Category: finance

Arranged Scissors 5 – Finding the Right Exchange

If you look at my IIMB grade card, one subject stands out. It is one of the two Cs that I have on the card, and the other was in a “dead rubber” (5th/6th term where grades didn’t matter for placements). This C was in introductory marketing management. Where the major compoenent was a group project called the application exercise (ap-ex). I frequently crib that I did badly in that project because four out of six people in my group did no work, or even negative work (and this is true). Digging deeper, however, I think the more fundamental issue was that the two of us who worked didn’t really know what we were doing. We failed to understand the concept of STP till a few years after the project was over.

STP is one of the most fundamental concepts in marketing. It stands for Segmentation, Targeting and Positioning. I quickly appreciated Positioning, but took a long time in trying to figure out the difference between segmentation and targeting. In my defence, they are highly inter-related concepts, and unless you look at it from the point of view of social sciences (where each unique point fetches you one mark in the board exam) it is not intuitive that they are separate concepts.

So you segment the “population” based on various axes. Taking these axes in conjunction, you end up “segmenting” the population into a large number of hypercubes. Then you do the “targeting”. Find the set of hypercubes that you want to sell your product to (in the context this post is about, sell yourself to). And so once you have found your “target segment” or set of “target segments” you “position yourself” and go out to sell. And then you need to figure out the “4 Ps” of marketing. Product (fixed here – it’s you). Price (irrelevant if you don’t plan to take dowry). Forgot one P. The other is Place (where you will sell).

The arranged marriage market can be broadly be divided into two – OTC and exchanges. OTC (over the counter) is the case where you have a mutual acquaintance setting you up with a counterparty. The only difference here between arranged and normal scissors is that in the arranged case, it is your parents who are set up with the counterparty’s parents rather you getting set up directly. Since it is a mutual acquaintance doing the setting up, the counterparty is at max two degrees away, and this makes the due diligence process a lot easier. Also, you have one interested third party who will keep nudging you and pushing hte process back and forth and generally catalyzing it. So people in general prefer it. Historically, there were no formal exchanges (apart from say a few “well known village elders”). Most transactions were OTC.

One problem in financial OTC markets is counterparty risk (which is what has prompted the US government to prop up AIG) but this is not a unique problem with OTC arranged marriage market – counterparty risk will always be there irrespective of the method in which the relationship was formed. Apart from providing counterparty protection, one important role that financial exchanges play is to improve liquidity in the market. The number of transactions that happen in the exchange ensure that the market is efficient and prices are fair. Liquidity is an important asset in the arranged marriage exchanges also.

The problem that I’m trying to describe in this post is about segmenting the exchanges based on their most popular commodity types. I don’t have reall live examples of this, but then for each product you will want to go to a different exchange. For example (this example may not be factually correct) both the Chicago Board of Trade (CBoT) and Chicago Mercantile Exchange (CME) trade in both corn futures and cattle futures. However, the volume of corn futures that are traded on CBoT is significantly larger than the volume of corn futures traded on the CME. And the volume of cattle futures traded on the CME might be siginicantly larger than the corresponding volume in CBoT.

So if you want to buy cattle futures, you are better off going to the CME rather than the CBoT since the former has significantly greater liquidity in this product, and thus you are assured of getting a “fairer” price. Similarly, to buy corn you should rather go to CBoT than CME. I suppose you get the drift. Now, the same is true with the arranged marriage market also. If you want to get listed on an exchange, you will need to make sure that you get listed on the right exchange – the exchange where you are most likely to find people belonging to your target segment.

To take an example, if you think you want a Tamil-speaking spouse, you are significantly better off listing on tamilmatrimony.com rather than listing on telugumatrimony.com, right? Of course this is just a simplistic example which I have presented because the segmentation and difference in markets is clear. Things in the real world are not so easy.

