Satyam Crisis – What is there to learn?

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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:

Dilbert – Financial Markets Explained

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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.

Best time for car buying is, now !!

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I recently went for a car upgrade and realized that “now” is the best time to buy or upgrade your car. If you have been thinking about buying a new car or even upgrading your existing car or even buying a second hand car, Dec – 08 probably is a bonanza month for getting a handsome deal.

Here are some of the reasons why December this year is better:

Dealer Discounts: December is the month, when car sales usually drop. A typical consumer wants to buy a car in Jan since that changes the model year of the vehicle in expectations of higher re-sale value. This year due to the economic downturn, the car sales have already hit badly, hence dealers are trying to push sales aggressively to reduce the inventory. So you can expect huge discounts on all ranges of cars.

Government Fiscal Stimulus Package : To provide some boost to the automobile sector which is hit by falling sales this year, government has announced a 4% excise duty cut. As per reports :

Maruti Suzuki India (MSI), the country’s largest car maker, announced it was cutting prices effective from midnight. “We are looking at passing on the entire benefit to the customers. We shall be cutting down prices in the range of 3.5-4% from midnight and most of our vehicles will be cheaper by that percentage,” MSI chairman R C Bhargava said.

This again brings huge benefit to the ultimate consumers.

Ease of Auto-Loan : With government trying to bring the repo rate down to ease liquidity crunch with the banks, it becomes easier for banks to provide auto-loans.

Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.

This can bring the auto-loan rate by 1-2% and makes the loan easier on the consumer pockets.

When I walked into the Sagar Automobiles (Maruti showroom on B.G. Road), I realized that almost all vehicle prices are down by a huge amount. For example, a typical WagonR Lxi which was priced at around 4.1 lakhs on road, now coming at 3.6 lakhs on road. If you already own a maruti vehicle and want to upgrade you can bargain for more discounts. Also the loans are coming cheaper with SBI giving a loan at 11.75-12%, while private banks at around 13% (which might be reducing further). BTW another reason to cheer while buying a car is the reduction in petrol prices. Also there is talk of privatizing the petroleum products (Petrol and Diesel), and if that happens, the prices are about to fall further. Consumer is the king for now!!

Mystery of Dividends – Stock Vs Mutual Fund

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I was talking to a friend about dividends in stocks and he suddenly came up with “What are dividends in mutual funds?”. I said it is different. Here is the answer:

Stocks : When an investor purchases a share of a company, he is essentially owning some part in the company.  Dividends are payments made by a company to its shareholders. When a company earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders as a dividend. A dividend payout typically indicates that the company has confidence in earnings growth and sufficient profitability to fund future expansion. Also for investors, it makes sense to earn that extra income for investing in the company, rather than waiting for the share price to rise up to get the profit.

Mutual Funds : When an investor purchases units of Mutual Fund, he is essentially contributing to the mutual fund corpus (similar to thousand others), which the MF will invest in various shares. The price at which these units are purchased at any particular time is called NAV. The problem with mutual fund NAVs is that when a mutual fund declares dividends, the NAV is affected.

For example, say for an XYZ mutual fund scheme, the NAV today is Rs 50. If the mutual fund declares a dividend of Rs 2 per unit. So if an investor has bought 100 units, he will get Rs 200 as cash. The problem is that this immediately reduces the NAV to Rs 48 (Rs 50 – Rs 2). Hence essentially the investor’s remaining worth has been reduced by Rs 200.

So whatever profit an investor has made due to increase of NAV, MF has given some part of it as cash back to the investor and called as dividend. The net worth of investor remained same, just that he has received some of it in cash.

Value Investing

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I was talking to few of my office-mates and realized that out of the team of forty, just ten had exposures to equity (shocking??) and only three-four have demat account and actively trade in stocks. It is not the effect of the recent meltdown, but despite the euphoria that existed just few months before about Indian stock market, lot of people still are stuck with traditional investment/saving plans.

I guess the real reason is the fear of loosing money. I usually do not blog about stocks, since I do not believe in giving recommendations of buy or sell. But for a normal investor, it makes sense to involve stocks as a part of his investments, but it is also important to make it part of long-term strategy rather than thinking short-term.

When I talked to few people, I realize that people want to invest in stocks because:

  1. I want to get quick returns (with few months, I can double the money etc)
  2. My friends are investing and so I should too
  3. I has some lump-sum money, some relatives/friends suggested to invest in stocks.

Most of the retail investors have wrong expectations from the stock market, especially after hearing of friends, relatives earning big bucks from stocks.

It is important to understand that “Nothing is free in life” including returns from stock-market. The people who have earned those handsome amount, have either burned their fingers earlier or have spent lots of time on understanding markets and investing in smaller amounts.

Nobody got instant money from stock market without hard work.

Investing in stocks requires a disciplined approach. One such approach is what is called Value Investing. In simple terms:

Buy stocks which are priced below it’s intrinsic value.

The approach to finding “intrinsic value” is by determining the fundamentals of the company. It is a balanced approach involving analysis of data involving the company. There are lot of books available on the topic (e.g. this book), but “The Intelligent Investor” by Benjamin Graham is considered as the bible of value investing (you can get an e-copy on ensips here, but may be illegal). There are lot of excellent forums for beginners or experts on investing in Indian Stock Markets like Traderji or Equity Desk (an excellent post by Basant on Equity Desk).  I am currently reading the book and may do a review sometime later.

Terrorism Insurance

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Mumbai was attacked by terrorists like never before and it is being considered as the biggest terror attacks on Mumbai.


