Tuesday, November 30, 2010

Dust the cobwebs of the night

Wake up! Greet the morning light with a smile.

Wipe the cobwebs of sleep from your eyes.

Do not wallow any more in the night.

The world awaits your presence outside!


The birds greet the morning with joy unbound.

The earthworm peeps its head out of the ground.

The morning dew twinkles on blades of grass.

Wake up! Go meet the day, it will not last!


The river winds its sparkling way onward,

Carrying blessings from another land.

The trees are laden in the orchard;

The fruits, ready to pluck, on every branch!


The night has gone back to its lair,

Retreating against advancing sun.

It's time you woke up from slumber and stirred.

Arm yourself, step out, take on the world.

Friday, November 19, 2010

Talking about Gold and Silver - Part 2

I did receive a few reactions to my article on gold a couple of weeks back.

(http://www.dineshgopalan.com/2010/10/talking-about-gold-and-silver-part-1.html ).


 Some of the main objections:


1)      Gold has no use for it, in the same sense that other commodities do – people don't need it to perform any useful function.  Its value depends on what people are willing to pay for it.

2)      A return of 6 to 7 percent in dollar terms and 11 to 12 percent in rupee terms is not really high


There are other objections usually advanced as well. That Gold is a dead investment, it's just a piece of metal with no productive use, prices are already high and where will it go from here…  Strangely, no one talks of silver much – it doesn't seem to evoke so much interest as gold.


Which is why in the history of the world more people have died fighting for gold than for any other cause – except religion of course!


Talking of gold not being of much use – is that not a desirable thing for something that is used as a store of value and a medium of exchange? Of what intrinsic use is the rupee coin you have? Historically, people across cultures have experimented with various forms of currency and the attributes that are required are:

                The sovereign cannot just print more of it whenever he wants (this is critical – we'll touch upon this again)

                It should not be affected by the elements

                It should be rare – else more and more of it will just reduce the value of other peoples' holdings

                It should preferably not have other uses since you do not want your currency to be consumed – only used to buy things that can be consumed


Gold and Silver have been most used in currencies over the years. It has invariably happened that the value of the underlying metal increases over time while the currency does not hold its value – obviously the coins are then melted for their intrinsic worth!


Governments across the world are just printing money as they wish.  They need this power to print money since it is the means of wealth distribution. Printing more money implies that (a) the value of the money you hold drops, and (b) the money that is printed newly can be deployed anywhere in the economy by the government, i.e., those in power.  They have just used their power of patronage to dispense largesse at the expense of all of us, and we do not even realize it! That's why governments hate to peg their currencies to any external value index.


Read the stories of hyperinflation across the world – Germany and Austria after the war, Argentina, and more recently, Zimbabwe, to see what can happen – and it's not an extreme doomsday scenario.  Well, it is extreme, and it is doomsday, but the way governements across the world are behaving now, it is not very improbable.


A return of 11 to 12 percent over the long term is not small. It is certainly a little higher than inflation. There is a lot of variability in y-o-y return, but we are only considering long term returns here.  Both stocks as well as real estate offer similar or greater returns over the long term. 


Between the two, silver is more volatile than gold. Silver has many industrial uses and a lot of it is consumed. Newer uses are being found for it in nanotech and other cutting-edge advances. Silver prices tend to go down more when economic activity is down, and increase more than gold when economic activity picks up, in line with other commodities.


For the long term I am bullish on gold, and more bullish on silver. Gold and silver should form part of every investor's portfolio – not the whole part of it, not a majority part of it, but certainly a substantial part of it.


How do we go about investing in Gold and Silver?  We shall see that in the next part of this series.


Saturday, November 13, 2010

Volatility - the new Reality (Investing strategies for today)

When you invest in a piece of real estate close to your locality, where you think you understand the demand-supply dynamics, you are taking a bet on the future – that your plot of land will appreciate. This is an individual call and the returns that you may or may not get has no relation to the overall market, or with the national and international economy, at least to a large extent.


 The same argument applies to individual stocks; however, there is an additional twist here. However individual the stocks may be they do get influenced by the broad market and tend to move in concert especially in times of extreme volatility, more so  in case of stocks which form part of the index.


There are several institutional players in the market, all of whom are investing in the same basket of stocks and are being compared against the same benchmarks. The performance of all equity fund managers in India is measured on how well they performed vis-à-vis the Sensex , in one way or other. Hence they all have a huge incentive to try to second-guess the Sensex and to mirror its movements. Not doing that would be too much of a risk only maverick fund managers would be willing to take, and that too not for long, since their performance measures would tend to catch up with them.