There are various kinds of marriage exchanges around. In fact, this has been a flourishing profession for a large number of years, and even the recent boom in louvvu marriages has done nothing to stem the flow of this market. You will have every swamiji in every mutt who will want to perform social service by opening a marriage exchange. Then, you have a few offline for-profit exchanges. Some of them work on a per-deal basis. Others charge you for listing, since it is tough for them to track the relationships that they’ve managed to create. Then, this is one business which has clearly survived the dotcom bust of 2001-02. The fact that this business is flourishing can be seen on the left sidebar of this page where I suppose a large number of them will be advertising. In fact, I encourage you to click through them since that will result in precious adsense revenue for me.

There is nothing wrong in carpet bombing, but that comes at a price. Notwithstanding the listing fees (which are usually nominal), you will have to deal with a significantly large number of “obviously misfit” CVs and bump them off. Especially if you live far away from the exchanges and have someone else broking for you, you don’t want to burden them too much, right? So the problem is in doing your segmentation and targeting. And then researching the exchanges to find which exchange has most liquidity for products belonging to both your segment as well as your target segment. And get listed on them ratehr than wasting precious time, energy and money listing on exchanges that are unlikely to be useful.

Since I began this (extremely long) post with marketing fundaes, I should complete it with some more (which is irrelevant to the rest of this post). A standard process for advertising is AIDA (Awareness-Interest-Desire-Action). Typically for a relationship to “happen”, you need a minimum of D from at least one of the parties, and a minimum of I from the other party. The normal arranged marriage process, however, assumes that an I-I is a sufficient condition for a sufficient lifelong relationship, and don’t give enough time and space for people to check if D is there. Hence the disasters. Hence the tilt towards the CMPs.

Arranged Scissors 1 – The Common Minimum Programme

Arranged Scissors 2

Arranged Scissors 3 – Due Diligence

Arranged Scissors 4 – Dear Cesare

Why is Ten Sports sitting on so many rights?

I wanted to stay up last night. I wanted to stay up and watch the WI-Eng match till the very end. Waking up this morning and checking the scorecard, it seems like it was a really good match. And Fidel Edwards seems to have become a last-day-shutdown specialist. This is the second time this series he’s hung on. And he’d done so once before against India at ARG.

There was another reason I wanted to stay up last night. I wanted to watch Liverpool play Real Madrid. I woke up this morning and saw that it was an amazing game, too. Looking through the Guardian Football site (btw, Advani seems to be advertising heavily on that site; it’s a pity he never advertises here on my site) I noticed that Chelski-Juve was also a strong game, despite the result. Another reason I would’ve wanted to stay up last night. For the record, I slept at 12:10. Tea-time in the Test match, and before either of the football games had started.

Ten Sports seems to have bitten off more than it can chew. It seems to own the rights to telecast too many different things. I think I have raised this point once earlier, but it pzzles me as to what Ten Sports is trying to achieve by getting rights to telecast so many things, most of which are happening at the same time. For example, over the last couple of weeks I’ve been unable to watch the first hour of WI-Eng even if I’d wanted to, because it was overlapping with the last hour of SA-Aus, which was being telecast at the same time.

The reason I slept off early last night was because I didn’t have the option to watch what I wanted. All the three games that I’d’ve been reasonably interested in were supposed to be on Ten Sports (Zee Sports doesn’t count since Tata Sky doesn’t offer that), and I  realized that I’d be forced to watch what the guys at the Taj Entertainment Network would want me to watch. Denied the option to choose what I wanted to watch, I went to bed.

It puzzles me that Ten Sports isn’t subletting its contracts. Devoid of anything decent to show, I suppose that ESPN or NEO would’ve only been too happy to acquire the rights to telecast last night’s Liv-Real game by paying a fee to Ten Sports. And it would’ve unlocked value at the hands of the remote-holder. Ten Sports need not let go of the rights to show all the games. All they need to do is to sell the “out of money options” – the rights to the game which they won’t be able to telecast anyway.

Now, the problem will be if accounting for all costs, no options are out of money. For example, you know you won’t be able to show Liv-Real. But you think that the loss of brand equity of your channel would exceed the money you’d gain by selling this option to another willing channel. The viewers are the only losers at this game, but I don’t know what can be done. After all, viewers  are way too dispersed in order for them to take any kind of action.

