Cards, Cars and Gold Czars

"Lucky you; a Credit Card in hand fresh off the boat!" or words to that effect. Thus went the refrain, notably from friends having made a similar India-to-US move mid-career; and thereafter grappled with the task of rebuilding a financial profile from scratch.

Fact is that, absent a Bureau score, many of us who wash ashore have to face the rather mortifying experience of credit denial(s). Some are forced to resort to Secured cards to build payment history. Therefore, the modest $1500 limit from BofA (I had higher in my first credit card as a mere student graduating from IIFT 20 years ago) felt like an occasion to celebrate!

Part of the distress, to be fair, comes from the dissonance between the erstwhile financial standing in India (while no HNW, one had the pick of financial products; and a feeling of being chased rather than chasing) to newbie status in the US of A. Mind you, this would be equally true even with a global bank; one you had used in India for years; and carried some priority status. Your creditworthiness is reset perforce.

So, with prospective landlords looking askance and utilities insisting on bank auto-debit of monthly bills, a credit card felt much like being granted the Moon. Why not use your India plastic, you ask? Unfortunately, that would be akin to kicking the can down the road. Even if you found a way past the international usage surcharge with an appropriate card, it would still not solve for the need to have usage and payment history domestically to build your credit profile (circular logic, did you say?).

Thankfully, there is a potential hack, and a doubly sweet one at that. AMEX, as I found out last week, could give you a charge card based mostly on your India relationship (albeit driven more by their customer service ethic than hyper-connectedness of the world)! Equally, this 'no limit' card saves me from needing to pre-pay my original credit card multiple times intra-month (when paltry limits meet large household set-up expenses). Note, therefore, my unequivocal endorsement for the 'Gold' in its name!

Next pit-stop in the finanical reset journey, is a car. Once again, as I shortlist, it is evident that usurious rates of interest await me on the loan. Neither will the humbling experience end quite there. Given recency of relocation, a lack of intimacy with domestic stocks is only to be expected. Ergo, I have miles to go to attain the next goal (of high-conviction stockpicking ideas). Till then, we soldier on, as we must.

Teesri Kasam

Investing as a theme pops up periodically here, testament to my abiding interest therein. Success here can have a fairly direct correlation to material well-being. That said, in matters financial, it matters more what not to do, than otherwise. In this, I am reminded of the quintessential Bihari ethos of Teesri Kasam.

Flashback 1961. Mare Gaye Gulfam, penned by the indomitable Phanishwarnath Renu, was turned to film by some of Indian cinema's tallest. On camera were Raj Kapoor and Waheeda Rehman, but also Iftekhar, Keshto Mukherji, AK Hangal and Asit Sen: names that verily lit up the silver screen much as the faces of cinemagoers for generations. Rest of the crew was no less luminous: Renu himself, Basu Bhattacharya, Shankar Jaikishan, Lata Mangeshkar, Manna Dey, Asha Bhosale, Mukesh etc. Perhaps above all, was Shailendra, this being the only movie the lyricist extraordinaire ever produced. Thus, we got Teesri Kasam.

So how does Teesri Kasam connect to my investing experience, personal or observed? Simply that Hiranan, its bullock cart-driving protagonist, idealist yet unafraid to try the new, makes mistakes in his pursuit of life's affairs, swearing each time never to repeat them. And in a fashion, his three blunders, that lead to the eponymous three vows, mirror my view of the most common slips in financial matters.

Perhaps unsurprisingly, Hiraman stumbles first in ignoring the risk-reward equation. His simpleton character tries to make a fast buck ferrying smuggled goods, merely managing a brush with the police and promising himself a long-term focus thereafter. Many of us, myself included, start life at the other end, content at managing money near-term and confusing bank balance for financial security. We fret about market risk but assume inflation-immunity. Consequently, savings go to FDs, PF contributions stay minimum, and equity action is a rushed, year-end Sec 80 investment at max. Thus, the power of compounding is missed for years.

