Cutting politicians down to size

Vir Sanghvi has once again given expression to the anguish of the middle class over extravagant politicians. One way to "socialise" politicians is to build a single multistory apartment complex of 543 flats where every single MP will live in the same kind of flat. There will be no more fighting over bungalows and no need for renovations. It will markedly reduce security needs by confining to one place, instead of spreading thousands of policemen in bangalows all over Delhi. A bulk of the security policemen will be released to provide protection to the common man also. Special armoured bulletproof buses with the best security can provide transport from this apartment complex to parliament every hour - eliminating hundreds of cavalcades holding up traffic. It will also cut the bloated ego of our politicians down to size.

Second look on Market Timing

On February 3 I wondered when to get back into the market with my successful exit cash. To cut a long story short, I did not get in, when I could have doubled my money in 3 months. I kept waiting and then it was too late. All I could do was book a little more profit for some holdings at Sensex 15000. Good timing for the exit. Again, this only reinforces my earlier belief (see Feb 3rdpost) that it is easy to exit but difficult to enter well.

I console myself with the thought that nobody could have predicted such a great election victory. And the lesson learned is that 3 months of pessimism wipes out all weak hands who sell and exit. Markets in oversold territory will bounce up after 3-4 months of pessimism. Even a 20-25% gain from 8000 to 10000 Sensex or so would have been worth it.

Now I am hoping for a rerun of the 1931 second dip after the bear market correction, so that I can get in.

Sensex 6000, where are you?!!!

Musings on Real Estate

(Post from India's housing bubble discussion board)

My point of view nowadays is that it is better to buy now before inflation wipes out the Rupee.

There is oversupply in the markey for real estate.But if you research the market, you will find that oversupply is in the premium/luxury market (>50Lakhs). Nobody built affordable i.e. 20-30 Lakh flats in the last 5 years. Demand in this segment is inexhaustible for the next 50 years. Also rent as a proportion of cost is favourable in this price range. One can think of getting a renter for 15000 bucks for a 30 Lakh flat. Nobody will pay 30000 rent, even if the flat is a 60Lakh luxury one. Even if they do, they will think of renting close to work, not in the boondocks where the flats have come up recently. I doubt if anybody is going to rent the luxury flats built recently (those who can afford such a rent have purchaed 3 flats each!). If one is thinking to buy a luxury flat now, I would say OK if you are going to live in it. Not OK as investment - wait for at least one more year.

Affordable range flats are not going to correct any more. Builders have been bitten once - they wont oversupply this time. They will trickle in small number of new projects for the next 2-3 years and will slowly start raising the prices as inflation (cement, steel, tiles) kicks in. They have purchased land at high price for luxury flats with high margin. They will not want to build cheap flats on them if they can avoid it. They will keep as much land as possible with them for 2-3 years, waiting for market to improve, then launch more luxury flats at even higher (inflatin adjusted) prices.

Just to satisfy my curiosity, can anyone tell me how much is the EMI per 1 Lakh loan (for 15 years) currently? I need it for calculation. At Rs.1000 pm EMI for 15 years, repayment is of 1.8 Lakhs on a 1 Lakh loan. In India's history, a 10 Lakh flat has always been worth more than 18 Lakhs after 15 years - not forgetting rent received/saved which hasnt been accounted. Will a 30 Lakh flat be worth over 60 Lakh after 15 years? I have no doubt. It is a great leverage play. But I dont want to spend all my salary on an EMI for something that will be valuable when I am old/dead. So I never leverage.

If you have 30 Lakh in hand, it will double in 9 years in a safe bank FD at 8%. Will a flat bought today for 30 Lakh double in as many years?

I am not sure.

SIMPLE RULE: Rent or Buy?For self occupation, in USA, the simple rule is that if the property is priced more than 200 times monthly rent, it is better to rent than buy.So if you can get a flat for 5000Rs rent, you should buy it only if it is for 10 Lakhs or so. If it costs 20Lakhs, you are better off renting.India traditionally has high RE values. I wonder what the multiple should be? I stick to the same 200 . At 15000 PM rent, 30 Lakhs is what I am willing to pay. I can buy a juggi. Or a flat 50 KM away.

Shubh Chintak, while I am in agreement with you, I think the deflation (as regards RE) has been happening for the last 6 months. Rest of the deflation in RE is going to be relative - to galloping inflation in essentials (I expect that to start in 2010 and last till 2014). RE prices will stay the same till 2012 while everything else will go up in price. 2012 onwards RE prices will also go up as cement, steel and tile prices also go up.So 2012 will be the time to time the market with built up property. For upcoming projects, the time to time is NOW!

