Money WhizDom: Demystifying the Bear Stearns fallout: The week that prevented global financial calamity.

By Adhvith Dhuddu, Regular Columnist

The US hasn’t been confronted by an economic tsunami of this proportion since the Great Depression. Although the downturn in the Indian stock markets was evident, the global repercussions could have intensified if the Fed’s antidote was considered insufficient. Many around the world failed to realize the gravity of the crisis because the Feds actions prevented a sudden and sharp downturn.

Never before has the US economy been confronted by so many issues that are affecting their fiscal and economic report cards, businesses, individuals and government. Its facing declining stock and real estate prices, increasing food, commodity and energy prices, weakening dollar, trade and fiscal deficits, increasing unemployment and inflation, decreasing investment, stagnant productivity levels, low confidence levels, decreasing consumption, low saving level, increasing cost of debt in a credit dependent economy, and to top it all off the failure the world’s fifth largest investment bank, Bear Stearns.

Many on Wall Street were aware of the pessimism surrounding Bear Stearns, but the severity of the fallout was what shocked investors and caught them by surprise. The implosion of Bear Stearns indicated a lot more than the dampened psychology on Wall Street. This fallout clearly showed how financial engineering and innovation outpaced the federal financial market regulators who were caught off guard, desperately trying to save face and avert a lock down of the financial system in the country (and around the world).

To understand what exactly happened at Bear Stearns, one has to put together a few pieces of the puzzle. The crisis that unfolded here was primarily driven by a liquidity crunch or in simple terms a lack of cash to meet day to day activities. Complex financial trades performed by investment banks require them to put up and receive large amounts of money (tens of billions) on a day to day basis, making them heavily cash dependent. The fluctuating values of its investments are why large sums of money flow in and out daily.

Investment banks are unique in their practice of using extremely high leverage to maximize their returns. A Lehman Brothers or a Goldman Sachs can approach a bank, put up $1 billion in assets as collateral to receive say $30 billion dollars to invest with, and this would be 1:30

This fallout clearly showed how financial engineering and innovation outpaced the federal financial market regulators who were caught off guard, desperately trying to save face and avert a lock down of the financial system in the country (and around the world)

leverage. Although it sounds outrageously risky, investment banks thrive on this luxury, something that banks and investment firms in India don’t completely indulge in. Bear Stearns in particular was highly leveraged, as high as 1:40 in some sections of its business.

The commercial banks like JP Morgan, Bank of America or Wachovia, who provide highly leveraged cash, can anytime call upon the investment bank to put up more collateral if they feel the investment bank has immersed itself in bad investments that are rapidly losing value.

Bear Stearns was whacked with a double whammy, when distressed investors started to pull out cash and some of their investments started to decline rapidly, the commercial banks demanded more collateral. Bear Stearns slowly drained their cash reserves to meet collateral demands, handicapping them on a daily basis. Their cash reserves declined from $17 billion to less than $2 billion in just four days, sparking a bank run. Having run out of cash they couldn’t clear trades on a daily basis, were unable to provide more collateral and couldn’t repay many investors.

This is when the Federal Reserve stepped in via JP Morgan to bail them out by providing emergency funds to continue daily activities, without which the complete financial system could have gone into a seizure.

It's important to distinguish an investment bank from a commercial bank to understand JP Morgan's involvement. Individuals park their savings in commercial banks which are insured in USA by the Federal Depository Insurance Corp (FDIC) for up to $100,000 per account. It’s common knowledge that the central bank of a country (in this case the Federal Reserve) is the

After starving off a bankruptcy at Bear Stearns and realizing the severity of the liquidity crisis surrounding investment banks, for the first time in 95 years (since its inception in 1913), the Federal Reserve opened the discount window to investment banks.

primary source of money and the lender of last resort, but only commercial banks have direct access to these funds via the discount window (i.e. rate at which they can borrow from the central bank). Commercial banks can borrow directly from the Federal Reserve, something an investment bank cannot do. Investment banks are not closely regulated by the government, which is why they cannot borrow directly from the central bank.

