Changes in the index and effect of changes in index

Sensex has touched 20K, Nifty sailing at 6K.

Some are still not happy. The reason -as I heard from many colleagues - “The stocks that I bought are not rising. What should I do?”.

Here is a news item of yesterday - “Cairn to replace MTNL and Idea to replace HPCL in Nifty Index.”

Then, CNBC TV 18 further elaborated on the news item: NSE today announced that MTNL will be replaced by Cairn on Dec 12, hence the MTNL stock was down almost 6%.

This is what is called stock risk. The overall market is going up, touching new highs everyday. Yet, some of your stocks are not performing. Instead, they may be going down.

The investors in MTNL are the ones who are suffering. Considered a bluechip stock, and a part of Nifty index, today it is paying the price for non-performance.

That is the reason why Index based investing is the most efficient strategy, as explained in my article Simplest Investment Strategy and Index fund Investments .

Choice is yours!

Link to previous article How are the stock markets working?

Have questions, please read the comments and post your views and queries in the comments section which helps in open discussion and avoids duplicity of questions.

You may be interested in reading my previous articles. Here is the link to Table of Contents in a chronological order.

How are the stock markets working?

How are the stock markets working?

Here is a short story that was delivered to our class at the Rotterdam School of Management, when we were LEARNING (or supposed to be learning) on “How to trade and make profits”.

This gentleman was a guest lecturer and came from a leading investment bank from London. He had more than 25 years of experience in trading - both on bonds and stocks. He introduced himself working at a real high rank in his organization and having almost 120 traders reporting to him. His words and presentation style reflected his experience.

He started by saying “So you all are here to learn trading and earn enormous profits? And you expect me to tell you how to do it? Right?”

Everyone looked convinced that he will teach us something worthwhile. However, he narrated an interesting story.
I’m putting it in my own words as below:

When Stock market trading started gaining momentum in the early 1980’s, there was a huge shortage of traders. Investment firms were finding it hard to find suitable individuals to whom they can teach trading and make them earn money for the firms. Moreover, individuals were not very enthusiastic about taking up trading as a career. Those who were willing to opt for it, were the ones who failed in other streams. This created a huge shortfall of “traders” in the market. So the investment firms and brokerage houses started looking around for people who can fit into their requirements.

The search ended at the vegetable markets. Yes- the “Sabji Mandi” of UK. (Sabji Mandi = Vegetable Market)

The vegetable vendors selling vegetables and fruits were laborious & hardworking salesmen (of vegetables) and had some typical characteristics. They had a very loud voice, which is required for survival in a Sabji Mandi. If they cannot shout, they cannot attract customers to buy vegetables from their stalls. Hence, they fit the requirement quite well, as during those days, there was no electronic trading in the stock market. All they had was a designated floor area, where stock traders interacted with each other. Shameless and loud voice was the need of the hour and was required to attract traders. Another criteria that these people fulfilled was that most of them had a well built physique with a good height - again good for attracting attention. Hence, the investment companies and brokerage houses picked up these tall, well built and loud voice humans to do trading for them and earn profit for the firm.

Actually, it worked quite well. As the stock market floor area was getting packed up with more and more people joining in - these long, high and noisy traders managed to carry on the business because they could be heard easily, could attract attention with their height and could also survive the pushing and pulling of the crowded floor area (and if required, throw out the lean individual traders)

However, markets are efficient and they have been efficient since long time. As more and more such tall and noisy traders came in, the floor area was filled only by these people. Other individuals started trading through agents, which used to be these same people taking order through hand signals. Technology crept in, telephones were used. Individuals started giving orders through phone.

Unfortunately, only loud voice and tall height was not sufficient to carry on trading in the efficient market. Hence, gradually, the investment firms started replacing these vegetable vendors with some more sophisticated and bit better educated salesmen. Physique and voice was no longer a requirement, as a lean fellow weighing only 40 Kilos could get his order executed on the phone. What was required was people who could understand money and finance, and make trades accordingly. Hence, the vegetable vendors were sent back to their original posts (Sabji Mandi) and somewhat educated salesmen took their places.

Things went on well for few years, but use of computers and technology took things on a different path. As people had historical stock data, they started to get into research. Valuation methods like DCF, etc. started becoming common. So called researchers were finally making way to evaluate stocks. The educated salesmen were no longer worth the job. Hence, trading positions then went to mathematicians, physicists and economists - especially the students from maths & economics. The salesmen returned to their sales jobs of door to door selling or working at showrooms.

Finally (and at present), the computer and internet have allowed everyone free access to data and valuation methods. Every smart alec sitting at home can now trade with his online account. Mathematicians, Physicists & economists with their limited knowledge about predicting stock prices and doing valuations were no longer required. As things became more and more efficient, MBA’s and PhD candidates with years of experience were hired to do trading and identify trends. They are the ones who are trading presently, and will continue to do so until the market identifies someone more efficient.

Story Ends:

What can you conclude from the above story? For us, the batch of students, it was just another proof of “No one can make extraordinary money from the market”.
Anyways, one thing can be clearly observed - everything is ruled by randomness. No level of knowledge can make anyone a master in stock picking or investments. For the ones those who still believe they can beat the market - all the best!

Link to previous article Indian Growth story and Investments

Have questions, please read the comments and post your views and queries in the comments section which helps in open discussion and avoids duplicity of questions.

You may be interested in reading my previous articles. Here is the link to Table of Contents in a chronological order.

Indian Growth story - 1

Following further from my previous article Investing in Indian Market and Indian Growth story - 1, let me focus something more on the Indian Growth Story.

Let me quote my own example. I belong to a town from North India. My city is big enough to have a government University, a government engineering college, a government Polytechnic college and a proposed government medical college which started this year.

My parents managed to build a nice and big independent house in my city (big in comparison to the metro standards). A typical 3 BHK flat in metros like Hyderabad, Pune, Delhi, and Bangalore would measure 1200 sq. feet. My house is more than 2000 square feet. My father still runs a shop, and having spent my childhood days in attending to my shop in case of absence of my father, I’m pretty comfortable running the shop. I have the liberty of easily finding co-workers and labour in my hometown - economical and polite.

