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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Archive for the ‘Wisely Speaking’ Category

Wisely Speaking- 7

Posted by Muthu on July 16, 2012

I’m getting an invitation every other day for Linkedin. I opened a Linkedin and Facebook account for a short while and closed the same. I do not see any need for me either personally or professionally to be in social network. When it becomes hygiene factor for me have a social network account, I would then consider the same. As of  now, I’m fine with communication through email and phone. Though I’ve not closed my Twitter account, it is dormant. Only Thiruvalluvar can say something meaningful in 130 characters:-)

Thanks for your responses on my recent TOI article. ‘Aval Vikatan’ interviewed me last week as to how home makers can manage the rising prices. The article would be published in this week’s issue.

Though I’ve been a shareholder since 1998, I’ve never attended any AGM (Annual General Meeting) so far. Last week, I attended the AGM of IDFC, in which I’m a shareholder for last 4 years. Prepared 6 questions and made it a point to raise the same in AGM. Mr.Deepak Parekh, chairman of IDFC answered all the questions. Some of the answers found its way in the business newspapers next day.

I met a person in the IDFC AGM who has come all the way from Mumbai for attending the same. He is 40 years old and is an investor. You may ask what is unique in being an investor. We are all one, isn’t it? The difference is that being an investor is his occupation and profession. He comes from a family with out any investing background and has made it up only through investing. He makes it a point to attend all the AGMs of the companies in which he has invested in. Since IDFC’s registered office is in Chennai, the AGM is always conduced here.

Mr.Parekh is the chairman of IDFC, HDFC and HDFC Bank. All the 3 AGMs happened last week and it would have been a hectic week for him to prepare, address, face all the questions and answer them for all the 3 companies. Mr.Parekh is the most respected face in corporate India.

You may be surprised to know that IDFC has contributed for creating half of telecom towers in the country, two third of wireless subscriber base, half of private sector’s thermal and hydro-generation, 50% of container cargo capacity addition in Indian ports, 20% of National highways constructed with private participation and 25% of passenger and cargo air traffic.

I’ve decided to attend AGMs of the companies I’ve invested in, atleast whose registered offices are in Tamilnadu. So I would like to be present in AGMs of IDFC and City Union Bank (CUB).

Disclosure: Though it is very clear above, I would like to explicitly mention that I’m a shareholder in IDFC & CUB.

I’ve been offering a particular suggestion to all our clients working in IT sector for the last 3 years. I would like to state it once again. Please do not tie up both your employment and significant part of your net worth to the same organization. If some thing goes wrong, you would loose both your income and savings.

IT sector is now becoming like any other sector. It may not command the salary and social premium any more. The same hold good for marriage market as well:-) For existing people in IT sector, they may not see huge salary jumps hence forth. For all the graduates whose dream is to get into IT sector, the reality may not match the dream.

Both employees and investors make good money when a company is growing. As it matures, high growth becomes a thing of the past.

I read somewhere long ago that average life span of an organization is 60 years. Out of all the companies listed in New York Stock Exchange 100 years ago, only one, General Electric has survived till now.

East India Company, a typical trading company, which ruled our country for long is no more. I read that an Indian has purchased the same, just to own our past ruler.

People who are of my age would remember using Bril ink for ‘ink pen’ at schools. The uniform we wore was always Binny’s. Both the companies are no longer there.

The place I live now had a huge perfume factory before. Do you remember Kunega perfume? This was the perfume used my middle class till eighties and children used to keep smelling pages of magazines like Kumudam and Vikatan where Kunega’s advertisement used to appear. As a marketing technique, they used to spray the perfume in their advertisement itself.

The televisions middle class used to buy in eighties are EC TV, Solidaire, Dyanora, Crown, Uptron (remember what’s on? It’s uptron!) etc. has now vanished. When we bought EC TV in early eighties, the waiting time for delivery used to be 6 months.

The movies we used to see would have a byline ‘Eastman Colour’. Eastman Kodak company, the undisputed leader in photography for more than a century filed bankruptcy early this year.

When I was working with Elcot New Era Technolgies (later renamed as ELNET), it was the biggest IT park in Chennai. Now it may be the smallest one in the city:-)

So if you own shares, it is your responsibility to understand the nature of companies and the sector. Nothing lasts forever and only few things survive for long term. If you invest in mutual funds, it is the responsibility of the fund manager to change the portfolio according to the changing environment.

Many people think their fund NAVs keeps going up and down based on the Sensex. Nothing can be farther than truth. Sensex consists of 30 largest companies in the market. Funds do not invest in Sensex companies alone. They may invest among hundreds and thousands of companies that are listed in the markets. Let me provide an illustration. Sensex was at 18091 on 29th January 2008. The NAV of HDFC Equity Fund on that day was Rs.192/- Sensex was at 18078 on 24th February 2012. Sensex was at the same level even after 4 years. Whereas NAV of HDFC Equity Fund on the later day was Rs.261/-. Though Senesex was flat even after 4 years, the NAV has grown by 36%. Whenever I talk about a fund performance, do not forget to read the disclaimer.

A childhood play mate who is four years younger to me, passed away in a road accident last week. When his wife conceived 2 years ago, it resulted in an unfortunate abortion at the end of 7th month. She is home maker with dependant parents. She would be having a difficult time both emotionally and financially. Seeing this, one more friend of me is very eager to take all the necessary insurances immediately.

