Thursday, April 8, 2010

Whither convergence?

All aspects of life are being converted into bits and bytes and being stored nowadays.  Every person will soon have a unique ID, which a camera will identify just by panning at his face. Every object in every part of the world will have its own string of identifiers and be tracked continuously by computers across the world.  Every time you pass any checkpoint (and there could be one on every street) your passing will be recorded by some computer and stashed away. The computer of course would have identified you either by analyzing the way you look, the way you walk, or even the pattern of your nose.  Every vehicle will send a constant stream of GPS co-ordinates to a satellite which will be stored for later retrieval. Every person’s location will be tracked every minute through his cellphone signal, and this data fed into a database. Every conversation he has on his phone will be recorded somewhere. Cameras mounted on cars will trawl streets and feed real time images to map-sites. Giant databases will store all this information. There will be backend programs constantly tagging keys to this data and indexing them for future retrieval. The data could be in the form of alphanumeric entries as well as live video feeds.

Every person’s shirt or some other accessory on his body will carry a video camera linked to the internet which will send a constant feed of whatever the camera sees.  Life will be ruled by a plastic card – a super-smart card which will act as your wallet, your credit card and your entry to your office, apartment and club.  It will be the key to admit you wherever you have to go, while at the same time it will act as a lock to prevent others from accessing what is yours. 

There will be cameras placed in the inside of your body at strategic intersections in your blood vessels to see if you are working fine.  The moment your heart misses a beat or a foreign particle enters the bloodstream it will alert your doctor who will pump some extra medicine by remotely instructing the drug canisters placed in your body. The precise mix and dosage of how much drug from each canister, will of course be calculated by the computer.  It is possible that the computer may decide – the doctor may not even intervene. If you forget to take your medicine as per the prescribed dosage, of course the computer will know, and your nominees may be denied your insurance on the grounds that you brought about your own demise.

Supermarkets will have RFID tags imprinted on every product, and RFID readers at every aisle and at the checkout.  You won’t even have to swipe to bill.  All you will have to do is pass through the checkpoint with a loaded cart –you will be billed, the money will be transferred, and your bill will be mailed to you without even your having to remove your card from your wallet.  The list of what you bought will of course then exist in a giant computer somewhere.

It will be possible to transfer money to anyone in the world or receive it by punching in the amount and a few numbers.  You will be able to retrieve details of all that you own, at the press of a button, and so will someone who has access to your data.

If you want to make sure students don’t bunk classes, the benches will tell.  If you want to make sure your employees are not goofing off while on their sales rounds, you ask the computer to compare their GPS co-ordinates for the day with their sales reports. And for good measure, to check on the GPS co-ordinates of the persons they were supposed to have met as well.

The databases will have data-mining software with sophisticated AI-impregnated algorithms which will analyze all the data about you and create your profile – where you stay, where you go, where you work, whom you meet, what you do, what you eat, what you buy, how you spend, how you spend your time, and, by extension, what you think.  Your profile will be matched against other profiles which match you on various parameters and the computer will draw up your psycho-profile. It will then try to guess what you will do, where you will go, what you will eat, what you will buy, what you will spend on, how you will spend your time, and by extension, what you are likely to think. This data will of course be available to marketers for a fee.  You will aid in this process by the trail you leave on your email, twitter, facebook, linked-in, and all your online travels through gateways such as Google.

The very same marketers will subscribe to the advertisement service at the billboard at the street corner. The moment the billboard sees you in the crowd it will flash advertisements customized for you.  It could even flash your name on the screen if it so desired and if the law permitted it.

All magazines will be downloadable online into your e-reader.  Each magazine will be customized with its own sequence of ads depending on the profile of the customer downloading it. Your e-reader will not be different from your single-access-card (which we spoke about), your cellphone, your laptop, your internet connection, or your TV.  They will all be part of one gadget which will be tied to you.  In fact, it will be programmed to cry, and to cry out, if separated from you by a distance of more than ten feet.

All things in the world will be linked, or linkable, through interlinked databases. Most of the applications mentioned above are actually real – it is happening in some part of the world today. Every day databases are growing larger along with the amount of storage space increasing, and the cost of storage is growing smaller.  Chips are getting more powerful, and algorithms more savvy. Computers are getting linked, and data is being shared. The speed at which data can be transmitted is increasing at an exponential pace. Every activity of daily life can be stored for posterity in the form of these bits. And the giant brains linking them are getting smarter.

Newer and newer applications will be found for all this data that is sitting around. Newer linkages, newer insights, and newer ways of exploiting those insights.  The day may soon arrive when the computers which have all this information start sharing it among themselves, form their own conclusions and start controlling our lives!  In any case someone who has the power can easily kill you by wiping off all your traces from the databases.  A more effective form of death than stopping of the breath.

