Managing your finances, the mother's way

The world celebrated Mother's Day last Sunday, with almost everyone heralding mothers as the most important person in their lives. And rightfully so. Despite being a father, and a very good one at that, if I might say so myself, I truly believe that mothers are the best. They care for us from the day we are born, through the rest of our lives. And not only are mother selfless, they teach us a lot. My mother has taught me a lot about life and the world, and not only that, I've also learned a lot about managing my finances from her. That mothers are called the Home Minister of a household is a clichéd joke, but mine is also the Finance Minister of ours. The way she manages our home is commendable and what I have seen her do has also helped me handle my finances better. Here are two of them:

Keeping a tab on expenses

From the 10 rupees she might give someone as a tip for handling her grocery bags to the 1,000 rupees she might pay for those groceries, my mom writes every expense down in a dairy. Having seen her do that since I was kid, I got into the habit as well after I started making a living. This habit has helped me immensely in figuring out areas where I need to be frugal rather than frivolous with my expenses. A rupee saved is a rupee earned, after all. And that same rupee when invested is more than one rupee earned.

Budgeting your expenses

And once you know where you're spending more than you should, you can easily set a budget so that you limit that expense. My mom has a set budget for every household expense that needs to be made. The fact that she has a clear idea of how much of what has to be bought allows her to make sure that nothing goes amiss. I do the same. The first budget I have set aside is for my mutual fund investments. Once that's out of the way, the necessity expenses are taken care of and only then a budget is set of entertainment or such expenses.

Both of these things are such basic elements of managing one's finances that we often overlook them while we end up focusing on the more complex issues. But that is another thing that my mom has taught me - get done of the simpler things first before you move onto the tougher tasks. Drink milk before you fill up with something else, or finish studying the easier bits of your syllabus before you move to the tougher sections, she always taught me to focus on the basics and get the foundation strong.

'It's elementary, my dear son,' she'd say. 'Thanks, mom,' is what I now say.

Gain Analysis for 7 months holding...

We have purchased following shares at various times as reported in our previous posts. For an average holding period of 7 months, net appreciation is as under:-

SCRIP	PURCHASE PRICE	PRICE as on 11 May 2015	GAIN	%AGE gain
ENTERTAINMENT NETWORK	410	681.65	271.65	66
EVEREADY IND	110	271.15	161.15	147
FEDDERS LLOYD	85	81.95	-3.05	-4
GRANULES	76	88.85	12.85	17
LLOYD ELECTRIC	180	184.35	4.35	2
NUCLEUS SOFTWARE	223	264.20	41.2	18
R S SOFTWARE	283	173.65	-109.35	-39
SUVEN LIFE SCIENCES	122	291.05	169.05	139
T V TODAY NETWORK	170	237.50	67.5	40
Infinite Computer Solutions	200	231.85	31.85	16
Zicom Security Systems	173	140.65	-32.35	-19
Bajaj Finserve	1450	1442.15	-7.85	-1
	IN ONLY 207 DAYS			31.94%

Disastrous obstacles ahead...

The Titanic, accelerated to 22 knots, full speed ahead, just before it hit the iceberg. Besides all the other factors, the speed at which it was going, gave it little chance of avoiding disaster, and of surviving the damage after it was hit.

This is a very appropriate metaphor for the dilemmas facing India just now. We have a 'Titanic' mentality, a flawed belief in our own invincibility. One part of this Modi Mania says, 'we have Modi', implying he will get us out of any hole, even change the Laws of Physics/ Economics.

To change the metaphor I have used above to describe macro-economic management just now, 'steering the economy' is very similar to driving a car. You don't accelerate a car as you drive through a crowded village, you slow down till you reach an empty stretch again. Or better still, you don't accelerate on a flat tyre, you wait for 'stability' before you try accelerating again.

