WPI Inflation for July 2010 stands at 9.97%

The provisional WPI Inflation numbers for July 2010 were released today, and the number was in single digits for the first time this year.

These are provisional numbers, and the number itself is just 0.03% shy of two digits, so there is a very good chance that it touches double digits (especially because the initial numbers for the past couple of months were revised higher).

Here is the breakup of the WPI Index along with the inflation numbers for some select items for July.

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As you can see – fuel, power, light and lubricants contributed most to last month’s figures, and that was because of the hike in the fuel prices.

Food inflation has eased a bit with the onset of a decent monsoon this time, and hopefully things will be better here-on.  This is especially important because food inflation has been really bad these past years, and it is best exemplified in this chart from an article by Dr. Subir Gokarn, Deputy Governor, RBI.

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The red line is Primary Articles which largely consists of Food Products, and that has been really high dragging the WPI number along with it. Any reduction in that number will help ease inflation a bit.

The good monsoon will assist this time, but I wonder how many bad monsoons it will take for us to develop a solution that is not limited to tinkering policy rates, and rather tackle issues like irrigation, food storage, distribution etc.

The Future of Credit Cards in India

The following is a guest post by Michael from CreditCardForum.com. He has conducted hundreds of credit card reviews for his site (his favorite being cash back credit cards) and has been analyzing the credit industry for years. Today, he will be discussing the international growth of credit cards and where he believes India will fit into the picture.

One of the most lucrative investments ever made by Warren Buffett was in the Coca-Cola company. In 1988, he began gobbling up their stock. At the time, Wall Street thought he was insane; the consensus was that Coca-Cola had already saturated America and other Western countries, so there was no room left to grow. It was considered to be a fully mature company.

Buffett saw things differently. Even though the Western markets were already saturated, he realized that many international markets were largely untapped… that is where the future growth would be. So he bought $1.02 billion of their stock, which worked out to be 7% of the company at the time.

Well as it turns out, Buffett was right. Over the next twenty years growth flourished overseas. Today, Buffett’s stake in the company is valued at around $11 billion and pays nearly a quarter-billion a year in dividends alone!

What does Coca-Cola have to do with credit cards?
It’s astonishing just how quickly debit and credit cards have become of the payment method of choice in America. Nowadays, people pay for just about everything using them. Personally speaking, I probably only use cash five or six times per year, and credit cards the rest of the time. In today’s fast-paced, technologically driven world, we are seeing plastic replace paper currency at a rapid rate.

I see this situation as being similar to Coca-Cola in 1988. Today, Visa, MasterCard, American Express, and Discover have already conquered America… but what about internationally? In the majority of the world, debit cards and credit cards are still a rarity, but that’s quickly changing. The aforementioned companies are seeing double-digit annual growth rates overseas. Not surprisingly, it is the technologically-savvy, growing countries – like India – where credit card usage is increasing the most.

What will the future hold for credit cards in India?
China and India are the two most populous countries, with 1.34 and 1.18 billion people, respectively. Although the populations are similar in size, last year the Chinese spent nearly $24 billion on credit cards, which is 12 times more than the $2 billion spent in India. However this difference is rather insignificant at such an early stage, since both figures still only represent a trivial fraction of each country’s economy.

In order to gauge where India is heading we must consider the following factors:

Past Growth Rate: According to the Indian research firm RNCOS, the country saw a CAGR of around 40% between FY 2006 and FY 2009 for credit cards.

Short Term Future Growth: The aforementioned firm predicts a CAGR of 20% between FY 2011 and FY 2013. According to their press release “…the payment card market is highly untapped and is still at its nascent stage due to a very low level of penetration in terms of payment card usage.”

Long Term Future Growth: The biggest obstacle facing long term growth will be infrastructure. According to the RBI, approximately 40% of citizens still do not have a bank account. Increased adaption of banking will be a key component in how quickly card usage is adapted. Furthermore, businesses will need to have greater ability and the willingness to incorporate debit/credit card processing. Lastly – and most importantly – society must also be willing to adapt the transition from paper to plastic.

Government Participation: One factor we can be relatively confident in is that the government has and will continue to be supportive of the card industry. The RBI has proposed launching domestic payment card and a POS network for card payments.


