Monday, January 30, 2017

The imminent crash of the Indian housing market and why buying a house is a stupidity


Two incidents moved me recently...

Firstly:
Just as I was about to tee off at the Milpitas Golf course this September I heard a ‘fore’ and was fascinated to see a fellow golfer tee off from the backyard of his home. I thought what a life/luxury.

I realized that this 7200 yarder golf course is inhabited by a mere 50 families and Zillow (the app that correctly dispenses info on real estate prices) indicated the price of each bungalow between approx. 1.1 – 1.3 million USD (approx. IRs 7.5 Cr)

One cannot ignore that US of A was built on the premise that the infrastructure (rail, road, bridges etc) are the bedrock of economic activity and the growth of any nation. And USA has by far the best infrastructure in the world.

Secondly:
The chief accountant of one of the top three builders in Bangalore visited me looking for a job and shared that the builder hadn’t sold more than 3 apartments amongst its entire national inventory in the last 4 months.

After my 4 week sojourn in the US, when I returned back to India, still in a state of daze, it took me a whopping  2.5 hrs to travel a distance of 30 kms from the airport to home and along the way in a traffic jam, I saw a larger than life hoarding of an apartment built by a top Indian builder offering a 4 bed apartment “starting at ‘only’ 6.5 crores” about a million USD.

This indicates and is reflective of a demographic – that there are a large number of people in Bangalore for whom a starting price of only a million USD for an apartment would be seemingly attractive. And ‘only’ is supposed to significantly enhance the value proposition of the apartment that’s built right next to a crematorium and on an illegally reclaimed land on a gutter that emanates more methane than a human body can tolerance or human mind can fathom.

Well this is a reality of this country that’s falling apart due to officer builder nexus/mafia, due to tier one and tier two cities choking to death because of rampant construction.

What a sham and ignorance on the part of a builder and the gullible home buyer respectively.

The lack of town planning and inherently corrupt city councils have made most of the cities un-habitable in India. God forbid if ever (once in a life) one has to transport an aged parent or a well-wisher to hospital, he/she will certainly be sacrificed along the way because an ambulance has no way/infrastructure to beat the traffic jams.

So that raises a question – what really is the right price of real estate and why that apartment in the eyes of that builder can be ‘only’ a million USD.

Every asset has an intrinsic value – the cost of replacement or the cost of building the asset is the intrinsic value. Add to it the profit of the seller/maker and that leads to the discovery of the fair market price.

For way too long (almost since the beginning of 2001) real estate prices have seen only one direction and that’s the way up. I have a few acquaintances in Gurgaon and Delhi and Chandigarh who gave up their jobs in order to deal in real estate. They have been found buying an asset in the morning and selling the same in 2 days at a neat profit. It was almost like the tulip mania when the Dutch thought that the world is going to run out of tulips.

India’s Black market economy helped. It is allegedly believed that the top 6 politicians in India have a combined net worth in benami property and assets that is equal or more than top 50 richest people in the Forbes list. For way too long corruption has siphoned off the nation’s and tax payers wealth to fill the coffers of people in the position of authority and an inherent lack of robust tax and tracking system has allowed a parallel black economy to mushroom and fuelled a bubble in almost all asset classes but above all in real estate.

The general cost of construction per sq feet (at standards that are followed in india) is about IRs 2000. Builders have a funny inexplicable formula of super built up. They sell part of all public areas to the buyer and add that to the area of the flat. Most say that the mark up in the area sold is only 25-27 %. That implies that if one is buying a 2000 sq ft apartment, he is likely to get 1600 sq ft of carpet area. Well if this is the norm and is legalised, its good too. But the truth is far from reality

My mother like all mothers on the planet wants to see her son own a house. The proverbial ‘one’s own roof over the head’ in times of a future distress. So a few years back I did start looking for a house but instinctively bought a laser area calculator (digital planimeter) to find the floor area of the house being sold. I used to carry the same during each visit to an apartment. Surprisingly most builders who claim to have a 25% attributed to super built up actually have 40% mark up in area. So a big fraud there.

House is an emotional investment round the globe and no one carries a planimeter when selecting a potential purchase. And the brokers have a knack of playing with ones emotion by painting the picture of a perfect home and actually talking about the location of the temple, the balcony , the virgin sun rays in the morning and generally making a customer believe that the said asset is being eyed by 7 other prospective buyers. And human beings are emotional gullible fools generally governed by cognitive biases.

Besides the 15% defraudment (unavoidable premium that one pays for other persons fraud) one has to pay for parking and floor uprise, etc etc. Talking of Bangalore in particular, a typical third grade apartment in a smelly location ends up costing about 20000 (300 USD) per sq ft of carpet area – and by the way you don’t own the piece of that land.

The recent demonetisation has taken the wind out of the sails of this ponzi scheme and the forthcoming RERA (Real Estate Regulation Act) is likely to bring some discipline but how will the builders make their infinite profits and make a charlie out of the gullible customer? They wont be able to………..

And that will start the big correction in the real estate market.

Today the monthly instalment over 20 years (if you own a house) is generally 3.5 times the present monthly rental of the same house. So if someone typically buys ones home between 35-40 years of age, he/she is likely to pay 3.5 times the probable rent of that same place in ones EMIs (equated monthly instalment). Can you imagine paying 3-4 times your monthly rent for the next 20 years of your life just to gloat in the feeling of owning the house – AND THEN BEING STUCK WITH IT.

