Book Review: Fooled by Randomness

Every body wants to be succesful in his/her life. But what are the reasons that some of us more succesful then our counterparts? Is it really down to skill, knowledge and stratergy or some thing altogether unpredictable? Black Swan the name give by the author Nassim Nicholas Taleb. After reading Black Swan I found fooled my randomness is also worth a read for the people who are associated with markets.

The book will definately challange the way you think about business and the world.More precisely its the factor called luck, how we percieve luck in our personal and proffesional experiences. Its more obvious in the markets we hear an enterpreneur has ‘vision’ or a trader is ‘talented’. but all too often thier performances is down to chance rather than skill, its becoz we fail to understand probability that we continue to believe events are non-random, finding reasons where none exits.

As a trader I loved the way the chapers are constructed in the book.

REFORMING THE COMMODITIES MARKET IN INDIA

The newly elected government seems to be going in the right direction. Indicating that this is the most literate cabinet India ever have. Last year Mr Chiddambaram proposed a CTT on all commodities contract, that could have been disaster for the commodities market if the same has been introduced. The exchange traded commodity market is still in its juvenile stage .

Commodities market in India need to develop a lot comparing to the other markets of the world. Current FM has shown indications that he will not introduce the CTT in the budget, this will cherish all the commodities traders and encourage the investors to focus on the commodities too as a investment destination.

Even the most developed country of the world have not imposed commodity tax.

Man who saved India from the Global Crisis..

Nassimm Nicolas taleb described the current global crisis worst then the 1930 recession. This is because of the financial system and economies are co related.

But India is in better state considering the world economy.Thanks to the vision of former RBI governor Y.V. Reddy conservative policies. He never allowed the Indian banks to write any securitization and turning them to toxic derivatives, that’s why of the whole trillion dollar exotic products India’s exposure is only 50 crores.  Mr Reddy predicted the real estate bubble in India and tightened the policy rates on continues basis.

Although he created a lot of critics for him self because of his conservative policy but if he didn’t acted on time the situation could have been worse.
After completing his tenure at RBI he has never seen in the media nor at his home town because he has been delivering lectures how to come out of this crisis at World bank, Banking Institutes and to many global financial systems.
In one of the interview prof Joshep Stiglz said that the only way US could have been saved from the subprime crisis if YV Reddy was handling US Fed reserve ins ted of Alan’s Greenspan.

Thanks to the vision of YV Reddy man who saved Indian financial system from entring in to the global fiasco.

ARE THE BULLS REALLY BACK

The decoupling theory which was introduced by some one before the sub-prime crisis in 2008 was went for the toss, when the Indian economy also suffered by the global recession. Now the Indian markets are ending in green from the last week and showing consistency but the European and the US stock markets are not showing such a great chance of revival.Is the decoupling theory persisting ? or the common views of analysts saying that its a election rally in the Indian market.

Global events are directly linked to the economy each and every major news do discount the market today or tomorrow. Be it the G20 sub mitt or the major chapter 11 bankruptcy filing by the MNCs. The Indian markets are up and when a finance guy want to know why they are up no body has the answer for the rally. Analyst has given a name to it saying its a election rally. Being in the market I always have a appetite to know the reason behind rise and fall of the market.

My friends are ringing me up and asking me Is it the correct time to enter in to the market ? I told them there is no correct and no wrong time to enter in to the market , its the script which you are buying has more importance rather then going gungho about the market. I still believe that the Indian capital market are very much in efficient they could be moved up and down by cartelisation. In the end Its the retail individual who is the sufferer . I don’t know where will be market after the elections or in the coming 1 year. I only remember one thing said my professor that to enter in to the market the loss born by you is the fees charged by the market . In market no body lose money neither the other one gain, Its only the transfer of wealth from one individual to another.

THE TALE OF TWO CENTRAL BANKERS

Economy always passes in different phases could be classified as the boom phase, the downside or the burst  phase . Central bankers are the key players in the economy with limited power in their hand.

Alans Greenspan and YV Reddy are credited with far greater power then they ever had and with responsibility for outcomes largely beyond their control. Central bankers actually have  very limited tools and hence limited powers.

Reddy in India understood the risk of bubble better than Greenspan .In the era of Greenspan the major collapse where the tech bubble, Long term Capital Management. and now the biggest ever financial crisis of all times. His successor Ben Bernanke along with US treasury Tim Giothner rebuilding by pooling finances in the US economy .

Reddy made several efforts to squash the bubble in the year 2004-2007 by raising the repo rate from 6% to 9%  which stopped banks from lending for urban purchase and increased the risk weightage to real estate.

Comparing the two economy US investor could buy $100 worth of shares with only $33. The Sensex gained 700% for the period 2003-08 and US housing prices rose 55%.

Mr Reddy deserved all praised for calibrated opening up rather then resisting to liberalization. Even after bubble recognisation central bank can’t do much.

