Friday, October 14, 2011

Life in the cloud: A modern fairy tale

Once upon a time there was a rich man in a village. He had a lot of land, a lot of cows, and gold tucked away under his mattress. He was a very contented man. He had earned it all in his lifetime through his hard work and had something concrete to show for it.

His son, who grew up in the village, went to the nearby city to do business. He was a very sensible, level-headed person and he was a shrewd businessman as well. He became a wealthy man in this own right by trading in grains and agricultural commodities. His warehouses were always full, and so were his vaults. His wealth was something that gave him a lot of satisfaction - and it was something he could see and feel the effect of in front of his eyes.

This man's son, who grew up with him in the city, went to the big city when he was twenty. He joined a software company, went to the land of El Dorado, quit, and started his own software company. He and his bunch of ten people wrote out some instructions to a box they called the computer, which were carried out in what they called the cloud, and serviced a few million people whom they never met. None of those people paid any money to access those services from somewhere in the ether; and the company did not earn a cent from its customers. But still they made a lot of money. Everyday there was a queue of people waiting outside its offices with sacks of money, begging them to take it. All that those people wanted in return was a share in the pie in the sky. Which our prodigal son gave, very grudgingly, and a small slice at a time. Each time he gave away a piece of this pie in the sky, what he called the valuation of the whole pie would be more than the previous time. And each time he increased the value, there were more people who were willing to pay more money for it.

The prodigal son invested some of this money in reaching his services to more people whom he never met, and soon there came a point where those people started coming in greater and greater numbers to visit his cloud, since the people they knew were visiting too. They all met somewhere in space, no one knows where, and they chatted, celebrated, mourned, hung out, discussed, debated, protested, grouped together, banded, disbanded - did all the things that people do in real life, but they never met each other face to face. They were all happy meeting in the cloud, where connections were instantaneous - you did not have to travel physical distances to meet. All you had to do was think of a person, the other person would tune in to your thoughts and think of you, and you were connected. Whether the other person actually existed in this world, or had an existence only in the cloud, was in several cases hard to determine. In fact, there were several cases where people fell in love with someone in the cloud, wanted to meet them in real life, and then found that they were actually talking to a ghost. After many disappointments like this, a few of these people had a brainwave. They started embodying for themselves a life in the cloud. They went and created an identity for themselves, in a completely new and different world called thirdlife. All their friends in the cloud, whom they had never met, did that too. Each of them created his own identity in thirdlfe, and there they met. In this process, they got more and more disconnected from their physical life here on earth. Their second life was in the cloud where they met people they knew somewhere they knew not where. The thirdlfe was in the newly created world, where they met new embodiments created by people they knew, in forms that were new, in a piece of real estate created in the cloud. They even got married in thirdlife and raised children.

How is our prodigal son connected to all this? He was not the creator of third life, but being the shrewd businessman that he was, using the money he got for his cloud, he bought a lot of real estate on thirdlife, near the temple of the cloud god. As thirdlife took on a viral form, and everyone had an embodiment in it, these embodiments wanted to stay near the temple of the cloud god in thirdlife. Now the cloud god was famous for curing problems stemming from insecurities caused due to embodiment of disembodied souls, and our shrewd son had rightly estimated that this would be a major problem among all the souls residing in thirdlife. He converted all the real estate he bought near the temple of the cloud god into sanatoriums, and charged by the day. The payment was in cloud real estate only, and thus he grew his empire. He soon became the richest man in thirdlife.

He still had lots of money left in his physical avatar out here. This was real money, and he needed further avenues to invest it. He went and bought some disembodied wealth in the form of what they called securities, and received a sixteen digit number with a twelve digit password. These securities were not ordinary securities. By some mysterious process which involved millions of people punching some numbers into the cloud through what they called trading terminals, the value of his securities changed by the day, by the hour, even by the minute. He would get messages every fifteen minutes from the cloud informing him about the status of his wealth.

The prodigal son was rich. He had all his money in the disembodied securities cloud, and in the embodiment of the disembodied cloud called thirdlife. On days that his wealth grew by five percent or more, he felt very elated. On days that his wealth declined by five percent or more, he felt very depressed. There were many days when the price movements in the cloud were so extreme that he could not sleep, either due to too much elation, or due to too much depression. It soon became too much for him to handle. All his joy and sorrow stemmed from the cloud, but he still had to handle it with his body and his mind, very physical resources which were rebelling at this overload.

The prodigal son could not take it any more. Wherever he turned, he saw embodiments of disembodied souls, handling vapors of different colors they called wealth, standing on clouds. He turned mad. His doctors advised a rest cure.

He went to his grandfather's village - yes, the grandfather was still alive - for rest. There he met some real people, walked on hard ground in real green fields, and shared in real joys and sorrows of his neighbors. He got cured in a month, and never went back again to his former life of disembodiment. And thus he lived happily ever after.

Wednesday, October 12, 2011

Time to sit on cash?

Volatility is the order of the day today. Markets go up by a few hundred points the day Merkel and Sarkozy meet and make vague promises, when BIg Ben announces US Quantitative Easing with a Twist, when Chidambaram and Pranab grudgingly make up after a meeting with Madam, when inflation data is bad, and on the days it is particularly cloudy. Markets go down by a couple of hundred points when people feel Merkel and Sarkozy's promises are vague, when they feel that Ben's efforts are not yielding any results, when they feel Chidambaram and Pranab are still plotting against each other, when inflation data is bad, and on the days it looks a bit sunny. The whole world seems spooked right now. The sins of the past are reappearing to haunt us; we are afraid in our heart of hearts of the consequences of economic catastrophe that will follow, which we do not want to acknowledge; and everyone is looking at others to see how scared they are. If everyone feels everyone is scared, everyone pulls out money from some assets and puts it into some other assets like US Treasuries; and if everyone feels everyone is confident, everyone pulls out money from US Treasuries and pushes up prices of all other assets by their buying.

At this point in time, it looks there is very little good news on the horizon. Europe is teetering from one promise to another, hoping to stave off the current crisis to some time in the future; the situation will get clearer by end-November. China is not going to get out of its slump in a hurry. The Indian economy seems to be slowing down due to a variety of factors including high inflation, RBI's efforts to fight it by raising interest rates, an ineffective government where paralysis seems to have set in, and of course slowdown of growth across the world. We don't know if the world is going to face a full-blown recession, but it certainly seems like there is going to be prolonged phase of low growth and uncertainty.

So at this point in time, what should be our investment strategy?

Buying stocks in the current situation seems a little risky. A lot of good stocks are available at what appears to be reasonable valuations. However, the benchmark to judge what is a reasonable price is the market itself and the markets seem to be highly uncertain right now. The upside seems to be minimal at this point, and the downside even from current levels could be significant. If you are convinced about any particular stock that you have been tracking for long, or if you are betting on or against specific events like buying stocks that have been affected by the recent mining ban in Karnataka in expectation of the ban not lasting for long, then go ahead and buy. But remember that the broad market is influenced to a high degree on FII and Institutional flows, who are in turn influenced by world trends and who tend to have a follow-the-herd mentality, which magnifies movements either way.

Gold has seen a steady rise in the last few years, with the last couple of years showing very high increase. The current consensus is that given all the uncertainties in the world economy, demand for gold will continue, and there is still scope for significant increase in prices over the next year or two. I would continue buying gold in small quantities.

Silver has dropped steeply in the last couple of months. It now seems to be quoting at attractive levels, and it looks like it may be a good time to buy. Silver is highly volatile, and may even go down further. In case it does, buy more. I am very bullish on the long-term prospects of silver - I think it is good to keep accumulating, especially on declines since the prices are highly volatile. The slowdown in the world economy should keep the prices down for a while, since silver has many industrial uses, but its value as a precious metal (like gold) and the fact that a lot of it gets consumed or used up, should ensure silver's long term value.

Real Estate prices have not dropped in the last few months, in spite of the increasing interest rates and tightening of liquidity by RBI. In fact, in the quarter ended June, real estate prices seem to have firmed up - across India the prices of apartments were twenty percent to forty percent up compared to a year ago. Real Estate prices always lag the economy and stock markets. Prices at these levels may not be sustainable, and the affordability problem of paying EMI's will show effect at some point. Expect real estate prices to decline from now till March.

