How Much Are You Worth?

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Series: Beginning Investing (2nd post)
Section: Set Your Goals
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Now that you're sufficiently pumped up to start on your own journey to wealth, here's a fun task for you - calculating how much you are worth today!

In performing this calculation, we will use a very strict and narrow definition of assets, considering only those of your things that hold or appreciate in value over time rather than the accounting definition which assigns a value to everything you own. The reason for this is that we're trying to arrive at the most conservative and true assessment of your net worth rather than a value that will reduce over time due to depreciation.

[You could add in the value of your goods to make you feel better if you like, but do remember that these will reduce in value over time and will not contribute to your financial goals. After all your surround system will not really fetch much ten years from now if you want to sell it to meet your financial goals! And, what the heck, your net worth is for your eyes only so where's the point in inflating it?]

The calculation is fairly easy:

• First, work out the total value of your assets (things you own that meet the definition above). This would include cash in bank accounts, stocks, mutual funds, property, gold, fine art, jewellery, foreign exchange, antiques and other valuables (and even the spare change in your drawer if you're sufficiently desperate!). To be really conservative, take a reduced value for the more volatile assets like stocks and equity funds to account for a possible fall in value. You could discount them by, say, 20-30%.
• Then total up your liabilities (what you owe to others). This would essentially include all kinds of loans like your car loan, housing loan, personal loans, credit card outstandings etc. Be true to yourself and count everything you can think of.
• Subtract your liabilities from your assets to get your net worth

The above ignores the value of your car and other worldly goods and it paints a very stark, but true, picture of your financial health.

All too often, we feel well-off because we have nice things, a rockin' night-life and a cool car but in reality, we're just a mis-step away from trouble. And like the picture of Dorian Gray, this 'net worth' calculation presents us with what the ugly truth really is!!

If you find you have a healthy positive balance from the above calculation, pat yourself on the back. You're already well down the path to financial freedom.

And, if you find you're in the red, don't despair. A bit of discipline and you'll soon be in positive territory, after which it's just a matter of time before you're watching your moolah grow before your very eyes!

Next Post on Beginning Investing: How Much Do You Spend?

Ask Value Research (Only You Can't!)

This is just a quick post to update you about an excellent feature on Value Research Online, which, by the way, is probably the best Indian mutual funds site on the Internet. Check out their 'Ask!' feature wherein you could submit queries about mutual funds and get pretty insightful and well-researched answers from their experts.

Unfortunately they seem to have suspended fresh queries for lack of resources (I'm sure they must have been swamped by questions!), but a look at the answers they did post in the past would be extremely instructive for mutual funds investors. I hope they re-start the service soon but, till then, you could get your own answers by looking at the wealth of data and information available on the site itself.

You Need to Start Investing - Right NOW!

Welcome to the first of my posts on beginning investing. If you’re reading this with any degree of interest, it’s probably because:

1. You have a decent amount of money in your savings account and you know you need to do something with it but you’re just too busy and don’t have time for it just now. You’ll get to doing something next weekend. [You’ve been saying that for six years now]
2. You have a friend who gives you hot stock market tips, several of which have shot through the roof while you stood by and watched him laugh all the way to the bank. You’d like to take a punt on the stock market but you’re not sure whether to risk it.
   [The right, though fairly useless, answer at this point is – it depends. But you’ll be able to answer it before we’re through]
3. You have all the good things in life, but no savings to speak of even though you earn quite a decent sum (Come to think of it, you wonder where your salary goes every month…). But there’s that new surround system on the market you need to buy tomorrow, after which you’ll be pretty much broke so you’ll read this now and promise to get started next month
   [You’re in more trouble than you can imagine, my friend. Forget the surround system and start focusing on saving something RIGHT NOW]
4. You earn a reasonable, though not high, salary and you’re wondering whether it is even possible to get rich with what you get [Given time and patience, yes, you can become pretty well off]
5. You want to start out, but you don’t know enough and need some step-by-step directions. [Well, I’ll try my best and hope you can make use of what I have to say]

While the circumstances of each of the above types of people might be different, what is common to all is inertia and / or inactivity – and yes, a general interest in the subject. However, the only 'interest' of any importance in terms of money is the type you get from your investments. Plain enthusiasm and intellectual pontification will get you nowhere. You must get started – TODAY!