No one has yet estimated the amount of damage suffered by the Taj and Oberoi Hotels. I saw the picture of Harbour Bar at the Taj Hotel in the Times Of India, it left me speechless, here it is :


Any terrorist attack can cause significant damage to the property. Insurers typically have a risk analysis for any events before they provide cover for it, but I do not think there was any risk analysis ever done for terrorist attacks. The same applied to the 9/11 attack on US. The insurance companies in US post 9/11 stopped giving insurance against terrorist activities.

After September 11, 2001, many businesses were no longer able to purchase insurance protecting against property losses that might occur in future terrorist attacks.Addressing this problem, Congress enacted the Terrorism Risk Insurance Act of 20021 (TRIA) to create a temporary program to share future insured terrorism losses with the property-casualty insurance industry and policyholders. The act  requires insurers to offer terrorism insurance to their commercial policyholders, preserves state regulation of this type of insurance, and directs the Secretary of the Treasury to administer a program for sharing terrorism losses. The three-year program that TRIA created backs up commercial property and casualty insurance, covering up to $100 billion each year after set insurer deductibles. The government pays 90% of insured losses over the deductible, with the insurer paying 10%.

A similar thing might happen with insurance companies in India, with so many terrorist attacks happening frequently. So before buying any insurance, it needs to be ensure that the policy covers damages due to terrorist activities. This is more true for the businesses. So few months back, TOI reported increase in adding terrorism insurance by people in India. It is a sensible move and should be done by everyone.

Surviving Layoffs - Financially

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We are certainly looking at a global slowdown in economy. With it comes the layoffs. I was discussing with one of my wife’s friend who is in retail industry on “Why during a recession the axe first falls on junior employees?”. If the economy is real bad, then only the senior management (upper layer) is targeted. Economically, it makes sense (if we are talking about purely cost-cutting) to reduce the management layers than the one at the last rung in the ladder. How many believe that removing upper layers will break the hierarchy and lower levels would be difficult to manage? May be, the answer depends, on which level you are currently working !! But, laying off at lower layers gives an impression of cost-cutting, spreading cheers among the shareholders.

Another thing which I hate, when company goes through rough patches, is the lack of clarity among employees, which comes from the top. Usually, no one is clear what will happen! Instead if the company openly communicates the state of the company to its employees and then does a pay cut (instead of firing), it will make more sense.

The fact is that no-one can escape the layoff/pink-slip in today’s uncertain times and hence it is prudent to prepare for it. One of the most important aspect of lay-off is the sudden loss of income (apart from the frustration and loss of self-esteem).

Here are some tips that might help you survive (or even blossom) during these tough times:

1) Severance Package: Some companies have a fixed policy of how much severance package is given out to laid off employees. For example, my company provide the gross income for (one + number of years of you service)  months. So I just completed two years, and hence if I get the pink-slip, I will get (one + two) = three months of gross salary. It is important that you find out what policy your company has, since sometimes the package can be negotiable. This means, if you get more, you can survive more months without job.

2) Reduce Debts : Yes, it looks like a common sense. If the income is gone, the expenditure has to go down. But the point here is that if you are still employed and the markets are uncertain, why wait till you get to hear you last day in company. Why not start reducing your liabilities?

  • Credit cards : One of the biggest enemy of a slowdown economy. If you notice carefully, some of the credit card companies have themselves started charging more from customers to battle the slowing economy. So pay off as soon as you can. Also just remove all those credit cards from your and your spouse’s wallet and dump it inside the locker.
  • Car loans : If you have that big car, the status symbol, which you brought when the economy was booming and you were the king, it is time to think it as a liability, a burden. Think carefully, can you switch to a lower car (Diwali times calls for a good deal while switching cars), else can you save enough to pay-off the loan, do it (even if you have to incur the pre-payment charges) .
  • Home Loans : You can not do anything about this, except that in really worst situation, you can
    • Sell it, (but these times are not good for selling either)
    • Rent it out (you can shift to some other rented apartment with a lower rent). Desperate times needs desperate measures.
  • Children education/marriage : Unless you are on the verge of marrying your child or sending him for higher education, you just have to find some source of income to handle the expenses.

3) Reduce Home expenses: If you already out of job or you feel that it might happen, try to reduce your daily expenses. No longer dinning out or take home calls or those late-night parties or expensive cuisines. Reduce the expense of travel, booze, visit to multiplexes and stick to only essentials. It might look like an overkill if you are still having your job, but reducing these expenses gets you into the habit (which you have lost over the period of time) and also it causes the saving of that money.

4)  Emergency Funds : If you have created the emergency funds like liquid cash(FDs) and jewellery, try to utilize them at the very last moment.  Break that FD or sell that gold jewellery only after you have cut down your expenses to bare minimum. If you don’t have such a fund, start thinking of creating it. The essential is a) three-six months of household expenses in liquid cash (Fixed Deposit is better) b)


                                                         To be continued …

What is Sub Prime Lending?

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Whenever any of the customer visits a bank asking for loan, every bank in India or abroad will ask for certain documents. These might vary from the type of loan to the various institutes. The main idea behind asking for documents is to ascertain the credibility of a customer from his/her credit card transactions or previous loan transactions and guess the background of customer’s financial capability. 

In India for example, if you try to get a home loan, you are asked your salary certificate and other loan details. This will indicate the capability of a customer to repay back the loan and also is an indicator of the amount of risk a bank is taking on that customer. The bank earn by charging interest rate on the loan.

