Wednesday, December 29, 2010

Ten Technology Trends for 2011

It’s always dicey trying to predict technology trends. But it becomes a bit easier if the time horizon is short, like say, a year. It’s also that time of the year, with the new year dawning, that one wants to look ahead and try to guess how things will pan out.

Technology is what technology does. In this article, I shall try to focus more on the impact of technology as I see it on our daily lives in 2011.

The distinctive trends that have caught on and look like accelerating in the next year are:

    1. The rise of smartphones: With the increased number of apps available on smartphones, we will soon come to a stage that we cannot live without one.  We will use it to speak and send sms as always. We will want to use it to upload photographs of family events as they are happening on to facebook. We will be tweeting on the go, and in the middle of every act. We will use GPS applications coupled with city maps to find our way around. We will play silly games on it like “Angry birds”. We will have the compulsive need to feed our cow, or till the land, or whatever it is that people do, when they join Farmville. We will use barcode reader apps to find out more about products on store shelves and to do comparison shopping. We will record events in our lives by uploading photographs on the net and tagging them. Our banking and bill payments will be on the go. Whether we know where we are going will continue to remain a question, but we will be doing more and more things on the go. To paraphrase Lewis Carroll, “if we don’t know where we are going, it doesn’t matter which road we take”; but we are definitely sure that we want to reach wherever we are going faster!

    2)      The rise of Android: Android phones that are hitting the market are catching up on features with Apple, and the apps are more in number and unrestricted. Nokia’s Symbian and MS Windows 7 will remain niche, and may even fail to take off. Android will overtake Apple, and Apple will continue to be strong. Corporates are beginning to allow connectivity from multiple devices as they resolve security issues, and that will ensure that the growth of RIM’s Blackberry also tapers off.

    3)      Different strokes for different folks: Wireline devices are not dying, not yet. High-end PC’s with wired connections will come into every home; most people who are reading this article already have a PC at home with a high-speed (?) internet connection. More people will buy high-end PC’s for the home, and several of us will upgrade. Cheaper PC’s for the rural markets and schools will be pushed by computer makers looking to expand their markets. System-on-chip products using more energy efficient chips like Intel’s Atom will increase in usage and penetration. As to wireless, more applications will be found for them. Corporates will start developing apps for their sales teams (to start with) and others, with applications “on the go” specific to their areas of work. 

    4)      Google will become more powerful, especially if Google TV takes off. They are collecting more and more of the world’s information in their maps, and more and more streetscapes from roving cameras. The fact that most internet searches are not searches any more, but “googles” only enables them to amass a load of valuable data about our buying habits and psycho-profiles which they can even use to predict behavior. In fact, Google Instant is a step in that direction.

    5)      TV will become more “on demand”; DTH television will gain a greater foothold in India. The old cable-wala as we know him, is a dying breed. Integration of TV and PC viewing is still some time away, it won’t happen in 2011.

    6)      More people will start working from home. In India, many companies have tried work from home policies with mixed success. There are several people who do not want to work from home – they find coming to office gives them greater flexibility and peace of mind, perhaps. But companies are pushing work from home more than before, and have even started talking of factoring a “discount” into their real estate planning to factor in working from home. The need to be seen as “woman friendly” will add to the trend. As connectivity at home improves, the willingness to work from home will increase.

    7)      LED lighting will start growing. After tungsten filament, it was mercury vapor lamps, then it was CFL. Even before CFL could take hold fully, LED is gaining ground. It consumes much less power, is much more flexible in terms of applications, and the technology is proven. As production increases, it will bring down prices and push up demand. People will need to get used to the difference in the ambient lighting, since LED has a different feel to it, but that will begin to happen.

    8)      Small solar powered electrical devices will take off in a big way especially in villages. These are becoming more and more affordable.

    9)      More and more people will hit the “Dunbar limit” on facebook and will start restricting their “friendships”. In India, this will be more than made up by the fact that more and more people will join facebook.

    10)     More and more of human interactions will happen on-line; and we will be less and less able to recognize our neighbors, leave alone becoming friends with them!

Tuesday, December 28, 2010

The best ODI team ever

We are back to the ritual that is conducted religiously every year. All-time great players have been nominated for a poll on the best ODI team ever. What purpose do such exercises serve?


Each player is a product of his times and each performance is unique. A person who does great things in one era has to be lauded for the fact that he has managed to rise above the constraints set on him by his environment, surmounted challenges posed on him by opposition, and managed to triumph in spite of all odds. Celebration of all victory is our way of acknowledging the indomitable spirit to fight that resides in all of us. 


The bowlers that the great Don faced and the countries he played against (England) are very different from what Sachin faces today. Both of them are champions, but from different eras. Why do we insist on having the debate about who is the greater batsman? Why not just revel in the greatness of both and feel happy about it?


The modern era is one of making lists. We want to rank everything and everyone on a scale, and are not satisfied till we decide who is number one. The persons or institutions being ranked sometimes do not take part in the process and do not care what you or I think about them; but unfortunately, in the era of market based economies, it matters. A lot of decisions are made based on who is first, and a lot of money is spent based on such rankings. So we have the spectacle of people competing to be ranked, and losing sleep over retaining their place on the rankings. Why not just enjoy the process and let the rankings go?


We rank batsmen based on their runs; bowlers based on their wickets. Since this does not seem adequate to capture the complexity involved, we throw in things like strike rate, quality of opposition (which itself is based on another rank, but never mind that), number of maiden overs bowled, etc. We assign weightages to each factor. Would these weightages adequately distinguish between the balance of various factors that changes with every match? But never mind that, we want one number, and one ladder on which to place people. We now have two lists, one of batsmen, and one of bowlers. Since the two need to be compared for the ladder is but one, we assign equivalences between number of runs scored and number of runs conceded, number of tons and number of wickets, and so on. And then we come up with one number. A number that encapsulates the genius of each sportsman… the whole genie in a bottle neatly packaged and measured!


You can imagine the following scene in a sports management agency. The client has a budget of ten crores, and he wants to sign on a couple of celebrity sportsmen for endorsements. The media planner will have a powerpoint presentation ready that has all kinds of scientific analysis; like, amount demanded by the player divided by his ranking as decided above,  a two-axis graph with performance on the x axis, and popularity on the y axis, with player names plotted inside… I am sure we could think of many more metrics.  What do such metrics actually stand for, what do they represent? No one gives a thought to that. Unfortunately, a lot of decisions are made based on these metrics, sometimes for want of a better alternative. I am sure a Richard Branson or a Steve Jobs, if asked to decide on whom to pick for endorsing their products, would not look at such metrics; they would look at numbers no doubt, but go with their gut. Unfortunately, when there are too many people deciding at the top, with too many stakeholders to report to, and too many justifications to make, everything has to be reduced to a metric.