The world economy is seeing great uncertainty and increased volatility in many markets. Some of the areas are as follows:

• Deflation/ depression possibilities in Europe, as the region nears its third recession in 6 years.
• Fallen oil prices, which will seriously affect major oil producers, including major emerging markets. These economies will see sharp spending cuts, or huge Budget Deficits and hence, falling currencies.
• A general commodity bust, consequent to a slowdown in China, which could tip into a serious crisis.
• A rickety Japan, which has a number of problems, and has still to see the after-effects of an unprecedented last ditch attempt at speeding up a sputtering economy. This could end in a Greek-style blowout.
• A potential currency war, which could be triggered by any of Japan, China or Germany devaluing suddenly and trying to garner export competitiveness. This triggers an upward Dollar spiral, with disastrous consequences for everyone.

Hardly a time for a still-stable Indian economy to try and wring out additional decimal points in growth, by shifting Monetary Policy from its focus on stability. Which makes me want to wade into this 'debate' between Mr. Jaitley and the RBI on Interest Rates.

This chorus for an Interest Rate drop is rather like a bunch of kids sitting in the backseat of a car, screaming 'faster!!! Faster!!!', with no idea of what the driver is dealing with. I don't understand this obsession with growth, in an economy that is one of the fastest growing in the world anyway.....it certainly has the highest growth momentum in the world. It's not like we are teetering on the verge of recession, like Europe, or trying to fight chronic deflation like Japan. I can understand an obsession with growth in those economies.

India is the only major economy still battling inflation. And we are just coming back from a near Currency Crisis.....shouldn't we be focussed on stability, especially given the rocky seas clearly visible ahead. How have we quickly created a consensus that all is well and we are ready to jump off a cliff with an umbrella?

Most of the underlying factors are still in the red zone. The fiscal deficit, for one: we are going to overshoot yet again, a modest target that still brackets us with France, that basket case of a no-hope economy that sits at the heart of the Eurozone crisis. The CAD is back above the 2% red line, in an era when the falling Euro and JPY is going to increase your trade deficit. If you look at the trade-weighted REER in nominal terms, you will find the Rupee has got overvalued, which is not going to be good news for your CAD.

If the CAD also represents your savings deficit, then any further uptick in the Investment Cycle will only bring more bad news on that front. So why not keep high real interest rates to push up domestic savings? A drop in the credit offtake could mean a cyclical deleveraging effect. This can be made up with other reforms that improve corporate profitability, like labour and land (acquisition) reforms, which bring down the cost of other inputs. Tinkering with Monetary Policy to bring down the cost of capital, is just lazy government, taking the easy way out.

The steep drop in oil prices has been a good stimulus for the economy, but this decline could have been used to bring down the fiscal deficit with some temporary taxes. Such initiatives could also cross-subsidise energy efficiency programmes and VGF funding for Solar.

With all this talk about the Modi Wave, real change of macro-fundamentals has been zero, and we are already talking about going to 'loose money' again, even as liquidity is already flooding in. This will only feed inflationary pressures, leading to a two-steps-forward-and-one-step- back policy that will only promote volatility in monetary policy.

I mean, why do we always to look to Monetary Policy to bail us out of a slowdown? Is it because everything else is more difficult, or is it because Markets are most sensitive to money flows, and they have a disproportionate voice in the mainstream media? Are the profit priorities of just a few rich and influential individuals, going to be allowed to destabilise the country's most important economic objective.....to provide stability first, and then create the right environment for growth to find its natural level.

Shouldn't the Govt's targets be first an inflation target, a fiscal deficit target, a Public Debt target, a Primary Surplus target.....and then a growth target, which follows as a result of the enabling environment that is so created. A driver is first meant to ensure that a car is stable, there are no accidents and the wheels are not flying off, before he listens to the kids screaming in the backseat. In India, you find very little debate on the rest of the variables that drive stable growth, and all the conversation is just about growth at all costs. This only promotes cyclicality and volatility, with its own economic costs.....most important, these costs (i.e. inflation, debt defaults, spikes in unemployment etc) are borne by the poor and the middle class, while the short-term benefits of incremental growth are eaten away by the elite.

