We saw it in the case of the Adag -Reliance communication telecom scam also. Everybody knew who was the beneficiary. He was on page 3 and Gautam Doshi was in jail for 130 days!

Now those who know how the CA system works, KNOW that there is a fee involved (just for curiosity see the Satyam audit fee figure and compare it to Infosys fees!). This fee goes to the partners who sign the audited report – but the audit is done by the employee (who gets a salary). To prosecute the managers is of course right, they need to be punished…but what about the partners? the firm itself? the ‘Brand’ umbrella?

When I was a student I did hear that the ‘Law is an ass’ – well what more can I say?

Sebi’s demand for another regulator will get louder – and some of the screaming could come from the members in service itself It is time a few lions and tigers are prosecuted too.

Read on…

http://www.thehindubusinessline.com/industry-and-economy/info-tech/article2692220.ece

The managers who have been debarred are Mr C. Ravindranath and Mr P. Sivaprasad — both employees of Lovelock & Lewes, an affiliate of Pricewaterhouse India.

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1. City bias: I have lived my life in the comfort of a city with good infra. The infra has been deteriorating over a long period of time, but I have actually seen the Municipal trucks WASH the roads of Mumbai with water. Today there is a drinking water shortage.

2. Equity bias: I eat, live, breathe and sleep equity. No, I do not claim I understand equity markets, but there is surely an equity bias. I have seen the down turns, have lived through 2 scams (it is difficult to hold on to your Rs. 100 share all the way up to Rs. 12000 in 14 months, right? or your Rs. 10 share all the way up to Rs. 1650, right?). Been there done that.

3. I do not think I have a gender bias, but have grown up among Tam Brahms and Gujjus. In my professional life have interacted with Marwaris, Sindhis, and of course Maharashtrians. Difficult to say I do not have a bias – not sure if it comes out in my writings. Have found good and bad people in all these communities. I have a few Muslim and Christian friends (studied in a Christian school too) and I would like to believe that I have no religious bias too. In the Mumbai that I grew up, frankly I never knew which friend was what caste. So there should not be a caste bias too.

4. Geography bias: My portfolio is predominantly Mumbai, and Chennai biased. I do not as a rule invest in companies from Hyderabad (long long ago much before Global Trust Bank and Satyam happened!). Though I do have companies from Bengaluru, and a couple of companies from Delhi, but clearly there is a geographic bias.

5. Understanding limitations:  My limitations of understanding equity markets and being biased towards the past cannot be done away with easily. For example it is easy for me to take the last 30 years data (1980 to 2011) and say “If you do a SIP for 8 years you CANNOT lose money”. What I actually mean is “If you had done a SIP ANY TIME in these 30 years and done a SIP you could not have lost money. FRANKLY I understand that the past is not an indicator of the future, but all of us will be biased with our own experience. I heard Jeremy Siegel say (I think it was on Bloomberg International) ‘market is at a p/e of 11 and historically the Dow has a p/e of 16. Again this is a HISTORY bias.

6. Recency bias: the fact that the latest information is better than old information is also a version of recency bias (oops!!). Also the bias that what has happened in the immediate past will continue is the recency bias – I hope I do not have that.

7. I am more biased towards Ayn Rand than towards Karl Marx. However capitalism as understood by AR is no longer in existence. So AR’s theories may not hold correct in today’s circumstances.

…will write about this later…

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Now the Athletic Federation of India wishes to withdraw support for 3 POPULAR EVENTS. Why does it want to withdraw support? BECAUSE PROCAM THE ORGANISER IS NOT PAYING ENOUGH RENT. The logic is simple – if you want my support, YOU have to pay me rent, or I will withdraw. Now is it a simple deal? Is it like market forces? If I do not wish to pay Rs. 500 for a cup of tea, I do not go to a 5* hotel.

NO with the AFI the deal is not so simple. AFI general secretary Lalit Bhanot has WARNED INDIAN ATHLETES against participating in the race. …if they do…they will be SUSPENDED. THEY will not be allowed to participate in the Common Wealth Games..”If the organisers earn more, they should give us more…says Bhanot”.

http://epaper.dnaindia.com/epapermain.aspx

If you have read Atlas Shrugged (I urge, implore, beg, request, threaten….you to do so if you have not read this book) you see these people who are the rule makers who put creativity at a discount and rule following at a premium. There are many companies like this too.

Not long ago to launch an international fund, there was a rule..that the amc should be atleast 10 years old. To launch international operations the airline had to be 10 years old. NO achievement criteria, just age (oops).

Similar for a company to be in the Index the only criteria is ‘market capitalisation’ – which means when everybody is buying realty, DLF will be in the index. If everybody is buying IT, Satyam will be in the index. However a brilliantly managed chain of boutique hotels WILL NEVER BE in the index. All telecom companies will be in the index, if things were fine Reliance Power (without any installed capacity) would be in the index .