This is precisely why the Fed had to allow JP Morgan to borrow massively, who then turned around and lent to Bear Stearns just to keep the company alive. The Feds couldn’t have lent to Bear Stearns directly and had to lend via a commercial bank. One could ask why not Citigroup or Wachovia or Bank of America, as they are also commercial banks. Unfortunately, these banks were preoccupied with cleaning up their own sub-prime mess, and JP Morgan was the only unscathed banking still standing tall on Wall Street.

When JP Morgan acquires Bear, it will primarily be for Bear Stearns' highly successful prime brokerage and clearing businesses. The two other divisions: investment banking and investment advisory are of little value to JP Morgan as its own investment banking division is a world-class setup. There was a lot of clamoring when the takeover price of $2/share was announced (now increased to $10/share), saying the company has been tremendously undervalued. Many critics might be proved wrong because the amount of garbage on the balance sheets of Bear Stearns might actually mean the company is negatively valued at say negative $10-$15 billion affecting JP in the future. But because JP Morgan has a $30 billion backing from the Fed, it might siphon off all the bad investments onto the Fed and retain the good ones eventually having little to no affect on JP.

After starving off a bankruptcy at Bear Stearns and realizing the severity of the liquidity crisis surrounding investment banks, for the first time in 95 years (since its inception in 1913), the Federal Reserve opened the discount window to investment banks. This revolutionary move has so far warded off failures at other investment banks and also reflects enormity of the crisis. Clearly the Fed realized that desperate times call for desperate measures.

Regulating investment banks and hedge funds is extremely tricky. The quantitative and mathematical nature of their operation requires them to trade equities, bonds, debt, forex, futures and options in large quantities at lightning speed. The positions on their balance sheet change literally every day making the risky and highly leveraged nature of their positions complicated for regulation. Although the Federal Reserve knew of the threats posed by this due to their closely intertwined nature to the financial system, they never saw the need to regulate because of the high level of counterparty surveillance at investment banks and hedge funds. The

The most apparent global impact is the severe dent on the psyche of the investors from Wall Street to the Great Wall. Besides the increased cost of debt, the cost of insuring and securitizing debt has also gone up.

last time counterparty surveillance failed was the 1998 collapse of Long Term Capital Management hedge fund. Although the Bear Stearns collapse was primarily driven by a liquidity crisis, it can partly be blamed on failure of counterparty surveillance.

The impacts of this event have been widespread. The increased cost of capital has had a major blow on the investment banks forcing them to decrease their leverage significantly in the recent weeks. The most apparent global impact is the severe dent on the psyche of the investors from Wall Street to the Great Wall. Besides the increased cost of debt, the cost of insuring and securitizing debt has also gone up. Decreased liquidity in these markets is also a valid concern.

One disturbing parallel this crisis draws with the Great Depression is that in both cases banks caved in. The Great Depression saw widespread failures of commercial banks (this is when the FDIC was introduced) and this time an investment bank which specialized in advanced investment strategies like sub-prime mortgages and quantitative trading fell through. Despite their functionary difference, in both cases they perilously threatened to crumble the complete financial system and freeze liquidity. Note that the Great Depression witnessed widespread failures of banks; in this case, we have only seen one investment bank fail. Any more nasty surprises could cripple the already strained financial system, fueling speculation of a depression or a longer-than-anticipated recession.

History has proven that the US economy is one of the most resilient and nimble structures around the world. It has braved diverse problems from accounting scandals to bank failures and continued to roar forward. This is largely attributable to the strong foundations and competent regulatory institutions. Although this down phase is looking different one can be sure that when the bad times pass, investment opportunities will open up.

Money WhizDom: Demystifying, debunking recent Bear Stearns fall out

Adhvith Dhuddu, CT regular columnist

Wednesday, March 26; 12:00 AM

The U.S. hasn't been confronted by an economic tsunami of this proportion since the Great Depression. Our financial report card looks bleaker than ever with declining stock and real estate prices, increasing food and commodity prices, increasing unemployment and inflation, weakening dollar, decreasing investment, stagnant productivity levels and, to top it all off, the failure the world's fifth largest investment bank, Bear Stearns.

