The Truth About Debt: Why 99% Rich Use It & Others Fear It | ft. Dr. Anil Lamba

Introducing Mr. Anil Lamba Hey guys, welcome back to another episode of the 1% Club Show. On today's episode, I have Doctor Anil Lamba. Dr. Anil Lamba is the author of one of the most popular books of India, Romancing the Balance Sheet. Today, he's come here with the launch of his new book, Start Early, Finish, Rich. So, Doctor Anil, thank you so much for being on the show. Speaker 2 Thank you, Sharon. Thank you. Pleasure being here. Speaker 1 Some of the largest companies of India hire you to solve their problems. You know, companies like LNT, companies like ICICI, you know, Ultratech, they hire you to solve their financial problems. You know, things which are not in textbooks, right? I can't find these in any other courses. So you talk about things with seemingly nobody knows. So how exactly do you know all of these things? Speaker 2 I don't know how to answer that question. I'm sure many others know I'm not the only one. Neither have I invented the subject. But what I do understand is, you know, different people may read the same book, but your interpretations may vary. So I think my interpretations are what different from somebody else's. Probably that's where the difference comes in. But financial principles are age-old, and I think all the credit for the knowledge has to go to the course called chartered accountancy. It's such a wonderful course. Everything we've I teach, I learned from there. Speaker 1 So I still remember when I just started my own business, three months into into it, I picked up your book Romancing the Balance Sheet. Anil’s Best-Selling Book I read it cover to cover and and then I came across a video of yours which said that 9 out of 10 businesses fail because of financial mismanagement. Speaker 2 Undisputed fact, at the cost of offending my own finance community brethren, I say the least. Finance management happens in the finance department. So by the time the finance professionals come into the picture, the good of the damage is already done. And you know what? That's an avoidable reason of sickness, right? I mean, if a company shuts down because the product is faulty, they deserve to shut down. If they shut down because they didn't understand how important it is to sell, not only to make but to sell, they deserve to shut down. But when everything is fine and you shut down due to financial mismanagement, and why did that happen? Because you didn't realize it is everybody's responsibility. Speaker 1 I was, I was watching one of your videos and you said that the companies that you would invest in, right, are companies which have low operating leverage and high financial leverage. Using Debt to Grow Your Company You know, these are the companies that you love. That's what you mentioned in one of the videos. I don't know if I am if I said it correctly. Speaker 2 Number one, people have a wrong impression about leverages. They're treated as a leverage is a bad word. People who don't have leverage get up and proudly sometimes say I'm debt free. I don't understand what is there to be proud about either. You're saying I'm debt free because now I'm not growing anymore. I don't have debt. I love it, but I don't want to buy your shares if you're not growing anymore, correct. And if you are growing and you say when you say I'm debt free, you're saying I will not use debt, I will use equity. Equity is probably three times more expensive than debt. So I have two golden rules, OK. I feel if you don't violate those rules, the more debt you take, the better you'll be. Speaker 1 Interesting. Speaker 2 So, so problem is not with debt, Problem is with taking debt and not being able to deploy it in such a way that you earn more than the cost of debt, OK. Or not being able to deploy in such a way that the money where you deploy will bring it back before the debt has to be paid back. OK, if these two rules don't get violated, debt is fantastic. Speaker 1 So I think taking leverage is important to grow faster. Speaker 2 Yes but then sometimes people misinterpret. I'm saying you want 100 crore project you got 100 crores in the cupboard. Don't use take debt. Not at all. First put your money. But if somebody starting 100 crore company and you have 100 crores, my suggestion is start a 300 crore company. If against your hundred you can borrow 200 more first put yours. Sometimes people give the right answer for the wrong reasons. It's a yes, yes, I should take that. Why? So you know, things might go wrong. I mean lose the money. So damn it, if you go in, there's a chances of you losing the money. All the more reason to put yours. You have no moral right to dress somebody else's money. So first put your money. It is a sign of your sincerity, your your confidence in your business. So for various reasons you got to put but against your money. If it allows you to borrow, let's say in the ratio of 1 is to one or two is to 1, then take the debt also and start a bigger business. Speaker 1 So then let's evaluate businesses here for a second. Primarily, there are two types of businesses. 1 is a product business, other one is a service business, right? In a product business, let's say I'm manufacturing company, then obviously I can take that, build a very big manufacturing plant, take larger purchase orders, be OK with, you know, longer waiting periods for receiving my money because I have debt. When Should You Take Debt? But if it's a service business where I'm offering a service of human labour or whatever it is. Speaker 2 First question is do you need money to grow your business Is what we are not saying tape debt because you're manufacturing or anything. A manufacturing company, if it has opportunity and to exploit that opportunity, you need money. Now the question is where should the money come from, equity or debt? I'm saying debt is cheaper option. Speaker 1 Correct. Speaker 2 In a service company, suppose the money is not required, then you neither need equity nor you need. That correct question is only when you need money, what should be used? So what is the relative advantage and disadvantage of each? If I give you a textbook answer, three factors have to be taken into