There is a vested interest bias. So the regulator says ‘Pension funds should invest only in the Index’ ….rent seekers all.

If you are a small runner let us all run the Mumbai marathon…damn the AFI.

And do you know how easy it is to manipulate the ‘regulators’? They can pass an order which says how much you can produce, at what price you can sell, to whom you can sell, and how it is unfair to sell to YOUR OWN CUSTOMERS at a lower price, how you should sell to a ‘poor competitor unmindful of the ‘poor competitor’ being the 3rd richest man?

Do not believe it? Read on…http://epaper.dnaindia.com/epapermain.aspx

if you find this article difficult to believe…welcome to the REAL world..and you thought the world was fair? L O L> ROFL > ROFL again and again…

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Yesterday a friend pointed out an interview of Mr. Azim Premji in Economic Times.

One quote was: “Subhiksha was unfortunate. I think it is a retail equivalent of Satyam. I think the media has completely ignored it, its a very interesting minefield for you. It is an out and out fraud, there is no question on it. The Company Law Board is investigating it. There was an overstatement of accounts, fake inventory, fake bills, fake companies that money was transferred to. At the time of investment that was not visible to us.”

Very strong statement from a very trustworthy man. However he did not say what conversation he has had with ICICI – and how he does not hold them culpable. And to think this is a ‘Qualified Professional’ who did it.

One venture capital CEO told me ‘Subhiksha is run by a very intelligent man. Sad he is too intelligent for me to deal with him. He scares me.’ And this was not a compliment.

However Mr. Premji may have come across such a company for the first time in his life. If his managers had done a due diligence…..a lot of this was visible. Just that Subhiksha got away with it so long.

About 23 years ago a clients driver hit somebody on the road – and the person eventually died. The lawyer advised him not to go anywhere near the hospital to inquire about the patient. The lawyer found out that nobody had claimed the body – and was disposed off by the Municipal authorities. Nothing happened.

You have heard of ‘Getting away with murder?’ I have seen it.

There are 2 sets of India – one which follows the rules. One which does not. Wipro belongs to the first lot. Subhiksha belongs to the second lot.

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Infosys: My investing guru asked me to buy it when this share was available at Rs. 100, I did not. Luckily for me met him again when the price was Rs. 300. I bought 300 shares. Then in a very short period it went to Rs. 700. I sold. Then did not buy Infosys again. Oh la la la!

Learning: Held on to Hero Honda from Rs. 40 till date, but sold a few shares in between. Holding period: 24 years +

Bharti Airtel: The same person asked me to buy this share at Rs. 80. I told him…Oh God I missed it at Rs. 30. He said you WILL tell me the same thing at Rs. 400. So I bought at Rs. 80 and sold at Rs. 1200. Why am I cribbing? Bought only 200 shares.

Mistake: Betting too little.

Learning: Really nothing. For me betting 10% of my net worth looks IMPOSSIBLE. However if a share grows to that level, I am comfortable holding on to it. Sounds stupid? Behavioural finance at work!!

Ask Parag Parikh what this means…ppfas will have the answers…

Gujarat Ambuja Cement: Bought at Rs. 18 held for 2-3 years sold at Rs. 40 or Rs. 50 (not sure)…maybe even Rs. 70. Mistake: Selling too early.

Financial Technologies: Same adviser asked me to buy it at Rs. 50. Ignored the advise. He sold 3000 shares at Rs. 2500. Nice lesson.

Satyam: Was asked to buy it at Rs. 30. Did not buy it. Reason: Did not like the broker who recommended it. He has never been trustworthy. Frankly no regrets.

DLF: At various prices many people asked me to buy it (even at Rs. 200 when it hit its low). Did not understand the balance sheet. Still do not understand land banks…no regrets though.

Missed all the KP shares – because they were in the portfolio of a mutual fund – most people who have been around long enough know which fund! No regrets, have my pants intact!

So many mistakes made – some cheap, some expensive, some not so stupid in retrospect!!