Many on Wall Street were aware of the pessimism surrounding Bear Stearns, but the severity of the fallout shocked investors and caught them by surprise. The implosion of Bear Stearns indicated a lot more than the dampened psychology on Wall Street. This fallout clearly showed how financial engineering and innovation outpaced the federal financial market regulators who were caught off guard, desperately trying to save face and avert a lockdown of the financial system in the country (and around the world).

To understand what exactly happened at Bear Stearns, one has to put together a few pieces of the puzzle. The crisis that unfolded here was primarily driven by a liquidity crunch or, in simple terms, a lack of cash to meet day-to-day activities. Complex financial trades performed by investment banks require them to put up and receive large amounts of money (tens of billions) on a day-to-day basis, making them heavily cash dependent. The fluctuating values of its investments are why large sums of money flow in and out daily.

Investment banks are unique in their practice of using extremely high leverage to maximize their returns. A Lehman Brothers or a Goldman Sachs can approach a bank, put up $1 billion in assets (cash, building, money in the bank, etc.) as collateral to receive say $30 billion dollars to invest with and this would be 1:30 leverage. Although it sounds outrageously risky, investment banks thrive on this luxury. Bear Stearns in particular was highly leveraged, as high as 1:40 in some sections of its business.

The commercial banks such as JP Morgan, Bank of America or Wachovia, which provide highly leveraged cash, can anytime call upon the investment bank to put up more collateral if they feel the investment bank has immersed itself in bad investments that are rapidly losing value.

Bear Stearns was whacked with a double whammy when distressed investors started to pull out cash and some of their investments started to decline rapidly, prompting the commercial banks to demand more collateral.

Bear Stearns slowly drained its cash reserves to meet collateral demands, handicapping them on a daily basis. Its cash reserves declined from $17 billion to less than $2 billion in just four days, sparking a bank run. Having run out of cash, it couldn't clear trades on a daily basis, was unable to provide more collateral and couldn't repay many investors. This is when the Feds stepped in via JP Morgan to bail them out by providing emergency funds to continue daily activities, without which the complete financial system could have gone into a seizure.

It's important to distinguish an investment bank from a commercial bank to understand JP Morgan's involvement. Individuals park their money in savings and checking accounts in commercial banks, which are insured by the Federal Depository Insurance Corporation for up to $100,000 per account. It's common knowledge that the Federal Reserve is the primary source of money, but only commercial banks have direct access to this money via the discount window. Commercial banks can borrow directly from the Feds, something an investment bank cannot do.

This is precisely why the Feds had to allow JP Morgan to borrow massively, which then turned around and lent to Bear Stearns just to keep the company afloat. The Feds couldn't have lent to Bear Stearns directly and had to lend via a commercial bank. One could ask, why not Citigroup or Wachovia or Bank of America, as they are also commercial banks? Unfortunately, these banks were preoccupied in cleaning up their own sub-prime mess, and JP Morgan was the only unscathed banking giant still standing tall on Wall Street.

If and when JP Morgan acquires Bear, it will primarily be for Bear Stearns' highly successful prime brokerage and clearing businesses. The other two divisions, investment banking and investment advisory, are of little value to JP, as its own investment banking division is a world-class setup.

One disturbing parallel this crisis draws with the Great Depression is that in both cases, banks caved in. The Great Depression saw widespread failures of commercial banks (this is when the FDIC was introduced), and this time, an investment bank that specialized in advanced investment strategies such as sub-prime mortgages and quantitative trading fell through. Despite their functionary difference, in both cases they perilously threatened to crumble the complete financial system and freeze liquidity.

Note that the Great Depression witnessed widespread failures of banks; in this case, we have only seen one investment bank fail. Any more nasty surprises could cripple our already strained financial system, fueling speculation of a depression or a longer-than-anticipated recession.