The only certainty in life is the uncertainty around it. Imagine being retrenched in a downsizing exercise, or having to change your job. A house at present Indian valuations is likely to make you nervous not confident.

Imagine being unreasonably bollocked by your boss and that irresistible feeling once every few years to tell him to goto hell. But not being able to, because the payment of EMI is just round the corner.

Imagine that one desire to live one’s life fearlessly and meaningfully at one’s own terms and conditions is being quashed by the burden of one’s EMI.

The logic behind the ‘round the corner’ housing market crash is simple. Too much of easy money has flowed into this asset class and the present prices aren’t sustainable. Either the rentals have to double from the present levels (which they can’t because that’s a function of demand and supply) or the real estate prices have to correct by atleast 50% from the present levels.

Sadly, I believe my mom will never see a proverbial roof over her son’s head in the near future.

Manu also writes on Huffington Post

Sunday, January 8, 2017

What Infosys’s Vishal Sikka’s tenure teaches us about ‘ Strategy ’

Recently Wipro’s Azim Premji and Infosys’s Vishal Sikka made joint statements about the stresses and tough times that lie ahead in the Indian IT sector and how the global factors have caused immense uncertainty – I agreed, for its been 2 years that I have been - through this blog, making a case that greed, unsound economic decisions and self-fulfilling political pursuits by nations and central banks have pushed the world to a brink of dangerous unanticipated consequences and that the present prices of ‘pretty much’ all asset classes are unsustainable.

But this piece is about strategy. I read this word so often that I am now almost sick of it. Speak to an over enthused student at a business school – he wants to excel in strategy and make a career out of it, speak to a new CEO – he would talk of a 10 year strategy and vision and make the incumbent employees feel scummish for their lack of strategy and vision, speak to a consultant (highly paid youngster at probably the big four with all authority and no responsibility) and he would regurgitate so much on strategy through his 100 page presentation that the customer would really start cursing the historical past, when the consultant wasn’t on board.

Well strategy is fashionable, it sounds great – but in reality its bullshit. As Peter Drucker says Culture eats strategy for breakfast everyday

200 years ago when nations orchestrated wars to take over other nations and land masses across the oceans, strategy made sense. A strategy once made could remain relevant for 50 years as letters and information could be sent/received over sea/horses at most twice a year. Officers of invading nations had orders to execute a decision and the same could be reviewed only after a few years. Results to judge successes or failures was possible – at best – over a decade.

Today all it takes is a tweet by Trump to make the price of fortune 100 company crash or a claim by wikileaks to make Hillary lose a winning US presidential election or a unfounded misinformation that encourages a nation to invade another and create a world havoc that is likely to have a century long ramification.

Disclaimer : Now I don’t know who Vishal Sikka is or what he stands for or what he brings to the table and I have nothing against him. He is just a case in point because I remember him as a non-promoter Indian to get the highest salary in India, to get an annual compensation of about 6 mill USD besides all the stock options. But I read 3 newspapers everyday to have a fairly good memory and to form an opinion.

When Sikka joined Infosys somewhere in June 2014 as the first non-promoter CEO, he was the next big thing in India. He talked of strategy and he talked of vision and the world took notice. The stock price of Infosys soared and he became the poster boy. At the time of his joining, the annual revenues of Infosys were about 6.9 billion USD and he talked of a six year 2020 vision of 20 billion in revenues. ie a approx. 2 billion increase in revenues each year. And he maybe got more bonus. Many of the rockstar executives who built Infosys over last 2 decades, allegedly quit out of frustration.

This reminds me of the despicable Jack Welch who made a fortune for himself but made the most ruthless organisation by firing 5-10% of workforce every year. As Simon Sinek says, companies that sacrifice their people for numbers rather than numbers for people aren’t built to last.

So as time progressed Sikka’s rhetoric of his vision became louder and the performance became quiter at about 7.9 billion USD in FY 2016 but he still maintained the gusto of his rhetoric.

The last Q3 FY17 results of Infosys are due on Jan 13th 2017 (oops that’s a Friday) and Sikka already warns of tough times ahead and by the way all of it is the fault of BREXIT and Trump.

And going by the HY (half year) run rate of FY17 Infosys will achieve about 9.5 billion USD in annual sales. With three years to go for 2020 – a 3 billion USD per annum increase.

Whats the point:

Its not Sikka’s fault. He has no role to play. The multitude of global factors and externalities are so diverse that any CEO or alleged strategist who talks of a 10 year or a 5 year strategy is only fooling himself or the board.

Its good to have a general aspiration (call it vision) for next 5-10 years. But having a 5/10 year strategy and a promise can help you get a bonus but all that matters is the next few quarters.

Companies are wasting too much time on vision and strategy not realising that merely a tweet, a simple geo-political externality or an event on which no one has a control can change the dynamics of our aspirations and strategy overnight.