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This event of abolishing loads by SEBI (on the mutual fund sales) there is increasing pressure on other regulators to reduce charges / fees. So the following scenario can emerge:

IRDA has decided that all life insurance products – term, unit linked insurance, endowment and pension products will be available to the customer directly from the company. Such sales will not include any marketing costs so it will be cheaper by 85%. Many people were surprised at the fall in the pricing. On some probing it was found that since the sales force was not needed, all life insurance companies sacked their sales force, training staff, sales support, etc. A few of these employees were absorbed in the marketing department. However the fall came as a pleasent surprise for the end customer. In all 2343 offices belonging to all life insurance companies were now available for being given on rent. Last heard of one life insurance company had shifted its head office from Mumbai to Sikkim – rents were affordable only at Sikkim

Food and Drugs Regulator of India has decided on the amount of ‘cost to selling price’ ratio. Thus the price of Lays chips came down from Rs. 10 for 22 gms to Rs. 1.24 per 22 gms. Retailers however have a choice of whether to keep it or not. Since the FDR of India was not applicable to small enterprises it is believed that most retailers would buy potato and make chips at home. Last seen Pepsi was lobbying in Delhi for a price increase as the wastage ratio in potato was taken at an unrealistically low figure of 14%, the actual figure Pepsi wanted was 76%.

The Institute of Chartered Accountants of India was resisting a ‘Super Regulator’ who wanted to set pricing norms for filing income tax returns (they wanted to cap it at Rs. 350 per annum in urban India and Rs. 185 in rural India). A committee was appointed to decide how audit fees was to be fixed. However two of the committee members could not attend the meeting because they were in a jail in Hyderabad. The institute wanted to know how they had negotiated fees at Satyam, so that the benchmark could be set. The committee will meet again in 2011 after the 2 members are released. Hopes of them being released was quite high because the main accused had joined the Congress party.

The car regulator re priced Nano at Rs. 93,700 and the Jaguar at Rs. 12,00,000. Mr. Tata said nationalisation was perhaps better, and he joined General Motors on their board.

However, there was a lot of downsizing in banks, life insurance companies and mutual funds. 29 out of the 42 mutual funds had decided to close shop and start share broking out fits, 9 out of the 14 life insurance companies had shut shop. Crisil had down graded LIC from AAA to BBB+ with a ‘caution’ out look. This was because when LIC decided to shut one office in Gauhati there was a nationwide protest. So the closure was withdrawn.

The Doctors Regulator had priced each visit to the doctor at Rs. 65 in urban India and Rs. 38 in rural India. Doctors practising Unani, Ayurvedic and Homeopathic streams were thrilled because the regulator had not put a pricing formula for the medicines. Last known one homeopathic doctor had decided to price each white globule at Rs. 45. He said at this price he did not mind even if the visit was made free.

A super super regulator reporting to Ms. Pratibha Patil and Mr. Obama was appointed to review the taxation structure. On reviewing the quality of infrastructure, ability to fight against terrorism, etc. the abolished service tax (Obama asked ‘where is the service’?) reduced Income tax to Rs. 38 per person per annum in urban india and Rs. 14 in rural India. Ms. Patil said Government had no servants and no civility so all the civil servants salaries were reduced by about 94%.

Last heard my friend was rejoicing – his son had got admission in Manipal Medical college – and the fees was reduced from Rs. 54 lakhs to Rs. 2.4 lakhs. However on reaching home his wife told him that the bank where he had kept 6 lakhs from his PF had just declared bankruptcy. Ms. Pratibha Patil could not be reached for comment whether nationalised banks would be bailed out. Mr. Obama had already invested all his money in Citibank.

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Some of the ‘older’ promoters are not happy with the moral values of the next generation. Then there are some of them who think nothing of breaking rules but will scream murder when their employees break rules – like Raju of Satyam sacking employees for making false vouchers!

In this scenario what can you do as an investor? Frankly the best advice is “I am as lost as you are”. One solution seems to be index funds – but index funds too have an issue. For example if you have a Rs. 50 crore portfolio in the sensex and the nifty you might be over exposed to many companies that you do not want, and you may not have exposure to some companies that you want. Now what?

One solution seems to be to invest in ETF. Say 11% of the sensex is Infosys – and you are not happy with that – is there a solution?

Well take the weights of the industries in the sensex and invest in that industry etf to that extent. Let me explain. If Infy, TCS, and Wipro make up 16% of the weightage in Nifty. You should invest 16% of your investible money in a ‘technology’ etf. If banking is 13% of the weightage in the Sensex put 13% of your money in a bank etf. By doing this you are really reducing the concentration risk in your portfolio.

Because if a company with 11% weightage in the Indices that you are in does a Satyam, you will lose 11% of your equity portfolio (assuming you are perfectly indexed) – and that is not small. If you have put 14% in a Technology etf the chances are your exposure to one company may not be too much.

Of course Warren Buffet may call this creating a mediocre portfolio – but if you do not have WB’s IQ and involvement (obviously none of the people I know have it) or the size of portfolio – what works for WB may not always work for you.

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When you lend money to a bank (which may be insolvent even as you are lending) or to a country (which technically cannot become insolvent like USA) there is lesser risk than when you invest in equities. Why is this so? Frankly I think it is because civil servants, ministers and the powers that be keep more money in debt instruments and less in equity instruments!

