The Guarantee of Return on Equity

The Guarantee of Return on Equity

A friend recently posted a question on a group, Quote;

“Are Equities really the best investment for the long run? This is the ‘mantra’ usually given to every new investor by the investment gurus. But is this always true ??? Most countries have had very long periods, during which equities have actually been losing money heavily. The longest period of negative real returns from equities was 66 years (for France), 55 years (for Germany), 51 years (for Japan), 22 years (for Britain) and 16 years for US. Considering the average human 'lifespan of investments' to be around 35 years (starting your career at, say, 25 and ending at the retirement age of 60), long term investments in France, Germany, Japan etc, would thus have not been beneficial to even long-term investors. So the important caveat is – investments are subject to market risks !!!
What about investing in 'up-and-coming' Economies ???An investor in Germany, may have started investing for (say) thirty five years starting from 1900 (when Germany was a rising star), only to see their assets wiped out in the 1940s – due to hyperinflation, as a result of the Second World War. Similarly investments made in recessionary markets like the US may never ever see any gain, for the foreseeable lifetime of even a long-term investor …”
UnQuote.
The question and the observation is certainly very and instead of a rhetorical reply calls for a serious research and treatment of our opinion that Equity pays off in the long run. The question calls for a serious treatment since on it depend our retirement benefits and peace of mind, amidst the cacophony and volatility of the markets.
By simply requisitioning Google or Wikipedia, one can instantly get information of all the countries on the two sides before during and after the WWI and in a war that consumed 7 million civilians and 9 million soldiers . It is not difficult to further estimate the economic loss to  property and the damage to the economy of the countries that were involved in the war. Loss was also incurred by the countries that were not directly drawn into the war. As their economies that depended on exports of agricultural and meat products did not have any takers.
Since our goal here is not to discuss the political upheavals, rather the economic returns we will only try to limit ourselves to the conditions that affect the economic conditions and these unfortunately means everything.
It is impossible in the matter to time and again not think of “Wealth of Nations” by Adam Smith. One may not even need to read it but when one just thinks logically regarding how a Nation’s wealth would get built with time one would start to understand the issue at hand.
The wealth of a Nation is dependent upon the economic activity that its citizens carry out both internally and  externally (export the product and services to other countries),under congenial conditions provided by its own government and the government of those countries with which it is  interacting ( or carrying on trade with).
Here the “congenial condition” is an important word. It signifies conditions that are favorable to economic activity. It may be possible that the trade between two countries may be suspended due to poor political conditions, but the requirement for certain items may still exist. Under such conditions, a third country is drawn in the equation which serves as a transit point for “exchange of goods” for both countries. The goods in such case may become expensive for both countries to import, but the trade can carry on nonetheless.
However under normal conditions a country may progress up the economic curve by simply carrying on its economic activity. The government sometimes tries to get the share of the pie , by starting its own industrial and commercial enterprises and competes with private companies of the countries in a fair or unfair manner. This becomes unimportant as the net assets of the country rises in any case. Agriculture, Industrial, Financial and Service sectors keep adding to the wealth of the nation month after month and year after year… under normal and favorable conditions ( like we say in chemistry NTP and STP conditions).
Now sometimes the conditions do not remain so normal or standard. E.g.

·         A country has a famine condition due to failed seasonal crop due to “Acts of God” like floods, Tsunami, failed rains, epidemic for humans, livestock or the crop itself. This a country is able to cope up with by importing the crop from other countries or on back of it’s buffer stock. The dent caused due to agricultural income loss may be compensated by the industrial or service sector, and the national wealth may not be affected much in the long run. In fact it may even grow further due to flourishing Industrial sector or Financial sector growth.

·         Slow down in the growth of the countries to which exports were being made. Hence the Rate of Increase of Growth may be affected temporarily.

·         Internal disturbance in country lie a civil war, rebellion causes a large scale destruction of national wealth just like the natural factors. In fact the damage may be much more to the economy as the infrastructure for producing and transporting goods  (factories, roads, railway lines , airports) may be damaged beyond imagination and prevent an immediate economic recovery.

