FirstBiz

Personal finance advice in 87 words: Lessons on investing from Scott Adams

 scott adams[1]Vivek Kaul
One of my bigger mistakes in life was to spend two years doing an MBA. ‘Herd mentality’ usually leads to disastrous decisions. After completing my MBA, I discovered Scott Adams and his cartoon character ‘Dilbert’. Dilbert(and effectively Adams) taught me more about management and how companies ‘really’ work, than two years I spent at a business school.
Interestingly, in the recent past, I have also picked up some basic personal finance lessons from reading a few books written by Adams. In his latest book How to Fail at Almost Everything and Still Win Big, Adams shares some of his experiences and draws a few personal finance lessons from them.
When the dotcom boom was on, Adams invested in this start-up called Webvan. “You could order grocery-store items over the Internet and one of Webvan’s trucks would load your order at the company’s modern distribution hub and set out to service all the customers in your area,” writes Adams.
He thought that Webvan would do for grocery what Amazon had done for books and bought the shares of the company. As the dotcom bubble lost steam and the stock price of Webvan fell, Adams bought more stock (probably following the strategy of dollar cost averaging). As the price of the stock fell, he repeated this process several times.
As Adams writes “When management announced they had achieved positive cash flow at one of their several hubs, I knew I was onto something. If it worked in one hub, the model was proven, and it would surely work at others. I bought more stock.”
A few weeks later, Webvan went out of business. “Investing in Webvan wasn’t the dumbest thing I’ve ever done, but it’s a contender…What I learned from the experience is that there is no such thing as useful information that comes from a company’s management.”
Adams also talks about this phenomenon in the context of professional stock analysts in his book Dilbert and the Way of the Weasel. As he points out “Professional stock analysts can do something that you can’t do on your own, and that is to talk directly to senior management of the company. That’s how a stock analyst gets all the important inside scoop not available to the general public, including important CEO quotes like this: “The future looks good!””
After his disastrous experience with Webvan, Adams decided to that get some professional help in investing all the money that he was making once the royalties of Dilbert started to pour in. As he writes in How to Fail at Almost Everything and Still Win Big “I didn’t have the time to do my own research. Nor did I trust my financial skills…My bank, Wells Fargo, pitched me on its investment services, and I decided to trust it with half of my investible funds. Trust is probably the wrong term because I only let Wells Fargo have half; I half trusted it. I did my own investing with the other half of the money.”
The results of the half trust weren’t any good either. “The experts at Wells Fargo helpfully invested my money in Enron, WorldCom, and some other names that have become synonymous with losing money. Clearly investment professionals did not have access to better information than I had. I withdrew my money from their management and have done my own thing since then,” writes Adams. He has been investing in index mutual funds since then.
Adams discusses the problem of listening to so called experts in Dilbert and the Way of the Weasel. As he writes “My problem is that I listen to financial experts, who give valuable advice for moving my money from me to them. My first clue that experts are less than omnipotent might have been that they all recommended different and conflicting things. The one thing that all their recommendations have in common is that is that if you follow their advice, they will get richer.”
Adams also talks about the importance of investors concentrating on systems and not goals. “Warren Buffett’s system for investing involves buying undervalued companies and holding them forever, or at least until something major changes. That system (which I have grossly oversimplified) has been a winner for decades. Compare that with individual investors who buy a stock because they expect it to go up 20 percent in the coming year; that’s a goal, not a system. And not surprisingly, individual investors generally experience worse returns than the market average,” writes Adams in How to Fail at Almost Everything and Still Win Big. This is a simple but a very important point to understand for every investor.
In fact, Adams once even tried to write a book about personal investing. As he writes in Dilbert and the Way of the Weasel “It was supposed to be geared toward younger people who were investing for the first time. After extensive research on all topics related to personal investing I realized I had a problem. I could describe everything that a young first-time investor needs to know on one page. No one wants to buy a one-page book even if that page is well written…People would look at it and say, “That’s all well and good, but I’m paying mostly for the cover.””
In fact, the plan was not even one page. It was just 87 words and here it is:
Make a will. Pay off your credit cards. Get term life insurance if you have a family to support. Fund your 401k to the maximum. Fund your IRA(individual retirement account) to the maximum. Buy a house if you want to live in a house and can afford it. Put six months worth of expenses in a money-market account. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement. (as described in Dilbert and the Way of the Weasel) (401k and IRA are essentially what we call provident funds in India).
