It is always easy to predict – especially if you have nothing at stake!

The world is today very worried about the Euro problem – because it is much bigger than the US problem. In fact the situation is so bad, that US has even decided to teach Europe about coping with the crisis…LOL.

In 2006 you saw NINJA loans (no income no jobs), in 2008 you saw the property bust in US. Now we are worried about the falling prices in UK.

In the year 2012 we will be panicking about the falling prices of real estate in CHINA. Not that it is not falling now, but it is expected to HARD LAND much worse than the soft landing that the government of China thinks it can manage.

China is a funny country – people have the money, but CANNOT spend. So they are investing. When they invest, they create a bubble. If the bubble bursts, there will be an issue!

So if 2008 was lost to US and 2011 to Europe, will 2012 be lost to China?

PS: did you notice I did not predict the Sensex or the Nifty? So any one can reach 12000 – be ready to hear my saying ‘I said it here first’…..

http://www.forbes.com/sites/gordonchang/2011/11/06/property-prices-collapse-in-china-is-this-a-crash/

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I F A grievances:

1. Clients are short term pleasure seekers: both the IFAs have been in the business for more than 10 years and have upwards of 500 SIPs running. Even clients who claim to have a long term view (will it become Rs. 10 crores in 20 years kind of questions) will suddenly stop their SIP and also withdraw their money.

2. SIP returns look less exciting over longer periods! – clearly mathematically challenged clients are difficult to handle. It is really difficult to explain to a client that a 14% p.a. return over a 15 year period is really a superior return.

3. If a client has increased the SIP amounts, the returns look worse!- so true mathematically. If you have done a Rs. 5000 SIP from the year 1999 to 2001, then Rs. 7500 till 2005, then Rs. 12000 till 2008 and Rs. 25000 from 2009 to 2011, the %age returns cannot look too good. This is simply because impact of compounding has been on  smaller amounts and markets are not at new highs!

4. Choosing the right amount of SIP is impossible: For some Rs. 2000 is right for 3-4 years. Once it becomes insignificant they either want to stop or withdraw the full amount. For some clients who do a Rs. 50k p.m. SIP suddenly the accumulated amount looks attractive to make a down payment to buy a house! There is a complete refusal to do a focused event based investing.

5. Neither is the investing scientific nor is the withdrawal scientific! – Suddenly when the markets are down there is a need for ‘doing some attractive equity deal’ or an ‘attractive real estate deal’. Here the easiest money to withdraw is the mutual fund accumulation – so out it goes. This is also because the LIC agent says ‘there is an exit load’ or ‘it is a loan’ or ‘it is an assured return scheme’ – simple words. Customer signs a form or goes on the net and withdraws the mutual fund accumulation. Simple.

6. There are too many people who the client listens to: Immaterial of how good the mutual fund adviser the client listens to the whole world. Blogs, magazines, television, neighbor’s dog, dentist, doctor,….and does something stupid. When it comes to calculating returns, the schemes are blamed. LOL.

7. Clients are impossible to handle Sir: this was the scream of an agent, and I really pitied the agent. When the agent suggested a scheme, the client invested Rs. 5000 in a SIP – and the fund did well over a 4 year period. The client said ‘you did not say this fund will do well or else I would have done a Rs. 25k SIP’. Vow!! this client needs a Nostradamus perhaps?

8. ‘The businessman investor is led by the CA’: Completely agree with the IFA! The CA says ‘do not do a SIP for more than Rs. 16,200 p.m. – we will have to get more details. This forces the IFA to look for 12 schemes for investing Rs. 200,000 a month. I do not think with all my experience I can think of finding 16 good equity schemes for such a paltry amount!

sure there could be more…..but that is for another day!

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This is a topic that I have spoken about too many times in the past….One of the steps required is to create different and various sources of income.

For a beginner who is starting on a first or second job how is he/she expected to create a second or third source of income?

Well at age forty if you want your Income Side to look like this:

Job 1

Job 2

Running a website on what you love to do

Writing articles on topics of interest (for which people will pay!)

Rent / Interest

Dividends

you have to start at age 22!

Well start building a portfolio – just make sure that you do as well as or better than the fund managers. If you are not confident of beating the fund managers, LEARN. Or go to the organized fund management industry a.k.a mutual funds. Unless you have to invest more than a couple of crores, or you wish to invest a lumpsum for a long time..SIP is a good route.

Seek a second job if your first job is not so great – or make the first job so great that you make enough money!

Clearly if your goal is to create the 3rd and 4th categories of income you need to buy some real estate (which can be rented out, not used!).

By the time you are 40 your dividend income, rent, and other so called ‘side’ income will be at least equal to your earned income.

