Thursday, December 24, 2015

Selling put options: An approach at reducing the purchase cost of a stock...

A Big Note: Author do not encourage a retail investor to trade in Options. 
Most of the retail investors use the facility of 'Limits' to buy the stock at a lower value. Here is how it works.
Let us say that you have a short term bearish view on ICICI Bank. The share is trading at 265 and your target purchase price is 260. So you place a 'Limit Buy' order to buy ICICI Bank at 260. If the price falls to 260 your order is automatically executed.
This is the simple method. The problem in this approach is that if the price do not fall to 260, you do not gain anything.
There is a better, albeit (a word which is so much better than 'but') riskier approach. It involves selling options. This is a method often used by Warren Buffet to lower his purchase cost.
Assume that ICICI Bank Rs.260 Put Option is trading at a premium of 8 rupees. You sell Put Option. This will immediately get 8 rupees in your account. If the price of ICICI Bank do not touch 260 in that month, you are richer by 8 rupees. Assume that the price falls to 258 at the end of the month. You will be expected to close your Option Sell by buying ICICI Bank share at a price of 260 which was your original purchase price. 
Net-net, you paid 260 rupees for a share of ICICI Bank and received 8 rupees. That makes your purchase cost for ICICI Bank share to Rupees 252 per share.
If you had used Limits, your purchase price is Rs.260. By using Options, you have reduced it further by another 8 rupees. 
This is simple process but with a few Caveats.
One, if you are working with options, you have to transact in a given lot size. For example, the lot size of ICICI Bank is 1700. This means that if your option is exercised (share price falls below 260) you have to buy 1700 shares of ICICI Bank. This will make this approach unattractive for many small investors.
Two, having an open 'Sell' position in options is very risky. Theoretically you can incur huge losses with an open position in options. Be very careful.
Three, I have not considered brokerage charges. Normally, brokerage is very high for option transactions. Brokerage could make the above trade unattractive. 
Four, Options are highly knowledge intensive and concepts intensive. Never venture into Options trading without having a rigorous conceptual understanding of Options and the risks involved.
For taxation purposes, Option trading is considered to be speculative transaction and the income is considered to be speculative income and is treated as such. Get a clear understanding of the tax implications before trading actively in Options. 
A Big Note: Author do not encourage a retail investor to trade in Options.

Friday, November 13, 2015

Brian Tracy: Getting Rich Your Own Way: Chapter Summary

To read a high level summary of the book, click HERE

In the introduction to the book 'Getting rich your own way', Mr.Tracy divides the general population into two groups. The first group, the wealth and successful people are the 'Action oriented people'. they believe in taking quick action and getting things done. The second group is the 'Talking and wishing people' who wait for things to happen to them.

To understand how to become rich, it is important to understand the factors that keep people from becoming rich. There are five reasons. First reason is that it do not occur to people that they could become rich. Their reference group consists of people similarly placed as they are. Second reason is got to do with a decision. Path to riches starts with a decision to become rich. Some people, due to various factors, do not take that decision. Third reason for people not becoming rich is procrastination. They wait for the right moment to take action which (right moment) never comes. Fourth reason is that people are not ready to pay the price by delaying gratification. The last reason why people do not become rich has got to do with their view of time. Being rich needs effort over a longer period of time. They longer the view of a person, the higher their chances of being rich and successful. The longer your time perspective, the goals will be long-term and the plans will be long-term in nature. You will become sensitive to how you spend your time.

There are five ways to become wealthy. They are:
  1. Become an entrepreneur
  2. Work your way up in an organization
  3. Become a self-employed professional
  4. Become good at sales
  5. All the rest
The good news is that you have some assets that you can leverage to become successful. These are:
  1. Specialized knowledge
  2. Skill: Better you are at your job, more you will be paid
  3. Money raised through savings, cash reserves or debt
  4. Network: The people you know. There are three things that you can do to expand your network. Make a list, network regularly and get involved in your community
  5. your creativity: One great ideas is all you need
  6. Good work habits
  7. A positive mental attitude
  8. The luck factor: Be prepared to receive luck. Try different things. Have clear goals and a plan of action. Clear goals lead to 'Law of attraction'
  9. Personal energy
  10. Choosing the right vocation
Do not accept any limits on your quest for success.

Chapter 2: Become a money magnet

The starting point of becoming wealthy is ‘Prosperity Consciousness’. You must become wealthy in your thinking before you achieve it physically. The first step in you path to become wealthy is the decision to change your thinking and impress in your mind the absolute faith that you can and will become a billionaire.

How you use your mind determines everything that you are or ever will be. You are just a mind with a body you use to carry it around.

There are three universal laws that one should use in one’s journey to become a billionaire. First is the law of expectation. This law says that whatever you expect with confidence – positive or negative – becomes your reality. If you confidently expect to become a billionaire and hold to that belief and act as if becoming a billionaire was inevitable, you will eventually become a billionaire.

Successful people expect to succeed in advance.

The second universal law is the law of attraction. This law says that your thoughts create a force field of energy that radiates out from you and attracts back into your life people and circumstances in harmony with those thoughts. Your main job is to keep your mind fixed on what you want and off what you don’t want.

Law of correspondence says that your outer world is like a mirror that reflects back to you what is going on you our inner world. As per this law, everything that happens outside of you corresponds to something happening inside you.

The laws are neutral. They can work for you or against you depending on the thoughts you choose to think.

If you passionately, madly want to become a billionaire, you will become a billionaire.

To become rich, one should think like rich people. You should try to find out how they think and try to imitate the same. One way to become rich is by following the law of accumulation which states that a great success is just the accumulation of many small successes. There are three areas where the law of accumulation is important for financial success. These are knowledge, money and experience. It is very important to continually accumulate all  the three to become wealthy and successful.  You must be serious about becoming successful. Also you must take charge of yourself. This means taking charge of your thoughts. Next step is to take charge of your actions. The first step in becoming rich is to have a reason why you want to be rich. Your goals must be specific.

