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.
The PNB fraud has left many of us feeling cheated although no money has gone out of our pockets directly. We feel cheated because the rich and the well-connected once again appear to have managed to get away after stealing a large amount of money. The pictures of smug high lifers seem to be mocking those who play by the rules.
We feel cheated because we are made to feel like criminals when we intersect with the financial sector—each of us, every few years, has to redo our KYC details. The linking of Aadhaar to various services has now reached a level where a corporate chemist chain is sending texts to customers to link Aadhaar to the account. When we seek a loan, the due diligence process is exhausting; the contracts are not really two people agreeing, it is the weaker party (us) just signing what the stronger party (bank) shoves across the table. Miss one EMI or get behind your credit card payment and the hounding begins relentlessly. A friend’s sister is a senior bank manager in a state-run bank in a small town in middle India. A part of her territory is also the nearby rural clusters and some of her work is loan recovery. As details of the Nirav Modi theft emerged, her sense of disbelief grew. She said that when sometimes people defaulted on loans, she has actually threatened to walk off with a cow or a goat as collateral to make good the bank’s loss. For the poor people, who will surely be even less able to pay their debt with their asset gone, the loss would be mind numbing. But the rich get away with it because of political patronage, collusion and greed. Fraud of this kind corrodes the overall value system of a nation when people feel justified in cheating and not paying taxes.
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.
If the Union Budget looks ahead at the year and makes forecasts on how the government will gather revenue and spend it, the Economic Survey looks back to take stock of what happened and then lays out the big-picture goals, challenges and scenarios for the Indian economy. It is more of a vision statement than a to-do list. Just as the Budget document has the signature flavour of the finance minister, the Survey carries the DNA print of the chief economic advisor. The key message of Arvind Subramanian’s Economic Survey for 2017-18 can be summed up in one phrase: revival and risk, and he shows this in one chart on the behaviour of bond prices and stock prices. (See table)
The rise and rise of the stock market points to the revival in the economy and the rise in bond yields points to worries on deficit, inflation and oil prices going up. Why are the stock markets rising? The Survey finds that the revival part of the story is “robust and broad based”. With the shock of demonetization and the Goods and Services Tax behind us, gross domestic product (GDP) growth for the current year is estimated to be 6.75% and for the next year between 7 and 7.5 %, making India the fastest growing major economy in the world. The reason for the robustness is the implementation of several deep reform initiatives. GST reform has added another 3.4 million indirect tax payers and GST collections are on an upward trajectory. In fact, the overall trend for widening the tax net is positive. The Survey finds that post-demonetisation, there has been a 0.8% monthly increase in new direct tax filers—an annual growth of 10% or about 1.8 million new taxpayers.
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.
Regulations in the financial sector need to keep evolving as the market grows in depth, breadth and complexity. Think of this as the need for road rules and a traffic management system in a large metro—what worked 30 years ago cannot work today. It was possible to travel 5 km in Delhi without running into traffic lights or traffic cops 30 years ago as road traffic was thin. A malfunctioning traffic light today causes hours of traffic jams. As the traffic volume rises, cities resort to one-way traffic rules, higher parking fees and other measures to curb traffic in the city centre. Financial markets are similar; regulations need to keep moving to keep pace with the changing face of the market. Has the market changed? Yes, the size of the assets under management by the three large parts of the retail financial market—mutual funds (only retail), life insurance and the National Pension System (NPS)—crossed Rs34 trillion in FY 2017, up from Rs22 trillion just 3 years ago. Both the volume of money and the number of people on-boarding these products has risen sharply over the past few years. The share of household savings in financial products has been rising and now more than one-third of household savings find their way into financial products. In addition to the urban users of these products, a new category of investors are getting added through the Jan Dhan accounts. These are people who will be first-time users of many financial products as they move from cash, gold and real estate.