And here’s why:

• Bank savings accounts and fixed deposits earn between 3-6%, on an average, a rate that is, at best, keeping up with inflation (inflation is the rate at which prices in general are rising every year). This means that, over time, you are getting POORER. Not only are you not moving forward, you are actually moving BACKWARD and, when the time comes for you to retire, you will realize that you cannot. You will have to continue working your whole life to support yourself and your family
• Even if you are looking at the quantum of money you will have, rather than purchasing power (though that’s no use, really, due to the fact that prices are also rising due to inflation and a lakh ten years later will not be worth as much as a lakh today), please do note that 3% interest in savings accounts will imply your money will double in only about 24 years (I am not joking). Do you really want to wait that long to see the Rs. 20,000 you have in your savings account become Rs. 40,000? Especially when it will buy probably the equivalent of Rs. 10,000?
• Interest rates on government-backed investments like PF are falling and will continue to do so till they reach market rates of interest i.e. around the same levels as RBI bonds. This is because the government cannot continue to pay out artificially high rates of interest while earning less than it gives you. Such a system cannot be sustained indefinitely. If you doubt this, I’d like to draw your attention to National Savings Certificates and Kisan Vikas Patra that used to pay out around 14% in the ‘90s (doubling your money every five years) whereas they are now around 6.5% (doubling your money only in around 11 years). Even the PF rate has come down to around 8% and will continue to decline despite the opposition of various parties in the Indian government
• Prices of real estate are going up to stratospheric levels. Chennai, the city whose property prices I am most familiar with, has seen price rises of around 30-100% per year in the past 2-3 years, depending on the area. They have reached a level such that a budget of Rs. 20-25 lakhs would be about the minimum you need to get anything decent (good residential neighbourhood, 2 bedroom) in the city. Prices in the crores are now commonplace. Chances are, if you’re buying an apartment ten years from now with the money you have in savings accounts, you will need to move to towns that you haven’t even heard of today!

I'm sorry if the points above seem harsh, but those are the facts. And that's why you’ve really got to get started right away. There will always be excuses for putting off investing (let's face it, it's not exactly fun) but I can assure you that the hard work is only in the beginning. After that, for most of us, a disciplined approach to investing can run almost completely on auto-pilot.

Last (but this could have just as well been the first point) the magic of compound interest really kicks in when your investments have time to deliver returns. All else being equal (and sometimes even when things are not quite equal) the earlier you start, the richer you will be. Investing is one of the areas where the fable of the 'Hare and the Tortoise' really rings true.

Give your money time and, even at low rates of interest (yes, you do not need to invest in stocks if you don't want to), you will probably do better overall than many, many people who've made a quick buck in the current bull run, myself included.

Just get started! It’s that simple.

Next Post on Beginning Investing: How Much Are You Worth?

Current Trends in the Indian Residential Property Market

Found a few links to info I found interesting so I thought I'd share them with you. Enjoy!

Research Reports

1. Outlook for India's Real Estate Markets is a Deutsche Bank study that tries to arrive at a broad trend for the next few years based on demographic / lifestyle changes in India
2. A positive-sounding article talking about how Indian property prices will go up. Too generic in nature, though. Did not have the kind of facts and figures we'd all like to see
3. An exhaustive document on the prospects of the real estate market by Trammel Crow Meghraj, where I noted two main points, namely that real estate in India averages about a 12% return year on year (which is almost as good as equity) and that the Indian market has already been through a boom-bust cycle which ended in 1999. Since then prices have been on a steady upward trend, but that makes one wonder when the next 'bust' would be! The only good news here is that it looks like the downward trend generally bottoms off at a higher level than the previous downtrend, implying a general increase in prices in the long term...

Property Prices

• Market rates and prices for Bangalore, Delhi, Kochi, Mumbai and Pune
• Some really super, up-to-date info on prices in various areas of Chennai, Bangalore, Delhi and Mumbai. The prices in Delhi and Mumbai are truly eye-popping! This site seems to be worth a visit now and then...
• Some prices for Pune, but couldn't make out how recent this info is

I just realised that I've never found a site that can actually gives regularly updated info on residential property prices in a city or, even better, in a specific area in a city. Does anybody know of such a site or even a regular newsletter / report?

