Tuesday, December 30, 2014

Some books for the Investment Enthusiast

One book to read - "Competitive Strategy" - Michael Porter- Will take time- Every sentence in the book seems to fit some company, if you think long enough. One reading is a waste. Keep on reading it for life. Helps me to look at a company from a longevity point of view and take a call.
For those who have zero knowledge of accounts, I recommend "How to Read a Balance Sheet". It is published by the International Labour Organisation (ILO) and an Indian edition is recommended. Wonderful introduction to accounting. Very inexpensive.
For those who know accounts, I recommend "Techniques of Financial Analyses" By Erich Helfert. A timeless classic . Indian reprint available, I think
Graham and Dodd :"Security Analysis"- A timeless classic. Not to be missed.
All other books, no views. Some are entertaining, some give us some perspective, but no book gives you an education. There are a few classics I like:
1. Where are the Customers' Yatchts?  -  Fred Schwed
2. Common Stocks, Uncommon Profits - Philip Fisher
3. Jonathan Livingston Seagull- Richard Bach
The last mentioned book has got nothing to do with investing, but will make you become better at whatever you do and help you keep faith in yourself, if you have done the right things.

Monday, December 22, 2014

Using statistics and trends to fool the investor

My column in Deccan Chronicle. Pointing out the abuses of statistics and also the simplicity and relevance of the ROE measure.


Peter Lynch on Financial Planning...

(Opening lines from a lecture by Peter Lynch.. circa 2000 or so... Do not have the full talk)

As a whole, the financial services industry has become morally bankrupt and spiritually depleted. We have created a ‘cottage industry’ that feeds millions who make a living within, and on the fringe of financial markets. Nowhere is the illusion more alive than in the allure of the terminology, “financial planning”. Here, millions of investors have assumed that a ‘scientific evaluation’ has occurred.
Before I share why the ‘scientific evaluation’ assumption is inaccurate, let me tell you how I believe the term ‘financial planning’ evolved. In the late 1980s, the financial services industry was deregulated. Up until that time, brokers sold stocks & bonds, insurance salesmen sold life and auto insurance, and banks made credit available. The sales method, employed at the time, was basically universal ‘give the client a headache and then sell him an aspirin’ (identify what was wrong and just ‘happen’ to have the solution in your briefcase).
When deregulation went in to effect, the financial services industry players had to appear to the investing public as all encompassing and, thus, the term ‘financial planning’ was born. It would be a universal sign that your bank teller can now also be your broker and your insurance agent.
One-stop financial planning became the norm. So what’s wrong with this picture?
There is a story that went around about three accountants that were applying for a job. Each was asked only one question: ‘How much is two plus two?’. The first two simply said ‘four’. The third got the job. Why? His answer was ‘What do you want it to be?’. Financial planning is a flawed process. This ‘scientific process’ works in essentially the same fashion as the question above. It is simply guesswork utilizing several significant mathematical assumptions such as interest rates, inflation rates and tax rates. These economic factors are unimportant to some since they always ‘buy low and sell high’. However, I hope that you would agree that they are assumptions that will impact the future. Therefore, since we realise that no one can accurately predict the future, it stands to reason that one or more of these assumptions must be incorrect in the plan, thereby leading to either the plan being reconfigured or a change in financial planners, or the worst choice, ‘doing it yourself’. Also the plan begins with the question ‘how much do you need at retirement?’. Therefore, the ‘scientific process’ is nothing more than smoke and mirrors, which utilizes the correct combination of assumptions to ‘reach’ that goal. The reality is that the assumptions are simply a tool to make a sale. And, at the next ‘consultation’ with another client and on the same day, your ‘Certified Financial Planner’ may use totally different interest, inflation and tax assumptions= for the same span of time!
Unlike many of my peers, I put my pants on one leg at a time. Perhaps this is why, I still have pants while others have lost their shirts (pants, underwear etc) and just as much an expert in being wrong as I am on being right. But remember that we are the sum total of all of our mistakes and smartest person is the one who made the most mistakes and learned from those mistakes. With that said... I will ----
All I ask is an open mind, which is difficult considering that the financial services industry, and supporting media outlets, spends billions on creating an illusion that even Houdini would appreciate.

