Harvard MBA Index

Recently was reading about an index designed by a Harvard Business School alumnus which gives a "Sell", "Buy" or "Neutral" signal on the financial market. Its called the Harvard MBA Index!!

To think of it its quite rational. It basically measures the percentage of people who take up jobs in market sensitive positions in the financial sector. These include investment banking, investment management, private equity, venture capital and hedge funds. Interestingly if the percentage exceeds 30, then its a sell signal and anything below 10 is a long term buy signal!!

Surprisingly in 2008, a record 41% of the passouts went for the so called "market sensitive" jobs and we know what followed thereafter in 2008 and 2009. In 2009, accordingly around 28% went to these jobs and in 2010 the figure stands at 31%. So to think of it from 2008 onwards right through 2009 and 2010 we have been mostly in the SELL TO NEUTRAL PHASE of the market. But financial market data shows otherwise. Year 2010 saw a sharp recovery in the global indices from the Abyss of 2008 and 2009.

Currently as things stand, the jobs data shows increased traction in the financial services "market sensitive" jobs. So probably we would see a much higher percentage of Harvard MBAs taking up these "dangerous" jobs.... hope its not the beginning of the next fall. Though am quite convinced that just like too many cooks spoil the broth, so does too much analysis of any given data destroy the significance of the data point!!

Beyond the Big Bang - Evolution of the Universe

Man is an eternal seeker of answers to his different questions. But there has been one question to which have not been able to find any answer. Have been reading since childhood that Big Bang theory was the answer to the eternal question – how the universe came into existence. A google search also pops up these results. Almost every other search result gives you the big bang somewhere in its explanation. Thanks to some human geniuses like Prof. Stephen Hawkings who have proposed the big bang theory and evolution of time and energy.

But I guess one question which most scientific section don’t discuss because they have no answer to it or probably don’t know how to get logic right for it is this – What happened before the big bang?

All current theories suggest that before the big bang happened, the mass of matter of infinite density came from nowhere. How can we rest on such a lame answer to arrive at the origins of our existence? My curiosity is a very basic one – from where did matter arise. We know that there was a dense mass of matter and the forces where so intense that it exploded and the universe came into being. But then where did the matter come from which made this dense mass. What’s the source of carbon, oxygen, hydrogen, nitrogen etc. These and the other elements of the Mendeleev’s Periodic table (remember your high school chemistry) are composed of different configurations of protons, electrons, neutrons, positrons, etc. But then there is no explanation from where these atomic and subatomic particles have come into being.

Life on earth took billions of years to come into its present form. Starting from microbes and then trees and then advanced creatures like humans and other mammals, we have come a long way. Is there ultimate goal towards which all this evolution is happening. One natural calamity shifts the earth’s plates and axis by a few degrees. Are all these changes part of a larger evolvement of the Universe towards some goal. Considering the expanse of the universe, it is very much likely that we are not the only living creatures in the universe. All creatures need not be human like and breathing oxygen. Maybe we are an exception to all other creatures in this universe. No one has any concrete answers to these questions and at the best we try to provide some logical and hypothetical explanation.

Another question which can’t escape the mind – WHAT IS SPACE? Space as we know it means vacuum and occurs where there is nothing. But how can there be some boundaries of space if there is nothing? The entire universe with its galaxies and particles are held within the space through gravitational forces. Then how can we say space is vacuum? There are invisible forces present within the space.

All these questions drives the mind to some crazy answers. Are we some part of someone’s laboratory experiments? Could it be that there are really heavenly creatures like God and the universe is just a small part of their playfield?

Money Lessons of a Lost Decade

Read this interesting piece written by Brett Arends and I believe its a must read for all....

What are the biggest investing lessons of the past decade? It's been a tough and turbulent ten years, but if we begin the next decade wiser as well as older then maybe it won't all have passed in vain.

For me, these are some of the main takeaways, lessons and reminders of the past few years.

