Mallya, Middle class and Indian Banks……

Recently during world cup match Vijay mallya was abused by group of Indian fans calling him ‘chor hai’, Apart from bank officials and politicians, Indirectly people who ever call him chor mostly indian middle class are also responsible for vijay mallya to become chor.

People from middle class background in india feel safety and comfort in Bank FDs OR
they believe that their money is safe in the banks.

Is the money in bank is really safe ?

I will answer that later, Before answering this question let us go to history first,

Somnath temple was believed to have been built around 4th century AD.In those days there were no banks, so people used to deposit their earnings / Savings mostly in the form of gold coins or ornaments in the temples. Maybe in those days also there were thieves around but nobody dared to steal from the temple. So people felt that temples were the safest place to keep their earnings / Savings. And maybe this lasted for almost 600 years.

In the 11th century, Mahmud of Gazni first invaded and looted the Somnath temple. It was rebuilt and looted for 17 times.Even then people used to deposit their earnings / savings in the temple. WHY?

Because of cognitive bias,is psychological condition,Please google it out more to understand the exact meaning of cognitive bias.

It was hardcored in the people’s mind that their earnings / Savings were safe in temples.
Because their forefathers did the same thing and they just followed what their forefathers did without considering the current situation prevalent then!

Now, it was common sense that after being looted for 1st, 2nd, 3rd time,
people should have tried to find some alternative to safeguard their earnings /savings. But, they still had faith in the temples. Of course,few might have found some alternative, maybe digging a pit and burying their gold coins and ornaments.

But, I think they were very few or else there was no point looting the same temple for 17 times.

Similarly, today we see so many Mahmud of Ghaznis in the guise of Vijay Mallya, Nirav Modi who have looted the banks and fled the country.

Somnath was looted only 17 times, but we don’t know how many times our banks have been already looted.
But, people feel that their money is safe in the banks. Just like the people of Somnath felt that their gold coins and ornaments were safe in the temple.

So, for those who believe that bank FDs are safe, your safety is limited to only Rs. 1 lakh.

Think twice!

It is high time that you come out of this bias and start exploring other alternatives to park your hard earned earnings / Savings.

Happy Investing

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Roti, Kapada, Tension, Udhaar- Techie ka Zindagi

Dear Reader,

I will tell you my friend story & how he ended up with Roti, Kapada, Tension, Udhaar, 620 CIBIL Score.

Let us call my friend Kiran

Kiran is an average IT professional who works in an IT company in ITPL Bangalore.He is from a middle class family from small town in south karnataka,He has some 12+ years experience and now leads a team of  Java Developers. So far so good.

Five years back he got married to a girl of his parents choice.After few months of staying apart she got a transfer in her organization & moved to Bangalore to stay with him.
A jubilant Kiran got a car so that he & his wife can go visit his in laws in small town in karnataka every other weekend.Every one was happy and life was evolving. he got a good hike in July 2016 he decided to buy a house in Whitefield.

He zeroed on 1BHK with a no-name builder.

First Mistake:

He took his In laws to show the model apartment and take their opinion.After looking at the model apartment his mother in law made a pungent remark and said that “I never thought my daughter will be pigeon holed in a 1BHK”. Kiran took this to heart & was deeply hurt.
He decided to let go of that opportunity.Let me tell you the background of In laws, They are retired govt teacher settled in small town in north karnataka, In karnataka  even a middle class person owns individual house  in small town as real estate cost is cheaper in small towns.

He decided to go for a 3BHK in an under construction apartment from a famous bangalore based builder in the vicinity.The apartment was costly as it is loaded with all possible bells and whistles. He dissolved all his saving, pulled money out of his PF,borrowed some money from his brother for the registration, downpayment, taxes etc. His the monthly EMI was high so he took a join loan with his wife.

Third Mistake:

By the close of 2017 his cash flow was completely jammed as he was staying in rented house and now had to pay for the EMIs as well.He was betting that by end of 2018 everything will be ok.. as expected that he will again get a good hike in 2018 & once the apartment is complete in July 2019 he will not have to pay rent.

