Asatyam masquerading as Satyam...

There is a very interesting story I read and probably authored by Kahlil Gibran. And it goes like this…

God created the world (let’s believe it for this story’s sake) and everything else that was needed. When he reviewed he thought there are 2 things which are missing – Ugliness and Beauty. So he created both of them and gave “beautiful” clothes to Mr/Ms. Beauty and “ugly” clothes to Mr/Ms. Ugliness. (Let’s say its Ms. Beauty and Ms. Ugliness) Both of them had a long and strenuous journey to earth from heaven and they decided to take a bath.

Both jumped into the river nude and were enjoying the bath. Ms. Beauty went far into the lake and when she turned back she was surprised to find that her "beautiful" clothes and Ms. Ugliness - both missing. She understood that Ms. Ugliness has taken her “beautiful” clothes away. Ms. Beauty did not have option but for wearing “Ugly” clothes and started searching for the Ms. Ugly who is roaming around in “beautiful” clothes.

The search I guess is still continuing and this 2 para story imparts a great deal of wisdom that ugliness is always behind a mask that looks beautiful. Let’s try to look beyond the mask or clothes or the exterior appearance. I cant find a more apt situation for this story when I heard about “Ramalinga Raju and his Asatyam” today in the news!...

Ability to lie without a wink in front of the whole world and that too for few years is a skill and I think Mr. Raju has landed up on a wrong job. He was a natural fit for a politician, a lawyer or a diplomat. Unfortunately he managed to be a successful software services entrepreneur taking his organization to great places by camouflaging a great deal of dirt and was looked upon by millions as a great role model.

This ability would be an envy to many politicians / lawyers and diplomats and the individuals and institutions who / that honored him should have had a bitter pill to swallow today.

He has betrayed the trust of millions and I am not sure what made him to tear his “Beautiful clothes” and show his actual nature. It could be the fear of someone else finding it imminently or an uncontrollable spike of bravery or his realization of lack of any more avenues to cover this up or a great sense of burden which he was unable to carry any further.

"An unshaken solution decays" since heavier particles tends to settle at the bottom and lighter at the top. Hence we always have to “Shake well before use”. I learnt that does not apply just a solution in a bottle but also to any system in general. ;)

Just as I said in one of my earlier blog that we should thank the terrorists who attacked Mumbai since they woke up a large number of people from their slumber and shook us up, I would suggest that India Inc. and the regulatory bodies should thank Mr. Raju for giving all of us a lesson in corporate governance and exposing the gaps. Unfortunately he is not an ethical hacker but a “vicious trust breaker of the worst kind”.

I believe the best punishment for such incidents should be meted out by the society / industry than the legal system. While Mr. Raju can start planning his stay in jail and there are no regrets about this and can probably resurface as a politician after few years, I fear Satyam as an organization is going to be a history and as an example for bad reasons.

“Power corrupts and absolute power corrupts absolutely”. This is a very famous statement but I disagree with it. If someone is looking ugly in a mirror then it is not the fault of the mirror. A mirror just reflects. Likewise power and temptations reveal what we are as individuals. I still believe that there are many in this country as corporate leaders who are not corrupted by power, greed, and temptations… or should I say atleast unaffected yet.

So Iam at a liberty to edit the above saying as "Temptations reflects or Greed reflects or Power reflects". And I am not sure why and what has blinded us so far to see this reflection.

Probably its our certainty... certainty that they cant be wrong. Should we start believing in another saying..."Certainty is absurd and doubt ensures progress?"

Why dont we have the power to realize when (and then its the )...

Clouds masquerading as Sky
Smile masquerading as Cunningness
Ignorance masquerading as knowledge
Imminent pain masquerading as short term pleasure
Promotion masquerading as shit load of work
Personality masquerading as Individuality

Asatyam masquerading as Satyam

Iam very sad at the turn of events since its another instant of "betrayal of trust" by one of the most respected guys in the industry yet...

Happy reading!

Welcome to the "Century of bubbles"....

Disclaimer 1: I read this story in web and am just reproducing it here with minor edits....
Disclaimer 2: Understanding this article demands some thing that is very scarce nowadays and that is ...patience! :)

Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 dollars as there were only two pieces of 1 dollar coins circulating around.

1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar.

2) B decided to purchase the land from A for 1 dollar. So, now A and C own 1 dollar each while B owned a piece of land that is worth 1 dollar.* The net asset of the country now = 3 dollars.

3) Now C thought that since there is only one piece of land in the country, and land is non producible asset, its value must definitely go up. So, he borrowed 1 dollar from A, and together with his own 1 dollar, he bought the land from B for 2 dollars.*A has a loan to C of 1 dollar, so his net asset is 1 dollar. * B sold his land and got 2 dollars, so his net asset is 2 dollars. * C owned the piece of land worth 2 dollars but with his 1 dollar debt to A, his net residual asset is 1 dollar. * Thus, the net asset of the country = 4 dollars.

4) A saw that the land he once owned has risen in value. He regretted having sold it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollars from B and acquired the land back from C for 3 dollars. The payment is by 2 dollars cash (which he borrowed) and cancellation of the 1 dollar loan to C. As a result, A now owned a piece of land that is worth 3 dollars. But since he owed B 2 dollars, his net asset is 1 dollar.* B loaned 2 dollars to A. So his net asset is 2 dollars. * C now has the 2 coins. His net asset is also 2 dollars. * The net asset of the country = 5 dollars. A bubble is building up.

