Annapoorani's Antics - Videos

I wanted to chronicle some of Annapoorani's antics. Here are some videos of Annapoorani's.

Here is a video of Annapoorani singing twinkle twinkle.

Here is a video of Annapoorani singing abc song

Here is a video of Annapoorani identifying shapes

Here is a video of Annapoorani counting objects and putting it to a bin

Annapoorani's Antics - Pictures

I thought I could write a blog post to chronicle some antics of Annapoorani.

Here is a picture of elephant that Annapoorani drew.

Here is Annapoorani with objects that she stacked:

Here is Annapoorani with her halloween dress

Here is a picture of Annapoorani busy painting

Product Review - Nexus 7

I recently bought a Nexus 7.


My impressions so far:
It is a big sized android phone :) Good qualities:
1. long batter life
2. light to carry
3. can be used for watching movies.

Things to improve:
1. Wish it had a back stand just like surface.
2. Screen was a a little bigger.
3. The movies and books are a little cheaper.

Is it a good time to invest in stocks in India

I have no idea what the market will do next week or even the next year. Also this analysis does not apply for the speculators who dont worry about the fundamentals of a business or the economy they are investing in. I am pretty sure there are some guys in Dalal street who are pretty smart and know when to buy a stock and when to exit and make a tidy sum on that. They might make a ton of money doing that. But I guess if you follow the fundamentals you will not be bad yourself.

My suggestion is to buy a index fund from UTI or HDFC.(UTI is cheaper). Now let us look at the fundamentals.

At today's price levels the sum of total of companies in the sensex make an average of about 6.7% profit.(source: value research online. remember: this is NOT the stock price appreciation. This is the profit they make in their business. So if you buy Rs. 100 worth of shares in the index then you can expect those companies to earn a rs.6.7 return. This money will most likely not be given to the shareholder but will be invested in the business to grow it. Shareholder gets his money by share appreciation and may be dividends. For the expert investor the P/E ratio of the indian index is around 15!! Thats what this means)

Now due to the economic downturn profits of many companies may fall in the coming year. So let us subtract 10% and that would put our return roughly around 6%.

Let us assume the inflation rate in India is 4%(conservative estimate) and let us also assume the companies grow about 4% every year in inflation adjusted terms(again conservative estimate). So the total profit of a company would increase about 8% every year. At this rate for our rs.6 profit to become rs.12 it would take about 9 years.

Assuming markets are willing to price the shares in the same 6% return then the appreciation of the stock in 9 years would be exactly 100%(or double).

Now that being said who knows how much the market will value the securities at. For example it is currently being valued at 6%. In the peak I think it was at 2%. Now since the economy is gloomy people want a premium and value it at 6%. Historically 6% valuation is about right(to put it another way a P/E ratio of 14 or 15 is what usually the securities trade at)

Problems of Indian Economy

I think India has lots of potential to grow. But I do feel that India faces lots of hurdles too. The following are some pain points of Indian Economy. Few things to be noted before we go through the issues point by point are:
1. Some of these issues might be applicable to other nations as well(Including developed nations like US and countries in Western Europe).
2. I am looking at the economy from a long term(15 to 20 years) perspective. But as some famous economist said "In the long term everybody dies!!". So short term matters very much too. (and sometimes short term is much more important than the long term, depending upon your current state in life.). After all if you can keep making profits in the short term in the long term you will be well off too!! But this article does not concentrate about the prospects of the Indian economy in the short term(I mean next 5 years).
3. I did think through the following issues I am going to mention. But they might look random as I did not spend time on how to present them with a continuous flow.

Now coming to the actual problems:
Absence of the rule of law: In India it is a common occurence for rowdies and mafia dons to have control in many of the core businesses. The reason this is bad is it affects the core of capitalism. One important thing that is necessary for capitalism to survive is the rule of law. With out laws capitalism would become pretty destructive. Just as an example say there is a pharmaceutical company that comes up with some new medication. If there is no rule of law then the medicine would not be properly tested. Whichever company has the political clout would be able to release its drugs but the company that did the real research and development and testing, if it lacked political clout, would not be able to release its drug. That is not development. In fact that is making the life of people worse. I can give examples like this in every industry. But bottom line is with out the rule of law, in short term, companies with political/mafia power wins but in the long term these companies are detrimental for the growth of the economy.

