Monday, December 31, 2012


One of the problems with crime in India is the quality of legal help available plus the timeliness in getting it. Legal aid is supposed to be free and every district is supposed to have one. Publicity is not given to those and many of them would be like unmanned railway crossings. None of the big law firms will do any pro bono or free work. No issues. However, they can today get enough interns round the year. They can take turns in each city to keep a legal aid cell manned. And their expertise can come in helpful. Often, cops refuse to register FIRs. If big name law firms back a Legal Aid centre, this can be overcome. People who are at the receiving end should have a helpline that is manned by quality. This should go a long way in helping the public. Timely and proper legal help can help to bring justice in a speedier way.

Sunday, December 30, 2012

Overpriced stocks may dampen 2013

My Column for Deccan Chrnoicle - 30-12-2012. A peek at 2013-- The year 2012 surprised the faithful flock of investors. A 20 per cent return was delivered twice over during the year in the backdrop of so many worries and global turmoil. The first two months and the last two months rewarded the brave with handsome returns. Global investors gave a resounding vote in favour of Indian equities, investing a record amount of nearly $24 billion in equities. Even when our economy was growing at nine per cent, we did not get this kind of inflows. Perhaps the rule of restricted choice made India the best choice in this distressed world. At the end of it, we have a market near 20,000 points on the BSE. The general opinion on the street is positive, unlike the previous yearend. Each year, people generally get wiser with one more year of experience under the belt. This is true for all, except for folk like us who invest in the stock market. For us, each year is ‘different’ because we have discovered a new reason to be in the market. We have come to a turn where all the quality stocks are extremely pricey. Investing in them now, is unlikely to give us any returns that will help us beat inflation. If there is going to be a rally in the market, it has to be solely on account of the cyclical sectors rallying. We also head into the last full budget of UPA 2, which means that the first six to eight weeks of 2013 could give us a lot of returns based on expectations. If one is unsure about which stock or sector to bet on, the wise thing to do will be to tank up on the index. Going by my logic of quality stocks being expensive, it means that the rally should mainly happen in metals (beats reason, but it could rally), PSU Banks (we are never short on hope), infrastructure (blinded by passion rather than reason) and capital goods (we never learn). We spent the whole of 2012 waiting for the RBI to cut interest rates. Will RBI do it in 2013? The noise on the street says, yes. We could witness a cut in the first quarter itself. If so, it will give a boost to the market and the banking stocks will again rally. It is interesting to note that most of the ‘diversified’ large cap funds have 20 per cent or more in the banking stocks and we also have half a dozen banking sector funds. And the government has promised to infuse Rs 15,000 crores more in to PSU banks to make them have a modicum of respectability. If interest rates are cut and the bond prices rally, there is cheer for the fixed income investors. If there is a one per cent cut, I would then exit half my positions in fixed income and shift to equities. Maybe I will start the move now itself, without waiting for the actual cut. This is because the equity markets would rally in anticipation rather than wait for the event to happen. Similar to Rip Van Winkle, the UPA 2 woke up sometime this year. They have pushed through a half-baked FDI policy for domestic retail and have promised a massive vote-catching direct cash transfer. All of this gives an impression to the market of a government that is committed to ‘reforms’. The year 2012 ends with equities back in fashion (albeit with a dramatically reduced domestic retail participation), gold in negative territory for the first time in eight years and fixed income remaining rock steady. This year also taught us the importance of staying invested in equities, unless one is a master at timing the markets perfectly. Gold, whilst intrinsically worthless, continues to reflect the fear of governments and the strength of the dollar and has to be a small part of a large portfolio. For the retail investor, there would be some opportunities to make some loose change from flipping in some PSU IPOs as the government will push some disinvestment through at some discounts to market pri-ces (not saying that market prices are right or wrong, but there could be some upside in the issue pricing) and the government-owned investors pump in moneys. Budget expectations would start, with infrastructure, government-owned oil companies, fertiliser companies, etc, would hog the limelight. Usual suspects like housing, finance, banks, real estate etc would also have their moments under the sun. As per Chinese calendar, 2013 is the year of the Water Snake. It sounds dangerous, but not poisonous. Have a great year

Saturday, December 29, 2012

A High risk trading opportunity??

This article appears in the latest issue (10Jan 2013)of Moneylife. A RISKY PROPOSITION The tail end of the year is seeing some heightened interest in equities. Starting the year at around 15500, the BSE Sensex added 3000 points by mid February. After this it went in to a range bound coma, with all economic indicators turning negative. What is interesting is the revival in the market momentum post mid November of this year, in anticipation of the UPA 2 waking up from its slumber and trying to push through a slew of reforms. Whilst all the global indicators seem to indicate a kind of economic slowdown, the markets are indicating something quite contrary. Our markets seem to indicate that the worst of the economic slowdown is behind us and that corporate earnings are on the rebound track. Moodys, the global rating agency have upgraded the outlook from negative to stable. The sell side broking houses, are also saying that the worst is perhaps behind us and advise putting money in to the markets. In fact, of the various opinions I have seen, the ‘worst’ case seems to be a level of over 20,000 on the BSE Sensex for 2013!! The rally of our markets in 2012 was bereft of domestic or retail participation. Amidst the global gloom, we had record inflows of FII money to the extent of nearly twenty billion dollars! And in the full year, we hardly had anyone telling us to buy. At best, in the beginning of the year, we all put a kind of fifteen to twenty percent gains, if any, on the indices with a low probability. And this gain happened in the first five to six weeks. After that, when UPA 2 decided to wake up from slumber, the market gathered momentum (just as we were all waiting for the BSE Sensex to go to 14000 or below so that we could buy) and is now threatening to enter in to new territory in 2013. So, should we jump headlong in to the markets? I am not talking about things like “there are always some pickings in the markets if you look” kind of answers. I am wondering about whether the markets as a whole are buy worthy at this point and can one be sure that we are entering a bullish phase? For me, there is a big disconnect between economic outlook and corporate performance expectations. One of them or both of them are wrong. Unless there is a strong recovery in the economy to be on a seven percent plus growth in FY 2012-13, the stock prices are clearly running ahead of expectations. Many people opined a few weeks ago that our markets were at their historically low “P/E” levels. Alas, they did not bother to figure this out in co-relation to the interest rate environment, which continues to be stubbornly high. Similarly, inflation refuses to budge, with the government doing nothing to improve supply. The government announcement to move to direct cash transfers (which would in turn imply that subsidies to producers would go, letting them earn free market prices), reduce disparity in petrol and diesel prices, disinvestment (even if it to LIC), retail FDI ( a symbolism if anything), bringing back Mr Chidambaram to the Finance Ministry etc are all factors that have been influencing a bullish undertone. At the same time, people are saying ( I have no idea about the basis for these conclusions) that the worst in corporate earnings is behind us and that earnings are bound to go up from here, making the markets attractive. As far as I am concerned, the markets are trading at close to 16 times FY 2012-13 earnings. Given that interest rates could fall by around one percent or one and a half percent in the next twelve months, this implies a corporate profit growth of over twenty percent each year over the next five to ten years. If I assume inflation to be at five percent, this implies a real earnings growth of fifteen percent and perhaps a top line growth that is equal. This implies a GDP growth rate that is higher than eight percent or so, assuming some earnings growth will come from fall in interest rates and some kind of productivity improvements. We also have the paradox of consumer spending driven stocks (FMCG, Pharma etc) being at unaffordable valuations leaving no margin of safety and cyclical stocks in metals etc at interesting levels. Similarly infrastructure stocks are weak. Private sector banks are dear and PSU Bank stocks look interesting based on published numbers. So, what should one do? My call is to go for now with the momentum with eyes open. However, unless we have a discipline to trade, I would keep away. In terms of discipline, it is important to keep what we call as ‘stop loss’ limits. These should be strictly adhered to. For me, this market is clearly not a convincing buy. However, I also believe that there is a trading opportunity given that coming February will be the last full budget by the UPA 2 and will go all out to please. There is also a high probability of the RBI being pushed to drop interest rates lower. So, there is a clear window of opportunity (with risk of losing money if not careful) to make some money if we trade with a lot of discipline. Clearly we are in unsafe zone and best to tread with caution.

Sunday, December 16, 2012

Trading the rally- Tiger by the tail

The government has managed to have its say in so far as the policy relating to FDI in retail is concerned. Our markets seem to think that this is a great thing and that this is perhaps a harbinger of things to come and that the ruling party will be able to push through everything required to make India a welcome destination for money from overseas. It is clear to all that our domestic finances are beyond repair (with expenditure constantly trailing revenues) and we need to attract enough of foreign capital flows in order to postpone our troubles. At some point, there will be a price to pay for sure, unless India structurally improves in a manner that export of goods and services will exceed the imports. The government is trying to focus on areas like restricting import of gold, which may plug some leak, but do not address any structural issues. So, the government is turning its attention to hang the ‘welcome’ signs to the foreigner to bring in his money. However, things are not so simple. If we look at the FDI in retail, the government approach is terrible. A new entrant will need to full fill a host of conditions and also seek each state government’s approval to open shop! General consensus is that at best this may bring in around ten billion dollars or so over three to five years. On the domestic front, the government is trying to bridge the fiscal gap by selling assets. This is a temporary solution. Once the government runs out of assets to sell, the problem re-surfaces. So, our problem of being financially ‘unviable’ (with revenues constantly falling short of expenditure) is an inherent one. The government is not investing in infrastructure that can help bridge this gap. Not that it is unwilling to, but is giving the impression that it cannot do. Roads, ports, power, logistics et all are the things required if India is to get a competitive edge in manufacturing or services. Simple labour arbitrage is not anything sustainable as wages will move towards each other (job losses in one country will move wages down, impose protectionism tariffs etc and job gains in the export nations will raise disproportionately). The world economies are also yet shaky. Europe is still troubled and it is possible that nations like Greece that were forced to accept moderation will go back to being profligate, causing yet another round of turmoil. The Euro zone is damp, US has to overcome its own fiscal cliff of moderating its finances and Japan is on the verge of contracting. So, domestic demand alone cannot keep us buoyant for long. We are going to feel the pain. The domestic politics of appeasement is also financially disastrous in the long run. There is a race to offer freebies to the populace by the Centre as well as the State governments. All of this fuel inflation. Supply side boosters are missing totally. Inflation is finally taking its toll on the consumer. We can see slowing demand in consumer durables, even whilst personal credit is growing. Interest rates could drop, but would not perhaps be significant enough to boost any demand. In this backdrop, our markets have turned bullish, on the back of record FII inflows in to the equities and debt segment. On top of that, the bulls point to the FDI victory in both houses of the Parliament as a sure indicator of the government pushing through reforms. As the government nears its last full year budget before elections, optimism is clearly visible. In this noise, it is important to keep a cool head. If you are a trader and want to trade this expected up move, do it with speed and caution. Speed because the market does not wait for you to complete your analyses etc., Caution because I do not see this move backed by fundamentals. The way to exercise caution is to have clear strategies for trading in terms of booking profits, having stop losses etc. Investment for the long terms can wait. Our markets are expensive at present levels and the run up in the last five to six weeks is clearly driven by liquidity and by very optimistic set of assumptions. It is very likely that the markets may be on tear for some more time, but given my conservative nature, I will keep aside. Quality stocks are expensive. The rally is driven by lesser quality names and at best, a trading opportunity.

