As the title suggests, its about how to avoid financial crisis. However, before you start getting any notions, would like to add here that we are not discussing complex economics, nor do we have any scientific model to predict a crisis.
It’s just that we came across a very compelling and yet a very simple idea on how to avoid Financial crisis and would therefore like to share the same with the readers. The idea has been borrowed from the bestselling author of “The Black Swan – The Impact of the Highly Improbable”, Nassim Nicholas Taleb. Must mention here, book should be read by one and all, especially those who believe they know everything or tend to over-generalize.
Well, the idea of preventing a financial crisis is very simple, “Nobody should be in a position to have the upside without sharing the downside, particularly when others may be harmed.” While this principle seems simple, the author mentions we have moved away from it in the finance world, particularly when it comes to financial organizations that have been deemed “too big to fail.”
Before you actually start realizing the importance of the above, we also recommend a documentary, ‘Inside Job’ (LINK). The same provides a comprehensive analysis of the global financial crisis of 2008, which at a cost of trillions of USD, caused millions of people to lose their jobs and homes in the worst recession since the Great Depression, and nearly resulted in a global financial collapse.
Add to that, the perpetrators, who brought about the financial crisis, emerged un-scathed with a few more millions in their bank accounts at tax payers expense: when the so called “conservative” bankers make profits, they get the benefits, when the banks get hurt, we pay the costs while ironically the banker still benefits.
Coming back to the point of avoiding financial crisis, instead of relying on thousands of meandering pages of regulation, the author suggests enforcing a basic principle of “skin in the game” when it comes to financial oversight: “The captain goes down with the ship; every captain and every ship.”
The above risk-management idea can be best understood from the rules formulated by the Babylonians, nearly 4000 years ago. Here it is:
“If a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death.”
The other variants of the above rule being, from the Roman heuristic that engineers spend time sleeping under the bridges they have built, to the maritime rule that the captain should be last to leave the ship when there is a risk of sinking.
The potency of the rule lies in the fact that people do not consciously wish to harm themselves. If they are held accountable, i.e. their own skin is involved in the game, they will act in their best interest and thus in the best interest of all the stakeholders.
Sadly enough, you and I may understand the idea, the Govt. officials, the Bankers, the Regulators do not or tend to turn a blind eye to the same. Its probably because the ones at the helm of the affairs are themselves the perpetrators.
Ekansh Mittal [firstname.lastname@example.org]
Update: Booked complete profit in Orient Paper & Industries Ltd (NSE Code – ORIENTPPR) with ~22% gain!!
This update is w.r.t. the Risk arbitrage opportunity (from Alpha plus portfolio) on Orient Paper & Industries Ltd (NSE Code: ORIENTPPR, BSE Code: 502420) initiated on 11th Jan’12 at Rs 50.50.
In case you participated in the same, this is to inform you that our members booked complete profit today (Monday, 26th Mar’12) in the price range of Rs 60-61. That’s a gain of ~21-23% in over two months (inclusive of Re 1.00/- per share dividend) against SENSEX return of 5.4% during the same period.
The report on the opportunity can be accessed (HERE)
Considering the volumes in the stock and the deliverable %, the stock can appreciate further. However, it seems like there’s some delay in HC approval and we therefore decided to close this arbitrage opportunity with ~22% gain.
Ph.: 0120-4109766, Mob: +91-9818866676
“Why I resigned from Goldman Sachs”….Greg Smith, Executive Director and Head of Equity Derivatives business at Goldman Sachs
Be it US or India, the story is same all over the world when it comes to dealing with clients at Brokerage houses, Trading (be it in equities, commodities, etc) advisory firms. As clearly mentioned by Greg Smith in his resignation letter, the corporate culture at such firms sidelines the interests of clients in their pursuit of quick money. The central point of discussion for analysts at such firms is: “How much did we make off the clients?” rather than for the client. It’s about who can rip off the client at a faster pace and search for a new muppet (“bakra” in hindi. Yes, that’s how the clients are referred to at such places)
I can thoroughly connect with resignation letter of Greg Smith, because early in my career I too decided to resign from a firm which earlier started as an ethical investment advisory firm and later veered towards the path of moral bankruptcy.
Read below (interesting bits highlighted with green)….An excerpt from Greg Smith’s resgination letter:
Today is my last day at Goldman Sachs. After almost 12 years at the firm, first as a summer intern while at Stanford, then in New York for 10 years and now in London, I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.
To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.
It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.
But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut out of the thousands who applied.
I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.
When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C Blankfein, and the president, Gary D Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.
Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than $1tn. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.
How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.
What are three quick ways to become a leader at Goldman?
- Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit.
- “Hunt Elephants.” In English: Get your clients some of whom are sophisticated, and some of whom aren’t to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them.
- Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.
Today, many of these leaders display a Goldman Sachs culture quotient of exactly 0%. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.
It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal email. Even after the SEC, Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.
It astounds me how little senior management gets a basic truth: if clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.
These days, the most common question I get from junior analysts about derivatives is: “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” ”ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.
When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there. My proudest moments in life getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics, have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me any more.
