Markets with Bertie: Why the concept of IRR is the best kept secret

Every January, Bertie is made to sit for the salary revision conversations for his household staff. To be sure, the conversing is done by the missus. Bertie’s brief is to sit with a solemn face and lend a degree of officiousness to the proceedings. He was thus seated with one eye on the gripping Test match being streamed on his phone when Santosh, their Man Friday, directed a ‘dekho na bhaiya’ at him. He was shown some papers that seemed to be an account statement of Santosh’s housing loan.

Bertie wasn’t certain what exactly he has to ‘dekho‘ so he looked at the missus for help. A cloud of irritation gathered on her face that soon made its way into her voice when she said ‘fir se batao bhaiya ko.’ After much back and forth, Bertie understood that Santosh was complaining about the housing loan. He had borrowed six lakh from the housing finance company and though he had repaid almost nine lakh in total, his loan was still not repaid. Bertie tried to explain the concept of internal rate of return (IRR) to Santosh but his expression told Bertie that he was not getting through. This EMI albatross, it seems, was his main argument in asking for a bigger raise.

That got Bertie thinking. Because the lay person cannot calculate IRR, it makes him feel that the lender is fleecing him. The same inability lets him buy insurance products with ‘Jeevan’ in their name. Bertie recounted his conversation with Santosh to a friend who heads the mutual fund sales at a large AMC. He smiled. Bertie probed to which he said, “Now think of what Santosh said in reverse. Instead of a loan statement, he has a SIP statement. He is going to add up all his SIP investments and compare it with the current value of his investments. As long as the latter is higher than the former, he is not going to complain.” Bertie smiled as well. “When calculated that way, most people who have been doing SIPs for last four years are all making money. So you need to stop worrying about what will happen to SIP flows if markets turn weak.” “The concept of IRR,” he signed off, “is the best kept secret”.

Mon, Ron and the never-ending bout

Since that choice is available these days, Bertie has decided to identify as half-fund manager, half-scribe. He finds the company of his scribe tribe much more enjoyable though. Unlike the ‘cautiously-optimistic’ money crowd, conversations with journalists are opinionated, animated and politically incorrect. While the former cannot think beyond Indian Accent and Yautcha, the scribes seem to know all the delicious hole-in-the-wall eateries. During Christmas week, Bertie caught up with two of his oldest journalist friends, Mon and Ron. Mon is a staunch supporter of free markets and in general, hates any type of intervention or regulation. Ron, on the other hand, believes that regulation has a role to play in the smooth functioning of markets.

Whenever the trio has met for lunch in the past, Bertie has generally played the role of a referee in a boxing match; not so much to declare the winner but more to send the pugilists back to thier respective corners when the fight gets nasty. Over some spicy jhunka bhakri in the bylanes of Bandra, Mon threw the first punch. “Stop playing God, you guys,” she said. The context was whether we need regulatory intervention in the futures and options (F&O) markets. “People want to gamble. Let them gamble. Wouldn’t you rather that they do it legally?” she reasoned. “Also, please treat investors like adults. If small investors are losing money as the numbers show, they will have the good sense to stop. And at an overall level, this is a zero-sum game. Someone wins, someone loses-just like cash equities.”

Bertie looked at Ron for a response. Unruffled, he focussed on the food while Mon was raining the punches. It was only when the shrikhand arrived that he cleared his throat. “Tell me, Mon,” he began. “If you didn’t like the food here, what would you do?” Mon looked at Bertie, then at Ron and said, “I will not come back here again.” “Exactly!” said Ron, “your free market will work here but in financial markets people invest their life savings and retirement corpuses. If those suffer big losses or get wiped out, there is no coming back.”

Ron was getting warmed up now. “Also financial markets, unlike restaurants, are inter-connected. One firm going bust can cause the entire system to freeze up with disastrous consequences.” Bertie nodded as Ron continued, “As far as your win-win goes, it’s fine till different people win and lose at different times. If only a small portion of people is consistently taking all the winnings from many small losers, then the system is not a fair one. That playing field has to be leveled.” Bertie is grateful that he does not have to declare a winner of the debate. As usual, they agreed to disagree, thanked the chef for the lovely food and unanimously decided on a Parsi joint for the next bout.

Bertie is a Mumbai-based fund manager whose compliance department wishes him to cough twice before speaking and then decide not to say it after all.