Friday, December 14, 2012


The institutional fund managers, who are custodians of investor money have demonstrated their irresponsibility by subscription to the issue of the Tower company that closed today. The whole world is touting that it is expensive, but these guys think it is cheap. By keeping away, they could have got the stock far cheaper in the secondary market later, if they love the stock so much. These kind of investments give rise to suspicion about the integrity of the fund managers. Unless they have a personal interest, I cannot imagine anyone investing in this issue. Surely there are far better investment opportunities available in the secondary market. Perhaps it is time for SEBI to step in and have a separate disclosure about investment in IPO by the fund managers. As it is, the fund managers are the only creatures in the industry who do not have any qualifications or hurdles to be cleared to manage money. An investor needs to be KYC compliant, a distributor has to pass exams, etc. If SEBI thinks it should be bothered with investor protection, a good place to start with would be to look in to which fund managers invested in this issue and keep an eye on them.

Monday, December 10, 2012

A liberal view of Direct Cash Subsidiy

The cash transfer scheme was first mooted by the UPA in 2005. The push came from the western world, which advocated direct cash transfers in order to overcome the shortfalls in the Public Distribution System (PDS). There is also a political angle to it. A government that is seen to be handing out cash can be perceived to be a benefactor and translate in to votes. A combination of both is the reason for the UPA government to push this scheme through. What it entails is to do away with the PDS. All products at free market prices and to those people who qualify for the ‘cash transfer’ (estimated at around one crore families) a periodic cash amount will be transferred to their bank accounts to enable them to buy essential stuff like food, fuel etc at market prices. In theory it sounds excellent. Free market means that no one has to do the complex PDS management and also help the nation to be rid of scams in ration distribution and control. We can also be rid of black marketing of essential commodities if cash transfers are adopted. To the actual recipient, this should be a good thing, in theory. No longer should they have to deal with the evil PDS chain. They can now buy freely from where they want. Similarly, for the government, a fantastic saving by shutting down the PDS, saving the costs associated with it (storage, distribution, procurement etc). Such kinds of programs exist in over 40 countries and were kicked off nearly two decades ago. By and large most have been doing well, except in a few cases, corruption has reared its ugly head there also. For instance, in small towns in India, it is not uncommon for the monthly pension payout to be subjected to a “toll” by the disbursing authority. India being India, corruption is endemic and embedded in the genetic structure. We will find a way to exploit every system. If administered properly, the end result would be a huge financial gain to the nation. The administrative mechanism (now proposed to be through the Aadhar scheme) has to be perfect. And it is going to be a task to ensure bank account opening. Without being negative about it, let us hope that the experiment succeeds. The scheme could take four to five years to be fully implemented. Hopefully, this would also mean that every citizen pays for every service or product. Electricity need not be given free, fertilizers need not be subsidised, and kerosene and diesel need not be separately priced. Corporate entities in the listed space would rejoice. Electricity projects need not get stalled because state electricity boards will now be able to meet commitments properly. The scheme rolls out in 51 districts in 14 states of the country on Jan 1, 2013, and will cover all the country's 640 administrative districts by end-2013. On paper, it sounds excellent, does it not? In reality, there will be more problems than solutions. People will take the cash subsidies; spend it on liquor, entertainment and mobile phones etc. Families will start to starve because they cannot now afford food at market prices, having spent the money elsewhere. And once people are addicted to cash receipts, each successive government at the centre and the state governments in conjunction will keep giving away more and more. In reality, corruption would tend to rise. The other issue is that the cash transfer, once given, cannot be taken away even if the person improves his standard of living. To take it away would be politically inconvenient and would lose votes. The other thing is that the scheme would have to be inflation indexed to provide for increase in food prices. A straw poll would indicate that women of the household would prefer subsidised food to getting cash in to the hands of the males, who would make a beeline for the liquor shop. The other thing is that coming close to the general elections of 2014, the scheme will be seen as a UPA or rather a specific Rahul Gandhi scheme (he is going to inaugurate the roll out ) and will ensure Congress voting by the masses. To this extent, such schemes generally can be construed to be a political tool for vote garnering. The other big risk is that the last mile reach through the banking system will pose problems. In the garb of overcoming that, the scheme might move to cash disbursement at designated locations, which will become a hotbed for corruption. If the scheme goes through, from the stock market perspective, bet on oil marketing, fertiliser, sugar, electricity, power generation etc. Forget the macro for now and see how it unfolds.

Tuesday, December 4, 2012

Close down the PSUs

The PSUs in India are a sad lot. They handle some of the key sectors and compete for manpower at a fraction of the salaries that private sector offers. Given this, they either attract very motivated persons or those who use the easy route of corruption that PSUs offer. Came across a newsletter that makes for very sad reading: Apparently, someone has filed a PIL asking why PSU’s are hiring from IITs! In effect, the litigant says that PSUs should offer equal opportunity to all college graduates and not give any preference to any institution. In other words, an engineer from IIT is the same as one from any private engineering college from the back of beyond. So, even if the PSUs want to have any kind of decent quality people, the Indian system will not. Our legal system also is under stress. The PIL was filed over a year ago. No response yet. All the more reason that we get rid of our PSUs without delay. Improve efficiency and let the government pay attention to law and order. Why should the government be in the business of business?


A view on the FISCAL CLIFF The "fiscal cliff" is a term used in discussions of the U.S. fiscal situation to describe a bundle of momentous tax increases and spending cuts that are due to take effect at the end of 2012 and early 2013. In total, the measures are set to automatically slash the federal budget deficit by around $600 billion or approximately 4 percent of GDP between FY 2012 and FY 2013, according to the Congressional Budget Office (CBO). The abrupt onset of such significant budget austerity in the midst of a still fragile economic recovery has led most economists to warn of a double-dip recession in 2013 if Washington fails to intervene in a timely fashion. (The above is a succinct summary from the Council on Foreign Relations (CFR) USA) The US has a ceiling for debt that cannot be breached without legislative action. The grim financial position led to an unprecedented credit downgrade, with the US losing the prestigious triple A rating. To cut this $600 billion, it involves an expenditure cut of nearly $400 billion and hike in revenues by around $200 billion. At this juncture in time, when the US economy is poised between recovery and recession, the impact could be catastrophic. Raising taxes, removing tax breaks, reducing defense expenditure, reducing healthcare, reducing unemployment benefits and other unpopular decisions would have a deep economic impact too. Healthcare cuts would impact drug companies; defense cut would impact fortunes of defense equipment suppliers and so on. The other thing that will surely play a role in what action America takes, is the recent disaster caused by hurricane Sandy. The impact on US would surely be shrinkage in GDP (with worst case estimates being a four percent drop in GDP!), job losses and drop in corporate profits (a combination of higher taxes and falling demand). More moderate estimates peg a half percent decline in the GDP of the US during 2013. IMPACT When the US sneezes, the world catches cold. Within US, there would be higher unemployment, lesser corporate earnings and reduced economic activity. Coming on the back of a none-too exuberant 2012, the outlook for 2013 will be adversely impacted. Reduced imports by the US will have impact on all economies in the world. Global money flows would be uncertain as US corporations will be bent on preserving cash rather than investing in growth. It would have a cascading impact on global growth and across the world, economic growth would be dampened. The Euro zone and Japan would be particularly vulnerable given their fragile economic situation. What would it mean for India? Difficult to guess at this stage, except to guess that it would be another negative factor for capital flows. US centric Indian companies would face some squeeze on their businesses. One possible impact could be lower oil prices, if US demand contracts. That could be the silver lining on the cloud for India. As far as our markets are concerned it would mean increased volatility in our equity markets, making the case for higher asset allocation to fixed income. MIDDLE OF THE ROAD? Many global experts opine that it would be impractical or impossible to achieve the fiscal measures that are prescribed. In the US, it is likely that a half way approach would be taken to ensure growth in the economy. Instead of trying to slash the budget deficit by the prescribed four percent, the real cut may be between one and two percent. This would mean only a partial cut in expenditure and a calibrated hike in taxation rates. Perhaps a more gradual road map would be laid out for fiscal consolidation. This would mean that the US would have to resort to higher borrowings. After the experience of the Euro zone with higher borrowings, it would put pressure on US credit ratings again. The US would perhaps benefit from the confidence of the global investors (who keep seeing their options declining day by day) who would still perceive US as a relatively safe harbour in a storm. Many possibilities exist and from here, we cannot really take an informed view. All it means is that the world’s largest economy is going through turbulence and the impact will be felt across the globe. And given the fact that most economies are driven by big business interests, I would put my money on the US not wanting to sacrifice growth. Fiscal discipline and consolidation can wait.