The practical way to achieve your goals is the power of visualization. Create a clear mental picture of your goal as if it has already happened. The clarity of your mental picture will determine how rapidly your goal will come to light in real world.  Use the power of visualization to see yourself actually doing things to achieve your goal. This is called ‘Causative thinking’. There are four factors that can multiply the power of visualization. They are length of visualization, frequency of visualization, intensity of visualization and vividness of visualization. One way to increase the power of visualizations is the ‘Treasure Map’. Create a poster and put your goal and a picture of yourself. Surround the central image with a picture of clippings from magazines and news papers that support your goal. Practice positive affirmation like ‘I can do it’, ‘I make it happen’, ‘I make a billion rupees’, ‘I am the best’ etc

Other actions that you can take include reading about successful people, study your business and industry, attend to podcasts in your car, take courses and attend seminars. Another step is to be around successful people. This step, vis. Changing your reference group is mandatory to achieve success. Visualize your goals before you go to sleep. Finally start your day in a thoughtful, productive way that sets you up for the challenges ahead.

Chapter 4: Start with nothing.

There are four steps to success in any venture. These are desire, decision, determination,\ and discipline. One of the reasons why people do not achieve financials success is that they associate spending with pleasure and saving with pain. Another manor strategy to accumulate wealth is to decide ‘not to lose money’. ‘Low debt’ and ‘Slow and steady wins the race’ are two strategies that the rich people have followed over time. One of the reasons why businesses fail is that  the entrepreneurs do not know how to make a business successful. The tow key reasons for business failures are poor sales and low cost controls.

The five keys to business success are.
  1. Plan, organize and get results
  2. Market and sell – One should learn to sell
  3. Select the right people
  4. Become a good negotiator
  5. Learn to read financial statements
The five rules of entrepreneurship are:
  1. Find a need and fill it
  2. Find a problem and solve it
  3. Focus on the customer
  4. Bootstrap your way to success
  5. Walk before you run. Be prepared to pay the price
Seven steps to business success are:
  1. Set specific financial goals
  2. Offer a superior product
  3. Start small and grow slowly
  4. Test before you invest
  5. Grow from your profits
  6. Selects people carefully
  7. Use financial leverage
Chapter 5: Build your business

Seven principles of business success are:
  1. Start at the beginning: Does your service solve and existing problem for a customer?
  2. Offer good quality oat fair price
  3. Practice frugality at all times. Remember if it is not revenue, it is expense
  4. Maximize marketing: Sell, sell, sell
  5. Love your customer
  6. Develop a complete business plan before starting: The exercise of creating a plan will focus the entrepreneur to think through the critical issues that are involved
  7. Never give up: Determination, persistence and patience goes hand in hand with business success. It takes time to succeed. Normally it take stow years to break even and four years to reach profits.
As per the factor of three, a new product or service must be better than its competition in at least three ways. Success rate for new product is only 10% while the success rate for improved products is 80%

Question to be asked and answered to succeed in business.
  • Is your product suitable?
  • Have you analyzed the market?
                Is there a market for this product?
                Is the market large enough?
                Is the market concentrated enough?
  • Who is your customer?
  • Why would they buy from you/
  • What are the alternatives?
  • What does each customer cost?
Seven great marketing questions.
  1. What exactly is the product or service, in terms of what it does to change or improve life or work of customer?
  2. To whom it is going to be sold exactly?
  3. At what price is it going to be sold to the customer?
  4. How is it going to be sold to those customers at this price?
  5. Who is going to sell it in this way to this customer at this price?
  6. How is it going to be paid for and when?
  7. How is it going to be produced, delivered and serviced?
16 approaches to finding a product or service to sell
  1. Start with yourself: Identify customer needs that are not getting satisfied in your area of interest
  2. Look for a product or service that excites you
  3. What can you improve upon?
  4. Find ways to offer value
  5. Keep your eyes open: Review the ‘Business opportunities’ column in the news papers
  6. Read trade magazines in your field
  7. Attend trade shows and exhibitions to learn about new products or services
  8. Ask friends about ideas to sell or distribute
  9. Keep current with business magazines. Look for ads for new products or business opportunities
  10. Look for products worldwide. Seek out hidden opportunities
  11. Introduce something new and different
  12. Look under your won feet. It is estimated that people have four ideas each day when they drive from and to to work
  13. Keep eyes open when you travel
  14. Move quickly on opportunities
  15. Continually scan the opportunity radar
  16. Find something you like and believe in.
Some approaches to doing market research
  1. Do your homework. Try the product and see how you feel
  2. Find out what others are saying
  3. Ask other peoples opinions
  4. Ask your bank manager for advice
  5. Ask friends and family for input
  6. Get a customer’s opinion
  7. Study your competition
  8. Become a pessimistic optimist. Try to find the fatal flaw in your products
  9. Look for hidden possibilities
  10. Think long-term
  11. Be open to negative inputs
Chapter 6: Market and sell anything

Five questions to answer before making a sale are:
  1. Why should I listen to you?
  2. What is it and what does it do? Product Feature
  3. Who says so? Testimonials
  4. Who else used it?
  5. What do I gt? What is in it for me?
Various ways to sell. (Is your phone ringing?)
  1. Personal sales
  2. Retails sales
  3. Distribution
  4. Newspaper ads
  5. Direct mail
  6. Mail Order
  7. Internet
  8. Direct selling
  9. Seminar selling
  10. Party plan
  11. Co-op mailing
  12. Government sales
  13. Manufacturer representative
  14. Chain stores
  15. Discount stores
  16. Supermarkets
  17. Department stores
  18. Premium sales
  19. Franchising
  20. Displays and exhibits
  21. Wholesale
  22. Advertising specialty (Gifts)
  23. Trade shows
  24. Fund Raisers
Opportunity Gap Analysis:

10 questions that one cans ask to find newer or better ways to distribute your product or service
  1. What other ways you could sell the product/ Take an existing product and find a different way to sell it (Home delivery of vegetables, for example)
  2. What additional customers are there for this product? Find new customer base
  3. How to modify the existing product to make them more attractive to your customers? Change packaging, functionality, increase size, reduce complexity etc
  4. What non-customers could you develop for this product? Identify customers who are not using any products (Story of an island where people do not wear footwear)
  5. What new products do your existing customers want?
  6. What additional methods of distribution exist for the product?
  7. What additional products could you distribute through your existing marketing channels?
  8. What new products could you develop for your existing distribution channels?
  9. What new markets exist for your new products and your current distribution channels?
  10. What additional products could your produce with your existing facilities?
11 rules to get free publicity
  1. Ask for it
  2. Prepare a press release
  3. Make it newsworthy
  4. Pinpoint your audience. Identify media channels used by your key customer segment
  5. Select your media carefully
  6. Create good working tools. Get goo letterhead, write good copy etc
  7. Send a photograph of your product in use
  8. Use direct mail. Identify food expert of TOI for example.
  9. Go on radio or TV. Prepare a fact sheet for the announcer. Prepare a summary of the benefits and interesting features of your product or service
  10. Offer something free
  11. Leave information behind
Chapter 7: How to get the money you need

There are three reasons why people do not follow up on their dreams. One, fear of failure, two, ignorance and three, lack of money.