The price something used to be is irrelevant. Just because a stock traded for $100 six months ago doesn't mean it's cheap at $50, or $20, or even $1.50 today. Think of technology stocks from 2000-02, bank stocks from 2007-09, and so on. The same is true, with some extra zeroes, for Miami real estate. Psychologists call this "anchoring" -- we let previous prices influence our views of current value. It's a menace, possibly the biggest peril facing private investors. (The corollary is that market bubbles give you plenty of time to get out when they start to deflate, but too many people hang around because they believe that things can't get any cheaper.)

Have a portfolio that doesn't keep you awake at night. For real people with real lives, investments that let you sleep at night are far more valuable than exciting speculations that offer "pin action" and "momentum". We've just seen why. If we really understand and trust an investment, we're more likely to hang on to it or even buy more, in a crash. This is a much-overlooked advantage to investing in companies like, say, Diageo (Guinness beer, Smirnoff vodka) or Kraft Foods (Kool-Aid, Jell-O) or ExxonMobil. If you owned them in 2000 and 2006, you were less likely to dump them when things got tough down the line. That's one reason I'm still wary of buying financial stocks in any environment, even if they are cheap.

Beware the phrase "relative value." It's the financial equivalent of "half pregnant"—pure nonsense. Value is value: It's absolute. An investment is inexpensive in relation to its future cashflows, or it isn't. But in every boom, many people are suckered into paying way too much for an asset on the basis that it's cheap relative to other (even more overpriced) assets.

Have the courage of your convictions. Today's investing geniuses started the decade looking like idiots, because they held old-fashioned value stocks, emerging markets, gold and commodities. These investments slumped for years while the likes of Cisco and AOL made countless paper millionaires. You can look wrong for a long time before you look right. It was ten years ago this winter that some of those value stocks hit rock bottom: solid blue chip companies were boasting 10% dividend yields, but hardly anyone wanted them. The brave made a fortune.

There is no substitute for saving. Sounds obvious, yet for most of this decade the U.S. savings rate has been on the floor. Hard to believe today, but earlier this decade some commentators argued that Americans didn't really need to save more because they were making so much money on their stocks and homes. Saving money is like losing weight. There are no reliable shortcuts. Whatever you make, spend less.

Never confuse a trade with an investment. If you want to speculate on the next bubble, it's up to you. Although risky, bubbles yield the easiest and biggest profits. Just remember it's a trade, a short-term holding, not an investment, which you should expect to hold for years. Just be sure to get out in time. Earlier this decade, too many people decided to call their tech stocks long-term investments once they started tanking, in effect turning a short-term loss into a long-term disaster. (Oh, and a corollary: Never be afraid to take a loss on your trades. The willingness to take a 20% loss may save you a 100% loss).

Daily headlines are less important than long-term trends. The investors I know who made a lot of money this dismal decade usually did so by understanding long-term trends--the effect of Chinese economic growth, supply and demand in the gold market, or burgeoning U.S. debt. Yet most private investors aren't interested in these long-term stories. They want to hear about short-term news -- quarterly earnings, takeover talk, market "action" and so on. What do you think investors paid more attention to back in 2001 -- Cisco's latest update on industry conditions, or the gold price? In retrospect, which turned out to be more interesting?

You can't time the market perfectly, but you can usually value it accurately. Investing more when assets are cheap, and less when they are expensive, is both doable and profitable. If you are patient and use dollar-cost averaging to smooth your way in, you will generally make good money over time. The finance industry repeats the self-serving mantra "you can't time the market" to keep you fully invested all the time. That's true in the narrowest sense that you usually can't pick the perfect moment when things will turn. But you don't have to.

Take expert forecasts with a grain of salt. In February 2008, fewer than half the economists surveyed by the National Association of Business Economics said they expected a U.S. recession that year; those who did expect a downturn predicted its effects would be "relatively muted." What is remarkable is not merely that the actual recession proved the worst since World War II, but that by the time of this survey the economy was already in recession (according to later reports). The opinions of stock analysts can be similarly fallible, especially when most analysts seem to agree. A case in point: At the peak of the housing bubble, when home-building stocks were at crazy valuations, most construction industry analysts were bullish.