account. OK #1 the cost factor #2 the control factor and #3 the risk factor. From a cost perspective, the cheapest is debt. OK, from a control perspective, debt is still better. Why? Because if you want to double your investment, you put 100. Now you want to make become twice the size. You take 100 from somebody else. From being 100% equity holder, you become 50%. You lost control. But if you take any amount of debt, you're still 100% owner control is there. So now cost factor debt is better. From a control factor debt is better. So from a risk factor, equity is better because debt come with a obligation to return, so there's a risk involved. Speaker 1 So now Doctor Rani, let's say I'm a business owner and I have been running business for the last two or three years now. If you had to consult me, what would be the questions that you would ask me to analyse my business, to tell if it's good or bad, if I'm running or doing a good job or a bad job? How to Analyze Any Business There are many, but I'll bring them down to one or two. Number one, I want to make sure you understand your cost of capital, which trust me you bring 100 businessmen right now, if not all 98 would not know, forget knowing cost of capital, they wouldn't be able to tell you how much of the capital in that business. Then you go to make sure that the revenue that your business generates should not only cover the cost of production if you're a product company or you're in your case, cost of making all these things, or the cost of admin or the cost of selling bread, which also cover the cost of capital. The vicious cycle is when you don't even know your cost of capital. You don't even know whether you're earning enough to cover that or not. Speaker 1 Right. Speaker 2 And within the capital, the most expensive is owners capital, and most owners think their own money is free. So when a business earns profit so-called and everybody is getting, but the owner is not getting a desired rate of return, that's not a sustainable situation, right. I was writing in one of those Sunday musing that it's a very fashionable statement to say a business is run for and on behalf of all the stakeholders. Who are the stakeholders, the owners, the employees, the vendors, the bankers. And I said that's nonsense. Business is run for one stakeholder and that is the owner. All the other stakeholders are facilitators in the process of ensuring that the owner makes money. Because when the facilitators try to fleece you, when does try and take as much from you, employees try and take as much from you. And if only they make money and the owner doesn't, guys, it's a matter of time before the owner will say there's no point continuing and then nobody will make, right. The facilitators have to understand, do everything in your power to see that the owner earns and earns how much that higher cost of capital that I told you right, That is a sustainable problem. Speaker 1 No, I get the point because let's say I have 10 crores and I'm working day and night on my business. Now if the profit that I'm making from that 10,00,00,000 is just let's say 1,00,00,000, I'm like why am I doing this business? I might as well put. Speaker 2 This or if everybody working with you, zoning, you're doing so well. Employees are getting handsome salary, landlord is getting rent, vendors are getting paid, bankers are getting paid, but Mr. Sharon is earning 567 percent. You will say, damn it, did I start this business so that I can generate employment in the country? Did I start the business so these guys can make money or should I be making money? If you are not making and everybody is making, sooner or later you'll say let's shut it down. Yeah, nobody will make money. So doesn't it make sense for everybody to make sure that you make in their own interest, not not out of the goodness of the heart, so that they continue making. They got to make sure you have to add, but for that you got to attribute the right cost to your capital. If you yourself think my money is free, then the tragic thing that happens is this business will still continue. Everybody around you will make money except you. I think whichever way you look at it, unless a business can earn for the owner thirty 4050% it is not worth running. But this again will raise a lot of questions. I'm not talking about profit margin. When I say business should earn 4050% then people misinterpret with business give you that kind of return because they are misinterpreting this to be a profit margin. Margin vs ROI I'm talking about ROI. Speaker 1 Can you can you explain? Speaker 2 I was a director in IT peripheral company, very large, a few thousand crore turnover, ridiculously thin margin. Business model was when the goods were land in in on the shores of India. They get released from customs, they're loaded onto hundreds of delivery vans sent all over the country and money collected should happen in seven days. If it took eight days, this company made a loss. That thinner margin. Wow. But if you complete in seven days, you could rotate 52 times in a year. Imagine just making a 1% margin. You can have a 1% profit margin and still have an ROI of 50% if you can rotate this money 50 times in a year. Speaker 1 I got it. So in a year let's say I have 10 crores and if I'm also going to make let's say 1% profit on this 10,00,00,000. But if I can rotate that money fast, meaning I can sell 100 times with that same money, you know, sell, make the money, buy raw material, sell raw material, buy, sell, buy, sell. Speaker 2 52 Times Now I used to tell them who's a finance man in your company. Ridiculous to say the guy sitting in account department are the only finance guy. This clerk in the customs office is the finance guy to me because if he delays releasing the goods, it's bad finance management. The truck driver delivering goods across the country is a finance man. A puncture in a truck is bad finance management. We have such a narrow notion of finance management. We people, first of all people, think accountancy is finance management. Speaker 1 Interesting. Speaker 2 Another example I give somebody this friend of mine, let's say hypothetical not actual. He buys potatoes for 100 bucks. Full day he works