thoughts

Adding two more to the list this January.

• Last-minute tax-saving investments.
• Return-guarantee funds — no matter how attractively packaged and/or presented.
• Unit Linked Insurance — of any kind — Policies (ULIPs).
• Financial products/services/agents/institutions which/who offer you “exclusive,” “privilege,” “priority,” “premium,” “premier,” or “another-similar-word,” access to some [usually useless] service.
• Insurance agents who offer “commission kickbacks.”
• Financial products/services/agents/institutions which/who offer to help you mimic Warren Buffett’s style of investing.

It really is in your best interests to run away when you’re face-to-face with any of these.

How many of these have you run away from so far?

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Since I often ask you guys to run away from a lot of financial products/services/agents/institutions, I thought I’d make a quick list of items that I have so far asked you to run away from.

• Unit Linked Insurance — of any kind — Policies (ULIPs).
• Financial products/services/agents/institutions which/who offer you “exclusive,” “privilege,” “priority,” “premium,” “premier,” or “another-similar-word,” access to some [usually useless] service.
• Insurance agents who offer “commission kickbacks.”
• Financial products/services/agents/institutions which/who offer to help you mimic Warren Buffett’s style of investing.

It really is in your best interests to run away when you’re face-to-face with any of these.

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Of late, I have been thinking about working towards having a “single source of financial truth.” Let me explain what I mean. There are four financial categories which I would like to track every month. These are:

1. Income,
2. Expenses,
3. Savings, and
4. Investments

More often than not, cash flows into and out of these categories happen from multiple bank accounts, which steadily grow in number as you shift jobs but retain these bank accounts for no readily explainable reason. The result: You have no clue what’s happening where. Your income’s being credited into Account A, your EMIs are being debited from Account B, your investments are happening from both Accounts A and B, you’re worried about delayed transfers from Account A to Account B, and so on. That’s the problem when you have multiple sources of financial truths. Trying to consolidate them into a single source of truth is close to impossible. There’s a side effect too: You end up with too many PINs and too many passwords and you end up remembering none.

Here’s my idea for a single source of financial truth.

A savings account that is not related to your employment and from which you conduct transactions across the four financial categories every month. At the end of every month, you review this account’s statement and you have a clear idea of your financial dealings.

I’d like this savings account to have zero to low minimum balance requirements, low operation and maintenance charges, a debit card with sufficient withdrawal limits, check book, internet banking, and third-party transfer (NEFT/RTGS) facilities, Electronic Clearing Services (ECS), and mobile alerts.

Explains why I’ve been on an account closing mission, trying to eliminate all sources of financial clutter and mess.

What do you think? Do you have better ideas? Which bank would you recommend for such a savings account?

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Having rethought through Part #1 of this series and the comments which followed, I should point out that the choice of financial instruments also depends upon when you expect to utilize the funds built-up in working towards your goal. For example: the financial instruments applicable for a short-term goal of purchasing a washing machine may not be relevant for a short-term goal of increasing your emergency fund.

In this post, I’d like to focus on the financial instruments available for working towards my short-term financial goals (i.e. goals which are ≤ 6-months away). My short-term goals generally comprise a set of purchases that I plan to make over the next six months (for example, a household electronic good such as a washing machine, a refrigerator, etc.). I realize that your short-term goals could be entirely different from mine. If such is the case, simply drop a comment to this post or email me with your specific situation and I will follow-up with a post dedicated to each of your queries.

Coming back to my situation, to plan for and meet such purchases, the best financial instrument available to me is a fixed-deposit linked savings account (commonly known as a money multiplier account). I create a simple cash flow matrix using Microsoft Excel, identify how much I need to put aside each month, and transfer this amount each month into a fixed-deposit linked savings account. The prime concerns in this situation are safety and liquidity of funds — a savings account that auto-sweeps extra balance into a fixed deposit is the perfect choice. Just ensure that such an account does not charge any form of penalty for reverse-sweeps. When it’s time to make the actual purchase, I simply withdraw the required funds and pay for the purchase with cash.

With this approach, not only do you not have to use your credit card, you are also rewarded by the higher interest rate applicable on the auto-swept funds. Done regularly, you also get into the very good habit of saving up cash for any purchase.

Tax implications: The interest amount earned with this financial instrument directly adds to your taxable income. You will also need to check with your bank for any tax deducted at source (TDS) applicable. (This section was requested by reader Sreenidhi.)

Again, if you’d like me to comment on your specific situation, do drop a comment (if you’re comfortable) or email me.

Note:

If you’re a new reader, you can find a backgrounder to this series at:

Part #1: How to classify your financial goals?