Real Estate scenario: India vs USA

I have often wondered about the reason for real estate price disconnect between India and US. Median house price of 200,000 $ will get you a lousy three bed room flat in India with poor services. Some possible reasons are:

1. Houses in USA are built of wood and last 20-30 years
2. Taxes are high for the services
3. Land is cheap.
4.If Indians took their currency to USA, it would depreciate massively to a level where you would no longer be able to afford a house

There are two issues between India and USA. First house prices in USA are very cheap compared to Japan (where land prices are much higher and quality of construction is very good- for 200,000$ you will get a tiny apartment), England (where land is slightly higher priced, for 200,000 $ you will get a small wooden town house), Germany and rest of Europe (land prices are higher, zoning laws very strict, very good quality houses are built - to survive a tank blast :-), $200,000 will get you a one room apartment, a million dollars will get you a slightly bigger two room apartment). All these countries offer good services and connectivity.

In India we have very high prices. Reasons are

1. Urban land cieling act (raises land price),

2.Agricultural land cant be used for urban land without notification (raises land price)

3. High stamp duty (raises cost of ownership and encourages black transaction

4. Poor law enforcement (increases transaction cost due to legal hassles)

5. Tenancy laws - they are so regressive that nobody wants to build for rental income, especially since law enforcement is so poor. Hence rents are high and house supply is low, increasing house prices

6. Political parties want to peretuate poverty (i.e. Congress). It wants to keep slums as such, so that they are given a Hobson's choice - vote for us and only then we will let you live in this lousy slum, which is illegal, but surviving because we let you be. That is why parties prefer to have reasons 1,2,3 and 5 - they benefit middle class directly. They would benefit the poor indirectly, but poor see their slum home demolition as a direct hit on their livelihood - they are too stupid to know better. They dont know that living in a slum is not their lot in life, with good tenancy laws they can all live in better housing. Politicians get away with it because it IS possible to live in a juggi. In the developed world, you would freeze to death.

7. Extremely poor connectivity. The moment one gets good roads, the prices of houses would plummet because rural land prices are extremely cheap. So that is why politicians dont want roads - their illegally amassed urban property would collapse in value.

It really makes sense for Indians to buy abroad. The moment they realise this there is going to be a likely flight of people and capital

Though it would be one hell of a commute from Delhi to NewYork! :-)

On Protectionism

As a person from India, I must say that potectionism for USA makes sense. Its bad for India, but good for USA for a couple of decades at least.

With free trade, the poor and less able American worker will be reduced to 3rd world standards. The only way to keep him rich like he is now is through protectionism.

Without barriers, people will be paid according to ability. Some 2 million Indians will earn well like top technocrats of USA. Some 20 million Chinese will too - in manufacturing jobs they will take away from Japan and others. But 100 million average Americans who dont have brains to do real quality work will lose their standard of living - they will earn minimum wage and will have no hope.

If there is justice, these dumb Americans deserve to live in their level of (in) competence. If there is justice, top Indian technocrats and hard working Chinese factory workers will get their due in salary, reaching developed world standards.

But 100 million Americans will lose their standard of living for this justice.

It would be stupid of the American govt not to protect them, thinking only of abstract justice - and I dont think US will stay away from protectionism, they are too smart for that. They know which side of their bread is buttered.

Musings of a China Bear

Chinese growth was more extensively investment driven than people realise.

A lot of Chinese capital investment will have to be written down - that has not happened yet. It is my belief that the exposure of overinvestment in China and loan defaults there, will herald the nadir of the current economic and stock market downturn.

If the Chinese govt tries to cover up bad loans, it will probably evaporate the 2 trillion dollars they have accumulated. Not all of that is a trade surplus, a big chunk is dollar investment made in China after conversion to local currency. There will be flight of capital out of China in such a situation.

Chinese inductry is also heavily energy dependent. If they resume their growth path, it will push up energy prices with sudden spike in oil prices, which will ensure that the growth in China and everywhere else is nipped in the bud. A growing Chinese economy is synonimous with rising oil prices - no wonder Buffet invested in energy recently. Unfortunately a standstill Chinese economy is also bad news because Taiwan, Japan and USA along with other world banks have made heavy investments in China and their investment returns will suffer.