Series on Beginning Investing - Coming Soon!

Based on the poll results till date that indicate a demand for material on beginning investing, I will be devoting several posts to the subject in between my articles on other stuff.

I will be tackling the subject in five parts, based on the order in which you need to go through it:

1. You Need to Start Investing - Right Now!
2. Set Your Goals
3. Before You Invest Anywhere
4. Get Started
5. Manage Your Investments

Based on my experiences and those of many of my friends, I know the hardest part is getting over the initial intertia and our natural tendency to procrastinate on money matters. The solution is to just start doing it! And I hope the step-by-step approach I will be laying out will be making it easier for you to start off on your individual journeys to wealth.

If you are new to this and feel the need to make your money work for you, do bookmark this site and come back in a few days to check out the first of my posts. I will space out the material to let it sink in and allow you some time to work on what you learn before coming back to read the next instalment. The reason for doing this is so you get a chance to clarify your doubts before moving on. Please feel free to get in touch with me over email or leave me your comments so I can try to tailor the content to what you really want to know about.

I'm pretty excited about this series and I really hope it's of use to all of you out there.

Next Post on Beginning Investing: You Need To Start Investing - Right NOW!

I'm a Hedge Fund - and So Are You!

Few of us think of our investments outside the rather narrow context of fixed / time deposits, stocks, mutual funds, cash and government bonds, a mindset that is driven by the common financial planning approach used by banks.

However, this approach does not give us a true picture of how we are faring, as our investment assets generally include many more things that we don't take into account. What about property, jewellery, art, foreign curency, antiques (just check out the market price of that teak almirah and you'll know what I mean) etc? They should count for something, and it's quite likely a lot!

Most of these are potential investment areas as well. People make tons of money on art, for example. In that respect we are probably a lot like hedge funds, which are like mutual funds except they can invest in any asset class they need to in the search for higher returns or whatever the fund's mandate is.

[By the way, you and I could not afford to invest in hedge funds as these are generally rather exclusive and require gigantic investments to qualify]

As a hedge fund, we would be doing financial planning at a 'net worth' level rather than at the narrower level that we do today and managing our wealth as a whole, rather than as 'bank assets' and 'other assets'. We would be allocating a risk rating to our 'other assets' and treating them as part of one overall portfolio. For example, antiques should be fairly low risk but art would be in the high-risk category. Real estate risk rating would probably fall somewhere in between.

What's the Value in This?

Well, for one, you'd feel a LOT happier being that much closer to being a millionaire or whatever you want to be. It's like a free one-time bonus!

Further, you might even want to re-look your portfolio at the net-worth level based on the risk profiling your bank does for you rather than focusing only on the money you invest with them.

If, for example, you are supposed to have 25% of your money in equity (read 'high-risk assets') then see whether your stocks + equity funds + art + real estate + foreign currency add up to that. Same goes for the portion in low-risk assets: check whether your bonds + cash + antiques can make up that portion.

Hey, that's just what private banks do for their customers. And we all deserve that treatment, right?

If you can add up your household assets, then the exercise is even more meaningful because you can plan your finances at a household level rather than as two individuals, making for a more balanced portfolio. That's how my wife and I do it and it works well for us.

Indian Art Market - the Dark Side

This is an addendum to the post on Indian art as an investment. While I still believe there are genuine gains to be made, check out this link for some rather chilling information... Another great article along with some very insightful visitor comments may be found here.

Bear with me because I'm going to continue posting on Indian Art off and on. I have a feeling this is a market that is on the verge of something big (in general, not just for the top few artists) and it makes sense to keep an eye on it.

Please Vote!

By the way, I've set up a couple of polls where you can vote to give me a better idea of what you want to read and whether you use the info from this site for your personal investments.

Request you to take a few seconds to vote and help me improve on my efforts.

Thanks!

Indian Art as an Investment

I've flirted off and on with investing in Indian art, my interest having been piqued because my uncle, Tapan Ghosh, is a pretty well-known artist and also because of some of the rah-rah articles you get to read every so often about Indian art doing well at international auctions.