This chapter addresses the third aspect of the above, vis. Getting the money that you need.

Various ways to raise money.
  • Your own savings
  • Selling assets
  • Credit cards: Raise your credit value while working and borrow off your card. This can be very expensive
  • Personal loans: Create a borrowing history by taking loans and paying them back
  • Borrow against collateral, gold loans for example
  • Love money. Money from friends, relatives, parents etc
  • Business loan from Bank. Before taking a loan, banks look for the following five factors
                Credit rating
  • Lease or rent: Especially during early stages
  • Bootstrap: Start small, reinvest your profits
  • Customer financing. Get customers to pay:
                Use payment terms: Tighter for the customers and looser for the suppliers
  • Subscription: Get the customer to pay the entire year payment before receiving the first issue. Reader’s digest model.
  • Sell online. Get paid first and then deliver services
  • License the right: AMC Model
  • Retainership
  • Multi-level marketing: Use sample to get the sale
  • Factoring the receivables: Take loan based on Purchase order from a customer
  • Franchise: Expand the business by selling the rights to use the business system
  • Venture Capital: There are three requirement for raising VC
                Proven success record
                Submit a complete business plan
                Competent management team
  • Small business loan from Government
  • Initial Public Offerings
  • Supplier Financing: Ge supplier to finance you with liberal terms initially.
Chapter 8: Think and grow rich

There are various ways to stimulate your thinking. These include:
  1. Positive thinking
  2. Clear goals and objectives. You become what you think about most of the time. Regular focus on goals stimulates the conscious and the sub conscious minds. Thinking about your goals activate law of attraction and begins attracting to your life people and circumstances that can help you achieve your goals
  3. Stimulate your curiosity. Develop a questioning and curious attitude. Use ‘why’ effectively.
  4. Stimulate your mind by reading books, attending seminars, listening to audio courses etc
  5. Practice creating visualization. Continuously imagine and visualize  your goals as if they are already achieved
  6. Learn to laugh at yourself
  7. Get physically active
  8. Practice intense concentration. Focus on one thing intensely over long period of time. It could be data gathering, problem formulation and defining the problem in different ways etc. The more you concentrate, the more your intelligence is available to you.
  9. Expect the best. Expect to be successful
  10. Take charge of your life. Every time you face a problem, immediately seize control of the situation by saying ‘I am responsible’. When you accept responsibility you immediately take charge of the situation
  11. Develop a burning desire. You must have an intense desire to develop your potential as a person.
Three qualities of a Genius
  1. Single minded concentration for a long period of time till a goal is achieved
  2. Systematic approach to solving problems, investigating, questioning and making decisions. They think on paper. They write down their thoughts and ideas. Thinking on paper makes a creative thinker.
Here are some steps to solve problems systematically
  1. Define the problem clearly in writing
  2. Make a list of all the causes of this problem
  3. Identify all possible solutions
  4. Select what appears to be the best solution at the moment. Do not strive for perfections
  5. Assign responsibility for the solution to a single person
  6. How to measure the success of the solution
  7. Set deadlines for implementing of the solution. Please note that any solution is better than no solution.
  8. Keep an open mind. Practice adaptive thinking as against mechanical thinking Adaptive thinkers keep the question open as long as possible, avoiding the tendency to jump to conclusion
There are three ways to stimulate your creative thinking. These are intensely desired goals, pressing problems and focused questions

Ways to get rich your own way
  • Keep an idea log
  • Relax and reflect. ‘Go into silence’ and let your mind float
  • Magic wand technique. Practice the exercise of fantasizing at regular intervals. Use an imaginary magic wand to magically remover your obstacles. How will your life look like when your goals are achieved? What is the first step that you have take right now to achieve your goals?
  • Project forward and think back. What would a successful you look like? How will you be thinking and acting? How will others look at you? What Will you be doing? How will you use your success for betterment of society, for building inner peace and serenity? What should you do now to achieve that success/
  • Complete the sentence. Create a partial sentence and try to find multiple ways to complete it. You can use this approach for personal growth.
  • Generate personal answers
                I could achieve my goal if I.....
                I could start a business immediately if I....
  • Practice ‘mindstorming’. This is also called 20 idea method. Write down the problem statement on th top of a white sheet of paper. The tone of the question is positive and enquiring. Then write down at least 20 answers to the question. Initially it will be easy to answer. However last 10 answers can be very difficult. However if you practice long enough, you will find that you have many solutions to every one of your problems
  • Practice brainstorming or mastermind technique
  • Ask ‘What if’ questions. ‘What if it were like that..’, ‘why is this situation like this...’ etc
How to evaluate your idea?

Not all ideas are good or workable. Once you have an idea, you should evaluate its feasibility. Here are some ways to do that.
  • Determine if the idea is valuable
  • Remain objective. Do not fall in love with your idea. Ask various people about the idea. Be ready to throw away the ineffective ones.
  • Let them cool. Give ideas time to become clearer
  • Ask right questions including
                Will it work
                What it takes
                Is it simple (Most important)
                Will it significantly improve the situation
  • How badly do you want it? Is it compatible with your values and dreams?
As per the law of manifestation, physical things are just the manifestation of inner thoughts. Everything is first created in the mind. The point made in the chapter will help you create your success first in your mind before it manifests in the outer world.