China is between a rock and a hard place. It cannot grow anymore. Its choice of being the manufacturing factory for the whole world means it is dependent on other people buying what it produces, to push its population from agriculture (under/un-employment, basically) to manufacturing jobs. This model cannot employ more than 4-500 million people. It is already close to this level.

Any further increase in factory employment will mean taking unacceptable levels of jobs away from US and Europe. It also requires heavy investment in training and high tech manufacture - that means high wage jobs, not going to be ceded so easily by USA and Europe. China will have no cost advantage in this realm - training a high tech worker will cost the same in US and China, so why move to China.

The next 20 years are going to be hard for China. The easy growth they have witnessed will now be more difficult to come by. They will have to be a lot smarter in producing what people want, and things people cannot do without. Most of the gadgets they currently make, are unfortunately the first useless expense that people are going to cut back.

The whole world is switching to a more sustainable economic model, where there will be less waste. Thats the only way 3 billion people in third world countries can become globalised - the earth cannot sustain 1 billion Indians, 1 billion Chinese and 1 billion from other countries in an American style of life. America itself will move away from it, this recession will force the issue. Life style will change in unprecedented ways. Old ways of analysis will not be valid anymore in the new economy.

Most of the investment made in China assumes that the current lifestyle will sustain for 20 more years. They have made massive infrastructure investments on this assumption. These investments are never going to bear fruit - people are not going down this road anymore - after they just finished building the road! :-)

So all those investments are down the toilet. So far, only their stockmarket has tanked some 60% from the highs. Where is the rest of the bad news?

It is my belief that the Chinese are keeping things quiet so that they dont precipitate a crisis like what happened when Lehman went under. They are shit scared, but are playing their cards close to their chest. The Chinese have mastered the capitalist game as well as anybody could - and they know that one whiff of failure will mean massive flight of capital, since people will want to cut their losses.

Are you kidding me that Chinese banks made only good loans and that they will continue to be services. No way!

Capitalism doesnt work that way. After the binge comes the hangover. A poker face is not going to hide the massive splitting headache in the Chinese economy.

I am a China bear. But I am also worried. China is likely to respond to any really bad downturn in their economy by attacking their neighbors. They may figure that the only way to give employment to their millions is as cheap cannon fodder - the same way USA got out of the depression!

I thought a world recession would be caused by spiking oil prices. I was wrong - bad loans did that.

A combination of bad loans and spiking oil prices can still be the triggering factor for a really bad Chinese recession. which it would export to the world.

Be Foolish, not foolish. The writing is on the wall
As posted on The Motley Fool

On Market Timing

I have realised that it is easy to sell near the summit of a bull market, when stock prices look ridiculously high.

On the other hand, it is very difficult to judge when we have reached a bottom on a market crash. Having successfully market timed, sitting on cash, you keep wondering - should I buy now? Is it a fantastic opportunity? What if the plunge drops and a rise starts?

But each time you trickle in some money and watch the markets crush it to half the purchase price, you start back in fear - am I getting in too early? Am I going to destroy all the benefits of a successful market timing? Is the market going to swoon for three years and go to half the present value, which would be the real time to buy? Is a future market fall worth waiting for? How long should I wait?

I have no answers to these questions. I have only learned that I have much to learn.

Thoughts on Centralised Admission System

I disagree with this system.

If you want to train 100 meter dash sprinters, you put your best talent in one school, select the best and send to olympics.You dont separate them into 100 schools and put them with marathoners, jumpers, javeliners etc and then make everybody train in everything. Or say that everybody should train in decathlon, because its best for all round athletic development.

Thats what schools like DPS, BVN, Amity are doing - selecting the best parents who will help kids perform later, like a 100 meter dash specialist school. If the rest of the parents bring snob value into these schools and want to get their average kids admitted in them - so that 6000 people apply for 180 seats - the problem is with the parents, not with the schools. 5820/6000 i.e. 97% of parents are going to be disappointed and some will vent their spleen on sites such as this.No matter what the point system, this rejection rate will bring anger to some.

I agree that DPS is much better than BVN. But both their aim in life is same - good academics. BVN just hasnt succeeded like DPS has. The only reason they both do sports and extracurriculars is that in IIM and job interview, academics being the same, those with wider range of activities are preferred. (Many students also do them for the same reason - for interview!) Both do the same - get in topper students from other schools at every class actively, to get the best students in, so that results are good.Strangely, Mothers, which goes for value education, also has good results in 12th because of fresh intake in many classes. SPV does not do this, except for 4-5 seats which fall vacant. Obviously in this attraction game, the very best will choose DPS RKP if they will have them. If not they chose DPS VK, then BVN or Amity. From 10th and 12th results, DPS RKP and DPS VK are almost neck and neck. BVN and Amity come next, again neck and neck, allowing for the bigger class size of BVN. When the principals and teachers are putting in efforts (and they are) at least they should get to choose the students.