I believe that when everyone is evaluated against a particular benchmark their performance will ultimately tend to follow the benchmark very closely.   There is a herd mentality that results in all institutional players behaving in the same fashion, and they control more and more of the money. It thus becomes a self fulfilling prophecy sometimes, sometimes a race to the bottom where everyone is vying to sell; and sometimes a euphoria-induced spiral to the top. The computer-based trading models worsen this situation since they could trigger off a one-way slide in case the markets steeply drop. FII inflows based on a commonly accepted "country-weightage index" only amplify the trend. As do cross-border money flows which results in disproportionate sums of money coming in or going out to move local markets across the world.


I still subscribe to the Benjamin Graham and Warren Buffett school of fundamental analysis, at least for old-economy stocks  – in the long run I believe "fundamentally sound" stocks will give good returns. But the long run is made up of several short runs; and the short runs are becoming more and more volatile. The performance of your equity portfolio today has a lot to do a lot with macro economic factors several of which have no direct relation to the company or industry of the company in which you bought the stock.


If we accept the above line of argument to be true, then our investing strategies need to change accordingly. The old fashioned "buy-and-hold for the long term" still works. In case you have picked your stocks well, it is a very good option to put your shares in a locker (that's only a figure of speech in these demat days!) and wake up once every few years to check the price. However, given that industry, economy, and company life-cycles are getting shorter nowadays, you may like to do that a bit more often just to ensure that your company continues to remain fundamentally strong.


While keeping the above strategy as the base, we should evaluate whether we need to modify it in light of the current situation. The way markets swing up and down nowadays, it is good to keep a close eye on the Sensex and take a call on the broad direction. One can never be fully right in this, of course, but we could take a position that, say, at today's 20k odd, the Sensex has some potential of upside with high volatility and risk; while with the Q.E.2, European crisis, etc. there is a significant risk of a steep crash that could be triggered off by some bad news.  Let's say the most likely scenario is that it will keep yo-yoing wildly in a band. Given this, would we want to shift some of our existing equity investments into debt or gold etf's and enter later, even if to buy the same stocks? It also has to do with the current outlook on gold and debt, of course. Gold has had a very good run in the last couple of years, and the upswing is showing no signs of reversal. Also, if there is a stock market decline due to some macro-related bad news like the US economy or Europe, there is every possibility that gold will go up still further. If one is unsure of both equity and gold, debt is of course a safe parking slot.


That implies of course that you should be able to switch between investment classes  with minimal cost. Some mutual funds do offer switch facilities – examine the costs of these options. I do not think this kind of switching should be done often; but there are occasions when you may take the call to switch. If you are invested in mutual funds, it is at least good to know switching costs in advance, and other things being equal, invest in funds that offer you this option at a low cost.


When markets were ruled purely by retail investors not acting in concert, investing for the long term without trying to time the market made sense. But markets are increasingly getting institutionalized. Market players are increasingly acting in concert. Euphoria is getting increasingly euphoric (for want of a better word). Panic is getting increasingly contagious. In such a situation, it is good to keep a macro-eye out and take a call sometimes and act on it.


I  welcome your views and comments.

Tuesday, November 9, 2010

Ben Bernanke

Two of my earlier poems...
The High Priest


Dipping his stick in magic soap,

He keeps blowing into the air.

Carrying a message of hope

The bubbles emerge, in thin air.


Fascinated, spellbound, we stare,

Holding our breaths, hoping they will last,

As each bubble dances in the air

We watch, fragile hopes floating past.


We hope he has imbued them with spells

To carry them through the turbulence;

We hope they won't break, nor dispel;

We pray in fervent desperation.


Greenspan kept blowing his bubbles

Till they blew up one day in our face.

Bernanke has now been installed

As High Priest: to convey all our prayers.

(written on 12-January-2010)


Uncle Sam's fairy tale


Cinderella's coach was created

From a pumpkin, couple of mice;

A turn of the wand generated

The coach, and all that was nice!


Greenspan used his wand very well,

Flooding the world with money;

But he was in charge of the press

That's known as the U.S. treasury!


Bernanke has now taken up

What Greenspan had long back started.

He is busy conjuring up

Dollars where none ever existed!


At the stroke of 12 she had to run,

For the magic would lose its power.

All fairy tales are good and fun,

Till comes the inevitable hour!


(written on 31-December-2008)



Monday, November 8, 2010

So what if she is Queen?

British Royal family joins Facebook - Queen Elizabeth is launching her own fan page ... royal family already has an account on Twitter and youtube... (news item on 8 Nov 2010)

So what if she is Queen?
She has to descend from her heights.
Curtsying fans, royal disdain
are past, in age of social networks!

