It is difficult to run into somebody in Delhi you know and not have them confess that they too are caught with their money stuck in stalled real estate projects in the suburbs of Noida and Gurugram. The bankruptcy process in the Jaypee Infratech Ltd case got the headlines, but the number of large developers in jail is not small. It includes companies such as Unitech, SRS Group and DB Reality, showing how deep the rot in real estate goes because rich people in India seldom go to jail for breaking the law.
Stuck in the still-to-be-Italian-marbled buildings are the savings of the urban mass affluent Indian who thought she was investing smartly in the property boom. Investors bought into the good deals offered by builders who offered to pay their first few EMIs (equated monthly instalments), who offered post dated cheques for those EMIs, who offered a free car if you booked a flat above a certain value. Real estate investors who bit the bait allowed themselves to believe deals too good to be true, to be true. They refused to listen to sane counsel of friends and newspaper articles that warned them against such deals.
It is a brand new financial year and some of you must be gearing up to do things differently this year. But before you begin looking for the next best investment or the next flavour of the year, spend some time thinking about the money mistakes you make. I find that money mistakes come in many grades that move from the very basic to the more sophisticated. I’ll talk about just three right now. Grade one money mistakes are entry level errors, grade two money mistakes are made by more sophisticated investors, and so on. For all the attention that ‘getting rich’ or ‘investing to win’ kind of titles get in the book space, I think they are jumping the gun. Most of us struggle with far more basic issues than making that one winning investment and working towards a jackpot. Identify the grade you’re at in the money mistakes matrix.
Grade 1 Money Mistakes
A very basic error, it is the ground floor of money mistakes. It is to say: I don’t have money to invest. I am too poor. I have no savings. Where is the money? I have no head for numbers. Too difficult for me. No time. Will do it soon. Will hand over money to my spouse, father, brother, good friend who will manage for me. I’m too young to worry. Now I’m too old, what’s the point. These are all loser statements. Don’t make them. I’ve run workshops on money that have had village level NGO workers earning a tiny salary to the mass affluent in big metros. They all had the same look: why am I in the room, I have no money to invest? If the peanut seller outside your office can save some money, so can you. Not having a surplus is easily fixed— you can earn more, spend less and rework your current borrowing and investing patterns. There is no other magic formula to starting a saving surplus in your monthly income rhythm. 1st graders can be identified by their don’t care attitude towards money, which actually hides many insecurities and fears.
I am reading a really cool book. When: The Scientific Secrets of Perfect Timing by Daniel H. Pink is a book about timing. Pink wants to turn timing from art to science and introduce a new genre in book titles, from ‘how to’ to ‘when to’. Pink says it matters when in the day we do things because his research shows that the human race has energy rhythms that are consistent across the world. Most people work better in the morning, hit an energy trough by about 2 pm and then recover by about 3 or 3:30 and then hit much higher levels by evening and 9 pm. What’s so great about that you may be asking? Well, for one, his work finds that scheduling a doctor’s appointment in the morning than in the afternoon may give you better care. Having your parole hearing in the morning carries a higher chance of being set free than in the afternoon. His advice: figure out your energy rhythms and then focus on your most productive and meaningful work in the time you know you are most effective. Leave routine tasks like admin work for the office day energy slump time.
Rahul Dravid filed a police complaint recently accusing an investment firm of cheating him. He invested Rs20 crore in a firm promising a 40% return. He recovered Rs16 crore but is yet to get back the remaining Rs4 crore. Instead of trusting a sharp shooter for higher returns, had Rahul Dravid invested his Rs20 crore in mutual funds, what would his portfolio look like today? The average large-cap 3-year return is 7.31% and the average 5-year return is 14.47%. His Rs20 crore invested 3 years ago would today be worth Rs25 crore and had he invested 5 years ago, he would be sitting on a corpus of Rs39 crore. That is if he got just average returns and not top quartile returns. But he is looking to just recover his principal from the sharp shooter who promised him super returns. Dravid would have been better off in funds than with a ponzi scheme that he trusted in search of more.