These 87 words summarise all that is there to know about personal finance.
The article originally appeared on www.FirstBiz.com on February 15, 2014
 (Vivek Kaul is a writer. He tweets @kaul_vivek)  

Food inflation is down but the figure Raghuram Rajan is watching hasn’t even budged

ARTS RAJANVivek Kaul  

As soon as some new economic data is declared by the government, the business lobbies demand that the Reserve Bank of India(RBI) should cut interest rates. The response is almost Pavlovian. Something similar happened yesterday as well. The index of industrial production(IIP) shrunk by 0.6% for the month of December 2013.
The manufacturing sector which constitutes close to three fourths of the index declined by 1.6% during the month. In comparison, it had declined by 0.8% during December 2012. The IIP is a measure of the industrial activity within the country and given that the number is in negative territory, what it tells us is that all is not well with the Indian businesses.
No sooner had the number been declared, the Confederation of Indian Industry I(CII), a leading business lobby in the country demanded that interest rates be cut. “We are especially concerned about the performance of the manufacturing sector, which continues to be in the red,” CII Director General Chandrajit Banerjee said. “We look forward for an accommodative monetary policy to spur demand and revive investment activity especially as inflation has started receding,” he added. Accommodative monetary policy essentially refers to the RBI cutting the repo rate, the rate at which it lends to banks.
The logic is that if the RBI cuts the repo rate, the banks will cut the interest rates at which they lend. This will ensure that people will borrow and spend more, which will translate into greater revenue and profit for businesses. Once businesses start making more money, they are likely to invest more as well. All this will lead to a higher economic growth, which for this financial year is likely to be at or around 5%. Or so goes the argument.
Another reason why business lobbies feel that the RBI should be cutting interest rates is the fact that the consumer price index(CPI) inflation in January 2014 fell to a two year low of 8.79%. This was on the back of food inflation falling to a 22 month low of 9.9%. Food products constitute nearly half of the consumer price index. Food inflation was at 12.2% in December 2013.
Food inflation came down because of the vegetable prices falling by 13.2% between December and January. This was primarily on account of greater supply of vegetables hitting the market. During the period August-September 2013, farmers made significantly better returns on their produce. This led to them planting more vegetables, leading to an oversupply in the recent months.
So with the consumer price inflation falling to a two year low, the business lobbies want the RBI to start cutting interest rates in order to revive consumer demand, which has been stagnating for a while. The IIP data when looked from a use based point of view, indicates towards the same. The consumer durables measure fell by 16.2% during December 2013.
But the question is will a cut in interest rates revive consumer demand? While in theory the link appears to be fairly straightforward, that is really not the case. Let’s consider a case where an individual takes a three year two wheeler loan of Rs 40,000 from the State Bank of India to be repaid over a period of 36 months at an interest of 18.25%. The EMI for this comes to around Rs 1451.
Now lets assume that interest rates crash dramatically by one third from their current levels and the rate of interest on a two wheeler loan from the State Bank of India falls to 12.25%. In this case, the EMI falls to Rs 1333 or around Rs 118 lower. Hence, even if interest rates come down by a third, the EMI falls only by around Rs 118 or a little over 8%.
Someone who wants to buy a two-wheeler will definitely not be influenced by it. As John Kenneth Galbraith writes in The Affluent Society, first published in the 1950s, “The customer, in contemplating the purchase, is less aware of the interest rate than of the monthly charge…There is, in fact, considerable agreement that monetary policy does not make any effective contact with consumer borrowing and spending. During periods of active monetary policy, increased finance charges have regularly been followed by large increases in consumer loans.”
Given this, the customer who wants to purchase a consumer good by taking on a loan should be comfortable with the idea of paying an ‘x’ amount of money every month as an EMI, irrespective of what the interest rate is.
In this scenario, what becomes very important is the rate of inflation. For more than five years, inflation as measured by the consumer price index has been very high. This has largely been on account of food prices having gone up at a very fast rate. High inflation has eaten into the incomes of people and led to a scenario where their expenditure has gone up faster than their income. This has led to people cutting down on expenditure which is not immediately necessary. This is reflected in the consumer durable number which fell by 16.2% in December 2013.
