'Skin in the Game' Reform: A Game Changer in the MF and Wealth Management World to Save the Retail Investor

Indian benchmark indices are at a lifetime high and hundreds of stocks that have been the market darlings are at their yearly and some 2-yearly lows. This fall has been precipitated in a matter of last -mere 5 months.

Obviously most of the fund managers (mutual funds, private wealth, PMS schemes) are finding corners to hide where they can find respite and concoct some solid theories and reasons for wealth destruction last seen only in 2008-2009 – after all these were the very same guys on CNBC, just very recently, who were chuffed at their stellar performance and recommending shares ala Vakrangee Manpasand and PC – forgetting that it’s a unusual proxigean spring tide. And as we have all heard before --  that all s*^@# rises in a high tide.

Some fund managers like Porinju (having faced perhaps the maximum erosion in their recommended portfolios) have been graceful enough to publicly accept the same and have learnt their lessons. I have great respect for people who have a clear intent and are quick to concede defeat when defeated and are quick to self-deprecate and crack a joke on themselves. Hats off Porinju. Your recent confessions hold you in good stead with small yet well informed investors like me.

Some relatively bigger names in money management business who have destroyed a much larger share of the savers wealth are finding ways to repackage some established theories  of legends such as Benjamin Graham (BG) and Buffett (WB) to avoid backlash and scrutiny. Some are repeating BG’s theories of quotational losses and appearing in full page interviews.

The public opinion is rife as to why the regulator of markets (SEBI) has introduced a volley of measures to simplify the mutual fund industry by reclassification of schemes and defining the size of companies on basis of market cap of companies and % of funds invested in a category of companies.

What’s wrong in it. Actually nothing.

Mutual funds and fund managers had created an ocean of incomprehensible financial products where schemes were being launched such as special situations, arbitrage, emerging companies, vultures picks, future stars etc etc. Just the names of the new schemes were being used and repackaged to amass fortunes (read expense ratios and bonuses).

Basically, all of this is a demonstration of the fund manager's alleged belief and necessity at that point of time to launch  new schemes using publicly available information based on specious research.

And the market regulator tried to streamline this so that the gullible investor, reposing trust in the mutual fund – basically the fund manager, sees some method in madness.

Indian markets are most volatile for the following reasons. The size of speculation is 29 times the real market capitalization. For the record some of the most sound and advanced and mature markets such as the USA, Germany and the UK have just 3-5 times the size of derivatives markets in comparison to the  cash market.

So I am in absolute awe of the regulator that all the recent froth in the market was removed judiciously by introducing mechanisms such as ASM and increasing the margin money requirements in the F&O trades. And it surprises me that investors are acting and reacting adversely because SEBI has introduced measures that will allow overheated and irrational markets to cool off and that will reduce the sheer gambling in the garb of investing.

I know of 2 middle class retired uncles who leave home every day with 10k of their pension money, leverage and take positions worth 8-10 times, get wiped out with just a 5-7% volatility in the prices and come hope sheepishly only to restart the next day to recover their losses. Derivatives are definitely weapons of financial destruction as they have no underlying asset/value and are merely an arbitrage between one person’s fear and another’s greed

I am shocked when people ask me questions – do you play markets. PLAY? I ask – is it a sport?

Statistically speaking, If you simply play an odd even on a roulette in a casino you have a better chance of making money than investing in the markets.

So, in this maze of multiple schemes, thousands of options, there is just one reform that SEBI needs to implement that could be a game changer in the interest of a common small investor.

That reform should be called the ‘Skin In The Game’ reform.

I have a 10-point recommendation for the entire MF and PMS industry where creative marketing and false promises disclaimed by reams of fine print are called out.

