Good and luck

It took a couple of days in Delhi for me to appreciate what is liberally referred to as winters in Mumbai. The cold chilled me to the bone, and it took superhuman effort to rouse myself out of the two razais in the morning. The fog was thick and the visibility limited but none of this affected by cabbie - he kept merrily cruising at 70kmph in arterial roads. Cruel but effective way to get someone forget the weather. And to think that the city will be baking in 40+ degree temperatures in the summer.

It is unfortunate that the human mind cannot appreciate the absolute. We are forever evaluating options relative to one another. Be it job, income, living conditions or even the weather. Reminds me of this great line from the movie, Lucky Number Slevin....

The unlucky are nothing more than a frame of reference for the lucky. You are unlucky, so I may know that I am. Unfortunately the lucky never realizes they are lucky until it's too late. Take yourself for instance; yesterday you were better off than you are off today but it took today for you to realize it. But today has arrived and it's too late. You see? People are never happy with what they have. They want what they had, or what others have. The grass is always greener on the other side.

More Than You Know

Just started Taleb's Fooled by Randomness. As it happens, this is the third consecutive book I am reading which talks about the role luck, randomness etc – I am using these terms to loosely mean uncertainty – plays in our lives. The previous two are Michael J. Mauboussin's More Than You Know and Malcolm Gladwell's Outliers. I will quickly summarize my takeaways from the first one.

The point is stunningly simple. That the market has several players, and the same bit of information is interpreted differently by different players. Naturally, a pre-condition is that the market players be heterogeneous and for the most part they are. When heterogeneity is maintained, the market on average correctly reflects the underlying state of the economy. One particular story (a true one, I believe) is used to convincingly illustrate this phenomenon. At a village contest, people were asked to guess the weight of an ox. The average value of the guesses turned out to be correct answer, although none of the individual guesses was anywhere close. The so-called experts represent only some players in the market, and at best, their predictions may only be close to the actual. When heterogeneity is compromised, however, players fall prey to group-thinking, and we end up with unsustainable booms followed by the unavoidable busts. The practical consequence is that one is better off investing in index funds rather than mutual funds.

Anyone invested in the market would know that "overvalued" and "undervalued" are two terms that every analysts throws in at will in his analysis. The value of a stock is the discounted value of its future cash flows (profits loosely), and the price is what it currently fetches in the market. Now, if the price of a stock is higher than its value, it is overvalued. The typical analyst recommends selling overvalued stocks and buying undervalued ones because sooner than later price adjusts to reflect value. The point made in the book is that it is not enough for you to find a great stock that is undervalued. The premise is that price will adjust to reflect value (in this case, price will go up). Meaning, there are just enough people out there thinking the same way as you are so that the demand for the stock pushes its price upward. If everything thinks the way you do, the stock would skyrocket immediately. And if no one agrees with you, well, the stock might stay undervalued forever.

So the trick is not just to find stocks that are undervalued, but also predict whether the market will agree with your assessment. It is probably for this reason that analysts love to appear on TV shows and rattle out their predictions. If enough people watching the show fall for it, well, you've got yourself a self-fulfilling prophecy. (The last point is my extrapolation).

The book covers such wide range of topics that I don't even remember all the things discussed. It definitely was worth my time, and hopefully I will get around to reading it again.

Tailpiece: Pune Mirror found my post worthy to be included on their website..

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