Despite having all the facilities at my home and my city, and being the only son to my parents, I still decided to leave my city for want of better education and earnings. With the best rank in my city in the engineering entrance exam, I could have easily taken up a seat at the government engineering college in my city in my preferred branch, but yet I decided to take up mechanical engineering at REC, Warangal, a city 1200 Kms. away from my hometown, and taking 26 hrs. to reach. Later, I was lucky to get a branch promotion to Electronics.

Why did I do that? Why did I leave my home despite having all the facilities at my home and all institutions in my city? People may have all kinds of great words to describe like “Career Aspirations”, “Self Motivation”, “Ambitions”, and all that crap. But today, I know that I left my home because I was GREEDY.

Did I go to REC Warangal for the benefit of that institute? Did I join the job at Hyderabad for the benefit of that job? Did I go to Netherlands and paid a heavy price for the studies for the benefit of the institute?

The answer to all the questions is NO. I did all the deeds for my own personal benefit. I did everything for my own, because I was greedy and I wanted more. I could have earned the same engineering degree from the college in my city - but I knew that the tagname of REC will be much more beneficial. I knew that I can earn good money by continuing my father’s business, but the so-called “emerging software market” in India can give me more salary. In greed of wanting more, I left my well-paid job, and went to an International business school with the greed that I will learn the tricks of stock market and make far more money.

Everyone does the above. Nothing wrong in it. Everyone has the right to earn the best salaries if opportunities exist and he/she is eligible for it.

However, the mistakes that we make in our assumptions can be very costly. When I left my hometown, I assumed that IT market will remain good even after 4 years of my engineering education and there will be ample jobs. It was a costly assumption, and I got a taste of that in 2000-2001.

We started campus interviews in mid-2000, the beginning of our final year. Almost 100 companies lined up for picking up the “Cream of the cream”. So called MNC’s brought foreigners to take interviews on campus, just to tell how good the company is, how much international exposure can a person get. Seniors who had joined these companies 2-3 years before, were asked to communicate with the final year students, telling them all the benefits - “International Travel within 3 months of joining”, “Great Take home salary”, “We get Pepsi and Coke FREE in office” and all such crap. One such Hyderabad based MNC brought a foreigner, who even went to the boys hostel to give a briefing, because he could not get a conference room as they were occupied by other companies. I cannot forget the scene where this gentlemen was standing in the corridor of boys hostel telling the benefits of working with his company and some of the students were standing wearing a towel and baniyan, some were coming out of the nearby toilets and the rest of us were feeling amused at listening to him and observing the ambience.

It was all about the forecast of requirements. It led to a huge hype being created for requirements of engineers. All based upon forecasts - which had no basis.

It was all going on well in August-September 2000. However, the bubble burst and in 2001, the same MNC’s started sending regret letters to the students, either delaying the joining date till further notice or informing about termination of job offer. Most of the fellow students managed 2 job offers on campus. Some smart alecs even applied for walk-ins and got more offers. Everyone was assured that this technology boom is here to stay. It somehow happened that the more offers a person had, the more regret letters he received. The hype that was going on just 8 months back, had came out with its reality.

One of the big 3 IT companies of India had hired 75 students of the total strength of 300 engineering students. The same company delayed the joining of these 75 students indefinitely. People say atleast Indian IT companies never lay off employees? Is it really true?

Continue to Part II of this article

Indian Growth story - 2

This is part II of article Indian Growth story - 1. Please read this article from part I before continuing with this part

We take pride in claiming that we work for MNC. Senior citizens, hardly knowing anything about a computer, are willing to marry their daughters to software professionals. I remember very well - there was a news item on AajTak, in June 2001, citing some marriage bureaus in Hyderabad and Bangalore saying that the demand for software engineer grooms have come down substantially after the IT bubble burst.

As I was greedy, I went places - from Warangal to Hyderabad to London to Holland to US and may be I’ll continue this as long as the market permits me to do so. I do everything for myself, not for anyone else.

What do you think of MNC setting up shops and offices in other countries like India/China? Are they doing it for the benefit of these countrymen? You decide!

How many of you heard of the Bhopal Gas Tragedy? Entire city and its population collapsed because of a chemical factory accident. Victims are till today fighting for their rights. Forget about the monetary claims, they, and their next generations, are impaired and disabled. What did the chemical company and its officers do? After the incident, they just vanished back to their home country.

A company like Posco is setting up steel plants in Orissa. Every now and then we hear news about its officers being kidnapped by opposing outfits. Has Posco stopped building it’s plants and factories? No. They will continue to do so, as long as they believe that it is in their benefit and they can extract profits.

They will first build factories, then bring instruments, equipments, and finally employ people. If they start making losses, they will follow reverse order. They will first cut the head count. Then they will think of selling the equipments, and then finally they will decide about selling/renting/leasing the land to someone else. Atleast they invest so much in a foreign country like India, in terms of equipment, factory buildings, and so on. And they will have to think twice in case they have to close the plant.

How about a software job? All it takes for a software company to start is a floor area and a few computers with phone and data links. Usually, the buildings are granted on lease by the government. If they have to close down, they will simply dump the computers, and ask the people to leave. Purchase of computers, bills of data and phone links are also financed by the foreign company. Decision can be taken overnight, as they have nothing to loose on the investments part, as compared to a mechanical factory.

A mutual fund manager comes and invests in India. What is his intention? Is he here for the benefit of India? He only means profit for his fund and nothing else. If Indian markets collapse, he will happily move to China, Russia, Brazil, Argentina, and anywhere in the world. The citizens will be left with is the country and its present situation. They cannot go anywhere.

The fact is that all the hype created is for personal benefit. Everyone is here for his own vested interests. Keep on listening to the CEO’s opening offshore centers in India, keep on listening to the Mutual fund managers about the great Indian growth story, keep on trading and investments, keep on carrying your software jobs, BUT JUST BE CAUTIOUS. Understand that everyone is here for their personal interest - and so are you. In case you fail to pay the EMI of your house loan, after a few threats, the bank will simply overtake your house and auction it. If you fail on car loan repayment, your car will be picked up by the bank.

NIIT has already built up relations with Chinese University to train Chinese students for IT. Companies like Infosys, Wipro already have major presence in other emerging markets as well as other countries, and employ a significant no. of locals. A BPO like 24*7 operations in Bangalore has brought French speaking foreigners to India on work permit, so that they can handle French clients.