• No advisor who gives advice on TV or print should be allowed to give a disclaimer.
• Irrespective of the size of the AUM, every fund should have a max cap of expense ratio not as a % of size but as a pure number. Why should a fund with AUM of 2 billion dollars or more charge over 3-3.5% in fees that amounts to close to 60 million dollars. After all incremental effort required to manage a larger or a much larger fund is just the salaries of a few more research analysts.
• Distribution fees offered by the fund houses should be reduced to less that 30-40 basis points and distributors mustn’t be offered perpetual commission on the funds brought in.
• All fund houses must be forced to have a similar fee structure for distribution and fund management fees (expense ratio) to disincentivise mis-selling.
• Why should an investor pay 3% for the first 7% ROI when Indian treasuries or Bank deposits are guaranteeing the same with zero risk. Fund houses and managers should get no or negligible fees and salaries respectively for generating returns up to the yields on Govt Bonds.
• The fund manager should swear under judicial oath that they and their close relatives as defined by the regulator for the purpose of gifting wealth would only invest in the fund managed by self and except for real estate and liquidity as desired by any individual, all investments in financial instruments will only be that fund that’s managed by the family member.

Some advocates of democracy might start jumping and call this preposterous. But how else do we curb counter actions by people acting in concert against the interest of small saver.

Yes, it’s a tough proposal but then if a fund manager wants to earn hefty bonuses, he must figure   this out and have a complete skin in the game.

• Fund managers only get a fractional % of their salaries if they return up to or less than the return offered by Govt treasuries.
• Infinite bonuses make fund managers take risks and positions that neither the gullible and ill-informed investor nor the regulator approves. Every fund manager must have a cap of a maximum performance bonus irrespective of a stellar return or a flash in the pan performance in any particular year.
• Is there any exit load on bank deposits? NO. Why should fund houses charge any exit load. An investor wont exit if the fund is performing and if the fund isn’t, and an investor wants to book losses and exit, why should the fund house be allowed to screw the investor twice over. Exit fees should be scrapped.

And lastly the law around this should be so robust and penalties so humongous that no one can pull off a Houdini on investors.

Rajat Gupta – the poster boy of Indian diaspora was pulled up badly and almost destroyed by the US law for one small mistake of his. The readers of this blog all know in their heart of hearts that almost every promoter and every insider of a listed company in India indulges and misuses the insider info for personal benefits. Would anyone accept that ever anywhere else in developed economies? And would Indian law be robust enough, ever, to instil the fear of God??

Only God knows……...

manu also writes in The Huffington Post

Financial Harakiri Made Easy

My first stock market investment was in year 1992 when my dad gave me some 100 shares of indo gulf fertilizers and I remember it was a bad trade as I traded all my life savings of Rs 17000 in a savings account to the then market price of those 100 shares that was Rs 7600.

But laissez-faire prevailed and I got a share certificate with a green transfer form attached to it. I still felt nice and confident because I saw an opportunity to learn the nuances of stock markets at 17 and make sense of those 2 pieces of paper.

How those 100 shares panned out in life is a matter of another piece at a different point of time but for the record that and all additions of life earnings added to timely systemic investments as on date have returned 17.8% CAGR since 1992.

Someone tried hard to sell me the Portfolio Management Scheme of MotilalOswal 12 months ago claiming that they have consistently returned 38% to their investors since inception. Financial advisors and relationship managers have a unique ability to make muppets out of gullible investors for whom a marginal delta in comparison to the AAA rated securities means the world and 38% is as good as it can get.

More amusing was, that, my research revealed that Warren Buffet’s life to date CAGR has been close to 20% and Motilal and its agents claimed a CAGR of 38%. I closed my eyes and visualised Buffet serving tea to Mr. RaamDeo Agrawal and Mr. Motilal Oswal if they have consistently been able to beat the Buffet hurdle.

Of course I never invested in Motilal or any of its alleged schemes but did keep a track on their presumptions and in July 2016 when they came out with a public research report on a share called manpasand beverages and a follow up report reiterating their stand in May 2017 and eventually in Jan 2018, I bought some shares only to follow and keep track. Look at these reports and you would have wanted to sell your house and invest in their recommendation.

Cut to May 2018, Manpasand Beverages is down  72% from its price, has eroded an ocean of investor wealth and small gullible investors are left holding their MTM losses in the hopeless world of being treated as muppets.

