Thursday, November 27, 2008

Say a prayer for Mumbai

There will be a time for reflection!

Now, is the time for a prayer

Tuesday, November 25, 2008

Increasing working hours in IT

This, from an article which appeared in rediff about IT companies increasing their working hours from 8 to 10.  

"The IT industry in India still follows the best practices it had introduced earlier. But this does not mean employees will work less. If they are being asked to stick to duty hours, this will increase the productivity," explained Infosys Technologies HR head TV Mohandas Pai.

"Besides," he added, "they are also being paid well to work hard. These are difficult times and if they don't work hard then there will not be any industry left in coming days."

Reminded me of the project manager I had earlier in life. He used to give the following argument to team members to work longer hours and to show up at work on Saturdays. “You are young, and now is the time to make a career. If you do not work longer hours now, when will you make a career for yourself”

Sure enough, there were many who worked longer hours. However, this did not necessarily lead to a productivity increase. In fact, my hunch is that, all these arguments had an inverse correlation with productivity.

Sorry, Mr Pai, but Infosys has been making 30% EBITDA margins. IT industry would not fold if your IT margins come down to 25%. Of course your investors would raise hell for you. But that does not mean you can get away with anything to please them. 

Now striving for better performance is prudent. However, why is is that we wake up only under pressure. Anyways, I have great respect for Infosys and their top team but this is not what I expected from a seasoned industry leader. He sounds like a heckled HR person who has not clue what to do. 

Saturday, November 22, 2008

Taleb on Mistakes that Market Traders can make

DS: What are the most common mistakes you see traders and risk managers making?

NT: As a trader, my job is to understand biases and trade on them. There are all kinds of biases. The most common is the small sample bias. Let's say you have 1:1,000 odds you will come home every day with a dollar and once in a while you lose $1,000. Many traders show very steady incomes but they could be fooling themselves because they don't have a long enough period to chart their performance. Their Sharpe ratio will not be indicative.

In option trading there is a similar bias. Short premium option traders, typically those who sell out-of-the-money options, are more likely to make money on a daily basis and then blow up. Likewise the yield hogs, those traders who would take any risk for a few basis points. You can fool yourself with your Sharpe ratios, and you can fool all of the financial engineers, but you can't fool an old Chicago trader who went bankrupt twice.

Another bias is what I call the size bias. If you have 20,000 traders in the market, sure enough you'll have someone who's been up every day for the past few years and will show you a beautiful P&L. If you put enough monkeys on typewriters, one of the monkeys will write the Iliad in ancient Greek. But would you bet any money that he's going to write the Odyssey next? You know that because of the sheer size of the sample, you're likely to find a lucky monkey once in a while. But the same applies to traders.

A third bias is the survival bias. Everybody will tell you that stock investing is a great idea because it's been back-tested by some serious guru and if you had bought one share of some stock during the Revolution you would now own the GNP of some banana republic. But you forget that your back-testing is only on stocks that are alive today and does not cover stocks in imperial Russia that a rational investor would have bought at the beginning of the century. Many continental stocks were recycled into wallpaper. When you look at markets you are only looking at the remnants, the parts that have survived. Or take real estate. People always say it goes up. But that works only if you always bought in places that became fancy.

Taken from Talebs interview to DS

This appeared in 1997. Wallstreet as well as regulators could have done well to pay heed to his rants.

Tuesday, November 18, 2008

Market is always right?? or Right on Average

We all know about the following fallacy of relying on average depth of lake!!

What would be your advise to a novice trying to cross the river? 

Now tell me, is the market always right or Right on average 

What would be your advise to a novice investor? 
What do you hear on CNBC or NDTV Profit or any other business channel? 

Sunday, November 16, 2008

Of Equity Analysts

In my line of work, I come across a number of equity analysts who religiously cover the stocks of various companies. In thier later twenties, thirty somethings, mostly just sit in their cabins, make a few phone calls and pen down their analysis religiously, quarter after quarter. And then there are those who send people to spy on the business, talk to customers and try to pry out more information from the management than what is discolsed publically. They do a great job of spreading the information. This is the good part, but that its. There are various shades of grey, some darker than the others.

