This is not easy to think or accept. People who continued their SIPs would have also done badly – no doubt about that. Your opening portfolio (Jan 2011) would have been down, and so would have the SIP figure.

Obviously at this juncture we can ALL see the negatives and we all KNOW that the market will go down, do we not!!??. (Hey there are some readers who do not get the sarcasm, sorry). Well when on TV and other media you look at the ‘experts’ – their views are worth hearing…

-Markets will go down to 12000 (no clue why there is such a consensus for this number!) and the more optimistic ones are predicting 18000. Of course the very hardy, never say die guys predict 20,000.

Frankly I do not know what will happen.

However a bad year is rarely followed by a worse year (yes it has happened in the past, but I am taking a calculated call!)..which means a NEGATIVE 25% will not be followed by a negative year. So assuming that the index’s starting point is 15,500 for Jan 2012 (I am writing this on 2nd Jan at 9.30am and this is the current sensex), I think seeing the sensex at 19500 is not impossible. This means that the current year’s return would be about 25% – just wiping out the 2011 losses.

Will the Re – US $ be at 60? not sure. However if many NRIs start keeping their money in India (remember the rates of Nri deposits have improved) and the software exports do really well, we could see the exchange rate at 52 instead of 62!

Not guessing the sensex, but just punting on the fact that the IMMEDIATE past has NO BEARING on the IMMEDIATE future. Simple, is it not?

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1. Suddenly many jobs are being lost: Remember slowing down, closing down are not words that happen only to somebody else! It happens to the best. Only your salary is certain, the variable salary is really variable. I now know of several people who are EARNING about 60% of their claimed CTC. The variable is just not happening.

Learning: when you commit to a life style, emi, etc. IGNORE a big portion of your salary. Assume only 50%, it helps.

2. Sorry kids, I got it wrong: Many kids in the age group under 26-7 who have done their SIP in equity funds may have to hear taunts from their parents! All SIPs started in the past 1-2 years are under water. If their parents are saying ‘see I told you, keep your money in the bank’ – frankly I do not know what to say. Equities will do what it does. Keep your cool. You have to do what you have to do!!

Remember the returns from 1979 to 2011 was about 18% p.a. – if you add dividends reinvested the returns should be better. However no ONE year may have got you 18% – there have been years of -46% as well as super years like 242%. Be ready for volatility. A terrible 2008 (-40%) was followed by a fantastic 2009 (90%)….so BELIEVE in equity. Accept that volatile assets will not give you linear returns. Have patience it is a test match, not a T 20 match.

3. Debt market is attractive ONLY in the short run: If you think SBI bonds at 9.95% p.a. is attractive, remember money should grow in REAL terms, not just NOMINAL terms. Nominal returns in SBI is 9.95%, but inflation is say 11.95% – in such a case YOUR money is not growing in real terms. It is SHRINKING….so you need to be in equities. Being in debt funds (I am in debt funds too) is a good tactical move for 12-14 months, at the end of that period you will have to come back to EQUITIES.

…..

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When they are trying to lose weight (I am talking about the serious guys n gals)

When they are trying to write an exam (you know a 6 month effort can impact your NEXT 60 years!)

When they are trying to meet a financial goal (need to make a down payment to buy a house in 6 months)

One very important thing with goals is to get a little realistic with your goals. Also some tactical changes are necessary from time to time with the goals.

Let us say a kid has a goal of preparing for an exam. He / she knows that ‘Diwali week’ or ‘marriage week’ or ‘Christmas week’ – can be very demanding on the reading time. It is necessary to adjust ones goal for that week accordingly. Let us say he/she studies for about 60-70 hrs a week. It is necessary to say ‘because there is a marriage in the family and many guests may come home, I will go to the college library and study’ or say “I will do subjects like accountancy or costing – so that there need not be too much of concentration …as some other subjects may require”. Or say ‘this will be a light week, where I will revise what I have done in the past”.