and sells for ₹101.00. Or he buys for 1,00,000 and sells for 1,01,000. OK. How much profit has he made? Speaker 1 1%. Speaker 2 No, he does the different, OK, so 365% we think is a 1% margin and damn it the same 1,00,000 he puts next day again, again he again he puts it right. Otherwise what I'm talking about 4050%. Speaker 1 Interesting. So just like how a business makes mistakes, what have you observed? That an individual makes mistakes which they don't know that they're making, and they'll eventually find out in the future. Mistakes to avoid (to grow your Personal Wealth) Because they don't understand enough. Like Lot, many people don't even understand the negative impact of inflation on their lives. They don't even understand their investments have to be done in such a way that the money is growing faster than the rate of inflation because they don't understand compound interest. I mean, everybody knows the word, but how many of them use it to their advantage because they don't understand the mechanics of stock market. And if they either they don't invest or if they invest, they invest foolishly. And I think a foolish investor is far more dangerous because the guy never ever invests again and then go and dissuade 10/20 other people that you don't invest. You know, I made that mistake. So there are so many things that go wrong. So unless people understand these things, you will not be able to. I mean, I mean there are tragic cases where you save your whole lifetime and you rely the money is not going to last you 6 months post retirement, right? Therefore, the only substitute is knowledge. Learn as much as you can about investing so that you can put your money to good use. Inculcate the habits of saving. Understand even income tax, there's a wonderful account called PPF if if you don't have everybody, I think should have APPF account that gives you one of the if you don't want to take any risk, if you want to be absolutely safe but still get returns greater than FDI. Think APPF is a wonderful account. And I think whether you even you may not realize what a phenomenal service that is to mankind with those who understand at that age, we'll probably thank you 40 years from today. Speaker 1 So I I still remember what my parents used to tell me that back in their days, a fixed deposit is to 15 percent, 16% interest rate. Can you talk about those days where people were getting 15% interest rate on fixed deposit? The Logic Behind FD Return Rates And the rate of interest doesn't make mean anything. If you had visited Mexico in the 80s, right, you would have seen the town plastered with billboards, banks, advertising fixed deposit schemes offering the rates of interest as high as 80%. Eight, zero. What does it sound? High? 80% interest rate. But that inflation was 100%. Interest only makes sense when compared to inflation. The government has to ensure that the real rate of interest is positive and real rate of interest means the rate of interest that you get less inflation. So when India had 1215% interest, the inflation was 1012%. So that doesn't mean anything. Speaker 1 Got it, got it. But today it's a little different, right? Today every is giving 4 to 5% post tax returns, right? Banking Crisis Loading in India? And the inflation for that same people who are in the 30% income bracket is about 10%. Speaker 2 So that is a negative real rate of interest and that the government has to make sure doesn't last long. That should happen for a can happen for a short period of time, but it cannot be sustained. Otherwise the banking system can collapse. Speaker 1 So you're saying right now whatever is happening in the country cannot? Speaker 2 Sustain cannot should not happen for long. Will not happen for long. Speaker 1 And why? What is wrong according to you right now? Speaker 2 Because your real rate of interest is negative, the deposited and bank will start feeling like an idiot, he said. I saved my money, my money grew by 5%, my prices have grown by 10%. Net net, I'm a loser, correct? The banking system can collapse, correct? When India pre 1991 had a rate of inflation of about 9-9 and a half 10%, banks used to give 12%. Speaker 1 Great. Real rate of return was +2 plus plus, yeah. Speaker 2 A negative growth rate for about 10 years. Recession. Recessionary conditions. I had a colleague of mine who did his charity accountancy under me, used to work for Goldman Sachs, still works for Goldman Sachs but was posted in Japan. He was visiting Pune and when he came to meet me, he says now when I put money in the bank, they're leaving service charges. They were charging you money. So interest has to be seen in the context of inflation. Now they've got 2 tools in their arsenal. Tool #1 monetary policy. Tool #2 fiscal policy. OK, fiscal policy controls taxes. Government Juggling Between Growth and Votes Monetary policy controls interest rates. Now tax. One method is you want to reduce demand. You got to make sure the citizen has less money in their pocket to spend so demand will go down South. They can hike up tax rates. Speaker 1 So that is what the government is increasing. Speaker 2 No, no, no, they won't do that because if you're trying to please your vote bank, and if you hike up tax rates, your inflation will come down, but your voter will be more convinced not to vote for you. So no sensible government will use that because it hurts the vote bank. Then the next option is use the monetary policy. Then the RBI governor would be asked to, if possible, intervene. And then the RBI governor will say, OK, we have decided to hike up interest rates. Now, when you hike up interest rates, those who deposit money in the bank will earn more, Those who borrow money will pay more. So more people deposit less people borrow money, which was floating in the economy, goes into the banking sector. When money supply in the economy comes down, inflation comes down. Speaker 1 No, but if the interest rates are increased, yeah, which is what probably what the RBI will want to do to control the inflation. Speaker 2 If there is yes right, the government may not want that. Why? Because that makes money more expensive than industry start suffering. The growth gets stalled, so employment