Coming back to cricket, there are not just individual rankings, but team rankings as well. And then you have a selection of the best current world one-day team based on points. Would a Dhoni or a Sachin perform similarly when they are part of a different team; how much of their performance is part and parcel of the set-up and the team they are in – how much of their spirit that we see in the game is intertwined with the team they are in?  All these nuances are ignored of course – we just want to pick one team that we think is the best, and in order to justify our choice we want numbers to back us up!


And then ICC has its 40th anniversary celebrations and declares that it will have an online poll of the best ODI team ever spanning players across generations. What are we comparing and why? We are of course ecstatic that a few of our players are there on the shortlist – they better be, considering the number of countries that play cricket, and considering the disproportionate amount of time we devote to cricket as a nation.


And then the winning team is declared. If you happen to have chosen the correct winning team in the poll, your name gets mentioned somewhere. You get your 15 minutes of fame. Several online polls are conducted in such a way now that the majority verdict on the poll determines the winner (with revenues to the telephone company if it is an SMS poll, but that is another matter). The irony that is lost by most people in such a scenario is that you are declared a winner precisely because you are part of the majority! To be unique, you have to belong!

(23 December, 2010)

Monday, December 27, 2010

Talking about Gold and Silver - Part 4

If you ignore ornaments, there are three ways you can buy gold. Physical gold in the form of gold biscuits, electronic gold in the form of ETF’s, and electronic gold in the form of e-gold from the commodity exchange. When it comes to silver, ETF’s have not yet been allowed by SEBI, and hence the options are only two – physical bars, and e-silver from the commodity exchange. Each of the modes of holding has its own characteristics.


Bullion in the physical form is the most free from political control.  In the US it was not lawful for private citizens to hold gold for a long time, and in India till the mid-90's, gold imports were restricted in order to curb private holdings of the metal.  In situations of war or public emergency , the entire gold reserves of the country can be commandeered by the government, who can pay you cash in return. But one of the reasons why we hold gold and silver is as a hedge against the threat of currencies becoming worthless! Gold in ETF form or gold lying in the commodity exchanges are easiest for the government to lay its hands on.  Also, in a situation where the actual physical stock is with someone else, and all that you hold is a piece of paper “promising” you delivery, there is always a counter-party risk involved. This risk could play out in various ways. For example, how do you know that the ETF is actually holding physical gold – part of their portfolio could be in the form of “gold-backed” securities which, unbeknownst to them, may not have a backing of solid gold behind it?


Modern markets and institutional structures with the backing of relevant laws and regulators, are built in such a way that they give us the confidence to trust in them. I do. I do trust them to the extent that a major portion of  my assets are lying with the government as PF or PPF, or in the stock markets as shares in demat form. But the 10 to 15% percent that I put aside as the “ultimate fall back”, – my investment in gold and silver serves this purpose apart from being a good investment on its own merits  – I would like to keep in physical form in my custody, thank you very much. Guarding against Black Swan events at least to the extent of 1/6th of my holdings strikes me as a sensible thing to do.


Okay, so let’s not get paranoid. Let us bring the debate back to level ground where there are no armageddons, no apocalypses. Assuming all the modes of holding are equally safe, how do we decide in what form to hold gold and silver?


We examined physical bullion in the last part of this series. When you sell gold biscuits or silver bars, the tax treatment is the same as that for any other asset. If you have held it for less than three years, the profit on sale would be added to your income for this financial year, and you will end up paying full tax calculated at your marginal rate. If you have held it for more than three years, you will be taxed  at  rates pertaining to long-term capital gains, i.e., 20 percent after indexation benefit, which could work out to anywhere between  13   and 20 percent of the gains. Having said that, most transactions in physical gold and silver are in cash, and carried out at the retail level.


You can buy gold (not silver, not yet at least) in ETF form. ETF’s are nothing but “Exchange Traded Funds” which are closed-ended mutual funds that are “traded” on the exchange, i.e., units of the fund are bought and sold on the exchange just like shares at the day’s quoted price, rather than redeemed through the fund manager at the day’s NAV. Gold ETF’s invest in gold and hence their prices are supposed to closely track the price of gold. For this, they charge a management fee which  in India  varies from 1% to 1.5% percent per annum. If one tracks the last few years’ performance of gold ETF’s , it has been observed that they do not exactly give the same return as the price of gold; they actually lag the gold price increase by about a percent every year. Part of this is of course due to the management fee that is charged for managing the fund. There are about a dozen Gold ETF’s in the Indian market – among them I prefer Goldbees from Benchmark AMC.


Buying from the cheapest retail source entails a buy/sell spread of about 4%, as we saw in the previous part. Add about 2% for the extra hassle of keeping physical gold, and selling it when the time comes, and you get, say, 6%. Buying an ETF through a broker involves commission at the time of buying and selling, totaling to about 1.5%. Add to this a management fee of, say, one percent per year. Equating the two, you get a “break-even” period of about five years. If your investment horizon is less than five years, go for ETF. If it is more than five years, you should prefer physical gold.


Gold  ETF’s get a special tax treatment since they have been classified as “ non-equity mutual fund ”.  If you hold ETF’s for more than a year, any gains you make on sale classifies as “long-term” and you can pay tax at the rate of 10 percent of the gains In case you hold it for less than a year, the gains are just added to your income and taxed at your marginal rate. This compares very favorably with physical gold, where the threshold for considering it long-term is three years.


You can also hold gold and silver in “e” form. National Spot Exchange, which is a commodity exchange, offers “e-gold’ and ‘e-silver’. They are like demat shares – you hold them in a separate commodity demat account that you open with them. They are fully backed by physical gold/silver with a facility to deliver the bullion physically to you at a nominal cost, at your option. You buy or sell them like you do shares. The tax treatment is the same as for physical gold or silver. Visit the website of National Spot Exchange to find out the modalities of opening an account, etc.


That concludes our four-part series on gold and silver. If you have been just reading this, and not bought any, it is time you ventured out into the market and bought some!