Extending this question, what can a sports body do to prevent a bidder from acquiring rights to telecast and then mess up the telecast (or not telecast it at all) ? After all, the sports body is out there to make as much money as possible from the TV rights, and they need to ensure significant investment into broadcasting by the broadcasters, so the “i’ll give rights to only those channels that are in the interest of the people” model won’t work.

One option would be to sell the rights to two channels in each market. But given that broadcast is a natural monopoly, the sports body will not be able to make as much by selling to two bidders as it can by selling to one bidder. Is there any other solution that you can think of? If yes, unleash.

Recession notes

Over the weekend I spoke to a few friends, over phone and GTalk. And enquired about their business. Some interesting insights:

  • On Saturday, I spoke to this guy who is a banker in the City of London. He says that one major fallout of the global economic crisis is that the financial markets have become highly inefficient.
  • Knowing that they won’t get bonuses, he says, bankers have no incentive to arbitrage these inefficiencies. Sadly, people refuse to believe that investment bankers perform socially useful and productive work
  • Yesterday, I was talking to this guy who runs a manufacturing SME. He says that apart from one really bad month (January) when orders fell over 50%, he is doing quite well.
  • Thanks to the downturn, a few manufacturing shops have shut down in various places in Europe. Now, the erstwhile customers of these erstwhile manufacturing shops are looking towards India for their sourcing. My friend is hopeful of bagging one such contract.
  • Thanks to the downturn, firms are integrating their manufacturing. For example, a prominent stationery manufacturer has decided to manufacture 100% of its products from its plants in India. My friend has been a long-term supplier to the india plant of this particular manufacturer, and now expects to get more business from them.

Interesting stuff overall.

50% Stake Sale

It’s finally happening. My mother has decided for good that I’m unable to manage all of myself, and hence I should divest 50% in myself. “The better half”, she says. She has been utterly disgusted due to my utter failure, and lack of effort, in conducting this divestiture by myself, and has now decided to take matters into her own hands.

Her second sister, along with her husband, has been appointed the lead investment banker for this deal. My mother’s eldest sister is going to be the chief scout in order to scout for possible counterparties to the deal. It is preferred, and desirable, that there be a single buyer for this entire 50%, and the current understanding is that if we are not able to tie up any good single investor, we will rather postpone the sale rather than going in for an IPO and selling the stake in bits and pieces to retail investors.

Thinking about it, I wonder if it is technically correct to call this a stake sale, since I don’t plan to take any dowry. Maybe if you take all costs into consideration, and not just the monetary ones, and if you assume payment to be a continuous thing rather than like a lumpsum (these  investment bankers, they can arrange just about anything), it won’t be inaccurate to call this process a stake sale.

Usually, in these circumstances, most of the work is done by the bankers, but it seems that in this case that I, as the person divesting the stake, will need to put in considerable effort. The effort that I was too lazy to put when I was supposed to be trying to do the deal myself, without any asssistance from any bankers. Actually this is something that a lot of companies that indulge in M&A transactions forget about.

Think about your own incentives and the banker’s incentive. For the banker, this is just a deal. All they are caring for is to find a buyer for your sale, and a seller for anyone who wishes to buy stake. Once the deal is through and the cheques and documents signed, they ask you to sign on a set of fairly heavy cheques, and walk away; job done. It is you, as the company who is selling the stake, who has to deal with the new investor for maybe the rest of your life – transaction costs in these kind of deals are high, and it is preferable it be done exactly once.

One thing I realize is that the effort required here is of a different nature to the one that you need to put when in the market without bankers’ support. In the latter case, you need to engage in an elaborate ritual of tiki–taka, slowly moving towards the goal, and then unleashing a shot at the right moment. It is a well-respected and common algorithm, and any attempts to side-step it, and use short-cuts, usually end in disasters.

