Tuesday, July 28, 2015

Book Review #23: One minute millionaire (Left Side): Authors: Mark Victor Hansen & Robert Allen

The objective of the book 'One minute millionaire' written by Mark Victor Hansen and Robert Allen is to create one million enlightened millionaires. As per the authors, this will create a domino effect that will have a positive societal impact.

Who is an enlightened millionaire? An enlightened millionaire is one who follows three principles. First one is do no harm. An enlightened millionaire do not undertake any wealth building activities that harm or impoverish other people. Second principle is to do much good. And the third principle is operate out of stewardship. They realize that their money is not just for them, but it is for blessing the lives of many people. 
How can one become a millionaire in one minute? As the book explains, it takes just one minute to generate a million dollar idea. The rest is all execution. The formula to become a millionaire is Dream + Team + Theme = Millionaire Streams. The path to millions starts with a dream, a goal, a want, a need to become a millionaire. That goal will drive all the subsequent steps. Having a goal is not enough. One should build a team to support them in their quest. Finally, one will need one or multiple themes to become a millionaire. There are four themes that one can use. They are Real Estate, Investments, Business and Internet. One should identify their primary theme and multiple secondary themes that they will use to become a millionaire.

The key idea in this book is that the journey to a million dollar starts in the mind. The primary focus of the book is on the mind of the individual. There are four steps to a million dollar journey. All of these steps happen in one's mind and help one prepare their million dollar journey. First of all, one has to decide that it is okay for one to become a millionaire. Decide that enlightened accumulation of wealth is a worthy goal. One has to work on her core beliefs and align them with the goal of wealth creation. Second step is to practice enjoying an abundant lifestyle. Visualize riches and wealth. Third step is to spend less than one earns and the fourth step is to invest the difference (between income and expense) in the theme of one's choice

Enlightened creation of wealth depends on a set of principles which the authors refer to as 'Ahas'. The book discusses 24 millionaire Ahas. First Aha is that everyone manifests their inner thoughts. They become what they think. If they think abundance, they will manifest wealth. If they think poverty, they will manifest the same. If one want to become a millionaire, one should continue to think abundance, they should think like they are already millionaires. Other Ahas are 'Be-do-have', 'Clarity is power', 'Size of the question determines the size of the answer' etc. A list of all the 24 Ahas with a brief description is given in this POST.

Since everyone manifests, the book focuses on Seven Manifestations that are necessary for anyone to become a millionaire. These manifestations are thought processes that fundamentally alter one's perspective. The manifestations help people remove their insecurities and doubts and place them firmly on their millionaire journey. The seven manifestations are:
Seven Millionaire Manifestations
The seven manifestations and the 24 Ahas together will give one the required mental rigor that will carry them through their millionaire journey.

One will need leverage to hasten their millionaire journey. The book describes five types of leverage. These are:
  • 'Other People's Money (OPM)' 
  • 'Other People's Time (OPT)' 
  • 'Other People's Experience (OPE)' 
  • 'Other People's Ideas (OPI)'
  • 'Other People's Work (OPW)
To apply the maximum leverage, you will require 6 forms of leverages. These are shown in the diagram below:
There are three advantages to having a mentor. First is that a mentor can give a different perspective on the challenges that one face. They can point out areas which one has overlooked or show a different angle to the issues. Second benefit is that a mentor can provide proficiency by filling the knowledge gaps. Third, a mentor can provide patience to handle challenges. There are four model of mentoring. First is the serendipitous mentor. These are mentors that one accidentally find on the way. Serendipitous Mentor need not be a person. A serious illness or a defining moment in life could be a serendipitous mentor. Next form of mentor is the Hands on Mentor. These are normally people who have already completed the millionaire journey. They can guide by showing the potential pitfalls. The third model of mentor is the Hero / Shero Mentor. These are often famous people, both men and women, who can provide guidance. While they may be unreachable, one can learn lessons from them by reading as much as possible about them. Authors advice us to identify our list of mentors and be in constant touch with them where possible. The best form of mentors are Transformational Mentors, who help transform one to a higher level.

