Uncategorized | Portfolio Yoga

Catching up….

Have you ever wondered how in all your life, you are doing only one thing – catching up? It’s as if we are forever chasing dreams and aspirations that we may not really desire but have been hard wired due to the amount of hope and aspiration that has been filled in by our near and dear ones.

Just think back, what was the last major decision you took that seemed out of line for the normal world? A decision that was based on just your choice than the choices made by some one else and which you are following blindly.

Our first steps at catching up are implanted in our brains by our parents. Early in school we are constantly encouraged to score high marks just because the neighbor’s son chintu has scored them and why should you be any different. This at a time when you actually do not believe in anything but want to spend your time doing what interests you.

By the time we hit the pre-teens, the implantation of idea is nearly complete. Now we no longer need the goading of our parents to try and beat chintu, we feel determined that we need to come on top never mind if that means sacrificing what we love doing most.

There are girls who have excelled in Music / Dance leaving it all together by the time they reach the X std or XII std since they now seriously believe that Music and Dance are more of a hindrance to their goal of becoming a Doctor or Engineer. And why a Doctor or a Engineer, well that is because it’s not their goal but something that every other friend of her aspires for and hence should be her aspiration too.

While the family members applaud the child in the early years when she starts to learn music / dance and yearns for her to show the same when guests arrive, they are the first to berate the same person in case, horror of horrors, the same child now wants to achieve something big in the are of her liking, Music for instance. It’s good as long as it co-habits with the other aims, but once it becomes her main goal, counseling starts to try and wean away from her choice to the choice others have made and which she too should make.

Once the person gets into Engineering, there starts the next race, the rat race which will take hold for the next couple of decades if not more of the person. The idea as usual is to first score good marks so that you can get a great paying job and nowadays that means getting into software engineering even if one has chosen mechanical engineering as his subject and once into a job try and get promotions every other year so that you can make more money than that friend of yours who you despise.

The goal post has now completely shifted from what you wanted to become to what the market wants you to become. Even without knowing, you have chosen a path that you feel you were always destined for but one which is nothing more than a hard wiring that has taken place from your birth.

In my own personal experience, the above catching up is true for most of my friends, say a ratio of 8 / 10. The question is, are you still catching up?

Black Money – Generation and Investment cycle

What is Black Money?

With all the agitations that are going on, its first important to understand that how black money is generated and invested. Black money is money that is not declared as Income and hence transaction is carried out in cash. To better understand how black money is generated and invested, lets take this fictional story.

First the generation of black money:

B a government officer at a utility company. His work involves getting in touch with the small and the big guys in the industry. Assume for a moment that he is corrupt. Because of his authority, he is able to demand and get bribes for doing his work (sincerely or insincerely). Depending on the works he approves, the payments can be either a few hundreds or go into thousands (now a days many posts are such that a single bribe runs into lakhs, but lets not go into those guys). While Initially its easy to handle and dispose off the money to purchase any items required for his home / daily needs, as the amounts build up, only option is to invest somewhere since the cash cannot be put into a bank account lest it comes to the notice of Income Tax authorities.

The Investment

One of the easiest way to dispose the black money is to invest in real estate. I will show why it seems to make sense for both the buyer and the seller to deal with black money.

For the Seller: Assume the Seller has purchased the site at Rs.500 per square feet a couple of years ago. Due to the boom, the current price stands at 3000 and he is very much interested in selling to book profits. Theoretically a sale at 3000 should yield him a short term (since its not 36 months from purchase) profit of 2500 (which will further negate a bit due to Indexation benefits).

But here comes a loophole of a sort. If you are selling a stock, price is transparent and you cannot hide the profits. But the real estate market being a opaque and non transparent market, prices are linked to what is called as the Government rate. Government rate is the rate that is fixed as the base price for calculating stamp duty charges and generally are lower than the market price.

Assume that the Government rate is 1000 (in Bangalore, I know many such areas where govt rate is 25% of market price). Our seller can sell the site at 3000 per square feet and still claim to have sold at 1000 since that is what the Govt rate is and generally agreements are made at Govt rate.