The sub-prime lending came because there are lot of demand for loans in the market and the laws were less strict in terms of whom to give the loan. Hence banks started giving money to customers even with poor credit ratings. This implies that banks took more risk (knowing that the possibility of the repayment is less) as per the history of the customer. This is done, so that banks can charge customers higher interest rates and can get a huge profits. The idea is that even if few percent loans get defaulted, you still can recover the losses by charging those extremely high interests.

Subprime loans can offer an opportunity for borrowers with a less-than-ideal credit record to become a home owner. Borrowers may use this credit to purchase homes, or in the case of a cash-out refinance, finance other forms of spending such as purchasing a car, paying for living expenses, remodeling a home, or even paying down on a high interest credit card.

There was also a lot of fraud involved in this sub-prime lending. Since a bank can charge higher interest and administrative charges on a sub-prime lending, they even started giving such loans to borrowers who were well with their credit history.

Imagine if most of the borrowers start defaulting on the sub-prime loan taken. The lenders would suffer significantly and that is what happened. The financial complexity of how such simple thing can lead to the current US financial crisis is difficult to understand.

Saving Money from 10 Free Softwares

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I recently bought a black HP Pavillion desktop for around 30K INR. It came with a “Starter edition” of Microsoft Vista, and lot of pre-installed HP Junk. It is natural being a techie to start surfing for free software for replacing some of the junk that come with Windows and to save money from buying those expensive softwares. Here is a list of softwares that I daily use, some to increase my productivity, some to replace pre-installed softwares and some to save money instead of buying those expensive softwares :

1) K-Meleon Browser : No doubt Internet Explorer is junk and can be harmful in terms of unauthorized scripts or pop ups. So most people recommend Firefox. I love it, but with FF3, is extremely bloated and eats up huge amount of my RAM. I tries Opera and Safari but didn’t like anything. Then I found K-Meleon, which is based on Gecko layout engine. It comes with few useful extensions too. It is fast and have some unique features too. A simple example is switching proxies with one-click. I use different proxies for my home and office, and using K-Meleon, I can switch between them in just one click. Very useful for me. 

2) CClearner : A pretty neat system optimization software. It removes unused files from your system - allowing Windows to run faster and freeing up valuable hard disk space. I have used it without any side effects and it helps me keep Windows stable. CCleaner - Freeware Windows Optimization

3) Launchy : Launchy is a free windows utility designed to help you forget about your start menu, the icons on your desktop, and even your file manager. A very handy tool, just press Alt-Space and it pops up, type whatever application you want to open say “word” or “vim”, it even shows various options. No need to go through “Start –> Programs” etc. Very productive and time saving and best mouse-free.

4) GNU Image Manipulation : GIMP is a free image manipulation software. It is extremely rich in features and can be very handy for amateurs as well as professionals for imagine retouching or any manipulations of image. It can be used for fun as well as for business purposes. Lot of people feel that it is very clumsy to use, but once you get hang of it, you will love it. You can do extreme makeover using GIMP, as the following example illustrates :

It surely is a replacement for Adobe Photoshop.

5) VLC Media Player : It can replace the default Media Player on Windows and is very versatile. It can almost play everything. It can play various audio and video formats (MPEG-1, MPEG-2, MPEG-4, DivX, mp3, ogg) as well as DVDs, VCDs, and various streaming protocols.

6) Outlook Attachment Remover : If you are stuck with Outlook as I am (although ThunderBird is considered as it’s replacement, for me it botches some of my emails), this free outlook attachment remover is extremely handy, especially if you get lot of attachments in your emails. This became very helpful for my office system too, since it extracts emails from outlook and keeps it in a pre-specified folder and still keeps the link intact in the email. Very very handy.

7) AVG Antivirus : Instead of spending money for Norton/Symantec Antivirus, the same kind of protection can be obtained by installing the free anti-virus software AVG. It provides a really good protection and doen’t consume huge amount of your resources. With Norton, I always had problems that the system runs slower. AVG is super cool and it keeps updating the virus definitions.

8) Office : The worst part of Windows, is that it comes with lot of unnecessary pre-installed products like IE, but it does not come pre-installed with Microsoft Office. You need to pay extra money to get the Office installed. This is where OpenOffice comes into picture. It is as close replacement to MS Office as it can be.

9) PDF Creator : It is a very handy tool, if you frequently write documents and want to share it with everyone. PDF obviously looks better than word documents. Just install the PDF creator and “print” any document to convert it to PDF. Simple!!

10) GNU Cash : If you want to have a software for managing your personal finance or a small business, then don’t go spending those $$ for buying any software. GNU Cash is extremely good and it is free. It uses a double-entry system, which might be confusing at first, but the tutorials are very nice. It will take you just few minutes to install and start going. It will take some time to look into specific features your need, but almost all that is needed is present. I will be doing a full review of the product later in some other post.

Financial Game - Creditability

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For my earlier post, I received a comment from RaagvamDutt, telling me about reverse mortgage. I am aware of reverse mortgage and know that it can be handy for old couple with constraint income. It does not contradict my conclusions of the earlier post, rather it compliments it.

  • Buy a house at old age, for living in it, and if you income is not sufficient, put the house on reverse mortgage, to earn that extra income and still live in it.

I just downloaded a new financial game called Creditability. It looks to me a pretty interesting game. Here is what the website claims :

Creditability is set in four different environments: university, a shopping precinct, TV studios and a village. The purpose of the game is to successfully complete the various tasks and challenges within each environment, building up knowledge of money, credit and debt.

