A big market move is accompanied by lots of excitement. Usually the excitement is of traders who are either kissing their screens or holding their heads in despair. Human beings tend to mimic the emotions of others near them—try being sober around a person who is laughing uncontrollably or try to not tear up when your friend is crying uncontrollably and see how tough it is not to react in empathy. Especially when there is a large market crash, the images on TV, the messages on social media and the newspapers all contribute to average people feeling that a big catastrophe has happened and they need to worry. And here is the strange thing: the real investors—that long-term equity investor who has a diversified portfolio of stocks and funds—simply have an average day at work. It is the punters, the market timers, the tip-seekers who get deeply influenced by the reactions of a market crash and spread the emotional contagion. Strangely, the most affected are people who have no stake or have very small sums invested.
Each of us has some link at a family level, direct or indirect, with the armed forces. A parent, a brother, an uncle, a cousin, a son, or a nephew. At a personal level, we know the first-hand stories of a wife not knowing if an ‘exercise’ will end in a dead husband. Of a father not knowing if the next landmine will have his son’s name on it. At a societal level, we can’t forget the border battles, and much closer home, the comforting presence of the army trucks and the green helmets as they rolled in after the 1984 riots to calm fires in West Delhi residential clusters. Can’t forget that when everything else fails in civic life, the army is called in to restore order. The army is called in not just to maintain order, but even for things like making that foot over-bridge that kept collapsing before the Commonwealth Games. And we have to only look over to our immediate northwest to see what damage an army can do to a nation.
It always amazes me. The confidence with which people make such definitive statements. Gold is always the best investment. You can’t lose on real estate. Stocks are a gamble. People like me, who take a middle-of-the-road approach and talk of diversification, were hooted down when gold was the best performing asset class two years ago or when people swapped their multi-bagger real estate stories. To talk of investing in equity in the go-go years of gold and real estate, when equity was down, was to invite derision and disbelief. But now that gold is down, real estate is in decline (held up only by a frozen market), fixed deposit (FD) rates are down and equity is moving sideways, it is a good time for some non-exuberant talk. If the chatter on WhatsApp groups (when they tire of recycling the same pathetic jokes) is any indication, people are willing to listen to sense. One forward that has come on almost all of my WhatsApp groups is the one titled “Real estate: the fall has just begun”. I traced the forward to a blog by certified financial planner D. Muthukrishnan of Wise Wealth Advisors, http://mintne.ws/1MhqzZZ . Very sensible stuff; do read. And remember to build in the tax impact on the final average return numbers given in the blog of the FD average being inflation plus 1%, gold giving inflation plus 1.5%, real estate inflation plus 3% and equity, inflation plus 7%.
We know anecdotally that floater rate home mortgages are sticky when they are high and rise quickly when they are low. Therefore, when I got a letter from my home loan vendor telling me that the company had generously reduced the benchmark rate by 0.05% last week, reducing in three digits what I will pay less over the rest of the loan tenor, I was surprised. Over the years, I’ve become used to letters from the home finance company raising rates—sometimes by 25 basis points, sometimes by 50 basis points—making this reduction something unusual. (One basis point is one-hundredth of a percentage point.) I’m stuck (for a variety of reasons) in a home loan that the bank vended, but then passed on to its home finance company. That is a problem because banks now have to use the base rate as a benchmark for all products and not the earlier Benchmark Prime Lending Rate (BPLR). The misuse of BPLR had nudged the Reserve Bank of India (RBI) to force banks to switch over to a base rate system in April 2010. The home finance companies, however, are not obliged to follow the base rate system and continue with home loans pegged to their own BPLR. Blogger Deepak Shenoy has a good piece on this (here: http://mintne.ws/1JJCSxQ ), where he says that some banks pass on their loans to sister home finance companies, thus managing to side-step the base rate-linked loans and staying with a benchmark they fully control. But five years into the base rate system and one full rate cycle later, it seems that even the move to a base rate system has not worked in rate transmission as far are retail borrowers are concerned.