Happy Brave New World!

Wednesday, April 7, 2010

Part 13: Marketing gimmicks and investor psychology

“This is your only chance to invest in the New Fund at Rs.10! As the NAV rises later, you will have to pay more!”  And you rush to hand in your money. What difference does it make what NAV you invest at? But ask the marketers. It works!

There is a fund house that is advertising heavily that they pay regular dividends out of their funds.  Assume you are young (which most of you are) and you are investing for the long term.  You would in that case want to invest in a fund for the long term and not keep taking the money out. As we saw earlier, for the power of compounding to take effect, you have to keep your money invested for the long term without dipping into the dividends.  In this case, every time you receive a dividend, you would have to reinvest it somewhere.  And where does the dividend come from? It comes from your own corpus, and the moment the dividend is declared your NAV drops to that extent.  Why then is it an advantage that the fund declares frequent dividends? 

The insurance company runs a highly sentimental ad that shows the father taking his child out for a walk by the sea, and dreaming about his future. Or the wife coming home to find her husband in what she thinks is a dead state.  Some clip like that is followed up by the conclusion that you should invest in a ULIP. Where is the connection? If it’s insurance they are selling, they should be selling you a pure Term Plan. If it is investments they are peddling, they should be talking about pure returns. As per IRDA regulations, they are supposed to put “Insurance is the subject matter of solicitation” at the end of every message.  They should change that to “Your emotions are the subject matter of exploitation”.

It’s the month of February, and you have to invest Rs.50,000 in tax saving schemes.  You have done all the homework and have zeroed in on three schemes, all of which are equally attractive.  What do you do then?  You split your money into three portions, and invest in all three schemes.  Why would you want to do that?  All of them are almost risk-free since they are guaranteed by the Government of India, and offer the same returns.  Perhaps you get more satisfaction by having more pieces of paper in your hand, and more items to keep track of. 

Instead of taking one insurance policy for a life cover of Rs.10 lakh, you buy two ULIPs, one endowment, and one money-back, all totaling up to a cover of Rs. 10 lakh.  You obviously spend more time thinking about the options, cutting the cheques, and keeping track of each of these policies. Why do you not just buy one policy for Rs.10 lakh?  Since you work more to keep track of them, do you feel more vindicated that you are doing something?  When it comes to investments we frequently fall into this trap. In the absence of more money at our disposal (which is true for all of us – this lack of money) we try to make up for it by more activity. We have all been brought up with the virtues of working hard and working more dinned into our heads since childhood.  In investments, as in other areas of life, we don’t often question the need to work harder – we just do, and it makes us feel better!

Your broker keeps calling you to tell you which stock is up today and which is down. NDTV and other news channels constantly run tickers at the bottom of the screen on stock prices which change by the minute. You have loads of buy and sell recommendations thrown at you. Some of them say that you have to target a return of x% and then sell.  Sell and do what?  Buy another stock of course! You sell
Company A and buy Company B, and your friend sells Company B and buys Company A.  Both of you are happy that you are constantly active in the act of making your money grow. Who benefits out of all this activity?  I do not know if you or your friend benefit, but the broker certainly does.  His commissions are made on executed trades. He makes money only if you buy and sell, not if you do nothing. Hence, it is in the interests of the trade to make you constantly trade!

Every time you buy and sell, you lose about 1 to 1.5 percent.  If you do this on average three times in a year, that’s 3 to 5% gone.  Out of your return.  Over the long term, when you compound the losses over several years, what would it be?  The only reason why you would buy a stock is if you consider a company as valued far below its intrinsic worth, and you would sell if the converse were true.  Why do you think the intrinsic worth of a company would keep changing on a day-to-day basis when it is dependent on the long term prospects of the company? Even if you were taking a timing call on the market, that would not vary on a day-to-day basis.

But try sitting tight and not doing anything and you will feel miserable.  It’s human psychology. You want to be doing something all the time, or you can’t seem to justify your existence, even to yourself. Investing is as much about fighting the markets as it is about fighting yourself!  If you invest directly into the stock markets, you should check the stock prices only once in a long while (what is long, I leave it to you to decide – Warren Buffett would say a few years), and act only after due deliberation. If you are not the kind to invest directly into the market, but prefer mutual funds, then pick a few (very few) mutual funds and stick to them for reasonably long periods of time.  Review fund performances once in a year or something, and adjust your asset allocations slightly to match changed circumstances. 

Discipline in this case, is to consciously try to do less!  I shall refrain from writing more – bye till the next issue!