Raining Problems:

He didn’t get the expected hike, neither his wife got a good hike in 2018.
The project got delayed by 13 months, so he ended up paying EMIs & monthly rent
His wife got pregnant and it turned out to be a complicated pregnancy.
His expenses increases drastically, so he starts swiping his credit cards and starts to max out.His wife is unable to join back after the end of her maternity leave and had no choice but quit

He ends the year 2019 with:

An semi-furnished apartment for which he have to pay almost 4k per month as maintenance.
Zero Savings or investment
Had to sell his car at a loss to reduce his EMIs
Home loan eats 85% of his net take home salary
Wife took a break to look after the kid so no income from her side
Had to request his Mother to move in with them so that she can support them with her pension
An unhappy brother who is unable to get his money back
Two credit card with a total debt of about 2 lacs
A CIBIL rating of 620

After all things said and done his mother-in-law again made a remark in her impeccable Kannada….which loosely translates like “Instead of a software engineer, i should have got my daughter married to a teacher or businessmen in my home town”

Yes, he regrets his decision to buy a house in Bangalore and have been unsuccessfully trying to sell it for the last 6 months.. any buyers?

P.S. Intention of this post not to hurt anyone,Don’t be very emotional when you are making decision of buying house especially in bangalore very rates are too high ,Consider all aspects like future earning prospects, monthly cash-flow and slow down in IT sector and your retirement planning when you are making decision to buy house in banaglore.

Techie guy, so everything is on his laptop…

This is a must read letter from a Widow who is a Chartered Accountant….
Hello Friends,

Few things I learnt after my husband’s death.
We always believe we will live forever & bad things always happen to others.
Only when things hit us bang on our head do we realize… Life is so
unpredictable….!

My husband was an IT guy. All techie. And I am a Chartered Accountant.Awesome combination you may think.

Techie guy, so everything is on his laptop….his ‘to do’ list, his e-bill and his bank statements in his email. He even maintained a folder which said IMPWDS, wherein he stored all Login id and passwords for all his online accounts. And even his laptop had a password.

Techie guy, so all the passwords were alpha-numeric with a special character not an easy one to crack. Office policy said passwords needed to be changed every 30 days. So every time I accessed his laptop I would realise it’s a new password again. I would simply opt to ask him, ‘What’s the latest password?’ instead of taking the pain to memorize it.

You may think me being a Chartered Accountant would mean that everything is documented and filed properly. Alas, many of my Chartered Accountant friends would agree that the precision we followwith our office documents and papers do not flow in to ‘day to day’ home life.At office, you have to be an epitome of Reliability /Competence / Diligence, etc., but at home, it’s “there is always a tomorrow”.

One fine evening, my hubby expired in a bike accident on his way home from office. He was just 33. His laptop with all his data crashed.

Everything on his hard disk wiped off. No folder of IMPWDS to refer back to. His mobile with all the numbers on it was smashed. But, that was just the beginning. I realized I had lot to learn.

Nine years married to one of the best human beings, with no kids……just the two of us to fall back on…..but now I stood all alone and lost!

Being a C. A. helped in more ways than one, but it was not enough. I needed help. His saving bank accounts & his salary bank accounts had no nominee. On his insurance, his mom was the nominee and she had expired almost 2 years back. But this was just a start. I didn’t know the password to his email account where all his e-bills came. I didn’t know which expenses he paid by issuing ‘standing instructions’.

His office front too was not easy. His department had changed recently. I didn’t know his reporting boss’s name to start with. When had he last claimed his shift allowance; his mobile reimbursement?

The house that we had bought with all the excitement was on a bank loan. Thought that with our joint salaries, we could afford the EMI.

When the home loans guys suggested insurance on the loan, we decided that instead of paying the premium on the insurance, the difference in the EMI on account of the insurance could be used to pay towards prepayment of the loan and bring the tenure down. We never thought what we would do if we have to live on a single salary. So now there was huge EMI to look into.

I realized I was in for a long haul.

Road accident case. So everywhere I needed a Death Certificate, FIR report, Postmortem report, etc. For everything there were forms running into pages, Indemnity Bonds, Notary, Surety to stand up for you, ‘No objection’ certificates from your co-heirs, etc., etc.

I learnt other than your house, your land, your car, your bike are also your property. So what if you are the joint owner of the flat?

You don’t become the owner just because your hubby is no more. So what if your hubby expired in a bike accident and you are the nominee, but if the bike is in a repairable condition, you have to get the bike transferred in your name to claim the insurance. And that was again not easy. The bike or car cannot be transferred in your name without going through a set of legal documents. Getting a Succession Certificate is another battle altogether.