The single biggest decision to be made in the millionaire journey is the selection of team members. One needs a dream team to reach the goal. The dream team should comprise of people who fall into each of the four categories, Hares, Owls, Turtle and Squirrels.
Hares are the idea generators, Owls create strategy and action plans to realize the ideas generated by Hares, Turtles play the 'Devil's Advocate' and examine and analyze the idea in detail from all angles and finally, Squirrels are the troopers who do the execution of the selected idea. The book also provides pointers on how to conduct effective meetings with the team to get the best out of the team resources.

The third form of leverage is the network.This is the most powerful leverage available. One of the most effective form of network is the 'Weak Ties' network. Some of the suggestions for building the leverage is to use the 'network of networks'. One must learn to cultivate the network assiduously by giving something free that could be valuable to the network. Another way to cultivate the network is by being regularly in touch with your network. 

The next form of leverage, Infinite Networks, is about tapping into the wisdom of the universe. There are three ways to do that. One is by giving. One should get into the habit of being a giver of money, happiness, smile, kind words, respect, courtesy. When it comes to life, always be a giver and not a taker. Second way to tap into infinite network is by maintaining integrity. The path to infinite network is through one's thoughts and attitude. One should always be thinking positive and self-enhancing thoughts and always display positive, upbeat and enthusiastic attitude.

There are multiple skills that one has to master through their journey. One should be adept at using modern tools like computer and other paraphernalia. One also need to learn negotiation skills. Yet another is listening skills. One should learn to separate 'position' from the 'issue'. Millionaires also have seven money skills depicted in the diagram below.

Finally, enlightened millionaires are skilled at managing their time. They instinctively know how to prioritize their work and focus on the high priority activities. The book provided 10 critical time management tips which are depicted below (Diagram: 10 Tips for Time Management).
None of the leverages mentioned (mentor, team, network, infinite network or skills) above will work without proper systems in place. Enlightened millionaires are adept at creating and maintaining systems. First system that they put in place is benchmarking. They set benchmarks for each of their goals and regularly monitor performance against their benchmarks. They also follow 'Zero Out' philosophy. This means that they are always on the look out for system to create wealth while investing Zero Cash, Zero Energy, Zero Time, Zero Management and Zero Risk. Finally, enlightened millionaires assiduously look out for creating multiple sources of income and residual income. They list out potential sources of income and systematically move ahead stabilizing one source at a time till each source provide streams of incomes within the 'Zero Out' philosophy.

Final part of the book take a deeper look at the themes. Due to the familiarity of authors with real estate, that theme is covered in a lot of detail. Different strategies are presented on how to make money in this theme with 'Nothing Down'.  Next, the book discusses the theme of business. 10 different business tracks are presented including B2B, B2C, B2G etc. Other business models like Infopreneurship, Writing a book etc are also briefly touched upon.

Finally, some general observations.

This book is packed with ideas and tips to become an Enlightened Millionaire. This is a very ambitious book. It tries to be all things to all people. Authors point out that people learn in two different ways. Some people are comfortable with logical learning. Also called left brain learning, this approach involves imparting lessons in the form of logically and sequentially organized data. The left hand side of the book (that is reviewed in this blog post) provides lessons in a logical way with facts and figures and bullet points and action items. The right brain approach to learning is more visual and experiential. The right brain people learn best if the lessons are imparted in the form of story telling. The right side pages of the book does just that. It tells the story of Michelle, who has to earn one million dollars in about 90 days to get possession of her children. How she manages to do that, by following the lessons of the book, is the story. 

From the point of view of a reader, much less a reviewer, it is very confusing. To do justice to the book, a conscientious reviewer like me will have to review the same book twice. Reading once itself was a tough exercise of my brain cells. And I have to read it again? 