I also teach (though not at school level) and its very frustrating to teach students who cannot keep up. The best teachers will want to teach the best students, it is how things are. Drona wants to teach Arjuna. (Ekalavya was there in those days also!!! ) In fact, teachers of good students will not be able to teach average students. Similarly, a teacher who will be good for average students will not be appreciated by a topper student who will want to race ahead.

Putting those students together is a bad idea

Comparing DPS Mathura Road and Modern School Barakhamba Road

I would say the 2 schools are equal, making the choice extremely tough to make. Both have good infrastructure, excellent teachers and are recently getting rejuvenated after a decade of slow fade.

Om sai ram, if I were you, all things being equal, I would choose on location and personal liking in your situation. I liked the building of DPS MR and the fact that there is only one location, so the child can grow attached to the school.

Rohina, I would stay with DPS MR. Performance comes in 5th and above classes only, by which time bright kids overhaul the average even with age advantage. Average students cannot get by with just age advantage. So your kid being younger will not matter by then, things get evened out. So no point repeating nursery in Modern when already in DPS MR.

In my opinion, both schools used very transparent admission criteria, though many have vented their sour grapes attitude on this site. Modern used better judgement in selecting the cream for their school. I was impressed by their interview, they separated the wheat from the chaff in 2 minutes, while SPV spent 20 minutes conducting an interview in which the discussion was like a gossip session. DPS MR used a not very efficient point system, which may not have selected the best suited kids. So thats a minus point.

Modern and DPS MR both have very young, new dynamic principals, out to prove their worth. I have no doubt both schools will see a marked improvement in their image very soon.One must acknowledge that both schools have had a deterioration of image in the last 10 -15 years. Image is image, it is public perception. Though not having anything to do with reality, it does matter.

If I had to compare, giving 10 to the better of these 2 schools, then I would say

1. Overall brand value Mod 10, MR 8. Both likely to improve, what happens 14 years from now is anybody's guess

2. Academics MR 10, Mod 7. But here, Modern's junior teachers are excellent, best in Delhi

3. Sports Mod 10, MR 10

4. Extra curricular Mod 10, MR 8

5. Infrastructure Mod 10, MR10

6. Snob value Mod 10, MR 7

7. Reverse snob value MR 10, Mod 3. By this I mean that in middle class society, in which I move, people will not like that one's child is in Modern, because they will think we are spoiling the child. Though this in totally unjustified, this is common perception. Although I know the reality, they do not. A lot of my relatives and friends will vocally and silently criticise my choice of Modern, they will do so much less for DPS MR.

So everything depends on what society you move in and what society you want your child to move in.I must hasten to add that most parents in MR and Mod are professionals and middle class. The school fees are reasonable and on par, Modern perhaps lesser by a fourth and both are far removed from international schools which charge 3 times more.

Those are my view points. Do let us know your decision. Gaurav, congrats on your selection

as posted on nurseryadmissions.com

The best school for sports in South Delhi

Thanks to SPOC, Karan, Shilpi and Dr. Sandeep. According to the web research I did, I think the rank for best sports school would be as follows

1. DPS RK Puram: It has the most coaches and gives coaching in the most number of sports.

2. SPV: Especially in cricket. Has a problem of small size. Old cricketing school, good cricket coaching in the morning

3. Vasant Valley: Same problem of small size, so getting enough good people for a strong team is more difficult. But very good coaching and small class size with individual attention. Places lot of emphasis on sports

4. DPS Vasant Kunj / Amity Saket/ Apeejay Sheikh Sarai / DPS MR/Modern BKR. All have reasonable coaching, good teams and good infrastructure

5. Laxman Public School (trying hard)

There are many north and west delhi schools which do well in the interschool competitions, but they are far away so I dont know them.

Shilpi, there are many misperceptions about DPS RKPuram, some of which I shared with you until recently, when I did the actual research.