In Buddhist meditations, they keep repeating the phrase ‘Anicca’. Anicca means impermanence. We need to plan for both long life and also for snapping out early.

Though you may have health cover, start creating a separate corpus for medical exigencies. The cover we have may be sufficient for next 5 to 10 years and can become inadequate then. As we grow old and get sick, additional coverage would not be possible. I advice people taking medical cover upto Rs.30 lakhs (Rs.50 lakhs is what maximum given). After 10 years, I do not know whether the cover would be adequate.

Also for some one having dialysis, it may cost around Rs.1 lakh a month. I read about a poor woman having Multiple Scelorosis and struggling spend Rs.40,000/- a month for treatment. Why poor woman? Most of us cannot afford to spend that amount on a regular basis for life. I’m highlighting this because, medical expenses are really expensive and it would become more so in future. Our problem would be aggravated if there is no sufficient fund for managing the same.

Emergency Fund, Term cover, Medical cover, Personal accident cover, Fire insurance cover for home and creation of corpus for medical treatment is a must. The best way for us to enhance our wealth to meet both our aspirations and contingencies is long term investing in equity. Please don’t forget that. If possible paste ‘Invest in equity regularly for long term’ on your bathroom door:-)

Posted in General, Muthu's Musings, Wisely Speaking | 4 Comments »

Wisely Speaking – 6

Posted by Muthu on June 8, 2012

I wrote in an earlier piece about an imaginary portal www.grandfatherdialogues.com. I thought that piece was funny. More funny is that there of lot of clicks from our portal for this non existent website. 

Last week two cover stories with my inputs got published in both ‘Nanayam Vikatan’ and ‘Gokulam Kadhir’. One was ‘How to cope up with rising prices’ and the other one was ‘How to live the life without borrowing’. I hear from the magazines that both have evoked a good response from readers. 

Some of my friends spoke to me about Aamir Khan’s program on medical profession last week. I’ve not watched any of his episodes yet. I watch TV very less these days. I’m sick of breaking news 🙂 

In my experience and opinion, the bad ones in the medical profession far outweigh the good ones. Corporate hospitals charge to the point of loot. I developed tooth pain last year. I went a corporate chain and after checking me, I was told that there are four wisdom tooth plus 2 decayed tooth which needs to be removed surgically. The estimate was Rs.70,000/- and I was told it needs to be done urgently and I cannot afford even a day’s delay. I was somehow not comfortable both with the diagnosis and the estimate.

The next day morning I got a call from the hospital as to what time I’m coming on that day and the Doctor is kind enough to allocate time for me immediately. I told her that I need some time to think. She said that Doctor has said that I’m delaying at my own peril. I slightly panicked and was also amused as to why the hospital is doing follow-up calls. I could not decide anything on that day. The next day also the call came from the same lady and she tried her best to create panic in me so that I would rush there immediately. 

I immediately went and meet my GP. He was equally amused by the update I gave him. He suggested another Dentist who is having clinic near by and has been practicing for last 30 years. I went to him and told the whole story again. He asked me to take a digital X-ray and come and see him. After seeing the same, he told me that there is only one wisdom tooth that needs to be removed, other wisdom teeth are not creating any problem now and only if it creates some in future, then we need to consider extraction. Since the tooth which has to be removed is in a twisted shape and deep inside, he suggested surgical extraction. I went for it. The consultation, surgical extraction and the follow up review; all put together cost me Rs.2300/- only.  I not only saved good amount of money but other teeth as well.

This clinic cannot be compared with infrastructure that of the corporate chain. There was a 5 star lobby, plasma TVs everywhere, extremely comfortable sofas which would lull you to sleep, beautiful front office ladies with a combination of looks of peacock and voice of Cuckoo, a security to open and close not only the main door but even your car door and above all the Doctor suggested that well placed (?!) people like me should not use ordinary tooth brush and suggested a electrical tooth brush costing Rs.8000/-. There was a small screen on his table, which showed a video of how to use the electrical tooth brush and it is benefits. He did not forget to add that it would be better to buy the same in their pharmacy as there are duplicates else where! I’m comfortable with Oral-B toothbrush for decades and have no intention of going electric:-)

My father developed a small wound like lump in his leg. My father being a diabetic, I took him to a Podiatrician again in a popular diabetic chain. He suggested a surgery on the same day. We did it. Then he asked us to come every 15 days and used to scrap the part and send his assistant to our home every alternate day for dressing. As the wound is about to heal, he would again scrap and send his assistant home. This cycle was kept on repeating regularly which cost both lot of pain, strain and money. This Doctor sent another guy to our home and insisted that we make special slippers. He warned that otherwise my dad’s leg needs to be amputated. So two special slippers was made at the cost of Rs.8000/-.

I felt that the above Doctor was looting us and we should take opinion from another Podiatrician who is not part of this money minting corporate chain. He was surprised as to why the healing wound was again and again scraped leading to an unending cycle of treatment. He suggested to let the wound to heal completely and prescribed medicine and ointment which has to be applied daily. He suggested wearing socks always as dirt would not touch the infected area and covering the wound area while having bath. In 3 months it healed very well and he asked us to just follow the above process regularly and my father being old and diabetic to come for a review once in 2 months. He charged Rs.600/- for the consultation and is worth every rupee.