Chapter 9: Learn from the best

Five qualities of great people:
  1. They display common sense: Ability to have experiences, reflect on the same and learn general rules from those experiences that can be applied across other situations
  2. They act intelligently. Intelligent action move you forward to your goals
  3. Expertise: Mastery of the domain
  4. Take charge of t heir lives. They take responsibility for whatever happens to them. They avoid blame game and let the past go
  5. They get the job done. They develop result orientation. Focus on getting the jobe done well and quickly. They set goals, objectives and priorities. They focus on what is important and stick to it until it is completed
Think in terms of hourly rate. This will help us use our time better than the rest. Identify you top three tasks list and focus on completing them

Qualities of leadership
  1. Vision: Have a clear vision of the ideal future. Practice imagining your ideal life 3 to 5 years hence. Imagine yourself being described as a successful person
  2. They have a deep sense of mission
  3. They practice optimism. Have unrealistic expectation of success. This will help you try more things. Once you try more things, you will succeed in more things.
  4. Know your business inside out
  5. Look for opportunities
How to find your opportunities
  1. Collect information. Attend seminars, listens to podcasts, read journals, magazines etc
  2. Visualize yourself as successful. Create a clear picture of how you will look, walk, dress, talk etc once you are successful. Combine visualization with action
  3. Keep your eyes open for opportunities. Look for problems in your working area. Start small with customer financing. Look for solution that can be widely applied. Look for solutions that can be sold by ordinary, competent sales people. Look for problems that really works and that can sell itself by word of mouth.
Study successful companies
  1. How does a company attract customers?
  2. How does thee company sell? What are the selling techniques? What are the successful selling methods? What kind of warranties and guarantees doe it give? What kind of follow up service it gives to it its customers?
  3. Who buys the product or service? What type of customers does sell to? Who are the customers for a specific product or service
  4. How does the company charge?
  5. How much does it charge? Does it require a down payment? What terms does it give?
  6. What does the company include in its sales?
  7. Where does the company sell?Cities? States? Location in cities etc
  8. How does it retain customers?
Twelve keys to following the leaders
  1. Find out everything you can about the top people
  2. Copy everything that people are doing to achieve success
  3. Admire your successful competitors. Never disparage your competition
  4. Look for formulas of success that you can transfer or adapt from one industry or business to another
  5. Look for areas in the field where big profits are being made
  6. Look at what small businesses are doing successfully and then consider the possibility of building a large organization doing the same thin on a large scale
  7. Look what established giants are doing and then provide customers with less expensive alternative
  8. Look for an area where you can use speed and flexibility to offer products faster and cheaper
  9. Find a way to improve best selling products
  10. Always follow the leaders Don't go in first with a new product or service
  11. Borrow good ideas from others
  12. Learn continuously. Never stop learning
  13. Finally try, try and try again. No one has been successful without trying.
Chapter 10: Lead the field.

Some of the rules for health, wealth and happiness
  • Do what you love to do. Analyze and decide on your natural talent and abilities and choose career accordingly. You should strive to do stuff that give you enormous amount of satisfaction and pleasure
  • Identify7 your core competencies. Identify the area of work where you can make the greatest contribution
  • Throw your heart into what you do
  • Commit to excellence. Dedicate yourself to life long learning. Get better at what you do
  • Become a life long student
  • Save at least 10% of your income
  • Do a great job where you are. Develop special talent and work in an area where your talent is valued.
  • Strategies to put your career on a fast track
  • Make yourself indispensable.
  • Work harder than anyone else. Develop a reputation for very hard work. Start earlier, work harder, stay later
  • Work all the time you work
  • Invest the extra time
  • Transform your career. Resolve to start one hour earlier. Work through lunch time. Sine everyone is out for lunch, this will give you one hour of uninterrupted work time. Resolve to work on hour longer than anyone else by staying later in the day.
  • Accept 100% responsibility. Be clear with your boss regarding the most important things that you do for the company. Take over tasks from your boss that can handle. Always ask for more
  • Step on your own accelerator. Work on priorities and do the job quickly . Have a sense of urgency.
  • Develop a niche strategy. Create a niche strategy to improve the cash flow of the company. Identify the activities of the company that can affect the cash flow. Six such activities are.
  1. Marketing and sales: Identify ho to sell better and how to improve the collections
  2. Finance: Learn to deal with banks, Venture Capitalists and other source of cash flow
  3. Production. In a company with stable sales forecast, a production engineering, ensuring continuous production  is the key resource to improve cash flow
  4. Distribution channels: For some companies distribution channels are the greatest sources of cash flow. If you can get into a position of impacting distribution channel, you can add value to the company’s cash flow.
  5. Labor relations
  6. Government relations
  • Develop specialized knowledge
  • Do things faster. Move fast on opportunities. Get reputation of speed
  • Build your network
  1. Develop a ‘Strategic Networking Plan’
  2. Successful managers, who got promoted often, spend 54% of their time networking
  3. Know more people. Get known to more people
  4. Join an organization that will help you build the network
  5. Talent X Relationships = Productivity
  • Learn public speaking
  • Be the best
  1. Identify KRAs
  2. Identify the weakest skill and continuously work on it
  3. You could be one skill away from maximizing your productivity, performance, output and wealth. Learn new skills
  • Develop good work habits
  • Develop a power base. Develop personal power, expert power and position power in that order.
  1. Use law of reciprocity to your advantage
  2. Make a list of people who can help you start by helping them
  • Guard your integrity
  1. Be trustworthyTrust yourself. 
  2. Be true to yourself. 
  3. Keep your wordLive your life as if your every act were to become a universal law
  4. What kind of world / country / company / family would it be if everyone in it were just like    me?
  • Focus on the future. It only matters where you are going
  • Work on your talents. Every leader was a follower once. They rose to the leadership position by working on their talents.
  • Start where you are
  • Develop a prosperity consciousness. Think of yourself as a work in process. Writ and rewrite your goals. Make and regularly review detailed plan to achieve your goals. Your outer reality is the expression of your inner thoughts and beliefs.
Get going and keep going. Never give up!!

Thursday, September 10, 2015

Book Review #27: Getting Rich Your Own Way: Author: Brian Tracy

To read the detailed chapter wise summary of the book, click HERE

The objective of the book 'Getting rich your own way' written by Mr.Brian Tracy is to provide a set of ideas and concepts that, if put into practice, will help one achieve their financial potential. The book does not focus on a single approach to building wealth and the preponderance of  insights, guidelines, concepts and inspirational inputs makes this book a must read for anyone who has a goal of becoming wealthy.

What makes this book very valuable are the actual contents. This book is filled to the brim with useful contents. Mr.Tracy uses a broad brush and touches upon almost everything. At some places this book reads like a study guide on investing. At other points, it is an inspirational book and at others, it is a compendium of common sense based practical approaches. 

Mr.Tracy is a marketing expert. If there is one theme that covers the entire book, it is the importance of marketing and selling on one's path to riches. It is possible to become rich without knowledge of marketing, avers Mr.Tracy, but the path becomes much more easier if one  has expertise in marketing. 