By doing this, he is able to avoid paying Short Term Tax that would have been otherwise applicable. The Buyer (our Govt officer) too wants such a deal since that will allow him to dispose off his growing currency chest.

Once the deal is finalized, the payment consists of 2 parts. The first part is by way of a Demand Draft for the amount that they are disclosing as their transaction price. This price is shown as the transacted rate and stamp duty paid on it, the second part is a exchange by way of cash for the remaining amount.

The Government hence looses on

1. The Short Term Tax Payable

and

2. The Stamp duty payable on the transaction.

Of course, the state does have a few laws to deal with it.

When buying a property that costs over Rs. 25,00,000, the Income Tax Act requires you to inform the Income Tax department, along with all the details of the flat you are buying. There is a prescribed form for this. The Income Tax Department has the right to purchase the flat at the same price as you have agreed to buy the flat instead of you and auction the flat in the open market. The idea behind this section of the Income Tax Act is that if the Income Authorities feel that the property has been sold below the market value then the Income Tax Department will acquire the property and sell it at the fair market value. The objective of this chapter is to try and cut out the black money transactions from property transactions. [Rule-48(K)]. (Source: http://is.gd/sQBmz8 )

But I have heard about such thing happening is very rare despite there being thousands of transactions that take place.

Now here is where one of the things that Ramdev has proposed seems to make sense. Its the withdrawal of 500 / 1000 currency notes. Most persons have voiced a negative opinion on that issue and I too believe that it alone cannot bring down corruption. But the idea is to make it atleast cumbersome.

As of today. much of India’s trade prefer’s cash to card. While branded jewellerly stores accept both without any additional fees, most small jewellerly stores ask for cash rather than card. And if its a card, one has to pay a additional service charge as well. The idea is to dissuade the buyer from paying by way of card where one can have a audit trail.

But if the notes are withdrawn, it becomes very cumbersome for handling large amounts. Today a One Lakh bribe can be easily pushed in a envelope. Think of pushing a 1 Lakh bribe via 100 rupee denomination. Storing the black money becomes still more cumbersome. In the above property case, if say 20 Lakhs (in Black) is paid via 1000 Rupee notes, it comes to just 20 bundles. On the other hand, if its to be paid via 100 Rupee bills, it comes to 200 bundles. While a handbag would be good enough to transport the sum earlier, now it will need the services of a suitcase.

Of course, the problem of corruption will not come down due to this one simple act. Only way is to get out of corruption is to make rules simpler but enforce them strictly. Also liberalization helps massively.

Also read: http://in.news.yahoo.com/blogs/opinions/dirty-money-not-just-black-072507737.html

SKS Micro – A study case in Trend Following

I am a strong believer in Trend following. Systems I build and those I trade are those that incorporate the same in one way or the other. In fact at 2 recent seminars where I gave a talk, I talked purely about trading the trend without any focus on why the trend is weak or strong. The only reasoning required is to know the trend in the time frame of your choice and then decipher how to get a entry point / exit point.

SKS Microfinance is a example of how a trend can continue in a single direction with strong news coming at every low (or higher in cases like Crude / Silver, etc). The news in itself may or may not have exited earlier, but when the news flow comes in, the trend just becomes stronger.

At the recent BgSE organised workshop I spoke about how to exit / enter using simple breakout strategies. The audience was not thrilled coming as it was right after a very good friend of mine spoke on Fundamentals and how a investment of 10K in Infosys was now worth 6 Crores or something of that order as well as how a 10K investment in Wipro / Cipla / etc would have worked out.

But a cursory glance at SKS chart says that the first breakdown happened at 1035 level. The breakdown level was tested but never did the market close above it. Its been downhill ever since and suffered its second major breakdown at 600 level. The fall has been so sharp since the listing that the 200 day MA is not even in operation 🙂

Unfortunately I guess that like Silver where a lot of small players am told were stuck with Short positions, here the opposite would have happened. The stock would have moved from strong hands to weak hands (read Retail players).