Wednesday, November 7, 2012


My latest piece in MONEYLIFE Thoughts for the discerning armchair investor A very valuable lesson in investing I learnt was from the father of one of my friends. His basic advice was that I should buy two residential houses. One should be for living in and the other for getting a steady rental income. The logic was very simple—one cannot be very sure about any financial instrument or inflation. If inflation goes up, rentals will go up. When one stops working, there is a house to live in and another one that will fetch a rental income. He also mentioned that the second home should be in a good locality and command excellent resale value, while the first one can be in a poor area. This was in the early 1980s. In those days investment in real estate made sense. Stocks were not very popular then; though, looking back; they were perhaps the best times to buy MNC stocks. Today, it is very tough to take a call on any company and expect it to deliver multiple returns. Going by pure faith, the choices get restricted to the HDFC-type of companies or MNCs. I expect more fairness from these companies than from family-owned Indian enterprises. To me, the one big difference between family-owned companies and government ones is that the former are driven by profits and are aware of the need of capital markets to thrive, whereas government companies have no articulated profit-making goals. Mutual funds as an investment vehicle seems okay to me, but one cannot expect anything spectacular from them. Over the long term, perhaps, the returns could be around 15% per annum. Of course, a lot will also depend on how, when and where I invest. Market conditions will have a lot to do with my returns as well, whether I adopt the SIP route or not. Choosing between a mutual fund route and direct equities is a personal call. Mutual funds offer us diversification of portfolio and investing in many mutual fund schemes simply diversifies fund managers’ skills. I would rather pick on a basket of six to 10 companies and build up a portfolio of those. The index, to me, is a very poor benchmark to aspire for. The making of an index is not based on quality or prospects but on other criteria that are irrelevant to returns. My basic expectation would be to get a bit more than the GDP growth (say 5% to 6% per annum over the long haul). Therefore, I will have to pick stocks from sectors that will grow faster than the GDP. In terms of sectors, I will pick those which are driven by consumer spending. Logically, the choices would be sectors like automobiles, FMCG (fast moving consumer goods) and pharmaceuticals. I will avoid sectors which are dependent on government action or intervention as the risk is too high. Those are merely speculative opportunities and do not create wealth. I am a big fan of cash flow analysis. I like companies that pay taxes (not merely make provision for deferred taxes) and generous dividends. Hence, I will not go near high-debt companies that show abnormal ‘profit’ growth, and engage in frequent dilutions. Take time off to read balance sheets, or be safe and stick to companies with the positive attributes, namely: no debt, normal tax payout and generous dividends. An important avenue is the facility given by the Government of India to let us invest overseas. I believe that, over time, the Indian rupee is going to be a loser, unless we strike oil, and thus keeping some of our wealth in foreign currency should be a good defence. In this, I will go straight for the US dollar. No matter what happens to it, the world still has no option but to trust the greenback. It would provide me with a hedge against inflation as well. Ultimately, each one has to be comfortable with the risk appetite he/she has. I am not a believer in creating an excel sheet to plan my savings and investments. I save what I can and invest what I wish to.

SKYFALL- Review- By Narasimhan Balakrishnan

Skyfall: No. 23, after 50 years 0 Comments, Be the first to comment+ COMMENT NARASIMHAN BALAKRISHNAN | 06/11/2012 05:38 PM | Skyfall is the perfect way to commemorate 50 years of Bond on the silver screen. It is not only the best Bond movie to date, but also the best action movie of this year Around 50 years ago, Sean Connery was chosen to play the lead in a movie, whose franchise would be the second highest grosser ever and probably the first after a couple more titles. Coming to the 21st century, James Bond movies have had their shares of highs and lows. Over 23 movies, six actors in the lead role and 12 and a half billion dollars grossed (inflation adjusted), the James Bond movie series is one of the most iconic ever. Skyfall, the 23rd Bond film, Daniel Craig’s third outing as 007, is probably the most awaited film this year after The Dark Knight Rises. And after the rather mediocre Quantum of Solace, fans would certainly hope for a much better movie. Delayed by a year due to MGM’s financial woes, Skyfall may be late but is certainly worth the wait. Skyfall is the Bond movie that takes the character so wonderfully introduced in 2006’s Casino Royale to another level. The plot of Skyfall is unlike that of any previous Bond movie. The 23rd time around, things are a lot more personal. MI6’s list of operatives in terrorist organizations is stolen and names are released publicly, five every week. M is haunted by a certain person from her past and it is up to an aging and slightly haggard Bond to clean things up. It all leads up to the climax, where one understands why the film is named so. What happened with the reboot of the Bond franchise in 2006 was that grandiose action sequences aside, the movies became more connected to the real world than the times of pen grenades, watch embedded grappling hooks and the over-the-top Armageddon schemes. James Bond is much more human and quite fallible too. Long gone is the one-liner spewing, un-woundable super spy-cum-killing machine who never missteps. Helmed by Sam Mendes (Road to Perdition, American Beauty), Skyfall is THE definitive Bond movie for the 21st century. The movie’s strengths are quite a few. First and foremost, the cinematography. The man behind the lens is Roger Deakins, who adds Skyfall to his already reputable list that includes movies like The Shawshank Redemption and A Beautiful Mind. The camera work is excellent throughout and shines particularly in a dimly-lit fight sequence in Shanghai and the climax. A big plus is that Deakins consciously avoids the use of shaky-cam, which would certainly feel out of place in a Bond movie. The locales are all captured wonderfully, be it the stunning opening sequence in Turkey, the Macau Casino or the climax in the Scottish countryside. Lighting is pitch-perfect in all scenes too. Never unnecessarily dark or too bright, this movie deserves an Oscar nomination for the cinematography. It is probably the best shot movie of the year. Next, the screenplay. With Neal Purvis and Robert Wade (Bond regulars) as the screenwriters, the screenplay’s missteps, if any are few and minor. A complaint could be made about the movie being too long but personally, I felt it was correctly paced. While the movie opens leisurely with the introduction of characters, the pace quickens and the tension is sustained very well. It goes to show that style and substance can co-exist in a Bond movie, which one certainly hasn’t seen in movies like Die Another Day or the immensely forgettable Living Daylights. Each character is well written and some characters given a new dimension too. The plot, while containing sufficient action, has a fair amount of emotional content too, something rarely seen in the Connery or Moore movies. While the movie has a serious undertone to it, there are some genuinely funny moments too. Moving on to the cast. Daniel Craig as Bond is the closest anyone has come to Ian Fleming’s character so far. Craig portrays Bond as a flawed man who seems to be losing his edge, but has an unwavering sense of duty. His performance is immaculate and it is clear that he has given his all to the role. He breathes life into Bond. While Oscar considerations are unlikely, it is certainly a top-notch performance. Every Bond movie has two heroines, one a damsel in distress who is seduced by Bond and mostly dies somewhere in the movie. And then there’s one that carries on till the end. This time around, the second job is done by Judi Dench, as M. She is consistently excellent and brings an extra dimension to the character and is unlike cold-hearted decision maker she has portrayed in earlier Bond films. It’s nice to see M get her hands dirty for once. Craig and Dench aside, the biggest strength of the movie is the antagonist Raoul Silva, played by a blond Javier Bardem. Javier Bardem is tremendous as the agent-turned-terrorist with unresolved mommy issues. There are moments where Silva is charming and humorous. There are some where is emotional. And some in which he’s downright menacing. Bardem pulls off all these scenes with consummate ease. One can safely say Silva is the best Bond villain ever. Bardem follows up his negative turn in No Country For Old Men with a completely different but nevertheless outstanding portrayal of Silva. His screen presence is outstanding. Oscar worthy performance, surely. Other cast members include Ralph Fiennes as Mallory, head of the British Intelligence Services, Naomie Harris—the inexperienced field agent and Ben Whishaw as the quartermaster. The action scenes are superb. No other word for them. Each action sequence has been choreographed painstakingly and the end result is amazing. Right from the opening chase in Istanbul to the pyrotechnics heavy climax, the scenes are uniformly stunning. In particular, a chase sequence in London followed by a shootout is exhilarating. The music, done by Thomas Newman who has worked with Mendes before, is top notch. Every scene has music that complements it. The opening track by Adele is also quite good. While the film boasts of so many positives, it has a few minor faults. The character of Severine (previously mentioned victim-heroine) is rather weak and Berenice Marlohe is not very good in the role. An argument could be made against pacing, as mentioned before, but these issues are few and far between. It is as close to the perfect Bond movie as one could hope for. While this is Bond in the 21st century, Skyfall does pay enough reverence to the Bond of the sixties and seventies and should keep old Bond loyalists happy too. The addition of two new characters which I won’t reveal should bring a smile to the faces of Connery-Moore fanboys. And the way the movie plays out in the end, it ends up as a perfect mix of old and new. Skyfall is not only the best Bond movie to date, but also the best action movie of this year and one can only hope the next Bond movie reaches the heights this does. It is the perfect way to commemorate 50 years of Bond on the silver screen. Bond certainly will be back, and I’m looking forward to it.