Natural resources: In the long term the resources that matter are NOT petrol, gold, diamond etc.(But they don't hurt!! having them is good!!). But what matters in the long term is resources like clean water, clean air, fertile soil, good ecosystem etc. Problem with India today is more importance is given to resources like gold, diamond etc but people don't pay much attention to water, air, earth etc. If India keeps up with its current levels of unhealthy pollution then the future of our population is bleak(our food security is threatened). Which also means the future of our economy is bleak. The level of pollution in India in some sense is much worse than the developed world. After all pollution just does not mean carbon dioxide(developed world produces more of this) but it also includes how you take care of water(I remember reading lots of textile companies in India that donot treat their waste properly and just discharge them to water), how you take care of soil(deforestation is one reason because of which fertile top soil is washed away), how you take care of air etc. And global warming(assuming it is not a lie as claimed by some republicans) is only going to make things worse. This is a big threat for the entire world population.

Fair Accounting: Nobody knows how much one can trust the balance sheet of Indian companies. Remember not all companies are bad apples. But there are bound to be some. After all even in US with all the regulations there were companies like Enron. So I would not be surprised if there are a bunch of companies in India reporting false numbers. The problem is until the company fails on one of its financial commitments nobody knows something is wrong.So until the company is pretty close to bankruptcy people would think that the company is doing fine based upon the financial reports.

This is by no means exhaustive. As I mentioned earlier I did not spend time on the flow of this article. So it might look random. But I do feel one should consider these issues when evaluating the long term growth rate of Indian economy.

Bank Interest Rates in India

Currently the interest rates in nationalized banks in India for fixed deposits are pretty good. They are hovering around 11%. I personally have taken advantage by prematurely withdrawing some of my deposits and reinvesting them at the new interest rate and making new deposits.

Recently at a dinner party I had an interesting conversation with a friend about investing in a house in US versus the interest rate in India.

First off one has to understand that one must absolutely have to lock the safety money in India on a nationalized bank deposit. There is no argument about it. You need to calculate your living expenses and make sure you have enough amount to tide you over any crisis for exteneded periods of time. Assuming you have done that, does it make sense to invest in real estate in US?

Let us take a 10 year past history. First the exchange rate. (source of this information is federal reserve New York, http://www.ny.frb.org/markets/fxrates/historical/home.cfm). The exchange rate of Indian currency on 1998 was approximately 42 and it is approximately 48 now, about a 15% difference. So you would have gained if you had the money in dollars. But it did stay at 39 for some point a loss of about 8%. But let us assume you made NO profit or loss in exchange rate in the past 10 years, i.e., let us assume the exchange rate stayed same.(I want conservative estimates!! I guess 38 to 42 is a pretty conservative exchange rate for Indian rupees)

The bank interest rates have stayed any where from 7% to 12%. Let us take an average of 9%. At 9% your money would have grown approximately 2.4 times in 10 years.(so 1 rupee you invested would be worth 2.4 rupees in 10 years).

Let us take the home prices now. Remember this is one of the worst times to sell a house(and is one of the best times interest rate wise). But let us NOT make any special accomodations for that at all.

The 10 year home appreciation in Bellevue(from 1998 to 2008) is about 100%(source http://www.zillow.com/homedetails/charts/49015943_zpid,10years_chartDuration). Also this is a conservative number as 50% of the houses have higher appreciation than this and some times much higher appreciation!

Home prices have held steady in Bellevue despite the downturn. So I tried taking one of the worst affected areas like Los Angeles, Phoenix etc. Ironically they have a better appreciation rate in 10 years than Bellevue!! For example los angeles is like 200+%. But let us just stick with Bellevue as that seems conservative(And I want conservative numbers in any forecast!!).

Let us assume you buy a house for $250k in Bellevue in 1998. You generally invest 20% to buy a house. So your downpayment would have been $50k. For the moment forget the interest you pay on the mortgage every month. We will account for that towards the end.

If you had invested that $50k in a bank deposit 1998 you would now have $120k. so your gain is $70k.

If you bought a house at the same time, the house would be worth about $500k now(100% appreciation). You owe 200k to the bank. So your money in the house is 300k, subtracting your downpayment your gain is 250k.

Now coming to the interest you pay on the mortgage: Initially when you buy the house the interest you pay would be more than what you would pay on a typical house for rent. But over the course of 10 years your mortgage payment would have stayed the same but rents in your neigbourhood would have increased to allow for the inflation.

Take the above example. For a 200k mortgage your interest would be $1000 per month(this includes some principal too. But ignore that.) When you bought the house in 1998 this would have been a big amount. But at 2008, 1000 is typically the rent you pay in Bellevue for a two bedroom apartment(and that is not sufficient if you have 2 kids!!). But if you had bought the house in 1998 you would be living in a nice 3 bedroom house for the same amount.