may suffer. So right now, the same problem Trump is having with the Fed chief, OK, He gets up and says every day, this guy is not supporting me. I'll he said I'll sack you, but he can't sack him. So. So that guy's steadfast in his own approach. He said, no, I will do what the economy deserves. I will not do what you want me to do so that on a complete warpath. Speaker 1 Right there, he, the the Fed chief, is fed. Speaker 2 Chief. Equivalent to our governor? Yeah. Speaker 1 He's not required to listen to the president there. Speaker 2 No, nobody is required to. Speaker 1 OK, but here. Speaker 2 No, no, no. OK, last, I should not name names, but let me not name the last three governors back. That gentleman refused to listen, so they did not extend the stuff. Then they brought another gentleman would come from America. He listened to the government for about 3 months and he stopped listening. So he was given marching orders and the next guy came. So they're always on a if the if the RBI governor is consensus, there is bound to be conflict with the government. Speaker 1 So if this, let's say for argument's sake, if this keeps continuing, if the inflation keeps continuing and people's purchasing power keeps dropping, because, you know, 99% of the people in India are not good investors, they're going to do the same old thing, which is keep cash and FDS or some money in the locker. Is the Middle Class About to Shrink? So that keeps continuing, let's say for five years, six years. Do you foresee that probably the middle class will start shrinking, more and more people will go below. They will not. Speaker 2 Have a new for so long, Where will the demand come from? See in inflation, demand is greater than supply, right? For demand, you need to earn enough. Speaker 1 Right. Speaker 2 So if, how, how will that go on happening? If if the economy is not growing, that cannot it's, it's, it's a, it's a cycle. It'll go up, it'll come down. It'll go up, it'll come down. Speaker 1 And you've seen this happen many times. Speaker 2 Always across the world, OK? Not only in India, across the world. Speaker 1 Interesting. So maybe now we can compare us to our neighbors. Let's go to China, right? Because I was. Speaker 2 Wondering which neighbor? Speaker 1 Our neighbor, right, Our China. How Did China Get Ahead of Us? So if you go back 30 years, if you compare the GDP and the economic situation of India versus China, they were probably at similar levels, right? But Fast forward to today, China is probably 3 * 4 times much richer on a GDP per capita basis. Compared to an average Indian, So what exactly happened there? More, right, Five times probably. What exactly happened over there which did not happen over here? Speaker 2 China grew at the rate of 1112%. Speaker 1 GDP growth. Speaker 2 For 25 years. Speaker 1 Talking about the GDP growth, GDP. Speaker 2 Growth 1112 percent, 1112% for 25 years. India started when we started liberalizing, India's growth rate went up to 8-9 percent and we kept it up for a few years. Had we? If we were able to maintain an 8% growth in GDP for as little as 20 years? OK. First of all, 20 years, 8% is not little by any stretch of imagination, but I'll still use the word little. Had we done it for as little as 20 years, India would have become a developed country. We were as close to it as that. Speaker 1 You mean like right now it would have been developed. Speaker 2 I'm talking about, yeah, this started in 91, Yeah, we would have become some time. Speaker 1 Back. I mean China is technically called a developed. Speaker 2 Country. But China, of course, I mean, not only developed, probably it has gone beyond that. Superb. Looks like some science fiction. Yeah. So China. But then on the other hand, China can do it because it's not a democracy. They can get things done on gunpoint. They want to develop this city into a industrial hub. They can pack everybody in trucks and move the people to another village somewhere. Speaker 1 Oh, that happens. Speaker 2 India cannot do that. So, so India's growth, when you see from the lens of we are a democracy, everything, every time you want to do something, some rights group, environmental group will come on the streets and stall it and we take all and which is the way it should be. Despite all those things, the growth that we achieve I think is very, very commendable. Speaker 1 OK. But then at the bottom line, how do we know what is better? Like is the average Indian happier or is the average Chinese person happier? Speaker 2 I have no clue about the Chinese, but I think the average Indian is happier. No doubt. You would think so. I think so. And I think because I see very little similarity between or very little, let's say the money available with you and the happiness quotient seem to be at cross inverse relationship they have. I see a lot of poor people far happier than the guys who are richer. Those guys are stressed out. Those are always grumpy, they're always grouchy. So one of the reasons we are happier is maybe because we have a fair share of not very rich people. Speaker 1 Interesting. Speaker 2 So if you look. Speaker 1 At maybe, OK, let's compare China and US now, right? US was a democratic and still is a democratic country, right? And they have been, they are the major superpower of the world, absolutely, right. Will We Ever Catch Up with the USA or China? So, but the story of China and the story of US is very different as to how they became superpowers. Probably if you look at US, what they did was they really favored, you know, businesses to thrive. They really favored, you know, entrepreneurs to take risks. There's a lot of risk capital in the USA. Lot of innovation happened and a lot of, you know, people came from around the world to live in United States. How can India become something like that? Like, do you think it's possible for India to become like that? Speaker 2 I think we are on that path, OK, Ever since we opened up our economy, we can become a melting pot like US. And now thanks to certain policies that are happening, a reverse brain train seems to be starting, right? So the more the talent that comes here and the more the, if the government continues to be responsive, it's, it's