Nice to see the old values (how funny we are happy to PAY to see the good man win, because in real life we are not sure what happens in the end!). So a good guy who works with a reasonable margin, has good HR practices, has good ideas can succeed in a big bad world.

I know my friends who are not in sales will not like my writing -  thanks to the equity markets and a fantastic portfolio manager I may not care about what they think – but they too should watch this movie!

For whatever reasons – voluntary retirement offers are now quite common and most people do not have a choice. However, if you do have a choice, see how to make the best of it. If you are given a VRS offer at age 45 and you have a transferable skill you could start a second career. If you join a small family run business you could even continue there till you are 65 or more – and thus it may actually be a good idea to take the VRS. Normally VRS will have the following implication:

1.    Loss of salary: the most obvious implication is the loss of salary, so there is no pay cheque.
2.    Loss of group benefits – medical insurance, accident and life insurance, discounted rates in housing (from an outside agency), etc.
3.    Loss of something worthwhile to do from 9a.m to 5 p.m.
4.    Loss of a social circle
5.    Loss of status at home as the ‘bread earner’ and ‘bread bringer’

If the company is going through a tough time and are making a VRS offer it is better to take it without much fuss. In a tough competitive environment the company may go out of business and may have nothing to offer. So taking the offer makes sense.

However, if the company has enough cash and is making a VRS offer they are likely to offer half the salary for the next 10 years (basic no allowances) and some other facilities. Here there is scope to negotiate – if not the money benefits like insurance, accidental death benefit, some group buying discounts, etc. Most companies who offer a VRS to reduce the age group will bend and give way. If you are enterprising you can offer outsourcing some of the functions that you have been doing / overseeing. Opportunities like vendor co-ordination, salary processing outsourcing, recruitment screening, recruitment back ground checking, are all functions which companies will happily outsource to retired employees with energy rather than outsource to outsiders. A few years back Tata Motors gave a free truck to its VRS employees as an incentive for taking the offer quickly – like an early bird offer. Thus being prepared for a VRS helps you take the early bird offer – and that may be substantial.

You need to evaluate your income after VRS, the chances of retaining some group insurance or a company paid medical coverage for life, chances of getting a similar job in a place of your choice, tax implications (some companies continue to pay a salary rather than a lump-sum), letting you attend some skill building programs run for employees – negotiation skills, computer skills, etc.

Based on all this you should take your decision to take the VRS. Normally it is worth it. A friend who took a VRS showed me his bald plate and said can you see the hair coming back? That is the fun of financial freedom – no boss to chew my brain!

Once upon a time there used to be a ‘ring’ in The Stock Exchange (you dummy it had to be just called this, because the other ones did not exist). The Stock Exchange, Mumbai became the BSE – the Bombay Stock Exchange. The people with the ’sauda’ book went into the ring and executed the transactions. Quotes were given by jobbers (called taravaniwalas). The daily turnover used to be around Rs. 200 crores – anything higher was considered great. There were 100,000 graduates / undergraduates who worked as jobbers, clerks going into the ring, sub-brokers, share transfer clerks, etc.

Then came technology – and the peopl who brought it said ‘now there is tranparency’ – after all the tech people, ‘educated’ people, etc. had to create new terminology. So out went badla, and in came F&O….and many such changes. Jobs changed hands. Frankly do not know whether the benefits went to the investor or the people who created a big army of financial service sector jobs. It would be intersting to see the ‘wealth created’, the ’salary paid’ , the turnover tax paid…velocity benefits everybody except the investor (assuming he is still alive!).

Then came the mutual fund industry – ‘wealth management’ they said it was. Again distribution was required, professionals were required – so ‘charges’ were imposed. Some people made an attempt to understand the charges – the super big guys understood and negotiated it. The smaller guys do not understand the charges though there are some who pretend that they do. The amount of expenses that an amc can charge is decided by the amount of money that they can charge as expenses and its own fees. These were fixed when the aum of the biggest amc was under Rs. 1000 crores. Now it is Rs. 100,000 crores. Mr. C B Bhave has an advisory committee which is supposed to benefit the end investor. I have not seen any MD of any company of any industry say “Regulator please reduce my charges so that the end customer can benefit”. Well bureaucrats have some simple illussions in life, do they not.

For a customer who invests Rs. 100,000 a year for 30 years the load that he pays would be Rs. 2000 * 30 = Rs. 60,000. However even if the fund puts in a mediocre performance, the amc charges he pays would be Rs. 250,000 in THE THIRTIETH YEAR ALONE!

If your margins are low, fixed costs are high – you can make money ONLY AND ONLY IF you are able to hit very high volumes quickly or have a huge cash chest to burn. For Tata Motors Nano and JLR may be a heady but a dangerous combination.

In retail the smallest player – in terms of cash chest – may have just fallen by the wayside. Subhiksha a retail player from South has closed all his shops in NCR, Nagpur and Mumbai. One does not know about his all India operations, but there are small stories about non payment of vendor dues, salary, etc. And to think that recently Mr. Premji of Wipro just pumped in Rs. 1000 crores into the company (ok, ok it was by buying out an existing shareholder, so the company did not get the money)! In fact the situation seems to have been so bad that Mr. R Subramanian (entrepreneur, MD) has not been able to raise debt nor get sebi permission for an IPO.