They need to upload themselves
on myriad of these networks,
Then canvass for followers
who "comment", "like" and say "LoL"!

They need to pick up lingo
that's crisp, vapid, to the point.
They need to upload photos
that compete with JLo and Hilton!

They need to post virtual tours
of the Palace fans can walk through,
silly cavorts on youtube,
all of them fit to download!

Royal Gravitas is dead
in age of mass Royalty.
The person with the most hits
is King, but just for the day!

(Dinesh Gopalan)

Saturday, November 6, 2010

Aadhaar: The UID Project

Nandan Nilekani is steadily moving ahead on the assignment that he has accepted. There is a lot to be said about co-opting these highly successful corporate types into politics – they have been there, done that, and are now probably driven by a genuine desire to do some lasting good to the people. An astute politician can use this to his advantage while providing the political air cover.


The initial teething problems seem to have been overcome, and issuance of cards is in process. The aim is to cover about half the population in another four years time, which is a huge task. The way it's been progressing, they should be able to achieve at least half this target if the other arms of the government cooperate. That cooperation is being won with difficulty. There are too many vested interests to watch out for among the politicians and bureaucracy who would not want this project to see the light of day. Anything that increases transparency, increases exchange of data, and facilitates sorting and classifying, is horrifying to contemplate!


There is a huge parallel economy operating in India. Most of trading is done in cash. A lot of real estate deals are either benami or facilitated by unaccounted money. Traders and professionals are not used to paying income tax – the tax law is just one more of those laws which are to be overcome.  The number of people who vote in any election is always buttressed by thousands of bogus votes. The multiple identity cards issued till date – PAN, KYC, Voter ID Card, Ration Card, etc. – have all been rendered ineffective through the ingenuity of the people who do not want them to succeed. GST and a uniform indirect tax code are being opposed for, I suspect, much the same reason – no one wants greater transparency and clarity of information.


Most welfare schemes of the government do not reach the people at all.  Most of the money is either paid as salaries to the administrators, or siphoned off on the way. Of the money that manages to reach the point of distribution, a large proportion is diverted to duplicate or fake identities. There is no way of identifying whether the money reaches the people it is intended to reach. Some estimates put the amount of "leakage" to be as high as 85%. Unless there is a foolproof mechanism to identify the ultimate beneficiary this leakage cannot be stopped. There are several vested interests in the system who would want such a mechanism to be never implemented.


Nilekani stepped in with a mandate from Manmohan Singh to issue an identity card that proves identity based on biometric factors – fingerprints and iris scans are the two chosen identifiers – which might prove impossible to forge or derail. The vested interests will not be liking it – and they are likely to be spread everywhere including in the ruling coalition.  They will try to derail the initiative at the slightest chance. Right now, doubts are being raised in the media about the UID which is sought to be portrayed as some kind of demon being introduced by the government to control the lives of the citizens.


The biggest argument against a single identifier seems to be the Orwellian scare of big brother ending up exercising supervision over us and controlling all aspects of our lives. If there is one national number it could end up compromising our privacy and enable the government to keep tabs on us more effectively. The fear is justified and needs to be addressed, but the solution is not to stop the advance of technology. Privacy is already being compromised by our cell phones being tagged for our location and taped for our conversations, satellites taking pictures of the changing face of earth every second, closed circuit cameras at public places, increasing electronic commerce, the data from which is backed up on powerful servers – the list could go on. All this is being aided by rapid advances in storage technologies and speed of networks. Machines are already capable of identifying us in a crowd based on our facial features or the way we walk. In a few years from now, it is possible that computers may be able to generate a unique number for every individual just by scanning them as they walk past on a busy road – in this case, instead of fingerprints and iris scans being biomarkers, the whole body will serve as one! Technology on a lab scale is already available to do much of this – it could become scalable very soon at the rate at which storage technologies and communication speeds are increasing.  So we are right in being scared of being tracked by some omnipresent computer, but how long can we postpone the inevitable?  All we will succeed in doing by denying Aadhaar is to postpone that day for some time. The Luddites who protested the advent of technology have never been able to stop its inexorable march – they manage to halt things for a while, but have to give in to the inevitability of change.


The better thing to do would be to recognize these concerns and bring laws in place to protect privacy, along with a focus on implementing those laws. It could start by inculcating a respect in our institutions and public investigative agencies for the privacy of the individual, which is lacking today. Agreed, a lot needs to be done in this area, but the solution lies in embracing the technological advances and putting safeguards around them, not in rejecting them outright.