Boards must realise and encourage the following:
  1. Growth is important – and imperative. Don’t put so much pressure on CEOs that they are forced to make specious commitments.
  2. Preserve cash – When a Brexit or a trump hits you – no one knows. Cash is king and cash is the one that will help you survive in tough times.
  3. Leveraging created on the assumption of ‘future growth of present revenue run rates’ (sounds almost as exotic as CDO’s of 2007 isnt it) is a sure shot recipe of disaster.
  4. The Baniya style of business has stood a test of time over 200 years, till Goldman arrived on the scene and changed the rules of the game. Live within your means and borrow what you can pay from present income – not future income.
  5. Every decision maker must have a skin in the game. Convert decision making executive’s present bonus and compensation into future equity if you want the organisations to survive.
  6. Conservatism isn’t a bane, it’s a virtue. For fools are full of confidence and wise are always in a state of doubt.
  7. Every present expense must pay for itself – strategic decisions taken in present for future issues without having a control on future are likely to be disastrous and not reflective of a sense of ownership or good leadership.
  8. Stop expecting month on month or quarter on quarter. Allow your CEO’s to work in peace and keep a quiet watchful eye. Fire them if you don’t like them but don’t create noise and disturb them every single day.
  9. In an ever connected highly efficient world make a 3/6 month strategy – if at all. Anything more than that is gas.
  10. Keep a watchful eye on people talking of 300 years of vision and balance sheet (surprisingly same people couldn't retain their CEO for more than one). Anyone reading this will probably be dead in less than 40 years and anyone talking of 300 years probably has no plan at all.
And lastly for GOD’s sake – stop talking about strategy and start working on culture.

Manu also writes in Huffington Post

Monday, December 26, 2016

The Savers Dilemma

During a recent trip to the US, I happened to meet many young executives from the Silicon Valley, doing relatively well and perhaps in the 95 percentile of income group but all fed up with lack of options to generate alpha on their idle cash lying in their savings / checking accounts. And that too in one of the most advanced and efficient consumption driven economies on the planet.

One relatively accomplished executive (we’ll call him John) in one of the top social networking company had an even stranger story. In 2009 (at the peak of the depression), John invested a million dollars with a top hedge fund with a non-guaranteed promise of indicative returns upwards of 15% CAGR on a premise that the bounce back from those levels was likely to be phenomenal in all asset classes and returns could even be higher than indicated.

Impressive isn’t it! I would have sold my wife’s jewellery to invest – for where else would one get that kinda return.

My curiosity got the better of me and I couldn’t help but probe. To my surprise John recently withdrew and got back USD 1,126,493 after 8 years, a CAGR of 1.5% with a detailed explanation from the fund manager as to how well his money worked for him in the hands of the fund and why the investors should feel happy in the times that were tough (2009-2016)

And by the way John was smug - for his sense of achievement was emanating from the fact that his checking account would have yielded just a fraction of this return. So John really did well by his own accord. And top of that the fund sent them a special shopping voucher (unexpectedly) worth USD 2000 for shopping on Amazon.

I did some research on US asset classes and was rather surprised at my findings.

Dow Jones moved from 7000 to 20000 in March 2009 thru Dec 2016
So if John had simply (read dumbly) invested in an index fund then his 1 million USD would have been 2.85 million USD

If John had bought gold his investment would have peaked to about 2.5 mil USD in 2011-12 but would have still been about 1.8 mill USD today

And of John had bought Apple stock for that amount, his money would be worth approx. 9 mill USD today besides earning about 17 dividend payouts in the same period

And lastly if rise of oil prices had impressed John, his money would have remained almost the same in 9 years

John and thousands like him would have definitely paid for his fund’s billions in bonuses.

Oh - I so hope that my best friend John doesn’t read this piece because the comfort of smugness on an issue is a virtue that once acquired must not be lost or destructed.

The point is simple :

Lack of financial knowledge is hurting the potential growth rate of capital that is being used by fund managers.

The greed for a superior return without a guarantee of capital protection just puts gullible investors at huge risks and there is no redemption from these ill-informed investment decisions.

And John isn’t alone – except for less than half percent of top wealthy people on the planet, very few are able to generate an alpha on their savings that beats inflation and grows capital.
If the annual rate of inflation is about 2% historically, the savings must generate a min yield of 2% for the value of the money to remain same or real return on investment to remain 0.

An average or above average executive is just too busy in the daily rigmarole of life, wife, kids, performance appraisals, corporate slavery to make any real sense of what to do with spare cash.

But the success of stocks like apple or gold are outlier events that occur thrice or 4 times in a 100 year spectrum. Only the people who have deep understanding of economics or trends can generate alpha or even protect capital.

Thomas Pikkety, in his award winning research and book has beautifully summarised that capital over a long period of time gets accumulated in the hands of few and the common man continues to suffer (relative income inequality)

If capital is deployed in non-sexy instruments and stocks of companies with sound management and fundamentals, and portfolios are diversified to include a variety of asset classes and the inherent greed can be curtailed to be satisfied with ordinary real returns on capital, all investors will definitely and most likely grow their capital at a far better rate than anticipated.

Mutual funds from trusted fund houses, that have low expense ratios and the ones that are tried and tested with historical success of more than 7 years should be bought rather than being carried away by the glamor of irrational returns.

Investing is simple as Buffet says Be greedy when all are fearful and be fearful when all are greedy. And if Buffet’s to be proven right, a Global Financial Armageddon is round the corner but then – that would be the time to be greedy – Isn’t it?

The next blog
Why it’s a stupidity to ever invest in a house


Manu also writes on Huffington Post

Thursday, November 24, 2016

The day India’s fate changed for better

I was in the UK attending a tourism meet when I was raising a toast for Trump, not because I agree with his indiscretions etc but because I was right. I was right in believing in June just after Brexit that Trump would really prove all pollsters wrong. And he did. But what greatly enhanced the feel and the high of the bubbly on my tongue that evening was the announcement of demonetisation and scrapping of the 2 largest denomination notes in India.

And that I thought required balls of steel and is the single biggest revolutionary step since the reforms of 1991.