Then came the time you realize that now you have to start changing all the bills, assets in your name. Your gas connection, electricity meter, your own house, your car, your investments and all sundries.

And then, change all the nominations where your own investments are concerned. And again, a start of a new set of paperwork.

To say I was shaken, my whole life had just turned upside down, was an understatement. You realize you don’t have time to mourn and grieve for the person with whom you had spent the best years of your life, because you are busy sorting all the paper work.

I realized then how much I had taken life for granted. I thought being a chartered accountant, I am undergoing so many difficulties. What would happen to someone who was a home maker, who wouldn’t understand
this legal hotchpotch?

A sweet friend then told me, “Dear, this was not an end. You have no kids; your assets will be for all who stand to claim after my hubby’s sudden death. I realized it was time I took life more seriously. I now needed to make a Will. I would have laughed, if a few months back, if
he had asked me to make one. But now, life had taken a challenging twist.

Lessons learnt this hard way were meant to be shared. After all, why should the people whom we love the most suffer after we are no more?

Sorting some paperwork before we go will at least ease some of their grief.

1. Check all your nominations:

It’s a usual practice to put a name (i.e., in the first place if you have mentioned it) and royally forget about it. Most of us have named one of our parents as a nominee for investments, bank accounts opened before marriage. We have not changed the same even years after they are no longer there with us. Even your salary account usually has no nomination. Therefore, kindly check all your Nominations.

– Bank Accounts
– Fixed Deposits, NSC
– Bank Lockers
– Demat Accounts
– Insurance (Life, Bike or Car or Property)
– Investments
– PF & Pension Forms

2. Passwords:

We have passwords for practically everything. Email accounts, Bank accounts; even for the laptop you use. What happens when your next of kin cannot access any of these simply because they do not know your password. Put it down on a paper.

3. Investments:

Every year, for tax purposes, we do investments. Do we maintain a excel sheet about it. If so, is it on the same laptop of which the password is not shared? Where are those physical investments hard copies?

4. Will:

Make a Will. I know you will smile; even I would. Had I not gone through all what I did. It would have made my life lot easier, a lot less paperwork. I wouldn’t have had to provide an indemnity bond, get it notarized, ask a Surety to stand up for me, no ‘no objection’
certificates from others, etc.

5.Liabilities:

When you take a loan say for your house or car, check out on all the what ifs…..what if I am not there tomorrow? what if I lose my job? Will the EMI still be within my range? If not, get an insurance on the loan. The people left behind will not have to worry on something as basic as their own house.

My battles have just begun…But let us at least try and make few changes so that our loved ones would not suffer after we go.

We do not know what will happen in the future. But, as the Scout motto goes: “Be prepared.”.

FIRE (Financial Independence Retirement Early) or fear of getting fired?

How to Achieve Financial Independence Retire Early(FIRE) status without the fear of getting fired from corporate Job?

If I ask this question obviously answers of people from middle class background(Forget about filmstars, Sportsmen, Politicians,Businessmen etc)

Study well, Join IIT, NIT,IIM or any other reputed engineering college

Work smart

Get Promoted

Join the board or start your own venture(Flipkart, paytm,facebook etc)

Get Stock option

Sell out

Make millions

Retire at 40

For Example who ever joined infosys before 1996 with ESOP(Employee stock option plan) have net worth of 15 crore now only through stock option.

Is it possible to retire  early if  you are not able to study at IIT OR IIM  or not able to join the board or not able to start your own successful venture  or without ESOP, Yes it is possible, Let us discuss the case study of Kiran

Kiran completes his engineering from average 3 tier engineering college from south Karnataka, In 1997 he joins small IT company with a modest salary of 15 thousand, As soon as getting his first pay cheque, He starts an SIP of 7500 Rs in a diversified  equity fund at the age of 23,Being a smart planner himself, He changes job every 4 years for better pay , As soon as  he gets hike he increases his SIP in mutual funds

Kiran also started investing small amounts in PPF, Whenever got the bonus he was putting money in PPF account,

He also bought 3 bhk flat for 30 Lakhs with a loan of 20 lakhs and 10 lakh saving he saved from a onsite assignment, He was able to manage his EMI along with regular savings in mutual fund ,After 10 years he was  able to close the loan with the bonus and frequent onsite assignments and pay hikes after changing the companies.

