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Commentary

Thoughts of a Corporate Consultant – Part XIV

The last three months have been crazy. I’ve been consulting – all day – at a banking software company, doing things like creating PPTs, reviewing documents, working through project plans, fighting fires, writing SQL and wading through RBI regulations. It has been a learning experience in many ways, and a taste of corporate life

The thing that’s been neglected, sadly, is the blog. I have had very little time, with the consulting and the family. But this has given me some time to retrospect as well. So I’m going to pen the thoughts I’ve had.

1. People don’t have time.

I have always been of the opinion that everyone should take control of their finances. That their retirement income is going to be their best friend. So they might as well track it now. Having seen corporate life more closely I’ve realized that there is just not enough time. Not enough time to do proper justice to stocks, or markets or even track a portfolio. It’s therefore easy to either buy stocks on “hot tips”, or give money to a PMS to manage. Or they get sold by an insurance plan simply because it’s easier. Anything as long as I don’t have to do much real work.

This is not something I knew intimately. As an entrepreneur I have always had the time to pursue what I wanted, and finance was always close to the heart since 2003. But in general, if you have to respond to the gargantual reply-all mega thread which has more “FYI” than real content, and do this every day, and then take phone calls that ask you what you think of that email, you will have no time to see if Reliance’s gas margins are showing a sequential decline, or even if your stock just broke it’s 35 DMA.

Why this is meaningful: I wanted to create a great web site where people could do stock and mutual fund research on their own. Haha. The number of people who do self-research are too few to matter today. It is, to a large extent, pointless to build a great experience or a great analysis tool unless – and this is the real lesson – unless you are investing or trading real money. It is then that great analysis matters, when your job is to make money. If your job is to provide great analysis, then attempt to provide it for people who are trading money – not retail investors. That is what I learnt.

You might thing this means advisors will make a ton of money. I don’t think so either. That’s because there is a huge change in the advisory game. I’ll come to that later. But the first point is that people don’t need to make money in the market. No, really. Because:

2. Salary hikes are young India’s growth strategy.

If your wages are going up 20% per year, then you don’t need to invest in the market. Because a person making Rs. 50,000 per month today will make Rs. 100,000 a month in four years (or lesser, going by anecdotal evidence). So the saving of Rs. 5,000 per month sounds ridiculously small even if it compounds.

Our wages have gone up that much in the past, in urban territories because of inflation led growth, easy money and wage arbitrage with the west. Inflation has been north of 10% (CPI) for most of the last five years. Cheap funding has made certain sectors pay ridiculous salaries (airlines, media, telecom) even if the companies make continuous losses. Wage arbitrage increases the salaries for the lowest hanging fruit (IT Maintenance, BPOs) which has a trickle up effect.

Whatever the reason, if your wages are going up consistently at that rate, you will not bother with investing in the market. You make your money work for you when your income is more stable – when the income curve is so steep, why invest? It will take a crisis and years of stability before investing becomes a viable option; otherwise we’ll just have to find new suckers chasing “momentum” stocks until they all fall down. (We’ll have those anyhow, but no one seems to be left behind after a downturn!)

3. The Advisory Game has to change.

Over the last few years, people and companies that have said they can “help manage your money” have been damaged. From PMS providers, to brokers, to mutual fund distributors to insurance intermediaries, all of them have faced a downturn. And this is not only because markets are weak. Weak markets definitely have a lower investor interest, but that isn’t the whole story.

The other problem is of fatigue. Such intermediaries have looted people over the last years. Regulations were then created to stop the loot. Mutual fund distributors got as much as 6% as commissions to peddle IPOs – that was stopped, and eventually entry loads were removed when it was found the higher one time loads made distributors churn the investors’ portfolios. (Remember, investors don’t have that much time). Insurance distributors looted ULIP investors with false promises and outright lies, and the collateral was (and is) hugely confusing to any layperson. PMS providers routinely used pool accounts to transfer profits from one investor to another. Others overleveraged or underperformed. Overall, sick of having been stolen from and reading stories of those that were looted, investors have decided to not bother. After all, they don’t have that much time, and their wages are anyhow taking care of growth.

The game changer will be something – I don’t know what. But I believe now that many of the current players will die. There will have to be new, lean and efficient players in the game, who use technology to keep costs low. Investors will learn to pay to play, but regulators won’t let them charge as part of the product.

And until this happens, the intermediary game will involve a lot of cribbing from everyone involved. Financial products are designed to be sold, not bought. Intermediaries will be unhappy about direct plans, mutual funds about having to spend money on education, insurance companies at strong IRDA fines (which will eventually be unshackled and allowed to compound) and companies like Sahara about what-does-regulation-mean.

4. India is at an inflexion point.

We are either going to see a huge growth story start from here, or a massive fall. I believe that some of the issues a growing country had learnt to ignore – the corruption, the sleaze, the Khaps, the dowry murders, the scams – are now becoming a larger part of our lives. If we don’t become totally numb, we will eventually revolt and demand that heads roll.

Think of the economic situation too. High inflation. Slowing growth. Moderating money supply. Ineffective reforms. Inadequate investment. Lack of research. Lies. More Lies.

The great story needs a great moderation as well, so that much of the evils of the current story can get wiped out. This could be a really bad ending.

If on the other hand the worst is behind us, then India’ can take itself much higher. GDP growth will go back to 8% and inflation will be moderated.

Unlike the west – where I see a muddle through economy and a slow, killing not-quite-a-recovery – I think India either grows massively from here, or fails and collapses (after which it will recover, we always do).

5. Blogging frequency doesn’t need to be “Daily”

Oh, it had become an obsession. And addiction. I felt withdrawal symptoms for two months. But now that I’m down to 3 updates a week, I see the futility of getting one post, at least one post, per day. I would rather think and write now, and I’ll have a better story to write about!

Thoughts?

Part XIV is just for kicks. If you find the earlier parts, please let me know.

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