Is 'Saving' Your Wealth-Building Plan? - The 5 Minute WrapUp by Equitymaster
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Is 'Saving' Your Wealth-Building Plan?

Feb 12, 2016

In this issue:
» Is India's new GDP data for 'reference only'
» 5 Warning signals of market crash
» ....and more!
Tanushree Banerjee, Co-Head of Research

Do you remember your first piggybank? I think all of us have fond memories of ours.

The piggybank is our introduction the concept of saving. They teach us the joys of ownership. And to take spending seriously.

Piggybanks, in some form or another, have been around for generations. My daughter is spoilt for choice in the variety of piggy banks on offer. But I'm proud that she's a good saver.

For Indians, the obsession with piggybanks starts early. After all, we are among the best savers in the world! With a savings rate of nearly 26% of GDP, we beat almost all developed and developing economies hands down. Parents save so much for their kids that most teenagers in India have no need for education loans. Weddings are hardly every funded with loans. Typically, the only time we approach a bank for a loan is while buying a house or a vehicle.

We try to save all our working lives so we can leave enough for the next generation. And so that we can retire comfortably. Since there is no Social Security, we need to save enough to meet our medical and household costs post retirement. Retirees also keep saving so they aren't too reliant on their kids.

All we do all our lives is save, save, save!

But does that make us wealthy? Is saving the best way to create wealth over a long period? Or do we need to do something more?

Most Indians think all they need to do is to graduate from their piggybanks to a savings bank account. Keeping their hard-earned savings in a bank and earning some interest on their fixed deposit gives many the satisfaction of wealth.

So far, we have been lucky to have a banking system that does not grossly disincentivise savers.?While there has hardly been any wealth accumulation in banks, at least they have not depleted the savings.

But what if we were to go the Japanese way? Japan had exactly the same savings rate that we have today, in 1989 (26%). Since then, the rate has fallen steadily to about 2% in 2014.

The reason?

Japan's interest rates have been below 2% for more than two and a half decades. The Japanese central bank recently added another feather to its cap by announcing negative interest rates. This means the Japanese depositor will have to pay the bank to keep his money.

With such a banking system, savings, however aggressive, cannot be the recipe for wealth creation. It is then how you earn and invest your savings that matters the most.

Rahul and I frequently mention the Warren Buffett way of creating wealth with great stocks.

But today I want to talk to you about someone else.

I came across Mark Morgan Ford, an American author, entrepreneur, publisher, and real estate investor in my very first interactions with Agora Financial a couple of years back. I have been a fan of his ideas on wealth building ever since.

Incidentally, my colleague, Anisa, at Common Sense Living, has been working with Mark to put together some of the best ideas on wealth creation. In fact she tells me that Creating Wealth will not just put Mark's ideas in the Indian context but also dispel some of the biggest myths about wealth building.

She has also offered to send out Mark's latest book to interested readers. It's called Living Rich: How to Live as Well as a Billionaire on a Middle-Class Budget.

Find out how you can get a FREE physical copy of Living Rich dispatched in the post to you by clicking here.

How do you plan to build your wealth apart from saving and investing well? Let us know your comments or share your views in the Equitymaster Club.

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2.50 Chart of the day

Economic statistics like GDP size and growth can give a fair idea of a country's global standing. This is particularly true if the data paints real picture of the economy. Over the years, lot of doubts have been raised about the official Chinese economic growth data. As per today's chart of the day, the jump in India's GDP growth number would lead one to believe that India's economic growth, during the current fiscal, will overtake China's.

Are India's GDP numbers trustworthy anymore?

Note - India's GDP growth for 2005, represents projected growth for FY16

So, is this higher rate of GDP growth something to be excited about? Not really.

There is a stark difference between the GDP numbers and ground reality. To make the GDP comparable on the international front, the statistics office changed the method of calculating GDP . On a broader level, little seems to be improving, except for the statistics.

Recently, Vivek Kaul wrote an interesting piece in his Diary about the similarity of India's latest GDP growth number with that of China's. According to him; just like China, the Indian GDP data also seems to have reached a stage where it is 'for reference only'. Thus, analysts will have to find their own way to figure out how different is the actual growth from the official numbers. In China, rather than relying on the GDP statistics analysts look at high speed economic indicators to figure out the 'actual' state of the Chinese economy. These indicators were outlined by China's premier Li Keqiang. According to Mr Li, GDP statistics were 'for reference only'. He preferred to focus on electricity consumption, the volume of rail cargo, and the amount of loans disbursed."


-13% since the start of the year. -8% since the start of the month. It would be an understatement to say that BSE Sensex has had one of the weakest starts in 2016. In fact it is not just the Sensex but also the smaller indices like the BSE Small cap that have been battered over the past two months. The business papers tell you that weak recovery in China, Fed's chances of raising rates, Japan's negative rates, India's questionable GDP growth and PSU banks' dire state of bad loans are to blame. Too much of bad news has suddenly taken the market by surprise.

If you are regular reader of The 5 Minute Wrapup you have been reading about the problem of bad loans since 2013. We questioned the new GDP numbers when they were first released. Bill Bonner told you to prepare for a negative interest rate world way back in April 2015. But the optimism about the government was too high then for investors to take note of the stark realities.

According us, as value investors we have to be conservative about the best and prepare for the worst. The margin of safety has to be built in at all times in our assumptions and valuations. More importantly, while it is necessary to be greedy when others are careful, you cannot afford to be callous.

We always insist that however cheap the stock, investors must throughly check its fundamental quality to assess the downside.

We believe we have found "5 Warning Signals" or "5 Red Flags" that show up in a business right before its stock price plummets.

In fact, ensuring that you're not investing in businesses which show these "5 Warning Signals" could potentially be the difference between creating wealth and incurring losses with your stock market investments.

Full details of these 5 Warning Signals, and how you can read them well ahead of other ordinary investors are given in our special report titled - The "Crash Score" Report.


After opening on a flattish note, Indian markets have plunged in the subsequent hours. At the time of writing, the BSE Sensex was trading lower by about 109 points. Among the sectoral indices, stocks from capital goods and oil and gas segment. Both mid cap and small cap indices are battered too, with each trading higher by around 2%.

4.50 Today Investing mantra

"The chains of habit are too light to be felt until they are too heavy to be broken." -Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Bhavita Nagrani (Research Analyst).

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1 Responses to "Is 'Saving' Your Wealth-Building Plan?"

NK Patet

Feb 13, 2016

To the extent our banks remain savings friendly, I consider fixed deposits great considering the fate of money invested in mutual funds. even gold to some extent is good. However, what has been missed may be purposely by the author of this article is that majority of the wealth building in the indian society has been through property; property acquired in younger days; property got through inheritance; property purchased after some windfall received. Shares as wealth builders in my personal experience if just kept and not reaped at regular intervals are also not great.

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