Having reviewed many books in this genre, I was surprised by the lack of structure in this book. As a reviewer, one looks first at the table of contents to see the layout of the book and form a mental picture of the flow of information. The table of contents of this book treats every section the same. For example, there are six sub-sections under the main section of 'Leverage'. However TOC shows the main section and the sub-sections in the same level. Another issue that I found with the structure of this book is that while discussion on Leverage cover half the book, the same not mentioned in the introduction to the book at all. On the other hand, the millionaire formula (Dream + Team + Theme = Millionaire Streams) which is covered extensively in the introduction to the book is but given scant mention once you start reading deeper in the book. 

Having read the left side of the book for about 6 times, I realize now that there are three sections to the book. First section is 'Millionaire Principles' covering discussion on enlightened millionaire, the millionaire Ahas and seven manifestations. The next section is on application of the principles. This covers  the six forms of leverage. Final section is a detailed discussion on the four themes vis. Business, Real Estate, Investments and Internet. 

The authors have a worthy objective of creating 1,000,000 millionaires. To this end they have provided links to many a resources available in their website which the reader of this book can freely use and learn. They also provide the requisite motivation by sending regular mails to keep the reader going forward his / her millionaire journey.

I will give this book a score of 3 out of 5. 

Monday, July 27, 2015

What is a 'Price Weighted Index'?

Dow Jones Industrial Average is a 'Price Weighted Index', unlike other Stock Indices which are 'Value Weighted Indices'. What is a Price Weighted Index?

Price Weighted Index is defined as a stock index in which each stock influences the index in proportion to its price per share. The value of the index is generated by adding the prices of each of the stocks in the index and dividing them by the total number of stocks. Stocks with a higher price will be given more weight and, therefore, will have a greater influence over the performance of the index. Here, the weightage of its 30 constituents is based on the price of the stock and not its market capitalisation.

Saturday, July 25, 2015

India Real Estate. Entering crash zone?

Have you read this interesting article in First Post? It says that real estate prices are about to crash across India.

I have been maintaining for some time that Real Estate Prices are very high in India and are due for a correction sooner or later. It looks to me that this correction is sooner rather than later.

Consider this. There are less than 30 Lakh people in India who has a taxable income more than Rupees 10 Lakhs per year. On the other hand, an average 2 BHK room in the outskirts of Mumbai costs over 1.25 Crores. Who can afford this? 

Answer? Speculators. Those with black money. DINKS and DIOKS (may be).

An average middle class person cannot afford this price. So what do they do? They stay in rented apartments. It works out cheaper. As per this article, the rental yield is about 3% which is much lower than a Bank FD. Which effectively means that it is much more lucrative to stay in rented apartment than buy a house.

Check out my article about Kambles in this blog to understand the details.

Signs of an impending correction is all around us. 10-10-80 Schemes, 20-80 Schemes, Developer paying Pre-EMI interest, pay  10% down and nothing till possession, Online sales of houses, Real Estate fairs offering huge discounts, seller paying the stamp duty, home augmentation offers (free furnishing, free modular kitchen etc) and even a 'Get one room free' offer (remember seeing this somewhere)....

Real estate inventory with the builders are piling up. It is currently about 77000 in Mumbai, which will take 30 months to clear !!.

Following are the seven reasons why I think that the real estate prices in India are about to correct.

1. Investor Expectations: News and signs of impending correction are all around us. The article in First Post is the latest sign that the prices are about to fall. As the expectations about a fall increase, investors will delay their purchases. This have a domino effect and will lead to further fall in real estate prices.

2. Working capital pressure: Builders normally manage the working capital requirements by rolling over the cash flow from apartment sales. As the sales of new homes fall, the builders will be under working capital pressure. Since other avenues of availing working capital are drying out, they, especially the small builders, will enter into a 'desperate sales' zone and lower their prices and sell the apartments at a loss. This in turn will add to pressure on the big builders to lower their prices.

