Job Loss Insurance

Job loss always hurts, but people find ways to make money out of other’s misery. I knew about job-loss insurance being available in other countries, but recently it got introduced in India. So insurance companies are now willing to pay EMIs in case of job loss.

Under the cover extended by ICICI, customers will get their three EMIs paid in case of a job loss due to retrenchment or layoffs. Moreover the job loss due to the closure of a division because of poor financial condition or action taken by any public authority resulting in the closure will also be covered by the insurer.

Can a job-loss insurance give you a piece of mind after a job loss? I have my doubts!!

Excellent Article – Holes in the Ground

I earlier wrote about “why not to buy a house” (Part-1, Part-2). But I recently came across an excellent write-up from Deepak on a more balanced approach towards buying a house. He writes scathingly on the way builders cheat the prospective buyers:

Typical deals are: you sign on a piece of paper looking at a hole in the ground. The builder promises to give you a "ready" house in say three years. The apartment size is shown to you and the "amenities" you will get, like a swimming pool, a tennis court, water to drink, air to breathe etc. You then get a bank loan for 20 years for some part of it, and the rest will fall in place.

The most eye-opening was the youtube video by a Unitech buyer who got really pissed-off by the way the company delivered the house. This reminded me of one of my friend who purchased a flat (~1700 sq. feet) near Sarjapur Road at the exorbitant price of Rs 2350 per sq. feet. The worst it is located not on the main road, but almost 3-4 KM inside. He recently shifted with not even the compound wall completed (no question of amenities in place yet). It was shocking and I have begun to agree more so with Deepak that the best buy for a house is the one that is either “ready to move” or “second hand purchase” :

But I'll pay well to get a ready house: if I'm buying for emotional reasons I would rather not have the worry and pain.

So true!!

What to do on getting Pink Slip – Concrete Steps

One fine morning, you reach office and your manager says “Let’s talk”. You suddenly get hundreds of thoughts because these are tough times. Your manager (depends on how he handles it) gives you the pink slip. The first reaction is of-course the DENIAL. This could not be happening to me. Here are the things you should do on getting the pink slip:

• Keep in mind that pink-slip does not indicate you incapability or incompetence. This is extremely important to realize as quickly as possible, since self-confidence will open hundreds of other doors for you. A pink slip just indicates employer’s incapability to either keep you employed or to fit you in the organization. Period.
• Relax take a deep breath and discuss with your manager about
• Severance Package
• Other Policy details related to lay-off
• Thank your manager and ask him some contacts
• Call up your friends in office (if allowed to meet, do meet them), discuss the situation and make sure not to let people show mercy for you. Ask them for their help/contacts (note down their personal email address)
• The biggest mistake people do is not to discuss the lay-off with their family members (spouse/parents/kids). A family is meant to provide the moral support needed in the hour of crisis and here is one. So don’t be hesitant, you have not failed them, rather it is just a phase, so discuss it openly with them. Don’t be ashamed to talk about it and the reason for the lay-off, it helps them to understand your problems as well as a way for you to out-pour the frustration.
• Take a day or two off with your family and try to forget and think about it. Over-speculation on “why you” will lead to more frustration rather than getting any answers. It is really worthless to discuss/think on why you were chosen. Instead give your mind some peace, so as to deal with the crisis in a pragmatic manner.
• Usually it takes 1-2 days to finally sink that you have been fired. In those 1-2 days, thoughts fly at jet speed and the more you try to think or sort out, the more confuse you become, hence it is very important to take these initial few days as a vacation. It is difficult, but extremely important.
• Now start focusing on the financial aspect of your lay-off. It is not at all difficult and you need to keep telling yourself and your family that world is not about to end, rather this is the time for all family members to come together and provide inputs on how to handle the financial situation. What to do:
• List down your hard cash (at home, in banks, FDs etc)
• Do not touch the long-term investments, so don’t even think about them.
• List down the monthly expenses to extreme detail (include for e.g. toothpaste expense per month)
• Strike the items which can be done without (e.g. dining out, movies etc)
• The remaining list will tell you how much monthly money you need and how much cash you have will indicate how many months you can survive without earning.
• List down the loan EMIs, credit card balance to be paid etc. These are the items which will cost you the most. And these are the items you seriously need to re-think on “how to get rid of them”. Make sure not to panic and start offloading everything. Give yourself 1-2 months and see if you can get some job.
• Do not even think of using credit card or personal loans to tide the expenses. This is the time to reduce your debt and not to increase it.
• Start updating your resume. Also call in your contacts and start sending the resume. You can also search on google for some consultants or job search websites and upload your resume. Simultaneously, start refreshing your basics for any interview call. You need to be prepared for any sudden interview calls and give your best shot.This is the time when your networking helps you a lot.
• It is also important to understand that all work is good, just because you were earning a handsome salary of 1 Lakh per month doesn’t mean that now earning Rs 20000 per month on part time basis is a bad idea. The only thing important is that you are earning back as quickly as possible and the temporary job you are getting into is aligned to your field. As an example, if you were a software engineer, following jobs can be a good idea:
• Software consultant on part-time basis
• Teaching SW Engg in a college/training institute as a visiting faculty
• On-line software development projects or finding other genuine ways to earn money online [like documentation or creating SW training materials etc].
• You can even encourage your spouse to take up the temporary job (if he/she is not working) while making yourself available for the house-work.
• If you really ever thought of starting your own enterprise, this is the god-given opportunity. This is the time to take risk, since you can’t be worse off.
• Most importantly you need to be patient while searching for job and you have to have confidence on your own ability. Keep finding the doors which can lead you out of the crisis, it does exist!!

