Padma Awards: Dhoni and Harbhajan Saga

Perhaps you may not agree with me, but the current anger by the Sports Minister on Dhoni and Harbhajan was uncalled for. The President may be the presiding deity for government officials, but is still a public servant. And therfore, that the two were unable to show up should not be held against them and is their perogative. Perhaps players's lack of respect for the awards is a reflection on what a sham and tamasha these awards have become over the ages.

The ministers who have made no real contribution to sports, or for that matter to any other thing, get to show their importance through angry (uncalled for) outbursts. They deserve to be snubbed. As for our sportsmen (and sportswomen) the award is only a recognition for their achievement and not the achievement themselves. Not being present on the award ceremony does not make their contribution less great.

Satyam acquired by TechM: Analysis

TechM emerged today as the highest bidder for Satyam. While this is puts TechM in a new league, the question that must be asked is the following

• Did TechM have an information advantage as there was one common member on the boards of both the companies? Now don't take me wrong, the information passed does not necessariy have to be explicit. Just the fact that the board member, who has a fudiciary responsibility to protect the interest of shareholders not stopped techM from bidding where it did means they had an advantage.
• Had it not been the case, would it not have made more sense for L&T to have bid higher since it already has a 12% stake in the company?

If this is the case then TechM got satyam for a bargain and perhaps this explains the jump in price in TechM's shares.
IBM which was rumored to be bidding for Satyam was clearly never going to be in the race. It had the least to gain. Why should an IT player such as IBM take only a financial risk of class action suites. It already has access to customers and to offshoring (remember it already has 50K+ employees in India). Same for Cognizant (it therefore withrew at the 11th hour). Wilbur Ross (a financial player) was only going to to be interested in partnership with a strategic player and at cheaper valuations. In normal times it could have leveraged and may have been able to offer higher valuations. Then again, these are not normal times.

Freidman vs Keynes

Milton Friedman, notes that, "There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income."

A certain Keynes may argue that the government is “.. Of the people, By the people and For the people”, spending people’s money or at least is supposed to be under a democratic system. Perhaps, it was this belief that led him to propose government intervention to prop up the economy.

So whether you believe in the ‘invisible hand’ of the market as proposed by Classicists or chose to follow the Keynesians, could ultimately depend on your view of the government’s sincerity

My 2 cents

1. Both the World Views (Weltanschauung) are flawed. They are joined at the hip by economics, which is based on the assumption of rational behavior of humans
2. I for one don’t want to take it too seriously for the following reasons

• I am not sure if humans are capable of being always rational
• Even if they are, how do you define rationality (Economics only measures rationality on one dimension aka money. Humans can be rational on many dimensions while appearing completely irrational on money)

While, both approaches can work wonderfully at various times (as seen in the past), the tremendous belief in their own worth (hubris) is their tragic flaw (hamartia) and ultimately causes reversal of fortunes (peripetia)

Perhaps, a mix of both approaches such as seen in India. Free (relatively) markets tempered with government oversight and occasional intervention may be the way forward

Technical Analysis

Recommend going long on NIFTY with a tight stop loss at 2750

A Grade Directors, B Grade Boards - Satyam Fiasco

Government has appointed 3 big names as independent directors to the new board of Satyam and promises to expand the board further. While the credentials of the three cannot be questioned, it is to be seen how they perform as a team. 

The previous board too had big names. People who are gurus in their own right. The likes of Palepu, M R Rao, Vinod Dham were truly 'A' Grade Directors. Raju for that matter did create India's fourth largest IT services company. However, as a team, it did turn out to be a 'B' Grade Board. Palepu infact was an expert on corporate governance. One of his course presentations begins with the title 'A Grade Directors, B Grade Boards'. Apparently its easier to preach then to perform. 

Anyways, what are the incentives for these new board members to perform? What about their existing organizations where there are already directors and conflict of interests? Only time would tell on how they perform. 

(A)Satyam Fiasco

The turn of events at Satyam has gone progressively from bad to worse over the last few weeks culminating in the confession letter from the Chairman, B Ramalingam Raju. The independent directors have already fallen like nine pins with half the board having resigned even before the 'suicide' note sent by Raju.