Online link to this arcticle: Click here

College students should know ABCs of credit score reports

Adhvith Dhuddu, CT regular columnist

Wednesday, March 19; 12:00 AM

Here's a startling statistic: In the economies of India, China and Russia, the ratio of people to credit cards appears healthy (ranges from 1 credit card for every 20 to 50 people), but in the U.S., the equation reverses, averaging 3 to 5 credit cards per person.This clearly shows how credit-dependent we are, but also reflects the requisite nature of credit cards in an increasingly cashless economy. With this in mind, the importance of maintaining, tackling and improving your credit history and credit scores cannot be more highly stressed.

Your credit score is a financial report card outlining how you have handled debt historically, helping corporations decide how creditworthy you are. Going forward, your credit score might be much more important than you think it is. When the Facebook generation steps into corporate America, unlike in the last century, when credit scores only mattered during credit card, home and car loan applications, in the future credit scores will determine everything from how your bills for water, electricity, cable and Internet are handled to your pay structure for televisions, laptops and other accessories.

The three broad aspects to focus on are obtaining your credit score, analyzing your credit score to report errors, corrections, and finally, outlining a plan to improve your credit score.

Credit reports are compiled by three companies: TransUnion, Equifax and Experian. The information in these reports is presented differently, and these organizations also calculate their own credit scores (Equifax has ScorePower, Experian has a PLUS score and TransUnion has its VantageScore). But it's your FICO score, compiled by the Fair Isaac Company, that is the all-important number. This score is derived from the information provided in the abovementioned reports and ranges from 300 to 850.

Taking the initiative to obtain your credit report is the first step. We are permitted to obtain one free credit report in a 12-month period from each of the three agencies or from FICO. The three agencies run a Web site, www.annualcreditreport.com, where anyone can request a report. This can also be done by calling 877-322-8228. Also, if you are rejected for a loan, denied a credit card, etc., you can ask for your latest credit report for free from one of the agencies (this has to be done within 30 days of rejection).

Close to 20 percent of all credit reports contain errors that might result in you paying a higher interest rate for a loan or rejection for a home or car loan. Sometimes the consequence can be devastating, such as losing a job. So it's important to go over and check for errors, misrepresentations and typos, and alert the credit reporting agencies. These agencies are obligated to fix errors when you point them out, and although the process is time-consuming and bureaucracy-oriented, it's worth it.

Finally, sketching out a plan to tackle the blemishes on your report and improve your credit score will be a drawn-out process requiring restraint, discipline and self-control. Here are some basic pointers to keep in mind when you are in the mall wanting to pull out your credit card to get your hands on those American Eagle jeans.

Your FICO score (or credit score) is derived from different aspects, such as handling of debt, number of credit cards, and credit limit to balance ratio, but without getting into the details, here are some things that might help or hurt your score.

Make sure you pay your bills on time; late payments tend to have a negative effect on your score. Your ratio of credit available versus outstanding balance is an important factor in your credit score. For example, if your credit limit is $2,000 and your outstanding balance is $500 with $1,500 credit remaining, your ratio is 25 percent. Lowering this number by clearing outstanding debts faster has a positive effect on credit scores.

The average age of your account is another determinant of your credit score. So, two things are important here: Try not to cancel your oldest card and don't unnecessarily apply for new credit cards. Refrain from applying for in-store cards such as the GAP cards and Wal-Mart cards, because this has a negative effect on your credit score.

Mastering the art of handling credit is not child's play and requires discipline, constant self-scrutiny and consistent follow up. It's a good habit to have, and starting in college is definitely beneficial. Countless books exploring credit scores have been published, and individuals have underpinned careers analyzing credit scores, so reading an article is only the first step.

But one book, the "Wall Street Journal Complete Personal Finance Guidebook" by Jeff Opdyke, is a comprehensive personal finance journal and also helps navigate aspects relating to credit.

Online link to this article: Click here

Federation of Karnataka Chamber or Commerce and Industry

URBANIZATION IN INDIA: MIGRATION OF A NEW KIND

Adhvith Dhuddu, Regular Columnist, JANUARY 2008 ISSUE

The turn of the century transformed Indian business, industry, government and people alike as modernization in the form of technology, internet and mobile phones seeped into the DNA of our country. While this was unfolding at a tremendous pace, it paved the way for another significant phenomenon for which we are now facing the consequences.