I know many Doctors as friends, clients and well wishers. I know how some of them, despite working in corporate hospitals, refuse to play the game and is in the bad books of administration. But for the tremendous goodwill they have with patients and excellent skills and competency, they would have been thrown out of the system long ago. Knowing them has ensured I do not fall for looters ruining both my health and wealth. In any profession more so in medical profession; it is important to know good people. When I went for a migraine check up with the most popular hospital in city, the migraine specialist there suggested a very expensive and controversial treatment. I checked with my Doctor friends. They in turn checked with their professional friends and got back to me stating not to go for the same as it can have disastrous consequences. Thank you Doctors.

I’ve to write about one ‘normal’ hospital here. From the time my wife conceived, we chose to go to Dr.Uma Ram for consultation, check up and planned delivery in her hospital, Seethapthy nursing home. We were extremely comfortable with her and she used to arrange for even pre-delivery knowledge sessions which were very helpful. She has given a 24/7 mobile number and said that since we are having bay long after our marriage; call the number for any issues. Even at 2 am in the night, when my wife I had some discomfort or fear, she used to call that number and some Doctor would be available to clarify and comfort. Since deliveries happen even in nights, the Doctor rarely gets good proper sleep and told me that she sleeps on an average for 5 hours a day, but not continuously.

Due to some complications, we opted for C-Section and have to be in hospital for 6 days. At the time of delivery, a very good neo-natologist was also present. Excellent care and attention was provided during the entire stay in the hospital. When the final bill came I was extremely surprised. For surgical delivery, 6 days stay in an air conditioned deluxe room; check up by other specialists like Anesthiseologit, Neo natalagist, round the clock periodical check up by Doctor.. all these put together was totally billed only around Rs.30,000/-+ I thought 30K is too less for the kind of treatment and attention they gave. So I went and asked Dr.Uma Ram why she is charging less. She laughed and told me that she is charging normally and not running the hospital for loss and as the others may be charging lot more, it looks cheaper. The hospital also co-ordinated and followed up with the local corporation office in helping us to get the birth certificate. Thank you Doctor and may your tribe grow. People like you only ensure that we do not loose faith in the system.

I’ m really happy the way markets are right now. As Prashanth Jain mentioned in his recent piece; these kinds of valuations you get only 3 or 4 times in a 20 year span. For most of us, the major investment time span in our life itself is only 20 years+. Many start worrying about their finances only in their thirties and some in their forties. I don’t want to talk about people who start wondering about all these in their fifties:-)  So the accumulation phase happens only for 2 decades. That being the case, accumulation of equity at cheap valuations should be mouth watering and not leave a bitter taste. If some of you believe in prayer; pray that markets should go down and be like this for next few years. If your prayers are answered, God wants you to be very rich:-)If you’re prayers are not answered, still you would end up making decently. That is the power of discipline and compounding.

The more markets trade in cheaper valuations during accumulation phase, the better it is for investors. However bull markets are longer than bear markets and in investment tenure of 20 years; one would have more of bull than bear markets. That being the case, bear markets should enthuse us. Only because of bear markets, our long term return from equity is good. You get more units in a bear markets and less units in bull markets. As Graham mentioned, as you get more at less price and less at more price, your average cost would be lesser than arithmetic average. If we understand this simple and effective truth, we would not be worried about market volatility and would do better things than constantly keeping track of NAV or share prices. Looking at portfolio every day or every week is a kind of addiction and if someone cannot live without seeing it; it is better to go for a de-addiction:-)

Whatever happening globally now is actually good forIndia. I would write about it in future.

It was nice to see the advertisement by oil marketing companies (OMC). Half truth conceals more than what they reveal. If you notice, the OMCs always use the word ‘under recovery’ and not loss. They get subsidized by oil and gas producing companies like ONGC, GAIL and also government. Interestingly the same government again receives thousands of crores as dividends every year from OMCs, ONGC and GAIL. We pay the highest tax on petrol. Neither the central or state governments (exceptGoa) want to work on that.

When the government started thinking of rising prices, the brent crude was around $130. Now it is around $98. That is 25% reduction in international prices. The rupee was weakened only around 5% during the period. I do not understand the logic of this price hike.

I also get no answer when I ask experts as to when Brent Crude was around $40 and rupee at Rs.38/- in 2008 why our petrol prices did not fall to say Rs.20/- or Rs.25/- per litre but was sold at nearly Rs.60/- What happened to all those excess profits generated by government companies?

The whole oil and gas pricing mechanism is so complex and confusing that it is very difficult to make sense of what we read in media or what is said by government. May be they want it to be that way.

Posted in General, Muthu's Musings, Wisely Speaking | 4 Comments »

Wisely Speaking- 5

Posted by Muthu on March 24, 2012

I get atleast few responses in the form of mails from you for every piece I write. That gives me a hope that some of you really read what I write:-) People who happen to read it through the blog also write to me. Some put it in the form of comment as well. I want to share a part of what someone wrote to me after reading the last piece. 

“A well worded article. It touched me because I have gone through the phases which you had described – especially the pain and endurance and acceptance part. I am a cancer survivor and not long ago I was on my death bed supposedly. Up to that moment I was fighting cancer and was fighting for my life, thinking that I would win over cancer with my drugs, doctors and positive thinking. But one day when my heart nearly gave up and I was lying on the bed connected to the machines with the doctors at my side waiting with the defibrillators to revive if my heart gave out completely, realisation dawned on me. The truth that death could take me any moment it wished to and nothing could stop it. That was a moment of acceptance.