All of them distill this information overload and predict what the company is likely to do in terms of revenues, margins and profits in the next quarter basis which they put a number as price target for the price of the stock in three years. They punish the management if the results end up being lower than that and reward the management if they end above it. 

Well what is wrong with this, is what one may ask? 

Nothing directionally but the number in question is the probelm The number is picked at random and long term assumptions are put in at random to justify the number. The number itself depends on the analysts disposisition towards the company, what side of the bed he woke up that day. Worse is, I have to put a sell on XX% of stocks on my coverage portfolio. 

The more, I try to make sense of these the more I find that there is no logic to these. However, every report is filled with post event logic of what happened and how their number is justified. Everything backed by post fitting of (often subtly twisted) logic. In times of volatile markets such as today, the variations are so huge that they are not even funny. The other day I say a report which downgraded price target of the stock from 450+ to 54 in one single sweep. the near term projections were not nearly as different. 

Some time back, I had come across research which found out a huge amount of correlation between the accuracy of projects by sell side analysts with whether the CEO and the analyst went to the same business school.

Another thing which strikes me. The management is punished for results not matching to guidance. The analysts almost butcher a management which promised 70% growth and showed only 60% . This has almost become a game (And only a few have mastered this).

What sickens me sometimes is the confidence with which these guys pronounce their judgements. Or are they playing liars poker. Notwithstanding the fact that their predictions never came true or at least a majority of them. 

Dont they have a fuduciary responsibility to the investors they sell their research too. 
Ooooooops! I guess there lies my fallacy. Most of these guys' research is not paid for. The brokerages make money only when they execute trades for these investors. 

Classic case of agency problem. 

PS: This is not true of all the analysts. Many, I know are the most hard working and well meaning professionals I have ever met. 

Wednesday, November 12, 2008

Obama, Outsourcing and How steps to prevent job losses may go wrong for US workers and be positive for outsourcing vendors?

Obama's coming to power has again raised the bogey of impact on outsourcing. I believe, that given the massive rhetoric by the President-Elect in the run up to election, and pre poll promises he would have to take some steps against outsourcing like cutting tax benefits for companies that outsource or for example $3000 incentive for every job kept onsite. While that would impact sentiment in the short term, I believe that this may actually turn out to be a positive development. 

I am fairly confident that Obama will take some notional steps in the form of financial penalty against outsourcing of jobs and believe that these would be positive for the industry. let me give you an example of how this could be positive. 

One of the problems that creches face is that parents show up late to pick up their wards. And, tradionally they would have to make a lot of excuses and a have a lot of explaining to do. Creche management would threaten to deny enrolment to kids and this causes a lot of duress to the parents and most of them alter behavior. 

In an experiment (from Freakonomics by Steven Levitt), a creche decided to impose financial penalty on parents arriving late. The expectation was that fear of losing cash would cause them to show up on time. However, the result was opposite of that expected. More parents started to show up late as they were quite happy to pay a fine. The fine made showing up late legitimate and obliterated guilt. Cost of guilt was way higher. It now was a simple 'opportunity cost' decision for the parents. 

So if the president only puts notional monetary penalties (Strict penalties are any ways ruled out, as the economy cannot afford it) the companies would be free of guilt while cutting onsite staff as the decision on whether to outsource or not would be purely economic and thus likely to favor greater outsourcing. 

Tuesday, November 11, 2008

Black Swans and Warren Buffett

Read Talebs 'Black Swan' last week.Made for an interesting read and a lot of the guys designing financial derivatives should have read Taleb. If they had, then we probably would not be in the current global financial mess. At least we could have anticipated it. Clearly black swan events can make these normally safe looking intruments blow up like Buffet's weapons of mass destruction.

Anyways, was just wondering if the worlds greatest investor Warren Buffett is another one of Taleb's 'black swans'. Probably he is, cause no other investor following his investment style has accumulated as much wealth and none more are likely to do so... oops perhaps he/she would be another black swan
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