And while the naysayers, most of them uneducated or politicians (read opposition), are crying hoarse over the move and marching around the parliament over-amplifying the plight of the people facing some difficulties, most cannot bear the shock of seeing their ill-gotten wealth become worthless in a fraction of a second. Mark my words no one of these protesters is worried about the poor farmer of an auto driver who is facing the difficulty. Most of these drama masters are suddenly cashless for there are assembly elections round the corner and election in India cannot be fought without cash in hand.

As a salaried employee since last 23 years, I haven’t really understood - what is black money. Never felt it, never touched it. But made me angry, very angry, to see people around me earning less, paying a fraction of income tax that i pay and having a better lifestyle than me, showing off cars that they don’t deserve to drive or haven’t earned with their hard work, working much lesser than me, less educated than me, and having seen no struggle in life. All thanks to a well-oiled machinery that generated a parallel economy – some say 50% of India’s GDP.

Paying cash for jewellery, land, holidays and cars had become a fashion statement and this breed with swathes and swathes of black money had blatant disregard of the nation or of the honest tax payer.

How would we expect the governments to develop infrastructure when infinitely large amounts of money for public welfare would get siphoned off because of the fertile environment that accepts and breeds black money.

It’s a sad state for any nation that among the ‘global lasts’ in ease of doing business
Why : because an honest entrepreneur just cannot wade his way through setting up an enterprise without the infinite hurdles of bureaucracy and archaic laws and unfriendly labour policies. At every step businesses have to earmark upto 15% of their capital to grease the system to facilitate licenses and permissions. By the way that’s if one doesn’t have to give a 20% equity to the politician in power.

It’s a sad state for any nation when a person walking on a footpath just drops down in a gutter and dies.
Why : because the local area engineer has taken a bribe or allowed the contractor to go scot-free without really completing the job.

It’s a sad state for any nation when banks lend to corporate entities without an adequate collateral cover and hundreds of billions of dollars of loans become delinquent.
Why : because of an inconvenient relationship between bankers, politicians and unscrupulous entrepreneurs.

The list and arguments are long but the gist is clear. The nation where 50% of its economy is a shadow and unreported, it will always create hyperinflation and assets and commodities will be unaffordable to a common man.

Modi has come so far, What he has done can cost him elections in 2019, the vote bank at the bottom of the pyramid is huge and today they are the ones who are in queues for hours trying to exchange a mere Rs 2000 (250 USD). Modi must hold his ground and take this mission to a meaningful closure thru a few simple steps such as.

  1. Make income tax records and returns of every individual in public domain. So that for every thousand rupees spent beyond a persons means, there are a thousand eyes that observe and report.
  2. Modi gave every Indian an opportunity to open a bank account, the same should be made compulsory by law and no one should be allowed to deposit or withdraw more than Rs 2000 ever.
  3. Facilitate the digital environment of wallets and cash transfers. Whether one is buying a kilo of potatoes or an apartment worth 10 million USD, choke the system to an extent that only a bank transfer or a digital payment works. PAYTM, MOBIQUICK, and the likes of these companies can play a significant role in building a transparent nation.
  4. Reduce banking transaction costs on credit/debit cards to a few basis points rather than the present few hundred basis points.
  5. Make any cash more than a couple of thousands worthless. If you cannot transact in cash, you would not want to generate it.
  6. Rather than reducing the size of balance sheet of the central bank (RBI) to the extent of the monies collected, spend this money on building roads and airports for next 20 years and not for the next 2 – which in the present scheme, by the time are commissioned are already out of capacity.
  7. Create a central registry of all land records and link transactions to Aadhar and PAN to reflect in form 26 AS.
  8. Above all, rudimentary as it may sound, pass a motion in parliament wherein financial misappropriation is treated as severely as rape or murder in the eyes of law.


Aristotle aptly said about 2300 yrs ago that “Man when perfected, is the best of animals, but when separated from law and justice, he is the worst of all”

Let the fear of law and judiciary percolate in the minds of every Indian citizen.

I wasn’t the biggest fan of PM Modi and believed that I had strong arguments in disagreeing with his rhetoric of his vision of India and his actions thereof. But today I believe that just that extra push, just that little reform, just that fear of God and justice can set India on a path to being a nation that it was 3 centuries ago when India’s GDP was 25 % of the world GDP.


Mr. Modi I am changing my opinion and I am falling in love with you, you are just a few steps away. Hold your courage of conviction in what you are doing.

Sunday, June 19, 2016

Goodbye Dr. Raghuram Rajan

Once upon a time there was a great manager in a great organisation who did wonderfully well. He was there on the basis of his competence and past track record. He had many great predictions to his credit and was a person respected for his knowledge and competence in his subject.

His boss though was a typical type A personality, rags to riches, rose to the top of the corporation, almost uneducated, but a man with amazing statecraft and could not bear the idea of an individual a many times more intelligent - reporting to him. This manager had the confidence to call spade a spade, could take all great actions in the interest of the corporation, was loved by all the customers and vendors of the corporation and also by all his colleagues.

But the boss, delusional and self-consumed in his hubris wouldn’t have any manager in his corporation who could look up in the Boss’s eyes, take rational decision, and challenge the usual.

The Manager quit. The Boss was happy. The corporation suffered. And it was business as usual.