·         External War with one or more countries. This is the most serious of the conditions . As in these conditions the whole nation starts to concentrate on the war and all productivity of the country comes to an actual halt. In quite a few countries the entire machinery starts getting used to make equipment for war and hence other productive manufacturing becomes zero. Due to exchange of fire cities, villages and towns get wiped out taking with them all the means of economic wealth generation and distribution. Eligible Human resource is diverted to the battle ground both at the front and the support system for the war. Food ,commodities  and other inputs of economic activity become expensive for the civilian population due to government procurement at elevated prices- hence the inflation- rather flares up.

·         The picture in case of war is generally well imaginable as everything wrong happens and even after the war the recovery is not easy as would be in case of a natural disaster. A decisive loss for the loser results in it paying a heavy reparation or “fines” for the loss.

This was precisely what happened in Europe, Japan and Turkey in WWI and WWII.

I agree with my friend that Germany (not in its modern geographical version) was a virtual economic powerhouse at the turn of 1900s. But the war that ensued completely destroyed it as it did England , France, Italy and Bulgaria too and many other countries. After the first war Germany was made to pay for the war in terms of A,B and C bonds, which it could not pay fully and was the main reason for the loss of self esteem of Germans.

This further impoverished Germany and led to the rise of nationalism and Hitler and further WWII.  This further impoverished England, France, Poland, Yugoslavia etc. I am again not going into the political details, rather simply stating that entire Europe virtually was under war from 1918 to 1945. During this period there were no producers, no major production, no major exports or importers and consumers as the war had it’s allies even in Asia and Africa who were being forced to support the war in terms of men and material and food. In essence the entire world came to a stand still. There was no creative production or economic growth in most part of the world except the US on whose land the war was not being fought.

Now to come back to the question of my friend. What is the guarantee of the suggested growth in equities in India or other parts of the world?

How to know that the corpus that we are collecting for our retirement will actually continue to grow.

Frankly none!!!

I have very often thought and said that the reason we invest in a company is because of our faith in it and its management. Similarly we have decided to invest in India because we have faith in our country and Its peace and progressive policies. When things don’t work with one government we patiently wait and bring another party to power and hope that they will perform for the benefit of the country.

As is the case with present government and expectations with the GST, Land Bill, Labour reforms and Rate reduction. The market went up because the industries expected to grow with favorable policies which would have been evident in the share prices and hence the MF returns.

If our government was to decide on an aggressive foreign policy with neighbors or the developed nations and had it led to a war or a economic blockade. Naturally the economic development would have suffered in the way that I mentioned in the beginning.

FIXED INCOME RETURNS: A question that my friend could have asked was , what was the rate of return in the European countries on the debt instruments or Fixed Income avenues?

How were the government bonds performing?

What was the rate of interest of banks during the era?

What about the private money lenders?

This is another question that we must inspect in close detail t another occasion.

But as would be evident to you immediately that return on such bonds would have been a suspect to say the least as there was a strong case of Capital risk and exchange rate risk in such case.

ELECTRONIC COMMUNICATION AND ELECTRONIC TRANSACTIONS

ELECTRONIC COMMUNICATION AND ELECTRONIC TRANSACTIONS

A few days back, I did a small coverage on our friendly Postman, who had served us for over 23 years. The piece was in a nostalgic tone and questioning the future of postal delivery.

This however should not set the tone of this article which happens to be in favor of electronic transfers and communications.

Most of the people to whom my articles are normally directed are seafarers, NRIs and HNIs or high networth individuals. However this may have to do with everyone who would care to read.

Normally it is very awkward for a middle aged male like me to stand up for the modern methods which everyone vouchsafes are not safe and full of risk. There is a very high level IT professional in UK whom I know( having a doctorate in Computer Science). He operates with conventional methods and does not access his bank account except by a ATM card. He may be aware of a few things that we are not aware of, however we will continue with our discussion.

ELECTRONIC COMMUNICATION:

There are stories galore how in past years people lost admission to prestigious colleges, or employment or a large investment opportunity because they did not get the required letter in time , due to whatever reason.

Nowadays it is rare to find anyone without an email address. It is in order too, as written communication has reached mind boggling speed and hence expedited the inter-personal and official transactions. Even the government offices have adopted email for official medium of transfer of information to individual stakeholders e.g. interview letters, appointment letters. Admit cards and results are freely being communicated through emails and SMS.

All this not only brings speed to our communication but also saves natural resources like trees for paper and fossil fuel for means of transportation which would otherwise be required to support the snail mail system of communication.