Using one week as a part recovery week in a study of say 8-9 weeks is not so bad after all.

Now you could do a similar thing with your diet also. Tell yourself..I wanted to reduce 6kgs in 12 weeks..HOWEVER instead of trying to lose HALF a kilo every week,…in the ‘Marriage’ week, I would be happy to hold my weight constant, and I will work on my weight from next week.

And similarly for financial goals. “This month is my sister’s wedding…so I will not be able to spare money for my SIP’…

THESE are just examples…but I am sure you get the drift…

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Experience has taught me one thing. You cannot draw conclusions based on one or two students or colleagues. To draw a conclusion, you need a huge, huge database across genders, medium of schooling, communities, geographies..and with that data you MAY be able to draw some conclusions….

Once in a MBA school (long time ago when I thought teaching was a noble profession) one HoD said – these kids are from the Hindi belt, they know the subject, but do not know English, hence they are not getting jobs.

I asked him what he was doing to rectify the situation. He said “Oh we are planning to give them Communication skills Workshop. Here we will teach them English, and some techniques on presentation, etc..”

I said let us pick up a 2-3 students and check out what is the problem (luckily he agreed – teachers are the worst when it comes to listening – ask me I am one!!!).

I asked 3 students to speak on ‘Why invest in equities’ – and they struggled speaking in English. I ‘saw’ a ‘I told you’ on the HoD’s face. I said “Now speak in Hindi…on the same subject”.

FUNNILY, they still struggled.

I said speak in English about India’s performance in the 2003 world cup – THEY ALL COULD SPEAK IN ENGLISH (reasonable English, yes there sere mistakes). Then I asked them to speak in Hindi, they were fluent.

I told the HoD – they needed to understand the subject better, far far better than what they currently do. Their syllabus was too long and big. They COULD NOT do justice to the SUBJECT – not enough time, so they choose to do selective studying (this serves the exam purpose)…and in real life flounder.

Same thing is happening in India about financial education. Many people know – spend less than you earn, create an emergency fund, start early, compounding, do your SIP – these have been written about ad nauseum. I think we need some basic behavioural finance classes! Identifying the problem is more important – preaching is not working!

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was a call that I handled this week.

I said:

Gee, frankly I do not know. It takes a great mind to say “I will charge you Rs. 24k, but honestly there is not much to do. And if you do your Rs. 250,000 per month SIP with me under my code, I will rebate the commission for the first year from the fee that you pay me. Take term insurance from the cheapest source on the net. Take your medical insurance from a government run organisation (internationally Ergo and Alliance are great claims payers – but I have no clue how they will behave in India where medical records have no legal sanctity).

So I asked him more details about the financial planner. He had promised to

monitor the portfolio on a regular basis (I am still wondering what this means since I heard it 30 years ago),

will anticipate the changes and do a portfolio shuffling on a YEARLY BASIS (to me this was suicide),

choose a Pension Plan and a Child Plan (to me this was amusing)

choose a term plan and a medical insurance plan (he was choosing the MOST complicated company)

do a cash flow (what if analysis for 30 years including what would happen if he lost a hand, leg, heart, life, etc.)

do a cash flow projection for him during retirement (this guy is now 32 years old)

do an annual review for a fee of Rs. 5000

be available for 3 hours during the year for any discussion

The client had a choice of where he bought mutual funds from (he would be doing a 1 year SIP and at the end of the year decide whether to continue based on the performance), BUT the life insurance had to be bought through the financial planner.

Frankly from the clients point of view this was NOT  a good deal, nor was the client capable of doing it himself — he was damn too lazy.

I had no alternatives to suggest….last I know his wife was tugging his shirt collar saying “Yeh sirf gyaan deta hai….WE NEED TO DO SOME THING..so what if it is wrong, we are smart enough to handle adversities, are we not”.

God bless.

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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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Well for those who took up a job in 2007/8 (means born in 1985 or later) markets have not been a great – at best it has been lukewarm. All those who started a SIP in 2009 or later are still waiting to see some returns over the bank fixed deposit rates.

