Dr Muthu 1.pdf

Archive for November, 2008 Money Mantras….(4) Posted by Muthu on November 30, 2008 I‟ve sent earlier 3 mails on pearls of wisdom from Warren Buffett. I‟m planning to continue to do the same. However from now on, I‟m also planning to include other great investment masters like Charlie Munger, Peter Lynch, Benjamin Graham, Philip Fisher, Sir John Templeton etc. in my series of Mails on the above subject. Hope you would all find this series insightful, enjoyable and rewarding. 1) “Investing is simple, but not easy.”- Warren Buffett 2) “It‟s true, of course, that, in the long run, the scoreboard for investment decisions is market price. But prices will be determined by future earnings. In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard.” – Warren Buffett 3) “In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond.” – Warren Buffett 4) “Somebody once said that in looking for people to hire, you should look for three qualities: integrity, intelligence , and energy. And if they don‟t have the first, the other two will kill you. You think about it; it‟s true. If you hire somebody without the first, you really want them to be dumb and lazy.” – Warren Buffett 5) “Money, to some extent, sometimes lets you be in more interesting environments. But it can‟t change how many people love you or how healthy you are.”- Warren Buffett 6) “We like pessimism because we like the prices it produces. It‟s optimism that is the enemy of the rational buyer.”- Warren Buffett 7) “I‟ve seen more people fail because of liquor and leverage – leverage being borrowed money. You really don‟t need leverage in this world much. If you‟re smart, you‟re going to make a lot of money without borrowing.” – Warren Buffett 8) “The stock market is a no-called-strike game. You don‟t have to swing at everything–you can wait for your pitch. The problem when you‟re a money manager is that your fans keep yelling, „Swing, you bum!” – Warren Buffett 9) “I quickly convinced myself that the true key to happiness lay in a modest standard of living which could be achieved with little difficulty under almost all economic conditions.” – Benjamin Graham 10) “There are two times in a man‟s life when he should not speculate – when he can‟t afford it and when he can.” – Mark Twain

Perils of trading in stock market Posted by Muthu on November 30, 2008 Stock Market is a giant casino. Surprised that this statement comes from an investment advisor who invests in stocks and equity funds and who also advises clients on the same. Let me explain. More than 90% of the people in stock market treat it as a Casino and so it gives results accordingly to them. In a Casino, who earns? As you are aware, Casino is a zero sum game. The only guy who earns consistently in a Casino in none but the Casino Owner. Likewise since most of the people in stock market treat it a like a Casino, the only guy who consistently earn here is none other than your stock broker who keeps providing you almost daily trading tips. If 90% of the people in market only continuously speculate and trade in market and end up loosing money in the long run, why are they doing it? This is similar to why someone is a smoker or alcoholic or drug user knowing fully well it is injurious to health. The answer is addiction! Like wise, for the speculators and traders in the market it is an addiction for continuous action. This continuous action only makes their adrenaline flow. That is why the world‟s greatest investor Warren Buffet says ” Never ask the barber if you need a haircut. There‟s very little money to be made (by a broker) recommending our strategy of buy-and-hold.Your broker would starve to death. Recommending something to be held for 30 years is a level of self-sacrifice you‟ll rarely see in a monastery, let alone a brokerage house.” As Personal Finance legend John Bogle points out,the way to wealth for the stock brokers is to persuade their clients and say ” Don‟t Just stand there. Do Something”. But the way to wealth for the clients is the opposite maxim ” Don‟t do something. Just Stand there.” This is the only way to avoid playing a looser‟s game. Stock or an equity mutual fund is not a lottery ticket. It means that you are part owner of a corporation (as in the case of stock) or corporations (as in the case of equity mutual fund). Roughly only 10% of the people who are involved in the market think on those lines. They are not worried about every day stock price movements. All they care is whether they are invested in a company which is continuing to grow or invested in a diversified fund which is a consistent performer and is able to beat the Benchmark returns. Their typical investment horizon is 10 to 20 years or more and the barest minimum period they look for equity investment is 5 years. Only this 10% would have earned the annualised return of 18% provided by the Sensex in the past. For a trader, few weeks to couple of months itself a long term and for an investor, as I mentioned above 10+ more years is only long term. Please read the book „Fooled by Randomness‟ by Nassim Nicholas Taleb. You would get more insight on the issues I‟m speaking above. Less than 5% of the traders ever make big money in the long run and the remaining 95% are complete loosers. If you are a long term investor, in a growing economy like India, the chances are almost close to 100% that you would make good money in the long term.

Would you want to be an investor or trader? Would you want to be in the 90% loosers category or 10% successful category? I want my clients to be in the 10% successful category who makes good money in the long term, who do not worry about short term volatility, do not track the stock prices and NAV on a daily basis and see where one stands. Once you a take a short term perspective greed or panic would set in and you would end up being like a casino player. Market rewards people with patience and extreme emotional discipline. But be sure that the reward is worth the wait. But we should also be thankful to these speculators and traders. Because of their greed and panic they keep providing us periodic opportunities to keep rebalancing our asset allocation and build our wealth. To explain, you should always follow an asset allocation. How much of your financial assets you want in Equity (Shares, Equity Funds) and how much in Debt (FDs, Postal deposits, Debt Funds etc.). When due to their greed speculators keep raising the shares to the extraordinary levels, your equity as a percentage of financial assets would go up. Then book some profits and put more in debts. When due to their Panic when speculators sell heavily and stocks are available at dirt cheap prices like now, your equity as a percentage of financial assets would go down. Then move a portion of your debt into equity by investing in shares / Equity Mutual Funds. This has been put more succinctly by Dhirendra Kumar of Valueresearch in the following paragraph. “One of the more interesting ideas in asset allocation is to change the balance according to market conditions. The concept is that over medium to long terms, equity markets inevitably move in cycles. There is a part of the cycles where equities are clearly underpriced and there are parts of the cycle when equities are clearly overpriced. In the former, one should give more weightage to equities and in the latter, less weightage. Then, as the markets go through their cycle, the investor will be best able to capture an optimum level of safety with that of returns.” By the suggestion I‟ve mentioned above, you may not get the maximum returns from the market, but would definitely get a very decent return with optimum level of safety. I‟m a champion of long term ( 10 to 20 years) investments in markets especially through SIP (Systematic Investment Plan). As your corpus in SIPs keep growing and once exceeds the asset allocation ratio, we can continue to rebalance your asset allocation by infusing the fresh money into debt funds. For people who do not have fresh money to infuse at that time, a part of the equity holdings can be sold / redeemed and moved into debt funds. There is no point in reviewing asset allocation too frequently. Some people even look at it daily !!!. Once in a year is sufficient to review and rebalance the asset allocation, if required. Considering our tax laws, yearly rebalancing would be more tax efficient too. So please be an investor and not a trader. Then you would never fail in stock market and would end up building a substantial wealth. As I indicated above, it needs enormous emotional discipline to be an investor. I wish that all of us develop the same and reap excellent rewards which Indian stock market is waiting to offer.

On a Lighter Note Posted by Muthu on November 29, 2008 Recently a close relative of mine shared an interesting joke about current financial crisis. I‟ve suitably modified the same and thought of sharing it with you. “A father has 4 sons and is looking worried. A relative visits him. Relative: Why are you looking so much worried? Father: I‟m worried about getting suitable alliance for my sons. Relative: Common yaar. You‟ve four sons who I think are doing reasonably well probably except the younger one Father: My first son is a stock broker. My second son works for Jet Airways. My third son is settled in U.S. and is working for an IT department of a leading bank. My last son, since he had no inclination for studying beyond school is running a small Paan Shop (Paanwallah who sells Paan / Beedas). Relative: So what is the problem? Father: All the girls‟ parents who are approaching our family for alliance wants to give their daughter only to the youngest son. No one is willing give their girl for the first three sons. How can I get the youngest married by passing the eldest three!! That is why I‟m worried.”

My Perspective on Current Stock Market Posted by Muthu on November 29, 2008 I wanted to write this mail as there is all round panic ( fuelled by Media) and negative sentiments. As I‟ve often quoted Buffett, he says we should be greedy when others are fearful and be fearful when others are greedy. This is the only way to make big money from the stock market in the long term. I‟ve been now asked these 2 questions frequently 1) What would happen to our stock market as there is recession all around the globe? 2) What I‟m doing on my investment front? (Nothing wrong with this question as we prefer the restaurant where the owner himself takes the food!) Let me answer both the questions one by one. Stock prices growth are dependant on the growth of the companies. The growth of the companies are dependant on the growth of the economy. Previous to 1980, we were going around 3% (What is famously then called as „Hindu rate of growth‟). Since 1980‟s our economy started growing around 6%. This 6% is real rate of growth (after adjusting for inflation). So the nominal growth was around 12% (assuming an average inflation of 6%).

Good Companies listed in the stock market grew more than this 12%. That is why sensex was able to provide a return of around 18% in the previous 3 decades. Good Equity Mutual funds have provided far superior return than the sensex. Looking at last 10 year data many of the good funds have provided annualized return of more than 25%. This means had you invested Rupees One Lakh in sensex 30 years ago, it‟s worth now would have been around Rs.1.4 crores ( money multiplied by 140 times). Likewise Rupees one Lakh invested in a good diversified equity fund 10 years ago would be worth around Rs.9.3 Lakhs (money multiplied by 9 times). For the last 5 years, our economy has been growing at a real rate of 8% to 9% and at a nominal rate of around 15%+. Companies did extraordinarily well resulting in fabulous return for the investors. Now the recession has started around the globe and it is expected to be longer (3 years+) and deeper. Out of 195 countries in the world, only a handful of countries are expected to grow positively. India is one among them. Even at the most pessimistic estimate we are expected grow at 6% real rate (12% nominal rate) for next 3 years and thereafter grow to the higher trajectory of real rate of 9%-10% (16% nominal rate). As a rule of thumb, good companies grew on an average 1.5X times the growth of economy. This means good companies would grow around 18% for next 3 years and around 25% thereafter. Stock prices always mirror the companies‟ growth in the longer run. Expect few sectors like Auto, Real Estate, IT etc., many other sectors are expected to recover back in next 6 to 12 months as liquidity position is being eased and interest rates are expected to come down and cheap credit would be made available for expansion and working capital. Also government is planning to heavily invest on infrastructure in next 10 years which would continue to fuel growth. Even as per BRIC report, which has been accepted by many reputed economists across the globe, India would maintain a high growth trajectory for next 30 to 40 years and would by pass the GDP of many European nations and Japan some where around 2025. This shows the potential of our growth in next 2 decades. With such a potential, there is no need to panic. One cannot make good wealth in stock market if his mind ruled either by greed or fear (especially at inappropriate times). In in my recent email on „How to become Crorepathi‟, I‟ve mentioned that Rs.One Lakh invested now would become Rs.27 Lakhs (money multiplied by 27 times!) in 20 years and Rs.5000/- per month SIP invested every month for 20 years would become Rs.1.16 crore. A small investment of Rs.5000/- a month fetches you one crore in 20 years. For this I‟ve assumed the past 3 decades sensex return of 18% whereas a good diversified equity fund is capable of producing a superior return than sensex (as proven in the last 10 years). I want to mention here the standard disclaimer: Mutual Fund / Equity investments are subject to market risk. Past Performance may or may not be repeated in future. Now coming to the question of what I‟m doing with my money. Normally I follow a strict asset allocation. To put it simply, asset allocation means how much of your money is invested in Fixed deposits, Liquid Funds, PPF etc. which are classified as Debt, Shares, Equity Funds etc. which are classified as Equity, Gold, Real estate etc. It is better to a follow a proportion for asset allocation which would be unique to each individual based on one‟s life situation and risk profile.

Normally, I do not invest more than 50% of our family‟s financial assets in equity. Looking at the extra ordinary opportunities now available at the markets, we are converting all our financial assets (except PF & PPF which are long term debt investments) into equities. This we‟ve done after keeping in SB A/C / Liquid Funds an amount equivalent to 2 years of our living expenses. I‟ve made a contingency reserve for a longer duration because both me and my wife are in sectors which are likely to face the major brunt due to current slow down. My wife is a software professional and I‟m an Investment Advisors,Financial planner & Faculty / Trainer. Though so far there has been no problems to her on job front and by god‟s grace my profession is also doing well because of my clients who believe in long term investments, my professional competence and integrity. Still to be on the safer side, we have a made this reserve and converting all other money available with us into equities. In my opinion this kind of investment opportunity does not occur more than once or twice in a decade and we should make the most of it. When the markets were absolutely bearish between 2000-2003 post dot com bust and 9/11 attacks, there was panic, fear and pessimism all around. Like now, media was predicting gloom and doom then. If you observe the pattern, in good times media fuels the greed and in bad times it fuels panic. Negative news sells like a hot cake when people are panicked. Though this may sound paradoxical, this is what usually happens. Fortunately by 2000-01, I was exposed to Warren Buffet, Benjamin Graham and Peter Lynch (whom I consider as my role models in the world of investments). So I invested my entire net worth in equities in the bear market (bearing contingency reserve) resulting in my subsequent wealth multiplication and financial independence. I‟m thankful to God, there is another opportunity made available to me now for raising our wealth to next level during the course of next 5 years or so. I‟m not saying that everyone should follow my strategy blindly. Some may be planning for their daugther‟s wedding, Son‟s higher education or for some major medical procedure in the near future. Never ever put this money in equity. In my opinion, equity investments should be made with a minimum outlook of 10 years. The barest minimum one can go is 5 years. Anything less than that, do not even consider stocks or equity funds. All I want to conclude, this kind of opportunity comes only once or twice a decade, so make the most out of it. If you are a SIP investor, continue investing in SIP and if you‟ve lump sum cash, this is the best time to make investments for long term. As the world famous personal finance legend Mr.John (Jack) Bogle mentioned recently, “If you were to put your money away now and not look at it for many years, until you were ready for retirement, when you finally looked at it, you‟d probably faint with amazement at how much money is in there.”

Warren Buffett Speaks….(3) Posted by Muthu on November 29, 2008 Let‟s continue to listen to the investment sage in these periods of tremendous uncertainity and volatality…..

“1) Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell. 2) One of the ironies of the stock market is the emphasis on activity. Brokers, using terms such as „marketability‟ and „liquidity‟, sing the praises of companies with high share turnover. But investors should understand that what is good for the croupier is not good for the customer. A hyperactive stock market is the pickpocket of enterprise. 3) In the business world, the rear view mirror is always clearer than the windshield. 4) You only have to do a very few things right in your life so long as you don‟t do too many things wrong. 5) Risk is a part of God‟s game, alike for men and nations. 6) I want to be able to explain my mistakes. This means I do only the things I completely understand. 7) Tell me who your heroes are and I‟ll tell you how you‟ll turn out to be. The qualities of the one you admire are the traits that you, with a little practice, can make your own, and that, if practiced, will become habit-forming. 8) We will reject interesting opportunities rather than over-leverage our balance sheet 9) Wall Street makes its money on activity. You make your money on inactivity. 10) At the beginning, prices are driven by fundamentals, and at some point, speculation drives them. It‟s that old story: What the wise man does in the begining, the fool does in the end.”

Warren Buffet Speaks….(2) Posted by Muthu on November 28, 2008 This the second part of the quotes from Warren Buffet. Let‟s listen to what the Master says……. ” 1) The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do. 2) Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful. 3) Unless you can watch your stock holding decline by 50% without becoming panicstricken, you should not be in the stock market.

4) The most important quality for an investor is temperament, not intellect… You need a temperament that neither derives great pleasure from being with the crowd or against the crowd. 5) Working with people who cause your stomach to churn seems much like marrying for money – probably a bad idea under any circumstances, but absolute madness if you are already rich. 6) Managers thinking about accounting issues should never forget one of Abraham Lincoln‟s favorite riddles: `How many legs does a dog have if you call his tail a leg?‟ The answer: `Four, because calling a tail a leg does not make it a leg‟ 7) For some reason people take their cues from price action rather than from values. Price is what you pay. Value is what you get. 8) It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you‟ll do things differently. 9) The first rule is not to lose. The second rule is not to forget the first rule. 10) There seems to be some perverse human characteristic that likes to make easy things difficult. “

Warren Buffet Speaks….(1) Posted by Muthu on November 28, 2008 Let us listen to Warren Buffett: ” 1) You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right. 2) What we learn from history is that people don‟t learn from history. 3) A pin lies in wait for every bubble and when the two eventually meet, a new wave of investors learns some very old lessons. 4) You should invest in a business that even a fool can run, because someday a fool will. 5) We don‟t get paid for activity, just for being right! 6) It has always been a fantasy of mine that a boatload of 25 brokers would be shipwrecked and struggle to an island from which there could be no rescue. Faced with developing an economy that would maximize their consumption and pleasure, would they, I wonder, assign 20 of their number to produce food, clothing, shelter, etc., while setting five to trading endlessly on the future output of the 20?” (Poking Fun at Option Traders) 7) Never ask the barber if you need a haircut. There‟s very little money to be made (by a broker) recommending our strategy of buy-and-hold.Your broker would starve to death.

Recommending something to be held for 30 years is a level of self-sacrifice you‟ll rarely see in a monastery, let alone a brokerage house. 8) A public-opinion poll is no substitute for thought. 9) The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective. 10) When you combine ignorance with leverage you get some pretty interesting results.”

How to become a Crorepathi? Posted by Muthu on November 26, 2008 I‟m in the business of meeting various people everyday for Financial Planning, Investment Advice, Teaching and Training. One common question I come across is how to become Crorepathi (i.e) to have One Crore worth of financial assets. I want to provide an answer for this through this mail. If you want to become Crorepathi in 10 years, You‟ve to invest Rs.30,000 every month. If the time span is 20 years, then the investment amount per month is only Rs.4330/-. If you can increase the time span to 25 & 30 years respectively, the the monthly investment come to Rs.1740/- & Rs.708/- respectively. If you want invest an one time amount to achieve a target of Rs.1 Crore then the investment amount is Rs.20 Lakhs, Rs.3.65 Lakhs,Rs.1.60 Lakhs, Rs0.7 Lakhs for 10 years, 20 years, 25 years and 30 years respectively. I‟ve assumed an annualized return of 18% for arriving at the above numbers. 18% is the annualized return provided by Sensex in the last 30 years.In the past, well managed diversified equity funds have provided returns far superior to the Sensex. I want to mention here the standard disclaimer, past performance may or may not be repeated in the future. Looking at the growth prospects of Indian economy for next three decades (based on BRIC report & other sources), I feel that superior return from equity is possible though the ride would be very bumpy (volatile). In order to appreciate the above numbers, you need to know the value of one crore today for the periods mentioned above. For this I‟ve assumed an average inflation rate of 6%. Today‟s value for future Rs.One crore are as follows 10 20 25 30

yearsyearsyearsyears-

Rs.56 Rs.31 Rs.23 Rs.17

Lakhs Lakhs Lakhs Lakhs

Any investment in equity market has to be preferably done for a minimum term of 10 years. There is a possibility that market may atleast go through 2 cycles in a period of 10 years. The barest…. minimum tenure one can invest in equity is 5 years. Anything lesser than that may prove to be very risky. It is better to avoid equity market totally if your investment tenure is less than 5 years.

Archive for December, 2008 Money Mantras….(6) Posted by Muthu on December 29, 2008 I always feel nice to share with you the „Money Mantras‟ series, the insights and distilled wisdom of great masters and thinkers. I also have a request to make. Please make it a point to share your feedback, perspectives and criticism for the articles I write. Some of you do keep providing feedback and that motivates me to write further. I know that all of you are tight pressed for time, so please do write once in a while if not regularly. Also request you to refer this blog cum portal to your friends and colleagues. I‟ve passion for spreading financial literacy and making as many people financially independent as possible. All my articles are written with this perspective in my mind and I rarely promote our services in these articles. So please do spread a word. Now let‟s come to this edition of „Money Mantras‟. 1) Only when you combine sound intellect with emotional discipline, you get rational behaviour. – Warren Buffett 2) Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. – Warren Buffett 3) You do things when the opportunities come along. I‟ve had periods in my life when I‟ve had a bundle of ideas come along, and I‟ve had long dry spells. If I get an idea next week, I‟ll do something. If not, I won‟t do a damn thing. – Warren Buffett 4) You only have to do a very few things right in your life so long as you don‟t do too many things wrong.- Warren Buffett 5) To buy when others are despondently selling and to sell when others are avidly buying requires the greatest of fortitude and pays the greatest ultimate reward.- Sir John Templeton 6) Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.- Sir John Templeton 7) The economy depends about as much on economists as the weather does on weather forecasters. -Jean-Paul Kauffmann 8) When I was young I thought that money was the most important thing in life; now that I am old I know that it is. -Oscar Wilde 9) October: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August and February. -Mark Twain 10) It‟s good to have money and the things that money can buy, but it‟s good, too, to check up once in a while and make sure that you haven‟t lost the things that money can‟t buy. George Horace Lorimer

Money Mantras….(5)

Posted by Muthu on December 22, 2008 Wishing you all a bright week ahead. I started this series as „Warren Buffett Speaks‟ and later rechristened it as „Investment Master Speaks‟ to make it more inclusive. Now again I‟m renaming it as „Money Mantras‟ so that the pearls of wisdom need not to be restricted to „Investment‟, but to the entire gamut of Personal Finance. Now let us hear from the great masters…. 1) “In a difficult business, no sooner is one problem solved than another surfaces – never is there just one cockroach in the kitchen.” – Warren Buffett 2) “You get recessions, you have stock market declines. If you don‟t understand that‟s going to happen, then you‟re not ready, you won‟t do well in the markets.”- Peter Lynch 3) “When stocks are attractive, you buy them. Sure, they can go lower. I‟ve bought stocks at $12 that went to $2, but then they later went to $30. You just don‟t know when you can find the bottom.” -Peter Lynch 4) “Just because the price goes up doesn‟t mean you‟re right. Just because it goes down doesn‟t mean you‟re wrong. Stock prices often move in opposite directions from the fundamentals but long term the direction and sustainability of profits will prevail.” -Peter Lynch 5) “Although it‟s easy to forget sometimes, a share is not a lottery ticket… it‟s partownership of a business.” – Peter Lynch 6) “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”- Warren Buffett 7) „The four most dangerous words in investing are ” This time it‟s different” „- Sir John Templeton 8) “Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac‟s talents didn‟t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, „I can calculate the movement of the stars, but not the madness of men.‟ If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increase.”- Warren Buffett 9) “We‟ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie (Munger) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.” – Warren Buffett 10) “So you think that money is the root of all evil. Have you ever asked what is the root of all money?” – Ayn Rand

My Contribution -Nanayam Vikatan – Current Issue Posted by Muthu on December 4, 2008 I‟m pleased to share with you my answer provided for a reader‟s query in the current issue (December 15th 2008) of „Nanayam Vikatan‟.

Incidentally, I was pleasantly surprised to learn that „Nanayam Vikatan‟ (NV) is the largest selling Personal Finance magazine despite its geographic and linguistic limitations. Normally, NV team gives me a real case study for which I provide a detailed solution, which is communicated separately to the reader. Due to space constraints, only a part of the query and a small part of the answer actually gets published in the magazine. The case given to me this time is a pathetic one. This person has been blessed with a girl baby after 16 years of marriage, after countless treatments and loads of prayers. Unfortunately, the child has been born with a hole in the heart and is scheduled for a major surgery next month costing few lakhs. Though his salary is not high (earning Rs.12,000/per month), he has accumulated close to Rs.15 Lakhs totally in the last 3 decades of his career, by doing creative design job for export companies on a freelance basis in addition to his routine job. A „friend‟ of him, who is also an insurance agent made him to invest in ULIPs, his entire life savings into 10 different plans. This has happened during the course of last 3 years. The agent has earned few lakhs as premium by exploiting this man‟s ignorance and our reader‟s net worth is now miniscule of what it was due to heavy distribution commission, admin charges, mortality charges and present market conditions. He is now having money just enough to cover the cost of surgery scheduled for next month. I‟ve provided a detailed solution as to when he should come out of the ULIPs, how much to invest in Debt & how much in equity, taking term cover & Medical insurance cover, investing small amounts regularly through SIPs for his daughter‟s future etc. It is never advisable to mix Investment and Insurance. I‟m planning to mail and post in our website soon the perils of mixing investment and insurance. As Warren Buffet has said, Investment is simple, but not easy. Likewise, insurance decision is not very tough but people due to their ignorance and intermediaries due to their excessive greed (desire for swank cars, MDRT status, vacation in different countries, exotic gifts, gold bars, extraordinary commission……. the list is too big to include here) sell insurance as an investment product. When we take a fire insurance, we never want our buildings to catch fire so that wecan get return, When we take a medical cover, we never want to fall ill so that wecan get returnBUTwhen it comes to Life, we want a return for survival ! Strange paradox, which is present only in Indian Psyche and not in developed worlds. In developed countries, terms covers are the most preferred product whereas in India your agent would turn a deaf ear, if you ask about term insurance. As mentioned above, I‟m planning to post by next week how your insurance advisors earn more than or equal to what you earn not only in ULIPs but even in many traditional plans. I know that some of my friends in the insurance advisory field may not be happy with what I‟m going to write but as a client you need to know the truth. Also remember that in any financial product, if your intermediary earns more or equal to what you earn, there is a tremendous flaw in the very structure of the product. From now on, make it a point to ask your advisor, how much he would earn in first three years and how much from 4th year onwards, when he or she sells you an insurance product. Also ask for the total costs (total amount charged by insurance company other including payouts made to agents). When

they ask you not to worry about that as the insurance company is the one who is paying them and not you, tell them very clearly that it is out of your premium, they get that money and so you‟ve every right to know that. (Please refer to Page# 66 in the issue dated 15/12/08 for above Q&A. I would also like to thank „Nanayam Vikatan‟ for providing regular opportunity to contribute in their magazine)

Archive for January, 2009 Money Mantras….(8) Posted by Muthu on January 27, 2009 As always, I‟m glad to share with you the new set of money mantras. This article contains some very beautiful quotes from Sage of Omaha, Warren Buffett. Also included are money quotes from father of modern Psychology and father of modern Economics!!. Please do read and enjoy the quotes and keep posting your feedback. Your words of appreciation are tremendous source of inspiration for me. 1)”The capital Warren Buffett

market

without loss is

like

Christianity

without

hell.”

–

2) “I like sharing my ideas but don‟t like imposing my ideas on anybody. It doesn‟t make sense and is a waste of time. If somebody has decided that they know everything that is there to know, nobody can help them. The best way to learn and succeed is to know that we know nothing. There is an entire universe out there and still some of us think we can know everything.” – Warren Buffett 3) “In the world of investing a few people after making some money tend to imagine they are invincible and great. This is the worst thing that could happen to any investor, because it surely means that the investor will end up taking unnecessary risks and end up losing everything – arrogance, ego and overconfidence are very lethal.”- Warren Buffett 4) “Personally I don‟t feel too comfortable with too much extravagance, because think like an investor. My thought process doesn‟t see a lot of value in a fancy designer suit. Thinking like an investor always is very important to bring in of discipline and focus. Before reading balance sheets and investing you make sure your outlook and mindset is that of an investor.”- Warren Buffett

I always car or a a sense need to

5) “Never let ego, arrogance and over-confidence control you – not just as an investor but also as a human being. You will never have internal peace if you are unable to look at everybody around you with love, compassion and understanding.”- Warren Buffett 6) “Irrespective of who the person is, he or she can teach you something you don‟t know. I have learnt so much from people all around me and I wouldn‟t have been able to learn all these wonderful things if I had not spoken to them with a smile. To quote Sir Isaac NewtonIf I have seen farther than others, it is because I have stood on the shoulders of giants.”- Warren Buffett 7) “The market does not beat them. They beat themselves, because though they have brains they cannot sit tight.” -Jesse Livermore 8) “You can never predict when that unknown torpedo will come out of the dark and smash the price of a stock.” -Ralph Seger

9) “Just as a cautious businessman avoids investing all his capital in one concern, so wisdom would probably admonish us also not to anticipate all our happiness from one quarter alone.” -Sigmund Freud 10) “To what purpose is all the toil and bustle of this world? What is the end of avarice and ambition, of the pursuit of wealth, of power and pre-eminence?” – Adam Smith

My Contribution-Nanayam Vikatan- Issue dated 31.01.09 Posted by Muthu on January 21, 2009 I‟m pleased to share with you my contribution in the current issue of Nanayam Vikatan. Please refer to the page number 72 of this issue. I‟ve answered queries from 2 readers. The first query pertains to building wealth for his daughter‟s wedding (who is currently one year old) & his retirement after 20 years. I‟m a strong advocate of long term SIP for wealth building. This man is capable of saving Rs.2000/- per month regularly and I‟ve recommended him to choose any 2 schemes out of the recommendations provided by me and go for a 20 year SIP. This would help him to meet his goals of daughter‟s marriage and retirement. For the common man, SIP is the best tool to create sustainable long term wealth through stock markets. I‟ve written about this in detail in my earlier article „ How to become a Crorepathi‟ and I‟ve provided the link below for your easy reference https://wisewealthadvisors.wordpress.com/2008/11/26/how-to-become-a-crorepathi/ The second query is an interesting one. He wants to know whether it is better to go for a mutual fund scheme or a pension plan offered by an Insurance company for building / investing the pension corpus. For the purpose of building the corpus, I would suggest the mutual fund route over pension plans offered by Insurance companies as the latter have higher charges which would eat away your savings. As one gets closer (say 5 years+) to retirement, he should start moving the corpus from the equity to debt schemes. This is nothing but revision in his asset allocation pattern as he moves closer to his retirement age. Once he reaches the age of retirement, he can invest the corpus in single premium annuity plans of Insurance companies. Single premium plans usually have significantly lower charges over the long term deferred annuity plans. Also it is not necessary to invest the entire corpus in insurance annuity but also consider other options like Senior Citizen savings scheme, Post Office MIS etc. Please review and share your thoughts.

Money Mantras….(7) Posted by Muthu on January 13, 2009 On Sunday we heard about the government‟s nominees in the Satyam Board. Government is taking whatever right steps possible in the given situation. Mr. Deepak Parekh is a professional of very high calibre, integrity and a face of corporate governance in India. This would give a strong boost to the sullen

image of Satyam. I‟m confident that with right board, taking right steps to retain the customer‟s confidence and ensuring that the employees morale level are high may salvage Satyam. But what I‟m unsure is about the „economics‟ part of Satyam. What is its actual balance sheet? Does it have a positive net worth, especially in the context of real estate nexus with Maytas Infra & Maytas Properties? What are going to be its legal liabilities and damages for all the misdeeds of the past to various stake holders? Whether the organization can survive despite all these? Or will it be forced into a bankruptcy? Being a Buffett admirer, I am reminded of one of his quotes ”When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact”. Unless we know the extent of Satyam‟s „bad economics‟, which would take more time to fully unravel, it is very difficult to predict the future of Satyam. If I‟m a Satyam employee or a shareholder, I would prefer to follow this maxim of Buffett “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks”. But as employees, in the present market scenario, changing vessels is also a daunting task. Some one asked me yesterday whether the government would take over Satyam to protect the 53,000 employees. Government is doing all the possible help it can, but taking over is highly unlikely. Then what about the lakhs of workers who have already lost employment in thousands of textile companies in Tirupur, diamond cutting companies in Surat and Auto Ancillary companies across India?. Government can only prevent further damage, appoint high calibre professionals and infuse temporary liquidity. We‟ve to wait and watch if this salvages Satyam. Glad to be back with the Money Mantras series. This is the first set of Mantras for the New Year. This is the only series of articles wherein 100% of my readers say they are able to understand, enjoy and appreciate it. Though my other articles are also well read and appreciated by many, there are some (especially who have less orientation towards personal finance) who say that certain aspects of some of my articles are beyond their understanding. I do not blame them for this and instead trying to do my best to make my articles understandable for everyone so that financial literacy spreads and grows. I may also repeat some of the money mantras (which appeared before) in my series. This I will do it consciously so that we‟ve opportunity to go through some important pearls of wisdom again, which may provide us fresh insights. However I would ensure that a) every new series have fresh set of Mantras too so that you do not find these articles merely repetitive b) I would give sufficient gap before repeating a Mantra. Now let‟s go for today‟s mantras. 1) “You can‟t make a good deal with a bad person.” – Warren Buffett 2) “If you let yourself be undisciplined on the small things, you will probably be undisciplined on the large things as well”.- Warren Buffett 3) “The market, like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive those who know not what they do”.-Warren Buffett 4) “It‟s easier to stay out of trouble than it is to get out of trouble.” – Warren Buffett 5) “Stock speculation is largely a matter of A trying to decide what B, C and D are likely to think-with B, C and D trying to do the same.” – Benjamin Graham 6) “When it is a question of money, everybody is of the same religion.” -Voltaire 7) “Money is like manure. You have to spread it around or it smells.” -J. Paul Getty 8) “Money is neither my god nor my devil. It is a form of energy that tends to make us more of who we already are, whether it‟s greedy or loving.” -Dan Millman 9) “There is a very easy way to return from a casino with a small fortune: go there with a large one.” – Jack Yelton 10) “Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.” -Sam Ewing

Your feedback on my Satyam Article Posted by Muthu on January 9, 2009 Thanks for your feedback on my yesterday‟s article about Satyam. Request your continued feedback, views and support. You may also post your comments in the portal, if you wish so. Only your encouragement and my passion for sharing knowledge are the driving force behind my writings. Despite having migraine, I watched the press conference of Satyam yesterday. Whatever little hope one might have had would have dented by the statements made by Ram Mynampati and his team. I‟m amazed by the statement that people at the level of Directors, Vertical Heads and Business Heads were not even aware of the margins. Only Ramalinga Raju was aware that the margins were as low as 3% (which he inflated in the books and showed higher profits) and every one else in the senior management had no clue about this. I‟ve to come to the conclusion that either these people are blatant liars and Raju‟s cronies or they are so dumb and incompetent for the position they are holding in the organization. The former seems to be true. I‟ve personally worked in BPO for 10 years and people who are exposed to IT & BPO know that truth is the otherwise. I‟ve worked from the level of Project Leader to Asst.Vice President. From the time I became a Project Manager, I was involved in budgeting, Cost Vs. Revenue analysis, Billing etc. From the time I was a General Manager, I know the micro details such as revenue and cost per seat, transaction wise break up of cost, apportionment of indirect cost like shared services, infrastructure etc. and precisely knew the profit or loss we were making for the project / vertical along with margins. How come then the entire top management team, Finance and Accounts, Audit Committee, Internal & Statutory auditors, Bankers who did due diligence were not even aware of any of these details ?. How come nobody even had a slightest doubt or suspicion? I believe the money would have been continuously siphoned off with the knowledge of many people and even people who did not profit from it should definitely have been aware that the business they are heading and running are not profitable. I do not believe the crap that these guys were „prisoners of circumstances‟. These people are not poor but well qualified IT professionals earning lakhs of rupees every month and probably would have made millions of rupees through ESOPs. Why did not they have the conviction to atleast question the questionable practices or atleast walk away. I can tell from my own life, this is very much possible. My first job was as an „Accounts Assistant‟ in Elnet Ltd. (formerly Elcot New Era Technologies Ltd.), which was a joint venture between Elcot and a Private group. Though I‟ve just finished my graduation and it was my first job, during the course of job, I started feeling fishy and felt that the top management may be indulging in questionable activities. I also used to feel that people in the middle management were aware of the specifics of deeds of top management and so on their part used to prepare false bills, expense statements etc. and keep claiming their part of the loot. The whole atmosphere was stinking. I was poor then (literally living from month to month on a measly income of Rs.1200/- per month with zero assets and some loans), still had the courage to resist whenever I was asked to be a party to „petty frauds‟ of some middle managers and did not budge when I was coerced and threatened. Despite my poverty and uncertain future, I boldly took the decision of quitting the organization rather than a party or a passive observer to the fraud. After I quit, based on investigation by government agencies, later the entire top management team, some people in Finance etc. were arrested and if my memory is correct got later convicted for a few year term in jail. I‟m not claiming to be Mr.Perfect. I‟ve my own imperfections and am aware of the same. At the same time I can say with conviction, if you choose to be ethical and fair in your business or employment and stand firm with that conviction, God will show you ways for a decent livelihood. I can say with pride that I‟ve never evaded any tax, never had any undisclosed income, make it a point to submit my entire account of income, Assets and Liabilities every year promptly to Income tax department. Filing of details about

assets is not mandatory if you are a salaried person. But I‟ve been filing my P&L A/C and Balance sheet even when I was employed. I do not have one rupee of unaccounted income (which is colloquially called as „black money„). As I told you yesterday, my inspiration for this comes from Buffett. When he can become the world‟s richest person by being ethical and honest, why can‟t we give it a try and see if we can survive decently without compromising our values? I was able to achieve my financial independence purely through ethical means and by paying all taxes. If there is a conviction, God will show the way. That is why I refuse to accept that this Satyam team who would have colluded with Raju would have been prisoner of circumstances. It is their greed which would have made them either to be active or passive participants. I‟m sorry to use the term. Ram Mynampati would have been thinking that we are all „thumb suckers‟ to believe the blatant lies he was making in the full glare of media. I suspect whether they even have money to pay salaries to employees for the month of January. Also Satyam has stated that Rs.6000 crores was in the Current Account of the Banks. How come the treasury management team of the organization would leave such huge money without earning any interest? Why no Analyst of Investment Banks and broking houses who are covering the stock have ever questioned this? This Rs.6000 crores would earn a minimum of few hundred crores of rupees every year if parked in a Liquid Plus scheme of a good mutual fund, without any threat to erosion of the capital. Why no Anlayst asked as to why Satyam is not increasing their profit by deploying and receiving interest on the idle fund. As an Investment Advisor, I advise my corporate clients who have surplus running into few million rupees to park them in liquid funds to earn better income for their organization. The very fact that a big corporate like Satyam did not follow even this basic treasury management function should have raised the eye brow of the analysts and they should have grilled the management in the earnings call. Probably they were sleeping or got too much carried away by the brand name of „Satyam‟. How come the Bankers gave an account balance or certificate of confirmation for the non existent money of Rs.6000 crores. How they would have accounted this? Were the documents forged? Why no due diligence was carried out by the bank? Again whether the bank in the question is the same bank which often appears in news for all the wrong reasons? I feel that Satyam is India‟s Enron and WorldCom. PWC may end up being another Arthur Anderson (atleast in India). I would strongly urge you to read the book „ The conspiracy of fools„ which would be more thrilling than a fiction, explains in detail how the global energy major Enron and top audit firm Arthur Anderson colluded and created a massive fraud. Probably some one would write such a book on Satyam in Future. I want to again reiterate that a fraud of this magnitude is impossible with out the knowledge and collusion of many people, both insiders and outsiders. I sincerely feel sorry for thousands of Satyam employees, their families, shareholders, vendors and various other stake holders. Sorry Friends, the entire Satyam top management has taken you for a royal ride and has messed up your lives. I pray and wish that you are able to come out of this pain sooner and chart a new path.

Warren Buffett on Satyam Posted by Muthu on January 8, 2009 It is very sad to note the latest developments in Satyam Computer Services and to see such a large and a once reputed organization going down under. When such events happens, which keeps happening across the globe periodically, your faith in the whole system gets shaken and it takes some time for the pain to heal and recover. My heart goes out to the thousands of Satyam employees, their families and Stake holders who face an uncertain future. Life is a Paradox. People who are familiar with Buddhism, Advaita or Psychology would be able to understand and appreciate the paradoxical nature of Life. It is indeed Paradoxical, a company which has been steadily built on lies and „Asatya‟ (Untruth) is named „Satyam‟ (Truth).

It is also surprising that a global audit firm with a great reputation, PWC would not even verify the bank statement to see the closing balance at the end of every quarter and financial year! Is this believable? How come the internal audit team, audit committee, CFO and key people in Finance team, bankers who do due diligence were not even aware of this? Raju‟s letter has brought out only tip of the iceberg. A company cannot create fictious bank balance of Rs.7000 crores without the connivance of so many people, both internal and external. Let us see what investigation reveals. It is also ironical, when I remember about a job offer I received from Satyam after various rounds of discussion in Chennai in 2002 and was asked to fly down to Hyderabad for a final discussion (which was a mere formality as per their HR) and to pick up the offer letter. During the final discussion with HR, as I was candid with their operations team, I shared with them certain truth about my life situation then, which I felt that the organization needs to know. You know what, inspite of the promise of a „job offer‟ and calling my „flying down to Hyderabad‟ a mere formality, I was rejected by them for telling the truth. Probably I was too naive then and did not understand then that in Corporate World, you only have to speak what people like to hear, candour is not a virtue and very few people value you for your honesty though they may claim it as a part of their corporate ethos and mission statement. After this current Satyam episode, our media which is very keen and tirelessly trying to bring accountability for Politicians, Police & Bureaucrats and always putting them under scanner should do the same for our businessmen too. I feel that in many cases both ruling and business class are hand in glove and media should also start focussing and bring under scrutiny business class and their vast empires. This would ensure that our business men become ethical (atleast out of compulsion due to media glare) and held accountable for their activities and follow the highest norms of corporate governance set by companies like „Infosys‟. Last but not least, there are lot of self proclaimed godmen with „Trusts‟ having tons of money, the source of which always remains under shrouds of mystery should also be brought under media scrutiny. Not only their source of money but their „activities‟ too should be under radar. I‟m not talking here about genuine Sadhus, Jnanis and enlightened souls who are only a minority but the vast majority of fraudsters in „Spiritual Business‟, which is one of the easy ways adopted by many to get money, respect and popularity. Coming to the subject of the mail, you may wonder when Warren Buffet ever spoke about Satyam?. What has happened to Muthu? Why he choose the title „Warren Buffett on Satyam‟. I have given below four nuggets of wisdom from Buffett which you would see as to how it is tailor made for „Satyam‟ in the current situation. That is the reason for my naming this article. “1) We are suspicious of those CEOs who regularly claim they do know the future – and we become downright incredulous if they consistently reach their declared targets. Managers that always promise to “make the numbers” will at some point be tempted to make up the numbers.” 2) The reaction of weak management to weak operations is often weak accounting. 3) We also believe candor benefits us as managers. The CEO who misleads others in public may eventually mislead himself in private. 4) It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you‟ll do things differently.” As I‟ve told you before, 9 years ago I took Warren Buffett as one of my role models in life not because he is rich. There are very many people who are rich with questionable means, attitudes and approach. I rarely respect anyone only for their wealth. Warren Buffet proved to the world that one can become rich, not simply rich, but the richest person on the planet by being completely ethical, honest, intelligent, humble, level headed, giving and above all a rare sense of wit and wisdom. I do see many rich people and very few are above questionable means. Infact I also see people who are both rich and religious (which one

may think as an excellent blend), but unfair in their business practices, evade taxes, bribe their way in all transactions and still think that they are good guys. They have one face for God and another face for poor mortals like us. Remember the poetry about Abu Ben Adhem which we read in School days. It is not important to be in the list of people who love God, it is more important to be in the small list of people whom God loves. Warren Buffett is an agnostic, some time even bordering on atheism, but I sincerely believe he would definitely in the small list of people whom God loves. One last word, retain a healthy dose of scepticism in your dealings with various category of people like Businessmen, Financial Intermediaries, Medical Professionals, Priests, Godmen , Media etc. It is very difficult to come across professionals with a right blend of ethics, honesty, competence and wisdom in any field and we have to follow the caveat „Let the buyer be Aware‟. Nothing is a substitute for your own intelligence, discretion and judgement.

Giving Posted by Muthu on January 1, 2009 Wish you and your family a very happy, prosperous, healthy and wonderful new year. Today we‟ve stepped into the New Year 2009. There are people who take new year resolutions and there are others who say why one should wait for a new year day to take a resolution. Whichever category you belong to, I wanted to share few thoughts with you on this new year day. In my opinion, Money or Wealth basically Consumption – spending for our life style or „rainy days‟ 3) Giving- what we spend second or both but completely ignore the

has three primary functions 1) Current 2) Savings and Investments- for our future safety for others. Most of us focus either on the first or last one.

For the last 2 years, I‟ve been an Investment advisor, Financial Planner, Trainer and Teacher and hence come across lot of people. I‟ve made presentation on Wealth Building in various forums including Spiritual Organizations. So I feel that I‟ve seen wide spectrum of people to obtain certain insights. When it comes to Money, the focus is primarily on either consumption or investment. But I feel that we should start giving equal importance to „Giving‟- donations or charities. To some extent, all of us give some money to others for helping them. No doubt about it. But it is very random and impulsive. We are not as methodical or as planned like how we approach our expenses or savings. I did some research about western societies on how they give. On an average, they donate 2.7% to 4.2% of their post tax earnings for helping the under privileged in their local community. One interesting observation I found was that the Lower and Middle income group donate around 5% of their post tax earning where as the Rich and Ultra Rich donate close to 3% of their Post Tax earnings. In Modern India, though we are rooted in a rich culture and tradition, I feel that giving is relatively less and is not in an organized manner. You may ask me, since I‟m talking about giving, what I‟m doing for others. As I always tell you, even when I recommend investments, I eat the same food I serve others. So the same is the case with „Giving‟ too. Till 2006, even though I was considering myself „generous‟, when it comes to helping others, I was also giving only on a random and impulsive basis. I did not plan for giving, like

I used to meticulously plan my expenses and investments. On introspection, I felt that I need to change this trait of mine. Hence I resolved and has started giving 10% of my post tax income towards charities from last financial year. Also my wife is sponsoring the annual cost of education for couple of needy children and is planning to do more. To have an external check, I‟ve requested my Auditor to verify if my contribution to others is not lesser than 10% of my post tax income. For some reason, either I‟m unable to find a suitable recipient or due to liquidity issue, if there is a short fall in giving, it would be automatically carried over to next financial year. Since all my income and wealth is 100% accounted for (i.e. no black money), it is easier for my auditor to verify whether I‟m carrying out the self imposed obligation. A word here about my Auditor, Mr.S.Ravi. When I discussed the above issue with him initially, I also came to know about how much he is giving for charities, despite his huge commitments and liabilities. It is not appropriate for me to discuss further his personal details. All I can say is „Hats off to him and May his tribe grow‟. To quote Bhagwan Ramana Maharishi, “What one gives to the other, he gives himself‟. If we look this statement in a narrow perspective, we may understand that if we give others, God will give more to us. But this is an incorrect way of understanding wherein we are making „Giving‟ an „Investment‟ for better returns in future. In a broader perspective, this statement means that we are all inter connected. In an inter connected world, pain and suffering of others affects oneself. That is why Ramana also used to say that „There are no others‟. For the purpose of this article, I‟ve restricted „Giving‟ to the monetary giving. As you all know, giving is not limited only to money. Giving can also be in the form of time, energy, kind words, listening with empathy, prayers, sending goodwill and peace through meditation etc. Some times these intangible giving is more valuable than monetary giving. Let us keep this perspective in mind while we donate money. Also giving need not be restricted to the organizations which are registered under Income Tax and offering us Section 80G benefit. Giving can also extend to „unorganized group‟ (i.e.) helping our maid servant‟s children education, helping the old security guard for his medical expenses, feeding the poor old and disabled people we come across in streets etc. I would strongly urge that let us give 1% to 3% of our income exclusively for the benefit of others. This is only the minimum threshold, the more one is capable and willing to give, it is better for our society. In a country like ours, where around 750 million people are earning less than a dollar per day, we can understand how each one of us can make a significant contribution to the society through our giving. Usually I write a lot on investments, wealth building on a regular basis. But had a strong urge to share my thoughts on giving with all of you on this New year Day. Hence this article.

Archive for February, 2009 Money Mantras….(9) Posted by Muthu on February 11, 2009 It has been 2 weeks since I‟ve written you. I was suffering from viral fever followed by Vertigo resulting in my long silence. Now I‟ve started recovering.

I feel good to start writing again and wanted to start my February articles with Money Mantra series. 1) “The most important quality for an investor is temperament, not intellect…You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” – Warren Buffett 2) “We both (Warren Buffett and I) insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think. So Warren and I do more reading and thinking and less doing than most people in business. We do that because we like that kind of a life.” – Charlie Munger 3) “Thousands of experts study overbought indicators, oversold indicators, head-andshoulder patterns, put-call ratios, the Fed‟s policy on money supply, foreign investment, the movement of the constellations through the heavens, and the moss on oak trees, and they can‟t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.”- Peter Lynch 4) “Once you have ordinary intelligence, what you need is the temperament to control the urges that gets other people into trouble in investing.” – Warren Buffett 5) “Ben‟s (Benjamin Graham) Mr. Market allegory may seem out-of-date in today‟s investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising „Take two aspirins‟?” – Warren Buffett 6) “Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid.”-Warren Buffett 7) “To suppose that the value of a common stock is determined purely by a corporation‟s earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Wells when he told them over the radio that the Martians had landed.” – Jim Grant 8) “Individuals who cannot master their emotions are ill-suited to profit from the investment process.”- Benjamin Graham 9) “Money can‟t buy happiness, but it can buy you the kind of misery you prefer.” -Author Unknown 10) “Before borrowing money from a friend, decide which you need most.” -An American Proverb

Archive for March, 2009 Money Mantras….(10) Posted by Muthu on March 25, 2009 This is the 10th article in the „Money Mantras‟ series. With this we‟ve hit a century, 100 quotes! I‟m glad that you continue to enjoy the wisdom from various sources about money.

1) Of one thing be certain: if a CEO is enthused about a particularly foolish acquisition, both his internal staff and his outside advisors will come up with whatever projections are needed to justify his stance. Only in fairy tales are emperors told that they are naked – Warren Buffett 2) The only man who sticks closer to you in adversity than a friend is a creditor. Anonymous 3) There are plenty of ways to get ahead. The first is so basic I‟m almost embarrassed to say it: spend less than you earn. -Paul Clitheroe 4) We are not to judge thrift solely by the test of saving or spending. If one spends what he should prudently save, that certainly is to be deplored. But if one saves what he should prudently spend, that is not necessarily to be commended. A wise balance between the two is the desired end. -Owen Young 5) The best assets you can have during inflation are your abilities. – Warren Buffett 6) The stock market is a no-called-strike game. You don‟t have to swing at everything–you can wait for your pitch. The problem when you‟re a money manager is that your fans keep yelling, „Swing, you bum! – Warren Buffett 7) Tell me who your heroes are and I‟ll tell you how you‟ll turn out to be. The qualities of the one you admire are the traits that you, with a little practice, can make your own, and that, if practiced, will become habit-forming. – Warren Buffett 8) “If investing is entertaining, if you‟re having fun, you‟re probably not making any money. Good investing is boring” – George Soros 9) Growth for the sake of growth is the ideology of the cancer cell. -Edward Abbey 10) The gap in our economy is between what we have and what we think we ought to have – and that is a moral problem, not an economic one. -Paul Heyne

My Experiences – Jaya TV Show Posted by Muthu on March 14, 2009 First and foremost I‘m thankful to many of you who made it a point to wish me over Phone, Email and SMS for a good performance in the show. Also some of my friends and well-wishers, whom I met on Thursday, encouraged me a lot. Above all my wife was very supportive and was very particular that I should make use of this opportunity and not let it to go due to my nervousness or health concerns. You were able to empathize with the fact that I was facing the T.V.cameras for the first time and that too in a one hour Live talk show which made me nervous. As I mentioned in the last mail, I thought (even still think!), a recorded show is more comfortable for the participant as there is an opportunity for reshooting / editing / correcting, if some thing goes wrong (which may as facing a set of Cameras focusing on you continuously makes you self conscious and is unnerving). But with effort and counselling from friends like you, I made up my mind to face the day with as much confidence as possible. I also realized the fact how sharing one‘s vulnerability with people who can be trusted and counted upon, makes you actually strong. Your weakness can be turned to strength with enough psychological and moral support from people who care for you. I was asked to come to the studio by 10.30a.m to get ready for the 12.00 noon show. Since I‘ve not seen a T.V. studio before, I was enthused like a child and was excited to see various sets,

Library, Program monitoring, Camera and sound control etc. At 11.00a.m, the director and comperor of the show arrived to talk to me. They obtained my nod for name of the topic they‘ve chosen to display as scroll in the bottom of the screen. They had a half an hour discussion with me to understand about my profession and the topic they‘ve chosen for the day. Armed with this knowledge, the comperor went ahead and started preparing questions and I was asked to go to make up room for touch up. I was asked to be present in the set by 11.45a.m and the technical team tied up ear phone, mike etc. to my body and was asked to give test speech to understand my voice modulation and set the sound equipments accordingly. The comperor gave me instructions as to when I should face her, when I should face the camera opposite to me and also what I should do in case if I find it difficult or fumble extremely when the live show is going on. I was also given briefing as to how to handle calls, how to know the caller is still on the line or not (this is because the calls land is the telephones in the sound control room and they keep pressing the mute frequently to ensure that noises like TV sound in the caller‘s room, a child‘s cry or dog‘s bark or any back ground noise does not disturb the quality of the show.) So once the question is asked you‘ll only hear a deadening silence and there is possibility you may think that the caller is off the line when he is actually on the line. Effective co-ordination between the sound control room, Comperor and the participant is vital in such as way that the call or discussion flows naturally for the viewers. So all this co-ordination happens as the show is on through physical sign or signals which is not visible to the audience. Also instructions from monitoring room keeps coming through the ear phone for the comperor to know that when the break ends and when program should recommence. The participant also gets a nod or signal accordingly. I realized how well co-ordinated a live talk show (for that matter any live telecast) has to be so that it looks spontaneous and seamless for the viewers. All the discussion, make-up, instructions for me to understand the nuances explained above, making me feel more comfortable (at home) and removing my nervousness in facing the live telecast….. all these happened within a span of just one hour. I thought all these requires days of preparation, discussion and rehearsal! How naive I was! This shows the competence of the crew and also reflects on their experience in conducting hundreds of such shows. I was self conscious and nervous initially and the comperor did an extremely good job of making me feel comfortable. My wife was also allowed to be present in the studio (a request I made to the Jaya T.V., which they were kind enough to accept) behind the Cameras and was encouraging me. This also boosted my confidence. After few minutes, I consciously shut down my noisy mind (which was only making me nervous) and started focusing on how I can genuinely help the callers and also add value to all the viewers who were viewing the program. Our program was flooded with unusual number of calls. I understand that many people did not get the line and not all who got connected was able to speak due to the time constraints of the show. Till the show was over I was not sure how it was going or perceived. But after the show the entire crew came and applauded me for my performance. I was told by them that the show went extremely well and I may get more opportunities in Jaya TV in the future. They also mentioned that my performance looked very professional and spontaneous. They also said that I was very confident and it did not look like a first live show. I was pleasantly surprised and am grateful to God because I only know the level of nervousness with which I accepted the invitation for the show.

I was also told that it is the first time a celebrity like Mr.‘Drums‘ Sivamani is making a call in this show. The fact that he conveyed his appreciation for my performance , wanted to meet me to discuss his ‗personal finance‘ issues and also invited me for his next show in Chennai was very well appreciated by the crew. I do not know whether he would really be meeting me as he is a very busy celebrity but I‘m grateful to him for saying so and appreciating me in public. This has boosted my self confidence and spirit. I‘m glad that I was able to create awareness about the need for Financial Literacy and selecting right advisors like Certified Financial PlannerCM(CFPCM). I was continuously getting calls (both mobile and landline) and SMS non stop after yesterday‘s show till late in the evening. These were from my friends, relatives and lot of viewers (both India and Overseas). I‘m very grateful to all of you for your kind words of encouragement and praise. I was unable to attend many calls and planning to return the same this weekend. In fact my throat became very sore in the night after being continuously on the phone since afternoon. I‘m happy with this. My sore throat indicates how much affection you have for me and how much encouragement you provide me. All these happened because of blessings of God, my family support and all your encouragement. My heartfelt gratitude for all of the above. Please continue sharing your feedback for the articles I post. This is the tonic for my mind and intellect.

Archive for April, 2009 Money Mantras….(11) Posted by Muthu on April 30, 2009 Here is the 11th series of „Money Mantras‟, the first one for the current financial year. 1) The real measure of your wealth is how much you would be worth if you lost all your money- Anonymous 2) Ask five economists and you‟ll get five different answers (six if one went to Harvard)Edgar R. Fiedler 3) An economist is an expert who will know tomorrow why the things he predicted yesterday didn‟t happen today- Laurence J. Peter 4) I am indeed rich, since my income is superior to my expense, and my expense is equal to my wishes– Edward Gibbon 5) Uncle claims that if he files his income tax wrong he‟ll go to jail, and if he files it right he‟ll go to the poor house – Nonnee Coan 6) Profits are like breathing. You have to have them.But who would stay alive just to breathe? – Maurice Mascaranhas

7) Credit buying is much like being drunk. The buzz happens immediately, and it gives you a lift. The hangover comes the day after-Dr. Joyce Brothers

8) Go for a business that any idiot can run – because sooner or later, any idiot probably is going to run it.- Peter Lynch 9) Both our operating and investment experience cause us to conclude that “turnarounds” seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price – Warren Buffett 10) A market downturn, doesn‟t bother us. For us and our long term investors, it is an opportunity to increase our ownership of great companies with great management at good prices. Only for short term investors and market timers is a correction not an opportunity.Warren Buffett

The Real Estate Bubble Posted by Muthu on April 17, 2009 I‟m thankful to people who have enquired why there is no article from me for the last 3 weeks. This shows your interest in my writing which is what motivate me to keep writing. I was not keeping well on and off for the last 3 weeks and that is the reason for my inability to write. I got a good response for the article „South Sea Bubble‟, in which none other than even Sir Isaac Newton last money. This shows stock market booms and bursts have been existing for centuries and there is nothing new about it. Every time a Bubble happens, a new set of investors learn some very old lessons. Lot of people in our country think that „Real Estate‟ Markets do not come under the cycles of boom and burst and there is an ingrained belief that the value of one‟s property always keep only going up. Nothing is farther from truth than this cultural belief of ours. Infact the current global financial crisis and recession started with the burst in the U.S. Real Estate Market. That market burst because every one who have been buying house on leverage (debt) thought that his house value will only keep going up and will never come down. Do you know that Real Estate prices in Dubai has fallen so drastically that the properties in a well developed city like Dubai is now cheaper than the property values quoted in Mumbai? Please read the below article for an interesting real estate bubble which happened in U.S. around 100 years ago! ” At the heart of the subprime crisis was the belief that house prices would continue to rise without any risk. This is not the first case of real estate bubble in the US. In fact, a huge real estate bubble developed in the US during the early twentieth century. That infamous bubble is known as “The Florida Real Estate bubble of 1920.” In the early 1920s, Florida entered a period of frenzied real estate speculation. At that time, the US was bustling with economic activity and it created a sense of delusion among people that such prosperity was infinite. The real estate market of Florida became the centre of the real estate story in the US. It became a popular destination for people who preferred its tropical climate. Population started growing steadily in Florida and housing couldn‟t match the demand. This in turn resulted in price escalation in the real estate market. Land prices quadrupled in less than a

year.This swift movement of prices in the region attracted a lot of speculators. These speculators began to buy and sell land for small profits within a short span of few months. The story of Florida started spreading across the country and people poured into the state eager for quick profits. It is said that during this time everyone was either a real estate investor or a real estate agent in Florida. Very soon windfall profits began to escalate to unsustainable levels. At these levels it became difficult to find new buyers to flip properties at huge profits by speculators. By the beginning of 1925, investors started reading negative articles about Florida investments. Forbes Magazine warned that the prices of lands in Florida land were based only upon the expectation and not upon any reality. At the same time bankers from New York and other regulatory agencies started investigating and scrutinizing the Florida real estate boom. Eeverybody started seeing the writing on the wall, and panic started creeping into investors and then selling ensued. The inevitable bursting of the real estate bubble had begun. With sellers outnumbering buyers, prices fell like a stone. The Florida land boom was officially over as the Great Depression began. Benjamin Graham once quipped “Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble… to give way to hope, fear and greed.” Asset price bubbles are part of every market. They do not happen overnight. These sharp upward moves are generated by a major shift in market psychology. This can come about by any kind of stimulus in the market. Investors begin to see the growth potential in a sector and invest large amount in a particular asset class. Subsequently, the media starts covering the action. This generally triggers massive interest from the public and retail investors begin to trip over themselves to get a piece of the action. This ultimately catapults prices in the market to unsustainable levels.“ (with inputs from Equitymaster)

Archive for May, 2009 Whether the Elections would help our Economy? Posted by Muthu on May 15, 2009 Some may feel that an election and the subsequent change of government at a crucial time like this could be a disadvantage to the country. But with the Indian government‘s finances stretched (thus crippling its ability to give out additional stimulus packages) the ongoing general elections might just turn out to be an inadvertent but effective substitute for the same. Elections are putting lot of money in the hands of the people. No, I‘m not talking about news reports mentioning about how much each party, especially the ruling party in Tamilnadu is ‗paying‘ for each vote. This is about how elections are fuelling our economy putting money into the hands of common man (aam aadmi- is my Hindi pronunciation Correct?). A Wall Street Journal report estimates that the spending by political parties and the electoral authorities for things such as transportation, materials and services such as banners, flags and

advertising etc will give a boost of about Rs. 142 Billion to Rs. 364 Billion to our sputtering economy. Further, the fact that these funds would have been employed in a concentrated time frame and that it would reach till the grassroots level all over the country will ensure that it gives a much needed push to the economy. Also in my earlier postings, I‘ve mentioned about how the former RBI Governor Dr.Y.V.Reddy saved our banking system from not collapsing like their counterparts in U.S.A. He had the guts to put his foot down to our Harvard educated former finance minister when he was pushed to liberalise the banking & credit policies, which Reddy rightly felt India was not yet ready for. The only private sector bank in India (you know which one), which was very aggressive in lending and repeatedly did not follow the stricter guidelines went to the verge of collapse only to be saved by Dr.Reddy and his team whom they thought was ‗very conservative‘. I recently read that Reddy is optimistic that India can grow at 8% plus from 2011. It was always well known that the key to India‘s scorching growth in the future will be ramping up of infrastructure, but sadly the same has been pushed to the back of the minds of policy makers. But when the former governor of RBI stresses that India cannot sustain a high growth rate of 9-10% unless it develops adequate infrastructure in sectors like power, ports and roads, it is certainly time to sit up and take notice. As reported in the Economic Times, this is what Mr. Reddy had to say, ―You should run at a speed that would strengthen your muscles and if you run too fast it will affect your health.‖ We certainly hope so, Mr. Reddy! (with inputs from Equitymaster)

Archive for June, 2009 Money Mantras….(12) Posted by Muthu on June 13, 2009 Here are the wise quotes from the Masters. Please read and enjoy. 1) The market, like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive those who know not what they do. – Warren Buffet 2) I am opposed to millionaires, but it would be dangerous to offer me the position. -Mark Twain 3) Money, if it does not bring you happiness, will at least help you be miserable in comfort. – Helen Gurley Brown 4) The unchecked striving for more, for endless growth, is a dysfunction and a disease. It is the same dysfunction the cancerous cell manifests, whose only goal is to multiply itself, unaware that it is bringing about its own destruction by destroying the organism of which it is a part. – Eckhart Tolle 5) You can‘t get rid of poverty by giving people money.- P.J. O‘Rourke 6) The trouble with being poor is that it takes up all your time. -Willem de Kooning

7) There are people in the world so hungry, that God cannot appear to them except in the form of bread. -Mahatma Gandhi 8) Who goeth a borrowing, Goeth a sorrowing.-Thomas Tusser 9) Creditors have better memories than debtors. -Benjamin Franklin 10) I think you have to learn that there‘s a company behind every stock, and that there‘s only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies.‖ – Peter Lynch

Incomes in India Increase Posted by Muthu on June 5, 2009 The Congress-led UPA coalition, which started its second term after a landslide victory might have something more to cheer about, something that may well lead them to believe that their efforts at pushing for inclusive growth has wrought some positive changes – by putting more money in the pockets of Indians. The efforts of the government in terms of economic reforms and high growth rate of around 9 per cent for the last three years has shown tremendous results. Making history of sorts, the monthly income of an average Indian for the first time has crossed the Rs.3,000-mark. If one goes by the advance estimate for national income released by the Central Statistical Organization (CSO) recently, the per capita income, which is a measure of the average income of a citizen, notched up a gain of 12.2 per cent, amounting to Rs 37,490 per annum during 2008-09. One look at the 2007-08 data shows that the per capita income was Rs.33,283 per annum, and if that was not enough, the per capita income at constant (1999-2000) prices also registered a growth rate of 4.9 per cent. However, were it not for the global financial crisis, the per capita income would have been even higher. Due to this reason, the country‘s economic growth was pulled down to 6.7 per cent during 2008-09 in comparison to the 9 percent during the previous fiscal. Similarly, national income also went up during the year and showed a 14.2 per cent rise with figures of Rs 43.26 lakh crores. The growth indicated by the CSO in various sectors might have helped the present UPA government secure a second term with thumping majority. The advance estimates of national income for the year 2008-09 were released by the CSO in February earlier this year but the estimates have now been revised incorporating latest estimates of agricultural production, index of industrial production and performance of key sectors like, railways, transport other than railways, communication, banking and insurance and government expenditure.

The CSO data further reveals the National Net Product (NNP) at factor cost at current prices is now estimated at Rs. 43,26,384 crore during 2008-09, as compared to Rs. 37,87,597 crore during 2007-08. This in turn shows a sharp rise of 14.2 per cent than last year. With Prime Minister Manmohan Singh and his team already started working on the 100-day agenda in his second innings, all eyes would are set on what the future holds. (Courtesy:Valueresearch)

What is Good for GM is Good for America! Posted by Muthu on June 2, 2009 What‘s good for GM is good for America,‖ said Charlie Wilson, the former Chairman of the US auto major General Motors (GM), once among the largest employers in the world and now battling for survival. From becoming the first American corporation to pay taxes of over US$ 1 billion 53 years back, to filing for bankruptcy now, GM has indeed covered a rugged path to self created doom. Whether what Wilson said was exactly what he meant or not, it certainly stood for the way most GM top executives have been thinking for the past five decades. During this period, the world‘s greatest automobile company has frittered away its reputation and market share with an unending string of flawed management decisions and arrogance towards customers and the government that would be hard to make up. And to compound the problem, the company invested too often foolishly as well as agreed to outrageous labour agreements and compensation packages for top executives. Given these misadventures, its product superiority disappeared steadily over the years, and so began its decline that continues still today. The company‘s market cap, which at its peak in 2000 was nearly US$ 50 billion, now stands at less than US$ 500 million! How it is possible that such an industrial giant could not find a competent management team in 50 years and turn things around is a question that will continue to worry management gurus and strategic thinkers for years to come. And if what was good for GM was also good for America, the question that might legitimately be raised is that if bankruptcy is the cure for GM, would bankruptcy also be in order for the US. Remember, like GM, even the US has seen declining manufacturing supremacy over the past many decades, and whacky splurging by governments and consumers. Borrowing to invest may still make sense, but borrowing to consume is what the Americans have been used to for so many years now. Isn‘t that the fast track to doom…bankruptcy in the case of GM and possibly for America as well? In fact, President Obama, in a recent interview with the leading American cable television network CSPAN, said that the US is already in deep problem now. ―We‘re out of money‖, said Obama. He added, ―This is a consequence of the crisis that we‘ve seen and in fact our failure to make some good decisions on health care over the last several decades.‖ Well, whatever may happen after the company files for bankruptcy, we hope that the end of an old GM lays the ground for the birth of a new one, for anything else would lead to a cascading

impact on the US economy given that the mass layoffs at GM will considerably add to the unemployment burden that the country is already facing. As for the bankruptcy‘s impact on India, there are though some reasons to cheer. As reported in The Economic Times, GM India‘s officials believe that the company‘s global restructuring could throw up substantial opportunities for Indian component companies shopping for cheap overseas assets. Furthermore, there are hopes that the company will now get a ‗good‘ management at helm that will lead to better times for the employees and customers in the future. We also hope so! (Courtesy:Equitymaster)

Archive for July, 2009 High Frequency Trading Posted by Muthu on July 27, 2009 I‘ve been quiet for some time and I‘m thankful to those who kept prodding me as to why don‘t I send atleast one article per week. There is no specific reason for my silence. It so happened! Any how, glad to be back again. In many of my earlier articles, I‘ve written about perils of trading in the stock market. I‘ve also described how derivatives are weapons of mass destruction. There is now a newer form of trading emerging which paves way for easy money to ultra-rich traders and brings disparity in the market. The name of this new fad is ‗High Frequency Trading‘. I always believe that we should always understand any new mechanism introduced in the market. We should understand that which we want to avoid also. Without this understanding, it is difficult to discriminate between right or wrong in the market. I‘ve given below (Courtesy: Equitymaster), what this High Frequency Trading is all about. Wall Street always keeps innovating various ways to promote greed which time and time again keeps claiming many victims, and this is the latest. Please read on. ‖ We don‘t have any problems with sophisticated computer models competing with humans when it comes to predicting events and their impact on prices in financial marketplaces. As the global financial crisis has shown, models can go horribly wrong, thus denting a big hole in the theory that state-of-the art computer programs have an edge over humans. However, as per a New York Times story, some institutions like Goldman Sachs may have found a way to circumvent this enormous shortcoming of mathematical models. Why try and predict the future when you can perceive the reality a millisecond ahead of others? If you are one of those who were left scratching their heads over Goldman Sachs‘ quick return to profitability earlier this month, one of the reasons for the same has been found. Blame it on High-Frequency trading. Allow us to explain.

