Blog Posts by Deepak Shenoy

  • Leveraging Our Trust

    Let us say there is a great business you would like to set up that involves a return of 20% every year after expenses and taxes. What if I gave you two choices:

    1)      You put in Rs. 1,000 as your investment, in setting up a business that returns Rs. 200 per year.

    2)      You put in Rs. 200 and borrow Rs. 800. The business still generates Rs. 200 per year. You pay Rs. 80 as interest on the loan, and the remaining, or Rs. 120 is yours.

    In the first case the return you get is 20%. Your capital is at stake so if the business slows down to a return of 5%, you'll only get Rs. 50 per year.

    In the second case, you make a 60% return — Rs. 120, on Rs. 200 of your capital. Awesome?  But if the business drops to a 5% return, you will end up getting Rs. 50, and you now have to pay interest of Rs. 80 — for which you have to shell out more money from your pocket. Effectively that whittles down your capital to Rs. 170 (Rs. 200 minus the 30 as excess of interest over profit)

    In the second case, the

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  • “Draw down the revolvers”

    It was what they needed to do, they all agreed. But what ended up dying wasn't a human — it was a company.

    In Enron's dying days, the company started to see problems with their debt. It had issued billions of dollars in short term commercial paper, a form of debt where it would borrow for short maturities and when the time came to pay back, simply borrow again to pay back the initial investors. Repayment was a "rollover" — you never actually had to pay any money back. Towards the end though, everyone in the market realized that Enron was in serious trouble, and wouldn't lend them money for too long; after all, who wants to be left holding the bag?

    In Conspiracy of Fools, Kurt Eichenwald goes through the horror of the last few days at Enron, with commercial paper shutting Enron out. First they couldn't "place" 30-day maturity paper, but there were some buyers for two-week debt. Within a few days, no one wanted anything to do with even multiple day debt — Enron would only get money for

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  • The Right Sort Of Company

    "Good Morning, Sehgal sa'ab". It wasn't a reference to Mr. Sehgal's car. "Sa'ab" was short for Sahib, the equivalent of "boss" or "sir". In any case, Mr. Sehgal had a Honda.

    "Hello, Sudhir. Good to see you after all this time. Don't tell me you have a tax problem", said Sehgal, in a worried tone, wondering why a chartered accountant was always the guinea pig during tax return time.

    "Not really, Mr. Sehgal. This is Rakesh Mannan. We want to start a company together. Tell us how. We're going to make software for solar cars, and make loads of money. "

    Good luck with that, thought Sehgal. Great ideas, and very little operational knowledge — however, crazier ideas have succeeded and you can't let an opportunity go. So he started.

    "So you have many choices — a partnership, an LLP or a private limited. A partnership is the least cumbersome, but you do have the issue that each of you as a partner has full liability".

    "What does that mean?", asked Rakesh.

    "Rakesh, if your partnership takes a

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  • The Unnecessary Prepayment Penalty

    With the RBI restricting the number of banks, and then who can own banks, they effectively narrow the playing field to a few entities, many of them owned by the government. The banks' lack of competition is compensated by RBI regulation, but that regulation sometimes leaves a lot to be desired. Especially when it comes to pre-payment penalties.

    You'd think banks would love their money back, if you tried paying it back earlier. But no, it seems. They charge you a penalty for early payment, typically 2-3% of your outstanding balance. It's strange, this charge. Why wouldn't they want you to pay a fee just to pay back?

    Their answer is that they're really scared of keeping money unused. The minute you pay back, they now have to lend that money out again, which they say takes time. And they lose interest in that time, which is why they need to charge you. But it's a hollow argument, because like all things financial they make a generic statement and oversimplify matters, or use complex terms

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  • Point of No Return

    Some are born dictators, some achieve dictatorship, and some have dictatorship thrust upon them. Syria's Bashar al-Assad falls in the third category. Faces are hardly infallible guides to character, but comparing Bashar's to those of his father Hafez and elder brother Basil is instructive. Bashar's grey-blue eyes would seem compassionate had they not been set so close together. The fuzz on his upper lip appears always a little short of a proper moustache. His chin recedes radically, making for a triangular head that sits on a disproportionately long neck. It's as if a sculptor had five different ideas of how to mould a bust, and finished the job hastily, leaving its elements unresolved.