3. Tightening of Bank Lending norms to Real Estate Sector: Earlier, banks could lend a significant percentage of their capital to the real estate sector. Two years ago, it reached an alarming rate of about 52% across the banking sector, while the norm is less than 10-15%. Seeing the risk to the banking sector, RBI intervened and tightened the norms and the oversight leading to banks cutting down on their lending to real estate sector. This in turn is putting pressure on the Working Capital situation of the sector as mentioned in point 2 above.

4. Strong black money legislation: The latest black money legislation introduced by the BJP government aims to crack down on the black money in this country. Traditionally black money was a major driver for escalating real estate prices in our country. Focus by government on black money has led to that moving out of the sector. This in turn is adding pressure on the working capital situation of the sector. 

5. Global economy is down: Many of the new home buyers are IT professionals. As we know, Europe is in recession, China market is tanking and globally economy is down except in the US. IT sector is expected to create 15% less jobs this year according to NASSCOM. IT companies may not pay the kind of salary hikes which are the historical norm and also there is a lot of focus on cost cutting in IT companies. The recent earnings downgrade of KPIT and Tech Mahindra portent not so rosy scenario for IT sector. So the Indian investors are becoming cautious and keeping their money in cash rather than investing in real estate.

6. Investible surplus moving to stock market: Currently Indian stock market is one of the few in the world, along with Japan, US and may be Iran going forward, that is doing well. It is expected to do even better in the coming years. Many investors are selling their real estate and investing the same in stock market with the eye on better returns. And this adds to pressure on real estate prices. 

7. Finally, Increasing real estate inventory: This will keep the prices down for some time till they get cleared. 

So my suggestion to those who want to buy an apartment. Wait. For all you know, you might end up with a villa for the same price.

Friday, July 10, 2015

Two concepts about money that the school should teach my son...

I love paradoxes.

You know what is the greatest paradox that I find? Our entire educational system is geared towards giving us skills to earn money, without ever teaching us about money.

They don't teach us how to save money, how to invest it or how to make money work for us.

Neither do they teach us about the concept of opportunity cost of idle money nor the relationship between risk and return.

Nothing is taught about how the equity markets function or what is the difference between a stock and a bond.

All of us are working towards earning money for retirement planning. God knows that we are not taught any of that stuff either.

That brings me to the question of the day.

What do I think are the most important concepts everyone should be taught right from childhood?. 

I think there are two financial concepts that everyone should learn.

One is the concept of depreciation.Other is the concept of compounding.

Simple words, big ideas. Simple concepts, big outcomes.

First about depreciation. As everyone knows, depreciation is the reduction in value of an asset due to normal usage of the same. It is the cost of 'wear and tear'. Companies love depreciation. It allows them to reduce their profits and pay less tax to the government. And this can be done without paying a single penny as cash outflow. 

No cash outflow, claim expense, reduce tax. Great, isn't it?

Not so much if you are a salaried employee. As a salaried employee, you cannot claim depreciation on your assets. That doesn't mean that you are immune from the effect of depreciation. That glamorous, sexy Toyota Etios that you purchased off the shelf from the Toyota Dealer? The moment the ownership changed hands, even without you so much as driving it out of the proverbial 'Gate of the Dealer', the car has lost about a fifth of its value. If you pay seven lakh today and want to sell it tomorrow, you will be happy if you can get 6 lakhs for that vehicle. Just the notional change of ownership has reduced the value of the vehicle. That is the pernicious impact of depreciation.

How can you escape this impact? Buy used car. If you wait till January to buy a used car purchased in September of the previous year, you will be able to buy a three months old used car at almost 4/5th of Ex-Show Room Price. You are not losing anything. You are getting an almost brand new car and the previous owner is paying for the depreciation. 

If the previous owner is a business man, he will be happy to conclude this transaction. He can claim both depreciation and the loss as expenses and pay lower tax on his lower profits.

That is smartness. Both from you and the business man...

The awareness about depreciation also teaches us that there are some assets, land being the most extensively quoted, that do not depreciate in value. In fact they do appreciate in value. So is the case with equities purchased at fair value. Their prices tend to appreciate over a period of time.