By creating this multiple streams of income you develop the guts and the cash flow to tell your boss ‘Hey …I am not coming from tomorrow’ or like a friend told his boss:

“Thanks to my investment management capabilities I have created a dividend stream 4 times my salary. I live on about 1/10th of my post tax income. On the basis of my current lifestyle I have enough income and wealth to live till the age of 140 years. However as my performance has been the best, give me a bonus which makes me feel good…or I just walk..not for the money, but because I am sure the market will pay me more – as a mark of my ability”

So go and create multiple sources of income…it helps!

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Well I am not against gold, and neither against real estate. However what do you call a market which is completely dependent on new investors bringing their fresh money. Well some people call it a Ponzi scheme. I would call it a Madoff scheme.

What drives the gold market is difficult to say – insecurity? Spain? Korean war? – and periods of extremely long price stagnation are scary. Similarly for gold to come down – just shrinking of demand (which is driven by prosperity?) can spook prices.

Real estate again has many myths. ‘Prices in Mumbai do not come down’. Look at the lucky people whose parents bought flats in Santacruz, Ghatkopar, Bandra, Khar…..the list is endless. However this is just 8% return !!

I still insist that you should have gold and real estate in your portfolio – but stop thinking of them as growth assets. They are not. They are Savings assets. You will see some steady appreciation – or a spike – but on a 10 year rolling basis you would have got about 1-2 % of real return.

FOR MOST PEOPLE I KNOW, THIS IS A FANTASTIC RETURN – they let a few million sleep in their savings bank account. So on a comparative basis they are better off doing a SIP in a gold etf – but stop expecting to get 24% return. Just not possible – the market has enough people who will buy put options soon…and there will be enough WRITERS.

Whowever thinks he / she has got good returns in real estate over say 30 years, please put it in an excel sheet..and see the IRR – very likely that you will get a number like 7 or 8% p.a. Not very impressive, no?

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The Christian community is quite conspicuous in its absence in the financial services field – especially in the investing areas like equity. They are largely in the bank deposits, company fixed deposits and in certain pockets in real estate. I had to reassure them that investing was not against the scriptures.

The first topic that needs to be considered is whether investing is or  is not scriptural as in many cases, the answer depends on the situation.

The question to ask is  ‘Why are you investing’?

Anyone investing because of
•    Greed (Luke 12:15),
•    To get rich quick (Proverbs 23:4-5),
•    Or to massage his ego (Proverbs 29:23)

Is not participating in biblically-based investing. Today whether you are a Christian or not, largely the sales person is selling to you on the basis of these three ‘appeals’. When a sales person tells you

“See you missed the opportunity of a 80% jump in the market – in the year 2009″ he/she is appealing to your a) Greed – will I get the same / similar kind of return in 2010 and going forward? and b) Fear – If I do not invest I will miss the opportunity to earn…such extraordinary returns.

When he/she tells you “Give me Rs. 500 a month for 2 years, and this scheme will give you Rs. 1000 a month for the rest of your life” they are appealing to your ‘Get rich quick’ mentality.

When the adviser tells you ‘Sir Subramoney is wrong. SIP works only in a rising (falling) market, SIP is not exciting. Also sir SIP is for poor people who can do Rs. 500 or Rs. 1000 investment per month. For rich people like you we are marketing a Venture Capital fund – sir the minimum amount is Rs. 50 lakhs – and you can invest in 3-4 instalments. You need to make it up to Rs. 50L in the next 3 months.Any way sir here is an invitation for a meeting at the Trident /Oberoi /Taj / Sahara Valley /…

Clearly they are massaging your ego.

If you succumb to any of these 3 sales pitches….well you are going against the scriptures!

This was slide number ONE…there are more slides, but am not promising the time frame in which I can write about this…

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Let us look at the dollar – it looks like the dotcom boom – when we were all sure that the tech stocks can only go up. Or the real estate boom of 2007 when we were all sure that Indian real estate can only go up – and then we know what happened. Now let us see something about the dollar:

- it has been beaten, battered and bruised. It could be very close to the bottom if not the bottom.

- US has a massive deficit, very close to zero interest rates (Ok not zero your money will double in 7200 years if you invest in it!!)

- huge social security deficit – social security may default in 2020 if not in 2019?

-countries like India dumped dollars (to acquire gold) – poor signaling for the big holders

- Bernanke grilled at the recent hearings – he got butchered by the senators.

Wait…how can the dollar go up? All that I have said are against the dollar..have I not?

Well read ahead:

the dollar’s bad news is already priced in? Perhaps the market has overdone the pessimism in hammering down the price. The bad news is really over done?

- Asian companies will pick up distressed assets and create some demand for the dollar – apart from Asian tourists finding it cheaper to travel to and tour US.

- the demand for American dollars will slow down in Afghanistan and Iraq

- Japan, Eurozone, and UK are not doing too great either – and the world does not trust the balance sheets from those companies at all compared to the US.