How I believe credit cards will be different from those in the United States

Nowadays, just about every credit card in the U.S. offers cash back, points, or some other form of rewards on purchases… but it wasn’t always that way. During the 60’s, 70’s, and 80’s, rewards were almost non-existent and most credit cards even charged an annual fee. It wasn’t until the American market started approaching full saturation that we saw cash back credit cards, travel rewards credit cards, and other “gimmicks” offered by banks to try and stand out from the competition. In summary, these extra perks would probably not be offered if the market wasn’t so competitive. For that reason, I do not believe we will see Indian credit cards offering widespread rewards for many years (the market first must become much more saturated).

There is also the possibility that we may never see such lucrative credit card rewards programs in India. Why? Because there are only two reasons it’s possible for banks to give 1% to 5% cash back on American credit cards:

(1) Credit card companies charge merchants processing fees, which average 2% and higher. These fees help cover the costs of the rewards. Many countries crack down on these fees and limit the amount merchants can be charged. For example, the Royal Bank of Australia capped these fees at only 0.5% in 2003. If India were to also drastically cut the fees, rewards would be far less likely.

(2) In the United States, the savings rate is very low. Since the recession it is historically “high” at 6%, but usually it is even less than that. Compare this to a country like India, where the savings rate is around 30%. Because Americans have so little money saved, many do not pay their credit account in full each month or they use credit cards for balance transfers… both of these forms of borrowing involve paying interest payments and/or transfer fees. That, in turn, also helps to offset the banks expense of offering rewards. However in a country like India where savings is high, I expect the population will generally be less likely to use this expensive type of borrowing. Therefore, it may not be profitable for banks to offer cash back credit cards and the like.

Conclusion

In my personal opinion, I believe the credit card business today is very similar to where Coca-Cola’s business stood in 1988 – there are massive untapped growth opportunities. Although India’s current infrastructure may not be considered the most ideal for the adaption of card payments at this time, I believe they are well poised. As a country that highly values science and technology, I am confident their usage of card payments will become widespread. It’s not a question of if, but when.

Reader email: How one reader developed his investing approach

Gaurav Palvia wrote to me about his investment approach after reading my request on the OneMint poll results post. I am reproducing his email below (edited slightly), as I think it presents an interesting angle to investing, and how he approached the subject.

My favorite part is when he called up all the agents to meet him, and got free advise from them. Pretty clever.

Here is what he says:

I am writing this as a follow up on your suggestion on “Results of the OneMint poll” to write our experiences about investing.

I am a software engineer working in the software industry for last 10 years.

I started looking into investments/finance around 2008 as a hobby/alternate profession ..something to pass my time if I get bored with my daily designing/coding routine.

I got interested in it, so i am pursing CFA from www.cfainstitute.org. Cleared level-1 of it in 2009 and now preparing for level-2 in my spare time.

I thought I will share some info/knowledge/experience I gathered during this period.

I recall somewhere I read that “WEALTH GENERATION IS A VERY SLOW AND BORING PROCESS”. I think it says it all…

I mean… one in a million can become Rakesh Jhunjhuwala who accumulated huge wealth at such a young age.

If you think you have that kind of skill then you should just follow your gut; take as much risk as you can ..in the stock market..do trading…whatever…

For the remaining people like us ; we need to clearly understand the above principal of wealth generation…..and not give up.

In a nutshell – the above principal says…”do your homework on a regular basis and have patience”

Though I have a DMAT account since 2001, and I made a little money during BJP’s disinvestment phase by investing in Shipping Corporation in India and then in VSNL, but that time I was a speculator and I made money just by speculation, – and may be I got lucky.

I had bought SCI at 36 and sold it when it reached 91…so made a real cool profit.

But it’s only after 2005 I started taking investment a little more seriously. I inquired with colleages..and someone recommended me an independent financial advisor who suggested me some XYZ mutual fund using SIP. I sold it last year and made no profits out of it even though I kept it for 3 years or so.

So I said to myself that when everybody is making money from mutual funds…why am I not able to do so? I searched various sites but I was still not able to decide which site to trust for information…so I thought of a different plan..and a witty one 🙂

I called CitiBank and asked them for financial planning…in 2 days time their representative came to meet me..and suggested me varios plans and a 4-6 mutual funds.

I did the same with HDFC/ICICI/AXIS and in 2 weeks time i had all the data suggested by all these representatives.