You have to stay in the game. One danger from the last ten years is that people will walk away from investing altogether and instead keep their money in the bank. It's a terrible idea. Cash is a very poor long-term home for your money. After taxes and inflation you'll be lucky to come out ahead. Inflation remains the quiet menace that investors too often underestimate. This has been a "low inflation" decade, when the consumer price index has only risen by a pretty modest 2.6 percent a year. But even at that rate, the purchasing power of a dollar has still fallen by about a quarter since 1999.

Never confuse the unlikely with the impossible. Ten years ago it seemed unlikely that Enron and WorldCom (and Bernie Madoff) were giant frauds, or that oil, recently $10 a barrel, would rise to $140, or that gold would skyrocket above $1,000 an ounce, or that stocks in boring "old" Europe would outperform Wall Street. Even five years ago few imagined real estate would crash nationwide, or that Bear Stearns and Lehman Brothers would collapse, or Fannie Mae, Bank of America and AIG would all need a rescue. Yet all came to pass. It's a fair bet that some of the things that happen over the next ten years seem just as implausible today.

Avatar – Beyond your imagination

You must be wondering what a movie review has got to do on a finance blog. But when US$ 250 mn goes into the making of the movie, it deserves its mention rightfully here.

Before going for the movie, I had read a few reviews about it wherein the critics had said “there are no words to describe AVATAR”. Now having seen the movie, I find myself in the place of those critics, at a lose of words to describe the most memorable cinematographic experience of our lifetimes.

Avatar has changed the meaning of Pandora for ever, at least for me. It takes your imagination to a completely new level and it wipes out the memories of any science-fiction you have ever seen or imagined. It seems James Cameroon is showing you a world that every child in us would want to be in; a world where there is purity and love for every form of life, where there are glowing grasses and flowers and birds brighter than the colours of rainbow and to beat it all mountains which float in the air!!! The feeling is so beautiful that it makes you cry for the love of it and makes you want to stretch your hand and heart out to touch it, feel it and embrace it! It is a dream that you might have dreamt to be a part of, and induces in you a slight envy for the one who are living it.

Avatar is the first movie wherein humans invade another planet, while since childhood we have been fed on movies of aliens attacking planet earth and to be more precise attacking America. The movie highlights the selfishness which has grown among our race and the extent to which we can go to make money and fame. Moreover the humans are striving to extract a material from Pandora which they themselves call Unobtamium!! Thankfully there are some good people among us who given an opportunity would want to permanently reside in Pandora and give up planet Earth sans the artificial luxuries which they would get on Earth.

I hope no Indian director attempts a remake of Avatar as I do not wish to see a modern day or futuristic Ramayana. Its not that I doubt their movie making capabilities, but am quite convinced about their failure at science fictions. To wrap it up, must say this is one movie which would linger on your minds for a long time and would obviously be your benchmark for any science fiction 3D movie in future. I really hate calling Avatar a science fiction as it seems more real than our real world. What is also interesting is that Cameroon is not looking to make big money from the movie. As he says he would be more than happy even if the movie breaks even as his dream of 15 years has been fulfilled through AVATAR.

Insurance and investment awareness

Insurance has different connotations for different people. For a financial sales person it means insurance premium targets to be met, for a family man, its a sense of security for his family and for some others it might be one of the options of saving on tax without much consideration for the real purpose of insurance as they do not see the need for it.

However it think it is important for everyone to understand that the real purpose of insurance is to provide for uncertainties and unexpected negative outcomes. The risk appetite differs from individual to individual and accordingly financial consultants recommend different classes of assets with different riskiness. Ones investment in insurance should also reflect one's risk appetite. At the forefront i would like to highlight that there should be a clear cut distinction between investment and insurance. ULIP is one product which was the baby of the financial industry and offered the investors a mix of both worlds - investment and insurance. Infact many ad taglines highlighted this issue - "investment bhi, insurance bhi, dono saat saat".

What a layman fails to understand is that he is falling short on both fronts, investment and insurance. The ULIP offers very low insurance coverage and also a significant proportion of the money put in goes as expenses in the first three years of the coverage, thus reducing the investment value as well. Infact the ineffectiveness of ULIPs can be felt in bearish markets when you realise that the insurance coverage on the ULIP is very low and would not be sufficient to meet the needs of your family in your absence and the NAV has also fallen sharply so your portfolio investment value has also eroded. I would say ULIPs are more suited for bullish markets but that too are better investment vehicles rather than insurance.