Recently I was invited to join a concall addressed by the same Mr. Raamdeo Agarwal as he was opining on Crude Oil prices. I thought WTF….. How can anyone opine on crude prices when even the King of Saudi Arabia might be clueless on the same. In a VUCA world where a tweet by trump can make DOW rise or fall by 2% or take crude prices thru the roof, where a posturing by Kim where Kim fires a useless missile - roils the world markets – oh by the way I am talking of Kim Jong Un of Korea and not Kim Kardashian, here is an Indian commentator commenting on the crude oil prices.

So when I asked him whats his accountability on Manpasand, because I invested my entire bonus and savings on the basis of his company’s research report, he was flustered and advised me that the concall was on Crude, refused to take ownership of his company’s recommendation and gave me the contact of his head of research Gautam Duggad. (GD)

Pronto – I called Mr. Duggad for some insight as I wanted a word of solace and advice as to the way forward to an investment that eroded approx. 75% of my wealth entirely on his and his company’s recommendation.

GD was flustered and angrily asked me who my relationship manager was. I asked him – ‘how is that relevant. Did your research report mention as a disclaimer that Motilal is answerable to only those people who reveal the names of their relationship managers when the shit hits the roof'.

And Mr. Duggad banged the fone down on me. I became a complete full-circle muppet. Or at least was treated like one.

Whats the point…….

1. Any financial advisor claiming to outperform the Buffet hurdle is making a Charlie out of you.
2. If you are able to beat the returns offered by bonds issued by central banks of your respective countries – without taking a risk – you are doing fine.
3. Keep investing your surplus and believe in the power of compounding rather than relying on specious research reports by companies finding and feeding their army of muppets with erroneous asymmetric information.
4. Invest in the quality of management rather than the sweetness or sexiness of companies like manpasand.
5. Capital protection is far more important that elusive returns on investments.
6. Endeavouring to marginally beat the returns offered by robust central banks will hold you in far better stead than endeavouring to beat the inflation rates of Zimbabwe and Venezuela.
7. Be patient in markets – they can be irrational on either side for prolonged periods of time. If your holding period isn’t forever then you shouldn’t be in markets even for 10 minutes.
8. Don’t follow any stock advisor blindly – Do your research and it takes no rocket science to identify stable well managed companies.
9. A boring company that is debt free, out of market favour, consistently giving dividends and growing at about 10% YOY and definitely not recommended by analysts on CNBC on a daily basis, is likely to give you a far better return than the sexed up companies finding the favour of analysts on TV channels, who are themselves mostly doing the opposite of what they are recommending on the TV.
10. And lastly why should you pay 3-4% as management fees to your fund managers (who don’t even guarantee a prevailing bank rate for fixed deposits and who play the markets on your money) – only to lose your capital and then hear them blame the systemic issues of markets.

Human beings have short memory and people are afraid to acknowledge disastrous consequences of the bias of cognitive dissonance in the face of questionable advice on business channels.

Vakrangee, PC jewellers, Gitanjali Gems and Manpasand (these can be all googled and enough information can be found online about the dubious managements of these companies) have been recommended by some of the well known stalwarts of the market and just these 4 companies have eroded close to 35 billion UD Dollars of shareholders wealth in less than last 90 days.

Try doing exactly opposite to what the commentators recommend on the television. You are likely to make more money than by following their advice.

Someone needs to be eventually hanged for this. Whether it’s the fraudulent promoters or the overzealous self-serving analysts.

The decision entirely rests with the muppets.

Manu also writes for The Huffington Post and can be contacted on mrg45@hotmail.com

The Invaluable role of “Chief Business Obstructers” in the modern corporate world

Darwins theory of evolution in its simplistic form says ‘The fittest survive and they fight to compete, survive and procreate’

Societies have evolved over generations where economic progression, education and character have all moved in a synchronous manner. Some of the most developed economies like the US, UK and France have had their fair share of tribulations such as wars, diseases etc but have demonstrated that they maintained their financial, military and intellectual hegemony from a global perspective.