However the reason why I would like to support E-Communication is for another reason in addition to ensuring that you receive your correspondence.

PRIVACY: Letters and other Official documents are open to breach of privacy especially in today’s colony based culture of row- houses or apartments. I have witnessed people complaining how their letters are being regularly opened and again sealed back.

At times few missing letters from the bank may be sufficient to reveal your financial position and liability to unscrupulous elements. I have witnessed a case where the perpetrators / kidnappers came to know about the amount in the bank account from a Bank Statement passed on by the Postman.

Statement of Account: of a Bank account does not only reveals your bank balance, but a few other personal details about you like PAN No., email address, nomination etc.

While the Statement of bank account gives out your immediate financial position, SOA of your DEMAT account and Mutual Funds are even worse. They can give out your total financial standing of your lifelong savings to people. The scenario is indeed scary as it gives a sense of violation.

Primary and secondary system of email : It is also a relatively common complain that a person’s email has been hacked .To this I had come up with an idea of Primary and a Secondary system of email.

With this system there is a central email address e.g. yourname@gmail.com. This ID should never be publicized or given to anyone except family members. Now you can create few other SECONDARY email addresses for various purposes. 1 email ID for your bank, 1 for your MFs and demat account, 1 for public domains like promotions and 1 for your employer etc. Next step is to install a email client like Outlook, Eudora etc on your PC. Laptop or Tab and have all the above accounts on the same client for receiving emails. For sending emails you can individually select the email id from which the email is to go out.

Second method, is to go individually to the particular POP mail site and the individual email account and create the FORWARDING to your Primary email address , which was yourname@gmail.com .

In this way your individual email addresses will not be known by entities who should not know  that address and you will also be able to know if a particular email address has been breached.

This will also deal with the data theft of email address that has become prevalent nowadays with employees of banks, insurance companies resigning and carrying away the data with them to be misused later.

Conclusion:

Always opt for online Statement of account of banks, Demat services, Mutual funds, Insurance companies etc.

Have individual email IDs for individual uses and have them redirected to your unique central account.

Relying completely on emails will not only enable you to  receive and organize them systematically but also keep a record for an extended period of time.

ELECTRONIC TRANSACTIONS:

 Most of the Seafarers and expatriates have their salaries remitted to a savings bank account. This is even today done by depositing cheques in the accounts and the money lies there for a few days to few weeks till you can access the account or issue a cheque on it. It is seen that there is always a week or two delay between the money coming to the account and be invested further. Sometimes this delay can be of months too.

Considering even a 10-15 days delay with 7-8 months for seafarers and 12 months for other individuals there is a huge opportunity cost involved and wasted. Even if you were to use the money for opening a Fixed deposit this gets delayed by 80-120 days for that amount. If the purpose is for investing in MFs or stocks the loss in opportunity cost is huge.

  I have always gained because of the electronic transactions. One such instance I distinctly remember. I saw that it was the last day of the higher interest rate of the bank which they had hiked only for 15 days in 2012 to attract NRE deposits. They obviously do not inform you .So while I was on ship, I could open FDs on line and gain by locking into a higher interest rate for a very long time. Similarly, I have gained umpteen times by investing online in case of large crashes of the market while being on board the ship.

Hence it is definitely in order that you opt for Internet transactions. Opt for i-transactions for your bank accounts, mutual fund investments, access to demat account even if you are not interested in the online sale-purchase of stocks.

Also opt for DCB (Direct credit to bank) of your Mutual fund redemptions, share-dividends, insurance paybacks and proceeds and any other source from where you receive or liable to receive funds.

In India at least the central bank called RBI is making compulsory to opt for electronic transfers.

You may be surprised that the amount of unclaimed dividends and bonuses in the capital market is so large that the government body called SEBI has formed a Investor’s Education and Protection fund.

Similarly, unclaimed amount from PPF and Employees Provident Fund is well into over Rs. 100 billion.

All this is due to poor record keeping by individuals on their personal record keeping. Most of the time reason is also that when the depositor dies the surviving members of the family has no idea about the financial products that the deceased had invested or saved in.

Similar case is with insurance policies. Due to poor education of the family members, the only time the money is required is when the Insured Person is dead. After him mostly there is no one to form the family as to what they should do.