Quite surprising that the national press has not carried any story about this…..or a bail out package! It is surely a big employer – at least 10,000 people!

Recession, slow down, pessimism about the Indian economy (of course because of the recession in the U.S. economy) are words that become common place in local lingo!

Everybody and his aunty is now convinced that the Sensex will touch 5000 very soon, and the last place to be investing now is the equity markets. Of course many of these people were sure that the equity markets will touch 25000 – just about 12 months back.

Times are tough. People who had Rs. 20 lakhs as salary and Rs. 55 lakhs bonus, however forgot that the bonus may disappear. Now the bonus has disappeared (luckily the job may still be there) but the EMI refuses to go away! Similarly the friendly agent who said that Unit Linked Insurance policy is a 3 year plan NOW tells you that there is some more premium to be paid! Forget vanishing premium, the policy seems to be vanishing!

Too many investment myths have gone unchallenged lately. And we love to believe that tomorrow will be like today. So the best thing to do is relax, and read the classics. This feeling is a little funny – today was just not like yesterday!

Let’s begin by examining the four biggest investment myths circulating right now:

Myth #1: The Market will recover in 3 months time

In case your broker, banker, relationship manager, – anybody whose job is dependent on the size of your cheque tells you that the market will recover in 3 months. He / She is praying loud. Like God, you can either listen to it, or ignore it.

Democracies, Free Markets, are the way to go. Even the Chinese believe in that! So the markets will do well – after all the index is a slave of earnings and optimism (price-earning ratio!). However, nobody can put a time line to it. That is tough.

Myth #2: Indian Growth Rate is poor!

The reality is India will continue to grow at a decent rate – 6.5% – is a FANTASTIC growth rate. All the strength of the English speaking population, BPO, KPO, software, exports are all in place. The strengthening of the US $ is a boon, the falling prices of oil is a boon, the falling wages is a boon for the manufacturing and software sectors – so just chill.

Three years ago, most of us would have given an arm and a leg for 6% growth. You need to remember that the US has a strong ability to innovate and grow. India will continue to be an important partner for the US, and we are not in a gloom only scenario. Our balance sheets are not over-leveraged (the equity markets will punish the excesses – look at Cholamandalam DBS – the share has fallen from Rs. 370 to the current price of Rs. 40!) – which means our recovery will be faster than the US economy.

Myth #3: The FII money will not come back!

The strengthening of the US dollar is surely going to make Emerging Markets as a class less attractive. However, if you believe that the US cannot go on converting all their coniferous trees into green backs, the US dollar will weaken. Thus at some stage when our earnings move up, and the markets look attractive, the monies will come back.

The flip side is there are many people who believe that the lag in the FII investment will be taken up by the mutual funds and the unit linked plan collections. This looks good in theory, however in real life it may be difficult. As downsizing happens, the first casualty will be the mutual fund SIPs and the Life insurance premium. This is a major cause of worry – as the BFSI sector is also a big employer. My take on this is very hazy.

Myth #4: Real estate and equity markets will take decades to recover!

In the more than 200-year history of equity investing in the United States, stocks have never taken decades to recover. I used the US example because Indian stock market history is not long enough. However, if there was an index fund available since 1978 (sensex base year), done a SIP, and re-invested the dividends, I dare say you would have got a great return (say 5% real return) over 30 long years. Add compounding to it, and you would be a rich person! Remember, you would have out performed your bank fixed deposit partner by a mile. (The key is regular investment and reinvested dividends, and a low asset management fee.)

The Nikkei 225 in Japan, is down more than 65% from its peak in 1989. Could India be headed for the same long, deflationary spiral? Not likely. The Japanese real estate and equity bubble was much bigger, government action there was clumsy and ineffective, and the banks were knee deep in shit. Indian economy is still growing.

In India the real estate mess is in the capital market – so risk transfer is quick, brutal and immediate. Real estate companies have fallen between 30 – 80% from their peaks.

Also remember the market normally does things in advance – so the battering may have happened AHEAD of the real market events. So if real estate prices were to fall (say 30%) the shares of real estate may actually go up! Logic being “Oh! After all the markets have fallen ‘only’ 30%, we had expected 80%”.

So, let’s buck the trend together – and look forward to a happy, healthy and prosperous New Year!

Happy 2009, and happy investing

No money comes free – immaterial of whether it is called Debt or Equity. The authorities have put a lot of conditions – no cash dividend, limits on executive pay, no throwing out people out of homes, et al. All these are “visibly” good for the authorities who want to feel good (“God” perhaps?) about what they are doing.

All this brings us to a big question – like all subsidy will it actually bring good or bad to the system?

If you believe in a free market should you throw a life boat for the people who are sinking? Surely when Lehman went down, in India, Nomura Securities took over the business, all the people were gainfully employed – at comparable salaries. So what is the downside of a bankruptcy? Really difficult to say.