Strangely that was the moment I made my peace with death. Immediately after that, an enormous amount of peace engulfed me and I was totally relaxed for the first time since my treatment started. And ironically, death did not choose to take me away that day. As I read somewhere, “Death taught me to live”. Today though I have overcome my malady, I know I am living on borrowed time but I am living my life with a sense of gratitude and appreciation.”

Today’s piece may be long (when it wasn’t?); all the more because I won’t be writing again till the end of April. I’ll tell you why somewhere in this piece; which should atleast offer you an incentive to read till the end.

I get questions all the time as to what would be impact on the markets – based on budget, fiscal deficit, crude prices, U.P. elections, Euro zone issue, U.S. situation, middle east crisis, Iran going nuclear…. the list is endless.

Usually I try to avoid answering these kinds of questions and if pressed very hard, tell something based on what I feel. These questions and my answer are of no use to you.

I participate in the conference calls of some good fund managers. At the end of call, questions from advisors invariably pertain where the markets are headed… in next few months, this year, what is the Sensex target for this calendar year or this fiscal etc.

In the calls I attended in December, I heard everyone of them saying that conditions are very bleak and they expect a further 20% correction in the first quarter of 2012 with Sensex hovering around 12000+ levels. Since there are only few more trading days left for this quarter, looks like we may end up in the range of 17000+, 40% more than what they predicted.

These fund managers are really good at their job- managing our money. The reality is that no one knows where the markets are headed next month, next few months or even this year. So you can now appreciate:-) the media which tries to forecast everyday where the markets are headed today, tomorrow, next week, this month before the F&O expiry etc.

The problem is that investors think that someone is no good as a fund manager or advisor if he cannot predict the near term market movements based on various events and give projection for markets. If this is the filter which is going to be used to evaluate the tribe, I can tell you that none of us can pass the same. If few of us on occasions come out with flying colours on such forecasts, it is mostly due to chance, like flipping a coin.

Understanding certain broad parameters and how things work can ensure that we get our approach right and don’t waste time on such gossips. Instead we may gossip about a film star’s affair, talking about in-laws, boss or colleague at work etc. which are more interesting than talking about stupid markets:-)

To put it simply for better understanding, this is how things work. In the long run, a stock price is based on its earnings; a company’s performance is usually dependant on the economy or economies in which it operates. So if there is economic growth, there is corporate growth; resulting in increase of earnings and price of stock as it is slave to its earnings.

In the short run, there may or may not be correlation between the price and earnings but over a period it converges. Even if the earnings are not cyclical, the price movements are always cyclical. An earning of Rs.10/- per share in a bear market can command a multiple of 5, resulting in the price at Rs.50/-. In a bull market, the same earning can command a multiple of Rs.15 resulting in 3 fold price rise.

The most important thing to understand is even for some reasons if markets do not provide a better multiple for a stock, its price may still increase due to increase in its earnings. If the earnings of the above company grows at 18% per annum, in 4 years the stock price may double even if there is no expansion in the multiple. There is another way of  looking at it. The earnings for Sensex a decade ago was Rs.200/-. This year’s earning is pegged to be at Rs.1200/-+. Assuming a trading multiple of 15, Sensex level of 3000, 10 years ago is same as the level of  18,000 today. The valuations remain the same but the earnings (of the companies in Sensex) growth has resulted in 6 times growth in Sensex.

So there is no point in debating about whether Sensex would be 40,000 or 60,000 in next 5 years. It’s driven by 2 factors- earnings and the multiple given by the markets at that point of time for the earnings.

If you believe that India would grow economically in the next decade or two, then there is a strong case of investing long term in Indian equities. If you believe otherwise, then you would be better off not investing.

If you look at our GDP growth; it was 3.5% in 1960’s, 4.1% in 1970’s, 4.4% in 1980’s, 5.7% in 1990’s, 7.2% in the last decade, optimistic projection of double digit growth this decade if we get the infrastructure story right or even otherwise a good growth rate of 8% or 9%.

Also if my understanding is correct, there has never been a single year of negative growth (recessionary year) inIndia. It has been in the growth cycle for decades. The rate of growth is sometimes strong and sometime weak; but structurally it is in a prolonged growth phase. Given our low base, this phase may continue atleast for next two decades.

The situation both internationally and domestically for the last 4 years is not very great. Despite that our cumulative growth of GDP during the last 4 years is around 30%. Very few can have this kind of growth with out doing anything for infrastructure:-)

Again, all the growth rates mentioned above are real rate of growth, after adjusting for inflation. When inflation is not adjusted, it is called nominal rate of growth. If you get a salary hike of 10% this year and the inflation is 8%, you don’t say your salary growth is only 2%. Income tax department too would not accept this logic:-) If a company earned a profit of Rs.100 last year and earns Rs.120/- this year; it is 20% growth – no adjusting for inflation. But when GDP data is published, it is always adjusted for inflation. This understanding is vital. So if we assume an average inflation rate of 8% every year in the last 4 years, our cumulative nominal GDP growth rate works out to be around 60%+; Not at all bad considering the environment we and the whole world have been in.

So if we anticipate a nominal GDP growth rate of 14% or 15% in future, the corporate earnings may do much better than the overall economic growth which includes lesser growth sectors like agriculture as well. Over long term, the return from equities would be in sync with corporate growth and more precisely its earnings and the multiples provided for the same.