From my travels abroad, I've come to hold the opinion that Indian art is rather undervalued compared to other Asian art, which seems to bode well for the industry as a whole.

I firmly believe it is possible to make windfall gains on art. The only major hitch is that the market is non-transparent and there is no real objective way to measure the worth of an artist, especially an upcoming one whose works have not been publicly traded in major auctions. And yet, the upcoming artists' works are where the truly spectacular gains are likely to come from. Sounds familiar, right? It's just like the stock market.

It was therefore a rather pleasant surprise to find this (not very recent) document on 'Art as an Investment' that gives some stats about an otherwise closed, under-analysed market. Some of the juicy details:

• the Indian art market (represented by an index comprising of 24 of the top Indian artists) has outperformed the S&P 500 by two times over the past 3 years, the top 6 (Akbar Padamsee, FN Souza, MF Husain, Ram Kumar, SH Raza, Tyeb Mehta) having trounced the S&P 500 by several times and the rest having beaten it by a small margin
• the emerging artists (high-risk, high-return like the stock market small caps) recommended are Chanchal Mukherjee, Baiju Parthan, Sekhar Roy, Jayasri Burman, Vaikuntam and Ramananda Bandopadhyay. There are also some mid-cap equivalent artists named

The presentation also goes on to talk about the factors to consider when investing in art, but these are rather obvious.

Anyway, I'm pretty excited about this info. Will look up some of these artists and let you know what I can find out. I would love it if you could also do some research and let me know.

Not Convinced?

Check out these articles and you'll know what I'm excited about!

• Atul and Anju Dodia's prices have apparently been increasing at 20% month on month!
• Works by second-tier artists such as G R Santosh, Avinash Chandra and Sohan Qadri are buzzing in a market valued at around 1,100-1,200 crores per year!
• Prices for top-tier artists such as Tyeb Mehta and FN Souza have risen 20 times since 2000!
• Starting with $3.5 million in 2000, Osian's Indian art fund has grown by 10 times till date!

Still not convinced? Just search on Google! I mean, even Femina is advising readers to buy Indian art. (Yeah, that's right!)

And all you investors know that when everyone is talking about an investment, it's boom time!!

Odds of Making Money in the Stock Market

I was surfing through some blogs and came across Value Investor India, a real gem of a blog that is not updated frequently but has some really good posts. It is based on value investing concepts and has some really good posts on arbitrage and industry overviews. Rohit, the author, has obviously gone deep into the internet to dig out some really good stuff, such as this arbitrage returns evaluator, which seems to be based on what I read in Buffetology (or maybe that's just how all arbitrage stock opportunities are evaluated).

Anyways, one post caught my attention, as it seems to be a pretty interesting way to look at timing the market. Basically, the concept is that you should take the current PE and be able to judge the odds of making money in the market based on how often the PE has been higher than this in the past. If today's PE is towards the higher end, then chances are you will lose money in the medium term.

The NSE, and perhaps even the BSE, site allows visitors to download historical index data (open, high, low, close, PE etc) into excel sheets. Now, once you have downloaded the data, it is fairly easy to count the number of times the PE has been higher than the current PE and divide by the total number of days in the historical period considered in order to get an idea of the probability of it being higher than today in future.

Example:
If today's PE is 18 and you see that over the past 1000 days the PE has been >18 50 times and <=18 950 times, then chances of you making money in the future are 5% and chances of losing money are 95%. So you might want to keep your money in the bank for now.

The obvious flaw in this approach is that as markets in India mature and growth slows down, future PEs might be generally lower than past PEs, thereby throwing your calculations out of the window. Further, since you are looking at an index PE, it would be wise to invest in an index fund on this basis. It might even be better than a passive SIP and yield better returns...

Why would this not work for individual stocks? Because individual stock PEs should not be anallyzed statistically as they are completely dependent on management and factors affecting the individual company. For a basket of stocks such as the index, the approach does provide a good rule of thumb.

If you have bought stock funds in a period when the odds were good of PEs rising in future, you'd probably have really done well, benefiting from the increased PE as well as rising earnings, a double benefit!

The example given in the post was that of the stock market crash during the UPA elections when apparently the odds were 10:1 of PEs rising afterwards - and of course the market soared over the next couple of years!

Anyone want to try this out and let us know today's odds?