Few cases have come to my personal attention where after the person had passed away. Family could not file a claim as they could not get their hands on the Policy documents. The agent did not inform them since he is supposed to be paid by the company. The company was not pleased when I sent them to file their claim after 3 years.

Now there are custodians nominated by government who can do the safekeeping of your Insurance documents in a demat way, just like your shares. But for that you must inform your family.

Conclusion and takeaways:

• 1.       Opt for electronic fund transfers and internet transactions in your financial dealings.
• 2.       Keep a record of all your investments in one place.
• 3.       Opt for Direct Credit to bank of ALL your redemptions, sales, dividends, bonuses.
• 4.       Opt for SMS information also which is available freely nowadays.
• 5.       Keep an electronic record of your insurances.
• 6.       Invest in a good antivirus.
• 7.       Keep changing your passwords regularly.
•  

 

PETROL AND OUR NATIONAL DUTY

So many times we just take up part data and draw conclusions that suit  our argument. This is also the reason why the standard of Indian researchers in our colleges/universities is less than satisfactory.
The below table is itself explanatory of this fact.
The compiler has taken lot of trouble in accumulating the data and making the slide.However he has overlooked a certain  fact that that a nation's economic calculations are not based on simple additions and subtraction.
In the year2005-2006 the average Re/ $ average rate was  Rs.44.2735 which as per the table pegs gasoline(petrol) as $0.9224 per litre.
For the year 2015-2016 the official average rate is still not out but let us take it as 64.50. The rate per litre comes to $0.9488 .
Here too I can take whatever $/Re and petrol rates to suit my argument=- that is the beauty of statistics- but that is not our lookout here.
1. What the compiler has overlooked is that during the decade in question Diesel was heavily subsidised and the subsidy component was either being financed by Fixed and elevated Petrol price.
2.Apart from the petrol , government was covering the shortfall by giving cash transfer to OMCs. This shortfall was obviously being funded by the tax payers.
3. The prices that you are seeing between 2007 and 2008 and again between 2008 and 2014 Jan have highly fluctuating. What do you think was the price that the Oil importers were paying to the O(il) P(roducing) C(ountries). This price is the spot price or sometimes the long term contract price.
4.During this time there have been great political turbulence in the middle east .Iran has been a subject of great interest. It could not sell it's oil and US placed embargo on it's oil export. All these had effect on the oil availability as such the country had to do a lot of spot purchases, all this while burdening the tax payer and the Petrol user.
5.Even the Onion buyers know that prices vary with demand. During the above decade the automobile industry has churned out a double digit growth . The farmer in Punjab has used free water  generated by diesel pumpsets running on subsidised diesel.
But during this growth in demand the price of petrol has mostly remained static.
6.All the well-to-do citizens bought 2000cc+ powered SUVs running on subsidised diesel.That included politicians, businessmen,media person, property dealers and crooks who paid no taxes.
At this time no one ever questioned the price of petrol, because they were not using it. It was being used by the poor Scooter, motorcycle and  Maruti 800 and Santro users.
Just for your information, very few luxury cars exist that run on petrol.Most run on diesel.
7.Now when the oil price has inched down only in line with the previous pattern. Should the government not try to eliminate the oil subsidy that has already burnt a hole in it's pocket and cover the shortfall on account of old subsidy..
8. As per government statistics ( which may not be accurate) 8 crores of LPG cylinders have been distributed to people who did not deserve it. This has been extrapolated from the no. of people who have given up their LPG subsidy.

At the end of my poorly managed argument, all I can say is that whatever be the form, it will always be the citizens who will pay the bills of the government. The government has no money, NO GOVERNMENT OF THE WORLD HAS EVEN A SINGLE CENT. It is all citizens money in form of taxes or loan given to the government in form of Bank FDs, Post Office schemes , PPF etc.
What your objection should be not micro issues that the government tries to put forward to you to distract you. should ask and ask for good governance.
File regular RTIs and Public Grievances for the useage of your tax money.
File petitions on downsizing of government machinery.
When most of the work is handled by Infosys and TCS, why is the IT department using almost 45% of it's tax revenues generated.
Why is there a full department of service tax in just 15 years?
Why should the direct taxes not be done away completely and we survive on the GST and expenditure tax?
Why must the government revenue departments not publish a Annual Report like Private and Public companies.
These are the questions that citizens must ask but no-one ever will.
It is much easier to throw vague barbs at no-one in particular and pretend that we have done our national duty... but we haven't.
JAI HIND

DOING WHAT YOU KNOW BEST

DOING WHAT YOU KNOW BEST

At least two to three times a year , the financial world provides an opportunity to the 2 billion literate experts of this world. This opportunity manifests itself in making quite a few armchair economists every time  and also throws up a lot of investment experts and advisors. This is required also, because there are serious shortage of jobs in this world; and what better job can be there than to comment upon the economies of the world , tell the televisions that the doom is near and how this crash is worst ever that the world has seen- ever in most cases meaning since last week .