Having said that, real estate is also about identifying good properties that are set to appreciate due to location, development in the locality, and other factors that could influence demand. If you get the right deal that you are convinced about, you should invest. It is worth looking at Tier 2 cities - in Bangalore check out this new area Budigere that all builders are flocking to.

Cash is good. Interest rates are reasonably high (though of course inflation is high too making real interest rates close to zero) and it is a good idea to park your money in FD's or income funds for a while. Get into cash, and wait for the right opportunities to invest in stocks or in real estate. Good opportunities are bound to come up with all this volatility in the markets.

Whoever said investment is a passive activity? "Invest in SIP's a given amount every month, don't worry about price movements, and in the long run you will emerge the winner!" I don't know if that is the right strategy any more, given this kind of volatility and greater positive correlation among all asset classes. Perhaps we need to get more savvy about the investment options available, keep track of them, and be ready to capitalize on opportunities when they arise.

Happy Investing!

Thursday, September 22, 2011

And then the chickens come home to roost

The US has still not come out of its recession. Europe is teetering on the brink. There is political turmoil in the Arab states. India is caught in a mire induced by corruption and mis-governance scandals. The Chinese growth engine is sputtering. Unemployment onshore is increasing everywhere as jobs are being offshored. Offshore jobs too are going away or being relocated too even more lower cost locations. Stock markets, commodity markets and all other kind of markets are yo-yoing wildly for the last four years, swinging from intense bouts of pessimism to uncertain optimism. 

In Europe, the PIIGS countries are still wallowing in the muck of their own creation. The protected welfare state structures of the past are not going to survive – there has to be a fundamental shift in the way the population lives and the transition is not going to be easy. Transitioning from a life of unsustainable luxury to living within one's means never is.  If Greece defaults, it could take the rest of Europe along for a very bumpy ride, since the lenders to Greece are banks from other European nations, led by Germany. So they will find a way to bail it out, but not without pain all around. Italy will have to tighten its belt and face tough times ahead. Ditto with some of the other countries in the EU. Some of the weaker nations may have to pull out of the EU – it is unlikely that sugar daddy Germany can keep subsidizing them for long. The Euro, which for a while held out promise of being an alternative currency to the dollar, is on its deathbed or at the very least, extremely sick.


China, whose economic might is only rivaled by its political ambitions for influence in the world, is facing its own set of problems. Exports are sputtering because the world cannot afford to buy more and more and is battling its own demons at the moment. Inflation at home is high and interest rates have been raised, just like in India. Wages are rising making exports less competitive. The housing bubble and infrastructure bubble fueled by excess borrowing and unsustainable creation of capital is showing signs of collapsing.


The Arab countries have always been run by the sheikhs, propped up by powerful "friendly" superpowers, in return for favors that oil can bestow. For all their sanctimonious posturing about democracy and human rights, the US is the country most responsible for propping up regimes without any legitimacy for economic and political gain. Some of those cozy equations are being shaken with current developments, and new ones will take time to form.


India is caught in its own web of corruption and mis-governance. We have several versions of the TINA (there is no alternative) syndrome, one of them being "There is no alternative" to corrupt governments! Confidence in the government is low. The economy has slowed down considerably. The common man is facing the pinch after years of sustained inflation, and lower wage increases. The poor are facing it even more since food inflation has been even higher.  A lot of the growth that was in the past led by housing and infrastructure is slowing due to the current high interest rates. In spite of the RBI raising interest rates a dozen times in the last year and a half, inflation shows no signs of abating, while growth certainly is. The stock market is teetering at 17,000 levels, not very sure which direction to head in; in the meanwhile, it swings wildly either way.


The US is yet to emerge from its troubles. The cheap money policy with QE1 and QE2 does not seem to have effected its magic. Growth has stagnated, there are no jobs, the housing market is still in the dumps, politics is in a mess, confidence is at a low, and it seems like the country is running out of options. The irony is that the dollar still continues to be the reserve currency of the world (and will be for some time to come) since There is No Alternative! US budget deficits are unsustainable, which they have been, for a long time. Decades of unsustainably high standards of living fueled by borrowing from the rest of the world is having its impact. Like the proverbial ostrich, the US continues to bury its head in the sand and expects that the problems will go away.

The world over, the chickens are coming home to roost. None of these developments should come totally as a surprise – they are the inevitable consequences of self-induced flow of events. However, the current times seem to be exceptionally uncertain since too many of these things are happening at the same time.

We do not know how each of these events will pan out but can only guess that will all eventually settle into some kind of uncertain equilibrium. Each of these events has the ability to swing markets wildly and none of them has settled into any kind of stable state.   In such a situation, it is perhaps time to re-evaluate investment options and strategies.  The usual mantra of buy and hold for the long term, do SIP, diversify across asset classes including foreign assets, may still hold good but perhaps with a twist. It is time to look at some strategies that are defensive while at the same time being ready to grab opportunities that will inevitably arise in wildly swinging markets like these.


More on that in the next.

Friday, August 26, 2011

On Steve Jobs leaving Apple

The world gasps in collective horror,
When one man rides into the sunset.
Why should one man make such a difference,
or his leaving generate such interest?

Some men come to define an age,
embodying all that it stands for.
Some men create and rule the stage,
Where only they play the leading part.

Some men create things that are new,
Changing the way that people live,
And some, they build institutions,
Monuments, conjured from the air.

A few there are who make it rich,
Starting from a place of nothing.
Enriching others are fewer still,
Creating gold by their passing.

Very very few, do it all,
Magicians passing through face of earth.
We wonder at such miracle men,
Who, through their lives, defy even death.

Tuesday, July 26, 2011

The tyranny of numbers

Yesterday India lost the first test of the current England Test series by 196 runs. Indian fans are of course disappointed, but there are three more games to go and they hope that India will claw its way back. Our team certainly has the ability to do so.


Anyway, the intent of this piece is not to talk about cricket. It is to talk about metrics. Metrics as in measurements, numbers, ratings, rankings, and how we are all slaves to them. The front page of the Mint newspaper has a photograph of Sachin Tendulkar with the following caption "Sachin Tendulkar missed out on his 100th international hundred as India faltered while trying to stave off defeat in the first Test against England at Lord's on Monday. The 196-run loss puts India's No. 1 Test ranking in jeopardy."  


What is more important in our scheme of things? The fact that it is after all a game and wins and losses are part of it? Or that it is a disappointing loss in a test match where we played badly and England played well? Or the fact that we are waiting for Sachin's hundredth international ton – what is his hundredth ton but a statistic, an eagerly awaited and welcome one of course, but a statistic nevertheless? Sachin made only 12 runs yesterday, it's not even that he got out in the 90's! Or is India's No.1 Test ranking more important?  A No. 1 ranking is a cumulative effect of many matches –maintaining the ranking is important, but is it more important than the game that just took place?


Also, the fact that it was the world's two thousandth test match, and the hundredth India-England test match, and Duncan Fletcher's 100th Test as coach, got a lot of mileage. The combination of all these important factors makes it a landmark test!


When it comes to measuring anything, there comes a point beyond which the focus is merely on the measurement; on the collection, compilation, collation, reporting and discussion of statistics. Everyone talks about these numbers, what they mean  and how significant they are. It is very likely that many of these numbers are converted to graphs and charts, preferably dual axis and in 3D. After some time, someone comes up with a metric indicating how many metrics there are. This is compared to another setup which tracks more metrics, of course followed by an effort to increase the number of metrics. The number of metrics itself becomes a metric and a target to be exceeded. Cricket of course lends itself to metrics generation much more than any other game, so it is not possible to compare cricket with other games. If it were, there would be comparisons, based on metrics of course, of how many and what kind of metrics cricket has in comparison to, say hockey, and there would be tomes and tomes of analysis on that. There would be consultancy organizations offering to take the learnings from cricket (meaning the metrics, not the game itself) and apply it to other games like hockey. There would be conferences with the theme "Metrics and their measurement, in pursuit of excellence" which would be attended by all the cricketers, presumably to improve their game.


