GLOBAL FINANCIAL MELTDOWN- LAYMAN'S VIEW

The present global financial meltdown is something unbelievable. So many people of repute, trustworthiness, international icons and experts all became greedy at the same time. This is not individuals or local areas but Institutions with enviable linage going back 150 years becoming willing partners. This just cannot be a mistake or error of judgement. The various check and balances built into the system by our fore-fathers just failed or should I say were ignored.The only motive driving them collectively across nations has to be GREED. This never happened in the past but unfortunately can happen again in the future.

To grasp what happened one has to visualise a large swimming pool full of people and a forest fire together. People individually can be at the deep end and enjoy the cool water without disturbing the persons around them. For any reason one person panics and grasp two different persons, with each hand. Had a solid support been available within reach the situation would have been controlled without much fuss. In the absence of such a support, the persons grasped would in turn try to hold on to persons around them, result total chaos. Likewise an out of control forest fire burns everything coming in its path.

Meltdown has two aspects:

1. Physical destruction of asset.
2. Asset is not destroyed but only its value is downgraded.

The first by definition has to be a local situation, maybe wide spread but not global in reach. The second has no boundary as it is not based on strict facts but on perceptions. Perceptions may or may not be based on facts. This peculiar but standard business practice has stood the test of time and asset values were upgraded or downgraded on principle of supply and demand. Like all good things this also had the potential to become a tool of the Devil. People the world trusted and respected, decided to become agents of Devil and start using this wonderful tool for devilish ends-- out of the main human failing-GREED. Since good always prevails over evil there is nothing to be afraid of. It will only take time to heal.

We all know that one should not buy based on the packaging alone but buy only if satisfied with the contents. This basic truth was kept aside and major transactions started based on packaging without due diligence of contents. Risky loans were given on higher rate of interests. These were then combined into exotic investment instruments and traded amongst the financial institutions as special packages. Since the rate of interest was high, institutions started making lots of profits. In turn these high profits justified higher pay packages and bonuses to the executives of the financial institutions. More risky the loan, higher the rate of interest resulting in more money going into the pockets of these people.

Since people entrusted with the responsibility of keeping a check and balance, like CEOs and Senior Executives, became a part of this greed, the entire phenomenon became as simple as taking away candy from a baby's hand. One of the positive fallout of this was busting of the myth that 'Capitalist Model' was superior to the 'Control Model' as market forces were the only honest reflection of what is good for the human race. For the first time a real level playing ground has been created. Both 'models' could be easily manipulated by GREED FOR MONEY OR GREED FOR POWER. Finally the State had to intervene to bring back stability and trust in the market. A combination of both models will show the way forward.

What is true for the economy is true for individuals also. I sympathise with persons who lost their shirt in the fall of the share markets. Those who lost all their savings when banks went bust will have to take solace from karma theory. They were in the wrong place when the forest fire approached. All others who would like to invest wisely, the following ideas may prove useful:

1. Control your natural greed. Do not try for maximising your returns from investment. Higher the risk better the return. Be satisfied with reasonable return in keeping with your risk profile.
2. Spread your resources within the asset classes, keeping the golden rule in mind always-50% in debt 50% in equity. To get better returns within this spread see my two blogs[ The Real Money Plant and Money Plant Revisited].
3. If you plan to take loans for vehicle, house or any other purpose, do so only after building up bank fixed deposits equal to two years EMI for each loan. You will not regret as these FDs will prove useful in more ways than one in the future. Yes, you can take these FDs towards the debt component of your investment plan.

I know what I have suggested would appear as excess caution to many. I can only once again strongly recommend them as they saved my shirt in this meltdown. Wish there was a way to hold all these greedy persons accountable and prosecute them for criminal negligence atleast. I know this is wishful thinking.

DO NOT BE DISHEARTENED. YOU WILL ALSO MAKE MONEY THE WAY I HAVE.

GOD BLESS.

MONEY PLANT REVISITED

I had written my blog [The real money plant] in the early stages of the present global meltdown. Since then I have become wiser as the southward journey of the share markets continued. It was gratifying to realise that my model for financial planning has passed the litmus test, though it needs a little straightening in the safety net area.

Along with the power of overdraft, one more instrument for improving your investment returns, with somebody Else's money, is to take LOAN AGAINST SECURITIES[LAS]. It works like this:-

Before investing in Mutual Fund check with your Bank which mutual funds are eligible for loans. Out of that list select the funds you like and make the investment. Once a sizable portfolio is ready you can open your account by pledging these units with the bank. After formalities are completed the bank will give you a limit which would be 40/50% of the current value of your units pledged. The limit gets revised as the value of the units change. The limit you get is what you invest again to buy units in any fund of your choice. The circle can be repeated endlessly. One has to decide the amount of loan one is comfortable with. Care should be taken to opt for final limits right at the beginning as it would save duties/expenses applicable whenever limits are increased. The limits sought are not linked to the value of units pledged.