A Modi government that is looking at the long-term is better served by a sharper focus on stability, and creating the right environment for sustainable growth, rather than a blind rush for growth. I sincerely hope that a Raghuram Rajan who has set himself the target for a 'bullet-proof' Balance Sheet, will not be swayed by this cacophony of voices that are looking for growth on steroids.

If at all interest costs need to be lowered, the Govt can give an Interest Subvention of, say, 4% for Solar investments. This will have the effect of reducing the cost of capital for solar investments, helping promote investments. Except that the cost wuld show up in the government's fiscal deficit, even if it is as a capital subsidy. But at least it will discipline the government, which will have to find other spending cuts. The net effect of a further solar subsidy (over and above the VGF of `1 cr per MW), will be to reduce imports (of coking coal and oil) and the cost of energy. Energy independence will give a fillip to agriculture and water management, which is just where growth momentum should be promoted.

To summarise, the government should focus on promoting asset profitability, rather than reduce the cost of liabilities. With rose-tinted profit outlook being posted by every analyst worth his salt, why should we resort to rate cuts: instead, keep real interest rates high, even as you reduce the cost of other inputs, especially land, raw materials and management value-add. This will bring in foreign investment, which will help kick off your Investment Cycle with equity rather than debt. That will kick off a virtuous cycle, bringing in FDI, besides promoting domestic savings. It will also silence industry lobbies that are behind this cacophony for lowering interest rates.

Lowering the cost of capital often results in misallocation of investments, even as we are suffering the after-effects of the rate-lowering spree and spraying of cash, after 2008. The chorus for a rate cut could hardly be wanting to go into another cycle of misallocation (of investments), even as we have still to write of the NPAs of the last cycle.

Demographic decline and increasing cost of capital

A fertility rate of 2.1 per woman is the minimum needed to stabilise a society's population. Anything below that will cause population to decline within a generation. Europe is at 1.55, Japan is at 1.3 and most of the important countries of Europe are around 1.3. Germany, Italy and Russia are at the bottom of the heap. Even China is at 1.6. More importantly, there is no historic precedent for a country to increase a declining birth rate except through immigration. The US is doing that, raising its birth rate for white Caucasians from 1.9 to a national birth rate of 2.1, just enough to maintain population. The difference is made up by the higher fertility of African- Americans and Hispanics.

Why does this happen? In low-income societies, children are seen as an earning asset and a support system in old age. In developed societies, children are a drain on parental resources, and increasingly, not much of a support in old age. We have seen this spectacularly in urban India which has moved from the joint family system to nuclear and even individual family units in a single generation. There is a direct correlation between urbanisation, per capita GDP and a drop in fertility rates.

Throughout my generation, we have rued a high population growth and celebrated low (population) growth rates. But the deflation/depression that pervades societies in long-term demographic decline is visible in Japan for the last 25 years and is now being anticipated in almost the entire developed world. It creates an 'inverted pyramid', where a small number of workers have to support a large number of dependents. This increasing dependence ratio creates stresses in society, especially when the government debt (and social obligations) of earlier generations has to be paid off. That is why the current deflation/depression scenario could prove to be especially burdensome on the coming generation.