I have always approached most of the things rather simplistically i.e. from First Principles. Here is how they went:

 What is a Stock/Share? It is part of a business that anyone can own legally, even if someone has limited funds.

What Stocks/Shares should I buy? Of a good reputable business which has near monopoly . Preferably a product that is used regularly and cyclically.

But I don’t understand balance sheets, all the financials which are to be considered while buying a share what should I do? Invest in Mutual Funds. Diversified and preferably large cap.

How long should one hold the shares of a good company? Forever! If the business is good and growing , why would you want to sell it and start looking for another good business. It is like closing your own running shop and starting another one instead.

This was as close my mind worked towards investment and all was going well… till something called derivatives came along.

These were very complicated financial concepts which made the people who were regularly buying and selling everyday (and hence called traders)- even more busy. Now they were not buying shares but promising to buy a whole batch of shares of a company by paying a fraction of what you and me were paying by “actually buying shares”. To cut a long story short at various times when the markets fell due to a lot of reasons that they do, a lot of people lost money, homes and even lives.

An even more complicated product wiped out the economy of United States and Europe in 2008 .

During all this time I was quite bewildered (not enough to not continue with my MF investing).I was wondering that what economically productive function was being performed by the FnOs or derivatives and individuals and companies who were dealing in it.

If something is not produced, it is not part of an economic activity. This production can be of something tangible like metal, petroleum, machinery, banking, Pharma OR non tangible like IT, healthcare OR services. Something must be produced to have a value attached to it. We all are part of that economic activity. If we do not work, not only will we not be able to earn for a living but also not add any value to the society and the economy. There is a classic theory of economics called Guns and butter, which you can google .

In short… we must do what we know..exert and assert our skills.

It is very important to read the above and understand before reading what I am about to mention below.

We earn by working and save it in the banks and further invest it in Mutual Funds, stocks, gold, real estate, bonds etc. The companies, the stocks of whom you own are carrying on their business and making a profit because of which your share price goes up. But what happens if that company whose shares you own, instead of using it’s profit to expand it’s business uses the money to invest in the Stock Market or buys MFs for itself? There is nothing wrong with it legally. They are confident that they will make more profit by investing than by carrying on their own business.

Let us further take this example. The government of a country has wealth in form of foreign exchange or surplus taxes in its budget (which rarely a government has). Now instead of using that wealth on development programs the government decides to take that money and invest in the stock market. Is that right, or is that correct? Is the government doing anything wrong? It maybe argued that by doing so the government is trying to bridge the deficit that it is always saddled with because the receipts from taxes are always less than what it has to spend for development. It maybe true ,however to me it looks like a python trying to eat itself tail onwards.

This was what China was trying to do. It was using it’s reserves to make profit from the market that was supposed to be coming up by it’s own developmental and growth policies…and who was supposed to be having a higher growth rate than China.

There is more to this in form of improper or incorrect data that used to be flowing out from China, which I always believed was “doctored” by the government. China is in fact in a unique position to show to the world what it intends to show and how much it has to show. I am personally witness to 2,3 incidents where the government or party workers kicked in to what was supposed to be a private drydock in order to create subterfuge and diversion from accidents that happened due to safety having taken a backseat.

Coming back to our talk… it is important for everyone to do what they are trained to do or supposed to do.

Government is supposed to create policies and a safe atmosphere for it’s citizens and businesses.

Businesses and industries are supposed to carry out their enterprise in earnest.

Citizens are supposed to abide by law like everyone else, work and earn their living and ensure that their dependents are looked after.

This is the ideal world…or utopia as we call it.

What actually happens is …

Government does business or creates confusion by interfering in businesses.

Businesses try to interfere with governance and twist laws to extract unfair amount from the citizens.