While this is a story (with minor variations) of almost all corporations around the world but, If You haven’t been able to figure out by now what I am talking about/writing about at the expense of my sunday afternoon glass of Chardonnay you might as well close the browser.
____
I was having an idyllic drink with my dear friend Sundeep Sahni last Sunday on the 12th June and were discussing the usual. A banter about the Brexit, Raghuram Rajan’s term, the state of the economy and the stress in the global markets that’s still hidden from the eye of the common man. Sundeep was so sure that Rajan would get a second term. Sundeep’s argument was:

  • Rajan is too good and intelligent a guy to be consumed by petty politics
  • India needs him
  • He has brought in fiscal discipline
  • He has exposed crony capitalism
  • Forex reserves are at a life time high under his stewardship
  • India’s respect as a meritocracy driven nation is highest in the international finance and business community
  • And he can call spade a spade
My argument was:

Calling spade a spade is the biggest problem
Yesterday Sundeep called me and said – ‘My God You were right’

Modi would have never allowed Rajan to stay on and neither would Rajan have stayed on - and it has been so evident in the last 2 months.

Anyone reading this piece is educated enough to realise and acknowledge that…
  • Subramaniam Swamy had no guts to raise an issue without the tacit permission from the top
  • He is a drama master for the Government
  • When the contents of our deep freezers have to be ratified by the religious zealots of the establishment, how could a man be allowed to take decisions on the interest rates and fiscal policies of the nation (no matter how good and beneficial they were)
  • Rajan created a system that exposed the severe fault lines in the banking system. A system that was definitely used, it is believed, to siphon off over 100 billion dollars.
It’s a shame that Mallaya is being trolled beyond imagination because he defaulted on a billion dollars in business losses. Afterall everyone took a risk - the businessman and the lender as well. No one has raised a question on the massive debts that are lurking in the banking system. And this is what we know of. Mallaya’s only real fault – he kept walking around and getting photographed with arm candies by his side when the employees of Kingfisher were in dire straits.

Mallaya ran a loss making airline and banks kept funding it without adequate underlying security/collateral. And if they did, why the fuss now if he isn’t able to repay.
Try raising a small loan from a nationalised bank. They would want a collateral for a collateral. There is no way in hell that you would be able to default.

And Mallaya’s ‘Kingfisher’ brand was taken-in as collateral to the tune of almost half a billion dollars by State Bank Of India. Did they dream of rechristening State Bank India to Kingfisher Bank of India in-case Mallaya defaulted or did they plan to co brand Kingfisher with SBI on T shirts and souvenirs and turn it into a multi-billion dollar enterprise?

A guy like Rajan was dangerous. Utterly dangerous to this caucus. And he had to be removed.

So a nationwide drama was created to embarrass him and raise questions on his integrity and his patriotism. My God – Swamy called him an agent of the American Corporations or CIA.

Any self-respecting, educated, subject knowledge expert doesn’t have time for all this bullshit. For he/she knows that the corrupt system doesn’t deserve him/her. Remember the protagonists in Ayn Rand novels.

And then….

Rajan knew better as well.

He could see that the world is on a precipice of a serious financial meltdown. I have repeatedly said in my previous pieces that 1929 or 2008 would look like a walk in the park. When that happens and when the big bubble bursts no one knows. It could be 6 months or 6 years. But whenever it happens it will be far more painful than Sep 2008

And obviously Rajan wanted to leave on a high. He did what he did and did it beautifully. Only people with innate knowledge of economics would agree that controlling inflation by a few hundred basis points is far more important than a few hundred basis points of growth in GDP. And he did get a grip on inflation.

Rajan could foresee that rupee’s sharp decline is just round the corner and the cascading effect of global issues on Indian canvas of finance, growth and banking would have been huge and seriously difficult to manage.

And in the face of such degenerate pettyism by the so called patriots why would have Rajan sacrificed the comfort and respect of being a top academic on this planet for the corruption stained corridors of power in the North Block.

Lets see 'NOW' India achieve 10% growth in GDP and a strong Rupee – now that Rajan will be history soon.

Sunday, May 8, 2016

The stark similarities between Donald Trump and Arvind Kejriwal and why Donald could well be the next most powerful man on the planet

Balls of steel was a common expression that everyone used once in a while but rarely during a public discourse – till the time Donald Trump emerged.

His candidacy - wherever it has reached so far (1001 delegates on 1st May 2016 and at a kissing distance from republican nomination and by the time I post this piece he would be a definite GOP candidate) leaves some serious lessons for each and everyone in the corporate world.

I will come to the lessons later but first lest talk about Arvind and Donald




Arvind Kejriwal : is a relentless persuader who won the Magsasay award for getting The RTI act implemented. Today RTI has empowered the nation to be well informed and a commoner can seek information on any subject on anyone from any government department. The sheer possibility of exposure has put the fear of God (to some extent) in an inherently corrupt nation.

He rose to power on the simplest of poll promises and a genuine visible commitment towards the duty of his future chair / position. He created drama, he challenged the corrupt openly, his rhetoric was simple, his promises came from the heart and he was inherently and intrinsically an honest fellow. And Boy! His party’s victory of 67/70 MLA’s in Delhi was a slap on opposition that no party wants to experience in its political career.

The poll pundits were having a field day declaring his future win as a black swan event and almost everyone had written his obituary even before he became relevant. The rest as they say was all history.

Donald Trump : Most of the American people I hear are threatening to move to Canada or relinquish their US citizenship – should Donald become the Pres of the US of A. Well my advice is - You might want to start getting your passports made because Donald’s presidency might just be a reality that no one was ready for.