Also there are other costs in owning a house like tax, maintenance etc. Let us add all this and subtract the rent you would have paid and say you had to fork out an extra $50k for owning the house(which is little high but let us stick with it). So from your gain of 250k subtract this and you end up with a 200k gain!! This is better than the $70k you would have gotten from the bank.

Again to reiterate, it would be stupid to invest in a house if you dont have money to tide you over the tough times. And bank deposits in India are an attractive and safe(and probably the right) way to save for that. But after doing that investing in a house is pretty attractive.

One more thing that I have omitted is the tax rate. You get tax advantage in owning a house. Unless you actually sell the house you dont have to pay any tax on your gains. Also for the mortgage and tax you pay on the house you can claim write off every year. But in a bank fixed deposit tax would be deducted every year if your interest is more than a certain amount, even if you dont withdraw your money.

Also one more thing to note is that in the above example I am just assuming you are investing only 50k as the downpayment. Assuming you invest the entire 250k would it still be attractive? The answer is it is not as attractive as the former. But it is still pretty good as you would pretty much save on all the money that you would pay on rent for 10 years(assuming an average of $600 per month that is equal to 72k for 1o years!!) . And also a house is more than just an investment, if you have kids etc. So it is probably worh it for most folks in any case!!

Leverage

Many big banks in US went out of business recently. If you dig through the reasons for it most of it is attributed to leveraging. I was thinking of the consequence of leveraging in our traditional businesses.

One of the traditional businesses for Chettiars community is money lending. Money is lent to people in exchange for a collateral. Usually only about 60% of the value of the underlying asset(which is usually gold jewellery) is lent. So if the borrower defaults then the lender gets the principle and interest back. Also this is an insurance in case the price of the underlying asset falls. So even if the price of the gold falls 40% the lender could still get back the principle.

I was thinking how one could leverage in money lending business and the following is one way of leveraging that I could think of(and there are many ways you can leverage!!):
Let us say you have $1000 to lend. When a borrower presents the lender with a jewellery the lender lends him the $1000. Now the lender has the jewellery and the borrower has the money. Lender can theoretically mortgage the same jewellery with another lender(Let us call this person the second lender) and get $1000 for it. Also let us assume the first lender can get a lower interest rate from second lender compared to the rate he lends the money to his borrower. So with this additional $1000 he can lend it to another borrower and make the profit on the difference of the interest rates. Also the first lender can mortgage the new jewellery "again" with another lender and can get another $1000 back and the cycle can continue.

On the surface it looks like a good plan. The first lender always lends money against gold. So even if the borrower defaults the first lender can ask the second lender(s) to sell the underlying jewellery and get his interest and principle back. It looks almost too good to be true!!

But the worst case scenario is: If the borrower defaults and at the same time the value of the underlying property falls. For simplicity let us assume all the borrowers of the first lender default and also the price of the gold falls to zero. Now if the first lender has leveraged 3 times it means he has invested $1000 of his own money and also has lent $3000 of borrowed money from other lenders. Assuming the first lender to be a law abiding citizen there are only 2 things he can do:

1) pay the other lenders the other $3000 making his total loss to $4000
2) Declare bankruptcy.

This is one way of leveraging!! There are multiple ways of leveraging in the international financial markets. They are complex to understand too. In the name of innovation all these high risk products have been introduced by these US banks. This just reminds me of a famous quote by warren buffett(this was quoted much earlier to the financial meltdown. I don't remember the words exactly but let me try to recollect the meaning of it!): " I don't understand why many new methods of "losing money" are being invented when the old method work just fine".

I also read somewhere that many of the big investment banks have leveraged in the ratio of 1:30. Meaning for $1 of their asset, they have a potential $30 of liability(meaning if the absolute worst case scenario happens then they owe 30 times their net worth). One thing to note here is that although these wall street firms lost a ton of shareholder money(and brought the western financial system to its knees) they did not do any thing technically unethical.(Although I am pretty sure they will be portrayed as villains just to satisfy the general population. In fact there is a good chance some of these executives might go to jail in the next several months). They reported all their transactions in their annual audit as per the law. But it just turned out that these deals were so complicated that most of the shareholders did not even know what the risk of these transactions were.

In finance I am generally suspicious if somebody comes up with a complex model to explain something. In general if it requires any thing more than high school math(and may be some accounting skills) and common sense I get suspicious. But the funny thing is even now people in wall street are coming up with these insane mathematical models that use calculus and many other complicated math to predict the future market returns!!