The mini revolution of mass migration to metropolitans and urban areas from the countryside caught many by surprise. Although a surge of people into cities was expected, the pace and magnitude is what created imbalances and debunked the inadequacies of large metros. The tech boom is what sparked this mass relocation, but now something else even more monumental might tip the balance to create mass hysteria in the metros.

This new episode, for which the seeds have already been sown, is the further migration from the rural areas to cities driven by the increase in productivity in agriculture and improved farming techniques. In India, 13.5 million hectares of arable agricultural land is cultivated by approximately 14 million farming families. As more efficient farming techniques emerge, as technology is introduced into farming, as private players and investors foray into agriculture, as supply chains become shorter and more efficient (elimination of APMCs, middlemen), as biotechnology and biochemistry percolate into our farms, as more efficient irrigation methods are adopted and as land tilled per farmer increases, the overall productivity of farmers will rise considerably.

As farming families become more productive, more members will have less to do and look to non-agricultural sources of income. This will attract them to teir one and teir two cities as rural areas lack diversity in income and business. Often, this is their only window of hope in their pursuit to increase non-agricultural income. A flow of this kind could be more devastating to cities (compared to the IT-migration) if proper planning and forecasting is not done. We must learn from the tech era that people do migrate to elevate their standard of living and quality of life. Then, we were drastically underprepared, under planned and only a crisis prompted action in many cases, but now we can plan, prepare and build for the future and avoid an unnecessary strain on capacities.

This differs from the IT-migration era because of the potential strain it can exert on the system. The agri-migration era will be slow and long (20-30 years) and this can either be a boon or a bane depending upon how well we recognize and confront this issue. Bangalore, Hyderabad, Mumbai and New Delhi (Guragaon) are ideal examples of this phenomenon. Civilizations tend to live and thrive in urbanized environments rather than rural ones.

Many solutions and reforms have been suggested for improving infrastructure, roads, etc. But this massive shift of population calls for basic structural reform and the respective governing bodies should be well equipped to assess, analyze and act. This macro issue calls for a multi-pronged solutions with multi-year reforms.

Union Minister of Panchayati Raj, Mr. Mani Shankar Aiyar, in the recent Economic Summit for Rural and Urban Development, suggested that one cure could be to initiate urbanization of rural India. But this, he said, starts with providing basic amenities like clean drinking water, proper sanitation, uninterrupted electricity, etc (often these are the reasons people migrate to cities). More importantly, he stressed on increasing sources of non-agricultural income and non-agricultural businesses in rural areas to stifle the future surge of people to cities. There was clearly a sense of urgency detected to remove the roadblocks for the development of rural India.

Empowerment at the local levels is a must (LSGs, district and city officials) and the mulishness of trying to centrally plan rural development for the entire country should be eliminated. This whole process should be participatory oriented and not bureaucracy oriented. Improving roads in villages is a crucial factor to increase rural affluence. This should be top priority for officials because this particular change can help villages in ways others cannot: it gives access to better education and schools, it gives access to better health care and hospitals, it inflates the size of rural markets giving rise to micro-businesses and will significantly increase nonfarm rural employment.

Individuals no doubt feel enriched by moving to a city, and in a democratic India where there are no restrictions on migration (unlike China, where there is a cap on migration to cities) and mobility is cheap and easy, metros will continue to inflate. So even with the control mechanisms in place, migration could slow down but will definitely not stop. Urban India is certainly poised to take on the world, but let us allow rural India and the, ‘aam admi,’ to enter the 21^st century with hope, optimism and confidence.