So if some one says that the long term annualized return in Equity/Sensex for the last 3 decades is 17% or 18%, it never means that you get 18% every year. This is also vital for understanding. You would have got 50% in a year, 30% in one, -40% in another etc. Normally a market goes through a complete cycle in 10 years; which is why we always tell the holding period in equity should not be less than 10 years. In general, the bull markets are always longer than bear markets; also positive years are more than negative ones. There are some international studies which say a bull market’s average span is 5 years and that of bear market is 3 years.

Again the word average can be mis-leading. This means we can invest money for 5 years, take it out and invest again after 3 years:-) It isn’t that simple. Nothing prevents a 10 year bull market or a 6 year bear market:-) Also as I’ve repeatedly pointed out, growth happens only in spurts, not sequentially. So even in a bull market you’ve days of sharp rises and sharp falls.

Enough studies and research has been done in this regard and the general pointer is, if you miss the best 1% of days (roughly 20 days) in 10 years, your return may probably equal a savings bank account return and if you miss 2% of days, you may not get any return at all or may even loose some capital.

So do not time the markets and make investing a regular habit. You may time only in the following situations- making lump sum investments when valuations are attractive, not making lump sum investments when valuations are expensive, start planning to phase out withdrawal a year or two before you near your goal – retirement, child’s higher education, daughter’s marriage etc. Again the term attractive or expensive valuation is relative. In a bear market, when you invest at attractive valuations, the markets can go further lower too and become more attractive:-) That’s fine as our investment outlook is long term and notional loss should not bother us. Likewise it is very difficult to know what is an expensive valuation in bull markets. Bull markets are very euphoric and we may think valuations are high, still it may run higher for even few years. Only in hindsight we’ll know when the valuations get peaked out; that’s also fine. It is better to be safer than sorry. In bull markets, especially at later stages, it is better to continue only monthly regular investments and not make any lump sum investments.

Strangely you would see all kinds of people who say something is expensive at a multiple of 15 would not mind investing at even 60 or 70 multiples in a bull market. Fear will be at peak in bear markets and greed would be at its peak in bull markets.

In bull markets, you would see pundits saying why this time bull markets would never end and go on for ever as we are into some new era. The same pundits would ask you to avoid equities all together in bear markets. Both bull and bear markets never goes on forever and there is no new era as far as financial markets are concerned. The details or context of cycle may vary, but cycles never change.

Reading financial history is always helpful. In 1970’s, the petrol price almost increased by 15 times to touch $40 a barrel. Then it went all the way down to $12 in 1980’s, reached the $40 mark again during first gulf war… In the recent years, it went as high as $150 in 2008 and came down to $40 levels in 2008-09. All the above numbers have not been adjusted for inflation and were then prevailing prices.

When gold ran up in 1970’s and went above $700 per ounce, the prediction was gold has reached a permanent high plateau and pundits thought it may even touch $2500. Well it went all the way down to $300 per ounce in 1990’s. Infact for someone who invested in gold at the peak of 70’s boom, it would have taken 28 years to just recover the capital. Even after more than 3 decades of $2500 per ounce predictions, gold is still at around $1700 per ounce.

The problem in commodities is that cycles are very longer. The average bull cycle is 10 years and average bear cycle is 20 years. Unlike equities, you would have noticed not only cycles are longer but negative period is much more than the positive period for commodities. When you trade or invest in commodities (gold is also a commodity), please keep this in mind. Of course, I would never advice trading or investment in any commodities. For social reasons, we do need gold and silver and a small portion of one’s asset can be invested in gold more for the purpose of diversification than anything else.

So completely ignore the news flow. Now we’ve started worrying not only aboutIndia but the entire world. Every day somewhere something is happening. Change in interest rates, consumer confidence, industrial data, unemployment data, consumption data, market data, inflation data etc…We hear it all over from China, U.S, Germany, France, U.K, Japan, and our own India and keep wondering what to do with all this information. The best thing is just ignore. World has never been a perfect place and it never would be. In bull markets, bad news is ignored and good news is magnified. In bear markets, bad news is amplified and good news is completely ignored. Cycles continue to happen and there would never be a perfect domestic or international situation.

Given that our markets have been at the same level for almost 5 years, the probability of a strong bull market is more. I do not know whether it would start this year, or next or 2014… Since our economy is in a prolonged growth phase and our market is still away even from the highs it achieved more than 4 years ago, I would assign a higher probability for a strong bull market in the years to come.

Though I’ve highlighted it many times, please remember the 17% or 18% long term returns from the equities is inclusive of all the bear markets as well.

In markets, knowledge or degrees doesn’t matter much. I’m not saying that you should be stupid or dumb. But if knowledge or degree matters a lot, all Ivy League and top B schools graduate should be the best investors. Often all these people including media pundits are dependant on their employment income for their survival and not their asset based income.

In that sense, you and I also have an equal opportunity in the market if we get our approach correct. Prof.Sanjay Bakshi who is a rare combination of being strong both in academics and investing has made a mention about an investor in Chennai, who has not gone to college, living in a middle class apartment, driving a Honda City, having a net worth of Rs.50 crores through right approach towards investment.

I don’t know whether you ever heard of Hetty Green, the first richest woman in the world in late 1800’s. EvenNew York Citywas dependant on loans from her for its survival few times. You may definitely not want to live the life the way she lived but still understand the power of compounding, conservative and value based approach.