Another argument is that other countries (US, UK) thought about introducing a unique national identifier, and  then dropped the plan. There are a few reasons cited like cost and security concerns, but the ground reality in those countries is different. Effective databases already exist with linked data; there are numbers like Social Security Number or its equivalent in operation; and there is no major problem when it comes to a person proving their identity.


In our country the picture is very different. Even the highly educated few like us shudder at the thought of having to apply for a gas connection or a ration card.  In spite of having a PAN card, driving license, and home telephone, the process is not easy. The bureaucratic wall that has to be surmounted to get anything done is intimidating to say the least. The villager who does not have an identity proof finds it difficult to prove his identity and get one; the picture is worse for the 100 million or so migrants. Can you imagine how difficult it will be for a migrant laborer from Bihar to open a bank account, transfer cash, or claim some government benefit when he is working in Bangalore?  In fact, the biggest argument advanced by Nilekani in favor of the scheme is the fact of "inclusion" – it will enable a large mass of people to become eligible for benefits and services they could not have availed of before.


The skeptics counter this by saying that the schemes could still be mismanaged – NREGS money may still not reach the beneficiary or the rice might be diverted from the PDS system. Is the UID to blame for this? It is for the administrators of each scheme to ensure that they use UID effectively if they want to. In any case, UID is not going to result in the existing setup becoming worse.


What about the fact that people may develop some eye disease making the iris scan ineffective? What about the fingerprints of manual laborers changing due to abrasion, given the nature of jobs some of them do? There are no answers to this kind of question – on the one hand you oppose the introduction of technology; on the other hand, quibble about the one percent issues that are bound to exist. I am sure our system will find a way to solve these problems – experience will show us how.


The critics point to the cost – current estimates suggest that it will cost at least Rs.45,000 crores. What's wrong with that?  It could be classified as "infrastructure" spending by the government and the money that goes to fund the scheme finds its way back into the economy. The same people who are crying themselves hoarse about the cost will support the argument that the government needs to indulge in spending, especially on the infrastructure side, to keep the economy growing.  It is also a fact that any number relating to a project of this size in our country is likely to seem big – that is due to the population of our country!


A UID is just a tool. It is for us to implement it correctly and prevent its misuse. I can't think of one good reason why the project should not go ahead – in fact, it's quite the other way round.  There are complaints now but they are merely quibbles; there has been nothing big so far that threatens to derail the scheme. Singh and his government need to be complimented for this initiative – what's the probability that in case for some reason the ruling dispensation changes, this project could also meander its way out of reckoning like Seshan's voter ID card?


Let us hope this project goes through to its conclusion and does not die somewhere along the way.

Wednesday, November 3, 2010

Personal Finance - Part 20: Talking of Real Estate

(this is the concluding part of my series on Personal Finance in Fidelity's internal newsletter BitsnBytes)
How many cases have you heard of people in India who have invested in Real Estate and regretted it? Even the few who manage to somehow invest at the peak of a boom, tend to recover their principal in a few years if they hold on. I don’t know who said it but “they don’t make any more of it any more”, so it is always likely to be a scarce resource. 

Any poll of retired people on their financial status invariably has the following two questions –  a) what is the wisest thing you think you did in your lifelong financial plan? And (b) what is the biggest regret you have – something you should have done but didn’t?   The answer in both cases, not surprisingly, revolves around having bought a house (in the first case) to regretting that they never bought a house when they could have afforded it. 


That brings us to the first point in Real Estate. Buy your own house. That needs to be your primary priority. Unless you are the only child of your parents, and will inherit the 50x80 plot in Jayanagar. Or your spouse is the only child of their parents, etc. While buying the first house, the considerations are a little different than what is normally used for investment decisions. Decide what is the kind of house you would like to stay in in the long term. Do you fancy an independent house, or want to be part of the community in an apartment complex?  Do you want a single-bedroom apartment or a three-bedroom one? Even if your job involves moving cities, decide on one city where you will buy your primary home. 


To buy that house, you need to wait till you have earned for a few years at least, since you need some money in hand, and a decent enough salary to be able to pay the EMI’s. If you are married and your spouse works too, then your affordability increases drastically. When you are buying your first house do not worry too much about where the market is, or where it is headed, just buy.  When you buy the house, you should liquidate all your other investments (except some cash kept aside for emergency needs) to make the down payment. Go in for as large an EMI as you can afford, and then some. Don’t forget to take out a term insurance policy covering the value of the house on yourself and/or spouse. 