Just by saying that India has an English speaking workforce is no longer true. Things are changing fast. Look around in your own office. How many colleagues will you find who cannot even speak a single sentence in English with proper accuracy? They think 10 times while composing an email. All we have is a bunch of programmers sitting and coding for foreigners. The case is no good for BPO, it is worse. Either they do data processing like data entry, or do try to sell products to overseas customers. All this business is running for the sole purpose of cutting cost. How long can this offshore business continue, no one knows. $-Re exchange rate, where is it headed?

Use your head before getting into any financial liability. Reap the benefits of your job as long as it allows you to do so, but don’t close your eyes to reality and risk. World is changing quite fast.

Link to previous article Investing in Indian Market and Indian Growth story - 1

Have questions, please read the comments and post your views and queries in the comments section which helps in open discussion and avoids duplicity of questions.

You may be interested in reading my previous articles. Here is the link to Table of Contents in a chronological order.

Investing in Indian Market and Indian Growth story - 1

There is a specialized branch offered at one of the prestigious IITs in India - called Ceramic Engineering. I understand that these kinds of specialized branches have limited seats, and are not very common. Other types of similar branches are Textile engineering, Petroleum engineering, mining, etc.

Interestingly, these branches have limited seats and more interestingly, these streams have very limited job opportunities. Yet, students opt for these branches. The reason: majority of them are not interested in the branch studies, but they are more keen on getting the tag name of reputed institutes with them.

How many textile engineering students from IIT take up a job at a textile firm or go for a Masters course in textile engineering? How many Ceramic engineering students take up job at ceramic industry and get into designing crockery or mosaic tiles? Ever heard of any ceramic company visiting IIT campus to hire ceramic engineering students?
Does it mean that the quality of students passing from IIT ceramic engineering branch are not upto the level of other branch IIT’ians? Definitely not.

So where do these students end up? They take up software jobs.

So many comments have been left by different readers on my blog, saying that they don’t believe that India’s growth is only fuelled by software professionals and their salaries. Other sectors like Banking, Retail, Oil and Gas, Telecom, etc. have contributed equally to the growth of this country. May be true, but how many of these high caliber professionals, passing out from reputed institutes in India land up in these sectors??

Ultimately it all boils down to money.
Sometimes back we were discussing one thing in a group of friends: Why do people from any and all backgrounds come to IT industry? Why they do not go to other sectors if the other sectors are also fuelling growth?

Someone said: I feel comfortable to work on a computer and that is my skill set which I utilize to the maximum.
Another one said: It is easy to talk to overseas clients on the phone instead of facing the Indian customers.

Interestingly, the second one had switched the job from a retail store where he was working as a inventory management assistant. Today he was proud to tell that he finds it easier to talk to overseas clients.

A friend of mine was previously working for a top Indian IT company (one of the big 3). Unfortunately (for him), he was assigned to a banking project which had a client who was an Indian Bank. He was supposed to train the government bank officers on using the product that he delivered. His experiences are amazing: “The bank officers slept while I was giving them a demo on how to use the product”. That was the reason he switched the job - not happy to serve the Indian customers - Corporates or Individuals.
Who is at fault - the trainee officers or my friends - I don’t know.

But one thing is sure - We Indians are not willing to work for Indian customers. You will find people willing to switch the jobs from other industries to the IT sector, but hardly anyone from IT sector will ever join other industries.

The reason - It again boils down to money. The billing that happens in US dollars or Great British Pounds or Euros give them more salary compared to their counterparts working for Indian customer oriented companies. A successful release of a product or project ensure either some good bonus, or atleast a five star party or outing at company’s expense, so-called MNC corporate culture with only 8 hours of work (extending into flexible working hours) 5 days a week, a A/C cubicle and loads of other freebies like Medical insurance, etc.

Is the same available to all other industry sectors? Ever heard of an individual working on flexible hours for any Indian customer oriented company - 5 days a week? A person may work as a store manager at big mall like Westside, Reliance stores, Big Bazar, Lifestyle, Shopper’s stop, etc. - may be he draws a good package of around 6 lakhs per annum, but is his life as easy as compared to that of an IT pro?

Anyone working as a call center executive at any mobile company is willing to switch the job as soon as he gets an offer from a so-called MNC.

Ever heard a free credit card being offered to a person working in Reliance Fresh? Or an Insurance agent chasing a Shoppers stop floor manager for offering insurance policy or tax savings? Any automobile manager getting calls for free credit cards? Does it mean that these people are not worth the claims of fuelling the Indian growth story?

A young relative of mine recently took admission in Automobile engineering in a college in Maharashtra. Unfortunately, he could not secure a free seat in the engineering entrance exam, so he paid a lot of money to secure this seat in the private engineering college. Before taking admission, he called me one day to ask if he should take this seat. Instead of I telling him anything, he convinced me that “An engineering degree will help him atleast secure a software job”.
4-years is a long time to study - I wish things remain good during these 4 years, markets remain good and his dreams should be realized.

Continue to Part II of this article

Investing in Indian Market and Indian Growth story - 2

This is part II of articleInvesting in Indian Market and Indian Growth story - 1. Please read this article from part I before continuing with this part

Electricity was invented in later part of 19th century. Today, it is impossible to believe in a world without electricity. Hundreds of engineers in India got jobs easily till 1970. What is the situation today? We have not stopped using electricity - instead its demand is increased manifolds, but are any there electrical engineering jobs created? Today thousands of electrical engineers pass out each year. How many of them get a job at an electrical company? Not even 1%.

Hundreds of cars and other four and two wheelers from various companies are running on Indian roads. Competition is fierce among different companies and is growing day by day. After Tata’s, Bajaj have tied up with Nissan for small car manufacturing. Everyday new and innovative models are coming out. How many mechanical and automobile engineers take a job in this industry? Forget about taking jobs, are there any vacancies existing despite so many companies getting into car and two wheeler manufacturing? All that is required is a group of mechanics.
All our mechanical and automobile engineers either join the software industry, or go for higher studies like MBA, again to join the software/consultancy industry.