Coming to the point of why I would not write till end of April; I would be sending you the portfolio summary for the financial year 2011-12 with my comments or notes, wherever required. In my opinion, a yearly review for you as an investor is frequent enough. Constantly looking at prices regularly would do you more harm than good. What is the point in looking at prices everyday or week or month after deciding your holding period is going to be 10 or 15 years? There is no need to get elated or weep at notional gains or loss.

Normally any asset class tends to deliver its long term return- whether equity or even debt based products like MIP only if you stay for the required holding period. There was all round panic when MIPs failed to deliver in first half of 2011, whereas in the last 6 months it has given good returns. When we say a holding period for a MIP should be 5 years, we say that with a reason. In any economy, especially high growth economies, interest cycles happen continuously. Though we cannot predict the cycles in advance, our understanding based on our experience and data pointers is, the returns get evened out if the holding period is 5 years.

We take every care to ensure that the data we send you is correct. Since the reports are generated out of data feeds we receive from RTAs (like CAMS, Karvy), if you find any discrepancy in the report, please do write to us. Also if you do not receive the report latest by April 30th, please write to me. I might have accidentally missed out and would send the report based on your intimation.

We may meet again in May:-)

Posted in General, Muthu's Musings, Wisely Speaking | 2 Comments »

Wisely Speaking- 4

Posted by Muthu on January 19, 2012

Benjamin Graham who is considered as father of value investing and security analysis and is also the mentor of Warren Buffet once mentioned:

“A suggestion I can make is that if you were sure that you could follow a dollar-averaging program, you could start [investing] right away. Dollar averaging is a method of investment under which you set aside regularly a fixed amount of money and invest it in common stocks generally, either in a single common stock or preferably in a group investment through investment-company shares. By investing the same amount of money at regular intervals – say, every three months, you get two advantages.

One is that over the years your investment reflects the average market price rather than the high market levels – which is where you are likely to buy if you follow the crowd. Secondly, the arithmetic of dollar averaging gives you more shares at the lower prices than at the higher prices, so that your average cost is lower than the arithmetic average. If you are putting $1,000 in one kind of stock and the price is $10, you’d get 100 shares. If later it’s $20, you’d get 50 shares. You bought more stock at the $10 basis than at $20. Consequently your average price would be less than $15.”

Over the last two decades, I’ve observed that there is a tendency to participate in the markets only when it is rising continuously. Good investments are the ones which are mostly made in bad times than in good times. That is why I always believe in the paradox that bad markets are good for making investments.

What Benjamin Graham has said about investing regularly for a long term works well for a portfolio of stocks like mutual funds or index than an individual stock. By doing this, we are able to avoid one of most fundamental and costly errors in investing; investing money when the markets are high and redeeming or not investing further when the markets are low.

Not only that we get average prices instead of higher prices over the long term, the average price is lesser than arithmetical average because we buy lot more when markets are low and lot less when the markets are high.

Our behaviour and emotional discipline matters most. If this can be absorbed inside the skin, we would do fewer mistakes with our investments.

Early this month, I was chatting with a senior citizen who is in his eighties. He has retired from a private sector company around nearly 3 decades ago and has no pension. He married very late in life and so many of his financial responsibilities came much later in the life. He had done well in discharging his responsibilities without resorting to debt, having an own house and managing his affairs till date without seeking the financial help of his children. Infact he keeps giving his children and gets nothing from them.

What he has done for himself is quiet commendable given his social background. I asked how he is able to do this way. He simply said ‘stock market’. When I probed further, he shared his portfolio with me. I was surprised. It is very high for his background and infact I’ve not seen the same quantum of wealth even with many people having a very high earnings.

He never watches any business channels or read financial newspapers or magazines. He just read the finance page in normal newspaper to have a general understanding of what is happening. He reads the annual report of companies he has invested in and doesn’t tinker his portfolio frequently.

He holds shares in one of the best wealth creator of the last decade. He told me after he purchased this stock in 2000; it fell almost by 50%. He reasoned that if something was good at Rs.X, it is all the more better buy at Rs.0.5X. So he doubled his quantity when the price fell by half.

He does not have the knowledge of many of the professors in finance, investment and security analysis. He may even feel that something is wrong with his approach if these gentlemen start taking class and talk about efficient market hypothesis, beta, alpha, hedging strategies etc. But he can be rest assured that with out their jobs, many of these professors may not be able to survive leave alone thrive. Whereas this person, with his understanding and approach, has thrived without a great job or handsome income.

In early 2000 when I was exposed to writings of Warren Buffett, an elderly gentleman used to do some assignments on a freelance basis in the organization I worked. Sensing his interest in markets, I used to talk to him enthusiastically about Buffett. The subsequent two years was a strong bear market due to dot com burst, twin tower attack etc. He taught me about picking stocks for long term, how to analyze a company etc. Again this gentleman also had a career in the capacity of junior management employee in a private company. He used to share his portfolio which he has been building for decades. If my memory serves me right, his portfolio was worth couple of crores then, a big amount for anybody even today; much higher a decade ago both on absolute terms and more so given his career and income levels.

His kinds are the ones who make good money in stock markets in the long run. In the last 3 decades+, when Sensex has given an annualized return of around 17%, people with this attitude would be the ones who would have made money. People, who buy in bull markets and sell in bear markets or stop buying in bear markets, don’t get benefited by the market. It is not the mistake of the market; it is our emotional instability and lack of discipline which prevents us from making wealth which markets are capable of offering.

