Tuesday, April 28, 2015


The way stock prices move during the day is a fascinating watch. It makes a mockery out of every one's predictions. I am excluding from this the specialist 'intra day' traders, who could perhaps align with split second changes.
There was this stock, that I had liked at around Rs.300/-. I spotted this very late as I have stopped following daily prices or markets. I was not aware of this company till about a month ago!. After having made my studies, I decided to add this to my portfolio. On the day I took a call, it was trading at around 290/-. So, I bought some, giving my broker a limit of 285/- (no reason, just thought I was an expert). Ultimately, I did buy some quantity at 287.
A few days later, the stock started to fall and it reached a level of around Rs.230/-.  I thought that I should add some at this level. So the following morning, the stock opened at around 245/- and again, without any rhyme or reason, I put a limit of Rs.240 on the stock, for buying. As the day progressed, the stock climbed up. My broker called and wanted to know if I wanted to buy at 'market' (around 256/) since it was on an 'uptrend'. I told him to hold on (again, no rhyme or reason). I had bought first at 287 and here I was, again dithering over a few rupees.
My aim is to hold this stock for ten years or more and I am looking at a thirty percent plus return. If that was true at around 300/-, it should be more so at 256. But I have my quirks. I am behaving like a short term trader.
I normally do not look back at the prices, once I have completed my purchases. I have done well in most of my limited purchases. But here, I am, disturbed by  the 'noise'.
This kind of behavior can result in either my missing an investment for buying or even stop my selling.
I did finally get the stock at 240/. and when I last saw, the price was 264/-, a couple of weeks ago.
I guess I was lucky. The stock could have run away. Of course, if could have tanked also. But the capriciousness of my decision making is perhaps costing me a couple of percentage points in my returns.

Sunday, April 26, 2015

How to deal with your Financial Advisor or Planner. A primer for Investors

( Replug of an old article)

We do not shy away from paying our doctor, when it comes to a health issue. When it comes to our wealth issue, our attitudes are very different. Same is the case for many of the services we use, whether it is a plumber or an electrician or the mobile repair person.
When it comes to our wealth, we do not think about engaging a professional. Perhaps, we have suffered losses on our investments as we thoughtlessly bought products without asking all the questions and tried to fit a square peg in a round hole. As a result, we have developed a generic mistrust of financial advisers. Of course, some of the advisers are also to blame, as they pushed products that gave them the highest commission, without considering its suitability for you.
To my mind, most of us lack financial literacy. We simply get carried away by anecdotal evidence or advice which we do not question.
To me, a financial planner or an adviser has a key role in assisting us with our money. The important thing to note is that his task should be confined to taking our present financial condition and explaining the risk in each of the products he advises us on. It should start with an assessment of where we are currently.
Often, I have seen people reluctant to share fin-ancial information with advisers. This is akin to not telling a doctor about your medical history. The first requirement is that before you go to a financial adviser write down everything about what you have and what you owe. This has to be the starting point.
The next step is obviously to write down what you make every month and how much you could put aside every month for the future. Also try and visualise what big expenditures such as college admission, marriage, car, house or whatever you think are going to be big and non-routine expenditures that you can anticipate. Now you are ready to talk to a financial planner.
Now you have two sets of planned expenditure: Those which are unavoidable and those which depend on how much you can save. In life, often our large expenditures have to be tailored to meet what we have. We may desire a three-bedroom apartment, but what we could afford could be smaller.
Once you decide to go to a financial planner, the first approach should be to evaluate what is clearly possible with your savings. This would obviously vary. If you already own a loan-free home, a vehicle and other comforts, your only concern could be your children and your retirement needs. So each problem is unique. The first answer I would seek from a financial planner is to ask him:
n If I take zero risk with my money, what would be the outcome with my savings? After five years, 10 years or 20 years? This would be my first line of defence.
n How much of my money can be spared to invest in riskier assets like shares, real estate etc? What instruments are available for me?
n For each instrument, I want to know the risk. Who is going to repay? When? And what are the price risks? Can I liquidate when I want and if so, what are the consequences?
Do not be shy of asking as many questions as you can. Once I get these basics, then it is up to me to choose an appropriate mix of risk. If I already have all the basics paid for, then I can take higher risk. If not, I have to opt for a lower risk.
The important thing is to understand that you should not push the adviser saying that this is what I need at different points in my life and give me a plan to get there, with what I can spare. If your needs are more than what your savings can provide for, then he will be pushed to a corner and give you instruments that are highly risky and you will end up in a mess. It is best to fit your needs to what we have. That is the only way to sleep in peace.