And so on it will go… somewhere in this whole process, the fact that we are talking about cricket in the first place is forgotten. We focus on the numbers, create our own interpretation of them, bring them to life in different contexts, weave stories around them, and bask in the resultant insights. After some time, it ceases to matter whether it is cricket we are discussing or some other game.  It is reduced to a play of numbers, and in the process the spirit is lost! If it sounds familiar, it is t because the same thing happens in many other contexts as well.


Wednesday, July 20, 2011

The fight to take over the world

Google+ is creating quite a buzz. It is still in a restricted-user testing stage but it has created enough interest among the early users and it looks like it will have a good chance of challenging Facebook's dominance. It is almost a desperate final attempt by Google to enter into the social media space – a do or die effort. Its two previous efforts, Wave and Buzz failed, the first because no one could figure it out, and the second due to major privacy concerns. Google looks like it might get third time lucky.


The internet battlefield is littered with corpses of companies that were once healthy, growing, and thriving, but grew sickly and died away as quickly as they rose to prominence. In social media, MySpace is an example that comes to mind. And Orkut. All the people gravitated quickly to Facebook – beyond a certain tipping point, more people join Facebook and desert the other sites since more people are already on Facebook. Facebook has long ago exceeded that tipping point – half the world is on it now. The other half is of course excluded from the world – a bunch of weirdoes who don't belong.


Google is by far the most successful internet company making huge revenues and profits. And they have achieved this position in just a few years. A large proportion of searches (except in China) is through Google, and since so many people access the net through the Google gateway, the gatekeeper gets to profit from the traffic. In this case, the gatekeeper also acts as their guide for the journey ahead; he knows a few million paths they can take – with his omniscient wisdom and infinite sagacity he prioritizes the options and most people follow his advice. As they proceed they are greeted with banner advertisements that the gatekeeper places in their path, advertisements that are very relevant to the object of their search. What power! What influence! It comes closest to being God.


But God is getting jittery. His followers still ask him for advice on which path to take and they follow his advice. They still read the banners placed in their path. But they travel in groups, hang out in groups and spend a lot of time with each other – and the places they hang out in are not owned by this God. That privilege is Facebook's. As people interact more and more on Facebook , posting millions of pictures, having trillions of conversations, and interacting in tons of forums, Facebook gets a deeper and deeper insight into people – how they connect, what they say, what they are interested in – and gets to control the environment in which they spend a lot of their time. The aggregation of information from this has immense potential to profit the person who has it. And this new God knows it. He is already muscling into Google's mail space by getting more and more people to send message s to each other on Facebook. It won't be long before he offers them search options as well – and then Google is in real danger of going the MySpae or Orkut way. Nothing is more sad than a God whose followers have all deserted him. The world is littered with ruins of ancient temples which were once the center of their universe. And for Gods who measure their own worth in market cap, it can be even more heartbreaking.


So Google is trying to woo people away from the new God. The task is not easy since they have grown used to worshipping at the Facebook altar. It is very difficult to make them desert – anyone who tears himself away to come over to the altar of the new God, is faced with an unfamiliar terrain, new rituals, new ways of doing things, and is very very lonely at first. And like any new world, this world will take getting used to. After going through the trouble of understanding Facebook, figuring it out, and getting used to it, why would anyone want to switch? The early adopters also have to wait for the entire thing to catch on; it will take time till they get a feeling of real community.


This time the chances of success for Google to encourage apostates into its fold seem good. The concept of Circles that Google has introduced is intuitive, easy to understand, and addresses the issue of privacy upfront. Facebook does have its privacy settings, but it is so hidden that most people do not know how to use it and it is not so intuitive. You don't send "friend' requests – you just drag them into your circles. They do the same to you. In that sense, it is a combination of Twitter and Facebook. The "Hangout" where ten people can get into video chat at a time is a great feature. People see that there are other people "hanging out" on video chat and join the group. Very similar to what happens in real life interactions. The early adopters are liking what they see and they are creating a very positive buzz around the product.


Whether Google+ will succeed or not remains to be seen. The denouement will not be long in coming. If it succeeds, then it becomes much more powerful than it already is. Google already controls a lot of internet traffic of the world, and knows what people are looking for. If Google+ succeeds, it will also be eavesdropping in the places they hang out, and know more and more about them. Them in this case of course means us. In our lives Google will become more omniscient, more omnipotent, and more omnipresent than ever.  That is a scary thought.

P.S: Link to a poem on Google I wrote a couple of years back:

Friday, June 24, 2011

Redefining Privacy

Nandan Nilekani announced yesterday the throwing open of the Aadhaar platform for development of third party apps. He wants to do an Apple or Android – create a bouquet of services, tapping into the creativity of thousands of skilled developers. Where there is a need, an application will emerge, motivated either by profit or social service considerations.
People are talking about creating secure payment gateways for e-commerce to accept payments from an Aadhaar verified source, scanning and uploading of verified documents with an Aadhaar tag, so that the person need not carry the document again – the possibilities are endless. All this is possible because we are able to identify and tag a person with accuracy.
Once every person in the world is identified, and every object in the world is tagged, and every interaction between these persons and objects has been coded or given an identity in code, then every transaction in the world can in theory be trapped, with myriad ways of search to locate them online.  
Since most of our interactions with the world are through gateways which pass through computers – think banking, credit card payments, office swipe card systems, cctv’s in malls and buildings - our entire lives are being uploaded into digital databases. Couple this with better search techniques – Facebook has just rolled out a technology where you can be identified based on features in photos that are uploaded; billboards can recognize you in the crowd as you walk past, and flash ads targeted at you; apart from your UID your biometric data like shape of your nose and length of your ears will exist in computer databases which will automatically identify you and tag you wherever you go. The mobile phone you carry with you constantly broadcasts your location down to the nearest 500 meters which can be “geo-tagged” and kept on record for posterity. And the latest snooping devices are unbelievably effective, cheap and difficult to find. Any object in your house or office can have a hidden camera and an attached microphone – these devices can now be bought over the internet starting at Rs.500 onwards.
All the data generated from all the above will be stored in databases. There will of course be people with access to these databases, or rather persons with access to software that will have the capability to hunt you out in all this data, and present your entire life’s story in one neatly compiled digital docket, either to people who have the power to access them like the government, or to people who are willing to pay for them. The trend is only helped by social networking sites where your friends post yesterday night’s party photos with you tagged on them.
So what happens to privacy? They say that nothing that you do online is private any more. We should extend that statement to say that everything that you do offline can be stored online, and nothing that exists online is private.
So then, what happens to privacy? We have to get used to a new world where there is no such thing as privacy, at least the way we understand and define it in today’s world. The way we look at it, our personal lives are off limits to our colleagues, what we do at work should be of no concern to those at home, our political views, religious views, groups that we are part of, whom we hang out with, and what we choose to do with our lives, are our business alone, and ours to divulge or not divulge depending on who are dealing with. That definition needs to be relooked at.
In several primitive societies, the concept of privacy is very rudimentary. Apart from the acts of defecation and procreation, very little is private in these societies. Extend that to much more evolved societies like our villages, and there is a little more privacy, but nowhere near what urban westernized notions of privacy have come to mean. Throughout human history, the norms of what is considered private have evolved depending on the times, the technology and the culture.
We are all adapting fast to the new online world. This new world is profoundly changing the way we live and throwing up newer possibilities and concerns in the way humans interact, and our notions of privacy have to change accordingly. A lot of things we now consider private will no longer be so.  Along with the redefinition of what privacy means, we will have to change our cultural and moral rules and taboos. Human nature will perhaps continue to be the same, but morality and culture depend a lot on projection where people like to project images that are different from what they are. As the projection changes, the rules need to evolve to keep pace – and along with that, our mindsets, behaviors, and way of living as well.
And at the pace things are changing, we should be prepared to do a lot of this in our lifetimes. We are headed for interesting times!

Monday, June 13, 2011

On godmen and marketing

Baba Ramdev blew it. He had (of course still has) a huge fan following; thousands of people follow him, yearn to be in his presence, listen to his sermons, bask in his shadow, or see him on TV. He with the most famous stomach in India then went and did something stupid. He decided to take on the politicians.