(5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollars. The payment is by borrowing 2 dollars from C, and cancellation of his 2 dollars loan to A.* As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollars. * B owned a piece of land that is worth 4 dollars, but since he has a debt of 2 dollars with C, his net Asset is 2 dollars. * C loaned 2 dollars to B, so his net asset is 2 dollars.* The net asset of the country = 6 dollars; even though, the country has only one piece of land and 2 Dollars in circulation.

(6) Everybody has made money and everybody felt happy and prosperous.

(7) One day an evil wind blew, and an evil thought came to C’s mind. “Hey, what if the land price stop going up, how could B repay my loan. There is only 2 dollars in circulation, and, I think after all the land that B owns is worth at most only 1 dollar, and no more.”

(8) A also thought the same way.

(9) Nobody wanted to buy land anymore.* So, in the end, A owns the 2 dollar coins, his net asset is 2 dollars. * B owed C 2 dollars and the land he owned which he thought worth 4 dollars is now 1 dollar. So his net asset is only 1 dollar. * C has a loan of 2 dollars to B. But it is a bad debt. Although his net asset is still 2 dollars, his Heart is palpitating. * The net asset of the country = 3 dollars again.

(10) So, who has stolen the 3 dollars from the country ? Of course, before the bubble burst B thought his land was worth 4 dollars. Actually, right before the collapse, the net asset of the country was 6 dollars on paper. B’s net asset is still 2 dollars, his heart is palpitating.

(11) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollars bad debt to B, but in return he acquired the land which is worth 1 dollar now.* A owns the 2 coins, his net asset is 2 dollars. * B is bankrupt, his net asset is 0 dollar. ( he lost everything ) * C got no choice but end up with a land worth only 1 dollar* The net asset of the country = 3 dollars.

There is however a redistribution of wealth. A is the winner, B is the loser, C is lucky that he is spared.

So, whats the moral of the story? Check out the following....

(1) When a bubble is building up, the debt of individuals to one another in a country is also building up.

(2) This story of the island is a closed system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island’s own currency. Hence, there is no net loss.

(3) An over-damped system is assumed when the bubble burst, meaning the land’s value did not go down to below 1 dollar.

(4) When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the losers. The asset could shrink or in worst case, they go bankrupt.

(5) If there is another citizen D either holding a dollar or another piece of land but refrains from taking part in the game, he will neither win nor lose. But he will see the value of his money or land go up and down like a see saw.

(6) When the bubble was in the growing phase, everybody made money.

(7) If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A ) and take part in the game. But you must know when you should change everything back to cash !!

(8) As in the case of land, the above phenomenon applies to stocks as well.

(9) The actual worth of land or stocks depend largely on psychology.

Finally, if we are fiscally prudent then we can wait for such cycles to hit the bottom and accumulate specific assets. I can also claim that this century seems to be giving us a series of bubbles... started with dot com bubble, now the housing bubble manifesting itself as a financial bubble.

Let’s see what’s next! I would bet that it would be a War bubble!... I will stop it at that allow you to think what that means.

Happy reading!

Never listen to an analyst! - Be the master of your destiny

Today India's inflation numbers have been announced and as predicted analysts were wrong. The expectations were around 10.2% and it landed up at 8.98%. No wonder they say an economist is an expert who will know tomorrow why that which he predicted yesterday didn’t happen today.

The announcement from Ratan Tata on the overall economic scenario and the reports about increasing job lossses in places like UK were not exactly the news you would cherish. There are lot of uncertainities and many are confused as to how to manage their personal finances.

Without sounding advisory i will share few pointers as to how you can plan yourself since i have seen many of my friends are extremely brilliant but still lack financial planning knowledge. We are Ignorant only in different subjects".

1. Stay with cash. This seems to be a very stupid pointer since many including me would respond that if i have cash then i would stay cash. :). The point meant is avoid huge financial commitments like asset additions at this juncture. The question then arises is how much is sufficient?

• Just break up your financials into following Total Income (A), House hold expenses (B), Investements & savings (C), Debts that are serviced (D), Total fixed assets you own (E), Total assets under loan / debt (F).
• Ideally you should have 6 times that of the commitments as cash or easily convertible to cash. Commitments here means (B+D). You cant survive without this.
• If there is an emergency you need to sustain for 6 months which seems to be the time for you to recoupe and find a new job.
• During uncertain times you can increase it to 9 months may be.
• If you are keen on continuing the investments too in this period then take (B+C+D).

2. Look at your debt service ratio (D/A):
Ensure that D/A does not exceed 25% to 30%. If it exceeds then you are diverting too much resources in accumulating long term assets.

3. Look at your savings ratio (C/A);
Ensure that this more than 35%. Please note that this is less than 1% in countries like US. In India the average is close to 35% i think. The lesser it is, worse shall be your retirement life and long term requirements. (If you are interested more on this check another blog of mine " Fiscally prudent american is a sucker")

4. Gear Ratio (F/E):
Ensure that this is less than 30%. This essential gives you the leverage you have on your networth. Many US companies & house holds are in deep trouble because it is highly leveraged. What does this mean, simply put if your networth is $1 and you take loans for $1 then you are 100% (1:1) leveraged. Lehman which went bust was leveraged on 30:1, which was heavily leveraged.

Please understand that bad debts are created at good times!. Fiscal prudence and living within the means are not old school of thoughts that are extinct but are very much applicable to all us and personal finance is the place to practice this.

Yours fiscally,

Happy reading!
PS; I am not an expert and would not provide any advice for charges / free. Please note that i believe in the saying "you are the master of your destiny".