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A key to achieving your financial goals lies in knowing what financial instruments to invest in for a given financial goal. For example: if your goal is to eliminate your car loan within the next twelve-month window, it’s financial suicide to start investing your loan repayment money in equity instruments (stocks, equity-oriented mutual funds, etc.). Similarly, if your goal is to retire within the next ten years, it makes no sense to start hoarding cash in a low-yield savings account.

But this is a mistake that we repeatedly make. I too have done so in the past — investing in the wrong financial instrument for the right financial goal. The end result is obvious frustration for not having achieved your goal. I believe that a good way to match your financial goals and financial instruments for achieving those goals is to classify your goals into definite time periods.

For example, I have begun to classify my financial goals as follows:

1. Short-term goals which are ≤ 6-months away.
2. Medium-term goals which are > 6-months but ≤ 24-months away.
3. Long-term goals which are > 24-months away.

I have also identified a set of financial instruments which fall into each of these three categories. Achieving a financial goal is now simply a matter of disciplined investing in the corresponding financial instrument(s).

Your goals and their classification should of course be realistic. For example, if your goal is to buy your first car within the next 6 months (a short-term goal), by fully paying for it in cash, but you have no savings and you spend more than you earn, there’s no way you’re going to achieve this goal no matter what the financial instrument you choose (apart from getting into debt — yes, I do consider debt to be a financial instrument; a dangerous one though).

Stay tuned for Part #2 where I discuss short-term financial instruments for meeting your short-term goals.

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You get a truckload of expert, but totally lame, advice. For example: This Diwali, invest in equity without risk (a must read).

To summarize: I start with INR 500,000. At the end of three years I still have … surprise … INR 500,000. In between, I speculated (actually, gambled) INR 88,000 by dumping it in a mutual fund, believing that the past is “the indicator” for the future. If the mutual fund turns out to be a genuine circus monkey, so what? Remember, I just made 0% on INR 500,000 in three complete years! Yay! Just look at my financial wisdom.

But here’s what I would do: If I had INR 500,000 today, I would straightaway put it in a five-year fixed deposit and earn 9.50% interest (as on today). At the end of five years, I’d approximately have INR 787,000.

It’s a classic case of “Yaardo Duddu Yellammana Jaatre.”

What do you think?

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In a bull equity market, human beings conjure magical investment formulae. Here’s the worst equity investing advice I have heard:

Your exposure — in percentage terms — to equity investments should be 100 less your current age. So if you are a 27-year old, your exposure to equity instruments should be 100 - 27 = 73%, with the remaining 27% in debt instruments.

Source: Leading personal finance magazines published in India.

Advice is cheap. Following them is quite expensive.

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Sane quotes — a welcome change!

Source: Markets could move in a higher P/E band: Religare Securities

The market is actually behaving as if there is no execution risk in anything at all, so the stock prices are reacting to a lot of news flows without projects actually getting commissioned or scheduled. This remains a risk, as we don’t know how the execution will actually pan out. The positive is that we could possibly see growth for these companies getting into a new orbit but it is not going to happen immediately. These are long gestation businesses, so execution is something that one needs to watch out for.

Source: Positive on Infrastructure, Financials: Kotak Mahindra Capital

It is very difficult to predict a level, but the fact remains that we are seeing a great amount of liquidity and just a virtual rush, which is the reason why people are just buying everything in sight and you are seeing stocks and the index reach dizzying levels. So, I think as long as liquidity continues to be strong, you are likely to see a strong market.

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Today’s dangerous quotes are ample proof that “experts,” especially in all matters monetary, are no better off than the layman. Read every word - they’re diamonds.

Source: An expert interview featured on CNBC/MoneyControl - Domestic fundamentals quite strong: Principal O(x)us Investment.

All in all, 10% from these levels is certainly very doable, which puts us around 19,000 by December. I think 20,000 is a nice round number that somewhere, sometime between now and March, is a 60% probability. So, it is not a bad bet.

Can you please share the spreadsheet that you used to arrive at this statistical conclusion? Nice round numbers? Give me a break mate! And which March are you talking about? 2008? 2009? 2020? Or even further?

When the market has the probability of 50-50%, 50% going up and 50% going down, you should have some of your portfolio in fixed income. But not when the market has something like an 80% chance of going up. It has consistently done that for four years, this is the fifth year.

Again, can you please share this spreadsheet too? I’d be indebted.

My advice to conservative investors is to be 100% in equities and within equities, you balance your portfolio with those that are relatively stable, those that are out of favour.

Mate, do you know the difference between being conservative and being speculative? I wouldn’t let you touch a rupee of my money.

So if you want to be conservative, you play it within the stock portfolio, not try and do that and try and do those. Either one of which, is liable to give you a few percentage points but not much more.