He declared that black money is bad, and needs to be brought back into the country. So far so good. Motherhood statements like this are excellent and no one dares counter them. Vague demands of "bringing back" black money, which has no fixed place of residence and cannot be identified, are excellent feel-good topics that make the conscience glow.  There is an innate need in all of us to feel morally superior – this is mostly satisfied by making grandiose uplifting statements of the moralistic or religious kind, and basking in the resultant glow.


He with the huge following thought he could do a Anna Hazare. What he forgot is that Anna is a social worker, not a godman (or yoga guru as the case may be); has a huge following but it is not being leveraged for money or fame; has not built a huge business empire which is vulnerable; and has a moral standing that the Baba, even with all his millions shouting his fervent praises, cannot match.


He perhaps thought he has reached the stature of a Satya Sai Baba or a Sri Sri. He has a long way to go before he gets anywhere close. He does not attract the devotion of his followers the way the other two do. Also, Ramdev's communication is too direct, too controversial, and too worldly – he is not even close in spiritual messaging to these other two gentlemen, one of whom is of course now deceased.


His meteoric rise (counted from an already high place which he occupied) and inglorious fall, all happened within a couple of weeks. He had the ministers of the UPA government fawning on him, visiting him at the airport – him who was a common citizen come to play a charade of protest – and the whole nation starting with the PM and Madam his leader, focused on him alone. He made some promises to the bigwigs he was negotiating with, then went back on his word. He decided to up the stakes in spite of his private assurances to them to the contrary. That pissed them off. It is dangerous to piss off such powerful people. They sent their armies in, obviously. He then ran away wearing women's clothes! That was the most stupid thing to have done – he should have stood there and demanded to get arrested. Whether he got arrested or got hit with a lathi, his stature as counted in martyrdom points, would have gone up several notches.

Then Baba Flat Stomach, who seems to be very ignorant on how to deal with the media, even though he owes his rise to them, went and said something to the effect that he would raise an army! What he said was bad enough, but the way it was twisted by his enemies-in-waiting made it sound diabolical. What he said sounded more like rhetoric, but people in high places with media attention on them need to be very careful of what they say. Which is why when any politician or great leader decides to speak "extempore", their close advisors tremble in fear. They the enemies, made sure that they denounced this as a plot by a deranged maniac to destabilize the nation by encouraging an armed uprising.


The Baba who should have stuck to his asanas, announced at the same time that he would go on a hunger strike. Self mortification as a ploy works only when the opponent is receptive, has a sense of guilt, has a lot to lose in case the mortifier ends up in the mortuary, and has not been recently very pissed off with the person in question. In short, given the sequence of recent events, the timing was all wrong.


He went on a fast. No one listened. He was shifted to hospital and reports emerged of his health deteriorating. No one heard. Amidst all this, no one was in any doubt that he would not die of hunger.  When an Anna Hazare declares a fast unto death, you cringe when you think about it because you know that the probability of his continuing the fast unto death or near to it in any case, is high. In the Baba's case, he had too many worldly attachments  including his ever-expanding business empire for him to lose it all by dying. That would be a clear waste, and the public saw it. So no one took his "unto death" seriously.  On the contrary, the government decided that this was a good time to take some resources away from investigating the 2G and Commonwealth Games Scams, and divert them to investigating the Baba's burgeoning business empire. They are not even subtle nowadays when they use the CBI and allied agencies to meet their own ends – no one thinks Kanimozhi would be in jail today if the DMK had won in Tamil Nadu – but that is another story, another track.


His advisors had to do some serious background work to prevail upon another guru, "his senior", to prevail upon the by now hungry Baba to break his fast. Sri Sri landed up and admonished his junior. The precise admonishments are not known but I guess it would have been something like "Don't be stupid – learn from me. Eat well, sleep well, give a lot of good advice, breathe deeply, but never paint yourself in a corner. Since you have just managed to do that, you stupid oaf, swallow your pride and some orange juice, and break your fast. Then come to my ashram in Bangalore, be my guest for a month, and I will teach you the art of Darshan (how to motivate followers), Sudarshan (as in Kriya) and Politician (how to make them run in circles around you)." And so it happened.  The Baba has retreated, broken his fast, and hopefully will go back to doing Nauli or Uddiyana Bandha for a while.


Wednesday, June 8, 2011

The Politics of Corruption

Everyone agrees that corruption is bad and that it needs to be rooted out. Half the people who do so are corrupt themselves, and are like the thieves who join the crowd singing devotional songs. The other half are sincere, but cannot seem to agree on the means to do so.


A significant proportion of the sincere half has rallied in support of the current movement sweeping the country, which reached a mass movement status thanks to Anna Hazare. Anna himself is a person who has led a very simple life, who was a driver in the Army before he went on to transform Ralegan Siddhi village and has been conferred the Padma Shri and the Padma Bhushan. His personal possessions are few, and he does not seem to be harboring any political ambitions. This gives him a moral authority that few can match.


However, it is debatable whether the cure proposed by Anna is in the long run going to be any better than the disease. His proposal of having a superordinate body with power to investigate and hand out punishments, seems to be an immediate way out of our current mess, where we have lost all faith in the existing institutions. People yearn for a dictatorship when law and order totally breaks down and there is extreme hardship caused by what is perceived as lack of decisive leadership. The yearning for a Lokpal with extensive powers seems similar to that. What about the current institutions? The CBI is considered the handmaiden of the government in power, the higher courts have  been of late tainted with accusations of impropriety against judges, the lower courts have never been perceived to be totally honest, the political class is expected to make money by dishonest means, the administration is seen to be suborned to the will of their corrupt masters the politicians, and so on the list goes at every level of governance and administration. With this kind of erosion of faith in institutions, it is understandable that people yearn for a super-body.  On a little reflection it will become apparent that the age-old question is coming back to haunt us: "Who will guard the guardians"? The Lokpal, if and when it comes into being, is also going to be made up of people – who will select them, on what basis, and how will we ensure that they use their powers with fairness and transparency?


The entry of Baba Ramdev only complicates matters further. He is a yoga guru who has built up a huge following, not least due to the power of TV and media. He runs a flourishing business empire that he has built from scratch. He has shown a tendency to enter into controversial areas, and air his strongly held, but hardly what you may term unbiased, views. It is good that he is using his vast credibility to crusade for such a noble cause, but where this will ultimately lead is anyone's guess. His main demand seems to be to bring black money back into the country. It is a demand that resonates well, but black money is not some identifiable dinosaur roaming in the wild, where all you need to do is go and catch it. With his antics, he might actually end up muddying the waters more, creating confusion and diverting the debate, which might end up suiting a certain section of people quite well.


What then are the solutions? Unfortunately that is not such an easy question to answer. We already have several laws and governing institutions in place. What we need to think about is how to strengthen these institutions by ensuring sound governance and non-interference. We should  look at a thorough revision of existing laws to give them more teeth, and introducing new laws where there are gaps. We should look at strengthening the ideas of ethics, morality and honesty in our education and public debates – there is too much emphasis given to "hard" aspects that can be measured, and lesser emphasis on these softer issues nowadays. Above all, we need to introduce more transparency in all areas of public governance right from the Village Panchayat upwards – sunlight is always the best disinfectant. Transparency and dissemination of information have become more and more easy in the modern world thanks to technology and the internet. Nothing radical in these suggestions, and nothing original – but perhaps that is the way to go. It is also not an easy journey – the battle against corruption is a constant struggle not very different from the mythological battles between the Devas and the Asuras.



What is undeniable is that there is a strong undercurrent of dissatisfaction and people are restive and want change. Anna Hazare and Baba Ramdev, and others who have risen in their support, are helping to bring the issue to the fore, and strengthening the voices demanding change. Let us hope that we will have changes that are principled, practical and capable of lasting.

Monday, May 30, 2011

A R Rahman Show

An A.R. Rahman show was organized on Sunday night at Palace Grounds, Bangalore, and Times of India was one of the sponsors.  TOI today of course covers it in great detail.


Some excerpts: "all roads lead to Palace Grounds", "people flocked to watch", "the crowd felt special", "the view was spectacular", "larger than life", "turned the stage red-hot with his sizzling performance", "greeted with thunderous applause", "create a halo on stage", "spectacular interplay of light, visuals, and sound", "the techno… was wrapped in … singing and choreography", "the singers made it a point to include a message of anti-corruption (Anna Hazare)".


