Money Matters!

Money, Money, Money is lovely song by Abba from 70’s. Money is an important thing in life but it is not everything.

Historically when life started, there was no trade as there was no ownership concept. With individual ownership concept, starting 10000 years back, barter system started. Which later got converted to money and later into currency system. With industrial revolution, wealth generation started galloping and with that the greed! Before this period, only rich people were  the royalty and their kin! This of course continues, I need not say who the modern royalty is. Latest revolution in computers and related businesses have crossed imagination in wealth generation, beyond everybody’s expectations. But the main thing is the “you and me” gang started doing well, moneywise!

How do people make money? Some are brilliant wealth creators, they develop products, processes and concepts which the whole world appreciates and buys. Some inherit money but people like you and me, make money in a very conventional way. Typical people of our generation got themselves good education, took a job, tried to get office accommodation, later bought own home. With other family responsibilities, small amount of money remained in balance which was promptly invested in Bank Deposits. This was the process of living life, straight as an arrow and most important, safety first!

But is the conventional way of living safe life and being satisfied with it, relevant in today’s times. Probably safe deposits route was perfect for socialistic thinking of 70’s and 80’s of last century, we got used to it and continued. One person in Mumbai was given Shares of Wipro in 70’s worth Rs.10000/. The person was moneyed even in those days. He promptly forgot about the shares. When he died around 2010, his family found these shares which were simply stowed away. Their value had become Rs. 280/ million! Wow, Wow and Wow! In today’s financial jargon it is called long term investment! The money was invested in the so-called Market! In modern economies an individual is now being forced to be in the “Market”. For bank fixed deposit now, interest rates are negligible hence the shift. But there is greed. People got lured from FD in banks to very high returns from time immemorial. When banks could not give good returns, how someone else will be able to give high  returns on money. No one raised such issues, at least initially.

In came Charles Ponzi in 1920 in USA. He started one such scheme and lots of  people got sucked and ruined in his schemes. A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned by the operator on previous investments. As explained, excellent marketing techniques helped first group of people to be lured to such schemes. They were given exorbitant returns from the money invested by next batch of people. This cycle continued for some period and then unexpectedly for the investors, but expected by knowledgeable people, these schemes collapsed. With the schemes collapse, the people collapsed. The way Cadbury chocolate has become generic name for chocolate made by any other company, all such fraudulent schemes came to be known as Ponzi schemes.

Latest to join the bandwagon is the currency in news, I won’t call it popular, Bitcoin. Bitcoin is a cryptocurrency, a digital asset designed to work as a medium of exchange that uses cryptography to control its creation and management, rather than relying on central authorities. The presumed pseudonymous Satoshi Nakamoto integrated many existing ideas from the cypherpunk community when creating bitcoin. Over the course of bitcoin’s history, it has undergone rapid growth to become a significant currency both on and offline – from the mid 2010 onward, some businesses on a global scale began accepting bitcoins in addition to standard currencies.

To give you some feel, in 2010 Bitcoin was trading at 1 bitcoin = US $ 0.003. In November 2017 at its peak it was trading at 1 bitcoin = US $ 17,900/. Today, January 2018 it is trading at 1 bitcoin = US $ 11,171/, this is the  reduction in one month. Ponzi Scheme? I don’t know. Bitcoin is trying to replace global currency in the form electronic currency. But for such type of Electronic currency to succeed, all nations in this world will have to agree. Ten developed nations in the world including US, UK, Denmark, Sweden, Australia have formally accepted Bitcoin as a currency. This may get accepted over a period of time as money. All sovereign countries formally have to be accept Bitcoin. Without this acceptance I visualize a tricky scenario e.g. today you can get one Pizza in US for one bitcoin. How much will you pay for the same Pizza in UK and in Australia? Is this rate going to be based on comparative rates of current currencies? Presently, I find it difficult to understand how this will be achieved. Will I dabble in Bitcoins today? Definitely not. The currency which can get 38% devalued in such a small duration, and has yet to get approval from most of the countries in the world, is a strict no, no for me. I am sure Bitcoin or something similar may become a global currency in future but I feel that is still some time away.

What will today’s generation tell their children about money management? Take your education and learn some special skills of your own! Well, I am sure you know the market conditions, if not study them and create your wealth. Don’t waste your money on homes and cars, when you can always rent whatever you want. But try to stay away from Bitcoins of this world. It is today’s Ponzi scheme!

To you my friends one quick suggestion. Under financial advisor, put some money in market schemes which are Trigger based. Your funds are normally invested in debt funds; but when the equity market is on the Bull run, the money  will get transferred to Equity, make decent money and when Bear run starts money will be shifted back to Debt funds! Any takers from my generation?

4 thoughts on “Money Matters!

  1. I think the market is always unpredictable. Nobody can time the market successfully all the time and shift the assets from debt to equity and vise versa to make profit. I am for the following approach to manage one’s investment. Invest a fixed % of assets in debt and equity as per one’s risk tolerance (say, 30% equity and 70% debt). Subsequently rebalance the portfolio periodically as market goes up or down to maintain the same debt / equity ratio as before (buy at low price & sell at high price). The prices of debt and equity normally move in the reverse direction (principle of demand and supply).
    – Madhav

    1. Madhav, ICICI wealth management guys help us in our investments. Currently there is a trigger based product which handles the swap automatically based on pre defined triggers capturing upward and downward movement. Current Bull run has triggered the swap from debt to equity and will do so vice versa! As you rightly said it is difficult know when to switch hence the automation which is probably based on previous experiences!

      1. Pramod,
        Yes, there are leading economic indicators which will predict the switch from bear to bull market and vise versa. However, there could be false alarms. Therefore, it may be prudent to make a switch from debt to equity & vise versa in stages (Like SIP) instead of switching the assets all at once from debt to equity & vise versa as per the market triggers. The portfolio rebalancing method that I mentioned essentially does the switching of assets in the right direction depending on the market condition but in stages, not all at once. This helps in mitigating the risk from false market alarms.

        I am not familiar to the financial products available to you in India. Which ICICI product are you referring to which uses market triggers to adjust the portfolio?

        – Madhav

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