In the banked world, though, one thing is clear – you are sitting in that conference room together in order to strike a long-term deal, and not for a random networking meeting. All parties in the conference room are aware that the reason they are all sitting there, together, is so that they can work out a long-term deal. And thus, explicitly mentioning the deal, and explicitly working towards it, are not frowned upon – like it sometimes is in the outside market. You don’t need an y tiki-taka here. Tiki-taka is also seen as a waste of time. You better follow a direct approach and just put the ball in the box and then have a striker shoot it.

And remember that in such brokered deals, there is usually no goalkeeper.

PS: I need photos of myself for the offer document. I realize that I dont’ have too many of those. I’m not too narcissistic in my photography exploits, and I dont’ bother to collect pics that others have taken of me, and hence the shortage. Last night, my mother looked through my facebook pictures and pronounced each of them as “useless”. So, if you have good pictures of me, plis to be sending me. If you dont know my email ID, just leave a comment here and I’ll give you my email ID.

IPL Structuring

I remember that this time, last year, I was eagerly looking forward to the IPL auctions. It also happened to be a time when I was actively looking out for a new job (i wasn’t going to find one till about six months later). And I was secretly hoping that one of the IPL franchises would employ me as a game theory and structuring consultant in order to help them out with the player auctions. While I tracked it online, I imagined myself sitting in the bidding room at the Trident, showing my excel sheet to the franchise owner and captain, and watch Preity Zinta enhance her Mata Amrita Index.

It was also a period of extreme NED, due to which i didn’t bother looking out actively to try consult for an IPL franchise. It was a period of low confidence, so I assumed I wasn’t good enough for this kind of work, and didnt’ bother doing anything in this direction. Frankly, I didn’t have a clue how to proceed, else i might have put SOME effort at least. A few months later, when the IPL was well underway, I figured out that one of my cousins is a big shot with Bangalore Royal Challengers, and he was among the people at the Trident who picked the Test XI to represent BRC. I wanted to kick myself, but for some reason I didn’t.

Currently, I’m comfortably employed, and so far have been happy with this job. Else I might have wanted to throw my hat into the ring. Once again, IPL team formation season is on. A few transfers have gone through already, and a few are currently in limbo. Bidding will happen next season for people who are joining the league this year. It promises to be an interesting time. And so far I’ve been deeply unhappy with the way the franchises are going about their business.

I’m especially upset with BRC, and have half a mind to call up my cousin who consults for them and give him a piece of my mind. How the hell could they let go of Zaheer Khan in exchage for Robin Uthappa? Yes, the latter is from Bangalore, and has that local pull factor. He has batted quite well this Ranji, though not anywhere close to what he played like 2 seasons back when he topped the batting charts. But he is supposed to be paid twice of what Zaheer was being paid! Is he really worth that much? I’m sure that BRC missed a trick here. I’m sure that had the BRC asked for a fee from Mumbai Indians in order to release Zaheer in exchange for Uthappa, the Indians would’ve definitely paid up. When Chelski can reportedly offer Anelka, Malouda, Alex and 15 million pounds in exchange for Robinho, Mumbai could definitely part with Uthappa and maybe a million dollars in exchange for Zaheer.

There were rumours of the Mumbai Indians negotiating a swap with Kings XI Punjab for a swap between Powar and Harbhajan, which reportedly got stalled because Harbhajan earns so much more than Powar. Once again, what if the Mumbai Indians paid a fee along with Harbhajan for Powar? I know it is ridiculous that Powar is worth Harbhajan plus a fee, but given their disparity in income, this is the only way that this deal is possible. And I’m sure that there is a particular fee, which if paid along with Harbhajan in exchange for Powar, will leave all the interested parties (Punjab, Mumbai, Harbhajan, Powar) better off. It seems like people are too lazy to find it.

The opportunities like this are endless. All that the franchises need is someone who has sufficient knowledge of game theory, coase theorem, a decent knowledge of cricket (interest in domestic cricket is a desirable quality) and who understands how to structure deals. I don’t know if franchises have already recruited such people but if they haven’t, they should try and recruit. The most obvious choice of person that I can think of who possesses all the above skills (including interest in domestic cricket) is me. Unlike last year, I’m not in the job market right now, but don’t mind doing some part-time stuff. I may not get paid, but I’m willing to work for a few IPL tickets and maybe invites to some parties with cricketers.