Eternal truth is that every industry has a saturation level. There can be no continuous creation of wealth, opportunities and jobs in any sector. As the electrical, telecom, mechanical and automobile industry have tasted the saturation levels, so will the software industry. When will it happen, no one knows.

Nothing comes for free - even if you work for a software industry with a fat pay package, your salary will not rise consistently with a double digit. If you get a 30% appreciation in your salary, the real estate prices and/or cost of living will appreciate by much more amounts, nullifying your hike.
Instead, just observe how many people end up becoming a fool in the name of software job. Real estate price hike has given us nothing but unaffordability due to sky-rocketing prices. Builders quote anything and everything - they know that people from IT industry have deep pockets and no knowledge of money and markets - create a hyper atmosphere of non-availability of land and intimidate these smart IT professionals about no future supply, and the builder can get what he wants.

A friend of mine went to take an affidavit: for a 50 Rs. stamp paper affidavit, the price quoted for him was 250 Rs., because the notary had first asked him what he does. Just because he said that he is a software engineer, 250 was quoted. That too this gentleman tried to negotiate and the response came that “Despite being a software engineer and earning so much, how can you negotiate?”. Finally he paid 250.
I too went to the same notary for an affidavit for a new vehicle purchase, and got things done in 120. I too was asked the same question about my profession, but I said I’m a retailer.
An automobile engineer if fired from his job will not hesitate to open a garage, he has expertise in it. A mechanical engineer can put up a furnace and continue his living if he looses his manufacturing job. An electrical engineer working in a government electricity board can take up repairing. What are the IT pros gonna do if they are sacked unfortunately? Can they develop products on their home computers and sell?

I’m not quoting all of the above because I want to intimidate anyone. All I want to convey is that PLAN YOUR FINANCES PROPERLY. Before getting into 15/20/25 years long commitments of house loan, car loan, share trading and other obligations, think twice. Think about whether your job will continue forever, whether you will be able to keep on getting the salary hikes consistently, whether your salary will be sufficient to repay your EMI and manage your family’s cost of living in a metro. Then and only then get into any financial commitment.

Link to previous article Effect of forex rate on industry

Have questions, please read the comments and post your views and queries in the comments section which helps in open discussion and avoids duplicity of questions.

You may be interested in reading my previous articles. Here is the link to Table of Contents in a chronological order.

Effect of forex rate on industry

Here is a news item available on the website of ICFA - International Custody and Fund Administration Site:;=478365
Spectrum pulls out of India
by Kris Devasabai 19 October 2007
Spectrum Global Fund Administration is closing its facilities in India and transferring all production and operations work back to its offices in the US.
Chicago headquartered Spectrum currently employs around 200 people worldwide, with just under half of that number based in Bangalore, India.
With the closure of the Indian facilities all fund administration activities will be transferred to Chicago and the firm's recently opened office in Columbus, Ohio, where the firm has been adding staff.
Spectrum said it made the decision to consolidate its operations in the US after talking to clients who wanted a closer working relationship with its staff. The move also allows the administrator to cut headcount and implement a more cost efficient operating model.
Spectrum has around $33bn in assets under administration, representing 110 hedge fund and fund of fund clients.
News Item Ends:

The above is the official news item that comes from a US based organization. It cites the reason of closure as “ clients who wanted a closer working relationship with its staff ” and “ The move also allows the administrator to cut headcount and implement a more cost efficient operating model ”.

However, an Indian counterpart, Rediff, has a different version to tell.

The title of rediff article is Rising Rupee claims first BPO victim.

The company has cited reasons such as increasing attrition and rising costs for closing its Indian operations.

Forrester Research, in a recent report, had mentioned that more than 60 per cent captive centres in India were struggling.
Sudin Apte, senior analyst and country head (India), Forrester Research, said, "In the past two years, more than 300 North American and European companies started their own offshore set-up to lower the cost of product development or back-office operations. But we clearly see over 60 per cent of them struggling due to spiralling costs, rising attrition, lack of integration and management support."
In the recent past, there have been news of various captive centres put on the block, the most prominent being the Citigroup's BPO arm.

What lies ahead? - You Decide.

As far as my thoughts are concerned, I firmly believe that things work RANDOMLY. Nobody knows the future - only ignorant claims can be made - about $-Rupee exchange rate, about work moving to/from India, China, Philippines, Canada, Romania, about how technology will continuously keep changing, how there will be continuous requirement, how emerging countries with English speaking workforce will always be able to create jobs, how other sectors fuel the growth of economy, blah, blah, blah, blah.

I too wish that Indian success story should continue, but I cannot ignore the risk of randomness and close my eyes with blind faith.

Ask the plight of the employees who reach the office one fine day and see that there login and email access has been blocked.

May be that majority of the readers will not agree with me. But yes, even if a handful of the victims of BNP Paribas Hedge Fund investors of Subprime Mortgage Crisis or a handful of employees of Spectrum Global Fund Administration at Bangalore agree with me, that should be sufficient.

I’m not publishing these BAD NEWS items to prove my point and claim that I am always correct or play around with emotions of victims of randomness, but it is an attempt to highlight the RISK.

Link to previous article How to start a stock trading and stock market advisory service?

Have questions, please read the comments and post your views and queries in the comments section which helps in open discussion and avoids duplicity of questions.

You may be interested in reading my previous articles. Here is the link to Table of Contents in a chronological order.

How to start a stock trading and stock market advisory service?

How to start a stock trading and stock market advisory service?

Imagine you doing an experiment.
Invite 1 million people to come with one dollar each (or to make exact calculations, ask 1,048,576 people to come with 1 dollar each.)

Now begin the experiment as follows. Collect all the 1 dollars from the 1,048,576 people. Hence you will have 1,048,576 dollars. Divide the entire group of people into 2 equal groups - each containing 524,288 people. Call one group as “HEAD” and other group “TAIL”.

Toss a coin - if head turns up, the people in HEAD group win and viceversa. Losers - i.e. TAILS group have to leave the game. Each of the winners - in the HEAD group - get the 1 dollar from losers and hence people in HEAD group have doubled their money.

Now again divide the winners (HEAD group) of 524,288 people into two equal groups - containing 262,144 each. Again call one group head, the other group tail. Again toss a coin. Losers loose their money, and winners get that money. Basically, the winner’s money doubles every time.