The rest of the review of the show is inserted as fillers in between these gushing phrases.


One of the tests I apply to see if any piece of text is full of fluff and vapid nonsense is to imagine replacing the main protagonist or event being described with someone or something else and imagining how it will read. In this article I could replace Rahman with Sachin Tendulkar, the music concert with the Opening Ceremony of the Commonwealth Games, and it still reads authentic – to the extent the above piece can be called authentic, that is.  Apply this test to whatever you read, and think about whether any piece of writing is worth anything if it passes this test. You will come across several such instances.


TOI is a sponsor for the event, and TOI covers the event later. The article reads like the adoring description of a devotee who has just come back from a darshan of her God, the Baba, and is describing the experience to fellow devotees. There is too much money involved here – how can it read anything else? The sponsors and the co-sponsors want their money's worth, and they want to convince themselves (and their bosses) that the event was worth the money spent. This article is more for the organizers to convince themselves that they did a great job and pat themselves on the back, than any real critical analysis of the show. Which is fine, the organizers are writing this for themselves, but what are we, the unsuspecting public, doing reading it? Think about it – many pieces of writing that cross your desk are likely to be of this variety.


Take the sentence "the techno…was wrapped in … singing and choreography (some words in between excluded by me)". The show is supposed to be a music show. We all know that all such shows are less music and more dance with choreography, so let us excuse that one. Now it seems that it is less about music and dance and more about "techno" – special effects, 3D, sci-fi, the works! Which is fine, but we will still insist on telling each other that we watched a great music show, and feel good about our support of music and all things musical!  You can see the same logic in different settings, different contexts all the time. A lot of the events that we are part of are characterized by such insidious shifts in objectives.


As to denouncing corruption, and supporting Anna Hazare, I am of course a whole hearted 100% supporter of the anti-corruption cause. I even lecture my family about it at dinner every day.

Friday, May 13, 2011


There's a new meter that measures

The value or worth of anything.

Based on hits, and on-line searchers,

Google's is the final verdict.


The giant brain at internet's core,

Is fed by millions of mouse clicks.

With each click it gains in power

Gaining wisdom on what the world thinks.


It has eyes that scan the whole world,

And its ears where sounds emanate.

All this in bits and bytes is stored,

Which are matched in turn to patterns make.


The more it knows what people want,

The more it is wired to their thoughts,

The more it tracks things that leave their trail,

The more it comes closer to being God.


Omnipresent, due to the Net,

Beseeched by million supplicants;

Omniscient, since all knowledge leads

To, and through, its databanks.


Omnipotence, just a step away

From controlling the fates of people.

Google will control, we will obey,

In bit-sized chunks, give our lives over.

(written on 16-August-2009)

Tuesday, April 19, 2011

Tera Kya Hoga Kalia? - Solutions

The solutions to the problems posted on 23 March.

Thanks Mark and Abe for posting your solutions. You got the first six questions right.

The entire problem including the questions with all three levels included is given here as the Solution.

An exercise in probability theory

You are of course familiar with the Kithne Aadhmi The scene in Sholay.  For those of you who are not, this is how it goes.

Kalia and two others (they are not named in the film - let’s call them Amar and Akbar) are sent by Gabbar on a special assignment to liquidate Jay and Veeru. The three brigands are thrashed by our heroes and return empty handed.  Gabbar is not amused.  He lines them up in front of him and starts loading his revolver.

It’s the famous Hindi film revolver with six chambers.  Gabbar loads three bullets in three adjacent chambers.  He rotates the chambers effectively randomizing them. He turns and faces Amar, Akbar and Kalia who are standing in that order respectively.

The plan is simple.  He will point the gun at Amar’s head and pull the trigger.  He will then proceed to Akbar and do the same.  Kalia is the last in line, and he will do the same to Kalia.  He will not randomize the chambers between shots. You are now at the point where he is about to start this famous Bollywood version of Russian roulette.  You are part of Gabbar’s gang and you are also the bookie.  You would like to offer odds to the rest of the gang.  Before that, however, you need to calculate the odds.  So you take out your pad and proceed to calculate probabilities for the following possibilities.  You had better be right, since your money is on the line.

(Let us assume the three bullets are loaded in Chambers 1,2, and 3. Chambers 4,5, and 6 are empty – Gabbar will start at any chamber (with equal probability) and shoot consecutively (without randomizing in between shots) at Amar, Akbar and Kalia respectively)

    1. Before the shooting starts: What is the probability of Kalia dying? (1/2)

    2)      After the first shot: if Amar is dead, what is the probability of Kalia dying? (Since Amar is dead, he died from one of Chambers 1,2 or 3. The next shot will thus be 2,3 or 4. And the shot after that meant for Kalia will be 3,4 or 5. 3 has a bullet, 4 and 5 don’t. Hence 1/3)

    3)      After the second shot: If Akbar is dead, what is the probability of Kalia dying? (you don’t know Amar’s fate) (Akbar was shot by either 1,2 or 3. Kalia will have to deal with 2,3 or 4. 2 and 3 have bullets in them; 4 is empty; hence 2/3)

    4)      After the second shot: If Amar and Akbar are both dead, what is the probability of Kalia dying? (Amar and Akbar were shot by “1 and 2” or “2 and 3”. So Kalia will get either 3 or 4; 3 has a bullet, 4 does not. Hence ½)

You also know that Gabbar is an avid gambler and likes to play cat and mouse with his victims.  He has already told you his alternate game plan. After the first shot, Gabbar might give an option to Akbar to choose whether he wants Gabbar to randomize the chambers or not. In such a case:

    5)      In case Amar is dead, what would Akbar choose? (Amar got hit with 1,2, or 3. Akbar will get 2,3, or 4 which means 2/3 probability of dying. Whereas if he randomizes, there are 2 bullets left in six chambers – chance of getting killed in 1/3. So he will choose to Randomize)

    6)      In case Amar is alive, what would Akbar choose? (Kalia will get one of 5,6 or 1 – chance of getting killed is 1/3 if he does not Randomize. On randomizing the chances of getting killed are half since there are still three bullets left. Hence he will choose not to Randomize)

Akbar happens to have an M.Sc. in statistics and hence is likely to be very logical in his choice.  He also wants to live if he can help it.

Now that you have calculated all the above, imagine another scenario, where Gabbar is going to randomize after every shot.  In such a scenario:

(Please refer to the excel file in the link attached – the solutions below refer to it

    7)      Before the shooting starts: What is the probability of Kalia dying?

    [Outcomes 1+3+5+7 = 25/72]

    8)      After the first shot: if Amar is dead, what is the probability of Kalia dying?

      [Amar dies in outcomes 1 to 4, of which Kalia dies in outcomes 1 and 3. Hence (2 + 8)/(2+8+10+16) = 10/36]

    9)      After the second shot: If Akbar is dead, what is the probability of Kalia dying? (you don’t know Amar’s fate)

      [Akbar is dead in outcomes 1,2,5 and 6. Of which Kalia dies in 1 and 5. Hence, (2+6)/(2+10+6+12) = 8/30]

    10)     After the second shot: If Amar and Akbar are both dead, what is the probability of Kalia dying? [1/6]

Wednesday, April 6, 2011

Self Delusion

Now that the Indian team has won the World Cup, there will be a spate of articles trying to analyze the victory. But before getting into that, we need to savor the victory, don't we? The whole nation is into a self-congratulatory mode, exulting wildly at the win. The players are being wined, dined, feted, hoisted, hosted, and generally smothered with attention. Every word that they utter is noted down for posterity. The fact that posterity lasts for a very short while in the modern age is something that we should not think too much about.


I have nothing against the victory. I think the players have done a great job and we need to be proud of them. But stepping back a little bit, there seems to be a little bit of perspective required somewhere.