I’m also wondering if cricketers’ pay will go down starting the 2011 season onwards. The IPL auctions happened just before the downturn was to begin, and I’m sure that franchises have overpaid for most players. Since players have all signed three year contracts, their pay till the 2010 season is safe. Beyond that, I’m not sure if franchises will offer them fresh contracts at higher or equal salaries.

It would also be interesting to see if some version of the Bosman ruling is to operate in the IPL. We can only wait and see.

The Aftermath

Baada collaborated on the research leading up to his post. I hereby acknowledge his contribution and condemn his laziness for not blogging it himself.

One of the major problems of the financial crisis that has been happening for about two years now is that investment bankers, as a profession, stand discredited. Before this, they used to claim to be on the top of the intellectual ladder. And now, thanks to a handful (more than a handful; but still a small proportion) of phenomenally stupid investment bankers, the entire community stands discredited. Not just that, they have left the community of quants, of people who can be good at structuring, of finance people, of statisticians, all discredited. You say “all you need to do is to get a few ibankers into these jobs” and you’ll have people come at you like a pack of hounds, waving Mint and saying “look at the damage these buggers have caused, and you think they can solve this problem”.

So Baada and I were talking about cricket the other day. About how thanks to the demands of television, flat pitches are being prepared everywhere. Which is leading to tame and boring draws. Which has led to domestic cricket being effectively reduced to a one-innings game. Which has led to massive fourth innings run chases. Which has led to bowlers break down once every couple of seasons. And so forth.

The argument put forth in favour of flat pitches is that in order to maximise television revenues, you need the game to last five days. Excellent argument, and Baada and I agreed to it. But the friggin’ point is that if you have  a boring game, no one is going to watch it. If you have a game that is most likely to end up as a draw, it will have no audience. Advertisers would be paying through their nose for near-zilch viewership.

In the medium term, things should even out. Advertisers will realize that due to the boring nature of Test cricket, no one will watch it anyway, and will back away. Ad rates will fall. And TV rights bids will fall consequently. And the boards will understand their folly and take steps to make cricket interetsing again. (there is also the danger that boards will use this to say that no one watches Test cricket anymore and scraps it altogether). However, advertisers should not be so passive and wait for things to even out.

Given a large number of statistics, playing conditions, day of week seasonality and all such stuff, it shouldn’t be hard for the smart advertiser to figure out which are going to be his most profitable slots. And bid specifically for those. If one smart advertiser does that, then that advertiser stands to gain against other advertisers who will end up paying more money for less profitable slots. And so all advertisers will become smart. Now, the channels will stop seeing uniform demand patterns for their various advertising slots. They will now need to acquire smartness in order to combat the smart advertisers. This way, smartness will prevail in the system.

I’m sure that once something like this happens, natural balance will get restored. It will take much less time for TV channels to realize that three-day Tests on bowling pitches can get them greater revenues compared to runfests played over five days. And they won’t take much time to communicate the same to the boards who will then restore Test cricket back to glory.

The problem with a lot of advertising people is that they see themselves as “creative people” because of which they assume they don’t need to know and use maths. And they don’t do the smart calculations I described earlier. As for the brand managers, it is likely that a lot of them decided to pursue marketing because they either didn’t like quant or found themselves weak at quant. Apart from a few simple excel models, they too are likely to shun the kind of smartness required here.

So where are the white knights who can save the version of the gentleman’s game played in whites? Not currently in the ad agencies. Most likely not in the marketing departments. They are all out there. A few months ago, they were employed. Earning very good salaries, and grand bonuses. Earning amounts of money unaffordable to most advertising and marketing companies. Thanks to the financial meltdown, they are available now. Looking for a fresh challenge.