Banks mislead the clients and channelize the wealth they are supposed to protect into avenues that are profitable only to themselves.

The professionals who are supposed to heal, build bridges, protect the country and carry on their professions start dabbling with their money and lack of knowledge…

As a result all goes haywire… and we have the entropy and disorder that we have.

About MNCs and competition

There is a certain mindset doing rounds in the psyche of the nation, which is denouncing the competition in business vis a vis the foreign companies and FDI.
Various twisted theories are being touted to prove how the nation is being robbed off ( or of) its riches and how very soon we shall be poorer.
It may have been alright if these theories came from the general population, unfortunately they emanate from various professionals of the business community or who support the business community like MBAs.
Here is why I think that such theories are outdated:
1. In modern business world , capital in form of currency is not restricted within boundaries of any countries. A plain load of wealthy tourists can easily spend more money on a 2 week holiday than the bottom line of a small cap company balance sheet. In turn they need not even get any durable or non durable product back into their country.
2. Whether it is a foreign or a domestic company they have to pay customs, excise , corporate and Income tax alike. There is no discrimination.
3. Competition does not mean loss of jobs- as with competition various latent demands of products is created.
4. Most of the swadeshi brands like Neem toothpaste that we think are  Indian are already owned by MNCs and various brands like Burnol which belonged to British company are owned by Indian companies.
5. With the onset of liberalization of 1991, the Indian companies have no doubt expanded , but they have also siphoned out the profits by way of under and over invoicing. This money that is coming by way of P-notes into the economy is actually and factually not FII but the Indian money routed back.
6. In keeping with the above it is better to have the foreign funds come in as FDI rather than FII; since the latter vanishes with the season.
7. If we are so fixated about promoting Indian companies , then why do these Indian companies not introduce some cutting edge technologies or develop greenfield factories with entire Indian input in terms of material resource and Indian capital.
8. Why should these Indian companies be allowed to set up by importing finished and semi finished machinery. At the end of the day IF anyone is going to set up a company in India- they will use Indian human capital- so why the fuss.
9. Last but not the least quite a few large Indian conglomerates have started appointing their CEOs from foreign countries. Well if they can't find someone to head from India then why the patriotic cry.

It's been 10 months since the last post...
Lot of eventful events have happened in these 300 days..few of them that have actually changed my life... some of them that have changed that of the whole nation's.
With the suggestions of a few colleagues at sea I have started writing a book so as to assist them with planning their future finances.
Will like to put up the book on this blog instead of putting it up for sale.

MY REPUBLIC

What is the idea of wishing each other Republic day if we don’t even know the importance of every year.

If we don’t even know how far away or how close to historical destination we are.

Very few of my countrymen recognise that in the last 3 years they have passed so close to what would have been civil war in any country.

The discontent with the establishment did not result in any leader being slain, it has resulted in the country rallying their support behind to simple 2 ordinary men. The third movement even a larger one in support of a girl whose name they never knew. Brave people of the republic – braved the chill and cold water cannons at the hands of their own country police . For this even the police must be lauded who have learnt to do their job- however despicable it may be. In any other country like the members of the ARAB SPRING – the police may have very much killed the leaders.

We have to congratulate the republic where the ordinary people have forced the government to set up a law reform committee- First Time in the History of the Republic.

We have to congratulate the republic where the Chief Justice has the courage to rebuke it’s prime minister and lament that he was not able to participate in the anti rape protests at india Gate.

We have to congratulate the republic where a retired Chief Justice can rebuke the government for its’s inaction.

...WHERE the law reccomendations are based on the input of 90000 ordinary Indians.

…WHERE the government brings out a law on RTI which in effect creates heroes out of ordinary people.

…WHERE an ordinary citizen can stand up with few supporters and bring down the greatest of politicians.

Indians and countrymen lend me your ears for I come here to commemorate the republic and it’s predecessors and not bury it.

What Gandhi stood for 70 years back- is still there and you can feel it inside you.

It is here  that power can pass through the hands of the mightiest without a drop of blood.

Celebrate that.

Celebrate your maturity which has happened on the back of 150 years of independence struggle and not 600 years of slavery.

We are THE REPUBLIC.

WE ARE INDIA.

When you can fee lit inside you- get up and wish others- HAPPY REPUBLIC DAY.