When you believe in free markets you do not interfere in any of the “market” discoverd figures – be it salary, interest, price-earning ratio, rent, or IPO pricing. Similarly when GM says it is facing bankruptcy what it means is the sum total of its assets is LESS than the sum total of its liabilities. However there is value in each of the assets. So if out of say the plants of GM if Honda, Toyota, Mercedes, Tata Motors, …each one decides to take some part of the assets AND use it more efficiently, the market benefits. However if a life boat is thrown at GM, they will keep coming back. Next time it will be in 2015, if not earlier!

Normally people invest to get returns. No doubt, everyone invests for returns. That magic figure governs the fate of all investment products. The logic in people’s minds is simple: The better the returns, the more money you will end up with.

But it’s not that simple in reality. Returns are not the sole deciding factor of how much money you are going to make from your investments. Two more factors determine how much money you will end up with:

a. The amount you put into your savings and investments

b. The amount of time you keep it there.

These two factors will have a greater impact on how much money you will end up with, rather than mundane things such as investment returns.

Have a play on the calculators on the web. Put with your own numbers and you’ll quickly arrive at the number you should be doing.
Here’s an example:

a. Let us suppose you need to cobble together Rs 5 crore over 40 years. With an investment return of 12 per cent per year you realize that you have to save a paltry Rs 3,980 per month.

b. If you deduct ten years from this horizon the figure automatically changes to a difficult Rs 14,000 savings per month – over three times the monthly amount today, although you have only taken 25% off from your time period.

c. Now you argue: What if you aim for a higher investment return? Surely then you can amass Rs 5 crore even in 20 years! You would need a fantastic return of 21% per year to turn Rs 14,000 into Rs 5 crore in 20 years.

Is that realistic? Consider this:

The stock market today is perhaps the only way you can reach your goal since it can give anywhere between 2% to 44%, depending on time period and how enterprising your fund adviser is.

Now, the charges of investing vary between 1% per annum to 2.5%, depending on the nature of fund management. So any expectation number you hear above 16% is almost a fraud if suggested by your advisor and foolish thinking if you expect it.

And in fact for an efficient indexing strategy, you should use a figure of 9 per cent to 15%. So, that 12% I was using is, if anything, fairly ambitious. It would certainly be easier to argue for a figure of 9% per year than 12% per year.

And hold on! Taking into account inflation and taxation, from gifts and cash which is generally quoted as a little below 2 per cent, so, you are now left with a paltry 10% return!

So now plug in the numbers!

You now have an investment return to aim for, an amount of money that you need to reach and if you put in a realistic guess at how many years you have till retirement – hey presto! The calculator will tell you how much you need to save.

But remember:

i. It is important to know that these calculations only tell you what to do, given certain assumptions. These are guesses at best and change regularly.

ii. You may find articles on the web saying ’static calculators are wrong, you should be using dynamic calculators’. It does not matter.

iii. This is good enough to make a start. The investment return you get might be different from what was predicted, and the date of your retirement might get closer or further away.

iv. Most important, since you are saving money in today’s world, you have to keep increasing the amount you save to take into account inflation and average earnings growth.

Fast Forward 2012:

Let’s fast-forward to the year 2012 with our original numbers of 5crores in 40 years with 12% rate of return and look at two possible scenarios: one good and one not so good.

Scenario I: Life is Rocking!

You manage an excellent investment return of 22% per year. That gives us a pot of investments worth Rs 450,000. The investment return is all the more impressive because we have only had inflation of 6 per cent.

Plugging the numbers in (a final value of Rs 5 crore which takes 35 years and Rs 4.5 lakh already invested at a 12% annual return), you need to save Rs 3,500 per month to get there. That is a paltry fall of Rs 480 per month.

In spite of the fact that we have a cracking 22% per annum, the amount we should be investing falls by such a small sum. Again, keeping a conservative mindset, you should not reduce the amount that you invest. You are just providing for a goal. So, till the goal is near, changes are not recommended.

Scenario II: Life is not all that rocking

You have actually managed an investment return of 10% per year. That gives us a pot of investments worth Rs 325,000. Again, inflation and earnings growth have amounted to 6%. Plugging in the numbers for this scenario (a final pot value of Rs 5 crore, 35 years to get there, Rs 3.25 lakh already available and a 12% annual return), we find that we need to put by Rs 4,800, again just a little more than what we have been investing so far.

So, have things really got harder for us because of the poor investment return that we managed? No. Our income has gone up much more, so paying this extra Rs 820 is now a breeze. Should you increase the investment? Yes, absolutely.
Either way, it’s better than doing nothing.

In conclusion, the gap between 22% and 10% is not small, is it? But the impact is subdued because of the time frame that we are looking at — and the impact is marginal. So the rate of return, though important, is not the be all and end all of investing.

By repeating the sums on a regular basis, you can adjust your rate of investing to account for changing circumstances and how well your investments have actually done.

What you can see from both the above scenarios is the importance of getting started early to minimize impact.
a. If all goes well in the first five years, you will want to invest Rs 3,500 per month.
b. If things go wrong, you would be left saving Rs 4,800.
c. However, if you hadn’t started saving at all, you would be left needing to save an unlikely looking Rs 7,650 per month.
So, remember now remember that Investment goes hand in hand with not just Return but also Time!