Tuesday, October 10, 2017

On Richard Thaler

Quotes from Michael Lewis' Undoing Project:

"There was at least one economist who didn’t feel that way, but he wasn’t, at least when he came upon Danny and Amos’s theory, anyone’s idea of a future Nobel Prize winner. His name was Richard Thaler. In 1975, Thaler was a thirty-year-old assistant professor in the School of Management at the University of Rochester with vague prospects. It was a wonder he was even there. He had two deeply pronounced traits that rendered him unsuited not just to economics but to academic life. The first was that he was easily bored, and highly imaginative in his attempts to escape boredom." 
"This was odd, as Thaler’s other pronounced trait was a sense of ineptitude. When he was ten or eleven years old, and a B student, his father, a detail-oriented insurance executive, had grown so frustrated with his sloppy schoolwork that he handed his son The Adventures of Tom Sawyer and told him to copy a few pages exactly as Mark Twain had written them. Thaler tried, seriously. “I did it over and over, kicking and screaming.” Each time, his father found errors—missing words, missing commas. The quotation marks in an exchange between Tom and Aunt Polly confounded him. Looking back on it, he could see that his problem was more than a lack of effort: He was probably mildly dyslexic. But people just assumed he was either careless or lazy, or both."
"Thaler had gone from college straight to graduate school mainly because his father’s life had persuaded him that business careers were mind-crushingly boring, and that he had no ability to work for someone else. He couldn’t think of what else to do but go to graduate school, and he picked economics because “it seemed kind of practical.” Only then did he discover that the field placed a terrifying premium on both precision and mathematical ability—to the point where it seemed that the only people who were allowed to make jokes in their journal articles were the guys who were best at math."
"He wrote his thesis about why the infant mortality rate in the United States was twice as high for black as for white populations. Controlling for all the obvious variables—education and income of the parents, whether the baby was born in a hospital, and so on—he explained only half the difference. He was left with what seemed an unsolvable puzzle. “I tried and failed to explain it,” he said. “I could have made it more interesting if I had had more confidence.” The economics profession responded by rejecting him for every university job he applied for. He settled for a job with a consulting firm. Then, just as he set out on a new path in life, the firm closed an office and let him go. At the age of twenty-seven, broke and unemployed, with a wife and two little kids, Thaler begged the head of the Rochester School of Management for a job, and the man gave him a temporary one-year gig teaching cost-benefit analysis to business school students. Back in school, he set out to write another dissertation. He found another interesting question: How much is a human life worth? He also found a clever way to approach the problem. He compared the salaries for risky jobs—coal miner, logger, skyscraper window-washer—to the life expectancy of the people who did them."
"(The number he came up with was $1.4 million, in 2016 dollars.)" 
"The paper secured Thaler a full-time job, without tenure, at the Rochester Graduate School of Management."
"Thaler thought that was really interesting. He told his thesis advisor about his findings. “Stop wasting your time with questionnaires and start doing real economics,” said his advisor. Instead, Thaler began to keep a list. On the list were a lot of irrational things people do that economists claim that they don’t do, because economists presume that people are rational." 
"The University of Rochester denied Thaler tenure. His future was hazy when, in 1976, he attended a conference on how to value a human life."

Richard Thaler just won the Nobel Prize for Economics.

I know there is a lot of survivor bias to the story and not every B student is going to win a Nobel Prize, but the story tells you that being a B student alone doesn't disqualify you from contributing to society, so long as you are inquisitive and willing to persevere.

Wednesday, September 27, 2017

Questions on ICOs continue to be unanswered

Yet another article, that doesn't even make an effort to answer the hard questions, but just propagates ICO bubbles.

For the record, here is my dissection of the article asking more questions:

"Entrepreneurs seeking capital to build tech startups have long sought out elite venture capitalists on the famed Sand Hill Road in Silicon Valley. Now the many startups developing applications for blockchain technology have another option: They can go online and raise millions by creating digital tokens, for use as currency on blockchain platforms, and selling them in what is known as an initial coin offering, or ICO."

Who are participating in these ICOs? the same people who could participant in a VC round or retail investors? If it is retail investors, how are ICOs fixing the information asymmetry and risk problems associated with an early stage asset?

"For instance, Protocol Labs Inc., based in San Francisco, which recently raised $253 million in an ICO, is building a network with blockchain technology on which digital storage can be bought and sold using the Filecoin tokens it sold in the offering. Protocol isn’t selling storage space; it’s building a market where people can buy and sell storage space."