I’m not a ‘suyambu’. I’ve done lot of mistakes earlier and do lesser mistakes now. However in addition to learning from Buffett,  Graham etc.; I’ve met good investors who have made wealth absolutely disproportionate to their income; through ethical and legal means, by investing in markets. I’ve met people who have been staying invested in good equity funds for more than a decade and reaping an annualized return of even 20%+.

Like Buffett says for the snow ball to become big, the slope has to be long. I can say with fair degree of conviction if I live long and mental faculties remain intact, making a sizeable snow ball isn’t that difficult.

When I was talking to a friend in business media last week, I told him that no one would have ever made money by following their recommendations. Newspapers and TV channels keeps recommending doing something everyday and magazines on a weekly or fortnightly basis:-). There is no point in blaming them. When we perceive value only through activities and like to be entertained, media do their part. It is the question of what entertain us- sports, cinema, religion, music, history, adventure or stock markets. For every need, there is supply available. The problem in investing arises only if you start taking everything in the entertainment seriously.

Entertainment, by its very nature, cannot be monotonous. It has to be different everyday. There has to be villain- be it FII or RBI or Government or Europe or USA. It needs to create fear and make us jittery; create enthusiasm and make us jump with excitement. All these are absolutely fine if you do not make decisions on investments or personal finance solely on this. If you cannot avoid getting impulsive by this entertainment; then better to avoid it all together. Otherwise our life becomes a most tragic entertainment:-)

I’m not against acquiring knowledge or educating oneself. I do it all the time. But this is of no use if there is impulsive behaviour and zero emotional discipline. It is unfortunate some of the very intelligent people I know easily succumb to noise around them created by media. There is an information and opinion overload. In the web world, everyone including me is a philosopher and a genius:-)

Because of human nature and behaviour, only a small percentage of people in the markets can reap the benefits it can offer. I feel it would always be so, because influencing the behaviour, even that of our own is the most difficult thing. I’m trying to see if majority of our clients can be part of this minority club. If it happens, the credit goes fully to you.

Not that we are good in forecasting. Nobody is. We do not even believe in forecasting, especially short term. However based on certain observations and trends, we’ve been pointing out for some time the possibility of interest rates peaking out, inflation coming down and rate cuts start happening. The first two has already happened and as for the last one we feel it is not the question of whether but when. We too get it right, at times:-)

Though 2011 has been second worst year (the other one being 2008) in our stock markets in nearly two decades, we attracted good amount of FDI. FDI is sticky and long term investments when compared to FIIs. This has not been highlighted.

With the present growth rate itself, we are projected to be the 5th largest economy in the world by 2020. I believe that if the government gets the infrastructure story right, even double digit growth rate us is very much possible. Keeping in mind long term bigger picture helps us not to be distracted by day to day news flows.

As far as rupee movement goes, though many variables influence this, given our economic growth rate and possible capital inflows from overseas, in the longer run the way forward looks like strengthening of the rupee.

In markets, they use two terms ‘time correction’ and ‘price correction’. It so happened that our markets are still lower than where we were in January 2008. Both in terms of time and price, the correction has been there for the last 4 years. So there is a strong possibility that the coming years would take our markets to the next level as the earnings have not stopped growing during the last 4 years and they always command a better multiple in bull markets.

Never forget the cyclical nature of the market. We may have a fresh top and bottom at the next level.  But when the market moves to the next level; so do our wealth.

When the interest rate starts falling down and equity markets starts picking up, MIPs are capable of doing very well. For this debt oriented hybrid plans, next few years may be rewarding.

It’s a good time to weed out poor equity funds and stocks and move into better ones.  As far as funds are concerned, we can help you and you’ve to take your own call on stocks.

Irrespective of market conditions, always continue your SIPs and whenever your financial situation permits, make it a point increase the monthly commitment. You would definitely be very happy about your decision in the long run.

Posted in General, Muthu's Musings, Wisely Speaking | 3 Comments »

Wisely Speaking- 3

Posted by Muthu on November 17, 2011

The flip-flop on the petrol prices in the last 2 weeks is hardly surprising. The government is getting more confused then ever.

It would be better to link the fuel prices to markets with the exception of kerosene and domestic LPG.

This would end the constant blame game between ruling and opposition parties & central and state governments.

All the opposition parties ruling different states conveniently do not talk about the huge taxes they are levying on fuel.

Government can remove subsidy entirely on petrol and diesel. We forget the fact that we are the ones who pay for subsidy too.

The subsidized diesel prices are happily being exploited by automobile companies for producing diesel run sedans and SUVs. People who drive these definitely do not belong to the poorer section of the society requiring subsidy.

Talking about subsidy, there is no need for us to follow the flawed western model of bailing out private companies at the cost of tax payers’ money. Vijay Mallya can afford to live without us paying for his losses. Why we have to share the losses of his airlines business? The profits from the liquor business was never shared with us:-) I was not there during King Fisher calendar shoot:-)

As many economists have repeatedly pointed out; privatizing the profits and socializing the losses is the recipe for disaster. Companies which are efficient and prudent would have no motivation if their reckless counterparts are bailed out by public money. There has to be both positive and negative incentives for businesses.

Nearly 6000 children in India die every day due to hunger and these 2 million deaths every year of  future India deserves priority over saving flamboyant businessmen. If their business fail; they and their generations would still be well off and have a life style which even a hard working upper middle class Indian can never dream about.