Continue this game for 20 times, and at the end you will have only 2 people left. Call one of them HEAD, while other as TAIL. Toss a coin. Whatever turns up, you will have only one winner belonging to the head or tail group.

So at the end, the winner, One single individual out of more than one million participants, , comes out as a consistent winner, and keeps the entire price money of 1,048,576 dollars.

After this, this individual will become a celebrity. He will be interviewed on news channels, will be offered advertisement contracts like those of heath drinks, chyawanprash, etc. and he will write a best selling book on “How to toss a coin and win consistently”. :- )

Now, let’s carry on another similar experiment but with different apparatus.

Collect 1,048,576 email addresses. Divide them into 2 sets, each containing 524,288 email addresses. Call one of them UP mailing list and other set DOWN mailing list.

To the UP mailing list, send a mail that “Microsoft stock will go UP in this month”.
To the DOWN mailing list, send a mail that “Microsoft stock will go DOWN in this month”.

After one month, for half of them your prediction will be true. Suppose the Microsoft stock goes up. So, discard the DOWN mailing list. Take the UP mailing list and again divide it into two - each containing 262,144 mail addresses. Again divide them into 2 mailing lists of UP and DOWN and send mails of Microsoft stock going UP/DOWN accordingly. For 262,144, you will be true.

Continue this exercise for 10 times. At this level (10th iteration), you will have 1024 people, for whom you will have always been proved to be true - consistently for past 10 times.

Stop sending the UP/DOWN mail now. Instead, send a mail to these 1024 people, saying the following:

My market analysis has always been true, as evident from the past 10 months about the price movement of Microsoft stock. My prediction is backed by hundreds of hours of solid research and can never go wrong. However, now this service will no more be available for free. One must subscribe to the service with a charge of 1000 dollars each.

Chances are, that at least 95% of these 1024 people will easily believe you (you’ve been correct in your last 10 predictions consistently), and happily pay 1024 * 1000 * 95% = almost 1 million dollars to you.

Ask them to sign up a form, at the end of which mention in fine prints “Investments are subject to market risks”.

Voila, 1 million dollars in just 10 months with only an internet connection and free email account. Not a bad business idea. You are safe because you have mentioned in the contract - “Investments are subject to market risks”.

Ladies and Gentlemen, this is exactly what your advisory brokers attempt to do. When opening a trading and demat account, you are asked to sign atleast 30 times on a 45+ pages long agreement. How many of us ever read it?

Forget about being true for only half of the individuals. You can prove yourself true to more than 50% of them. In a month (30 days), it is possible to see a stock price sometimes going up and sometimes going down. Hence, if it takes the maximum fall on 21st, and maximum rise on 28th, send the mail to the 2 groups accordingly, mentioning the dates of the month on which your UP and DOWN movements were correct. You will end up with much more customers.

If you have further doubts over how the advisory services work, read the comment left by ANIL RAI on my previous article Are you really making money in the Stock Markets?

Have questions, please read the comments and post your views and queries in the comments section which helps in open discussion and avoids duplicity of questions.

You may be interested in reading my previous articles. Here is the link to Table of Contents in a chronological order.

Mathematics of finance - 1

In a city like Hyderabad, Delhi or Mumbai, how many deaths occur daily due to road accidents? 1, 5, 10 or 25? The number varies. But yes, it happens daily. Do we notice it or we take it for granted? I tend to take it for granted if I see a news item mentioning “2 people died in a road accident”.

On highways in India, how many deaths occur daily due to road accidents? Just to make an estimate, a bus can carry 50 passengers and if on an average 2 such buses meet road accidents everyday across the country, then there is a loss of 100 people. Again, on an average, it happens daily. Do we notice it or we take it for granted?

Then, how many deaths occur if a volcano erupts in a country like Japan? Chances are that volcanic eruption can be predicted. Hence the number of casualties can be controlled. But still, the no. of casualties is much larger than what we see in overall highway accidents. But do we see volcanic eruptions daily? No. Probably once in a few years, that too in a volcanic area and that too can be predicted. Do we notice it or we take it for granted? Atleast I would read the news item atleast once.

Now, come to something larger - Tsunami comes only once is a thousand years, may be even after a longer time. The effect A Tsunami has sufficient power to hit multiple countries, affecting right from Indonesia to Andaman, to Indian Peninsula and on the way to the borders of Pakistan and Afganistan.
Loss of life in a Tsunami: Devastating.

How about Hurricanes, like hurricane Catrina or hurricane Rita which hit the US coast line in last years? Hundreds of thousands of people had to be relocated.

Why am I telling all these things? :- )

Well, I want to convey the simple message: What appears to be less probable, has a more devastating affect and interestingly, it comes without any notice or prediction.

Tsunami may come once in thousand years - but when it comes, it has the power to erode out the entire region and take lives numbering in millions. Everyone notices this news item.

Road accidents happen every now and then - one or two people die, hardly anyone notice it. Even if they do, they take it for granted.

When the news of Tsunami came, “Tsunami” became the most searched word on internet. Newspaper, TV, media everyone started to talk and educate people about tsunami.

Does the same level of coverage happen for road accidents? I don’t think so.

Continue to Part II

Mathematics of Finance - 2

This is part II of the article Mathematics of finance - I. Please read the first part before proceeding with this one

However, the same thing goes on in the stock markets.
We hardly notice anything like a 1% or 1.5% daily up or down price movements. But when the debacle comes, it takes along everything.

1929, was the year when Americans tasted the first setback in stock market. Individuals went bankrupt, huge job losses, economy went in deep recession - all this happened in one single day.

1987, it was the London stock exchange that crashed. More than 16 million shares were sold on London Stock exchange.

1997-98, Russian Government defaulted on its government backed bonds. South American countries like Argentina, Brazil were considered the emerging markets of the world. The default on government backed bonds from these countries lead to the collapse of the so called emerging markets, which caused a global setback. All these things happened in one single day. Finally we saw the internet bubble burst.

Investors lost their shirts, and their pants too. Companies went in losses, resulting in huge job cuts like that during the IT bubble burst of 2000-2001. Hundreds of individuals in countries (including the most developed countries like US) had no way of earning a living. Fortunately, for them, the US government had a very robust unemployment grant. Do we have any such thing in India????