I just zeroed in on those mutual funds that were suggested by all these representatives…the common ones….and then did a SIP on these Mutual funds on my own from my ICICI Dmat account.

And I could double my investment in exactly 2 years of time…last month I sold them as I needed some cash. So this was my first real profitable venture.

But during the time I kept reading…and reached on some conclusions as how investment should be done by a retail investor.

So I am just listing those ideas ……

1. I think for retail investors SIP / Mutual fund is the easiest way, as it shields us from doing all the equity analysis.
Equity analysis is a real full time job, and I suggest let’s leave it for experts. Mutual fund houses spend all their time/money/energy into it so a retail investor should just choose 4-5 well known mutual fund houses and invest money as per his risk appetite.
It also does not mean that choose any mutual fund from these houses. I think one should look for the following qualities in a Mutual fund:

a. Past 3-5 years annual returns. I guess any Mutual fund that gives above 20% return is good enough. But as we compare returns from other mutual funds…we may think even 20% is less so its best to choose a 3-star to 5-star rated mutual fund.

I normally check the rating of the fund from www.valueresearchonline.com. They have rated all the funds.

b. Credentials of the Portfolio Mgr. If the Portfolio Mgr is a C.A + CFA + IIM and has 15 years of exp in the industry and a proven track record..what else do you need? There are very less chances for him to make mistakes than for people like us who dont have that kind of credentials and experience.

c. Net Assets. Its very important to check the Net Assets of the fund. I will never invest in a fund which has say 10-50 crore of Net Assets only. It may return great returns..but it is that risky as well.
I will rather go for a fund which has atleast 500 Crore of net assets; has a established reputation…in the market for quite some time.

2. The second important question when a retail investor starts investing is..which mutual funds he should choose.
We keep hearing abt lot of sectors (Tech/Realty/Power etc) doing good at times…and keep hearing how some made fortunes by investing in these sectors.
But I think some one who is just starting to invest; he should not get bogged down by such stories.
I think if you are  a beginner, and if you can do a SIP in 5 mutual funds then you can choose 3 Equity diversified funds and 2 sector specific funds. But before investing – remember to check their rating/past history from a rating agency.

3. When to invest: I think if you are going the SIP way; it does not matter when you start investing. Because of the regular investing you end up buying units at an average cost…unless one is really unlucky and he bought all the units when the market was doing exceptionally well…and is now not expected to do the same in next 5 years or so.
But I guess it does not happen that way practically..if you choose reasonably well mutual fund and keep invested for 3 years or so ..you will earn reasonable returns.

As I said initially i had invested in a Mutual fund..and kept it for 3 years..but still i could not make much money of it.

It didnt mean that I lost money…I could still recover all my principal. The reason i did not make any money because i was fooled by an independent finacial advisor and I selected a completely wrong mutual fund scheme.

4. When to exit: I can suggest a couple ways as when a retail investor can exit
1. Set a target as when to exit. If i set a target that if i get 35% returns and it is good enough for me; then I should exit when i get 35% returns.

The other way can be that when I will get say 35% return I will just recover my intial amount and keep the remaining 35% to grow.

In this way I will never loose any principal and allow my remaining 35% to grow as well.

One can make it a little interesting as well by first recovering the amount that one could have earned in that much period in a bank F.D and keep the remaining invested. This way one can be sure to earn the bank interest rates on his principal and have the remaining to take all the financial ups/downs. This way I think I won’t lose my sleep atleast.

I think looking at the current times and Indian economy one should be more than happy to achive 35% return annualy and recover his principal when he gets total 50% return. So recover your principal when you earn 50% return and keep the rest of the money invested.

I am not a daily trader and don’t believe in daily trading as my profession is quite time taking and does not leave me with much spare time; but i keep a watch on my funds/economy/markets and I will never sell in panic but I will always sell when I see exceptionally good gains.

Also I am not discouraging some one to not invest directly in equities/commodities. I never found sufficient time to do thorough equity analysis myself …so I cant comment on that. But like an average greedy person I also keep on picking things from time to time 🙂

-Safe Investing
Gaurav Palvia

I thought the email was interesting enough and covered so many aspects that it would make a good read for other readers. More than anything else, it shows that investing is a personal journey, and you need to develop a style that suits you the most.