When Global Trust Bank was in operation it obviously had many shareholders, vendors, employees, and fixed deposit holders. Then the bank audited by the great Pricewaterhouse Hyderabad failed, the government stepped in. It did not ask the vendors why it chose to supply, at what price etc. but went and protected the vendors, employees and its fixed deposit holders. Pertinent to note that all the 3 categories would have chosen to supply their ware (things, time and money respectively) KNOWING the risk, and therefore seeking a risk premium. What this means is a person would have left a Rs. 4 lakh job in SBI and come to GTB at 11 lakhs, a vendor would have priced his supplies at 10% premium, the fixed deposit holder would have got a 3% premium vis-a-vis the fixed deposit of SBI. However when it came to protection, the only guy who paid (pays) the FULL RISK premium is the equity holder. Now with Satyam it is an action replay. Similarly if you are a FD holder in Citibank USA you get protected in all this sham. However, if you are a holder of Citi equity, you have been had.

So Obama, Deepak Parekh, Company Law Board, P C Gupta, are all creating a moral hazard in the corporate sector. All the stake holders should share the suffering – singling out the equity holder will ensure that we cannot grow the equity culture. If we want to become a country of investors from a country of just savers, we should not allow such risk mispricing by behaviour. Mr. Deepak Parekh who has made most of his wealth from the equity markets should appreciate this point of view. I hope he does!

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1. Takes the fee upfront

2. Lessons are taught the hard way, but students do not remember it long enough

3. Never negotiates fees – the dumber the student the higher the fee, and no mercy is shown!

There are some lessons which I am just enumerating here – you can amplify it when you want it:

a. Market movement is normally violent. Volatility is a market characteristics. We watch the market for a few years (months, weeks, hours) and quickly come to a conclusion that “markets are now quite”. Something like a kid seeing a tiger in a cage and saying, “Can I cuddle it?”.

b. Leverage hurts, leverage hurts, leverage hurts. I am strictly anti leverage. I have been happy doing real estate deals, car deals, etc. WITHOUT leverage. In a bad / slow market – combined with a falling market, leverage can kill. Look at a share called Cholamandalam DBS. Came down from Rs. 370 to Rs. 32. Compared to that Satyam came down to Rs. 34! Which is worse leverage or fraud? Ouch!

c. We are in a slowdown, US is in a deep recession. If Obama does not continue with the tradition of convincing the average American that he can continue to live beyond his means and the rest of the world owes him a living, things will get worse. Really worse.

d. Value buying is fashionable. Value buying looks at numbers like Price to Book value ratio, dividend yield ratio, etc. PLEASE DO NOT DO THIS BLINDLY. If you do not trust a balance sheet (ha ha) ratios make no sense. So be careful.

e. Companies are in a slowdown means they are in a temporary problem. They will not die, they may continue to bleed.

f. Many stocks are seriously underpriced. However tooooo maaannnyy stocks are terribly over-priced. Please know the difference between price and value. It is tough but worth learning.

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What did Raju do which was very different from other entrepreneurs? Actually, nothing. He just got caught. Why did he get caught? He waited for it to become too big – and that was foolish. Most entrepreneurs I know have a scant respect for Corporate Governance. Most merchant bankers will take a mandate from anybody who will pay a fee. Most brokers will happily sell an IPO which the market will buy. All those people who are today talking of corporate governance, should first clean up their own homes.

Could Satyam not have raised US $ 2 Billion between 2002-2007? He could have done it easily. All he had to do was to create JVs – like Refco sify which he did in the past. Could he have found a merchant banker to help him? You’ve got to be kidding – he could have asked for a beauty parade, and they would have done it. Raju just got the advice and timing wrong. Somebody in his office did not download the list of MBs – that is all.

Many entrepreneurs (a friend who consults with CEOs says all) take decisions in the clubs in the evening over a peg rather than in their hallowed board rooms. Boards are filled with people who can talk eloquently on television about corporate governance. Real friends (who will speak the truth) are kept out of OWN BOARDS – they are used as a sounding board on the day before!

Entrepreneurs are broadly of 2 types – Rule Makers and Rule Breakers (see fool.com). Rule makers are the ones like Mukesh Ambani, Deepak Parekh, etc. the Rules are Made by them. Like the Golden Rule of Investing – he who has the gold makes the rules. The Rule Breaker is the one who creates his own rules – Virendra Sehwag is a fine example. He has no ‘knowledge’ of the classic rules of cricket – so he creates his own rules and lives by them – Dhirubhai Ambani was perhaps on the same list as Sehwag. Corporate Governance and Dhirubhai Ambani? No prizes for guessing what is the meaning of “Maane Nathi Khabar”!

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