not an impossible dream to have. It may take several years by the time we become like America, right? But I think the pace at which we have grown in the last few years, it change in terms of changes if that continues that they're not far. Speaker 1 Maybe because you've seen that change, you know, in front of your eyes. So for example, some someone like me, I'm 30 right now, I only understood economics probably like 7-8 years back. The Horror of Pre-Liberalisation So because I want understood it just recently for me to understand or appreciate the changes that happened in 6-7 years is not that significant. So, can you draw some examples of change that you have observed over the last three decades which makes you confident about India? Speaker 2 I think the change started with the day we began liberalizing, and we didn't do it voluntarily. We were made to do it because we took IMFIMF. Speaker 1 Can you tell us what is liberalization? What happened? Speaker 2 You know before 91 India was not an open economy. OK, by open meaning no foreign company could say let's go to India and set up shop. Impossible for why foreign we are not allowed. Forget foreign company, even if you're an Indian company, you want to start a new business or even if you want to expand your existing business. God knows how many licenses were required, so we were living under what is known as a license Raj. Speaker 1 OK. Speaker 2 To take you a little further back, I think in the mid 70s, we were not like that then. George Fernandez had become the industries minister, if I'm not wrong. Yes, for India and he said no, none of these Coca-Cola used to be in India before that they were thrown out. All multinationals were thrown out because Coca-Cola was thrown out company like Camper Cola and thumbs up a bond otherwise they would have never count. Then till 1991 we were like that you had to take a license you and it was huge amount of red tape. The result was if you wanted to fly, you had one option, Air India. You want to drive a car, you have two options, Ambassador and Fiat. You wanted to invest in mutual funds, you had one option, Unit Trust of India. You want insurance, life insurance one option LIC very uncreatively Life Insurance and Life Insurance Corporation of India. Speaker 1 Sort of monopoly. Speaker 2 Absolute monopoly, and the result was mediocrity. Speaker 1 Because when there is a monopoly, there's no innovation. Speaker 2 No competition there is no like if you wanted to. I live in Puna, there's a company called Bajaj Auto. You want to buy a scooter? I'm told you had to pay a 33% booking advance for a capital goods item like a scooter. And a father used to book and son used to get delivery. Wow, 7-8 years waiting period for a scooter. Speaker 1 When was this? Speaker 2 Till 1991. Speaker 1 Eight years waiting period. Speaker 2 5671 of I mean those days you had a NRI uncle or somebody, the biggest favor you could ask him was can you send me a demand draft in dollars? Because if you book a scooter at dollar payment, you would get it in maybe 3-4 years rather than eight years. Why? So the big demand supply mismatch, no competition. Consequently, if somebody bought a scooter from Bajaj in the 60s or the mid 70s or the late 80s or the early 90s, there's hardly a change in the scooter, No innovation, no improvement. Why would you? You are the Apple of scooters. There's a motivation. 1991 government opened up it's doors. Speaker 1 They finally realised that this is not. Speaker 2 They didn't realise IMF, we were in dire straits. You know, we used to every now and then go through a balance of payment crisis, which means if you import more than you export, you want to import European dollars. Speaker 1 Correct. Speaker 2 India, you want to spend, you can print rupees, but you want to import, you can print dollars. Only American can do that. Yeah. So you have to export. And if your exports fall short of imports, OK, then how do you pay for it then? Of course, you have to buy dollars. When you buy dollars, you sell rupees. When you sell rupees, you create a supply of rupees and a demand of dollars and rupee become weaker, demand a dollar becomes expensive, etcetera, etcetera. Interesting. India used to have frequent balance of payment crisis. I mean, there were times that we didn't have enough money to import for a few days. Well, you know, 1991, before Manmohan Singh became finance, with Narsimha Rao became PM, there was a Chandrasekhar government for 10 days. OK, If I'm not wrong, the finance minister was Yashwant Sinha and India had such a shortage of forex that he pawned our gold with the Bank of England and took a loan. And I think one of the first acts of Manmohan Singh was, I don't know where he got the money from. He returned and brought a gold back. And then he did some phenomenal things which changed a lot of. I'll tell you a story. We were going through a similar balance of payment crisis earlier on in the mid 80s when Indira Gandhi was the PM and the government had a meeting. Stories from India’s Pre-Liberalisation Era What do we do? How do we solve this forex problem? Now? Answers were also obvious that there is a huge body of Nris all over the world. If those guys send more money than they're sending home, all our problems can be sorted out. So why aren't they sending more money? That answer was obvious. You take money out of the country, you bring it back, it is called repatriation. Repatriation, OK. And if you take it back again, it is called expatriation. Indian laws did not permit expatriation of funds. Speaker 1 So once you bring the money in India, you can't take it out. You can't take it. Speaker 2 Out. So if you are, imagine you're an NRA sitting and you want to. You don't need to be a patriot to send money back home. Like you yourself pointed out interest rates for 12/13/14 percent. Nowhere in the world you get that it made commercial sense to pack your money back home. You send your money home. Most welcome tomorrow you say you want it back government says sorry you can't take it back. So you would think 10 times before you send money. So government realized this is a bottleneck. They came out with a beautiful brochure wooing NRA guys come into India all the