All articles and interviews aim to get some insight into what got the team where they are today. What is the secret of their success?  And this is where it becomes very interesting. From whatever I am able to gather, the secrets of success as divulged by various members of the winning team are: Sachin Tendulkar, hard work, Guru Dera Wala Baba, Sachin Tendulkar, commitment and focus, dedication, planned and targeted preparation, Sachin Tendulkar, an excellent coach, hunger for victory, discipline, Sachin Tendulkar…


If the stock market goes up by 700 points today, the newspaper headlines say that it is due to a stable situation in the US, less than expected bad news from Japan's nuclear disaster, positive outlook for the Indian economy, stable government at the Centre, etc. If on the other hand the market goes down by 700 points, the newspaper headlines will say that it is due to worsening inflationary outlook, bad news from Japan's nuclear disaster, price of oil, situation in Libya, increase in commodity prices, etc. Depending on what is the event that happens, the right set of reasons is chosen.


The analysis of the cricket team's victory also seems something like that. We know that victory requires one part each of hard work, commitment and focus, dedication, preparation, coaching, hunger, discipline, and five parts of Sachin Tendulkar. Why did we need to play the entire tournament to know that? And how come these conclusions are being touted as great insights?


No one bothers to ask why it is that the other teams lost when they too had all the above, perhaps more than one part each in some cases. (Actually, I know the answer to that one – they didn't have Sachin Tendulkar!). Or why we got knocked out at the league phase the last time around, when we had all the above ingredients in equal measure?


Not just in cricket or the stock markets, but in every area of life, we tend to justify our views and biases, based on analysis carried out on hindsight. Only those things are allowed to insert themselves into reckoning that fit in with our preconceived notion of the world. The results from the analysis in turn bolsters our conviction in our own arguments. Everyone thinks alike and there is immense pressure, both overt and subtle, to agree to what is the obvious truth. The more we analyze in this fashion, the more we are convinced that we are right, and the more self righteous we become. Cricket and stock markets are just examples; the malaise is spread much wider.


And we happily wallow in self delusion. It's not a bad way to be. At least we are happy!

Monday, April 4, 2011

Captain Cool

The whole nation accepts him as leader,
Perhaps as one who was born to lead.
He rose up from the small towns of nowhere
to captain the Indian cricket team.

He heads a team that is full of titans,
with egos fed on adulation.
To them, he is first among equals,
and they acknowledge him as their captain.

He is bold, but not seen to be reckless.
He is cautious, but surely not feckless.
He is rustic, in a charming way,
and suave, at home in any ambience.

He seems to hold his head under fire,
not carried away with every current.
In stormy seas, he has his own anchor,
which seems to moor him, and give him strength.

No one in India is acknowledged,
as completely as undisputed.
What is his appeal that they hold him
high and shower him with their esteem?

If it's hopes of a nation he carries,
he does not let the burden show.
Just watch him, taking to the shadows,
after every brief moment of triumph.

Dinesh Gopalan
4 April, 2011

Friday, April 1, 2011

The Tournament Finals!

Excitement risen to fever pitch,
Eagerly goading each other on,
The nation waits with bated breath,
For the tournament just anon.

To each it's like his own fervent wish,
what, this moment, he wants the most;
Multiply that by a billion,
number of hearts stilling with hope.

Why should one event mean so much,
Catharsis to an entire nation?
Can't we treat it just as a game,
Stripped of such high expectations?

Or is it that we need these rituals
of bonding in collective hope?
Moments of victory and defeat
that we all agree mean much more?

A coming together, a bonding,
eager awaiting of the outcome,
where everyone comes together as one,
and for once, prays to the same Gods?

Dinesh Gopalan
1 April, 2011

Tuesday, March 29, 2011

Indo Pak match

Gladiators out on the field,
Each country's chosen champions;
A Roman Circus, where the assembly
lines the stands, cheering, and bays for blood.

Caesar is there up in the stands,
Displaying love for sports, and country.
Millions more are lining the aisles,
with scarcely disguised lust for victory.

Pent-up passions coming to the fore,
Jingoists waving flags, and uproar.
It's not about the game on the field,
It's far beyond that, and much more.

All wars require an arena,
for some, it is the cricket field.
They need champions, and an enemy:
To fight is an inbuilt human need.

Wednesday, March 23, 2011

Tera Kya Hoga Kalia?

An exercise in probability theory

You are of course familiar with the Kithne Aadhmi The scene in Sholay.  For those of you who are not, this is how it goes.

Kalia and two others (they are not named in the film - let’s call them Amar and Akbar) are sent by Gabbar on a special assignment to liquidate Jay and Veeru. The three brigands are thrashed by our heroes and return empty handed.  Gabbar is not amused.  He lines them up in front of him and starts loading his revolver.

It’s the famous Hindi film revolver with six chambers.  Gabbar loads three bullets in three adjacent chambers.  He rotates the chambers effectively randomizing them. He turns and faces Amar, Akbar and Kalia who are standing in that order respectively.

The plan is simple.  He will point the gun at Amar’s head and pull the trigger.  He will then proceed to Akbar and do the same.  Kalia is the last in line, and he will do the same to Kalia.  He will not randomize the chambers between shots. You are now at the point where he is about to start this famous Bollywood version of Russian roulette.  You are part of Gabbar’s gang and you are also the bookie.  You would like to offer odds to the rest of the gang.  Before that, however, you need to calculate the odds.  So you take out your pad and proceed to calculate probabilities for the following possibilities.  You had better be right, since your money is on the line.

    1. Before the shooting starts: What is the probability of Kalia dying?
    2. After the first shot: if Amar is dead, what is the probability of Kalia dying?
    3. After the second shot: If Akbar is dead, what is the probability of Kalia dying? (you don’t know Amar’s fate)
    4. After the second shot: If Amar and Akbar are both dead, what is the probability of Kalia dying?

You also know that Gabbar is an avid gambler and likes to play cat and mouse with his victims.  He has already told you his alternate game plan. After the first shot, Gabbar might give an option to Akbar to choose whether he wants Gabbar to randomize the chambers or not. In such a case:

    5)      In case Amar is dead, what would Akbar choose?
    6)      In case Amar is alive, what would Akbar choose?

Akbar happens to have an M.Sc. in statistics and hence is likely to be very logical in his choice.  He also wants to live if he can help it.

Now that you have calculated all the above, imagine another scenario, where Gabbar is going to randomize after every shot.  In such a scenario:

    7)      Before the shooting starts: What is the probability of Kalia dying?
    8)      After the first shot: if Amar is dead, what is the probability of Kalia dying?
    9)      After the second shot: If Akbar is dead, what is the probability of Kalia dying? (you don’t know Amar’s fate)
    10)     After the second shot: If Amar and Akbar are both dead, what is the probability of Kalia dying?

You can post your solutions in the “comments” section against this article.

(don’t try googling – you won’t find the answers since I just made all this up)

Tuesday, March 15, 2011

The Globalization of Unpredictability

“The crisis in Japan is going to cause huge losses to insurance firms.” That much is obvious, but the point to be noted is that it seems to have caught both the insurance companies and the power utilities running the plants off guard. One thought the business of insurance firms as well as people running nuclear plants is to be prepared for unpredictable risks.  As one of the officials of the firm running the nuclear plants was quoted saying “we were prepared for disasters such as Tsunamis, but we were unprepared for an earthquake and Tsunami of this magnitude causing this extent of damage”. The whole world is concerned with the extent of damage wrought in Japan. The tentacles of the financial system extend across the world, and any incident anywhere impacts the rest of the world in myriad ways.

Rise and fall in stock market indices are normal. What is not normal is the extent of crash that sometimes happens – a case to point being the worldwide fall in the aftermath of the Global Financial Crisis. The reason was not just sub-prime, but a host of other global economic factors, which again somehow seemed to be linked to sub-prime; no one really knows or can unravel the full extent of these linkages.

We are shocked and dismayed at such meltdowns. When the entire system suffers a shock like this, our faith in our infallibility is shaken. We believe we have built systems and processes to take care of any shocks and that the even tenor of our lives will not be shaken. Both at an individual level, as well as a systemic level, we convince ourselves, we have the ability to withstand shocks of any kind.  How valid is this belief and in reality is this kind of insulation achievable?