This is the best time for you to infuse quant to your business. You won’t get the kind of quant supply in the market that you are seeing now. Even if the financial industry doesn’t recover (in any case it will never go back to 2007 levels), supply side factors should ensure lower supply. Do that little experiment now. Acknowledge that numbers can do a lot of good for your business. Understand what structuring is all about, and estimate the kind of impact a good structurer can have on your revenues. Make that little bit effort and I’m sure you’ll get convinced. Go make that offer. An offer these ex-ibankers can’t refuse in the current circumstances at least.

PS: When I refer to investment banking, I also include the “outside-the-wall” side of the business (called “markets”; “sales and trading”; “securities” and various other names). In fact, I mostly talk about the outside-the-wall business, not having had any exposure inside the wall.

What rate of interest did Kubera charge?

It is fairly well established that Tirupati Venkataramana (it is Venkataramana and not Venkateshwara – remember that it is a Vaishnavite temple) took a loan from Kubera in order to finance his wedding to Padmavati. And till date, Venkatarmana has been soliciting contributions from visitors to his shrine in order to help him pay off this loan. Given that the loan was for the purpose of getting married, I think we can quickly establish that it was a Personal Loan. What I’m trying to figure out, however, is what rate of interst did Kubera charge Venkataramana.

For starters, I think somewhere in our scriptures, we can find out the amount that Venkataramana borrowed. Rupees didn’t exist in that era, but I’m sure we can find some figures in terms of gold, or other commodities. And we should be able to estimate the rupee value of this loan by suitable backward extrapolation.

What might be slightly tougher is the time period. When did Kubera exist? When did Venkataramana exist? When did he get married to Padmavati? The date is important, for we should know how many years to discount for when we do the IRR calculations. However, I’m sure that with sufficient effort, we should be able to find the date of this particular transaction to the nearest millenium.

Then, there are the loan repayments. Let us assume that Venkataramana is in general a poor man, and his repayments can be approximated to the amount of offerings he receives from visitors to his shrine. Catch a few people sitting for McKinsey interviews, and estimating this amount is also not going to be very tough. We should be able to get fairly accurate figures for the last few years, and then we should be able to appropriately extrapolate backwards accounting for various regime changes (I’m assuming here that the temple, for whatever reason, will refuse to cooperate in this noble endeavour – else we can get the repayment amounts from the temple books).

We also need to remember that the repayment is not complete. People still contribute generously to the Venkataramana Personal Loan Repayment Fund. However, if we assume that the loan has already been repaid, we can get a floor on the rate of interest that Kubera charged. It is intuitive right – that if more money pours in, the interest rate would’ve been higher? Let us also assume that there were no repayments till about five hundred years ago, which was approximately when the temple was built. Assuming zero repayments till then, it again gives a floor on the interest rate.

Obviously, I don’t already have any of the data that I’ve mentioned here, so I can’t actually do the calculations. However, if McKinsey decides to solve this problem, they can do so in March during their interviews at IIMs. My prediction, however, is that the rate of interest will come out to be a number which, in normal circumstances, would be found to be usurious. Thus, we might probably be able to show that people are contributing to funding a greedy usurious rich moneylender when they contribute to the Venkataramana Personal Loan Repayment Fund. I don’t know what further use this might be put to, but I think the process will be an end in itself.

On a closing note, I would like to point out the greatness of our culture – which, even in mythological times, could boast of complicated financial products such as Personal Loans. This one factor, I think, is enough to show that our Indian culture is superior to all other cultures.

PS:  Sometime back, I was wondering if the Venkataramana Personal Loan Repayment Fund could be the largest money-laundering operation in India. However, a little thinking revealed that our political parties are definitely far far ahead when it comes to that.

Tenure Matching

One of the fundamental concepts of finance is to match the tenure of assets and liabilities. That the tenure of source of funds (equity, debt, etc.) need to match the tenure of what they are used for. So, if you need money to tide over till your next payday, you need to take an extremely short-term loan. If you need to borrrow to fund a house – an application that has a long tenure – you need to take a longer-term loan. And so on.