license that are there you know we'll we'll give you single window clearance we'll do this we'll do that and we will permit X batteries. Now this is not the time to discuss this but one fellow who responded to this was a gentleman called Swaraj Paul. Lord Swaraj Paul who is from the House of Lords in UK, OK, runs huge industries in India. Kaparo group, APJ group, famous name. He came to India. What a smart guy. He didn't want to come and start industries from scratch and go through all the you know those days. I don't know why I started this. Those no, no. Speaker 1 This is very interesting, please continue. Speaker 2 I mean, I'll have to go backtracking to give you back stories for that. You know what percentage shares should a promoter hold to control a company? Speaker 1 Ideally I mean mathematically 51%. Speaker 2 But otherwise, real, practically speaking, how much should you have? Frankly, it can go down to one day. We can do a series on case studies. You can have 10%, you can have 8%, you can have 5%. Speaker 1 As long as you do a majority. Speaker 2 Stakeholder No, no, no, no. It's a different, he said. Let's find out companies where promoters have small stakes. Speaker 1 OK. Speaker 2 And then you go to the market and start buying the shares. And if you acquire more than this fellow stake you, it kind of becomes a hostile takeover. So one of the cases of hostile, he identified two companies, one was Escorts, the other was DCM, OK, Escorts owned by the Nandas and DCM, then owned by the joint family of Bharataram Charataram. And if I'm not wrong, in one of the companies, the promoters had 7% stake and the other company, the promoters had 4% stake. So Suratwal came to India and told his broker start buying these shares now. You know, if you take your mind back, you are a youngster, you come into the age when there is DMAT, you have a passbook for your shares. Those days there were no DMAT, right Physical shares. So now if if you hold shares of a company, let's say there's a company called Sharan, let's give you a product. Speaker 1 One 1% club. Speaker 2 1% Club Limited OK, and and let's say I'm a shareholder and I sell my shares too. I met Rachit just now to Rachit. Yeah, now 1% clubs owner has changed. One of the owners has changed. You should know. Yeah. How will you know? You have no clue unless Rachit and I get together and tell you. Interesting. So those days physical shares, if I sell my shares to Rachit, I used to hand over the share and a transfer form where I said I have today sold 100 shares of 1% club to Rachit and sign it. Rachit will sign. I have bought 100 shares. Now you have my sign with your records. Why? When I bought the share that signed a form. When this comes to you for transfer, you make sure this is genuine transfer. You compare the signature, then you will remove my name and put Ratchet's name. Now why will Ratchet put his name with you if he doesn't? Tomorrow you declare A dividend, it will go to my house. Tomorrow you give a bonus, it will come to me. But Ratchet says last week this company gave dividend and he'll received it. This company gave a bonus also maybe last year. Track record says once in 5-6 years they give. That means that no benefit to be gained at least for the near future. And he said I didn't hold it. I didn't buy the shares to hold it for long. I bought it because next week, next month the price goes up, I'll get rid of it. Second problem those days was to send it for transfer, you have to send by snail mail, OK, It would go by that mail, it would reach your secretary of department. It will take a long time to change and then you send it back roughly 3 months. It would take for it to come back in that three months any selling opportunity, you could not enjoy it. So Ratchet says I don't intend to hold for so long. So when I sell my shares to him, I give him a share certificate and a transfer form saying I have sold 100 shares of this company to Blank and I say if you want, you put your name in it. A little later Rachid sells it to this guy. This guy sells it to this guy. This guy sells it to that guy. Now by the time it reaches him, he says now dividend is about to be declared. If I don't put my name, dividend, good one in that blank, he'll put his name and send it to me. What I'm trying to say is your companies 10 shareholders have changed. You have no clue companies didn't know who their owners were. Speaker 1 Back in the day. Speaker 2 Back in the day. So Rajpal came to India, started buying shares and probably, I'm guessing now, probably didn't send them for transfer till he collected more than 4% and more than 7% and must have made one big bundle and sent to them, transferred to my name. Those guys must have got a heart attack. Where the hell did this guy come from? Such interesting. I mean those days, such fascinating thing would happen. You could track these things and write stories and stories and stories about it. Speaker 1 And then he came in and did a hostile takeover. Speaker 2 No, no, he failed. He failed. Those guys went to court and court, unfortunately for him and fortunately for the promoters said no, no, no, no. This is they forced the promoters to buy back the shares from Swaraj Paul. See when when you take a make a hostile attempt, the price start rising because you're creating a demand for it correct. The poor guys were forced to buy their own shares back from him at a premium and pay him some interest. So they were absolutely upset. Swaraj Paul was equally upset. What the hell? I did everything else for law. How can so both of them were disgruntled. Swaraj Paul said I'll never come back to India and this and that came back again and again. That's a different story. But they failed. I got two books on in my library, 1 written by Swaraj Paul, one by Mr. Nanda kept next to each other. Both books have a chapter on this and that talks about you know we entrepreneurs with a sweat and toil build these things like brick by brick and like a decor these guys and so as well paints a totally different picture. Government invited us, they said come India needs your help. I went out of my way and they did very interesting. Speaker 1 So this this is what happened when the government started