So, what are coin owners getting? Free access to storage space later? i.e. pre buying what will become a costly asset? But will storage stage actually become a more valuable asset? What's the basis?

Same questions can be raised for Golem factory example.

"The tokens can be bought and sold after an ICO by investors. If a company’s platform is a success, the value of its tokens should increase because there will be greater demand for them."

Why? As in why should the value of the tokens increase even if the company is a success?

Additionally, most companies make revenues & profits in many different forms - so owning shares in the company always worked, because you got a share of all profits, made in any manner. ICOs effectively take away that inclusiveness.

"Doing an ICO doesn’t preclude a company from also raising money through equity offerings. But some startups are switching entirely away from equity funding, says Spencer Bogart, managing director and head of research at Blockchain Capital, a venture-capital fund that both invests in ICOs and makes traditional equity investments in startups. “You can raise a venture round or raise 10 times as much with an ICO and give up no control,” he says."

Right, because as an investor, I love the idea of investing in assets that have scant connection to asset's profitability and I don't need any control to prevent misuse by the founders.

"Whatever the risk, some investors say it may be worth it. That’s because the companies selling coins in ICOs are aiming to develop technologies that could be fundamental to entire industries, as, say, email or file storage or computing power are today."

Oh come on, why would using ICOs make it any more likely that the founders would solve "fundamental problems". If someone tells me file storage marketplace is a fundamental problem, then I want to smoke the same weed they are.

Saturday, September 23, 2017

Experimenting with Indexes - JUNIORBEES

Between May & August of 2016, I sold 28 different scrips from my portfolio and exchanged all of them for 1 ETF - JUNIORBEES that tracks the Junior Nifty index.

The 28 scrips contained all kind of shares from penny stocks like GTLINFRA, STERLINBIO, LITL, UNITECH to pretty good blue chips like RELIANCE, BALMERLAWRIE & HDFCBANK and precious metals like AXISGOLD & KOTAKGOLD. At the time of selling, the booked profit ranged from losses of 60% to profit of 194%. i.e the range of what I sold was actually quite diverse. Amounts held in portfolio ranged from a few hundred rupees per scrip to one scrip being more than a lakh rupees in holding,

Last week, I sold all my JUNIORBEES position. One reason was that it was hitting an all time high. The second was that my holding period exceeded one year, switching me to long term capital gains bracket.

Of course, it is no surprise that I made a profit, the markets in India were on a bull run. But what is interesting is to compare what would have happened if I kept my original portfolio and not switched to JUNIORBEES. So here is the comparison of the original holdings vs JUNIORBEES:

Potential Profit %
if kept in in Underlying
Actual Profit %
after switch to JUNIORBEES
Grand Total12.30%38.63%

The table lists the differences strictly on price, any fees and brokerage paid for the switch has not been deducted. Intra-day changes might also place a minor variation in the comparisons as the the actual sale price of the LHS is based on the price I actually sold at while the potential is based on closing price on the day I sold JUNIORBEES. The RHS is strictly based on the actual prices I traded on. The variations and brokerage put together should not factor for more than 2%, IMHO, hence not being material for this calculation.

Clearly JUNIORBEES has trumped.

Thursday, March 02, 2017

How I became Vocanic CEO

After six and a half years at Vocanic, I recently left. This was one of the hardest decisions I had to take.  There is a lot to write about my tenure at Vocanic, but I am trying to focus this post on the past 18 months or so which had more noteworthy stories, I believe. There are 3 parts to this topic - Becoming Vocanic CEO, the decision to leave Vocanic, and the decision to join Quantcast. In this post I am only focussing on the first.

Vocanic was acquired by WPP in December, 2013 and we were placed into the GroupM group along with 5 other agencies - Mediacom, Mindshare, Maxus, MEC and Xaxis. The four shareholders who sold the company (in order of their shareholding) were Ian McKee, Liam McCance, Stephen Thirgood and myself. I were granted some company shares as part of a Stock Option grant. Shortly after the acquisition, I was promoted to CTO position.

GroupM bought Vocanic because we were a Social Media agency with proprietary technology, which they believed was a differentiating factor. We believed ourselves to be a Consulting firm with execution capabilities in both Social Media and Tech. Either way you look at it, Vocanic was broadly two businesses - an agency business offering Social Media management and affiliated services; and a Tech business offering product and applications offerings. Most of our client facing team understood that the two were joint at the hip and we could offer services that truly was differentiated in the market. 

