Welcome to the Machine: America and Money

I wrote a while ago of my first brush with America's financial system as a fresh-off-the-boat expat applying for a credit card. Thanks to a career mostly pivoted on financial services, however, my experiences with the world's largest economy run broader. These have only deepened in the last couple of years building a life in the country, but continue to leave me perplexed on more than one count.

Of my subsequent wanderings, I find the average American's attitude vis-à-vis the stock market the most peculiar. One might verily imagine investors lining up outside the door given its extraordinary breadth (in offerings), depth (of liquidity) and information access (implying transparency). Yet, in reality, retail participation in the NYSE-Nasdaq is unlikely to make India's NSE jealous. Broader still, it appears linked to the outlook around Money.

Some facts for starters. Wealth-accumulation is, in many ways, an inveterate part of the 'American dream'. Next, unlike the land of my birth, inflation has mostly been in check since the Supply Shocks of the 70s. Finally, median incomes have almost doubled in the period. Statistics, therefore, point to significant investible surpluses. Yet, reams can rightly be written about burgeoning US household debt as much as the general disaffection of its populace in matters financial. It takes us back squarely to saving discipline.

To unravel this, consider an analogy from another bane of modern human existence, namely lack of fitness. Be it a shudh desi tond or American overweight, we know that exercise is key. Indeed, that rush of endorphins at the end of a workout is the glow of champions. Watch what happens next, as the hungry, proud-as-Punch body heads out to eat. How often do we overestimate calories burned; gorge on 2X the amount we typically need; and feel no qualms therefrom? And then we bemoan fitness levels, go jumping from one fancy exercise plan or fad diet to another, and hurtle towards the eventuality of a large medical bill.

Just as the gap between calories burned and replenished drives success in a weight-loss regimen, so a saving habit determines financial well-being. So why the proclivity for conspicuous consumption that fells the average American? Answers are at hand. Akin to the rush post a rigorous workout, income growth also stokes an increased propensity to spend. Cast under its 'have-earned-this' spell, Americans splurge guiltlessly on indulgences. Luxuries of today turn into necessities of tomorrow, and wallets continuously seek new extravagances to feed the sense of entitlement. A social-media-centric existence plays no small part in this frenzy, with lifestyle expectations driven by peer benchmarks, resulting in a vicious dance of debt.

Culturally overindexed on wealth, America can only be happy when the cycle of overcompensating rising income with indiscriminate consumption breaks. The solution is obvious, but fundamental. From chasing the tangible and easy (spending), the Average Joe or Jane needs to be inspired towards the intangible and difficult (saving, directed towards goal-focused investment). Apps that demystify wealth by making its creation and tracking ubiquitous shall pave the way. Celebrate, therefore, the tingle of income more than the whoosh of the credit card, virgin or otherwise, as the real money machine. Godspeed.

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

Flashback 1966. Mare Gaye Gulfam, penned by the indomitable Phanishwarnath Renu, was turned to a film by some of Indian cinema's tallest. On camera were Raj Kapoor and Waheeda Rehman, but also Iftekhar, Keshto Mukherjee, AK Hangal and Asit Sen: names that veritably lit up the silver screen much as they did 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 Bhosle, 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 Hiraman, 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, which 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, managing only to land 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 with managing money near-term and confusing a bank balance for financial security. We fret about market risk but assume inflation immunity. Consequently, savings go to FDs, PF contributions stay at a minimum, and equity action is confined to a rushed, year-end Sec 80 investment at most. 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, and — being inexperienced — rams it into a horse-cart, earning a royal 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 until 12 years into my 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 for Insurance. The point is to tackle the big rocks as soon as one is able, which requires 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-long journey. His consequent conflict with zaalim zamana and zamindar is typical filmi (the denouement is anything but), culminating 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 facts?

A tad more on that last-named. Its typical setting, interestingly, involves folks who spend a lifetime mistaking investing to be a spectator sport. They watch the market ceaselessly, debate it tirelessly, 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 market, or both.

Be it rooted in any of these mistakes, 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). Through 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 hard-won lessons. "The four most dangerous words in investing are — this time it’s different", as 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 given 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 heartstrings tug easily for those that guard her borders. Our Forces' stellar record of support 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 an occasional blemish, standing tall amidst a general decline in standards of public life (which plumbed new depths in the 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 must implement a system of 'defined benefits' (percentage of last salary; with math around years worked), paying uniform pensions to retirees in the same rank. Yet, simple as it may be, the commitment is not sans ramifications. It is a multi-dimensional issue, wherein the crux is money.

For starters, a bitter pill must be swallowed immediately. In short, funds are needed to bring legacy pensions on par with recent retirements. Unfortunately, this hit isn't a mere one-off either. The GoI's pension bill inflates considerably in each pay revision cycle (roughly every decade), going forward. With our economic planning often a precarious balancing act, this has been a dealbreaker hitherto.

Additionally, there is a 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 the police and para-military, but could cross over to non-uniformed personnel too. Rail-karmis appear to be first off the block here (with 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.

The 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 be?

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. Migrating to the NPS, however, would be no cakewalk — demanding more of a cultural mindset shift than routine policy tweak.

Parsing through all this requires time: a commodity the Modi Govt may not have. It is an inescapable fact 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 brethren would certainly wish to avoid.

Investor as a Split Personality

"Be ye of reasonable means, with intent to secure thy future, thou canst afford nought to be in stocks." There, I quote myself (Shakespearean 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 the face of voluminous data on the benefits of stock-picking, makes even the well-heeled go weak in the knees? Market evidence shows that the issue is not opportunity. Nor is it barriers to 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 overexposure to this asset class, 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 in a diametrically opposite manner 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 an appropriate down payment, and pre-pay whenever you 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 are optimal. Stocks you trash financial planners and 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 a last resort (if faced with hardship). Stocks you look for upsides in days or weeks, often selling for small profits in a bull market, or a 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. The crux here is behaviour. And hence another homily with a touch of of Will Shak: "Stay ye considered, consistent, and committed; and abiding wealth shall 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 perspectives 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 signals of stress were unmistakable in our portfolio, and were 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 house-cleaning, with varying degrees of success, across all players.

Though mandarins at FinMin and the RBI downplayed it, this improved hygiene had a major hand in ensuring that our country emerged from the 2008 GFC 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 the 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.

The 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 the lessons of 2008 and its aftermath are entirely forgotten.

The most visible of these is our weak credit reporting framework. Despite having moved marginally away from Indian consumer finance (in a work sense), I still hear enough stories of inaccurate reporting of defaults, especially around old write-offs that have simply been misrecorded. 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, and disputed charge write-offs 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 come to light when the consumer applies for fresh credit, often for big life events like a 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 the charge being in the hundreds versus a 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 disincentivise 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.

This brings us to the issue of coverage, notably the recurring demand to expand consumer behaviour monitoring to telecom and other utility payments. The rise of wallets and payment solutions is blurring the lines here in any case. Yet, this could well be an après moi, le déluge moment. The dimensionality of credit data — volume, churn, nature of disputes, etc — would multiply overnight were this to happen. This makes it incumbent to establish firm ground rules now, with a sharply 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 one strikes. Lest history judge us differently.