Purchasing assets that will appreciate in value is called Investing. Buying assets that will depreciate in value is called Expenditure.

So lesson one, if you have money and want to buy assets, make sure to buy those which will appreciate in value. Buy Investment assets. In case you want to buy depreciating assets, make sure that someone else pays for the initial depreciation. 

The second concept is the power of compounding.

They teach us compounding during our school days, of course, they do. Who can forget all those complicated formulae about compound interests and geometric progressions that we were asked to (nay, forced to) learn during those childhood days? We are finally out of it, now that we are adults. Compound interest is for kids, not for salaried employees like us, correct?

Not so fast, mister. Not so fast....

Compounding is the reason why small, innocuous investments done consistently end up as huge values over a long period of time. As you keep on investing small amounts of money regularly, that money is silently, unobtrusively working to create more money for you. 

That is compounding. 

The value explosion has nothing to do with the amount you invest. Value explosion is due to the rate at which money creates new money every day, every hour, every minute, every second.....

That rate at which money explodes is the rate of compounding. Technically it is called CAGR (Compounded Annual Growth Rate).

Power of compounding also means that earlier you start investing (purchasing assets that will appreciate in value), more are the benefits of compounding. 

Power of compounding is what increased the amount of Rs.10000 invested in 1980 to become almost 600 Crores in 2015 (by buying shares in Wipro).

There is another hidden insight to compounding. It is Investment Acceleration. It is like acceleration in a car. 

What does acceleration do in a car? Progressively it reduces the time taken to cover the same distance. Initially you cover 10 Kilometers in about 7 minutes. As you accelerate, you cover 13 Kilometers in the next 7 minutes and 17 Kilometers in the next 7 minutes and so on. As a corollary, an accelerating vehicle will cover same distance in progressively lower time.

(Don't do this on the highway. This is a mathematical illustration).

Compounding is a risk less investment acceleration. Let us say that you buy a share at 50 rupees. If the share price touches 55, you would have got 10% return on your investment. Which means a 10% appreciation in share price leads to 10% of return on investment.

Now assume that the share price has touched Rs. 100. At this price, a 10% appreciation in share price (from 100 to 110) is equivalent to 20% (10/50) return on your original investment. If the share price touches 200, you just need the share price to go up by 2.5% for you to achieve 10% return on your investment.

Can you see the investment accelerating. Same percentage appreciation in price, multiple percentage appreciation in your return on investment. This is compounding.

Do they teach these in schools? No, of course not. Even if they teach us compounding it is to show us in the losing end. An example question on compounding will look like this.

'Mr.Ram borrows Rs.100000 from a bank at an annual interest of 10% with a promise to pay back the principal and accumulated interest at the end of five years. How much will Mr.Ram pay to the bank at the end of five years:
a. If the interest is calculated as simple interest.?
b. If the interest is calculated as compound interest? '

See, in this question Mr.Ram (you and me) is always a borrower who has to pay back principal and interest to the bank. Mr.Ram is never an investor. As per the questions asked in the school, Mr.Ram always is at the receiving end of compounding. He is never the beneficiary of compounding.

Instead of the above question, the school could ask a question like this. Both the questions evaluate the same concept, vis. compounding.

'Mr.Nilekeni purchased 100 shares of Infosys at Rs.100 in the year 1994. By 2014, the number of shares had increased to 1000 and the share was trading at 1000.
a. Calculate the CAGR on Mr.Nilekeni's investment.
b. If in 1994, Mr.Nilekeni had invested Rs.10000 in a Bank deposit at 10% interest rate, compounded for 20 years, what would be the value of Mr.Nilekini's deposit in 2014.
c. Based on the answer to a. and b. above, if you were Mr.Nilekeni in 1994, where would you invest your money? What are the factors that you will consider? 

So there. 'Depreciation' and 'Compounding' are the two topics about money that every individual should learn in school. 

It will help reap 'compounded' rewards.