    There was nothing unresolved about the features of Hafez and Basil al-Assad, or of charismatic rulers in the neighbourhood such as Muammar Gaddafi, Ayatollah Khomeini and Saddam Hussein. You could easily imagine these people ordering the bombing of civilian settlements and the massacre of thousands, as

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  • How To Manipulate Stocks

    Dear Upcoming Stock Manipulator,

    You have heard from all sources that stocks are manipulated, which is why you want a piece of the action. While we cannot hope to enumerate all the methods by which you can steal money from the pockets of retail investors, we can provide you with a few starting points.

    Insider Decider

    In the large number of stocks available in the country, the real information is available only to the management of companies. Before results are announced, results are already known. All you have to do is to find that inner circle of people that are aware of such details, or tap into the auditing or consulting agency and find "impressionable" people who are responsible for drafting such results. Or find the investment banker responsible for a merger or acquisition. Or get information about a private placement to a large institution from its employees. You might think it is only the young or the less-well-heeled that can be bought with money, but that is the thinking of a

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  • Spooked By The RBI

    On May 3, the Reserve Bank of India announced the annual monetary policy and soon after, stock markets dipped 2.5%, with some stocks falling as much as 10%. Our monetary policy is one of those things no one really cares about until it gets to a point where it hurts them — and this is such a time. It sometimes isn't entirely clear why the RBI's actions should impact the stock market, so let's take a look.

    A few things in the policy were specifically geared towards arresting inflation, which, after being out of hand for over a year, is now officially out of hand. It has not been about onion prices; the general price index at the "Primary Articles" level has been over 12% for nearly one-and-a -half years now. The US Fed, which has been countering inflation by pretending it doesn't exist, has recently mentioned that price rises are "transitory"; you just pay more on the way to a place where, by sheer luck, you pay even more. India is already there.

    To curb inflation, the only tool that the

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  • India’s Inflation Kool-Aid

    India's economic growth is measured in terms of Gross Domestic Product (GDP) as reduced by Inflation. So we grew — according to the recent CSO release — a whopping 20% on GDP last year (2010-11), and because inflation was, well, pretty high, we grew a only a "real" 8.6% in 2011. How can you grow 20%  but only really grow 8.6%? Inflation eats up the rest — and in a way "deflates" the GDP.

    This year, the GDP deflator is at 11%+. We have had only six higher figures in the past since 1961, and this year is the highest since 1991 (13.73%). But can you really rely on it?

    The GDP deflator is calculated in a complex way, but according to Deepak Mohanty, Executive Director at RBI, much of that is based on inflation of the WPI — or the Wholesale Price Index. This is the measure of Wholesale prices of commodities and manufactured goods across the country, released monthly.

    There are multiple price indexes in India: The WPI and four different indexes of Consumer Price Inflation (CPI). This is

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  • Five Easy Ways To Get Suckered

    It used to be fashionable for men to show each other their scars, and demonstrate that they had suffered more than the other guy, even if it involved a quick trip to the restroom to illustrate their end of the story. In the currently squeamish situation of children not being allowed to get any scars, with the threat of the Public Flogging of the Dad, I believe it will soon be fashionable to discuss how one got suckered buying various things. Here are five ways that you can build your database of stories that will be told one day.

    Asking your banker where to invest

    This is like asking a barber if you need a haircut. In fact, if you asked your banker if you needed a haircut he would likely say yes, and then work out a deal where the barber pays him 6%.

    There was a time when bankers were staid, honest, hardworking people who would know who you are, remember your birthday, and know enough about your finances to give you proper advice. That breed has retired or been upgraded into

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  • ETFs and Skewed Indexes

    The concept of an Exchange Traded Fund (ETF) is that you buy a mutual fund like a stock on an exchange. This is suitable for investors who want to invest in a basket of instruments or an otherwise difficult-to-invest market.

    For example, investors in India may want to invest directly in US stocks. But the legal procedures for direct investment are painful — instead, they could buy an ETF that, in turn, is based on a US stock index.

    When you buy a unit of, say, NiftyBeES (an ETF by Benchmark Mutual Fund), you get a share worth 1/10th of the Nifty price; so for Rs. 580 you could buy a piece of an index that, without the ETF, could take you more than 40 lakhs to fully construct.

    While most index funds lock you in for a year or so (with a 1% exit load) ETFs can be sold any time without such a penalty. But it could just be that you can't sell very easily if the ETF is not well traded — getting a price lower than the fund's NAV is, in a way, an exit load.

    There are now more than 2000 ETFs in

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