Now Kiran is 40 plus, He has reached middle management level in an IT company, Work pressure is high and work looks boring for him, Apart from expectations from his boss and colleagues his high, So he is no longer enjoying his work since He wanted to take early retirement, He consulted me for advice

All this while Kiran was managing his finances all by himself.  Since he decided to retire early, he consulted me to take stock of the situation and to understand his readiness for retirement.

Kiran is having a liquid asset of around of 3.10 crores now. His savings as on date is as follows:

Equity Mutual Funds – 200 Lakhs

Public Provident Fund – 40 Lakhs

Provident Fund – 60 Lakhs

Bank Deposit – 10 Lakhs

His long term financial goals include –

  1. Provision for inflation adjusted monthly withdrawal of 50,000 for the next 40 years, assuming longevity of 85.
  2. 40 lakhs for the higher education of his daughter & 20 Lakhs for her marriage.
  3. 25 lakhs for setting up an endowment for supporting poor children
  4. 25 lakhs as reserve money for health care, changing car etc.

After allotting money for the short term goals (2nd to 4th above), he has around 2 crore, which can be earmarked for his retirement planning.

Early Retirement Investment Advice and Options

I suggested the following investment advice and options for his early retirement in India.

  1. Invest 90 lakhs in debt mutual funds and withdraw 50,000 per month through systematic withdrawal on the 1st of every month. He can increase the monthly withdrawal limit by 6% every year to offset inflation. 90 lakhs will be sufficient for this withdrawal for the next 15 years.
  2. Invest the balance 110 Lakhs in diversified equity funds for the next 15 years. Assuming very conservative rate of return of 10%, this will grow to around 4.5 crore in 15 years. He can then invest 3.6 Crore in debt mutual funds and plan for monthly withdrawal of 1.2 lakhs on a monthly basis from the 16th year onwards. This 1.2 lakhs will be the equivalent of today’s 50,000 assuming inflation at the rate of 6%. He can also increase the withdrawal amount by 6% every year to offset inflation. 3.6 crore is sufficient for this withdrawal till his age of 85.
  3. At the age of 60, Kiran will also have 90 lakhs as surplus amount (4.5 Crore -3.6 Crore = 90 lakhs). Kiran can use this amount for gifting to grand children or any other goals, which he can decide upon.

Kiran has already submitted his resignation and is currently serving his notice period.

Factors that helped Kiran for early retirement in India

  1. Starting an SIP of 7500 from the first year of his job and increase in the investment by 6% every year. This investment is now worth 2 crore.
  2. Starting PPF at young age and investing smaller amounts in the initial years. He increased the contribution in the later years when he started getting financial incentives.
  3. Not withdrawing from Provident Fund even on changing jobs.
  4. Purchasing only one house for self-use through home loan and clearing the loan amount in 10 years.
  5. Giving quality education to his daughter who is a topper in her class.

Early retirement scenario in India

There is no perfect retirement plan available in india, If your bank relationship manager or Insurance agent is offering such product , he is fooling you,Early retirement planning involves proper asset allocation between different asset classes ie equity(mutual funds, stocks) , debt(Fixed deposits, liquid funds,NSC) and periodical review and re-balancing between different asset classes.If you are not able do asset allocation it is better you take the help of financial advisor.

In absence  of social security at old age like western countries and frequent layoff’s happening in IT sector  in india at middle & senior management levels ,early retirement planning is a must for all of us

If you have not thought about Retirement planning, think about it today itself, tomorrow may be too late.

Happy Investing

 

Focus more on savings not on returns………..

 

Most of the new investors I interact in my daily life  are more worried about returns from the mutual funds ,rather than how much they can save for financial freedom , Focusing more on returns will lead to disappointment and some people to get more returns will fall prey to fraudulent or quick money making  scams .

Saving % for the average Indian is 32%. If 32% is the average savings %, how does your savings % rate in comparison? Focus on what you are earning and the % you can save — that will transform your financial life.

Let’s have look at investment portfolio of a working couple in a IT MNC, I got this mail from couple working in IT MNC.