If the US economy gets into a recession, it will directly impact the Indian market. Even though the IT companies claim that they are shifting focus to European countries, the truth is that we are still dependent heavily on US. Even if we focus on Europe, the world is so much dependent on each other, that it is impossible for anyone to stay shielded. Remember the recent Subprime mortgage crises? It started in US, hit Australia, then UK base northern rock bank, and then Europe. The ghost is still haunting US economy and jitters are felt all over the world.

The fact is that whatever appears to be least possible or almost impossible, it has the most shocking affect. And when things start to go bad, everything goes bad. A recession starts with lower returns or even losses from the stock market, followed by job cuts, followed by less consumer spending, no loans, strict measures in place to check for black money and unearthed income, no more luxury affordability for common man.

Every day we read in newspaper that the common man of India is rising; the middle class is rising - is it really true? The fact is that the rise is compensated (or better to say - overtaken) by the huge price rice. Majority of individuals laden with loans with commitment for 20 years. Recently all the floating loan payers got the shock of their life when their EMI was increased substantially, due to the continuous interest rate increase.

If tomorrow, the stock market crashes, and is followed by another round of side-effects of job-losses and monetary failures, can we withstand it?

Let me continue more on this in second part tomorrow. Definitely, most of the readers will NOT agree with me :- ) So, please post your comments.

Have questions, please read the comments and post your views and queries in the comments section which helps in open discussion and avoids duplicity of questions.

You may be interested in reading my previous articles. Here is the link to Table of Contents in a chronological order.

Investing in US Stocks and Options

Indian investors can now go for global buying and investing in equity or shares by choosing among the real blue chip stocks such as Google, Microsoft, IBM, Wal-Mart, Coca Cola and others.

India’s premier online trading site, has launched its foreign trading facility for Indian investors who want to invest upto $200,000 in a financial year in Stocks, ETF- Exchange Traded Funds, Derivatives like Stock Options or Index Options.
ICICIdirect launched the service in alliance with Penson Financial Services which is USA’s fourth largest broker having $6.8 billion in assets under management. The online portal will provide an excellent option to trade and invest in US stock exchanges such as NYSE, NASDAQ and American Stock Exchange.

As per the information I have, for registering for this service, a one time fees of Rs. 99 is to be paid and money is remitted to USA through ICICI Bank (Users are requested to confirm for the exact charges and service taxes before going for the offer). The facility is only available to resident individuals and not available to corporate, partnership firms, HUF, Trusts, and NRIs.

Anil Dhirubhai Ambani Group (ADAG) who is managing Reliance Money was the first company to launch overseas trading facility in partnership with CMC Markets but that was only for derivatives segment.

Thus, ICICI Web Trade has become the first to offer ‘delivery-based’ overseas trading service. Though in derivative segment, trading in futures is not allowed, RBI prohibits investing overseas for use in margin trading.

Have questions, please read the comments and post your views and queries in the comments section which helps in open discussion and avoids duplicity of questions.

You may be interested in reading my previous articles. Here is the link to Table of Contents in a chronological order.

Post office savings schemes (Tax Planning)

Today, I’ll cover some points of the conventional savings plan - The Post office saving schemes.

Post office savings schemes are extremely common in our country. Now a days, even brokerage firms like ICICIdirect are offering to invest in Post office schemes through online trading accounts.

A look at the scheme gives a good picture:
• A fixed interest rate of 8%
• Lock-in period of 6 years
• Tax benefit (major attraction for such schemes)
• Easily accessible at your neighborhood post office

As compared to the usual PPF savings account which has 15 year long maturity term, the post office savings scheme has a major advantage that it has only 6 year long maturity. However, the interest of 8% is 0.5% lower than that offered by PPF account (8.5%) and another disadvantage of post office savings scheme is that the interest you earn is taxable.
In case of PPF account, the interest you earn is completely tax-free.

Hence, there is a clear trade-off when one compares the post office savings scheme with PPF account.

These are some of the advantages and disadvantages of the post office savings scheme, which can be found on majority of financial websites and financial planning documents and leaflets.

However, there is a major risk involved in post office saving scheme from my point of view. Here is the list that I believe should be looked at when deciding whether you should opt for tax saving through post office savings scheme or not:

Your friendly neighbourhood post office is really unsafe:

If you believe that the money you deposited in the post office scheme is safe, think again. Hundreds of thousands of post offices are spread across the country. They are running in small rooms which hardly have any security. When safe banks and locker rooms with security guards can be robbed in broad daylight, are the post offices running in 1 or 2 room buildings safe?

No computerization: All Paperwork

If you deposit money in your post office savings account, the sole proof that you have is a paper receipt; may be even an entry in a passbook. However, there have been numerous incidents of mismatch in the passbook entries with those on the registers of the post offices. You might be given a paper certificate, but it becomes your responsibility to maintain it. If you loose it even by mistake, you will be made to run from pillar to post to get your money back

No Roaming facility

None of the post offices offer deposit of money in one post office and withdrawal in the other. In the present world, where relocation is going on at a rapid pace, it is a must to have some such facility, which unfortunately may not be available as of now in your post office savings accounts

Duping chances by agents:

The chances are high that one may be duped by the agents of so called post office schemes. Several stories have been unearthered where the so-called agents promised people to invest in post office schemes and eloped with the savings of their lifetime. There is no identity proof for such people issued by the post offices. Even if they do issue, there is no way to verify them

Lack and knowledge and the common “government job” attitude:

It’s easy to spot, but difficult to explain. The post office in my neighbourhood always has only one single person. He takes the posts, speedpost, registered posts, deposits, withdrawals, etc., etc. Apparently, he handles everything. Everything is maintained in paper registers. Chances of mistakes are quite high and the rest is explained by standing in the queue for atleast 30 mins even if there are 2-3 people in-front of me.

So my opinion, don’t go for post office schemes. Better opt for tax saving infrastructure bonds with a lock in period of 3 to 6 years and the interest rate ranging in the region 5% to 9%.

Have much longer investment horizon, go for PPF, but Post office savings schemes are a serious no-no in their present form and with the given infrastructure.
I compare it to the UK post offices, which offer multifaceted offerings to their customers. Right from postal services, greeting cards, stationery, they are in the business of money, credit cards and even phone cards as well. Government should improve the post office schemes and the way they work, else the scheme will be completely out of interest for the young generation who are willing to have everything online.