In fact, a common refrain about banking crises is that they happen mainly due to the tenure mismatch – banks borrow by means of short-term deposits, and then invest these in long-term loans. Most theories regarding liquidity crises cite this as a common problem.

Now, my contention is that this banking/finance rule is just a special case of a much larger rule in life. Remember that funding, or raising money, can be looked at as a “problem”. By classifying it as a problem, I’m not necessarily saying it’s a very tough problem. All I’m saying is that it’s a problem. And when you do raise money, it is a solution to the problem. Thus, the generalized form of the rule

The tenure of the solution needs to match the tenure of the problem.

So before you look for a solution for any problem in life, you need to first figure out about the tenure of the problem. And then generate a list of possible solutions which have similar tenures, and then pick the best among them. And based on my limited anecdotal experience, most people don’t really appreciate this concept when they suggest, and sometimes even implement, certain solutions.

So on Monday I called up a friend and told her that I was going through a strong bout of NED and we should meet up. She started philosophising and said that this is a fundamental problem and that I should think of a fundamental solution. That I should get a new hobby, or learn a new instrument, or some such long-term thing. Of course, I know myself better than she does, and so I knew that my problem was short-term, and so all I needed was a nice evening out. A short term solution to a short term problem.

On the other hand, during my previous job, I used to go through prolonged periods of NED. A little analysis revealed that the fundamental reason for this NED was my job, and that until I got a new one, I wouldn’t be happy. It was a long-term problem that deserved a long-term solution – of finding another job. However, most of the advice I got for my NED was of the nature of “go get drunk, you will be fine”.

My mother also doesn’t seem to appreciate this tenure concept. Nowadays I’m afraid to crib to her about anything, because if I crib, she assumes it’s a long-term problem and suggests that I should get married and that she’ll intensify her efforts in the arranged-marriage market.

Yes – people not appreciating this tenure concept is a long-term problem. The solution to this should also, thus, be long-term. They need to be taught such a lesson regarding this, that they won’t forget this concept for the rest of their lives.

An old delta hedge

I learnt finance only in 2005. It was around that time that I first came across the concept of delta hedging. However, I now realize that unknown to me, I had indeed used this concept to great effect in 1999.

That was the year when I had started preparing for the JEE. I had joined BASE, the best JEE factory in Bangalore. I was having a hard time since I hadn’t studied one bit in all of 11th standard when my friends had dilgently solved Irodov and other books. I had missed one whole month of prime summer holiday JEE prep thanks to the Math Olympiad Training Camp. I knew I needed to be focused. I knew I didn’t want to be distracted. However, I also knew that I would be under tremendous pressure for a year, and any means of easing a bit would be welcome.

During our monthly counselling sessions at BASE, the Director would call for us to create angst. “You need to have the fire in the belly”, he used to say. “And be able to channel it in the right direction in order to fuel your effort. Without fire in the belly, nothing can be done”

I must mention here that this was one of those unintended consequences things. I didn’t plan out this delta hedge. I realized the hedge only in hindsight. I had just followed my instinct in doing what I eventually did. Looking back 9 years down the line, I think it was a fair idea. Only, that like in everything else that I do, the implementation was horrible. Nevertheless, I think the learnings from this are going to be useful, and are going to have a net positive impact on society.

I put blade like naayi on a classmate, who is perhaps the most brilliant woman I’ve ever known. She was a good friend back then, at the point of time when I started the blading process. As you might have come to expect of me, I did a pretty horrible job. Disaster would be an understatement. It was depressing. I lost many nights of sleep to this. If I were less informed, I would’ve classified it as a blunder.

If you noticed, I had slipped in a little para where I mentioned the need for creating fire in the belly. This failed blade would fire it. This failed blading attempt would provide the angst, which I could channel in the right direction if I so wished. This failed blading attempt would make me angry, would make me upset, and would help me focus on my goals. And the sleepless nights this failed blading attempt gave me – I used them for mugging for the JEE.