Donald just like Arvind, spoke his mind and didn’t hide his naivety behind the garb of “Yes We Can”. He has raised issues that linger in the minds of every global citizen who understands even an iota of economics and has some common sense and connected instantly with a dangerously large number of Americans. He must be the only candidate who is funding his own campaign and therefore has no obligation towards the need of wars and chaos elsewhere. He has no obligation towards the pharmaceutical companies that sell a monthly cancer prescription for thousands of dollars when the same costs a minute fraction to produce.

Trump’s eventual win will also be called a black swan event but it is seemingly clear that perhaps more swans are black than white.

And this leaves us with a few significant lessons:

  1. Irrational exuberance is the biggest catalyst why executives take chances and stretch the imagination of their excel sheets to stratospheric levels. They become unreal because of performance bias. More than often tremendous amounts of wealth is destroyed due to the inability to discount black swan events.
  2. Black swan events are no longer symbolically correct – they are more frequent and more real than ever. Could anyone ever bet on Leicester at 5000:1 and by-jove Leicester won.
  3. Never ever underestimate the power of a person who speaks from his heart and has an infinite passion. Right or wrong - passion and honesty is all that’s required for success.
  4. Intent (genuine or crooked) is really the most powerful tool. Irrespective of one’s articulation or oratory, intent cannot be hidden and human beings have an immensely powerful cognitive ability to differentiate between a right and a wrong intent.
  5. People (read employees / citizens / and even family members) remain quiet or they compromise because they don’t have a choice but never ever construe someone’s silence as weakness. Else you’d be taken aback with an unpleasant surprise at some point. The majority of the US middle class has connected with Trump because he has allowed them to think and connect with himself.

Besides the drama and the useless rhetoric that comes along with Trump and Kejriwal – ‘Watch out World’ – they might just change the order of the bourgeoisie.

Sunday, May 1, 2016

Sureshot failure of Ecommerce and its underpinnings in the Indian mindset

A few days back I was oppressively put off by a mountain of garbage on my way to work and this area is Koramangala – The fulcrum of ecommerce revolution in India, with highest per capita in the country,  home to dozens of startups, stone’s throw from the offices of flipkart and Accel partners (the posterboys of ecommerce and PE funds).

While my belief in Modi’s Swachh Bharat and Acchhe Din only sees a new low with each passing day of his PMship, I couldn’t help but draw a few correlations and predict with a degree of confidence that - E-commerce in India will never be a success story and the reason behind that is the basic Indian mindset.

I will tell you how:

The basic premise of the digital economy or E-Com companies is a change in peoples buying habits. Amazon has successfully demonstrated that they have changed the mental wiring of their customers and have made them habitual to buying online and when you induce this change, customers buy more and eventually these customers will pay a premium for  the convenience of ordering and returning goods from home and will pay for the entire spectrum of services (order, delivery, product, return, reorder) and still leave a penny or 2 on the table for the Jeff Bezos of the world.

And hats off - Jeff has swung it beautifully and successfully induced a change in the buying habits of Americans

But India is an exception. Because You just cannot change the habit of an Indian.

Kahneman’s theories on cognitive studies demonstrate that humans think and develop in a very linear manner. And same set of people cannot have different personalities for different situations.


CharlesDuhigg's (of the New York Times) studies demonstrate that Habitsare formed after a person has learned something new, like how to parallel park. This process engages the basal ganglia, or the part of the brain located in the prefrontal cortex that works to start and control movement and emotions. From there, it’s a three step process to a “habit loop.” There’s a cue, or trigger, which signals to your brain to turn a behavior into an automatic routine (say-throwing the garbage at a wrong place), followed by the actual routine of the behavior, and then the reward. The reward, Duhigg told NPR, is the brain’s own personal cue for when it should recall the automatic behavior.

Once that happens, the brain takes a break. "In fact, the brain starts working less and less," Duhigg said. "The brain can almost completely shut down. And this is a real advantage, because it means you have all of this mental activity you can devote to something else." For example, Wood cited one study, which found that participants in the habit of eating popcorn at movies would eat just as much stale popcorn as those who were eating fresh popcorn. "The thoughtful intentional mind is easily derailed and people tend to fall back on habitual behaviors," she said. "Forty percent of the time we're not thinking about what we're doing."
So whats the point:

When despite all the education and rising incomes and improved standards of living, Indians don’t hesitate to dirty their corner just outside their homes and continue to litter (and I saw someone throwing a big garbage bag straight form his Audi A-8 contributing to the record breaking height of this mountain of garbage) and continue to live in a pretence of oblivion and there is no evidence of evolution in the corrupt and inhumane character of an Indian by and large, thereby proving that education , income and habitation doesn’t change the inherent character, how can the half a dozen Bansals (Sachin Binny Mukesh et all) ever hope to change this personality when they eventually decide to stop burning an average of 10 mill USD per day (an approximate sum total of cash burn per day in the form of various discounts and schemes in the digital economy space in India).

The customers will simply stop buying when they stop getting discounts.

Because Indians cannot change....

Another disappointing character trait was demonstrated by the citizens of Delhi who worked hard to make the odd-even fail by simply buying the alternate numbered cars. An initiative that’s successfulin some of the most developed countries was virtually held hostage by selfish citizens who would rather live in one of the most polluted cities in the world and thereby putting their and their families life in harm’s way but would not allow a government initiative to succeed – which is a proven success elsewhere.

Because Indians cannot change....

And perhaps in a country where we allegedly assumed an infinite potential in the Ecom space, the harsh reality is starkly different.

The game of musical chairs is on in full swing and while all the players are dancing in the cacophony of this boom, assuming that there are enough chairs to grab – In reality there aren’t any at all.