Tuesday, October 30, 2012


(An edited version of this REVIEW appears in BUSINESS WORLD of 12th Nov 2012) Title: Return to India Author: Shoba Narayan Publisher: Rupa Publications Price : Rs. 395 Most young Indians desire is to go and make a career outside India. Surely, the most sought after destination is the United States of America. Every youth would love to escape the education system in India and complete the graduation and beyond in USA. Affordability is one important deterrent. One other way to get in is to do very well and get an admission with as much scholarship as one could get. The other way is to get a graduation from a good institution in India and do the post graduation in the “promised land”. Then you take up a job, get a green card and get citizenship. The quality of life and the merit based system is a big pull. Once settled in to a job, the thing to do is to find a culturally compatible spouse from India and melt with the Indian community out there. Life goes on, dreams get bigger and the stay prolongs. At some stage, when the children grow up, the dilemma of ‘return to India’ confronts everyone. Return to India, by Shoba Narayan is a ‘memoir’ of the entire journey narrated crisply. The author, coming from a conservative ‘tambram’ family records the conflict from departure to return. The family elders who do not want her to go, her determination to go and the campus life are recorded honestly. Without going in to details, the author has conveyed the conflicts and the turmoil across the family in embarking on this journey. The conservative upbringing and the value systems remain with her and the happy acceptance of the choice of spouse selected by the parents get narrated faithfully. Emotions play a big role throughout the memoir. The narrative style is appealing because the emotions are conveyed by simple narration of events and a lot of reading between the lines is required. At each stage, the author makes you pause, think and let the reader take a call about which side to take. Nearly two decades of a person’s life are covered very well in just over 250 pages. The author’s love for New York comes through very well. Obviously, staying in the big apple also implies a level of status that not all émigrés to USA will enjoy. To this extent, the memoir steps clear of any economic challenges that an Indian with an average or below average pay packet would face out there. The memoir also captures the change in life once life enters the marriage phase. The arrival of children brings across the conflict between the material things in life and cultural values. The author goes to USA after the formative years were spent with family members in India. Far out in the USA, when your children start on their journey in life, the conflicts begin. Should one leave the children to grow up with life in USA or should one return home so that the children grow up with ‘home’ culture and values? This is the eternal conflict and resolving it is not easy. Till the family emerges, you live life chasing your own dreams. Once children come on the scene you devote all your energies to them. You want to take a hard call on return to India. I guess these are personal calls and each one may react differently. The author does not pass any value judgements and simply states what path she took. At one level, the memoir also tells me a thing or two about financial security for a middle class Indian, especially if you are a ‘Tam Bram”. The education system out here in India drives the cream away from India. In the USA they get to the top of the economic ladder and that gives them the freedom to make choices. Given the prudence of most Indians, they reach financial freedom early enough to be able to make a choice on ‘back home’ option. Along the way, US citizenship for the children gives them the flexibility to follow the path that their parents took. Of course, one also has the option of not returning and let the children grow up there and be a citizen in the true sense. The author does talk about her friends who chose that option. The memoir, at one level, is also about how we handle our urge for ‘freedom’. The societal mores and pressures makes us want to ‘get away from it all’ and seek greener pastures. After doing that, we find that the same threads that we wanted to cut off, continue to pull us. The reason for our escape also becomes the reason for our return. Being a memoir, the author sticks to her feelings and conflicts. As a story, we long to know about the other family members. This is not a shortcoming but a credit to her for staying the course, when it would have been easy to digress. This is recommended reading for all children who want to leave our shores in search of a ‘better’ life. This memoir also tells me why the USA should be the first choice for emigration.

Sunday, October 28, 2012

MY LIFE, MY MONEY- The trap of life insurance

(This article appears in today's Asian Age/Deccan Chronicle) INSURANCE IS NOT INVESTMENT.. The IRDA finally seems to be telling the insurance companies to be more modest about what they should charge as commission or fees from the money that they collect as premium. It may not go beyond this. Of course, they are also imposing ‘fines’ on some companies for paying higher commissions or for delay or denial of claims. The biggest problem with the life insurance companies is that they hardly sell pure life insurance. In the guise of life insurance, they focus more on selling a combination of investment and insurance. Whilst I do not know about the reasonableness or otherwise of the life insurance cover charges, I can say with assurance that the investment products are unhealthy for the customers. The fees and the administrative charges etc amount to more than what a mutual fund or an ETF would charge you. And there is no reason to believe that the insurance companies deliver superior investment performance as compared to the mutual funds. If you have invested in ULIPs you will know about the issues. The insurance companies will only mention the performance with respect to amount invested by them and never on the money that you have shelled out. Even your friendly agent will not tell you what the returns on your own outgo are. There is absolute opacity in the way insurance companies do business. My view is that if at all one has to consider insurance, there are only two sorts of insurance. One is medical insurance and the other is pure life insurance. Both are expenditures and not investments. Do not look for returns. Often, the insurance agent will con you in to buying an investment product, by saying that you will get your money back. Do not fall in to the trap. It is like saying that I will return your money after thirty years, but do not ask me for interest. We see many online advertisements that keep shouting things like “only Rs.600 per month” or some such figure for a one crore life cover. Of course, there will be an asterisk etc so the actual number may come a bit higher. These kind of pure life policies are the best for an individual. Of course, if you have a lot of money and do not have to worry about what happens to your dependents financially after your death, then do not waste money on life insurance. After all, more people live beyond sixty than those who die before this age. So, the odds are in your favour in any case. Take a term policy that gives you life cover, say, till age 50 or 55. By that time, you should have been able to provide for your dependents. If not, it is unlikely you will provide anything more in the few years of earning that you may have. So, around that age, you should stop the expenditure on the life insurance business. Starting early is good, because it locks you in to a lower outgo. The older you are, the higher is the premium for the same value of risk covered. Insurance has to be a rational choice and not an emotional one. The biggest scam going around is ‘children’s policies’. Under normal circumstances, children will live beyond you. Second, if your child were to pass away unfortunately, there is no adverse financial impact on you. So, why do you insure your child? Now, your agent will tell you that the ‘policy’ will pay for education or marriage etc of the child. You have now got in to the realm of investment. Here, the insurance company is not as efficient as a mutual fund. So, invest the same amount in any mutual fund. You ask the agent about the rate of return on the amount you are expected to fork out every month/quarter etc and you will find that it has to be lower than a bank fixed deposit rate or any mutual fund investment. AVOID CHILDRENS INSURANCE POLICIES. If at all you do take a life insurance policy, ensure that you discontinue it once your dependents are financially secure or you have provided enough for them. I would have recommended a full life policy with payment of sum assured on death, provided there was a secondary market for trading in them. You could take the policy and sell it off in your sunset years to someone who will get the sum assured on your death. You could sell it at a discount and enjoy the money. Of course, you could buy such a policy if you want to leave behind a sum for your dependent. In such a case, make sure that your will mentions about who will / should get the insurance proceeds. Mere nomination is not enough, because the nominee merely is an agent to receive the money and it rightfully belongs to your legal heirs. Life insurance is a morbid topic and often agents play upon your emotions to sell you products that make no financial sense. Take some time before you commit in to anything long term. Take a piece of paper and do your homework. If in doubt, talk to others. R. Balakrishnan

Tuesday, October 9, 2012

Time to sell?

This appears in the recent issue of Moneylife. Has some extra comments A FALSE DAWN The gap up opening of the markets on Friday the 14th looks like a kind of a relief rally to me. With so much negativism around, this move by the government to hike diesel prices looks good. However, the flip side is where the negativism in the move lies. This move is not a move to reduce subsidies but a move to bring additional income in to government coffers. Given the extortionist levies on petrol and diesel, surely the ‘subsidy’ is an accounting illusion. People may not agree with me, but if you take a look at the selective subsidies that industry get where the benefit reaches only a few pockets, the fuel subsidy is a more equitable one. A diesel price hike of over ten percent is inflationary and is going to impact everything. Inflation in food prices is already running high and this move is (borrowed quote from a reader who commented on the QE 3 on a website) like ‘throwing wood in to a fire’ to douse the fire. The announcement of permitting FDI in retail and aviation has made people happy, but what it means is yet to filter in. The retail FDI ‘policy’ is a misnomer. One would have expected a government in power to not create a division between states. By saying that the centre will approve and then each state to approve is mindless. This will set a dangerous precedent for all future moves where economic liberalisation is needed. Borders between states are being thickened by such a thoughtless policy. In hard number terms, we will not see more than ten billion dollars flowing in over the next three years. As regards aviation, again it may provide relief and/or an opportunity to a couple of airline company promoters but it does nothing to change the The moves by the ECB and the US Federal Reserve give a reprieve to global markets. Perhaps it would mean additional cash to spare for emerging markets. Already, our markets have witnessed good inflows and the stock markets are on a decent run. The US markets crossed their 2007 highs. Presuming that there is no roll back of a significant nature by the time you read this, we will have a spike in inflation. Freight rates are surely set to go up. Captive power (most SMEs operate on diesel gen sets) costs would also go up. A spiral that would make the RBI even more reluctant to lower interest rates (unless pressurized by the government of India). The other negative impact of the global moves on easing liquidity would be to fuel up commodity prices. Easy availability of money at ridiculously low costs will see more speculative action in commodities. This and the high interest costs would tend to put pressure on corporate profits. The big worry for us would be whether this spike in commodity prices would extend to oil. Logic says that a feeling of wellness across the globe would push up oil prices further. However, the markets may actually go higher for some time. If the government sticks on to its announced price hike in diesel, the presumption would be that our government is serious about reining in fiscal deficit and bring in higher flows to the markets. There would be enough valuation arguments created to encourage this flow. The move by the government to hike diesel prices means an annualised additional recovery of around Rs.20000 crores. Surely, consumer price impact across the board would be far higher than this number. The BSE Sensex at around 18000 is trading at around 17 times FY 2011-12 earnings. For those who like to look at calendar year data, the return is close to 19% YTD for 2012. If earnings grow this year at around 12% (close to long term averages), we are talking about markets valued at nearly 15 times expected earnings for this financial year. Is it cheap? We have fixed income instruments available at eight times earnings. The difference in valuation represents our expectation of future earnings momentum in the stocks as well as a possible fall in interest rates. Should all this happen the rupee could strengthen. Whether it would be significant enough to make a dent on the trade deficit is not clear to me. Perhaps the rising commodity prices would offset the rupee gains. Inflation will be the biggest fight investors and consumers will face. Easing liquidity without doing anything to improve supply side is futile. Increased liquidity will simply chase the same volume of goods. You do not have to be an Einstein to figure out the outcome. So if markets are going to remain strong in the near term, I would reduce my exposure to equities by selling off some of my stocks/mutual funds. Maybe there would be some momentum in sectors that have fallen off heavily over the past six months to a year, but these moves would be without any strong backing on the earnings. The Indian market at 15 times plus forward earnings is expensive and leaves very little room for long term capital appreciation. Clearly, liquidity is driving markets and not corporate earnings. I know and hear that everyone is talking about markets having strength and poised for further highs. In fact there is talk of the BSE Sensex breaking old highs and forming a new high. I am happy to have people like that around so that they provide the exit to cowardly persons like me. R. Balakrishnan