Here are some screenshots :

ss3                                   ss1

Why NOT to buy a house - II

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I received some comments on my earlier post. Jyoti said :

Your post lists all the valid points for "Buying a house after taking home loan at very high interest rate". But one point is missed - taking a house a investment and selling it after making decent profit and in process accumulating some fund.

I did mention this point in my earlier post

If you really had all the time in world to buy a house and sell it after 2-3 years, then I think you should go ahead.

Jyoti pointed out that a house can be helpful for old people who have no one to take care of – Sell the house and live on interest OR put the house on rent.

Well first thing, if you are old with no earning and entirely dependent on your children to support you, then it is for sure that either you really goofed up prioritising your financial goals OR you had blind trust on your children for support. I agree that there are lots of people who fall under this category and this is an important lesson of all of us in our generation.

Let me tackle her options (assuming I am that old person):

1) Put the house on rent

If I put the house on rent, then I too have to live in a rented apartment, unless I have more than one house. I can gain only if my rent is less than my tenant’s :) Simple maths. If I want to do that I have to lower my living standards. For example, if I have a house which can be put on rent for 14K, then to successfully live on that rent, I need to stay in a house with a rent say 4K-5K. If I as flat owner want to charge more rent, so will be my flat owner :) Doesn’t make sense…. (Another option exists, you rent out the flat in a metro and go and stay in your village/small town, but that is my whole point, if you have to do that why not purchase a house in the same village/small town, it wont cost much and you can use the money earned during lifetime in some better investment avenues)

2) Sell the house and live on interest

This is only possible if you earned a handsome while selling. Imagine for example, today you buy a flat in Bangalore costing 25-40 lakhs, when you retire (30 years from now) how much you expect the returns? Keep in mind that when you sell, so many factors can kill your calculations. Imagine the plight of people who bought houses near old airport (in Bangalore) few years back, now with the airport shifting, the prices have come down, and no guarantee that prices will bounce back and to what levels. I was talking to one of my office-mate who works in Fremont (USA). He was telling me about his friend who bought a house in USA few years back and now when he wants to sell he is finding no takers, he is now even willing to have a loss and sell it. Yes, ofcourse you can gain a lot, but basing your entire post-retirement life on this is not a sound idea (unless you have other investments which can take care of that). BTW, we have not factored the amount of money you have invested over the period in home loans (A 40 lakh house post home loan interest can cost you even 60 lakhs or more based on interest rates). And what about the inflation? Say your 60 lakhs house (including interest) sells at 5 crores (just a random number), do you think that would be enough after 30 years?

As an example, my dad started earning Rs 500 per month 40 years back and lived handsomely (he used to say lavishly) despite the fact that out of Rs 500 he used to pay Rs 200 for his brother’s studies. So essentially he stayed lavishly in Rs 300. After 40 years, i.e. now, if you want to stay that lavishly probably you need around Rs 1 Lakh (just a guess) in a metro. Let me lower it to Rs 50000 [post tax]. If you want to be more conservative in your living, you can even live in Rs 25000 [Rent, travel, grocery etc etc assuming no liabilities] That is close to 50 times. So to maintain current living standard you need may be 50 times that you earn per month. So Rs 25K now, would translate to Rs 12.5 lakhs per month (what about inflation causing rupee depreciation). This is the interest you need per month, so you need a whopping Rs 150 lakhs per year as interest with investing Rs 4.4 crore (34 % per annum). I hope my calculation is correct :)

But at any rate assuming at old age and no responsibility exist, just to live at the same standard, you can not do it alone on a house.


  • Buy a house for living in it, at old age.

  • Don’t expect your children to stay with you (unless you keep them dependent on you)

  • Don’t just buy because everyone is buying, think long term, where you want to settle in your old age. Timing and location are important.

  • Buy a house which you can maintain. In old age, it is difficult to spend huge money on maintaining big house. Security is also a concern.

  • There are so many investment avenues other than house, think about that. In old age, big house won’t help, but surely the life long memories of your world travel can help. Spend money to enjoy life, and not to get imprisoned by the enormous house loan burden.

  • Keep accumulating small portion of money and buy a house when you are in your forties. At that age, your will be at the peak of your responsibilities, you can have your priorities clear.

If you are earning in dollars or have loads of money, then only buying a house makes sense as investment.

Why NOT to buy a house - I

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If you are living in Bangalore (or for that matter any Indian urban city), everyone would be telling you to buy a house (in case you haven’t already done). I talked about this earlier.

Last month I met my old friends from IIT-K. Some of them are still unmarried and the priority for them is to change their marital status. For those who are married, they are thinking of either buying a house or already have booked one.

One of my friend ‘S’, is at the stage of becoming father and he recently bought a house worth Rs 40 Lakh in Bangalore. Despite the steep price it is just a 3BHK apartment, and the home loan costs him more than Rs 40K for next 20 years. Recently with the interest rate rise, the tenure increased to 25 years and EMI by Rs 600.

I am not questioning his decision, since it is a personal one, but if we look purely in financial terms, it is a double whammy, an exorbitant EMI outgoing every month and the expenses of fatherhood. It is a different matter that he is very cool about it. But for a paranoid like me, it is like choking yourself.

A 3BHK apartment in say close to your office would not cost more than 15-18K, while the apartment not being in so close to your work location increases the travel cost. With EMI of Rs 40K + Petrol Expenses would be humongous.