Societies in the first world countries prided themselves with superiority and there was a race among these nations to establish themselves as a leader in one thing or the other. Inventions (technological, financial and medical) of every form happened in the western world.

So why did India get left behind so miserably, when evolution of homo-sapiens happened almost at the same rate/manner across the globe.

The answer lies in one word “Corrupted Greedy Character”

But this didn’t happen by design – it was the natural evolution of a nation where its large population zealously procreated and grew roughly 4 times from 350 mill to 1.3 billion in just 65 years.

And Darwin’s to blame majorly for the present character of this nation. Or at least his theory explains this at best.

Lets reflect objectively on the causal factors.

India can primarily be divided into 2 kinds of demographics Rural-Agrarian and Urban-Corporate.

The rural-agrarian have relied on limited means, producing and consuming and storing for the proverbial winters/rainy days – Simple.

The urban-corporate are living in small over populated cities with limited resources and infinite greed among themselves to survive, grow, hoard and procreate. Another phenomenon happened in the Indian sub-continent in the last 50 years. Indians were primarily fighting floods, droughts and starvation and suppression in the last 300 years, but the last 50 were marked by rapid economic developments, lesser vagaries of nature, economic development led by rapid and almost alarming shift from agrarian to services based economy and a large part of urban population having marginally more than required.

Yet the starvation gene (let’s call it the gene X) still continued to exist and despite the rapid progression, in last 50 years, on all fronts namely economic, medical, food, transportation and habitation, the gene X that encourages to hoard, be greedy and survive at all costs and mostly at other’s expense, persisted and didn’t mutate at the same fast rate as the economic development of this sub-continent.

That’s why Indians over eat and eat till they are proverbially full (read bursting after a meal). They are generally a dissatisfied lot wanting more than what they deserve or can actually earn.  And that explains why inspite of being a rather superior nation on many fronts, this subcontinent still behaves primitive, back stabs, in-fights on trivialities and sadly the educated in the so called corporate world spend majority of the time pulling the other one and the surrounding ones down because of a misplaced sense of depravation and insecurity that purports corruption, greed and above all ‘obstruction’.

And that catalyses the breeding of ‘Chief Obstruction Officers” in the corporate world too. Fair warning pls – no COO should feel attacked – we could even call these assets - Chief Business Obstructers or Chief Financial Obstructers. They are all the same. For brevity lets just stick to CBO’s

C N Parkinson wrote a powerful essay in 1955 that pretty much defined the expansion of bureaucracies in an organisation and how work aligns and expands itself according to people available for its completion and organisations are perpetually insecure. Every insecure company necessarily wants to have infinite multiple layers of inefficient CBOs to keep an alleged check and balance.

But lets talk of the role that these CBOs play in the fate of organisations.

These people have never actually handled a business in its true sense. (the corner shop paanwalas are better businessmen because they invest their own money and have a skin in the game). CBOs pretend to be confident, very knowledgeable, stretched on the chair as if on a hammock (during an official meetings – but that’s a body language that hides inferiority in the garb of stretched posture), their condescendence and pretentiousness would put thought leaders such as Kotler and Prahlad to shame

Nothing amuses me more than seeing people from disparate backgrounds, accidentally landing themselves in position of authority, pretending to be Prahalad’s reincarnation, aspiring to make a mark without an iota of responsibility, assuming authority because no one questions, pretending to have a connection with GOD (when God least cares), and then start preaching on topics and industries – of which they have no knowledge.

We call them “Chief Business Obstructers”

 

A friend was sharing his personal experience when he used to run a business that grew 5-6 times in 4-5 years. Customers were happy, colleagues were thrilled, profits were good. So much so – the growth rates encouraged his company to start thinking IPO. Nothing gives an executive more joy when peers in the industry start talking about small businesses that become a formidable force and everyone starts talking of these small businesses as the next big thing.