Those who listen to their ‘psu’ or ‘government’ oriented elders in the family even starting a SIP must have been difficult. Now they must be facing the wrath of the family saying ‘see your portfolio is down by 30% – in the bank you would have earned….’ blah blah blah.

So these kids are under tremendous pressure -on one side from parents who do not understand equity investments, media which loves action, and other classmates saying ‘see I told you not to listen to Subramoney (take your pick) see what has happened.

What should they do?

1. Remain calm: if you are investing for a long term (let us say for a goal 5 years away) just continue your SIP.

2. Remember if you look at equity on a daily basis, you could get scared – just stay away from the idiot box or the pink paper whichever is your mode of poison.

3. When somebody asks you to buy a Pension Plan, ask for the asset management charges. Recently one mutual fund has launched a Retirement Plan – and I have seen websites and ‘advisors’ doing a detailed analysis WITHOUT talking about the asset management charges. Did I say ‘It is difficult to make a person understand something if his livelihood depended on ‘not understanding it’ ? well here that is another problem…

signing off for now…:-)

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She said “The world has not seen such a turmoil ever. You can say keep investing in a SIP for 2-3-5 years, but where is the evidence that with so much of volatility, for equities to do well – is it not better to put money in debt instruments like PPF?”

Very fair question – and since I could not ask a woman her age, let me guess – she must be less than 25 years of age.

When equity markets are low one needs more confidence to be in the equity markets. To be in cash or debt markets seems to be the more sensible thing to do now. Why? Because everybody is doing it….right?

Well the market is a funny animal. It is also a slave of the earnings and another multiple called the ‘price earning ratio’. Without getting into too much of detail let us look at why does a person buy equities?

It is for 2 reasons:

- dividend income (not easy to predict, but at least an attempt can be made) and

- speculative income ( change in price earning ratio – far more difficult to predict).

Now let us take the example of a good company quoting at a price of Rs. 100. Let us assume that this company is T and has an EPS of Rs. 10 and has a price earning of 10 (Rs. 10 X 10 = Rs. 100).

Let us also assume that historically this share used to sell at a higher price earning – of say 15, but as the markets are down (i.e. the people do not want to pay a higher p-e for the market as a whole).

Now over the next 3 years – 2012, 2013 and 2014 the EPS of the company are 12, 18 and 20 respectively. What will happen to the price of the share?

Assuming that the companies future looks bright…etc. the likely scenario are as under:

Market remaining depressed ( i.e. p/e remaining at 10) the prices would be 100, 120, 180 and Rs. 200 over the next 3 years.

Market getting better (i.e. p/e remaining at 15) the prices would be 150, 180, 270 and Rs. 300 over the next 3 years.

Market clearly is a slave of these 2 numbers – there is no escaping at all.

Then why is everybody not buying? Just because of the following fears:

- what if it gets worse than what it is now?

- what if the price-earning ratio goes down?

- what if the earnings of the company go DOWN instead of going UP as you are saying?

- nobody is buying…why should I buy?

- FIIs are selling, why should I be buying?

- Every expert in the media is saying ‘do not catch a falling knife’ – is it not scary?

Frankly there are no easy answers – nor does any one person have an answer to all these questions. I am very comfortable answering these questions POSITIVELY for a large number of listed shares – just as I know that many companies will do badly! So answering for individual companies looks difficult, but as usual I am optimistic on a group.

A SIP in a good mutual fund (or an index if you wish!) over the next 3-5-7 years should see a return better than a debt fund. If you are more scared stick to a balanced fund (like say Hdfc Prudence – 65% in equities) and sit through the troubled times. Like Peter Lynch says one of the factors needed for making money in the markets is the ‘stomach to see churns’…

Answering her question of  ‘Is it the worst time in world affairs’…No my dear girl, no. This is the worst churn that YOU are seeing. Markets have seen famines, depressions, tsunamis, wars, riots, world wars, cold war, epidemics, bankruptcies, insolvencies, cheating, frauds, over optimism, over pessimism, …etc. etc. See a long term chart of say 150 years of the stock market existence – each of these events look like a blip.