At an individual (country) level, immigration and productivity growth could mitigate the effect of the debt hangover. Japan has seen very high productivity growth in a deflationary economy, which is why at an individual level we have not seen the kind of misery that one would expect, say, in a depression. The per capital GDP has stayed buoyant, in a zero-inflation economy, leading to better living standards despite a high dependence ratio. High savings and a persistent current account surplus have ensured that Japan remains a creditor nation. In a perverse way, the new Abenomics philosophy to print money and service debt will eventually lead to inflation, but if it happens after the ageing 65+ segment has been seen off, there will be much less misery than if they had taken any other course. Once the 'geriatric hump' has been seen off, a sharp inflationary shock that demonetises the Yen and reissues a new currency would settle the bankruptcy problem once and for all. This has been done before (in Germany in 1920). In a country with a low dependency ratio, wages will catch up with inflation, provided productivity remains buoyant. Higher productivity produces a higher stock of capital, especially over a longer period of time. As population drops and debt gets paid off, a society gets richer in real terms, not poorer. Throughout history, population has been rising and so has debt, resulting in lower equity per person (aka wealth). Now, as the equation reverses, a dropping absolute number of people with a rising cumulative stock of capital (i.e., wealth) will result in higher equity per person. This will reduce leverage ratios and lead to higher consumption, which is a must if all that higher productivity is to find an outlet. For the first time in history, higher wealth will come with a falling population. That will make labour more scarce than capital, and I don't know how society will handle that. Certainly, the elitist mindsets that wear the suits in finance and industry today would be caught unprepared, I am sure. Politicians also will be blindsided. All this will take a good half-century to play out but will be seen at different stages in different societies. India will have time to learn from others because it will be the last to enter this stage.

There are two jokers in this pack. One, productivity rises so fast that it renders labour surplus faster than the population can reduce. The magic number is 2.5 per cent because the decline in most country populations will be about 1 per cent in the worst of cases. This does not look impossible, given the twin booms in energy and robotic automation that seem to be round the corner. Two, they find breakthroughs in cloning or some method of asexual reproduction, which allow specific countries or ethnic groups to reverse their declining demography. At the moment, it looks like Japan and Germany will do something drastic to arrest their demographic decline.

Of the four inputs to production - land, labour, organisation and capital - only two would be left valuable. In a zero-cost energy society, also facing declining population, the real cost of land would drop to nothing. We can see that spectacularly in Japan, where real estate is still 80 per cent below 1989 levels. That should be a lesson to those readers who look to real estate as the most durable legacy they want to leave behind for the next generation.

Organisation is just a higher form of labour, which in a falling population would tip the scales in its favour, vis-á-vis capital. This would increase the per capita GDP. Intelligent readers can draw some serious long-term direction from this if they want to draw conclusions for planning their children's careers. If I know crowds well, most people will be caught in the middle of a real estate crisis before they start to question the existing wisdom of 'real estate being the safest investment'. Bond market bears who are perpetually betting on a sharp rise in interest rates may find themselves waiting for Godot.

That brings us to our final conclusion. With demographic decline, you get a falling cost of capital, as opposed to the cost of labour. That reduces the opportunity cost for investors, even as it reduces corporate profitability because of wage inflation. So countries in demographic decline, which include Japan, most of Europe, even China, are going to see this scenario. These countries will also see rising wealth and savings, even as they see falling investment opportunities. This is already visible in some countries and will become visible in others (for example, China).

Countries that are laggards in this (demographic) trend, like the US and, of course, India, will have a higher cost of capital and lower wage costs. They will see better investment opportunities and, of course, will be net capital importers. From a currency standpoint, it makes sense to 'carry trade' from poor demography countries and invest into better demographies. We know that carry trades work but only over the long-term. This would be particularly true over periods of sharp demographic change like the ones we are going to see over the next 15 years.

For Indian investors, who are heavily loaded up with real estate, the path forward is clear. A worldwide drop in the cost of capital will see disinflationary trends drop the cost of capital, although we will not step into deflation. This will reduce returns from real estate. They would do well to borrow in currencies that are facing demographic decline and find pockets in Indian markets, where you get healthy differential returns. The actual methods may look a little complex because they may have many legs, but the underlying philosophy is recounted above. Remember one very important principle of investing: Go where you can see predictability. Any investment hypothesis that is based on something as unchangeable as demographics has to be very robust. And this single hypothesis could help you generate outsize returns for a very long time in the future.