Here are some more practical cases of how Post office Investments are risky and what they cost to the innocent investors

Behavioural aspect of financial analysis

Financial Bloggers are often accused of one thing - repeating the same thing again and again and again. I agree with it; I tend to repeat things again and again.

Let me tell you one of my good experiences. I was about to finish my masters course at the Rotterdam School of Management. So, there was an informal session going on with one of my favourite professors. Having finished the course around 2 hours before time, he asked us if we had some questions that he may answer. My fellow students asked him about his past, his job profile (he was a full time trader previously), family, etc.

I posted a different question altogether:

What is the toughest question you’ve faced while teaching your students in finance?

It seemed as if he was just waiting for this question. He started by responding:

It’s not only the toughest question, but also the most embarrassing question - and this question repeatedly keeps on bugging the finance professors across the world.

He then continued:

“The toughest question every finance professors face, and even you may face someday, is: You teach several high caliber students about investments and trading. If you are so intelligent and smart about investments, finance and trading, why aren’t you rich?.”

The moment he said this, there was a big laugh in the class. However, after a moment, there was silence. The reason was that people realized what they had learned during the entire course and then (probably) they asked the same question to themselves. After spending so much money, taking a break from a well paid job, doing a costly course at an international business school, we were not in a position to answer the simple question.

Well, then we had a nice discussion about the reality of markets and financial products. What all we’ve learnt during the entire course, in a nut-shell was that “one cannot make enormous profits consistently in the market”. One may be lucky for 1, 2 or a few years - but how long can he carry on making profits - no one knows. Come together the fundas of diversification, asset allocation, tax saving, psychological biases, behavioural finance, disciplined approach, systematic investment plans, blah, blah, blah - all these terms factor in and ultimately the individual is left with no big profit in the end of everything.

My professor was already a trader with a reputed MNC financial firm and was based in New York. He said that the most interesting thing that he spotted during his career was how stupidly people behave with their money, how ignorant they are with respect to the financial products and markets, yet all this is done to get more money. Hardly anyone knows how to calculate the profits. Hardly anyone is willing to learn the right mathematics, but the moment there is a news on business channels, quoting EBITDA, Profit after tax, EPS, etc., etc., people will be fascinated about the numbers - though they hardly understand the meaning of those numbers. Brokers, investment advisors, agents & sometimes even organizations declaring financial results use these figure very well to make a fool of people. All they end up doing in the market is making bets.

In my previous articles, like DCF analysis, I attempted to give the right picture.

In my another article: Should you invest in IPO, I attempted to disclose the profit/loss calculation with respect to IPO applications.

Interestingly, for both these articles, people either responded by saying that they have not understood the method OR they picked up their best performing investments to prove that they are in big profits.

I’m not trying to say that you are in complete loss or not doing the right thing - but I’ve always advised to look at the whole picture. For example, you may have earned enormous profits in the recent IPO like Power grid IPO. However, look at the whole picture - let’s say past one year. How many IPO’s have you applied for? Were you allotted shares for all those IPOs which you applied for? How much was the profit that you made? Is the overall profit better than what you’ve lost in risk free bank accounts or FDs?

Similar thing goes for profit/loss calculations for stock trading and investments. Just take last 1 year or 2 year horizon or your entire investment horizon since when you started trading. Do a DCF analysis and see where you stand. Have you performed better than the risk free bond returns or bank account? If yes, have you performed better than the market - like those tracked by ETF? If yes, they can you continue doing so consistently year after year? If the answer to any of the above questions is no, then you must give a second thought to your investment strategies.

Well, sorry for repeating the same things again :- )
Thanks for reading till the end.

Have questions, please read the comments and post your views and queries in the comments section which helps in open discussion and avoids duplicity of questions.

You may be interested in reading my previous articles. Here is the link to Table of Contents in a chronological order.

Slow Down Culture

This is not my original post, but an email forward received. I too feel slow down culture should be practiced, but only after one settles with job and career

Read on if you have the time in this fast paced world……a very interesting article!

It’s been 18 years since I joined Volvo, a Swedish company. Working for them has proven to be an interesting experience. Any project here takes 2 years to be finalized, even if the idea is simple and brilliant. It’s a rule.

Globalize processes have caused in us (all over the world) a general sense of searching for immediate results. Therefore, we have come to posses a need to see immediate results. This contrasts greatly with the slow movements of the Swedish. They, on the other hand, debate, debate, debate, hold x quantity of meetings and work with a slowdown scheme. At the end, this always yields better results.

Said in another words:
1. Sweden is about the size of San Pablo, a state in Brazil.
2. Sweden
has 2 million inhabitants.
3. Stockholm , has 500,000 people.
4. Volvo, Escania, Ericsson, Electrolux, Nokia are some of its renowned companies. Volvo supplies the NASA.

The first time I was in Sweden, one of my colleagues picked me up at the hotel every morning. It was September, bit cold and snowy. We would arrive early at the company and he would park far away from the entrance (2000 employees drive their car to work). The first day, I didn’t say anything, either the second or third. One morning I asked, “Do you have a fixed parking space? I’ve noticed we park far from the entrance even when there are no other cars in the lot.” To which he replied, “Since we’re here early we’ll have time to walk, and whoever gets in late will be late and need a place closer to the door. Don’t you think? Imagine my face.

Nowadays, there’s a movement in Europe name Slow Food. This movement establishes that people should eat and drink slowly, with enough time to taste their food, spend time with the family, friends, without rushing. Slow Food is against its counterpart: the spirit of Fast Food and what it stands for as a lifestyle. Slow Food is the basis for a bigger movement called Slow Europe, as mentioned by Business Week.

Basically, the movement questions the sense of “hurry” and “craziness” generated by globalization, fueled by the desire of “having in quantity” (life status) versus “having with quality”, “life quality” or the “quality of being”. French people, even though they work 35 hours per week, are more productive than Americans or British. Germans have established 28.8 hour workweeks and have seen their productivity been driven up by 20%. This slow attitude has brought forth the US ’s attention, pupils of the fast and the “do it now!”.