All this could see the dollar strengthening – remember Citibank, Pepsi, Coke, McDonalds are big beneficiaries of the Asia growth stories – and they all remit huge profits back home…

so a strong dollar in 2010 …and the tech doing well…possible, correct? Well, it is at least a view!

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He hopes to start a business (perhaps) and cannot make up his mind about whether to, when to or…any of the other questions. So he has decided to keep money in the Income bucket (bank fixed deposit) rather than a growth bucket (real estate, equities). Very sensible.

Yesterday another girl around 30 years wanted a pension plan for herself. She is the wife of a very high income guy and can set aside a nice amount on a monthly basis from her income.

While saving for retirement (this is called the accumulation phase for those who did not know) success is a function of 3 important factors – starting early, investing enough, invest often, do not withdraw, and save it from the taxman as long as possible. Then of course aim for and get a reasonable rate of return. The math is pretty elementary.

And compounding worked in the past, works in the present and will work in the future! Past performance in this case is a great indicator of future returns!!  The relationship between time, amount invested, frequency of compounding,  rate of return, and the total corpus is purely mathematical! Clearly no brains are required – V = A*(1+r)^n.

It is boring, clear, mathematical and accurate. If you can control A, n and aim for a reasonable r, V is guaranteed.   The problem is that success requires discipline, and wealth creation should start early and be  given a high priority early in one’s career. There is a beautiful calculator called ‘cost of delay’ calculator. I have no clue about how to put it on the site so …not being put up! Suffice it to say if you are 23 years of age and you could save Rs. 10,000 a month, assuming a 9% p.a. you are going to have Rs. 26,37,200 LESS in your retirement account by the time you are 58 years of age. Quite expensive a delay? Is it not?
The magic of compounding rewards early starters. Delay may make it impossible to attain THE GOAL. After all like in driving – start early, drive safely and reach alive is good advice whether in driving or in investing. Do not try to make up in ‘r’ what you can do in ‘n’. It is like starting late and driving fast.

I like a new joke (black humor?) – In the race between a Yamaha and a Honda bike the winner was the Ambulance. Investment ambulances are not available!

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read on!

http://www.telegraph.co.uk/finance/personalfinance/fameandfortune/5353609/Darren-Gough-I-think-Ill-cut-back-down-to-two-cars.html

interesting take?

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However the common man – or most of the people whom I meet are so poorly equipped to deal with the real estate market that they are just shooting in the dark. Most of them do no research, have no idea about the builder, leverage themselves like ‘good times are permanently mine by right’ , – this combination is scary.

If you are a ordinary common person it is only mutual funds that let you invest on a monthly basis with amounts as small as Rs. 1k or even lesser. So an index fund (if you are not sure how to select a fund) is perhaps the best risk reward ratio for most of these investors. If you are inclined to take lesser volatility than an index fund, a balanced fund with about 65% in equity is a better bet (cap gains are still tax free).

I have friends who bought a property in prime Mumbai at the bottom of the real estate market – 1999 -2000 at a price of X. One of them who gave it on rent to a multinational is getting about X/2 as rent! Imagine a 2 year payback for a south mumbai flat! Now the price of the flat even conservatively is about 10X – not bad even in a so called ‘low’ market!

So to make money in the equity markets you need the following:

• learn about money
• find a good fund house
• choose a good portfolio
• invest regularly (invest, not trade)
• over a long period of time.

if you do all this you will make money in equities.

To make money in real estate you need to do the following:

• find a good guy with real estate knowledge (my advisor knows the real estate market very well)
• take bets in multiples of 15 lakhs
• leverage cautiously – instalment buying is a form of leveraging
• trade (every 4-5 years my advisor shuffles our portfolio, some times in 2 years)
• do not invest in real estate if you want rental income (commercial is far superior)
• have a name like Deepak Parekh, Hiranandani, Raheja…if you cannot do that Pray!

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Most of the “killer” diseases have been eradicated or a cure found for. If you are in a household mentioned above, at your age of 72 years, you will still have to worry about inflation!

You will have to worry about – inflation, a long term care insurance (which will take care of your hospitalisation bills, day care, etc.), and a pension that takes care of all your needs – even if it needs a manager to take care of your money. I know one 72 year old who likes to keep all his money in savings accounts and bank fixed deposits. Asking him to invest in any other asset class is a nightmare and another 80 year old who happily keeps all his money in equity – his dividend income is far, far greater than his requirements.

Both may be extreme cases, but a 72 year old has a serious possibilities of living till the age of say 90 – in such a case – inflation is a serious worry.

May God bless his soul, but I hope he dies by the time he is 78, because I expect him to exhaust his savings – and he is not at all keen to take anything from his children.

In the course of my consulting I meet all kinds of people – excessively into equity, and excessively into real estate, debt etc. Please read about asset allocation and go only for a balanced portfolio – nor more than 60% in volatile assets like equities or real estate.

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