Food prices have now started to come down and that is some good news for the Indian consumer. But if one looks at what economists call core inflation (i.e. non food non fuel inflation which forms around 40% of the consumer price inflation index) that remains to be high at 8%, as it has over the last few months. The core inflation contains measures of housing, medical care, education, recreation, transport, personal care etc, basically, everything that is required for a reasonably comfortable living.
Interestingly, this number is closely tracked by the RBI governor Raghuram Rajan. He had said on January 29, 2014, “that he would have liked to see a greater reduction in core inflation.” A day earlier in an interaction with the media he had said that “. Core (inflation) tells us something about the second round effects. Even within core, there are some which we need to pay attention to like some aspects of services like education, which have been going up quite strongly.” Given this, it is unlikely that the RBI will cut the repo rate anytime soon.
If the consumer demand story is to be revived again, the core inflation needs to be brought down, so that consumers feel comfortable in spending money. The ironical part here is that despite the economic growth falling from more than 10% to less than 5%, over the last few years, core inflation continues to remain high. The explanation for this lies in the fact that the high price of food, leads to a demand for higher wages and that leads a higher core inflation. When businesses have to pay higher wages, they, in turn, demand a higher price from consumers. And this in turn impacts consumer demand.
The government can definitely play a role here by cracking down on hoarders of food and at the same ensure that there is no shortage of wheat and rice in the market, of which it has enormous stocks.
As far as businesses lobbies are concerned it is worth looking at what Galbraith said in that context. “To restrict consumer borrowing by increasing the interest cost on instalment and other loans collides abruptly with the process of consumer-demand creation…Any step to discourage borrowing and buying will be automatically opposed by the machinery for consumer-demand creation.”
 The article originally appeared on www.FirstBiz.com on February 13, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

To meet fiscal deficit, Chidu does an Enron, junking all accounting principles

P-CHIDAMBARAMVivek Kaul  
The Mint newspaper has a very interesting article today on the finance minister’s P Chidambaram’s latest move to use the Reserve Bank of India(RBI) to help meet the fiscal deficit target of 4.8% of the GDP, set at the beginning of this financial year. Fiscal deficit is the difference between what a government earns and what it spends.
As per this plan the finance ministry is talking to the RBI for an interim payment or transfer of the central bank’s income. The RBI follows an accounting year of July to June. Given that, it usually transfers its income to the central government in August every year. Last year, the central bank had handed over Rs 33,100 crore to the government and the year before last, it had handed over Rs 16,100 crore.
But the government does not want to wait till August this year. It wants the central bank to pay up immediately, in order to contain the burgeoning fiscal deficit. The trouble is that the RBI Act does not have a provision for transferring surplus before the accounting year ends.
The government is desperate for any revenue irrespective of where it comes from. The fiscal deficit for the nine month period between April and December 2013, stood at Rs 5,16,390 crore or 95.2% of the annual target of Rs 5,42,499 crore (or 4.8% of the GDP as estimated in the budget presented in February 2013).
For the first nine months of the financial year, the government has run an average fiscal deficit of Rs 57,377 crore (Rs 5,16,390 crore/12). But for the remaining three months, it has very little room.If the government has to match the numbers projected in the budget presented in February 2013, over the next three months it can run a fiscal deficit of only around Rs 26,109 crore (Rs 5,42,499 crore – Rs 5,16,390 crore). This means an average fiscal deficit of Rs 8,703 crore per month, which is a whopping 85% lower than the average fiscal deficit per month that the government has run between April and December 2013.
One way of controlling the fiscal deficit is slashing expenditure. This is not very easy to do given that salaries need to be paid, employee provident fund needs to be deposited, interest on government debt needs to be paid and the government debt maturing needs to be repaid.
But one trick that the finance ministry has come up with on this front is to postpone a lot of payments to the next financial year. An article in the Business Standard estimates that subsidies of around Rs 1,23,000 crore will be postponed to the next financial year. These are subsidies on oil, food and fertilizer which should have been paid up by the government in this financial year, but will be postponed to the next financial year. The article points out that the government will need Rs 1,45,000 crore to pay up all the subsidies but is likely to sanction only around Rs 22,000 crore. This leaves a gap of Rs 1,23,000 crore which will be postponed to the next financial year, and will become a huge headache for the next government.