Thursday, December 23, 2010

Clarifications on Gold rates

Checked rates today at Tanishq and Shubh Jewellers.

The rate quoted on the Mint masthead is Rs. 2043.50 per gram. Tanishq's base rate is 2120. They charge about 5% margin (it varies as per a sliding scale - it's 5% for a 10 gram coin) plus 1% sales tax. The actual rate for a 10 gram biscuit is 2247. They will buy back Tanishq biscuits at the base rate (2120) if you buy ornaments from them with the proceeds. In case it is a cash buyback they will deduct 5% and give you 2014. So the net buy/sell margin actually works out to about 11% including the tax.

Shubh Jewellers quoted 2088 as their base rate, plus 1% tax. Their buyback for Shubh biscuits is currently is at 51 rupees less, that works out to 2037. 

As expected, the buyback is at a rate slightly less than the day's benchmark rate. The rate at which they sell to us differs widely.

Tuesday, December 21, 2010

Talking about gold and silver - Part 3

How to buy gold and silver


When you buy a car, there could be a justification for paying more for a Swift over an Alto; you could consider paying more for a Louis Philippe Shirt over a shirt from a lesser brand; you might willingly pay twice that amount for a designer shirt that is exclusive. In some cases additional features justify the higher price, and in some cases it is justified by the brand value.  How much premium should be paid for "brand" value is debatable, but there is some justification for it once you have taken care of your basic necessities, and want to show that you are progressing in life.


That is as far as consumption expenditure goes. When it comes to investments, would you pay more for one share of Reliance just because you bought it from a big reputed broker? Perhaps you may pay commission at a few basis points higher for the convenience of dealing with your regular banker or broker, but I am sure you would not want to pay too much of a differential. When it comes to commodities like oil, iron, or copper, would people pay more just because they are buying from a different source? The international price of all commodities at the wholesale level is the same.


Gold and Silver are investments, and they are also commodities. Ignoring ornaments for now, would you pay more for a ten-gram gold biscuit (whatever the grammage, we shall refer to it as biscuits in case of gold, and bars in case of silver) just because you are buying it from a particular source? Let's assume you are willing to pay more because you are buying it from your bank, but how much more will you be willing to pay? 1%? 2%? What if I tell you that your bank charges you at least 15% more than what you would pay if you knew where to shop? Would you still buy gold from your bank?  They won't even buy it back from you – just check the purchase price from your banker today, and ask your jeweler how much he would be willing to buy it at. The difference is the buy-sell margin you pay. If it is anything less than 15%, let me know.


Gold ornaments have been considered a good investment since time immemorial.  Ornaments are no doubt good as investment, since the value of gold tends to go up over time; however, buying gold in ornament form has its drawbacks.  The "making charges" are anywhere between 7 to 15 percent depending on the intricacy of the design. When you return it there may be certain deductions like "melting charges". If you return it to a different jeweler than the one you bought it from, it is certain that he will cast aspersions on its purity, and tell you that what you thought was 22 carat is only 20 carat gold. There goes another 10 percent! You could ask for BIS certified gold or buy from a reputed brand like Tanishq – this ensures that the "melting" purity is what has been guaranteed – but in that case the making charges are likely to be at the higher end of the band. The good brands may not even quote you a rate per gram, they will talk only of a "piece rate". 


There is no harm in buying gold ornaments; in fact, for those men who are married or have girlfriends, it is highly recommended. Just don't think of it as an investment, at least not as an investment in gold! Once you think of it as a consumption item, you will not mind paying the making charges; in fact, you will splurge on the most intricate pieces, as you should.


When you invest in gold, you should buy only 24-carat gold biscuits. Depending on where you buy it from, the person selling it to you will try to justify higher prices based on "quality" – once you are assured that you are buying from a genuine source, any talk of quality to justify a premium is bullshit.  Have you ever taken your old gold jewelry to the shop wanting to sell it? My wife and I have, and we have had the experience of the jeweler putting the ornaments in a pan and applying a blowtorch to them, converting the whole thing to a lump of gold, the purity of which he later checked. It does not matter if it is specially imported from Switzerland, it does not matter if the packet looks pretty or if the gold itself has some fine sayings embossed on it, it does not matter if the relationship manager offers to deliver it home – the value of gold lies in the intrinsic worth of the metal and nothing else. Once you cease to look at gold as an ornament, there is a definite reduction in the mystique!


Since it is a commodity after all, the trick in buying is to buy at the lowest price. Most jewelers you ask will refuse to sell you gold biscuits; since there is not much margin in it, they don't stock it. Some will tell you they have only their own store-branded 22-carat biscuits. This is preferably avoidable.  Finally, you will find some jewelers who will be willing to sell you biscuits. They will charge you one percent sales tax on that day's price while selling it to you, and buy back the biscuits bought from their own store at about 3 to 5 percent less than that day's price. A large jeweler like Tanishq offers to buy it back at 5 percent less than that day's price, and the quality is assured. Shubh Jewellers which has several outlets in Bangalore buys it back at Rs.51 less which works out to 2.5% less. That is when they buy back biscuits you bought from them in the first place; what we need to see is what we get when we sell it to any other jeweler in the market.


The best way to go about it is to of course compare the price that you are getting with the benchmark rate for the day, i.e., the 24 carat gold rate that is published in the newspapers. Among the retailers, Shubh jewelers is the lowest with a 2.5% premium over the day's rate. Any jeweler should be willing to buy biscuits from you at a couple of percent lower than the day's benchmark rate; adding the one percent sales tax that you pay on purchase, gives us a buy/sell spread of about 5 percent at the cheapest retail sources. The buy/sell spread when you buy in retail would generally be between 5 and 8 percent, taking all these factors into account. 


When you buy from a bank, you can only sell it back to a jeweler since banks don't buy back what they sell to you; they charge you 15 to 18 percent more than the day's benchmark rate, and the jeweler when you sell it back will take off another couple of percent. The bank might give you a 2 or 3 percent discount to keep you happy. Your net spread works out to anywhere between 15 and 20 percent.


When it comes to silver, you buy it not in grams, but in kilograms. You are unlikely to get nicely minted bars like in the case of gold; the market believes in bars of silver poured into "kutcha" moulds, which are never exactly equal to half kg or one kg or whatever – but you don't have to worry, since you pay for the exact weight. You should buy silver bars (99.9 percent purity) from a jeweler who is willing to sell it you – very few are – after checking on the buy/sell margin. I find Sri Krishna Diamonds and Jewelry (No. 1, Commercial Street) to be a good source; the buy/sell margin works out to 6 percent – 1% sales tax when you buy, and a deduction of 5% when you sell it back.  