However, as it happens with an acquisition, management changes followed in the following months. By July 2015, Stephen had exited and Liam was in the process of exiting the company. Both were affected by the big-company syndrome as well as nurtured an itch to pursue other interests. When the management was being restructured, I had offered to take up COO role covering all aspects of the business except Strategy and Client Facing. However, Ian believed that someone from within GroupM was necessary to tide over the relationship issues we were having with the group and agencies - logic that I agreed and subscribed to.

So Ian recruited Rebecca Ashby as our COO and Rebecca set up structuring the company for future. While the efforts of that exercise were broadly in the right direction, I came out not spotting the next challenge I wanted to take on. Tech assignments in that roadmap looked, at best, incremental.

At this time, I spoke to Ian about leaving, but Ian was genuinely convinced that working in a bigger group and making this a win-win for both us and GroupM was an important and unfinished business. He convinced me to stay, which I did.

In the coming months I busied myself with a couple of projects and didn't think too much about leaving. However, by year end 2015, there were significant differences in the direction Ian and Rebecca wanted to take and the two weren't seeing eye to eye. I personally respected both approaches, but the strife wasn't setting the right environment and the team was often split on whose direction to follow.

Over the year end break, I decided to talk to Ian about leaving again. However, coming into office on first working day of 2016, I learnt that Ian and Rebecca had agreed that things weren't working out and Rebecca was leaving. I did not want to leave Ian with another departure but decided to postpone it for a few weeks to see how I could help out in transition. Ian and I spoke about the COO replacement plan and while Ian was generally willing to give me more responsibility, but the formal decision wasn't made.

In about 10 weeks time, GroupM decided, in turn, somewhat shockingly, that Ian wasn't working out as the CEO and asked him to leave. His departure was sudden and without a succession plan in place.

Again, this left yet another vacuum - this time a much bigger one. Within a few months, we had gone from a management team of 4 (Ian, Liam, Rebecca and me) to only one. In the past 5-6 quarters, there had been multiple rounds of change in management and key staff in every market. The only function that had been relatively stable had been tech team. 

At this point, GroupM management made it clear that no decision on the next CEO had been made and anyone in the management team was free to apply. I was happy to apply. Firstly because I was, and am, a firm believer in the Vocanic brand and the offerings it could bring to the market; Secondly because I had been close to Ian and had the best perspective of what was needed to take things forward; Thirdly, at a personal level, it would have given me an opportunity to take on a new challenge at just the opportune moment I was wondering about next steps; and Last but not the least, I knew that there was a mutual comfort between me and the key stakeholders both in GroupM and in Vocanic. Hence I put up my hand.

I got no preferential treatment during the selection process - I was made aware that there were other candidates and the choice was going to be based on merit, not on association; I made it through the first round. Next I had to make a presentation on the strategy of Vocanic going forward. 

I had little intention on a business-as-usual approach, but rather one where we would focus on our strengths and cut out the offerings where we had no differentiation. Incidentally, the template of the presentation I had to submit clearly made me feel that GroupM was looking for a similar approach - they prompted that our competitors were CRM companies (Lithium and Salesforce were specifically mentioned) and how I would tackle them. I thought this was a good sign - looked like we might be thinking alike. So I submitted and later presented my plan.

So, after about 8-9 weeks of selection process, I was appointed to be CEO of Vocanic.

to be continued..

Friday, December 09, 2016

Demonetisation: Initial admirer to now skeptic

It has been a month since the Indian Government announce demonetisation. Over time I have emoted at extremes about this move - starting with immediate elation, defending the move among skeptics, to now being a critic of the move. This post is an attempt at documenting some of the thoughts.

Let's start by discussing the Government's motives. Among analyses, here seems to the list of benefits:

  1. Elimination of black money w.r.t:
    1. Untaxed wealth
    2. Reducing corruption
    3. Crime uses
  2. Getting a special dividend of about 2 Lakh Crore that could be used by Government to fund public initiatives
  3. Eliminating the cash in the hands of political opponents
  4. Defending the currency against counterfeiting by terrorists
Depending on whether you are a supporter or critic of the move, you may believe in one or a combination of the above factors to be the real reason behind the move. Personally, I feel it is a combination of 1 & 3 with 2 being a bonus. Modi has spoken about eliminating unaccounted wealth since the election campaign, and if that can be done together with eliminating the opponent's ability to compete, why not do both in the same shot? Getting a special dividend from RBI to pay for public initiatives is icing on the cake. 