Historically, humankind has always been exposed to unpredictable events.  One king used to invade another and there used to be plunder and pillage as a natural consequence. Natural calamities would destroy or carry away lifetimes of effort and destroy entire towns or villages. Lack of communication systems would keep people cut off. A flood or a drought would destroy means of livelihood with monotonous, but unpredictable, regularity. There were no insurance mechanisms in place. People had to rely on their own ingenuity, and their personal and social networks to get back on their feet and continue with their lives. This has always been true and it has been accepted as part of the human condition. 

What has also been true is that we always recognized the unpredictability of human affairs, and accepted a lot of things as the workings of fate. Every culture has a strong thread of resilience running through its philosophy and way of life to enable its people to cope with unpredictability. Human ingenuity has evolved over time to absorb these shocks and emerge stronger for it. To that extent things are the same. What is different, however, is our increasing belief that we have built, or shall be able to build, systems of increasing sophistication to mitigate these risks. I am now referring specifically to financial mitigation – we feel that our stock markets, banks, insurance companies, global tie-ups, and other constructs will somehow eliminate these risks.

We have built complicated statistical models with all kinds of distributions and sigma limits to contain the world within bounds of predictability. We build such models based on past experiences after ignoring outliers as not fitting the model; make a range of assumptions on the future which, being a range, will be restricted to one; model the future into one of our known theoretical constructs; make our decisions based on that, and then rest easy on the assurance that we have managed to control the world as known to us!

It is not any different from what we have historically done; humans have always insulated themselves into a cocoon of comforting predictability, whether it be in terms of geography, community, religion, culture, business networks, or martial alliances – all to make life more predictable. Invariably, some outside influences have broken into these cocoons, shattering all illusions, and exposed the vulnerability of human life and human endeavor.  Our statistical models are nothing but an extension of this search for predictability and security.

What is different now is the interlinkages across the world which makes more and more people depend on the same models and the same constructs, and the forces that compel entire systems to make decisions based on the same set of assumptions. When money is pulled out of the Indian stock market, a lot of money is pulled out because all FII’s think alike; they think alike since they follow the same accepted wisdom; they follow the same accepted wisdom since everyone is interlinked and believes in the same infallible reality on a far greater scale. Insurance companies compete with each other to offer lower premiums – for doing this I am sure they have to ignore some of the “outliers” in terms of risk; other insurance companies have to follow suit since if they do not, they will be out of business. All hedge fund managers think alike. So do all fund managers, actuaries in insurance companies, central banks worldwide, presidents and prime ministers,… the list goes on. Even if they don’t think alike they are forced to act alike. The interlinkability of the modern world ensures that.

When problems are at a retail level, the impact is restricted. More and more problems today reverberate globally in terms of impact. Paradoxically, as we strive to control our  own destiny more and more through these global systemic constructs, we get more and more impacted through remote events happening elsewhere and are less and less in control of our own destiny!

Friday, February 4, 2011

Tricks of the mind

You will never hear an insurance salesman say "when you die…" or even "if you die…". It is always "if something unfortunate happens…". We don't want to hear bad news, not even contemplate about possible bad events in the future. Most of us tend to put off buying insurance or writing wills for this reason; we do not want to contemplate our own deaths. A lot of things in life can be attributed to running away from the fear of the inevitable; some things in financial planning included.  There is also a cultural bias here. In most cultures it is considered inauspicious to talk about bad things. And death, everyone agrees, is a bad thing.


In the middle of our straitened, stressful circumstances, we all dream that one day the clouds will open, and a huge light full of blessings will descend on us from heaven. There are enough instances in mythology of heroes being showered with flowers by the Gods – the fact that they did something extremely heroic to deserve it is often forgotten.  Every alternate fairy tale is about the poor Cinderella meeting her Prince; only the settings differ. All religions promise deliverance in the hereafter. Religions also impose stiff conditions to the deliverance, but we do not want to think of those difficulties all the time. We always want to believe in the ultimate deliverance; life will somehow ensure that we reach there.


Financial products exploit this to the hilt. The Pension Plan has a promise attached to it that in your retired life, you will keep getting a monthly income; the Child Plan advertisements show some children playing on the beach, and your child playing with a stethoscope around her neck, playing on our sentiments, and somehow managing to convey that investing in that plan will ensure that your child will become a doctor. Never mind that the child may have other ideas; or that the amount you get will depend on the amount you put in. More important, never mind how and where the investments are made, what are the charges, commissions, and leakages; and is that the best use of your money? We will subscribe to the plan, contribute a few thousand rupees a year, and happily live in the illusion that we have taken care of our child's future. Ditto for daughter's marriage. Marriage plans are very popular too.


The Child Plan, Marriage Plan, or any such "life goal" plan from any insurance company invests in some equity and some debt through a mutual fund inbuilt into it. After deducting a lot of commissions. Why can't we save on the commissions and invest directly in equity or debt ourselves through mutual funds? It has the same effect, while saving a huge lot on commissions. We perhaps do not want to do that since the end use is not labeled – how are we sure that we are taking care of our daughter's marriage, or child's education, unless someone labeled it as such? Also, we do not want too much transparency – the opaque structure of these products suits us since we want to live in the assurance, never mind its full or complete validity, that we are doing our duty – please let me not know how I am doing every once in a while. Why swallow the bitter pill of reality every time – the comforting opiate of faith and hope is no doubt better?


We repeat our puja every day, and go to the temple every Tuesday. That gives us a lot of comfort since we are taking care of our after-life through some rituals which promise deliverance. Religions have rituals which hold the promise of unleashing great potent forces; so does financial planning!


When you ask share traders about their trades, you will always hear success stories more than stories of losses made. Partly it is deliberate, the desire to impress others through stories of success. Partly it is due to the fact that the mind tends to forget the bad experiences over time, or discounts their importance, and builds up the good ones. In terms of evolution this may be a desirable thing since optimistic and positive minds tend to live longer and happier, but in terms of decision making such forgetfulness may not be the ideal thing. This may induce us to get into risky trades without considering the downsides. Several times, when we are sold on some investment, we want to avoid going into the downsides; our mind rejects all the negatives and soaks in the positive news. Not a different state of mind from someone in love and possibly not married – the mind sees only positive things about the beloved. Marriages and staying together are known to shatter such illusions. But as in the case of investments, it may be too late – you have already bought into it.


There is the other extreme too, that is very common.  There are people, in fact many of them, who are so afraid of taking risks, that they will invest only in Fixed Deposits. With nationalized banks. "No shares for me, thank you, they are too risky". "Real estate? I have heard enough stories of people losing their land to encroachment". They are very happy to earn 7% pre-tax on their FD's while inflation runs at 9.  But they sleep better.


Morals to these stories? When it comes to investments there are several morals you can pick. Whether you derive morals from them or not, it is good to be aware of these tendencies. One of the things a good investor needs to avoid is self delusion. And as seasoned investors will vouch, that is the most difficult thing to do.

Sunday, January 30, 2011

We work in default mode

Have you ever missed the money that is deducted from your pay-slip every month as PF contribution? It is very likely you don't even know what the contributions along with interest have amounted to, over the years. If, on the other hand, you had been investing the same amount in a bank account at the same rate of interest, would the corpus have amounted to so much? Very unlikely, if you come to think about it, for you would have dipped into the money along the way; it would have come out in small chunks and you would never have realized it.


There are people who sometimes buy some shares and forget about them entirely for some years, or even decades. One fine day they wake up to discover that the shares are worth a significant sum of money.  If they had been keeping track of it regularly the temptation to sell the shares somewhere along the way would have been too high.


The power of compounding is incredible. It multiplies your money to unimaginable proportions if left untouched over a long period of time.


The same effect can be observed in real estate. Since the amount of investment is very high to start with, you put in all you have, and borrow a substantial sum. You take a large loan from the bank and get into an EMI commitment, all that you can afford. As you get additional income along the way, your focus is to prepay the loan to bring the loan down to more manageable levels. You adjust your lifestyle in order to be able to pay more towards loan repayments. All the while, when you are focusing on the repayment, the land or apartment is left to grow in value undisturbed. And one fine day you find that you are free of the loan and your real estate is worth a substantial sum of money.


In all the above cases, there is not too much thinking or decision making to be done along the way. You make the decision at the time of buying, and then operate in a default mode. You would of course do well to monitor the portfolio once in a while for any signs of fundamental changes in assumptions; but you leave the portfolio pretty much alone. 