liberalization and. Speaker 2 No, this was pre. Speaker 1 This was pre. Speaker 2 Yeah, this is pretty this 80s so. Speaker 1 So basically all of these things were happening. There are no innovation, there are monopolization of companies and then got India was in a big deficit when it came into dollars versus INR. Did the IMF Force India to Open Its Borders? So they had to borrow a lot from the. Speaker 2 IMF and then from time to time, yeah, IMF. Speaker 1 Yes. Then the IMF forced India to say that you have the 2. Speaker 2 Opinion was we will give you assistance provided you make these changes. Speaker 1 And then they opened up the borders. Then what happened? Speaker 2 Then India started flourishing. Speaker 1 Like so why didn't he not do this if it was that simple? Speaker 2 No clue, no clue. Maybe the political leadership, maybe the quality of leadership, maybe vested interest. You feel a lot of power, right? If everybody has to completing to you, I need industry and then you get the opportunity to make money, I'm guessing, I'm guessing. Speaker 1 Also maybe the lobbying by these incumbent companies of India telling don't open. Speaker 2 Up even these companies that they had to expand had to take licenses you want to. So those were different days. Speaker 1 So then the IMF forced India, and that's when the boom happened. That's when the. Speaker 2 Boom. Then we did it very intelligently. I mean, it's not that we did it because IMF is saying and we're very upset. No, we went all out into it. And that time also there was a fair segment of population we recognize, yes, this is what we need. In fact, we also wanted it. You never would listen to us, but at least you listen to IMF. Speaker 1 Is that the time when the stock market of India started booming? Absolutely. And is that the time when most of US retail investors started investing in the stock market? Speaker 2 Still not enough invest but yes, I think it became a very exciting place and the person to whom credit should be given for having brought it to the masses of Dhruba Ambani. Speaker 1 OK, can he kind? Speaker 2 Of brought it out from it was a close club earlier on, a close club of brokers and you know a few people who would trade and masses were not involved after Dhirubhai Amani made it glamorous. Speaker 1 How did he make it glamorous? Speaker 2 Several thing, Dhirubhai, the way he grew the kind of progress a lot of PR lot of people used to, people who bought his shares made a lot of money. I mean people have bought 100 hundred shares of Reliance, that's it. And they build houses and married the daughters those days etcetera, etcetera. So they swear by him. So as a result, what would happen is even the vegetable vendors, fruit sellers started applying for IPO one day. We should discuss the IPO history also how it happened initially, how it would happen and the instrument that banks came out with because your money would get blocked for three months. Issues used to be oversubscribed 5000 five 100,000 times. So I mean imagine if 1000 times over supply, meaning one guy gets 999, people get the money black but but the money is blocked for three, three months. Speaker 1 For all the thousands. Speaker 2 Then the instruments came out. Don't have to block money, keep it in the bank. Bank will give you this document. You use that to pay and the money will only be in cash if you get allotted. You know so much. Used to be I should write newspaper column those days. I found it difficult, despite being a professional and full time into it difficult to keep track of the changes that were happening. Exciting changes, each in more exciting than the other. Speaker 1 So my dad also told me this that during that time, 90s and early 2000 even he started investing because of the euphoria. OK, but then he lost a lot of money and then never touched stock market until I introduced him A. Speaker 2 Statement I made some time back. You know, if you invest without fully understanding the repercussions, then that person is more dangerous because not only that person never invest, then you dissuitate 20 others, right, Which I think is dangerous and therefore. Stock Market in the 90s & the Lore of Harshad Mehta What have you and did a lot of people lose money during that time? Speaker 2 Phases come and go. When Harshad Mita scandal, before Harshad Mita scandal, market is booming. When Harshad Mita scandal happened, market crashed. So every time it crashes, some people will lose, right? Every time it goes up, some people will make money. So that is the phase that will happen every time. So which is why knowledge becomes so important that even when you lose, you should know why you lost. It should not be reserved. No, no, this is a bad place to be No, it's not a bad place to be. You should expect this to happen. Sometimes it will go up, sometimes it will come down and discerning people can take advantage of both. When it crashes is a great time to get in. I mean, if it doesn't crash, when the hell will you buy I I love crashes. You know certain share that you have FOMO for now. Here's the time I get them cheap again so. Speaker 1 So back in those days, what was the hot stock? So right now we talk about A. Speaker 2 IACC. Speaker 1 ACC Cement. Speaker 2 ACC Cement, one of the. Speaker 1 Cement was hot stock. Speaker 2 Why? But had you bought whatever the reason? But had you bought ACC then the price it reached then I don't think it reached again in a lifetime. But that's some 15,000 or something. Wow, so many shares were there. I just put out a story the other day about Mazda. Mazda Industries. Speaker 1 Yeah, you, you talked about I, I saw your YouTube video on that. The price went from 100 to. Speaker 2 6-6 bucks to 1500. Speaker 1 6 bucks to 1500 how did that happen? Speaker 2 The Hudson method started buying those days. Hudson method would touch anything, it would go up. So but what? Speaker 1 Exactly was he doing to make it go up if you can explain? Speaker 2 Hudson method used to buy demand supply by the question was where was he getting the money? That was the question one didn't realize those days rumours would go around that you know it is film stars black money or politician money or or criminals money. But