There seems to be some loophole in regulations that govern marketplaces like Nasdaq that allows some traders to see market orders slightly ahead for everyone else. Now, how about installing a superfast computer that in less than half a second not only sees the market orders but also crunches data so that the same shares could be bought in advance of the actual orders and sold to the same people at a higher price? Of course, the payout per deal could be small but when spread over thousand deals, it could run into millions of dollars, all virtually risk free. A research firm puts the estimates at US$ 21 bn per year. Looks like good old fundamentals and long-term investing going for a toss? If history is any guide, this ‗wonderful‘ innovation too will one day come back to haunt Wall Street.‖

Archive for August, 2009 Is this why our Food Prices are rising? Posted by Muthu on August 26, 2009 We all know about the present drought situation and the rising food prices. Is the food shortage in India due to insufficient area under plantation? Surprisingly the answer is no. According to a report by KPMG and Associated Chambers of Commerce and Industry (ASSOCHAM), approximately 40% of the crops in India are lost in the field post harvest. The reasons vary from the lack of infrastructure to a long supply chain. India has about 21.7 million tonnes storage capacity against a requirement of 31 million tonnes. Moreover, these facilities are single storage for specific products resulting in poor capacity utilisation. Then, the entire supply chain is dominated by several unorganised players (the middlemen). This adds to wastage from the farm to the consumer, retailer, processor or exporters. Hopefully the present situation will force the government to shake up from its lethargy. But given the past track record, this might be hoping for too much. (with inputs from Equitymaster)

RBI‘s Novel Strategy Posted by Muthu on August 21, 2009 People living in big towns may have taken banking services for granted. But the fact remains that an overwhelming 70% of our population does not even have a banking account. Thankfully though, the importance of bringing such a huge swathe of our population under financial inclusion has not lost on our banking regulator, the RBI. And this has led to the germination of a brand new idea. A report by the RBI working group has come out with a

recommendation that in order to have a speedy and cost effective financial inclusion, people such as kiranawalas, petrol pump owners and retired teachers be allowed to function as business correspondents (BCs) for banks in areas where there are no bank branches. Ideally, these BCs should be allowed to undertake activities such as disbursal of small value credit, recovery of dues, collection of small value deposits, sale of micro insurance, pension products and other such activities. The report has even gone to the extent of discussing the remuneration for BCs stating that as they may take away high volume but low value work from banks, the resultant cost savings could be transferred to BCs as their compensation. While the RBI is still contemplating the same, we hope that such novel ideas do see the light of the day as it will help in bringing about a structural change in our banking system and add to the long term well being of the economy. (Courtesy:Equitymaster)

U.S. to become a Banana Republic, warns Buffett Posted by Muthu on August 21, 2009 Warren Buffett has given a dire warning in his recent article appeared in ‗The New York Times‘. He has mentioned that if U.S. is going to continue like this, it would ultimately end up as a ‗Banana Republic‘. Buffett rarely makes predictions and if he makes one, the whole Financial Community takes the same with lot of seriousness it deserves. For those who want to know what Banana Republic means , this is a term that is used to describe a country that is politically unstable and whose economy is dominated by foreign companies and depends completely on one export (such as bananas) for its livelihood. Warren Buffett, in his traditional simple and homespun style, wrote in the article of The New York Times explaining how the policies the US government is currently using to tackle the crisis can affect the country over the long run. Just like unchecked carbon emissions will cause icebergs to melt, says Buffett, unchecked greenback emissions (US dollar printing) will certainly cause the purchasing power of the currency to melt. Despite the fact that the US economy appears to be on a slow path to recovery, the cause for concern is the enormous dosages of ‗monetary medicine‘ that continues to be administered, which is creating an annual deficit in the US of alarming high levels. While most of the effects of these actions are still invisible, their threat can be as disastrous as that posed by the financial crisis itself. Buffett suggests that to avert such a disaster, the US government must end the rise in the debt-toGDP ratio and bring US growth in debt back in line with the growth in its resources. This is because even if a big part of this debt were covered by foreign investors and by Americans saving substantially more than they have done in a long time, he estimates the US Treasury would have to find US$ 900 billion to finance the remainder of the debt it is issuing. If not, Buffett forbids that the US runs the risk of becoming a ‗Banana Republic‘.

(with inputs from Equitymaster)

EPF Money coming into Stock Market Posted by Muthu on August 20, 2009 The government sure seems to be very serious about improving the flow of funds into capital markets from subscribers of retirement funds. In a fresh directive, it wants the Employees Provident Fund Organisation (EPFO) to initiate the process of parking around 3-5 per cent of the retirement fund of the subscribers in stocks. Through this, the government believes that the flow of funds into capital markets can shoot up to a whopping Rs. 13,000 crore, reports Mint. The decision was taken during the Central Board of Trustees (CBT) meeting which is the apex decision making body of the EPFO. The logic here, ministry officials said, was that the EPFO would have negligible risks and get healthy returns if investments in stock indices are done on a long term basis. The ministry had come out with the new investment pattern last year in August. This came just after the move to allow managing of funds by private players like HSBC, Reliance Capital and ICICI Prudential. The EPFO has also selected State Bank of India for this purpose. The EPFO, manages provident fund accounts of about 4.5 crore subscribers and it has a corpus of Rs 2.57 lakh crore. (Source:Valueresearch)

What Warren Buffett has to say to a Wise Investor? Posted by Muthu on August 18, 2009 Warren Buffett- the name which inspires me and evokes a sense of great reverence and gratitude. By closely following his writings and observing this great personality, I‘ve become what I‘m today. For the purpose of many of you who are new, I wish to quote some from what I wrote earlier in October‘08 article. I started my career in stock broking greatly influenced by the positive business media coverage on Harshad Mehta in those days. Trading, ‗hot tips‘, frequent churning of investments was the approach I inherited from the above experience. After the global melt down of 1996-97, I lost my job in stock broking and whatever little money I‘ve made out of trading!. I then went into BPO and started earning good money. Still the ways of investing continued to be the same, because that is the only way I knew! No doubt I made some good money in 1999-2000 bull run by

trading and subsequently lost the same and at one point was having negative net worth due to leveraging. Frustrated by this, I felt there is some fundamental flaw in which I was approaching ‗Wealth Building‘. By chance, in 2002-03 I started reading about Warren Buffet. Also I read all his annual letters & reports (which are freely available in the website http://www.berkshirehathaw ay.com) and books written about him. (FYI- He has never written even a single book in his life.) Then my whole approach to wealth building and personal finance changed enormously. I got well equipped to better utilize the bull run which started in ‘03-04. I would attribute my passion for taking ‗Wealth Management‘/ ‗Personal Finance‘ as profession and the wisdom gained so far significantly to Warren Buffet. Not only that, the lessons I‘ve learnt from him has personally ensured that our family is financially independent now (i.e) passive income from our financial assets are capable of taking care of our decent life style. Because of this we are no longer dependant on monthly income / Salary to maintain our life style. The house we live in Adyar is our own (i.e) has zero debt because housing loan has been fully paid off. I do occasionally trade now, if an opportunity presents itself. Old habits do not go away that easily. However there is no longer any compulsive need for trading. I simply use, if an opportunity present itself. I do not chase opportunities. Even for this I‘ve allocated, only a small part of my capital. Most important, there is zero leverage & zero loans in our family balance sheet. This mail is not to brag about what I‘ve achieved but to emphasize how this one man has influenced my financial life and helped in achieving financial independence and how all of us can use his wisdom for our financial / life upliftment. Our Organization, Wise Wealth Advisors is the outcome of my effort to integrate what I‘ve learnt in the last more than a decade with our customers and help them in building and managing their wealth. As you may be aware, Warren Buffett is called as ‗Sage of Omaha‘, for his wisdom, austere life style, integrity and above all impeccable ethics and value system. He has become the richest person on the planet by completely being honest and ethical. This in itself is a great feat considering the fact that most of the people are willing to bend values and principles even for petty gains. If you read his biography, you would be amazed that how many times he could have yielded to temptations / unethical business deals, had he wanted to. To me, the very fact that one can become the richest in the planet by following values, being spiritual (I‘m saying this in a broader sense as Warren Buffett is an Agnostic) and humble, is one of the greatest achievements. I‘m glad to present today the top 30 (instead of the 20 I promised earlier) quotes of Warren Buffett, I personally like. Since every word of wisdom from the master is important to me, choosing the top 30 for this article was a tough task. Any how, I‘ve given it a try. Please read and enjoy. 1) What we learn from history is that people don‘t learn from history 2) When you combine ignorance with leverage you get some pretty interesting results. 3) A pin lies in wait for every bubble and when the two eventually meet, a new wave of investors learns some very old lessons.

4) We don‘t get paid for activity, just for being right! (which is one of the Fundamental value of Wise Wealth Advisors). 5) You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right. 6) A public-opinion poll is no substitute for thought. 7) It has always been a fantasy of mine that a boatload of 25 brokers would be shipwrecked and struggle to an island from which there could be no rescue. Faced with developing an economy that would maximize their consumption and pleasure, would they, I wonder, assign 20 of their number to produce food, clothing, shelter, etc., while setting five to trading endlessly on the future output of the 20? (Poking Fun at Option Traders) 8) Never ask the barber if you need a haircut. There‘s very little money to be made (by a stock broker) recommending our strategy of ‗buy and hold‘. Recommending something to be held for 30 years is a level of self-sacrifice you‘ll rarely see in a monastery, let alone a brokerage house. 9) The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do. 10) Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful. 11) The most important quality for an investor is temperament, not intellect…. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd. 12) Working with people who cause your stomach to churn seems much like marrying for money – probably a bad idea under any circumstances, but absolute madness if you are already rich. 13) It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you‘ll do things differently. 14) The first rule is not to lose. The second rule is not to forget the first rule. 15) Price is what you pay. Value is what you get. 16) There seems to be some perverse human characteristic that likes to make easy things difficult. 17) In the business world, the rear view mirror is always clearer than the windshield. 18) You only have to do a very few things right in your life so long as you don‘t do too many things wrong. 19) Risk is a part of God‘s game, alike for men and nations. 20) Tell me who your heroes are and I‘ll tell you how you‘ll turn out to be. The qualities of the one you admire are the traits that you, with a little practice, can make your own, and that, if practiced, will become habit-forming.

21) I want to be able to explain my mistakes. This means I do only the things I completely understand. 22) In a difficult business, no sooner is one problem solved than another surfaces – never is there just one cockroach in the kitchen. 23) Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac‘s talents didn‘t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, ‗I can calculate the movement of the stars, but not the madness of men.‘ If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increase. 24) We‘ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie (Munger) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grownups who behave in the market like children. 25) Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. 26) In the world of investing a few people after making some money tend to imagine they are invincible and great. This is the worst thing that could happen to any investor, because it surely means that the investor will end up taking unnecessary risks and end up losing everything – arrogance, ego and overconfidence are very lethal 27) The Capital Market without loss is like Christianity without hell. 28) I like sharing my ideas but don‘t like imposing my ideas on anybody. It doesn‘t make sense and is a waste of time. If somebody has decided that they know everything that is there to know, nobody can help them. The best way to learn and succeed is to know that we know nothing. There is an entire universe out there and still some of us think we can know everything. 29) Irrespective of who the person is, he or she can teach you something you don‘t know. I have learnt so much from people all around me and I wouldn‘t have been able to learn all these wonderful things if I had not spoken to them with a smile. To quote Sir Isaac Newton- If I have seen farther than others, it is because I have stood on the shoulders of giants. 30) Never let ego, arrogance and over-confidence control you – not just as an investor but also as a human being. You will never have internal peace if you are unable to look at everybody around you with love, compassion and understanding.

Perils of Timing the Market Posted by Muthu on August 13, 2009 Time and time again, we‘ve been emphasising the importance of NOT timing the market. It is the time (duration of your investment) and not timing that matters. Despite investment masters and experts highlighting the futility of timing the market, the average investor (and many Investment Advisors too) always think that somehow he would be able to outsmart everybody and time the market.

As legendary investor and one of the most famous investment guru, Peter Lynch points out ―Thousands of experts study overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the Fed‘s policy on money supply, foreign investment, the movement of the constellations through the heavens, and the moss on oak trees, and they can‘t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.‖. Still a whole set of advisors and traders thrive on the concept of timing the market and make money for themselves, if not for their investors. I would like to quote excerpts from one of my earlier article on ‗Perils of trading in the market‘. Stock Market is a giant casino. Surprised that this statement comes from an investment advisor who invests in stocks and equity funds and who also advises clients on the same. Let me explain. More than 90% of the people in stock market treat it as a Casino and so it gives results accordingly to them. In a Casino, who earns? As you are aware, Casino is a zero sum game. The only guy who earns consistently in a Casino in none but the Casino Owner. Likewise since most of the people in stock market treat it a like a Casino, the only guy who consistently earn here is none other than your stock broker who keeps providing you almost daily trading tips. If 90% of the people in market only continuously speculate and trade in market and end up loosing money in the long run, why are they doing it? This is similar to why someone is a smoker or alcoholic or drug user knowing fully well it is injurious to health. The answer is addiction! Like wise, for the speculators and traders in the market it is an addiction for continuous action. This continuous action only makes their adrenaline flow. That is why the world‘s greatest investor Warren Buffet says‖ Never ask the barber if you need a haircut. There‘s very little money to be made (by a broker) recommending our strategy of buyand-hold. Your broker would starve to death. Recommending something to be held for 30 years is a level of self-sacrifice you‘ll rarely see in a monastery, let alone a brokerage house.‖ As Personal Finance legend John Bogle points out,the way to wealth for the stock brokers is to persuade their clients and say ‖ Don‘t Just stand there. Do Something‖. But the way to wealth for the clients is the opposite maxim ‖ Don‘t do something. Just Stand there.‖ This is the only way to avoid playing a looser‘s game. Stock or an equity mutual fund is not a lottery ticket. It means that you are part owner of a corporation (as in the case of stock) or corporations (as in the case of equity mutual fund). Roughly only 10% of the people who are involved in the market think on those lines. They are not worried about every day stock price movements. All they care is whether they are invested in a company which is continuing to grow or invested in a diversified fund which is a consistent performer and is able to beat the Benchmark returns. Their typical investment horizon is 10 to 20 years or more and the barest minimum period they look for equity investment is 5 years. Only this 10% would have earned the annualized return of 18% provided by the Sensex in the past. For a trader, few weeks to couple of months itself a long term and for an investor, as I mentioned above 10+ more years is only long term. Please read the book ‗Fooled by Randomness‘ by Nassim Nicholas Taleb. You would get more insight on the issues I‘m speaking above. Less than 5% of the traders ever make big money in the long run and the remaining 95% are complete loosers. If you are a long term investor, in a

growing economy like India, the chances are almost close to 100% that you would make good money in the long term. Would you want to be an investor or trader? Would you want to be in the 90% looser‘s category or 10% successful category? I want my clients to be in the 10% successful category who makes good money in the long term, who do not worry about short term volatility, do not track the stock prices and NAV on a daily basis and see where one stands. Once you a take a short term perspective, greed or panic would set in and you would end up being like a casino player. Market rewards people with patience and extreme emotional discipline. But be sure that the reward is worth the wait. But we should also be thankful to these speculators and traders. Because of their greed and panic they keep providing us periodic opportunities to keep rebalancing our asset allocation and build our wealth. To explain, you should always follow an asset allocation. How much of your financial assets you want in Equity (Shares, Equity Funds) and how much in Debt (FDs, Postal deposits, Debt Funds etc.). When due to their greed speculators keep raising the shares to the extraordinary levels, your equity as a percentage of financial assets would go up. Then book some profits and put more in debts. When due to their Panic when speculators sell heavily and stocks are available at dirt cheap prices like now, your equity as a percentage of financial assets would go down. Then move a portion of your debt into equity by investing in shares / Equity Mutual Funds. This has been put more succinctly by Dhirendra Kumar in the following paragraph. ―One of the more interesting ideas in asset allocation is to change the balance according to market conditions. The concept is that over medium to long terms, equity markets inevitably move in cycles. There is a part of the cycles where equities are clearly underpriced and there are parts of the cycle when equities are clearly overpriced. In the former, one should give more weightage to equities and in the latter, less weightage. Then, as the markets go through their cycle, the investor will be best able to capture an optimum level of safety with that of returns.‖ By the suggestion I‘ve mentioned above, you may not get the maximum returns from the market, but would definitely get a very decent return with optimum level of safety. I‘m a champion of long term ( 10 to 20 years) investments in markets especially through SIP (Systematic Investment Plan). As your corpus in SIPs keep growing and once exceeds the asset allocation ratio, we can continue to rebalance your asset allocation by infusing the fresh money into debt funds. For people who do not have fresh money to infuse at that time, a part of the equity holdings can be sold / redeemed and moved into debt funds. There is no point in reviewing asset allocation too frequently. Some people even look at it daily !!!. Once in a year is sufficient to review and rebalance the asset allocation, if required. Considering our tax laws, yearly rebalancing would be more tax efficient too. Equitymaster‘ s chart explains (source: Trend) how timing the market is at your own peril. ―The markets seem to be on a downward path. I will invest only when they start turning positive‖. This is a standard argument given by most investors when asked to invest in a falling market. In fact, I‘m amazed how many novices think that they are great investors. These investors believe that they could time the market to perfection and hence, investing in a falling market makes no sense. However, expert after expert has gone on to say that trying to time the market is a fool‘s game and should be avoided at all costs.

During the last ten year period, if an investor would have missed out the ten best days in the stock market, a sum of Rs. 100,000 would have returned a puny Rs. 133,592 as opposed to Rs. 349,256 had he stayed fully invested. Your investment of Rs.100,000/- invested ten years before in Sensex is worth following (Data Considered: Sensex closing between 5th August 1999 and 5th August 2009) Remain Invested – Rs.3,49,256/Missed best 2 days – Rs.2,68,775/Missed best 4 days- Rs.2,14,702/Missed best 6 days- Rs.1,81,304/Missed best 8 days – Rs.1,49,496/Missed best 10 days- Rs.1,33,592/Even missing the two best days would have lowered his final figure by a significant 23%. The moral of the story is that it pays to remain invested for the long haul rather than trying to move in and out of markets in an attempt to try to time them. So please be an investor and not a trader. Then you would never fail in stock market and would end up building a substantial wealth. As I indicated above, it needs enormous emotional discipline to be an investor. I wish that all of us develop the same and reap excellent rewards which Indian stock market is waiting to offer. (Inputs: Equitymaster and my earlier article)

Money Mantras….(13) Posted by Muthu on August 10, 2009 Here are the wise sayings of the Masters, for the current month. I‘m planning to select top 20 quotes I like out of the numerous wise sayings of my Investment Guru, Warren Buffett and share the same with you. I‘ll do this some time before this month end. I‘m also glad to share with you; I was informed by the IFA Association that now I‘m among the top 50 IFAs (Independent Financial Advisors) in the Chennai City. This is possible because of your support and trust placed on me. I‘m deeply grateful to you for the same. 1) Chains of habit are too light to be felt until they are too heavy to be broken. – Warren Buffett 2) The investor of today does not profit from yesterday‘s growth.- Warren Buffett 3) I don‘t look to jump over 7-foot bars: I look around for 1-foot bars that I can step overWarren Buffett 4) You do things when the opportunities come along. I‘ve had periods in my life when I‘ve had a bundle of ideas come along, and I‘ve had long dry spells. If I get an idea next week, I‘ll do something. If not, I won‘t do a damn thing.- Warren Buffett 5) We believe that according the name ―investors‖ to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ―romantic‖.- Warren Buffett

6) It‘s better to hang out with people better than you, … Pick out associates whose behaviour is better than yours and you‘ll drift in that direction.- Warren Buffett 7) It‘s true, of course, that, in the long run, the scoreboard for investment decisions is market price. But prices will be determined by future earnings. In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard.‖ – Warren Buffett 8) Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver. – Ayn Rand 9) Money often costs too much. – Ralph Waldo Emerson 10) Money will buy you a fine dog, but only love can make it wag its tail – Richard Friedman.

The Chinese Bubble Posted by Muthu on August 5, 2009 Now, here is a guy who did his doctoral thesis arguing that Japan was a bubble in late 1980s and was proved right. He then wrote a long report at the World Bank in the early 90s that South East Asia is a bubble and was again proved right. Then came his research notes in 1999 calling the dotcom a bubble and still more notes in 2003 arguing that the US property market is a bubble. Phew! With that kind of a track record in detecting bubbles, you better listen to him whenever he talks of a future bubble. So, is he finding a bubble these days? Indeed. Andy Xie, one of the world‘s leading market analysts and the man we are referring to believes that the Chinese property and the stock markets could be the next big bubbles to pop. According to him, both are being fuelled by the excess liquidity that is being pumped into the Chinese economy and which instead of being diverted to producing goods and services is being invested in asset markets like real estate and stocks. To further strengthen his case he argues that China‘s average price per square meter nationwide is quite close to the average in the US despite the fact that the US per capita income is seven times that of China‘s urban per capita. China‘s property market, according to Xie, has stopped to make sense from an affordability point of view. While he does not know how long the frenzy will continue, he does believe that the bursting of the bubble may lead to a very hard landing for the Chinese economy. (Courtesy: Equitymaster)

Making money in the Bear Market

Posted by Muthu on August 3, 2009 When the Sensex went all the way down to 8000 levels, we mentioned in our articles as to why we should be greedy, when others are fearful. Some chose to stop their SIPs (Systematic Investment Plans), defeating the very purpose of SIPs, which is an instrument designed to take advantage of volatile market cycles. I‘m glad that many of our clients maintained balance and equanimity and stayed invested, following the the very core of our long term investment policy, it is the time ( of how long you stay invested) which matters and not the timing. This coupled with a strict asset allocation methodology would yield optimum return in the long run – 20 years or more. Not many lent their ears due to immense fear of an economic catastrophe at that time. We invested our own money and the monies of the client who had conviction in our philosophy and methodology. Those who listened are sitting on a good pile of profit already. Our Investment Guru is Warren Buffett and we are grateful for his wisdom. Please read below as to how Buffett made money in this bear market also. Warren Buffett has done it once again. Just like he has been doing it over and over again since the start of his career as a security analyst and money manager. ‗Be greedy when others are fearful and fearful when others are greedy‘ goes his simple homily. But simple doesn‘t necessarily mean easy, just like it wasn‘t easy to put your hard earned money in the stock market between September 2008 and March 2009. The markets were tanking almost everyday. Fear was everywhere, gripping everyone. But not Warren Buffett. Buffett was busy. Busy being greedy that is. Some of his bigger buys during that period were US$ 230 million in BYD Co, a Chinese car and battery maker, and US$ 5 billion of preferred stock in Goldman Sachs along with another US$ 5 billion worth of warrants in the company. The Goldman investment has since generated a US$ 2 billion paper profit for Berkshire Hathaway. The BYD investment too has been nothing short of a bonanza. In September 26 2008, Berkshire bought 225 million BYD shares at HK$ 8 each, then worth about US$ 230 million in total. BYD shares closed at HK$ 42.9 this Friday, thus valuing Berkshire‘s stake at an eye popping US$ 1.25 billion now. Yes, value investing remains as alive and kicking as it was when Buffett started his career. And as you can see above, it can be immensely rewarding for the disciplined practitioner. I would like to stress again that stay invested for long term, do periodical (once in a year should be fine) asset allocation and use market volatility to your advantage, instead of running away from the markets. (with inputs from Equitymaster)

Archive for September, 2009 A Bomb scare of different kind and the ‗short‘ of the Century Posted by Muthu on September 29, 2009

On the eve of the auspicious Vijayadasami day, which is supposed to be good for starting any new initiative or activity, I start this article in an auspicious way I know- by providing a nugget of wisdom from Buffett ―Speculation is most dangerous when it looks easiest.‖ All the stock market traders whom I‘ve been in touch with regularly are now saying that the time is ripe for speculation and make some quick money. Please read the above quote and ‗let the buyer be beware‘! We‘ve been a kind of doom‘s day prophet as far as the Financial future of U.S. is concerned. We‘ve written in the past how mounting public debts is making U.S., an emperor of debt and how it may end up being a Banana Republic and a Bankrupt country. However we honestly wish that the above should not happen, U.S. being one of the world‘s best liberal democracies which encourage talent from worldwide, a technology leader and has created a great country by encouraging immigration and making it a multi ethnic and multi cultural state. Collapse of U.S. may also mean collapse of various good institutions and collapse of liberal values and Freedom. Despite our wish, the way U.S. economy and Financial system is moving, it looks like U.S. may end up either disastrously or create enormous problem for world countries (it‘s so called enemies with whom it always wages ‗war to end all wars‘) through its military might. I‘ve given below opinions from two great brains as to how a bomb scare of different kind is tickling in U.S. and how ultimately its financial system would have a complete break down. ‗Bomb scares from terrorists have unfortunately become ubiquitous in recent times. But according to Russell Napier, strategist at CLSA Asia-Pacific, mankind is now faced with a bomb scare of a different kind – that of the ‗public debt bomb‘. He believes that within the timeframe of a decade, the public debt bomb in the US will explode and push the US government into bankruptcy, thus forcing it to impose capital controls to prevent a ‗flight of capital‘ to Asia. This is because Asia will be one of the few places in the world where currencies and asset prices will appreciate even during this time. By flight of capital, he means that private capital may cease to be willing to finance US government debt, and may even stop wanting to hold currencies of the Western countries, rather preferring to hold currencies of Eastern countries like India and China. To put a check on such a flight of capital, he expects the US government to go to the extent of imposing capital controls. While economic forecasts are usually quite unreliable, what does seem plausible in his argument is the unnerving fact that credit in the US is today bigger than what it was when the recession began. Public debt is thus certainly a hazardous bomb set to explode!‘ ‗The US has launched a massive offensive in Latin America and has bombed its key cities‘. Well, this might be a figment of our imagination right now but if veteran investor Marc Faber is to be believed, the event could actually play out in reality in few years. Speaking to a leading daily, Faber, the author of the Gloom, Doom & Boom newsletter believes that the fiscal and monetary responses in the US and elsewhere have solved nothing and postponed everything. And hence, when the moment of truth will finally arrive, there will be a total breakdown of the financial system. But before that, it is highly likely that Governments will continue to print more money, leading to high inflation rates, lowering of standards of living and eventually, wars. Faber heaped further criticism on the US dollar and believes that it is a doomed currency and is in fact, the ‗short‘ of the century.

However, people staying in Asia especially in countries of China and India have little or no reason to fear as he believes that these countries are living in exciting economic times and these regions could see continued prosperity for years to come. Of course, as he very rightly pointed out, Asians should learn to grow from within the region rather than through exports to sick countries.‘ (with inputs from Equitymaster)

This is how Buffett makes his Billions Posted by Muthu on September 25, 2009 We were all surprised a year ago, when Warren Buffett bought US$ 5 Billion of Goldman Sachs preferred stock. After all, Lehman Brothers had just collapsed and Wall Street was tottering. Moreover, Buffett‘s past involvement with bankers like Salomon Brothers had turned out to be time consuming affair. But then, he rarely passes a good deal, even if there is bad news all around. In fact, especially when there is bad news all round. The next day Buffett had said, ―The price was right, the terms were right, and the people were right.‖ Buffett also secured a margin of safety from the terms of contract – a 10% dividend and also the right to buy US$ 5 Billion of common stock at a strike price of US$ 115 per share. A year later, his decision has turned out be correct. Buffett‘s investment in Goldman has made Berkshire Hathaway richer by US$ 3 billion in twelve months! Given the current share price of Goldman Sachs at US$ 183, the warrants alone are worth US$ 3 Billion ((US$ 183 – US$115)*45 m warrants). Of course, the warrants were not available to the ordinary investor in the US . But then, all he needed to do was buy the common stock to comfortably outperform the broader market. Easier said than done! Don‘t you wish that Buffett could invest for you too? (Courtesy: Equitymaster)

We need Trillion Dollars- How much you are Saving and Investing? Posted by Muthu on September 18, 2009 It is not surprising for us to find that the per capita consumption for Indian households in almost every category of consumables is amongst the lowest in the world. While one might think that this is because of our colossal population, let us assure you that is not the whole truth. This is because even as a percentage of GDP our consumption expenditure has fallen from 77% in FY02 to 67% in FY09 (source: CMIE). This is because Indians have been more inclined towards saving. So much so, that we are today amongst the highest per capita savers in the world. And now, we are expected to save even more! A trillion dollars over the next ten years to be precise. As per the latest Goldman Sachs report, India will require US$ 1.7 trillion in financing over the next decade to meet its infrastructure needs. This estimate tops both Goldman

Sachs‘ earlier estimate of US$ 620 billion as well as our government‘s 11th Five-Year Plan (2007-2012) infrastructure spending of US$ 500 billion. Even if the financing for the 11th Plan have been accounted for, we will need at least a trillion dollars more to execute the investments required. Goldman Sachs expects most of the infrastructure investment to be funded by India‘s domestic savings without significant recourse to external borrowings. This belief stems from the trend of rising domestic savings rate and robust balance sheets of private sector companies. Goldman Sachs has pegged the gross savings rate in Asia‘s third largest economy to rise to 40% of GDP by 2016 (from 38% in FY09) and remain at high levels for well over a decade. These savings will be pertinent to fund public private partnership (PPP) projects that are estimated to fund 30% to 50% of the total infrastructure investment in the next decade. While there is no denying the fact that India‘s favourable demographics has the potential to deliver the savings required, whether the same will be optimally utilized is the question. Doubling the country‘s electricity generation capacity and the length of paved roads besides adding substantially to our railway, irrigation, port and airport networks in 10 years seem uphill tasks given our poor track record. However, as per Goldman, these are all required to achieve better GDP growth rates in the next decade. What is even more important to note is that for this plan to fructify, India‘s household savings must be intermediated through the financial sector (pension funds and the like) to the government, which then spends on infrastructure. India‘s infrastructure build up and financing thus presents enormous opportunities, not just for producers of capital goods, developers and raw material providers, but also for financial intermediaries. However, in the same breath we need to mention that red-tapism and corruption could erode plenty of these savings. Quoting an earlier Goldman report ―Indian companies on average lose 30 days in obtaining an electricity connection, 15 days in clearing exports through customs, and lose 7% of the value of their sales due to power outages‖. The conflux of the increased infrastructure spending requirements and the burgeoning fiscal deficit leaves India with only one viable option to meet its forecasted growth – substantially stimulate the private sector‘s participation in infrastructure. The PPP route is being touted as the best bet at leveraging private sector participation into the sector. So, how much are you saving and investing? (Courtesy: Equitymaster)

Global Financial System needs more Failures & How Good Regulations saved us! Posted by Muthu on September 17, 2009 It‘s been a year since the demise of Lehman Brothers, a catastrophic event that deepened the credit crisis, sent the financial markets into a tailspin, froze credit and caused governments across the world to bail out big institutions that were hitherto deemed ‗too big to fail‘. What is more, since then a debate has raged worldwide whether preventing Lehman Brothers from bankruptcy would have alleviated the crisis that ensued.

As reported in the Economist, while from a purely economic point of view the failure of Lehman hit global economies very badly, from a political point of view bailing out financial institutions then drew considerable criticism as it created moral hazard. Infact, the Economist further reported that at some point political pressures would have required a big firm to go bust. After all, it was only after the Lehman incident that global governments got into damage control mode. Interestingly, investment guru Jim Rogers believes that the global financial system needs more failures like Lehman Brothers to restore a functioning free market. This is what he said, ―Market fundamentals are that failures should collapse and be replaced by creative new forces rather than being propped up as zombies. Financial institutions have been failing for centuries and the world has survived.‖ We believe that bailing out the financial system was inevitable given the enormous pain that would have followed. Having said that, mechanisms will have to be built into the system that will ensure that such a financial blunder is not repeated in the future. Good regulation is what saved the Indian banking sector from throwing up the likes of Citibank after the global subprime crisis. While the formal Fed chief Mr. Alan Greenspan has criticised the excessive regulation in countries like India, we also have credible voices supporting our cause. Mr. Raghuram Rajan, the former chief economist of the International Monetary Fund (IMF) who also chaired a committee on financial sector reforms in India, believes that all India needs is ‗clever‘ regulations. The economist who was amongst the few to predict the financial bubble in the West, has in an interview to a business daily, said that the global economic damage was largely inevitable due to the underlying rot already present in the system. According to Mr. Rajan while government intervention, particularly in Western economies has helped quell the panic, the same was not without having long term impact on fiscal balances. Further, Mr Rajan has advocated RBI‘s focus on expanding access to financial services like savings and insurance rather than pushing credit down the throats of the poor. His views certainly hold significance in the light of financial sector reforms required for the evolution of Indian banking sector. Also please refer to the article I wrote in October‘08, how RBI, particularly the then RBI Governor Dr.Y.V.Reddy saved our banking system from collapse, when world over Financial institutions were crumbling. This article was appreciated by many and I‘ve given the link below, if you are interested in reading the same. https://wisewealthadvisors.wordpress.com/2008/11/29/thank-you-drreddy/ (with inputs from Equitymaster)

Money Mantras….(14) Posted by Muthu on September 15, 2009 Here are the ‗Money Mantras‘ for this month. Surprisingly, this article does not contain any quotes of my dear master, Warren Buffett. Just for a change ! Relax, Read and Enjoy. 1) The safe way to double your money is to fold it over once and put it in your pocket. – Frank Hubbard

2) Inflation hasn‘t ruined everything. A dime can still be used as a screwdriver. – Anonymous 3) They who are of the opinion that Money will do everything, may very well be suspected to do everything for Money. -George Savile 4) The only reason a great many American families don‘t own an elephant is that they have never been offered an elephant for a dollar down and easy weekly payments. -Mad Magazine 5) ―Your money, or your life.‖ We know what to do when a burglar makes this demand of us, but not when God does. – Mignon McLaughlin 6) A bank is a place that will lend you money if you can prove that you don‘t need it. -Bob Hope 7) If you lend someone $20, and never see that person again, it was probably worth it. Author Unknown 8) Money is neither my god nor my devil. It is a form of energy that tends to make us more of who we already are, whether it‘s greedy or loving. -Dan Millman 9) Women prefer men who have something tender about them – especially the legal kind. Kay Ingram 10) Money frees you from doing things you dislike. Since I dislike doing nearly everything, money is handy. – Groucho Marx

George Soros, Police Station for Power Theft & Micro Enterprise Employment Posted by Muthu on September 8, 2009 1) This man surely knows how to profit from both, stock market boom as well as bust. Take the case of the latest financial crisis. Last year, when most of the hedge funds were in damage control mode, trying to avoid bankruptcies, this man went ahead and returned a hefty 10%, which investors in the developed markets would accept gleefully in good times let alone the cataclysmic 2008. We are indeed referring to the hedge fund titan George Soros. As per a leading financial portal, Soros, also known as the man who broke the Bank of England, had 14% more assets to manage in the month of July under his eponymous fund as compared to the start of the year. On a YoY basis, the growth in assets is even more impressive at 41%, easily making him one of the most powerful hedge fund managers in the world. Indeed, during this entire financial crisis, the man‘s clairvoyance has shone through. He was not only among the few to successfully predict a big financial tsunami but was also among a select group of people to argue earlier this year that the world economy has hit a bottom and that stocks could rally. And he seems to have put his money where his mouth was. 2) After police personnel posted especially to guard politicians, India is now going to have its first police station exclusively to guard electricity. Yes, you read right – electricity. At least

three sub-inspectors and a dozen constables would comprise this station, which is slated to come up in Agra where power theft is the cause for almost half of the electricity consumed. But power theft is not the only major problem that is facing the country. The cost of power sold by a number of power generating companies, especially during periods of high demand, has been extremely high, thus leading to huge jump in prices. Seems like as much as India needs power, it is being deprived of the same! 3) When it comes to manufacturing, size does matter. And this is the mantra that the Chinese policymakers have adopted to such devastating effect that they have left competitors like India far behind. A recent study by the ADB (Asian Development Bank) and analyzed by LiveMint, has revealed that –micro enterprises that employ less than five people account for 61% of manufacturing employment in India as compared to just 8% in China. Now, combine this tiny piece of statistic with another one which says that on an average, labour productivity in micro-enterprises is just one third of that existing in small enterprises (establishments that employ less than 50 people) and it becomes clear why India lags China in manufacturing. Not only this, there is enormous wage differential between micro and small and large enterprises, thus giving rise to huge inequality. Clearly, if India has to become a force to reckon with in manufacturing and foster an environment of more equitable income distribution, constraints that prevent larger enterprises from taking shape like restrictive labour laws, red tapism and many others will have to be removed on a priority basis. Otherwise, the huge demographic advantage that we have is in danger of grave under utilisation. (Courtesy: Equitymaster)

India‘s worst monsoon! Posted by Muthu on September 1, 2009 The anxiety over the monsoons remains as water levels in India‘s main reservoirs are still at only 42% of capacity as on August 27. This is on the back of India‘s poor monsoon season this year, which is set to be the worst in last 40 years. What‘s more, the slow filling of reservoirs is also putting winter crops and power generation in the limbo. The weather bureau has said that September rainfall may improve, but even then, this year‘s monsoons would still be about 20% below normal. The deficit rains have badly affected India‘s rice crop and have also hit soybean, cane and groundnut crops. They have also disrupted the flow of water into the main reservoirs that are vital for hydropower generation and winter irrigation. Though India emerged relatively unscathed from the credit crisis when compared to the West, the monsoon related problems might just end up being the country‘s biggest problem area. (Courtesy:Equitymaster)

Archive for October, 2009 Money Mantras….(15) Posted by Muthu on October 14, 2009 It‘s good to be back after a gap of 2 weeks. I was down with viral fever for last 2 weeks and hence this gap. I am pleased to start this month article with Money Mantras, timeless wisdom from Masters. Please read and enjoy the wit, wisdom and insights. 1) Value investing ideas seem so simple and commonplace. It seems like a waste to go to school and get a Ph.D. in economics. It‘s a little like spending eight years in divinity school and having someone tell you the Ten Commandments are all that matter.– Warren Buffett 2) You can‘t see the future through a rear view mirror.- Peter Lynch 3) The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price. – Warren Buffett 4) The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. – Warren Buffett 5) In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A rightthinking duck would instead compare its position after the downpour to that of the other ducks on the pond – Warren Buffett 6) In a finite world, high growth rates must self-destruct. If the base from which the growth is taking place is tiny, this law may not operate for a time. But when the base balloons, the party ends: A high growth rate eventually forges its own anchor. – Warren Buffett 7) First, beware of companies displaying weak accounting. If a company still does not expense options, or if its pension assumptions are fanciful, watch out. When managements take the low road in aspects that are visible, it is likely they are following a similar path behind the scenes. There is seldom just one cockroach in the kitchen. – Warren Buffett 8) If the misery of the poor be caused not by the laws of nature, but by our institutions, great is our sin. – Charles Darwin 9) There are people in the world so hungry, that God cannot appear to them except in the form of bread. -Mahatma Gandhi 10) Fate often puts all the material for happiness and prosperity into a man‘s hands just to see how miserable he can make himself with them. -Don Marquis

Archive for November, 2009

Credit Card Crisis in China & India Posted by Muthu on November 25, 2009 There is a rise of another credit crisis, to be precise credit card crisis in China and India. The change of our mindset towards savings, consumption and defaulting in payments is giving rise to this new crisis, the impact of which cannot be underestimated. Can you believe that now one out of every five Indians default in payment of credit card dues, raising the NPA Levels to as high as 20%? Please read on to know more about this next credit crisis. The Chinese have been traditionally considered as the thrifty lot who save for the future. And the wild western economies had a notorious reputation of being the ones that splurge. In short, while the Chinese saved over 40% of their income, Americans were happily binging on more than 90% of their income. But this was before the global economic meltdown. The trend is now seems to reversing. And we smell another crisis looming around the corner. While the credit meltdown was most severely felt in the US; the rest of the world did feel the aftershocks. But the Chinese seemed to have missed the lesson riding on the pace of economic recovery there. While the US consumers have at least started trying to reverse their gigantic credit card debt, credit card issuance has risen by more than 32% over last year in China. The unemployed Chinese youth is piling up huge amount of debt on multiple credit cards. Guess on what? In order to spend on food and fun. And the poor Chinese parents are now being chased by recovery agents. This is surely a bad news for China as well as the rest of the world. China is the biggest foreign owner of US treasuries and held around US$ 801 billion of that in September 2009. The figure was around US $ 1 trillion in March 2009. But now China is off-loading its dollar reserves. We agree that the dwindling significance of the dollar is one reason for this. But one cannot ignore the huge credit card debt that the Chinese are racking up. If China has to worry about its own debt, we wonder who will bail out the US? The picture is not all that rosy in India as well. The 8% plus GDP growth rate, emergence of fancy salaries and fancier malls to spend them had made Indians quite a spend-thrift. Indians have collectively amassed over 25 million of credit cards by end of FY09. Average spending by an Indian on credit card has increased to Rs. 2,400 per month from Rs. 1800 per month in the last 2 years. According to Indian Cards Council (ICC), the non-performing assets (NPA) on these credit cards have grown four folds. They stood at 20% this year as compared to 5%-6% last year. Though the frequency of usage and the purchasing power of Indian credit card holders are lower as compared to international standards, the annual credit losses on cards in India were about Rs. 3,420 per active card while the same were Rs 3,070 per active card in FY09. Moreover, India also had a larger percentage (over 44%) of inactive cards as compared to economies like Australia (20%) and Singapore (25%). No doubt, the situation is getting worrisome. The credit card companies are wary about the same. They earlier aimed at garnering maximum market-share by offering free credit cards but are now going slowly on new issuances. They are blocking inactive cards to reduce the costs of communication and billing. They are also restarting to charge an annual fee for such cards as this will ensure higher number of active cards. It is expected to trigger more usage only by credit worthy consumers. Blocking all the cards of multi-card defaulters is a welcome move to curb NPAs. Banks are also tying up with employers to deduct dues at the source for employees who have defaulted on credit card payments. We believe these steps will go a long way in nipping at the bud any credit card bubble that could evolve. Let us hope that we learn the lesson before it is too late.

(with inputs from Equitymaster)

Some more on The Tao of Warren Buffett (Money Mantras….18) Posted by Muthu on November 24, 2009 November 22‘nd was my 5th wedding anniversary and wanted to share with you the last article in the series of ‗The Tao of Warren Buffett‘ on that day. As I could not find time on that day (you may know why!), I woke up at 4 am today for writing this blog. I received lot of feedback that the wisdom nuggets from the great master were highly enjoyable. Here is the last set in the above series of articles. Please do read and share your feedback. It so happened that the month of November happened to be a month of ‗Money Mantras‘. Enjoy the current ride in stock market with caution and make some good money. Now the Master Speaks… 1) There comes a time when you ought to start doing what you want. Take a job that you love. You will jump out of the bed in the morning. I think you are out of your mind if you keep taking jobs that you don‘t like because you think it will look good on your resume. Isn‘t it that a little like saving up sex for your old age? 2) Wouldn‘t be great if we could buy love for $1 Million. But the only way to be loved is be lovable. You always get back more than you give away. If you don‘t give any, you won‘t get any. There‘s nobody I know who commands the love of others who doesn‘t feel like a success. And I can‘t imagine people who aren‘t loved feel very successful. 3) When ideas fail, words come in very handy. 4) I‘m a better investor because I am a businessman and a better businessman because I am an investor. 5) When a chief executive officer is encouraged by his advisers to make deals, he responds much as would a teenage boy who is encouraged by his father to have a normal sex life. It‘s not a push he needs. 6) The reaction of weak management to weak operations is often weak accounting. 7) With each investment you make, you should have the courage and conviction to place atleast 10% of your networth in that stock. 8) My idea of a group decision is to look in the mirror. 9) It is impossible to unsign a contract, so do all your thinking before you sign. 10) The great personal fortunes in this country weren‘t built on a portfolio of fifty companies. They were built by someone who identified one wonderful business.

(Courtesy: The Tao of Warren Buffett by Mary Buffett & David Clark)

More on the Tao of Warren Buffett (Money Mantras….17) Posted by Muthu on November 12, 2009 Thank you so much for your birthday wishes and positive appreciation for 20 new quotes from the great master, Warren Buffett. I wish to share some more interesting gems from the master in this article. Source- The Tao of Warren Buffett by Mary Buffett & David Clark. 1) Accounting is the language of business. 2) Anything that can‘t go on forever will end. 3) It is not necessary to do extraordinary things to get extraordinary results. 4) The chain of habit are too light to be felt until they are too heavy to be broken. 5) Marrying for money is probably a bad idea under any circumstances, but it is absolutely nuts if you are already rich. 6) Wall Street is the only place that people ride in a Rolls-Royce to get advice from those who take the subway. 7) You should invest like a catholic marries- for life. 8) Never be afraid to ask for too much when selling or too little when buying. 9) It is easier to stay out of trouble than it is to get out of trouble. 10) Managing your career is like investing- the degree of difficulty does not count. So you can save yourself money and pain by getting on the right train.

The Tao of Warren Buffett (Money Mantras….(16)) Posted by Muthu on November 3, 2009 Today (3‘rd November) is my birthday and I want to begin the day by sharing with you ‗ The Tao of Warren Buffett‘. October‘09 has not been a great month for my blogging. I just posted one article. This is my primarily due to 2 reasons. 1) My inconsistent health

2) Yahoo rejecting my bulk mails repeatedly as Spam thereby preventing me to send mails to you. My Wisewealthadvisors domain (from Indiatimes) does not allow me to send to more than 20 mail ids at a time. Considering the volume of people who read my mails, this was also not possible due to the limited energy levels and patience I have. If Yahoo route does not work, I‘ll resort to the above model, though it is time consuming because I enjoy immensely sharing the knowledge with you. What I‘m today is because of all of you and this is one of the small way of showing my gratitude. There is a book called ‗The Tao of Warren Buffett‘ written by Mary Buffett & David Clark. I read this book recently and wanted to share on my birthday some gems from my master, which I‘ve not shared previously. This becomes the Money Mantras series…(16). As my birthday gift to you all, I‘ve given below 20 quotes instead of usual 10, all new ones. 1) You don‘t have to make money back the same way you lost it. 2) Someone is sitting in the shade today because someone planted a tree a long time ago. 3) You pay a very high price in the stock market for a cheery consensus. 4) You want to learn from experience, but you want to learn from other people‘s experience when you can. 5) We enjoy the processes far more than proceeds, though I have learned to live with those also. 6) If calculus or algebra were required to be a great investor, I would have to go back to delivering newspapers. 7) It‘s hard to teach a young dog old tricks. 8) Can you really explain to a fish what it is like to walk on land? One day on land is worth a thousand years talking about it, and one day running a business has exactly the same kind of value. 9) If you hit a hole in one on every hole, you wouldn‘t play golf for very long. 10) A friend of mine spent twenty years looking for the perfect woman; unfortunately when he found her, he discovered that she was looking for the perfect man. 11) Forecasts usually tell us more of the forecaster than of the forecast. 12) The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs. 13) In the search of companies to acquire, we adopt the same attitude one might find appropriate in looking for a spouse: It pays to be active, interested and open-minded but it does not pay to be in a hurry. 14) When you combine ignorance and borrowed money, the consequences can get interesting. 15) The most important thing to do if you find yourself in a hole is to stop digging. 16) If you don‘t make mistakes, you can‘t make decisions.

17) Any business craving of the leader, however foolish, will be quickly supported by studies prepared by his troops. 18) I‘m very suspect of the person who is very good at one business-it could also be a good athlete or good entertainer- who starts thinking they should tell the world on how to behave on everything. For us to think that just because we made a lot of money, we‘re going to be better at giving advice on every subject- well, that‘s just crazy. 19) The smartest side to take in a bidding war is the losing side. 20) No matter how great the talent or effort, some things just take time: You can‘t produce a baby in one month by getting nine women pregnant.

Archive for December, 2009 Indian Marriages- A Good Economic Stimulus-Rupees Six Trillion! Posted by Muthu on December 30, 2009 Do you know that a) Indians provide a great economic stimulus through their wedding. This continuing happy economic stimulus is nothing when compared to the temporary stimulus packages announced by our Government. b) Indian weddings are the fourth largest contributor to our GDP. Sounds interesting? Please read on……. That India has one of the best demographic advantages heading into the next couple of decades is now perhaps well known and extensively documented as well. And when you talk about this advantage, one tends to think about higher productivity nine times out of ten. What escapes one‘s attention is the fact that this advantage coupled with an age old Indian tradition is also capable of injecting some pretty big dosages of economic stimulus for a long, long time to come. And this is no ordinary stimulus. As per a leading daily, even a conservative estimate of this stimulus could make it the fourth largest contributor to India‘s GDP. The stimulus that we are referring to is nothing but a collective muscle of the big, fat Indian weddings. With nearly half of the country‘s population below the marriage worthy age of 29, the wedding scene in India is likely to be a huge beehive of activity for many years into the future. And since a good part of an average Indian‘s wealth is spent towards wedding, this could easily translate into an economic stimulus to the tune of Rs. 2 trillion to Rs. 6 trillion. Thus, while experts may play a guessing game over whether India‘s Finance Minister may roll back its economic stimulus or not, this is one stimulus that they can happily count upon year after year. (with inputs from Equitymaster)

Risk from U.S.A Posted by Muthu on December 23, 2009 Last 2 years there have been many numbers of stories about how many banks went burst, how people lost their life savings, employment and their homes. What started as a sub-prime crisis in U.S. snowballed into a huge credit crisis over the globe, especially developed countries. Countries which topped in quality of life indices like Iceland went burst overnight. Recently it is the turn of Dubai and Greece to go burst. There is a fear that many more countries would go burst in 2010. When a country is unable to honour its credit obligations, it goes burst and this is known as Sovereign risk. Recent episodes like Greece and Dubai have clearly highlighted that the chances of a sovereign defaulting on its debt is perhaps higher now than any other time in history. Hence, banks do not want to take chance. As per a leading daily, top managers of some large banks are now discussing whether they need to start making provisions for different forms of sovereign risk, in the same manner as they now make reserves for corporate or emerging market risks. Whether this could be executable is not known for sure. What we know for sure is just as mortgage and corporate risk were the big themes of 2008 and 2009; sovereign risk is likely to emerge as one of the biggest themes in 2010. Also there is now a unanimous consensus among leading Economists across the globe that U.S. Dollar would find it very difficult to maintain its supremacy and would be greatly weakened. This would result in reduced global supremacy too. U.S.‘s strength has been its dollar, technology and defence. With economic strength reducing it is likely have to reduced power in global affairs. This cannot be palatable for it. So it may start more wars to ‗end all wars‘ so that it can have resources plundered from other countries. These wars can be fought under the disguise of eliminating terrorism or protecting western civilization from other ‗barbaric civilizations‘ or ending oil monopoly or championing for the cause of democracy. The irony is that modern civilization demands wars are fought under a ‗noble cause‘. Even historically, we‘ve killed each other for ‗noble reasons‘ in the name of religion, language, ethnicity etc. Let us see how the dollar is going to be weakened. It is very difficult to find a Chinese central banker getting a chance to air his personal views. But that protocol was broken recently. The Deputy Governor of the People‘s Bank of China has let his views known to an academic audience. And it really turned out to be an eye opener of sorts. He feels that there aren‘t just enough US dollars around to buy the gigantic US debt that is likely to come onboard in the coming months. It should be noted that until 2006, the US ran a current account deficit to the tune of US$ 800 billion. This means that exporters to the US got US$ 800 billion annually and they used most of this to buy US debt. But with the US consumer going into a shell after the crisis, the current account deficit has come down an eye popping 50%, thus leaving the exporters with just US$ 400 billion with which to buy US debt. On the other hand, debt issuance by the US has increased at an alarming pace, thus creating demand supply mismatch of epic proportions. Little wonder, investors are placing

huge bets that price of US debt or in other words US treasury, would go into such a free fall that it would be difficult to arrest its decline. Of course, the US Fed can come to the rescue and buy all the excess debt, but this would mean injecting trillions and trillions of dollars worth of cash into the system and giving an open invitation to runaway inflation. Clearly, there seems to be no easy way out for the US out of its current mess. As stated above, U.S. may resort to increasing its defence spending by waging more ‗noble‘ wars which would obtain it control over more global resources (read oil), which would also fuel its failing economy. If you‘ve read Samuel Huntington‘s ‗ Clash of Civilization and the remaking of World Order‘ and look it what‘s happening now in the world, one gets a feeling that certain civilizations and countries would disappear from this planet and we may see a new world order in the coming decades. If nuclear weapons are used, Life as we know may cease to exist. If it all there is a destruction of this planet, it won‘t be from any external sources (movie like 2012), but by our own mankind. This may very well happen even during our life time. (with inputs from Equitymaster)

What Jim Chanos is currently bearish about? Posted by Muthu on December 21, 2009 We all know that Warren Buffett‘s investment style is buying rock solid companies and staying invested in them for the long term. Now, what would be mirror image of this strategy? Shorting companies that look extremely weak fundamentally and holding the position for long periods. And the foremost practitioner of this art is a man called Jim Chanos. Called a short selling guru, Chanos is perhaps the most successful pure equities short seller in the world right now. Thus, when he is bearish on something, his words cannot be dismissed lightly. Ironically, he seems most bearish on a country that other investors feel is the most attractive growth story of the next decade or two. Indeed, we are referring to China. Chanos believes that China is forging its GDP numbers on a massive scale by not providing adequate depreciation for a very, very shaky capital base and further adds that there is no bigger credit excess than China right now. In fact, he has called the China credit excess problem ―Dubai times 1,000 or worse‖. There could well be a lot of merit in his argument. It is a well known fact that China‘s export driven growth model has crumbled in the wake of the credit crisis and if it were to keep its economy on a higher growth path, the current model will have to be altered dramatically. We are not saying that it may not be able to do it. However, the transition may not be easy and there could be a lot of turbulence ahead. Perhaps, Chanos is pointing out to one such turbulence, which he believes could happen any time soon. (Courtesy:Equitymaster)

Warren Buffett Speaks (Money Mantras….19) Posted by Muthu on December 10, 2009

Many of us have role models or mentors or Gurus. It is not necessary that we should be known to them. It is enough if we know them and be willing to learn from them and develop their traits. I‘ve number of such mentors in both spiritual and financial arena. J.Krishnamurthi, Eckhart Tolle, Nisargadatta, Ramana, Anthony de Mello, Paramacharya are some among the many names which comes to my mind as my spiritual mentors. Likewise Warren Buffett, Peter Lynch, Benjamin Graham, John C.Bogle, Phil Fisher, Sir John Templeton are some among many who have shaped my approach towards ‗Personal Finance‘. I‘m grateful to all of the above and continue to learn from them and get their guidance in various aspects of Life. Currently, among the some books I‘m reading, I want to share with you what I‘m reading in the book ‗Warren Buffett Speaks- Wit and Wisdom from the World‘s greatest Investor‘ by Janet Lowe. As always with Buffett books, this book too contains his quotes of wit and wisdom in abundance. 1) Buffett‘s opinion on dealing with press: As you may be surprised to know seldom there is a negative press about him even in a country like USA. Buffett always opines that it takes 20 years to build a reputation and 5 minutes to ruin it. If we think about it we will do things differently. Now let‘s listen to what he says about Press. ―The tough part about it is that essentially there is no one, virtually with the exception of an assassin, that can do you as much damage as somebody can in the press, if they do something the wrong way.There may be Doctors out there who can do you just as much harm, but in that case, you initiate the transaction.‖ 2) On feeling good: ―I keep an internal scoreboard. If I do something that others don‘t like but I feel good about, I‘m happy. If others praise something I‘ve done, but I‘m not satisfied, I feel unhappy‖ 3) When Buffett asked his mentor, Benjahmin Graham for a job with no salary as he was very keen to work under him: ―Ben made his customary calculation of value to price and said no.‖ 4) When a journalist commented that Buffett wears cheap suits, with his characteristic wit he said: ―I buy expensive suits. They just look cheap on me.‖ 5) On aiming well: ―To swim a fast 100 meters, it‘s better to swim with the tide than to work on your stroke.‖ ―Like Wayne Gretzky says, go where the puck is going, not where it is.‖ 6) On his Life style (which is very simple): ―I can‘t think of anything in life I want that I don‘t have.‖

―It‘s easier to create money than spend it.‖ ―I don‘t measure my life by the money I‘ve made. Other people might, but I certainly don‘t.‖ ―Money, to some extent, sometimes lets you be in more interesting environments. But it can‘t change how many people love you or how healthy you are.‖ 7) On honesty: ―Never lie under any circumstances. Don‘t pay any attention to the lawyers. If you start letting lawyers get into the picture, they‘ll basically tell you, ‗don‘t say anything‘. You‘ll never get tangled up if you just lay out as you see it―. 8) On Friendship: On how to define friendship ―I remember asking that question of a woman who has survived Auschwitz. She said that her test was, ‗would they hide me‘?‖ ―I‘ve a half dozen close friends. Half male, half female, as it works out. I like them, admire them. There are no shells around them‖. 9) Buffet opines that inherited wealth is nothing but food stamps for rich. ―All these people who think that food stamps are debilitating and lead to a cycle of poverty, they‘re the same ones who go out and want to leave a ton of money to their kids.‖ 10) As mentioned above Buffett does not believe in inherited wealth. Infact he has given almost his entire wealth to Bill & Melinda foundation for charity. He is not only the largest investor but also the largest giver (donor) in the world. When Buffett‘s son Howard ran for country commissioner in Omaha, people assumed that because of his surname, his campaign would be well financed.On the contrary Warren Buffett said: ―I asked him to spell his name in lowercase letters so that everyone would realize that he was the Buffett without the capital‖ (With inputs from: Warren Buffet Speaks-Wit and Wisdom from the World‘s Greatest Investor by Janet Lowe)

Archive for January, 2010 Beware, The Real Estate Companies are coming to You Posted by Muthu on January 28, 2010 We‘ve mentioned in the past to our clients not to go for IPOs of many Real Estate Companies, warned them about the ‗very rich‘ valuation the realty companies enjoyed, and also be sceptical of Mutual Funds which are very aggressive with Real Estate Portfolios, be it Equity or Debt Funds.

I‘m not an expert in Real Estate. However some of my friends and clients have good knowledge in this arena. They are mentioning as to how many properties remaining unsold in various areas of Chennai, especially in the OMR Region. Not only that, in general in many areas, the valuations are not what it used to be. Unless, you are looking for a home to reside, it is better to be beware of smooth talking by many of the intermedidarires, especially in commercial properties. It is better to be cautious, rather than regret later. None other than Deepak Parikh, has said that Chennai has a built up inventory of 2 years of supply. Being aware of the fact, the realty companies are in desperate need of money and are coming to you. Please be careful and read on. India Inc. appears to be on a fund raising spree. Take the case of 2009. Indian firms raised US$ 20.2 billion from share sales in 2009, mostly through follow-on offerings. This represented a 181% increase from the year earlier. IPOs accounted for just US$ 4.1 billion of the total. What‘s more this buoyancy is expected to spill over in 2010 too. JP Morgan expects share sales in India to reach as much as US$ 30 billion in 2010, translating into a 50% YoY increase. This will be prompted by government stake sales and IPOs by power and property firms. No doubt, the revival in economic growth and the rally in the stock markets have encouraged Indian companies to make hay while the sun shines and raise funds. But it seems doubtful whether Indian investors will have the capacity to digest such massive fund raising on a consistent basis. Again, talking about IPOs, you can expect about 10 or so realty companies coming to your door asking for Rupees 167 billion sometime soon. Yes, that‘s the kind of realty IPOs that are in the pipeline. And you need to be very careful who you give your money to. We have, time and again, cautioned you of the valuations of many of the IPOs that have hit the market in the recent past. Mr. Deepak Parikh, Chairman of HDFC, has in a recent interview evinced caution at the valuations of the realty IPOs that are in the pipeline. According to him, there is large scale oversupply in the commercial property market. Further, a large amount of commercial property lies vacant in Mumbai, Chennai, Hyderabad, and Gurgaon. In fact, he opines that the current supply is sufficient for two whole years. Not surprising then that builders are now on the lookout for aggressively raising money. After all, their capacity to keep rates high despite holding on to huge inventories directly relies on their ability to raise fresh funds. (With inputs from Equitymaster)

Warren Buffett Speaks (Money Mantras….20) Posted by Muthu on January 1, 2010 Wishing you a very wonderful new year 2010. I take this opportunity to convey my gratitude for your continued support and trust in us. As mentioned in my last series of Money Mantras, I‘ve been reading the book, Warren Buffett Speaks- Wit and Wisdom from the World‘s greatest Investor‘ by Janet Lowe. On this New Year day, I‘m delighted to share with you some more interesting and insightful quotes of my beloved master, Warren Buffet.

1) Diversification is a protection against ignorance. It makes little sense for those who know what they are doing. 2) A lot of great fortunes in the world have been made by owning a single wonderful business. If you understand the business, you don‘t need to own very many of them. 3) That which is not worth doing is not worth doing well. 4) If at first you do succeed, quit trying. 5) The only way to slow down is to stop. 6) There is nothing like writing to force you to think and to get your thoughts straight. 7) When proper temperament joins with proper intellectual framework, then you get rational behaviour. 8) If principles can become dated, they‘re not principles. 9) It is sort of the ultimate act of generosity when you go out and teach someone something that is going to be harmful to your own commercial well being. 10) I would be a bum on the street with a tin cup if the markets were always efficient. 11) Investing in a market where people believe in efficiency is like playing bridge with someone who has been told that it doesn‘t do any good to look at the cards. 12) It has been helpful for me to have tens of thousands (of students) turned out of business schools taught that it didn‘t do any good to think. 13) John Maynard Keynes essentially said, don‘t try and figure out what the market is doing. Figure out a business you understand and concentrate. 14) For some reason, people take their cue from price action rather than from values. What doesn‘t work is when you start doing things you don‘t understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it‘s going up. 15) The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty is actually the friend of the buyer of long term values. 16) Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can‘t buy what is popular and do well. 17) You don‘t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ. Rationality is essential. 18) Happily, there‘s more than one way to get to financial heaven. 19) Of course, the investor of today does not profit from yesterday‘s growth. 20) If the business does well, the stock eventually follows.

Archive for June, 2010 New ULIPs: Are they really different? Posted by Muthu on June 30, 2010 Time and time again, we are never tired of reminding you that combining Insurance and Investments are bad. Be it ULIPs or traditional insurance policies, where you get a meagre return of around 6%, which is barely sufficient to only match inflation, if at all. Any Life Insurance policy other than plain vanilla ‗Term Insurance Policy‗, are not in your interest and is only in the interest of Insurance agents. No doubt, why term insurance policies are not ‗sold‘ and constitute less than 2% of the Insurance Industry‘s size. Our Standard Warning: Stay away, a long distance, from life insurance agents, who try to sell you any insurance product other than plain vanilla term insurance products. If you listen to us, you will be getting a high risk cover at a low cost. In fact, that is what life insurance is all about. Your investments can be deployed else where, at a lower cost and better returns. There is a lot of talk going on now about ULIPs ‗new avatar‘. They are the same old wine in a different bottle. New ULIPs are as bad as their ‗previous avatar‘. Infact, it has become more complex. ULIPs, like tobacco or alcohol, have been legitimized by our honourable Government of India, due to their narrow vision (thanks to successful lobbying by IRDA & LIC), ignoring the interest of millions of investors. The Insurance Regulatory and Development Authority (IRDA) introduced sweeping changes in Unit-linked Insurance Plans (ULIPs) yesterday. Among the measures are-a five year lock-in, even-out commission over the first five years and graded charges for the subsequent years. How will these changes affect ULIPs? Are they competitive now with mutual funds (MFs) as long-term products? Nothing has really changed for the investors. All IRDA has insisted is that the fat commissions, which insurance companies were paying, would have to be spread over five years. Insurance companies were doling out upfront commission as high as 30%-35% to distributors in the first year. They will now have to spread this commission over the five-year lock-in period. But this will put off distributors used to making a fat upfront income. ―It‘s not attractive for distributors anymore,‖ said Debashish Mohanty, country head (retail), UTI Asset Management Company Ltd (UTI). Mr Mohanty points out that for mutual fund investors, there is no entry load. If you invest Rs1,000, you will get units equivalent to Rs1,000. Considering a commission of 6% in ULIPs for the first year, if you invest Rs1,000 in a ULIP, your investment will be worth Rs940 after deducting the 6% expenses.The insurance regulator has attempted to cap the charges at 4% annually for 5 years, and 3% for 5-10 years and 2.25% for products of above 10 year terms.