Our monthly income is ₹2 lakhs  (post tax, no Emi) and monthly expenses are to the tune of ₹60k.We have 10 lakhs in shares and 4 lakhs in PPF. We have 12lakhs in savings account.We are doing a SIP in tax saving fund for ₹5000(45K invested). We have no loans.I am 34 years old and my husband is 37 years old and we are employed with a reputed product based IT MNC in bangalore and have a 3 years old daughter.

We want to invest and save for my daughter’s schooling, college education, marriage,and our retirement. We also want to buy a villa in 8 years with some lumpsum down payment and a vacation during the same time period. We have a medium risk appetite. Please help?

Do you see the problem in their investments, The basic problem their monthly investment is hardly less than 5% of their earnings, even 29% rate of return from their  equity fund will not make any difference to their portfolio, Instead of focusing on returns , If they would have started SIP of 125,000 from their monthly surplus of 1,40,000 for 20 years , they would have accumulated around 13 crores.They would have easily bought villa and arranged funding for kid education and vacation etc

Invest in a combination of PPF and ELSS funds for tax saving purpose, If the goal is to plan for retirement,Buying a Villa or big house, fund children education and take a vacation , You should be doing huge SIP’s for long term and shouldn’t be worried about short term negative returns ,Even with nominal rate of return 10 to 12%  you can easily manage funding for the goals.

Focus more on savings instead of worrying about the investments returns from mutual funds

Happy Investing

Wealth destroying opportunities…..

Last 9 years I am closely observing mutual fund industry both as a investor and advisor, Based on my experience I have made the list of wealth destroying opportunities, how people lose opportunity create long term wealth

Stopping SIP – This according to me is the strongest weapon to kill the wealth creation opportunity. How? Let’s have a look at it.

I am sharing my experience  , Both husband and wife  working as IT professionals started an SIP of 50,000 Rs to achieve the retirement goal of 5 crores in 20 years ,at the rate of return of 12  percent, Suddenly something has come up for them, They  want to give loan to a friend who started a real estate project who has promised an higher rate of return ie more than 20% for their money, So they stopped SIP, The SIP was started 2 years back, Now all their focus is on their friend and entire retirement corpus will depend on their friend returning their money back after making profit in real estate business.

(2) Ignoring financial goals –

I have done goal based financial planning for a working  couple working in a IT MNC in banaglore, They are from North India and wanted to move and settle in North india by taking early retirement, at age 45, started SIP of 40 K to get 2 crore corpus at age 0f 45 considering 12% rate of return, SIP was active since last one  year and was giving negative returns,Now ‘Something comes up’ during deepawali ,Now they changed the house furniture and interior decoration by redeeming the mutual fund investments. Finally they killed the opportunity to make 2 crores.

(3) Not understanding the difference between Need and Want

Easy money available on EMIs, Credit card and show off culture has changed the spending pattern of the society considerably. In the race of one up man ship, people end up spending on Wants without thinking twice whether they really Need those things. Such a behavioral change the society is witnessing, kills the opportunity of wealth creation.

(4) what is the minimum investment? – A very common question often comes, What’s the minimum investment requirement? How come one’s goal has anything to do with minimum investment? And then people try to negotiate with the GOAL, which is a reality but just to prove themselves they invest lesser than the required. For ex – instead of requirement of Rs.50000 to achieve Rs. 5 crores, one invests only Rs. 25000 to settle for Rs.2.5 Crore and ends up compromising in life. Saved 60 lakhs to miss out 2.5 crore. What a kill.# Return assumed @12% CAGR

(5) Investing for short term in mutual funds– This is really funny. One’s mind is conditioned to invest in mediocre endowment plan for 20 years, PPF for 15years but the same guy wants quick return from market linked products. In fact, it should be other way round. Let’s understand this by following example.

Investment per month (Rs.) Rate of return No. of months Value of investment
50000 12% 240 Approx. 5 Crs.
50000 12% 180 Approx. 2.52 Crs
50000 12% 120 Approx. 1.16 Crs

By lessening 5 years i.e. from 20 years to 15 years, one can kill the opportunity of creating extra Rs.2.5 Cr.

(6) Underestimating the burden of tax and inflation –

Most of the investors tend to ignore the burden of tax and inflation. Check this, an FD offering 7.5% interest gross may actually fetch only 5% interest for the individual in highest tax bracket. Assume inflation at 5%, the net return would be 0.