I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm or the trust of its clients for very much longer.
Like most investors, are you prone to bouts of irrationality when it comes to investing in stocks? If yes, then read below.
Charlie Munger was asked a few years ago to explain how he achieved his amazing success in the stock market. He thought for a second, and then replied simply: “I’m rational.”
Implicit in Munger’s reply is that other investors are prone to bouts of irrationality. A rational investor, such as Munger, has an edge if other investors make decisions that are subjective, impulsive or emotion-based.
To understand better what it takes to be such an investor, here are three core concepts that every rational investor understands and embraces. If you invest your capital in contravention to any one of these concepts, you are not a rational investor.
The decision-making process focuses on a comparison of price and value
Before making an investment decision, the rational investor requires answers to two simple questions: “What’s it cost?” and “What’s it worth?”
The first question is easy to answer. The second question is difficult to answer, sometimes exceedingly difficult. Regardless, a rational investor will not allocate capital unless both questions can be answered with a reasonable level of confidence.
In other asset classes, the nexus for decision-making always revolves around a comparison of price and an appraisal of value. For example, a rational person is not going to sell a house valued at Rs 25 Lakhs for Rs 10 Lakhs. This sort of irrationality does not happen with houses. But it happens every day in the stock market.
Many investors are, in effect, “blind investors” because they make buy and sell decisions without knowing value. You are a blind investor, for example, if you buy the stock of a company because you like its products, or because the company has impressive growth prospects. These are reasons to become interested in a company. But they are not sufficient reasons to buy the stock. The stock might be overvalued by 50 per cent or more. Without an understanding of both price and value, an investor cannot make an informed, rational investment decision.
A stark example that comes to my mind is Jubilant Foodworks. You may like Jubilant Foodworks for the fact that they run Domino’s Pizza chain in India and have impressive growth prospects, but then you cannot pay just about any price for the company.
The purpose of the stock market is to facilitate liquidity
Many investors misunderstand the purpose of the stock market and this leads to irrational decision-making. Its purpose is to provide a venue for buyers to acquire ownership in publicly traded businesses and for owners (investors as well as companies trying to raise capital) to sell those interests.
The market is amazingly efficient in this regard. There is always a ready bid and there is always a ready offer. It just takes a second or two to acquire or sell a part-ownership interest in a publicly traded business.
But that is as far as it goes. The market tells you price. The market does not tell you value. To ask the market to facilitate the trading of business ownership and, in addition, to value those businesses accurately is asking too much.
When investors see one of their stocks drop by 20 per cent, they get upset because they think they have lost money. But all that has happened, in reality, is that the current offer for their asset has declined by 20 per cent. The value may have not declined at all. It is entirely possible that it has increased.
The owner of a private business does not get upset if he gets a lousy offer for his business. Even if the private business owner actively solicits offers, he does not expect to get a full value offer each and every day. The rational owner of a business, whether it is a private business or a publicly traded business, knows that full value offers occur infrequently.
Price and risk generally move in tandem
All the B-schools will probably sue me for the above, as this is exactly opposite of what they teach in their curriculum.
Most investors misunderstand risk as it applies to the stock market. Most do not understand that, generally, as price declines, risk declines. If the price quote for a stock worth Rs 100 falls from Rs 80 to Rs 60, the risk of buying or owning that stock has declined in concert with the price.
When value exceeds price, risk declines when value subsequently increases and/or price decreases. And when value exceeds price, risk escalates when value subsequently decreases and/or price increases.
When irrational investors think about risk, they focus only on price. Price is everything to such investors. The fact that they are not carefully comparing price and value creates an analytical void. Emotions usually fill that void.
Higher prices create enthusiasm and an increased interest in buying. Falling prices cause worry, but there is a way for the irrational investor to alleviate the worry: They sell everything!
Ironically, irrational investors tend to worry most when they should be worrying the least – when value exceeds price by a wide margin. And they tend to worry least when they should worry the most: when value exceeds price by a narrow margin, or, worse, when prices exceed value.
Since the successful closure of Provogue arbitrage opportunity (only for Alpha Plus members), many members want us to suggest such opportunities at regular intervals.
We would like to re-iterate here that arbitrage/special situation opportunities occur at irregular intervals and are not typical trading tips. Also, we are not compulsive investors or traders.
Our objective is to earn good returns (by good returns we mean 25% plus annualized pre-tax return) with low risk and thus we will come out with an arbitrage/special situation opportunity only when we are confident of the above two.
The other concern that many members have is w.r.t. the number of arbitrage opportunities during their subscription.
As indicated on our website (refer the following Link – Alpha Plus Portfolio), we expect on an average 6 Risk arbitrage/Special situation opportunities in a year. In case one gets less than 6* arbitrage opportunities during his/her subscription of 12 months, the subscription will be extended.
I hope the above allays your concerns.
Before signing out, I would request you to not to undermine the importance of long term investment in stocks of good companies. Investment in stocks of good businesses constitutes 60-70% of our portfolios at any point of time and it is in these investments the magic of compounding works.