Online link to this article: FKCCI JANUARY 2008 ISSUE

Federation of Karnataka Chamber or Commerce and Industry

ARTICLE: COFFEE, COTTON AND THE CHANGING WORLD OF COMMODITIES

Adhvith Dhuddu, Regular Columnist, DECEMBER 2007 ISSUE

The commodity market boom coupled with inflation is taking more out of our pockets for everyday purchases of coffee, channa, chilli and crude oil (petrol, gas, and diesel) than ever before. These elevated prices are here to stay and it’s not too late to explore opportunities to put your money to work in the commodity arena. This extended Bull Run initiated at the turn of the millennium is expected to last at least another decade.

The explosion in commodity prices (i.e. raw materials, natural resources, precious metals, etc) closely resembles the buoyant stock markets the in the late nineties (in USA), the only difference being these lofty prices are sustainable over the long term. This is because of the tremendous imbalance in the supply demand relationship in the next few decades, attributable to the rise of South East Asian economies (more demand) and fast deteriorating supplies.

It's imperative to be well-informed about commodities as they — unlike stocks, bonds and real estate — are a part of our lives every day. Your breakfast includes corn and milk, your Coffee Day mocha contains sugar, cocoa, and coffee, your lunch and dinner include wheat, rice, beans and pulses; the car you drive is made up of steel, aluminum and rubber. Every day you touch and feel commodities that are traded on a 24 hour basis around the world, and every day the demand for these consumables is outpacing the supply.

Sugar for example has been experiencing a rise in prices for the last few years. An increasing number of sugar beet processing plants being shut down since the mid 90s in the US and higher demand for sugar from China (China has increased its sugar imports by 20 percent year-over-year for the past 6 years) are some reasons. Brazil’s (Brazil is one of the highest sugar producers) smarter use of its home grown sugar for local consumption and ethanol use have reduced its capacity to export also contributing to the price rise. Being one of the top producers, consumers and exporters of sugar, India has shown it is self sustaining but this resilience might soon fade away once Indian producers start to feel the pinch.

Lead is a metal with wide ranging applications in electric power systems, lead-acid batteries, ceramics, roofing, forklifts, television, computer monitors, etc, and its demand is expected to swell in the next two decades. With supply either constant or deteriorating, a price rise in lead is inevitable.

Global freight and shipping rates are at all time highs (check the Baltic Exchange Dry Index), and these outrageous prices affect commodity players. This automatically drives up the prices of steel, copper, aluminum etc, because either the producer or the supplier has the burden of paying shipping costs. This was an insignificant factor a few years ago, but increased sea traffic, insufficient ships and inadequate port capacities is driving freight rates to record levels and directly impacting commodity prices.

The Central Banks of any country have the power to warm up the printing presses and create more money out of thin air if there is a need. But it’s impossible to similarly create tangibles like foodstuffs, precious metals and raw materials. It will take time (10 to 15 years) to bring to market these highly demanded commodities to meet the supply.

It is cumbersome to invest directly in commodities like sugar, lead or coffee, but more direct methods like investing in a commodity index (tracks a bunch of commodities), or an ETF tracking a commodity index solves the problem. Some internationally acclaimed indices like the Rogers International Commodities Index and the Dow Jones AIG Commodity Index are up many-fold in the past few years.

Other alternatives include investing in companies that produce commodities. Behemoths like Arcelor-Mittal (produces steel), Alcoa (produces aluminum), Phelps Dodge (produces copper), Rio Tinto (mining giant), Vedanta Resources, etc, are sure to rope in record profits in the next decade and a half with rising commodity prices. In fact most of these stocks are up over 300 - 500 percent in the last few years and still appear undervalued. Locally, scrips like Amara Raja Batteries, Hindustal Zinc and Tata Steel have risen over the last few years. An economic slowdown in the US or the Asian subcontinent will drive commodity prices lower, but this only presents a buying opportunity for long term investors.

It is also very safe to invest in countries that produce commodities. Natural resource rich countries like Australia, New Zealand, Canada, Bolivia and Chile will experience good economic times in the next few years.