Friday, September 21, 2012

Book Review: Growth in a Difficult Decade

FROM EMPLOYEE TO EMPLOYER- A MOTIVATIONAL COLLECTION Book: Growth in a Difficult Decade. 2012 Authors: Compilation by and concept by Regus plc Published by : Regus. Price : GBP 19.99 Regus plc is a global business enablement partner. They make your transition from slave to entrepreneur easier by giving you fully equipped office space across nearly a hundred countries. Then there is a company called Mindmetre Research that is in to business and consumer analyses. Both these organisations are headquartered in UK. Regus is now present in India also. Both the firms have a keen interest in entrepreneurship. Looking at India, it is evident that the more the state tries to do something the less we achieve. World over, governments are thinking that they will print their way out trouble. However, sustainable growth can only be brought about by private enterprise. India has grown over the last two decades in spite of the government and not because of the government. Now, when the economy looks like staring at a potentially ‘lost’ decade, entrepreneurship is perhaps the way for nations to emerge out of the hole of ‘no growth’ that we seem to be staring at. Today, individuals are willing to take risks to become an employer rather than remain an employee forever. It is not essential that the drive being at age thirty or age sixty. Everyone can. Both the above organisations have put together a compendium of 64 entrepreneurs from across the globe. Six continents, sixty four snap shots. Unlike conventional biographies, this book is more a compendium from secondary and primary sources. The narrative style is unlike a normal book one reads. This book fleshes out the entrepreneurs with snapshots of their business growth as well as some quotable quotes that have been the driving forces for these entrepreneurs. The book is also like watching a trailer. Entrepreneurs like Marc Benioff who founded or Leandro Rizzuto ( a must read section about a business that is in to aids for hair dressing ) can provide inspiration for those who want to cross the bridge from receiving a salary to setting up your own shop. The good part about the write ups is that there is a very brief write up about an entrepreneur and a commentary about the business growth. Each story is four to six pages on an average. You can read it at leisure, though if you are thinking of quitting being a slave or have just quit, you will read the book in one go. Some entrepreneurs and business stories that you find of more relevance will leave you with a sense of wanting to know more. So if you are expecting a life story of any business or businessman, don’t read this. However, if you want a pen portrait of entrepreneurial hunger, you can benefit by reading about this group of sixty four disparate personalities. The unifying thread is the fact that each one identified a gap in some business service or ventured in to something totally new. Reading about these varied people, one gets a sense of different thoughts bonded together by creativity, the ability to delegate, the need to choose the right team, the need to respect knowledge etc. In a sense, this book will help you look at all the factors that you may want to look at. There is reference to the website of each entrepreneur so that you can go for more depth of information if you desire. Entrepreneurship is about creating your own space. To create and nourish that space, you need to have your own guiding principles, some traits and skills. Here, you have a rich selection of people who share their thoughts with the reader and can help you to speed, up the learning curve. Importantly, this book showcases people who have created new spaces where none existed and in the process filled in some needs for the customer. Creativity, innovation, persistence and talent management seem to a common thread running through the sixty four chosen ones in this book. Most of us dream about having our own set up. We spend time dreaming and talking about it. However, not many actually venture out, due to a deep sense of insecurity and a fear of failure. And many will say that the economic conditions are not best to start a new venture or take risks. Andre Monteiro, co-founder of Compra3 (an innovative online shopping site) has this to say of risk taking, “Risk is part of an entrepreneur’s routine. The economic crisis is just another condition that highlights the risk, and entrepreneurs are used to these conditions. Most people are worried, but for the entrepreneur it’s just the natural habitat.” Among the cast of characters, there is also the flamboyant Donald Trump sharing some of his success mantras. Behind every brilliant idea and light hearted banter, there is also the extraordinary amount of hard work that people have put in to get to their goal. Sure, not everyone will make it, but if no one steps out the world stagnates. Do not look for too many details, since the focus of the book is to bring you the big picture and not the fine print. One important thing is that the revenues (presumably after costs) will be donated to the Red Cross. All the more reason for wannabe entrepreneurs to get a copy and dip in to the book at any place you can put your finger. Every page has some inspiration for you.

Wednesday, September 5, 2012

Keep Faith in Equities

EQUITIES DELIVER- DON’T LOSE THE FAITH The economy seems to be firmly in the grip of a slowdown. Growth is decelerating across sectors. On the other hand, we are seeing food prices climbing higher each day. Even the weather gods have decided to be hostile this year, with near drought like conditions. Corporate earnings are certainly slowing down, though the stock markets seem to have done very well this calendar year, so far. A weakening rupee, stubborn inflation and a central bank (RBI) that is reluctant to drop interest rates. All these do not portend well for investors. The stress on the populace is showing. The first sign of a troubled economy is the signs that the savings rates have started to fall. This is a sign that rising prices are forcing people to save less. An optimistic way of looking at this falling savings rate is to say that people are not slowing down the spending. I would carefully watch the sales trend in big ticket items like durables, automobiles and two wheelers. So far, people seem to be unconcerned about slowdown and are buying. Interest rates hopefully should start to fall. High interest rates are hurting corporate India badly. Profits growth has come down to single digit and threatens to go negative in terms of growth in this fiscal year. All the asset classes seem to have done well, indicating the easy money availability with investors who are happy to take risks. Of course, the FIIs and the LIC of India have also pumped in decent amounts in to the markets this year, so far. Equities have given good returns and so have fixed income. Gold took a breather, scaring off many late entrants and seems to have resumed its climb. Of course, a depreciating rupee has added its own kicker to the momentum. Many foreign investors have lost in dollar terms due to the strength in the dollar as well as the weakness in the rupee. All indications are that the dollar is likely to gather further strength as troubles dog the Euro zone with no solution in sight. Politically, this seems to be the worst of times since independence. Everything seems to be in a stagnation zone as the ruling party and the opposition trade charges and totally neglect the populace. Policy making has ground to a halt. The slim hope is that there is certainly a better man at the Finance Ministry in terms of capabilities. Infrastructure spending seems to be a thing of the past. In this context, I would certainly advise people to take some money off equities and put it in to either income funds or bank deposits. Of course, for those in direct equities, there will always be opportunities and it is likely that over the next twelve months or so, attractive bargains may be available. I am bullish on gold, so long as it is a small part of your overall asset allocation. Not on any intrinsic valuation, but purely taking a view on global fear and a weakening rupee. SIP returns (assuming termination in first week of august 2012) were as under: 5 year returns 4.66% 10 year returns 13.53% The above is for the NIFTY ETF. However, if you were in HDFC Top 200, the returns would have been 22 percent plus for ten years and over ten percent for five years. Clearly shows that a well managed equity fund delivers great returns. Yes, you have to be lucky and choose right. Over half the funds did worse than the index. I am not endorsing Top 200 or any other fund, but using it merely to show that your choice of a fund can make a significant difference to your final corpus. Clearly, a pointer that equities will give you modest returns over long term so long as you make investment a steady habit and eschew looking at prices daily. Of course, the returns will look higher when the termination is in a good phase like the present. Termination in a bad market will naturally mean worse returns. So, it is all a question of timing. Maybe it makes sense for an investor who is near his last leg of investing through the SIP route, to keep tabs on the returns and when he sees returns in excess of 13 or 14 percent on a compounded basis, close it out and put it in to a liquid fund. This will offer some protection against getting whipsawed by a poor market. For example, if I have been saving in equities for the last couple of decades and am in my seventies, with no further commitments, I should keep an eye on pulling out money from equities and moving it in to fixed income products. If I have direct equities, the objectives would be different. Of course, it all depends on how rich I am at that point in time. Ideally, I should not need that money in equities during my lifetime to sustain my daily needs. This year, there is a lot of hope left in the market. The biggest hope is that the interest rates will start to fall off. This will help us in two ways. One is that whatever we have invested in income funds or in bonds, will give us a capital appreciation as rates fall. The second is that it will signal an improvement in corporate earnings apart from an improvement in relative attractiveness of equities as opposed to fixed income. Keep your faith in equities alive. That is the only hope that we will either beat inflation or minimise our loss of capital.

Tuesday, August 28, 2012


In the late eighties, the PSU banks were getting primed for global display. NPA provisioning was a function of available profits and more ignored than not. Slowly, the view of the mandarins in the banking turned to cleaning the Aegean stables. Huge write-offs and massive doses of capital infusion followed. At that point, the realisation dawned that the problems were mitigated by the high levels of SLR and CRR that were imposed on the banking system, which actually stopped the banks from frittering away all of the depositors money. The Era of liberalisation saw experts asking for lowering in the reserve requirements, to enable banks to lend more and have freedom over the resources. This process started gradually, with RBI being reluctant to let go. The important thing to note here is that the skill sets of the PSU Banks have not changed at all. It still continues to be at the whims and mercies of the government of India. Nothing has changed. PSU Banks still do not attract any serious talent. A look at the banks like HDFC or Axis or Yes Bank and you will know the differences. PSU Banks, with their rotten pay scales in relation to the private banks, will force poor talent that will feed itself on corruption and nothing else. The higher the lending, there will be exponential increase in NPAs for the PSU. In this context, the demand of the gentleman from SBI to do away with CRR is ridiculous. By now we all know that even if a peon of the SBI were to be made the CMD, the performance of the bank would not differ by a single paise. If the RBI wants to reduce reserve requirements, caution is advised. First change the pay scale system, get good talent and good skill sets. Then give them freedom. Dont let a driver of an Ambassador get in to the cockpit of a Boeing.

