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 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.