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

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.

Manu also writes in Huffington Post

Twitter @manurishiguptha

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 12^th 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.

If Chetan Chauhan can be the boss of NIFT the next RBI governor could well be Mohan Bhagwat.


Manu also writes on Huffington Post 

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 1^st 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.

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