Tuesday, July 24, 2012


GOVERNMENT INERTIA “The policy of being too cautious is the greatest risk of all.” (Jawaharlal Nehru) When the UPA II was installed in to power at New Delhi, there was opinion that the ‘dream team’ of Dr Manmohan Singh, Mr P C Chidambaram and some key bureaucrats like Montek Singh was back and we could expect to revisit the 1991 reforms all over again. Euphoria was so much that on the day the election results came in, the markets opened gap up with a gain of over five hundred points. Since then, this government has been a series of disappointments. I do not want to debate here whether this dream team deserves any credit at all for what happened in 1991. But, suffice to say that this time around, they have left the markets and the investors high and dry. Initially, we all were led to believe by the government that the Euro crises were a western disease and that we would not catch any side effects. Then we were consoling ourselves that whilst our growth rate is slipping, we will still grow faster than other economies. The government officials were busy trying to persuade us that in the world of the blind, “one-eyed” is king. Inflation has been another area where the government policies have not been able to make any impact, except in perhaps a negative way. Populist moves that give away something free to others, generally tend to add to money supply, without doing much. The government policies (or lack of any impetus or fresh initiatives) have left the markets at the mercy of market forces of demand and supply. Central bank stance and the government stance seem to be at apparent conflict with each other. Which of them is right, time will tell. Our markets are witnessing a strange divide. There is a huge demand for high quality stocks (FMCG, Pharma etc) that have become very expensive. It is very unlikely that anyone will make serious money buying the stocks at present levels. At the same time, the high risk stocks have cooled off and will perhaps drive the next round of the market rally when it happens. By no stretch of imagination can this market be labelled as a bear market. The broad markets are trading at sixteen times earnings and it is possible that the earnings growth in the coming financial year may be in single digits. Stocks from the PSU universe continue to behave like yo-yos based on what one feels about government policy, each day. For example, when the government policy was interpreted as freeing the oil sector, the oil marketing companies looked good. However, when it was realised that the government is shy of addressing the subsidy issue, the same stocks looked not so attractive. Judicial activism also is at odds with market forces. We saw what happened to the stock of Indraprastha Gas which stands accused of making too much money. Government policies are in a kind of limbo at this stage. One is not clear whether the exit of Pranab Mukherjee from the Finance Ministry and the Prime Minister assuming the role will result in any improvement in the situation. The sharp deterioration in the rupee dollar exchange rate has led to tremendous losses for foreign investors who have already put money in to India. Given our inflation, the rupee can only weaken further. To nullify this, we have to attract FDI and / or FII money in a big way. That can come only if the government policies are stable and not capricious. The threat of retrospective taxation has shaken the faith of people across the globe. Perhaps this one factor (GAAR) has been the single largest contributor to the sad state our stock and currency markets. The real issue is that we have not had the government address anything with reference to economy or markets over the last three years. The expectations have gone so low that anything they do will be viewed as positive by our markets. In a sense, our markets presently seem to have priced in a view that this government will not do anything positive to boost the economy. So, fundamentals apart, the government policy changes, should hopefully bring cheer to the markets. I am not talking about more bail out or dole packages (like NREGA etc) but something positive like hiking diesel / kerosene prices, reducing any other subsidy or lowering interest rates or giving incentives to promote new industries etc. At this juncture, when it is clear to everyone, including the politicians, that India cannot be islanded from global troubles, we need positive or affirmative action from the government. This government has just two years left to complete its full term. With each passing day, the possibility of voluntary action to improve the economy seems to be reducing. There is only reaction to events. Hence, my take is that there is safety in fixed income. I don’t mind sacrificing the upside in equities (from here, there is not much upside left, though valuations are not very stretched except for the good quality stocks) for peace of mind. And inflation refuses to budge much lower, thus delaying the fall in interest rates.

Tuesday, July 10, 2012


(This appeared in the Deccan Chronicle of 8th July, with a misleading headline) The battle against inflation seems to be a lost one for us. Nearly four years and there is no sign of abatement yet. Clearly, even in a flagging economy, the rate of inflation is a very clear indicator that there is a supply crunch. This high inflation also depreciates our currency quickly and compounds the problem as the import content in inflation (petrol, diesel, transportation etc). Following classical economics, the RBI wants to follow a tight money policy and not lower interest rates. At the same time, the ruling party in the government of India want to show that there are no issues and wants to give away freebies. This is a classic conflict that is playing itself around the world. In all this, the big winner has been inflation and no one else. Apart from impacting us on our spending habits, inflation and the consequential weakening of the rupee do have a bearing on some of the listed companies. Firstly, I have to take a view as to whether the rupee will weaken or strengthen from here. Logically, a country with a rate of inflation higher than the US and with continuing trade deficit will look at a consistently and continually falling currency. There can be relief to the currency from flows in to the country through migrant remittances, loans, FDI and FII investments. Whilst we had all these in the past, it has not stopped the rupee from falling. It merely delayed the process. In essence our need for dollars seems to be higher than the available dollars. It is logical to assume that companies that are net foreign exchange earners will gain. This is true, if they always earned in dollars and are able to hold their dollar prices for the goods or services that they supply. What happens in reality is that they get some immediate benefits and after that, competition results in a lower dollar price. Thus, over a reasonable time frame, the falling currency does not help anyone. There are those who say that a falling rupee is good for exporters and that a rising rupee hurts exporters. This simply is a reflection on the inefficiency of our exporters. If a rising domestic currency were to hurt, would Japan (the Jap Yen moved from over 300 Yen to the dollar to the present level of 80 Yen to the dollar over the last four or so decades) have continued to increase its exports? If we take the gem and jewellery industry, the value addition is very thin. Imports are in foreign currency. Thus, changes in exchange rates do not mean much except over the very very short term. Similarly, in the IT industry, there will be competitive pressures that will keep dollar prices falling as the rupee keeps weakening. Thus, the worst impact is on the Indian consumer due to our dependency on oil imports. Similarly, our import of unproductive but fear led gold contributes to the single largest reason for why our rupee is falling. If private gold imports were halted, we can address a major issue. Our passion for gold becomes a kind of self fulfilling proposition. The more the gold we import, the higher the pressure on the rupee and the more expensive gold becomes for the Indian. Out of our dollar shortage of nearly three hundred billion dollars, gold alone contributes to over one hundred billion dollars! And gold is intrinsically an unproductive asset. We may see some industries like natural resources lock in to a bit more money as domestic prices do tend to track global prices. Consumer price inflation also gets adversely impacted when the rupee is weak. Thus the FMCG companies will make a bit more money. The biggest fear all of us should have is about the monster called “Stagflation”. This happens when supply does not increase, but prices keep going up. Our economy is particularly vulnerable as demand continues to be high, driven by rising wages and the small base we have started from. In these times, it is tough to find investments that will grow faster than the rate of inflation. All consumer co stocks are expensive and more upside based on valuations are not on. At best, one can keep money in liquid funds or in bonds or debentures. The return can vary from seven to ten percent. One possibility is to hope for a cut in interest rates. This can happen either due to policy action or tapering off of demand or a combination of both. As this happens, investment in to income funds or debt instruments can also give some capital appreciation. This is not a bad option considering the valuations in the equity markets which make the risk reward equation unfavourable for equities right now. Returns from fixed income seem to be high enough to stop one from switching more money in to equities.