The key to wealth creation lies in not being too active!  All of us like to operate in the default mode; the trick is to identify those default actions that are beneficial to us in the long term and then get into the habit. Too much thinking and analysis could be detrimental in this situation; in fact too much thinking and analysis is injurious in most situations!


We can use this insight into a fundamental trait of human psychology to our advantage. It is good to have certain long term goals for investments and then keep working toward s them in a programmed manner. It is not really a good thing to switch from one investment to another too often. It is good to go in for borrowings, especially for buying your house, and for investments, since it forces us to work towards the repayment.


Whatever your income is, decide on how much you want to spend, and put the balance into a separate account. This account should be earmarked for investments, and linked to a demat account as well. Whatever investments you do are from this account, and whatever returns you get, including dividends, go into this account and not into your spending account. Once a month, you invest the balance money lying in this account into some investment, whether in direct equity, equity funds, fixed deposits, debt funds, real estate, or gold/silver. Any sale or redemption proceeds go back into this account. This way you have "paid yourself first" by diverting money into your investment account from your spending account.


As to the investment account, you don't take anything out; just keep putting in. Any money that is used from there goes into investments; any money coming in from investments comes into the investment account.


You should also be aware of how the same tendency to operate in a default mode is misused by marketers in structuring financial products. All insurance products that have a savings element attached to them compel you to pay the premium periodically, which is good; they also compel you to not look at how your investments are performing too often, which is also good; hence, when you finally get some money back in the end, it seems like a big sum to you.


However, what we ignore is the fact that a huge percentage of premiums paid on such insurance products goes towards administration charges, agents' commissions, and all other kinds of charges. Since we are operating in a default mode, we do not think about this, but we should. What if the same money that we paid as premium goes into our own investment account and we invest in a mix of equity and debt mutual funds? The insurance company too does the same thing – runs a mutual fund at the back end and puts our money into a mix of equity and debt.  When we do it on our own, we will save on all the commissions and the miscellaneous charges. And if we leave it alone long enough, and not check our corpus too often, one fine day we will be surprised at the amount of money we have left.


Think about it. And think of other ways in which you can get into some "good habit" default modes of operation. And think about how many other ways marketers dupe you by taking advantage of the fact that we all operate in default mode.

Wednesday, January 26, 2011

We trust in everyone, but ourselves

When we go to the doctor we trust that he will give us the best advice possible which is in our best interests. The same applies for a financial advisor – or what passes for financial advisors in our country, which is insurance agents, ppf agents, relationship managers and middlemen of all kinds. In case of the medical profession, at least we pay some fees to the doctor, so there is some incentive for him to stay honest if he is of the principled kind. In case of financial advisors, we do not pay anything; we know that the agent gets paid his commissions from the company which sells us the product; and still we expect that the advice will be in our best interests!   We have an infinite capacity to delude ourselves, so as to not take responsibility for our own actions!


Almost every diagnostic clinic offers a standard percentage cut to the doctors who recommend their tests. The doctors have targets from the hospitals they are part of for "bed occupancy" and " revenue per bed per day".  Medical representatives keep pushing doctors to prescribe their more expensive brands in preference to cheaper generic alternatives. Doctors are sponsored on foreign junkets which are titled as seminars. Equipment such as sugar monitors are sold at a subsidized rate since the strips which are consumables required daily can be sold at fifty times the production cost.


Consumers are not well educated on generic or other-brand alternatives for the same drug. Even those who ask for a generic alternative get cheated because there is an industry out there which makes very cheap generics with very expensive printed MRP's which makes it a double whammy – the consumer pays more than what he would pay for a reputed brand for buying a cheap generic! Medicines are also bundled into all kinds of useless combinations in order to position them better and increase the price - in several cases the combinations are actually harmful.


If you are unfortunate enough to land up in a hospital for an ailment yet to be diagnosed, you can be sure there will be several tests, and several cross referrals to other specialties and further tests prescribed by those doctors. When you are being admitted to the hospital you will likely be told that only the more expensive rooms are available. This will happen especially if the hospital knows that you are going to claim insurance – they ask you that question even before asking you your name.  All operation and consultancy charges are in direct proportion to the amount you pay for the bed.  I don't know how this system is allowed to persist; apparently it has something to do with cross-subsidizing the people who are less well off, but surely there are better ways to do that?  


When it comes to insured patients the system ensures that the bill is inflated.  The patient does not mind; he thinks he is getting better treatment at someone else's cost. Third Party Administrators (TPA's) in case they are involved take a pretty big cut as well. All this is finally paid for by all consumers in the form of higher insurance premiums and also higher costs even for those who do not have insurance. The US healthcare system shows us to what ridiculous levels all this can reach. We in India have started moving down the same path – for the last few years, the rate of inflation in medical costs is more than twice the normal inflation rate.


When anything becomes an industry with large investments,  with an entire ecosystem emerging  to back it up, you can be sure demand will be engineered or induced in such a way that the industry survives and grows. Do you hear the Biocon ads on diabetes control  on FM? Is that the industry responding to the large incidence of diabetes or is it industry creating a hype around the disease to create an unnecessary need to do expensive tests and increase daily monitoring?  When there are several huge hospitals in the city with investments of a few lakh rupees per  bed, don't you think there is an incentive for the hospitals to create a need around using their services? To what extent is the hospital there because the patients need it, and to what extent are the patients lining up because the hospital came up in the first place, is a moot point. The answer in all such cases is fuzzy.


Just like medicine, financial services is also an industry. Just as with the medical industry, we need to be aware of the pitfalls of dealing with the financial services industry – not all companies or advisors out there are out to cheat you, but there are many who will; and there are many who will take advantage of your ignorance to push an unsuitable product on you, which while it may not be cheating, would be bordering on the unethical.


The insurance agents have their targets. They are induced to push ULIPs which are pure scams, even in the so-called "capped commissions" new avatar, or the old fashioned Endowment plans which are non-transparent with huge commission structures, and never Term Insurance which is all you need the life insurance company for.  


Mutual Fund distributors push new untested funds by asking you to shift your money and keep churning – this is because the commission on new funds is higher. The fund industry will keep coming out with newer variants of funds most of which do not make sense and have very vague mandates. They keep shoving the same toothpaste into newer packaging. New mint flavored flexi-cap infrastructure diversified fund! I am waiting for that to come – that day is not far away.


Recently a scam came to light – it was discovered that some very large corporate clients of money market funds were effectively earning two days' interest by deploying one day's funds – this used to happen by taking advantage of the cut-off times for different funds that were kept different to aid in this. Who pays for the extra day's interest? The other unit-holders of the fund, of course. Since SEBI has put in place some rules to safeguard against this in future, the fund industry fears a drop in corpus.


Gold and silver may be a good investment, but not in the form in which they are usually sold.  There are huge margins on gold and silver which are charged in various forms – making charge, melting charge, labor charge, margin charge – which makes jewelry or silver items a bad investment. Even the margins on gold biscuits or silver bars can be quite high if you do not know where to buy them.   Since more and more people are starting to get a little savvy about gold values, the industry has started pushing diamonds now – diamonds may be forever but their investment potential is poor. To the best of my knowledge all rocks last forever. The diamond industry led by De Beers has done a fairly good job of capitalizing on the already existing mystique around diamonds, and adding to it, to their commercial benefit.


The relationship manager at the bank has his targets – and they are product specific. You can be sure that whatever product he is pushing is based on the commissions the bank is getting, and not because he has your best interests at heart. He also has the unfair advantage of having access to your bank account information, and knows how to strike you at your most vulnerable moments, when you have money to spare.


None of this should surprise you – when it is an industry out there, all these practices are bound to exist. What should surprise you however – it does me – is how we as consumers are not really bothered to educate ourselves at least to the extent required to see through these marketing tactics and decide on what is really good for us. I suspect a large part of the reason is our reluctance to take things into our own hands; in case we educate ourselves we have to face up to the fact that we are ourselves responsible for our health (or illness), both in the case of physical health as well as personal finances. It is far easier to just trust someone blindly and blame the vagaries of fate and the vicissitudes of life for our state of perpetual impecuniousness.