 

Enter – “The Chief Business Obstructor”

Corporate world is funny – everyone pretends to abide by Thomas Bertman’s adage “don’t fix it – if it ain’t broken” yet no one practices it indeed. On the contrary system gives authority to incompetent people who know nothing about a business and these wise men try and fix every single thing that’s not broken - till the business is on its  knees, is on ventilator support and eventually breaks down.

Corporate world is replete with examples of excellent businesses that tried to do a lot when nothing was required to be done and businesses and leaders who did nothing when a surgical intervention and action was required.

But there are clear and distinct signs that leave a trail of evidence, sometimes discovered much later (similar to the tail effect of a comet) when its too late, that sow the seeds of demise of well run, well managed, perfectly fine companies irrespective of their size.

I spoke to about 9 different C and D level executives and have endeavoured to summarise below the signs we must look out for – if we care for the longevity of the companies.

1. When setting up businesses do not allow the old loyalists from other divisions (who have no freaking clue of the new businesses) to opine.
2. Keep things simple – Product , Market, Marketing, Sale, Customer, Customer Service. This is all that matters. Anything beyond that is all farce.
3. Always almost make your projections keeping a buffer for difficult and unexpected times. Microsoft excel is a wh@#e – you can titillate it to whatever extent. It almost always fakes in real life.
4. Every executive who leverages the company, must be locked in (by hook or crook) into company’s employment for the length of the debt. Else the promoter will be left with the hot potato at the end while the executive would have taken his/her hefty bonuses and digested. Does this sound like Fuld?
5. Executives who fix up meetings 4 times a week on disparately different subjects – Weekly updates, strategy for the week, strategy for the month, long term strategy probably need to be fired immediately because they have nothing better to do and are only trying to establish their relevance at the cost of some other business and someone else’s time.
6. There is a trend to ask for weekly monthly and yearly cash flows week after week after week as if the flow of cash is the living account of the flow of bile of the Chief Business Obstructer.
7. To establish their own importance, some CBOs suffocate the businesses of cash to an extent that their artificial importance gets established as if they are The Fed and 90% of the time of the business is spent in making excel sheets or symbolically accounting for the CBO s bile.
8. When reviewers start commenting on everything that they don’t have info about and keep showing the business and its CEO in questionable light just to justify ones’s 8 figure salary and pretend to be custodians of the business – pls definitely get wary.
9. CBOs ensure that the business doesn’t have enough money to even pay its salaries while they are happily gloating in the warmth of their annual bonuses and planning trips across the globe.
10. CBOs unleash a volley of 20 something’s analysts, seeking data from companies with the sole purpose of making themselves and CBO’s look like saviors but in reality setting a rot of mission fatigue within the organisation.
11. Pretend to be owning the business at someone else’s expense, without investing a penny and feigning ignorance when shit hits the roof and finding someone else to blame.

The few reasons why a handful of businesses have survived over ages are – when..

1. Owners and CEOs have trusted a handful of performing executives over long periods of time.
2. Businesses aren’t judged week on week but are judged year on year and brand-on-brand and reputation-on-reputation and happiness-on-happiness (teams and customers)
3. Owners don’t allow fraudulent people with all authority and no responsibility to exist in the system without any measurable accountability.
4. Owners call-out the fakery by converting the hefty bonuses into equity and making these well-wishers participate in the success/failure of the company.
5. The fundamentals of running a business are kept simple where cash is king and debt is death.
6. Businesses aren’t enamored by the western style of cash flow discounting and valuing the future elusive cash into present ongoing party.
7. HBR in a series of popular blogs have lauded the Indian baniya style of doing business and has given an infinite importance to collaborative culture and care for all.
8. Businesses are managed with lean teams that are empowered and productive and not meeting 10 times a week to discuss strategy when none really exists. Take for instance Berkshire Hathway's office in Omaha that manages 510 Billion in marcap of businesses with a handful of 25 employees.
9. And lastly….
10. Rather than reinventing the wheel of management styles – unconditionally back the performers, remove the flab and rapidly weed out the fakers.

Manu also writes for HuffPost