Thursday, June 28, 2012

Investment in stocks- An old fashioned way

2009- Thoughts on investment. Still green A few friends have called up and discussed the matter of building a portfolio for the long term after publication of my article about my friend at Mangalore (Adding Zeroes, Money Life, Oct_ 2009). The first and most important requirement is that the money you keep aside for investing in stocks should be money you can totally afford to ignore for at least ten if not twenty years. Ideally, this is the money that you plan to leave aside for your children in the form of stocks (barring unforeseen circumstances). Treat this for your personal calculations as money spent. And, also, do not invest if you are the type who will look at prices everyday and worry about the portfolio. Clearly you should not be in the stock market at all, your greed notwithstanding. Let me begin by listing out my biases towards stock picking. Since I am more of a pessimist than optimist, l will start with the characteristics I hate. In other words, I rule out companies with these characteristics: 1. Absence of dividend. A genuinely profitable company should pay out dividends. If the company does not pay dividends in spite of showing profits year after year, I avoid it; 2. Non-tax paying or low tax paying. A company that pays no tax or very low tax year after year is ruled out. If the profit is real, the company ought to be paying taxes; 3. Companies with very high debt worry me. In a good year, the business will earn a rate of return higher than the interest cost, but could be in trouble in a bad year. If the company passes muster on all other criterion, then maybe I will probe further, but in general, high leverage is a red flag; 4. Third generation family owned and managed companies. Indian companies are generally family owned and are passed down from father to son, like heirlooms, corporate governance be damned. Typically, in the third generation, the number of claimants increase and lead to a combination of poor management, siphoning and lack of focus; 5. Companies that show profits year after year, but do not pay dividends and yet keep raising equity regularly; 6. Change of auditors is a red flag. Investigate thoroughly. If not satisfied with the reasons, avoid the company; 7. Companies that keep advertising even if they are not in the consumer space; 8. Companies that are managed by so called professionals, but treat it like a fiefdom, engage in random diversifications that do not make any sense and award huge stock options; 9. Companies where the promoter has several other unlisted companies which siphon profits. (I believe most Indian companies do this, so the level of check required to ascertain this may not be possible for everyone); 10. Suspect management integrity. This is the most subjective one and in most cases, it would be turn out to be a question of degree rather than one of principle. I have hardly come across any company which will pass total muster on this score, so have decided to be a bit practical and take my chances; 11. Super normal profitability is another worrying sign. In most cases, this happens at a nascent stage, just around the time a company goes public and is planning further fund raising. If the whole industry is making 10% of sales as profit and someone is making 25%, my first instinct is to be sceptical. This is certainly a ‘red’ flag; 12. A ‘me-too’ company is one to be avoided. The company I choose should be clearly number one or two in its business. Only when you pick up companies that are in new segments (so called ‘sunrise’ industries like bio technology etc) can you look at small players. There is no point in looking at a small player in the textile business or in the FMCG business; 13. Companies in industries that are overly regulated by government. This is a debatable point, but I believe that given the circumstances, it will not be possible to dismantle controls on industries such as fertilizer, oil etc., Whilst ultimately it should happen, I prefer to keep away. In general, government interference (like in PSU banks) generally makes an investment less attractive whereas the event of government getting out completely from any company would make it more attractive. 14. In today’s funny accounting world, I am also wary of this thing called “consolidated’ accounts, when it includes profit shares of entities that are not 100% owned by the company. And, the companies do not even show the accounts of the subsidiaries on their websites! After this, I use some financial screens of which I hold the ROE (Return on Equity) to be perhaps the most important criterion. I would like it be steady to improving. Generally, my attempt is to focus more on cash flows rather than mere earnings. For instance, in any industry, you can NOT provide for bad debts and show earnings. However, the cash flow picture would be terrible. I give high importance to management in terms of competence and integrity. I also like to see companies that have the potential to grow at more than the pace at which economy grows. For instance, if we expect industry to grow at 10% and inflation to be 5%, then the company has to grow at more than 15%. Financial analysis is simple, but needs time and effort. I usually like to sit with at least three years annual reports. Unfortunately, today I see the annual reports getting more opaque. Financial information shared with the investors is getting less and less. I get a lot of useless diatribe from the management under the head “management discussion”. Here, no company is going to openly admit its faults. You will get to read only good things or blame on external factors for poor performance. Real issues are buried. From the above, it is clear that for investing directly, you need to spend time. Once you decide to invest, have a specific sum set aside and stick to the discipline. NEVER borrow to invest. And review your investments at least once a year. After making an investment, if you realise you have made a mistake, get rid of it immediately, without bothering about the price. I have seen people not selling their mistakes because of an inability to take losses and then see it becoming worthless over time. Do not sell unless you really need the money or have a better use for the money in terms of returns. One more weakness I have is with regard to timing. If I like a company and it is doing well, I will not sell. The price does not bother me. And another thing I have found out. If you hold an investment for more than a decade or so, then the dividend income generally is quite substantial as compared to your original cost. I believe that over time, dividend income should become quite substantial, if you are a patient investor. What I have given above is from my experience. More importantly, my attitude to investment is totally different from most. For me, investment is with money I have to spare. I do not trade. So, you see, I am the complete ‘gambler’. Investment in shares is no different, to me. When I invest in shares, I am taking a chance on the business competence, outlook and the promoter. Sometimes I win. R. Balakrishnan ( November 2nd 2009.

Sunday, June 24, 2012


INDIA’S CREDIT RATING (This article appears in today's Deccan Chronicle/Asian Age) (you can see it at There is a debate on about credit rating agencies and their actions or pronouncements on India. Naturally, we get emotional about it and think that as a nation we will never default. History is witness that we have defaulted at least twice post Independence. And many people take irrelevant numbers and compare India with other nations and feel strongly that we are better than so and so country that has a higher rating etc., To put it in perspective, Indian economy has always been short of being an investment grade on a standalone basis. Yes, we can get a higher credit rating, if we stop importing oil. We must stop importing oil and everything else must be the same. Our exports, our software earnings, our NRI remittances etc., Frankly, I think this is not possible. If we stop importing oil, one can imagine the ripple effect. The auto industry would be a fraction of what it is today. We can only have an auto industry that can be supported by the domestic oil produce. Maybe if all Indians pledge to stop buying gold, it could improve the country’s credit rating. It has to be voluntary and not a forced one. Every import (other than perhaps the nefarious thing called precious gems and jewellery or gold) has a contribution to our growth. So, if we do stop importing something, there would be a ripple effect somewhere. If we can control our appetite, surely we can get a better credit rating. However, controlling one’s appetite is blasphemous! How dare I suggest that Indians stop buying gold? How can I tell them to stop driving cars? It is simply not done. So, structurally, we have a receipt and payment account, where our payments in foreign currency exceed our receipts in foreign currency (our trade deficit) by nearly a billion dollars every day! For a full year, we have a dollar shortfall of 300 billion! We are a fortunate nation. Indians, who have left for better pastures overseas, send in close to five billion dollars every year. So, we take care of some of our hunger for dollars through the dollars they send us. For the balance, we have a serious problem. We can either borrow or make the foreigners send in money in dollars to invest either in industry or our stock markets. Unfortunately, we do not permit them to invest freely everywhere. For example we do not let them invest in agriculture. The fear is that if they bring in better techniques, the local farmer (who is subsidised every which way) will cease to exist. We do not let them buy land for fear that they will drive up the prices. We do not let them set up retail shops for fear that the local baniya (who serves you adulterated dal and food grains) will go out of business. We need at least another two hundred fifty to three hundred billion dollars every year, to keep our economy growing. Ideally, we should not borrow. For, if we borrow, we will be unable to repay since we are perennially short of dollars. The only solution is that the politicians wake up and create an environment where the foreign money is having a sense of safety. They are used to taking risks. All they need is some comfort that the local laws do not surprise them (like Pranab Mukherjee trying to collect some dues on a transaction of many years ago or changing the laws every year). Or take our archaic labour laws. The fear of having to carry labour without having the ability to get rid of them is a big handicap. The leftist approach of ‘job security’ has resulted in jobs not getting created at all. The entire manufacturing base of the world has gone to China. We have missed out big time, thanks to the vested interests of our political leaders. To me, this is treason of the highest order, where they deny a better life to its citizens on the pretext of protecting them. India’s credit rating has always hovered between the highest in the junk grade (Double B) and the lowest in the investment grade (triple B). So there is not much to cry about, except that when one moves from investment to junk grade, a lot of money shies away from us. Many investors have charters that prohibit investment in to junk rated investments. They will be compelled to pull out any investments in India and new ones will be put off. It is not just an impact on cost of borrowing or investment, but an impact on how much money India can attract. The tragedy is that we have seen the benefits of opening up the economy in 1991 and now in the last two years, we have kind of pulled down the shutters. This clearly proves that the current PM has learnt nothing in spite of having been around in 1991. What this entire drama means for us is that a downgrade can have a bad impact on stock markets and on the exchange rate of the rupee. In turn, it will contract our economy besides adding to inflation. It is futile and illogical to argue that rating agencies are wrong. They do make mistakes. In this case, the only mistake they are perhaps erring is on the side of caution, I think. It is past being a wake-up call. Our economy can either recover to a 7 to 8 percent growth level or go back to the five and six percent rates. It all depends on whether the government has the courage to let go. In the meanwhile, it is best to keep one’s money in fixed deposits or in Fixed Maturity Plans or in Bonds of companies.

Wednesday, June 20, 2012

State of the markets- Expensive even today

Moneylife » investing » stocks » stock-investing-are-stocks-really-cheap Stock Investing: Are stocks really cheap? June 19, 2012 12:09 PM | R Balakrishnan There is a widespread propaganda that stocks have become undervalued. Think again All professional money managers are parroting that stocks are undervalued currently. A pile of statistical data is produced everyday by a multitude of analysts working in broking companies that emphasises the undervaluation—using earnings forecast of not FY12-13 but FY13-14. This is called ‘forward’ earnings and is used to make a comparison with the past. They are all making the claim that the markets are at their cheapest in terms of many measures, including P/E ratios. I look at stocks prices, market indices and forecasts of companies, and find myself at odds with the masters of the markets. Good quality companies (where I can breathe easy and become a Rip Van Winkle) are at multiples of over 20-25. Nothing, except government-owned banks, is being valued at single-digit multiples of its earnings. Well, if I believe that the stock markets are a reflection of the expectations of investors, then surely what remains expensive will continue to remain so, unless the expectations take a turn. If anything, they can take a turn for the worse. A lot of optimism is built into the forecasts of brokerage companies. After all, they have an interest in sounding optimistic. Let’s look at the problems facing some of the key sectors. If you take the banking industry, we have the universe of government banks, none of which inspires trust. They change their basis of accounting and classification of loans like we change T-shirts in the Chennai summer. So, comparison of results from year to year is a thoroughly useless exercise. If I go by the news of industrial slowdown, the expanding basket of sticky loans to large borrowers in aviation, microfinance, textiles, real estate and infrastructure, how can I believe that a government bank has actually reduced its problems? More so, since it is these banks that had the size and malleability to have funded large (and dubious) borrowers (such as State Bank of India’s generous funding of the sinking Kingfisher Airlines). So, if we see stocks of a government bank trading at 3-4 times ‘reported’ earnings, there could still be a lot of downside. Sure, there is an upside possible too: when we see hordes of foreign investors coming back to buy Indian stocks as if they are limited edition copies of rare manuscripts. Then we have oil company stocks which are neither expensive nor cheap. The excellent results of Bharat Petroleum and its bonus issue seem to be totally at odds with what is happening in the sector and disconnected from the politics that surround the industry. Does any one of us, even for a moment, believe that the chairmen and managing directors of oil companies actually decide the fuel prices? Is it not obvious that they are making these statements on the orders of their political bosses? How do you invest in such companies and not worry? Auto stocks are no bargain either. If you go sector by sector, probably some metal stocks look undervalued by traditional yardsticks. But metal stocks, like Tata Steel or Hindalco, have become more global than Indian. Worries in Europe and America are ruining their bottom lines and they have become truly ‘cyclical’ stocks; so one cannot pay too much for these anyway and most long-term investors will keep away from them. Tata Motors is also headed this way; its fortunes are tied to global economy and markets. Our pharmaceutical company stocks are another ‘safe’ sector with reasonable growth prospects. However, none of them appears to be at bargain valuations. That leaves us with the ‘technology’ sector that supplies labour to the world. The rupee’s weakness is surely a good thing for them. At the same time, their labour costs are going up; there is restlessness in the industry and there are doubts about their ability to go to the next level of growth and efficiency. Considering all the worries, the stocks are not at the bottom-end of their valuation band. Inflation continues to be the friend of sectors that are engaged in direct consumer spending. With supply not improving (since there is a lack of confidence among businessmen to invest more money to expand), consumer demand is still driving prices higher. Consumer companies keep finding cleverer ways to increase prices at a rate higher than inflation and are enjoying a golden period. I have not even gone into a discussion on sectors like ‘infrastructure’ or ‘telecom’. These sectors have a great need to keep raising fresh rounds of equity and will remain out of my radar until they become mature companies. We are all fretting because the indices seem to be kind of hanging in there, unable to break out of a range. Well, I wonder why we complain when we have got a 20% return in the first two months of the calendar year. The real worry is the attitude of foreign investors to our markets. They are the pillars and the foundation of our markets today. So, we have to keep praying that their money will keep pouring in, to provide exit to temporary hands that hold them and the new supply that Indian promoters keep providing them with. Indian investors clearly overreached in the 2005-08 boom with most people who could not afford equity risks, putting money into mutual funds and direct equities. So, we have to wait for retail investors to come back. Maybe the downside of this market is limited to around 10%-20% from these levels. However, there is no guarantee about the trigger that would attract money from foreign investors again. Until then, we can only hope that our politicians do not give us such a scare that our GDP growth rate expectations fall back to the Hindu rate of growth. As a strategy, if I do make a bet now, I would buy exchange traded fund of the Sensex for a one-year horizon, with a planned exit when the return nears or exceeds 20%.