Stock Market FAQs

• What is a share?

Shares/Stocks are document which allows the holder to own a part of the company. This is an important definition, holding/buying a stock is just not holding a piece of paper (or in electronic form) but it is like owning a part of the company.

• Why companies sell shares?

Any company is initially owned by a single promoter or joint promoters with unlimited liability. The term unlimited liability implies that if the company goes bankrupt, the promoters are totally liable. Sometimes the company is owned by group of people (promoters & non-promoters) with limited liability.  The term limited liability implies that the owner’s liability is limited to their contribution to the initial capital.

When business expands, the owners decide to raise money. There are many ways to raise money, one of which is to approach the common public allowing them to own some part of the company for the money they will provide.

• What is the difference between debt and equity?

Debt: Similar to normal public borrowing from banks (loans). When companies issue debt instruments, they want to borrow money from specific investors or in general public. This is different from equity which is borrowing money by selling a part of the company ownership

 

Debt	Equity
No company ownership	Part of company owned by holders
Company legally bound to pay interest (similar to loans)	Company may or may not pay dividends (not called interest since it is not decided/declared)
High preference over Equity owners	Least priority

• What are primary and secondary markets?

Primary Market: The public buys the issue directly from company e.g. IPO (Initial Public Offering)

Secondary Market: The public (investor) buys the shares from other investors e.g. normal share trading (on NSE/BSE)

• What is Fixed priced Issue and Book Built Issue?

When a company decides to go public, it wants to float the IPO. This is essentially the first time the company shares will be sold and part of ownership given away to raise funds. So what should be the basis to decide the price of the initial offering?

Fixed priced Issue: The company decides the initial price of the share (taking the help from experts) and it is mandatory for the company to disclose in the IPO documents about the various factors that are being taken to fix the particular price. The price is fixed.

Book Built priced Issue: The company uses the free market to determine the initial price offering based on the supply and demand of the proposed shares. In essence, asking the public (taking bids) to decide what is the price they are willing to pay for the share.

• What is Face Value, Price Band and Cut-off Price?

Face Value: It is the value of the share printed on the share certificate. It is normally Rs 10. The importance of the face value is only for the company, in terms of the accounting entries. The actual value or price of the share is usually higher than the face value (the difference is called the premium).

Premium = Market Value – Face Value

The money generated by selling the shares of the companies are not entered in the same place in the accounting books of the company. For e.g. if the Face Value = Rs 10, Premium = Rs 90, hence the actual price that the company received for one share is Rs 100 (Rs 10 + Rs 90). If the company floated say 1 Lakh shares, then it actually received Rs 100 Lakh by selling those shares. In accounting books however, it will write :

Equity Increase (by selling shares) = Rs 10 Lakh

Reserves & Surpluses = Rs 90 Lakh

There are obviously benefits of doing this. Face value is also called Book Value and more information can be obtained from the wiki page.

In a Book Built Issue, the promoters/owners of the company decide a price range within which the bidding can happen. This is called price band. The final issue price decided by owners after the book-built process is called cut-off price.

• What is Red-Herrings Prospectus?

It is a preliminary registration statement that must be filed with the Securities and Exchange Commission or provincial securities commission. It describes the issue (IPO) and the prospects of the company.

LIC Jeevan Aastha – An eye opener article

Sandeep Shanbhag wrote an excellent eye opener article on LIC’s Jeevan Aastha. I am just re-reading it and admiring the author’s penetrating eyes to get the essential out of the marketing mumbo-jumbo.

Jeevan Aastha is a fixed-return investment plan that would offer a return in the range of 6.75% to 7.25% p.a in most cases.