These are more expensive than mutual funds. The total maximum permissible expense for a mutual fund stands at 2.5% on the first Rs100 crore of the average weekly net assets collected by the fund. This is then reduced to 2.25% for the next Rs300 crore, 2% on the subsequent Rs300 crore corpus, which finally comes down to 1.75% for the balance assets. The expenses consist of Investment Management & Advisory fee (1.25%); Custodial fees (0.05%); Registrar & Transfer Agent (RTA) fee (0.25%); marketing expenses including commission paid to distributors (0.65%); Audit fees (0.10%); Costs of fund transfer from location to location (0.10%) and other expenses (0.10%). Moneylife contributor R Balakrishnan says, ―The ULIP changes are cosmetic in nature. Maybe the product becomes a little more efficient than it used to be, but in no way has it become comparable to a mutual fund. In a mutual fund, the total damage is limited by law to 2.50% per annum. In ULIPs, the selling commission has not been reduced. The only thing that has happened is that instead of front ending, it is now supposed to be spread evenly. In effect, a marginal improvement.‖ Some industry experts believe that ULIP charges will still be opaque and can differ from company to company. Insurance companies can still charge a lot of money to investors under the garb of administration and management expenses. Mr Balakrishnan pointed out that in all investment products of the insurance industry, ―There is a management charge, administration charge and some other charges. Typically, these aggregate over 3% per year, assuming a typical monthly investment of say Rs20,000 per month. These charges are separately deducted from the contribution paid by the customer.‖ He added, ―ULIPs are the sole survival mechanism for the insurance industry. And they are perhaps the biggest prop for the stock markets. The government just does not want to rock the boat. Hence they have legitimised what they have been doing.‖ (with inputs from Moneylife)

Warren Buffett: How We Select Stocks to Buy? Posted by Muthu on June 28, 2010 We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favourable long-term prospects (3) operated by honest and competent people (4) available at a very attractive price. We ordinarily make no attempt to buy equities for anticipated favourable stock price behaviour in the short term. In fact, if their business experience continues to satisfy us, we

welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price. Our experience has been that pro-rata portions of truly outstanding businesses sometimes sell in the securities markets at very large discounts from the prices they would command in negotiated transactions involving entire companies. Consequently, bargains in business ownership, which simply are not available directly through corporate acquisition, can be obtained indirectly through stock ownership. When prices are appropriate, we are willing to take very large positions in selected companies, not with any intention of taking control and not foreseeing sell-out or merger, but with the expectation that excellent business results by corporations will translate over the long term into correspondingly excellent market value and dividend results for owners, minority as well as majority. Such investments initially may have negligible impact on our operating earnings. For example, we invested $10.9 million in Capital Cities Communications during 1977. Earnings attributable to the shares we purchased totalled about $1.3 million last year. But only the cash dividend, which currently provides $40,000 annually, is reflected in our operating earnings figure. Capital Cities possesses both extraordinary properties andextraordinary management. And these management skills extend equally to operations and employment of corporate capital. To purchase, directly, properties such as Capital Cities owns would cost in the area of twice our cost of purchase via the stock market, and direct ownership would offer no important advantages to us. While control would give us the opportunity – and the responsibility – to manage operations and corporate resources, we would not be able to provide management in either of those respects equal to that now in place. In effect, we can obtain a better management result through noncontrol than control. This is an unorthodox view, but one we believe to be sound. (Excerpts from the annual letter written in 1977 by Warren Buffett to his Shareholders)

W Posted by Muthu on June 25, 2010 It‘s been an easy matter for Berkshire and other owners of American equities to prosper over the years. This huge rise came about for a simple reason: Over the century, American businesses did extraordinarily well and investors rode the wave of their prosperity. Businesses continue to do well. But now shareholders, through a series of self-inflicted wounds, are in a major way cutting the returns they will realize from their investments. The explanation of how this is happening begins with a fundamental truth: With unimportant exceptions, such as bankruptcies in which some of a company‘s losses are borne by creditors, the most that owners in aggregate can earn between now and Judgment Day is what their

businesses in aggregate earn. True, by buying and selling that is clever or lucky, investor A may take more than his share of the pie at the expense of investor B. And, yes, all investors feel richer when stocks soar. But an owner can exit only by having someone take his place. If one investor sells high, another must buy high. For owners as a whole, there is simply no magic — no shower of money from outer space — that will enable them to extract wealth from their companies beyond that created by the companies themselves. Indeed, owners must earn less than their businesses earn because of ―frictional‖ costs. And that‘s my point: These costs are now being incurred in amounts that will cause shareholders to earn far less than they historically have. To understand how this toll has ballooned, imagine for a moment that all American corporations are, and always will be, owned by a single family. We‘ll call them the Gotrocks. After paying taxes on dividends, this family — generation after generation — becomes richer by the aggregate amount earned by its companies. Today that amount is about $700 billion annually. Naturally, the family spends some of these dollars. But the portion it saves steadily compounds for its benefit. In the Gotrocks household everyone grows wealthier at the same pace, and all is harmonious. But let‘s now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others. The Helpers — for a fee, of course — obligingly agree to handle these transactions. The Gotrocks still own all of corporate America; the trades just rearrange who owns what. So the family‘s annual gain in wealth diminishes, equalling the earnings of American business minus commissions paid. The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend, and in a wide variety of ways, they urge it on. After a while, most of the family members realize that they are not doing so well at this new ―beat my brother‖ game. Enter another set of Helpers. These newcomers explain to each member of the Gotrocks clan that by himself he‘ll never outsmart the rest of the family. The suggested cure: ―Hire a manager — yes, us — and get the job done professionally.‖ These manager-Helpers continue to use the broker-Helpers to execute trades; the managers may even increase their activity so as to permit the brokers to prosper still more. Overall, a bigger slice of the pie now goes to the two classes of Helpers. The family‘s disappointment grows. Each of its members is now employing professionals. Yet overall, the group‘s finances have taken a turn for the worse. The solution? More help, of course. It arrives in the form of financial planners and institutional consultants, who weigh in to advise the Gotrocks on selecting manager-Helpers. The befuddled family welcomes this assistance. By now its members know they can pick neither the right stocks nor the right stock pickers. Why, one might ask, should they expect success in picking the right consultant? But this question does not occur to the Gotrocks, and the consultant-Helpers certainly don‘t suggest it to them.

The Gotrocks, now supporting three classes of expensive Helpers, find that their results get worse, and they sink into despair. But just as hope seems lost, a fourth group — we‘ll call them the hyper-Helpers — appears. These friendly folk explain to the Gotrocks that their unsatisfactory results are occurring because the existing Helpers — brokers, managers, consultants — are not sufficiently motivated and are simply going through the motions. ―What,‖ the new Helpers ask, ―can you expect from such a bunch of zombies?‖ The new arrivals offer a breathtakingly simple solution: Pay more money. Brimming with self-confidence, the hyper-Helpers assert that huge contingent payments — in addition to stiff fixed fees — are what each family member must fork over in order to really outmaneuver his relatives. The more observant members of the family see that some of the hyper-Helpers are really just manager Helpers wearing new uniforms, bearing sewn-on sexy names like HEDGE FUND or PRIVATE EQUITY. The new Helpers, however, assure the Gotrocks that this change of clothing is all-important, bestowing on its wearers magical powers similar to those acquired by mild-mannered Clark Kent when he changed into his Superman costume. Calmed by this explanation, the family decides to pay up. And that‘s where we are today: A record portion of the earnings that would go in their entirety to owners — if they all just stayed in their rocking chairs — is now going to a swelling army of Helpers. Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large portions of the winnings when they are smart or lucky, and leave family members with all the losses — and large fixed fees to boot — when the Helpers are dumb or unlucky (or occasionally crooked). A sufficient number of arrangements like this — heads, the Helper takes much of the winnings; tails, the Gotrocks lose and pay dearly for the privilege of doing so — may make it more accurate to call the family the Hadrocks. Today, in fact, the family‘s frictional costs of all sorts may well amount to 20 percent of the earnings of American business. In other words, the burden of paying Helpers may cause American equity investors, overall, to earn only 80 percent or so of what they would earn if they just sat still and listened to no one. Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac‘s talents didn‘t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, ―I can calculate the movement of the stars, but not the madness of men.‖ If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the fourth law of motion: For investors as a whole, returns decrease as motion increases. (Excerpts from the annual letter written in 2006 by Warren Buffett to his Shareholders)

A Managerial Story you will never read elsewhere Posted by Muthu on June 24, 2010 The majority of Berkshire‘s (Warren Buffett‘s company) managers are wealthy, and work because they love their businesses. Even though the businesses are owned by Berkshire, these managers are given authority to run them as if they were their own. Here‘s a story of how one of their managers truly wanted their business to do well.

Bill Child is the manager and former owner of R.C. Willey, Utah‘s dominant home furnishing business. As Bill is a Mormon, therefore his stores are never opened on Sunday. Despite operating with this disadvantage, Bill still managed to grow his business from $250,000 of annual sales in 1954 to $342 million in 1999. In 1997, Bill suggested to Warren that they opened another store in Boise. Warren was initially reluctant about expanding to a new territory with a no-Sunday policy against other entrenched rivals that were opened every day. Bill offered to do a remarkable thing: To fund the purchase of the land and of building the store, and to sell it to Berkshire at cost if the store was successful. If expectations fall short, Berkshire did not have to take over the store. As it turned out, the store was successful and Warren Buffett purchased the land and building at cost back from Bill. Bill did not want to accept even a single cent of interest for the two years his funds of $9 million were tied up. (Courtesy: Martin Lee)

Posted by Muthu on June 23, 2010 While Insurance agents are eating 35%-40% of your premiums, Mutual Fund Advisors who were paid 2.25% out of the entry load, is earning now zero through load account. They don’t even get paid 1% out of load account (as there is no load), when their counterparts in Insurance Industry is earning 40% commission. More and more advisors are now leaving Mutual Fund Industry as it does not generate any income, except trail commission of 0.3% to 0.5% per annum, out of the expense ratio of the funds. Instead they have started pitching for ULIPs and PMS, which are good for them, but not good for investors. Unless SEBI, intervenes and does something, this industry will either perish or become very stunted, with very few long term players. This may lead to many fund houses (except top 10 ) out of existing thirty eight, themselves exiting the business. When fund houses themselves exit the business, we need not even speak what agents or advisors do, as this has become a unprofitable profession for them. There should be a margin or financial incentive, which should be transparent, for the advisors who are recommending Mutual Funds. Since it is no longer there, a product which is good for an investor, will not be advised, which would defeat the very purpose of SEBI totally abolishing Sales Commision. Now, please read what ‘Times of India’ has got to say.

Government’s decision to treat unit-linked insurance products (ULIPs) as insurance instruments and allow them to be regulated by Insurance Regulatory and Development Authority of India (IRDA) will boost the growth of ULIPs. But, equity-oriented mutual funds, which are governed by the Securities and Exchange board of India (Sebi), will be affected adversely because of the stiff regulation on the payment of commission to sales agents. According to Sebi ruling, mutual fund companies can‘t charge any fees (entry load) from investors. So, if companies want to pay commission to their sales agents, they will have to pay from their pockets. The step is good for investors as companies have to put in the entire money in equities, which in turn will increase returns. ―Sebi‘s order discourages MFs to become aggressive by mobilising funds through selling units to new investors, who are not aware of the MF schemes. Now, they depend more or less on the old customers only,‖said chief executive officer of a mutual fund company. However, with government‘s ruling that ULIPs are insurance products, insurance companies will continue to pay hefty commission to their agents to push ULIPs. At present, many companies pay up to 40% of the first year‘s premium paid by a person as commission. In the second year, the commission amount varies between 5% and 10% of the premium. After that the commission and other fees become competitive. In 2009-10, according to Sebi website, total fund mobilisation through equity oriented funds was only around Rs 2,100 crore as against over Rs 4000 crore in 2008-09. In 2007-08, the figure was Rs 52,600 crore, while in 2006-07, it was around Rs 30,000 crore. In the first two months of the current financial year, the figure is dismal at Rs 157 crore. A senior fund manager said the decline in the net fund inflow into the equity oriented scheme is due to the Sebi order, coupled with strong push to ULIPs by the insurance companies. In order to balance the hefty commission deduction from the first and second year‘s premiums, insurance companies amortise them to be deducted from the premiums paid in the next five to ten years, depending on the term of the products. But, commission is given from the premiums paid by the insured persons, which affects their returns. However, in the long term, the damage is on the lower side if the stock markets give good returns. In the short term, the damage is more. If a person wants to exit from an insurance scheme after four or five years, his net return on the entire amount paid by him as premium — after adjusting for the mortality charges —will be much lower. In many cases, customers are not even aware of the commission portion. But, agents push Ulips aggressively as they get fat commission. This is evident from the fact that in 2009-10, all the insurance companies mobilised around Rs 45,000 crore through ULIPs. (with inputs from ‘Times of India’)

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Posted by Muthu on June 22, 2010 ULIPs are back again. Good fortune for insurance agents and absolutely bad for investors.

When I write against Share Trading, Life Insurance Products (both traditional and ULIPs, with the sole exception of Term Plans), Portfolio Management Services (both legal and illegal) etc., the question invariably put forward by the advisor community who are selling these products are as to if the Government itself have allowed these products to exist, who am I to question them. This is a very strange argument. Have not Government allowed selling of alcohol, country made liquor, smoking, Lottery, bull fight etc.? Many countries have legalised casinos, one night stands etc. Some Governments allow suppression of minority rights, ethnic cleansing etc. One state Government in India is accused of actively sponsoring killing of minorities. Governments in power have encouraged demolition of minority places of worship. Many Governments in the world actively promote ethnic cleansing, drug trafficking, arms trading etc. Have not Governments in the world which prevents equality to woman, equal rights to all races, freedom to follow various forms of worships etc.? There are Governments which actively encourage terrorism. Just because Government is allowing some thing, does it mean it is a good thing to do? Government may allow or follow so many things. But as an Individual, it is for us to choose what is good and ethical. People have asked me in various meetings and forums, how it is possible for an Insurance company‘s ULIP to guarantee highest NAV, which a Mutual Fund cannot do. Initially I was also caught by the surprise, but definitely I knew intuitively that it is misselling and there should be details in the fine print. Because in a product which is ‗marked to the market‘, how can you guarantee the highest NAV? It is impossible. After doing some study, I realised it is nothing but a marketing gimmick. Here are the details I gathered from ‗Valueresearch‘ and ‗Moneylife‘. ―One after another, a number of insurance companies have launched ULIPs which promise to repay the investor on the basis of the highest NAV that the fund has achieved. The pitch is that these funds‘ NAV effectively does not drop. Once a level is achieved, then the investor is assured of getting at least as much, no matter what happens to the market. It‘s certainly a very attractive idea. Any investor who is told of this concept will immediately start salivating at the thought. Imagine how rich you could have been had you been invested over the last ten years and had been able to lock your investments at the magical value that the markets achieved on the day when the Sensex touched 20,873! Any investor thinking about this product would say, ―What a wonderful idea!‖ Why don‘t all investment schemes-whether mutual funds or ULIPs or even portfolio management schemes offer this kind of a protection on all their products anyway? The answer to this obvious question is simple. There is no free lunch. These products don‘t actually offer what you think they are offering. That is, they do not offer equity returns that never fall. Instead, they offer an investment system with a very long lock-in (seven to ten years) in which protection is achieved by progressively putting your gains in a fixed income assets which will give returns far more slowly than a pure equity option. The lock-in and the nonequity assets make this a very different kind of investment than the equity-gains-withoutlosses dream that these funds‘ advertising seems to imply. First, how do guaranteed NAV plans work? The most important point to understand is that insurance companies are guaranteeing NAVs, not returns. Are the two different? Yes. NAV is a number at a point in time and returns happen over a period of time.

For instance, your 10 year plan may have hit an NAV of Rs.14, after five years. At that point, it is the highest NAV. This Rs.14 is guaranteed for the next five years. What if the NAV remains at Rs.14 for the next 5 years or goes down to Rs.13? You would still get this NAV of Rs.14. But Rs.14 happens to be 4% over 10 years! Not worth the trouble. There is no free lunch in life. If you want to know how the schemes would work in practice, take a look. In the above mentioned example, when the NAV goes up to Rs.14, all that the manager has to ensure is that this amount remains intact at the end of the next five years. What he would do is simply invest X amount of money in the bond market so that it fetches Rs.14 at the end of 5 years. Now, whatever happens, getting Rs.14, at the end of 5 years in ensured. In the 6th year, if the market goes down, the NAV also will god won. But your Rs.14 is ‗guaranteed‘ for 5 years, at a pathetic rate of return. If the market goes up, the NAV also goes up – say to Rs,16. Now, more money will be shifted from equity to bond funds to retain the NAV of Rs.16 at the end of the balance period. Notice that more and more money shifted to debt to lock up the highest NAV. This is because to guarantee on anything, you must get a guarantee on the Principal. And it is debt is one that protects the principal amount. So, in effect what you are buying is a progressively timed debt fund. But ask yourself what a debt fund will do to your returns. We don‘t think you will get than more than 6%-7% returns on the guaranteed NAV schemes. And, most important, what will a debt fund do to your insurance / risk protection? Surely, when you want an insurance plan, you don‘t want to end up with a bank fixed deposit with some insurance thrown in! The truth is that in a growing economy like India‘s it‘s extremely hard to lose money over a long period like seven years. If you are willing to lock in your money for seven years, then for all practical purposes, you have a guarantee of making a profit. However, even that‘s not the real reason that these funds are useless. The real reason is that if you are willing to lock-in for seven to ten years, then practically any equity mutual fund would deliver this dream of equity-gains-without-losses. Seven years is a very long time. Over such a period practically any equity portfolio into which any kind of thought has gone would capture substantial gains. This is not mere conjecture. Since at least 1997 the minimum total return that the Sensex has generated over its worst seven is 12 per cent, which was over the seven year period from 6th July 1997 to 5th July 2004. Of course, this is not a guarantee that is signed in a contract and legally enforceable, but it‘s the kind of guarantee that any thoughtful investor would be willing to believe in. Mind you, this is also not a guarantee that you will get the highest NAV achieved but again, that‘s the kind of thing that can‘t be attained if you want the gains of pure equity anyway. The most instructive thing in this whole business of guaranteed highest NAV products is the contrast between the illusions spun by those peddling complex financial products and the reality of simple, straightforward investing. It just reinforces one‘s belief that financial products are being designed whose goal is nothing more than to create a marketing hype which can manipulate the psychology of the ordinary saver.‖ (with inputs from Valueresearch & Moneylife)

Restructured ULIPs- Old Wine in a New Bottle Posted by Muthu on June 21, 2010 Despite the changes announced by IRDA, ULIPS are still a bad investment for investors. We‘ve been always highlighting the fact that combining Investment and Insurance is bad for investors, and good for agents. If your insurance agent recommends you any policy other than term insurance, please be aware that it is his interest he is placing first and not yours. These insurance agents ignore the fact that as an advisor, to quote Charlie Munger, ‗you want to deliver to the world what you would buy if you were on the other end‗, Before getting into ULIPs, let us take the case of an ordinary traditional policy, which are regularly sold as an investment to you. Your Insurance Advisor, typically earn on an average around 35% (it was more than 50% in case of ULIPs at certain instances and now it is settling around 10%-25%) of the first year premium you pay. From the second year onwards the renewal commission is around 5% every year, till your policy matures. You earn on average 6% annualised return in a traditional policy, whereas your advisor earns closer to same amount of return. Your Advisor earns what you earn, but the entire investment is yours. If the renewal commission is instead 1%, you‘ll be earning 10% annualised return. ULIPs are highly front loaded investment products, wherein your insurance is also now combined, making it highly profitable for insurance agents. Why you should never combine insurance and investments in a product like ULIP is, your investments looses portability and tied to a fund manager, who may or may not perform well. Quitting your ULIP means not only changing your fund manager, but loosing your insurance cover also. The charges would be low, if you‘ve taken a term insurance separately, and channelise your investments through Mutual Funds. Let us now listen to Dhirendra Kumar. Over the last couple of days, you may have heard and read in the media that the ULIP battle is over and the government has changed the relevant laws to ensure that IRDA continues to regulate ULIPs. Don‘t believe this for one moment-nothing is over. All that has happened is that the government has decided to throw investor to the wolves. Investors will now themselves have to take the full responsibility of discovering the truth about this most toxic of all asset types and keeping their money safe from it. Given the enormous financial clout and the marketing hype of the insurance industry (not to speak of their tame regulator), expect no more than some cosmetic changes which enable insurers to give a fig-leaf of a PR spin that if there were any problems with ULIPs, they have been fixed. The core problems with ULIPs remain, and no one will now have any interest in fixing them. Problem number one is high expenses with heavily front-loaded commissions. You may heard insurance apologists (including IRDA) claim that ULIP expenses are now down to three per cent or some such number. Don‘t believe this for one moment. This figure is a sophisticated piece of subterfuge that is intended to hide the truth. This is the expense level that would be achieved by newer ULIP products if investors stay invested for the entire term of ten or more years. In practice, insurance agents earn so much in the beginning that the entire

sales effort (and product design) is arranged to get the investor to quit after three or five years and shift the money to another ULIP. Instead of going on repeating the theoretical expense number that will supposedly be achieved in the future, IRDA should come up with the real effective expense level that is actually being charged from investors today. This ought to be easy enough to do. The total amount of money that is being managed under ULIPs is known to IRDA, as are the myriad types of expenses that insurers are charging on this money. These two numbers would give the real expenses that are actually being charged from real investors. I doubt whether IRDA will ever reveal this number. To do so would immediately lay bare the truth about whose benefit insurance regulation in India being conducted. There are some other basic numbers about the ULIP scam that you will never discover, no matter how closely you pore over IRDA‘s 214-page annual report. One crucial number is the lapse rate of ULIPs. Apparently, this is so because regulations are so arranged that ULIPs don‘t lapse, they just go into a ‗premium-awaited‘ limbo. This immortality bestowed upon ULIPs by insurance rules is facilitated by the fact that insurance company can keep cancelling units to recover the basic charges, instead of being forced to recognise that the customer has abandoned its product. Anyhow, none of this is going to change now. Realistically, there was probably never any chance that the government would allow meaningful reform of ULIPs. To do so would mean implicitly admitting that there was something seriously wrong in the way things have been done so far. Now, the regulatory die is cast, once and for all. Next time an insurance agent approaches you with a ULIP pitch, or when you see one of those emotion-stirring ads on TV, consider the fact that these people now have the full backing of the government and the regulations to cause as much harm to your personal finances as they‘d like to. As an investor, it‘s your own battle now. (with inputs from Valueresearch)

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Posted by Muthu on June 19, 2010 Please read below the letter written by Warren Buffett in CNN, a few days ago. ” In 2006, I made a commitment to gradually give all of my Berkshire Hathaway stock to philanthropic foundations. I couldn’t be happier with that decision. Now, Bill and Melinda Gates and I are asking hundreds of rich Americans to pledge at least 50% of their wealth to charity. So I think it is fitting that I reiterate my intentions and explain the thinking that lies behind them. First, my pledge: More than 99% of my wealth will go to philanthropy during my lifetime or at death. Measured by dollars, this commitment is large. In a comparative sense, though, many individuals give more to others every day. Millions of people who regularly contribute to churches, schools, and other organizations thereby relinquish the use of funds that would otherwise benefit their own families. The dollars

these people drop into a collection plate or give to United Way mean forgone movies, dinners out, or other personal pleasures. In contrast, my family and I will give up nothing we need or want by fulfilling this 99% pledge. Moreover, this pledge does not leave me contributing the most precious asset, which is time. Many people, including — I’m proud to say — my three children, give extensively of their own time and talents to help others. Gifts of this kind often prove far more valuable than money. A struggling child, befriended and nurtured by a caring mentor, receives a gift whose value far exceeds what can be bestowed by a check. My sister, Doris, extends significant person-to-person help daily. I’ve done little of this. What I can do, however, is to take a pile of Berkshire Hathaway stock certificates — “claim checks” that when converted to cash can command far-ranging resources — and commit them to benefit others who, through the luck of the draw, have received the short straws in life. To date about 20% of my shares have been distributed (including shares given by my late wife, Susan Buffett). I will continue to annually distribute about 4% of the shares I retain. At the latest, the proceeds from all of my Berkshire shares will be expended for philanthropic purposes by 10 years after my estate is settled. Nothing will go to endowments; I want the money spent on current needs. This pledge will leave my lifestyle untouched and that of my children as well. They have already received significant sums for their personal use and will receive more in the future. They live comfortable and productive lives. And I will continue to live in a manner that gives me everything that I could possibly want in life. Some material things make my life more enjoyable; many, however, would not. I like having an expensive private plane, but owning a half-dozen homes would be a burden. Too often, a vast collection of possessions ends up possessing its owner. The asset I most value, aside from health, is interesting, diverse, and long-standing friends. My wealth has come from a combination of living in America, some lucky genes, and compound interest. Both my children and I won what I call the ovarian lottery. (For starters, the odds against my 1930 birth taking place in the U.S. were at least 30 to 1. My being male and white also removed huge obstacles that a majority of Americans then faced.) My luck was accentuated by my living in a market system that sometimes produces distorted results, though overall it serves our country well. I’ve worked in an economy that rewards someone who saves the lives of others on a battlefield with a medal, rewards a great teacher with thank-you notes from parents, but rewards those who can detect the mispricing of securities with sums reaching into the billions. In short, fate’s distribution of long straws is wildly capricious. The reaction of my family and me to our extraordinary good fortune is not guilt, but rather gratitude. Were we to use more than 1% of my claim checks on ourselves, neither our happiness nor our well-being would be enhanced. In contrast, that remaining 99% can have a huge effect on the health and welfare of others. That reality sets an obvious course for me and my family: Keep all we can conceivably need and distribute the rest to society, for its needs. My pledge starts us down that course.”

V Posted by Muthu on June 19, 2010 I’m pleased to inform you that by the Grace of Arunachala, esteemed clients and well wishers like you, there is a tremendous response for my Jaya TV interview. Jaya TV Senior producer told me that like my earlier live talk show, this interview has also come out good. He indicated that I may get future offers from Jaya TV. I’ve been continuously getting calls from Tamil People all over the world, sharing their appreciation, experiences and clarifying their doubts. There have been heart rendering stories too, that how some stock brokers have made them loose their hard earned life earnings through trading, how unsuspectingly ULIPS was forced on them as a guaranteed return investment product by ‘Friendly Managers’ of a premier nationalised bank and some private banks etc. I was surprised that many people were under the impression that ‘Trading’ is a way of investing in the stock market. That is what the brokers have taught to these gullible public. Some said that their stock broker have never told them that one can invest for long term in shares. They are not even aware of the difference between speculation and investment. I told them that their stock brokers would starve to death, if they start advising on holding shares for long term. They earn revenue only if these people continuously buy and sell. I could sense that many were able to understand the difference between Speculation and Investment by the simple illustration I provided. Also people are surprised to realise that traditional insurance policies, which have been sold to them as a long term investment product is providing them only around 6%annualised return. Many were not aware of the term insurance product, a very inexpensive way to get huge sum assured, if the family’s bread winner dies. They were asking why their agents never told them about this but mainly sold ULIPs and traditional plans. What to say. What is good for the croupier need not be good for the customer. There were also tales of unscrupulous mutual fund agents, who sold them closed ended NFOs (which fetched them a good 4% to 6% commission), many of them, which are quoting now below par. I told them that are very few NFOs which comes out with a genuine new theme or concept, and most of them are designed for the sake of collecting more money from the ignorant public. It is always advisable to go for existing well performing diversified equity funds. Not combining investment and insurance was well received.

Most important, there were lot of queries about what is CFP certification, how to locate a CFP, what would be their fee etc. The very fact that even a lower middle class individual is asking about fee shows that there is an awareness which is slowly but certainly building among common public that one has to pay a fee to the Financial Advisor, like a Doctor, Auditor, Lawyer etc. They are now able to start distinguishing between an agent, who pushes high commission products and a Professional Financial Advisor. At the same time, I also cautioned them not to take CFP certification for granted that they will receive good financial advice, as is the case with other professionals like what I mentioned above. There are good Doctors who place patients’ interest first and not so good Doctors who ask patients to go through a battery of tests, even when it is not required, for the sake of commission. Like MBBS, B.L and C.A, a CFP certification indicates a person is qualified to dispense professional advice. It is upto the individual to do the due diligence, whether he is selecting a right CFP. The power of compounding and the need to get returns which beats inflation by a comfortable margin was well received. People are actually willing to take non-guaranteed return products like mutual funds, which are capable of providing them good returns, if the holding period is minimum 10 to 20 years. Longer the time investment stays, higher will be the return, due to power of compounding. What I spoke about was very basics of Personal Finance, which every Financial Advisor knows, but many won’t tell you. As Warren Buffett says investing is simple, but not easy. Only one needs to know some basic financial concepts and arithmetic while investing. Like wise Personal Finance, is only about basics. Be wary of the Advisors, who make it look like complex, so that they can create an impression that they are providing extra value. Following basics of Personal Finance is very simple, but not easy.

Is Warren Buffett against Mutual Fund Investments? Posted by Muthu on June 17, 2010 Most of the people know that I consider Warren Buffett as my role model. The general view amongst the Elite Advisors community is that Warren Buffett is against investing in Mutual Funds , as if he is fine with their selling ULIPs, PMS, Derivatives trading, Speculation, Complex financial products which they themselves do not understand etc. Some of the fellow CFP certificants also have shared this view with me. Elite Advisors position mutual funds as a ‘common man’ product and the ‘special people’ should be provided with some thing ‘exclusive’, which ofcourse brings fat commissions to them. Since I’ve read a lot about, on and by Warren Buffett, let me share his below quote with you, so that we are no longer under the myth that Warren Buffett is against Mutual Funds.

“Most Investors, both institutional and individual, will find that the best way to own common stocks is through an Index Fund that charges minimal fees.”- Warren Buffett In a well developed economy like USA, where the growth rate is very less, where close to 50% of the house hold invest in mutual funds, around 85% of the fund managers under perform the S&P 500 Index. In a rapidly growing economy like India, where the growth rate is high, where hardly 1% to 2%of the population invests in the mutual funds, wherein many fund managers are able to beat the index comfortably over a 5 year, 10 year, 15 year period etc. by 4% to 5%.+ I think the advisor community knows what difference an extra 5%+ can make. To illustrate if the index is giving 18% return and I invest Rs.1 Lakh today for 20 years, it would become Rs.27.39 Lakhs. If I invest in a diversified equity fund which is able to beat the market by 5% and gives me 23%, my return would be Rs.62.82 Lakhs. A difference of 130% in absolute returns over 20 year period. That is why I insist that the intermediaary charges should be less and every single percent makes lot of difference in the long term. So I’ve invested my own money in diversified equity funds & debt / hybrid funds and advise client also accordingly. I serve the food I eat. I practice what I preach. Once when India becomes a developed economy, growth rates becomes slow, most fund managers would find it difficult to beat the market. It may happen anytime during next few decades. We are in the position to what U.S was in early 1950’s, wherein many fund mangers were able to beat the Index comfortably for nearly 3 decades, when the economy was growing rapidly. Fund Managers like Peter Lynch are the best example for this. Once the growth rate of economy became less (because the base has become huge), many fund managers found it difficult to spot good high growth investment opportunities. This lead to majority of the fund managers finding it difficul to beat the Index, and in fact started under performing the Index, due to their poor stock selection. In the long run, nobody or very few can beat the Market. Then, If I’m still alive, as advised by Warren Buffett, I would be putting my money in a pure low cost Index Fund and would advise clients also accordingly. I’m true to my conscience and will do with my clients’ money, what I do with my own money.

A New Beginning for Genuine Advisors Posted by Muthu on June 17, 2010 All is never lost! Over the last month I‘ve been interacting with large numbers of mutual fund advisors around the country. These interactions have all been as part of large events where broad cross section of advisors of all kinds have been present. It goes without saying that almost to the man, advisors say that their business has been, for all practical purposes, destroyed by the abolishment of entry load by SEBI. These protestations are understandable. Few businesses can take the sudden revenue reduction of 50 or more per cent without a lot of pain. Moreover, many advisors are relatively small businesses run by the business-owner with at most a handful of employees. However, I strongly felt that mentally, most advisors are modeling the future of their business without imagining the kind of growth that is possible. To me, the situation in the mutual fund business is most similar to that in the stock brokerage business 10 years ago or that in the telecom business at the same time. To all intents and appearances, India is set for years of economic growth. Moreover, a large chunk of our urban population consists of young white collar workers who are going to come into the saving and investing stage of their lives over the next decade or so. At this juncture, the kind of reforms that have been implemented over the last year by SEBI should be seen as making mutual funds an investment product that is far more suitable for building a good business around. Let me explain what I mean by a ‗good business‘. It means a business which offers a product that is clean and honest and none of whose characteristics have to be fudged or hidden. Say what you may but this is not so common in financial products. Look at ULIPs. Today, every ULIP salesman in the country dreads finding a knowledgeable customers who asks intelligent questions. It‘s a product that has fallen to such depths of anti-investor structure that it can only be sold to customers who are not thinking for themselves. There may be no shortage of such customers today, but it‘s not a good way of doing business for a small advisory, which relies on long-term personal relationships and word-ofmouth. In sharp contrast, the mutual fund business now has a basis for a fair and open long-term dealing with its customers. Whether its sales commissions (which don‘t exist any more), or funds sticking to their mandate, or transparency in the information that is put out by funds, there‘s nothing that even the most nit-picking investor can find that is wrong with the structure of the fund business. The biggest source of mis-selling in the fund industry — new funds being offered with flimsy differentiation from older ones — has now been completely choked off by the regulatory stance. For mutual fund investors, it is a time to be confident of the product class they are choosing and that means that for fund advisors who wish to take up this opportunity, it could be the end of something, yet the beginning of something bigger. (Source: Dhirendra Kumar, Valueresearch)

-A Posted by Muthu on June 16, 2010

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I’ve been writing the ills of Portfolio Management Services, PMS (both official and unofficial) for the last few days. I keep hearing from various sources that PMS are aggressively pitched in the market now because the upfront commission offered by the Broking Houses and Mutual Funds are high (which of course is borne by the investor). While searching the archives, I came across what Dhirendra Kumar of Valueresearch wrote some time ago on PMS and thought of sharing it with you. Please read on. PMS services – which are often wrapped in terms like wealth management – are sold on a premise of managing investors’ portfolios on an individual basis, customised to each customer’s needs. PMS’ charges can range from a flat fee or a performance-linked one.The performancelinked fee is generally in the form of an about 2 per cent fixed, plus about 20 per cent of profits above a certain index-linked level. PMS fees are certainly high, but that’s not the main problem with them. The drawback is that there is a complete lack of transparency, along with all the other ills that come with it. I was contacted by an acquaintance who wanted some advice on whether he should take up the services of a PMS that had approached him — he was attracted by the gains promised. He had been told that the PMS investment was likely to make for him 8 to 10 per cent a month. This is an astounding number. 8 or 9 per cent a month compounds to a gain of about 150 per cent a year. If money grew at this rate, it would be around 20 times the starting value some time during the third year. This is a completely outlandish claim that would be impossible to sustain under any possible circumstances. If there exists an investment manager in the world who can do this then he or she would stop working for others and quickly become one of the richest people in the world. Yet such claims are made routinely. However, they are made orally and with vaguely stated caveats that make them meaningless. Unfortunately, those who make these claims understand human nature very well. Once a susceptible victim has heard ‘8 per cent a month’, his mind is completely full of fantasies about what he could do with such wealth. It’s like an infatuation, where the infatuated simply will not pay any attention to anything that detracts from the qualities of his infatuation’s target. The real issue here is the utter lack of transparency and verifiability. PMS is a secret business. No data is ever available about what exactly was earned by any PMS client. When you ask a PMS salesman about performance, he comes out with these fantasy numbers that are not verifiable in any possible way. The PMS and wealth management businesses hide behind the fact that they can’t reveal other client’s confidential information so they can’t give anyone verifiable numbers about their investment performance. This is a completely spurious argument. It would be easy to set up a framework of transparency whereby trustable, auditable yet anonymous data about actual PMS performance can be made available. If every other kind of financial service provider can provide aggregated data without revealing customers’ identity then portfolio managers and wealth managers can do so too.

In practice, the real problem with PMSs is not that their services are expensive, but that their services may actually be non-services and yet no potential customer can ever discover that.

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Posted by Muthu on June 15, 2010 One of the terms that financial advisors like to use a lot is ‘asset allocation’. Almost every financial planning exercise begins with an asset allocation exercise. The sort of entities that are pitching themselves as wealth managers are specially focussed on this. The general idea seems to be someone asks you some questions that relate to your life and your earnings and your plans for the future and then comes up with a report that tells you how your savings and investments should be divided into different kinds of assets. Based on what people tell me of their experience with these outfits, I have gathered that over the last few years, the inputs and the outputs to this exercise have become increasingly complex. Once upon a time, someone would ask you a few rudimentary questions about your income and your ‘risk tolerance’ and then mostly recommend whatever investment could earn them the maximum commission. Now, wealth managers like to ask dozens of questions about your past, present and future income and then come up with a long and complex financial plan that mostly recommends whatever investment can earn them the maximum commission. However, there is no doubt that we have made progress. Earlier, financial plans were typically a sheet of paper that you could just read. Now, you are likely to get a text document and an Excel spreadsheet. I believe the better wealth management outfits may even throw in a Power Point presentation. That’s not all. I don’t have accurate statistics, but there’s considerable anecdotal evidence to suggest that the proportion of financial planners who wear a necktie has increased sharply in recent years. Clearly, the age of serious financial planning and wealth management is upon us. Ever so often, one reads in a newspaper or sees on a business TV channel, some worthy captain of the wealth management industry explaining why Indians need more and more of their services and how hard they are striving to provide those services. Unlike the mere necktie-wearing financial planner who actually visits you, the high priests who speak to the media also wear business suits. Clearly,these are serious men, and they are seriously focussed upon your wealth. The basic pitch is that rich people have complex financial needs and therefore need special services to manage their money. Like any consumer product, the pitch liberally uses terminology chosen to make you feel special. If you get attracted by a fancy advertisement or brochure for ‘wealth management’ or ‘high-end private banking’ or something like that, then the first thing to do is to close your eyes and count to ten. The most important thing is to tell yourself that these people are using words like ‘wealth’ and ‘private’ as a way of manipulating your feelings, of making you feel that they are going to do something special for you. Basically, these services are not about selling money management but a feeling of exclusivity, the same as any expensive product. The idea is to tell you that since you are wealthy, you must have something exclusive, something specially designed for you. How can you feel rich while investing in the same old things that ordinary people do? It’s

an easy trap to fall into since many consumer products and services are also sold with this kind of appeal. However, to fall for this ‘exclusivity’ a pitch for a watch or a pair of shoes is a lot less harmful than it is for investment advice. Think of it this way. If you are a good potential customer for such schemes, it definitely means that you have more money than the average Indian. And almost certainly, you didn’t earn that money by being unsmart about money. Believe me, you have a better chance of being able to figure out investments yourself than the random marketing guy some bank sends to wheedle your money out of you. (Source: Valueresearch)

Death of Intermediaries & Emergence of PFA (Personal Financial Advisor) Posted by Muthu on June 14, 2010 The trend is unmistakable. Either do it yourself or learn to pay for financial advice.The turmoil in the mutual fund and insurance industries has taken its toll on the livelihood of independent financial advisors (IFAs). In the early days, IFAs had an easy living. The asset management companies selling mutual funds paid anything from 2%-6% upfront on new fund offers (NFOs), around 2% on ongoing schemes and a trail commission of around 0.5%-1% per annum. The investor did not know and/or did not care, though the money was coming out of the money he invested. Similarly, the IFA also sold unit-linked insurance plans, which yielded a fat commission at the expense of policyholders. Good times do not last. In a right move, wrongly handled, regulatory action has recently focused on preventing leakage from investments. It has had a direct impact on the IFA community. This is an important thing to keep in mind. In the old days, we used to pay ridiculous amounts to a travel agent to buy railway tickets. Today, technology has made things cleaner and cheaper. Technology will enable disintermediation further. Once the National Stock Exchange came up with the electronic trading system, a profession called ‗jobbers‘ became redundant. This is unavoidable. In fact, I think that one day, the exchanges themselves will compete with the brokers. Combined with banking technology, dematerialisation of shares, etc, I do not see why a person cannot directly buy or sell shares on the market without going through a broker. It is already happening. Direct market access allows large institutions to trade blocks of shares directly from the exchange‘s computers. In the debt market, the Reserve Bank of India has introduced a platform which enables institutions to deal directly. Perhaps it is time for the regulator to enable institutional investors to trade directly on the stock exchange without going through a broker. This will reduce transaction costs. Where an intermediary offers only transactions, there is no rational need for intermediation to exist. Technology can take care of it. The same has started a trend in retail financial products. Those who can do it directly will do it that way. How will the others buy financial products? That brings us to the crux of this column. If an investor cannot do his own research and yet would like to invest his money, he has to pay for it. Indians do not like to pay for advice. We want free software, free downloads of music, free e-books—and free advice. It is high time this mindset changed. Or else, keep your money in the bank. Or do your own homework.

Just as we have a family physician, it is time to engage the services of a personal financial advisor (PFA) or a financial planner. The sooner you do it, the better for you. Today, there are PFAs who make a living out of advising people on how to manage their money. They help you to optimise your investment strategies. They help you to define your financial goals and give you the best possible path to reach the goals. Not only that, they will help you to establish whether your goals are reachable or not. Your PFA would either be someone with considerable experience in the financial industry or someone with moderate experience and a qualification that makes him a ‗certified financial planner‘ (CFP). A CFP can help you at two levels. Assuming you are at an early stage in life, having a long way to go, he can actually help you with a comprehensive financial plan. Remember that a financial plan is never static. It keeps moving as your circumstances change. So, it is best to have a PFA who offers you a kind of regular advice with a six-monthly review of your plan. This helps you understand your own finances better. The key thing is to realise that a planner is necessary since you will never have enough time to manage your own finances. And you will not be aware of all the possible avenues of investments and their pitfalls. Many people tell me that it is not easy to walk up to a total stranger and make a ‗financial confession‘. It is time to overcome your shyness. It is as essential as consulting a doctor. Here, it is best to choose a financial planner who is engaged in this business alone and not a ‗seller‘ of products. For instance, if he is an agent of one insurance company, he may not be able to offer the best policy to you. Financial planning includes savings, investment, insurance and more. Alas, most planners will not have much knowledge of asset classes beyond financial ones. For this, you may have to rely on other professionals. For example, a planner is unlikely to help you with real estate. Instead, if he is focused on selling commissions, he may try to sell you a realestate portfolio management service which is the most inferior way of investing in real estate. There are a few options to pay the planner: • If it is a one-time advice, payment could be by the hour. • If it is a one-time plan, a one-time fee is in order. • If it is an ongoing arrangement, then a one-time fee plus an annual fee. The fee could be a fixed amount or expressed as a percentage of the money that he advises you on. Each planner would have a different style of charging. If the planner also earns commissions by selling some of the products to you, he is duty-bound to tell you what he makes. Ideally, it is best to engage one planner for advice and execution. I would prefer a planner who is not a seller of products. Only then can he choose the best for me. I would also be suspicious of ‗free‘ advice from a person who is a seller of a product. A planner will be like your ‗wealth‘ doctor. His advice can only be as good as what you let him know. Choose him with care. Make sure you understand what he is telling you. This also means that the IFA has to now evolve into a complete advisor rather than being an insurance or mutual fund agent. It may be worthwhile for many to get qualified as a CFP, to acquire the right tools and knowledge of financial planning.

(Source: Moneylife, R. Balakrishnan )

I have been in financial markets for years. Whenever someone meets me, all s/he wants is a ‗tip‘ on which scrip to buy. While I generally duck the issue by turning to other subjects, of late, I have started responding by demanding a fee for giving a tip. Suddenly, the conversation stops. The tip-seeker makes some excuse and leaves in a huff.

a day?

40%

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$2

Posted by Muthu on June 14, 2010 I was not active in blogging for last couple of months due to lot of unavoidable reasons. I’m grateful to many of you who kept asking why I stopped sharing, what you graciously termed as interesting and insightful articles and thoughts. I’m active into blogging again by sharing good articles, my thoughts etc. I wanted to get started again with a big bang. And that’s why I consciously choose to write or share four articles during weekend, a lengthy one on my musings about ” M Mutual Funds, octors seudo aints ” and “ o not speculate and let roking Houses to manage your Funds M “, both of which I hope would make you think and introspect. Once you open your mailbox on Monday morning, I hope you would have some food for thought. Title: Portfolios of The Poor: How the world’s poor live on $2 a day Author: Daryl Collins, Jonathan Mordoch, Stuart Ruterford and Orlanda Rutherson Publisher: Princeton Univ Press Price: Rs 982 The poor may not have the bank balance to back this claim, but they are not financial ignoramuses, says this new book. Have you ever wondered how, in these times of galloping inflation, your office boy and household maid manage their day-to-day expenses on a meagre salary? Food, clothes, housing, primary education for children, transportation, etc.: while the expense heads keep growing and the cost incurred on each keeps multiplying, earnings often fail to keep pace. Which makes one ponder: how does 40 per cent of the world’s population manage to live on merely $2 a day? This is the larger question that the authors of this book attempt to answer through their microlevel studies and observations. Their finding will come as a surprise to those who condescendingly believe that the poor are unsophisticated in financial matters. “Poor households actively employ financial tools not despite being poor but because they are poor,” they say. With real-life examples from different countries – Bangladesh, India and South Africa – the authors have put together a rich and detailed narrative of the financial products and moneymanagement techniques employed by the poor to cope with the perpetual shortage of money. “It was, surprisingly, the tools of corporate finance – balance sheet and cash flow statement –

that offered the structure with which we could begin to understand what it takes, day by day, for the poor households to live on so little,” they say. The book thus busts the myth that the poor remain poor because they cannot manage their money smartly. More fundamental, or rather structural, reasons are at play because of which they are unable to rid themselves of the yoke of poverty. Through the lives of people like Hamid and Khadeja of Bangladesh, the authors demonstrate that for the poor money management is a fundamental, well-understood part of everyday life. For them the cost of an error can be dire: one small miscalculation could mean that they have to skip a meal or go without food for a day. The book also focuses the spotlight on the abysmal quality of financial products available to the poor. “There is a fortune at the bottom of the pyramid,” said C.K. Prahlad, the management guru who passed away recently. Multi-national corporations, especially those in the FMCG sector, such as P&G and Unilever were quick to embrace this concept. Single-serve or sachets that can be bought even by the poor are one example of the implementation of this concept. Alas, the financial services industry remains a laggard in reaching out to the poor. Except for a few notable examples such as Grameen Bank of Bangladesh, and the work being done by a few micro-finance institutions, by and large the poor remain under-banked and under-served. (Which is why the Unique Identification project beaded by Nandan Nilekani is so exciting: it promises to give a massive boost to financial inclusion.) The larger financial entities have by and large chosen not to tap the potential of this segment. This is a book that deserves to be read and assimilated. Not only those in the world of microfinance and social service, head honchos at top financial-sector firms should also read it. It could awaken them to a new area of opportunity — perhaps the last virgin market – that is waiting to be tapped. (Source: Wealth Insight)

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– Buy Insurance policies online

Posted by Muthu on June 14, 2010 Do you plan to buy a term plan through an agent? If yes, our advice is that you give it a second thought. Today many insurance companies offer insurance products online. These include ICICI Prudential Life Insurance, HDFC Standard Life Insurance, Aegon Religare Life Insurance, Reliance Life Insurance, and Bajaj Allianz. The policies sold online are often cheaper than those sold via agents. The reduction in price is mainly due to the elimination of hefty agent’s commission that companies shell out for their offline products. By going online, the company eliminates the middlemen and hence saves on the biggest cost in insurance – distribution cost or the cost of convincing the customer to buy the product. In India, online insurance may not be as popular as in countries such as US and UK. But seeing the phenomenal growth in online travel between 2004 and 2008 (more than 50 times), we can expect a lot in the times to come,” say Yashish Dahiya, CEO of policybazaar.com, an insurance-

related portal. He believes that we are currently in the nascent stage. Over the next four-five years, he says, the online segment will account for around 40 per cent of all the insurance sold in India. He also expects online insurance to grow much faster than online travel. Online vs. offline purchase When a buyer contacts an agent, the letter is more likely to push a product that earns him a higher commission. ―Of the entire insurance market, 90 per cent products are not bought but sold. The agent sells what he wants to sell and the customer does not buy what he want to buy,‖ says Dahiya. This happens mainly because the agent is interested in earning the highest commission, so he hides information that he does not want the customer to know.

By contrast, when you buy insurance online, you eliminate the conflict of interest vis-à-vis the distributor by digging up information yourself and deciding what you want to buy. “Online there is a lot of personal involvement and transparency, so the chance of mis-selling gets minimised and you are more likely to choose the product that is the best for you,” says Dahiya. It is difficult to buy a term plan, which provides the most inexpensive life cover, from an agent. The latter are unwilling to sell them because of the lower ticket size of the premium, and hence their commission. You are better off trying to buy a term cover online where nobody will try to dissuade you from buying this product (agents invariably push Ulips). Aegon Religare Life Insurance has launched a zero-commission term plan – i-term – which no agent will sell. The best way to purchase it is via the online mode. Pros and cons Purchasing insurance online is also convenient. You don‘t have to travel to an office or be kept on hold on the phone. It saves a lot of time and effort. The websites of most insurance companies allow you to compare quotes from all leading brands and find the best deal. Most importantly, you save on cost by getting a cheaper product. Online insurance purchase has its share of shortcomings too. One, since no agent is answerable to you, you should read the policy document carefully and understand its implications fully. Two, although the use of technology makes the entire process easier and saves time, people who are wary of internet transactions may not like to use this mode. Three, people who live in farflung areas and do not have internet access will not be able to use this channel.

Modus operandi Decide on the insurer after doing thorough research and comparison of features of policies from different insurers. Also check what price you will have to pay for the policy, i.e., the premium. Finally, before you choose an insurer, see if you fulfil the entire set of criteria for the issuance of the policy.

Once you have chosen the policy you will be required to provide personal details such as date of birth, address, sum assured, medical history, your present state of health, etc.

Ensure that you provide exact and correct details. Thereafter, you will have to select the mode of payment. Most companies allow you to pay online, by cheque, or by demand draft. If you choose to pay by cheque, the company’s representative comes to collect the cheque and documents from your home or office. After you have provided the required details, the company’s back-end process starts. It will verify the information you have provided in the form. The company does so by sending a representative to verify and collect the required documents. The representative also clarifies your doubts (if any). In case a health check-up is required, the representative fixes an appointment with the doctor for you. Thus, online purchase does not mean that human interaction is eliminated completely. How safe is online purchase? According to Dahiya, it is safest to buy insurance online. He believes a person gets cheated most commonly when he is having an unrecorded conversation with an agent. ―With the amount of mis-selling that happens in India, it‘s the face-to-face meeting which is probably the worst way to buy because nothing is recorded there. When one buys online, everything – every session, every cookie – is recorded and so you have proof that you can show months down the line, which the company has to stand by,‖ says Dahiya. For its low cost, convenience and the way it eliminates conflict of interest, clearly online is the way to go when buying insurance.

Points to remember while purchasing insurance online · Ensure that you make a comparison. One of the advantages of buying online is that you can at any time during the day compare the quotes provided by different insurance companies. You may do so by either going to companies‘ websites or to aggregator sites such as policybazaar.com. · Read the policy documents and make sure that you know the policy‘s terms and conditions. · Look for riders, which are add-on benefits that you may buy and add to your policy. · Before taking a buy decision, consult your financial planner about the right product, if you have one. · While making the payment, do it on your own. Do not pass on your log-in details or PAN details to others for making the purchase. · Prefer purchasing on a recorded line. · Do check all the important details over email, online chat system or phone before taking a decision. (Source: Value Research)

PMS & Mutual Funds, Doctors & (Pseudo) Saints Posted by Muthu on June 13, 2010

In the message I posted this morning, I emphasised on letting your broker not to influence you to speculate and trade in stocks and derivatives, give him power of attorney and hand over your money for PMS. You should understand that, due to SEBI requirements, not all the brokers can officially do PMS. This requires a certain net worth, license, compliance norms etc. But all your stock brokers are unofficially doing only PMS. They get a certain sum of money from you, and keep ‗buying and selling‘ based on their ‗research‘ on a regular basis. I‘ve been a trader in the past and but for me getting exposed to Warren Buffett, I would have been no where today financially. Not only that I might have become another Stock Broker, who would be merrily making money out of you. Warren Buffett, a normally soft spoken man, detest trading and has very strongly said that short term capital gains should be taxed at 100%. As I‘ve traded for more than 6 years in my life through ‗unofficial‘ PMS, I would ask you to place a challenge to your official or unofficial PMS sales pitcher. Let them prove that they are able to provide atleast index / benchmark returns for a 5 year period and above after all their trading charges, fund management fee and share in profits. It is impossible to beat the market returns at such a higher expense ratio. Do not go by verbal returns they are mentioning. Ask them to show documentary proof and also give reference of atleast 10 clients, who would vouch for this. Use your prudence to ensure that those are genuine references and not ‗set ups.‘ Do you know that your stock broker makes money anywhere between 0.3% to 0.75% when he takes a short term position for you, both at the time of buying and selling. What would be his driving factor? To do more ‗research‘ and trade frequently and make money out of your money. If this is the case of a ‗cash trader‘, less said is better about a derivative trader. Atleast on the above model, you make some money but here you are destined to loose all your money. Do you know that Mutual Fund Houses also offer PMS? You may not have been aware, as I‘ve never positioned that product in designing in your portfolios. Mutual Fund industry and agents too had lot of unhealthy practices which looted money from investors in the form of frequent churning (they got 2.25% to 4% every time they churned your portfolio), higher expense ratio for closed ended funds and the rewards ranged from foreign trips, domestic trips, gold coins, silver coins, 5 star hotel dinner and cocktail parties, even movie tickets. Per application intensive is offered or demanded even now, and your Rs.10,000/- is distributed among 10 different funds so that agents can make more money. All week days ending with ‗Y‘ are login days for applications, and you get movie tickets for ‗Singam‘ to ‗Karadi‘ and ‗Nari‘. The scale of loot by a mutual fund agent was relatively less than by your insurance agent or stock broker. But still loot is loot. Out of the above, the least ‗looter‘ (Mutual Fund) was first caught by SEBI and he has been so strongly disciplined than even what was required, his very survival today is a question mark. The second set of ‗looters‘ (Insurance) is now being disciplined due to the force of the guy (SEBI) who brought the first set of looters to their knees.

The third set of ‗looters‘ (PMS, both official and unofficial), cannot escape from the attention of the guy whose current focus is mainly first and second set of ‗looters‘. Coming back to what I intended to write about ‗PMS‘ offered by Mutual Funds. PMS have always been offered by fund houses for the ‗creamy investor‘ and now it is aggressively pitched by first set of ‗looters‘ because they get around 3%+ upfront commission and a higher trail commission. Have you ever questioned why a Mutual Fund House should offer a PMS product, when they have all kind of schemes already in existence where even a guy with Rs.500/- can invest. Many HNIs are of wrong opinion (fortunately for PMS Advisors and unfortunately for HNIs financial health), they need to be treated differently from a ‗common man‘. It feels nice to have an IIM graduate as your portfolio advisor and a beautiful girl as your relationship manager. Don‘t forget that you are the one who is paying for the IIM graduate and the good looking female. Mutual Funds says that they ‗customise‘ the portfolio for you in PMS. Any genuine advisor, normally customise your investment portfolio based on the existing schemes available in the market where the yearly expense ratio is around 2%. Whereas as per the JPC (Joint Parliamentary committee)‘s findings, which probed into past stock market lapses, the expense ratio works out to 30% in PMS which includes broking charges (they keep churnnnning your portfolio), fund management fee, administration expenses and share in profits. For PMS people, you are definitely their ‗creamy‘ investors. Since I do investment & portfolio planning, financial goal mapping through mutual fund schemes, I want you to caution that the advisor tribe (be it banks, national distributors, regional distributors and IFAs) have started very aggressively positioning the PMS offered by Mutual Funds, instead of positioning normal funds which are good for you. I would like to repeat again that what is good for the croupier need not be good for customers. Mutual Fund houses are also not sacred tribe. They are also like any other financial services provider, be it Insurance company or Stock Broking institution. They are forced, rather left with no option but to behave better now. But they too have loopholes like PMS products and that is why do not trust any institution or person blindly. Professionals are different from business community. A profession is not a business. They have to be transparent about what they earn out of you, be it your Doctor, Lawyer, Auditor, Financial Advisors etc. Especially, with the first and last one you should be very very careful, as they deal in products also instead of just giving professional advice. One Doctor of Malar Hospital, insisted that we do a particular test for my wife only at Lister lab present in Malar Hospital . When we questioned why can‘t we do the same at Lister, Adyar, he got indignant and said that he will accept the test results if it is done only at Malar. As advised, we did it in Malar and paid Rs.2500/- for the tests. I made it a point to check with Lister, Adyar as to how much the test would cost if we do it there, the answer I got was Rs.1600/-. Still curious, I called up Thyrocare and asked how much the test would cost. The answer I got was Rs.700/-. I went and confronted the Doctor with these facts and told him that if he wanted more money, he could have increased his consultation fee. He hung his head in shame.

Doctors, who run pharmacies, tend to prescribe only the medicine available there and also the Pharma companies which offer them higher margins. Everytime you take a test or scan, at many a place, the referring Doctor gets commission. Higher the cost, higher the commission. Have you noticed that referring Doctor‘s name is captured immediately in any of the lab or scan centre you go. Why can‘t we expect the Doctor to disclose the commission he receives, the foreign trips he is offered, which is nothing but out of our money. If I take a Scan for Rs.10,000/- and the Doctor gets Rs.3000/- as a referral fee from the scan centre, why should not he disclose that? It is my money, he is taking. Why Indian Medical Association should not act like SEBI in disclosure norms. What is the guarantee that the Doctor would not be driven by his personal greed than by patient‘s interest? Auditors take insurance and mutual fund agency in wife‘s name and ask people to invest for Sec.80C, through them. They also ‗over value‘ the ‗incentive‘ that has to be paid to the Income Tax assessing officer under whose scrutiny your file is, pay him ‗less‘ and pocket the difference. This is over and above the huge fee, they bill you for resolving such cases. Last but not least, in the category are the (pseudo) saints. The genuine ones are rare to come by. A ‗saint‘, who spoke about the importance of celibacy and was raising everyday in popularity, was caught in a compromising position with an actress. Another ‗saint‘ claims that a stray bullet (which are normally used for killing wild dogs that damage the crop in the near by farms) fired from a distance of 500 metres, 20 minutes after he has left the place and hit a thigh of the devotee causing only very superficial injuries, is an attempt to kill him and he has forgiven the murderer. This ‗saint‘ his known for his strong personal aspiration for Nobel Peace Prize and never fails to utilize any opportunity to market and brand himself as ‗living Mahatma‘. Another ‗Baba‘ who claims any disease can be cured by his breathing exercises, including terminal illness like advanced cancer and is appearing on TV almost everyday, has started a political party to reform India. Good Luck to him. We‘ve another ‗saint‘ who hired Goonda killers to eliminate the ex-Manager of the Mutt who was of constant irritant to him and defaming him continuously in and around his mutt. He was so revengeful, the order given to killers was to eliminate the ex-Manager inside the temple where he was working. I do not want to talk anything about another God Man, who has already become a house hold deity and I see his photos in many of my clients‘ place. It is not that I‘m afraid to talk out the truths I know, but would prefer to keep quiet, since unlike the others mentioned above, he has already found himself a place in the pantheon of Hindu Gods and talking about ‗this God‘ would hurt the religious sentiments of many. ‗Saints‘ are also professionals, that‘s why they are included in this article. Do not trust any Saint, Doctor, Lawyer, Auditor, Financial Advisor etc. blindly. Ultimately it is all about your Spiritual, Physical and Financial health. Thanks for your patience in reading this.

Do not speculate and let Broking Houses to manage your Funds (PMS) Posted by Muthu on June 13, 2010 We’ve always been against speculation, trading, both in Stocks and Derivatives and PMS (both official and unofficial) offered by Broking Houses and even Mutual Funds. Oh, sorry, I used the wrong term, your ‘Fund Managers’. We’ve also been strongly against combining insurance and investments, which only benefits your Insurance Agent. oh! again sorry, I used the wrong term, your ‘Insurance Advisor’. In the world of Personal Finance, Please be aware that more a product or service is complexly structured in a way that you do not understand, the more likely it would suck significant sum of your money to the intermediary. Demand for transparency. Always ask your broker or PMS guy, when at the end of the year he gives you 12% return, as to how much he earned out of your investments. You’ll be amazed, if he really shares the details. When you buy an insurance product, always ask what is the first year commission your advisor would earn, and how much it would be from the subsequent year onwards? When you buy a mutual fund, ask the advisor, what would be the trail commission he would earn year on year on your investment? Please, Please ask how much your Financial Planner / Advisor / Broker / Agent, earns out of your investments. Do not hesitate to ask any advisor, including me, this question. You have absolute right to know this informaation. We’ve been using whatever platform available to us (including my recent interview in ‘Jaya TV’) to create investor awareness, on the above. Always opt for absolutely low cost financial products. Kindly do not go for products in which the intermediaries, many a time, earn more than what you earn out of your investments. In all the above, like a casino owner, they make the money. Whereas you as the gambler, loose your money. Some time ago, I wrote to some of you as to how in PMS, your broker can easily earn 30% per annum through brokerage earned by repeated churning of your portfolio, higher fund management charges and above all share in your profits. What is good for the croupier is not good for the customer. Now let me cite an interesting instance, when a ‘reputed’ broking house gave ‘buy’ and ‘sell’ call to different set of clients on the same day. Have you ever come in contact with someone who advises you to buy and sell the same thing at the same time? No, then welcome to the world of Indian retail brokerages. One such brokerage, India Infoline, has come out with two different reports on Punj Lloyd Ltd on the same day but with opposite recommendations.

Both the reports, whose copies are with Moneylife, were published on 31 May 2010. In one report, India Infoline wanted institutional investors to ‘sell’ (which according to its recommendation structure meant, “Absolute-stock expected to fall by more than 10% over a 1year horizon”) shares of Punj Lloyd. It also gave a 12-month target price of Rs97 or 29% lower than the current trading price of Rs137 as on 28th May. On the other hand, India Infoline’s second report, issued on the same date and on the same company for its private client group recommended to ‘buy’ Punj Lloyd shares with a target price of Rs158 as against the closing price at the end of 28th May of Rs137. There was no time frame or limit mentioned for the target price in this report. According to India Infoline’s recommendations parameters mentioned in this report, a ‘buy’ meant absolute return of over +10% (no time frame or limit mentioned). For its private client group, the brokerage advised: “With a robust order book, the company is well covered for the next couple of years. The company does not have any legacy orders remaining to be executed and Punj Lloyd is shifting projects from Simon Carves to the parent entity. We expect the company’s PBT to witness 74% CAGR over FY09-12E. We reduce our target price to Rs158 per share from Rs198 per share earlier to reflect concerns on extended period of non-billing its client and slow execution rate. However the recent correction in the price provides room for upside, hence we recommend high-risk investors to take exposure in the stock.” When contacted, Harshad Apte, India Infoline’s vice president for corporate communications, said, “Both these reports are in fact, targeted and sent to two separate set of customers and also both these recommendations are for differing time horizons. One of the recommendations (IIFL Private Client Group) is for the retail clients and carries a shorter time horizon while the other one is meant for institutional clients and is for a longer time horizon.” There is no period mentioned in the report for the private client group. However, it is assumed that all brokerages use 12 months as standard period for target price. So, the question still remains as to why the brokerage wants one group of its clients to sell and other to buy Punj Lloyd shares? Maybe the brokerage-and its clients-knew better. After Moneylife wrote about this case and also brought it to the attention of the Securities and Exchange Board of India (SEBI), the brokerage firm has come out with a press release clarifying the research calls made by different teams of the IIFL group. However, the company’s stand does nothing to comfort the investors; in fact it should raise eyebrows higher. The company, in its response, has very conveniently stated that the IIFL group has two separate and distinct retail and institutional research teams that are separated by ‘Chinese walls’. In today’s world of finance, it isn’t too difficult to see the irony in this idea. The Chinese wall concept is most commonly utilised in financial institutions with interests in both investment banking and brokerage operations. Its purpose is to provide a separation between the two, while allowing the company to engage in both activities without creating a conflict of interest. This wall is not a physical boundary, but rather an ethical one that financial institutions are expected to observe. While this was widely practised until a few years ago, wide cracks have become increasingly evident in the Chinese wall model over the years. The porous nature of this so-called wall was in full display during the recent debacle in Wall Street, when investment banks tumbled one after

the other. These institutions are supposed to have internal policies that necessitate impartiality on the part of analysts. But very often, these policies are based on flimsy structures, open to being twisted and violated in the process. These institutions compensate the very same ‗impartial‘ analysts based on some investment banking deals they might have participated in. The end result is there for all to see. The case is no different in India where insider trading and market manipulation are rampant. Fancy portfolio management services (PMS) products offered by various brokerages show that there are, in effect, no Chinese walls. Moneylife has written about cases where PMS money has dramatically shrunk because the broking arm took the money heavily traded in and out of stocks that not only meant huge costs but also huge losses. These products are designed in such a way as to entice high net-worth individuals (HNIs), but are usually based on shoddy strategies that end up creating havoc on the client‘s portfolio. Very often, the advice to HNIs is diametrically opposite to that given to retail investors. India Infoline‘s press release also states, ―The respective research teams conduct independent research and reports are made by separate research analysts considering the various factors including client group to which they are providing the services, risk profile, investment goals, horizon of investment etc. Since the different sets of investors, institutional and non-institutional customers, have different time horizons and different investment philosophy, they need to be serviced differently.‖ This looks good only on paper. Besides, we are not even sure if this is what the reality is. Indeed, SEBI is now thinking of actually removing Chinese walls inside asset management companies because they actually serve no purpose. (with inputs from Moneylife)

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Posted by Muthu on June 7, 2010 There are those who have relationships, and there are those who need to fake them by calling everything a relationship. No, don‘t get me wrong, I haven‘t suddenly started writing a personal advice article. This is still about personal finance and investments. It is my firm belief, borne of years of interacting with investors, that in general, the small-scale individual financial advisor provides a much better quality of advice and service than the large organisations like banks and others. This is a general rule and there are surely exceptions, but by and large, if whoever you are dealing with calls himself a ‗relationship manager‘ (or any other title with the word ‗relationship‘ in it), then it‘s to hide the fact that there actually is no relationship. Unfortunately, in the mutual fund world, the abolition of entry load is producing a side-effect that has weakened the small-scale advisor vis-à-vis the relationship crowd. Since August last, the income that distributors derive from selling mutual funds has gone down sharply. It‘s clear now that the resultant business stress has harmed the larger outfits relatively less. Typically, they are selling mutual funds to customers to whom they are providing a range of services (sorry, relationships) , while the small-scale advisor is providing only one specific service which earns him much less money now. In some cases, the money he now makes is less enough to take the business close to being unviable. Why do small-scale advisors generally provide better advice and service than the relationship peddlers? The answer, ironically, is that a larger proportion of them actually have a relationship with the customer. Often, they are someone who is personally known to the customer or has been introduced by someone whom the customer knows personally.

Moreover-and this is probably the most important factor-they own their business and expect to serve the customer in perpetuity. Through personal experience, they know that they‘ll be answerable for a long time to come and that any egregiously bad investments will impact the one thing that is central to their business-word of mouth recommendations. On the other hand, the so-called relationship manager will almost certainly have moved on to his next job or his next set of relationships within months. His customer generally finds it much more difficult to leave because he uses a whole bunch of services from the bank and in any case has no personal responsibility because the advice he originally gave was also not his-he was merely the mouthpiece for whatever sales pitch his employer asked him to deliver. Courtesy: Dhirendra Kumar, Valueresearch

Archive for July, 2010 Let us listen to Dr.Raghuram Rajan , Posted by Muthu on July 31, 2010 Who is Dr.Raghuram Rajan? If you Google, you would find a lot about this brilliant guy. For the purpose of this article, it is good for us to know that he is the Economic Advisor to the Prime Minister of our country. India has the second largest number of billionaires per trillion dollars of GDP. In fact, post the crisis, we may actually have the largest number of billionaires. Anyways, the economic advisor to the PM, Dr. Raghuram Rajan has a different take on this. As per him, a large number of the Indian billionaires are people who have earned their billions through their proximity to the Government. As per Dr. Rajan, most of these people have earned their billions from things like land, real estate, natural resources and other areas that require licenses. Or in simple words, areas that require proximity to the Government. As per him, India needs to stop patting its back for getting international recognition on this front. Instead we need to pull up our socks. We need to start working on structural reforms that would help to reduce the growing economic divide within the country. We hope the PM pays heed to his advice or a movement like Naxalism will become the norm rather than the exception that it is today. Let us listen to what he has got further to say about present global economic crisis and especially about India. In some sense the US is a metaphor for industrialized countries. The issues there are those that countries could identify as their own; inequality for one. Inequality is a problem because when people don‘t stand at the same level in the long run and see very different opportunities, then their attitudes towards reforms are very different. So ultimately, the destruction of a society is when you have extreme levels of inequality and you don‘t have an agreement on anything.