BRISK OUTLOOK

Well India’s rating has been downgraded by S&P from stable BBB to -BBB, making situation more worse for the economy. Several measures on the fiscal side has been announced by the government reducing the excise duty by 2% and service tax by 2%. Concerns have been raised that the domestic firms will face problems while raising the money from abroad with the downgrading but I feel the affect will be negligible or 50/50. because looking at the current situation across the glob its equally difficult to raise the money from abroad because money has become a scarce commodity in the world. Several stimulus packages have been announced by the various governments bailing out the sectors.The situation has been conflagration from financial sector to the manufacturering sector which is said to be the growth engine for the economy.Lay offs and stocks lying in the go-down are common seen every where. Its time to better watch the things and then react because every day is a event day for economies.

ALL SET FOR LIMITED LIABILITY PARTNERSHIP

Finaly the revolution in the Indian partnership has come and from April 1st 2009, the partnership undergo a huge transformission and the liability of the partnership will be limited to the shares they hold in the firm.

Limited Liability Partnerships (LLP), is the format that will allow professionals, traders and even producers of goods to conduct their business without worrying about losing their personal assets due to lapses of other partners. 

An LLP would be taxed for its income while the income of individual partners would be tax free; a benefit that is not available to companies. Companies pay tax on their profits and again pay dividend distribution tax when they distribute profits among shareholders. The LLP format protects partners from double taxation. 

NEW FDI NORMS? ARE THEY IN FAVOUR OF INDIA

The Indian corporate is facing a severe liquidity crisis – evidences of which are well known as pledging of shares for the loan. The central government has eased the norms of FDI and it could go up to maximum 99.5% in most of the sectors. Some see it as an election pro move and critics have there opinion that the government has opened the can of worms.

The cap has been kept at 99.5% because 100% subsidiaries of foreign companies forego tax benefits of combined FDI and FII investments.

According to the Department of industrial policy and production (DIPP) any company will be projected Indian owned if the foreign company has less than 50% beneficial ownership in the company.

For example RANAJN PVT LTD, registered in India as an Indian company where a foreign company holds 49% stake and its Indian partner hold 51%. Ranjan pvt ltd investment in any sector will be considered Indian Investment, regardless of whether the sector is one in which FDI has been capped like telecom.

Well there have been certain issues like beneficial ownership has been brought in to the notice?  It’s expected that DIPP will give clearance on Monday over it. There are some more issues which are not cleared it seems the decision has been taken more in a half hazard manner. For the time being don’t eat your head wait to see some clarifications on Monday.

SEBI ON THE AWARENESS SIDE FOR PLEDGING

With the debacle of Satyam Chairman SEBI had made useful amendments in the month of January. SEBI has provided for disclousre norms when the promoters of the listed company pledged there shares. The amendments mandates that the promoter should disclose to the company the details of the pledged shares.

The Disclosure shall be made to the stock exchange in any quarter if the total no. of shares pledged by the promoters exceeding 25000 shares or 1% of the company which ever is lower.

Steps taken by SEBI are commendable but these are some of the dark areas which could have been considered:

1.       The amendments do not made compulsory in the event of indirect pledging of shares of the listed company promoters.

2.       The mandated disclosure for share pledging are restricted to the promoters, it could be extended to others also.

3.        Negative pledging situation has been covered or not yet to be disclosed.

4.       The time frame of 14 days is longer than the time frame mandated for other disclosure under the take over.

 

SEBI did a commendable job with the disclosures after the Satyam Saga we hope to see SEBI being the one of the world’s best regulator in the future.

 

INFECTIOUS GREED

I am back on my blog after a long gap of 24 days . In fact I was very much in the Mumbai but some how couldn’t able to contiue with the writing . Well Infectious greed in a great book to read, the author of the book is Frank Partnoy who has also written FIASCO : Blood in the water on Wall Street.

Infectious greed consists of grear literature on the financial engennering, financial innovation focused on structural finance and ofcourse the misuse of the derivatives over the time by the street smart bankers. The Book insist on how the Financial market was polluted by the various exotic instruments, which where introduced with the hope of making market efficient. The concept of efficient market was also challenged in the 1990’s and even in the previous market disasters.

The Book is a great read focusing on the traders like Andy Krieger, legends like John Meriwether and Paul Mozer Krieger, high profile collpases such as Barings bank (Nick Leeson) and LTCM Long term Capital Management . The book documents how each level of financial risk, loss of control and complexity obscured the sickness of companies in question and pushed individuals to ever more ingenious deceptions.

Mr Partony did offers a clear vision of how the financial market reached at epidemic stage and how the control could be regained before furher damge is done. Unfortunately the book was published before the SUBPRIME MESS which has changed the whole scenario of the financial market and the risk management control of the financial institutions.