Mutual Fund Tracking

Chandoo created this excellent Mutual Fund excel sheet that act as a simple Mutual Fund tracker. The USP of the excel sheet is that it fetches the MF NAVs from the website and uses that to track your funds. The problem with the excel sheet is that if you have subscribed to MF Systematic Investment Plan (SIP) then it is difficult to use the mutual fund excel sheet. So I modified the excel sheet to add your SIP investment tracking too. Here is the modified excel sheet. Here is a screenshot :

             

Here are the steps to use the excel sheet:

• Select the name of MF from the drop down list
• Enter the start date of MF SIP
• Enter the starting units (as of held today)
• Enter the amount per month

This will immediately give you the results for your portfolio. (Make sure to refresh the NAV sheet for latest NAVs).

You just need to open the excel sheet everyday. It will compare the today’s date with the MF SIP start date. If the date matches, it will automatically update the Units field (by using the today’s NAV and amount per month).

Satyam Crisis – What is there to learn?

One of the significant quote from Benjaman Graham’s Intelligent Investor is that “Every stock has a company behind it!!”. The biggest proponent of value investing, Graham intends to change the way investors look at stocks. The primary aspect of Graham philosophy is to invest only in companies that you know.

This implies that “Assessing Management” is one of the primary aspect of study before investing in the company. An investor need to  evaluate the credibility of the management. While it is important to establish the credibility of management based on what they have delivered in past, but most of the time an investor gets influenced by the image created by the media of its CEOs or promoters. So while “Reliance” is good and the image of Ambani Brothers may be excellent, it is important to look at, what the management delivered for each of the Reliance companies.

This fact is highlighted by the recent Satyam fiasco. Satyam planned to buy two real estate firms Maytas Infra and Mytas properties with 1.6 billion $. The chairman of Satyam, B. Ramalinga Raju justfied the buy saying

Stating that it is part of its plan to de-risk the core IT business in times of recession, Mr B. Ramalinga Raju, Chairman of Satyam, said the combined entity would help face the challenging environment and uncertainty in the market.

This raised suspicion among investors not only in terms of buyout giving significant benefits to the promoter family but also in terms of valuation of Maytas, causing Satyam to drop the acquisition plans.

Byrraju Ramaling Raju has been a well-known and renowned name in the field of Information Technology, receiving lot of awards. Just seaching for B. Ramalinga Raju gives you enough information about the person and the media report will cause you to believe that the person have impeccable credibility. In fact Satyam received “ Golden Peacock Global Award for Excellence in Corporate Governance” 

The honor is especially relevant given that corporate governance best practices are considered key benchmarks by stakeholders who evaluate corporations. In fact, their importance is magnified in difficult economic environments.

If we just look at the stock price of Mytas Infra and Satyam on 16th Dec,

16th December	226.55 (Satyam)	481.00 (Mytas Infra)
19th December	162.00 (Satyam)	246.00 (Mytas Infra)

The dates are important since 16th Dec evening, the news was officially announced of a Satyam buyout of Mytas. This can be significant if we see that stock prices of most of the infrastructure and software companies are going down. This essentially gives a feeling of insider trading!!

The biggest learning for a value investor is that

Do not just bank on the big names in the industry, but to assess the management, go into the details of how much the management has delivered in the past years.

Some interesting reads on this:

• Financial Express 1 
• Financial Express 2
• Mint Editorial
• Motely Fool
• Hindu Business Line

Dilbert – Financial Markets Explained

This is absolutely hilarious. Scott Adams writes on his blog:

Think of financial theory as a stool. The stool is supported by three legs, or truisms.

• History always repeats.
• Past performance is no indication of future returns.
• Asshats are trying to steal your money.

These three truisms can explain any financial phenomenon. For example, if your financial advisor suggests that you invest in a market bubble that is about to burst, he will explain that the past is no indication of future results. Just because a Price/Earnings ratio of 45 has never been sustainable in the past doesn't mean it won't be perfectly safe in the future.
And when the bubble bursts and you lose half of your money, your advisor will explain it's because history always repeats. In other words, he's an asshat trying to steal your money.
This stool also explains the housing situation. Financial experts knew that making loans to hobos had never been a good idea in the past. On the other hand, past performance is no indication of future returns. Maybe this time would be different. Then history repeated and asshats stole your money. As a bonus, they even stole each other's money this time. You have to admire their thoroughness.
One last thing you need to know: People who say it is a good time to invest are called bulls. The bulls are at the center of all financial problems.
In summary, if you want to understand financial markets find a bull and look at his stool.