For the emerging markets, particularly those that have focused on export-led growth, the lesson is that you need someone to buy. And in the last 10 years, it has been the industrial countries. But they are in deep crisis, so who do you sell to? And so, they have to adjust their pattern of growth. Fortunately for India, it neither became producer biased nor did it force exports. While this slowed the growth rate, it facilitated a much more vibrant domestic economy to grow. And when we liberalized, we did so across the board. In that sense, we have a more balanced economy. What I worry about India, however, is the problem of inequality. The rural areas, in many ways, are falling behind because they are not connected to the urban and coastal areas. Many of the ones that are backward do not have access to education, healthcare. It is very much a thing that the US has; so, in that sense, while 8-10% growth is fantastic, we also need to figure out how to expand opportunities for those being left behind. There is no substitute for giving people the capabilities to be productive workers. We are not a rich country. How much redistribution can we afford? Which means schools, healthcare, some level of insurance, financing, access to markets; roads that connect them to bigger markets; railway and transport lines. In a sense you have to move the vibrant economy into interior parts of India. So, I would say that many of these schemes are palliatives to keep the pressure down before they explode. I think they are necessary, but you can‘t let palliatives overcome what is essential—creating those capabilities. There are ways, but they are enveloped in the old ways of socialist thinking, which I think is holding us back in tremendous ways. This is why governance is difficult. I can sit here and preach, but somewhere out there someone has to balance it. While they are acquiring those capabilities, you have to allow them to live. Which is why targeted subsidies are fine. The dangerous political path is to say we can protect you from all problems. If petrol prices go up, we will buffer them; if food prices go up, we will buffer those. Ultimately, food prices going up is telling you something and you need to respect that. The broader issue is that you can draw a social safety net for the poorest of the poor and this is where targeting is important. Targeting through UID (the government‘s unique identity programme) could reduce leakages appropriately. I think we also need a mindset, which says that we cannot afford to go beyond this. Beyond that, the only way forward is to create capabilities. We have to some extent be careful about promising too many rights that we can‘t deliver upon in an effective way or deliver in a distortionary way. Politicians understand that long-term solutions are hard and so across the world they have focused on short-term solutions. Take China, for example. Its entire effort during the crisis has been to revitalize its exports without focusing on the fact that changing the pattern of growth is also important. Why? Because politicians know that one is a tried and tested path. Why go down the untested path right now? In the US, the Fed (the Federal Reserve) is on hold because monetary policy is a low-cost way of trying to get the economy back on a growth path. No matter if there are old problems—we are creating a bubble economy—we can live with that so long as the economy is back to where it was because then the jobs will be back and the politicians are back. To my sense, you are absolutely right and that is the central problem: the fixes every country has are very shortterm, which ensures that the deeper fault lines are never addressed.

(with inputs from Mint and Equitymaster)

The story of Argentina: A Lesson for USA and rest of the Nations Posted by Muthu on July 30, 2010 We posted an article on August 21‘st 2009, ‗ U.S. to become a Banana Republic, warns Buffett‗ . Please click the below link to read that article https://wisewealthadvisors.wordpress.com/2009/08/21/u-s-to-become-a-banana-republic-warnsbuffett/ Things have only been further worsening in the U.S and the world stage since then. Anyone not alarmed by the state of the U.S. economy is not paying attention. Despite the obvious dangers–devastating inflation and the ruin of the dollar–the United States seems pledged to a debt-funded spending spree of gargantuan proportions. In opposing this trend, critics face the problem that the perils to which they point sound very theoretical and abstract. Perhaps Zimbabwe prints its currency in multi-trillion units, but that‘s a singularly backward African dictatorship: the situation has nothing to do with us. Yet an example closer to home might be more instructive. Unlike Zimbabwe, this story involves a flourishing Western country with a large middle class that nevertheless managed to spend its way into banana-republic status by means very similar to those now being proposed in Washington. The country in question is Argentina, and even mentioning the name might initially make any comparison seem tenuous. The United States is a superpower with a huge economy. Argentina is a political and economic joke, a global weakling legendary for endemic economic crises. Between them and us, surely, a great gulf is fixed. Yet Argentina did not always have its present meager status, nor did its poverty result from some inherent Latin American affinity for crisis and corruption. A century ago, Argentina was one of the world‘s emerging powers, seemingly destined to outpace all but the greatest imperial states. Today it is … Argentina. A national decline on that scale did not just happen: it was the result of decades of struggle and systematic endeavor, led by the nation‘s elite. As the nation‘s greatest writer, Jorge Luis Borges, once remarked, only generations of statesmanship could have prevented Argentina from becoming a world power. For Americans, the Argentine experience offers multiple warnings, not just about how dreadfully things can go wrong but how a nation can reach a point of no return. Not only did Argentina squander its many blessings, it created a situation from which the society could never recover. Argentines still suffer from the blunders and hubris of their grandparents without any serious likelihood that even their most strenuous efforts will make a difference. A nation can get into such a situation easily enough, but getting out is a different matter. A corrupted economy can‘t be cured without being wiped out and started over. It is hard, looking at the basket case Argentina has become, to imagine what an economic powerhouse the country was before World War II. From the 1880s, Argentina was, alongside the U.S. itself, a prime destination for European migrants. Buenos Aires was one of the

world‘s largest metropolitan areas, in a select club that included London, Paris, Berlin, and New York City. Argentina benefited mightily from foreign investment, which it used wisely to create a strong infrastructure and an excellent system of free mass education. It had the largest and most prosperous middle class in Latin America. When World War I began, Argentina was the world‘s tenth wealthiest nation. Right up to the 1940s, American and European economists struggled to explain the glaring contrast between booming Argentina and slothful Australia. As many studies pointed out, both countries had begun at a roughly similar point, as agricultural producers dependent on fickle world markets. Yet Australia remained stuck in colonial status while Argentina made the great leap forward to the status of an advanced nation with an expanding industrial base and sophisticated commerce. So what happened? Certainly the country was hit hard by the depression of the 1930s, but so were other advanced nations that ultimately recovered, and Argentina profited from intense wartime demand for primary products. The country was killed by political decisions, and the primary culprit was Juan Peron. He dominated political life through the 1940s and ruled officially as president from 1946 to 1955, returning briefly in the 1970s. Although he did not begin the process, he completed the transformation of Argentine government so that the state became both an object of plunder and an instrument for plunder. Peron came from a fascist and corporatist mindset, which became more aggressively populist under the influence of his second wife Eva. They aimed their rhetoric against the nation‘s rich, a designation that was swiftly expanded to cover most of the propertied middle classes, who became an enemy to be defeated and humiliated. To equalize the supposed struggle between the rich and the dispossessed, the Perons exalted the liberating role of the state. The bureaucracy swelled alarmingly as nationalization brought key sectors of the economy under official control. Government bought loyalty through a massive program of social spending while fostering the growth of labor unions, which became intimate allies of the governing party. Argentina came to be the most unionized nation in Latin America. Peron also ended any pretense of the independence of the judiciary, purging and intimidating judges about whom he had any doubts and replacing them with minions. The Peronist model–a New Deal on steroids–evolved into an effective clientelism, in which party overlords and labor bosses ruled through a mixture of corruption and violence. Clientelism, in effect, means the annexation of state resources for the benefit of political parties and private networks. Right now, both the word and the concept are not terribly familiar to Americans, but this is one Latin American export that they may soon need to get used to. As high taxes and economic mismanagement took their toll, the Perons blamed the disasters on class enemies at home and imperialism abroad, but the regime could not survive the loss of the venerated Eva. After attempting briefly to swing back to the center, Juan Peron was overthrown and driven into Spanish exile. Later governments tried varying strategies to reclaim Argentina‘s lost splendors and some enjoyed success, but Peron‘s curse endured. Even when his party was driven underground, its traditions remained: demagogic populism, a perception of the state as a device for enriching supporters and punishing foes, and a contempt for economic realities.

Utopian mass movements inspired by Peronist ideas and charisma segued easily into the far-left upsurge of the 1960s, when Argentina gave birth to some of the world‘s most dangerous terrorist and guerrilla movements. By 1976, the military intervened to stave off the imminent collapse of the state and launched the notorious Dirty War that killed thousands. Since 1976, Argentine economic policies have lurched from catastrophe to catastrophe. The military junta borrowed enormously with no serious thought about consequences, and the structures of Argentine society made it impossible to tell how funds were being invested. Foreign debt exploded, the deficit boomed, and inflation approached 100 percent a year. Economic meltdown had disastrous political consequences. By 1982, like many other dictatorships through history, the Argentine junta tried to solve its domestic problems by turning to foreign military adventures. And like other regimes, they found that their control over military affairs was about as weak as their command of the economy. Military defeat in the Falkland Islands destroyed the junta. By 1983, a civilian president was in power once more. But nothing could stop the nosedive. Inflation reached 672 percent by 1985 and 3,080 percent by 1989. The disaster provoked capital flight and the collapse of investor confidence, not to mention the annihilation of middle-class savings. In the words on one observer, Jose Ignacio Garcia Hamilton, the nation became ―an international beggar with the highest per capita debt in the world.‖ Another civilian president, Carlos Menem, took office in 1989, and despite his Peronist loyalties he initially tried to restore sanity through a program of privatization and deregulation. But events soon proved that Menem was only following a familiar pattern whereby a new regime would speak the language of reform and moderation for a couple of years before facing a showdown with the underlying realities of Argentine society. Menem could not overcome the overwhelming inertia within the country, the juggernaut pressures toward the growth of the state, to bureaucratization and regulation, and the destruction of private initiative and free enterprise. Between 1991 and 1999, Argentine public debt burgeoned from 34 percent of GDP to 52 percent. During the same decade, government public debt more than doubled as a percentage of GDP. These burdens stifled private investment so that productive sectors of the economy languished. Economic disaster led inevitably to a collapse of social confidence and the evaporation of loyalty to the state. The more heavily the country was taxed and regulated, the more Argentines took their transactions off the books, creating a black economy on par with that of the old Soviet Union. In terms of paying their taxes, Argentines are about as faithful as the Italians to whom most have blood ties. Tax evasion became a national sport, second only to soccer in the Argentine consciousness, and provided another stumbling block to fiscal integrity. The collapse of respect for authority also extended to the law: courts are presumed to operate according to bribes and political pressure. Systematic corruption has had horrifying implications for national security. After all, once you establish the idea that the state is for sale, there is no reason not to offer its services to foreign buyers. One spectacular example of such outsourcing occurred in 1994, when Islamist terrorists blew up a Jewish community center in Buenos Aires, killing 85. The investigation of the massacre was thoroughly bungled, reportedly because the Iranian government paid Menem

$10 million. It is trivial to list the many other allegations of corruption and embezzlement surrounding Menem. What else is politics for, if not to enrich yourself and your clients? In 2001-02, Argentine fortunes reached depths hitherto unplumbed. A debt-fueled crisis provoked a run on the currency, leading the government to freeze virtually all private bank accounts for 12 months. At the end of 2001, the country defaulted on its foreign debt of $142 billion, the largest such failure in history. With the economy in ruins, almost 60 percent of Argentines were living below the poverty line. Street violence became so intense that the president was forced to flee his palace by helicopter. Since 2002, yet another new government has presided over an illusory economic boom before being manhandled by the ugly ghosts of Juan and Evita. Those specters were on hand to whisper their excellent advice to a new generation: if you face a crisis caused by excessive government spending, borrowing, and regulation, what else do you do except push even harder to spend, borrow, and regulate? Over the past two years, new taxes and price freezes have again crippled the economy, bringing power blackouts and forced cuts in production. Public debt stands at 56 percent of GDP, and inflation runs 20 percent. Last October, the government seized $29 billion in private pension funds, hammering the final nail in the coffin of the old middle classes. Judging by credit default swap spreads on government debt, the smart money is now betting heavily on another official default before midyear. The Argentine economy may not actually be dead yet, but it has plenty of ill-wishers trying hard to finish it off. We all know that deficits drive inflation, which can destroy a society. Less obvious is the political dimension of such a national suicide. Debts and deficits must be understood in the context of the populism that commonly entices governments to abandon economic restraint. No less political are the probable consequences of such a course: authoritarianism, public violence, and militarism. The road to economic hell is paved with excellent intentions–a desire to save troubled industries, relieve poverty, and bolster communities that support the present government. But the higher the spending and the deeper the deficits, the worse the effects on productive enterprise and the heavier the penalty placed on thrift and enterprise. As matters deteriorate, governments have a natural tendency to divert blame onto some unpopular group, which comes to be labeled in terms of class, income, or race. With society so polarized, the party in power can dismiss any criticism as the selfish whining of the privileged and concentrate on the serious business of diverting state resources to its own followers. Quite rapidly, ―progressive‖ economic reforms subvert and then destroy savings and property, eliminating any effective opposition to the regime. Soon, too–if the Peron precedent is anything to go by–the regime organizes its long march through the organs of power, conquering the courts, the bureaucracy, the schools, and the media. Hyper-deficits bring hyperinflation, and only for the briefest moment can they coexist with any kind of democratic order. The U.S. certainly has very different political traditions from Argentina and more barriers to a populist-driven rape of the economy. On the other hand, events in some regions would make Juan Peron smile wistfully. California runs on particularly high taxes, uncontrollable deficits, and overregulation with a vastly swollen bureaucracy while the hegemonic power of organized labor prevents any reform. Thankfully, the state has no power to devalue its currency, still less to freeze bank accounts or seize pension funds, and businesses can still relocate elsewhere. But in

its social values and progressive assumptions, California is close to the Democratic mainstream, which now intends to impose its ideas on the nation as a whole. And at over 60 percent of GDP, U.S. public debt is already higher than Argentina‘s. When honest money perishes, the society goes with it. We can‘t say we weren‘t warned. (Courtesy: Edited Excerpts: Philip Jenkins, the free library)

When Money Dies Posted by Muthu on July 30, 2010 An obscure little book is capturing reader imagination like never before. ‗When Money Dies‘ by Adam Fergusson was last heard retailing as high as Rs. 73,000 at an online retailer! In fact, as per reports, this book has caught even Warren Buffett‘s fancy. The world‘s greatest investor has termed it a must read. Now, what exactly is this book and why this new found interest in it? This book is perhaps an indicator of the dangerous times that lie ahead of us. It highlights how an unchecked growth in money printing can cause disastrous consequences if not controlled on time. We all know that enormous amount of money has been printed in most parts of the world, particularly in the US. And this is certainly quite inflationary. The only thing that is keeping it in check is the fact that people are holding on to their money and not spending it as quickly as before. However, such a scenario may not last long. People‘s willingness to spend money can change so suddenly that it can catch economists completely by surprise. And then all hell can break loose. Inflation can go completely out of control. So out of control that as per the book, during the German hyperinflation of 1920s, it took 1 trillion German marks to buy just one unit of English currency! Money lost its value so fast that it was not unusual to see people taking home their wages in suitcases or covering their wall with paper money because it was cheaper than wallpaper. Rest assured there are even more chilling accounts in the book of how the economy completely broke down in Germany. We may certainly not have an inflation as bad as that happened in Germany. But we are definitely setting ourselves up for a huge disaster if we do not act on time. As the author of the book recently mentioned, ―Politically, now is the only time tightening can be done. In a year or so it won‘t be possible politically any more‖. We hope Messrs. Bernanke and company are listening. If any one of you is able to get the above book, please lend me the book for a week. Can you tell us which is the safest asset in the world right now? Gold could be one of the options. However, there isn‘t enough quantity of the yellow metal for it to absorb trillions of dollars of cash and still not move much in terms of prices. How about the US Government bond? It is the sovereign bond of the most powerful and wealthiest nation on Earth. Plus, it was the asset of choice the last time a crisis happened. Certainly, the US Government bond does qualify as the safest asset in the world based on historical track record. However, is the famed US Government bond going to be equally safe in the future? Clearly not if the noted economist and investor Marc Faber is to be believed. In fact, as per Faber, the value of the US bond would be nothing more than worthless pieces of paper going forward. This is thanks to the enormous amount of debt the US has piled on. Faber believes that the US Government will have to run a giant Ponzi scheme just to be even on its interest payments.

In other words, it will have to keep issuing new bonds so that the money raised could be used to pay its ever rising interest expenses. The repayment of debt is just impossible as per Faber. And this scheme would come to end the day new bond issuances will not be able to match interest payments. Then, the US Government will be left with no other option but to print money thus significantly raising the risk of a hyperinflation like situation. While the reality may not turn out as grim as Faber has predicted, the US is indeed staring at a problem the magnitude of which is unheard of. The safest asset in the world may not be that safe after all. What is hyperinflation and why it is considered risky? Hyperinflation is inflation that is very high or ―out of control‖, a condition in which prices increase rapidly as a currency loses its value. The main cause of hyperinflation is a massive and rapid increase in the amount of money that is not supported by a corresponding growth in the output of goods and services. This results in an imbalance between the supply and demand for the money (including currency and bank deposits), accompanied by a complete loss of confidence in the money, similar to a bank run. Enactment of legal tender laws and price controls to prevent discounting the value of paper money relative to gold, silver, hard currency, or commodities, fails to force acceptance of a paper money which lacks intrinsic value. If the entity responsible for printing a currency promotes excessive money printing, with other factors contributing a reinforcing effect, hyperinflation usually continues. Often the body responsible for printing the currency cannot physically print paper currency faster than the rate at which it is devaluing, thus neutralizing their attempts to stimulate the economy. Hyperinflation is generally associated with paper money because this can easily be used to increase the money supply: add more zeros to the plates and print, or even stamp old notes with new numbers. Historically there have been numerous episodes of hyperinflation in various countries, followed by a return to ―hard money‖. Older economies would revert to hard currency and barter when the circulating medium became excessively devalued, generally following a ―run‖ on the store of value. Hyperinflation effectively wipes out the purchasing power of private and public savings, distorts the economy in favor of extreme consumption and hoarding of real assets, causes the monetary base, whether specie or hard currency, to flee the country, and makes the afflicted area anathema to investment. Hyperinflation is met with drastic remedies, such as imposing the shock therapy of slashing government expenditures or altering the currency basis. An example of the latter occurred in Bosnia-Herzegovina in 2005, when the central bank was only allowed to print as much money as it had in foreign currency reserves. Another example was the dollarization in Ecuador, initiated in September 2000 in response to a massive 75% loss of value of the Sucre currency in early January 2000. Dollarization is the use of a foreign currency (not necessarily the U.S. dollar) as a national unit of currency. The aftermath of hyperinflation is equally complex. As hyperinflation has always been a traumatic experience for the area which suffers it, the next policy regime almost always enacts policies to prevent its recurrence. Often this means making the central bank very aggressive about maintaining price stability, as was the case with the German Bundesbank, or moving to some hard basis of currency such as a currency board. Many governments have enacted extremely stiff wage and price controls in the wake of hyperinflation but this does not prevent

further inflating of the money supply by its central bank, and always leads to widespread shortages of consumer goods if the controls are rigidly enforced. Do you want to know how high Hyperinflation can be? Take the case of Zimbabwe. Hyperinflation in Zimbabwe began in the early 2000s, shortly after Zimbabwe‘s confiscation of white-owned farmland and its repudiation of debts to the International Monetary Fund, and persisted through to 2009. Figures from November 2008 estimated Zimbabwe‘s annual inflation rate at 89.7 sextillion (1021) percent.By December 2008, inflation was estimated at 6.5 quindecillion novemdecillion percent (6.5 x 10108%, or 65 followed by 107 zeros). In April 2009, Zimbabwe abandoned printing of the Zimbabwean dollar, and the South African rand and US dollar became the standard currencies for exchange It is perceived that fiscal and monetary policies are the two levers with which growth in an economy can be regulated. But we believe that most of the developed economies have pushed the fiscal knob to its maximum permissible limit. Little wonder most of them are singing the austerity tune these days. So does this mean that the Governments have finally decided to go slow on spending and are looking to cut their fiscal deficits? Certainly not believes Marc Faber, one of the top big picture guys in the world right now. ―I am not a great believer in this austerity that they are proclaiming‖, Faber said recently in an interview. He further adds that even if Governments cut deficits, it is most likely to be offset by a very expansionary monetary policy. In other words, the US Fed and other central banks will print so much money that nominal interest rates would continue to remain low. This in turn could force people to spend and invest and thus push up economic growth. However, this is not going to solve any of the long term problems. Very likely, we could end up with an even bigger recession few years down the road. Thus it looks like there are no easy solutions in sight. (with inputs from Equitymaster and Wikipedia)

A Perspective:Benefits of Investing through SIP Posted by Muthu on July 29, 2010 SIP (Systematic Investment Plan) in mutual funds is a most heard, but less applied concept. Though we have a sizeable corpus of SIPs running every month, I feel that we‘ve miles to go before we achieve self satisfaction in this regard. Every single SIP we receive provides us satisfaction that we are also instrumental in making investors participate in the growth story of our economy. Does it mean that a lump sum investment does not provide us joy? It does. They also participate equally in our country‘s growth story. However not everyone is capable of lumpsum investments.

But everyone is and should be capable of investing small sums every month over a long period of time. Let me start with an example of one of the funds we recommend to be part of core portfolio of every investor. If you‘ve invested Rs.5000/- every month in this fund for the last 10 years, how much would be it‘s value now? Hold your breath, it is Rs.35.26 Lakhs. You would have invested Rs.6 Lakhs over a 10 year (120 months) period resulting in nearly 6 fold rise of capital. This works out to an annualized return of 29.07%. This fund has been in existence for last 186 months (as of June 30th 2010), roughly 15.5 years. If you‘ve invested Rs.5000/- every month in this fund for the last 15.5 years, since it‘s inception, how much would be its‘ value now? Again you would be surprised, it is Rs. 1.34 crores. You would have invested Rs.9.3 Lakhs over a 15.5 years (186 months) period resulting in nearly 14 fold rise of capital. This works out to an annualized return of 26.62%. Based on the past performance, if we project a 25% returns for a period of 20 years (investing Rs.5000/- per month), how much would be the value? Unbelievable it is Rs.3.43 crores. You would have invested Rs.12 Lakhs over a 20 year period (240 months) resulting in 29 fold rise of capital. Kindly note that the above illustration is based on past performance. Mutual fund investments are subject to market risks. Past performance may or may not be repeated in future. The products does not offer any guaranteed returns. Sensex has provided an annualized return of 18% over the last 30 year period. You may also refer again to our recent article ‗Want to become a Crorepathi?‘ Please click the link below for the same https://wisewealthadvisors.wordpress.com/2010/07/24/want-to-become-a-crorepathi/ Every family with an income of Rs.50,000/- should aspire for investing atleast Rs.10,000/- in SIP. For people who are planning for retirement, children‘s education, daughter‘s wedding etc. should roughly try to invest 20% of their monthly income in equity funds through SIPs. The myth is that, timing is essential to generate high returns. The Reality is that, it is the time and not the timing that matters On a study conducted for a 25 year period in BSE Sensex, if you‘ve invested in the best day (when the Sensex was at the lowest) of every year, you would‘ve received an annualized return of 17%. Instead, if you‘ve invested in the worst day (when the Sensex was at the highest) of every year, you would‘ve received an annualized return of 15%. A difference of 2%.

But tell me honestly, how many of us are capable of predicting the best day and the worst day every month or every year, that too consecutively for decades? Who can time the market to the perfection? None. Not even the ‗Experts‘ can. We earn regularly. We spend regularly. Shouldn‘t we also invest regularly? All we need is a blend of income, time and discipline. We‘ve income and time, all we need is discipline. The discipline of making small but regular investments. An SIP is like operating a recurring deposit account with a mutual fund. A method of investing regularly to benefit from the stock market volatility. It is convenient and hassle free. Once you give a one time instruction, your account would be debited on a regular basis. It is a forced savings. Small amount invested every month to become a huge sum after some years. This is a low cost, transparent way to build your wealth. Some people stop the SIPs when the markets go down. This defeats the very purpose of SIP, which is a method of investing to capture and mange stock market volatility. You get more units when the markets are lower. Stopping SIPs when the markets are down is self defeating. Trying to time the market is a Fool‘s game? Do you want to be one? Please read by clicking the below link what I‘ve written earlier in this regard. https://wisewealthadvisors.wordpress.com/2010/07/25/trying-to-time-the-market-is-a-foolsgamedo-you-want-to-be-one/ Most of us delay investments until the last moment. Needless to say, the longer you delay, the greater will be the financial burden on you to meet your goals. On the other hand, you would be surprised what you could achieve by saving a small sum of money regularly at an early age. Moreover, the earlier you invest, the longer your money works for you and greater will be the power of compounding. The power of compounding underlines the importance of making your money work for you at an early age. Suppose A & B invest Rs.5000 every month earning interest @18%p.a.(which is the annualized return of Sensex for the last 30 years) on a monthly compounding basis. A starts at the age of 25 years and B starts at the age of 35 years. Both of them invest for 5 years (Rs.3 Lakhs) and hold their investments till 60 years of age. A ‘s investment would have appreciated to approximately Rs.7 crores whereas B ‘s investment would have grown to only Rs.1.33 crores Thus, A ‘s investment would have almost become seven times more by just starting investing earlier than B, though the amount saved by them is the same.

Clearly, the power of compounding can have a significant impact on your wealth accumulation, especially if you remain invested over a long period of time. In nutshell, benefits of investing in Mutual Funds through SIP are       

Professional Management– Ensures that the best brains are managing your money. Diversification– Ensures risk reduction. Low cost – No entry load. The annual expense ratio is around 2%. Liquidity– Ensures that you get back your money, whenever you want. Transparent– Ensures you are appraised of the portfolio regularly. Extremely well regulated– Ensures that the fund follows laid down process. Tax efficient – For Equity Funds: Dividends are Tax Free, No Long Term Capital Gains Tax, Short Term Capital gains tax of flat 15%

In your own welfare, I would sincerely suggest that you go for a long term SIP, not less than 20 years, so that you can reap the benefit of compounding. I wish you all become crorepathis and financially independent so that you would be able to have a better quality of living.

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Posted by Muthu on July 28, 2010 As mentioned few days ago, I‘m modifying and presenting you an article I wrote long back on ‗Giving‘. In my opinion, Money or Wealth basically has three primary functions 1) Current Consumption – spending for our life style 2) Savings and Investments- for our future safety or ‗rainy days‘ 3) Giving- what we spend for others. Most of us focus either on the first or second or both but completely ignore the last one. For the last 3 ½ years, I‘ve been an Investment advisor, Financial Planner, Trainer and Teacher and hence come across lot of people. I‘ve made presentation on Wealth Building in various forums including Spiritual Organizations. So I feel that I‘ve seen wide spectrum of people to obtain certain insights. When it comes to Money, the focus is primarily on either consumption or investment. But I feel that we should start giving equal importance to ‗Giving‘- donations or charities. To some extent, all of us give some money to others for helping them. No doubt about it. But it is very random and impulsive. We are not as methodical or as planned like how we approach our expenses or savings. I did some research about western societies on how they give. On an average, they donate 2.7% to 4.2% of their post tax earnings for helping the under privileged in their local community. One interesting observation I found was that the Lower and Middle income group donate around 5% of their post tax earning where as the Rich and Ultra Rich donate close to 3% of their Post Tax earnings.

In Modern India, though we are rooted in a rich culture and tradition, I feel that giving is relatively less and is not in an organized manner. You may ask me, since I‘m talking about giving, what I‘m doing for others. As I always tell you, even when I recommend investments, I eat the same food I serve others. So the same is the case with ‗Giving‘ too. Till last year, even though I was considering myself ‗generous‘, when it comes to helping others, I was also giving only on a random and impulsive basis. I did not plan for giving, like I used to meticulously plan my expenses and investments. On introspection, I felt that I need to change this trait of mine. So in discussion with my family, I‘ve made a decision. Either after next 2 decades or after I die, whichever is earlier, depending upon the life situation then, a minimum of 1/3 ‗rd to a maximum of 50% of my wealth would go for charity. Our family would form and run a trust along with some wellwishers towards this cause. The rest of my wealth would only go to my family. I strongly urge you to read again, an article of Warren Buffett posted by us earlier, ‗I‘m giving back 99% of my wealth, can you give atleast 50%‘. Please click the below link to read his moving message https://wisewealthadvisors.wordpress.com/2010/06/19/im-giving-back-99-of-my-wealth-canyou-give-atleast-50/ Literally, not philosophically, we came with empty hands and are going to go back with empty hands. Whatever wealth we got is from the society only, and it is our duty give back atleast a part of it to society. As Warren Buffett says ‗If you‘re in the luckiest 1% of humanity, you owe to the humanity to think about the other 99%‘. People who read this article are either middle class or higher middle class or wealthy. Given the poverty in the world, we‘ve been lucky to be part of the 1% of the humanity. To quote Bhagwan Ramana Maharishi, ―What one gives to the other, he gives himself‘. If we look this statement in a narrow perspective, we may understand that if we give others, God will give more to us. But this is an incorrect way of understanding wherein we are making ‗Giving‘ an ‗Investment‘ for better returns in future. In a broader perspective, this statement means that we are all inter connected. In an inter connected world, pain and suffering of others affects oneself. That is why Ramana also used to say that ‗There are no others‘. For the purpose of this article, I‘ve restricted ‗Giving‘ to the monetary giving. As you all know, giving is not limited only to money. Giving can also be in the form of time, energy, kind words, listening with empathy, prayers, sending goodwill and peace through meditation etc. Some times these intangible giving is more valuable than monetary giving. Let us keep this perspective in mind while we donate money. Also giving need not be restricted to the organizations which are registered under Income Tax and offering us Section 80G benefit. Giving can also extend to ‗unorganized group‘ (i.e.) helping our maid servant‘s children education, helping the old security guard for his medical expenses, feeding the poor old and disabled people we come across in streets etc.

I would strongly urge that let us give atleast 3% of our income every year exclusively for the benefit of others. Other option is, if you are good in building wealth, ensure that atleast 10% of your wealth at the time of retirement or death, whichever is earlier, goes for charitable causes. This is only the minimum threshold, the more one is capable and willing to give, it is better for our society. In a country like ours, where around 800 million people are earning less than 2 dollars per day, we can understand how each one of us can make a significant contribution to the society through our giving. Usually I write a lot on investments, wealth building on a regular basis. But had a strong urge to share my thoughts on giving with all of you.

Archive for July, 2010 You can never become Rich Posted by Muthu on July 27, 2010 As I did couple of weeks ago, I‘m planning to share with you occasionally random thoughts on issues relating to my personal domain, which would at the same time applicable to most us because many a times the human behaviour and experiences are not unique, and is same for all of us. We as human beings also have our own fair share of folly. Many people wrote to me when I shared ‗random thoughts on myself, my profession and social compulsion‘. They shared their most personal issues with me. All of us have our own vulnerability and there is nothing to be ashamed about the same. You may be puzzled by the title of the message, coming from a Wealth Advisor. Life is very fragile. We are all mortals. I‘m not going to write a spiritual article, though I would love to, but this is not the forum for that. We all often forget the above statements. Before the end of this century, the 7 billion of us inhibiting this planet would be replaced by a different set of people. Many of us pursue wealth at the expense of other aspects of life. As you‘re aware, our organization is named as ‗Wise Wealth Advisors‘ because we believe that wealth without wisdom is not only useless but also may be dangerous. Also Wealth should be attained through Wise means. That‘s why our tag line is ‗Wealth through Wisdom‘. Let us go back to 1995. I was working in a stock broking firm for Rs.2500/- a month. My father and I lived in a 150 sq.ft. house and had zero savings. Meeting our monthly expenses itself was a big challenge. Despite that we‘ve to help my elder brother who was not doing well in life.

I can vouch from my personal experience, no relative likes to be in touch with you once you are poor. They see you as a burden. Good friends and genuine wellwishers are an exception to the above rule. We had only one of our relatives to look upon then for help. I honestly feel that they could have saved my elder brother easily from the chronic ailment he is suffering, which has crippled him for life, had they taken initiative when they identified the problem. They were reasonably well placed to provide him treatment and cure him, given their financial strength at that time, especially given by brother‘s closeness to them then. When I got a seat in IFMR for MBA-Finance (thank you Rakesh for nudging me to join this course), with my meagre earning of Rs.2500/- per month, I literally begged the woman of the house of the above relative for loaning me the annual fee of Rs.5000/- (today the fee is running into lakhs of Rupees). Though they had money, they said it is up to me to take care of my educational expenses if I want to study further. They knew that we were leading a poor life and was living in a tiny house, barely able to even survive in the world, also helping my elder brother in the process. They were also not dumb enough to realise that doing this course would be a way for us to come out of the poverty. We had no one else to ask to. There are always unknown angels in life. There was a stock trader in Madras Stock Exchange then by name Srinivas, who was my colleague in the stock broking firm I worked. During 1995 itself he has run into loss of few million rupees (which was huge at that time) and was in great financial distress. Seeing me very upset, he enquired for the reason, when with great hesitation I explained my plight, he further borrowed Rs.5000/- and gave it me. But for him, I would have never gone for my MBA. I still remember him with gratitude and pray for his welfare, wherever he is now. Subsequently, my boss, Mr. Jayesh A.Shah came to know about my poverty, to make you visualize- I just had 2 old pants and 3 worn out shirts and used to walk 8 kms every day unable to bear the bus ticket cost of Rs.1.25/- and was not in a position even to have a wrist watch and used to keep asking people on the road for time -he spoke to his father and sponsored my second and third year of MBA education from the social welfare trust run by his family. He also gifted me his books purchased while he was studying MBA (he is from IIM-A). I understand that Mr.Jayesh Shah is now somewhere in the gulf region and is associated with stock market. I‘m grateful to him too. I was the most poorly dressed, without shoes or even watch, when I did my MBA. This relative family did not even feel fit in helping me having couple of set of good dress, a pair of shoes and a wrist watch. Beggars are not choosers, right? I‘m grateful to the then Program Incharge of the course, Prof. Dr.Narasimhan (whom I understand is now in IIM-B), other professors and good friends, who constantly encouraged me. I want to stop writing about this relative family and move further because I can even write an exclusive blog about their meanness and greed, which may be of no use to you. The woman of that house has only further worsened in her pettiness and greed and is grooming the next generation also to slip into her shoes. Most of the people who come to me for advice want to become rich. You can never become Rich. ‗Rich‘ is a relative term. It is always in reference to someone or something. For many of you, who saw the Jaya TV breakfast show recently, wherein I had the privilege of

being the guest of the day, I told one should aspire to be ‗Financially Independent‘ and not ‗Rich‘. If you believe, being rich means owning lot of money, there are many more people in the world with much more money than you. Two decades ago, Warren Buffett and Bill Gates were not the richest people on the earth. Today they are, replacing the earlier ones from their positions. In a decade or two, Warren Buffett and Bill Gates may be replaced by some others. If this is going to be the plight of Warren Buffett and Bill Gates, what to say about rest of us? For argument sake, if we assume that some one is rich, if his financial assets is atleast Rs.1 crore or above, it is not so. I came across a gentleman recently whose networth is Rs.3 crores but needs Rs.5 Lakhs every month out of it, to meet his life style. Understandably, he is miserable and cannot have his requirement met out of the corpus. He needs another Rs.3 crores to fulfil his expectations. Obviously, he feels inadequate. On the other hand we have 800 million people living in our country with less than $2 a day. 40% of the world population lives less than $ 2 a day and go to bed with empty stomach. So arrive at your own life style needs, preferably avoid envy and comparison and do not try to create a life style because someone else wants it but only because you want it. If your life style demands that you need Rs.50,000/- every month, then if you have Rs.60 Lakhs, you can be termed as financially independent. Though you‘ve lesser money (only 1/5 th ) than the above mentioned gentleman, you are richer than him. When I had the guts to quit at the peak of my career and chose to be on my own in a totally different line, started doing what I‘m passionate about, not everyone was amused. Everyone in the relative circle thought that I‘m crazy to ‗retire‘ from well paying career early and start something ‗foolishly‘ on my own. Also as my profession involve more of reading and thinking and talking and less of doing, (as Buffett says ‗We don‘t get paid for activity, just for being right‘) everyone concluded that I‘ve become lazy. My failing health which restricted my physical activity added to their conviction. They thought that I‘ve become a parasite and become dependent on my wife‘s earning and wealth. To establish oneself in a totally new profession from employment in a different field requires tremendous amount of inner conviction. Also something just takes time. To quote Buffett ‗No matter how great the talent or effort, some things just take time. You can‘t produce a baby in one month by getting nine women pregnant.‘ A true professional builds his profession purely through referrals and it needs atleast 5 years for him to establish himself. It‘s just 3 ½ years, we‘ve been in profession and is being recognized by informed and quality clientele (to appreciate what value we bring in needs certain amount of knowledge and understanding, that‘s why we‘ll be professional for classes and not masses. By classes, I do not mean someone‘s wealth but their mental attributes.), media houses – both print and visual and by wellwishers and friends. But our relatives continue to look down on me. Many of them are multi-crorepathis, they measure people only by their ‗activities‘ (remember I‘ve written earlier about a busy suburban GP Doctor) that are visible to their ignorant eyes. Also most of them

either envy or dislike me because I‘m refusing to be part of their rat race and refuse to measure my value in terms of wealth. Even if I loose all my wealth today, I know my value. I know what I know and there are good quality people in the society, who recognises my value. I pity the people who cannot understand that I enjoy the ultimate luxury of doing everyday, what I passionately love to do, helping people to create and manage wealth and be their ‗Personal Financial Advisor‘. I‘ve time everyday to think, read and write. This luxury cannot be matched by their expensive villas or cars. If they cannot see value in what I do, so be it. Who cares? My wife has been very supportive. Otherwise given the social pressure, for example, one lady relative of us who works in a bank, always used to look at me with disdain, when I was operating from home office with my cotton pants and T-shirts, I would have found it very difficult to carry on with my profession and may be forced to go back to employment. Both my wife and I were contributing for running the family. She has a good income and decent wealth. So I‘ve put significant portion of my wealth in long term (10 years) wealth building assets. This restricted my liquidity but did not affect me as I was duly supported by my wife. But given the social (read ignorant relatives) perspective, I‘ve been managing my family‘s finances independently for last few months. Added to this, I‘ve written earlier, how I was forced to put a separate office in an office complex, and move my office from home. Though by God‘s grace, I‘m financially self sufficient, I‘ve to increase my liquidity to meet both domestic and official expenses. This means I should liquidate some of my assets, which I‘ve already started. For those of you who are tracking my stock portfolio, I‘ve sold my holdings in SREI Infra yesterday @ Rs.88.50/- per share. During November‘08, when stocks were available at a huge bargain, I was unable to control my ‗greed‘ and bought whatever stocks possible like IDFC (Rs.50/-) , Karuturi Global (Rs.6/-) etc. From a lady relative of us, who is multi-crorepathi, but prefers to keep all the money in fixed deposits, I asked for a loan of Rs.2.5 Lakhs for 2 years @ a rate of return above fixed deposits. I‘ve also told her that I would sign a bond paper in this regard, duly attested. This confirmed her suspicion that I‘m useless and have been simply whiling away my time. She refused to give money. So I sold my Gold ETFs and purchased stocks, knowing fully well that Gold would appreciate significantly due to the global crisis and people loosing faith in currencies. That Rs.2.5 lakhs is nothing for her and she knew that I‘m not going to run away with her money. I was also willing to provide her a rate of return better than her fixed deposits. You know how much Gold has appreciated in the last 20 months. Of course people are people and it is her money and so she had the final say on this. My random thoughts are always longer… To conclude, decide what your life style should be, including your regular savings to keep pace with inflation. Build sufficient wealth which would help you to match ‗your‘ life style and your financial goals like children‘s education, daughter‘s wedding etc. Cover your risks through Insurance so that your savings are not dented on the eve of any contingency. Like you have a family physician, have a personal finance advisor, who would help you to build and manage wealth, risks etc.

As long you have above, there is no need for you to compare yourself with Ambanis, Bill Gates or Warren Buffetts of the world. You can never become richer like them. Even if you become, someone or other is going to over take you soon. Aspiring to be rich keeping your relatives or someone else in the society as benchmark, would not give you good quality of life. Once you reach that position, only your benchmarks would keep changing, at the cost of your quality of life. As far as possible, be it job or profession or business, try to do what you enjoy doing. This is a greatest asset one can have. Just have wealth goals making you to be financially independent and do not keep chasing the mirage of richness. You‘ll never ever be there.

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Posted by Muthu on July 25, 2010 I‘m amazed as to how many novices including CFPs, Investment Advisors, Stock Brokers, Wealth Managers and Investors think that they are good in timing the market. These people believe that they could time the market to perfection. However, genuine expert after expert has gone on to say that trying to time the market is a fool‘s game and should be avoided at all costs. As Personal Finance legend John Bogle points out, the way to wealth for the stock brokers is to persuade their clients and say ‗Don‘t just stand there. Do Something‘. But the way to wealth for the clients is the opposite maxim ‗Don‘t do something. Just stand there.‘ This is the only way to avoid playing a loser‘s game. It is impossible to predict the best and worst days in the stock market. For example, over the last 10 years, the worst single day was 17th May 2004, when the market dropped 11.14%. However, exiting on that day would mean losing out on a gain of 8.25% the very next day! This rise was indeed very rapid, but what‘s more important, is that the climb was almost as high as the best single day of the decade – 1st March 1999, when the Sensex gained 8.97%. Missing just few days of good performance can significantly reduce your over all returns. Let us take a ten year period – 30th June 2000 to 30th June 2010. Remember this ten year period contains the most spectacular rise and fall of the Stock Markets. Let us assume you‘ve invested in Sensex during the above 10 year period. Ofcourse good diversified equity funds have provided far superior returns than Sensex. We‘ll come to it little later. During the last ten year period, if an investor would have missed out the ten best days in the stock market, a sum of Rs. 100,000 would have returned a paltry Rs. 1,74,964 as opposed to Rs. 3,72,747 had he stayed fully invested. Your investment of Rs.100,000/- invested ten years before in Sensex is worth following Remain Invested – Rs.3,72,747 Missed best 10 days – Rs.1,74,964

Missed best 20 days- Rs.1,02,894 Missed best 30 days- Rs.64,860 Missed best 40 days – Rs.43,474 The cost of missing best 10 days is Rs.1,97,783 where as cost of missing best 40 days is Rs.3,29,273. Infact your capital would have got significantly eroded if you‘ve missed the best 30 and 40 days. For missing, just best 20 days, you would not have even received even Savings Bank interest. Tell me honestly, in hindsight, how many of us would have been able to predict the best 10 days during the last 10 years leave alone predicting the best 40 days? But the whole stock broking business (where you get daily tips!) is run on their ability to time the market. They are the fools of the market and people (customers) who believe in them are the bigger fools of the market. Atleast the fools of the market earn income at the cost of bigger fools. Where as the bigger fools end up loosing every thing. So the fools are actually intelligent and the bigger fools are only dumb and ultimate losers. This is applicable not only to stock trading but also trading in derivatives, currencies, commodities etc. Before you venture into trading of any form, ask yourself the question, ‗Do I want to be the Bigger Fool of the Market?‘ In stock markets, money always moves from the pockets of most active to the most patient. Let us listen of Dhirendera Kumar of Valueresearch: ―Anyone can invest regularly when the going is good, but can you stay the course and continue to invest when the going gets bad? The way stock markets behave, it isn‘t easy to figure out what‘s likely to happen in the short or medium term. Is it possible to have an investment strategy that will make money in the long-term regardless of what happens in the short-term? If the past is anything to go by, then there certainly is. The fact is that all the nerve-rattling action of the rise and fall of the Sensex has nothing to do with the small investor and should not bother you. If this sounds bizarre, here‘s proof from time. We studied the SIP (systematic investment plan) returns of diversified equity funds over the last 10 years. How much could you earn by this simple way of investing and going at it for a long time? You‘ll be surprised. If you had invested Rs 20,000 a month for the last ten years in any one of the better mutual funds, your Rs 24 lakhs could have grown to almost a crore of rupees. In fact, the best few could have left you with a stash that would be substantially more than a crore! And mind you, the last ten years were not exactly a trouble-free period. There would have been times when your portfolio would have come under a serious threat of going into the red. And what could you do then? You could either exit the market to save your capital. Or be patient and go on to become a crorepati! The key we are pointing out to is ‗long-term‘ investing. Instead of figuring out where the stock market will be next week or next month or next year, just focus on the simple

strategy of investing a steady amount regularly and keep doing it month after month, year after year. The all-important role of time can also be demonstrated with another example. Consider two investors A and B who set out on their journey to accumulate wealth. Investor A realised the potential of equities quite early and started investing Rs 20,000 a month, 10 years ago. Investor B, on the other hand, procrastinated for five years before finally buying into the equity story. He started investing double the amount each month to catch up with his friend. Despite investing an equal amount of Rs 24 lakhs, Investor A would be almost twice as wealthy as Investor B as his money would have more time to compound. The lesson is simple – there is no substitute for time so the sooner you start investing, the faster you will join the elite club of crorepatis. A story about building wealth over the long term could have concluded here, but stepping back in time reveals some more compelling facts. We decided to move away from the glory of the last few bull years to check results over different time periods. Since mutual funds have not been around that long, we used the Sensex to check out SIP returns for every block of ten years since 1980. What we found is that while an investor would have earned far higher returns than other asset classes in most of the decades, equities did show their fearful face in two of these 10-year periods – those ending in 2001 and 2002. In fact, the performance had been uninspiring in the decade ending 2000 as well, when the markets failed to earn a return equal to the risk-free rate. The caveat ‗mutual fund investments are subject to market risks‘ does deserve some attention after all. But there are a lot more things to consider before jumping to a conclusion. First, the superb returns generated even by passive investing for so many years. It was only in two out of 18 periods under consideration that the markets threw up a bad surprise. Further, the fact that these two decades ended during the worst meltdown till then, will have to be discounted as extending your investment horizon by a couple of years could have turned things around quite dramatically. And lastly, this analysis was based on passive investing. In actuality, actively managed funds have beaten the market by a huge margin. All this leaves us pretty convinced that over the long term even small investors can become wealthy. So while you keep trying your luck at some of the popular game shows, keep investing small amounts in mutual funds as well. The probability of becoming a crorepati through the latter is much higher.‖ (With inputs from Dhirendra Kumar and Sensex performance data from www.fidelity.co.in )

Want to become a Crorepathi? Posted by Muthu on July 24, 2010 I wrote about this 2 years ago when our readership was not even one tenth of what it is today. Since this is also an ever green topic, I‘m modifying and posting the article again. I‘m in the Profession of meeting various people everyday for Financial Planning, Investment Advice, Teaching and Training.

One common question I come across is how to become Crorepathi (i.e.) to have One Crore worth of financial assets. I want to provide an answer for this through this article. If you want to become Crorepathi in 10 years, You‘ve to invest Rs.30,000/- every month. If the time span is 20 years, then the investment amount per month is only Rs.4330/- for making Rs.1 Crore. If you invest the Rs.30,000/- mentioned above for 20 years then you would have a whopping amount of Rs.7.03 crores. If you can increase the time span to 25 and 30 years respectively, then the monthly investment come to only Rs.1740/- and Rs.708/- respectively for achieving Rs.1Crore. If you invest the Rs.4330 mentioned above for 25 and 30 years respectively, you would end up having Rs. 2.52 crores and Rs.6.20 crores respectively. If you want invest an one time amount to achieve a target of Rs.1 Crore then the investment amount is , Rs. 20 Lakhs for investment tenure of 10 years Rs. 3.65 Lakhs for 20 years Rs. 1.60 Lakhs for 25 years Rs 0.7 Lakhs for 30 years I‘ve assumed an annualized return of 18% for arriving at the above numbers. 18% is the annualized return provided by Sensex during the last 30 years.In the past, well managed diversified equity funds have provided returns far superior to the Sensex. I want to mention here the disclaimer that mutual fund investments are subject to market risks, there is no guarantee of returns and past performance may or may not be repeated in the future. Looking at the growth prospects of Indian economy for next three decades (based on BRIC report & other sources), I feel that superior return from equity is possible though the ride would be very bumpy (volatile). In order to appreciate the above numbers, you need to know the value of one crore today for the periods mentioned above. For this I‘ve assumed an average inflation rate of 6%. Though inflation have varied between sub 1% to double digit percentage, surfing the net, provided me the average benchmark for inflation over a period of decades is around 6% Today‘s value for future Rs.One crore are as follows 10 years- Rs.56 Lakhs 20 years- Rs.31 Lakhs 25 years- Rs.23 Lakhs 30 years- Rs.17 Lakhs

Any investment in equity market has to be preferably done for a minimum term of 10 years. In my opinion, an investment tenure of 20 years may make you wealthy beyond your imagination. It is the TIME in the market that is important and NOT timing the Market. There is a possibility that market may atleast go through 2 cycles in a period of 10 years. Any investment tenure lesser than that in equity may prove to be very risky. It is better to avoid equity market totally if your investment tenure is less than 10 years. Do not listen to your stock brokers or ‗Pseudo Investment Advisors‘, who would suggest investing (trading) from a day to week(s) or month(s). As Warren Buffet says ‗ Never ask the barber if you need a hair cut. There‘s very little money to be made by a broker recommending our strategy of ‗buy and hold‘. Your broker would starve to death. Recommending something to be held for 30 years is a level of self-sacrifice, you‘ll rarely see in a monastery, let alone a brokerage house.‘ Please refer to my earlier article ‗Perils of trading in the Stock Market‘ to know more about Stock Brokers rather Stock Traders. I‘ve given the link below for your easy reference. https://wisewealthadvisors.wordpress.com/2010/07/15/perils-of-trading-in-the-stock-market/ Wishing that you become a Crorepathi and above all ‗Financially Independent‘. In pursuit of making Wealth, we cannot forget about giving back to the society. In that regard, I would be modifying and presenting you an article I wrote on ‗Giving‘ 2 years ago. This is also an ever green topic which we should never forget to remember.

Would Greece be followed by UK, USA and European Union? Posted by Muthu on July 23, 2010 The bad news for Greece is that despite some help from abroad, and some attempts at internal reform, investors are still leery of the troubled state. The good news, if you can call it that, is that they will soon have company in the penalty box. Now that investors have come face-to-face with the reality of sovereign default in the developed world, greater scrutiny will befall those countries with fiscal conditions similar to Greece. The United Kingdom is a cause of great concern, with a debt ratio rapidly approaching Greek levels. The economic challenges facing Britain are aggravated by a Labour government that is pushing the country further toward socialism. As a result, from mid-2008 to today the pound sterling has lost some 25 percent of its value even against the US dollar. Debt and socialism are a toxic mix for investors. When I served as a Member of Parliament, under Margaret Thatcher, freedom literally burst upon Britain. We dropped the top rate of income tax from 92 percent to 30 percent (generating far higher tax revenue); abolished foreign exchange controls overnight; and demolished socialist controls by, for example, allowing people the basic freedom to own their own telephones! A wave of enterprise sprung up and Britain once again was referred to as ‗Great,‘ without causing wry smiles. Though it may be astounding by today‘s standards, we instituted a public debt repayment schedule. Thereafter, sterling soared by almost 100 percent between 1985 and 1995.

Great Britain has, until the present, never experienced more than two successive socialist governments. Today, the Conservatives, who covertly support the surrender of UK sovereignty to the socialist European Union, are seen as offering little alternative to socialist Labour. Despite the appalling economic record of the current Labour government, recent polls show a serious risk of a hung parliament after this summer‘s general election. Suddenly, investors face the real prospect of a fourth socialist government. This specter, combined with the massive debt and misspending of the past three administrations, has led to serious out-flows from sterling and UK government ‗gilt-edged‘ bonds, or ‗Gilts.‘ As in the United States, the economic problems encumbering the UK and most of Western Europe are deep-rooted. They stem from many decades of dependence on monetary expansion to ‗paper over‘ fiscal irresponsibility. GDP growth has been obtained by government subsidies of consumer demand, financed by debilitating taxation of productive enterprise, unimaginable public debts and massive currency debasement. Alas, it is also becoming painfully clear to investors that, unlike the past, the problems are now too big for the same old government remedies. Whereas the recent first wave of recession caused individual people and companies to face bankruptcy, the looming second wave threatens entire governments. Who can bail out governments if a number of them default simultaneously? The IMF is a sort of ‗central bank of central banks,‘ but it is largely backstopped by the United States. Will China, Germany, or other creditor states be willing to assume the role of global guarantor? If so, what will this mean for the sovereignty and competitiveness of the old pillars of the Atlantic? Greece is a small economy. But its debt problems highlight fault-lines undermining the euro, and with it the socialist dream of a United States of Europe. Today, Greek ten-year bonds sell at yields north of 6 percent, nearly 300 basis points higher than similar maturities in German, Danish, or French sovereign bonds. While Britain‘s debt has become a cause for some concern, investors have drawn hope that the Conservatives would carry the coming election and restore some semblance of fiscal order. However, recent polling has exposed the risk of a hung parliament. Suddenly, the previously unthinkable notion of a British default crossed into the realm of possibility. Ten-year British Gilts sold off to yield above four percent, a significant premium above the country‘s Continental rivals. In other words, the free market has priced in a loss of the UK‘s prized ‗triple A‘ credit rating, while the perennially laggard and politicized rating agencies merely issued warnings. As we have said before, the United Kingdom, as one of the two main bulwarks of modern finance, is the figurative ‗canary in the coal mine.‘ It is my belief that just as Greece preceded the UK, Britain will precede the United States along the dark and dangerous shaft of excessive debt. Although the United States is nearly five times larger than the UK, our financial difficulties are in nearly the same proportion. In many ways, problems in the U.S. may be more intractable. Although the Federal Reserve is actively holding down the short end of the yield curve to near zero, 10-year notes are currently yielding more than 3.6 percent. If the Fed were to cease purchasing Treasuries, or the rating agencies were to become realistic, the free market would drive the 10-year into dangerous territory.

History is littered with examples showing that socialism kills enterprise. The UK and EU are largely socialist. The US is becoming increasingly so. This political trend, coinciding (unsurprisingly) with a major recession, invites catastrophe. It is one thing for prudent, rich states like Germany to bail out small states like Greece. But few states have the ability or the will to bail out financial giants like the US, EU, or UK. If such a maneuver were attempted, it would surely drag the entire world into depression – and I don‘t take the Chinese or the Germans to be that foolish. Absent a reasonable avenue for rescue, we are increasingly likely to see these formerly steady giants topple. If you‘re stuck in their shadow, look out. We have long alerted readers to the possibility and even likelihood of sovereign defaults. Once a key domino falls, collapse can be devastatingly sudden. Those heeding our warnings should be wary of socialism wherever it lurks. Be glad that darkness strikes first on the other side of the Atlantic, but be wary that are close behind. (Courtesy: John Browne, Capitalism Magazine)

The Collapse of America Posted by Muthu on July 22, 2010 David Walker is the former Comptroller General of the United States, and former head of the Government Accountability Office. As the nation‘s chief accountant he was appointed by President Clinton. He resigned near the end of George W. Bush‘s second term. He had no authority to decide how a single penny of government funds should be collected or distributed. His job was to count those funds. Mr. Walker‘s enormous range of mind extends far beyond a single budget year. His long-range perspective allows him to project fiscal trends decades into the future, and to assess, through simulations, the impacts of policy decisions beyond their immediate effects. He truly understands the economic maxim, promoted by Henry Hazlitt, to look beyond the visible effects of any given policy and to consider its unseen consequences. When Walker plotted these trends, and considered demographics among many other factors, what he found was ―chilling.‖ If fundamental reforms are not begun now, he concluded, the United States will experience a financial and political collapse comparable to the fall of Rome. In a presentation to the National Press Foundation, January 17, 2008, Mr. Walker brought forth the following facts and projections: 1. From 1966 to 2006, the percentage of federal funds spent on Medicare rose from 1% to 19%. This trend will grow exponentially as millions of ―baby boomers‖ enter the entitlement pool. 2. For the same period, spending for mandated government commitments rose from 26% to 53% of the total budget. The budget is increasingly out of the control of government officials. 3. As of 2007, Medicare is running in arrears. In 2017 Social Security will be in deficit. By the year 2040, Medicare and Social Security alone will be running annual deficits of nearly 900 billion dollars.

4. Medicare spending from now until 2032 will be 235% of economic growth. By 2040, Medicare will be spending about 10% of the nation‘s Gross Domestic Product annually, and the annual deficits of the United States will total some 20% of the total Gross Domestic Product. The bottom line is this: mandated fiscal entitlements, projected into the future, are over 52,000 billion dollars. That will equal 90% of all household wealth in the U.S., and will place a burden of over 450 thousand dollars on every household in the land. This is almost ten times the present median household income level. Mr. Walker concludes that ―We face large and growing structural deficits largely due to known demographic trends and rising health care costs.‖ Further, ―GAO‘s simulations show that balancing the budget in 2040 could require actions as large as cutting total federal spending by 60 percent, or raising federal taxes to two times today‘s level.‖ To close the revenue gap through growth, the United States economy would need to expand in the double-digit range for the next seventy-five years. During the boom years of the 1990s, the economy grew at an average rate of 3.2%. Walker concludes, succinctly: ―we cannot simply grow our way out of this problem.‖ Health care entitlements constitute by far the largest single piece of this economic disaster. Those who think that creating thousands of billions of dollars in new government entitlements–in a health care bill that adds tens of millions of Americans to government programs–will do anything except hasten the coming bankruptcy are out of touch with reality. Mr. Walker has taken his show on the road, in an attempt to educate Americans about the financial disaster they are creating. He was accompanied by both the Brookings Institute on the left, and the Heritage Foundation on the right. He stresses that this coming financial meltdown is known by everyone in Washington–but no one wants to acknowledge it. The Rasmussen poll shows that almost twice as many Americans think that cutting the deficit, rather than health care reform, should be the president‘s top priority. Another poll shows that twice as many people think that the reform legislation will drive up costs than think it will lower costs. Perhaps these Americans grasp Mr. Walker‘s point better than their elected representatives do. A nation that violates the rights of its citizens cannot, in the long run, escape the consequences of its moral failure. When a nation with the unique strength of the United States does so systematically and over decades, the results must necessarily be catastrophic. The dire economic forecast of David Walker illustrates the connection between the moral and the practical. To regain our economic viability we must regain our moral viability. (Courtesy: Edited excerpts on an article written by John Lewis, Capitalism Magazine)

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Posted by Muthu on July 21, 2010 We‘ve always been advising our clients to hold 5% to 10% of their total asset allocation in Gold, as gold has proved to be a safe haven in turbulent times and is a good hedge against inflation.

We also wrote recently about the forthcoming (may be between from now to next 5 years) ‗Gold Bubble‘. Please do not go overboard on gold and at the same time ignore the gold altogether. As suggested, you may keep upto 10% of your assets in gold. The moment we talk about gold, buying a gold ornament only comes to our mind. This is an expensive and wasteful option to own Gold. Buy jewellery for ornamental purposes only and look at the following option for investments. The best way to own gold is not physically but through ETFs (Exchange Traded Funds). Here, you convert gold into a financial asset and hold it in demat form. There is no physical threat like robbery, obtaining and safe guarding it in a bank locker etc. Easy liquidity should be one of the key characteristic to look at while investing in an asset. On that front, ETFs have some more way to go as holding Gold in the form of ETFs is gaining momentum now and trading volumes expected to grow in the years to come. Also kindly do not get carried away by luring advertisements such as ‗no making charges‘. Please read below the experiences of Chirag Mehta in this regard. We are in a seasonally lull period when it comes to gold purchases, especially in India. No major festivals around the corner and the end of another marriage season ensure gold buyers remain at bay. However, contrary to the earlier statement, I witnessed one of the craziest gold buying frenzy recently! One large jewellery shop was more packed than a Virar local at 6.00pm. I saw buyers scrambling to even get inside the shop and jumping over each other in an attempt to do so. The shops admin guys along with security were busy outside the shop trying to calm people down and were even issuing tokens to buyers to get inside the shop. There was hardly any place to stand at the counters and the sales people were struggling to entertain customers. It was because the jewellery shop was offering a bargain – no making charges on gold jewellery. In the normal course, this making charge tends to be around 8-10% of the total cost. Now, that‘s significant! One thing that immediately caught my attention was what would an 8-10% correction in gold price mean? This was being offered at just one shop, a correction in price would mean a bargain throughout the country. This is what will support prices if there is a meaningful correction. Yes, the jeweller did come up with the offer of no making charges and thereby giving buyers a reason to buy. But, the poor buyers didn‘t know that they were being ‗swindled‘ on account of higher gold price being charged. The converted gold price (from International spot gold prices and rupee rate plus the duties and taxes), the one used for arriving at real time fair value for Gold ETF was Rs. 1,863.20 for 0.995

purity (24 carat). If you deduct VAT that is included in pricing, you get a one gram price of Rs. 1,844.75. Gold jewellery is usually made of 22 carat gold, hence you convert the above price to 22 carat, it will be equal to Rs. 1,699.52 per gram. MCX gold price for the near month contract was Rs. 18,414 per 10 grams. If we convert this price to 22 carat equivalent, it would amount to Rs. 1,696.43 per gram. But, the jeweller that was offering no making charges was levying a price of Rs. 1,805 per gram for 22 carat gold jewellery. Comparison of prices: (price per gram for 22 carat gold, excluding VAT charges)

Real time Gold ETF conversion price* MCX equivalent price for 22 carat** Jewellers’ price #

Price in Rs. per gram 1,699.52 1,696.43 1,805

Source: Bloomberg, Industry * price converted using 09th July 2010 (Friday) closing International gold price and rupee rate MCX closing price on 10th July 2010 (Saturday) for the August Contract #Jewellers price on 10th July 2010 (Saturday) Note: Gold markets and currency markets remain shut on Saturday and Sunday and therefore Fridays closing prices prevail over the weekend. The jeweller charged more than 6% higher than the actual prevailing price. All those buying gold in form of jewellery lost the moment they bought it. Knowing and tracking gold price closely, I questioned the sales person ―Why are you charging such a high price?‖ His answer was: ―It‘s not higher; this is the price of gold. This is the price that we charge and you would find a similar price across all the jewellers‖. Luckily, being in the gold market, I knew what the right price of Gold is. Even I was one of those who bought from that jeweller during the offer. It was out of compulsion following a cultural tradition driving the purchase. Please do not take us wrong. Indeed there‘s no alternative to buying jewellery purchased for adornment purposes. Women in India have a high fascination for gold jewellery, as most men might testify, and there‘s no other substitute than to buy it from jewellers. Investors need to recognize the fact that there is a difference between buying gold for ornamental value, and buying gold as an investment. Owning gold is very important, and desirable, for all investors. But the ‗golden‘ question is – how should one invest in gold? The facts say that most of the investment in gold in India is in the form of jewellery. But that is not the best way to invest in gold. As discussed above, when investing in gold through jewellery purchases, there are making charges, mark up (profit margins) and also high liquidation charges plus the risk of purity. So, what does investment in gold via gold jewellery purchase sum up to?

10% making charges, 6-10% margins (on gold value), 5% liquidation charges (melting charges levied while selling back) and doubtful quality. Would you ever invest in a mutual fund which charges 15-20% entry load, 5% exit load, and whose quality of investments is doubtful? Of course not! The same way, investing in gold in the form of jewellery is not wise. In fact, it is probably the worst way to invest in gold due to the reasons discussed above. Earlier, there were gold import controls that restricted holding gold in other forms forcing people to buy gold in jewellery as a mode of investment. But, now the sector has been opened up, Indian prices move in sync with international prices and there are better options like Gold ETFs available for investments. So, dear reader, please remember to purchase Gold ETF‘s for investments and jewellery for ornamental purposes only. (with inputs from Equitymaster)

Planting the Dream: The Anubhav Plantations Scam Posted by Muthu on July 20, 2010 On 2nd December 1998, thousands of people from places like Shimla, Trichy, Sangli and several other Indian cities and towns converged at the New Woodlands Hotel in Chennai. All of them were investors in the collapsed Anubhav group‘s teak plantation schemes, and a majority of them were on the brink of bankruptcy. They had come to Chennai in response to a letter from an advocate inviting them to come and check all the records and the balance sheet of the company. The investors could be seen everywhere – sitting on the pavements, standing around the building, walking up and down the roads – all of them tense and worried. The investors had sensed wrong doings at Anubhav when the cheques issued to some of them bounced in mid-1998. Many depositors, who went to the group‘s offices to collect their deposit amount after maturity, found the doors locked and lodged complaints with the police. Later, thousands of investors demonstrated in front of the company‘s headquarters in Chennai. But the main accused, C. Natesan, Chairman, Anubhav Group (Natesan), had already gone underground. The Anubhav group of companies was eventually found to have duped investors of over Rs.400 crores. As details about the ‗Great Plantation Scam of the 1990s‘ were revealed in the media, Natesan‘s modus operandi shocked those who held the Anubhav group in high regard.