As pointed out in the book, there are many routes to riches. One of the routes, chosen by most of the millionaires in America, is the path of owning and running a business. Almost 70% of millionaires in USA run their own companies providing products and services that the public wants. A chapter is dedicated to running a real estate business. 

Almost 10% of millionaires work for others, especially in the areas of marketing and sales. Mr.Tracy spare no effort in emphasizing the importance of marketing skills. He exhorts the reader to take classes, update themselves in the latest concepts in marketing, sales and finance and learn from the experiences of great marketeers. 

Author points out that almost 98% of people do not achieve their financial potential because they do not have clarity regarding their goals and wants. Without that clarity, people get confused about what they want and how to approach and wander from one situation to another like a flitting butterfly. Author emphatically recommends writing and rewriting ones goals on a daily basis to ensure clarity and focus. Clarity of goals will provide the energy to take action to achieve those goals. 

The book emphasizes four aspects if one wants to become rich. First aspect is the mind. Everything that is created by man started off as a concept or idea in the mind. This means that one has to work on making oneself mentally ready to become rich. We discussed one aspect, goal clarity, already. The other mental aspects of equal importance are maintaining a positive approach to life. One should consciously strive to remove negativity from the mind and replace it with positive thoughts. Optimism help people to expect success and motivates them to try different stuff in their quest of success. Final aspect of working on mind is to accept responsibility for what happens to oneself and not to blame others or environment for the outcomes of one's actions. The third aspect about mind is the emphasize on idea generation. Path to wealth starts off with great ideas. Creativity is what generates ideas. Author lays a lot of stress on developing creativity that he has dedicated one full chapter to that topic.

Second aspect is the bias for action. It is not sufficient that one has a lot of ideas. One should also take quick action to validate, accept / discard one's ideas. This will remove the clutter in the mind space and create space for new ideas to flow. Until one takes action to convert ideas from the mind to the physical realm, one cannot make progress. As the author quotes in the book, 'You just need the last idea to succeed to become wealthy'.

Third aspect covered is the importance of continuous and life-long learning. The book provides a number of options for one to learn new stuff. Since the world is changing rapidly, only continuous learning can help one keep up with the changes and take advantage of the same.

I have already covered the fourth aspect of the book, which is the importance of marketing and sales in ones quest for wealth. All the successful individuals had one thing in common. They had faith in their ideas and had the ability to communicate the benefits in simple terms to the customers. Fortunately, marketing skills are learnable and one should definitely consider upgrading one's skills in this area as a part of continuous learning, the third aspect covered above.

Finally, there are two features of the book that I want to bring out. Each chapter start and end with relevant quotations. There are two quotations that I liked more than others. One is "The future has many names. For the weak, it is 'The Impossible'. For the fainthearted, it is 'The Unknown'. For the thoughtful and valiant, it is 'The Ideal' -- Victor Hugo ". The other quote that I liked was "The grass is not in fact always greener on the other side of the fence. Not at all. Fences have nothing to do with it. The grass is greenest where it is watered -- W.Somerset Maugham".

The other feature is the 'Action Exercises' featured at the end of each chapter. These detail specific actions that the reader has to take to apply the ideas mentioned in this book. The action exercises move the book from the theoretical, conceptual and advisory level to the practical realm.

Now time for some cribbing.

Books by Mr.Tracy are darn difficult to review. I have read his book 'Goal' and I just finished reading 'Getting Rich Your Own Way'. The fact remains the same. Mr.Tracy's books are filled with memorable points, ideas, concepts, practical applications and wisdom in every line. It is difficult for a reviewer to capture the essence of these books since entire book is the essence.

Still a reviewer must try. Reviewing books is his task.

In the review of the book 'Lords of Finance' published in this blog, I had underscored the importance of a well-structured book. The table of contents should give the reader an idea of the high level layout of the book. Knowing the layout will make it easy to follow the book as one progresses reading it. 

The trick is to make the Table of Contents of a book like an aparitif. It should provide an initial interest in the book and should generate curiosity to continue reading. The TOC should neither be too terse, nor be too elaborate. 

That is where this book fails the initial test. For a smallish book of about 250 pages, the TOC is far too detailed. 

And once you go inside, the book demands a lot from a reader. The book is filled with headings and sub-headings and sub-sub-headings, printed in fonts of all sizes and types, be it bold, italic, center aligned or left aligned. Too much structure in the book make one's head go round as one tries to put all together. 

Too many discrete contents, if you see my drift.


As I mentioned at the beginning of this review, if you have a goal of building wealth, reading this book is a sine qua non.

If you do not have that goal, perhaps you are not reading this book.

Friday, August 28, 2015

Book Review #26: The Lords of Finance: Author: Liaquat Ahamed

Ambitious in scope, bold in execution, lyrical in prose and grand in its vision, the book 'Lords of Finance' tells the story of 4 Central Bankers, Montagu Morgan of Bank of England, Benjamin Strong of the Federal Reserve Bank of New York (New York Fed), Hjalmer Schacht of Reichsbank and Emile Moreau of Banque de France, who controlled and guided the financial destiny of the world during the tumultuous period of early 1900. This book covers the seminal events of the early 20th Century, World War I of 1918 followed by a brief period of global economic boom culminating in the great depression of 1929 and its aftermath leading to World War 2 and beyond.

In the introduction to the book, author Liaquat Ahamed, lays the base for the rest of the book. He starts of by discussing the terrible global consequences of the great depression - of global economic crisis, food wars, closed factories, high level of unemployment and sustained deflation. The global depression of 1929 lasted for almost 10 years and led to an entire lost generation. Another major impact of the depression was the rise of Xenophobia and the rise of Hitler and the Nazis in Germany, which would lead to terrible global tragedy (World War II) 10 years hence. Introduction also covers Gold Standard, where the value of the currency of each country was dependent on the quantity of gold possessed by the country. Since gold was hardly available world wide, Gold Standard led to restrictive credit flows and concomitant restriction on economic growth. Ebbs and flows in the availability of gold led to deflation and inflation in commodity prices.

Liaquat Ahamed wrote this book in 2008. As he was writing this, the world was experiencing similar economic depression as happened in 1929. Banks were imploding, unemployment was rising and global economy was entering into a recession. Central Bankers were trying their level best to bring order and control to global financial system, much like the protagonists of this book did at the beginning of the century. Nothing has changed except for technology. In that sense, the lessons of this book are still relevant today.