Sunday, June 10, 2012

Think Equities, Think Long Term

(This appeared in the Deccan Chronicle of 10th June 2012) THINK EQUITIES- THINK LONG TERM The turn of the millennium changed the mindset of investors. We had an old set of investors who were happy with their winning the lotteries in the form of share allotments in regulated low priced public issues. Then there came the new breed. Stocks doubling in anything from one week to six months became fashionable to gun for. Stories of success always spreads like wildfire and no one wants to talk about failures and losses. Public lore made our stock markets as a ‘sure’ route to untold wealth. Alas, the first round was too brief and savage. 2001 came like a butcher, killing all including the bystanders. Many people swore off equities as the borrowed money invested in the stock markets became a huge burden. A healing process and by 2007, things were back in full swing. Everyone had reliable information on so many stocks. Mutual funds raked in money through the IPOs. Yes, long term was okay, so long as it was not too much more than a year. Then 2009 came and destroyed everything. New entrants were trampled upon. Most exited in panic. Those who stayed through the massacre of 2009 and put in new moneys reaped big rewards. Alas, the picnic ended too soon. The fall was brutal and the rise caught most unawares. Those waiting to time the markets could not get in as the election results of 2009 shut out new money from the gains. Now, introspection and fear dominate the investors. We see that even if one had stayed for five years in a SIP in the broad market, the returns are like savings bank deposits, at best. Then if one looks at a ten year record, things begin to make sense. In the last two years, our markets have witnessed a divergence that is not usual. Stocks of companies in sectors like FMCG and Pharma have witnessed huge run ups. It looks like there is a flight to quality. This makes me confident that we are not in a bear market. Investors seem to prefer less risk in their stock picks. Stocks of the momentum era (real estate, infrastructure, metals etc) have fallen badly, some by as much as ninety percent. I suspect the market capitalisation is half of what it was at its peak. Money is still around in plenty. That itself keeps the bear away. In spite of the innumerable troubles surrounding the globe, every stock market is doing okay. No bargains in value terms in any markets as a rule. None of the markets are in single digit P/E multiples. The most worrying thing seems to be the lack of faith that we have in our companies. Corporate results have been fairly ok in this gloomy year of low economic growth. Yet, the Indian retail investor is leaving equities to seek peace in fixed deposits, bonds, bank deposits and gold. Our equity markets are totally dependent on the FII money flows. If they pump in money, the markets go up. If they don’t do anything, our markets remain flat. If they sell, the bottom falls out. There is no counterbalance to the foreign investor. The FIIs are a mix of long term and short term players. Most of the FIIs stay invested for long in markets like ours, where the growth rates are the attractions. Government actions, inactions and scandals do dent their confidence, but they seem to be far braver than us. They realise that Indian corporate sector is doing well and will do so, in spite of government. Investors clearly are worried about government owned companies, which do not seem to have the profit motive that drives stock prices. The money which chases these stocks put their faith in the government of India seeing sense in letting go of the management at some time. Maybe the expectations do get tempered from time to time, but everyone knows that given the poor financial health of the sovereign, it is a matter of time before corporations are driven by free market forces. Failure to do so is like pushing a self destruct button. The goings on in the market makes it clear that equities are for the long term. Equity investment has to come from money that you do not worry about. You cannot put money in equities today, hoping to use it for a specific need in the next few years. It should be used more for estate or wealth creation. The individual has to start with fixed income for most defined needs and then use equities out of the balance money. Timing of entry can be decided, but there is no control over markets when we want our money. Yes, we may get a panic situation like in 2009 or so when the index cracked to below 10,000. Today, if it cracks to around 12,000 it may be a great time. For these kind of opportunities, it is important to preserve liquidity. Equities are for investment and not savings. If we can understand the distinction, we will not cry about markets. Fixed income can only give us so much money. Keep investing in equities if you want to create wealth.

Saturday, June 9, 2012

Are governments necessary?

(From The Daily Reckoning 0 Freedom, Naturally By Joel Bowman It is at times useful to imagine how a truly laissez-faire society, one entirely emancipated from the shackles of state coercion, might exist and operate. Morris and Linda Tannehill examine this very idea in The Market for Liberty: Is Government Really Necessary? The Market for Liberty imagines a totally free society — one with no government intrusion whatsoever — in which the free market is left to respond to the demands of individuals without recourse to institutionalized coercion, implied or actual. Is such a stateless existence even possible, much less preferable? Or, as so many contend, is it merely an academically contrived utopia? Morris and Linda Tannehill address all the usual fears and protestations that a truly nongovernmental — i.e. anarchist — society conjures up. Whenever there arises in conversation the mere suggestion of a totally free, laissez-faire market — the possibility that human beings might even be able to survive (much less thrive) without the safety net of state control — apologists for “benevolent government” invariably step atop their soapboxes and ask, “Yes, but who will provide education for the masses, if not the public schools?” or “Who will care for the sick and weak, if not the public hospitals?” Indeed, these are questions that deserve thoughtful, honest answers. But these questions assume realities that are not in evidence. They suppose that “the public” (i.e., the state) actually has money to “provide” these services, rather than, as is actually the case, first having to expropriate (steal) it from private, productive individuals. Furthermore, the fallacy of benign governmental control relies on the idea that governments can provide essential services more reliably and cost-effectively than the private sector. In other words, the government’s obligation to provide essential services is more reliable and effective than the private sector’s opportunity to provide essential services. Admittedly, this debate does not lend itself to easy, black-and-white conclusions. But as the Tannehills argue persuasively, the free market provides solutions that governments would never dream of. “The big advantage of any action of the free market,” contend the Tannehills, is that errors and injustices are self-correcting. Because competition creates a need for excellence on the part of each business, a free- market institution must correct its errors in order to survive. Government, on the other hand, survives not by excellence, but by coercion; so an error or flaw in a governmental institution can (and usually will) perpetuate itself almost indefinitely, with its errors being “corrected” by further errors. Private enterprise must, therefore, always be superior to government in any field. (It is worth mentioning here that corporations acting in collusion with the state are not private enterprises as the Tannehills define them. They are simply entities that have co-opted the government’s “gun-for-hire” to do their dirty work for them. Think Wall Street “bailout” recipients and their army of DC lobbyists. Indeed, think any institution at all that seeks unfair protection or promotion from the state.) The lines on the battlefield between the comfort of state control and the liberty of anarchy are familiar to all. The state is a protector, one side argues. The state is a prison guard, the other side argues. • How, the statist is heard to question, might common disputes find resolution without the currently preferred monopoly of the state’s courts? • What about private monopolies that would ruthlessly jack up prices and bleed us working-class proletarians to death? • By what means might a laissez-faire society offer protection from foreign aggressors? • How might the personal liberties underpinning the whole system be protected if it were not for the tireless work of the state’s police and its myriad other law-enforcement agencies? Indeed, the statist continues, how would “the law” itself even come into being, and in what shape would it find application in the absence of the all-knowing, all-powerful state? The Tannehills address these anxieties thoroughly and logically. “Freedom is not only as moral as governmental slavery is immoral,” they write, “it is as practical as government is impractical.” Discussions criticizing the state’s myriad shortcomings and follies are many. The Tannehills’ Market for Liberty takes the extra step in providing viable, concrete solutions to state-sponsored dilemmas. The free market, they argue, can correct the state’s tendency toward costly excesses, and can do so peacefully and voluntarily, simply by following price signals from the market itself. The Market for Liberty is, for all intents and purposes, a very real, practical solution set to those most commonly presented excuses for acquiescing to governmental authority. The government is not merely a “necessary evil,” the Tannehills argue. “It is necessarily evil.” Of course, The Market for Liberty does not project a utopia in which acts of violence simply disappear and where every individual immediately sets off on a long road to perfection. Rather, the authors illustrate how individuals acting in their own self- interest, coming together to engage in mutually beneficial exchanges, are thus incentivized to act with honesty and integrity. “The history of governments always has been, and always will be, written in blood, fire and tears,” the Tannehills assert. In The Market for Liberty, they show how freedom is not only an alternative to the state, but a far superior one worth, at the very least, our immediate and undivided attention.