I’d be interested in hearing more such stories, please leave a comment or email me if you prefer that.

Results of the OneMint poll

Every morning I wake up to at least one email or comment from someone who gives out their mutual fund folio number and wants me to send them their statement.

I used to reply to such requests explaining why I can’t send it to them and what they should do, but I have stopped because I never get a response back, and when I do, it is from people who fail to understand why I can’t send them their statement.

It is a little disheartening to see how so many people lose track of their investment, and lack the means to track it back or understand what’s going on.

I was going through a few such emails last week, and in exasperation I wondered if anyone is making any money on stocks at all. If people can’t even track their mutual funds, how the hell do you expect them to make any money out of these beasts?

It was with such depressing thoughts that I wrote my post about most people losing money in the stock market. At that time I expected the response to be largely negative, but to my pleasant surprise, more than half the respondents said that they have made money in the stock market. If I were CNN, I would have told you how un-scientific this poll was, but I expect OneMint readers know that already.

The results still make for an interesting reading, and here is a pretty little pie chart that summarize them for you.

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There were some pretty interesting comments on the post too, and they are definitely worth a read too.

I am happy to see that things are not as bad as I expected them to be, and the fact that we are in a up – market certainly helps too. I’d like to follow up on this poll, and invite you to share your story of why you made or lost money in the stock market, and how you would have done things differently, or what you would have wished was different. Kind of like Patrick’s comment who lamented the high brokerage cost, or Tony’s comment who took better control of his own money, or Pallavi who goes the way of MF systematic investment plans.

Leave a comment or send me an email.

I’ll start off with a couple of my own thoughts.

First off, I never go after something which everyone else is interested in. I lost some money in the dot com crash, which was my first experience with the stock market, and then I saw people losing money in the real estate crash, I know a lot of people who lost money on IPOs, and I wonder if the same is going to happen with gold someday.  I feel that by the time something gets popular enough to interest the ordinary investor, the party is already over.

This is probably overly simplified but over the years, I have found it very difficult to invest in anything that is popular. For example, gold is popular now, and although I write a lot about it, I am not invested in it at all.

Second is day trading or getting into something with the prospect of making a quick buck. To Patrick’s point, getting in and out ensures that you incur a lot of costs, and they eat into your profits, and in general it has never worked for me, and I don’t think it ever will.

So, in summary, my own experience and mind – set tells me to stay away from popular investing themes and frequent trading.

Your turn now! Leave a comment or send me an email.

Delhi Traffic Police has a FB page and so does OneMint

I discovered the Delhi Traffic Police page on Facebook today, and have been amazed by it. There are about 20,000 people who like it, and it appears to me that people report on traffic violations on the page, and then Delhi Police responds and takes action on the incidents (not all of them I guess). I just read a comment about a hospital that I know quite well, and how cars were blocking its entrance, and then the folks at Delhi Police responded saying that they are going to take immediate action!

The fact that Delhi Police has a Facebook page is quite amazing in itself, but when they respond to comments, and take action – that is quite incredible. Kudos to them for being so tech-savvy, and helping citizens in this way. Quite incredible!

I came across this via an awesome post at the India Business Blog, where they discuss other unusual, and inspiring uses of Facebook in India.

While we are on the subject, let me do a little bit of shameless self-promotion. I have recently created a Facebook page for OneMint, so if you are on Facebook, and like OneMint as well, then please do like OneMint on Facebook, and spread the word among your friends too.

On to other stuff now, – I really liked this post at TechCrunch – Bill Gates: In Five Years The Best Education Will Come From The Web. Internet is obviously changing the way knowledge is being delivered, and we will see some great innovations on this space in the years to come.

Finance related pieces that caught my eye this week:

Value Research had an interesting piece on the MOSt 50 ETF, and how it is underweight on RIL.

India  – the jewel crown in Standard Chartered’s crown @ beyondbrics was a good read about StanChart in India.

How does option “Exercise” Work? at Capital Minds is a good primer on the subject.

Learning about inflation from a box of eggs @ Ajay Shah is a good way of analyzing the subject.

DIY Projects to Save Money: Should you take them on? @ Digerati Life is a question that a lot of us have thought about at one time or another.

That’s all for this week, enjoy your weekend everyone!