A commerce graduate from Chennai‘s Vivekananda College and a chartered accountancy course dropout, Natesan was a man who dreamt big. His ostentatious lifestyle, his cars, and his plush office in Chennai‘s up market Royapettah area were frequently cited by the media as examples of his lavish tastes. Natesan started his career in 1983 by launching a consultancy firm, ‗Yours Faithfully Consultancy.‘ In 1984, he entered the construction business with three partners. Three years later, he closed this venture and set up the Anubhav Foundation. In 1992, Anubhav Plantations Ltd. (Anubhav) was floated as a public limited company. Over the years, the Anubhav umbrella expanded to include various other companies such as Anubhav Homes Ltd., Anubhav Resorts Ltd., Anubhav Finance & Investments, Anubhav Communications & Advertising (Pvt.) Ltd., Anubhav Royal Orchards & Exports, Anubhav Hire Purchase Ltd., Anubhav Green Farms & Resorts (Pvt.) Ltd., Anubhav Agro, Anubhav Security Bureau, Anubhav Interiors and Anubhav Health Club. By 1998, Anubhav had become a Rs. 250 crores group which, apart from its teak-plantation schemes, was involved in the timeshare, finance, and real estate businesses. These companies were backed by a nationwide infrastructure of 91 offices and over 1,800 employees. Natesan had plans to forward-integrate from teak into furniture and to get imported machinery to make it. However, his growth strategy was focused mainly on mobilizing funds from investors. The group had already raised vast sums of money from the public in the form of fixed deposits, teak units, and a combination of fixed deposits and teak units. Natesan was extremely secretive about the financial performance of his group. In the plantations business, Anubhav was the market leader. It operated through four companies: Anubhav Agrotech, Anubhav Green Farms & Resorts, Anubhav Plantations, and Anubhav Royal Orchards Exports. Anubhav‘s shaky financial condition could easily be seen in its books. In 1996-97, plantation income amounted to Rs. 35.32 crores and net profit was Rs. 38.69 lakhs. The low profitability was attributed to the group‘s high, non-productive, expenses. In March 1997, Anubhav‘s current liabilities exceeded its current assets by Rs.6.40 crores. The company‘s paid-up equity capital was just Rs. 36 lakhs while its borrowings, both secured and unsecured, amounted to Rs. 2.64 crores. Loans and advances amounted to Rs 25.95 crores, of which Rs 10.75 crores had been lent to Anubhav Foundations, Anubhav Green Farms & Resorts, Anubhav Resorts and Anubhav Communications. In the schedule explaining the loan provisions, it was mentioned that the funds had been used for the purchase of residential apartments (Anubhav Foundations) and farmland (Anubhav Green Farms), and to meet the expenses incurred on advertising and marketing (Anubhav Communications). Most of the plantation firms had a skewed capital structure. According to CRISIL‘s findings, on an average, while Rs.35 lakhs was contributed from the promoter‘s side, the public funds raised were usually above Rs. 300 crores. Most of these companies did not even have sufficient crop insurance. Also, the offer documents of these companies did not highlight the risks involved. The lack of industry

regulation made it virtually impossible for the average investor to distinguish between a fly-by-night operator and a genuine player. Most of these companies were reluctant to provide information about themselves. During investigations conducted by Business India, officials at Parasrampuria Plantations refused to even talk to the magazine. However, when the magazine sent people posing as investors, the response was extremely enthusiastic. Investigations regarding the schemes being offered by various companies across the country indicated that things were definitely out of joint. According to estimates, more than 4500 plantation companies had raised over Rs 25,000 crore from the public during the 1990s. The laxity of the concerned regulatory authorities was a major factor behind these scams. In the early 1990s, setting up a finance company was very simple as there was no supervisory authority for sole trading or partnership firms, nor did they fall under any regulatory framework. This gave them a competitive advantage vis-a-vis the other non-banking financial companies (NBFCs). Though there was a limit on the number of depositors these sole trading or partnership companies were allowed to have, there was no ceiling on the amount of deposits they could collect. As per the Partnership Act, a partner in one company could be a partner in numerous other partnership firms. With the stock markets performing badly and banks cutting back on interest on deposits, plantation schemes appeared very attractive for investors impatient for returns and willing to take risks. An investor commented, ‗Why do people invest in these kinds of firms? Because people want to make more money, fast. What do we get from the nationalized banks as interest? A mere 5%-7%, whereas Anubhav was paying 21-24% interest. ‗ (Source: Excerpts- Free case studies- www.icmrindia.org)

We are Poorer than we thought Posted by Muthu on July 18, 2010 A new measure of poverty has shown that just eight Indian states have more poor people than 26 of the poorest African nations together. So much for our grand economic success story. Being worse off than Sub-Saharan Africa is serious. And we do it so effortlessly. Just eight states, mind you, of one country — our shining India — offered 421 million really poor people, while the top 26 poor countries of Africa, the dark continent known for poverty, famines and wars, could together come up with only 410 million. Chak de India! The eight states — Bihar, Uttar Pradesh, West Bengal, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa and Rajasthan — are not new to the game of poverty. But what the Multidimensional Poverty Index (MPI) shows is that they are poor not just because they lack

money but also because they have abysmal standards of living. And no, the two are not umbilically attached. The MPI was developed at the Oxford Poverty and Human Development Initiative under the leadership of development economist Sabina Alkire. It goes beyond money to measure levels of poverty. It looks at a range of deprivations in the household, of which income is just one factor. It looks at human development, and what makes one poor. And this holistic approach to assessing poverty can force us to look at human beings rather than at beguiling figures like the GDP. To measure poverty through the MPI, one examines a situation from various angles, using different indicators of poverty, like education, health, housing, nutrition, assets and access to basic services like drinking water, sanitation, cooking fuel and electricity. And assessed this way, it turns out that more than half the world‘s poor live in south Asia (51%), and just over a quarter (28%) in Africa. Take the glorious case of our own country. We have had rapid economic growth, more income and less poverty measured in cold monetary terms. Yet our development indicators are as bad as before, endemic hunger still rules, and child malnutrition remains at almost 50%. How poor you actually are could depend as much on your own income as on the social investment made by the state. To overcome poverty we need to recognise it — and that‘s where the MPI could be an enormous help. Especially when we are looking at targeted spending of limited public resources. But coming back to the shame factor, this is not the first time that India has been compared unfavourably with the poorest countries of Africa. The definitive study by Peter Svedberg, development economist at Stockholm University, comparing food insecurity and endemic hunger in India and sub-Saharan Africa (we were worse off, mostly) raised eyebrows in academic circles a few years ago, but nothing came of it in actual terms of policy. More recently, Abhijit Banerjee, development economist at the Massachusetts Institute of Technology, pointed out that the state of maternal and child health in India is much worse than in subSaharan Africa. He was also pretty critical of the government‘s ways of dealing with such failures. Meanwhile, it is clear that India — and south Asia — will not be able to meet the millennium development goals. According to a recent United Nations report, no progress had been made in the last two decades in reducing hunger levels in south Asia. Happily, however, hunger levels have fallen somewhat in sub-Saharan Africa. Incidentally, the MPI method can also be used to monitor and evaluate programmes and policies. It has been taken up by Mexico to create their own multi-dimensional measure of poverty and Bhutan uses it to calculate Gross National Happiness. Maybe we can use it in parts. It may help us get to that fantastic, elusive ‗inclusive development‘. (Courtesy: Antara Dev Sen, DNA)

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Posted by Muthu on July 17, 2010 The Bombay high court on Friday denied gods permission to dabble in the share market.

―Gods and goddesses are meant to be worshipped in temples. We do not want our Lord Ganpati to be part of share trading,‖ the high court observed while ruling that private unregistered charitable trusts cannot open demat accounts in the name of deities for transactions in shares and debentures. A division bench of justice PB Majmudar and justice RM Sawant dismissed a writ petition filed by the Sangli-based Shri Ganpat Panchayatan Sansthan Trust. Owned by Sangli‘s royal family, the Patwardhans, the trust had moved the court seeking directives to the National Securities Depositories Ltd (NSDL) to permit it to open demat accounts in the name of five deities. ―Let gods remain in the temples, let them not come out for commercial trading,‖ remarked the judges. The trust had obtained PAN cards for the five deities, Ganpati, Chintamanishwar Dev, Chintamanishwari Devi, Suryanarayandev and Laxminarayandev, in 2008. It then moved an application to a bank seeking to open savings and current accounts in the deities‘ names, so that a demat account could be operated. ―There is nothing wrong if deities are allowed to take part in share trading. Deities are treated as legal persons under Hindu law. If one can hold property in the name of gods, why can‘t a demat account be opened?‖ argued the petitioner‘s counsels Anil Anturkar and Uday Warunjikar. Anturkar also argued that the deities had been provided PAN cards under the Income-Tax Act. ―Hindu deities are recognised as artificial juristic persons and can hold property in their name as they are liable to pay income tax and wealth tax,‖ said the petition. The court, however, refused to bite the bait. Justice Majmudar remarked, ―Under which provision of Hindu law are Lord Rama or Ganesha considered a person? Bank accounts are operated by human beings, you cannot prosecute the deities if something goes wrong.‖ Representing the NSDL, senior counsel Janak Dwarkadas argued that demat accounts can be operated only in the name of individuals, not deities. ―It will be difficult to take action in case of illegal transactions if accounts are opened in the names of deities,‖ Dwarkadas argued. S Ganesh, senior vice-president, NSDL, stated in his affidavit that there is no provision in law by which a demat account can be opened in the name of deities. The judges, while dismissing the petition observed, ―In our view, the petition is without any substance. It is true that under the Income Tax Act, the income earned by the trust of a deity is treated as the income of the deity, but provisions of the I-T Act cannot be implemented in this case. Even in nationalised banks, no account is allowed to be operated in the name of a deity.‖ (Source: DNA)

The Story of Katen Parekh Posted by Muthu on July 17, 2010

Out of the scams and bubbles happened in the last 2 decades in Indian Stock Market, the scams of Harshad Mehta and Katen Parekh are of outstanding ones. Many of you who have started in the markets after the earlier part of this decade, may know some thing about Harshad Mehta, due to the flamboyant life style he lead and passed away in jail in the year 2002, at the age of 47, under mysterious circumstances. To start with I thought I would share with you with the story of Katen Parekh and his modus operandi. I‘m also planning to write about Harshad Mehta scam, CRB Capital Markets Scam, NBFCs scam, plantation scams etc. which has happened in the last 2 decades. Unfortunately, as is always the case, people never learn from the history, due to their greed. Also in a country like India, where the laws against white collar crimes are not very stringent, the guilty often goes unpunished or gets the least punishment. As Warren Buffett says ‗It has been far safer to steal large sums with pen than small sums with a gun.‘ Some of the people who were involved in both the Harshad Mehta and Katen Parekh scams, who were levied only minor penalties and suspensions, are back in the market with vigor and are regularly seen in the media as ‗investment advisors‘, ‗traders‘, ‗investors‘ etc. Many who are now new to the market are not even of these gentlemen‘s antecedents. They are respected, because they are rich. One CFP recently compared one such rich person as Warren Buffett of India. This rich person, who is a part trader and part investor and a likely market manipulator and scamster, who has a questionable history and has been indicted in the past, by Government committees probing into the scams, is compared with Buffett who commands respect not because he is the richest in the world but because of his wisdom, ethics, integrity, honesty and strength of character. This CFP could have as well admired a rich politician than this scamster who is now seen as the face of investors in India. If this is knowledge a CFP has, what to say about common public? All the scams are built like Ponzi schemes and a great bubble is created which are usually followed by severe bursts. People who are earlier to catch a bubble, make huge money, and become the role models and envy of others. People fail to realize that in all Ponzi schemes, that some become rich at the cost of many others. They are carried away by immense greed. You might not have forgotten the recent ‗Gold Quest‘ scam. A relative of mine was persuaded by a seller of this scheme, to participate in the meetings conducted by the ‗Gold Quest‘ teams. He got carried away by seeing some people who made huge money in short period of time wanted to join the club. I warned him so many times about not to get carried away by these luring. As Buffett says ‗ Nothing sedates rationality like large doses of effortless money‘. Despite my repeated advice, he joined the scheme and lost the money. To my knowledge, he feels so shy even to lodge a police complaint, that his hope of recovering the above money is zilch. The icing to the cake is that he invited me couple of times to attend their meetings citing that this company is the one which makes gold medals for Olympics etc. I refused the bait and I wish that he had emotional strength not to be lured by easy money. Now let us to go to the story of Katen Parekh (KP).

KP was a chartered accountant by profession and used to manage a family business, NH Securities started by his father. Known for maintaining a low profile, KP‘s only dubious claim to fame was in 1992, when he was accused in the stock exchange scam. He was known as the ‗Bombay Bull‘ and had connections with movie stars, politicians and even leading international entrepreneurs like Australian media tycoon Kerry Packer, who partnered KP in KPV Ventures, a $250 million venture capital fund that invested mainly in new economy companies. Over the years, KP built a network of companies, mainly in Mumbai, involved in stock market operations. The rise of ICE (Information, Communications, and Entertainment) stocks all over the world in early 1999 led to a rise of the Indian stock markets as well. The dotcom boom contributed to the Bull Run led by an upward trend in the NASDAQ. The companies in which KP held stakes included Amitabh Bachchan Corporation Limited (ABCL), Mukta Arts, Tips and Pritish Nandy Communications. He also had stakes in HFCL, Global Telesystems (Global), Zee Telefilms, Crest Communications, and PentaMedia Graphics KP selected these companies for investment with help from his research team, which listed high growth companies with a small capital base. According to media reports, KP took advantage of low liquidity in these stocks, which eventually came to be known as the ‗K-10‘ stocks. The shares were held through KP‘s company, Triumph International. In July 1999, he held around 1.2 million shares in Global. KP controlled around 16% of Global‘s floating stock, 25% of Aftek Infosys, and 15% each in Zee and HFCL. The buoyant stock markets from January to July 1999 helped the K-10 stocks increase in value substantially. HFCL soared by 57% while Global increased by 200%. As a result, brokers and fund managers started investing heavily in K-10 stocks. Mutual funds like Alliance Capital, ICICI Prudential Fund and UTI also invested in K-10 stocks, and saw their net asset value soaring. By January 2000, K-10 stocks regularly featured in the top five traded stocks in the exchanges. HFCL‘s traded volumes shot up from 80,000 to 1,047,000 shares. Global‘s total traded value in the Sensex was Rs 51.8 billion. As such huge amounts of money were being pumped into the markets, it became tough for KP to control the movements of the scrips. Also, it was reported that the volumes got too big for him to handle. Analysts and regulators wondered how KP had managed to buy such large stakes. According to market sources, though KP was a successful broker, he did not have the money to buy large stakes. According to a report, 12 lakh shares of Global in July 1999 would have cost KP around Rs 200 million. The stake in Aftek Infosys would have cost him Rs 50 million, while the Zee and HFCL stakes would have cost Rs 250 million each. Analysts claimed that KP borrowed from various companies and banks for this purpose. His financing methods were fairly simple. He bought shares when they were trading at low prices and saw the prices go up in the bull market while continuously trading. When the price was high enough, he pledged the shares with banks as collateral for funds. He also borrowed from companies like HFCL.This could not have been possible out without the involvement of banks. A small Ahmedabad-based bank, Madhavapura Mercantile Cooperative Bank (MMCB) was KP‘s main ally in the scam. KP and his associates started tapping the MMCB for funds in early 2000. In December 2000, when KP faced liquidity problems in settlements he used MMCB in two different ways. First was the pay order route, wherein KP issued cheques drawn on Bank of India (BoI) to MMCB, against which MMCB issued pay orders. The pay orders were discounted at BoI. It was alleged that MMCB issued funds to KP without proper collateral security and even crossed its capital market exposure limits. As per a RBI inspection report, MMCB‘s loans to stock markets were around Rs 10 billion of which over Rs 8 billion were lent to KP and his firms.

The second route was borrowing from a MMCB branch at Mandvi (Mumbai), where different companies owned by KP and his associates had accounts. KP used around 16 such accounts, either directly or through other broker firms, to obtain funds. Apart from direct borrowings by KP-owned finance companies, a few brokers were also believed to have taken loans on his behalf. It was alleged that Madhur Capital, a company run by Vinit Parikh, the son of MMCB Chairman Ramesh Parikh, had acted on behalf of KP to borrow funds. KP reportedly used his BoI accounts to discount 248 pay orders worth about Rs 24 billion between January and March 2001. BoI‘s losses eventually amounted to well above Rs 1.2 billion. The MMCB pay order issue hit several public sector banks very hard. These included big names such as the State Bank of India, Bank of India and the Punjab National Bank, all of whom lost huge amounts in the scam. It was also alleged that Global Trust Bank (GTB) issued loans to KP and its exposure to the capital markets was above the prescribed limits. According to media reports, KP and his associates held around 4-10% stake in the bank. There were also allegations that KP, with the support of GTB‘s former CMD Ramesh Gelli, rigged the prices of the GTB scrip for a favorable swap ratio before its proposed merger with UTI Bank. KP‘s modus operandi of raising funds by offering shares as collateral security to the banks worked well as long as the share prices were rising, but it reversed when the markets started crashing in March 2000. The crash, which was led by a fall in the NASDAQ, saw the K-10 stocks also declining. KP was asked to either pledge more shares as collateral or return some of the borrowed money. In either case, it put pressure on his financials. By April 2000, mutual funds substantially reduced their exposure in the K-10 stocks. In the next two months, while the Sensex declined by 23% and the NASDAQ by 35.9%, the K-10 stocks declined by an alarming 67%. However, with improvements in the global technology stock markets, the K-10 stocks began picking up again in May 2000. HFCL nearly doubled from Rs 790 to Rs 1,353 by July 2000, while Global shot up to Rs 1,153. Aftek Infosys was also trading at above Rs 1000. In December 2000, the NASDAQ crashed again and technology stocks took the hardest beating ever in the US. Led by doubts regarding the future of technology stocks, prices started falling across the globe and mutual funds and brokers began selling them. KP began to have liquidity problems and lost a lot of money during that period. It was alleged that ‗bear hammering‘ of KP‘s stocks eventually led to payment problems in the markets. The Calcutta Stock Exchange‘s (CSE) payment crisis was one of the biggest setbacks for KP. The CSE was critical for KP‘s operation due to three reasons. One, the lack of regulations and surveillance on the bourse allowed a highly illegal and volatile badla business . Two, the exchange had the third-highest volumes in the country after NSE and BSE. Three, CSE helped KP to cover his operations from his rivals in Mumbai. Brokers at CSE used to buy shares at KP‘s behest. By mid-March, the value of stocks held by CSE brokers went down further to around Rs 2.5-3 billion. The CSE brokers started pressurizing KP for payments. KP again turned to MMCB to get loans. The outflow of funds from MMCB had increased considerably form January 2001. Also, while the earlier loans to KP were against proper collateral and with adequate documentation, it was alleged that this time KP was allowed to borrow without any security. By now, SEBI was implementing several measures to control the damage. An additional 10% deposit margin was imposed on outstanding net sales in the stock markets. Also, the limit for application of the additional volatility margins was lowered from 80% to 60%. To revive the markets, SEBI imposed restriction on short sales and ordered that the sale of shares had to

be followed by deliveries. It suspended all the broker member directors of BSE‘s governing board. SEBI also banned trading by all stock exchange presidents, vice-presidents and treasurers. A historical decision to ban the badla system in the country was taken, effective from July 2001, and a rolling settlement system for 200 Group A shares was introduced on the BSE. The small investors who lost their life‘s savings felt that all parties in the functioning of the market were responsible for the scams. They opined that the broker-banker-promoter nexus, which was deemed to have the acceptance of the SEBI itself, was the main reason for the scams in the Indian stock markets. SEBI‘s measures were widely criticized as being reactive rather than proactive. The market regulator was blamed for being lax in handling the issue of unusual price movement and tremendous volatility in certain shares over an 18-month period prior to February 2001. Analysts also opined that SEBI‘s market intelligence was very poor. Media reports commented that KP‘s arrest was also not due to the SEBI‘s timely action but the result of complaints by BoI. A market watcher said, ―When prices moved up, SEBI watched these as ‗normal‘ market movements. It ignored the large positions built up by some operators. Worse, it asked no questions at all. It had to investigate these things, not as a regulatory body, but as deepprobing agency that could coordinate with other agencies. Who will bear the loss its inefficiency has caused?‖ An equally crucial question was raised by media regarding SEBI‘s ignorance of the existence of an unofficial market at the CSE. Many exchanges were not happy with the decision of banning the badla system as they felt it would rig the liquidity in the market. Analysts who opposed the ban argued that the ban on badla without a suitable alternative for all the scrips, which were being moved to rolling settlement, would rig the volatility in the markets. They argued that the lack of finances for all players in the market would enable the few persons who were able to get funds from the banking system – including co-operative banks or promoters – to have an undue influence on the markets. KP was released on bail in May 2001. The duped investors could do nothing knowing that the legal proceedings would drag on, perhaps for years. Observers opined that in spite of the corrective measures that were implemented, the KP scam had set back the Indian economy by at least a year. Reacting to the scam, all KP had to say was, ―I made mistakes.‖ It was widely believed that more than a fraud, KP was an example of the rot that was within the Indian financial and regulatory systems. Analysts commented that if the regulatory authorities had been alert, the huge erosion in values could have been avoided or at least controlled. After all, Rs 2000 billion is definitely not a small amount – even for a whole nation. (with inputs from ICMR India)

Small Investors Now out of Mutual Funds Posted by Muthu on July 16, 2010 It is now getting close to a year since the Securities and Exchange Board of India (SEBI) abolished entry load on mutual funds. During this period, much has been said and written about how an old business model will have to change and how people will transition to a new one. But

looking back at what has happened so far, one negative impact of the SEBI‘s directive is very clear. It is now utterly uneconomic for anyone in the mutual fund industry to serve retail investors. Unless some miracle happens, from now on, mutual fund investment is an activity that will be entirely limited to wealthy individuals. Let‘s see why this is so. Consider a small investor, who would probably invest something in the range of Rs. 10,000. If he‘s figured things out a bit better, he would also start an SIP (systematic investment plan), probably about Rs. 2,000 a month for a period of one year to begin with. As things stand now, the advisor who has done the job of convincing this investor to invest, may get remunerated with about Rs. 75 to begin with. Later, after a year, he starts getting a continuous commission of about Rs. 25 a month, likely paid quarterly. This is the trail commission for the total accumulated investment of Rs. 34,000, as well as an estimated gain of 10 per cent a year. Eventually, the customer might invest more and the money will accumulate. However, that requires a certain period of customer support, hand-holding and contact. But, is there money in the system to pay for these services? If you multiply the above numbers by five or ten, then the answer possibly is yes. However, a rich investor (although the word rich is taboo, so we now use the awkward euphemism high-networth individual), who puts in Rs 1. lakh to begin with and then Rs. 10,000 or Rs.20,000 a month, would not find any problem in being serviced well. Is there no way that a customer can be serviced at lower investment levels? There is, but only if that customer already has some other financial connection with the service provider and the cost of customer contact and acquisition can be amortised over a larger business. In practice, this means the service provider is necessarily a bank. It‘s only your bank that could find it economic to sell you a mutual fund for a small amount. Unfortunately, that‘s not a great solution for the customer. Of all the entities that distribute mutual funds, banks have the worst track record of systematic mis-selling. In any case, banks are far more interested in guiding all possible customers towards products with the highest possible commissions. In effect, that‘s the situation now. Simple business economics, combined with the way mutual fund regulations have evolved, has ensured that the small investor is unlikely to become a mutual fund customer. Equity funds remain by far the best way to invest in equity in a gradual, transparent and flexible way and the effective shutting out of the small investor from equity funds is not a great outcome. Mind you, this is not an argument for creating upfront incentives. No matter what today‘s problems are, it must not be forgotten that the root of all mis-selling in all financial products is distorted incentives. If a financial product incentivises the seller for creating a transaction, then that‘s all he will do. Upfront commissions were the root cause of misselling in mutual funds. If you want to see a truly horrifying example of upfront commissions laying waste to investor‘s savings, you just have to look at India‘s insurance industry. Therefore, higher upfront commissions (or any upfront commissions at all) are certainly not a solution. From the investor‘s point of view, the best outcome is a long-period of good

returns and the only solution is a compensation system that rewards the intermediary for that. (Courtesy: Dhirendra Kumar, Valueresearch)

Perils of Trading in the Stock Market Posted by Muthu on July 15, 2010 I wrote the above article close to 2 years ago, when we had a daily readership of few dozen people. Now that we have few hundreds reading our articles everyday, I thought of posting the same again with some modifications, as this is an ever green topic and the lesson, we the investors should never forget. Please read on. Stock Market is a giant casino. Surprised that this statement comes from an investment and ‗Personal Financial advisor‘ who invests in stocks and equity funds and who also advises clients on the same. Let me explain. More than 95%of the people in stock market treat it as a Casino and so it gives results accordingly to them. In a Casino, who earns? As you are aware, Casino is a zero sum game. The only guy who earns consistently in a Casino in none but the Casino Owner. Likewise since most of the people in stock market treat it a like a Casino, the only guy who consistently earn here is none other than your stock broker who keeps providing you almost daily trading tips. If 95% of the people in market only continuously speculate and trade in market and end up loosing money in the long run, why are they doing it? This is similar to why someone is a smoker or alcoholic or drug user knowing fully well it is injurious to health. The answer is addiction! Like wise, for the speculators and traders in the market it is an addiction for continuous action. This continuous action only makes their adrenaline flow. That is why the world‘s greatest investor Warren Buffett says‖ Never ask the barber if you need a haircut. There‘s very little money to be made (by a broker) recommending our strategy of buy-and-hold. Your broker would starve to death. Recommending something to be held for 30 years is a level of self-sacrifice you‘ll rarely see in a monastery, let alone a brokerage house.‖ As Personal Finance legend John Bogle points out, the way to wealth for the stock brokers is to persuade their clients and say ‖ Don‘t Just stand there. Do Something‖. But the way to wealth for the clients is the opposite maxim ‖Don‘t do something. Just Stand there.‖ This is the only way to avoid playing a loser‘s game. Stock or an equity mutual fund is not a lottery ticket. It means that you are part owner of a corporation (as in the case of stock) or corporations (as in the case of equity mutual fund). Roughly only 5% of the people who are involved in the market think on those lines. They are not worried about every day stock price or NAV movements. All they care is whether they are invested in a company which is continuing to grow or invested in a diversified fund which is a consistent performer and is able to beat the Benchmark returns. Their

typical investment horizon is 20 years or more and the barest minimum period they look for equity investment is 10 years. Only this 5% would have earned the annualized return of 18% provided by the Sensex in the past 30 years. Had they stayed invested in a good diversified equity fund, they would have got 4% or 5% more. Let me illustrate this with an example: If you invest Rs.5000/- every month in Index continuously for 20 years, @18% annualized returns, the corpus would be Rs. 1.17 crores. If you invest the same in a good diversified equity fund, which is able to generate 5% above Index, (i.e.) 23% returns, then for the same amount invested above, the corpus would be Rs.2.51 crores. A difference of Rs. 1.34 crores for an increased return of 5%. Likewise, taking the above returns as example, for a lump sum of Rs.1 Lakh invested today in Index, it would become Rs.27.39 Lakhs after 20 years. The same in a good diversified equity fund would have fetch you Rs.62.82 Lakhs for the same period. A difference of Rs.35.43 Lakhs, for an increased return of 5%. Standard Disclaimer: The above is only an illustration. Mutual Fund investments are subject to market risks. There is no guarantee of returns and the past performance may or may not be repeated in future. For a trader, a day to few days to few weeks to few months itself a long term and for an investor, as I mentioned above 10+ more years is only long term. Please read the book ‗Fooled by Randomness‘ by Nassim Nicholas Taleb. You would get more insight on the issues I‘m speaking above. Less than 5% of the traders ever make big money in the long run and the more than 95% are complete losers. If you are a long term investor, in a growing economy like India, the chances are almost close to 100% that you would make good money in the long term. Would you want to be an investor or trader? Would you want to be in the 95% losers‘ category or 5% successful category? I want my clients to be in the 5% successful category who makes good money in the long term, who do not worry about short term volatility, do not track the stock prices and NAV on a daily basis and see where one stands. Once you a take a short term perspective greed or panic would set in and you would end up being like a casino player. Market rewards people with patience and extreme emotional discipline. But be sure that the reward is worth the wait. To quote Buffett ‗ The stock market serves as a relocation center at which money is moved from active (traders) to patient (investors).‘ But we should also be thankful to these speculators and traders. Because of their greed and panic they keep providing us periodic opportunities to keep rebalancing our asset allocation and build our wealth. To explain, you should always follow an asset allocation. How much of your financial assets you want in Equity (Shares, Equity Funds) and how much in Debt (FDs, Postal deposits, Debt Funds etc.). When due to their greed speculators keep raising the shares to the extraordinary levels, your equity as a percentage of financial assets would go up. Then book some profits and put more in debts. When due to their Panic when speculators sell heavily and stocks are available at dirt

cheap prices, your equity as a percentage of financial assets would go down. Then move a portion of your debt into equity by investing in shares / Equity Mutual Funds. This has been put more succinctly by Dhirendra Kumar in the following paragraph. ―One of the more interesting ideas in asset allocation is to change the balance according to market conditions. The concept is that over medium to long terms, equity markets inevitably move in cycles. There is a part of the cycles where equities are clearly underpriced and there are parts of the cycle when equities are clearly overpriced. In the former, one should give more weightage to equities and in the latter, less weightage. Then, as the markets go through their cycle, the investor will be best able to capture an optimum level of safety with that of returns.‖ By the suggestion I‘ve mentioned above, you may not get the maximum returns from the market, but would definitely get a very decent return with optimum level of safety. I‘m a champion of long term ( 10 to 20 years+) investments in markets especially through SIP (Systematic Investment Plan). As your corpus in SIPs keep growing and once exceeds the asset allocation ratio, we can continue to rebalance your asset allocation by infusing the fresh money into debt funds. For people who do not have fresh money to infuse at that time, a part of the equity holdings can be sold / redeemed and moved into debt funds. There is no point in reviewing asset allocation too frequently. Some people even look at it daily !!!. Once in a year is sufficient to review and rebalance the asset allocation, if required. Considering our tax laws, yearly rebalancing would be more tax efficient too. For long term investors in mutual funds, even once in 3 year review is enough. So please be an investor and not a trader. Then you would never fail in stock market and would end up building a substantial wealth. As I indicated above, it needs enormous emotional discipline to be an investor. I wish that all of us develop the same and reap excellent rewards which Indian stock market is waiting to offer.

Sell cheap and tell the truth Posted by Muthu on July 14, 2010 In today‘s article, we are going to focus on one of the Buffett‘s Manager, who lived by the principle ‗Sell Cheap and tell the truth‘. Still she made her business a huge success, by scaling up, and not by looting her customers. Warren Buffett makes no secret of his belief that a good business needs a good manager and, when he buys businesses, prefers to leave management in place, if they are good and know what they are doing. There can be no better example of this strategy than the Nebraska Furniture Mart founded by the incredible Rose Blumkin. Rose Blumkin was born in Minsk, Russia in 1893, one of eight children of an impoverished Rabbi, and worked from the age of six in her mother‘s small general store. Rose did not go to school but learned arithmetic from a family friend.

When Rose was old enough for outside employment, she got a job in a local haberdashery and was soon running the show. Soon after, she married, and with her husband migrated to America, her husband going ahead before her, and Rose making her way alone via the Trans Siberian Railway, apparently without a passport. The Blumkins made their way to Nebraska where Rose, to augment the family income, sold second hand furniture from her home. Things must have gone well enough for Rose because in 1937, she borrowed $500 and opened the Nebraska Furniture Mart in a basement shop in Omaha, under the motto that she was to make famous: ‗Sell cheap and tell the truth‘. Rose Blumkin had problems in getting the big furniture wholesalers to stock her, but she outsmarted them by buying excess stock from other out of state retailers at reduced prices and selling them to her Omaha customers at low profit margins. This set the scene for the business practice that was to make her famous; buy in bulk, run a tight ship and pass on any cost savings to the customers. She generally worked on no higher than a 10 per cent mark up. The Furniture Mart grew bigger and bigger, with Mrs B, as Buffett used to call her, working long hours every day and getting her family to do the same. Rose Blumkin‘s furniture shop became a Nebraska legend. The original 3000 square feet shop now occupies 75 acres. Warren Buffett, as a local resident, knew about the store and the wonderful business that Mrs B had established and made several attempts to buy her out, but could not come up with a price that was acceptable. Finally, according to Roger Lowenstein in Buffett: The Making of an American Capitalist, Buffett walked into the store one day, approached Rose Blumkin, and asked her if she wanted to sell and, if so, to name her price. Mrs B said she was a seller at 60 million dollars and Buffett accepted immediately. He insisted apparently, on Rose and her sons, by then helping her to run the business, retaining a minority shareholding and keeping on managing. Buffett knew from previous enquiries that the business was grossing about 15 million dollars a year in profits, but seemed to have done little additional checking, settling the deal within a few days, without audits or due diligence. He knew a good deal when he saw it, and, as he was later to say, he trusted her integrity. After the deal was done, Rose Blumkin is alleged to have told Warren that they were now going to ‗put our competitors through a meat grinder‘. That would not have been news to the various businesses that had tried to compete with Mrs B over the years and who had already been minced. In his 1984 Letter to Shareholders, Warren Buffett said this, reflecting his own investment principles: ‘I have been asked by a number of people what secrets the Blumkins bring to their business. These are not very esoteric. All members of the family: 1. Apply themselves with an enthusiasm that would make Ben Franklin and Horatio Alger look like dropouts; 2. Define with extraordinary realism their area of special competence and act decisively on all matters within it;

3. Ignore even the most enticing propositions falling outside of that area of special competence; and 4. Unfailingly behave in a high grade manner with everyone they deal with. (Mrs B boils it down to “sell cheap and tell the truth”). Mrs B kept at it but apparently became a bit irascible as she grew older. In 1959, then over 90 years old, she had a falling out with family members who were then running the store and left in high dudgeon. So what did she do? She opened up a competing store, specializing in carpets, not far from the Nebraska Furniture Mart, calling it ‗Mrs B‘s Warehouse‘. She did pretty well, apparently causing a dent in the Furniture Mart‘s carpet sales. Several years later, she reconciled with family members, sold the carpet business to Berkshire Hathaway for $5,000,000 and went back to work at the Furniture Mart, turning up, of course, seven days a week. Rose Blumkin died in 1998, aged 104. A business legend. (Source: Buffett Secrets)

Posted by Muthu on July 11, 2010 The above questioned was posed to me in the initial meeting I had with a prospective client recently. He asked me how much returns can be expected from stock market. I told him if he stays invested for a minimum period of 10 years, based on past performance, he can expect around 18% annualized returns. A good well diversified equity fund may be capable of providing few percentage points more than the return stated above. He was visibly disappointed. He has never been exposed to stock markets and was under the impression that this is the place where you multiply money rapidly. He probably suspected my ability and might have thought that he should have gone to a more aggressive advisor. He mentioned a remote suburban place in Chennai, where if he invests the same money, it would multiply by 5 times in another 5 years, an annualized return of 38% per annum. He asked whether the money he invests in diversified equity fund would give this return in another 5 years. I said him a strong ‗NO‘. A question may arise in your mind, when in one of my recent article I‘ve mentioned wherein my money in certain stocks have multiplied 3 to 6 times in less than 2 years, and have the possibility of providing return upto 40 times within next 10 years. If this is possible, then why what this man is asking for is not possible? The reason is simple. In the later part of 2008, the whole world was gripped with fear, as if everything has come to an end due to U.S. subprime crisis, and there is no tomorrow. This resulted in a stampede of selling securities, as people wanted to convert them into cash. There

were only sellers, and very little buyers. Because of this, the prices of the stocks, of good value and growth companies, became dirt cheap. Both financial and general media continued to scream, how the whole world around us is crumbling. Negative news sells faster and it amplified the fear of people. Markets are always driven either by extreme greed or extreme fear. This kind of multiplying the money by 6 times in less than 2 years, is due to the conviction that there have been always bubbles and bursts, and during bursts even good things have no takers and are available at a ridiculously low prices. But we cannot time the bursts. You‘ve to wait patiently for years, to get this kind of good opportunity, have cash because at the time of distress selling, cash is the king, and have strong inner conviction to ignore the negative sentiments around you. This kind of contrarian calls are very difficult to take, but can be developed by having mentors like Warren Buffett and absorbing and implementing their wisdom. But this kind of opportunity cannot be extrapolated to the average performance of the market. In real estate also, in places like OMR, people who have bought land a decade before either out of vision or luck, would have multiplied their money by few times. But these kinds of returns cannot be attributed to the whole Chennai market. Even if the whole market is in a bubble zone, it would be followed by the burst. Not everyone who buys during bubbles sells, because we‘re driven by greed that prices would continue to raise indefinitely, and majority gets struck with their assets. The raise in prices for them is only notional and when they get struck with the assets at the time of bursts, its value would be much lesser than what they paid for during bubble. Markets, be it stocks or real estate or commodities like gold are always cyclical. No one can consistently predict the tops and bottoms. So in Markets, in the longer run, we can expect only the average annualized returns, because we are the market. We cannot forget the fact that in fact even for a genius investor like Warren Buffett, it took 4 to 5 decades, to become the richest person in the world. Only rare ones beat the market in the long run because we are the market. Based on past performance and empirical data available, these are average long term returns you can expect out of following investments. Gold- 6% Real Estate-12% Shares and Equity Funds-18% Traditional insurance policies like Endowment, Money back etc.-6% to 6.5% Hybrid products like MIPs- 10% to 12% In South India, we generally believe that real estate and gold are the only good investments. People proudly tell me that a piece of property they purchased in a prime area for Rs.1 Lakh 30 years ago is worth Rs. 1 crore now. An absolute return of 100 times. If you convert this into annualized returns, it works out to 16.6%. Where as the Index, leave alone the good performing diversified equity funds, have given you an absolute return of 180 times in the last 30 years. An annualized return of 18.9%. This difference of 2.3% (18.9%-16.6%) over 30 years means that you would have multiplied your money by additional 80 times, had invested your money in equities. The above prospective client, said he need a month or two to absorb all these things, discuss with family and get back to me and promptly paid my fee for the initial discussion.

Coming to the question of fee, a good friend and wellwisher of mine referred me to his friend who is earning in millions of rupees every year and may have a networth running into few crores. The moment he said to his friend, that he has to pay Rs.1000/- for initial consultation alone (because afterwards we do not charge the clients on an on going basis, if they invest in mutual funds through us), he took two steps backwards and became non-committal in meeting me. I‘m not willing to give a consultation to this man free of cost. If he finds, paying Rs.1000/- for a right advice is difficult, then it is his problem. There would be neighbouring PMS or ULIP salesman who would be willing to invest any number of hours and days , ‗free of cost‘ with this man, as once he gets into their hooks, they can milk money out of him. I have an extremely opposite example too. One young lad from a city in North India, called me over phone and told me that he narrowed down (for his own reasons) on me, after visiting web portals of various ‗Personal Financial Advisors‘. His case is a pathetic one. Till 2 years ago, they were one happy family. Having 2 houses and decent financial assets. Father working in Government, mother, being a Doctor, too working in Government Hospital. He has one younger sister who is doing her engineering. Mother died suddenly due to cardiac arrest when she was in her early fifties. Father developed ‗Parkinson‘s disease‘ and his health has detoriated very rapidly and under the continuous care of nurses and maids and Doctors are not giving more than a year or two, for him to depart from this planet. This lad, suddenly developed severe heart complications at such a young age and was referred by the local doctor to Frontier Life Line Hospital in Chennai. His sister is getting severely depressed and is unable to focus on her studies, as the whole family is crumbling. We mortals, often forget how fragile our lives are. When he came to Chennai for heart treatment, he sought my appointment and met me for 3 hours on a Sunday morning. He is unable to trust anyone and it looks like some of the relatives of the family, taking advantage of his pathetic situation, wants to take control (grab) of his family assets. This lad does not even have a PAN card and was totally clueless as to how to move further. I detailedly explained him how he should proceed further, do‘s and dont‘s and how to protect his wealth from the vultures. He was immensely satisfied and felt very confident after the meeting. When he asked how much he should pay me, looking at his pathetic life and financial situation, I refused to accept any money, and told him that I‘m glad that I was of some help to him in his very difficult life situation. He was very insistent that I should take some money from him as he derived lot of benefit from our meeting. Finally, I relented and accepted the Rs.300/-, he was able to pay me. I value this Rupees Three Hundred fee a lot. I respect the prospective clients who respect me. In our question of relationship with existing clients, it is one based on mutual regards. As you are aware, we do not make any cold calls, and we are like (good) Doctors. We want to expand our profession purely on referrals or people coming to know about us through our web portal or media and contacting us on their own. We are doing a great disservice to investors, if we are going to chase them. It is the responsibility of every ‗Personal Financial Advisor‘ (PFA) to stop with creating awareness, and not aggressively chase behind the investors. Value, if you have, would definitely be recognised by the market, sooner or later. That is the reason why even though, Mr.‘Drums‘ Sivamani called up during my last year live TV show on ‗ Personal Finance‘ and was magnanimous enough to appreciate an unknown person like me and expressed his desire to meet when he visits Chennai. As per the guidelines provided by the media, I requested him to get my contact details from the TV channel. He has not called me subsequently. Being a person involved in a profession of art and creativity, which totally engrosses one‘s time and energy, I do not find any fault with him for forgetting to call me subsequently. I admire his magnanimity in taking time to appreciate an unknown professional in public media. Lot of my friends and wellwishers, suggested that I call

Mr.Sivamani and follow up as there is a strong possibility that Mr.A.R.Rahman‘s account also would come to me along with his, as they are close pals. One insider in an AMC, informed me that their funds are now being (mis) managed by a bank, and services from us would be of tremendous help to them I‘m very clear in the conviction that the first call or invitation has to come from a prospective client and we should not be the one chasing them. As I said we should conduct our profession like a true advisor and not as an agent. If a VIP has a health problem, he goes to the Doctor. The Doctor does not make cold calls and chase them. Once after some one becomes our client, then it becomes our responsibility in periodical followups, reviews, meetings etc. Likewise, we the advisor community, have to position ourselves only as an advisor and not pressurize the investors in selling a product. Products or Services, should be bought not sold. Our work stops with creating awareness. I also want to share an interesting experience I had with an I.G of Police, since retired. The initial meeting happened for 3 hours. His personal finance was in a mess and he agreed with all my observations and suggestions. During the course of the meeting, he addressed me in singular couple of times. He wanted me to be his ‗Personal Financial Advisor‘ and also boasted about the tremendous amount of clout he has with elite of the society and how his relationship would benefit me. I kept quiet. Next day morning, he called me and started addressing me in singular. I told him that as a professional, he needs to address me in plural. He said that he is used to calling very senior police officials in singular, and would address me also like that. I told him that right from my driver, office boy, maid, small vendors etc., I always address them in plural. I said that I would refuse to work with him, if our values do not match. He tried putting pressure to me through a very good friend of mine who referred me to him, to accept him as a client with him addressing me in singular. I refused to be his PFA and I‘ve never regretted the decision even once. I respect people for what they are and not what they have. I believe in what Ramana says ‖ Whatever is destined not to happen will not happen, try as you may. Whatever is destined to happen will happen, do what you may to prevent it. The best course, therefore, is to remain silent.‖ I absolutely follow the first 2 part of the above quote in toto. The only problem is I‘m unable to remain silent. If I find snobbish, dictatorial, greedy, deceptive, pretentious, dominating behaviour etc., I don‘t remain silent. I usually get candid with such people. May be I would evolve. If God‘s will is such that this characteristic of mine would be as it is, so be it.

The Current Gold Bubble Posted by Muthu on July 10, 2010 We‘ve been writing about the bubbles of the past. History is of no use unless we learn something out of it.

I want to write today on a current bubble, the Gold bubble. Gold is a useless asset. There is no industrial consumption for it. It does not yield you any dividend or interest. Long ago, Gold ceased to be an underlying asset for printing currencies of the nations. Though people may talk about spectacular returns, Gold has given in the recent years, past performance and history tells us that Gold is a mere hedge against inflation, (i.e.) the growth in value corresponds to inflation in an economy or world, over a long period of time. If you take last 4 to 5 decades performance, Gold has gone through strong bubbles and burst. Traditionally, Gold has been yielding, on an average only 6% per annum, which is a protection against inflation. At best Gold protects your wealth but does not enhance it. Gold has only ‗Social perception value‘ and no real utility value. There is no real value to Gold, other than what we socially attribute to. In a country like India, Gold is considered to be the best of the asset and in occasions like marriages, the value attributed to a family is directly proportionate to the amount of Gold they own or offer. Right from the poorest to the richest in our country considers Gold as a ‗must have‘ asset. For the poorest and middle class, sometime this is the only ‗asset‘ they have. When you attend marriages, you can see that the women who ostentatiously display the gold ornaments they have, are the envy of other women. Since almost every family in India has some investment in Gold in the form of jewelleries and ornaments, I keep listening to people as to how wise they are in ‗investing‘ in Gold, rather than equity or real estate, given the phenomenal increase in the value of Gold during the last few years. Let us listen to Valueresearch. ―Gold prices seem unstoppable. They‘ve reached levels that would have been unimaginable a few years ago and gold cheerleaders say that they are on their way to levels that are unimaginable today. When investors go and look for information on whether gold is still a good bet, there is no shortage of strong and apparently well-reasoned arguments supporting why gold prices will continue to rise. There are many variations to these arguments, but basically, they all boil down to some version of the ‗safe haven‘ theory, viz. that investors are fearful of the future of stocks, bonds, currencies and all other kinds of financial investment. They think that there could be another financial crisis and are thus being smart in rushing in to an asset type that has a historical reputation of protecting wealth in bad times.

Not just the financial media, but even the general media now carries articles recommending gold as a significant chunk of individual investment portfolios. As a mainstream financial investment, gold‘s day appears to have arrived. Or has it? Will gold live up to the hype? Definitely, the hype has now reached impressive levels. On the Internet, it‘s not difficult to find apparently sane analysts who say that gold could rise to four times today‘s price in five years. Projections of two to three times today‘s price levels in a year or two are commonplace. Is this a bubble? The truth is that in any sensible discussion, that question is not even worth asking. Of course gold is a bubble–what else could it possibly be? The gold of today is not the gold of old — a largely physical asset that was a safe haven in troubled times. This is a paper asset; with highly liquid and highly leveraged markets where derived proxies of gold trade in much larger quantities than any underlying demand. This bubble is like the other commodity bubbles that you have seen over the last few years, whether oil, copper, nickel, wheat and so many others. In fact, gold is even more of a bubble because it is an inherently useless material, earning no dividends or interest. There‘s no industrial consumption story like copper or nickel here, and unlike oil, there isn‘t any danger of ‗peak gold‘ laying waste to the world economy. Gold is the purest of all bubbles — where even the story being told by its proponents is that they expect its price to rise because everyone expects it to rise. Sure, if you think this bubble will continue then by all means try and milk it for all it is worth. Bubbles are by definition irrational and who knows, gold‘s price could actually rise five times in five years. But if you invest in it today, have no illusions that you are putting away money for a rainy day. You are actually speculating that a particular madness will continue for a while. One day this madness will end suddenly, and then you‘ll have to run away. When that day comes, how much money you finally make will depend on whether you can outrun the stampede for the exit gate.‖ I want to conclude this article with what Warren Buffett has to say about Gold ― Gold gets dug out of the ground in Africa, or some other place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head‖. As it goes without saying, Warren Buffett has refused to participate in the current ‗Gold Rally‘. (with inputs from Valueresearch)

The South Sea Bubble Posted by Muthu on July 9, 2010 Thanks for your overwhelming response to my blog on ‗Random Thoughts‘. I‘m surprised that many of you have been forced to live for others expectations on what your standard of living or life style should be. Some of you have thanked me that you‘ve got a conviction of not living for others, from my above article. If someone is going to respect you, based on your possessions, care a damn about them. They do not deserve your attention and nor their respect has any value. They do not respect you, but your

house or car or Blackberry or jewellery etc. No one except your Auditor and your Personal Finance Advisor, needs to know about your wealth. If ostentatious display of your wealth is only going to get you appreciation from your relatives, friends, peers or society, do you think that appreciation has any value? It is always better to maintain a low profile and it is good for you if people do not know about your wealth. Since I‘m in the profession of ‗Personal Finance‘ and usually have access to all the information pertaining to wealth of my clients, I know people who live an ordinary life style but have few crores of financial assets other than their residential house. No one other than me and their Auditor would know about their wealth. Likewise I‘ve seen people with bungalows in posh area, having really good income, high end cars, lead a life style which makes society envies them, actually having negative networth. They are into huge debts and have no networth to speak about. Again this information would be known only to me and their Auditor, and not to the society. There is no need to get respect from anyone based on your possessions. If they can respect you for what you are, fine. If they are going to respect you for what you have, simply ignore them. For those of you who want to know more on above, I suggest you a very popular personal finance book ‗The Millionaire Next Door‘. It is available in Eloor lending library, can be purchased at ‗Land Mark‘. Read it, you would to be amazed to know the insights the book offers you. Now we will discuss about the famous ‗South Sea Bubble‘ Let us hear what the famous scientist, Sir Isaac Newton who last significant portion of his wealth in ‗The South Sea Bubble‘. ―I can calculate the motions of the heavenly bodies, but not the madness of people.‖ What Warren Buffet has to say about above? ―Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac‘s talents didn‘t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, ―I can calculate the movement of the stars, but not the madness of men.‖ If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the fourth law of motion: For investors as a whole, returns decrease as motion increases.‖ So what is this South Sea Bubble? Irrational exuberance pervades the stock market. Speculators pay ever-higher prices for shares despite scant evidence of underlying value. Skeptics warn that the bubble will burst. The amount the market declined from peak to bottom: Stocks in the South Sea Company were traded for 1,000 British pounds (unadjusted for inflation) and then were reduced to nothing by the later half of 1720. A massive amount of money was lost. In the 1700s, the British empire was the big dog on the block, and that particular block spanned the entire globe. For the British, the eighteenth century was a time of prosperity and opulence, meaning a large section of the population had money to invest and were looking for places to put their money. So, the South Sea Company (SSC) had no problem attracting investors when, with

an IOU to the government worth £10,000,000.00, the company purchased the ―rights‖ to all trade in the South Seas. The few companies offering stock at that time were all solid but difficult investments to buy. For example, the East India Company was paying out considerable tax-free dividends to their mere 499 investors. The SSC was perched on top of what was perceived to be the most lucrative monopoly on earth. The first issue of stock didn‘t even satiate the voracious appetite of the hardcore speculators, let alone the average investors who were assured of this company‘s coming dominance. The popular conception was that Mexicans and South Americans were just waiting for someone to introduce them to the finery of wool and fleece in exchange for mounds of jewels and gold! So nobody questioned the repeated re-issues of stocks by the South Sea Company. People just bought the expensive stocks as fast as they were offered. It didn‘t matter either to investors that the company wasn‘t headed by experienced management. Those who lead the company, however, were born public relations directors, who set up offices furnished with affluence in the most extravagant quarters. People, once they saw the wealth the SSC was ―generating,‖ couldn‘t keep their money from gravitating towards the SSC. Not long after the emergence of the SSC, another British company, the Mississippi Company, established itself in France. The company was the brainchild of an exiled Brit named John Law. His idea wasn‘t so much based in trade, but in switching the monetary system from gold and silver into a paper currency system. The Mississippi Company caught the attention of all the continental traders and gave them a space to put their hard-earned dollars. Soon the worth of the Mississippi Company‘s stock was worth 80 times more than all the gold and silver in France. Law also began collecting defunct companies to add to his massive conglomerate. This success on the continent stirred British pride, and, believing that British companies could not fail, British investors were desperate to invest their money. They were blind to many indications that the SSC was run too poorly to break even (whole shipments of wool were misdirected and left decaying in foreign ports), and people wanted to buy even more stocks. The South Sea Company and others made a point of giving people what they wanted. The demand for investments caused IPOs to sprout out of everything, including companies that promised to reclaim sunshine from vegetables and to build floating mansions to extend Britain‘s landmass. They all sold like mad. Eventually the management team of SSC took a step back and realized that the value of their personal shares in no way reflected the actual value of the company or its dismal earnings. So they sold their stocks in the summer of 1720 and hoped no one would leak the failure of the company to the other shareholders. Like all bad news, however, the knowledge of the actions of SSC management spread, and the panic selling of worthless certificates ensued. The huge hole in the south sea bubble also punctured the Mississippi Company‘s unrealistic value and both came crashing down. A complete crash, which would be heralded by the folding of banks, was avoided due to the prominent economic position of the British Empire and the government‘s help in stabilizing the banking industry. The British government outlawed the issuing of stock certificates, a law that was not repealed until 1825. (with inputs from Investopedia)

Thoughts on myself, my profession and social compulsion Posted by Muthu on July 8, 2010 I‘ve been reading and thinking enough these days to write half a dozen blogs every day. But I know your time constraints and hence wants to restrict to one blog or two a day. Over a period, I may also make it only twice or thrice a week. I‘m writing this from our new office. We‘ve shifted from our home office to an office complex in Mount Road, just behind ‗Temple Towers‘. We occupied the office since this Monday. We have been doing small pending works for the last few days and we would send you a separate email with office details. During December‘06, I decided to quit my employment career forever, since I did not enjoy my office environment and my health started detoriating rapidly. I had no clue as to what I‘m going to do next. Since I always had passion and knowledge towards ‗Personal Finance‘, I wanted to make that as my Career. I decided not to work for anyone and I wanted to be on my own, so that I need not compromise my values. In the current scenario, it is very difficult to hold an employment in the field of ‗Personal Finance‘ without compromising one‘s ethics, values and conscience. Also I had a problem. I know that I know about ‗Personal Finance‘. But how to make the world know it? So I started writing my CFP exams since January‘07 and completed the final module in December‘07, all in first attempt. Parallely I started the practice as a Financial Planner since January‘07 itself. CFP certification has not provided me any significant value addition in terms of knowledge but is an ‗official‘ acknowledgement that I know about ‗Personal Finance‘. Honestly I‘ve learnt much more about ‗Personal Finance‘ and Investments from legends like Warren Buffett, Charlie Munger, Benjamin Graham, John Bogle, Philip Fisher, Peter Lynch etc. rather than what I‘ve learnt in my CFP certification. We decided our professional model in such a way that we would provide ongoing advice on various aspects of ‗Personal Finance‘ to our clients and our revenue would come from the commissions earned from that portion of the financial assets of a client getting invested in Mutual Funds (both debt and equity) through us. This was working fine till August‘09, when the entry load was totally abolished. This move was aimed by SEBI due to lot of malpractices in the industry like frequent churning of clients‘ portfolios to earn more commission, AMC‘s encouraging churning or bringing in more assets through NFOs, many of them were in no way unique etc. I‘ve written a separate article about the malpractices which were prevalent in the industry, so do not want to go through the details again. SEBI‘s punishment for the industry is so severe that the very existence of AMCs and Advisors are threatened. Majority of the advisors have already quitted the industry and is now happily selling products like ULIPs, PMS etc. which fetches them very high commission, at the expense of the investor. We do not earn any upfront income from the investments of the clients. We get only an annual trial commission of between 0.30% to 0.50%, depending upon the asset class. So our professional income has fallen by more than 70%. As is the case of everyone in the industry, the future of AMCs and Advisors are uncertain and we have to wait and watch to see as to how the industry evolves.

Though we are growing in volume and new clients are getting added regularly through referrals, our income has fallen drastically. I feel that in the months and years to come, lot of existing players may disappear both at the AMC and Advisors level. Consolidation of AMCs and reworking of the business model may happen. Only the fittest would survive. For those of you, who may get worried as to what will happen to your investments and whether we would exist to serve you, consolidations have happened in the past too. So only the AMC who may manage your funds may change. My personal belief is that most of the AMCs whom we‘ve narrowed down and make your investments would survive. Your money would be safe, subject to the standard disclaimer, Mutual fund investments are subject to market risks & past performance may or may not be sustained in the future. Whether we would survive, yes we would. By God‘s grace, I‘ve the capability to generate passive income from my financial assets which would ensure our continuity. In the longer run, our professional model would evolve in such a way that it is self sustaining. This is the time when majority of advisors are either quitting or scaling down their operations like moving from an office complex to home office etc., we‘ve taken a contrarian call of setting up office by spending Rs.3 Lakhs (including rental deposit) and increased monthly expenditure due to moving to an office complex from home office. If you think, there is some vision on my part, which others lack, you are wrong. Left to myself I would have decided to continue from home office, till the revenue model is clear. I‘ve to put a separate office now due to social compulsion. Some of our relatives are of opinion that I‘m doing nothing for the last 3 1/2 years and idling away my time at home. Their notion of work is activities which should be evident to others. Nobody dared to speak to me directly about this, as I can be very candid when some one offends my self respect or self esteem. I‘m no Buddha nor have intention of becoming one. But my poor wife has to face this ‗social stigma‘ of husband, in the eyes of relatives, doing ‗nothing‘ but simply ‗idling‘. She has domestic responsibilities, has a high stress job and has to cope with a sick husband who has certain special needs. This ‗social stigma‘ has added more pressure to her. Out of my utmost love and affection for her, much against my personal wishes, I decided to set up a separate office. I‘m very grateful to her and her support is what keeps me going. Though so many people passed so many comments, one relative of us is very unique. He is a busy Doctor (General Physician) and was told by my friends belonging to his area that he sees around 100 patients (50 tokens in the morning and evening respectively) a day. Assuming he spends atleast 10 minutes with a patient, he needs to work 1000 minutes or 16+ hours a day. I do not know whether the number told to me is exaggerated or he spends much less than even 10 minutes with a patient or is he really working 16+ hours a day. He has been doing this 6 days a week for last 3 or 4 decades. I‘ve had only few interactions with him but I always could smell from the way he speaks, he consider his profession more of a burden rather than being passionate about it. In his opinion, he is the busiest soul on earth, may be. I do not even know whether he gets time to update his professional knowledge. He is that busy. He may not have anytime to think, read, look inward, have finer interests etc. He is always in a state of ‗short temper‘. I‘ve occasional bouts of short temper, but I‘m yet to come across someone like him who is either always irritated or short tempered. He is the only one who spoke to me directly and very harshly saying that he is

very busy always and I‘m lazy. In his opinion being busy always is a virtue, and having time for oneself is a vice. As is my nature, I promptly confronted him. I do not want to go further into these details. But I‘ve a suggestion for him. He can try becoming a day trader in stocks and derivatives. I do not think any other job would keep a man busier and active than this. Ofcourse, there is a strong possibility of permanent wealth erosion in this job. I want to have an one to one talk with this gentleman, and objectively evaluate what each one of us have achieved in our respective profession. I‘m confident that what he thinks he has achieved may not even be a fraction of what I‘ve achieved professionally, both in BPO and in my current profession. Typically in our profession, our initial meeting with client would happen for couple of hours. From then on all the interaction is through phone and email. We meet them only when they want or for reviews. Whatever service or investment requirements our clients have based on the telecons are taken care of by our able execution staff. We believe in Buffett‘s maxim ‗We don‘t get paid for activity, just for being right‘. So we focus more on giving the right advice and not ‗activities‘. We strongly believe that more activity on your portfolio or finances may be very expensive and at times even harmful in the long run. In a Profession like ours, we do not add a new client every day. So I spend my time mostly in telecons, emails, reading, thinking, writing, meeting people from the industry etc. On the days I meet a new client, each meeting takes couple of hours. I think, read and sometimes also write between 4am and 8am in the morning. On an average, I spend 4 hours everyday for knowledge enhancement related to my profession rather passion. I spend another 3 to 4 hours on phone calls. Other than this, meetings also happen. If you ask me, whether I‘m busy. The answer is both yes and No. Reading, writing, talking, meeting clients etc., I do not consider that as ‗work‘. It is part of my life, as it is my passion. Most of the clients have become my friends. So talking to them, I do not consider as work. Reading what I like is not work. I like to work with people whom I like. So I choose my clients, as much as they choose me. I‘ve said ‗no‘ to clients, whom I‘m not comfortable with. To quote Buffet, ‗We intend to continue our practice of working with people whom we like and admire. This policy not only maximizes our chances for good results, it also ensures us an extraordinarily good time.‘ Also I‘m not only an Investment Advisor but also primarily an investor. Investing requires thinking, not activities. One should patiently identify good stocks and pounce on them, when an opportunity presents itself. This requires lot of conviction. To quote Ayn Rand ‗ Wealth is the product of man‘s capacity to think‘. When almost everyone in the world was desperately trying to sell in 2008 crisis, prices went down drastically. There was fear all over. Medias screamed about world getting into another ‗Great depression‘. I moved some of my debt into equity and purchased the shares I‘ve identified earlier. Those shares are now ranging from 3 bagger to 6 bagger ( 300% to 600% absolute returns in 20 months). One or two stocks have the capacity to become 20 to 40 bagger (hold your breath, a return of 2000% to 4000%), may be in another 10 years, from the rock bottom prices I‘ve purchased in 2008. I‘ve the ultimate luxury of getting to do what I love to do everyday. Like 99% of the human beings on earth, I also have my own fair share of sufferings. But I absolutely enjoy what I do, subject to certain limitations due to health issues. I‘ve already retired 3 1/2 years ago and I would continue to practice my profession till I live, at my own pace, subject to my health. All the above are known to me. But how do I explain this to that Doctor and other relatives, who have a strong conditioning that what a man should do for living, which involve ‗activities‘ and ‗going‘ to an office? Why can‘t people mind their own business? Are they all capable of

understanding all these? Any how all of them should be happy, now that I‘ve started ‗going to office‘. In my new office, I‘ve an exclusive air-conditioned cabin, with a refrigerator and a sofa, along with executive and guest chairs plus other amenities like unlimited broadband, cordless phone, inverter with 5 hour back up etc. I‘ve replicated my ‗home office‘ in ‗new office‘. I‘ve also retained my ‗home office‘ as it is, for me to work early mornings, weekends etc. Some things, some people and some life situations are really crazy. Anyhow everything happens according to God‘s will. On an optimistic note, if we‘ve to scale up our operations, this place would be very useful. We can have 3 back office staff, one common system for 3 execution staff, who would be mostly on the field and an office assistant. In our professional model, including myself, I would be able to accommodate totally 8 people in our office. Also I get irritated when people ask me, if I‘m doing well in profession and life (read wealth), then why I‘m still using an 8 year old second hand santro car. The car is working absolutely fine. Why it should bother some one? Even when I was a General Manager in BPO, I used to travel by bike. Why one‘s standard of living should be equal to his cost of living? Do you know that, Warren Buffet still lives in a 3 bed room house purchased 40 years ago and drives an old car? Do you know his office size? 1500 Square feet. Do you know how many people he has employed to manage his company, being the richest person in the world? Just 12. All the VVIPs of the world go and meet Buffett either in the hall at his house or his cabin at his 1500 sq.ft office. Do you know how much Buffett earns as salary? Just $100,000 dollars per annum or roughly $8300 a month. 99% of his wealth is invested in his company Berkshire Hathaway. As is his policy, his company never pays any dividend and all the earnings are reinvested. So he never earns even $1 as income from his company, other than his paltry salary. He manages his affairs with this income plus income generated out of balance 1% of his assets, which is not invested in his company. If someone is so concerned that we should be travelling in a Honda City or Accord or Innova or Mercedes Benz, then please gift me one. Our family would decide when to buy what. This would be based both on our needs and desires. We are not there to fulfil someone‘s expectation of what should be our cost of living. My thoughts are raining today and would like to stop with this. If you‘ve read the entire article, thanks for your patience. Kindly wait till tomorrow, to read about the ‗South Sea Bubble‘.

4Posted by Muthu on July 7, 2010 Warren Buffett never participated in the famous ‗Internet Bubble‘ which happened early in the year 1998-2000.

All the fund managers were ecstatic at the time when stock prices multiplied by tens of times in a span of less than 2 years. There were virtually no Fund Managers and Investors, who were not holding ‗Internet Stocks‘. Buffett made a passionate appeal to fund managers, Private Equity players and common investors not to get carried away by absurd and unsustainable valuations. Internet stocks were commonly quoting at a PE ratio of 2000 and above. This means that an investor was willing to pay 2000 years of earnings to get a piece of stock. Many companies, which had negative PE, as they were just formed and yet to even start their operations, attracted billions and millions of dollars. Nobody listened to the ‗old man‘ Buffett. But both print and visual media sided with investors in internet stocks and increased the frenzy of once in life time opportunity to easily multiply wealth, severely ridiculed Warren Buffet for loosing touch with reality. Fund Managers commonly mentioned in their interviews that Buffett is dumb that he is unable to see a dawn of new era. Warren Buffett‘s investment vehicle ‗Berkshire Hathaway‘ under performed even the most mediocre fund manager‘s performance for more than 3 years. Buffett who is known for his emotional discipline informed his share holders that he would not invest a single dollar in these Internet Companies and said that they should be ready to embrace under performance till the internet party is over. You all know about the subsequent great dot com burst in the year 2000. Then the media started heaping praises on Buffett for his even temperament and intelligence, not being carried away by the frenzy. When Medias asked his opinion after the bubble, he quipped ‖ The world went mad. What we learn from history is that people don‘t learn from history.‖ So we will look at history of such bubbles dating back to few centuries. A good friend and wellwisher of mine suggested that why don‘t I write about one of the earliest bubble ‗ The Tulip Mania‘. Today I‘m going to write about the great tulip craze and tomorrow I‘m planning to write about the great South Sea Bubble, in which even one of the world‘s famous scientists, Sir Isaac Newton, lost his entire wealth. The tulip mania happened during the years 1634-1637 in Holland. The amount the market declined from peak to bottom: This number is difficult to calculate, but, we can tell you that at the peak of the market, a person could trade a single tulip for an entire estate, and, at the bottom, one tulip was the price of a common onion. In 1593 tulips were brought from Turkey and introduced to the Dutch. The novelty of the new flower made it widely sought after and therefore fairly pricey. After a time, the tulips contracted a non-fatal virus known as mosaic, which didn‘t kill the tulip population but altered them causing ―flames‖ of colour to appear upon the petals. The colour patterns came in a wide variety, increasing the rarity of an already unique flower. Thus, tulips, which were already selling at a premium, began to rise in price according to how their

virus alterations were valued, or desired. Everyone began to deal in bulbs, essentially speculating on the tulip market, which was believed to have no limits. The true bulb buyers (the garden centres of the past) began to fill up inventories for the growing season, depleting the supply further and increasing scarcity and demand. Soon, prices were rising so fast and high that people were trading their land, life savings, and anything else they could liquidate to get more tulip bulbs. Many Dutch persisted in believing they would sell their hoard to hapless and unenlightened foreigners, thereby reaping enormous profits. Somehow, the originally overpriced tulips enjoyed a twenty-fold increase in value – in one month! Needless to say, the prices were not an accurate reflection of the value of a tulip bulb. As it happens in many speculative bubbles, some prudent people decided to sell and crystallize their profits. A domino effect of progressively lower and lower prices took place as everyone tried to sell while not many were buying. The price began to dive, causing people to panic and sell regardless of losses. Dealers refused to honour contracts and people began to realize they traded their homes for a piece of greenery; panic and pandemonium were prevalent throughout the land. The government attempted to step in and halt the crash by offering to honour contracts at 10% of the face value, but then the market plunged even lower, making such restitution impossible. No one emerged unscathed from the crash. Even the people who had locked in their profit by getting out early suffered under the following depression. The effects of the tulip craze left the Dutch very hesitant about speculative investments for quite some time. Investors now can know that it is better to stop and smell the flowers than to stake your future upon one. (with inputs from Investopedia)

Ayn Rand- Is Money the root of all evil? Posted by Muthu on July 6, 2010 1) So you think that money is the root of all evil? Have you ever asked what is the root of money? Money is a tool of exchange, which can‘t exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears, or of the looters, who take it from you by force. Money is made possible only by the men who produce. 2) When you accept money in payment for your effort, you do so only on the conviction that you will exchange it for the product of the effort of others. 3) Have you ever looked for the root of production? Take a look at an electric generator and dare tell yourself that it was created by the muscular effort of unthinking brutes. Try to grow a seed of wheat without the knowledge left to you by men who had to discover it for the first time. Try to obtain your food by means of nothing but physical motions–and you‘ll learn that man‘s mind is the root of all the goods produced and of all the wealth that has ever existed on earth.