Always buy one pure term plan for your insurance needs and have investments in mutual funds if you cannot manage your equity portfolio yourself. Infact i would say ETFs (Exchange Traded Funds) clearly stand out as a better option to mutual funds also. It has been observed over a large sample size over 15-20 years time period that very few mutual funds could actually outperform the benchmark indices. ETFs provide you returns which are in line with index return and have very low margin of error. There is no entry and exit load and you only pay the brokerage like any other equity transaction, which is minimal. Doing an SIP into ETFs is a wise idea and you do not need fund managers to manage your money.

Now coming back to insurance, realise that have an insurance for every liability and every asset. Insure your assets like home, car, life, etc. Also insure your liabilities like home loans and other loans. But then also avoid over-insurance as then you might just end up paying premiums which could be avoided. Understand your risk taking capacity and your assets and liabilities and act accordingly. If in doubt contact your financial advisors, but don't take any product they push without understanding its implications....

Is China the next Dubai

To question China's relentless and inevitable rise to the top of the world's economic pyramid today is to invite ridicule. Investors like Jim Rogers have long thought that China is the only worthy investment story on Planet Earth. Anthony Bolton, the United Kingdom's answer to Peter Lynch, recently threw his hat in the ring, emerging from retirement and moving to Hong Kong to start a China fund. Other China bulls have predicted that the Chinese stock market could overtake the United States in terms of market capitalization within three years.

This is heady stuff for a country that didn't even merit its own chapter in the World Bank's "The East Asian Miracle: Economic Growth and Public Policy," published only 15 years ago. Back then, it was all about Japan and the Asian Tigers -- Taiwan, Singapore, Hong Kong, and South Korea. Even today, China is a story of remarkable contrasts. Yes, it boasts currency reserves of $2.3 trillion, making it, by that measure, the richest country in the world. But China also is a country where 200 million people live on less than $5 a day. Understanding that China's rise won't happen without some serious bumps along the road is the key to making -- and keeping -- money from the "China Miracle." Is China the Next Dubai: Lessons from the Tiny Emirate Superficially, Dubai's rapid development from speck of dust in the desert to mirage made real is not that different from China. Cheap financing combined with world-class aspirations fueled Dubai's property boom that included the world's tallest building, the Burj Dubai. Dubai property prices doubled between 2005 and 2008, as commercial and residential real estate in the middle of the endless desert became as expensive as cramped quarters in New York and London. The emirate's rulers even targeted a China-beating annual GDP growth of 11% to 2015. Eighteen months later, the vacancy rate for Dubai office buildings is 40%, even as planned new construction is set to double the city's office space over the next two years. China bulls will dismiss uncomfortable comparisons with Dubai with a knowing chortle. After all, the population of China is a thousand times greater than the tiny emirate's. And Dubai's $50 billion GDP is less than the economic wealth that China has generated in the last three months. Yet, perhaps this is precisely the reason you should pay attention to the rising din of China critics. Even as the media falls all over itself to praise the remarkable efficacy of China's $585 billion stimulus package, "Bond King" Bill Gross of PIMCO made investors squirm when he observed that the all-knowing economic philosopher kings running the Chinese economic show may inflate... gasp!... a bubble of their own.

Is China the Next Dubai: The Sin of Over-investment? Much like little bubble brother Dubai, the problem in China is best summed up in a single word: "over-investment." Even as U.S. and global consumers are closing their wallets , China is building more steel, more factories, and more malls for which there is almost no demand. Much like in Dubai, many Chinese skyscrapers stand empty, even as whole new cities are being built where the vacancy rates are as high as 75%.