Saturday, December 6, 2014


Title: AYODHYA   The Dark Night
Authors: Krishna Jha and Dhirendra K Jha
Publishers: Harper Collins, India
Price:  Rs.499.00


There is a breed of people who will do anything in their pursuit of power and furtherance of political ambitions. One of the oldest weapons has been the use of religion as a tool to attain these goals. History is replete with examples of God being used and abused to whip up emotions and create a divide amongst people. Faith is a personal thing and should not be a weapon to divide people.
The Hindu Mahasabha which was the arm trying to form a “Hindu” nation used several strategies to try and achieve their objective. One of them was to ‘recapture’ Babri Masjid and create a “Ram Janmabhoomi”. This episode is shrouded in mystery and the problem still has to be resolved. It is a moot question as to whether a solution can be found that will please everyone. Surely, there will be politicians on either side of the fence, waiting to ignite passions.
The events of that night are re-constructed by narratives from persons who were there. The entire plot hatched by politicians with active participation from the local administrative person goes through with some hitches. From a key team of three, one backs out and the other two are left to accomplish their mission. The police and the security are manipulated to look elsewhere. And the local District Magistrate, KKK Nair aids and actively abets the installation of the idol and keeps the law at bay. And this was presumably with the blessing of the then Chief Minister of United Provinces, Shri G B Pant.
The interesting thing is that before the idol was installed, there were three or four ‘akhadas’. The word ‘akhada’ (or akhara) means a group. Each of the akhadas, till the grand conspiracy, claimed itself to house the birth of Ram. The akhadas (Nirmohi akhada which claims ownership of the disputed place, means a group without attachment), whilst claiming to worship one hindu God or the other, were generally at each other’s throats. Violence between akhadas was common.
This conspiracy did get the idol in to the masjid and then followed fights between akhadas for the management of the new “Ramjanmabhoomi”. The cash collections itself was a big lure. And the Hindu mahasabha had its act ready. The idol was installed in the middle of the night and posters announcing the ‘miracle’ were all over the place before sunrise! The local administration was an active accomplice in this incident.
“Ayodhya- The Dark Night” is a docu-drama that aims to reconstruct the night when an idol of the Hindu God Rama was placed inside the Babri Masjid. The authors, Krishna Jha and Dhirendra K. Jha are two journalists who have dug up archives of old newspapers, magazines and interviewed hundreds of people to try and piece together the drama on the night that the idol was placed inside the mosque. What has come out is a book that reads like a thriller, with the dramatis personae sketched out and the dastardly actions of the politicians, the religious heads and the administration in perpetuating this act clearly brought out.
It is a brilliant effort and is a read for all of us who have not delved in to history and merely follow the television media or rely on hearsay and come to biased opinions. Many of us may not be aware of the India that was in the period between independence and the adoption of our Constitution and one facet of the battle between fundamentalism and secularism is brought out well in this book. We all have a general view on history but rarely do we go deeply behind an event.
Each group of participants- the religious sects, the civil servants and the politicians are united by the common thread of acquiring wealth and property and religion is merely a platform. The multiple sects of the Hindus want control over the Ram Janmabhoomi to control the money that flows in. The civil servants use their clout to create divides and usurp property and money and the politician wants to have voter base to remain in power. All of this is brought out with names documented.
Since this is a reconstruction of events, with narrators giving their version, there could be elements of fabrication or distortion in the book. However, the main plot seems credible, though there is no conclusive evidence of any one individual being named. Names thrown about include Veer Savarkar to a Mahant Digvijay Nath (who was also accused of the murder of Mahatma Gandhi and then let off).
The book also raises several questions. Why do we have ‘state’ and ‘central’ demarcations when it comes to law and order? It was relevant during the fateful night at Ayodhya and is equally relevant today. Why do politicians let things fester and remain indecisive? Prolonging a problem simply because they think it may hurt some pocket of their votebank has become a standard procedure. Why do political parties use faith as a tool at all? Why do we as people meekly keep quiet? Are we so lost in our day to day existence that we tolerate the politicians and continuously ruin the country for future generations?
After reading this book, if you have merely followed your text books on history, you will change your perceptions on so many leaders of the past. Sadly, none of them come out as heroes. Clearly, Ayodhya issue could have been frozen within twenty four hours of its happening if the administration and the politicians had a will to act firmly. Alas, each one was worried about his own seat of power. After reading this, we also realise how the present set of leaders are obfuscating the issues and goading people with half-truths, if not total lies.
The authors also have given their views on events as reconstructed. One may or may not agree with their views and biases. Even if you take them away, there is enough left for the reader to form his own views. Whilst one may challenge the details of the history as reconstructed, there is enough to give you a broad outline. Whether each and every nuance of the conspiracy has come out is not material.
India won its independence to become one nation after a long battle with the English.  With its multitude of religious sects and sub-sects, India has become a fertile ground for politicians to use religion as a stepping stone to power and wealth. How long back in history will each one go behind the other for retribution or retaliation? Will our tomorrows be ruined by yesterdays?