4) Wealth is the product of man‘s capacity to think. An honest man is one who knows that he can‘t consume more than he has produced. 5) To trade by means of money is the code of the men of good will. Money rests on the axiom that every man is the owner of his mind and his effort. Money allows no power to prescribe the value of your effort except the voluntary choice of the man who is willing to trade you his effort in return. Money permits you to obtain for your goods and your labor that which they are worth to the men who buy them, but no more. Money demands of you the recognition that men must work for their own benefit, not for their own injury, for their gain, not their loss–the recognition that they are not beasts of burden, born to carry the weight of your misery–that you must offer them values, not wounds–that the common bond among men is not the exchange of suffering, but the exchange of goods. Money demands that you sell, not your weakness to men‘s stupidity, but your talent to their reason; it demands that you buy, not the shoddiest they offer, but the best that your money can find. 6) But money is only a tool. It will take you wherever you wish, but it will not replace you as the driver. It will give you the means for the satisfaction of your desires, but it will not provide you with desires. Money is the scourge of the men who attempt to reverse the law of causality–the men who seek to replace the mind by seizing the products of the mind. 7) Money will not purchase happiness for the man who has no concept of what he wants: money will not give him a code of values, if he‘s evaded the knowledge of what to value, and it will not provide him with a purpose, if he‘s evaded the choice of what to seek. Money will not buy intelligence for the fool, or admiration for the coward, or respect for the incompetent. The man who attempts to purchase the brains of his superiors to serve him, with his money replacing his judgment, ends up by becoming the victim of his inferiors. The men of intelligence desert him, but the cheats and the frauds come flocking to him, drawn by a law which he has not discovered: that no man may be smaller than his money. 8) Only the man who does not need it, is fit to inherit wealth–the man who would make his own fortune no matter where he started. If an heir is equal to his money, it serves him; if not, it destroys him. But you look on and you cry that money corrupted him. Did it? Or did he corrupt his money? Do not envy a worthless heir; his wealth is not yours and you would have done no better with it. Do not think that it should have been distributed among you; loading the world with fifty parasites instead of one, would not bring back the dead virtue which was the fortune. Money is a living power that dies without its root. Money will not serve the mind that cannot match it. 9) Money is your means of survival. The verdict you pronounce upon the source of your livelihood is the verdict you pronounce upon your life. If the source is corrupt, you have damned your own existence. Did you get your money by fraud? By pandering to men‘s vices or men‘s stupidity? By catering to fools, in the hope of getting more than your ability deserves? By lowering your standards? By doing work you despise for purchasers you scorn? If so, then your money will not give you a moment‘s or a penny‘s worth of joy. Then all the things you buy will become, not a tribute to you, but a reproach; not an achievement, but a reminder of shame. 10) Money will always remain an effect and refuse to replace you as the cause. Money is the product of virtue, but it will not give you virtue and it will not redeem your vices. Money will not give you the unearned, neither in matter nor in spirit. 11) Let me give you a tip on a clue to men‘s characters: the man who damns money has obtained it dishonorably; the man who respects it has earned it. Run for your life from any

man who tells you that money is evil. That sentence is the leper‘s bell of an approaching looter. So long as men live together on earth and need means to deal with one another–their only substitute, if they abandon money, is the muzzle of a gun. 12) But money demands of you the highest virtues, if you wish to make it or to keep it. Men who have no courage, pride or self-esteem, men who have no moral sense of their right to their money and are not willing to defend it as they defend their life, men who apologize for being rich–will not remain rich for long. They are the natural bait for the swarms of looters that stay under rocks for centuries, but come crawling out at the first smell of a man who begs to be forgiven for the guilt of owning wealth. They will hasten to relieve him of the guilt–and of his life, as he deserves. 13) Money is the barometer of a society‘s virtue. When you see that trading is done, not by consent, but by compulsion–when you see that in order to produce, you need to obtain permission from men who produce nothing–when you see that money is flowing to those who deal, not in goods, but in favors–when you see that men get richer by graft and by pull than by work, and your laws don‘t protect you against them, but protect them against you– when you see corruption being rewarded and honesty becoming a self-sacrifice–you may know that your society is doomed. Money is so noble a medium that is does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as halfproperty, half-loot. 14) Until and unless you discover that money is the root of all good, you ask for your own destruction. When money ceases to be the tool by which men deal with one another, then men become the tools of men. Blood, whips and guns–or dollars. Take your choice–there is no other–and your time is running out. (Source: Capitalism Magazine : The above is an excerpt from Atlas Shrugged, © Copyright, 1957, by Ayn Rand. It is reprinted with permission from the Estate of Ayn Rand.)

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Posted by Muthu on July 6, 2010 I‘m very much surprised that my article ‗ Do we have Free Will?‘ generated a significant number of responses both through emails and telecons. Honestly, I never anticipated this. Some have responded that our lives are defined by God‘s will or Destiny or Randomness and we do not have Free Will. Some have said that we‘ve free will but there are so many variables over which we‘ve no control, so it is as good as not having free will. Some others have mentioned that practices such as Japa, Meditation, Pranayama, Prayer and other religious and spiritual practices can influence the God‘s Will favourable to an Individual.

Generally we expect only good things to happen to us. We want our lives to be perfect. However in reality it is not so. To quote Ramesh Balsekar ‖ Life is imperfect. Life is not perfect. Life is full of contradictions. Life is full of opposites. All I‘m saying is that ‗What Is‘ is exactly what is supposed to be―. The whole spirituality industry is run on the premises of two basic human emotions, hope and fear. To quote Ramesh ―Instilling fear and hope are the only refuge of shallow spiritual teachers―. Some have cited instances in which what they have planned or visualized happening accordingly. To quote Ramesh again ―If what has happened is what you wanted, it simply means that it has happened not because you wanted it but because it tallied with God‘s Will. So if your will does not coincide with God‘s Will, what you will, will not happen―. What I shared is my personal conviction and I agree that perspectives can vary, which in my opinion is also part of God‘s Will. I want to end this message with a quote from the great scientist Albert Einstein. ―Everything is determined, the beginning as well as the end, by forces over which we have no control. It is determined for the insect as well as for the star. Human beings, vegetables, or cosmic dust, we all dance to a mysterious tune, intoned in the distance by an invisible piper―.

Do we have Free Will? Posted by Muthu on July 4, 2010 I seldom write anything in our blog which is not related to Personal Finance because that is the primary nature of the blog. However I thought on rare instances, I may take the liberty of writing on other topics too. Spirituality and Personal Finance are two main areas of passion in my life. (Mount) Arunachala is my Spiritual mentor and Warren Buffett is my ‗Personal Finance‘ mentor. I consider blessed having these two as my mentors. During the last few months, at an intellectual level, a radical transformation has happened in my mind. I‘ve developed a strong conviction that whatever I go through, good or bad, pleasant or unpleasant, pleasure or pain, happiness or misery, joy or anxiety, anger or compassion, fair or unfair etc., everything is as per the will of God. I‘ve no free will. This change is very radical for me as I always wallowed in guilt about something which has happened in the past or anxious about some thing which may happen in future. I was never at peace with myself because I was in constant fight with reality and my ego refused to accept the reality.

This conviction was partly through the introspection of my life‘s experiences and partly through the influence of teachings of Ramana, Nisargadatta and Ramesh Balsekar. If you think, I‘ve become a wonderful person, because of this inner change, it is absolutely wrong. I‘m what I am, with my own anxieties, guilt, anger, contradictions and paradoxes. But despite these there is also a space in mind which gets peace through acceptance. And there is a development of significant inner strength in accepting and facing reality. I‘m now able to accept myself instead of constant inward resistance to what I am. You may then question as to how I live my everyday life. I‘m continuing to live the way I lived before. But with one small change. What I‘m doing is, to quote Ramesh Balsekar ‗You must act in life as if you are the doer, knowing that you are not the doer‗. In fact, having this attitude at an intellectual level is the only Spiritual practice I do. You know that we discourage too many ‗activities‘ (which only benefits the intermediaries) in Personal Finance and advice on a more passive long term approach. To quote Warren Buffett ‗ Lethargy, bordering on sloth should remain the cornerstone of an investment style.‗ The same attitude has percolated down to my spiritual practice also. Lazy man‘s approach! Recently, I read somewhere, the world famous physicist Stephen Hawking himself concluding in an article that everything in life is pre-determined but we do not know what is pre-determined. I incidentally happened to read an article today ‗ The Moving Finger Writes…‘ by Mukul Sharma, in Times of India. I‘m amazed to know that studies and experiments have been conducted in science regarding free will and the conclusion is that we don‘t have one. I‘m sharing below some excerpts from the above article. ‖ Research shows that brain impulses to act happen up to half a second before the person is conscious of it. Benjamin Libet was a researcher in the Physiology department of University of California, San Francisco and pioneering scientist in the field of human consciousness. Way back in 1970, he hooked up a bunch of subjects to a whole lot of brain scanning and muscle monitoring equipment and then asked them to move a finger whenever they wanted to and to report when they made the decision. Normally when we think of doing something, the thought is converted into electrical impulses in the brain which then cause the required muscle movement. And these impulses can be recorded and measured. Therefore it came as total shock to Libet when he found that the brain impulses happened upto half a second before the volunteers said they were conscious of it. In other words, apparently conscious decisions to act were preceded by an unconscious build up of electrical charge within the brain. Unusually cause came after the effect. The experiments which have been successfully repeated several times since have rocked the world of consciousness studies. The reason is, they seem to show that free will – the powering

of making decisions that are unconstrained by external circumstances or by an agency such as fate or divine will- doesn‘t exist. Like, forget profound life changing choices, if we can‘t even move a finger without being pre-empted, what kind of independent entities are we pretending to be? Philosophers have been trying to come to terms with the ramifications of the experiment and the best they‘ve done so far is to tell us that perhaps consciousness is some kind of epiphenomenon generated after the brain has done its job. On the other hand, what if there exists some fuller collective consciousness that we subscribe to and are an ingredient of which in fact is responsible for initiating all action in the universe? Being a component of larger whole would then put us right back in the driver‘s seat again as equal and volitional partners in every activity. Studies like Libet‘s have only just begun to shed some light on the role that such a super consciousness could be playing our lives. ‖ It is my personal belief that everything including both good and bad that happen to us and we do is due to God‘s will and free will is an illusion with which we have to live. To quote Ramesh Balsekar ‗ The human being lives on fictions. For example, the human being knows that the sun is stationery and that it is earth that is in movement but nonetheless in his daily life he accepts the fiction that sun rises and sets. So the understanding is that all this is an illusion and that you do not have free will, but in life you must act as if you have free will‗. Nisargadatta has put this very beautifully ‗ Once you realize that all happens by itself, call it destiny, or the will of God or mere accident, you remain as witness only, understanding and enjoying, but are not perturbed. You are responsible only for what you can change. All you can change is only your attitude. There lies your responsibility‗. I realize that it is very difficult for people to accept even at an intellectual level that there is no free will. I would not have also accepted it but for an inner intellectual conviction that evolved on its own. I agree that the majority of the humanity would disagree with the fact that there is no free will and that is also part of God‘s will. Free will versus God‘s will can be a never ending argument and each one is entitled to have his own perspective, which as I said above is also the part of God‘s will. I end this article with what Ramana has got to say about this. ‗ Whatever this body is to do and whatever experiences it is to pass through was already decided when it came into existence. This is not to be taught to all. Even if we tell them, it will only lead to endless discussion‗.

A tragic story- The case of disappearing Mutual Fund Advisors Posted by Muthu on July 2, 2010 Common Shah is a typical small investor—he knows a bit about markets, had a unit-linked insurance plan (Ulip) that he had been (mis)sold (don‘t we all have them) and some mutual fund (MF) units invested monthly via systematic investment plans (SIPs).

His agent was a neighbourhood adviser—MFWallah—and you could buy fixed deposits, MF, and initial public offerings from him. In his first meeting with Shah, MFwallah had said that business was very competitive and he had to survive on the upfront commissions received but the customers were sometimes asking for a cut from that. The recurring commission, trail, was too small to amount to anything—basically would take care of his chai-wai expenses. The margins were getting squeezed thanks to the big brokers who opened shop all around and could give snazzy brochures and product spiel. He told that he was more or less at the bottom of the distribution pyramid, getting the minimum brokerage while his bigger counterparts got twice or thrice more than him and the regulator, too, was not making life easier with unique identification number, markets participants and investors identification number, know your customer (KYC), and so on. MFwallah wanted to sell insurance to increase revenues but could not. There was only talk of sales, incentives and yes, the trips abroad. MFwallah was no Gandhi, but he wanted to draw the line somewhere—hit-and-run selling was not his cup of chai. His was a small business in a small town and could grow only on referrals and repeat business. His job was cut out: He knew basics of financial planning, tax planning and he advised people to invest in SIPs. Most of his clients went by his word though they could tell if the camera on their mobile phone was 3.2 or 5.1 mega pixels without batting an eyelid but could not tell the difference between a monthly investment plan and SIP if their life depended on it. Like any businessman, MFWallah wanted to maximize profits but never went overboard as he wanted the customers to come back. Suddenly, he went missing a few months after August 2009. He sent a letter to his customers that since the entry load commissions for mutual fund were abolished; he had to give up the business and do something else for a living. His customers, too, forgot about MFs and went on with their lives, they were not interested in opening demat accounts. The stock brokers were interested in day trading and not in advising on MFs. Shah met his banker for advise but was told that he had two choices— either to buy MF new fund offering or buy an Ulip. The banker had no time to sit across and discuss what Shah‘s risk profile or investment horizon was. Managerji had targets to meet. Shah had to literally wriggle out of being sold an Ulip. He asked about New Pension System, the banker glared at him and called someone else to find out what this new thing was and finally asked Shah, do you have PRAN? Shah was perplexed, he believed he was alive and so technically had pran, but he was mistaken. It was not that pran but permanent retirement account number for which he needed to get KYC done (not that three letter word again). Shah went home confused. He didn‘t know what to do and now he didn‘t have somebody reliable to advise him too. He simply bought gold. Gold needed no advisers, demat account or KYC. This story is only partly fictional. In India financial literacy is at a discount. The person who sells a product becomes an important link in bringing the savings to productive channels. The collection from equity MF is hardly 10% of Ulip collection over the last year and about 600,000 MF accounts were closed last year. You don‘t need to be James Bond to tell where the commission is higher and where it is lower. This tells us some important things:

1. Financial products are sold and not bought—and if your neighbourhood adviser is not adequately compensated for his effort, he is just going to leave the business. 2. Regulation is useless if it‘s like closing the window with seven lever locks while leaving the door wide open. Unfortunately we do not have many do-it-yourself investors in India. There is some hand holding needed, of course mis-selling was there, as in any business, but no salesmen means no-selling not right selling. What should small investors do now? Scout around and find a good investment adviser with experience who focuses on the customer‘s wants and financial goals, implement the plan. He also should pay a fee to the adviser/financial planner. There is glaring vacuum that needs to be filled by competent people who are experienced or certified financial planners. It is one thing to regulate mis-selling and quite another to make an adviser unattractive. If the stakeholders do not wake up to this fact, then you could expect to read an article: ―The curious case of the missing mutual funds‖. (Courtesy: Shankar S, Livemint)

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Posted by Muthu on July 2, 2010 It is very important that your Advisor while creating your portfolio, invest in funds that have proven itself over various market cycles, comes from a fund house that has good fund and risk management capabilities in place etc. You may not be aware, that fund houses provides us with additional incentives for positioning and promoting funds that are laggards and have less AUM (Assets Under Management). In effect, a good advisor is penalized for recommending what is good for you. Advisors who recommend what is good for the fund house, reaps more reward. Strange, but it‘s true. We get from fund houses, the schemes that have to be promoted for every quarter, which would be good for them but need not necessarily good for you. It is not that fund houses and advisors were clean, before SEBI penalized the Industry by abolishing entry load. Each and every fund houses came out with various NFOs (New Fund Offers), which are many a time not unique in any way from their existing fund, just to gather assets, at the cost of investor interest. Many came out with close ended funds, which had higher costs, so that they can pay the ‗advisors‘, anywhere between 4% to 6%. Whose money, your money! ‗Advisors‘ were actively encouraged to promote such funds, by meetings conducted in star hotels, with expensive dinner and cocktail parties. Not only that, the reward for ‗top performers‘ included travel to exotic locations across the world. No doubt, majority of the ‗Advisors‘ (Banks, National Distributors and Individuals) actively promoted these NFOs, ignoring what is good for customers, but which added money to their kitty, at the expense of investors.

Do you know that, there are more than 3000 mutual fund schemes already in place in a country where only around 0.8% of the population invest in Mutual Funds? What ‗Advisors‘ did also was, to keep switching your money from one NFO to other NFO under the logic of ‗profit booking‘ and earning upto 12% per annum as commission out of your money. These ‗Advisors‘ many a times did not bring in any fresh money or new investors, but merely churned the portfolio. Is only Mutual Fund Houses and Advisors were the culprits? No, many investors also were culprits. How? Because they demanded that they should be ‗paid back‘ atleast 1% of their investments as the incentive for investing through a particular ‗advisor‘. The ‗advisors‘ who paid back such money regularly was respected for their ‗integrity‘ and given repeated business. Result, they sold investors product which fetches them the highest commission. They paid 1% to investors out of 4% to 6% charged by them. I never understand, how an investor gets motivated by a guy, who charges them 6% and pay back 1%. In this article, we‘re going to learn about a fund house, which has proved itself to be the worst fund house. This fund house launched a fund called ‗JM Agri & Infra Fund‘ two years ago under a ‗star fund manger‘, by name Sandeep Sabarwal. A ‗halo‘ was built up around this fund manager‘s prowess and incentives upto 6% were offered to sell this fund. Many ‗advisors‘ happily sold this product, with out explaining the risks of a sectoral fund, the fund house‘s weak fund and risk management capabilities, but just under the halo of one man, Sandeep Sabarwal. I know CFPs who aggressively sold these funds. That is why I always advise you not to get merely carried away by CFP certification, even though I‘m possessing one. There are good advisors in the market without CFP certification and there are bad advisors with CFP certification too. If you‘ve invested, Rs.1 Lakh in the above fund, which came around 2 years ago, your money is now worth only Rs.30,000/-, a loss of 70%, despite the last year bull run. So much so far for the Sandeep Sabarwal‘s halo and investment prowess. Do you know that what Sandeep Sabarwal is doing now? He has become the PMS Head one of the leading and ‗reputed‘ broking house and continues to manage the money of cream of the mortals, HNIs. Let us listen to Moneylife. ―It is hard to figure out which mutual fund schemes will be among the best. But, for some strange reason, it is easy to see which fund house is the worst. JM Financial Mutual Fund has created a unique position for itself in the mutual fund industry. Its schemes continue to be among the worst performers in whichever category they belong to and virtually across any time period. Be it equity diversified funds, index funds or balanced funds, JM‘s schemes figure right at the bottom of the performance charts in all categories. It is hard for any fund house and its schemes to be such consistent underperformers. Among the 20 worst-performing equity diversified funds over the past one year, JM has taken the cake by throwing up as many as five schemes. All these schemes have grossly underperformed their respective benchmarks (see table). These include the JM Hi Fi Fund (-8%),

JM Equity Fund (3%), JM Multi Strategy Fund (7%), JM Large Cap Fund (7%) and JM Contra Fund (8%). In the equity diversified funds space, only one out of its bouquet of 10 schemes has managed to beat its benchmark. While it has underperformed on a one-year basis, JM Multi Strategy Fund has provided returns of 22% since inception, compared to its benchmark‘s (BSE 500) return of 16.7%. All others have failed to even play catch-up with their respective benchmarks, when their performance is calculated since inception. Take, for instance, JM Core 11 Fund, launched on 5 March 2008, which has a very tempting investment strategy. This Fund would have a portfolio of exactly 11 stocks. Each of these 11 stocks would be invested to the extent of 9.09% at the time of purchase. The portfolio would be rebalanced every 15 days to get all stocks back to the limit of 9.09% to prevent any stock going above the targeted concentration range. For all its fancy strategies, the Fund has managed to put in a ridiculous performance, earning -31% returns since inception, while its benchmark, BSE Sensex, has yielded 1%. JM Contra Fund has also let investors‘ money go down the drain. The objective of this Fund is to ―invest in a contrarian manner‖ in equities. Its process is to avoid momentum stocks and overowned sectors, thus ―improving risk profile and play on the relative attractiveness of mid-caps and large-caps.‖ Launched on 12 September 2007, it has given a return of -22% since inception, compared to its benchmark, BSE 500, which has returned 3.6% in the same period. It has lived up to its name. Among the other underperformers are the JM Hi Fi Fund and the JM Emerging Leaders Fund. The investment strategy of the JM Hi Fi Fund is to ―participate in India Building story‖ by taking exposure to high-growth industries of infrastructure, real estate and financial services. It has managed -14% returns since inception. JM Emerging Leaders Fund, launched in August 2005, aims to identify new high-growth businesses at fair valuations and also take exposure in companies that are undergoing a turnaround/revival in profits or in stocks that attract a low P/E multiple relative to peers in the same sector. The Fund‘s strategy is to pick stocks which could ―outperform the markets and hence generate a favourable Alpha‖ due to their high growth potential. Unfortunately, its performance has not done justice to its strategy, yielding -5% returns since inception compared to 17% for its benchmark index, BSE 200. Even in the micro- and small-cap category of funds, JM‘s schemes managed to underperform the market at a time when micro- and small-cap-oriented funds were shining brightly—as was the case during the recent bull market. The JM Emerging Leaders Fund was among the worst performers. JM has only one index fund in its portfolio. It has somehow managed to make a mockery of the passive investing concept too. Launched on 2 February 2009, the Fund has returned 42% since inception, while its benchmark, S&P Nifty, has surged 56% during the same period. Over the past one year, the Fund has earned 4%, while the S&P Nifty has risen almost 10%. If fund managers make a hash of even passive investing, what hope would investors have of getting decent returns from its actively managed funds? ― (with inputs from Moneylife)

Archive for August, 2010 Japan Today Posted by Muthu on August 31, 2010 Yesterday one young man walked into our office and invested one third of his salary in SIP. If you think he is in a high tax bracket, you are mistaken. His earnings are moderate. Despite that he is investing a very significant percentage of his salary. Felt good that our inputs are partly responsible for his inspiration. He would end up wealthy and is glad to have him as our client. May his tribe grow. Gross domestic product figures for the second quarter show that China has overtaken Japan as the world‘s second largest economy. I have been travelling while on leave from the university in Tokyo where I teach, and was in Paris when the news broke last week. My first reaction, frankly, was one of relief. In English, perhaps, one might say it was ―a load off my shoulders.‖ In Japanese, people use the phrase ―right shoulder up‖ to describe a graph that keeps going up, with each year‘s figures rosier than the last. Of course, if that climbing line is someone‘s right shoulder, it means the left is languishing somewhere out of sight. We‘re seeing only half the person. Reading the papers that morning at breakfast, I saw a graph indicating the point in the 1990s when Japan‘s G.D.P. had peaked, after which the line started jagging down and up, over the long run comparatively levelling out. The relief I felt had something to do with the person I saw there, no longer so awkwardly bent. Finally we know where Japan stands — on level ground. It‘s not difficult to find similar graphs. One shows Japan‘s natural population growth. Every year from 1910 to 1977, the population increased by more than 1 percent. Then the growth began to slow. In 2005, for the first time, the population shrank. Right shoulder down. Another graph on rice production from 1878 to 1980 shows the point in the 1960s when Japan‘s rice production began to decline. Decades before China overtook Japan, the country had started downsizing, preparing for a smooth landing. Three years ago, I saw a television program about a new breed of youngster: the nonconsumer. Japanese in their late teens and early 20s, it said, did not have cars. They didn‘t drink alcohol. They didn‘t spend Christmas Eve with their boyfriends or girlfriends at fancy hotels downtown the way earlier generations did. I have taught many students who fit this mold. They work hard at part-time jobs, spend hours at McDonald‘s sipping cheap coffee, eat fast food lunches at Yoshinoya. They save their money for the future. These are the Japanese who came of age after the bubble, never having known Japan as a flourishing economy. They are accustomed to being frugal. Today‘s youths, living in a society older than any in the world, are the first since the late 19th century to feel so uneasy about the future. I saw young Japanese in Paris, of course, vacationing or studying, but statistics show that they don‘t travel the way we used to. Perhaps it‘s a reaction against their globalizing elders who are still zealously pushing English-language education and overseas employment. Young people have grown less interested in studying foreign languages. They seem not to

feel the urge to grow outward. Look, they say, Japan is a small country. And we‘re O.K. with small. It is, perhaps, a sort of maturity. The rest of the world‘s population is still exploding, and we are coming to see the limits of our resources. The age of ―right shoulder up‖ is over. Japan doesn‘t need to be No. 2 in the world, or No. 5 or 15. It‘s time to look to more important things, to think more about the environment and about people less lucky than ourselves. To learn about organic farming. Or not. Maybe you‘re busy enough just living your life. That, the new maturity says, is still cooler than right shoulder up. Of course, some people don‘t see things this way. The old guard — those politicians who led the charge in the heady 1970s and ‘80s and fought back (however pointlessly) against the economic stagnation of the ‘90s — still want to compete. Those men, best represented in my view by Tokyo‘s governor, Shintaro Ishihara, speak as if they are under siege. They hate being beaten by China. For them, it seems, maturity only means striving to be No. 1. They won‘t change. They are too settled in an earlier stage of development, in a dream of limitless growth. But society matures around them. The new maturity may be the province of the young Japanese, but in a sense, it is a return to something much older than Mr. Ishihara and his cohort. Starting in the 19th century, with the reign of the Meiji Emperor, Japan expanded, territorially and economically. But before that, the country went through a 250-year period of comparative isolation and very limited economic growth. The experience of rapid growth was a new phenomenon. Japan remembers what it is like to be old, to be quiet, to turn inward. Freshly overtaken by China, Japan now seems to stand at the vanguard of a new downsizing movement, leading the way for countries bound sooner or later to follow in its wake. In a world whose limits are increasingly apparent, Japan and its youths, old beyond their years, may well reveal what it is like to outgrow growth. (Source: Newyork Times- Japan and the Ancient Art of Shrugging: Norihiro Kato is a professor of Japanese literature at Waseda University. This article was translated by Michael Emmerich from the Japanese).

My Little Secret: Just Keep Planting Posted by Muthu on August 29, 2010 For the last 3 ½ years, since I chose to be on my own, in an uncharted path, there have been lot of discouragement, snide remarks etc. I also used to have self doubts as to whether am I doing the right thing in following my passion. There were months when we did not have literally a single client walk in or even one transaction. Also there have been lot of regulatory changes like abolishment of sales commission etc. Whenever my chips were down due to self doubt, I used to keep reading a real life incident which I read few years ago, which immediately connected an inner chord with me and has stored the same in my draft folder.

I used to read this to inspire myself that there would be a way out of every challenge. Today I thought, why don‘t I share my little secret with you. Time has come for it to come out of my draft folder and get into public domain. Once you read this true story, you would understand why I always keep using in my writings the terminology or analogy of ‗Sowing Seeds‘. Since I read this real life incident few years ago, I‘m unable to recollect and acknowledge the source. Please read on. Paul Rokich is my hero. When Paul was a boy growing up in Utah, he happened to live near an old copper smelter, and the sulfur dioxide that poured out of the refinery had made a desolate wasteland out of what used to be a beautiful forest. When a young visitor one day looked at this wasteland and saw that there was nothing living there — no animals, no trees, no grass, no bushes, no birds…nothing but fourteen thousand acres of black and barren land that even smelled bad — well, this kid looked at the land and said, ―This place is crummy.‖ Paul knocked him down. He felt insulted. But he looked around him and something happened inside him. He made a decision: Paul Rokich vowed that some day he would bring back the life to this land. Many years later Paul was in the area, and he went to the smelter office. He asked if they had any plans to bring the trees back. The answer was ―No.‖ He asked if they would let him try to bring the trees back. Again, the answer was ―No.‖ They didn‘t want him on their land. He realized he needed to be more knowledgeable before anyone would listen to him, so he went to college to study botany. At the college he met a professor who was an expert in Utah‘s ecology. Unfortunately, this expert told Paul that the wasteland he wanted to bring back was beyond hope. He was told that his goal was foolish because even if he planted trees, and even if they grew, the wind would only blow the seeds forty feet per year, and that‘s all you‘d get because there weren‘t any birds or squirrels to spread the seeds, and the seeds from those trees would need another thirty years before they started producing seeds of their own. Therefore, it would take approximately twenty thousand years to revegetate that sixsquare-mile piece of earth. His teachers told him it would be a waste of his life to try to do it. It just couldn‘t be done. So he tried to go on with his life. He got a job operating heavy equipment, got married, and had some kids. But his dream would not die. He kept studying up on the subject, and he kept thinking about it. And then one night he got up and took some action. He did what he could with what he had. This was an important turning point. As Samuel Johnson wrote, ―It is common to overlook what is near by keeping the eye fixed on something remote. In the same manner, present opportunities are neglected and attainable good is slighted by minds busied in extensive ranges.‖ Paul stopped busying his mind in extensive ranges and looked at what opportunities for attainable good were right in front of him. Under the cover of darkness, he sneaked out into the wasteland with a backpack full of seedlings and started planting. For seven hours he planted seedlings. He did it again a week later.

And every week, he made his secret journey into the wasteland and planted trees and shrubs and grass. But most of it died. For fifteen years he did this. When a whole valley of his fir seedlings burned to the ground because of a careless sheep-herder, Paul broke down and wept. Then he got up and kept planting. Freezing winds and blistering heat, landslides and floods and fires destroyed his work time and time again. But he kept planting. One night he found a highway crew had come and taken tons of dirt for a road grade, and all the plants he had painstakingly planted in that area were gone. But he just kept planting. Week after week, year after year he kept at it, against the opinion of the authorities, against the trespassing laws, against the devastation of road crews, against the wind and rain and heat…even against plain common sense. He just kept planting. Slowly, very slowly, things began to take root. Then gophers appeared. Then rabbits. Then porcupines. The old copper smelter eventually gave him permission, and later, as times were changing and there was political pressure to clean up the environment, the company actually hired Paul to do what he was already doing, and they provided him with machinery and crews to work with. Progress accelerated. Now the place is fourteen thousand acres of trees and grass and bushes, rich with elk and eagles, and Paul Rokich has received almost every environmental award Utah has. He says, ―I thought that if I got this started, when I was dead and gone people would come and see it. I never thought I’d live to see it myself!‖ It took him until his hair turned white, but he managed to keep that impossible vow he made to himself as a child. What was it you wanted to do that you thought was impossible? Paul‘s story sure gives a perspective on things, doesn‘t it? The way you get something accomplished in this world is to just keep planting. Just keep working. Just keep plugging away at it one day at a time for a long time, no matter who criticizes you, no matter how long it takes, no matter how many times you fall. Get back up again. And just keep planting.

Kalaivani and Thathva Bodha Posted by Muthu on August 28, 2010 My friend sent me the transcripts of a Washington Post‘s NRI journalist‘s article about a poor girl who is working in ‗Giri Trading Agency‘ near Kapaleeswarar temple in Mylapore, Chennai. Felt like sharing the same with you. After a simple Temple Darshan we entered ―Giri Trading ‖ and started searching for this Book on Thatva Bodha.

We found many people buying various books and CDs and from their smart walks and accumulation of CDs from Bhajans to Bombay Jaishree, sent a nice feeling in us, that, we have come to the right place indeed. I was looking for this Book while my wife started collecting Bharathiar‘s songs and MS‘s Music. I searched everywhere for this book. There was this Girl Kalaivani, standing next to the Cashier, sincerely watching all our movements. A black Girl, should be from a nearby Village, might be 17 or 18, should not have crossed 8th Standard, and might be out of poverty she is here. All my Journalist‘s brain unnecessarily calculated about this gullible girl and though she was repeatedly watching me, I ignored her and started searching for ―Thathva Bodha‖. I saw many books from‖Sandhya Vandanam‖ to Swami Vivekananda‘s Chicago Speech‖ but having spent a good 40 minutes, I looked at her.She also looked at me curiously. I asked her, knowing fully well that such a girl cannot have any idea of anything, leave alone Thathva Bodah. ―Sir,Shall I help you?‖(in Tamil) ―Yes I am looking for Thatva Bodha?‖ ―Sanskrit Text or English /Sanskrit?‖ God. She knows. ―Sanskrit and English‖ ―Do you like to have the Publication from Chinmaya Mission or Indu Publications or by Ramakrishna Mutt?‖ ―I don‘t know. I just want to only learn you see. I don‘t really know indeed‖ ―Do you read Tamil Sir?‖ ―Yes I am a Tamilian ‖ (thinking to myself how most of my life time I like to act in most other places that I am not). ―Then Sir, you can take this‖. She ran to the Shelf where I had searched for 30 minutes, removed the books in the front side and came out with a book in Tamil. ―This one in Tamil by N.Sivaraman by Indu Publications infact is simple and wonderful. You have the Sanskrit Text too inside.‖ My God, Why did I under estimate such a genius? Just because of my arrogance that I am an NRI. Or just because I presumed such a black, gullible girl, who would have come for this job out of absolute poverty, would not have any idea of ―Thatva Bodha‖ I decided to change my attitude and realise that I am absolutely an ‗Idiot‘ at this moment in front of this wonderful girl and submitted myself in all humility.

―Madam, I really don‘t have any idea of even who wrote Thatva Bodha till Yesterday. I just attended a lecture on this subject and was fascinated by the lecture and hence…‖ ―Did you attend Goda Venkateswara Sastri‘s lecture in Bharathiya Vidya Bhavan?‖ ―Oh God! How did you know?‖ ―He regularly takes classes on such subjects. Infact he is one of the best sir, in the city on such subjects.‖ ―You are interested in such subjects?‖ ―Yes Sir, I read a lot about Swami Vivekananda and Ramakrishna and Thathva Bodha incidentally is my favourite Subject‖. ―You mean to say you have read Thatva Bodha?‖ ―I have read this one by Sivaraman and once you read it you won‘t feel like keeping that book on the table at all.‖ ―Why what is so great about this book?‖ ―Sir, you must be joking that you don‘t know about Thatva Bodha.‖ ―Really I accept my ignorance.‖ My wife was watching from the corner, admiring all her CD collections. ―Sir, according to me if you read this it gives the entire Vedanthic Saramsam and one would become a bit more humble in life leaving Ahamkaram (Ego) once for all.‖ ―Is it a fact that reading this simple book one would get so humble?‖ ―Ofcourse one should be involved totally into the text, needs lot of conviction and devotion.‖ My wife joined the conversation and she felt this girl is indeed a very very talented intelligent girl. So she told me ―Why don‘t you interview her for Washington Post. Why at all you should think of Paris Hilton?‖ I also felt that I owe something to her. So I asked her whether she can spare sometime for an interview. She politely refused saying ―My boss is to give me permission, besides many people are looking for guidance like you and hence I have to go.‖ ―What is your name anyway?‖ ―Kalaivani‖ My wife‘s admiration for her devotion to duty and her total involvement in her work, made her go direct to the boss. ―Sir, that girl Kalaivani…‖

―Yes, very hard working girl.‖ ―This is my husband Viswanath .‖ ―Nice meeting you Sir.‖ ―He is the Senior Journalist in Washington Post.‖ Boss stood up. ―Washington Post?‖ ―Yes Sir. I would like to interview this girl. I am highly impressed with her ethics.‖ Boss called her. Time was 5:45 pm. ―Kalaivani, they have come all the way from USA, they would like to spend sometime with you. Can you?‖ ―Sir, there are so many customers waiting for some guidance, it is a rush time. If they can come again tomorrow…‖ ―Ok Ok, I can come again tomorrow.‖ I again came next day morning leaving all my appointments with Times of India just to see this girl. It was no rush hour. My wife and myself found out… Kalaivani is from a nearby village near Arcot. She has 5 sisters. She is the eldest one. Her father was a drunkard and he died a few years ago caring for none of them. Her mother used to work as a helper in Masonry and passed away two years back, leaving all the 6 on the streets. This girl who had completed her 9th standard decided to search for a job and ‗Giri Trading‘ came forward to help her out. She brought all her 5 sisters with her and with her meagre salary she is taking care of them. All the 5 sisters are going to a nearby corporation school. ―Kalaivani, but when did you get this enthusiasm to learn about Thatva Bodha?‖ ―Sir after joining here, I decided that the best way to be of help to the customers is to know the subject first. I took small Books on Swami Vivekananda and started reading. I found the subject so fascinating. I decided to read other books in Tamil like Bagavad Gita and Viveka Choodamani. Thats how.‖ ―What is your salary?‖ ―Rs. 2500 Sir‖ ―Are you able to manage all your expenses with the 5 sisters?‖ ―Not at all sir but the boss helps me a lot.‖ ―What is your aim in Life?‖

―I want all my sisters to get education then they would get easily employments is it not?‖ ―If I give monthly Rs. 10000 for meeting all your expenses. would that suffice?‖ ―It is indeed too much but that also I would accept only through my boss.‖ We took her to the boss and told him that we would like to send Rs.10000 every month so that all her sisters‘ education would be completed. Boss said ―She deserves it sir. You can trust me I will hand over the amount to her every month or alternately you can open an account in her name and start transferring.‖ My friend John Paul, who is the Regional Manager of Times of India, had also come with me. He said ―You have done a good thing.‖ My wife said ―I pray that Karpagambal helps Kalaivani to become an expert in Vedantha and start giving lectures in USA. We can arrange for her lectures.‖ We left wonderstruck. If we go into the interiors of Bihar and Barrackpur, how many more Jewels can be found. I really became humbled.

Your SIP support & some musings Posted by Muthu on August 27, 2010 We wrote on August 1‘st about our passionate SIP appeal and requested your support for giving thrust to our SIP momentum. Well how can I convey my gratitude? The SIPs we‘ve received so far and the ones we are going get in next 2 days makes this month the largest number and value of SIPs we‘ve ever done so far. Not only that our last 5 months contribution of SIPs is around 170% of what we were able to contribute in our first 3 years of professional existence cumulatively. This assures us that if we‘ve value to contribute, sooner or later we would be recognized by the market. We‘re lucky to be recognized sooner because of you. Despite some of our relatives who made snide remarks, looked down on me and boasted about their being busy and labeling me lazy, I was determined not to give up. Well all these people can see is the plant or tree. They forget the fact it takes time to sow seeds. One needs intelligence to recognize the intelligence of the other person. Unfortunately these people lack it. For those of you who may not be aware of our professional model, we‘ve never made a single cold call in the last 3 ½ years of our existence and we were and are keen to build the profession based on referrals, coming through our existing clients, self referrals through our web portal and

from the website of FPSB India, who is the conferring authority of Certified Financial PlannerCM(CFPCM) certification in our country. We are lucky enough to be recognized by the regional visual and print media. This helped in strengthening our credibility. We‘ve no intention of pursuing any opportunities in this regard. If it has to happen, let it happen on its own. Interestingly, couple of web portals including one famous one approached me for writing articles. They happened to visit my website and liked what I write and so provided me a chance. I did not take up those opportunities. Let me explain why. I‘m not a creative or original thinker, though I‘m trying to see if I would be able to horn these skills. I‘m a voracious reader and is good in sharing (duplicating) what I read with some value addition from my part. I‘m not violating any IP rights because I share only what is available in public domain, duly acknowledging the source, wherever required. My strength is editing and sharing things in the way which would be interesting and informative to the readers. My weakness is I‘m unable to think originally on my own or is able to think originally only to a limited extent. One lady of a popular web portal asked me why I‘m refusing their opportunity explaining how many million hits they get every month vis-à-vis me having a limited audience of couple of hundreds a day. I told her I would get back if I‘m able to think originally, which is more unlikely. She further told me that what impressed them was my skeptical and irreverential style. I told her that I do not write consciously like that. Probably my writing reflects my personality. I was very poor in English during my school days. I was under the care (or lack of it) of various relatives due to domestic circumstances. I attended my public exams with an empty stomach. One distant relative of mine, made fun of me along with one of my close relative family that I do not know the difference between ‗do‘ and ‗does‘. Well my friend, you have well to do, educated parents and had a nice childhood. Not all are lucky like you. Count your blessings and do not look down on less privileged. We had one English teacher by name Ms.Elizabeth, who was not generally liked by students. Sensing my pathetic situation, she one day called me to the teacher‘s room and told me to never give up in life and have trust in God. She further told me not to worry about my weak English or lack of knowledge of grammar. She told me if I keep reading, I would be able to write well even with out the knowledge of grammar. Till date, I do not know English Grammar theoretically, but somehow able to write and talk without much grammatical errors. Thank you teacher, for your timely encouragement. I just want to pose a challenge to those who criticized me for ‗doing nothing and being lazy‘ during our first 3 years of professional existence. Like I moved from BPO to ‗Personal Finance‘, from the security of employment in the experienced field to being on my own in my chosen field, you try doing the same. Then you would understand the difficulties of it. It takes lot of conviction to follow one‘s passion and an uncharted path. In future atleast do not criticize people who follow their passion, if you cannot encourage them. I‘ve been writing about my perspective of America. I got calls and mails from some Americans themselves agreeing with our views. One American who is having a Personal Finance blog asked me for giving link to my articles. Well ‗virtually‘ we are one small world.

As always, my thoughts wander. Coming back to SIPs, we want to focus more on making people participate in the equity market through SIPs. It is the time (duration) which matters in an equity market of one of the fastest growing economies in the world and timing does not matter. Our economy is expected to grow phenomenally in the decades to come. If someone is capable of making lumpsum investment and not worry for atleast 10 years, he would be amply rewarded. Why I want to focus on SIP more than lumpsum is SIP is and should be possible for all. The ideal investment period is 20 years. It is duration and not the amount that matters. The markets are cyclical. It will enthuse you, scare you, make you feel bored etc. Any good investment is boring. There would be bull markets, euphoric markets, bear markets, depressed markets, flat and ‗going no where‘ markets. In the course of your SIP tenure, it is most certain you will go through all of these. As an icing on the cake, there can be occasional scams too. Become little saintly! Develop detachment. Never react to any of the above scenarios and stay in your charted course. Please note that markets have provided excellent annualized returns despite all these. Atleast we have 3 decades data for benchmark index and more than last 15 years data for well performing equity mutual funds. Never ever stop your SIP or redeem your investments till the time of maturity. Your detachment and control of emotions would make you wealthy beyond your dreams. Last but not least, forget about equity investments if your investment tenure is less than 10 years. For anything lesser than that, your neighbourhood stock broker is waiting for you. He is ever available to trade for you. Take your ‗funny money‘ there and you would definitely come out ‗richer‘ with experience of what not to do with your money. The choice is yours. Good Luck.

Destruction of Mutual Funds and the way forward Posted by Muthu on August 27, 2010 Its one year since our mutual funds industry has been killed (not exactly because still some amount of life is left) by making it a no commission product. India is the first country in the world to abolish sales commission altogether and make all funds compulsorily as ‗no load‘ funds. For those of you may not know, earlier you were paying of 2.25% of the invested amount as ‗Load‘ or Sales commission, which was automatically deducted from your account and paid to the advisors. Some who are living well above the ground, sitting on ivory towers may argue that ours is best regulated industry and investor friendly country in the world. Before coming to this conclusion, we‘ve to look at some hard facts. In a country of 1160 million, with around 300 million people having ability to save and invest (even if it is small sum), there are roughly around 8 to 10 million investors in the mutual funds. This works out to abysmal 0.86% of the total population and 3.33% of the investible population. A great degree of financial inclusion! No doubt, the numbers speak for themselves.

India has the highest proportion of self employed and entrepreneurs in the world. That is why we are growing despite our governments. Ofcourse, we cannot forget the fact that it is Dr.Manmohan Singh in early 1990s created the atmosphere for entrepreneurs and self employed to thrive. Before that, Capitalism was such a bad word and Socialism was the most accepted ideology. Nothing wrong in talking about equitable distribution of wealth. But wealth has to be first created for distributing. No individual would create wealth, unless there is an inbuilt motivation and reward for him to do so. This is the core of capitalism. There were around 40,000+ self employed advisors in the country, in addition to Banks and National & Regional corporate advisors. Post abolition of sales commission, the number of self employed advisors is pegged around 8000 for whole of the country. A whopping drop or wiping out of 80% of advisors. The only remuneration majority of them get is ‗trail commission‘. For those of you who may not know, mutual funds have an annual expense ration of around 2% of the corpus, which is not directly debited to clients account, but is indirectly borne as this 2% is divided by 365 days and is adjusted in daily NAV, which includes fund management charges, RTA (Registrar and Transfer agent) charges, custodian charges, brokerage for transactions, selling and administrative expenses etc. Out of this around 0.4% to 0.5% is paid annually to advisors as ‗trail commission‘. It is expected that this percentage may increase in future. Abolition of sales commission has not only removed 80% of the people from the profession but has also created significant entry barrier. As there is no sales commission, people who are able to create income in the longer run alone can survive in this profession. A minimum of 5 years+ is required for an advisor to create monthly income to take care of his life style. In a country like ours, how many of us have the capacity to live with out any decent (survival) income for atleast 5 years? So people who are focussing mainly on this profession have to wait for earning good income. Don‘t mistake me, if someone can stay put in the profession for more than 5 years, then the reward is worth the wait as 0.4% to 0.5% of the corpus is earned as income per annum. If corpus is X, then higher the X, higher the income. So if someone can scale up his X, then he would have handsome income. The reward is directly in proportion to creation of wealth for customers. A right way to remunerate. I understand from industry sources there are only 30 to 50 active individual advisors in Chennai, which has a mutual fund investor population of around 2.5 Lakhs. The number of active advisors was around 1000+, before the abolition of load. Please note that these are the data I obtained from the industry sources, which may not be 100% accurate but gives us a fair idea of where we stand. Many small investors do not have advisors to guide and service them and hence exiting the industry. The irony is mutual funds are the least expensive, most transparent, professional managed, zero cost (other than annual expenses) no risk (other than market risks) way to participate in the growth story of our economy in the decades to come. If you look at, other than this 0.86% of the population, it is FIIs (Foreign Institutional Investors) who have benefited most out of our growth in economy. As I‘ve written in the past well managed mutual funds have given returns as high as in the range of 26% to 30% per annum during their last 15 years of existence, post the liberalization. I would like to add here that the benchmark index Sensex itself has given an annual return of around 18% in last 30 years of existence. Even if you‘ve been investing in

Sensex just Rupees one thousand every month for the last 30 years, you would have invested totally Rs.3.6 Lakhs over a period of 30 years, and your corpus would be worth Rs.61 Lakhs today. Power of compounding! I passionately feel that Indians should participate in India‘s growth story which would pan out in the next few decades to come. That passion is what which made me come from a totally different industry into ‗Personal Finance‘. It is not that I‘m an altruist. But I‘m willing to invest my time, energy, knowledge, notional loss of my employment income to build our wealth along with that of clients. I‘m confident that we bring into table a lot of value, competence, knowledge, insights and service. I wish that atleast 1% of sales commission is brought back, if not for our sake (we are more confident about trail income), but to ensure that more self employed professionals come into this industry. Otherwise this industry would help only a small percentage of population to get wealthy as the reach would be limited. I‘m also wary of stock brokers, insurance agents, FD sellers, Chartered Accountants (in the name of their wife so that they maintain their ‗professional ethics‘) taking this investment advice as an additional source of income. Many of the above, lack domain knowledge go for instant gratification rather than long term income model wherein one‘s income grows along with clients wealth, do not bring in the values, competence and above lack insight and passion. It is only money which is driving factor for these people and not the love for profession. Many of these people just know name of some products, but cannot differentiate between a value, growth, sectoral, thematic, cap oriented, diversified fund, also cannot understand the strategy and performance of various funds and advice course correction when required. Their knowledge of debt funds and the way they work is zilch. I see most of the Chartered Accountants taking insurance and mutual fund agency in the name of their wives and sell blindly these products to their trusting clientele. Desire, if not backed by competence, knowledge and insight, is mere greed. As the numbers of practicing chartered accountants are less in the country, they would be better of focusing in their core profession. Mere greed may help them but not their blindly trusting clients. I wish and hope that people who genuinely love this profession and hence wants to make money through this come into the profession rather than people who see this as just a source of additional income. To encourage more passionate people to come into this profession, I sincerely hope that regulator would take a relook at the remuneration model and bring in some form of reasonable, transparent and well regulated sales commission.

Crony Capitalism: Privatising Gains and Socialising Losses Posted by Muthu on August 26, 2010 Capitalism is the dominant economic system in the world today. Despite the events of the last three years, it has proven itself to be an effective system for economic and material prosperity. The richest countries in the world have capitalist systems, as do the fastest growing emerging economies (China is not officially a capitalist society but it is one in reality).

Capitalist systems need other elements to work properly. First, the system is very unequal in terms of its income distribution. So it is necessary for governments to tax and redistribute some of the wealth – all countries have this to varying degrees. Second, capitalism needs an effective set of rules and regulations. This is especially the case in the financial markets area. Over the last three years, we have witnessed how a lack of effective regulation nearly brought down the global financial system. What makes capitalism work? One of the most important elements is having the right incentive structure. Good behaviour should be rewarded while bad behaviour should be punished. A company that produces good quality products at reasonable prices will be rewarded with higher profits. Similarly a company that produces poor quality products is likely to fail in the long run. A company always strives to make better products more efficiently. If they don‘t, another company will, and take all their market share. The bottom line is that companies must have the threat of going bust. When it comes to banks, things are a little different. Banks hold citizens‘ money, so we must ensure that they can always fulfil those liabilities if need be. As a result, the government will tightly regulate what banks can and can‘t do, to ensure they are solvent. In the event they go bust, governments will reimburse depositors (up to a certain amount). The large international investment banks make significant sum of money from trading profits. It can be in the hundreds of millions of dollars per day. Their trading operations range from executing client orders (and taking a commission) to make their own bets on which may markets will go (known as prop trading). Prop trading is a risky business. There is a risk of losing money, much like is the case for any retail investors who buy stocks. As individual investors, we know this risk and accept the loss if our stocks turn out to be bad. Banks can get it wrong too. And they did. Banks took large losses on trading bets that went wrong, particularly in the mortgage markets. What happened? I‘d like to say that the banks went bust, were punished for the behaviour, and the next bank didn‘t dare make the same mistake. But no, this is the exact opposite of what happened. Instead, governments around the world pumped money into the banks, bailing them out, and effectively absorbed their trading losses. Today they are back to record making profits, but I don‘t see the taxpayer getting any of that back. I am fully supportive of individuals, businesses, and funds using the markets to make a profit. The more market participants we have, they more efficiently they function. What‘s important is that people who invest in the market have the risk of losing money. This ensures they always try and make sound investment decisions. Imagine if you bought a stock. If it goes up, then you make a profit. If it goes down, the government bails you out and you don‘t lose anything. What would you do? Probably buy a lot of stocks. After all, it is risk free for you. Well, this is exactly what happens with the banks. They take high risks so that they end up with a large profit or a get a bailout and lose nothing. This is exactly the kind of behaviour that leads to unstable financial markets. If we want to prevent the next crisis, we have to ensure that banks are not such risky entities. The taxpayer should not back entities that want to make bets in financial markets. Otherwise, their incentive structure is flawed. Those institutions that wish to invest in the markets should be separate from the banks, and not given a bailout in case their trades go bad. Capitalism can be an excellent system with the right incentive structure in place. What we have now is a crony capitalism whereby gains are privatized but losses are socialized. Let‘s

hope governments and regulators around the world recognize this and act before the crisis comes. (Courtesy: Asad Dossani, Equitymaster)

My Income is Low but I want to Retire Rich Posted by Muthu on August 26, 2010 This is the question I often get from people who are in the income range of around Rs.10,000/- a month. They are convinced that there is no way they can become wealthy. When I did some programs in TV on ‗Personal Finance‘, many of the technicians who are earning the salary in the above range used to discuss this with me after the program is over. Well let us assume that these people are graduates and do not pursue higher education beyond that and start their career at the age of 22. By the time they turn 25, their salary would have touched the Rs.10,000/- mark. It would be appropriate to share here, there are skilled but under educated people like carpenters, masons, auto drivers and many small time entrepreneurs like tea stall owners, petty shop owners also earn this sum. Some of you may have here question regarding my yesterday‘s article wherein I‘ve mentioned 77% of the people in the country is earning less than Rs.600/- per month. So how come these people are then earning then Rs.10,000/- a month? Well India is a (Sub) Continent. It has many economies. For example, eight states in India- Bihar, Uttar Pradesh, West Bengal, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa and Rajasthan are poorer than top 26 poorer countries of Africa, the dark continent known for poverty, famines and wars. It is pathetic to note that these states have 421 million people who are as poorer as their poorest African counterparts. It is ironical that all these 26 poorest nations in the world have a population of only 410 million, whereas the poor from our just above 8 states over take them in numbers. Well there are economies like Tamilnadu, where it is increasingly difficult to get a labourer for working. My driver is earning Rs.8000/- a month and maid who work for 2 hours a day gets Rs.2000/- a month. She works in three houses and we have to adjust our routine according to her timings. Her husband is working a security guard in an apartment. Together they may earn above Rs.8000/- a month. A carpenter earns Rs.450/- a day and a mason Rs.550/- a day. They do not work for more than 8 hours. Even for my driver, whenever (almost daily) he works for more than the fixed hours, an incremental rate has to be paid per hour.

For infrastructure projects and construction activities in Tamilnadu, increasingly labourers are being brought from states like Orissa and Bihar, as the state simply do not have the manpower from the local pool. The state has 40,703 factories, the largest in the country. Nokia‘s plant in Chennai is the world‘s largest mobile handset manufacturing factory. Tamilnadu constitutes for 50% of the total country‘s leather exports, largest electronics manufacturer, second largest automobile producer, third largest exporter of IT & BPO services. It has the largest number of educational institutions in the country. You may also be surprised to know that Tamilnadu is the most urbanized state in the country and social inequality is very less and opportunities are made available to all irrespective of caste or religion, thanks to the social reforms movement of the last century. I‘m not a brand ambassador for Tamilnadu. Being born in this state, I know about it better. That‘s all. There are other equally well developed states like Gujarat, Punjab, Delhi etc. The point I‘m trying to make we‘ve so many sub economies in the country and the growth is not evenly distributed. It is like having economies like Australia, Bangladesh and Somalia in the same country. Coming back to our original discussion, what a person earning Rs.10,000/- a month to do for retiring rich. He has to compulsorily allocate 10% of his income for the following. For all practical purposes, he should consider the balance Rs.9000/- as his real income. Since many a times, he would be the soul bread winner of the family, he has to take atleast his 10 years of future income as term insurance. Rs.12 Lakhs term insurance for a 25 year old would not cost more than Rs.250/- a month. Another Rs.250/- a month he should provide for taking a health and personal accident cover for him and his family. The above two take care of major unexpected contingencies of Life. The remaining Rs.500/- per month, he has to invest for his estimated working tenure. Assuming he would be working till 60 years, he has to go in for a SIP (Systematic Investment Plan) in a good equity fund for 35 years (from the age of 25 to 60) for Rs.500/- per month. By doing this, at the time of retirement, assuming an annualized return of 18%, he will have whopping Rs.1.75 crores. At an estimated inflation of 6% p.a., the value of the above Rs.1.75 crores today is Rs.22.83 Lakhs. A pretty decent sum for the current income of Rs.10 thousand. Please note that his income is not going to remain static and he would be far well off if he is going to maintain 10% of his income for long term SIPs. Yesterday my friend has sent around half a dozen SIP application forms of his employees for Rs.1000/- per month for 20 years. Though this may not provide a significant income , the ‗Socialist Muthu‘ is happy. The ‗Capitalist Muthu‘ is happy when he get lumpsum investments or SIPs for higher amounts. The idea is to maintain a balance and keep both the Muthus‘ happy!!

So if one plans properly, even if his income is low, he can become financially independent and wealthy.

India: Dark Facts and Stats Posted by Muthu on August 25, 2010 What would you do if you are asked to live for Rs.12/- a day? You cannot survive. Neither can I. You would be surprised to know that Rs.12/- is the poverty line of this growing ‗super power‘ called India. This means if per capita expenditure is above Rs.12 per day, you are not poor. Sound fascinating, isn‘t it. How many of us are aware of this? Do we know about Suresh Tendulkar? Sachin Tendulkar, yes but who is this other Tendulkar? The main stream media does not have time or enthusiasm to focus on this other Tendulkar. Media gets more eye balls when Sachin Tendulkar is focused, who will watch what Suresh Tendulkar has to say? When our country is growing around 9% p.a and is expected to grow in double digits, let us celebrate the ‗India shining‘. India is definitely shining for you and me. But have we ever asked why more than one third of the country is under the control of Maoists and Naxalites and Government machinery is virtually absent in these areas? Do you want to know what is the national average of monthly income to be categorized as under below poverty line? The new all-India average rural poverty line is set at a monthly expenditure of Rs 446.68; the national urban poverty line at Rs 578.8 a month. This means if I‘m living in Chennai and is earning Rs.580/- a month, then I‘m not poor. Do not ask me how will I be able to survive in Chennai at Rs.580/- a month? I‘m above the poverty line fixed by government and hence I‘m not poor. If I‘m living in my native village and am earning Rs.450/- a month, then I‘m not poor. This is as per the latest statistics provided by Suresh Tendulkar committee report and is accepted by planning commission and government of India. Before blaming Suresh Tendulkar, let us understand some facts. The planning commission earlier said that the people under ‗Below Poverty Line‘ (BPL) is 27.5% of our country‘s population. Lot of states protested that this data is very conservative and not true. Unable to face the heat, it appointed Suresh Tendulkar to review the reality. He came to astounding conclusion that if he applies yard stick mentioned above, which in his opinion is barest required to survive, the people under poverty is 37.2%, nearly 10% above than what planning commission has earlier projected. This means that 432 million people in our country do not even have few hundred rupees as income per month. Do you wonder what if the per capita expenditure is put at Rs.20/- per day, Rs.600/- a month? Then a whopping 77% of the country is below poverty line. This means 893 million people in this country are surviving below Rs.600/- a month. This was the outcome of Prof. Arjun Sengupta‘s recommendation which was rejected by Government probably as it felt Rs.20/- a day is too high to aspire.

I‘m glad that Government has accepted atleast Rs.12/- to be sufficient to survive in this country. Why don‘t our elected representatives lead by example and show how to survive with Rs.12/- or Rs.20/- a day? Do you know that our government rejected even the committee report provided by our own rural ministry when it mentioned 50% of the Indians are living under below poverty line? This was also not acceptable for our government and finally after lot of opposition it has accepted 37.2% when the reality is above 77%. The icing on the cake is this Rs.12 is based on 2004-05 prices, when we are having double digit food inflation for last few years. I‘m unable to fathom how our poor are surviving. Even as per the data of Arjun Sengupta, my maid, driver, our gardener, security guard are all NOT poor people, but are above poverty. Wonderful. Mera Bharat Mahan. My India is really very great. Well, how many poor people are in India? There are many answers. I‘ll give you all .The New Delhi‘s Planning Commission India has 30 crore people living below the poverty line. But its Rural Development ministry says the figure is over 40 crore. Again the World Bank on basis of 1.25 dollars per day believes India has 45 crore poor people. Now, Abhijit Sen, a top Planning Commission member and respected economist says if one factored in calorie intake of 2,400 for rural areas and 2,100 for urban areas, then 64 per cent of urban India and 80 per cent of rural India would be below the poverty line. India is shining only for around 250 million people, but what about the rest 900 million? If 77% of the population of this country is unable to have even Rs.20/- a day, what is the surprise in rising of Maoists and Naxalites? These movements are only symptoms. What we‘ve to really fight is poverty. For the second fastest growing economy in the world, India continues to have one of the worst track records in social indicators, especially child malnutrition and hunger. India is ranked 66th out of 88 countries in the Global Hunger Index drawn up by the International Food Policy Research Institute, and nearly half of the country‘s children are malnourished—a track record worse than sub-Saharan Africa. Yet, as the annual billionaire count in India has been relentlessly on the rise, the growing inequity, and the consequences that follow such high levels of inequity—including rising Maoist influence—should serve as a wake-up call for policymakers. With this kind of inequality how we are going to maintain our social fabric? Class wars would become inevitable unless we help these millions and millions to come out of dire poverty. I‘m writing this article with a heavy heart thinking about the faceless millions and millions who are struggling to barely survive everyday. It would be ideal to call Rs.20/- a day as starvation line rather than poverty line. (Inputs: I browsed not less than a dozen websites to cull out the above info.)

Who will win:

’

’ Tortoise?

Posted by Muthu on August 25, 2010 China today is investing nearly half its GDP, something that‘s simply unprecedented. No other economy, at no other time in history, has invested capital on that scale. At the peak of its economic miracle, Japan was investing only 30 per cent plus of its GDP; but China is investing 50 per cent! Roy Ramos of Goldman Sachs paints a graphic picture of China‘s credit expansion, estimating that in less than ten months in 2009–10 it added ‗the equivalent of India‘s banking industry twice over‘. Over 200 years of economic experience tells us that hyper-investment creates a bubble and ends in a dreadful collapse. Even common sense should tell us the same thing. If you spend trillions of dollars in creating mammoth bridges, malls, plants and ports, the immediate impact is nice and invigorating. The economy expands, people earn more, they spend more, factories hum with production, and wealth gets created. But problems begin when ports go half empty (because they are larger than needed) or roads fall short of toll revenue targets (because fewer cars are being driven). It‘s what economists call ‗over-capacity‘ created by ‗hyper-investment‘—in common sense terms, it‘s simply a case of building a palace when all you needed was a five-bedroom dwelling. But China has consistently defied all such prophesies of doom. Too many smart people—for very cogent and rational reasons that are steeped in economic logic and theory—have been predicting that China‘s bubble has to burst. But it‘s not happened, and shows no real signs of happening, yet. Actually, the time has come to acknowledge a truth: either conventional economic theory will have to be rewritten, or China will eventually collapse. The two cannot co-exist. China cannot defy 200 years of economic laws with such ease and facility; either its defiance will end in tragedy, or conventional economic theory has become irrelevant and hit a dead end. Perhaps big factories create waste, while big infrastructure, especially life-enhancing social assets, empowers people. By rapidly educating your workforce, by brilliantly executing immensely large projects, by importing expertise and dollars in a shrinking world, you could create a ‗shower of wealth and productivity‘ such that consumption ‗trickles through‘ quickly into the bubble. China‘s final and ultimate repudiation of conventional theory may be the apparent neutralizing of democracy. Two hundred years of political economy have taught us that genuine enterprise and innovation take place only when people are free, when individual genius soars unfettered. Look around you—America, Europe, Japan, Israel, South Korea, Brazil, India, Australia, the bulk of the world‘s wealth resides and flourishes in a democracy. But China is challenging that axiom; once again, it is using ambition and infallible execution to trump democracy. It believes that people will trade wealth for freedom; for nearly three decades, this belief has held good and gathered in strength. So will China drive the final nail into the coffin of history? Can real wealth be shared and sustained if ordinary people live in constant fear and threat? Sooner or later, won‘t the will to create wealth break down, or a revolution of rising expectations overturn the rule?

Now look at India: that‘s a classical textbook case. India‗s structure is an uncanny prototype of a ‗promising‘ economy. Well above half its GDP—nearly 58 per cent—is consumed by over a billion people (another 11 per cent is consumed by the government), giving it the kind of organic strength that transformed the economies of the US, UK, Germany and Japan. Just its rural economy is made up of 800 million people spending over $425 billion. This when agriculture‘s share is declining, manufacturing is rising, and services are already more than half the GDP—again, a classically attractive mix . Like China, India saves nearly 40 per cent of its GDP, but the bulk comes from households (as against China, where state- owned corporations with somewhat contrived accounting contribute more than households). India‘s resource consumption has decreased for every incremental dollar of GDP since 1991 (as against China, which was using three times more resources per dollar of GDP than India). India‘s economy is healthily private, with state-owned corporations accounting for less than a tenth of the output. Its stock exchange was set up in 1875, the oldest in Asia—it is also perhaps the most digitized in the world. At slightly over a trillion dollars, its stock market capitalization is about equal to its GDP—another beautifully balanced economic attribute. Its foreign reserves are over a quarter of a trillion dollars, neither uncomfortably high, nor low. India‘s bank credit is roughly equal to half its GDP (as opposed to 150 per cent for China), while bad loans are at an astonishingly low 2-3 per cent in a world devastated by toxic financial assets (recall that China‘s bad debts are precariously estimated at between 30-50 per cent, the large range itself betraying a huge risk of fuzzy estimates). Indian banks had virtually zero exposure to the sub-prime paper that ravaged America and Europe. About 40 per cent of the economy is exposed to global trade (exports and imports)—low enough to escape world crises, yet high enough to remain an open, competitive economy. The Indian rupee largely floats against world currencies, in contrast to China‘s yuan, which is globally pummelled for being artificially undervalued. The rupee danced in a 25 per cent band after Lehman‘s collapse, without disrupting anything. A red rag is India‘s weak government budget and rather high public debt at 80 per cent of GDP—but here again, the highly vulnerable dollar loans are paltry by Asian standards. India is in a very sweet demographic spot, being the youngest country in the world: half a billion Indians are less than twenty- five years old, giving it a unique ‗demographic dividend‘ among peers. Ten of the world‘s thirty fastest-growing cities are in India; its urbanization rate, at 30 per cent, is accelerating. With 350 million people displaying a reasonable proficiency in English, it‘s the largest English-using country in the world. Its judicial system is robustly based on English common law. It‘s a genuine, albeit imperfect, democracy. China‘s hare or India‘s tortoise. Perhaps the answer will not be quite as simple as who is investing more and growing faster today. You will have to put your arms around a few intangibles: Who has superior innovation? Who has more entrepreneurial savvy? Who is grappling with and expanding in intensely competitive conditions? In stock market parlance, China is the ‗beta stock‘: it could give wildly high returns, or it could sink like a stone. India is the ‗defensive scrip‘ which may not leap to the stratosphere, but is also unlikely to fall too much from where it is. If China scales the summit, it will

force a rewrite of economic textbooks. If India ascends to the top, it will reinforce the strength of conventional wisdom. China‘s spectacular sweep, compared to India‘s relatively mild rise, could tempt an easy answer, but it would be wise to remember that history unfolds over several decades, perhaps even in fractions of centuries. So it truly may be too early to call this match. Do also remember that China and India were the quickest to bounce back after the Lehman crisis. China‘s rebound, however, was accompanied by huge debt and deflation, as prices (and therefore demand) were weak. India‘s turnaround was sturdier, caused by lower debt and modest inflation. So in economic terms, India‘s nominal GDP grew twice as fast as China‘s for a few quarters on the trot—the first time that this happened in nearly three decades. This is what economists call a ‗lead indicator‘: in simple language, it could be the one swallow which makes the summer, an early signal of change. But before we spring to quick conclusions again, do remember that China is so far ahead that India‘s fledgling momentum could easily get snuffed out. The imponderables are far too many; China‗s ambition and confidence are, unfortunately, equalled by India‘s poor governance and self-doubt. China could yet rewrite economic theory, and India could yet blow its chances. As with all good games of chance, there‘s a joker in the pack. What if India were to graft some of China‘s ambition and determination? Or, what if China were to adopt some of India‘s democracy? Now the game gets really interesting, because the odds then move, from comparing economic structures, to figuring out which country can do what more easily. Can India fix its governance more easily than China can repair its politics? Whoever gets this one right will win the biggest wager of the twenty-first century. (Excerpts from Raghav Bahl‘s new book ‗Super Power? The amazing race between China‘s Hare and India‘s Tortoise‘)

25 Statistics that proves the extinction of American Middle Class Posted by Muthu on August 24, 2010 The 25 statistics below prove that the middle class is being systematically wiped out of existence in America. The rich are getting richer and the poor are getting poorer at a staggering rate. 1. According to a 2009 poll, 61% of Americans ―always or usually‖ live paycheck to paycheck, which was up from 49% in 2008 and 43% in 2007. 2. 36% of Americans say that they don‘t contribute anything to retirement savings. 3. A staggering 43% of Americans have less than $10,000 saved up for retirement. 4. 24% of American workers say that they have postponed their planned retirement age in the past year. 5. The number of Americans with incomes below the official poverty line rose by about 15% between 2000 and 2006, and by 2008 over 30 million US workers were earning less than $10 per hour.