Ofcourse there are lots of argument for and against it, let me think through it :

1) Buying a house is like building an asset

Has anyone thought why we want to build an asset? My father worked as professor in a little known town “Indore” for almost 45 years. He started at a meager Salary of Rs 400 per month and reached to Rs 10K after so many years. The pension he receives now is Rs 5K per month. In such a small amount he built two houses, but all his children, no longer want to stay in Indore, since more opportunities exist in other cities. My parents spends most of year with each of us, and hence the two houses he built are of no use to any of us. We sold one and he is earning interest on that amount.

So how does the “asset” helped him? I guess rather it deprived him of the much needed “extra” money he might have used during his younger years.

So for sure, the “asset” can not be for your children. Also I would rather not believe that our children would be “emotionally attached” to the house. Bollywood funda “Es ghar ke saath hamari bachpan ki yaadein judi hai”. I guess, most of their formative student life will be spent in hostels in India or abroad.

2) Buying a house gives you security

This asset takes months to sell off, so in case of emergency, it is of no use as a liquid asset. If you are salaried, then you will rarely come across situation where you would need so much money (Rs 40 Lakh etc) to sell a house (unless some medical emergencies come, but then medical insurance should help rather than the house).

It also cannot give you security if you loose your source of income. The logic people have is that if you loose your job, you don’t have to pay the rent, but don’t you have to pay the EMI? Try not to pay your EMI for 2-3 months and then see the volte-face of the same bank who pestered you into getting that loan. So till the time your loan is over, in next 20 years/25 years, you better not loose your job.

3) Buying a house is like investment

If you have investment in mind while buying a house, then why not stock markets. Everyone agrees that investment in stock market has overshadowed any other form of investments over a long horizon (say 10-15 years). So why not build a corpus based on stock markets. If you really had all the time in world to buy a house and sell it after 2-3 years, then I think you should go ahead. But may be you better do it on a full time basis. This can only help if you buy just before the booming time and then sell if after 2-3 years. With markets saturating in Bangalore, it does not make sense, if at all you want it as an investment, then focus on emerging areas like Mysore, Pune etc.

4) Buy a house now before it is unaffordable

I simply don’t understand this logic. The assumption here is that your salary will never increase. I think many of us came from smaller cities, and because of lucrative money we came, so even many years from now, you will get opportunity and if you grab it you will earn much much higher than you do today. Also if the assumption is that salary will not increase, you anyway cannot survive with a house loan. Interest rates can go up based on many external factors and assuming salary remains same for next 15 years, won’t you be expanding your family, kids & their education etc etc. So I guess the equation remains same, but the perspective of how you look matters. Mumbai is considered saturated in terms of real-estate, but even now you can buy a decent house (after so many years of saturation). I know because my brother recently bought an apartment in Mumbai.

To be continued …

What is Indemnity?

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I am a big fan of Outlook Money, b’coz they explain most of the things in simple terms. If you ever took an insurance you might have came across a word “indemnity”. Most of the us either ignore it or say “What the damn is Indemnity?” and chances are that even your insurance agent is not aware of the meaning.

Outlook Money, explains it in simple words, here is how :

  • This applies to non-life insurance policies
  • Say, you bought a car insurance. The car costs you Rs 5.5 Lakhs
  • The insurance policy will say that it will cover loss due to damages or theft.
  • Does that mean that you will get Rs 5.5 Lakhs if the car is stolen at some later date (say after 3 years)

If this would be true, every car owner would be buying a car and either making sure the car gets stolen :) or damage it themselves. Here comes indemnity rule to save the insurance company. What this concept says that

“Compensation paid by insurance company will never be greater than the value of the loss at that time

Essentially it makes sure that whoever insured the car will never get monetary benefit out of it. Hence the  insurance company is only liable to pay for the value of the car at the time of loss (post depreciation and wear/tear). Interesting !!

Home Loan Trauma, Some Tips

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If you had taken a home loan in recent time, you would be an extremely worried person. With rising interest rates, you would be cursing your bank, the Reserve Bank of India, government, even Israel for raising oil prices and what not. Cursing never solves a problem, but a pragmatic rethinking will surely help. Typically when home loans are taken the household budgets are anyway streched to the hilt, so even a small increase will be felt very sharply. Instead of grunting about the root-causes of such a massive increase recently, it would really help if you worry about what your next step should be.

Facts: Interest rates are up and so is inflation. Your home loans outgo is same (without any reduction in the burden) and you also end-up paying more for the daily household items. But your salary is same.

Effects: Your incoming money is same, but your outgoing is increasing, including reduction in your investments. (an 8% return on your fixed deposit, now is earning negative since inflation is going to be around 9%)

What to do? Here are some easy steps for pondering over and including as your action items:

1) Think of those FDs or post-office investments lying around earning negatively, so why not unlock them and pre-pay your home loans. Make sure you recalculate your emergency funds and if there is an excess, use that for prepaying the loan.

2) Think about that huge amount of jwellery your wife accumulated over the period of time, it would make sense to partially liquidate it and use that to reduce your loan burden. This will give you some breather in your cash-flows with reduced home loan outgoings.

3) Re-estimate your insurance needs, if you are under-insured, seriously think of buying term-insurance to cover any unfortunate occurances. If you are over-insured, you can think of reducing few of those unnecessary policies which is eating up your expenses without much value addition.

4) Dont be a miser, but if you are into the habit of going for weekend parties or weekeend travels stop it for just few months. It doesn't cost much for each single party or travels or movies, but colelctively it can offset your increase in home loans.

5) Start a recurring desosit for next 3-4 months and whatever amount is accumulated, use that to prepay your loans.