Hiraman's second folly is not planning for oversized loads. He picks up a consignment of bamboo, being new, rams it into a horse-cart, and gets a thrashing. His kasam: avoid 'long poles'. Of such cargo, real estate is the most ubiquitous in our lives and the cause of much financial misery. I didn't buy my first till 12 years of career (missing two Gurgaon booms); yet others buy too early; or too much; and some simply a 2BHK that they outgrow in no time. A similar case could be made of Insurance. Point is to tackle the big rocks as soon as one is able, which means a financial plan.

Twice singed, Hiraman is then felled by the most confounding folly of 'em all. Tasked to transport Hirabai, a performer in the Great Bharat Nautanki Company, to the village fair, he is smitten by her beauty and (in his eyes) apparent virtue, during the course of their day-plus journey. His consequent conflict with zaalim zamana and zamindar is typical filmi (the denouement is anything but), culmintating in his third and final vow: say no to nautanki-walis. Cut to our financial lives; and how often have we similarly lost when appearances and emotions outbid logic and fact?

A tad more on that last named. Its typical setting, interestingly, is folks who spend a lifetime confusing investing to be a armchair sport. They watch the market ceaselessly, debate it tireslessly, and wait for the 'right level' endlessly. Then suddenly one day, armed with an ostensibly hot tip (delivered over sips of 'Glen' perhaps), they rush in to bet the ranch. They may get lucky, but mostly they don't, only to slink back into the corner, cursing their luck, the markets, or both.

Be it rooted in any of these mistakes, but it is the dud that we carry too long that has the biggest bite (I have never lost as much money as I have selling late). Pigheadedness, optimism, or sloth, we only invite peril home when the basic principle of stop-loss goes amiss.

These experiences aside, like most walks of life, success in investing must rest on the bedrock of lessons learnt. "The four most dangerous words in investing are: this time it’s different" is how one of the greats so adroitly put it. It remains a game where discipline and math plainly trump creativity and chance. Ignore this, and one is left to rue mare gaye gulfam.

OROP: No Silver Bullet

Emotions have run amok on One Rank One Pension since the governmental baton passed to the NDA last year. In a fashion, this is actually a compliment to the PM's leadership. After all, expectations are sky-high in light of the ruling party's widely perceived fauji-friendly tilt, made even more striking by the UPA's characteristic somnolence (that election-eve accpetance of OROP was disingenuous, if not downright dishonest).

Imagination need not be stretched to understand why OROP demands find widespread support. Naturally, the nation's heart-strings tug easily for those that guard her borders. Our Forces' stellar record of aid in times of calamity or strife comes in handy too, no doubt. To top it all, the institution enjoys a moral high ground, thanks to a reputation unsullied barring occasional blemish, standing tall amidst a general decline in standards of public life (that plumbed new depths in UPA years).

So why the delay? The ask itself is clear: to index pensions to benefits for currently serving personnel. In other words, the Government implement a system of 'defined benefits' (percentage of last salary; with math around years worked), paying uniform pension to retirees in the same rank. Yet, be simple as it may, the commitment is not sans ramification. It is a multi-dimensional issue, wherein the crux is money.

For starters, a bitter pill must be swallowed immediately. In other words, funds are needed to bring pensions of old retired on par with new. Unfortunately, this hit isn't merely one-time, but inflates GOI's pension bill considerably in each pay revision cycle (roughly every decade) going forward. With our economic planning often a precarious balanacing act, this has been a deal-breaker hitherto.

Additonally, there is clear-and-present danger that OROP for the fauj opens a Pandora's Box and demands of a similar nature could emerge from other service groups. This includes Police and para-military, but could cross over to non-uniformed personnel too. Railwaymen appear to be first off the mark here (we hear noises around 'essential lifeline of the country' etc) but others may well follow suit. It is this deluge of politico-legal and economic tangles that worries the government.

Fact is that defined benefit pension programmes always run the risk of unsustainability. Many countries have junked such plans on account of the rising burden on declining (productive) populations to support a growing number of retirees. Granted we aren't there today, but what is to suggest that we never will?