A case for rural employment in agrarian/rural industry and ofcourse other than agriculture

The Ministry of Statistics and Programme Implementation recently revised the way it calculates the gross domestic product (GDP) of India. As per this new way of calculating the GDP, agriculture, forestry and fishing form around 18 per cent of the total economic output of the country.

As per the old way of calculating the GDP, agriculture, forestry and fishing formed around 16 per cent of the GDP of the country (based on April to September 2014 GDP at current prices). Hence, as per the new method, there has been a small improvement in the share of agriculture in the total economic output.

Nevertheless, once one takes into account the total number of Indians dependent on agriculture for a living, the real picture starts to come out. Data from the India Brand Equity Foundation, a trust established by the Ministry of Commerce and Industry, points out that agriculture 'employs just a little less than 50 per cent of the country's workforce.'

If nearly 50 per cent of country's workforce is engaged in an activity which produces only 18 per cent of its economic output, there is something that is not quite right about the entire scenario. There are way too many Indians dependent on agriculture to make a living. The situation gets even worse once you take into account the fact that most people who work on farms don't totally depend on income from the farm.

As Mihir Sharma writes in Restart: The Last Chance for the Indian Economy, 'This is one of the few occasions where the statistics are so obvious that they're worth quoting. Here is the most relevant statistic: If farming households were forced to live on their agricultural income alone, then more than 60 percent of them would be below India's poverty line.'

Those working on the farm are aware of this. 'This is why, at last count, only 17 per cent of them - less than one in five! - subsisted entirely on money from their farms. The remainder all did some extra work off it,' writes Sharma.

So, nearly 50 per cent of the country's workforce works towards generating only 18 per cent of its economic output. The trouble with Indian politicians has been that they have worked towards trying to improve the second number. 'Many people have been convinced that if there was just some way to increase agriculture's share of output... things would be better,' writes Sharma.

But that is easier said than done. A major reason for the same is the fact that the average size of an Indian farm has been falling over the years. The State of the Indian Agricultural Report for 2012-2013 points out that: 'As per Agriculture Census 2010-11, small and marginal holdings of less than 2 hectare account for 85 per cent of the total operational holdings and 44 per cent of the total operated area. The average size of holdings for all operational classes (small and marginal, medium, and large) has declined over the years, and for all classes put together it has come down to 1.16 hectare in 2010-11 from 2.82 hectare in 1970-71.'

This is something that cannot be reversed. The size of farms has been growing smaller because over the generations the number of people dependent on agriculture for their income has grown. This is despite the fact that at 157.35 million hectares, India has the second largest agricultural land in the world. Only the United States has more land than what India has.

The agricultural output can be improved. 'The efficacy of other agricultural inputs such as fertilizers, pesticides and irrigation is largely determined by the quality of the seed used. It is estimated that quality of seeds accounts for 20-25 per cent of productivity. Hence, timely availability of quality seeds at affordable prices to farmers is necessary for achieving higher agricultural productivity and production,' the State of the Indian Agriculture Report further points out.

Nevertheless, there are way too many Indians dependent on agriculture and that needs to change. That will only change if the country as a whole generates enough semi-skilled jobs where people can be employed. But the job growth in India has been abysmal over the years. 'In the years from 1972 to 1983 - not celebrated as a time of overwhelming prosperity - the total number of jobs in the economy nevertheless grew by 2.3 per cent. In the years between liberalisation and today, jobs have grown at an average of only 1.6 per cent per year,' points out Sharma.

If India's young who are entering the workforce need to be absorbed, jobs need to grow at 3 per cent per year. Add to this the massive number of people who need to be moved from agriculture to other areas, the rate of growth has to be even faster. The matter is further exacerbated when we think about the population growth rate India has.

There are no easy answers here and this is something that the Narendra Modi government will have to address in the next Union Budget as well as years to come.

Coincidences, Corelations, investing!!!