6) Take out all of your credit-cards including the one your spouse has, keep it inside a locker. If you dont have easy access to credit card, you won't spend. This can help reduce your outgoing on those monthly credit card bills, which never seem to go away. Once you are out of this crunch you can take them out again.

7) Redution of car loans should be given more priority than home loans or education loans. You dont get any tax benefit on car loans and you are not building any asset.

Money Saving Tips

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Over the period I have realised that there are lot of places in our daily life where we can save money. I am not advocating being a miser, but avoiding carelessness, does have its own benefit. There are lot of times, when we just spend money because we enjoy, for example, going to flashy restaurant once in a month or purchasing that sexy negliee to impress your wife :) or buying that expensive cellphone.
To me personally, these are definitely NOT wastage of money. It is always a good buy because it gives you happiness or satisfaction. Even though any of these are not assets building but it gives immense pleasure which is why they are worth doing it.
I am not going to talk about stopping such impulsive buying or focussing on building your assets or making your money work. Most of us get into this because of either peer pressure or guilt. For example, in Bangalore everyone is buying a house, despite the fact that they are forking out as high as 50% of their salaries and with increasing interest rates, it is pinching harder. I have realised that the main reason a young couple in 30s want to buy a house is simply peer pressure, since everyone in their circle is buying a house. A house of your own is important but not at the expense of enjoying your life.

Here are some of my money saving tips:
  • Keep a box and put whatever change(1-2 Rs, coins etc) lying around into it. It not only helps to save money but also very useful when needed
  • Save electricity and water usage. Make this a habit and inculcate in your children. Unless you get that habit, your children wont. It not only saves your money but the environment too.
  • Experiment with brands and defy the marketing gurus. Dont be shy to experiment with brands, sometimes the rival brand has a good product and cheap too.
  • Buy daily usage items from near-by stores, even if bit costly. The saving of fuel and time of going to large supermarkets will be worth it. Also everyone tends to buy more in super markets than near-by shops.
  • Repair your motorcyle/cycles and start using it rather than using car for every small distance you go. It will also save your time during traffic hours.
  • You dont have to pay exhorbitant money for 1Mbps internet connection, instead opt for 128Kbps/256Kbps, these are also good speeds.
  • Turn veggie and non-alcoholic for one or two weeks in a month. It is good way to stay healthy too. Boozing/Partying every weekend is not compulsory.
  • Start exercising daily and brush your teeth twice a day. How does it saves money? It will avoid your medical expenses over long term. It also saves money on life insurance.
  • Share/Borrow with your friends the DVDs & books, instead of buying/renting. It is a win-win for all and you save money too
  • Dont buy softwares unless necessary, spend time in searching for some alternative freeware software.
  • Be aware of reward points earning on your credit cards. Most people dont bother about it. Some few months back I purchased a full flight tickets just using the accumulated reward points.
  • If you can refinance your loan, even if getting a 1% reduction in interest, do it. It will really worth, on cumulative basis.
  • If your office provides Sodhexo coupons, use them and dont feel shy to ask even in large restaurants/shopping malls, whether they accept them. It is as good as your currency and its tax free.
  • You can save substantial amount simply by paying entire credit card bill before due date. Only use the interest-free period (30days - 45 days) rather than revolving credit. When you make a credit card purchase make sure you can pay it withint 30 days.

Wall Street (1987)

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I recently saw the old movie Wall Street (1987).
It is movie by Oliver Stone, a young stock broker Bud Fox (played by Charlie Sheen) who is desperate to succeed. He idolizes Gordon Gekko (played by Michael Douglas) who is a ruthless and legendary Wall Street Player.

The main character is Bud Fox, but Gordon Gekko becomes the ultimate hero, especially with his classic dialogues.

Interestingly, there is a talk of a sequel to Wall Street, called Money Never Sleeps, which will bring back Gordon Gekko.

Here are few of the famous quotes by Gordon Gekko in the movie:

  • The point is, ladies and gentlemen, that greed, for lack of a better word, is good. Greed is right. Greed works.
  • You see that building over there? I bought it three years ago. My first real estate transaction. I sold it ten months later and made $800,000 profit. It was better than sex. At the time it was all the money in the world. Now it's a day's pay.
  • It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or gained its simple transferred from one perception to another.

How crude oil affect daily life?

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Everyone including people who are apolitical are blaming the UPA government for the spiraling inflation caused mainly due to soaring crude oil prices. For common man the question is "How the prices of crude oil affect his/her daily life?. The first answer that comes up is that prices of petrol will go up. But to really understand the impact of crude oil, there is a need to go little deeper.

Crude oil is the product found by digging into the earth. This is not oil which can be directly used, hence lot of big refineries across the world, refine the crude oil into various products which can be consumed by average person.

This is how refining of crude oil is done. If you look carefully on the right hand side of the picture, all these are the products output from a refinary (one example of refinary is the Reliance's refinary in Jaamnagar near Mumbai).

Crude oil price becomes important since this is the input to refinary and it has to be bought from countries which have the natural resources. This is the main reason the Arabian countries are rich, they entire region have naturally large concentration of crude oil.