Thursday, November 20, 2014

What books for equity investments?

Many of you have written to me asking what books would help to get one's feet wet when it comes to investing in direct equities. This article from Moneylife (a subscriber only website) highlights the books I think that will initiate the passion in those of you who are willing to spend time.

Monday, November 10, 2014

maxiMUM government

With the ballooning of the cabinet members to 66 (just seven short of the Jumbo Cabinet of 73 under the Soniya Manomohan coalition), Modi has for sure gone back on one part of his promise of Minimum Government Maximum Governance.
Clearly, all the quotes before the election were just sloganeering.
And why bring people in to the Cabinet through the Rajya Sabha? Why not let them face the public, get elected and come in?
In five months plus, this government has yet to find its feet. Apart from a sweeping program, a river cleansing program, we are yet to see anything serious.
One man can only do so much. The PMO is clearly in charge and the rest of the cabinet is just an appendage. Agree that the party does not have folks with any experience in governing, but surely governance standards were supposed to be higher.
Well, Modi is the last great hope for this nation of a hundred languages and crores of Gods. If he fails, not even the Gods can help this unfortunate bunch of people.


(A slightly touched up version appears in the Deccan Chronicle)

So we want to invest in stocks and make money. Do we just want the thrill and the experience one time or is it an important avenue for you to put your money to work for you? There are some mental processes you must go through, before you invest in stocks. Whether you are investing in direct equity or following the mutual fund route is not relevant.
One of the first things is to know what you are doing. In other words, do you understand where you are putting your money to work? One good test would be for you to be able to explain your action to your school going kid. That is the best way to be sure whether you know what you do. Do you buy any physical object simply because others are buying? Surely not. Similarly, understand what you are buying with your money.
The second thing to understand is your attitude to money (or in technical jargon- “Risk tolerance”).The whole point in investing is that you should be happy with what you have done with your money. There is no point in doing something because some wise man or a financial expert told you to. This comfort can only come if you understand where you are putting your money to work. Clearly, if you are the type that will sit down with an excel sheet and compute the live total for your stock or mutual fund portfolio, you have a serious problem. You are more likely to lose your health while trying to build your wealth.  Once you understand different financial instruments in the markets and make an informed choice, you are better prepared to overcome anxious moments. Of course, the first time a panic in the markets happen, you will tend to have knee jerk reactions, but if you have thought over this possibility, you can take advantage. If there is a crash and you have invested without any knowledge, obviously you will panic and sell out. Hence, you can build attitude with knowledge.
The third and, perhaps (to me for sure) the most important thing whilst investing in equities, is “Time Horizon”. Warren Buffett is often quoted as saying that his preferred holding period of a stock is ‘forever’. If you want to be in equities, think long term. I am talking about ‘investing’ and not about ‘savings’ or ‘day trading’.  You cannot have a ‘fixed’ time horizon in equities for the simple reason that the markets may not be nice to you on the day you have decided in advance to sell. Selling is a patient art. You wait for a good bull run, see what your compound returns are and then decide to get out if there is too much heat. The question is to put your money back to work, if you do not have a pressing need for it.
If you need your money in one, two or three years, do not park that money in equities. The minimum time window I would like to give to equity investing is ten years. Why ten? Simply because it is reasonably long enough for us to pass through at least one business cycle.
I come across people who want tips on stocks that will double in anything from a few days to a few hours. These people approach equities like one approaches gambling. In one year, what does one expect from a company that will change its fundamentals so much? The only exceptions will be some corporate action that changes the price or a sudden extreme unanticipated change in the fortune. Yes, sometimes we see exponential moves when the stock market cycles change in the small cap or mid cap stocks due to reasons of focused buying and the generally illiquid market for their stocks.
However, if you are hunting for short term gains, you must be equally prepared to lose most of it. If losing money bothers you, clearly, stocks are NOT for you.
Stock market investing is a way to build wealth. It is not a savings avenue. Start here only after you have saved enough to meet your known needs. You cannot bank on market uncertainties to provide for your known and quantified needs. Make your investments when you have the money and the price is right. Same should apply when you want to liquidate them. Wait for your price.
I know that most people are mentally not tuned to investing for ten years. Many think that one year is a long term. They do not have the attitude and should not be investing. They give stock markets a bad name.