I don’t know if I’ve told this particular bladee about it (I probably have), but I’ve always internally dedicated my success in the JEE to her.

However, this story was not to end happily. The delta was hedged, but the gamma would come back to bite me at a later date. The angst and the anger and the pain was fine when I needed them, but now (after I joined IIT) that I didn’t, it led to NED. Terrible NED. This would go on to be one of the biggest causes of NED during my life at IIT. As Shah Rukh Khan says in Baazigar, “kuch khaane ke liye kuch pona bhi paDta hai”.

Bloomberg Watching

Two weeks back we were all given dual screens at office. A couple of days after that, those of us that had joined recently got Bloomberg logins. It’s a very restricted version of Bloomberg, with most of the strong features having been disabled. One feature that is enabled, though, is to get the graph of the daily price movement of a security, or an index.

It is necessary to have hobbies at work. It is humanly impossible to concentrate solely on the work for all the eight or ten hours that you spend at office. You need distractions. However, in order to prevent yourself from being too distracted, it helps having one or two very strong distractions. Distractions which can crowd out all other distractions. They can be called “office hobbies”.

In the past, my office hobbies haven’t really been constructive. In my first job, I was part of a PJ Club, and we would exchange horrible jokes. By the time I got to my next job, I had been addicted to Orkut, and kept refreshing it to check if I’d gotten any new scraps. Of course, when there is a cricket match on, the Cricinfo screen makes for a good office hobby. In the last ten days, the World Chess Championship has served my evenings well. However, it is important to have a sustainable hobby which could also be constructive. One which might have a small chance of making impact on your work. And most importantly, it would be ideal if the boss doesn’t really disapprove of your office hobby.

For the last week and half at work, my right screen (remember that I have two screens) has been reserved for Bloomberg Watching. A Bloomberg window is open there in full size, and I would’ve usually put the daily movement graph of the Nifty there. And it updates real-time. It’s like a video game. I just sit and watch. And get fascinated by the kind of twists and turns that the markets take.

Twenty years back, I would spend my evenings in the courtyard of my grandfather’s house in Jayanagar watching ants move about. I would be fascinated by their random, yet orderly movements. I would spend hours together watching them.

Around the same time, I used to play another game. I used to splash water on the (red-oxide coated) walls of my loo, and watch the different streams of water flow down as i crapped. I would get fascinated by the patterns that the water droplets would form, the paths that they would take, the way they would suddenly change speed when they intersected, and so forth. I would end up squatting there long after I’d been done with my crap.

So what I’m doing now is not exactly new. I just watch a point move. Orderly from left to right. Wildly fluctuating in the up-down direction. I look at the patterns and try to guess which animal they look like, or which country they look like. I get fascinated by the sudden twists and turns that the curve takes, and wonder about the collective wisdom of all market participants who are faciliating such movement. I occasionally scream out to my colleagues saying stuff like “nifty below 2600!” and they respond with a “behenchod…” or some equivalent of it.

As the day wears on, I realized that some animals I had recognized earlier in the day are hardly visible now. They are but specks in the larger graph that is the day. And then I realize that unless there was something truly special, the movement of the day will also soon be lost. It will be available for download from the same Bloomberg terminal but that will be about it. And so forth.

Occasionally I catch some unsuspecting soul on my GTalk list and spout such philosophy. I tell them about how after a while everything becomes insignificant. About how we will always be just small players in the larger system. The smarter among them will add their own philosophy to mine, and sometimes we come up with a new theory. The not so smart among them – they will ask me about my views on the market. And what would be good picks (this has been a regular question I’ve been asked ever since I got back into the finance industry but more about that later). And then they say something like how terrorists are the reason the stock markets are plunging, and how the government should protect investors’ money and stuff.

Some day I hope all of this will be useful. Some day I hope my eye for recognizing animals and countries where none exist will enable me to come up with some earthshaking strategy, which can make millions for my fund. However, now that doesn’t matter. All that matters is the unbridled joy of watching the ticker move up and down. Rise and fall. Take baby steps, and the occasional giant leap. It’s surreal.