An even better way to cut the spread in case you are someone who buys in reasonably large quantities (say at least 100 grams in case of gold and 5 kg in case of silver) is to buy from the wholesale market. That is of course Zaveri Bazar when it comes to Mumbai and the area around Avenue Road when it comes to Bangalore.


At about Rs.45,000 per kg of silver vs. about Rs.20,000 per ten grams of gold, silver is more voluminous to handle and store. Holding gold and silver in physical form also exposes you to the risk of theft.  If that bothers you, it is possible to buy gold and silver in demat form , either as ETF's, or as e-gold and e-silver. We shall examine that in Part 4 of this series.


(A lot of the information given in this article is based on first-hand personal experience - it is possible that you know of other good sources that provide equally fine or better rates.  Do add your comments or write in case you have any information to share.)

Monday, December 20, 2010

Tribute to Tendulkar

(This was written in February, 2010 when he hit the first double century in one-day internationals. Revisiting it again on the occasion of his 50th Test Century yesterday against South Africa)


Scaling further heights of success

After conquering all known peaks

Requires a very different mindset;

It's with himself that he competes!


Recalibrating every time,

Not resting on his past glories,

He starts again; his enthusiasm

And appetite not allowed to dim.


Every innings a fresh outing,

Looking forward to joy of play;

He carries the hopes of a nation

Lightly, as not to intimidate.


He sets his own terms in his field,

Master of all that he surveys.

For one with achievements so mighty,

Frighteningly humble are his ways.


What gives him the motivation?

What does he look forward to next?

Reaching the peak of his profession,

Only he can set his next target.


At heart he must be a child still,

Looking forward to every new day,

With miles to go before he sleeps,

Starting his journey, setting off again!

Wednesday, December 15, 2010

Right to Privacy

Ratan Tata has filed a plaint in court stating that his right to privacy has been violated. While the case itself has huge elements of voyeurism to keep us engaged and wanting to hear more, privacy be damned, privacy as an issue needs to be debated. We are now in an age where almost everything we do is, or can be recorded somewhere with severe possibilities of misuse.


Several governments of the world are desperately trying to put Julian Assange behind bars on what appears to be trumped-up rape charges – apparently he continued to have sex with one lady when the condom fell off, and had sex with another when she was asleep!  We all know what the real issue is. Wikileaks has turned the same guns that governments use (that of illegal tapping and recording) against them, and in a most public way.


Our cellphone numbers are already being hawked. Our bank account details are compromised. Credit card databases are being mined for information. Our browsing habits are being tracked by cookies which build personal profiles based on our browsing patterns. Our location at all times is traceable within a few square kilometers since we carry in our pockets a location-locator-cum-broadcaster called a cellphone. Our spending details  are part of easily accessible online databases. Income tax returns are being filed online now; what's the bet it won't be sold?


Coupled with this is the power of governments to authorize phone tapping, interception of emails, etc., all of which is invariably done in the interests of "national security". After 9/11 it is not even allowed to voice opposition to things that are done in the name of safety and security. There are paper laws in place to regulate these things, sometimes not even that, but none of us believes that any procedures are being adhered to. When big brother wants to snoop, big brother gets his way.


Google is photographing every inch of the earth every few hours, and storing it somewhere in retrievable form.  They have vehicles trawling the streets taking photographs and updating street scenes all the time. More and more vehicles are being embedded with GPS trackers. The movements of prisoners are being monitored by implanting sub-dermal transmitters.


Arab women are gifting pens to their husbands that have hidden cameras in them. And using the evidence to confront  their husbands with proof of their infidelity. If you or I want to spy on someone it is very easy to hire a detective agency to start recording every movement of the person.


We instinctively look over our shoulders to see if we are being followed.  Now we don't know where to look.


The justification offered sometimes for some of the tapping that is legal is national security. But once data is stored in digital form, it is almost impossible to prevent it from escaping. It is so easy to copy and transmit. As we see in the case of the Radia tapes, once it is out in the public domain, the spread is viral. On a smaller matter not of national concern, a good example is the MMS on the DPS school incident about five or six years back.


In such a scenario it becomes essential for us to be able to protect our privacy with all means at our disposal. Like encrypting our messages and phone calls. Having secure private networks. Having virtual and physical safeguards around all data. This is not always possible. How do you guard your credit card, tax returns, and other financial data since they reside in other databases? Do we really want to activate the privacy settings in facebook to the full extent – most of us don't even know how.


However, where it is possible it is resisted – by big brother, of course. The law prescribes strict "know your customer" norms for both opening bank accounts, and obtaining new cellphone connections.  Since the encryption algorithm on the blackberry is impossible to crack, the government wants the servers to be located locally with full access to people's messages. The US is arm-twisting the Swiss to disgorge details of bank accounts. Most transactions in the world are done through Visa or Mastercard settlement systems – the US government I bet has full access to them.  


Big brother wants to know everything about us, when he pleases, how he pleases. But he becomes very displeased if information in his possession is leaked out. Imagine a state where the government knows and controls every aspect of your life; not a moment is private;, and access to all modern privileges is guarded by information gateways through which you have to pass.  In such a situation it becomes impossible for the individual or even a group to resist the might of the state. And the might of the state can easily turn from benign, to assertive, to authoritarian, to dictatorial, to brutal. It depends on the people who control it after all. More than that, it will not only be the state but several agencies who will know all about you and will start using that information. That is more harmful. In both cases, the damage caused is insidious and can hardly be felt.


When mighty kings used to control the land, the maximum damage to them was sometimes caused by guerrilla groups who struck from unexpected directions and vanished without trace. Wikileaks reminds me of that. When technology is being used by big brother to spy on us, why not the same technology be used to expose him?  Big brother will of course resist. Julian Assange could be killed in a mysterious accident, or could get a long jail term for crossing the street when the red light was on. But the sources of leaks can be many. How can you stop them all?


The same technology that is coming to the aid of governments now will be their bugbear. It is in the nature of things that in the strength of everything lies the seeds for its own demise.