Monday, April 13, 2015

GOLD- investment of fear

 (This appears in Deccan Chronicle and Asian Age)

People still love gold. However much we tell them that the returns are poor, gold still draws folks to it. Recently on the Social Media pages, I came acros some interesting data:
In 1980 Gold was 1330 and Sensex was 100
In 2014 Gold was 27800 and Sensex was 27000
i.e Gold multiplied by 20 times and Sensex multiplied 270 times.
and the rich Gold Investor got???

One point made was that most of the Sensex companies of 1980 no longer exist or have been blown away out of business and hence do not give the comfort of the yellow metal. The other point made in favour of Gold was that whilst the stock markets can fall as much as fifty or sixty percent from peak, gold never has fallen so much.

Let us address these issues.
The way we invest in to the stock market is critical. When we talk Sensex, we are talking about thirty handpicked companies that account for a substantial part of the market in terms of size (market capitalisation). There is no guarantee that the company included in the Sensex would be around in one, two or twenty years. So, how does one avoid these pick pockets?

Many years ago, I would not have had a fair answer to this apart from saying that the investor needs an advisor who will help hime keep score as well as warn him when a company drops out, when a new one takes its place etc. However, today, I will just tell the person that I will not worry. There are these “Exchange Tradeed Funds” (ETFs) which replicate the index. When there is a change in the index, these ETFs are simulatenously adjusted to reflect the new compoasition. ETFs are passive trackers of the index they represent and the margin of error is very very narrow.

Gold has no intrinsic value other than one of fear. Even assuming that it has now been accepted as an alternate store of value, its price cannot rise too much beyond the cost of manufacture.

The other thing which strikes me is that buying physical gold is the worst possible form of investment. You pay taxes, you pay ‘making’ an/or ‘wastage’ etc which add to your cost and when you sell, you do not get back any of these surcharges. Buying a gold ETF is a better thing.  Of course, I presume that most of the people who buy physical gold, do it either out of ignorance or because it is bough with unaccounted money. Gold is probably the most sought after asset for those who have unaccounted cash.

When I buy a share, I am buying a piece of some business. That business grows and the value of the share changes according to the business. On the other hand, the value of gold depends on things like demand supply, economic uncertainties, fear, value of the local currency vis a vis the US dollar etc.  And gold has no practical use. Of course, if the world were to go back to the gold standard, things would change.
Last time when gold made its big move from under a $1000 per ounce to near $2000, everyone noticed.  So now everyone wants to be there when gold price moves up. All I would say is that this is typical ‘herd mentality’ and not based on any logic. Here we have a strengthening Indian economy, which means that the rupee should get stronger unless there is deliberate action to suppress the rupee to support exports.

I am of the school that firmly trusts a high quality equity investment far more than buying the yellow metal. Everyone of us, I guess has that urge to be invested in everything. If you are one of those, irrespective of what I say, you will end up buying gold. To those kind of folks, I would say- “Go easy. Do not commit more than ten percent of your total money. And please do not buy physical gold. Buy  Gold ETFs if you have to.”

One person said that Gold price will not crash as much as share prices can or do. That is possible. However, share prices do rebound so long as the underlying is intact. As far as gold is concerned, the only underlying thing behind its price, is perception. Not anything that can be labelled as an ‘earning’ capability. Gold is merely a currency of fear.  Think hard before you put your hard earned money in to gold.

R Balakrishnan

April 8th, 2015

Wednesday, April 8, 2015

The Real Estate Regulatory Bill - Some early thoughts

Finally we will be getting a Real Estate Regulator. And not just one. At least one per state. There is an enabling provision which permits a state to have one or more.
A quick read of the framework, leaves me wondering as to whether there is going to be real protection.
First, the good thing is that the act talks about mentioning all measurements only in 'carpet' area. Unless there is some final devil in the print, this should enable us to compare prices across builders.
The govt wants the builders to deposit fifty percent of the amount received from buyers in to a separate bank account within 15 days. This is messy. For what period of time should the money be there, I do not know. I am sure that the bankers will work out a way to let the builders access liquidity and earn some interest and fees in doing so. I am not sure this is a workable provision. Fifty percent is a large amount and it presumes that the builder can manage to complete the project without accessing half his money. Anyway, let us wait for the final print. My feeling is the builder lobby (which includes most of the law makers in both houses) will not let this happen.
The penalty is just ten percent for non compliance. This is peanuts and the builder will simply add this to the cost of the project. If he is fined, it comes out of your pocket and if he is not, it is extra profits.
There is nothing about compulsory publication of per square foot sales price to be mentioned. When we have a one rupee match box carrying the MRP, it is strange that we will not see a MRP in a real estate asset. Thus, the biggest window to black money is kept open.
Let us see the final shape the bill will take. And since the fountainhead of corruption in India are the state governments, do not expect any great protection. Most of these regulators are like condoms- Supposedly to protect, but ultimate objective is to help in getting the consumer screwed.