High net worth individuals (HNIs) can also invest directly in commodity exchanges. Multi Commodity Exchange of India (MCX India) and National Commodity and Derivatives Exchange (NCDEX) are two major commodity exchanges in India. As our economy expands, the volume of commodities traded locally will rise and the demand for membership to these exchanges will increase with it. This will translate into increased revenue and higher profits for commodity exchanges (the main source of revenue for commodity exchanges is trading fees and membership fees).Long term investors can thus obtain membership and watch its value rise, or simply purchase a stake in the exchange. Something very similar is unfolding in our stock exchanges, spurring a rat race for stakes in the National Stock Exchange of India (NSE) and Bombay Stock Exchange (BSE).

One spectacular book, “Hot Commodities,” written by legendary commodity investor Jim Rogers explains why the next decade and a half will see an unprecedented boom in prices of all types of commodities be it precious metals, energy, cereals or food. Being the first to foresee the commodity boom in 1998, he commands immense international respect.

Not surprisingly, the Canadian dollar was worth US $1.04 three decades ago during the late 1970s commodity bull market. It was exactly during this period that oil hit the record high of $101.30(inflation adjusted). The late 1970s was also when gold and silver hit record levels. This is exactly what has been happening in the recent past, and will continue to do so in the future. History might not repeat itself but it definitely rhymes with the past.

Online link to this article: FKCCI DECEMBER 2007 ISSUE

Money WhizDom: Entrepreneurship as a career choice

Adhvith Dhuddu, CT regular columnist

Monday, February 11; 12:00 AM

Peter Drucker famously said, “Entrepreneurship is neither a science nor an art. It is a practice."

Choosing entrepreneurship as a career choice not only requires courage and vision, but a deep desire to succeed and overcome at all costs. This career path is replete with unique obstacles and challenges that require more than just theoretical and practical knowledge to resolve. The DNA of a successful entrepreneur is coded with traits like effective communication skills, good networking abilities, mental resolve and grit, excellent theoretical and practical knowledge, hard worker, people skills like good listening ability, capability to motivate and drive individuals, respect for others, and above all a self starter who believes in the idea and his or her people.

Deciding to go solo might be an easy decision to make, but sticking to your guns in dire times requires persistence and doggedness. But once you make the initial move, leaving no stone unturned to attain prosperity should be the primary goal.

An ominous misconception is that inexperienced startups can lead to disasters. This is absolutely untrue if the entrepreneur believes in himself/herself and the idea. Experience definitely counts but if Mark Zuckerberg of Facebook, or Michael Dell waited to gain, “experience,” we wouldn’t be bombarding our friend’s walls and wasting two hours a day on Facebook. So never wait for the, “perfect time,” to start an enterprise because it might never come.

More often than not, the simplest ideas receive resounding and overwhelming success. Over analysis and excess scrutiny only lead to inaction and missed opportunities. Following a simple mantra of trying to identify a vacuum in the system and subsequently filling it with an uncomplicated product or service is sure to get credible recognition.

Another pivotal factor in your success as an entrepreneur is where you get your advice from. When you aspire to do something different and unique, the world is against you, the odds are against you and criticisms and denouncements will bestowed upon you with generosity. It’s essential to get your advice and guidance form an individual who is at a social, economic and financial position that you aspire to be in and not your friend or professor (people who have got practical not theoretical experience), because a drowning man is of no help to another drowning man.

The US is a capitalistic economy and the thriving free market system is conducive to entrepreneurs. Every entrepreneur dreams of selling his product or service in the US market. The environment in this country is encouraging to entrepreneurs and one should take help from the different sources. The US Small Business Administration website (www.sba.gov) contains a treasure trove of information on a number of aspect s like writing business plans, finding potential investors, getting tax help, sourcing raw materials for your product, etc.

Another excellent source of help and information is the Virginia Department of Business Assistance (www.dba.state.va.us) where specific information helpful to businesses in Virginia is well laid out. Issues like licensing and permits in the state, taxes and rebates applicable only to Virginia businesses, etc are explored in detail.

In Blacksburg, we have access to the world class Virginia Tech Corporate Research Center which is home to numerous startup companies. They too help in all aspects of business startups like idea incubation and improvement to venture capital funding. Another good source for ideas and networking is the ELITE club at the Pamplin College of Business. ELITE meets regularly with the common theme of entrepreneurship and encourages idea generation amongst students.