6. According to Harvard Magazine, 66% of the income growth between 2001 and 2007 went to the top 1% of all Americans. 7. In New York, the top fifth of earners collect more than 53% of the income; the bottom fifth takes home less than 3%. 8. Over 1.4 million Americans filed for personal bankruptcy in 2009, which represented a 32% increase over 2008. 9. Only the top 5% of households have earned enough additional income to match the rise in housing costs since 1975. 10. For the first time in US history, banks own a greater share of residential housing net worth in the United States than all individual Americans put together. 11. In 1950, the ratio of the average executive‘s paycheck to the average worker‘s paycheck was about 30 to 1. Since the year 2000, that ratio has exploded to between 300 to 500 to one. 12. As of 2007, the bottom 80% of American households held about 7% of the liquid financial assets. 13. The bottom 40% of income earners now collectively own less than 1% of the nation‘s wealth. 14. Average Wall Street bonuses for 2009 were up 17% when compared with 2008. 15. The average income of the top fifth of New York families is 8.7 times greater than that of the bottom fifth. This is the biggest difference of all states. 16. The average income of families in the top 5% in New York was five times greater than the average income of families in the middle 20% of earners. Again this is the biggest difference of all states. 17. The average federal worker now earns about twice as much as the average worker in the private sector. 18. An analysis of income tax data by the Congressional Budget Office found that the top 1% of US households own nearly twice as much of America‘s corporate wealth as they did just 15 years ago. 19. The average time needed to find a job has risen to a record 35.2 weeks. 20. More than 40% of Americans who are employed now work in often low-paying service jobs. 21. For the first time in US history, more than 40 million Americans are on food stamps, and the US Department of Agriculture projects that number will go up to 43 million Americans in 2011. 22. What American workers compete with: In China a garment worker makes approximately 86 cents an hour, and in Cambodia it‘s 22 cents an hour.

23. Despite the financial crisis, the number of millionaires in the US rose a whopping 16% to 7.8 million in 2009. 24. About 21% of all children are living below the poverty line in 2010 — the highest rate in 20 years. 25. According to Professor Emmanuel Saez of the University of California at Berkeley, the top 10% percent of Americans now take in approximately 50% of the income. (Courtesy: Michael T. Snyder, Newyork Post)

What is my Religion? Posted by Muthu on August 24, 2010 I do not think I‘ve ever shared my personal faith with you, except the article on free will, in which I indicated that I believe whatever happens in this world, both and good and bad, is as per the will of the God. We are a small nut or bolt in a giant machinery and we can never understand the workings of the machinery, the will of the God. For your easy reference, I‘ve given below the link of the articles I wrote earlier on my personal faith https://wisewealthadvisors.com/2010/07/04/do-we-have-free-will/ https://wisewealthadvisors.com/2010/07/06/your-responses-do-we-have-free-will-albert-einstein/ To live an everyday life, we‘ve to take decisions and make choices from moment to moment. So I act as if we have a free will, with an inner conviction that all actions happen according to the will of the God. I too have everyday anxieties, pressures, stress etc. Despite that there is a space in mind, which comes from acceptance of ‗What is‘. What probably made me write this article now because; today is ‗Avani Avittam‘, the day of changing sacred thread. It‘s since 10 years I‘ve stopped wearing sacred thread. For the sake of my father, atleast once a year, on this day I used to wear sacred thread. Even that desire has fallen off now and I‘m not going to wear sacred thread today. This article is not to say that I‘m right and others are wrong. As I share issues from my personal domain occasionally, I had the urge to write this article today. I used to regularly visit temples, perform rituals and ceremonies, once upon a time a passionate follower of a Guru etc. I even used to do ‗Sandhya Vandanam‘ (a daily routine prescribed for Brahmins) regularly. With out any conscious effort on my part, all of these have fallen off naturally. I do have attraction for visiting old temples and have some irresistible pull for ‗Mount Arunachala‘. So when I feel like, I do visit temples, but those instances have since become rare. I do think of ‗Mount Arunachala‘ everyday, but do not attach any undue importance to the same.

I do not perform any religious rituals, ceremonies or participate in any religious festival and activities. It‘s a strange paradox. On one hand, I‘ve complete trust in God and the other hand I do not perform any activities of the religion. But I appreciate the essence of the religion like Upanishads etc. My father and wife have their own religious practices and beliefs. I respect their right to practice their faith. There are some occasional conflicts which arise when some beliefs are imposed on me. My father tried his best in creating guilt in me for being non-religious. I do not have even a tinge of guilt and I‘ve to say his mission has failed. My wife is unable to understand the strange paradox of me having faith in God and at the same time not following the prescribed set of beliefs and rituals. Though I‘ve attraction for ‗Mount Arunachala‘, my God is not personal. He is impersonal. The impersonal consciousness would have created us and we have created ‗Personal Gods‘. I was thinking of God as a ‗Super human being‘, because I‘m a human being. As I recollect reading from the works of a spiritual teacher, if an animal is endowed with intellect, it would think of God as a ‗Super animal‘. Ours is an inter-caste marriage. When we have a kid, it won‘t be brought up in either of our caste. Infact, I‘ve no intention of even teaching religion and would probably share with the child only the essence of religion as it grows. If it is a boy, I‘ve no intention of putting a sacred thread for him. I used to be very interested in astrology and have even learnt the basics of astrology. Astrology, Vaasthu etc. at best may be relative truths. I‘ve lost all curiosity to know about my future. I‘ve seen best of the astrologers and nobody is able to predict the future with accuracy. I‘ve seen marriages fail even though they had concrete foundation of astrology. The fact of the matter is life is uncertain, unpredictable and insecure. I‘ve accepted these atleast on an intellectual level, hence the need for astrology and stuff related to that have fallen off automatically. This is one of the reasons why rituals and ceremonies also have fallen off for me. Earlier I used to be very scared about death and used to read a lot about reincarnation, after life etc. Now my mindset is that let me face what happens to me after I die, if the entity continues. If the entity does not continue also, it is equally fine. What is the use of fighting the reality? Let me live this life to the best of my capabilities. I do not believe in a God who rewards and punishes me based on my activities. Even Karma, is a continuous stream of cause and effect, where the cause becomes effect and the effect becomes the cause. Karma is also impersonal and is no longer ‗personal‘ for me. It is very difficult to under the universal or cosmic design and I‘m not going to break my head as to why good and bad happens to me. 99% of the humanity may have their own share of sufferings and pleasures. May be the lucky 1% have very less of suffering and more of pleasures. I do not understand the design and accept my ignorance.

I neither believe in positive nor negative thinking. Thinking happens, which is both positive and negative. Duality and opposites are unavoidable facts of life and I am learning to live with both of them. We can appreciate the good only when there is bad, beauty only when there is ugliness, light only because of darkness, pleasure because of pain, happiness because of suffering etc. I‘m attracted as much, may be more, to spirituality as I‘m attracted to ‗Personal Finance‘. I‘m fond of reading Ramana, Nisargadatta, Ramesh Balsekar, J.K., Anthony de Mello, Eckhart Tolle etc. To me, religion, rituals, ceremonies and festivals are more social in nature and only spirituality is personal. I sincerely believe and accept that if there are 7 billion people in the world, there can be 7 billion paths and ways of thinking. I do not condemn or say that somebody is inferior and I‘m superior. I just shared what I am and accept people also as they are.

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Weapon

Posted by Muthu on August 23, 2010 America is injecting more and more dollars into circulation. What will happen? One day Dollar may be worth a toilet paper and do you know which other two countries would be mainly affected by this? China and Japan. Foreigners, willing to own paper issued by the US government, now own about 25% of total US debt. China and Japan, alone, account for over 50% of the foreign government ownership of US Debt. And there lies the problem for China and Japan – and the opportunity for India. When you owe the bank a bit of money and cannot repay, you are in trouble – goes the old saying – but when you owe the bank a lot of money and cannot repay, the bank is in trouble. As mentioned above, China and Japan own 50% of the US debt. Every analyst, every trader is watching what they do. If China or Japan start to sell their US Dollars, the currency traders will all rush to sell the US Dollar before China or Japan can hope to complete their trades. Let‘s say Japan sells 10% of its USD 787 billion in US Government debt at a ―good‖ price. You can bet that when news of that trade hits the market – and it will, even if with a delay – the US Dollar will fall so sharply, that the rest of the 90% that Japan still owns will be worth a lot less. Maybe 20% to 30% less. The truth is that no one knows how much the US Dollar can fall from here if foreign governments were to sell their US Dollar holdings.

China knows the US Dollar is a threatened currency, but it cannot sell its US Dollar reserves – it will destroy its own ―wealth‖. So, China is buying mining companies and assets wherever it can and sending the military and navy for strategic protection of those assets. All a very expensive and round about way to own hard assets and to diversify away from the US Dollar. The RBI is in a sweet spot and can get the same diversification as China seeks for a few basis points from investments in financial instruments. Unlike China and Japan, the RBI‘s holdings of US Dollars are small enough not to cause a scare in case the RBI begins to sell a bit. Though this action will be noticed. After the RBI bought gold on November 2nd, 2009 at about USD 1,059 per ounce, the price of gold shot up to USD 1,215 per ounce by December 2, 2009. By February 2010 the price of gold declined to USD 1,062 as that news ran itself out and other more powerful factors occupied the mind of the market. This is proof that the RBI‘s actions may cause a near term flutter but will be soon forgotten. Quantitative Easing (QE) is a term we often hear in the news. What does it actually mean? Effectively, it means that the central bank will print money. In most cases, the central bank will buy government bonds with newly printed cash. QE is usually accompanied with a low interest rate policy. The four major central banks of the world (Federal Reserve, European Central Bank, Bank of England, Bank of Japan) are all following this policy to a certain degree today. Let‘s first understand the purpose of monetary policy and how a central bank can use it. An expansive monetary policy (low rates & QE) is used to stimulate the economy. The purpose of low interest rates is to encourage borrowing and investment. Low interest rates also discourage savings, and hence promote consumption. QE‘s purpose is to inject cash into the economy. This should also stimulate investment and spending. Only one thought should come into our minds now – Inflation. An expansive monetary policy must lead to higher inflation. After all, printing money means more cash in circulation for the same number of goods. So that implies prices should go up, i.e. inflation. The four major central banks all want inflation. That is why they pursue a low interest rate policy combined with QE. Why do they want inflation? Well, the developed world is full of debt, both public and private. Inflation reduces the real value of the debt, so the central banks like inflation. In economics, there is a useful equation that describes the relationship between cash and output. MV = PY M – Stock of Money V – Velocity of Money P – Price Level Y – Real Output The standard theory goes like this: If you increase M (i.e. QE) real output will not change, and only price levels will rise (i.e. inflation). It assumes V is constant.

As is the case in most of economics, theory and reality are two different things. What‘s happening today is the variable V is falling. This means that if we increase M, it doesn‘t mean that price levels will rise. QE doesn‘t mean we will have inflation. The velocity of money refers to how often money is turned over. So the faster we spend money, the higher the velocity is. So when individuals receive their salary, they go out and spend it. Someone else receives that spending, and then spends that same money. Money continuously gets turned over, and this is a measure of economic activity. The reason QE is not going to create inflation for now is that money is not getting spent. Banks that are receiving fresh funds are not lending out the money. Credit is falling. Government bond yields are so low because any new money banks have is simply used to purchase government bonds. Lending isn‘t taking place, and this is a function of banks and businesses both becoming more cautious. When lending and spending doesn‘t take place, the velocity of money falls. This can lead to deflation rather than inflation. In fact, the reason the central banks are so happy to pursue low interest rates and QE is that inflation is not a real threat. Because of the falling velocity, deflation is the real threat to the developed world today. Deflation is much more dangerous for an economy than inflation. With deflation, the real value of debt goes up. For countries that are already heavily indebted, this is like icing on the cake. Falling prices also means that wages will fall, and demand will. Consumers put off spending in anticipation of lower prices, leading to further slowdowns in the economy and falls in prices. From a trading point of view, what does this imply? First, gold will be affected. Gold is used as a hedge against inflation, and deflation can put downward pressure on gold prices. In fact, this applies to all commodities. Most commodities have a positive relationship with inflation, and will be affected by falling prices. US Treasury bond yields are extremely low, and according to many analysts it is a bubble waiting to burst. With deflation, treasury prices will only go higher (and yields lower). Japan is a good example of a country that has battled deflation and has some of the lowest government bond yields in the world. Quantitative easing should cause higher prices in theory, but reality tells us a different story. Falling velocity and economic activity are more important determinants of prices compared to interest rates and money supply. (with inputs from Ajit Dayal and an article by Asad Dossani- Equitymaster)

Is America becoming a Third World Country? Posted by Muthu on August 23, 2010 We‘ve been writing for nearly 2 years as to how U.S. is steadily going down the drains. The current generation is paying for the lack of insight of the previous generations post the U.S becoming ‗super power‘. As we‘re very slowly inching our way to prosperity, though inequality is tremendously high, we‘ve to learn lesson from U.S. Nothing lasts forever, especially if we forget the very traits that bring us up.

It would be appropriate to quote Nisargadatta‘s words here ‗From the summit all roads lead downwards. Societies are like people-they are born, they grow to some point of relative perfection and then they decay and die.‘ Though it is far from what dominates the debate in Washington, every day brings fresh evidence of the new reality that America is entering. And it‘s not just about dismal unemployment figures and gloomy foreclosure numbers. As the New York Times reported last week, Hawaii has gone beyond laying off teachers and has begun laying off students, closing its public schools on 17 Fridays during the last school year. In the Atlanta suburb of Clayton County, the entire bus system was shut down. Colorado Springs turned off over 24,000 of its streetlights. The Philadelphia Inquirer reports that Camden, New Jersey is soon to permanently shutter its entire library system. And last month the Wall Street Journal reported on the trend of cash-strapped states and counties giving up on the idea of maintaining paved roads, allowing them instead to turn back into gravel. And those localities that can‘t even afford to put gravel down are just letting the roads, as the Journal put it, ―return to nature.‖ A seminar at Purdue University on this trend was entitled ―Back to the Stone Age.‖ Though the particulars of our country‘s transformation are painfully real to the rest of the country, Washington and Wall Street remain blind to USA trajectory toward Third World status. Long-term unemployment is rising and millions of Americans are struggling to survive. The gap between rich and poor is wider than ever and the middle class is disappearing. Finley calls them ―the new poor.‖ ―That is a different category of people that I think we‘re seeing,‖ he says. ―They are people who never in their wildest imaginations thought they would be homeless.‖ They‘re people who had enough money — a lot of money, in some cases — until recently. ―The image of what is a poor person in today‘s day and age doesn‘t fly. When I was growing up a poor person, and we grew up fairly poor, you drove a 10-year-old car that probably had some dents in it. You know, there was one car for the family and you lived out of the food bank,‖ says Finley. ―In the past, you got yourself out of poverty and were on your way up.‖ ―It was the American way, a path taken by millions. ―Today the image is you‘re getting newer late model cars that at one point cost somebody 40, 50 grand, and they‘re at wits end, now they‘re living out of the food banks. And for many of them it takes a lot to swallow their pride,‖ says Finley. Today the American way is often headed in the opposite direction: downward. Two weeks ago, Microsoft founder Bill Gates and 40 other billionaires pledged to donate at least half of their fortunes to philanthropy, either while still alive or after death. Is America a country so blessed with affluence that it can afford to give away billions, just like that?

Gates‘ move could also be interpreted as a PR campaign, in a country where the super-rich sense that although they are profiting from the crisis, as was to be expected, the number of people adversely affected has grown enormously. They also sense that there is growing resentment in American society against those at the top. For people in the lower income brackets, the recovery already seems to be falling apart. Experts fear that the US economy could remain weak for many years to come. And despite the many government assistance programs, the small amount of hope they engender has yet to be felt by the general public. On the contrary, for many people things are still headed dramatically downward. More than a year after the official end of the recession, the overall unemployment rate remains consistently above 9.5 percent. But this is just the official figure. When adjusted to include the people who have already given up looking for work or are barely surviving on the few hundred dollars they earn with a part-time job and are using up their savings, the real unemployment figure jumps to more than 17 percent. In its current annual report, the US Department of Agriculture notes that ―food insecurity‖ is on the rise, and that 50 million Americans couldn‘t afford to buy enough food to stay healthy at some point last year. One in eight American adults and one in four children now survive on government food stamps. These are unbelievable numbers for the world‘s richest nation. Many Americans are beginning to realize that for them, the American Dream has been more of a nightmare of late. They face a bitter reality of fewer and fewer jobs, decades of stagnating wages and dramatic increases in inequality. Only in recent months, as the economy has grown but jobs have not returned, as profits have returned but poverty figures have risen by the week, the country seems to have recognized that it is struggling with a deep-seated, structural crisis that has been building for years. As the Washington Post writes, the financial crisis was merely the final turning — for the worse. With the 2nd anniversary of the crash just around the corner, American kids have been forced to learn about money the hard way. Fewer available summer jobs, market crashes and teacher cutbacks have affected teens there on a personal level. Lavish spending by their parents on them has also stopped. The unemployment rate in the US is around 25% for teens and 15% for 20-24 year olds. Young people are now only too aware of the difficulty of landing a job. They are now actively trying to build their CVs with new skills (Mandarin Chinese, technology), relevant internships and extracurricular activities. They are even trying to build networks in the corporate world. And all of this while they are still in school. They have also realised the value of saving for a rainy day. More than half of 18-29 year olds have curtailed spending since the crisis began. The youth have also become more conservative investors due to market volatility. They are now cautious about unrealistic returns in real estate or tech stocks. Seems like we will be seeing a much more conservative and financially responsible new American generation in the years to come! (with inputs from Huffington Post and Equitymaster)

Are Mutual Funds Safe? Posted by Muthu on August 21, 2010 Are Mutual Funds Safe? This is a common question I get from the first time investors. Let me provide an answer through this article. In life, we cannot avoid risks but can manage the same (i.e.) Risk Avoidance is impossible whereas Risk Management is possible. Walking in the middle of the road is risky, whereas if you walk on pavement, it is less risky. Still can you hit by a vehicle? Theoretically, the answer is Yes, but practically the chances are very less. Likewise take the case of bank deposits. Is it Safe? In theory, No because, as per Deposit Insurance and Credit Guarantee Corporation Act, 1961, deposits of each depositor in a bank is insured up to a maximum of Rs. 1,00,000 (Rupees one lakh) for both principal and interest amount held by him ―in the same right and same capacity‖ as on the date of liquidation/cancellation of bank‘s licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force. This simply means that there is no guarantee whatsoever for bank deposits beyond Rs.1 Lakh and you‘ve no legal recourse for any default beyond this amount. Though theoretically and legally bank deposits are risky, in practice RBI does not allow any bank coming under its purview to go burst. If you recollect, when GTB (Global Trust Bank) collapsed, it was merged by RBI (Reserve Bank of India) with OBC (Oriental Bank of Commerce), in the process safe guarding the interest of investors. In the fag end of 2008, when one private bank faced the risk of ‗bank run‘ (majority of depositors asking back the money at the same time, which bank can provide) RBI came to its support and provided ample liquidity and publicly made an announcement that the bank is safe. This prevented the bank from collapsing. Thanks to RBI. Though theoretically there are some risks in mutual funds, in practice SEBI (Securities Exchange Board of India) never allows any mutual fund company to go burst or collapse. The market regulator, the Securities and Exchange Board of India (SEBI), does a good job of protecting investors‘ interests. There have been buy-outs in the past where the schemes are transferred to the new owner, but no collapses which have left investors in a quandary. As you might have heard many a times ‗ mutual fund investments are subject to market risk‘ but no risk of default, collapse of mutual fund companies. Thanks to SEBI. If you recollect, in the later part of 2008, when there was suddenly huge redemptions is FMPs (Fixed Maturity Plans), SEBI and RBI pitched in and provided a liquidity window ensuring that there is no default due to lack of liquidity. The mutual fund industry is well regulated in India. Mutual funds in India are in the form of a Trust. This means that the money belongs to the investors and is only held in the name of the Trust. The investment arm, the AMC, acts as a fee-for investment manager and does not own the money. This does not mean that the investments are risk-free. Investors need to take the risk of volatility or bad management and money can grow or lose value depending on the

market and investment decisions. However, sensible mutual fund investing is a good way to include equity and debt in individual portfolios to see realistic growth. Although they come without any explicit guarantee of capital protection, mutual funds can give the investor peace of mind. Every investor wants to protect his capital and aims for a reasonable return on his investments. The question, then, is: do mutual funds (MFs) meet these criteria? Being subject to market risks, MFs do not guarantee capital preservation. However, there are plenty of safeguards built into the system to protect the interests of investors and their money. Let‘s take a look at some such features. Structural Safeguards: The capital market regulator, Securities and Exchange Board of India (Sebi), which regulates MFs, is a critical entity in protecting investor interest, be it by drafting regulations or monitoring their implementation. It has laid down guidelines for all constituents of an MF, like sponsors, trusts, asset management companies (AMCs) and custodians. Regulations pertaining to sponsors and trustees are crucial to protecting investor interest. For instance, to be the sponsor of an MF—the sponsor of an MF is what a promoter is to a company—one needs to have at least five years of experience in the financial services business, three of which should have been profitable. This ensures a minimum track record for the sponsor, whose expertise should give investors comfort. The board of trustees, which is set up by the sponsor, also aims to protect investor interest. At least two-thirds of the directors on the board are required to be independent. This helps in maintaining an independent stance, albeit slightly tilted in favour of investors. Trustees also monitor fund performance and compliance with Sebi regulations. The trust holds the investors‘ money in fiduciary capacity. The Sebi MF regulations, 1996, give the trustees immense power. In case of continuous underperformance and unethical practices, trustees can even dismiss the AMC. Regulatory safeguards: Sebi‘s investment guidelines add another layer of protection. For instance, an equity MF scheme cannot account for more than 10 per cent of a company‘s paid-up capital. Similarly, a debt scheme cannot invest more than 10 per cent of its corpus in unrated debt instruments issued by a single issuer, and the total investment in such instruments cannot exceed 25 per cent of the scheme‘s net asset value (NAV). These stipulations go quite some way in making the investments more secure. Besides, Sebi has introduced a slew of changes over the last two years, which includes making the Scheme Information Document available to the investor. Also, scheme-related documents now provide detailed information on fund policies, risks, trustees and operations. Some other changes that Sebi wants to introduce aim to bring in standardisation and transparency in disclosures by MFs. Apart from these in-built structural and regulatory features for safety of investments, there are three other aspects reinforcing this effect. Benefits Of Diversification : Mutual Funds provide the benefits of diversification that help any investment to minimise the impact of volatility and earnings risk as opposed to investing in individual securities. One can diversify across asset classes—equity or debt—and across companies and sectors. Wide product range: You can invest in Mutual Funds according to your risk appetite. If you are risk-averse, you may go in for debt funds or a combination of debt and equity, such as

monthly income plans and balanced funds. Those willing to take risk for the sake of greater returns may go for mid-cap or sectoral funds. Risk management: Apart from the benefits of diversification and a wide product range, MFs have another safety feature. Each AMC has its own internal risk management teams comprising risk analysts, who monitor risks and keep them in check. To conclude, there are enough structural and legal safeguards to ensure that mutual funds do not collapse or run away with your money. It is practically impossible. In my opinion, the only risk I see is ‗market risk‘ , which can be managed (cannot be avoided) with the help of an ethical and competent advisor. (With inputs from Outlook Money & Cite HR)

MAXIMIZE MONTHLY INCOME Do you want to know how to Maximize your Monthly Income than what is provided by your fixed deposits, post office investments etc.? Very simple, invest in MIPs and read the below article completely to get a thorough insight as to how to maximize your monthly income. MIPs stand for Monthly Income Plans offered by Mutual Funds. Many a time people have confusion between SIPs and MIPs. SIPs are a way or method of investing in Mutual Funds. MIPs are debt oriented hybrid products offered by Mutual Funds. SIP is a method and MIP is a product. So do not get confused between a SIP and a MIP. Do you know ‗Asset Allocation‘? This means allocating your money amongst various assets like land, house, gold and financial assets. Financial assets are again classified into debt and equity. Debt refers to products like Employees Provident Fund (EPF), Public Provident Fund (PPF), postal savings, fixed deposits, Senior citizen savings scheme, bonds, debentures, debt funds offered by Mutual Funds etc. Equity refers to shares, equity schemes offered by Mutual Funds etc. Mutual Funds offer a unique product called MIP (Monthly Income Plan) which normally invests around 75% to 80% of the assets in debt like government securities, commercial papers, certificate of deposits, credit agencies rated bonds, NCD (Non Convertible Debentures), floating rate notes, money market etc. They have the mandate of investing upto the balance 20% to 25% in Equity. They may also have the option of staying 100% invested in pure debt, if the fund manager feels that it is not advisable to have equity exposure at a given point of time.

MIPs aim at enhancing the return over and above what one normally gets out of Fixed Deposits and Postal Products. I want to provide you an example of two of our favourite MIPs among our recommendations of few MIPs which are again amongst the entire universe of MIPs offered by all Mutual Funds inIndia. Two of the MIPs we suggest as part of one‘s core MIP holding, have provided annualized return of above 9% over the last 5 years period and have also provided an annualized return of around 11% for the last 10 years. Compare the above returns with your other small savings fixed income products. You stand to gain more in good MIPs. Even a small increase can make a lot of difference to investors in debt based products. Disclaimer: Mutual Fund investments are subject to market risks. Past Performance may or may not be repeated in future. Please read all the scheme related documents carefully before investing. MIPs are not guaranteed returns products like Fixed Deposits, Postal Savings etc. and are riskier than the same. The above data is as on 17th December 2015. The minimum holding period we suggest for a MIP is 5 years, to get enhanced return over and above fixed deposits. Please do not forget the above disclaimer. MIPs offer tremendous tax advantage. There are mainly two options to choose from, dividend option and growth option. Some advisors suggest dividend option for people who need regular income without realising how they are minimizing the returns and jeopardizing the cash flow of an investor by suggesting this option. Let me tell you why. Dividends from MIPs are tax free in the hands of investors. But they do not realise that the mutual fund companies pays 28.84% as ‗Dividend Distribution Tax‘ on the dividends paid, out of the scheme (investors‘ money) effectively reducing the returns of investors. Not only that the percentage of dividend declared is not consistent, and there are months when dividend payments are skipped. People who are dependent on a fixed and regular cash flow suffer a lot because of this. Instead if they invest in growth option and start withdrawing a fixed sum through SWP (Systematic Withdrawal Plan) from the 37th month onwards, they have two advantages. Being long term capital gains, irrespective of the tax bracket an investor belong to, the tax rate is only 20% (with indexation). This means they pay only 20% on the gains made viz-a-viz 28.84% tax on the entire money paid out as dividend. Indexation means adjusting for inflation. So the actual tax rate would be significantly lesser than 20%. To illustrate:

Let us assume you‘ve invested Rs.1 lakh in a MIP scheme in March 2011. Let us also assume you got an annualized return of 10% and is withdrawing the same in April 2014. Cost of inflation index for 2010-11 is 711 Cost of inflation index for 2014-15 is 1024 So Rs.1 lakh adjusted for inflation is 100,000/ 711 * 1024= Rs.1,44,022/At 10% returns, your MIP would have become Rs.1,33,100/Since the MIP value is lesser than inflation adjusted capital, there is zero tax liability for you. My guess is that if inflation is high, you may have negligible or even no tax and if inflation is low or moderate, you may have significantly lesser tax (than the rate of 20%). Also taxation is applicable only when you actually withdraw the gains. As long as you let it grow, there is no taxation. As you are aware, FDs are taxed on accruals every year. There would be no TDS (Tax Deducted at Source). In MIPs, you‘ve to declare the gains and pay taxes unlike FDs where the tax would be deducted at source and you would be paid only the balance. I also want to highlight one more point. The SWPs of MIPs, each withdrawal, has a principal and an interest (gain) component. The tax would be applicable only on the gain part and not on the principal part. So you don‘t pay tax on the entire withdrawals but only on the gain part. Since the amount and date of withdrawal is fixed by an investor, he has a fixed, regular and predictable cash flow. The fixed income you would be getting out of your corpus, would be perpetual (subject to capital not getting eroded, for which chances are less, if you opt for a right percentage of withdrawal in discussion with your Personal Financial Advisor) and you can keep increasing your income by keep increasing the corpus. How to increase the corpus, if you‘ve no chances of getting money in future through any other means? Simple Mr.Investor. We always advice to save atleast 20% of one‘s income and keep reinvesting it in equity funds through SIPs (Systematic Investment Plan). This is to keep pace with inflation. If you don‘t do this, the fixed income which you receive now, which is sufficient for your current cost of living, would cease to be sufficient in the years down the line. As your SIP corpus keeps growing, once in 5 years or so, you can move the accumulated corpus to MIP. This would increase your MIP corpus, there by increasing your monthly income. Again you‘ve to ensure that, atleast 20% of that money is saved through SIPs. You‘ve to keep doing this once in every 5 years so that your monthly income keeps growing and you will be able to manage the increasing cost of living. Living long can be as risky as dying young, so says a great philosopher, who else, none other than Mr.Muthu! Just ensure that MIPs form a core part of your financial assets.

If you need any further clarification, please feel free to write to me.

Li Lu: From Tiananmen Squ

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Posted by Muthu on August 19, 2010 Do you know who Li Lu is? His story shows how strange and unpredictable life is. Read this remarkable journey. Li Lu is a real story of endurance, acceptance and rising above all. Can you believe that one who was a most wanted dissident of China can end up being an American investor in one of its leading company? Do you know he is most likely to end up as an investment manager of billions of dollars into countries like China and India? Here is the classic story of Li Lu and I salute the spirit of this man. When he escaped to America after hundreds of his fellow protestors were killed in Beijing, he was one of the most wanted dissidents in China. Born in 1966, the year Mao Zedong initiated the Cultural Revolution, Li was separated from his parents when he was less than a year old. He passed through half a dozen adoptive families during the first decade of his life. Mao‘s regime condemned his mother, a botanist and the daughter of a wealthy landowner, and his father, an engineer, as bourgeois intellectualsand therefore enemies of the state. They were sent to separate labor re-engineering camps. Facing a life of hard labor, Li‘s mother was forced into having to choose one of her children to keep with her. She kept Li‘s older brother. ―Mao Zedong‘s way was to make people crazy,‖ Li said. ―It was like a religious cult. You cut all the culture, you kill or jail all the people with learned minds who think independently. Anything that remotely reminded you of humanity was destroyed.― On the eve of Mao Zedong‘s death in 1976, Li survived an earthquake (one of the biggest earthquake of last century that killed lakhs of people) in Tangshan, China, that killed the adoptive family whom he had grown to love. In the earthquake‘s rubble, the 10-year-old boy ran through the city; the dead bodies overwhelmed him and he blacked out. When he came to, he saw a woman giving birth and heard her cries. Days after the earthquake, radio propaganda claimed that Mao Zedong‘s administration was helping his ravaged town-something that ran counter to what he saw. ―The soldiers and party officials are grabbing all the things available for relief for themselves or their family,‖ he recalled. ―Older people just don‘t get anything. So I developed a tremendous aversion, you know, hatred toward those people.‖ He was living with his blood family again and came under the guidance of his grandmother, a founder of elementary schools in the 1930′s. She told him the only way he could beat the government and help people was, first of all, to educate himself. Mr. Li immersed himself

in books, which gave him the idea that ―other people have lived a different life, a better life, so should I-so should everybody.‖ His convictions led him to Nanjing University and Tiananmen Square. He was deputy commander of the student movement, second to Chai Ling, who subsequently studied at Harvard Business School. He saw many of his fellow student protesters shattered by the massacres. ―They couldn‘t get over this sense of loss and failure and guilt,‖ he said. ―It was terrible and I had some of it.‖ He arrived in Manhattan in December 1989. By 1996, he had earned a B.A., M.B.A. and J.D. from Columbia University, and written a memoir of his experiences in China ( Moving the Mountain , Macmillan London). With royalties from the book, as well as fees earned from giving lectures, he made investments and rode the bull market to the $125,000 he needed to pay his living costs and the tuition not covered by his scholarship. ―Early on,‖ he said, ―I know I gotta make money work. The whole thing is, really, money makes money. That‘s the whole thing about capitalism. Without the capital, there is no ism.‖ His early success in investing, linked with his abysmal experience with communism, made him a true believer in the free market. ―But the precondition of capitalism is a free man,‖ he said. ―With free market and free man, if you remove one of them, it is not called capitalism in my dictionary. Without a free man, there is no free market. That‘s called exploitation. In China, there‘s not capitalism. It‘s official corruption, that‘s what it is.‖ Li Lu is now a founder and Chairman of Himalaya Capital Management. Li was inspired to get into banking after hearing Warren Buffett, a Columbia alumnus, give a lecture at Columbia in 1993. Upon graduation, Li Lu worked in an investment bank until late 1997, when he founded Himalaya Capital Management. From 1998 to 2004, he managed both a hedge fund and a venture capital fund. His fund suffered a 19% percent loss in 1998 from the Asian Financial Crisis. In late 2004, he transformed the hedge fund into a long only investment vehicle, LL Investment Partners, LP, which is currently focused on global investment opportunities. Charlie Munger, Vice-Chairman of Berkshire Hathaway and a long-time partner of legendary investor Warren Buffett, is an investor of his fund, and a ―mentor and good friend‖ (in Li Lu‘s own words). Li Lu has been known as the man who introduced the Chinese battery and auto maker BYD Company to Charlie Munger and Warren Buffett. He is an informal advisor to BYD. His LL Investment Partners owns about 2.5% of BYD. In May 2010, Li Lu helped to translate and publish the Chinese version of ―Poor Charlie‘s Almanack, The Wit and Wisdom of Charles T. Munger‖ in China and wrote a foreword for the book. Li was named a global leader for tomorrow by the World Economic Forum in 2001, and a Henry Crown fellow by the Aspen Institute in 1998. He is a member of Council on Foreign Relations and Young Presidents‘ Organization. Li is rumored to be the front runner to manage a large portion of Berkshire Hathaway‘s investment portfolio once Warren Buffett steps down. According to The Wall Street Journal,

Charlie Munger has recently said ―it is a foregone decision‖ that Li Lu is going to be a member of Berkshire‘s top investors team after Warren Buffett retires. This was also hinted several times in some conversations with Buffett. Years ago, Li told Munger to buy BYD, a Chinese battery and auto maker. Munger took the advice, and Berkshire‗s BYD bet has yielded profits of about $1.2 billion. According to the Wall Street Journal, Li‘s hedge funds have banked returns of 26.4 percent in the last 12 years (compared to 2.25% for the Standard & Poor‘s 500 stock index over the same period). Should he take on a role at Berkshire, Li‘s penchant for foreign investments will likely result in the investment company making more deals outside the U.S.A. Li‘s original fund had annual compound growth of more than 29 percent, from inception in January 1998 through the end of 2009, the manager said in Poor Charlie‘s. Another fund posted an annual compound return of more than 36 percent, Li said. Buffett‘s responsibilities will be split upon his death or retirement among at least three people, the company has said. A CEO will oversee the collection of more than 70 operating units assembled by Buffett and Munger, and one or more investment managers will allocate capital and manage Berkshire‘s portfolio. Buffett‘s son Howard will probably assume the position of non- executive chairman to preserve the firm‘s culture. ―I have the pleasure of knowing Li Lu and he is a brilliant and high-grade individual,‖ Whitney Tilson, founder of hedge fund T2 Partners LLC, said in an e-mail. ―I am thrilled for him as well as for Berkshire Hathaway, which is one of our largest positions.‖ Buffett said last year that he had four candidates to succeed him as chief investment officer. He didn‘t publicly name them. Earlier, he‘d said that he would audition managers who are ―genetically programmed‖ to avoid large risks. (with inputs from The Newyork Observer, Huffington Post, Business Week & Wikepedia)

We are not exaggerating- An unbelievable outperformer Posted by Muthu on August 18, 2010 I wish I had an investment advisor like us atleast 10 years ago. Sounds self appreciating, let me explain. As I‘ve written in the past, till the year 1999-2000, I was playing the loser‘s game in the stock market. I was mostly into trading with some investments in mutual funds. Even in mutual funds arena, a significant portion of my then networth was tied upto sectoral funds like Alliance New Millennium Fund (which was subsequently taken over by Birla Sunlife). No doubt that I ended being a looser with a negative worth. God send, I happened to come across Warren Buffett and read all his annual letters to his shareholders. Then I started scouting for books written by him. To my surprise, I came to know that he has not ever written a single book. So I read books written about him and his methodologies.

I realized what a fool I‘ve been and quit trading. I paid off my debts and started with a clean slate. Initially I was looking for value stocks. There were lot post dot cum burst. I choose GAIL, given its absurdly low valuations then. Despite 09/11 scenario, it became an 8 bagger (800% returns). I thought what I need to do was to simply extrapolate the success and ended with some dud stocks too. Also I continued to be a market timer and constant profit booker. I remember buying Reliance Industries at around Rs.100/- and subsequently selling it for Rs.150/-. Now you can see for yourself what is its value post bonuses, hiving off various businesses after division between brothers etc. Likewise I purchased Reliance Capital at Rs.70/- and booked profit around Rs.100/. You can see how far Reliance Capital has travelled subsequently. Even in the bull market, due to sharp corrections, I got scared and sold of some of my holdings despite loss. My SIPs were also for shorter tenure. I realized that I was not a good stock picker but was able to bump into or spot gems once in a while (honestly 3 stocks in the last 3 years). So I started focusing more towards mutual funds. Even in mutual funds, which by very nature is a long term instrument, I did the foolish acts of redeeming when the market fell sharply and stopping SIPs during market down turns precisely when one gets the major benefits of investing through SIPs. I was very emotional with markets and paid a dear price in terms of opportunity loss. I kept on correcting my mistakes till I became confident that I‘m an informed investor some time around 2006. To my surprise, I realized that despite many errors, due to some very good decisions I‘ve made, I became financially independent by then. By this time, I‘ve developed lot of passion for Personal Finance and specifically Investment Planning. In January‘07 I enrolled for CFP and started practicing as an investment advisor. My clients have benefitted a lot by the wise advice provided by us. People who did not have conviction and quit the market due to panic in late 2008 paid the price dearly. There is no need to feel bad about it, because I was also like you for more than 10 years (1995-2005). It takes lot of conviction not to get emotionally involved, not to time the markets, not to get either greedy or fearful and stay in the decided course. If I am, who is armed with a MBA in Finance from IFMR (Institute for Financial Management and Research) and is involved in the markets since 1995 can be so stupid and emotional; I do not blame the average investor for their follies. Many of our advices out turned out to be good. Some have gone wrong too. You cannot make any decisions, if you do not want to make any mistakes. In another 4 months, we would be completing 4 years of our professional practice. I could see that we were able to horn up our investment advice skills in the last few years and I‘m able to see a qualitative leap in the last one year. Most of our recommendations have turned out to be right. We‘re monitoring, some of our recommendations, which are not doing quite well.

We give sufficient time for the fund manager to bounce back and would call quits only if he is unable to make course correction even after a lapse of 2 to 3 years. Any great fund can have some bad years, but as along the fund and risk management processes are in place, we should give it benefit of doubt. I‘m not a very healthy person. It would be 38 years this November, since I‘ve been inhibiting our planet. If I‘m lucky to be alive for next 20 years, I would be very wealthy, purely through my investments, not counting on professional income which is also becoming reasonably good. Compounding needs time. Going forward too, we may be making mistakes occasionally. It is very difficult to be correct all the times. All I can tell you is our good decisions would far outweigh the bad ones. This means surely you would be better off through our advice. Wherever we go wrong, we would make course correction at appropriate time. Our advice is based on quantitative, qualitative and intuitive factors. This intuitive factor is the out come of last 15 years of experience with my own investments, personal finance and understanding of markets. All I can tell you is that people, who trust us and stick to our guidance, would stand to gain a lot in the next few decades. You would have created enormous wealth beyond your dreams and existing wealth would have been managed properly. All you need is not to be greedy or fearful. Markets, by very nature are cyclical, and you should not be carried away in both good and bad times. Sounds like a spiritual practice. Yes, detachment is the key to making wealth. I‘ve learnt this very hard way by experimenting with myself. Honestly I would have been 10 times better off in my wealth, if I‘ve got an advisor like us ten years ago. You are all definitely luckier in this regard. It may sound like that I‘m bragging. I know the value of what I know now, and I‘m saying this out of pure self conviction. I‘ve written in one of my recent article about gifting of SIPs as AMCs accept third party cheques. As per a circular issued on Monday, this would not be possible henceforth. The cheque has to be issued from the bank account of the applicant and monthly ECS should happen from the same account. It is heartening to note that some of you wrote to me about gifting SIPs for the needy people. As I told you, we‘re tireless in spreading awareness about SIPs. This is the best way for anyone, irrespective of their income levels, to build substantial wealth. I‘m seeing lot of hits on the articles written about SIPs. I‘m glad that we are also contributing in a small way for spreading the awareness about a great, proven way for building wealth over a period of time. Today we are going to discuss about a fund which is completing 5 years this month. So for our calculation purposes ‗today‘ is as on July 31‘st, 2010.

This fund is little unique in nature. This fund focuses on buying great companies at a low valuation with a long term perspective in the small and medium size category. If you‘ve been investing Rs.5000/- a month for the last 59 months (one month short of 5 years), you would have invested Rs.2.95 Lakhs. The value of your money today is Rs.6.04 Lakhs. An annualized return of 26.26%. Whereas its benchmark returns is only 14.69%. This means this fund has beaten its benchmark by 11.57%. Unbelievable outperformance. If you‘ve invested Rs.5 Lakhs lumpsum at the time inception of the fund, it is worth today Rs.15.96 Lakhs. This works out to an annualized return of 23.84%. In this scenario, the fund has outperformed its bench mark by 9.15% Having an alpha of 11.57% and 9.15% in the above mentioned scenarios shows the ability of the fund manager to beat the benchmark by a huge margin, due to able stock picking. We cannot forget the fact that the fund is only 5 years old and has seen both bull and bear phases in its limited period of existence. Despite these, it was able to provide the returns mentioned above. In my opinion, this fund is one of the must have fund in every investor‘s portfolio and has a good potential for future performance. Disclaimer: Mutual Fund Investments are subject to market risks. Past performance may or may not be repeated in future. There is no guarantee on returns. Sensex has provided an annualized return of around 18% in the last 30 years. I would write about another fund next week. Watch out for this space. You may browse the SIP folder/category in our website for more archives.

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Posted by Muthu on August 17, 2010 Let‘s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills. What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy. Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: ―Directors welcomed the authorities‘ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.‖ But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: ―The U.S. fiscal gap associated with today‘s federal fiscal policy is huge for plausible discount rates.‖ It adds that ―closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.‖

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years. To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act. Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It‘s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be. Is the IMF bonkers? No. It has done its homework. So has the Congressional Budget Office whose Long-Term Budget Outlook, released in June, shows an even larger problem. Based on the CBO‘s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our ―official‖ debt and our actual net indebtedness isn‘t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities ―unofficial‖ to keep them off the books and far in the future. For example, our Social Security FICA contributions are called taxes and our future Social Security benefits are called transfer payments. The government could equally well have labeled our contributions ―loans‖ and called our future benefits ―repayment of these loans less an old age tax,‖ with the old age tax making up for any difference between the benefits promised and principal plus interest on the contributions. The fiscal gap isn‘t affected by fiscal labeling. It‘s the only theoretically correct measure of our long-run fiscal condition because it considers all spending, no matter how labeled, and incorporates long-term and short-term policy. How can the fiscal gap be so enormous? Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today‘s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year. This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck. Herb Stein chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: ―Something that can‘t go on, will stop.‖ True enough. Uncle Sam‘s Ponzi scheme will stop. But it will stop too late.

And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills. Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it‘s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece. Some doctrinaire Keynesian economists would say any stimulus over the next few years won‘t affect our ability to deal with deficits in the long run. This is wrong as a simple matter of arithmetic. The fiscal gap is the government‘s credit-card bill and each year‘s 14 percent of GDP is the interest on that bill. If it doesn‘t pay this year‘s interest, it will be added to the balance. Demand-siders say forgoing this year‘s 14 percent fiscal tightening, and spending even more, will pay for itself, in present value, by expanding the economy and tax revenue. My reaction? Get real, or go hang out with equally deluded supply-siders. Our country is broke and can no longer afford no- pain, all-gain ―solutions.‖ (Source: Laurence Kotlikoff, Bloomberg)

Mr.Buffett, you are wrong and your close pal Mr.Munger is right Posted by Muthu on August 16, 2010 U.S. is in the verge of collapse. We‘ve been saying this many a times that we look like a dooms day prophet. The collapse of U.S., U.K and some other European countries is imminent. The question is only, when. The only other option left for U.S is to use its military might and plunder resources from other countries. They may get into clash of civilisations and emerge stronger, at the cost of eliminating significant portion of humanity. Or who knows, with the changing global dynamics, the U.S may also get wiped out. If you think, these are my day dreams, you are wrong. U.S. is running a ponzi scheme for last few decades by issuing new debt to repay the old debt and is now emperor of debts, with a negligible savings rate. The endless consumerism and passion for possessions, by leveraging and not investing for future, is finally taking a toll on its citizens. Believe me or not, there will be a day, we will loose our labour arbitrage in sectors like IT & BPO because U.S. citizens would be willing to work at our cost or may even be lower. Indian IT & BPO companies may find it better to set up their shops overseas and recruit local talent instead of employing Indians. The sector may remain, but the premium placed in the society like in our marriage markets for IT alliance or craze and competition in giving brides to bridegrooms settled in U.S., would slowly come to an end.

When I discuss these with people, they quote my mentor, Warren Buffett saying that U.S. would recover and prosper. Warren Buffett is an astute guy. You should never go by what he says and instead observe what he does. I‘ve been telling you that Buffett is my mentor. A whole hearted, yes. However I never blindly follow any human being or a Guru. As a mankind, we all have our own follies and vulnerabilities. Nothing wrong per se, in having human weaknesses, the problem starts once we start believing that someone is super human. At the end of the day, the elite of the mortals are also mortals. I religiously (what a paradoxical word) follow ‗Asset Allocation‘. This simply means how much of our financial assets should be in equity based instruments and how much should be in debt based instruments. So we‘ve in our portfolios equity funds, MIPs, long term SIPs, direct equity etc. I ensure that we try to stick to the asset allocation pattern as much as possible. Hard core Buffett fanatics I knew, criticised me for following an asset allocation when Buffett advocates investing only in equities and his holding period is forever. What Buffett says is technically correct but in practice he never follows that. He holds 99% of his wealth in equity, which is in the form of shares in Berkshire Hathaway. So he is not lying. At the same time if you see, he ensures Berkshire Hathaway follows asset allocation like holding shares, municipal bonds, treasury bills, debentures and above all huge amount of cash. So in theory Buffett has invested all his money in equity, which is his company but in reality he follows asset allocation in his company. The forever holding period of shares is only applicable to some of his core holdings and he has booked profits or losses in the shares in the past. What he is basically doing, is running a mutual fund for which he is the fund manager. Despite his human face, he is a hard core capitalist. Though he says derivatives are financial instruments of mass destruction that did not prevent him from getting a good deal for a song from Goldman Sachs, which primarily deals in derivatives. He also defended, before U.S. senate, the excesses committed by Goldman Sachs, because he has a significant stake in it. Though Buffett is saying, U.S. economy would improve, he is moving money to short term bonds, fearing hyper inflation, started investing in China, and is coming to India next year. He wanted to extend his insurance business to India and as the current insurance regulations do not permit a foreign company to hold major shareholding, he has started insurance broking in India. He is also heavily investing in ‗old‘ business like rail roads shows that U.S. has to start again as a brick and mortar economy. U.S. economy may improve probably after couple of decades, after they clean up the mess they are in, be frugal and sacrifice atleast one generation of hard core consumerism and thriving on debts, starts saving and investing in their own economy. Charlie Munger is much more forthright and says it‘s all over for U.S. as the super economy of the world and it has to start afresh. He can be candid in his views as he does not represent the human face of American Capitalism, whereas Buffett has such compulsions. Does this mean that my admiration for Buffett has gone down? No way. He is my mentor in personal finance, and I would be forever grateful to him for that. However that does not mean that Buffett is perfect, none of us are. We can admire people but glorifying them as super human, is at our own peril or foolishness.

Earlier this year, Charlie Munger wrote a parable on U.S. I‘ve given the same below. It is a lengthier one. But if you‘ve patience to read it, you may gain a lot of insights and wisdom. Basically It‘s over: A Parable about how one nation came to financial ruin In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature‘s bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island ―Basicland.‖ The Europeans rapidly repopulated Basicland, creating a new nation. They installed a system of government like that of the early United States. There was much encouragement of trade, and no internal tariff or other impediment to such trade. Property rights were greatly respected and strongly enforced. The banking system was simple. It adapted to a national ethos that sought to provide a sound currency, efficient trade, and ample loans for credit-worthy businesses while strongly discouraging loans to the incompetent or for ordinary daily purchases. Moreover, almost no debt was used to purchase or carry securities or other investments, including real estate and tangible personal property. The one exception was the widespread presence of secured, high-down-payment, fully amortizing, fixed-rate loans on sound houses, other real estate, vehicles, and appliances, to be used by industrious persons who lived within their means. Speculation in Basicland‘s security and commodity markets was always rigorously discouraged and remained small. There was no trading in options on securities or in derivatives other than ―plain vanilla‖ commodity contracts cleared through responsible exchanges under laws that greatly limited use of financial leverage. In its first 150 years, the government of Basicland spent no more than 7 percent of its gross domestic product in providing its citizens with essential services such as fire protection, water, sewage and garbage removal, some education, defense forces, courts, and immigration control. A strong family-oriented culture emphasizing duty to relatives, plus considerable private charity, provided the only social safety net. The tax system was also simple. In the early years, governmental revenues came almost entirely from import duties, and taxes received matched government expenditures. There was never much debt outstanding in the form of government bonds. As Adam Smith would have expected, GDP per person grew steadily. Indeed, in the modern area it grew in real terms at 3 percent per year, decade after decade, until Basicland led the world in GDP per person. As this happened, taxes on sales, income, property, and payrolls were introduced. Eventually total taxes, matched by total government expenditures, amounted to 35 percent of GDP. The revenue from increased taxes was spent on more government-run education and a substantial government-run social safety net, including medical care and pensions. A regular increase in such tax-financed government spending, under systems hard to ―game‖ by the unworthy, was considered a moral imperative—a sort of egality-promoting national dividend—so long as growth of such spending was kept well below the growth rate of the country‘s GDP per person. Basicland also sought to avoid trouble through a policy that kept imports and exports in near balance, with each amounting to about 25 percent of GDP. Some citizens were initially nervous because 60 percent of imports consisted of absolutely essential coal and oil. But, as the years rolled by with no terrible consequences from this dependency, such worry melted away.

Basicland was exceptionally creditworthy, with no significant deficit ever allowed. And the present value of large ―off-book‖ promises to provide future medical care and pensions appeared unlikely to cause problems, given Basicland‘s steady 3 percent growth in GDP per person and restraint in making unfunded promises. Basicland seemed to have a system that would long assure its felicity and long induce other nations to follow its example—thus improving the welfare of all humanity. But even a country as cautious, sound, and generous as Basicland could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland‘s citizens more and more whiled away their time in the excitement of casino gambling. Most casino revenue now came from bets on security prices under a system used in the 1920s in the United States and called ―the bucket shop system.‖ The winnings of the casinos eventually amounted to 25 percent of Basicland‘s GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos (many of whom were engineers needed elsewhere). So much time was spent at casinos that it amounted to an average of five hours per day for every citizen of Basicland, including newborn babies and the comatose elderly. Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called ―financial derivatives.‖ Many people, particularly foreigners with savings to invest, regarded this situation as disgraceful. After all, they reasoned, it was just common sense for lenders to avoid gambling addicts. As a result, almost all foreigners avoided holding Basicland‘s currency or owning its bonds. They feared big trouble if the gambling-addicted citizens of Basicland were suddenly faced with hardship. And then came the twin shocks. Hydrocarbon prices rose to new highs. And in Basicland‘s export markets there was a dramatic increase in low-cost competition from developing countries. It was soon obvious that the same exports that had formerly amounted to 25 percent of Basicland‘s GDP would now only amount to 10 percent. Meanwhile, hydrocarbon imports would amount to 30 percent of GDP, instead of 15 percent. Suddenly Basicland had to come up with 30 percent of its GDP every year, in foreign currency, to pay its creditors. How was Basicland to adjust to this brutal new reality? This problem so stumped Basicland‘s politicians that they asked for advice from Benfranklin Leekwanyou Vokker, an old man who was considered so virtuous and wise that he was often called the ―Good Father.‖ Such consultations were rare. Politicians usually ignored the Good Father because he made no campaign contributions. Among the suggestions of the Good Father were the following. First, he suggested that Basicland change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees—and former casino patrons—to produce and sell items that foreigners were willing to buy. Second, as this change was sure to be painful, he suggested that Basicland‘s citizens cheerfully embrace their fate. After all, he observed, a man diagnosed with lung cancer is willing to quit smoking and undergo surgery because it is likely to prolong his life. The views of the Good Father drew some approval, mostly from people who admired the fiscal virtue of the Romans during the Punic Wars. But others, including many of Basicland‘s

prominent economists, had strong objections. These economists had intense faith that any outcome at all in a free market—even wild growth in casino gambling—is constructive. Indeed, these economists were so committed to their basic faith that they looked forward to the day when Basicland would expand real securities trading, as a percentage of securities outstanding, by a factor of 100, so that it could match the speculation level present in the United States just before onslaught of the Great Recession that began in 2008. The strong faith of these Basicland economists in the beneficence of hypergambling in both securities and financial derivatives stemmed from their utter rejection of the ideas of the great and long-dead economist who had known the most about hyperspeculation, John Maynard Keynes. Keynes had famously said, ―When the capital development of a country is the byproduct of the operations of a casino, the job is likely to be ill done.‖ It was easy for these economists to dismiss such a sentence because securities had been so long associated with respectable wealth, and financial derivatives seemed so similar to securities. Basicland‘s investment and commercial bankers were hostile to change. Like the objecting economists, the bankers wanted change exactly opposite to change wanted by the Good Father. Such bankers provided constructive services to Basicland. But they had only moderate earnings, which they deeply resented because Basicland‘s casinos—which provided no such constructive services—reported immoderate earnings from their bucket-shop systems. Moreover, foreign investment bankers had also reported immoderate earnings after building their own bucket-shop systems—and carefully obscuring this fact with ingenious twaddle, including claims that rational risk-management systems were in place, supervised by perfect regulators. Naturally, the ambitious Basicland bankers desired to prosper like the foreign bankers. And so they came to believe that the Good Father lacked any understanding of important and eternal causes of human progress that the bankers were trying to serve by creating more bucket shops in Basicland. Of course, the most effective political opposition to change came from the gambling casinos themselves. This was not surprising, as at least one casino was located in each legislative district. The casinos resented being compared with cancer when they saw themselves as part of a long-established industry that provided harmless pleasure while improving the thinking skills of its customers. As it worked out, the politicians ignored the Good Father one more time, and the Basicland banks were allowed to open bucket shops and to finance the purchase and carry of real securities with extreme financial leverage. A couple of economic messes followed, during which every constituency tried to avoid hardship by deflecting it to others. Much counterproductive governmental action was taken, and the country‘s credit was reduced to tatters. Basicland is now under new management, using a new governmental system. It also has a new nickname: Sorrowland. (with inputs from Slate)

Work-Life Balance: A different perspective Posted by Muthu on August 15, 2010 Happy Independence Day!

Yesterday I got a call from a journalist friend of mine who wanted me to do a live program today for a prominent TV channel regarding ‗Job opportunities in the Finance Sector‘. I can talk about job opportunities in ‗Personal Finance‘ and to some extent in ‗Financial Services‘. Honestly I do not know what are the job opportunities available in the entire Finance sector. So I‘ve to decline the offer. Some time ago, the same channel has asked me to do a program on ‗Job opportunities in Real Estate‘. Again, due to lack of sufficient knowledge, I let go the opportunity and the same was done later by the MD of Hanu Reddy Realty, who in my opinion is a more appropriate person for the topic. Yesterday I made it a point to convey clearly, what I know and in what areas I would be able to do a program. I do not know if I would get a call for third time, having declined 2 opportunities. If it comes, it‘s fine. If it doesn‘t come also, it‘s fine. So be it. It is better to say ‗No‘ to the opportunities I mentioned above, instead of making a fool of myself, the viewers and wasting the time slot of the channel, which can be better utilized. The programs I‘ve done in another channel was able to strike a chord with audience, because it pertains to the area I know and passionate about. Today morning, I got up very early as usual and was browsing the net. We‘ve some general views on Work-Life balance and I also believe that everyone should have that. But HK Shivdasani in DNA has looked at the Work-Life balance in a different perspective and I found it interesting, though I do not endorse whatever has been said, I definitely feel that there are some good take away from the article. I‘m sharing the article below. ‗What is your ultimate goal in your life? To be successful and affluent? Just to be happy? To achieve a unique identity in society? Self-actualisation? Or, if you have already matured as a person of substance, to give back something to society? Or to follow the Hedonists and seek pleasure and nothing but pleasure as a goal of life? Your answer to this question may be along the lines of, ―Probably all these, though that‘s quite impossible.‖ Yet my purpose here is to share with you a single formula that, I believe, can help a person realise all the above goals and more. Let us begin with the most popular life goal, ie, success. One way to learn is by studying the lives and habits of successful people. Albert Einstein, for example, worked on the ideas that flashed in his mind at all times of day and night. So absorbed was he in his work that he sometimes asked his butler to serve him lunch, forgetting that he had finished it already. Melody queen Lata Mangeshkar would practise for hours as a teenager, and she has continued to enjoy her mammoth practice sessions every single day of her life. Sachin Tendulkar, even as a school kid, loved batting practice, hitting balls against a wall well past midnight. Think of Zakir Hussain, Bismillah Khan, Michael Jackson, or an Olympic winner of your choice. All these achievers have just one thing in common: they never had ‗working hours‘. And that‘s because they never ‗worked‘. They enjoyed their work so much and remained so absorbed in it that no other activity was as much ‗fun‘. They never knew or needed to practise ‗work-life balance‘.

Advocates of work-life balance recommend that after college or office hours, we go to some club or park with friends for some recreation, but these people — such as Tendulkar absorbed in cricket — derived more pleasure in their ‗work‘. In other words, they have had more ‗fun hours‘ (read ‗work hours‘) than most of us have work-plus-fun hours. Why are we not so involved in our work? To understand this, imagine what could have happened if Tendulkar had gone for a career as a chartered accountant or Einstein as a lawyer. Or if Bismillah and Jackson had been forced to study engineering. Well, that is what is happening with most of us. We fail to see a ‗fit‘ between something inside us and the demands of the career or profession. The greater the scope in your work or profession to satisfy basic drives that can propel you over a lifetime, the greater will be your involvement in fulfilling them. In common parlance we call it ‗passion‘. You hear people saying someone is highly successful because his work is his ‗passion‘. People whose needs are not adequately satisfied at work function just to meet their survival needs. To fulfil their core driving forces, they look for diversions and recreational activities suggested by work-life enthusiasts. The names mentioned above could convey the misleading impression that we are talking of geniuses. But in today‘s highly competitive world, excellence in work has become mandatory. We find thousands of young architects, doctors, fashion designers, and managers who made it to the pinnacle of their profession while in their 30s and 40s. They were successful thanks to their commitment and passion, not because they practised worklife balance. Unfortunately, most people do not know what their driving forces are. It takes considerable time to identify the work areas that could become a passion for those who are dissatisfied. One way we find out is when they express pleasure in changing over to a suggested field and discuss strategies to change course mid-stream, as it were, age being no bar. Should we slow down the march of civilisation, the benefits of which we are reaping — thanks to inventors like Thomas Alva Edison, who famously said it was 99% perspiration — by asking these geniuses to work limited hours? Secondly, if all of us were to adopt this work-life balance model, and ‗worked‘ for more or less the same hours and spent some hours with friends, family, and in relaxation, we would all end up as the same ‗standarised‘ products from a factory, made using the same mould! But isn‘t our world a wonderful place because of the diversity of people? I had said I shall offer one formula to achieve all the different goals of life. We discussed success. But what about the happiness that so many seek? Well, success and happiness go together. Is happiness different from doing something that is fun, gives you joy, and satisfies your needs? Happiness and success are the same side of the coin, and result from carrying out exactly the same activities. What about a person of substance, who wants to give something back to society? You can only give what you have in abundance, and in the field in which you are a master — to give, you first must achieve a lot, through ceaseless pursuit of your passion.

And, finally, what about individuals whose ultimate aspiration is to achieve a unique identity in society, what you may call ‗self-actualisation‘ or personal fulfilment? Carrying forward our logic, a unique identity is attained through social recognition, which comes from making an extraordinary contribution to one‘s field. Personal fulfilment is the outcome of attaining success, happiness and a unique social identity. Such a full realisation of potential is possible only when a person is driven by his own individual passion. To sum up, the concept of work-life balance is seriously flawed. Selecting a career or profession that exploits or gratifies one‘s unique driving forces is a far better route to success, happiness, personal fulfilment and a distinct identity in society than trying to follow some flawed notion of work-life balance. Having a passion gives life a purpose. Many research findings have now proved that those who live with a purpose live longer (and healthier) than those living without a clear purpose or passion. So identity your passion and pursue it to live long and be happy.‘

Charlie Munger: Do you know three things which make Buffett successful? Posted by Muthu on August 14, 2010 Charlie Munger is a long time friend and business partner of Warren Buffett. He is also the vicechairman of Warren Buffett‘s investment vehicle Berkshire Hathaway. Charlie Munger is one of the greatest investment geniuses of our times. Both Buffett and Munger are great friends who enjoy each other company a lot and Munger is the sounding board for Buffett. Munger is as much responsible for Berkshire‘s success as Buffett. But Buffett scores over him in his down to earth approach in sharing his wisdom and more over a common man is able to connect to him easily. Munger is extremely intelligent and highly rational but does not have a ‗human face‘. So he is more popular in academic and investment geniuses circle for his cutting edge brilliance. Buffett is as intelligent and rational like Munger but he underplays the intelligent and rational part and projects more of his human aspects. Munger in a speech listed out three things, in his opinion, makes Warren Buffett successful. Mental aptitude: Buffett is one of the smartest people I know. Buffett has been extremely interested in investing since he was 10. There is no substitute for having a very intense interest in something you‘re trying to succeed at; Buffett started very early. When you are in a field like investing, which requires long compounding periods, this is an important factor; Warren Buffett is one of the best learning machines on Earth. Extremely high-IQ people don‘t need to keep learning throughout life (they can coast), but people with less intelligence need to keep learning. Buffett had both – very high intelligence and continuous learning. Buffett‘s skills have increased markedly since he turned 65! If he had stopped learning earlier in life, his record would be much less impressive. Focus: The work at Berkshire Hathaway was concentrated in one mind. Great committees are unsuccessful in most fields (such as investing and physics). Buffett maximizes objectivity.

A lot of very bright people make continually bad decisions because they have bad character traits and, worse, they encourage them. Don‘t be an extreme ideologue – whether right or left. Positive Reinforcement: As Buffett succeeded more with his approach and as more people knew of him, this was a form of positive reinforcement to keep doing what he was doing, and do it better. Positive reinforcement is a very important force in life; give positive reinforcement to people you care about when they do good things. Some more snippets from the above speech. On business schools: The flip side of this poor education in most liberal arts programs is that if you have the sense to pick up the key ideas in all disciplines, you can beat people in your field who are more talented than you. On learning the method of learning: People can be spoon-fed to excel at tests, but if you learn the method of learning, you can enter new fields and dominate them. On being rational: Be a little more rational and you can beat everyone. It‘s fun to be rational. On books he recommends: The Martians of Science: Five Physicists Who Changed the Twentieth Century by Istvan Hargittai; and Einstein: His Life and Universe by Walter Isaacson. On mentors: Most of Warren Buffett‘s achievement came by sitting on his ass and reading. You‘d get fired in corporate America if you did that! The present generation of multitaskers won‘t produce people who think as well as Buffett. Wisdom comes by sitting on your ass. (with inputs from National Post)

Around 40% annualized returns since inception- Are we selling dreams? Posted by Muthu on August 13, 2010 Two days ago, two gentlemen walked into my office. I never meet anyone without appointment, as it helps in better time management for all concerned and was not in best of my moods on that day. A new Toshiba Laptop has been sold to me without operating system, which was not informed to me at the time of sale. There was a little tiff that morning with the vendor, who took the system for installing proper OS. My chair wheel got broken for the third time in a month. The furniture seller is fond of doing pooja for hours together and then visit lot of temples before reaching his shop by noon. He was not responding to my repeated calls as he was busy spending time with his God. Our maid lost my belt loop while cleaning our bedroom and I‘ve to visit a leather goods shop to get the replacement. All these resulted in me reaching office late. When I‘m in a bad mood, it shows on my face. I was not happy to see 2 people suddenly entering my office and I asked with a little scowl as to what these 2 men want. One man was holding a LIC dairy and informed that they have come to discuss investments. By that time, I was fuming inside and was wondering why someone wants to sell me an investment, which I don‘t like, without asking for a prior appointment.

I tried putting up a good face and invited them inside my cabin. It turned out that two of them after seeing my interview in ‗Jaya TV‘ recently wanted to start Rs.5000/- SIP each, every month for 20 years and came to meet me in that regard. I tried my best to come back to normal mood and explained them the benefits of SIP. They said that they will think about it and get back to me after couple of days. I wonder whether they would come back after seeing an instant frown on my face. I can only hope that they come back! Any way, don‘t sweat the small stuff and at the end of the day the whole life is small stuff. I‘ve been writing series articles about benefits of SIP and showcasing the performances of different funds (which are part of our recommendations) in this regard. The fund I‘m going to discuss today has completed 8 years in July‘10. As the data I‘ve pertains to as on June 30th, 2010 (considered as ‗today‘), for the purpose of this article the tenure of the fund is 95 months and not 96 months. You‘ve read the title of the article correctly and we are not selling dreams. The very first article we wrote was about a diversified equity fund. The second article we wrote was on a Midcap Fund. Both these fund are around 15 years old. As I mentioned above, this fund is around 8 years old and it is a madcap fund. If you‘ve invested Rs.5 Lakhs in 2002, its value today is Rs.71 Lakhs. Your money multiplying by 14.2 times, an annualized return of 39.8%. The fund‘s Alpha is incredible 11.1%. This means that the fund has outperformed its benchmark (BSE Midcap) by 11.1%. Hats off to the superb performance. If you‘ve invested Rs.5000/- per month for 95 months (one month short of 8 years), you would totally invested Rs.4.75 Lakhs spreading across the entire period. The value today is Rs.19.73 Lakhs. Your money multiplying by 4.33 times, an annualized return of 35%. This 35% is made possible despite both a strong bull and bear run in the last 8 years and market settling down flat in the recent times. Really consistent outperformance. Disclaimer: Mutual fund investments are subject to market risk. Past performance may or may not be repeated in future. The returns are not guaranteed. Sensex has provided an annualized return of 18% in the last 30 years. I‘m never ever going to get tired being passionate about SIPs. Anyone, even with a surplus of Rs.1000/- can start a SIP and timing the market is immaterial. Twenty year period is a good time for a SIP investment. Request you to spread the awareness of participating in our country‘s growth through SIP. When the country grows, not only the elite of the society, but even a common man should participate and benefit out of its growth. Also for your information, people who cannot afford even SIPs of Rs.1000/-, there are Micro-SIPs even for Rs.100/- per month. Also you can gift a SIP to someone. AMCs accept third party cheques for SIPs. I‘ve gifted my brother, who has to face lot of misfortunes in life and is suffering from severe problems, a

SIP which runs regularly for last couple of years. This is in addition to the endowment corpus we created and the monthly contribution we provide. Though I‘m always there to support my brother, in case of anything happening to me, he should be financially self sufficient enough atleast to survive. You can gift SIPs for whomsoever you consider needy, like your relatives, friends, employees, maid, driver, security guard etc. Considering the power of compounding and our growth rate, this is the best gift you can give for someone‘s future.