After Wikileaks and Radia, people will be more careful in guarding their privacy – there will  be new tools available to enable that, big brother will use his strength to prevent that… the story will go on. There is an inherent justice in things that upset the balance of power.  From that angle, whatever is happening is for the good.


In the meanwhile, I am sure Ratan Tata has started being more guarded in his phone calls!

Tuesday, December 14, 2010

Winning at Tic Tac Toe

Who hasn’t played Tic Tac Toe? You may know it by different names, like naughts and crosses or X-zero, but you are certain to have played it in your childhood. You would have progressed in the game to a stage where it was difficult for someone to beat you and any game with a good player always resulted in a draw. You figured that this is a very simple game and moved on to other things in life.

But have you thought about what is a foolproof formula to win in this game? Or at the very least increase your chances of a win against an inexperienced player, since it is not possible to beat a good player? If you think about it, it’s actually very interesting to figure out the move sequences in this game. Let’s try to analyze the first few moves.

But first, the rules. The game consists of drawing a grid of 3 x 3 squares like this.

The players take turns to play. The first player puts an ‘X’ in one of the nine squares. The next player puts a ‘O’. Back to the first player who puts an ‘X’ and so on, till any one player gets three of his pieces (X or O) in a row, vertically, horizontally or diagonally to win. In case no one succeeds in doing that, it’s a draw.

A typical game when finished would look like this – in this case X has just won:

The strategy is of course to complete the row of three once you have two in a row; if you don’t have two in a row waiting, you block your opponent if he has two in a row; if that is not the case, you see if you can create a situation where you place your move in such a way that you create two opportunities of a finish, in other words create a fork, which makes the opponent helpless. What I mean by a fork is this:

X has created a situation where he will win in the next move.

The first move that X makes can be one of three types:

Centre opening: Where X places his move in the centre square, like this:

Corner opening: Where X places his move in one of the four diagonal corners, like this:

Side opening: where X places his move in one of the side squares, like this:

Let’s analyze each of these openings one by one.

Centre opening: If X opens in the Centre, O has to place his move in one of the diagonals, else he loses.

Correct reply:

If O places his move on the side, this is what happens:

X wins

Corner Opening: If X places his move in the diagonal corner, O has only one possible move, and that is, the centre. This is what happens if he plays any other way, e.g.,
Possibility 1: If O replies with one of the sides:

Possibility 2: If O replies with one of the corners:

X wins in both cases.

Side opening: If X opens on the side, O can play one of the following four moves:

i.e. O can place his move to either side of, or in any of the two squares above, X.

If he doesn’t, this is what happens:

Case 1:

Case 2:

X wins in both cases.

I shall not analyze the moves following these. That should be easy enough for you to do!

Monday, December 13, 2010

Deepika Padukone on Relationships

This is what happens when you go and ask a film star for her philosophy on life!


 Excerpts from an interview with Deepika Padukone (by Sneha Mahadevan – DNA dated 12 December, 2010).


All bold-faced items are extracts from the article in DNA – rest of the comments are mine.


Deepika says that in real life she is quite conservative in her thoughts about love and relationships. "If I am in a relationship, I give it my 200%. Maybe it is because of my upbringing or because I have seen my parents have a successful marriage. .. I am made to believe that marriage and relationships are for keeps… eventually you work it out if it matter to you… if it doesn't, then you move on amicably"


The new definition of loyalty apparently has to do with being loyal for the moment. "When I am with my boyfriend for the night, the one-night stand, and only the one-night stand, occupies my mind, my thoughts, and my body. I believe in being 300% loyal to him. This is because of the inspiration I got from my pastor at Church who used to tell us that Relationships are for keeps" – unknown starlet being quoted in Hollywood Tribune!   I am sure variants of that quote are being published all over the world at the moment.  Hail conservatism!


"When a relationship ends, you have time for yourself. It also makes you realize the importance of certain other relationships in life, which you tend to sort of neglect when you have a special someone. It has taught me never to take anyone for granted"


All the "others" in her life, who are not her special someones, are very lucky. She is likely to realize their importance time and again!


Though work helped her get over a break-up (with Ranbir Kapoor), Deepika suggests other ways to deal with a break-up too "You could get drunk, go out partying or maybe get a new haircut."


Lovely suggestion. If you see her bald suddenly, you know she is going through a particularly intense break-up.


Certain relationships help you develop and grow as a person. I have been single and I have been in relationships, both have their plus and minus points and I am quite okay with both. The best part about being single is that you are not answerable to anybody. When you are in a relationship there are certain responsibilities.


So when you get tired of your responsibilities, you should go and be single again? This is too complex for me. You can either like one or the other – actually, I am still trying to figure this one out. Deepika is too deep for me!


"I think one of the reasons why relationships don't survive is because you are constantly in touch. There is no time to miss that special someone. Earlier people had to travel miles to make a phone call or write a letter and that is probably what kept the relationship going"


Wow. She is the one who wants to give 200% isn't she? I am sure her boyfriend (don't know if that's the right politically correct word – should we use "relator" and "relatee"?) would have had no objections if she did not insist on calling him fifteen times a day or Videocon ten times a day.


I am still trying to digest it. Rajneesh or J Krishnamurthy are far easier to understand!


Friday, December 10, 2010

Asset Allocation revisited

This whole business of "asset allocation" has been overhyped. As per conventional theory which all financial planners like to quote, "it has been shown that 80% of your return depends on asset allocation (between debt, equity, etc.) and only the balance on individual skill, luck, timing, or whatever".  So you should invest in a disciplined way x% in equity, y% in debt, etc. 


The asset allocation theory is being stretched to say things like "x% in local equity, y% in debt, z% in emerging market equity, a% in commodities" – basically, don't put all your eggs in one basket. But how do you determine those percentages? Don't believe any numbers that are thrown at you from so-called sophisticated financial analysis. Most of the analysis rests on the fundamental premise that the different asset classes have a low or negative correlation. The way asset prices move up and down nowadays, they all move up or down at the same time, thus destroying the fundamental premise itself.



The problem with all such "automatic" algorithms is that they are based on assumptions that are forgotten later - and the rule is blindly followed. There can be no one rule. Investment is opportunism, and strategies will have to keep adapting with changed circumstances.



One more rule "As you grow older invest less in equity, and more in debt. Follow the 100-age rule to decide the percentage you will invest in equity."