Two new Gmail features that will make your life easier

Google has recently announced a feature that allows users to log in to multiple accounts from the same browser, and it’s a really neat thing for people like me who regularly use two Gmail accounts.

This feature is being gradually rolled to all users, so if you don’t see the option on one of your Google accounts, sign in to your other account to see if the option shows up there.

First go to Google.com and sign in from the link on the top right hand side of the screen. Then click on Settings –> Google Account Settings which is present at the top right of the screen.

You should see a screen like this with an option of “Multiple sign-in”. Click on the “Change” link and follow instructions to enable this.

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When you next log in to Gmail, you will see an option that asks if you’d like to login to another Gmail account. You can use that to open another account.

The next new feature is to allow users to drag and drop attachments from Gmail. If you are using the Chrome browser, then now you have the option to drag and drop an attachment from Gmail, and save it anywhere on your computer.

I really like this feature because I always find it difficult to save attachments anywhere other than the desktop, and then my desktop gets cluttered in no time. If only Firefox supported this feature….but I guess that can only be a matter of time.

Components of the Wholesale Price Index in India

Recently I wrote about how food is the first thing that comes to mind when someone talks about inflation, so I thought it’d be a good idea to check out the various components of the Wholesale Price Index (WPI) in India, and see how much weightage food has in these calculations.

As you will see, food features twice in the index – once under primary articles, and then under manufactured products, and has got a sizeable influence on the index indeed.

Here are the different components along with their weightage in Wholesale Price Index (WPI).

Primary Articles
Food Articles 15.4025
Non Food Articles 6.1381
Minerals 0.4847
Sub Total 22.0253
Fuel, Power, Light & Lubricants
Coal Mining 1.7529
Mineral Oils 6.9896
Electricity 5.4837
Sub Total 14.2262
Manufactured Products
Food Products 11.5378
Beverages, Tobacco and Tobacco Products 1.3391
Textiles 9.7999
Wood and Wood Products 0.1731
Paper and Paper Products 2.0440
Leather and Leather Products 1.0193
Rubber and Plastic Products 2.3882
Chemicals and Chemical Products 11.9312
Non-Metallic Mineral Products 2.5159
Machinery and Machine Tools 8.3633
Transport Equipment and Parts 4.2948
Basic Metals and Alloys 8.3419
Sub Total 63.7485
Grand Total 100.00

Most people lose money in the stock market

I was trying to look up something, and this Google auto-suggest intrigued me. Here is a screen-shot.

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Really? stock market and virginity?

While I have no interest in knowing when most people lose their virginity, I do have a lot of interest in knowing if most people are in fact losing money in the stock market.

Personally,  I do believe that most people lose money in the stock market, but I don’t have any data to back it up. I loosely define “most” as more than 60%, and my sample set is the people I have known over the years.

I created a poll to test this out, and if you have a few seconds – please answer this small poll located at the bottom of the right sidebar of the site.

You have to answer with a Yes or No, to this question: “Have you made money in the stock market?”

It is anonymous, so no one will know your answers. Please vote now, and in the meantime I will look for other information around this.

Are onions really cheap?

Inflation is on everyone’s minds these days, and when someone brings up this topic, they usually talk about food inflation, and how milk has gotten expensive and tomatoes have shot through the roof.

I thought I’d see how the data around this looks,  and I went to the website of the Ministry of Commerce and Industry, and downloaded the Wholesale Price Index (WPI) for 2010.

From there I calculated the percentage inflation on various items, and found these results. These are the food articles that have gained in price in 2010.

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Not everything went up this year, there were a few things that went down as well. Here is a chart that shows those.

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I was a little surprised to see that onions have fallen in prices so sharply, but on further research I found that this is only due to a higher base in the beginning of 2010. The wholesale price of onion was up to Rs. 1200 – Rs. 1300 per quintal in Nashik at the beginning of the year, and was reduced to half of that by May.

I saw a story on Financial Express from May that a bumper onion harvest is expected this year, and the production is expected to grow to 8.5 lakh tons from 7.6 lakh tons last year.  The fall in potato prices also seems to be due to the high base effect, and I won’t be surprised if other fall in prices can be explained by that as well.

Monsoon seems to be progressing well, and one can only hope that inflation (at least food inflation comes under control), and doesn’t rear its ugly head again.

PS. The numbers on tomatoes were all screwed up, so I couldn’t include them in these calculations.