As posted on admissionsnursery.com

Some data on the Dow Jones Industrial Average

There were stock market returns in the 1930s, they did not beat safe debt returns in terms of risk (speaking broadly). Look at the following charts

All Time: (In the long term, we are dead and cannot enjoy our money)http://stockcharts.com/charts/historical/djia1900.html

1920-1940
http://stockcharts.com/charts/historical/djia19201940.html
Look at the knife you would have had to catch in 1932 (at DJI <40 to get the reward of DJI 150 in 1939. More likely, you would have got in at 1933 at DJI 100 and reached DJI 150 in 1939. Look at 1930 to 1932.How many downward plunges were there - you would have had no returns from 1931 to 1939 if you had called the bottom too early. Old people would die waiting in such a time frame

1940-1960:
No matter where you invest, you make money long term http://stockcharts.com/charts/historical/djia19401960.html

1960-1980: Speaks for itself
http://stockcharts.com/charts/historical/djia19601980.html

1980-2000: Also speaks for itself
http://stockcharts.com/charts/historical/djia19802000.html

I dont want returns 10 years from now, I would rather put it in debt securities and wait for a better opportunity in todays market

Investment thoughts for 2009

Only about 60% of the bad news is out, 40% bad news is yet to come (in my estimate). Some of the bad news still waiting to happen are:

Short Term (for 2009):
1. Earnings degrowth in Chinese companies, leading to loan defaults, Chinese bank failures and depressing commodity prices. There is a deafening silence from China right now, the bad news is likely to be humongous.

2. Earnings degrowth in Indian companies - though most companies will ride out the storm

3. Low commodity prices decimating the remaining value in Russian and Brazilian companies with loan defaults and more trouble for International banks

4. Slow grind down in USA with increased job seekers (fresh grads, laid off people and old people who are unable to make ends meet in retirement, all running after the same pool of shrinking jobs), causing marked reduction in salaries - bad news gadget makers and retailers and credit card companies

Long term (for 2010)
5. Collapse of the education market, since the fees are not commensurate with subsequent earnings prospect. There will also be student loan defaults, since high fees paid will not yield returns in the job market

6. Saturation in the computers and techno gadget markets will lead to poor performance by companies manufacturing these, since people will no longer buy useless gadgets when they already have a gadget which does similar work.

7. Decline in dollar value with low interest rate coupled with high fiscal deficit as the govt pump primes the economy will make imports expensive. People will stop buying cheap crap from Chinese companies because they dont need them and they get expensive. Chinese companies manufacturing useless articles will (and are already) going broke.

8. European high tech manufactures and high tech services will have a slowly shrinking market. The grind down there will be slower than US but equally prolonged.

9. Credit card defaults will continue through 2009 and 2010, putting presure on financials. It will also put severe pressure on retailers as is happening now.

10. Unexpected political events (wars) causing reduction in economic activity, effect of demographics in USA as the baby boomers age and the increased cost of medical attention are all risks not yet factored in.

My expectation:
The time to invest in India, China, Brazil and Russia is after their markets come down about 30-40% from current levels when more of the bad news comes out. Maybe later half of 2009 or first half of 2010

The time to invest in US markets is probably never in our lifetime. At least not for the next 15-20 years. If at all one has to invest, then after markets come down another 30-40% from current levels (Dow 5000 levels) in sharp downturns and trade actively, getting out on every sharp upturn.

Long term hold strategy may be to buy into low cost mutual funds at every downturn (Dow 5000 to 6000 levels) for young people. Old people are not able to hold for 10 years, so stay away from this strategy.

Stock selection will be very difficult in the next 10 years, since there is a change in the pattern of world economic activity, similar to what happened in the sixties and seventies. The tree will bear fruit in 2020, which tree nobody knows.

Old people should invest in debt securities for regular income.

Remember:
1. The time to invest long term in stocks after the 1929 crash was 10 years later in 1939.

2. The time to invest after the recession of the seventies and early eighties was 10 years after 1974

3. Stock selection after 1929 and 1974 was successful in the hands of just one or two super investors. And we dont know how much of that was luck siding with them

4. The world was changing in the 1930s. And the 1960s and 70s. The old ways died and nobody anticipated how things would be.

5. The world is on the threshold of unanticipated change, just like the 1930s and 1970s. The old ways will die. New patterns of living will emerge. The rules of investing will of course remain the same. And they are screaming - WATCH OUT! BE CAREFUL! DON'T GET TOO GREEDY!

We live in intersting times. Watch with curiosity, but keep your money safe, dont jump in too eagerly and with too much expectation.

(my post on The Motley Fool website)