The performance of equity markets is tracked by looking at the "index". The Index is just a bunch of selected stocks with assigned weights out of a universe which consists of hundreds of stocks. Hence the performance of the index is no indicator of the performance of any individual scrip, especially a stock that is not part of the index. However, all stocks tend to move along with the index (the beta) apart from moving on their own due to "intrinsic" (alpha) factors. The fact that the movement of the index usually is a good proxy for movement of individual stocks just shows that factors which move the market play a very important role in the performance of your portfolio, apart from your individual scrip.



You are supposed to ignore these dips and rises in the index and keep investing the same percentage in a disciplined way, as per the asset allocation school of thought. They are right in a sense if you consider the fact that most people buy when the markets have already trended up, and sell when it's down. Any non-thinking approach, read disciplined approach, will give better returns than that.


January 2008: 21,000. October 2008: 9000. December 2010: 20,000.


If you had bought at the highs and sold at the lows, you are screwed.  The disciplined approach is better. But with such volatility, can we afford to ignore the market movements?


Take today's levels. Given the macroeconomic factors (of the world economy!) we do not know how money flows will happen. If money is pulled out of India, the markets will fall. If a lot more money comes in, they will rise, but making the situation even more ripe for a steeper fall. I would probably reduce my exposure to equities right now.


No asset allocation theory takes real estate into account. Real estate will throw all your theories off by miles. It needs lumpy sums of money, and probably a loan as well. So in effect, say when you buy your first house, you are invested in real estate more than 100% of your net worth! Then you repay you loan over a period of time, save some more money whether in equity or debt, and then when you buy your next property – you are back to more than 100% in real estate since you have another loan! It does not make sense to keep fixed deposits or debt investments on the one side, and a loan at a higher rate of interest (which it invariably is) on the other. So what asset allocation are we talking about?


Theory urges us to keep more and more money in debt as we grow older. When you are around 50, keep at least half your portfolio in debt. That yields you 8%, and net of tax 6%. Inflation is running at 7% levels – or let's assume what you get just covers inflation. How can you become wealthy following this approach?


Life expectancy has increased. Job expectancy has decreased. Let us say you stop working at 55, due to factors voluntary or involuntary, and you have 70% of your money in debt. You are going to live till 100 (God bless you!) – pray, how are you going to manage?


In the US currently, debt is yielding a return of zero point zero something percent. So they are drawing down on their principal to meet living expenses? And their life expectancy is high…


Then what do we need to do?  Which investment gives us  very good potential for upside while minimizing the downside? Real estate, as in land. Buy small plots in places which are going to see population growth or development. It could be suburbs of large cities or in tier 2 towns about 5 to 8 km from the city centre – in other words, the periphery where development has not yet caught up but will catch up soon. At worst, you will get back your principal and inflation over the next ten years. At best, if you choose well, the upside is, Inshallah, unlimited.


Choose small plots within developments where "conversion" has just happened, where the builder has bought the land very cheaply on a "per acre" basis, converted it, laid out the basic amenities, and sold it to you at a good premium. Let us not grudge him that premium since buying land by the acre and taking care of it is not within our range of capabilities. When it is part of a "development" the security aspect is also taken care of.


Once you buy that land, forget about it. Don't forget to pay the annual property tax though.


When you retire, sell a couple of these plots, and use the money to build on a couple of others, and rent them out for a steady income stream.


If you have identified some good companies which have great growth potential, buy equity directly in those. That's for individual scrips.  For the broad market, when the markets are at a low (who knows what is low– let's say when you think so) buy index etf's.


Borrow to the extent that income streams, including rentals, can support, especially to buy real estate. There is always the threat of hyper-inflation all over the world, given the way governments are running the printing presses. If that happens, it is better to be a net borrower rather than a net lender. It is also good to have your money in "real" assets like real estate and gold/silver.


That reminds me – don't forget to put some money aside in gold and silver!


(What I have said here is not conventional theory, and it is not something everyone will agree with. I welcome your views, reactions, rejoinders, denouncements… )



Thursday, December 9, 2010

There is no free lunch

Assured return equity plans. ULIP's that guarantee a minimum return. Structured products with guarantee of highest NAV. Capital protection schemes. All kinds of twists are added by sellers of financial products to convince the customer that he can have the cake and eat it too. Everyone wants to make super-profits but does not want to take the risk of losing his money.


Debt instruments offer capital protection. We are of course ignoring counter-party risk here. They are priced at 7 to 9 percent (currently) for durations of one-year plus. By definition anything that offers more in terms of returns comes with higher risk attached.


Equity has given historical long-term returns in the range of 15% plus. Actually, equity is very controversial – depending on which "long term" period you take and the range of years you choose, the returns can vary widely. But let's say for the sake of simplicity that the ten-year returns from 2000 to 2010 is, say, 15%; and if you see three-year blocks in the same period, the returns vary from minus 50 to plus 150 percent. (Please do not rush to confirm data – this is just an example though I think it should be fairly representative).


As a customer what do you want? You want equity-like returns of 15% plus. But you want your capital to be always protected. As a fund manager you know that this is not possible. But the marketing guys are pushing you. The CEO has set the year-end targets for net fund inflows. Competitors are offering products that promise the moon. So you succumb – we all do, ultimately.


UTI's  was one of the earliest  and most famous case of guaranteed returns going awry. It had to be split into two, and wait for divine providence in the form of a market resurgence to breathe some life back into it. In the meanwhile, the people who had invested were not really concerned; the Government of India backed it anyway.


How can a fund manager offer a guaranteed return on any mutual fund or a basket of investments that resembles a mutual fund? Several ULIP's offer this, even if at a low number. Guarantees are only possible when the fund manager invests a portion of his portfolio in debt products. If the minimum guarantee is, say, 6%, the fund manager can just invest most of his corpus in debt and meet his target. That is what he will do. But what is portrayed to the investor is different.  The investor is under the impression that it is predominantly equity that his money is kept in.


What about the Highest NAV guarantee? In this fifteen-year product we will guarantee you the highest NAV of the next ten years, or your original principal back, at the end of the fifteenth year. Capital protection, along with getting the highest NAV! Manna from heaven!


What happens of course, is that as the stock market goes up beyond a point, the fund manager shifts more and more of the money into debt so that at maturity, the promises can be met. He might even hedge himself at various points in time. So finally your returns even out and you pay an additional cost for all this hedging as well as for the fancy name of the scheme. There is of course a small probability that markets might not trade in the bands expected, and then things can go horribly wrong. In this case, if the markets move only in the upward direction, the fund manager is in a bit of trouble.