Leaving aside the real motive, for us to truly support the move, we must believe that 1 & 2 has a key role in Government's true intentions. Let's assume that and move on.

Let's move then to the effects. While at one extreme, there is extreme shortage of cash in some segments, specially the rural ones, many segments of the economy has adjusted by using cashless transactions. Given India's natural size, and its generally inventive citizenry, their ability to react and adapt shouldn't come as a surprise to anyone. 

Without belittling the consequences to the poor and rural populace who are perhaps worst hit by the move, we need to consider the long time positive effect on the economy - would that long term benefits outweigh the immediate pain and suffering of the masses? 

My initial reaction to that was a resounding YES. Here is what I thought:
  • Some of those with unaccounted wealth will lose it altogether. Good riddance.
  • Those who hoarded that wealth in realty would ideally convert the entire value at market rate, pay a higher capital gains, but end up benefitting the economy overall by eliminating cash in realty transactions.
  • The move will instil a fear of establishment among the common trader in India and force them to think of moving towards better accounting of transactions and avoid a repeat of the uncertainty they went through this time around.
  • It will move the country towards a cashless society, which in itself reduces the scope for a lot of the evils that cash brings on its own. (India has substantially higher use of cash as a share of GDP than any other big economy, including the US, whose biggest export could be arguably USD currency)
However, with time, I want to go back on almost every single argument. Here are my rebuttals:

  • No one seems to have lost unaccounted wealth. Most of them held very little in cash, and those who did manage to launder it back. Sure, some of it will be lost, but not enough to either benefit the government in terms of taxes or to act as a punitive effect.
  • From what I hear, the realty argument was only in my head. No one else believes it. Everyone, even those involved in realty in a big way, are just waiting for enough cash to come back in circulation to go back to old ways. If those involved in realty think otherwise, then my singular arguments, however sensible it is, won't make much of a difference.
  • On fear of establishment, it might still work, but the general response is either one of admiration (by those who had nothing to lose) and anger (by those who were affected by it) - no one seems to have taken any moral lessons. 
  • On moving to cashless society, the reality at ground is absolutely counter. I am going to spend rest of the article talking about this.
India is not ready for a cashless society. We are very far from it, so far that it looks comical that we even attempted to move to one in 2016 without the fundamentals in place, if of course we believe that was one of the intentions.

Here are the broader reasons:
  • How would vast majority of the illiterate population interact with this cashless society? Who is thinking of them?
  • The cashless society is for the banked. Everyone else is left out. And Jan Dhan accounts are not yet a passport to participating into a true cashless society, at least not in 2016.
  • The process of KYC and setting up an account and coming up with a reason to do ReKYC every now and then, is just painful.
    KYC is such a overwhelming function that banks have permanent counters for KYC, something I don't recall in 1990s when I observed banking as a son of a banker, or something I don't see in Singapore at all. (Every single year, one financial institution or the other I deal with blocks my account and asks me to KYC and my details haven't changed one bit in the past decade or more.)
  • Indian credit cards need an PIN to function. Other country's cards don't need. What's the result? We will have tourists not being able to use cards that they can use everywhere else in the world - not progress in the right direction.
  • Public institutions, like Metro, Museums, Canteens etc still don't have facilities to accept cards. Given the push, wouldn't it be natural that at least public institutions deals with its retail customers they way Government wants its private businesses to deal with retail customers?
  • As much as people may believe in Modi, why would anyone want to volunteer to pay higher taxes to a system that hasn't proven itself to be very efficient in allocation of tax rupees over the years? How are we bridging that trust gap?
  • Lastly, Indian trade is conducted with the assumptions of the benefits of cash. i.e if there is a shop that can operate at 20% margin on cash with minimal tax outgo, they would need to charge roughly 12.5% on the goods to maintain the profitability (2.5% on merchant fees on the transactions and 10% as added revenue so that after paying for taxes, the trader gets to keep the same 20%) - I don't think the economy is ready for that step up. 
Put together, even if we were to believe that Government had the right intentions, we are nowhere close to having a smooth cashless society going, and we may be at least 5 years away from one. And 5 years is too long a transition period for a developing economy.

Administrative note

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