It will take you a few years to pay back the EMI’s fully – any incremental money you get in the interim should be used to prepay some EMI. To start with, you can go in for a fifteen-year loan (twenty years is too long, given that our interest rates are quite high), but as you keep prepaying (without reducing the EMI amount, just reducing the term), you should be able to repay the loan in seven to ten years’ time. Till then it is understandable if you do not have any investments in equity or debt or any other kind of asset class.  


Once you have your own house and have cleared the loan against it, you then come to evaluating real estate as an alternative asset class in competition with equity and debt. I am not including gold as an alternative asset class here since I assume a small part of your portfolio (5 to 15%) will be invested in gold for the long term. The conventional rule for asset allocation states that, between equity and debt, you invest 100 minus your age as a percentage in equity and the balance in debt. While the rule is a broad guideline, you are free to ignore it. Keep investing incrementally in a mix of equity and debt depending on your comfort and keep an eye out for good real estate opportunities.  


The trick is to identify plots of land on the outskirts of the city (I am now continuing the argument keeping Bangalore in mind – these arguments will apply to most other cities except perhaps Mumbai and Delhi where the dynamics are a little different, as are the amounts involved) which will develop in the next ten years or so. Go too far out and you may not get quick appreciation anytime soon. Come too close or buy in a place that is already developed, and you will most likely see a good rise in price over the years, but nothing spectacular. It is safe to go in for “converted” land, preferably BDA plots. 30 x 40 sites require a lower amount and are more salable in future since they have a more liquid market than larger sites. Having said that, 60 x 40 is a good size to aim for.

Any bank will be willing to lend you money against buying the property. First liquidate all your investments so that you can put in as much as you can upfront and minimize the loan.  As to any incremental amounts that you make later like bonus or savings, you have to take a call – whether to invest in equity or prepay some part of the loan. Investing in debt on the one side while keeping a housing loan on the other does not normally make sense since you will be earning less interest than what you are paying. Investing in equity while you have a loan on one side though, means that you are in effect borrowing (at the rate which the Bank charges you for the housing loan) to invest in equity. Think about whether you are comfortable doing that; make sure you don’t over-leverage yourself. 


You can decide to build a house on the plot of land that you purchase. In fact, the loan terms are better if you intend to build a house on it. This has the advantage of bringing in rent for you once the house is ready. You could, alternatively, build a “portion” and live in one part of the house and rent the other, a very popular Bangalore model. If you are an old-time Bangalorean you must be having a dozen uncles and aunts who have done that – in my view, we have a lot to learn from them when it comes to financial planning!  


Real Estate requires large sums of money as an investment upfront. It forces you to save for the down payment; it forces you to save more to pay the EMI, and it forces you to save to prepay the loan. All this while your money is invested in an asset that appreciates on its own without much intervention on your part. On the other hand, if you are invested in equity, and let’s say the value doubles, you suffer from the itchy fingers syndrome and want to sell. Given human psychology and the way all of us are, it makes sense to invest in real estate for more reasons than one! 


Check with your parents’ contemporaries (if you are old enough, check with your contemporaries) who have invested in real estate any time between twenty and forty years back.  Find out what price they paid while buying, and check the price now. Work out the CAGR (Compounded  Annual Growth Rate). It is likely to be anywhere between 12 and 18 percent. 12 to 18 percent on a sustained basis is a big deal. The biggest advantage that real estate has is that it allows the power of compounding to kick in. And this calculation does not take into account any rental incomes that the house may have earned! 


Talking of rental incomes – rental incomes on real estate are not very high. But it is still good option to consider since the amount turns out to be decent due to the high value of the underlying! You can typically expect 2.5% to 3.5% per annum of the current market value of the house as rent. This implies that the rental values keep going up to keep pace with inflation. Building one house to stay in, and one house to rent out (or of course one portion each) is the best option in financial planning that I can think of! 


And then say you make more money. Lots of it. You have already bought a couple of properties. What next?  You should look at investing in commercial real estate. Ideally, buy a 50 x 80 corner site on the side of a 100 feet wide road in an upcoming layout; wait for a few years; then build a shopping complex on the ground floor with offices on the top. You need not worry about the money for “building”, banks will be glad to lend it to you based on the security of the underlying land.  


And then you have a dozen tenants who take care that you have sufficient income every month. By the time this happens, of course, you have retired. You can hire a manager to make sure the rents come in on time every month, and tour the world with your spouse or significant other. 


If that’s not a good dream to work towards, I don’t know what is! Happy dreaming, happy working, and happy investing!  With this, we come to the end of our series on Personal Finance. I hope you enjoyed reading it as much as I enjoyed writing it. Feel free to write to me any time with your comments, suggestions, or queries.  Bye!