As conundrums go, this is hardly unsolvable. One need look no further than our Central Government employees who have been on a defined contribution (versus defined benefit) programme for over a decade. In fact, the National Pension System is class-leading, with multiple low-cost, managed-risk product options (especially those that enable qualified equity exposure) and offers an excellent alternative. Switch to NPS, however, shall be no cakewalk and would entail a mindset shift than mere policy change.

Parsing through all these requires time: a commodity the Modi Govt may not have. It remains true that the UPA's wanton profligacy in the name of social inclusion has pushed India close to the edge of a fiscal precipice. An ill-conceived or reckless OROP implementation must not become another nail in this coffin-in-the-making. That is a prospect our fauji brethern would certainly wish to avoid.

Investor as a Split Personality

"Be ye of reasonable means, with intent to secure thy future, thee cannot afford naught to be in stocks." There, I quote myself (Shakespeare merely for effect)! Truly, the merits of equity investing are beyond doubt. Even more certain is that they are ill understood. "The real key to making money in stocks is not to get scared out of them" is how Peter Lynch, one of the gurus of the craft, put it admirably.

So why this reticence that, in face of volumnious data on stock-picking benefits, makes even the well-heeled go weak in the knee? Market evidence shows that the issue is not opportunity. Nor is it barriers of entry; lack of visibility; or absence of ambition. And very rarely, contrary to popular belief, is it ability. For today, let us dwell on that last named, for it is the one I find most difficult to fathom.

In context, ability could be thought of in two ways: the capacity to invest; and skill therein. Not that I choose my company specially, but enough investible surpluses (after emergency cash or fixed income commitments) exist around me. However, they find their way into real estate, almost without exception. I don't discount residential or commercial realty being part of a well designed financial plan (though my personal experience of returns isn't much to write home about). However, I do take issue with over-exposure to this asset class, and notably when at the expense of equity.

Nothing brings this better to light (to the mythical point on ability) than the dramatically different approaches folks follow while investing in stocks versus real estate. Most realty shopping, perhaps on account of packet size, is backed by effort, discipline and rules. However, the same individuals behave diametrically opposite when picking stocks. For instance:

• Look before you leap?: You buy an apartment in DLF after arduous research, talking to the world and their mother before you commit. Stocks you buy because you got a hot tip with a shot of Jack Daniels last night!
  
• Shylock or Great Gatsby?: You bargain down to the last thousand, even hundred, in buying property: negotiating terms, comparing freebies and so on. Stocks you buy in a bull market, when the local barber is dispensing investment advice, with nary a care about valuation!
  
• Till Debt do us part?: You negotiate mortgage rates down to the last bp, manage monthly EMIs with appropriate down payment, pre-pay whenever can through the tenure; all to keep debt under control. Stocks you rush headlong into F&O or complex margin positions with little regard for complexity or leverage?
  
• Ain't it a team sport, baby?: You are happy to employ and pay for real estate expertise with agents, lawyers, architects, interior designers etc; anything to ensure asset acquisition and management is optimal. Stocks you trash financial planners, avoid research advice, preferring hunches and going solo?
  
• Time in market vs timing the market?: You invest in property for the long term, commitments that typically last years; and exit only when goals are met, or as last resort (if faced with hardship). Stocks you look for upsides in days or weeks, often selling for small profits in bull market, or huge loss when bears rule.

I will not even start the argument that disciplined equity investing can bear returns superior to real estate. Or that the property market is far less transparent and much more illiquid. Least of all that smaller packet size and SIP possibilities make equity an easier option to manage risk through market cycles. All of these are true; yet they are just facts. Crux here is behaviour. And hence another homily with a touch of of Shak: "stay ye considered, consistent, and committed; and long term wealth shalt be thine." Amen!

