The Hindu Business Line : Learn about stocks through a love story

INVESTORS like you may be the least interested in romance. But "Dollar Wise Penny Foolish" by Siva Nara and Priya Raghavan, published by Wise Pen Corp (www. dollarwisepennyfoolish. com) is a love story about stocks for `aspiring millionaires', with Sam as the hero and Jessica, the heroine, plus a lot of friends.

They explore answers to questions such as why should one invest in stocks, how to make millions by investing only $125 a month, how can one identify a company in financial trouble, how to detect accounting scams, and so forth, through `easy-to-understand examples, charts, homework assignments' and a fun trip to Las Vegas.

With Ayn Rand's quote, "Wealthy is the product of a man's ability to think," begins `wisdom mocha'. Sam and his pals assemble at Starbucks "for the promised cup of a tall mocha in exchange for financial knowledge". Sam enlightens the group, "When you deposit your money in banks, you are in need of their services. However, when you invest in corporations, they are in need of your money," he says distinguishing between the two.

"Why should banks pay you more when you are in need of their services?" asks Sam, and reasons: "That is why banks are more profitable businesses, because they get money from the public and have no obligation to provide great returns." On the contrary, companies need your money, and have to provide excellent returns, to stay in business, explains Sam.

There is the `rule of 72' that he'd explain, to decipher how long it will take to double your money. "Just divide 72 by the interest rate," Sam simplifies. "For $10,000 to double with an interest rate of 5 per cent, it would take 72 divided by 5, which is 14.4 years." If the rate or return were 20 per cent, it would take 72/20, that is, 3.6 or roughly three and a half years to double your principal investment.

Meet Jessica in chapter two. "I don't want my original $10,000 to vanish, if I make a wrong investment choice," she says anxiously, and Sam offers to tell her about "the safest and surest ways of not only retaining $10,000, but also making it grow exponentially" in one word, "stocks".

Do you know how much profit banks make from the money you keep with them? "Anywhere between 200 per cent to 500 per cent profit," according to Sam. "When you invest in a certificate of deposit of a savings account in a bank, the bank doesn't keep your money in its safe. They in turn invest your money by lending it to major corporations and make bigger profits from your money," he says, arguing that it is better if you put the money directly in the company. Ditto with mutual funds, too, he'd add, and offer the choice to either be an active investor, or a passive one.

To press his point of view, Sam gives analogies: "Not investing in stocks is like owning a supersonic jet and occasionally using it to fly between New York and Boston. Not investing in stocks is like having the latest computer that is not connected to the Internet. Not investing in stocks is like visiting Orlando without going to Disney World and Universal Studios."

In a chapter on the `I' word, one learns that the first record of inflation was when Alexander the Great introduced a uniform coinage to all the territories he conquered. "He confiscated the gold and silver in these countries and minted coins from them." Then comes a quote of Leon Henderson to let you chuckle - that a little inflation is like a little pregnancy; it keeps growing. But, when the group notes that the average cost of raising a child including college education is $700,000, Bill exclaims, "I'm actually about to pass out. Do I need a million dollars to raise two children? I declare I'm going to take a solemn vow of celibacy."

Every year an average of 6 per cent increase in prices happens automatically without your knowledge, informs Sam. Happily, thought, the day's news is that our annual wholesale price index-based inflation fell to 4.09 per cent during the week ended July 2, from the previous week's 4.14 per cent. The inflation rate was at 7.08 per cent last year.

Don't forget taxes either, reminds Sam. "Every day, when you work for eight hours, you lose three hours of pay in taxes." Which explains why May 3 is known as tax freedom day, he'd add. "Whatever you earn from January 1 until May 2 goes to taxes. Everything after that goes to you." We'd have to recalc the date for the Indian taxpayer.

Drawing morals from Mike Tyson's filing for bankruptcy, Sam cautions that if investors focus only on the products and promotions but not on the company's financial healthy, they might find all their money evaporating. Mounting debt can deliver the ultimate knockout!

Meanwhile, Jess has invited Sam to join the family barbecue, so they get to know him better. "She was sending out clear signals," thought Sam...

To know what happened thereafter, let me send out a clear signal: DWPF!

BookValue@TheHindu.co.in

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