You can write to : manurishiguptha@gmail.com

Friday, September 4, 2015

The Story Greed, Deceit and its effect on Organisational Culture

When I first read Greg Smiths resignation letter 3 years ago on the ides of march, I knew something wasn’t right in the way financial institutions operate. A myriad of thoughts ran through my mind.

When we trust the people who advise us and implicitly follow the financial institutions that handle our hard earned money, we believe that we are buying professional advice at a fee that is normal.
Reality across the financial institutions is far from it. The very fundamental of NIM (Nett interest margin or commission on transactions)  that forms the bedrock of investment banking or simple banking stands compromised when a client is referred to as a muppet or transactions are done to make a 'hit and run'.

I am going to tell you 3 short stories here:

Greed part 1:
Yes “Hit and Run”. I have lately come across this word so frequently uttered incestuously by entrepreneurs who are doing the so called series A,B,C ‘or whatever’ funding of their amazing sustainable scaleable ideas in the hope of founding the unicorns
or
the very people who are funding these, each one hoping to find a ‘muppet’ before passing the parcel stops and the last muppet obviously files for Chapter 11.

At a time when 7 trillion of global market cap has been eroded in just 1 week between 24th and 28th Aug 2015, the net worth of Lloyd Blankfein has shot thru the roof . He happens to be the CEO of the most coveted investment bank on the planet  and is now a billionaire. Obviously he has found his muppets right.

The incapability of the human mind to connect the dots and take informed decisions leads to severe imbalances that keep aggregating to unmanageable proportions which eventually become endemic on a global scale.

In the early part of 2008 Murti of Goldman Sachs predicted  crude at US$200 and would have found thousands of muppets to dump oil futures and earn hefty bonuses in trading commissions and thereafter till the Feb of 2009, crude only accelerated towards earth to breach below US$ 40.

By the Dec of 2014 when the crude had already fallen to $65 from the $110 levels Goldman went on to predict a $40 level in the coming months and I am sure would have amassed billions in commissions on the base of their specious advice to gullible investors who were trying to get a positive alpha on their investments.

At the time that this piece was being written the crude was around $37.

What amazes me is the blatant manner in which these 'super' financial institutions such as Goldman Sachs etc across the globe misguide and get away with it and no real regulation has been formulated till day to make these goliaths accountable. No one seems to have a clue of what they are talking. They only seem to be in a perpetual search for muppets.

Greed part 2:
When all the top financial institutions collude to create a epiphany of deceit to fix the loan markets at the cost of billions of retail borrowers across the world to make supernormal profits, they start fixing LIBOR. Tom Hayes might be the face of the scandal and now a state guest for 14 years but can you even begin to imagine that the LIBOR which is allegedly the most transparent measure of global financial health was fixed fraudulently since the last 3 decades thereby making loan seekers pay larger than required interest rates and in every way feeding the bonuses (linked to profitability) of the bankers across the globe.

When fraud is at a mass market level, it’s in every ones interest to hide it – for its impossible to convict 80% of the bankers.

Greed part 3:
It was a sad day on the wall-street when Sarvashreshth Gupta a 22 yr young Goldman Sachs analyst jumped to hisdeath after complaining of 100 hrs a week work and ridicule by his boss and unreal timelines and pressure to complete presentations. When he left India as a student of Pennsylvania University, the family would have seen no end to their happiness - for dreams come true when you travel to new countries for education and jobs and money. But sarvashreshth was being made to feed someone else's greed.

Moral of the three stories:

At an extrinsic level these might be isolated cases of individual frustrations / failures / or misplaced ambitions that the media would make these sound. But at an intrinsic level these stories are a reflection of an irreparable rot that has infested the corporate culture where irrational demands and insatiable expectations of abnormally higher profits make people do things that are outside the subsets of propriety.

Culture in families, in organisations, in countries and on the planet is a function of varying degrees of greed and righteousness. The global culture now sits on the bedrock of an ultra-capitalised greedy planet that is only working towards higher and higher profit and bonuses.

Unless the captains of the industry such as Blankfein and hundreds like him don’t take it upon themselves to get rational in their greed and change the corporate culture, and let the results, profitability and achievement of Annual Operating Plans be a function of organisational culture having underpinnings in happiness, care, trust, patience, compassion and not simply a mindless pursuit of month on month profit, the talent and lives of people like Greg Smith, Tom Hayes and Sarvashreshth Gupta would continue to get wasted.

We are born to be ‘naturally’ truthful and happy and stress-free and cohabitate peacefully on this planet with each other. Greed and fraud and deceit takes a lot of effort. The choice is entirely ours as to what seeds we want to sow in our respective organisations that would eventually form the ‘corporate culture’.

Warren Buffets white knight investment into Goldman Sachs in 2008 might just have been his life’s biggest moral mistake.

And next time someone tries to sell you a capital protected market linked investment/insurance plan (which only God can guarantee) give that fellow a tight slap and start running away from him for such a thing doesn’t exist and will never exist either.

Manu also writes on Huff Post.

Sunday, August 9, 2015

The Run Rate Conundrum - 'Or the beginning of The Great Depression'

Being a citizen of a country obsessed with cricket, the only run rate that I ever knew was the runs that a batsman makes per over and that i thought defined the run rate - till recently when I realised that even businesses (read new e commerce world) are getting discounted and valued on their run rates. It must be very interesting for those old brick and mortar industrial houses such as the Tatas in India and Walmart
in the US that flipkart and facebook are valued more than these over a century old business behemoths. What took billions of man hours to build has now been surpassed in value by young turks who took their ideas to fruition in a matter of a few years.