This essentially means that the government will not recognise expenditure when it incurs it, but only when it pays for that expenditure. This goes against the basic accounting principles, where an expenditure needs to be recognised during the period it is incurred. If a private company where to do such a thing it would be accused of fraud. Interestingly, even last year a lot of subsidy payments had been postponed. The American company Enron used this strategy for years to over- declare profits. It used to recognise revenue expected from the future years without recognising the expenditure expected against that revenue, and thus over-declare its profit.
That’s how things stack up for the government on the expenditure side. On the income side, the government is indulging in massive asset stripping. Since January 2014, public sector banks have announced interim dividends of Rs 27,474.4 crore. Now what is the logic here? Earlier this year, the government had put in Rs 14,000 crore of fresh capital in these banks. So, the government gives ‘x’ rupees to public sector banks and then takes away 2’x’ rupees from them.
Then there is the very interesting case of the Oil India Ltd and ONGC buying shares in Indian Oil Corporation worth Rs 5,000 crore, a company which is expected to lose around Rs 75,000 crore this year. Hence, no investor in his right mind would have bought stock in this company.
Given that all these companies are owned by the government, this is essentially a complicated manoeuvre of moving cash from the books of these companies to the books of the government. The next time any UPA politician talks about corporate governance, the example of IOC should be brought to his notice.
And then there is Coal India Ltd. The world’s largest coal producer declared a record dividend in January. This dividend aggregated to Rs 18,317.5 crore. Of this, the government will get Rs 16,485 crore, given that it owns 90% of the company. The government will also get Rs 3,100 crore, which Coal India will have to pay as dividend distribution tax. This money should actually have been used by Coal India to develop more coal mines so that India does not have to import coal, like it currently does, despite having massive coal reserves. But that of course, hasn’t happened.
Also, there is another basic issue here. The sale of assets from the balance sheet to meet current expenditure is not a great practice to follow, given that assets once sold cannot be re-sold, but the expenditure will have to be incurred every year. Asset sales cannot be a permanent source of revenue.
The UPA government has brought India to a brink of a financial disaster. The next government which will take over after the Lok Sabha elections later this year, will have a huge financial hole to fill. As the old Hindi film dialogue goes “hum to doobenge sanam, tumko bhi le doobenge (I will drown for sure, but I will ensure that you drown as well).” The UPA clearly has worked along those lines.
The article originally appeared on www.FirstBiz.com on February 12, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Shopping lesson from Calvin and Hobbes: So much selection, and so little choice

Calvin---Hobbes-calvin--26-hobbes-254155_1024_768Vivek Kaul  
A few months back I stopped going to the local supermarket. There were two reasons for the same. The first reason was the fact that finding a cab that would drop me home, proved to be a tad difficult on occasions in the evenings. Like the autowallahs of Delhi, the taxiwallahs of Mumbai are also a little finicky, when it comes to small distances (though I must add that this happens only in the evenings in Mumbai, unlike Delhi, where it is a perpetual phenomenon). Given this, I had to walk home on occasions, carrying the stuff that I had bought. And that was not very pleasant.
The second reason was the fact that the amount of choice overwhelmed me. It left me confused on what to buy and what not to buy. Even buying something as simple as biscuits could involve a few minutes of decision making. I figured out that calling up my local banya and getting stuff home delivered was easier.
In fact the situation reminded me of a Calvin and Hobbes comic strip that I had read a while back. And this is how the rant from the comic strip goes:
Look at this peanut butter! There must be three sizes of five brands of four consistencies! Who demands this much choice? I know! I’ll quit my job and devote my life to choosing peanut butter! Is “chunky” chunky enough or do I need EXTRA chunky? I’ll compare ingredients! I’ll compare brands! I’ll compare sizes and prices! Maybe I’ll drive around and see what other stores have! So much selection, and so little time.
But this set me thinking on whether I was the only one having problems with more choice or was there something more to it? At a basic level we call love more choice, there is no doubt about that. As Sheena Iyengar writes in The Art of Choosing “Whatever our reservations about choice, we have continued to demand more of it.”