Then there are complicated structured products. If the index, which is today at 20,000 goes up to 26,000 levels, you get the full benefit, after that you get half of the increase till 30,000; after that, nothing. On the downside, you are limited to going down till 16000, a twenty percent drop. There can be infinite variations of these. There must be complex hedging algorithms at the back end to take care of eventualities with assigned probabilities to each.


From the customer's side, he gets some "assurances" but at what cost? Finally, the fund manager has to invest in the same equity and debt markets, and their fundamental characteristics do not change. For hedging against any eventuality, the fund manager (a) takes a call on the direction of the underlying, and (b) pays a price if the call goes the other way. It is not possible for the fund manager to cover against all eventualities; hence by necessity he concludes that certain events are so improbable, that he can risk not covering against them. How many of us have not taken life cover because we are sure that nothing will happen to us?


As people have experienced across the ages, there is no such thing as an absolute guarantee. Nassim Nicholas Taleb gave it a very catchy name, he called it "The Black Swan". In his rambling style, he told us that there are no guarantees in life. Just because you have not seen a Black Swan in your entire life, does not mean that they do not exist. We all know that of course. But we want to believe – how we desperately want to believe! There are no black swans, there never will be, if I see one it's my eyes that are deceiving me – it's not black, or some sorcerer has colored the feathers, it's not black… human beings have an inherent need to be  comforted with false assurances so that the castles they have built in their dreams do not come crashing down.


Mathematical models give a false sense of security. You pop in some numbers into an options pricing model, which goes by the intimidating  name of Black Sholes and generate some numbers to assess your liability; or aggregate sub-prime loans into a Markowitz model which miraculously get converted into Triple A gilt-equivalents; feed some cricket scores into a black box called Duckworth-Lewis and decide the fate of the World Cup; all the while with a secret fear which you do not acknowledge, that you don't understand what the models do, overridden by a foolish hope born of wanting to believe that nothing will go wrong. The priest who guards the temple in each case assures you that God will answer  your prayers, everything will be fine, he understands how God's mind works, he will tell you what rituals to follow to stave off doom, and charges you for it. Why does high Finance seem very similar to religion? The parallel to religion does not end there. When disaster strikes as it should (make that "as it will"), the whimsical ways of God (six sigma events) are blamed. And placatory rituals are found. Sometimes the old religion is abandoned, only in search of a newer, more complex, model.


No one knows how these models work, and no one wants to. In any case even if they understood it no one has the patience to listen to them explaining it. How many times have you seen cricket commentators explain the logic of what Duckwort-Lewis throws up? Which of us knows what were the assumptions that went into the model in the first place?  Which one of us really wants to know?


If a simple cricket game with its limited variables can be so intimidating, what about the real world. How many variables do an economy move?


As a customer if the Government of India or an institution backed by it offers me a guaranteed product, or the Tatas, or Birlas, I just go for it. If something goes wrong, Big Daddy will pay. I know that there is no free lunch, but my lunch will be paid for by someone else.


The latest case of course being the horrible losses incurred at Aditya Birla Money on the Options Maxima Scheme. The "Short Strangle" strategy based on the premise that markets would be range-bound went horribly wrong. Big Daddy Kumaramangalam had to chip in with a 100 crore infusion from Aditya Birla Nuvo.


Someone finally has to pay for the lunch.

Tuesday, December 7, 2010

Microfinance - Part 1

Everything is for helping the poor. As is Microfinance. The story goes like this.  The poor farmer whose wife is having a complication during child birth rushes to the money lender to borrow to save her life. Or to get his daughter married. Then ends up working for the rest of his life just to keep up with the interest payments. If it were a Hindi film, the moneylender would probably be having malicious designs on the wife or daughter. It's enough to make you weep.


A lot of it is true as well. However, moneylenders do perform a useful function, that of lending money to the poor in times of need, especially to those who are outside the pale of formal banking systems and who do not have any security to offer.


The obvious question then arises "Why cannot  banks offer microfinance – finance in very small amounts, to the poor?" The banks cannot do it – they do not have the reach and their cost of servicing loans is very high due to high salary and overheads. They would rather make 10,000 loans of Rs. 10 lakh each than 10 lakh loans of Rs. 10,000 each. They also do not have the mechanism to make collections on a weekly basis at the customer's doorstep – most of the beneficiaries would be people earning daily wages who will find it impossible to save up to pay once in a month.


However, there is a huge arbitrage here which cannot be ignored. The lending rates of banks are in the range of 12 to 18 percent, while the lending rates of moneylenders  could vary anywhere upwards of 60 percent, and in several cases even exceed  100 percent per annum. This was a big opportunity for an institution or institutions to step in to bridge the gap. If the institution could manage to borrow from banks or from entities abroad at 12 percent levels and lend it out at, say, 25 percent levels… that is what is called an untapped opportunity in entrepreneurial parlance. Such a model to be successful would need to have the following:

                Low-cost disbursal and collection mechanism

                Ensuring no defaults – a real challenge when the borrowers are small and numerous

                Scale in terms of sheer number of loans


Grameen Bank of Bangladesh has a tried and tested model which has been extremely successful in that country. They lend to the poor who do not have any collateral and ensure repayment through groups formed at the local level. Peer pressure is used to ensure that people pay – the group is also useful in inculcating good savings habits and spreading financial literacy among the people. The Grameen Bank works primarily for upliftment of the rural poor; its lending rates are in the region of 20 percent. The bank has been in existence for more than 25 years now. It acquired international recognition when it was awarded the Nobel Peace Prize, along with its founder Mohammad Yunus, in 2006.


In the last few years, several microfinance institutions set up and started expanding in India following the "Self Help Group" model. The Group is held responsible for timely repayments, and systems are institutionalized where they meet regularly. The Group this ensures repayments through peer pressure. Some of these institutions grew really big. The one that is in the news recently, SKS Microfinance, founded by Vikram Akula, is the biggest, with millions of borrowers across India.


As they began and started expanding, the repayment record of these institutions was very good. They boasted of loan repayment rates of 99% or above. How much of this is due to evergreening of loans (the practice of lending fresh money to repay the old dues) is not clear; there is reason to believe that at least in the initial years when the whole movement took off, the rates of repayment were genuinely high, but 99% repayment from poor borrowers is something that stretches credulity.