As a reviewer, what I like about this book is its structure. Liaquat Ahamed is a Finance Professional and his inherent need for order and flow reflects in this book. The book is divided into five parts, organized in chronological sequence. Part 1 titled 'The Unexpected Storm' covers the onset of World War 1 in 1914 and discusses the approach of each central bank to respond to the event. The efforts were un-coordinated and country specific. In this Part, the author introduces his protagonists detailing their career path. While the four central bankers are the key focus of the book, there are others - like Keynes and JP Morgan- who played a major part in the events that unfolded since.

Part 2 of the book, titled 'After the Deluge' covers the period from 1919 - 1923. The war had ended and the world was picking the pieces.

Part 3 of the book, titled 'Sowing a new wind' covers the period from 1923 till 1928. The global financial system had entered into a period of excess. Optimism abounded, the economies of the countries boomed and government, banks and investors started taking unwanted risks.

Of course, such excesses as was witnessed in the mid 1920's had to have their repercussions. This happened in the form of the ensuing depression from 1929 to 1933. The anatomy of this depression is captured in part 4 titled 'Reaping Another Whirlwind'

Part 5 of the book titled 'Aftermath' covers the period from 1933 to 1944 and discusses the hesitant steps the financial system was taking to come out of depression and stabilize the global economy. This initiative was thwarted when world entered into another world war in 1940.

If we human being have a flaw, it is our unbounded optimism despite historical evidence to the contrary. In the prologue, author talks about how, at the beginning of 1914, there was a certainty that a war, let alone a global war, was impossible. The world economy was inextricably linked through the flow of credit and the adoption of gold standard and any war would disturb this equilibrium and threaten the economies of all the players involved. Hence common sense suggested that the countries should not go to war !

Little did they know that a global war lasting four years was about to break out in a few months. Austria declared war on Serbia on 28 July, 1914. Initial opinion was that the war would last a maximum of six months. The economic impact of the war was felt within a few days across the world. There was run on the banks in Europe and stock exchanges across Europe were closed down. London stock exchange closed down next, first time in history. As central banks started printing currency, gold standard began to crumble. Dollar lost its value, and American businessmen who imported from Europe found themselves in payment crisis.

The responses of the Central Bank to the events impacting the country are inextricably linked to four factors. One is the savings culture of the country and the confidence that the citizens have on the stability of country's financial system. For example, both France and USA were able to raise money by selling government paper to its citizens to partly finance the war. This avenue was not open for Germany and the country was forced to print currency war leading to inflationary pressures.  Second aspect is the strength of the financial system and the financial prudence exhibited by the country. UK in the early 1900 was famous for its prudence which encouraged other countries to park their funds in UK. This ensured a steady flow of foreign capital to the country. Third aspect is the autonomy of the Central Bank. While Bank of England was relatively autonomous, Banque de France was an arm of the French Government. This meant that Banque de France had little autonomy in decision making and this weakened the financial system of the country. Final factor is the personality of the Central Banker and how they respond to crises that hit the country's financial system. Central bank is in the enviable position of having to maintain public confidence in the nation's banking system. For example,Montagu Norman, head of Bank of England, was very conservative banker and saw his responsibility as to keep London running as the credit capital of the world. Schacht of Germany was very hard working and ambitious, a trait he picked to contrast with his father who was not ambitious. Benjamin Strong of Federal Reserve Bank of New York was a crisis manager. Emile Moreau of France had grown in position by being close to the political class. While England was very conservative in spending during the war, France was very incompetent and ran up huge debt.

All the four countries were in some way prepared for the war since they had faced some form of Banking Crisis between 1907 to 1912 and had built up their Gold Reserves. However, the unexpected duration of the war (1914 - 1918) put strain on the finance of these countries and hence on the world economy at large.

By the time the war ended in 1918, the countries in Europe had already paid a heavy economic price. For one, the war had cost over 200 Billion Dollars which was almost 50 percent of their combined GDP. Second, the countries had taken recourse to debt financing (both domestic and international, mainly from US) and had mountain of debt to repay. Third, the countries resorted to printing currency to finance the war and the strong discipline of gold standard was violated.

It is fascinating to see how countries responded to these developments. Essentially, they had two options. One is monetary tightening to suck up excess currency from the system  bringing exchange rates in line with pre-war gold standard. This meant increasing the interest rates thereby squeezing the credit demand and sucking up currency from the system. UK under Norman resorted to this tactic. This led to about 6 years of economic contraction in UD, high levels of unemployment and lack of demand.  However, by 1922, the economy and prices had stabilized.

Second approach, adopted by Germany, was to accept the deviation from pre-war gold standard as the new normal by devaluing the currency.. Among all the countries in Europe, Germany was the most profligate in printing currency to finance an expected short war. However, as the war ended Germany was awash with paper currency. With the war having ended, the country was lacking goods to buy but with paper currency to spend. This led to unimaginable hyper-inflation in the country. German currency lost almost all its value.At the worst, the exchange rate was 11 trillion German Marks to a Dollar !!

Among all the countries US benefited the most from the war. Heavy demand of goods and services from war torn Europe kept the US Economy running. This also led to inflow of gold from Europe to US. At the end of the war, US had almost 80% of the gold in the world !. This had the impact of destabilizing the global gold standard significantly.

The key issue, that created further post war rift in Europe was reparations. Germany, being the instigator of war, was expected to pay back the costs to the victorious countries. Each victor had different demands. England demanded and atrocious sum of about 200 Billion Dollars, almost 5 times the pre-war GDP of Germany. France was more interested in segregating Germany to smaller countries with the aim of weakening the country.
These atrocious demands led to severe resentment in Germany and culminated in the disintegration of monarchy and the creation of German Republic.

There were saner voices which cautioned that demands for huge reparations would only weaken Germany  and thus the entire Europe. Once such voice was that of Montagu Norman, head of Bank of England. Another one was that of Keynes. It is gratifying to note that over the years, saner voices prevailed and the reparation demand came down to about 12 Billion Dollars, payable over an extended period of time.

The period from 1923-28 affected different countries in different ways. For Germany it was the elevation of Hjalmar Schacht to the position of the head of Reichsbank. The policies adopted by Schacht saw the gradual recovery of German currency and subsequent deluge of foreign funds into the country. The year of 1924 also brought in the Dawes plan that finally resolved the issue of German reparations. This period also saw the elevation of Moreau as the head of Banque De France. Initial part of the period saw French Frank tanking to almost 40 per dollar (from a pre-war rate of 5 per dollar) before smartly recovering to a managed rate of about 18 Franks per dollar.