But is more choice helpful? “An abundance of choice doesn’t always benefit us…The expansion of choice has become the explosion of choice, and while there is something beautiful and immensely satisfying about having all this variety at our fingertips, we also find ourselves beset by it,” writes Iyengar.
She says this on the basis of a very interesting experiment on jams, she carried out with Mark R. Lepper . This study was finally published under the title When Choice is Demotivating: Can One Desire Too Much of a Good Thing?
Barry Schwartz summarises this experiment in The Paradox of Choice: Why More is Less, very well. As he writes “Researchers set up a display featuring a line of exotic, high-quality jams, customers who came by could taste samples, and they were given a coupon for a dollar off if they bought a jar. In one condition of the study, 6 varieties of the jam were available for tasting. In another 24 varieties were available. In either case, the entire set of 24 varieties was available for purchase.”
The results were surprising and conclusively proved that choice beyond a point essentially ends up confusing people, rather than making their lives easy, which should be the case. As Schwartz points out “The large array of jams attracted more people to the table rather than the small array, though in both cases people tasted about the same number of jams on average. When it came to buying, however, a huge difference became evident. Thirty percent of the people exposed to the small array of jams actually bought a jar; only 3 percent of those exposed to the large array of jams did so.”
As Iyengar and Lepper conclude in their research paper “. Thus, consumers initially exposed to limited choices proved considerably more likely to purchase the product than consumers who had initially encountered a much larger set of options.”
The logical question to ask is why is that the case? “A large array of options may discourage consumers because it forces an increase in the effort that goes into making a decision. Or if they do, the effort that the decision requires detracts from the enjoyment derived from the results,” writes Scwartz.
In fact, less choice is more beneficial for companies as well. As Iyengar and Lepper point out in their study “Several major manufacturers of a variety of consumer products have have been streamlining the number of options they provide customers. Proctor & Gamble, for example, reduced the number of versions of its popular Head and Shoulders shampoo from 26 to 15, and they, in turn, experienced a 10% increase in sales.”
This does not mean that choice should be done away with completely. The lesson here is that beyond a point choice confuses rather than helping people. When people are given a limited choice they are more likely to make a choice. As Iyengar writes in The Art of Choosing “Since the publication of the jam study, I and other researchers have conducted more experiments on the effects of assortment size. These studies, many of which were designed to replicate real-world choosing contexts, have found fairly consistently that when people are given a moderate number of options (4 to 6) rather than a large number (20 to 30), they are more likely to make a choice, are more confident in their decisions, and are happier with what they choose.”
Interestingly, the rise of the internet was helped to make choosing easier. But it hasn’t. It has introduced one more level of choice. As Schwartz explains “The Internet can give us information that is absolutely up-to-the-minute, but as a resource, it is democratic to a fault—everyone with a computer and an Internet hookup can express their opinion, whether they know anything or not. The avalanche of electronic information we now face is such that in order to solve the problem of choosing from among 200 brands of cereal or 5000 mutual funds, we must first solve the problem of choosing from 10,000 websites offering to make us informed consumers.”
The article originally appeared on www.FirstBiz.com on February 12, 2014
 (Vivek Kaul is a writer. He tweets @kaul_vivek)  

IPL is a great example of why big brands die hard

Indian-Premier-League-IPL-logoVivek Kaul
The Indian Premier League (IPL), the world’s biggest T20 cricket tournament, has been surrounded by controversies for a while. The latest round started yesterday with a panel appointed by the Supreme Court indicting Gurunath Meiyappan for spot fixing. Meiyappan is the son-in-law of the BCCI president N Srinivasan. Srinivasan also owns the IPL Team, Chennai Super Kings (CSK). He is also scheduled to takeover as the first chairman of the International Cricket Council (ICC) from July 2014.
This is not the first time that controversy has hit the IPL. In the past, there have been issues about the shenanigans of Lalit Modi, and how he started and ran the tournament. There have been issues about the union minister Shashi Tharoor using his late wife Sunanda Pushkar to pick up “sweat equity” in the now defunct IPL team Kochi Tuskers Kerala. Then there have also been issues about spot fixing, leading to the arrest of S Sreesanth, Ajit Chandila and Ankeet Chavan, who played for the Rajasthan Royals cricket team.