Dr.Subbarao, governor of RBI in a recent speech has mentioned that there over 6 lakh inhabitations (metros, tier 1 to tier 6 cities, towns and villages) in the country and only thirty thousand  of them (just 5%) has reach to banking system. He has also further said that only 40% of the population has bank accounts and even this may be on higher side due to dormant accounts.

When it comes from horse’s mouth, we can definitely take it on the face value. What we see around is also validating the above data. The country’s largest bank, SBI itself has only around 14,000 branches. A prominent private sector player, HDFC Bank has only around 2000 branches.

In the draft guideline for new banking licenses, thrust is given for compulsorily operations in semi-urban and rural areas. If you think, banks predominantly operating in these areas would be sick, take a look at Tamilnadu based banks like Karur Vysya Bank, City Union Bank etc. A bank can reach out to these segments and still be commercially successful too. (Disclosure: I ‘m a shareholder of City Union Bank).

Interestingly being regional players: KVB & CUB has around 400 & 300 branches respectively. In Tamilnadu, KVB, CUB, LVB & TMB have made banking accessible for many. These are all private sector banks, have been around for generations and are being run both prudently and profitably.

If financial inclusion, with out compromising prudence or profitability is the aim; I think there is so much which can be learnt and emulated from the above by other ‘new age’ private sector banks.

Also I’ve accounts with both the ‘old’ and ‘new’ private sector banks (I’ve never had accounts with any PSU bank, except SBI for our family’s PPF accounts). In the ‘old’ ones; atleast till now there is no concept of ‘Relationship Manager’. Still they know each customer well. Around 12 years ago, I gave a bearer cheque for Rs.10,000/- to someone. As I never issue a bearer cheque, the teller got suspicious, went to the manager’s cabin and informed him. The manager immediately called me on my mobile (the call charges was very high those days) and asked me whether I’ve given that particular cheque or should he alert the police!

Even last year, I issued a cheque to someone and forgot to sign the same. When it came for clearance, I got a call from the bank requesting me to come and sign the cheque so that they can honour it. I can write many more instances with my 2 decades experience of banking with these ‘old’ banks.

In the ‘new’ ones; our accounts fall under ‘Privileged’ or ‘Priority’ or ‘Preferred’. So we always have a RM assigned to us. On an average, a RM changes atleast twice a year and he keep calling us pleading to help him in achieving his targets in selling financial products, gold etc. No one in the branch knows us personally. We are just another account number. Now it has mellowed down; till 2008, we used to get pre-approved loan letters and calls routinely.

I used to wonder why a bank wants to lend me without me asking for it and also without any supporting document whatsoever. Once I called up a bank’s call centre and asked them how they ascertain my credit risk since the loan is offered without any proof or collateral. The lady on the other end got terrified with my questions and brought her manager on the line.

He told me that since my cheques do not get dishonoured and I maintain a decent balance, they found me worthy of offering loan without asking for any proof or collateral or surety. I pointed out that the loan I was offered is many a times the balance I maintain with them and asked what recourse they have if I default on my loan and how my repaying capability is assumed on the flimsy ground of the average bank balance and not dishonouring the cheques. He did not know what to say and profusely apologized for offering me a loan:-)

If you want to experience prudence, just walk into a Shriram Chits office and ask for a loan. The level of verification they do, collaterals, surety… the way they appraise the credit risk, would put even a banker to shame. I’m saying this based on what borrowers from the above company has told me.

If you wan to know how reckless a bank can be, read the books written by Ravi Subramanian, a former banker. Who knows it better than an insider?!

As I repeatedly mention that we all belong to 25% India which is growing and doing well. We happen to be in this minority club and just imagine how more difficult life would be if we have been part of the majority club.

The strange paradox even if you belong to minority club is how much is enough. One recent report mentioned that only 0.4% of our country’s population has assets of $100,000 (Rs.50 lakhs) other than primary residence. In one such family I know, the head of the family has to go through prolonged hospital admission and an organ transplantation which cost more than Rs.25 lakhs. Due to his hospital confinement, his business suffered, the debts mounted as they no longer could be serviced. The story did not have a happy ending. He passed away, the entire networth got wiped out, the house was kept as co-lateral for the loans… Well, I do not want to write further what the family went through.

When a family member narrated these details; I was dumb struck as to how much is enough when such a calamity happens to a family, despite belonging to the top 0.4% of this country.

I was discussing about these kinds of huge expenses due to medical exigency with another advisor. He has keen insights on health insurance and told me that many companies do not renew the health insurance if the claim during the life time exceeds a particular percentage, say 200%. This means that if you have Rs.3 lakhs cover and is promptly paying the premium year after year; once you totally claim Rs.6 lakhs (in different years), the company would refuse to renew your health cover further. And as claim history and pre-existing condition needs to be disclosed and is also shared between companies; you may not get a new cover from any other company too.

I’m trying to understand this further and since I know many fellow advisors also reading our blog; request you to share your thoughts with me.

Whenever someone meets me for investment advice, I always ask whether they have adequate risk covers. If the risks are not covered, savings can get wiped out even by one single event.

I’ve to write a separate piece on people’s attitude towards risk. A guy who considers investing Rs.5000/- a month in SIP as risky does not consider not having a term cover as risky; when he has dependant parents, home maker wife and young kids!

The general perception is that risky things happen only to neighbours and not to us. We are also some one’s neighbour, isn’t it?

Posted in General, Muthu's Musings, Wisely Speaking | 4 Comments »