Net return = Gross return-Tax-Inflation

Instead of investing in tax efficient debt funds, people kill the opportunity of creating wealth creation.

(7) Over exposing to assets emotionally – Darlings of investments are real estate and gold. Traditionally people invest in these two asset classes just because they are tangible, can be shown off. Over and above it also sucks the liquidity and disallows the partial redemption. Real estate in particular has helped in killing the opportunity of wealth creation.

(8) Falling prey to tall claims – Often so-called long-term investors fall prey to tall claims of Ponzi schemes due to greed. Thus, kill the opportunity of long term wealth creation.

There are still more opportunities , I will Stop here

Happy Investing

No robot, no machine, no algorithm can replace advisor…

Recently while watching India vs New Zeland cricket match,I observed the ad of  ET now ,  the ad was saying how investor  can get additional 25 lakhs by investing in mutual fund  through the ET now app without taking advice from financial advisor and also ad was also saying how investor can get 1.5% extra return from investment done in mutual fund schemes through the ET now mobile application .

Curious to know how investor make extra return of 1.5% ,I was just going through the expenses incurred by investor in various mutual fund schemes ,this is called expense ratio,hardly the difference between regular (through advisor) and direct(investing throug apps like ET now, paytm etc) is 0.02% for almost 95 percent of the mutual fund schemes, Apart from this these apps have already started deducting transaction and maintenance charges and last 6 months most of the direct schemes have increased the expense ratio ,Now we have very minimal cost difference between regular and direct schemes.

We often underestimate emotions and tend to believe that decisions about money and life are “rational” in nature.In this context the role of an advisor remains that of selling a fund.Identifying funds (the best ones) from amongst thousands of funds is a rational analysis best performed by a machine (robot or an mobile app like Paytm, etnow).

Therefore, if fund selection is the basis of advisory, then it is almost impossible to beat the machine.But, if managing complex human behaviour (human emotions) is the basis of advisory then it is almost impossible for a mobile app to beat a man.

And the good news is investment is largely a behavior management service.

Let’s look at a few examples to exhibit the nature and behavior of people and see for ourselves how emotions triumph over reason.

1) Vinodh is on a diet and agrees to go out on a business dinner, thinking that he will be able to limit himself to one glass of wine and no dessert. But the host orders a second bottle of wine and the waiter brings by the dessert cart, and all bets are off.

2) Kiran thinks that she can go into a department store when they are having a big sale and just see whether they have something on sale that she really needs. She ends up with shoes that hurt (but were 70 percent off).

3) Similar problems affect those who have problems with quitting smoking & alcohol, a failure to exercise, excessive borrowing, and insufficient savings.

As human beings we think something and we do something quite the opposite.

When we plan we think logically but when an easier path shows up almost always our temptation / greed gets the better of us and we let go the planned route by succumbing to the temptation of the easier path.This is what happening with most of investor who are completely depanding on apps like paytm, etnow.

Self-control problems can be illuminated by thinking about an individual as being made up of two individuals,

1) A far-sighted ‘Planner’ and
2) A myopic ‘Doer.’

You can think of the Planner as speaking for your Reflective / Thinking and Planning System and the Doer as heavily influenced by emotions and temptations; the intuitive person who can act without giving it a thought.

The Planner is trying to promote your long-term welfare but must cope with the feelings, mischief, and strong will of the Doer, who is exposed to the temptations that come with arousal.

One part of the brain gets tempted while the second part shows us ‘reason’ to stay invested.

Unfortunately the first part almost always prevails over the second unless and until it is aided by an external force known as “sound advisory”

In investing, all is hunky dory when one is planning investing.

1) Long term need

2) Conviction in the economy

3) Conviction in the process

But come a bout of market volatility followed by BEARS blaring out their views and opinions on CNBC, the investor starts developing cold feet.

The long term view no longer seems true and temptation to exit is foremost in the heart.

This is the juncture that can puncture the goals and wealth creation potential of the investor.

No robot, no machine, no algorithm can act in such instances because one needs to have emotions to understand emotions.

A good advisor is one who steps in at this juncture and uses his foresight, knowledge and intent to pause the temptation before it becomes a decision.

A great advisor has high levels of sensitivity; someone can feel the joy and pain for others; someone who is emotional and a little spiritual.

I can’t see a machine with such an heart.

Happy Investing