However, what baffles most is the claims made in the letter itself. Even more than the fact that he did defraud the investors, what was baffling is that how system (investor scrutiny, a reputed independent auditor and scores of professionals in the company, all sworn to ethics by their affiliation to the association to the body of chartered accounts.

Add to that the disbelief that the company itself was poorly managed and the claim that the company made just 3 percent operating margin on revenues of over 2000 crores (Rs 20 Billion) in Q2 of FY09 while even smaller companies made margins between 12-15 percent. The larger ones infact make close to 30 percent margins.

So the fear is that Satyam actually made money (and cash) all these years and this has been siphoned off over the last few months or systematically over the years into either the the infra companies (Maytas infra and Maytas Properties)

The aborted Maytas deal was the first botched step to cover the tracks. The letter seems like a last ditch attempt to save the rest of the family (read the Raju sons) from ruin and from the law catching up with them and possibly other friends (read accomplices) at Satyam.

He, infact may be counting on the laxity in law enforcement in the country. The cases go on for years while he roams free on bail.

That he has damanged his reputation is a sad fact that would have happened anyways. Its unfortunate that he resorted to this. After all he is the man behind creating India's fourth largest IT services company.

The equity analysts have withdrawn their coverage on Satyam as they the accounts that they rely on now have no credibility

Banks have stopped relying on certificates issued by PWC. Even for other organizations. If the circle of Trust, the very basis of the finance has been broken we could all face anarchy.

Stocks to Buy

Amongst the companies that one could look at are Zicom Electronic Security Systems, Bartronics India, Gemini Comunications and Bharat Electronics who are the listed companies that manufacture security equipment

Media and Mumbai: An open letter on role on media

I am not going to even attempt to talk about the media from Pakistan but Indian media, if you are reading, should be ashamed of the way you handled the coverage of the Mumbai horror.

I am accusing you and your ilk (with a few notable exceptions) of the worst possible behavior for disregarding professional ethics and for fear mongering and sensationalizing.

1. Shame on you, for putting the lives of our brave soldiers in danger by telecasting live pictures of the the counter operation.
2. Shame on you, for conveniently putting away all sane voices of our leaders and sensationalizing silly remarks by a handful of silly politicians. As putrid as our politicians are, you are equally bad if not worse.
3. Showing live, amongst other things conversations with the terrorists and helping them in spreading their propaganda.


The people hiding in the chambers got attacked after you pointed out people were stuck there. For harassing an injured police officer, who had suffered four bullet wounds by asking him to repeat his experience again and again.

All you care about is your TRPs. You feed the nations curiosity and fears but demand a CMs resignation when a certain XYZ happens to visit the site to pay his homage, or he said 'out of curiosity'. Can a citizen only satisfy his curiosity only by watching the idiot box free of all what you throw at us. I blame you for doubting the people's intelligence.

so all of you, please straighten up. We, the people, will deal with you once we have are done with our beloved politicians.

Evidence to nail mumbai masterminds!

I am angry and a bit of a cynic an this point of time to pardon me!

My impression (no awards for this)

1. People are very angry all over
2. Reactions from India: A lot of accusations against politicians, intelligence officials, Pakistan (some against certain sections, some against Pak government and some against entire Pakistan)
3. Counter reactions from Pakistan: Anger at some of the above accusations, messages of reconciliation when Pak diplomats talk to Indian media, Conspiracy theories - some quite sickening,

People are making a lot of suggestions. A lot of them just angry reactions, some more sane but always at the wrong forum. Who is taking action. In my heart, I am convinced that there are forces within Pakistan that want to destabilize India, possibly within other their government. I hears claims that India has concrete evidence. But just those, I have not seen the evidence for myself. Maybe I never will but I want to as it will put an end to the part of me that does not believe it.

But everybody, at least on the Internet forums is convinced. Have they seen the evidence? I doubt it. How could they be so sure if they have not and recommend an all out war with our neighboring country with people who are very much like our own.

Well, may not all like our own we would say. But don't we have the naxals, the deobandis, I have talked to people from Kashmir who are sick of both India and Pakistan. They want this war to end and peace to prevail.

I am sure everybody should want it. But I am also sure that everybody does not. Where is all of this taking us? Is the ISI chief going to visit India. He was going to, one day. Now, I am not so sure.