then you realize that man had an unlimited supply of money available from the banking sector used to raise money against BR. BR is bank receipt. Bank receipt which is equivalent to a stock certificate. I mean in a share market you sell shares in a in a bank you give them, you sell the securities, but you don't give physical securities. Just as a stock market, you buy a share, you don't get the share immediately, but the broker gives you a contract note, correct. Similarly, a bank doesn't give you the security, they give you a bankers receipt on a letterhead. So he would take these bankers receipts and raise money against those and which are sometimes bogus receipts. But I, but, but how does it matter? I mean if I, if I bring you this phone and say give me ₹10,000, I may give you a blank box. But I say Sharon give me 10,000 bucks or give me ₹1,00,000. I mean you'll examine this. Is it worth 1,00,000? But if I tell you give me today for 1,00,000 and day after tomorrow I'll buy it back for 1,00,000 and 2000, then how does it matter to you whether it is genuine or a bogus? So long as you trust I'll buy it back. So you used to give those. Take the money, put it into stocks, make it multiply, come and give it back to you. You make money, I make money. Everybody's happy. Speaker 1 Interesting. So now let's come to today, the current time, the Indian market as we know today, whoever I talk to today, when I ask about the Indian market, this is overvalued. Tips to Build Wealth in the Stock Market They say that the multiples don't make sense, the valuations don't make sense, the PE multiples don't make sense. How do I like, based on your wealth of knowledge over the last three decades of analyzing the Indian markets, what phase of the Indian market do you think we are in right now? Speaker 2 Disclaimer, not my Forte. I'm not a broker. I'm not. I don't consult on stock. My Forte is business finance. I do attract these things because I take them. It's my font. So I, I'm not an economist. I'm a child regarded right. So these are things which I just out of hobby I I read. Speaker 1 No, but I think your understanding of the subject helps you, you know, make this kind of. Speaker 2 But I must make the disclaimer, I'm not the expert. Speaker 1 Expert on this, but the current situation remind you of sometime in the past. Speaker 2 I think every now and then the same situation will come. These are cycles. These are cycles. They will happen. All you need to do is if there's a rising phase going on. Yeah, if one understands and technical analysis then when it rising phase goes on, don't start selling because after you sell it may go on rising, let it continue, right? Let the fall begin and I fell 2 dips is the time to get out. When it falls don't start buying because falling because after you buy it may go on falling. Let the falling finish when it start rising again 2 jump up because when it rises, it may fall again. So if it rises, falls, it rises again. If 2 tops, successive tops are higher than each other. After a fall is the time to get in. When it starts falling and goes up again and falls, 2 bottoms are below each other. Not a foolproof method, but a pretty good method too. Speaker 1 That is a very interesting note to end the conversation. Doctor Anil, I think we've gone across the board with respect to our topic. We've talked about macroeconomic, yes. How was India before the 90s? How is India looking at right now? How do you invest your money? How should a business owner look at their money? And finally, what it really takes to be financially intelligent, right? It's not just about knowing how to invest, your knowing just, it's not just about saving money. Anil Lamba’s Much-Awaited Next Book It's not just about OK, this is my income, this is my expenses, this is my savings. Speaker 2 What we didn't talk much about and let it let me quickly give you 2 minutes. It's the book that brought us together. Yes, yes, start early, finish rich. But this book is aimed at kids and young adults. Speaker 1 OK. Speaker 2 One of the reasons I wrote it is because every person I meet, my clients, I always say they're injured people. They have made the mistakes, they've suffered the consequences. Then they felt the need to come to somebody like me or anybody else to learn. And almost everybody has told me some time or the other during their interaction with me, why wasn't I taught this in school? So I've written this book so that let's teach them young so that they don't make these mistakes. What does their parents probably made? So this book I've divided into 3, four parts. 1 is general financial concepts, second is personal finance. If you want to learn to invest in third of them, assuming a fair percentage of them might want to become startup founders. Absolutely. So how do you start a business? Everything I've spoken to them, I've not spoken down at them. I've spoken to them like adults. Only language uses very, very easy, a lot of illustrations. So how do you start? What are the legal structure? How do you raise your funds if you want to start a new business having started, how will you maintain financial statements? How do you read them? You'll have to pay taxes. So what is taxes, etcetera, etcetera. So these are all parts of the book. So I said let me bring that into it. No, no. Speaker 1 Absolutely. I think this is your 8th book if I'm not wrong, right? I think you're a serial author who just keeps coming out with best sellers one after the other, and I for sure I think you didn't bring the book. Speaker 2 But I'm going to send it. Speaker 1 To you please send it to me a signed copy I will definitely read it cover to cover as the same as I have read your most popular book, Romancing the Balance sheet. Great. And yeah, thank you so much Sir, for. Speaker 2 Coming here, pleasure, such a pleasure. Speaker 1 I hope you had fun thoroughly. Speaker 2 Enjoyed talking to you today? Speaker 1 Thank you so much. Thank you guys. On that note, I hope you guys have enjoyed this conversation. I hope you guys have become a little bit smarter by listening to us talk about finance, hopefully in an entertaining and educational manner. On that note, guys, we'll see you in the next one.