Torches and Snow Houses

A few weeks ago, after a high-heat session hashing out a data governance/ lineage offering at work, a teammate shared material from Edward Snowden's interview by Prof Lawrence Lessig with me. It made for truly sombre reading. Watching the documentary Citizenfour (which premiered in the same month) yesterday was a grim reminder not merely of the profound moral-legal issues involved, but also of the question of what, if anything, has society learned from the sordid disclosures and consequent debate.

First off, public memory is arguably impaired by information gaps regarding what Snowden actually exposed. Mainstream media mostly reduced the 2013 leaks to personal gossip, political theatre, and character assassination. Its occasional stirring into thriller-like coverage of Snowden's whereabouts or asylum attempts was also as predictable as it was puerile. The terrifying reality of mass citizen surveillance, which was core to the episode, was almost entirely ignored.

The fact remains that l' affaire Snowden deserves examination through multiple lenses. The legal, moral, political, and organizational perspectices are obvious, but the precipitating action was technological. In fact, advances in information technology enabled the Orwellian surveillance just as much as they paved the path for its eventual exposure. Furthermore, this was not an isolated example: infotech advancements have dramatically outpaced our legal and ethical framework in the last few years. No lesson is enough, for we continue to lack the muscle to foresee and mitigate the risks of such revolutions.

Going back to Snowden, it must be acknowledged that there are two fundamental dilemmas (lines of morality and legality blur here) at play. First, at a policy level, is the balancing act between prevention of public harm and invasion of privacy. The vision of Big Brother run amok is not just conspiracy theory fodder. Equally, it is difficult to guarantee civil liberty without the protective cover of public policy, which almost directly implies the enforcement power of a benign regime. As such, a balance is expected to be provided by internal checks, legislative oversight, judicial review, and Fourth Estate scrutiny. This framework assumes no information asymmetry, however, and is increasingly strained by an inherent bias, namely, one that results from a sustained global rise in threat frequency, disruption severity, and adversarial sophistication.

The second ethical conundrum is personal and, one would think, integral to whistleblowing. Many would find no fault in the NSA's use of PRISM under a means-justify-ends logic. For them, loyalty to one's employer and commitment to a hallowed mandate (perhaps even a premonition of vituperative consequences), should have weighed heavily against Snowden. Yet, he acted under an overriding, good-faith obligation to shine a light on these surveillance practices. He evidently recognized his duty as being beholden to the nation at large, not merely to its instruments of state. Defining the 'common good' is a slippery slope, of course, and causes one to pause before becoming overly celebratory of Snowden's stance.

Finally, there is the perspective of consequences. If one were to characterize Snowden's actions as Gandhian civil disobedience (conscience-driven, non-violent, public action), then he undeniably shook the State out of its complacency. From Obama on down, the polity was compelled to attend to policy deficiencies, including reform at the NSA itself. As for Snowden, the price of valuing integrity and a high sense of morality, enormous as it may be, was only waiting to be paid. History will be the eventual arbiter, but this is the seeming cost to keep the spirit of deliberative democracy alive.

Bigger, Better CIRcle

One of the more fulfilling assignments in my career was in a role managing consumer debt in the Indian banking and financial services industry. I had started in mid-2007, when signs of stress were unmistakable in our portfolio, and enough to discern similar trends across the sector. They were the direct consequence of indiscriminate lending and immature borrowing practices that had been rampant earlier in the decade. Naturally, the resultant losses led to tighter credit policies and general housecleaning, with varying degrees of success, across all players.

Though mandarins at FinMin and RBI downplayed it, but this improved hygiene had a major hand in ensuring that our country emerged from GFC 2008 relatively unscathed. Thus, while capital flows and liquidity hit a reset globally, one of its key facets, namely burgeoning consumer debt and subsequent borrower impact, largely gave India a miss. I argued too, with a ringside view, that rise of credit bureaus was one of our most far-reaching gains from this period ("CIRcle of Life"). They emerged from the shadows in those days beset by uncertainty and churn, and have remained a vital cog in the industry’s wheel ever since.

GFC is now but a distant memory (save for some of us). Credit offtake has reached or exceeded pre-crisis levels in most economies globally. Consumer indebtedness is not yet a concern, including in India. Everything points to business-as-usual. Hence, it is vital that we address any gaps in credit management before lessons of 2008 are entirely forgotten.