The country worst affected during this period was Great Britain and this has got to do with the country aggressively moving towards pre-war Gold Standard levels. This decision led to increase in interest rate curtailing the money in circulation. Increase in rates also led to reduction in business activities leading to high level of unemployment and dissatisfaction in the country. At a time the economy needed stimulus and expansion, the country did exactly the opposite and paid a great price. It is worth pointing out that both Germany and France had anticipated this possibility and had resisted the return to the pre-war level gold standard.

Yet another reason for England taking this wrong decision was that Winston Churchill, who was not an economist, was the Chancellor of Exchequer during this period. Due to his lack of knowledge of Economy, he was forced to take decisions based on economic advice received from experts, even though in his gut he knew that  return to gold standard was a wrong decision.

This decision is all the more surprising since, Kaynes, who had vociferously opposed the return to pre-war gold standard fearing exactly this outcome, was a friend and confidante of Churchill. That the land of Keynes acted against his recommendations while other countries followed the same is perhaps the greatest irony of it all.

Meanwhile in the US, economy was expanding and the stock market was on a roll. The Dow went from about 70 in 1923 to about 160 in 1927 leading to fears of a stock market bubble. However, it corrected by about 10% in 1927 and was range bound in that level for much of 1927.  There were clamours for Central Bank to intervene in Stock Market which Strong actively resisted. He did not want the additional responsibility of managing the stock markets to affect his focus on price stability and economic growth. This period also saw the beginning of speculative excesses in the US that will turn to Irrational Exuberance (Bubble) leading to the crash and the great depression a year later. The fag end of this period also saw the passing away of Benjamin Strong, the head of US Fed.

The bubble in US stock market started in the summer of 1927. By early 1928, Dow was trading at 200, a 30 percent jump in just six months. Through the year 1928, Dow continued rising creating concern in the policy makers. George Harrison, who succeeded Benjamin Strong in New York Fed wanted to raise the interest rates. However there was difference of opinion between the N Y Fed and the Federal Reserve Board on how to handle the bubble. Fed wanted to raise interest rates while Board was in favor of direct intervention into the financial markets by asking banks to stop providing loans to brokers. Fed recommended ten times to raise rates and board vetoed it all the ten times.

Dow touched a peak of 381 on 3 September 1929. By July of that year, signs of impending crash was apparent to experts. Most of the professional investors sold off their positions by July and had made money in the market. That left retail investors ('Boot Blacks, House Servants and Clerks'), many of them women, carrying the can as the market started collapsing.

The curious aspect of the bubble was as follows. The president of US, Mr.Hoover was warning about excessive speculation, the Congress - both House and Senate - were for legal intervention to control speculative markets, NY Fed and other Fed Banks wanted to increase the discount rate to control money supply to burst the bubble and the Federal Reserve Board wanted to control the credit flow to the stock market (direct intervention) to apply brakes on excessive speculation....Despite all these efforts, the bubble persisted, immune to the efforts of the policy makers.

The flow of money to US Markets negatively impacted the economies of European countries, especially Germany and England. Both countries were tied to the gold standard and so the gold flowing out of their countries into the US Markets, thereby weakening their economies and driving Germany into recession, second time in a decade.

By August, saner voices began shouting about an impending market crash leading to a crash landing of the economy.

The period also bring to sharp focus on the personality clashes of  the Central Bankers. The key player in this drama was Morgan. He was very friendly with Strong and took a personal liking for Schacht. However, he disapproved Emile Moreau, a feeling which was reciprocated, and at various points his personal dislike of the French hampered effective resolution of issues. Moreau on the other hand disapproved of British attempts to return to pre-war gold standard and felt that Britain was trying to elevate the pound sterling at the cost of French Franc.

Finally, this period also saw the Central Banks coming out of the shackles of war and asserting their independence from the Bureaucracy. For some like Morgan and Schacht it was easier than for Moreau, but all of them managed to handle the challenge quite effectively.

British went out of gold standard in 1928. British pound was devalued and the economy entered a growth path. However, France, which was holding about 100 million in pound sterling lost heavily due to this devaluation. Bubble in the US dried up the flow of foreign credit to Germany and pushed the country to recession.

From a peak of 381 in early September, Dow had fallen to 250 by November of that year, a fall of 40% in a span of two months. Initially experts viewed the fall as good and that this will not affect the 'Main Street'. However as the year 1930 started, the economy entered into a deep correction as public had stopped spending. Fed tried to pump prime the economy to no avail.

In the year 1930, global economy collapsed. Industrial output was down, unemployment increased and prices started falling leading to deflation. Gold started flowing to relatively stronger economies like US and France. Countries like Argentina, Australia and Brazil left gold standard and let their currencies devalue (Same thing is happening now. China has devalued Yuan, Brazilian currency has devalued by about 30% in 2015).

Even while economy was collapsing, the Banking System in the US remained stable till the end of 1930. In late 1930, there was a run on Bank of United States (BUS) which collapsed. Anxious of the safety of their deposits, investors across the country started withdrawing their deposits from the banking system. People were keeping their money everywhere but in banks. Banks in turn started calling back their loans to ensure capital adequacy. The effect of this, along with US and France accumulating Gold was to reduce the credit flow to the system, just  as the economy was rebounding.

The pressure on the banking system continued through the year 1931. Many banks across the country declared Bankruptcy. Board could have intervened to prevent this catastrophe. However, the feeling was that this will rid the economy of inefficient banks and economy will rebound stronger. Governors of states across the country started declaring Bank Holidays to stop the run on the banks.

Harrison of Fed and other experts felt that such kind of piecemeal approach will not work and requested President Hoover to call a Bank Holiday across the country. By now it was clear that there was overhang of pessimism in the county and Hoover would lose the General Elections which were to take place by end of 1932. Hoover did not want his last decision as President to close the Banks across the country.

A single statistic puts the entire US recession in perspective. Dow Jones Index, which closed the day of 3 September 1929 at 381, stood at 40 on 8 July 1932, a fall of 90% in less than two years !!!

It was in this situation that Franklin Delano Roosevelt (FDR) sworn in as President of the United States.