The most important thing for an equity market to do well is DEMOCRACY – so next time there is an election – get off your butt and vote. No democracy no markets  – no wealth

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Let us take a kid born in 1987 – would have graduated in 2007-8 and finished his/her MBA in 2009. This was not a great season to graduate, but would have found a decent job – say paying Rs. 400,000.

Assuming that this kid was very smart he/she would have started a SIP in 2009 or 2010. Now if her parents were from the public sector or worse from the government cadre they would have said the following:

-put money in PPF

- buy a LIC policy – it belongs to the government, your money is safe

- make a RD in a bank.

A smart kid may have done all this with small amounts, but also started a SIP in an equity fund.

Circa Nov 2011. Very good chance that the SIP is showing negative returns, especially if it is a dividend payout scheme (like what all elss schemes ought to be). Imagine the conversation that the kid must be going through at home:

Dad: I told you not to put money in equities….see..you are losing money!!!

Kid: But dad equity is for the long term…

Dad: Do not teach me..I work in a bank, I know how it works

Kid: I am doing only 5000 per month – of which Rs. 3500 is in an ELSS

Dad: You could have opened a FD in my bank. Same tax benefits!

Kid: but dad the interest is taxable…na?

Mom: Just because you have done MBA you think you know more than your dad? He has 22 years experience in banking – same bank that too. He is now close to becoming a GM in the bank!!!

Kid: Mom I am not arguing, just telling you the facts…bank interest is taxable while mutual funds are free of tax…

Mom: Ok enough of your argument…see how much this money would have become in 2-3 years in a bank or PPF. Will it ever become that much in this so called equity? My friend’s son lost Rs. 3.5 lakhs in the share market. We are not so rich to lose it. Remember all this money will be required for your wedding…

Kid: Ok mom…bye see you dad…I will write the bank clerical exam. Afterall the MBA degree is not really helping….

My take on this conversation:

it is really difficult for kids (and even elders, but recent converts) to keep investing in a falling market. Their conviction is severely tested during such times. The market has really fallen off the cliff – and we do not know whether we are mid way or have reached the end. Some very smart people have stopped their SIPs about 12 months back and are currently looking smart.

However it does make sense, kids, to keep investing. If you are scared, it may make sense to reduce the amount – but if you are aggressive you should be starting a new one now! Ok, jokes apart, just keep the SIP going, and in 12 months, 20 months or 30 months, I promise you, your returns will be better than the debt options – all the best.

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- Domestic growth has slowed in recent months to pretty low levels, and a senior banker saying be happy with 6% growth next year

- A fallen and further falling Rupee?

-Inflation stuck at double digits – latest is 10%!

- RBI’s constant raising of interest rates have NO impact on inflation.

Foreign investors have bought just a net $800 million of Indian shares vs.  $29 billion last year!

Korean won has slipped about 1% this year

Malaysian ringgit is down around 2.4%.

The rupee has fallen 14%, ONLY  Turkish lira, down 17%, and the Kenyan shilling, – 15% are behind us.

In October, India’s trade deficit rose to $19.6 billion!

Exports are falling, oil, gold, and coal imports are hurting bad…

Slow FDI and slow FII – The benchmark Sensex is down 20% this year.

Indian government has  raised the limit for foreign institutional investment in sovereign and corporate bonds by $5 billion each. Impact on the currency? Marginal and short term!

The great Mani Shankar Iyer says we should not let the currency float…and should be in the pre 1991 era.

For any good thing to happen, we should get rid of the Congress, or ensure that the Congress gets rid of the ‘left’ inside the Congress.

My vote is for a grinding to lower levels of the sensex – no dramatic fall…but a slow process of 16500-15000 but via 17000 – so SIP will work, do not try timing…

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