If you have to do it as a business because you are trader with a bank in fixed income, you can do it, but not as a retail investor. Retail investor should really be in equities. Within equities the retail investor as well other investors make their choices about how risky a portfolio to have.

WTF (acronym for What The Fuck) dude? I am speechless.

I think it’s about time SEBI initiated proceedings against CNBC/MoneyControl for publishing such “exclsuive interviews with experts.”

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It is just the sheer supply of money coming into this market. Ever since liberalization started and FIIs were allowed to invest in India, we have seen this kind of volume of money. It is almost torrents of money, which is coming in.

Some of the predictions are that Bernanke will reduce interest rates further. If that were to happen, the sky is the limit.

And here I am thinking that Ben Bernanke cut interest rates in order to revive his country’s economy and not to feed our stock market.

In the short, medium and long-run, India looks very good. There is no question about it.

There you go. Apparently, we have a bullet-proof economy.

Source: Stick to your asset allocation: Chime Consulting

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Source: Indian markets set to scale greater highs soon: First Global.

We think India is headed to P/E multiples of between 25 and 35 times in the next nine months’ time. China trades at 40-45 times earnings and that market does not look like selling off. So there is no reason why India should be considered overvalued at 17-18-19 times wherever it is.

I fail to understand the logic behind these statements. Do you?

Q: So subprime is now just a bad cut of steak on your plate, nothing else?

A: This is inelegant but the sub prime was just a pimple on the butt.

This has got to be the most dangerous statement of 2007!

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I was hooked to these thoughts for quite some time today.

In 1959, Benjamin Graham (author of The Intelligent Investor) had this to say about Initial Public Offerings (IPOs):

Somewhere in the middle of the bull market the first common-stock flotations [i.e. IPOs] make their appearance. These are priced not unattractively, and some large profits are made by the buyers of the early issues. As the market rise continues, this brand of financing grows more frequent; the quality of the companies becomes steadily poorer; the prices asked and obtained verge on the exorbitant.

48 years later, it’s exactly what has happened in the current bull-run in the Indian stock market. The symptoms are a perfect match.

So what happens next?

The heedlessness of the public and the willingness of selling organizations to sell whatever may be profitably sold can have only one result - price collapse. In many cases the new issues lose 75% and more of their offering price. The situation is worsened by the aforementioned fact that, at bottom, the public has a real aversion to the very kind of small issue that it bought so readily in its careless moments.

So is the Indian stock market headed towards a south-bound journey?

One fairly dependable sign of the approaching end of a bull swing is the fact that new common stocks of small and nondescript companies are offered at prices somewhat higher than the current level for many medium-sized companies with a long market history.

I’d need to research a bit to verify if this statement holds true for the Indian stock market today. I’d appreciate some help here.

Note:

You might want to explore Gala Time - A Blog about Indian Capital Markets, by Kaushik Gala. I’m a regular visitor.

Update on September 14, 2007:

From The Economic Times:

In the biggest ever response to a public stock offering, the state-owned Power Grid Corporation of India Ltd. (PGCIL) has received subscription of Rs 1,90,000 crore, a slice of which came from provident and retirement funds - investors who rarely put money into equity. The company will raise around Rs 2,985 crore through the IPO, which has been oversubscribed 65 times. Some of the retirement funds that have put in subscriptions are employee funds of Canara Bank, Oriental Bank and several state electricity board funds.

Ouch!

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At Crossword, I picked up “The Intelligent Investor” by Benjamin Graham. I am hooked to the book - Graham’s ideas are as applicable today as they were when he first wrote the book back in the 1950’s. I’d say that a general awareness of finance is required to fully appreciate the text.

Graham offers refreshing viewpoints. For example, here’s the often quoted view on risk vs. return:

It has been an old and sound principle that those who cannot afford to take risks should be content with a relatively low return on their invested funds. From this there has developed the general notion that the rate of return which the investor should aim for is more or less proportionate to the degree of risk he is ready to run.

Graham’s view is:

The rate of return sought should be dependent, rather, on the amount of intelligent effort the investor is willing and able to bring to bear on his task.

Have you ever assumed something to be risky simply because you weren’t motivated enough to gather the knowledge to prove otherwise?

In the past, I have.

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The prevalence of mark-to-market accounting, credit-default swaps, and other tools of modern finance allow risk to be repriced quickly as conditions change. This rapid repricing, paradoxically, tends to aggravate short-term instability. But drawing attention to problems as they emerge forces managers to restructure troubled portfolios or entities before dangers can reach explosive proportions and threaten a broad-based implosion of credit quality.

Source: “Putting Today’s Credit Market Risks In Perspective,” a report published by Standard & Poor’s Ratings Services.

Drop a comment if that paragraph made any sense to you.

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