Ekansh Mittal [email@example.com]
* – Arbitrage opportunities such as recently suggested IVRCL and IVRCL A&H merger (suitable only for members with a portfolio of 40-50 lakhs and above) not included in 6, as only about 30% of our Alpha plus members can participate in such opportunities.
However, we must mention here that such opportunities are really good for members with above mentioned capital as liquid funds or bank FDs offer ~9% pre-tax on annualized basis.
Are you by any chance bullish on Trent Ltd? If yes, then earn extra 5-7% by buying (CCCPS) Series – B shares of Trent
In case you are bullish on Trent Ltd, a retail operations company from the house of Tata’s that owns and manages lifestyle chain Westside, Star Bazaar, a hypermarket chain, Landmark, a books and music chain, etc. and contemplating buying the stocks of Trent, then you can earn 5-7% extra return by buying (CCCPS) – Series B shares of Trent Ltd (BSE Code – 710052).
In case you are not aware, CCCPS stands for Cumulative Compulsorily Convertible Preference Shares.
- Cumulative – The above being 0.1% CCCPS, the dividend payment is cumulative and at the end of the period (date of allottment to date of conversion)
- Compulsorily Convertible – As the words suggest, the above preference shares are compulsorily convertible into equity shares
When and how did these CCCPS came into existence
Trent Ltd had allotted 44,51,414 Cumulative Compulsorily Convertible Preference Shares (CCPS) Series-A and 44,51,414 CCPS Series-B of Rs. 10/- each for Rs. 550/- per share to the existing shareholders on a rights basis (2 CCPS – A and 2 CCPS – B for every 9 shares) on August 28, 2010.
As per the Letter of Offer, One CCPS Series-A was compulsorily and automatically convertible into one fully paid-up Equity Share of Rs. 10/- each on September 01, 2011, while one CCPS Series-B is compulsorily and automatically convertible into one fully paid-up equity share of Trent Ltd on 1st Sep’12.
So, as of today, all the 44,51,414 CCPS Series-A stand converted into equity shares while CCPS-Series B will be converted on 1st Sep’12
How can you earn extra return?
As per the closing prices on 6th Mar’12, the CCPS Series-B shares of Trent Ltd are available at Rs 850-855 per share against the closing price of Rs 910 for equity shares of Trent Ltd, thus a gap of 6.5-7%.
However, in case you buy CCPS Series-B shares, you will miss out on annual dividend of Rs 7.5-8 announced during Jul-Aug of any calendar year on the equity shares of Trent Ltd, thus reducing the gap from 6.5-7% to around 5.5-5.8%
We were looking for an arbitrage opportunity, but couldn’t get one!!
Well, its not that we are bullish on Trent, we were rather carrying out research on listed Preference shares of different companies. Had Trent been listed in Futures and Options, we would have considered the arbitrage opportunity during Jun-Jul’12 (had the spread been 5-6%).
Since Trent is not listed on F&O, this post is dedicated to all the shareholders and those considering buying the shares of Trent Ltd in near future.
Besides the above, we are also tracking few other listed Preference shares such as Network 18 – 5% Preference shares, Pennar Industries etc.
We will be covering them soon, through a detailed post.
Ekansh Mittal [firstname.lastname@example.org]
Dear Alpha Plus members,
This is w.r.t. arbitrage opportunity on Provogue India Ltd shared with you on 3rd Jan’12.
We hope you are holding with 7% allocation at an average of Rs 23.50/- (3-4% allocation at Rs 20-21 based on our report dated 3rd Jan’12 and further 3-4% allocation at Rs 26-27, post High court approval)
For detailed report, refer the following link – Download report
The Board of Directors of Provogue India have fixed 9th Mar’12 as the record date (7th Mar’12 being the ex-date) for the purpose of determining the shareholders of Provogue India who will be entitled for:
- The shares of Prozone Capital Shopping Centres Limited in share exchange ratio of 1:1, i.e. shareholders holding 1 share of Provogue India (till the ex-date) will be entitled for 1 share of Prozone Capital Shopping Centre.
Profit booking strategy
In this case, we would have preferred selling 70% of holding before the ex-date (7th Mar’12) and the remaining 30% on 7th Mar’12 and thus retain the entitlement for the shares of Prozone Capital in the ratio of 1:1 (for the shares of Provgue that would have been sold on 7th Mar’12).
However as per the company announcement on NSE, the trading in equity shares of Provogue shall be suspended w.e.f. 7th Mar’12 on account of scheme of arrangement (basically capital reduction).
We confirmed from the Company Secretary of Provogue and as per him it may take 7-10 days for the resumption of trading in the shares of Provogue.
Now, 7-10 days is a big gap and thus involves Market risk. In case the market corrects sharply over the next 7-10 days, the re-listing of Provogue may happen at much lower price.
We would therefore recommend booking complete profits before the ex-date, i.e sell 100% holding in Provogue by 5th Mar’12 and enjoy 40-45% return in just a matter of 2 months.
Please feel free to drop a mail or call us in case of any queries.
Ph.: 0120-4109766, Mob: +91-9818866676