When I hear the Pak president on TV, I want to believe that he is genuine, for sake of all of us in India. But is he? I am not so sure?

Despite all this, I know the masterminds of this evil plot are out there somewhere. But where, I do not know?

The only thing I am sure about is that for humanity's sake, we need to keep a level head, avoid knee jerk reactions? Can I do that? I am not sure?

Context based news search from Google

Searched for "Mumbai" from Google's news service from their India, US and Pakistan homepage. Have come across different news reporting from TV channels which add their own regional and national context to news events.

However, had not expected such differences from the organization which claims to "Do No Evil". They do seem to have succeeded to put context in online news search. Sometimes, even hiding the true picture under all the context.

Say a prayer for Mumbai

There will be a time for reflection!

Now, is the time for a prayer

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. 

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.

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? 

 

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. 

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. 

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

Being Nice in business! and its implications

Seth Godin, in his post sees a big opportunity in being nice. However, being nice is just one more example of A Rule of Thumb ( like "Customer is King") you just unwittingly follow. It works sometimes but not always. Consider a company serving a big line of customers with just one employee manning the service desk. She greets every one, asks a couple of questions about their health and suddenly there is a mad rush at the end of the line and the company now needs two servers.

What is the best way to be nice? Simple! don't charge for your service. This is the mistake that a lot of people can make. I am not saying don't smile, or be unpleasant (even though the smiling kinds are costlier to hire and anyway even more costly to maintain ie. keep motivated) but the problem is just getting carried away by these rules of thumb. You need to really ask yourself, does this really impact your business.

BA, for example found out that it was much more beneicial to solve a customer complaint than to get it right the first time. Now should all businesses do that? Anyways, what would happen to all the six sigma experts, then?

Avoiding Moral Hazard: Fed Style

Moral hazard in economics
In economics and ethical theory, the term moral hazard may be used for any situation where a person or organization does not bear the full adverse consequences of its actions.

Lending and debt
Rescue operations carried out by governments, central banks, or consortiums of financial institutions can encourage risky lending, if lenders know that in case of serious problems they will not have to take losses. Similarly, if governments know that inability to pay creditors will lead to yet more loans (to prop up finances), then they are less likely to have sound financial policies.

By refusing to bailout Lehman, Fed signalled that it would longer allow moral hazard ( although it had been looking the other way and may have caused moral hazard itself when for example it brokered the Bear Sterns deal, or remember TBTF? anyone).

While its difficult not to feel sorry for the employees of firms that fail, you also know that some where atleast some of these were arrogant enough to make 'bad bets' (as they call them, almost likening it to gambling). If they had come good these guys would be reverred like gods. But now, who will pay back the investors who thought their money was safe with these geniuses.

Tough Questions from Singur: Tata Motors and Government Vs Farmers

Tata Motors as stopped work in Singur in West Bengal, but its spokesperson said that there is still a small window open for Tata to return if normalcy returns. The $350 Mn that Tata Motors has put into the project is now a sunk cost. There are two scenarios for Tata to return.

1. Farmers give in (of their own volition/ forced or coaxed by government/ community pressure from lure of future jobs etc)
2. Or Tata strikes a deal with the farmers and gives additional payout to these farmers

The second scenario is appealing if the total payout would be lower than the amount Tata would have to invest in a new factory elsewhere + time costs. However this would not generally be good for other companies (and even for Tata) as this could potentially become a trend.

Even if the government acquired the land from the farmers at the prevailing market price, it is always a fraction of the land value after is handed over to the industry. The question is, at what price should the government acquire land. Is forced acquisition justified. What happens if one farmer does not want to give up his land and his land is smack in the middle of the land in question. What is your answer if the farmer in question is you and you little hut, that you call home, is smack in the center of it. What if farming is the only thing you have done your entire life. These are tough questions to answer if you are not the farmer.

And without fail, there are also rumors/reports of people close to the government owning a substantial stretch of land close to the land under question. What of these?

However, if you were a true believer in free markets, you would ask Tata to acquire land on their own at market rates and go fetch elsewhere even if one farmer refuses. The pseudo capitalists would let the government do their dirty in this case and use the free market argument to get government to slacken regulations elsewhere. What would you call such people? Ethical?

Certainly not....