I am sure all of us fondly remember the time when we got hiccups as kids and then being told by our grannies it`s a sign that someone is remembering us. Or the time when crows caw-cawed at the top of their voices in our balconies. For many, it was a signal that some close relatives are likely to pay us a visit soon. Of course, as time passed, most of these beliefs have come to be known as nothing but mere superstitions. But wouldn`t it be interesting to find out how did they originate in the first place?

Well, the answer lies in the most gifted yet somewhat eccentric human organ ever created. Our brains that is. You see, our brains try to make sense of the things around us by resorting to causal stories all the time. In other words, if an event A has happened, we find hard to believe that sheer chance or luck caused it. We immediately start to rationalize that some other event B caused event A to happen. Even if it is something as unrelated as our hiccups being caused by someone near and dear remembering us. Our brains just refuse to accept the fact that there are thousands of possibilities out there. And therefore it could just be coincidence that when B happens, A also happens.

Putting it differently, what essentially happens is that we often confuse correlation for causality. And no one has made more fun of this apparent shortfall of our brains than a gentleman who answers to the name of Tyler Vigen. On his eponymous website, there are some really bizarre conclusions that he has arrived at. For e.g. did you know that the more cheese of a particular variety called mozzarella the people of US consume, the more civil engineering doctorates come out of US universities! Or for that matter the more chicken the US eats, the more crude oil it imports.

Well, if you are scratching your heads trying to find out the link between these events that seem so highly interdependent, let us tell you to relax. Please note that no such links exist. It`s just that there`s high correlation between these events but absolutely no evidence of causality. Actually, the wiring in our brains is at fault here. Whenever two variables show some trend of moving together, our brains automatically assume that one causes another. But as Tyler Vigen has shown, this could prove to be ridiculously wrong at times.

Unfortunately, we carry this bias over into the field of investing as well. You see, success in investing is all about trying to predict where stock prices are going to be in the future. And therefore we start to look for factors that have a high degree of causality with them. However, often times we zero in on parameters that have high correlation but are not necessarily the cause of higher stock prices.

What makes matters worse, especially in the short term, is that these high correlation but low causality factors do tend to dictate stock prices.

For e.g. things like interest rates, inflation, currency movements or commodity price movements do end up showing high correlation with stock prices in the near term. But do these cause the stock prices to move in the long term? Absolutely not. Long term, it is things like business fundamentals and the quality of the management that drive stock prices. And therefore, it is these causal factors that investors need to rely on if they need to succeed doing long term investing.

Trust us, what causes most people earn poor returns while investing is the inability to distinguish between these two parameters. And also the difficulty in sticking with the right ones over a long period of time.

So the next time you are attempting investing, ask yourself whether the parameters you are looking at will predict stock prices accurately over the short term or the long term.

If it is the latter, you are on the right path even though you could face some hiccups in the near term. However, if it is the former, you could do well to abandon them even though your near term results are good.

Gain Analysis 6.5 months average holding

We have purchased following shares at various times as reported in our previous posts. For an average holding period of 6.5 months, net appreciation is as under:-

SCRIP	PURCHASE PRICE	PRICE as on 30 Apr 2015	GAIN	%AGE gain
ENTERTAINMENT NETWORK	410	793.40	383.4	94
EVEREADY IND	110	270.45	160.45	146
FEDDERS LLOYD	85	71.75	-13.25	-16
GRANULES	76	92.85	16.85	22
LLOYD ELECTRIC	180	210.00	30	17
NUCLEUS SOFTWARE	223	183.30	-39.7	-18
R S SOFTWARE	283	201.05	-81.95	-29
SUVEN LIFE SCIENCES	122	288.85	166.85	137
T V TODAY NETWORK	170	226.20	56.2	33
Infinite Computer Solutions(27/2/15)	200	248.15	48.15	24
Zicom Security Systems(27/2/15)	173	161.10	-11.9	-7
Bajaj Finserve(7/4/15)	1450	1434.90	-15.1	-1
Overall Gain	IN ONLY 196 DAYS			30.60%