Sunday, October 26, 2014

Investing safely- a video

here is a link to a video recording of the talk I gave at Moneylife


You learnt to make money-Learn enough to keep it

(This appeared in today's Deccan Chronicle)
Most people who earn and spend money do not take a high interest in what happens to the money they save. Often, it is a cursory discussion with someone before they write a cheque for some scheme or more often than not, investments are an impulse decision. They do not bother to take the effort to understand what they are doing with the money that they save or ought to save.
If you think that by simply dealing with a financial advisor you have done the best for your money, you need to get your head examined. He is out to make a living. And it does not necessarily come by doing the best for you. Similarly if you think that the bankers with who you and your grandfather dealt with have your interest at heart, you seriously need to get your head examined. To a bank, you are a customer, with a revenue target. Period.
If you go to a restaurant, do you think they will tell you which food has the lowest calories, lowest fat content? Will the seller of French fries tell you that it could be bad for you? So is the case with a banker. The person who you talk to, does not own the bank. His salary is dependent on the revenue he generates for the bank. And unfortunately, it is very unlikely that the product that is best for you will give the banker the highest revenue. Most likely, the converse would be true.
I am sure that to earn your money, you must have studied a lot and put in considerable efforts. Some professions give more and some less. But every rupee earned is a result of some effort that you have put in for a long time. If you spend so much time and effort in earning it, you owe it to yourself to understand how saving and investment works. Often I hear people say, ‘leave it to the experts’, “I do not have a head for it” etc.  Sure, investment is not a very easy topic but surely what you know on your trade or profession is not a cakewalk either. You could manage to become proficient in that.
Expertise in money matters is claimed by many but few really ever know everything. To compare, I can say that in medicine you have a lot of specialists, a few generalists but no one is complete.
On the way to getting yourself some knowledge in matters of money, there are some (like we can only save if we spend less than what we earn) which are obvious and some ( will a deep discount bond be better than a regular coupon bond) will flummox even most of the financial advisors. So do not lose heart. Since it is your money, it makes sense for you to spend time and effort learning about how money works.<>
You could actually break down your learning in to a few convenient heads. For instance :
Emergency Funds
Managing cash
Borrowing on credit cards
Housing Loans
Mutual funds
Fixed deposits, debentures etc
Insurance (life and health)
The power of compounding
Estate planning
Drawing up a will
Timing and markets
Do I need the money /
What is my neurotic state (Nervous, Anxious, Concerned, Active worrying or Relaxed?)
Once you decide to take the plunge, there is enough material available on the internet today. Why you should become financially literate is more to do with being at peace with your money rather than trying and squeezing the last bit out of an investment strategy. Most of us spend our lives with modest means and may not need experts to guide us. However, a fully DIY may elude even the savviest investor.
Once you start studying, a sure sign of your understanding a concept is when you can explain it to someone else lucidly.
Ideally, we should have at least one (preferably two or three) financial guides or teachers who we trust and make sure that we pay for advice. If we are willing to pay for advice, there is no reason why the advisor will bother about selling a product that gives him the best earnings. If possible, it is best to use one advisor to learn from and an intermediary merely for the transaction (buying / selling etc). Today, most transactions can be done online, but the irony is that offline is cheaper than online! Once you are paying for advice, then do not hesitate to squeeze pennies on the execution side. After all, it is our money.
Of course, you have a choice to be financially ignorant. Being so makes you very likeable to bankers, financial advisors and brokers. They are working for their money, using your money.