But despite these controversies, the brand IPL has held strong and advertisers have thronged to it, year on year. Interestingly, the research firm American Appraisal, in a report titled Clearing the Fence with Brand Value: A Concise Report on Brand Values in the Indian Premier League found that “43 percent of the respondents thought that the controversies surrounding the tournament impacted their new or continued relation with the IPL as sponsors or advertisers.” But more interestingly, “almost half said that the controversies in no way influenced their decision to affiliate with the tournament.” American Appraisal reached out to over 300 companies and ad agencies that are involved with the IPL. 
So what is it that makes brand IPL so strong despite all the controversies that have surrounded it? India is a cricket mad nation and for any company which has a consumer oriented focus, some money to spend and a lazy marketing strategy, it makes sense to be associated with the IPL brand. But that as they say is a no brainer.
The more important question to ask here is why have the companies continued to be associated with the IPL, despite all the controversies surrounding the tournament. Niraj Dawar possibly has an answer in his book Tilt- Shifting Your Strategy from Products to Customers. As he writes “Brands die hard…One consequence of the strong association of a brand with a criterion of purchase is that even when the brand falls behind technologically or fails to deliver on the product, it continues to benefit from the customers’ default assumptions for a long while…Customer associations provide the brand with the buffer that shields it from crises and quality issues.”
The IPL brand is well settled in the minds of the Indian consumer and the controversies that have hit the cricket tournament have been unable to dislodge it. Given this ‘strong’ association of the Indian consumer with the IPL, it is not surprising that companies and their brands want to continue to be associated with the T20 tournament.
This, despite the fact that the IPL may have failed to deliver on its main product, which is an honestly and competitively played twenty over cricket match. For all we know that may not be happening, given that the owners of IPL teams (like Gurunath Meiyappan of CSK and Raj Kundra of the Rajasthan Royals) may have been betting against their own teams.
A report in the Mumbai Mirror newspaper points out “In his exhaustive and extensive report on the spot-fixing scandal in last year’s Indian Premier League, Justice Mukul Mudgal has raised suspicion about one particular game between the Chennai Super Kings and the Rajasthan Royals. While the 170-page report largely remains inconclusive over whether matches were fixed in the league, it clearly states this particular match needs to be investigated. “The Committee feels that there is enough information available on record to indicate that a further investigation is required in respect of the match held at Jaipur, between Rajasthan Royals and Chennai Super Kings on May 5, 2013,” the report says.”
Despite this, the Indian cricket fan (who also happens to be a consumer) is not done with the IPL as yet. Once a brand is established consumers typically tend to give it a long rope. As Dawar writes “Microsoft was able to retain most of its customers even through the life of the ill-conceived Windows Vista operating system, a disastrous product that would have been the death knell for a start-up brand. Apple’s reputation was barely dented despite the antenna problems of iPhone 4, AT&T’s spotty coverage, and the embarrassment of prematurely launching Siri, an artificial intelligence bot that was not quite ready for prime time, and faulty Apple iMaps. The brand easily withered these slipups.”
If a start-up would have made any of these mistakes, the game would have been more or less over for it. But that is not the case with big and established brands. Interestingly, the controversies started to hit the IPL only after the first few seasons, and by that time it had already managed to establish itself in the mind of the Indian consumer. As Dawar puts it “Customers are slow to switch, so that even if decline sets in, it is gradual allowing the company time to fix the problem and respond to challenges.”
This time that consumers give a big brand to fix itself can also lead to complacency, as happened in case of BlackBerry. As Dawar puts it “It allows managers the room they need to remain in denial about challengers and challenges. When BlackBerry sales continues to rise, even into 2012 in some parts of the world, its newly appointed CEO felt free to declare early that year, “We have fantastic devices in a fantastic ecosystem. I don’t think there is some drastic change needed.”
We all know what happened to BlackBerry after that. Consumers do give long ropes to big brands, but these are not infinitely long ropes. One day their patience does run out. Maybe, there is a thing or two, the Board of Control for Cricket in India (BCCI) which runs the IPL, can learn from this. 
The article originally appeared on www.FirstBiz.com on February 12, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)