Hats off to these young companies for what they have created in such a short period of time.

But there is another side to this story of how the calculations based on ‘run rate’ have brought the world to the precipice of destruction and collapse.

And 2 sectors, one with which I am closely involved - hospitality, and one which I am closely watching lately, are perfect examples of how Bill Gates has done an immense disservice to the human mankind by inventing that little devil (thats what we will call it from now on), the ‘ + ‘ sign on the excel cell where you plot the run rate for the shortest period of time between the two cells, drag the cells to a time period of convenience, where the potential extrapolation of that run rate makes Walmart’s annual sale look pale in comparison to the run rate and get millions of dollars of funding for the idea that is yet to hatch.

In late 90’s it was as easy as registering a domain and coming up with an idea. And a couple of million dollars could be raised easily and the founders would start surviving on Dom Perignon in the hope of a Nasdaq listing just a few months from the conception of that idea.

What happened in early 2000 and the dot com crash merits no explanation or waste of time of the readers of this piece.

The consultants and investment bankers who had deployed trillions of dollars of funds (..of HNI’s , pension funds, 401K in the US etc) in these dot.com companies and earned and digested their deployment bonuses (because no one ever made any profit) suddenly became lecturers and advisors on topics such as how the chaos of 2000 could be avoided.

Relying on the perfectness of the short human memory, about 7-8 years later these investment bankers got a brilliant idea and a new scam of CDO’s emerged on the premise that house prices will go up infinitely and incessantly across the globe and a simple burger flipper ended up owning 3 houses because of cheap credit and loose control on credit checks and what followed consumed the likes of Lehman and over a hundred banks across US and Europe. But the investment bankers had already encashed their ‘deployment bonuses’ and share of the brokerage incomes by doing a circular trading of these Collateral Debt Obligations and who was left behind holding a carrot? The commoner who was enticed to buy his second or the third home and the pension funds and the hard earned money of HNI’s (that was siphoned off by the likes of Madoff and hundreds of fund managers of these Ponzi schemes).

And - Because many of these institutions were too big to fail, it was all eventually funded by governments thereby expanding the balance sheet of the respective central banks and during this time when people were losing their homes and losing jobs, interestingly the global sale of ultra luxury goods was at an all time high and there are no prizes for guessing who was stoking this insatiable demand of these luxury goods (Louis Vuitton, Hermes, Dom Perignon, Rolex and Cartiers of the world)

Almost 7 years later (I am convinced that collective short term human memory begins to fade after 5 yrs and is completely wiped out in 7) we are seeing a frenzy like never before where people say that ‘this time it’s different’ because the businesses have actual run rates and e commerce activity has actually taken off and the approx. 16-17 trillion dollars that’s conveniently printed by the US Fed needs deployment and therefore the same cycle all over again.

While we are yet to see many/any of these multi billion dollar companies churn any positive cash flow, the distribution of deployment bonuses is at an all-time high.

I was amazed to hear that a Japanese company paid out close to 135 million dollars in a year to one of its rockstar executive for deploying approx a billion dollars in the same time period. That’s 13.5% in deployment fees/bonus. (this example is over-simplistic but is being mentioned just to make a point)

Small companies selling salads, idlis, sandwiches, rotis are getting obscene amounts of funding because they are allegedly having an exemplary run rate and conveniently someone is seeing immense potential of growth because of a 15 day run rate which if you extrapolate using the devil ‘+’ on excel makes this company/portal worth a couple of billion dollars.

Why?? Because they sold 2 pieces of their product on the day of the launch and ever since they have been registering a 100% growth in the last 30 days. And none of the investment bankers want to miss this opportunity to own these growth stories. Is this sustainable? I don’t think so. And I am quite sure about it. On the 31st day of course the run rate isn’t the same but the funds have been deployed for accelerated value creation.

During the times of irrational exuberance everyone only talks of growth potential and entrepreneurs only look at their product and imagine that every single person on the planet is their potential customer and an infinite demand is assumed and therefore exuberance. No one realises that in the hyper competitive and efficient market with negligible barriers to entry any great idea is great only as long as it’s in the mind.

Hotels are an interesting case in point. The consultants make the owners spend humongous sums of money on the basis of the ‘little devil’ and suddenly large investments on land and building seem recoverable but oops only a handful of hotels in this country have been able to recover their investments and majority of the hotels chains are reeling under severe debt and a popular chain ‘Leela’ is almost bankrupt and many other hotels will take over a hundred years to recover investments going by the actual run-rate.

But consultants have taken their fees and are looking for new clients and there is no answerability.

This will continue for ever unless:

  • Every fund manager is made a part owner of the businesses where he is recommending investment.
  • 'change the consultancy model from all authority and no responsibility to all authority and all responsibility'
  • 80% and not 20% of the compensation of these deployment managers comes out of the positive cash flows of the businesses.
  • Consultants are made to move from the model of ‘all authority and no accountability’ to ‘all authority and all accountability’.
  • Consultants, investment bankers, and deployment managers aren’t allowed to ‘hit and run’ at the cost of the investor.

Till that historic instance in time some innocent child again shouts and says that the ‘emperor is naked’ this bubble will keep getting inflated and will consume the world all over again and if indicators are anything to go by and if the sum total of all present economic, political, financial, emotional and judgemental decisions could be plotted on some model to arrive at a result……

What lies ahead will make the depression of 1929 look like a walk in the park.


Manu also writes in Huffington Post