The first decision that FDR did was to declare a national Bank Holiday for 10 days. As paper money became scarce, people resorted to innovative arrangements, including Barter, to carry on financial transactions (churches accepted IOUs from parishioners, for example). FDR used this window to delink from Gold Standard and devalue US Dollar. Over the next two years, the devaluation of US Currency continued, by end of which the currency had devalued by almost 40 percent. Devaluation of Dollar coupled with other policy measures initiated by the government turned around the economy.

During FDR's first term from 1932-36, US Industrial Production doubled and economy expanded by 40 percent...

Meanwhile Germany moved from one economic crisis to another leaving most of its adult population unemployed. This led to a lot of upheavals and led to Hitler taking over as the Chancellor of the Country in 1933. These chain of events finally led to World War 2.

The decade of 30's was also the time when Keynes star started shining. The events in the past decade had proven right in most of his opinions. From the mid of 30's he played a key role in the Bretton Woods conference organized to regulate the international monetary order post World War 2. Keynes understood that one of the key reasons for the crisis of the past two decades was that each country was taking its own decisions, with out any global co-ordination. The need for the hour was an international organization that can co-ordinate the activities of various central banks. This organization, which was named IMF, could also lend money to countries to help them tide over temporary crises. IMF founded in Bretton Woods in 1945, continues to play its key role even today.

What were the mistakes committed in the 1920s that led to the Global Recession? How could  the bankers have handled it differently. Author sites two reasons. One is the illogical adherence to the Gold Standard. This unnecessarily strengthened the country currencies and impacted the economic recovery. Second mistake was insisting that Germany pay reparations for World War 1. Author points out that while Europe started with a demand of 32 Billion from Germany, all that they could get over almost 13 years was 4 Billion !. However, demand on reparations took away the focus from the more urgent task of Economic Recovery.

Lessons of this book are still relevant. The world is still experiencing the impact of the great recession that started in 2008. Just like the previous recessions, this one also started with reckless banking practices and countries had to bail out their financial sector.Last recession proved that the only way for countries to come out of recession is monetary expansion. Keep the interest rates low and devalue the currency to spur economy.

Fortunately the policy makers seem to have learned a lesson. Almost all the countries resorted to economic stimulus  in 2008 to jump start their economies.

Will that work? Was the stimulus sufficient? Could something have been done differently?

Only time will tell. Perhaps it will take another Liaquat Ahamed, writing in 2108, to tell us whether we are taking the right steps now in 2015.

The key takeaway from this book is that uncontrolled financial sector will quickly deteriorate and crash taking the global economy with it. It is very important that each country put in tight controls over its Financial Sector so that we do not repeat the past mistakes.

Remember that 'Those who forget history are condemned to repeat it'.

Tuesday, August 4, 2015

Applications Invited from Suitable Candidates..

Our company, ABC Investors (ABCI), invites applications from suitable candidates for the role of 'Bonded Labor'. Your job will be to provide our company with substantial salary and significant increments each year. 

Company Philosophy:
ABCI do not believe in management hierarchy. Each employee selected will manage themselves and report to the owner of ABCI. There are no managers in our company. Neither are any time sheets or attendance systems or personal ID card. Each employee is expected to be responsible and conduct themselves in line with the HR policy of ABCI and the laws of the country.

Educational Qualifications: 

Professional Qualification and Experience: 
  1. While we do not expect the candidate to have prior experience for the task at hand, emphasis will be given to candidates with history of demonstrable results. 
  2. We are open to recruit candidates that show exceptional potential, even though the current results do not factor in intrinsic potential of the candidate.
  3. Remember, we will be paying retainer fee for potential, not for your past performance. 
  4. The selected candidate should show self-sufficiency. Any evidence of tendency to borrow money, either long-term or short-term, will lead to immediate disqualification of the candidate. 
  5. Candidate should have strong parentage with demonstrated honesty, integrity and capability to raise strong children. It is very important that parents be actively involved in the growth of the candidate. Candidates whose parents spend less than 50% of their energy on them need not apply. 
  6. Candidates who are high in demand from other employers need not apply. This will be calculated as a ratio of retainer fee to expected results. We are looking for candidates with reasonable R/E (Retainer Fee to Expected Results) valuation.
  7. The selected candidate should have high level of 'Inner Worth' in relation to their retainer fee. We are looking for low value of R/I ratio (Retainer Fee / Inner worth) valuation.
  8. Candidate should have a 5 year demonstrated ability to deliver consistently growing results.
  9. Candidate should have a record of delivering consistent exceptional performance during the last 18 months. 
  10. Candidates should have a demonstrated ability to efficiently manage their resources. 
Job Description: 
  1. The candidate should be registered with one or more Exchanges, preferably those with pan India access.
  2. The selected workers are expected to deliver results from the moment they join ABCI and will continue to deliver results 24*7*365 
  3. No holidays 
  4. You will be given a one time retainer fee based on our assessment of your current worth. The retainer fee will be unilaterally decided by the company. There will be no negotiations. 
  5. In return, you are expected to pay regular salary and significant annual increments to the employer till such time the contract is terminated subject to point 6 and 7 below. 
  6. ABCI reserves the right to terminate the contract for employment without giving any notice to the employee. 
  7. Employee will not have the option of terminating the contract for employment. 
  8. In normal case, subject to point 6 above, the employee will be on probation for a period of 366 days from the date of employment. During the probation period, based on their potential, the company may pay additional retainer fee to the employee. 
  9. The selected candidate is free to work for other employers, subject to point 2 above. 
  10. The selected candidate will be working from recognized employment exchanges using their own devices. Our company will not provide any accommodation, furniture or Laptop to the selected candidate.
ABCI is looking for candidates with demonstrated honesty, integrity and ability to provide sustained hard work and deliver significant returns day after day for years to come. We are looking for a very, very long-term relationship with the selected candidate.

Contact us:
In case you are interested, please drop an email with your performance reports to us at 'XXX@ABCI.YYY' and we will revert.

Post Script:
Sometime back, I read an article on how every Dollar / Rupee that we invest become our employee and works tirelessly for us day after day till that Dollar / Rupee remains invested. I extrapolated the same to equity investments and imagined how the stocks of each company, chosen wisely, can do the same for us. The company works like our employee, providing us returns on our investment day after day till eternity.

Based on that I made this job ad, seeking applications from such companies to be a part of my portfolio. Each company will work as my employee. I am flipping the entire investment process around. Instead of me actively trying to find good companies, I am asking good companies to seek out and find me.