The story for the consumption of the general public was that these institutions were doing a lot of social good. They were lending at rates far lower than the money lenders – this is like saying that you are celibate since you sleep around less than Tiger Woods – and aiding in social development by "enabling" the poor. Enablement implied that they could use the money to start their own business or stand on their own feet, or avoid a debt trap – actually it's a bit vague what it meant.  A couple of microfinance institutions realized that true enablement occurs due to a combination of factors that includes access to education, easy access to health care facilities, availability of power and infrastructure, etc.; money needs avenues to be deployed productively and the ecosystem that creates those avenues needs to be built up first.  These few institutions realized that focusing on rural development initiatives along with providing credit was required and started focusing less on growth of the loan book and more on provision of loans coupled with NGO type work in developing social infrastructure.


Following the pioneers, several microfinance companies entered the arena. All of them wanted fast growth in terms of number of loans and aggregate loan portfolio, which has a parallel to the early days of telecom. When a new market is being established for the whole category in general, the early movers want to capitalize on their advantage by going for topline growth. This has multiple benefits.  You move in before others even realize the market is out there waiting to be tapped. You crate entry barriers for the new entrants. You try to reach the "tipping point" after which people buy your product because everyone buys your product. And most important, you create valuations. Any PE investor looking to invest will look at the current "numbers" in terms of number of loans, number of connections, or whatever; what is the expected growth, for which, in true equity analyst style, a graph showing the last three years' trendline will be extended infinitely into the future; and not look at the "bottomline" since the market is still nascent. This gives an incentive to ignore the bottomline, increase costs, provide duplicate connections or multiple loans as the case may be. The internal systems and processes are also not strong at this point. A lot of sins can be hidden in a system which is growing furiously.


In case of microfinance, several institutions started playing this game. One suspects that in this process, there are a lot of bad loans that have been created. Also, the companies started lending to the same borrower in the pursuit of growth.  There are several cases where the same borrower has five or more loans, all with different institutions! Several of the borrowers would probably have accounted that  money as revenue rather than as loan! How do we know the strength of the loan book in case of all these companies who have lent crores of rupees to lakhs of borrowers? The only thing an investor hopes for, as the companies themselves do too, is that the growth in numbers would still make the percentage of bad debts look small.


The companies got PE funding – for example, Akula got some funding from Narayana Murthy's venture fund as well. All PE's as we know, look for profitable exits. So the IPO becomes essential. In any case, how does the promoter become wealthy if not from "unlocking" value through an IPO? Any comparisons to Grameen Bank at this stage would be ridiculous, since all these companies departed from that model long back. Grameen Bank did not try to list, and profits are distributed among the participants.


So the IPO of SKS Microfinance happened. Investors, including of course large institutional ones, jostled each other in the queue in their eagerness to subscribe. It was a compelling story. India is a large untapped market. It has a large base of people without access to formal banking systems.  They now have an alternative to the moneylender. They are willing borrowers at 26 percent per annum. The companies that do the lending have mastered the art of collecting the money back along with a low-cost model. They borrow in turn either from local banks or from abroad at 12 to 14 percent. Even allowing for a cost of operations of about 6 percent, including bad debts, it yields a margin of 6% on the asset base, which when translated into return on investment, becomes a very high number. This growth would of course, continue. The valuation as we all know is nothing but a discounted value of future expectations. Expectations were high; the issue was a success. Akula took home a lot of money. So did several others.


The first indications that something was wrong came when there were reports complaining of coercive tactics for recoveries, and of course, the favorite, borrower-suicides.  (At a certain level I do not have any objections to coercive tactics for recoveries – if I have borrowed it is my duty to pay up or face the consequences – but I shall skip that line of thought since it is not a politically correct line of thinking!). Andhra introduced a bill (still to be passed) putting severe strictures on microfinance companies. There is an inside story here that we shall never know. Andhra already had a successful microfinance model where money was being lent at absurdly low rates, subsidized by the government. This is run from the major towns, and local politicians and bureaucrats are involved. One can imagine the huge patronage network that is already in place, and the vested interests that have been created, which will be threatened by these new developments. The system is running amok because of too many institutions trying to enter the fray, there are noises about coercion and suchlike, and the halo around the social development objectives seems to be slipping especially after the successful IPO – what better time for these lobbies to strike? So the word has gone out in Andhra that loans taken from microfinance institutions need not be repaid. The recovery rate has plummeted from the earlier claimed 99% levels. Suddenly, the whole edifice that was built on assumptions of exponential long term growth, and assured repayments, has started looking weak. SKS Microfinance which after listing shot up, plummeted to below offer price.  When valuations are built on future expectations and hype, any prick to the balloon can cause the entire balloon to deflate.


In the meanwhile, two months after a successful IPO, Akula sacked his CEO Gurumani, who by the way, was  an ex-banker who was brought in at a salary comparable to foreign banks. No one knows what the problem was, but the whole episode does raise serious issues on corporate governance. 


Akula's discomfort was compounded by his divorced wife going public over matters public and private – under the backdrop of a messy post-divorce child custody case, she accuses him of bad governance in his institution – he is not exactly portrayed in saintly light.  Actually, that should not matter so much. With the money he has, he can buy a sainthood anytime!


And Sheikh Hasina in Bangladesh is of late making noises about Grameen Bank lending at very high rates, and the tax department is investigating Grameen Bank for possible tax evasion. I am sure the politicians of Bangladesh are not very pleased at the success of Yunus but they could not touch the one with the halo; now the climate seems right for muddying the waters the bit – why would they lose the chance? It is no different from how our politicians would act!


Being the first microfinance company to grow so big, and being the first one to list, unfortunately puts the spotlight a little too strongly on Akula's venture. There are several other microfinance companies waiting in the wings to make their IPO's, all of whom have deferred their plans for the time being. The whole edifice of banking is built on the principle that the borrowers, at least a large mass of them, want to repay; and the depositors will keep their moneys with the bank. If either of the two assumptions breaks down, there is a systemic crisis. What is being engineered by the politicians now by encouraging people not to repay is a systemic crisis that could have long-term repercussions.


Talking of long-term repercussions, it is actually good that the microfinance juggernaut has slowed down and people are talking of placing curbs on it. There was (and still is) a real danger of this going the way of the sub-prime crisis, with similar moral hazards, similar unbridled growth of debt, etc. We shall go into that in the next part on microfinance.