Now realize that how these product output of crude oil post refining is used
  • Petroleum gas - used for heating, cooking, making plastics
  • Naphtha or Ligroin - intermediate that will be further processed to make gasoline
  • Gasoline - motor fuel
  • Kerosene - fuel for jet engines and tractors; starting material for making other products
  • Gas oil or Diesel distillate - used for diesel fuel and heating oil; starting material for making other products
  • Lubricating oil - used for motor oil, grease, other lubricants
  • Heavy gas or Fuel oil - used for industrial fuel; starting material for making other products
  • Residuals - coke, asphalt, tar, waxes; starting material for making other
If this is the case, crude oil price will instantly make the following costly:

1) Cooking gas
2) Petrol/Diesel
3) Plastic
4) Kerosene
5) Industrial Fuel
6) Aviation Fuel
7) Other lubricants

All these will further cause an increase in food products, transportation (for all industries causing significant increase in every single product we use). Consider how this directly increases the cost of most manufactured goods in terms of the plastics used in everything from plastic bags to computer keyboards to dental fillings to the cost of clothing. (Acrlyic and polyester are petroleum products).

Hence essentially crude oil price will directly or indirectly will cause increase in cost of almost everything causing infaltion (that is in talks now a days). No government anywhere can stop the increase of prices in such a scenario. With demand continuously growing, there is no short term solution unless everyone

1) Start reducing their individual usage of energy
2) Start using alternate means of enery (e.g sunlight, bio-waste fuel)

This inflation seriously can erode your earnings & investments in long term.

Comments by Alisa

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An interesting comment by Alisa on this post. Just thought it appropriate to bring on the main page :
I certainly agree that profits can be made in the stock market, but it is not an easy task if you want to do it on your own. By doing it on your own, and doing it effectively, you minimize the costs and thereby you can maximize your return on investment. But its going to take diligence, patience, and time. But in the long run, it will be worth it.
Yes, indeed. Investing in stocks is profitable and certainly you need lots of patience. The question is about "personalities". Some people are brought up to be extremely patient with life, others are not. I think our "personalities" too govern the stock market outcome. So to gain from stock market you need to develop a habit to learn from mistakes, be patient and work hard for getting those gains.
I think that the earlier in life one is able to start investing the better. This way you benefit from the principle of compounding and you have time to recover from the impact of any severe losses. As far as actually entering into a buy transaction that would depend on your goals. You can buy when the "stock" is on sale, or if you really feel that the stock is worth it's market value, you can buy it even at a higher price especially if it has a potential to go even higher)
A very important point. To start early is the key, but at-least in India, most of youngsters think of spending rather than investing OR saving and those who are interested in stocks are the ones who think its a way to instant richness. Stock Market should be a way to achieve your long term goals and it needs a lot of diligence.
Yes the stock market definitely means risk and we should try to minimize and guard against loss as much as possible. As I am new to investing I am still learning how to best do this. I think that the more knowledgeable you are about the business you are investing in, the better decisions you can make in this area.
There are so many other types of investments besides stocks and I think it is wise to have some diversity in this area. However, someone who has been in this longer than me and who has had a lot more success says that you should diversify if you are a novice but if you know what you are doing then you should have more in the investment that will bring you the greatest return.
Yes, diversification is advisable to people who want some hedge against their investments. I believe diversification should be based on individual needs.
Lastly, I agree that reading and researching is the key to helping you to be successful. Read books, magazines, newsletters, and listen to audio books, and anything else that will help you to make more informed decisions.

Again, a lot of work, but I think its worth it!

Great points Alisa.

Good Stock Market Blog

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Most of the blogs that I have seen, usually provide "buy" or "sell" recommendations. I have never came across a blog which tells a new investor (esp India centric) on how to start investing in stocks.
I just found a good blog. It has an interesting post "Secrets of Successful Investors". Pretty handy.

How & When to invest in stocks?

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Everyone have heard about the enormous profits earned by people investing in stock markets. This causes a greed among investors to earn quick bucks. Equities have definitely given biggest returns amongst all other investing avenues. But in India, lot of people have still stayed away from stock market. How & When to start investing in equities?

I have seen first timers getting the advice to go the Mutual Fund route to equity exposure. I do not think it should always be that way. If you are willing to do some hard work, have long term goals and patience then despite being a first-timer, you should seriously think about investing in equity markets. Some tips on how and when to start :

1) There is NO best time to start investing. Rather than waiting for a bear phase or identifying the start of bull phase, invest when you can some cash to spare.

2) Keep in mind that stock market means risk. Dont expect astronomical returns or scamper away on the first hint of losses. Stock market wont give you instant richness, but a disciplined approach can help you achieve your long term goals.

3) Stock markets are just one avenue of investing, dont put all your eggs in this basket.

4) Get a Demat Account as soon as possible and choose a online broker who have minimum charges for transactions. Get aware of various terminologies and ask the broker to provide you a demonstration.

5) Read, Research and Understand before investing. Dont go by the tips from relatives, friends, magazines or websites. If anyone provide you any information about any company cross-check it, look at the history and try to identify a trend.

6) Instead of investing large money in a single chunk, spread your investments in time. You may have 50,000 Rs for investing, but do invest it over many months and across different companies.

7) Most first timer think that they need atleast few thousands of ruppees to start investing. You can start with whatever money you have. The lesser the better since if you gain, you will be thrilled that you started building your portfolio from miniscle amount. If you loose, you wont have much regret over the amount you lost and you will gain valuable experience.

8) Dont be greedy if you gain. It is easier said than done. If you gain, start believing yourself and build confidence but dont overdo it. Gordon Gekko said "Greed is good", but for first timers, it is better to start slowly. Think of this as a marathon than a sprint.

9) Dont care much about short term news report of stock markets going up or down. Stay invested for long term.

10) After getting Demat Account, start reading, researching and upgrading yourself about the terminologies and the way to do research. But dont keep lingering too long. Use a small amount and start investing. Unless your money is involved, you wont learn quickly.