Approaching a profession lawyer for incorporation and other legal aspects early on could be a toll on the bank account. A cheap, easy and efficient way is to submit all legal documents for incorporation online at a one stop legal website called Legal Zoom (www.legalzoom.com). At Legal Zoom, you can incorporate as an individual, LLC, partnership and for any state, etc for a competitive price.

In the end, entrepreneurship cannot be mastered by reading books or attending lectures. Like flying a plane, irrespective of how much flight simulator one plays, getting your hands on the controls of a real jet is what matters. Similarly, diving in and putting your plans, ideas and thoughts into action is what counts. This is essentially what Drucker meant, that Entrepreneurship is not a science or an art, it is in fact a practice. So, think big, start small and act now!

Money WhizDom: Does your financial quotient line up with your EQ and IQ?

Adhvith Dhuddu, CT regular columnist

Wednesday, March 12; 12:00 AM

Your IQ is probably what got you into this excellent university, but developing your emotional quotient is equally important in shaping your personality. By graduation, our experiences in and out of class boost our IQs and EQs significantly.

But your financial quotient is what will shape your financial future. Your financial knowledge will dictate how well you handle credit, the quality of your savings and investments, how well-padded you are in a crisis and how well you plan for retirement. Whether you like it or not, financial planning is an integral part of everyone's life, and with a high FQ you can successfully plan your finances and finance your plans.

Closely scrutinizing yourself to see how you score on the FQ scale is relatively straightforward and easy. Your FQ is primarily derived from the following aspects: how well you handle debt, investment planning to battle inflation, spending habits, tax planning (when you step into corporate America), and finally, saving and retirement planning. Having worldly knowledge in these five areas will greatly help secure your wealth.

Many of us take on debt early on in life through credit cards, college, and car and home loans that we strive to pay off our whole lives. Although all debt is not bad, it's important to understand the difference between good and bad debt. Undertaking debt for college to add value to yourself, to help you climb the social and economic ladder, is without a doubt good debt. Devouring your credit limit for unnecessary purchases that you will spend years paying a 17 percent rate on is bad debt.

People undermine the importance of investing and often fall prey to myths suggesting the high risks involved in stocks, bonds and commodity markets. These are safe investment vehicles and will inevitably be part of your long-term portfolio to create wealth.

In the last 80 years, stocks have returned 9 to 10 percent compounded annually, compared to corporate bonds and government bonds returning 4 to 5 percent and treasury bills earning 3 percent. In the same period, inflation averaged 3.5 percent, and these numbers are likely to hold going forward.

So the best way to battle inflation is certainly not treasury bills and savings accounts earning 1 to 2 percent, but a balanced blend of quality stocks and corporate bonds. The power of compounding clearly shows how inflation devalues your money. For example, $1,000 you earned in 1980 is worth approximately $380 today.

Clearly, a penny saved is not a penny earned because that penny will depreciate in value (bacause of inflation) if it sits idle in a checking or savings account. This also does not mean all your earning should be invested in high-yielding securities and bonds. There are many risk-free financial instruments, such as certificates of deposits, high-yielding savings accounts, and treasury inflation protected securities, that will preserve the value of that penny.

The American economy is driven by spending and consumerism, and every individual seems to have an unending desire for material wants. Indulging in extravagant purchases beyond your means is sure to get you into a financial ditch. Clearing all outstanding debts before big purchases is vital.

Planning and managing your taxes will be another important part of your career. Mastering the voluminous tax code would take a lifetime, so this department also calls for basic understanding and an intelligent tax adviser.

Having basic understanding of the above-mentioned concepts is crucial for two reasons: to prevent your financial planner from exploiting your ignorance, and to understand what your adviser tells you so that you can cautiously assess the pros and cons of your financial plans.

Online link to this article:
http://www.collegiatetimes.com/stories/2008/03/12/does_your_financial_quotient_line_up_with_your_eq_and_iq_

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