This no-rush attitude doesn’t represent doing less or having a lower productivity. It means working and doing things with greater quality, productivity, perfection, with attention to detail and less stress. It means reestablishing family values, friends, free and leisure time. Taking the “now”, present and concrete, versus the “global”, undefined and anonymous. It means taking humans’ essential values, the simplicity of living.

It stands for a less coercive work environment, more happy, lighter and more productive where humans enjoy doing what they know best how to do. It’s time to stop and think on how companies need to develop serious quality with no-rush that will increase productivity and the quality of products and services, without losing the essence of spirit.

In the movie, Scent of a Woman, there’s a scene where Al Pacino asks a girl to dance and she replies, “I can’t, my boyfriend will be here any minute now”. To which Al responds, “A life is lived in an instant”. Then they dance to a tango.

Many of us live our lives running behind time, but we only reach it when we die of a heart attack or in a car accident rushing to be on time. Others are so anxious of living the future that they forget to live the present, which is the only time that truly exists. We all have equal time throughout the world. No one has more or less. The difference lies in how each one of us does with our time. We need to live each moment. As John Lennon said, “Life is what happens to you while you’re busy making other plans”.

Congratulations for reading till the end of this message. There are many who will have stopped in the middle so as not to waste time in this globalized world.

Fund Management at B-Schools - I

Have a look at this article making waves across major newspapers and even on a few business channels: B-school students cut their teeth on stocks

This article talks about various students at top and middle rung business schools of India getting into the business of fund management by collecting money from their fellow students. Using this collected money, they do the stock picking and give fabulous returns to the “investor colleagues”.

Here is an expert from the article

Be it the Investment Bank of Kozhikode at IIM-K or Arth (inspired by the Arthshastra) at the National Institute of Industrial Engineering or Unnati at Management Development Institute, Gurgaon or Credence Capital at IIM-Lucknow, students are assuming the responsibility of managing kitties amounting to a few lakhs amidst the volatility in the capital and money markets.

“Returns too have been exceptional,” said Anupam Dubey, one of the fund managers at NITIE. While net asset value — loosely, the current market value of investment — of NITIE’s fund was 14 last year, it is up by four points now.

"We sit up till about two in the morning tracking stock movement. Besides, we speak to our alumni and our faculty for guidance. But in the last year, our fund has had returns to the tune of 30%-35% on the sensex stocks and about 60% on the mid cap stocks," Balaji added.

Actually, lots of other sentences can be picked up from the article.

Being myself a student at an international business school, that too doing a specialization in finance, investment and trading, I salute the spirits of the student fund managers for taking the courage to collect the money and take the responsibility of investing it, and I also thank the fellow student investors who have shown confidence in their colleague student fund managers, allowing them to invest the money on their behalf.

It is definitely a very good learning experience as a student and if things go well, the achievements can be added as “flash cards” on to the resume, so as to get hunted by the potential recruiters to get a job of your dreams.

A team member of mine at my previous job is presently studying at NITIE. On his Gmail Profile, he has placed a link to this article and placed his status as “Arth - The Quasi Mutual Fund of NITIE" rocks,” followed by a link to the above article. Very recently, he joined the fund management team.

Though it will be easier for anyone to claim that quote no. 2 is not good, as the investment has grown only from 14 to 18, while Nifty based ETF has returned better than that
from quote no. 3 that 30-35% on Sensex and 60% on mid cap stocks is not upto the mark compared to the overall market rise or the respective ETF returns

But I want to remain positive on this development :- )

One thing that I like about this style of learning is that the students are betting either their own money or they are taking money from the colleagues who trust them. It is the perfect way of learning practically - do your own experiments, setup your own apparatus and then enjoy the rewards or failures yourself. So kudos to the students of these funds.

Continue to Part II

Fund Management at B-Schools - II

This is part II of the article Fund Management at B-Schools - I. Please read the article from the first part before continuing with this one

But I cannot stop myself from adding a note of caution :- ) (As always)

When the entire market and country is going euphoric about the stock markets, Sensex and Nifty touching record highs each day consistently, then it is easy to garner positive returns.

There are few things that one should keep in mind:

• The article mentions that the funds are being mentored by seniors, alumni and professors of the institute. Are the student fund managers learning the facts about how to compare the returns against the market index and see how they have performed?
• Are the student managers able to understand the fundamentals of stock picking? (though, in my opinion, there are no such stock picking fundamentals :- )
• Can they see whether their fund returns are atleast comparable to the returns offered by respective ETFs?
• As of today, the funds are working as small entities with small amounts. Are the future fund managers learning that there will be a big amount of money if they have to manage a fund professionally (Like Reliance MF has assets worth 70,000 Crore Rs.)
• I believe (though I may be wrong) that legal aspects of MF investments may not be covered in these small college based unregistered funds. Though these will be covered once the student fund managers join the professional fund management organizations
• They are in the process of getting the funds registered. I believe that is a very good move - it will ensure that the legal requirements as well as practical problems in a registered regulated fund will then help the student fund managers to get a practical understanding of the money management
• Most Important of all - are the professors, along with other mentors, informing the students about the efficiency of the markets and other available financial instruments like ETFs and Index funds?

I hope to see these small funds growing big, registered and regulated. But I will not be happy if the registered student funds start collecting money from common man. It will then defeat the purpose of fund management learning.

To all student fund managers, kudos to you all and keep up the spirit - just make sure that you keep your learning practices to your own money (of yourself, your alumni and fellow students).

Have questions, please read the comments and post your views and queries in the comments section which helps in open discussion and avoids duplicity of questions.

You may be interested in reading my previous articles. Here is the link to Table of Contents in a chronological order.

DCF Analysis continued - I

Further to the Basic tutorial on DCF analysis with example - in this article I will highlight some more practicle uses of DCF analysis, by varying the investment returns and time horizon and how it impacts your investments.

Here is the original investment plan as covered in the Basic tutorial on DCF analysis with example:

Start Date


Investment Period

3 years

End Date


Interest Rate


Present Value of












Annualized time






















































































Net (Sold-Buy)



Net % Return



Annualized % Return



As we can observe, the Net % return is positive, since ALL the investments are considered to the positive (as displayed in the table below):



% Profit





























Continue to Part II

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