The most visible of these is our weak credit reporting framework. Despite having moved away from Indian consumer finance (in a work sense) I still hear enough stories around inaccurate reporting of defaults, especially around old write-offs that have simply been mis-recorded. A chunk of these are false positives from identity mix-ups by CIBIL and or the lender in question. Equally, there are instances of bad data like closed credit card annual fees, collection agency fraud, disputed charge write-off etc.

No less worrisome is the imbalance of power that puts the onus for data clean-up entirely on the consumer. Processes to do so in a few banks are reasonably unfriendly too. Most important, though, is the opportunity cost. Almost all cases I know came to light when the consumer has applied for fresh credit, often for big life events like home purchase. In at least a couple of cases (till my advice to the contrary) folks were even willing to honour an incorrect demand in order to get a “clean CIBIL” (motivated by the math of charge being in hundreds versus credit need that is much larger). This is hardly kosher.

It goes without saying that the issue needs a fix at source. Banks must be taken to task for irresponsible reporting, with a threat of monetary compensation to disincentivize laxity. In most mature markets, this is secured by legislation (FCRA. CCA, Privacy Act etc). If needed, the government must consider similar consumer protection laws in India as well.

The other issue with credit reporting is coverage. There is a strong argument to expand consumer behaviour monitoring, in the Indian context, to telecom payments. The rise of wallets and payment solutions are blurring the lines here in any case. Yet, this could well be an apres moi le deluge moment. Dimensionality of credit data would multiply (volume, churn, nature of disputes etc) were this to happen. It makes it incumbent to establish the ground rules now, with a much better defined financial services scope.

Crises, as students of economics know, are cyclical by their very nature. Hence, we must act now, so as to be better prepared when the next unforeseen strikes. Lest history judge us differently.

Inflation Bonds: Flatter to Deceive

Months in the making, the Reserve Bank of India has finally launched consumer inflation linked bonds. Going under the moniker of 'Inflation Indexed National Saving Securities - Cumulative' (a mouthful, if ever), these bonds had been the subject of much anticipation. Alas, the fine print finds them come up woefully short.

The biggest stumbling block is tax treatment. In most countries with such bonds, the formulation goes broadly thus: pay the investor a nominal interest rate on face value while letting the FV float in line the linked inflation index. It is a simple structure that pivots on gains from the inflation-driven FV increases, which are accounted as capital gains from the taxman's lens.

To take a line from the fabled Maggi sauce commercial, the IINSS is different. It has been structured as a bond paying interest, the rate of which is pegged to the Consumer Price Inflation index. By implication, the entire interest earned qualifies as income, to be taxed at the marginal rate. To be fair, if only the inflation-compensating portion been subject to capital gains, it could have benefited from indexation. Clearly Fin Min and or RBI thought otherwise.

Several sticky points other than taxation come up too. The typical desi fixed-income investor, mostly given to income, may not line up in droves for the compulsorily cumulative IINSS. To boot, the lock-in period itself is rather long at 10 years. Such an extended tenor may only accentuate inflation and interest rate uncertainties that scare away investors. Early exit is possiblle, but only after 3 years, and with a penalty. Finally, there is an unfathomable 500K investment cap. All told, I don't see investors being inexorably drawn to IIMSS (versus, say, infrastructure bonds with friendlier format and better post-tax return.)

Be those as they may, one could still have rooted for distribution success. We know only too well that, in the Indian context, financial products need to be activey sold (occasionally with little correlation to merit, ULIP being case in point). I wouldn't hold my breath for this though: these bonds are to be sold only via banks, and their low commission structure is unlikely to be incentive enough there.

Perhaps I am being overly cynical. Maybe IINSS is a step forward, but it could have been so much more. Certainly, days into his tenure, our rockstar RBI Governor had himself talked the big game as to it's market-making potential. At least on that count, if not more, this is an ahem.