Mutual funds have done well and have been in the news for mostly good reasons in the past few years. The number of retail investors is growing, the systematic investment plan (SIP) book is now at Rs6,500 crore a month and long-term investors have seen stability in their money growth. When seen in the context of large banking scams or the loot of investor money due to misselling of life insurance products, or the periodic ponzi schemes that loot not just the rich and the famous, the fund industry looks good.
I’m the salt and pepper hair woman who you may notice walking into one of your hangout joints and exiting quickly for the fear of raising the average age of the room. You must know that I occasionally step into or past your congregations just to inhale some of the new energy, the vibrant mood, the chirpy buzz. At your age, people like me were in an India that was very different. I remember sitting in a pub with my friends in the UK, post my Masters and just days before I returned home to Delhi. This was in 1994. Not that long ago. But two decades is indeed a long time. We were going around the table talking about what we will miss about life in Cardiff. We were a bunch of girls having a drink and I remember saying that I will miss the freedom of sitting in a public place having a drink without being judged or propositioned when I’m in Delhi. So, pardon my thinly concealed joy at seeing you girls out there at all hours without giving a damn.
Every time people who have defined benefit retirement plans make rules for the market, their lack of understanding comes across clearly. Take people in the Ministry of Finance for instance, and then look at what subsequent Budgets have put in place. Not only is there arbitrage between asset classes on the definition of long term, there is arbitrage within an asset class too on the basis of which product you choose to buy. If tax policy is used to nudge behaviour, there is some serious malfunction in the Indian policy that is nudging in all the wrong directions and all the wrong products.
In India we answer the question, ‘How many years does it take for an asset to become long-term?’ in different ways depending on the asset. You have to hold equity for 1 year, real estate for 2 years and debt for 3 years for the profit made to become ‘long term’. This classification of assets is against Finance 101, since both equity and real estate are asset classes that cook slowly over time. They give their best performance over a long period of time. How long is long? Data analysis done by my colleague Kayezad E. Adajania (read it here) shows that it takes about a 7-year holding period to iron out volatility in equity. The thumb rule for real estate puts the cycle at about 10 years. Market-linked debt (as opposed to relatively fixed-return debt products such as bank deposits) as an asset class for retail investors is mostly used for short-term purposes for emergency funds, for near-term cash needs and for income generation. It would be more logical to make debt go long term at 1 year and keep a 5-year threshold for long term for both equity and real estate. At the very least, policymakers need to equalize the definition of long term across asset classes.
The auditorium was packed. Girls were sitting on the floor in the aisles. I was visiting Banasthali University, 75 km south of Jaipur, to speak to the postgraduate management and journalism students. About 250 curious pairs of eyes were bright with anticipation and I was hoping that I don’t let them down.
For those who don’t know, a quick update on this unique university. The journey of how this university came to be is quite a story. In 1927, the Jaipur state secretary in the home and foreign department, Pandit Hiralal Shastri, left his powerful job to relocate to a remote village (then) called Banthali to work on rural reconstruction. His friends said he’d gone half mad to do this. Who gives up power, prestige and money like this? But he moved himself and his family to the village. One day he found his 11-year-old daughter, Shanta, teaching the village kids under a tree. Sometime later she asked him for a room so that she could teach them without fear of storms or wild animals. He told her—you build the bricks and I will build the room. He forgot about the story thinking that the child will move on to other things. Three months later she showed him 300 handmade bricks she and the village kids had made. I saw one of the bricks that the institution has preserved. To touch the brick made by a determined young lady almost a 100 years ago was surreal. Shastri built that room and decided to give his daughter the best education he could manage. Music and martial art classes were organized. There is a painting of young Shanta in a sari, wielding a lathi and practising in one of the preserved rooms. When you remember that this was in rural Rajasthan in the 1920s when girls were married off as soon as they could be, the image of the lathi-wielding girls just adds to the amazement.