One blogger described one of Beijing's leading malls, "The Place," as "stunningly dysfunctional, catastrophic... with fifty percent of the eateries in the basement boarded up. There is simply too much stuff, too many stores and no buyers." Perhaps no project better illustrates China's dilemma than the spectacular, $450 million Bird's Nest Olympic stadium, designed to last for 100 years and withstand a magnitude-8 earthquake. Yet, the stadium now stands empty, with paint peeling ignominiously from its slick girders. "You build it and they will come" is a better Hollywood movie plot, than a sustainable development strategy. Scratch the surface behind China's impressive growth numbers, and they tell an unsettling story. Consider that 19 out of 20 dollars of China's GDP growth this year is from investment in fixed assets -- empty malls, ghost cities, and tens of thousands of bridges that lead to nowhere. China is investing at a pace like no other country in history.

Post-war Germany achieved a peak investment to GDP ratio of 27% in 1964; Japan's peaked at 36% in 1973, and South Korea's at 39% in 1991. The comparable number in China today is 50%-plus. Yet, not only are the Chinese building a lot of stuff they don't need, they also are getting a heck of a lot less bang for their buck. From 2000 to 2008, it required $1.5 in debt to produce $1 of GDP in China. Today, it takes $7 of credit to yield $1 of growth in GDP. No one has done that poorly since, well, the bad old days of the Soviet Union. Is China the Next Dubai: Enron Revisited? The knives are coming out to make money on China's collapse. Jim Chanos, founder of the investment firm Kynikos Associates and iconic short seller, has put the Chinese market in his sights. Chanos made his reputation -- and a good chunk of his fortune -- as one of the first Wall Street analysts to see that Enron's earnings were pure fiction. Chanos believes that much like Enron, inconsistencies in China's statistics -- like the surging numbers for car sales but flat statistics for gasoline consumption -- confirm that the Chinese are simply cooking their books. The Chinese even have a phrase for ripping off foreigners: "Neng pian, jiu pian" -- "If you can trick them, then trick them."

The bad news is that, if Chanos is right, the collapse of the Chinese economy will be 100 times worse for the global economy than the brief hiccup that was Dubai. If China's economy stops running hard, it will have profound effects on its ability to finance the exploding U.S. deficit. In Chanos' view, the slowdown in China may be as big of a watershed event for world markets as the subprime collapse was in the United States. Little wonder that he is betting the farm on shorting China's economy. For students of financial history, the coming collapse of China is as painfully obvious today as it will be to others with the benefit of 20/20 hindsight. That doesn't mean that China won't eventually emerge as a global economic power. After all, the rise of the United States from a tiny country of 2.2 million people in 1800 to the world's leading power a century later was punctuated by at least half a dozen financial manias followed by depressions.

But as the British economist John Maynard Keynes observed, "in the long run, we're all dead." If you have a shorter time horizon, batten down your investment hatches. The investment seas may get rough.

The Common Elements Of Success of a trader

In Van Tharp’s latest book “Super Trader,” he provides 10 common characteristics frequently found among the best of the best among the hundreds of traders he’s worked with throughout his career. Like me, I think you may find it of interest!
1. They all have a tested, positive expectancy system that’s proved to make money for the market type for which it was designed.
2. They all have systems that fit them and their beliefs. They understand that they make money with their systems because their systems fit them.
3. They totally understand the concepts they are trading and how those concepts generate low-risk ideas.
4. They all understand that when they get into a trade, they must have some idea of when they are wrong and will bail out.
5. They all evaluate the ratio of reward to risk in each trade they take. For mechanical traders, this is part of their system. For discretionary traders, this is part of their evaluation before they take the trade.
6. They all have a business plan to guide their trading. You must treat your trading like any other business.
7. They all use position sizing. They have clear objectives written out, something that most traders/investors do not have. They also understand that position sizing is the key to meeting those objectives and have worked out a position sizing algorithm to meet those objectives.
8. They all understand that performance is a function of personal psychology and spend a lot of time working on themselves. You must become an efficient rather than inefficient decision maker.
9. They take total responsibility for the results they get. They don’t blame someone else or something else. They don’t justify their results. They don’t feel guilty or ashamed about their results. They simply assume that they created them and that they can create better results by eliminating mistakes.
10. They understand that not following their system and business plan rules is a mistake.