Renting Vs Buying a House Dilemma

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I recently read an article in Economic Times. It talked about virtues of buying versus renting a house. Here is a sample calculation done by the author. I fail to understand that why everyone talks about buying a house as biggest thing in your life. In India, parents or peer pressure causes each individual to think on the lines of getting their first house as soon as possible. You finish your education, get married, buy a house, have kids so on and so forth. Some things remain same. Times are changing and so should the needs and priorities.

If you are an individual who has been pressured into buying a house to "build an asset", dont panic. Think really thoroughly before jumping into the buying spree. Here are few questions you can ask yourself before you think of buying a house:

1) Will you be changing the city in few years owing to greater opportunity? If yes, postpone the buying idea.

2) Do you want to settle abroad in coming few years, or you think your spouse might get an opportunity to do that, postpone buying. Everyone now a days wants to settle outside India.

3) Do you or your spouse, wish to pursue higher education (usually MBA), then wait for the house. A higher education can cost a handsome money.

4) Can you really afford the EMI without sacrificing your other needs? There are lot of people (middle class) who want to see the world. You can't do that when you are old and your body doesn't help you. Life is short, enjoy it.

5) Are you thinking of starting your own company? Most of the people don't start companies since they never come out of rat-race. The vicious cycle of adding responsibilities, liabilities and then never able to coming out of it. Think seriously.

  • There is no major income tax advantage with buying Vs Renting for the salaried.
  • Buying a house would imply less money in hand for other needs/enjoyment in life
  • Rent will always be less than the EMI you shell for the entire life typically in a metro
  • A house is usually an asset for you when you retire and have no income. Then it saves your monthly outgo for rent. But with your old age, there are chances that your children will no longer be in India or in the same city. So why purchase a big house which you cannot maintain.
There are so many better avenues to put your hard earned money and getting much better returns that you can think of putting your money for them for long term. Once you are settled in a city, then you can think of encashing that money for buying a house.

If you still think buying a house makes lot of sense, buy a house in a city where you want to retire and stay for rest of your life.

10 Tips to protect credit card fraud

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Tip #1 Put signature on the back panel of the credit card

A merchant has to verify the signature on the back of the card with that on the purchase transaction slip. Some merchants fails to do that, but putting your signature on the back of the credit card can minimize the mis-use.

Tip #2 Do not use your credit card for Online shopping from a public computer

This has been time again mentioned in various magazines/blogs/websites, but it still remain the single most important loophole, which causes significant mis-use of the credit card. To add an extra security measure I always use credit card from my home computer and not even office computer.

Tip #3 Always make sure to use secure http connection. The URL should contain https and seeing that a lock symbol is at the bottom corner of a website.

Tip #4 Mark the CVV number (last three digits at the back of the card) illegible by ink and remember it either in your head or keep it secretly at your home.

Tip#5 If you credit card bank provide some mechanism to create virtual cards (like HDFC's Netbanking OR Axis's eShop Card) use that facility.

Tip#6 Get a credit card issued with a very small limit

With disposable income rising and the mentality of credit card companies to provide exhorbitantly high credit limits (sometimes 2-3 times monthly salary or even more), it is no longer surprising that if you try to get a credit card, the limit would be several lakhs. It will be a big blow if such a high value card is mis-used. I have a citibank credit card with a limit of 20K (this was 5K when I was in IIT as a student). I have consistenly "thwarted" citibank's ploy to increase the credit limit. This credit card is of immense use to me and I mostly use the card for my daily purpose. I dont live in fear since the maximum misuse that can be done is (20K - outstanding balance) at any given time. If you dont have a card, ask the company to issue a card to your non-working spouse OR your child (Not an add-on card).
Another way is to push the company to reduce the credit limit. I have done this for my wife's credit card (whose initial limit was 1 lakh, which I forced the company to reduce it to 20K).

Tip# 7 Register for mobile alerts

All banks and credit card companies will now-a-days sends mobile alerts for any transaction in your account. It helps instantly to know if a misuse happened.

Tip #8 Use the a pre-set limit option (usually it is not advertised or made clear to the customer).
Credit card companies offer a pre-set limit option, where any transaction greater than the preset limit will need bank's authorization. It helps greatly to reduce the misuse.

Tip #9 Keep the bank aware of your changing addresses

This is another of the biggest reason for misuse. Sometimes the credit card user forgets his/her credit limit expiry date. If you have shifted your residence, and bank still has your old address, the new credit card will be automatically send to your old address (most of the times the mobile number has also changed, so bank has no way to intimate you). In last four years, I have shifted four cities and nine houses, each time I make sure to update the address in all banks.

Tip#10 Keep track of your expenses

This is easier said than done. It is so easy to use a credit card and throw the counter slip, so that when monthly statement comes, you will be wondering which are the correct and incorrect expenses. A simple precaution of keeping the old receipts can help you tremendously.

Budget 08 - A populist measure

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The budget session gives a good opportunity to start re-blogging. The Finance Minister as expected (due to coming polls) delivered a populist budget. The salaried people have definitely benefited by the budget with:
  • Increase in basic exemption limit
  • Doubling the slab limits
  • Increasing medical insurance limit by adding parent's insurance cover
  • Tax Free monthly income from reverse mortgage
The budget allows more income in-hand for a salaried employee along with indirectly opening routes for higher expenditure.

If you are earning in Sikkim state, you benefited the most. FM has removed all tax-liability for individual earning in Sikkim state. This budget has given no heed to the IT-industry (especially export oriented IT companies) and the shining days seems to be over for them.