Please remember that money plant is like any other plant. It will take time before giving fruits. Yes if you have sufficient funds in one lot right at the start[like just retired persons or after selling a property], this period can be cut short. Following steps by way of safety net are recommended from personal experience.

• My Bank does not allow part redemption's of the pledged units. After achieving your desired LAS limit, it is adviceable to duplicate your investment in the same funds but do not pledge them. This will provide you with additional liquidity in the form of free units which can be sold for booking profits if the need arises. The free units sold can be purchased again when the market falls.
• Keep atleast 25% of the limit availed in Fixed Deposit. You can link it to the OD account but avoid using these funds even for short or medium term requirement. This arrangement would prove very usefull in a meltdown like in 2008 or at the time of closing the account.
• By experience you will know the level below which your LAS limits will not fall, this amount also becomes part of your safety net.
• As markets grow you will soon reach the LAS limit. A stage will come when the value of the units pledged is higher than the LAS limits opted. This differance also becomes part of your safety net. At this stage review your position and set new targets for debt and equity investments.

Students of economics will recall the concept of deficit financing which they had studied. Liveraging of today is a flavour of this concept. If done in excess it will lead to meltdown and doom, if not done at all you will remain at the present standard of living. The choice is difficult but not impossible to make. Find the right mix you are comfortable with. What is life without some RISK.

Wish you a comfortable journey of making money with somebody Else's money. WIN WIN for all

The Real Money Plant

I should start with a disclaimer. I do not have any academic qualification in finance or investment subjects. My knowledge is totally street acquired. It has benefited me tremendously hence would like to share it with anyone who would like to listen. It is the most easy thing to make, one should only know how to do it. Yes I am talking MONEY.

Never work for money, always think and plan how money can work for you. Earning from someone else's money is called the POWER OF OVER DRAFT. Without a business/employment one cannot reach within striking distance of money-hence put everything in to get something started. I am saying this so that your priorities are clear and no rash steps are taken.

From whatever you earn, save what you can. Amount saved depends on individual circumstances but the key word is constant conscious effort to save money. Initially do not bother about investments, simply convert your savings in bank fixed deposits. Again how much depends on individual circumstances-any figure between 5 lacs to 10 lacs would be a good beginning. Ask your bank to give you OD facility on your FD. This varies from 70 to 90% of the FD original amount(HDFC and most public sector banks have this facilities as far as I know). Now you are ready to make money work for you.

'Fools buy houses and intelligent people stay in them'- still holds true. Property is a great investment but not as a starting point. Property accretions are locked in till the same is sold. Therefore think of buying only when your investment income can cover the EMI (your salary/business income should not be locked in property). The best investment is in mutual funds. You can try shares if you have the feel for it, I don't have it. It is a wrong time to talk of equity, but for me the India growth story is intact for the next 20 years at least. The present crash is only a short term regularly recurring phenomenon. My experience shows that 30 lacs invested in mutual funds gave 30,000 per month dividend income(apart from capital appreciation) before the January 2008 crash. This figure should help in planning. This is the big picture. One follows this path at his own comfortable pace to reach the desired destination.

At this stage the power of over draft will act as a booster. The 5 lac overdraft limit which you have will earn for you in the following ways:

• The OD facility should be attached to salary account. Withdraw 1 lac and invest in mutual fund. Salary gets credited thereby reducing the loan on which interest has to be paid to bank. For monthly expenses draw when needed. Payments by credit cards come up at the end of month. Bank charges interest for days of actual OD availed. Interest saved is money earned. Earnings on 1 lac invested extra.
• We always keep some cash balance in our bank accounts for emergencies and needs in immediate future. This amount is sleeping as it would seldom be eligible for any interest earning. Once the account is overdrawn, money is available when required, but you pay for actual withdrawal. Any payments received in between start earning bank leading rate, from the moment of deposit the same principle applies- interest saved is money earned.
• Timing the share market is next to impossible. Whenever the market undergoes a major correction, you can use the OD limit to make investment and repay the loan from receivables. In the longer run you will earn a respectable amount from this source.
• For greater flexibility keep increasing your fixed deposits (with OD limits) as this will also help in balancing the portfolio through investments in debt.

By now it should be apparent that investments in mutual funds is like having an orchid of wonderful fruit trees. The more care you take of it, better the returns. Replace old trees from time to time. Money requirement will keep changing, but the returns from mutual funds will keep flowing in. This would ensure a comfortable old age. Mutual funds are the real money plants in our life.

Hi There

This is my first post. In fact, this is the first time I am really using the Internet. Will get my bearings and start blogging soon. What about? This that and everything. I have a lot of crazy ideas which I hope somebody someday will be able to convert to reality. Until then, as my blog title says, this is all loud thinking. Anybody listening?