One of the surprises that SKS offers is that a lot of FII’s have been locked in and hence have no way to exit. Am saying this since a question was asked of me of why Karnataka Bank was falling despite JP Morgan having picked up a huge quanity of shares (this was at the workshop which was held a day after the JP Morgan buy. The fact is that FII’s need not be smart (as can be seem from SKS Micro / Satyam (where a lot where there before the fall and still are with it) and many others.

Buying Cheap (read low) is never IMO a good strategy in the markets since its like rowing a boat against the flow of the river. Tough and may not yield the desired result.

Cheers

Prashanth

Thoughts on Quora

First there was the VBulletin style forums, then Yahoo Groups then Facebook and then Twitter and in between somewhere came linkedin and now Quora.

The meat of all the sites above as well as the many I have missed was to enrich user experience by being able to connect one to another based on our choice of subjects or topic we liked.

So while the Yahoo groups and VBulletin style groups are sites which focus on a particular type of information (and more the people flocking to that particular site / group, better the chance of learning / knowing / enriching ourselves).

Facebook came with a different agenda. The idea was to connect to our friends so that we knew what they were upto :). Once upon a time, you needed to visit a friend to know what he was doing, now, voila, all you needed to do was login to fb and see what your friend is doing. Of course, since connecting is easy, we connect to every one who seems to be interesting (the thought being, what is there to loose after all).

Twitter hit upon a idea of connecting in a different way. Instead of just knowing what your friend was doing, how cool it would be if you can share what you like or what you feel (there of course is a bit of overlap with fb since you can do the same there too) as also connect with guys you don’t even know if you felt that the information they shared (links / posts) are on subjects that you were interested in.

Linkedin approached the whole social networking in a wholly different way. Instead of connecting with friends for chit chat, here the idea is to connect with professionals so that it opens new avenues.

I have been a member of linked in for many years and have 100+ connections and while I have head stories of how linkedin has helped, what I mostly see is A connects to B, C and D in every update. I wonder if its just human psychology at work here to make it appear that the more we connect, the more potential we have got for better oportunities never mind the fact that not many even bother to read teh updates.

Yesterday, got a invitation to Quora. This takes the social networking concept in a pretty new way where the idea is that you can either ask a question that bothers you or answer where you feel you can contribute.

In just 2 days, am feeling bored with Quora while when I joined Twitter, it excited me no end. The problem as I see is that I don’t know whether I should wait for days on end to get a answer to a question that bothers me when a google search can give me similar / better results in real time.

Add to it, the problem is that there is nothing that says the answer has been given by a person with the right credentials. There is ofcourse a way to vote up or down, but that is assuming that others are either following you and are interested / knowledgable in similar area of expertise.

The bigger problem is motivational. If you are good at something, how often will you find the time and the interest to respond to queries on your topic. It takes time and lots of effort and if it does not even get noticed, you may start to feel, what the heck am I doing wasting my time on something where there seem to be no rewards.

Unless properly moderated, most sites / forums become a spammers delight. Am seeing it in groups (Yahoo / Facebook / Linkedin) and same can happen here too. Right now, its invite only and hence numbers are low, but once its open for all, without moderation and grouping, your question can attact no attention since the number of questions will be too much for anyone to handle.

For the time being, I would rather stay with Google where I can search and get answers from different sites / forums than hope some lonely sees my request and answers the same.

Happy Networking

Prashanth

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Some Recent Commodity moves

MCX Rubber was trading in Jan 2009 at 7000 and now trades at 24000

Cotton trading at 90 in August 2010 (US cents per Pound for Upland cotton) now trades at 230 (Link: http://bit.ly/gSqIHo)

NCDEX Pepper which was trading at 10500 in Mach 2009 is now trading at 27180

and the most recent and best of all 🙂

NCDEX Red Chilli which was trading at 4100 in September 2010 is now traded at 10550

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