Do you know that only 3% of Indians Pay Income Tax? Posted by Muthu on August 12, 2010 Do you know that only 3% of Indians Pay Income Tax? Out of its population of over a billion people, India has only 31.5 million tax payers. Assuming we leave aside 50% of the population that is marginally above or below the poverty line. Of the remaining 500 million, 94% still remains un-taxed! Thus depriving the government of critical funds to empower the economy. Problems relating to fiscal deficit and the like could be solved with efficient taxation. But the real problem lies in an economy that evades taxes. As per unconfirmed statistics, India tops the quantum of black money hoarded with Swiss banks. At over US$ 1.5 trillion, it could more than double the economy‘s GDP if accounted for. There was so much talk before last general elections both by ruling and opposition parties about this. Post elections, nothing happened. May be, politicians as a class, would prefer not to take efforts bringing back this black money to the country. Just make right noises before the elections to impress the poor illiterate ‗Aam Aadmi‘. Problem ‗solved‘ for next 5 years. Calling it a ‗shadow economy‘, an article in Bloomberg enlists the problems associated with unaccounted incomes. It turns out that countries have two economies, the official one and a shadow version. The official economy is the one that governments measure in terms of addition to GDP. This is by way of tax receipts, employment numbers etc. The shadow economy is all the money and jobs generated outside the official economy. It may be either legal or illegal. The ‗shadow economies‘ for the US and Greece accounted for only 9% and 31% of the respective GDPs in 2008. Nevertheless, these funds could have saved the economies billions of taxpayers‘ funds. Not to mention – plenty of embarrassment. The official figure for India is not known. But probably the government should work on making the official economy more attractive. This could be done by reducing the incentives to participate in the shadow economy. What do you think would be the best way to reduce the share of India‘s shadow economy? Definitely not the solution given by Director Shankar in his Tamil movies like Sivaji, Anniyan and Indian, which many people saw by purchasing ‗black tickets‘ (tickets sold outside the cinema halls for a premium), contributing their might to ‗shadow economy‘. Isn‘t it Paradoxical Mr.Shankar? I hope that Mr.Shankar and his ‗S‘ Pictures pay their income taxes regularly. The solution is not violence, but better governance.

Dear Mr.Prime Minister, are you listening? (with inputs from Equitymaster)

I see markets multiplying multi-fold from current levels Posted by Muthu on August 11, 2010 Given below are the edited excerpts of interview given by Nilesh Shah, the deputy chairman and managing director of ICICI Prudential AMC, in DNA Money. Most sectors are priced for perfection or a little above it. Very few sectors are priced below perfection. For example banking, technology, FMCG (fast moving consumer goods), pharma all look priced for perfection or more than it. The infrastructure space — cement, metals, construction, engineering are the ones which are priced a little below their fair value. So in some sense, the consumption theme appears at fair-value to above fair-value and infrastructure appears below fair-value to fair-value. The infrastructure sector had gone up on expectations, then 2008 brought them down. Then one saw a lot of projects getting delayed. If you see February of 2009, we were facing elections. Before that, in October 2008, there was a liquidity crunch. So projects which were on the drawing board got delayed due to liquidity and then because of political uncertainty. Then you ended up hitting a drought; construction cannot take place without water. Then there was news of the meltdown in Europe, so again people became fearful. Somewhere, the pace of infrastructure investment somehow got bogged down every time it was trying to rise. In this process, the valuations were high and the delivery was low, they needed to meet. Stocks would have gone down otherwise also because your delivery did not happen, but came down more because their valuations were high. And that is the reason why the infrastructure sector has underperformed the broader market over the last 18 months. Now we are seeing a turnaround. There are more power stations getting commissioned now than have been over the last few years. Road projects have been awarded for tender which will be beneficial for construction. Capacity additions are also starting to happen. All these things put together, we should see a revival in the infrastructure sector. And now you will benefit because valuations are low and delivery is high. In my equity fund I remain fully invested. We do try to take defensive calls when we think the market is trading above its fair value, but these are all near-term concerns. On a five-year basis or a 10-year basis, I see markets multiplying multi-fold from current levels. So I am not investing for tomorrow or day after tomorrow, I am investing for five years or 10 years. Within equities, we are becoming overweight on the consumption theme and we are overweight on the infrastructure theme. We are becoming a bit more focused on large-caps. We are trying to invest in stocks which have limited downside and better value. It is kind of a little more defensive portfolio than an aggressive portfolio.

It is difficult to predict whether we will receive flows from foreigners in the near-term, since there could be valuation issues. Over the medium to long-term, we will receive flows. This is a country in which we offer over 7% on a 10-year government security, much higher than the US. In the UK and Europe, it is under 4%, in Japan, it is even lower. We are offering good rate of return on our debt. If one looks at equity in the US context, if in the last 10 years the markets have remained where they were, what hope do we have for the next 10 years? The last 10 years were a good time for America. They had good credit expansion, good economy, benevolent central bank. But going forward, they would have to pay the price of the deficit. So in the medium- to long-term, we are far more bullish on FII allocations because we will be able to provide return on investments. There are many other markets which will not be able to. Japan, for 20 years, equity markets have only gone down, not gone up. It is difficult to say whether China is undervalued but it is trading cheaper than India. Russia is trading at one-third of India‘s valuation, but is this cheaper I don‘t know. Maybe they deserve to trade at those valuations. There is a distinction to be made between the valuation level and the attractiveness of the valuation. Within emerging markets, we are getting flows because we deserve to get flows. So in the last 10 years they haven‘t moved ahead, I doubt if in the next 10 years also they would be able to move forward. Whereas I can bet most people would expect Indian equities to be at significantly higher levels over the same period. We are faster growing, we are more diversified and our return on equity is superior to any other emerging market. Our corporate governance track record is better compared to other countries. In Russia, one of the largest companies was decimated in no time. In India, that kind of thing is unlikely to happen. Brazil is a commodity country. If I am not mistaken, a large portion of their market is made up of two companies from the oil and telecom sector. These alone can‘t make up a large portion of a market. In India we have technology, pharma, we have banks. It is very well diversified. India is not a country, it is a continent in itself. If you look at the history of the modern Indian equity market, it started with the setting up of electronic exchanges, dematerialisation of shares, better corporate governance enforced by the Securities and Exchange Board of India. All these things have failed to achieve the ultimate objective, making the retail investor comfortable enough to invest. It is a puzzle why investors are happy with below real rate of return on bank deposits and other instruments but not willing to take the risk of investing in equity. There is a disappointment about retail equity participation in Indian equity markets for many, many years. Nothing has changed. A couple of reasons which can be attributed to that — World-over, pension funds invest in equity. In India, they are not permitted to do so. If someone sees the benefits of long-term investment in equity through a pension fund and the impact it has on the portfolio, there would be a level comfort which would begin to build. But today, that luxury is not there so it does not entice people to come into it. Secondly, equity is being seen as a trading market rather than an investment market. If you had invested over the long term, the market has grown multiple times since the early

90s. But you have the ignorance of investors, the failure of intermediaries to position equities correctly. There is no substitute to education. More initiatives for investor education would certainly help as will better corporate governance.

Journey from BPO to Personal Finance Posted by Muthu on August 10, 2010 Before I proceed into the topic, I want to share with you an opinion suggested by a friend of mine. He suggested that the comments pertaining to the ‗Topic of the week‘ can be posted on the article itself and Visitor‘s arena can be reserved for ‗general feedback‘. This would ensure easy tracking. As the comments goes in the order of earliest posting to the latest, visitors would not be able keep track on views pertaining to particular topic of the week. Two of you have posted comments in the ‗Article‘ and two others in the ‗Visitors Arena‘ (as suggested by me). May I request you to use ‗Visitors Arena‘ for general comments and use articles for specific comments? I request our two friends and wellwishers who‘ve posted your feedback in ‗Visitors Arena‘ to repost in the ‗article‘, so that I can delete the same from ‗Visitors Arena‘. Sorry for the trouble. Going forward, only general comments would be approved for posting in the ‗Visitors Arena‘ and anything pertaining to an article or ‗Topic of the week‘ would be posted in the comments area. This would make ‗comments‘ more organized and trackable for fellow visitors. Sorry for goofing up and kindly bear with me for the inconvenience. I‘m writing this to share with you some details of our journey in an uncharted path during the last 3 ½ years. Till the age of 34, I‘ve not been in the field of ‗Personal Finance‘. I‘ve established myself for a decade both in the international and domestic BPO. I stepped into the industry at the entry level and rose to the level of Asst.Vice President, getting seven promotions in a span of a decade. This was due to the combination of God‘s Grace, hard work and mainly I happened to be in the right industry at the right time. I definitely did not hate my BPO work and have given my best in the roles provided to me. However after Warren Buffett came in to my life a decade ago, my heart was totally into the area of investments and Personal Finance. As I became financially independent and BPO work has stared impacting my health too, I decided to take ‗Personal Finance‘ as my profession.

My wife fully supported me taking a break from the job for 6 months to 1 year to recoup my health. Except her, none of our relatives supported my decision of quitting a job when I had a ‗secure career‘. As I‘ve told you before, I enrolled immediately for CFPCM certification. Though I know that I know, I needed right credentials to tell the world that I know. I cleared all my CFP modules in the first attempt and completed the certification within one year of quitting my career. Immediately after quitting the career, even while I was doing my certification, I started practicing as a ‗Personal Financial Advisor‘. I decided that our professional model would be such that we would grow by referrals only. This is the way I wanted to position ourselves in the market. We‘ve not made a single cold call till date, for acquiring a new client. We would never ever make cold calls, even if we do not get any business. We want to grow by ‗word of mouth‘ referrals only. The first call should be from the prospective client and not vice versa. Now a days I‘ve also started getting clients, who come to know about us either through our or FPSB India (CFPCM Certification provider) portal. For the budding professionals, let me tell you that this is not the easy way to grow, without generation of leads. I consciously chose the most difficult path. But I want to share with you today that the growth is possible even through this model. The first 2 years was the most difficult period. There were months there were literally no transactions or may be 2 or 3 transactions. But anyone came to us went back very satisfied. Slowly they started referring people and the business was trickling in. I was lucky to be recognised by both print and visual media. This helped my existing clients to reinforce their trust in me. But in terms of incremental business from new clients, it was very marginal. One major break through in visibility came in the form of Mr.‘Drums‘ Sivamani calling and sharing his appreciation in a live show I did for Jaya TV. He also said that he is interested in meeting me and would do so when he is in Chennai. He has not called me till date. I‘m grateful to him for taking time to call in a public media and appreciate a budding professional. His appreciation of me was probably one important factor that I had the good opportunity of being invited recently a as a guest for Jaya TV‘s breakfast show, ‗Kaalai Malar‘. Some wellwishers in the mutual fund industry suggested that I give a call to Mr.‘Drums‘ Sivamani as they know that how the investments of him and his close pal Mr.A.R.Rahman is being mismanaged by a bank, trying to maximise its revenue. They said that I would be adding a lot of value to them, if I manage their portfolio, which is a sizeable sum. All they wanted me to do was to make a call to Mr.‘Drums‘ Sivamani. I‘ve complete faith in God‘s will and it is he who decides everything in my life. I keep on my table a picture of Mount Arunachala with a Ramana Maharishi‘s quote, which I often keep looking at ‗ Whatever is destined not to happen will not happen, try as you may. Whatever destined to happen will happen, do what you may to prevent it. This is certain.‘ So if I‘m destined to have Mr.‘Drums‘ Sivamani and Mr.A.R.Rahman as clients, it will definitely happen. If I‘m not destined, it will not happen. So be it. The onus is on Mr.Sivamani, to initiate a call or not. I do not compromise our professional values because a person happens to

be a VIP. As far as I‘m concerned, they are my clients and I‘m their ‗Personal Financial Advisor‘. This I‘m not saying out of ego or arrogance but my sincere belief as to how a professional should function. A Doctor cannot hunt for patients, they (including VIP patients) should come to him on their own. This would ensure that the Doctor maintains the professional respect and patients are able to trust him because he is not chasing them and selling his services. As always, in my musings, I digress a lot. Coming back, as my profession was not picking up in the way people had expectations, there was social pressure one me to go for a job in the area of ‗Personal Finance‘. In my opinion, one has to compromise a lot on his principle and values, if someone opts for a job in this area. The very industry is designed to maximize its revenue at the cost of customers. If you do not play the game in the way they want you to play, you are out of the game. Any how the game they play is a foul game and I do not want to be a part of it. Luckily, from the 3‘rd year onwards the profession started picking up in a good way. From the 4th year beginning (i.e. from January this year), the growth has been rapid, more so in the last 5 months. My plan was move away from my home office after completing 5 years in our profession. God had other plans. Due to social compulsion, I moved to an office complex in Mount Road. No regrets. I‘m continuing to enjoy what I‘ve been doing in the new place too. My humble request to people whose relatives or friends, choose to be an entrepreneur or a professional, give them time to sow seeds. It will take a while for seeds to sprout. Only a plant or tree to would be visible to the eyes of society. But only to the person who is sowing, he knows about the seeds which are invisible to the eyes, as they are under the soil. If you change the soil frequently, a seed will only remain a seed and it would not have opportunity to grow. It is very important to persist and stay put whether one gets business or not. If you can stay in a business or profession for many years, and can give real value to your customers, sooner or later, you are bound to be recogonized. In a worst case scenario, even after spending significant number of years, you do not see any growth, then you may quit. Definitely there is a risk, if we try to be on our own, and that is how life is. Opt for being an entrepreneur or a practicing professional, only if you can embrace uncertainity. Do not worry about the opinions of your relatives and others, who look down on you as they are unable to see the plants growing. You know that you are sowing right seeds in the right soil. Leave it to God to decide whether you would be successful or otherwise. If the growth is slow, accept it and wait. If the growth is rapid, enjoy that your calling is getting recogonized by the society sooner than later. If you do not grow or succeed, quit with your heads high, as you had the guts to be on your own and experiment something in life. Look at Doctors who are practicing in and around your locality. They study for 7 to 8 years. It takes a decade for them to get recognized by the local community and also from far of places (through word of mouth references). Then only they start earning good revenue. The growth may look sudden, but do not forget the fact the number of years the Doctor spent in sowing seeds.

Unless you are a professional with parents who are also professionals in the same field (like Doctor, Auditor, Lawyer etc.), you are not going to get clients on a platter. Like wise, there are not many difficulties, if you are going to inherit a business from your father. Otherwise, it needs patience, values, hard work and above all luck to succeed and grow. By the very design, most start-ups fail. That has never deterred entrepreneurs and professionals to be on their own and try their best in the market. Leave it for the market to decide if it needs you or not. If the market does not need you, have faith that God may have different plans for you.

The Unfortunate Billions Posted by Muthu on August 6, 2010 This article is dedicated to billions of unfortunate people, about whom I am going to write today. Before that some musings, as usual. Being a ‗Personal Financial Advisor‘, I come across a wide spectrum of people. Majority of them belongs to ‗Higher Middle Class‘ and ‗Middle Class‘. HNIs and ‗Lower Middle Class‘ constitutes a smaller portion. One thing I notice in significant number of people is the sense of inadequacy, though they are financially adequate. We forget the fact that we are lucky to be among a small percentage of global population who have money or assets worth speaking about. I‘m really surprised when I come across Crorepathis feeling insecure and extremely anxious about their finances than my maid or driver. I‘m amused when our relatives (many of them are very rich) evaluate me on what (they think) I own. They are most curious to know how I‘m managing my livelihood and sympathise me for quitting a ‗good job‘ and is ‗foolishly‘ doing something. Many of them neither understands nor tries taking effort to know what I do. Their ‗anxiety‘ was high especially when I was operating from our ‗Home Office‘ and now they should have been bit relieved that ‗I‘m doing something‘ from a separate office. All these people understand is Money, Possessions and Activities which should be visible to their eyes. Since they are lucky to have these, many of them are snobbish, high handed and are in the continuous rat race of acquiring more and more till they drop down to death. They do not value knowledge, thinking, reading and other finer aspects of life. Why should I live to impress someone? As Will Rogers says ‗Too many people spend money they haven‘t earned, to buy things they don‘t want, to impress people they don‘t like‘. I know about my networth, which are in financial assets and hence not visible to them. Why should I declare them that? If they want to respect me for what I am, then it is fine. I don‘t value the respect I receive based on what I own. Likewise I respect people for what they are and not based on their money and possessions. I‘m glad that I‘ve lot of friends, wellwishers and clients who values me for what I am. Also I work with people whom I enjoy working with. Unfortunately one cannot choose his relatives. Simply they happen to be one.

I wanted to share today some facts and stats today on the extreme inequality and poverty our world is facing today. I‘m sharing this so that we do not complain about we do not have but be grateful for what we‘ve been endowed with. Since the whole life is interconnected, let us think about our unlucky brethren and do whatever possible from our end to alleviate their suffering. To quote my mentor Warren Buffet, ‗If you are in the luckiest 1% of humanity, you owe to the humanity to think about the other 99%‘. Now let us come to the facts and stats of poverty, worldwide. Almost half the world, over three billion people, lives on less than $2.50 a day. At least 80% of humanity lives on less than $10 a day. More than 80 percent of the world‘s population lives in countries where income differentials are widening. The poorest 40% of the world‘s population accounts for 5% of global income. The richest 20% accounts for three-quarters (75%) of world income. The wealthiest 10% accounts for 59% of all the consumption and the poorest 10% accounted for just 0.5% of overall consumption. The GDP of the 41 Heavily Indebted poor countries is less than the wealth of just the world‘s 7 richest people combined. 0.13% of the world‘s population controls 25% of the world‘s financial assets. For every $1 in aid a developing country receives, over $25 is spent on debt repayment. The poorer the country, the more likely it is that debt repayments are being extracted from the people who neither contracted the loans nor received any of the money. According to UNICEF, 24,000 children die each day due to poverty. And they die quietly in some of the poorest villages on earth, far removed from the scrutiny and the conscience of the world. Being meek and weak in life makes these dying multitudes even more invisible in death. Around 28% of all children in developing countries are estimated to be underweight or stunted. The two regions that account for the bulk of the deficit are South Asia and sub-Saharan Africa. Nearly a billion people entered the 21st century unable to read a book or sign their names. 1.6 billion People, a quarter of humanity, live without electricity. Less than one per cent of what the world spent every year on weapons was needed to put every child into school by the year 2000 and yet it didn‘t happen. Infectious diseases continue to blight the lives of the poor across the world. Every year there are 350–500 million cases of malaria, with 1 million fatalities. Africa accounts for 90 percent of malarial deaths and African children account for over 80 percent of malaria victims worldwide.

1.8 billion People who have access to a water source within 1 Kilometer, but not in their house or yard, consumes around 20 litres per day. Millions of women spending several hours a day collecting water. Whereas in U.K the average person uses more than 50 litres of water a day flushing toilets. The average daily water usage is about 150 litres a day. The highest average water use in the world is in the U.S., at 600 litres a day. A mere 12% of the world‘s population uses 85% of its water, and these 12% do not live in the Third World. Some 1.8 million children die each year as a result of diarrhea. Close to half of all people (50%) in developing countries suffering at any given time from a health problem caused by water and sanitation deficits. Number of children in the world is 2.2 billion. Number of them in poverty is 1 billion (every second child). 10.6 million Children (size equivalent to total children population in France, Germany, Greece and Italy) died in 2003 before they reached the age of five. 1.4 million Children die each year from lack of access to safe drinking water and adequate sanitation. 2.2 million Children die each year because they are not immunized. 15 million children (similar to the total children population in Germany or UK) orphaned due to HIV/ AIDS. In sub-Saharan Africa 80% of the population depends on traditional biomass (fuelwood, charcoal and animal dung) for cooking, as do 50% of populations of India and China. Indoor air pollution resulting from the use of above claims the lives of 1.5 million people each year, more than half of them below the age of five, that is 4000 deaths a day. Approximately 790 million people in the developing world are still chronically undernourished, almost two-thirds of whom reside in Asia and the Pacific. That is why ‗Giving‘ is very important. Kindly click the link below to refer to the article I wrote recently in this regard. https://wisewealthadvisors.com/2010/07/28/giving-2/ Humanity is one. Let us do whatever possible from our end. (with inputs from ‗Globalissues‘)

,

’ true

Posted by Muthu on August 5, 2010 When we wrote a week ago, about the benefits of investing through SIP (Systematic Investment Plan), we had so many queries from our readers. I‘ve given the link below for your easy reference https://wisewealthadvisors.com/2010/07/29/a-perspective-benefits-of-investing-through-sip/ The illustration we‘ve given in the above article is about a diversified equity fund. Subsequently we wrote an article last Sunday, with a passionate appeal on investing through SIPs. The link is given below for your easy reference https://wisewealthadvisors.com/2010/08/01/a-passionate-sip-appeal-and-why-you-should-investin-a-mip/ The response to the above article was overwhelming. In fact in the first 3 days after we wrote the above article, we‘ve received fresh SIP commitments worth Rs.2.5 Lakhs per month. This is both from existing and new clients. The ticket size varies between large, medium and small. We‘ve already executed the transactions worth Rs.50K out of the above commitment in the last 3 days. We earnestly believe that the rest of the above commitments would also be honoured and we might end up channelizing totally Rs.3 Lakhs worth incremental SIPs per month during August‘10. The average tenure of majority of these SIPs is between 15 to 20 years. We‘re humbled by the trust our clients place on us. In today‘s article, I‘m going to write you about performance of a Midcap Fund. Midcap funds are relatively riskier than diversified equity funds. But if you stay invested for a long run, the risk can be managed and reduced significantly. As I never tire of repeating, it is time in the market and not timing the market, which is important. If you‘ve invested a SIP of Rs.5000/- per month, in a Midcap fund which we regularly recommend to our clients, for the last 10 years, the total amount you would have invested over last 10 years (120 months) is Rs.6 Lakhs. Do you know, what would be your value of Rs.6 Lakhs today? It is mind boggling, around Rs.48 Lakhs. An annualized return of 33.27%. This fund has been in existence for last 177 months, roughly 14.75 years. If you‘ve invested a SIP of Rs.5000/- per month, since the inception of the above fund, you would have invested over last 14.75 years (177 months) an amount of Rs.8.85 Lakhs.

Do you know what would be your value of Rs.8.85 Lakhs today? Hold your breath, it is around Rs.1.42 crores. An annualized return of 29%. If you‘ve invested a lumpsum amount of Rs.5 Lakhs in the fund 10 years ago, it‘s worth today is around Rs.80 Lakhs. An annualized return of 31.97% If you‘ve invested Rs.5 Lakhs at the time of inception (14.75 years), your investment is worth around an amazing sum of Rs.2.30 crores. That is why, we are never tired of telling you that you should stay invested in equity for 20 years or more. The barest minimum period is 10 years. In the last 15 years, the fund is since inception, markets have gone through Asian crisis, Dotcom burst, Katen Parekh Scam, twin tower blasts, subprime crisis, global financial meltdown and three bull runs. Despite all of the above, you‘ve got returns mentioned above. If you stay invested in a good fund, longer the time horizon, your risk get very substantially reduced and the possibility of earning gets substantially increased. The data provided above is as on June 30th, 2010. Now it is time for disclaimer. Kindly note that the above illustration is based on past performance. Mutual fund investments are subject to market risks. Past performance may or may not be repeated in future. The products does not offer any guaranteed returns. Sensex has provided an annualized return of around 18% over the last 30 year period. The best service you would be doing for yourself, your family, your near and dear, your friends and wellwishers is to encourage them to invest in equity funds through SIPs. If they are capable of investing lumpsum investments, then that is also welcome. Kindly tell them that the amount of investment is not important, but the period or tenure of the investments is very very important. Also for people who are looking for less risky and a stable income or growth option, do not forget to tell them about MIPs (Monthly Income Plans). I‘ve given the link of our article once again in this regard for your easy reference. https://wisewealthadvisors.com/2010/08/01/a-passionate-sip-appeal-and-why-you-should-investin-a-mip/ The retail participation in Mutual Funds is abysmally low due to lack of awareness. It is the FIIs (Foreign Institutional Investors) who have been majorly participating and reaping the benefits from the Indian economic growth of around 8% to 9% per annum. Isn‘t it high time that our own people learn the benefits of such products and become financially independent, wealthier or most important to come out of debt trap and poverty? I once again passionately appeal to join me in spreading the awareness.

Let us make SIP a movement where some one can invest as low Rs.500/- or Rs.1000/- a month and participate in the India growth story.

Vikram- A Young Genius Posted by Muthu on August 4, 2010 Vikram, a young lad has sorted out all, well almost all of my website related problems. One thing I‘ve always learnt is not to hesitate to seek help, when it is required, especially when it pertains to an area in which I‘m ignorant. Technology is one area in which I‘m strongly ignorant. Paradoxically that is the area I‘ve to use frequently on a daily basis, as I‘ve designed my own blog and writes content on a regular basis. Last couple of days, I‘ve been desperately seeking your help due to the problems like advertisement getting popped up by ‗Google Ads‘ at the end of my articles. My web portal is my virtual home and office. Would I like someone to paste posters or put up hoardings in my home or office? Definitely not. The same logic goes for my virtual home & office too. This is my private space and I do not need any sponsors or advertisements. I‘m doing blogging out of passion and not obsession. I do not want to make a living as a blogger or I expect any revenue from this activity. First and foremost, I would like to thank our client Mr.Suresh, who first noticed ads started getting displayed at the end of my articles. He pointed out that the things I‘m precisely against like share trading, PMS and ULIPs are actively promoted by Google Ads in my webpage. Mr.Suresh, being a creative writer and a content provider for web portals etc., told me that he would try to find a professional who can help me in having my own space in the virtual world, map my existing domain name to the same, write html code to integrate WordPress into my domain space, as WordPress is an ‗openware‘ etc. In the mean time, many clients took the pain of creating JPG files of Ads getting displayed under my articles and shared with me the same. Some opined putting a disclaimer, as mentioned by me, would be a better option. One or two clients said that they could see no ads because probably they might have gone simply into the home page and not clicked any article links. On Monday evening, I received a call from my Client and wellwisher, Mr.Sivakumar, who was then at Hyderabad airport. He said that he saw the problems I‘m facing and his son Vikram, who is doing graduation in computer engineering in Singapore and has come to India for a brief vacation, can be of some help to me. Initially I told him that I‘m planning to take a help of a practicing professional who would be referred by client mentioned above, Mr.Suresh. Persistence is one of Mr.Sivakumar‘s strong virtues and he said that I meet his son on Tuesday, who would be coming to my office. Subsequently I came to know that Vikram has been among 25 people short listed across the country for the national team to participate in ‗International Informatics Olympics‘, and from that group a final four would be selected for representing our country in the above Olympics.

Vikram visited the office on Tuesday and I told Vikram all my tech or rather net problems and here are the things what he did 1) He did some research and I paid a small sum (which is payable every year) to WordPress for keeping my virtual space, free of any ads. 2) He also further researched and told me that I can also use more graphs or images or photographs, if required, in my blogs by purchasing my own space. To start with I‘ve paid a small one time payment to get 5 GB permanent space. This space, if and when it gets exhausted, I can keep purchasing additional space, by a small one time fee. 3) Also wordpress, again for a very small fee every year, allow me to create my own domain name and get it displayed in the toolbar, instead of wordpress name. As I already have a domain id, all I need to do is to use is my existing domain. For this, I need to first access my domain name at the domain provider‘s website and make some changes there and incorporate it in WordPress portal. As I forgot the password, I‘ve been following up Times domain for last 2 days making a dozen STD calls, being put on hold 20 minutes each time. Atlast, they have issued the password this evening. Vikram made the necessary changes and it worked fine. Again this service also costs only a nominal fee. But now suddenly we are unable to access our website. As he has gone out now, he would be looking into the problem tomorrow and seek help from WordPress web support, if necessary. 4) He also did some basic but important things like closing the pages in my website for comments and allowing only comments at the end of articles. People who wanted to share their queries, feedback or appreciation in general have chosen pages like ‗About Us‘, ‗Reach Us‘ etc to put their comments. However these pages are not for comments and only my articles are. So what to do if someone wants to write a query or share feedback or appreciation. For this purpose, he suggested creating an exclusive guest page, where the viewers can write what they want to write. So I‘m planning to create a page called ‗ Visitor Arena‘ which would be the exclusive page for visitors to write what they want to write. The existing comments in the pages would be deleted. This decision is very painful one for me but have to do it as part of revamping my portal. Your comments and appreciations and are all engraved in my heart, from where they cannot be erased. Kindly start using the ‗Visitor Arena‘ once it is created. 5) One of the other teething troubles I had was my inability to use [email protected] regularly as India times Mera mail server which hosts this id is down most part of the time, though I‘ve purchased unlimited space from them. Also this web portal does not allow features like meaningful signature etc. It would look professional if send mails from my own domain name rather than yahoo mail or hotmail. Vikram did a wonderful thing. He made my gmail and wisewealth mail, speak to each other, by doing some changes in Pop Mail Accounts and henceforth my gmail would become my wisewealthadvisors mail. Vikram is a genius and my sincere thanks to him for providing all the help I required on net support, by spending significant time and with passion. Though he is extremely intelligent, he is a simple and down to earth person.

I would also like to thank Mr.Sivakumar, Mr.Suresh and all the other clients and visitors to the portal who took the pain of trying to help me out in whatever way they can. In next few days, the remaining teething problems would be solved and then would make certain changes as mentioned above. Hopefully in next couple of days, our website would be fully functional after necessary modifications. Once this happens, we would have best of both worlds, having our own website which also double up as our blog. Thanks for all your support.

A Passionate SIP appeal and Why you should invest in a MIP? Posted by Muthu on August 1, 2010 First and foremost, I would like to repeat my passionate appeal sent through SMS today to some of you urging to consider this month for investing in SIPs of Equity Mutual Funds, for a period of 20 years. If you‘re already having SIPs, request you to consider increasing the quantum. The amount is immaterial, but is the duration is what it matters. As always, we want to lead from the front and always do with your money, what we would do with our own. Our Family has started today fresh SIPs for Rs.15,000/- per month for 20 years, in addition to our on going SIPs. SIPs can be started during any month. There is nothing special about this month, except that we‘ve an inner urge to focus more on the same this month. Let me make it very clear. We‘re not being offered any unique special incentives by any Mutual Fund company to focus this month on SIPs. It‘s our own inner urge. In fact, if each one of you can refer us atleast one person whom you like most for investing in SIP , they‘ll be immensely grateful to you, when the day of harvesting arrives. Occasionally, when I bump across someone to whom I recommended SIP 10 or 12 years go, when I was in BPO, the gratitude in their eyes is very evident. This gives me enormous satisfaction. So I can vouch for this from my personal experience. If the person you like most is poor or belonging to very lower middle class like Driver, Maid, Office assistant etc. also, no problem. It gives us immense pleasure in serving them. Let the amount be even Rs.500/- or Rs.1000/- a month. We are not worried about the amount invested. What is important is the time (tenure) they are going to invest for? The ideal tenure is not less than 20 years and in exceptional cases, it is o.k. with 10 years. Nothing less than this, please. All one needs for doing SIP is a PAN Card copy and a Bank account. Please read my article (the link given below) to convince yourself and be passionate about SIPs. https://wisewealthadvisors.wordpress.com/2010/07/29/a-perspective-benefits-of-investingthrough-sip/

As you know, we do not believe in pushing products and is building our profession patiently and purely through referrals. However I feel very passionately how a whole generation can become financially independent through investing a small or fixed sum over a long period of time and wants to be a part of that process. I‘m not soliciting any business from you and am trying my best to put in words, how strongly I feel about this. MIPs stands for Monthly Income Plans offered by Mutual Funds. Many a time people have confusion between SIPs and MIPs. SIPs are a way or method of investing in Mutual Funds. MIPs are the hybrid (predominantly debt) products offered by Mutual Funds. SIP is a method and MIP is a product. So do not get confused between a SIP and a MIP. We‘ve mentioned earlier about ‗Asset Allocation‘. This means allocating your money amongst various assets like Land, House, Gold, Commodities, Art and Financial assets. Financial assets are again classified into Debt and Equity. Debt refers to products like Employees Provident Fund (EPF), Public Provident Fund (PPF), Postal Savings, Fixed Deposits, Senior Citizen Savings Scheme, Bonds, Debentures, Debt Funds offered by Mutual Funds etc. Equity refers to Shares, Equity Funds offered by Mutual Funds, Equity based ULIPs offered by Insurance companies etc. Mutual Funds offer a unique product called MIP (Monthly Income Plan) which normally invests around 75% to 80% of the assets in Debt like Government Securities, Commercial Papers, Certificate of Deposits, Credit agency rated bonds etc. They have the mandate of investing upto the balance 20% to 25% in Equity. They also have the option of staying 100% invested in pure debt, if the fund manager feels that it is not advisable to have equity exposure at a given point of time. MIPs basically aim at protecting capital and also enhance the return over and above what one normally gets out Fixed Deposits and Postal Products. I want to provide you an example of two of our favourite MIPs among our recommendations of few MIPs which are again amongst the entire universe of MIPs offered by all Mutual Funds in India. Two of the MIPs we suggest as part of one‘s core MIP holding, have provided annualized return in excess of 13% over the last 5 years period and have provided a annualized return of around 12% since inception. Compare the above returns with your other fixed income products. You stand to gain around 4% more in good MIPs. A 4% difference can make a lot of difference to investors in Debt based products. In the example given above, your capital doubles approximately every 6 years, by taking less risk.

Disclaimer: Mutual Fund investments are subject to market risks. Past Performance may or may not be repeated in future. MIPs are not guaranteed returns products like Fixed Deposits, Postal Savings etc. The minimum holding period we suggest for a MIP is 5 years, to get a significant return over above a Fixed Income product. A minimum holding period of 3 years is recommended, if you are looking for returns equivalent to a Fixed Income Product. Please do not forget the above disclaimer. MIPs offer tremendous tax advantage. There are mainly two options to choose from, dividend option and growth option. Most of the advisors in the market suggest dividend option for people who need regular income without realising how they are minimizing the returns and jeopardizing the cash flow of an investor by suggesting this option. Let me tell you why. Dividends from MIPs are tax free in the hands of investors. But they do not realise that the mutual fund companies pays 13.84% as ‗Dividend Distribution Tax‘ on the dividends paid, out of the scheme (Investors‘ money) effectively reducing the returns of investors. Not only that the percentage of dividend declared is not consistent, and there are months when dividend payments are skipped. People who are dependent on a fixed and regular cash flow suffer a lot because of this. Instead if they invest in growth option and start withdrawing a fixed sum through SWP (Systematic Withdrawal Plan) from the 13th month onwards, they have two advantages. Being long term capital gains, irrespective of the tax bracket an investor belong to, the tax rate is only a flat 10.3% (without indexation). This means they pay only 10.3% on the gains made viz-a-viz 13.84% tax on the entire money paid out as dividend. Since the amount and date of withdrawal is fixed by an investor, he has a fixed, regular and predictable cash flow. The withdrawal should start only from 13th month for the returns to be classified under ‗Long term capital gains‘. If the amount is withdrawn during the first one year, it attracts an exit load of 1%. Not only that the returns are taxed as ‗Short term capital gains‘, the tax rate being the tax bracket under which an investor falls into. If the investor is in the highest tax bracket, he has to pay tax at the rate of 30.9%. Someone may ask, what I‘ll do for one year without an income. Very simple, what you require for the first year, keep it in your Savings Bank Account, earning 3.5% p.a. You invest only the balance amount for long term and can start the withdrawal from 13th month onwards. The fixed income you would be getting out of your corpus, would be perpetual (subject to capital not getting eroded, for which chances are less, if you opt for a right percentage of

withdrawal in discussion with your Personal Financial Advisor) and you can keep increasing your income by keep increasing the corpus. How to increase the corpus, if you‘ve no chances of getting money in future through any other means? Simple Mr.Investor. We always advice to save atleast 20% of one‘s income and keep reinvesting it in equity funds through SIPs (Systematic Investment Plan). This is to keep pace with inflation. If you don‘t do this, the fixed income which you receive now, which is sufficient for your current cost of living, would cease to be sufficient in the years down the line. As your SIP corpus keeps growing, once in 5 years or so, you can move the accumulated corpus to MIP. This would increase your MIP corpus, there by increasing your monthly income. Again you‘ve to ensure that, atleast 20% of that money is saved through SIPs. You‘ve to keep doing this once in every 5 years so that your monthly income keeps growing and you will be able to manage the increasing cost of living. Living long can be as risky as dying young, so says a great philosopher, who else, Mr.Muthu! Just ensure that MIPs form a core part of your financial assets. Any questions, please do write to me.

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Posted by Muthu on August 1, 2010 A bit lengthy article. But in my opinion, a definite and worth read. When the super-investor, Warren Buffett, gave a chunk of his fortune to his son, Howard, there was one proviso: it had to be spent on charitable projects. Paola Totaro goes on the road with the billionaire philanthropist. It is a typical midsummer‘s day, duck-egg blue skies, a wisp of cloud, not a hint of breeze. A convoy of vehicles is burrowing deep into the impossibly green mountains of rural Congo. The first, a flat-top, is bristling with men and machine guns and the last, a jeep, is driven by a brilliant young anthropologist who also happens to be heir to the now defunct Belgian throne. I am in the truck in the middle sitting next to the son of the second richest man in the world. Howard Buffett, eldest son of the billionaire investor Warren Buffett, is a big man blessed with a big, easy laugh. As we hurtle past forests, fields and farms, you wouldn‘t know it. The Illinois farmer, photographer and philanthropist has been awake all night fighting a kidney stone in a tiny hotel room in Kindu, one of Congo‘s poorest and most miserable townships. He is not the type to complain. But he is pale and the last wretched hours are etched on his face. We‘ve been on the road a few days already: Rwanda first, then carefully, almost surreptitiously, with the help of the UN, over the border into Congo. He is travelling incognito in this dangerous, conflict-torn part of East Africa to avoid VIP fuss.

It has been this way since 2006, when Buffett Senior not only stunned the global financial community by bequeathing $30bn to the Bill and Melinda Gates Foundation, but also earmarked $1bn in family company shares to each of his three children. Raised in the knowledge that their father doesn‘t believe in inherited wealth, the gift was a huge surprise, but the unusual caveat didn‘t raise a blink from the siblings: the money was theirs but only if they could find ways to give it all away. ―My dad calls it the ovarian lottery,‖ says Buffett, gazing pensively out of the Land Cruiser window. ―I could have been born in Bangladesh, I could have been born royalty, I could have been born black or Hispanic in America. But I was not. It was a lesson I learnt as a child from my mum, too. She said that with privilege comes responsibility.‖ Ever since, Howard G Buffett has used his dad‘s money to live his mother‘s credo. The 55-yearold has travelled to 96 countries, spanning both hemispheres and every continent – except Australia. He has had an AK-47 poked into his chest in Ethiopia, been arrested in Bosnia, had his arm mauled by a cheetah in South Africa and held the hand of a young mother in Ghana as she watched her child die. Today, he is swallowing painkillers to ensure the punishing schedule is not disrupted by his health. Buffett is here to get his hands in the dirt and see if the villagers who are testing sustainable farming techniques funded by his Foundation really are reaping rewards, or if there‘s a way to get more bang for his (billion) bucks. ―I‘ve been to Africa countless times and I have learnt something every time,‖ he says. ―The 20th visit was different to the 40th visit which will be completely different again to this one.‖ Buffett‘s understanding of the countries to which he channels aid is best expressed through his photography: unflinching gazes into the eyes of the dying, children wracked by disease, old women traumatised by violence, babies born to a world with very little. There is the spirit of the foreign correspondent in him, driven by adrenalin and a better story or picture just around the corner. Last year, with National Geographic, he produced a spectacular tome documenting his travels and the Foundation‘s work. Not one of the 15,000 print run will be sold, but every US Congressman and Senator in Washington has a copy. Ensconced in the rattling truck, the farmer-turned-philanthropist outlines an ambitious new plan for his Foundation, evolving from a traditional aid and development charity to a powerful advisor geared to help Washington shape food security policies for the developing world. Unlike his father, who has spent a lifetime happily communicating his investment philosophies worldwide, Howard has been a virtual unknown until now. Last year, the head of a major antipoverty think-tank told the New York Times that she hadn‘t seen Buffett – or his ideas – out there: ―He‘s not reclusive, but he‘s a kind of to-the-ground person,‖ said Julie Howard of the Partnership to Cut Hunger and Poverty in Africa. Buffett wants to redress that critique, conceding ―I can‘t change anything while being a hermit‖. ―There is some vital work being done by the Gates Foundation, by the Rockefellers, the State Department,‖ he says candidly. ―But I see a disconnect ? they all talk about yield as if farmers in Africa have a choice: to sow particular types of seed, to get to market. But these are the poorest, most disenfranchised farmers in the world. They often have a small plot of dust and that‘s it. ―Give these farmers improved seeds and fertiliser and he might up his yield, but the important thing is high diversity crops so if one‘s hit by drought, another might provide a bridge.

―We‘ve helped many people, and it‘s all needed, but I have also watched really poor policy being made ? and bad policy can wipe out all the good work. We want to affect change from the top rather than just from the bottom.‖ These words from many others might spell pie in the sky, but this is a Buffett talking, and when a Buffett and his money talks, governments tend to sit up and take notice. No matter what they do, Warren Buffett‘s children are likely to be judged by the paternal gene. Howard carries the names of his grandfather, a legendary Republican Congressman, and yet some of his earliest memories are of his maternal side. And when it comes to his life‘s work, he cites his mother, Susie, as his greatest influence. ―My maternal granddad was a Church of Christ minister,‖ he explains. ―He was a staunch prohibitionist who‘d put me on his knee and tell me not to drink. ―I‘d say, ‗Why not, grandpa?‘ and he‘d reply, ‗Because every time you drink alcohol it kills brain cells and Howie, you don‘t have any to waste‘.‖ The anecdote, delivered with infectious guffaws, is funny, but also seems a touch cruel. Buffett tells the story to explain why he is teetotal, but I wonder what effect the words, and their implication that he wasn‘t smart enough, might have had on a young boy forced to grow up in the enormous shadow cast by his father. Warren Buffett‘s life story is the stuff of economic legend. Blessed with a prodigious mathematical brain and canny intuition, he made his fortune by picking under-valued stocks for investment and sticking by them with determined patience. His prowess over half a century gave him the nickname the Oracle of Omaha, and his wealth, estimated at $64 billion, has until recently been second only to Microsoft king Bill Gates. Buffett‘s gentle eccentricities have earnt him cult status: he still lists hamburgers and Cherry Coke among his favourite foods, eschews the fast and furious strategies of Wall Street and lives in Nebraska. Son Howard is a similar enigma: a character who can ooze compassion and humanity in one breath and a steely conservatism the next. Like Warren, he wears his homespun ―I‘m just a farmer from central Illinois‖ like a badge. He loves meat and minimal vegetables and, much to his GP‘s frustration, avoids drinking water, instead living on two litres of Coke a day. I met Howard on an Italian coastguard‘s boat during a mid-sea rescue of a refugee boat between Libya and Sicily. He was taking photos for his book. I wonder what it‘s like for him to meet new people, knowing their primary response is probably shaped by curiosity about his father. And does having billions of dollars to give away put you on guard with everyone that you meet? Buffett nods, his answer clear though wordless, and quickly returns to his mother: ―When it comes to my work ? the biggest influence is my mum. When I was young, she used to take me to the Omaha projects, tough areas in the north of the city where kids really needed help.‖ When he was five, the family opened their home to a young Sudanese refugee – one of the first to arrive in the US – and she lived with the Buffetts until she finished university. He also remembers a troubled local black boy that he mentored when he was a Cub Scout leader: ―Watching mum try to help other people, getting involved in civil rights ? she worked tirelessly, trying to empower small organisations of African-Americans to make change in their communities.‖ ―He gets his head from me and his heart from his mother,‖ laughs dad Warren, who gives a rare interview about his family. ―The money may have come from me but ? they [Howard and his siblings] reflect much more of their mother in their attitudes than they do of me. There is ? enormous support and great pride from me but they were learning these things from her when they were very small children.‖

Susie Buffett, unconventional and free-spirited, left her husband and the family home in 1977 when she moved to San Francisco to pursue a career in music. The kids had all finished high school and while Warren was devastated, he accepted the unusual arrangement. The couple never divorced, took annual holidays together and retained an intimate friendship. Susie never stopped caring for her husband, even finding – and later encouraging – a relationship with the woman, Astrid Menks, who would become Warren‘s second wife after Susie‘s death in 2004. Howard has also been unconventional, in 1982 marrying a woman not only nine years his senior but with four daughters by her first marriage. He and Devon remain happily married with a son of their own, Howard junior, who is in his mid-twenties: ―I met her on a tennis court in California. She has been the most amazing, supportive person you could ever ask for who makes everything I‘ve ever tried to do work.‖ Significantly, the other Buffett children made career choices that echoed their mother‘s passions. The eldest, ―Little Susie‖, has steered her philanthropic Foundation to children‘s projects in poor Omaha neighbourhoods. Peter, aged 51, followed his mum‘s love of music, writing musical scores for movies including the Kevin Costner epic, Dances with Wolves. His Foundation targets the education of girls in developing countries. Howard concedes that his familial influences are a mass of political and social contradictions, from his arch-conservative grandfather and business titan, liberal Democrat father to his free-spirited and unorthodox mother, a champion not only of the poor but of women, abortion rights and population control. In a later exchange of e-mails, I ask him how he reconciles his self-identification as a Republican, the philosophies of his altruistic mother and his work: ―When a person needs help they are not a Democrat or Republican – they are a human being. Too often we get wrapped up in philosophy or how things will look. ―My mother taught me that the most important things in life come from inside of you. I‘m not Republican or a Democrat inside – I‘m a person who hopes I can play a very small role in improving as many lives as possible.‖ The Congo township of Kindu is one of the most miserable, yet strangely exhilarating places on earth; scattered haphazardly at the feet of an active volcano, its streets are black from lava and fringed by row after row of tumbledown shacks. Life is defined by the rhythms of survival; every available space is covered with meagre produce – potatoes, firewood and beans displayed for sale on threadbare cloths, jerry cans of petrol, bottles of clean water and the occasional stall with second-hand clothes. Buffett slows the car to point out a table piled high with what look like mud doughnuts stacked on broomsticks. Fashioned from scrap paper pulp, water and leaf litter, the briquettes are an alternative fuel trialled to save the habitat of the rare mountain gorilla. It may seem strange that in the midst of such human suffering, the philanthropist should be channelling resources into the plight of the gorilla but in Africa, when war and conflict are involved, everything is linked. Every year, thousands of hectares of forest are burnt to make charcoal for people to cook and boil water. The refugee camps that circle the town have enormous fuel needs – and the very militia that drove people from their homes also controls the charcoal trade, hiking prices and using the profits to fund their arms. The pilot project has worked better than they dreamed and Howard Buffett wants to see the production for himself, even asking workers how they think the product can be improved. But

for all his interest, there is no guarantee of funding. Buffett, like his father, detests waste: projects are not funded if their impact is short term. But here, the potential is unlimited: ―If I am somewhere that I can see I can do something that might work – and I see a partner with which we can do it – it‘s hard for me not to go in there and do it.‖ Buffett‘s foray into global philanthropy began with animal conservation. Early on, his father had provided $100,000 for each of his children. Taken by the plight of the cheetah, Howard bought 2,500 hectares in South Africa and set up a private reserve and research station to secure vanishing habitat for the animals to breed. But the more time passed, the more he was struck by the dissonance of focusing on animals while humans struggled to survive; it began to eat away at him. Buffett invested in land near the reserve where plant researchers are now working on drought-tolerant maize. He has not looked back since. Howard Buffett, restless as a child and a bit of a troublemaker as a teen, found it difficult to deal with his dad‘s emotional distance: ―I used to misinterpret his tone to mean that he didn‘t care about me,‖ he told Roger Lowenstein, author of the unauthorised 1995 biography of Warren Buffett. ―It‘s the exact same quality that makes him so good as an investor. There was no emotion in it.‖ As we drive through the lush equatorial landscapes of North Kivu, the subject of his father comes up regularly. Howard says his twenties were a little haphazard: school, a couple of colleges, a little bit of real estate work, ―then I bought a bulldozer and dug basements which got me into farming‖. At the age of 28, however, his Republican grandfather‘s spirit reared its head: reading a newspaper, he noticed that two local government positions had become vacant. He ran and won office as Republican county commissioner in Omaha. Howard was elected for a four-year term but ended up resigning just before it ended to join Archer Daniels Midland (ADM), America‘s biggest farm commodities processor. CEO Dwayne Andreas, credited with turning ADM into a global agricultural behemoth, was also one of the biggest political donors in US history. He gave to both Republicans and Democrats but will be remembered for contributing (illegally) $25,000 to Richard Nixon‘s campaign via the Watergate burglar, Bernard Barker. Buffett had deep misgivings about leaving political office prematurely but, at 37, was fascinated by Andreas and agreed to take a senior managerial position. ―It was one of those times that you don‘t know if you‘ve made the right choice, but it turned out to be fantastic. ADM opened a whole new world to me. ―Have you heard of the movie The Informant?‖ he asks. (I read later that it stars Matt Damon, is set in Decatur, Illinois, where Buffett lives and tells the story of America‘s biggest price-fixing scandal.) He tells me of the day in June 1995, when FBI agents knocked on his door: ―The company was apparently involved in a major price-fixing scandal. I‘m there thinking, what are my duties? I am spokesman for ADM worldwide. I am in charge of all investor relations ? I share all the political duties.‖ The first interview lasted more than three hours. When it was over, he rang his father: ―I said ‗Dad, you‘re not going to believe what happened ? they have almost 400 agents out in the field interviewing several hundred ADM employees ? This is huge. Do you think I should resign?‘ ―And this is so classic of Warren Buffett. He doesn‘t say you should resign or you shouldn‘t resign. [Instead] he gives you a more important, key question to think about. He says to

me: ‗Only you can decide that. But you don‘t have more than 24 hours to make that decision‘. ―And he was right. You are either in it or you are not in it.‖ Buffett made a gut call, went to work the following day and left at noon: ―The pressure on me was unbelievable; that expectation that if you are not with us then you are against us – big-time corporate America putting the biggest walls around themselves. And dad was right; you are either in it or you are not.‖ Buffett went home to his wife and together they grappled with the fear that he had made the smartest – or the most stupid – decision of his career. It turned out to be the right call, but also the most difficult period of their lives. In the months that followed, the Department of Justice unearthed an international scandal. Three executives, including Andreas‘ son Michael, went to prison and in 1997 the company was fined $100m, the biggest anti-trust fine in US history. It was also life-changing for the Buffett family. Howard Junior, aged 11, had been in his father‘s den when the FBI agent arrived: ―The first thing he said after the agent left was, ‗Dad are you going to jail?‘ I told him no and then he asked me if anyone I work with or know was going to jail. I had to say, ‗I don‘t know‘. I‘m sure that I was reassuring but think, what does that do to a kid?‖ He may have appeared distant while the kids were growing up, but Warren Buffett‘s voice exudes paternal pride and affection when he talks of his eldest son now: ―He has managed to blend this love of farming with his empathy for people who have gotten the short straws in life.‖ Howard‘s own experience being a dad has been vastly different. He and Howie Junior have travelled together at least three times a year since his boy was 12: ―Sometimes I felt that I pushed him to see too much. He was 15 years old when I took him to Bangladesh and there were people dying before our eyes. He became very uncommunicative. I said to Devon, ‗I think I‘ve pushed him too much‘. But he talked to his mother and he was OK. He has this amazing sense of humanity.‖ Howie Junior, who now works in the White House on the Domestic Policy Council, has completed the Republican-Democrat generational cycle of the Buffett family. He says travelling with his father was a fundamental formative influence on his life. ―Everywhere we went was to determine something – to meet local people, to understand their problems, and then to try and determine what interventions would be successful. People welcomed us in their homes, gave us more food or drink than they could possibly afford to part with, and left us by asking that we not forget them.‖ Family influence and legacy is more complicated: a nurturing mother and the unconditional love of a grandmother, a father who taught him integrity and a paternal grandfather with ―immeasurable indirect influence‖. ―Every father,‖ says Howard, ―in some way, strives to right the wrongs of his own father. My father understood that any opinion he expressed to me would be taken as prescriptive, so he was wary of not directing me in my childhood. He allowed me to process and think through things independently. Philanthropy has been an integral part of my life. I could

think of few things more fulfilling than to affect positive and lasting change in the lives of millions of disadvantaged people around the world.‖ The Congo sun is blazing and a group of young farmers, men carrying scythes and women with babes at the breast, are crowded around a field. A heat shimmer rises from the earth and Howard is on his haunches examining the roots of a maize seedling. Encased toe-to-knee in rubber waders, he has tramped out into the dirt to see close-up how one of his pet agri-projects is going. Here, the traditional slash-and-burn techniques that have depleted forests and worn out farming land, have been replaced with ―no till agriculture‖ – a brand new notion for the local farmers. It‘s what we would call mulching: land is cleared and all cut vegetation returned to the soil. At the same time, a field nearby is sown with the same seeds, with farmers using the old ways to allow for comparison of yields, seed growth and soil quality. This experiment is being repeated in scores of places to prove to the farmers that they will benefit. Buffett wants to know what women think: after all, it is they who will do most of the field-work. It is clear that they are anxious about extra work and the time it will take to see results. Buffett asks that they persevere. It might take three years to see the difference, he tells them: ―I am a farmer. I use the same methods on my land. Some people give up but trust me, please. It takes time and it will get better.‖ Walking back later, I chat with an official from the Catholic Relief Service, a partner in the scheme. She is a tough, no-nonsense black American aid worker who has led some of the toughest African missions and postings in her 30-year career and met many donors who visit to see their work first-hand. ―Howard is different; he‘s hands-on and has this great humility. He is easy with people, they talk to him and there is a trust straight away,‖ she said. ―But he‘s also upfront about asking tough questions and it is clear he wants real answers.‖ This project is just one experiment being repeated in scores of villages, not only in Africa but in Central America. It is a good example of sustainable agriculture, what Buffett calls ―nurturing‖, and a fundamental building block he believes is necessary on the road to food security. Water is the other, and $150m is being channelled into trialling new methods to secure reliable supplies: these are the basics he wants re-injected into the global discourse on food security. Genetic research to improve seeds, much of it funded by Gates, is not enough: ―Current food security arguments are all based around easy answers and a quick fix, but there is no such thing,‖ he says. ―Africa is the only place where food production per capita has declined, soils have low fertility, three quarters of the land is depleted,‖ he says. ―Farmers will stay trapped in poverty without a commitment to develop small-scale agriculture.‖ The amount Howard Buffett‘s Foundation gives depends on the market value of the Berkshire Hathaway stock – roughly $65m a year. ―It sounds like a lot,‖ he says, ―but everyone‘s resources have limits. My goal is to give away all the new money we receive each year. I do not see the point in increasing our endowment – why would you put money in the bank when people are dying of hunger or when people need clean water? I would rather judge our success by our impact on people‘s lives, not the size of our bank account‖. (Courtesy: The Independent)

SIP CROREPATHI I meet many people across wide spectrum of society who comes to us for personal financial advice. One common question I come across is how to become Crorepathi (i.e.) to have One Crore worth of financial assets. I want to provide an answer for this through page, as to how to make one crore and much more, through a simple way. Also people, who are already wealthy, would get insights on how to multiply wealth. Not only that, people who want to manage their wealth would get an idea as to how keep pace with inflation. If you want to become Crorepathi in 10 years, you‘ve to invest Rs.30,000/- every month. If the time span is 20 years, then the investment amount per month is only Rs.4330/- for making Rs.1 Crore. If you invest the Rs.30,000/- mentioned above for 20 years then you would have a whopping amount of Rs.7.03 crores. If you can increase the time span to 25 and 30 years respectively, then the monthly investment come to only Rs.1740/- and Rs.708/- respectively for achieving Rs.1Crore. If you want invest an one time amount to achieve a target of Rs.1 Crore then the investment amount is: Rs. 20 Lakhs for investment tenure of 10 years Rs. 3.65 Lakhs for 20 years Rs. 1.60 Lakhs for 25 years Rs 0.7 Lakhs for 30 years I‘ve assumed an annualized return of 18% for arriving at the above numbers. 18%+ is the annualized return provided by Sensex during the last 35 years. In the past, well managed diversified equity funds have provided returns far superior to the Sensex. Please note that mutual fund investments are subject to market risks, there is no guarantee of returns and past performance may or may not be repeated in the future. Please go through the below piece to get complete details of returns of Sensex, Fixed deposits , gold and silver through the last 3 decades. https://wisewealthadvisors.com/2012/04/06/must-read-im-saying-this-for-first-time/ Looking at the growth prospects of Indian economy for next few decades, I feel that superior return from equity is possible though the ride would be very bumpy (volatile). In order to appreciate the above numbers, you need to know the value of one crore today for the periods mentioned above. For this I‘ve assumed an average inflation rate of 6%. Though inflation has varied between sub 1% to double digit percentage, I‘ve assumed a future long term

inflation of 6%. Always this assumption can be changed to 7% or 8%.. to arrive at the revised values. Today‘s value for future Rs.One crore are as follows 10 years- Rs.56 Lakhs 20 years- Rs.31 Lakhs 25 years- Rs.23 Lakhs 30 years- Rs.17 Lakhs Any investment in equity market has to be preferably done for a minimum term of 10 years. In my opinion, an investment tenure of 20 years may make you wealthy beyond your imagination. It is the TIME in the market that is important and NOT timing the Market. There is a possibility that market may atleast go through 2 cycles in a period of 10 years. Any investment tenure lesser than that in equity may prove to be very risky. It is better to avoid equity market totally if your investment tenure is less than 10 years. Every single SIP we receive provides us satisfaction that we are also instrumental in making investors participate in the growth story of our economy. Not everyone is capable of lump sum investments. But everyone is and should be capable of investing small sums every month over a long period of time. Let me start with an example of one of the funds we recommend: This fund has been in existence for last 240 months (as of December 31‘st 2014), 20 years. ‗Now‘ refers to the above date. If you‘ve invested Rs.5000/- every month in this fund for the last 10 years, how much would be it‘s value now? Guess? It is Rs.16.46 Lakhs. You would have invested Rs.6 Lakhs over a 10 year (120 months) period resulting in close to 3 fold rise of capital. This works out to an annualized return of 19.17% If you‘ve invested Rs.5000/- every month in this fund for the last 15 years, how much would be it‘s value now? Hold your breath, it is Rs.74.43 Lakhs. You would have invested Rs.9 Lakhs over a 15 year (180 months) period resulting in close to 8 fold rise of capital. This works out to an annualized return of 24.99% If you‘ve invested Rs.5000/- every month in this fund for the last 20 years, since it‘s inception, how much would be its‘ value now? Again you would be surprised, it is Rs. 2.53 crores. You would have invested Rs.12 Lakhs over a 20 year (240 months) period resulting in nearly 21 fold rise of capital. This works out to an annualized return of 25.64%.

In all the above scenario, your capital was not invesed at one go but over a long period of time. Still you may see for yourself how much the same has grown multi-fold. Disclaimer: Kindly note that the above illustration is based on past performance. Mutual fund investments are subject to market risks. Past performance may or may not be repeated in future. The products do not offer any guaranteed or assured returns whatsoever. Please read all the relevant documents carefully before investing. Every family with an income of Rs.50,000/- should aspire for investing atleast Rs.10,000/- in SIP. For people who are planning for retirement, children‘s education, daughter‘s wedding etc. should roughly try to invest 20% of their monthly income in equity funds through SIPs. The myth is that, timing is essential to generate high returns. The Reality is that, it is the time and not the timing that matters In the period 1982 to 2011, the annualized return of Sensex was 16.75%. If someone had the capacity to know as to what is the lowest level in Sensex every year (if you know some one, I would like to meet him) and invested only on that day, he would have a made an annualized returns of 17.39%. Someone like me, who is very dumb in timing the markets, still timed it, only to end up investing in the highest level of Sensex of each year, would have made an annualized return of 16%. Coming to sensible investors like you, who have chosen the disciplined way of investing by investing a fixed sum every month would have ended up with annualized returns of 16.71% The difference between the disciplined investor and an excellent (non existent) market timer is only 0.68% But tell me honestly, how many of us are capable of predicting the best day and the worst day every month or every year, that too consecutively for decades? Who can time the market to the perfection? None. Not even the ‗Experts‘ can. We earn regularly. We spend regularly. Shouldn‘t we also invest regularly? All we need is a blend of income, time and discipline. We‘ve income and time, all we need is discipline. The discipline of making small but regular investments. An SIP is like operating a recurring deposit account with a mutual fund. A method of investing regularly to benefit from the stock market volatility. It is convenient and hassle free. Once you give a one time instruction, your account would be debited on a regular basis. It is a forced savings. Small amount invested every month to become a huge sum after some years.

This is a low cost, transparent way to build your wealth. Some people stop the SIPs when the markets go down. This defeats the very purpose of SIP, which is a method of investing to capture and mange stock market volatility. You get more units when the markets are lower. Stopping SIPs when the markets are down is self defeating. Trying to time the market is a Fool‘s game? Do you want to be one? Most of us delay investments until the last moment. Needless to say, the longer you delay, the greater will be the financial burden on you to meet your goals. On the other hand, you would be surprised what you could achieve by saving a small sum of money regularly at an early age. Moreover, the earlier you invest, the longer your money works for you and greater will be the power of compounding. The power of compounding underlines the importance of making your money work for you at an early age. Suppose A & B invest Rs.5000 every month earning interest @18%p.a.(which is the annualized return of Sensex for the last 35 years) on a monthly compounding basis. A starts at the age of 25 years and B starts at the age of 35 years. Both of them invest for 5 years (Rs.3 Lakhs) and hold their investments till 60 years of age. A ‘s investment would have appreciated to approximately Rs.7 crores whereas B ‘s investment would have grown to only Rs.1.33 crores Thus, A ‘s investment would have almost become seven times more by just starting investing earlier than B, though the amount saved by them is the same. Clearly, the power of compounding can have a significant impact on your wealth accumulation, especially if you remain invested over a long period of time. In nutshell, benefits of investing in Mutual Funds through SIP are       

Professional Management– Ensures that the best brains are managing your money. Diversification– Ensures risk reduction. Low cost – No entry load. The annual expense ratio is around 2%+. Liquidity– Ensures that you get back your money, whenever you want. Transparent– Ensures you are appraised of the portfolio regularly. Extremely well regulated– Ensures that the fund follows laid down process. Tax efficient – For equity Funds: Dividends are Tax Free, No Long Term Capital Gains Tax, Short Term Capital gains tax of flat 15%

In your own welfare, I would sincerely suggest that you go for a long term SIP, not less than 10 years, so that you can reap the benefit of compounding. I wish you all become crorepathis and financially independent so that you would be able to have a better quality of living.

TIME OR TIMING If you‟ve invested Rs.1 lakh in Sensex on 1‟st January 1990 and did not disturb it until 30th November 2015 (26 years, 25.91 to be precise) it would have multiplied

33 times and become Rs.33.38 lakhs. This works out to an annualized return of 14.49%. We saw that over 26 years Sensex got multiplied by 33 times. Let us assume you missed the best 40 days spread over the above 26 year period. Then your money would have multiplied by mere 2 times instead of 33 times. 40 days over 26 year period is just 1.5 days per year! So hopping in and out of the market can dent your returns very significantly. Regular investing and staying for a long time (which would include the best days as well) is the way to build sustainable wealth. Please see the complete data below: Stayed invested for 26 years: 33 times, 14.49% per annum Missed 10 best days: 12 times, 10.14% p.a Missed 20 best days: 6 times, 7.22% p.a Missed 30 best days: 3 times, 4.75% p.a Missed 40 best days: 2 times, 2.54% p.a It is clear that if you‟ve even missed the 10 best days, instead of getting 33 times your wealth, you would have got only 12 times. Just missing 10 best days in nearly 3 decades costs you so much. It is interesting to note that by just missing 10 or 20 best days over 26 year period; market gives you only fixed deposit kind of return. For missing 30 or 40 best days; you just get savings bank account returns. Markets tend to go up sharply on a few days, then consolidate for long periods and then go up sharply again over a few days. So just missing these days can bring down your returns drastically. It is impossible to predict the best days in advance and we would come to know of the same only in hindsight. I also read somewhere that some of the best days of the markets come immediately after its worst days. It looks like many a time the worst and best days are lumped together in a short period of time. There is no way to prevent worst days and time the best days. Not many get rich from stock markets because they lack patience, hop in and out, losing many of the best days. So don‟t try to time your entry into the market. SIP is the way. What matters is how long you stay invested so that you catch as many best days as you can and maximize your returns. Start early. Invest regularly. Stay the course. Get wealthy. Staying the course without disturbing long term compounding is the key. All the best.

(Data source: PPFAS mutual fund‟s investor education material based on Value Research data).

Life Pointers I just thought of putting here few pointers which I intuitively trust and is the core of my spiritual belief system. As with any beliefs, you can totally disagree with what is being mentioned below. If you know me; you already know how imperfect I am. For those who do not know me; do not have any high opinion about me based on my spiritual beliefs or writings. You are definitely bound to be disappointed. 1) “Everything is determined, the beginning as well as the end, by forces over which we have no control. It is determined for the insect as well as for the star. Human beings, vegetables, or cosmic dust, we all dance to a mysterious tune, intoned in the distance by an invisible piper.”- Albert Einstein 2) “Once you realize that all happens by itself, call it destiny, or the will of God, or mere accident, you remain as witness only, understanding and enjoying, but not perturbed. You are only responsible for what you can change. All you can change is only your attitude. There lies your responsibility.”- Nisargadatta 3) “Whatever this body is to do and whatever experiences it is to pass through was already decided when it came into existence. This is not to be taught to all. Even if we tell them, it will lead to endless discussion.”- Ramana 4) “If the moon, in the act of completing its eternal way around the earth, were gifted with self-consciousness, it would feel thoroughly convinced that it was traveling its way of its own accord on the strength of a resolution taken once and for all. So would a Being, endowed with higher insight and more perfect intelligence, watching man and his doings, smile about man‟s illusion that he was acting according to his own free will.”- Albert Einstein 5) “Whatever is happening is bound to happen. There is a series of events; a scenario is written down. So according to the scenario, things happen. There is no volition as far as an individual is concerned; things happen on their own. When that is seen, there is already a certain peace of mind.”- Nisargadatta 6) “Whatever is destined not to happen will not happen, try as you may. Whatever is destined to happen will happen, do what you may to prevent it. This is certain. The best course therefore is to remain silent.”- Ramana 7) “I do not believe in freedom of will. Schopenhauer‟s words, „Man can indeed do what he wants, but he cannot want what he wants‟, accompany me in all life situations and console me in my dealings with people, even those that are really painful to me. This recognition of the unfreedom of the will protects me from taking myself and my fellow men too seriously as acting and judging individuals and losing good humour.” – Albert Einstein 8) “In reality things are done to you, not by you. Your desire just happens to you along with its fulfillment or non-fulfillment. You can change neither. You may believe that you exert yourself, strive and struggle. Again, it all merely happens, including the fruits of the work. Neither is by you and for you.”- Nisargadatta

9) “The human being lives on fictions. For example, the human being knows that the sun is stationery and that it is earth that is in movement but nonetheless in his daily life he accepts the fiction that sun rises and sets. So the understanding is that all this is an illusion and that you do not have free will, but in life you must act as if you have free will.”- Ramesh Balsekar The only spiritual practice I do is to keep the above pointers in mind and still act and function as if both myself and others are having freewill. It may sound paradoxical; but it works very well for me:-)