Inception, the Movie

Saw Inception (after everyone else) and yet was gripped. My kind of movie – big, nerdy and fast. Now, the aural spectral response of my ears is a bit defective and I sometimes strain to hear sounds which others hear easily – a.k.a. I hear low! That factor, combined with low end sound producing transducers in my laptop/earphones could have made following the “train” of thought in this movie a bit of a challenge. Thankfully, that did not happen and I could hear all the sounds easily. Which meant I allowed my mind to move in step with the movie’s narrative and appreciate the nuances. And spot the flaws.

The nuances (numerous classical physics lessons sprinked everywhere):

1) Liked the usage of general relativity trick in dream world #2 at the end where Arthur invents the ‘kick’ by setting off a charge in the lift shaft of the hotel elevator. Idea being that in a zero – gravity world, an explosion would provide a differential acceleration to serve as the waking jolt. But I dunk that as a major flaw later on.

2) Restraint on part of Chris Nolan. As per the plot, killing someone in a lower level dream wakes him/her up in the immediately higher level, but the story avoids this tactic and adds to the drama by relying on an innovative invention of kicks. Chris Nolan spent 10 years on Inception! It shows. Perhaps.

3) The Penrose Strairs.

The flaws (I guess you can come across more, but these are the ones that hit me):

A) Cobb’s kids are with their grandfather in the US. He wants to meet them and that’s his motivation for all that dreaming. The movie makes you believe that he is on the run and needs to win his right of passage back to the US. But then there is one scene where he does meet with his father – presumably that meeting was in the US? How did Cobb get into the US then? The picture on the right, taken from also brings out a related thought.

B) Speaking of Physics, can you fight someone in zero gravity, stack your colleagues in a dormant layered sandwich, tie them up securely, cut off the wires supporting the elevator cabin and set off a charge – all in 3 minutes?

C) The totemic flaw of the movie: At the start, Ariadne is explained the solid reference points that the dreamers’ personal totems  provide. Idea is that by noting the physical behavior of one’s totem when spun/thrown/used one can determine if he is dreaming or awake. Now, Cobb’s totem is a top that spins. If it keeps on spinning then it’s spinning in a dream world and if it topples over then Cobb is in the same world in which you are reading this post! Now, what makes a top topple? Friction. What causes friction? Gravity. So, ideally the dream world should have no gravity. Which should explain why spinning tops keep on spinning. But the dream worlds 2, 3, 4 did have gravity, right?

This to me is the biggest flaw in the logic.

Did you know that Ariadne, the French student of architecture who helped Cobb create the architectural cobweb of dreams shares her name with the Greek mythological character also known as the Mistress of the Labyrinth? She had helped Theseus escape Minotaur’s labyrinth by giving him a sword and a spool of thread to mark his tracks through the maze. That was good symbolism in the movie.

Also, the first thought that came to mind when seeing the last few frames of the movie was that Christopher Nolan could be setting the stage for a sequel. I’d rather that he returned back to caped crusaders and left this plot just where it is at the moment – in a state of “limbo”. The point is that at the start of the movie, when Cobb shows his totem spin to Araidne it spins and drops. Count the time it takes. And compare that to the time that his totem keeps spinning during the last scene. The latter spin is longer. I guess the assumption here is that all along the force (or impulse) with which the top is spun by the totem owner remains the same all the time – hardly likely. Inebriated Cobbs, sweaty palmed Cobbs, tense Cobbs – would all spin the totem at differing initial speeds, right? And that would mean differing spin times, right? Anyway, perhaps the spinning top was never really Cobb’s totem – A thought that got ‘seeded’ in my mind was that perhaps the ability to see his kids’ faces was his real totem after all. In which case, it’s ‘limbo’ all the way…

If you have not watched this apparent brainteaser of a film, please do so – I recommend it. Moves fast enough and if not anything else it’s good to exercise those grey ones once in a while. In the end, I hope somewhere this leads to reality 😉 – in the sense that perhaps there will come a day when humans will be able to mine the data hidden in our brain (aka subconscious?) better. I read about the fourth fundamental electronic device called the memristor on the flight to Hyderabad recently. While discovered almost 30 years back, commercial production and application seems to be happening only recently. Couldn’t the neural synapses – many of them unused but full to the brim, represent something of a biological memristor? With deep, old memories that get “called” from functions that run during dream time?

Yaaaawwwwn. Good night. Sweet dreams.

Spiced it Up!

Turmeric is on a roll. Prices of the yellow spice are up a whopping 64% this year. That’s about thrice the rise of the Sensex. India is the largest producer, consumer and exporter of turmeric, so I am sure a few people in India must be very happy these days. But the bulk of the masses are not since the party is not just limited to turmeric (aka haldi). Prices of most spices are spiralling upwards. Cardamom, pepper, cloves, mace, nutmeg and all sorts of things are becoming dearer by the day. This article here talks about the awesome climb of turmeric and other things. And that left me thinking about what type of people invest in commodities and how do they do it and is there some opportunity here for people like me to dabble in condiments.

Most online brokerages offer commodity trading and one can take positions in the spot or the futures markets. That’s all I know and I guess I have no desire to know more. These are highly cycical things and difficult to understand. I guess the only commodity that I have direct exposure to is Gold in the form of units of an exchange traded fund. All rest are beyond my comprehension. The ban on commodity trading in India was lifted in 2003 and volumes have certainly risen along with the advent of institutions like MCX, NCDEX etc. Speculators, industry houses must be trading a lot for both hedging as well as speculation. Thankfully there is not much retail money being put there. Since commodities are much more volatile than stocks. That characteristic should be an ideal breeding ground for the day trading gangs hoping to make some alpha given the high beta. However, given the predominantly agrarian nature of the country’s economy, I would guess that commodity trading should be quite popular here. It was a pretty short-sighted decision on the part of the Government to have banned commodity trading in the wake of the serial droughts that had hit the country during the 50s and 60s limiting the farmers’ ability to honour the various forward contracts that they had taken positions in. So whats happening now that while commodity prices are zooming up due to inadequate supply lines, the action is restricted in the hands of few. And that must be fostering mindless speculation with the action centered around a very small clique. Reportedly, the average daily turnover by value of spices futures on the National Commodity Exchange has doubled from a year earlier. Since the market lacks depth, only a handful of players hold sway. Definitely not a situation for retail rats like us to be found dead in.

My father and his ancestors used to grow cotton on their fields. I stay away from the black alluvial ancestoral soil of mine, but trading in cotton and making a few bales of money in the bargain might just emotionally connect me to my roots. So what do I do? Where do I go? Some quarters advise the advent of commodity based mutual funds as a good avenue for retail investors to build exposure to commodities. That advise certainly does not work for me. These mutual funds do not take positions directly in the underlying commodities. They buy stocks of companies that are long commodities by the virtue of their area of operations. That’ s proxy investing and a bit of misrepresentation by the asset management companies if one goes by the names of such mutual funds. At least the Mirae Asset Management company’s fund in this regard is more modest by including the word ‘stock’ in its name:  “Mirae Asset Global Commodity Stock Fund – Regular Plan (G)”. And then there is constant drone from the commodity perma bull and India basher, hitchhiker and biker Jim Rogers who keeps telling us how commodities as an asset class has a looooong way to go – up, is what presume he means.

I guess we need to wait for some time for Indian banks & mutual funds to be given the green signal to start trading in commodity futures. The Forwards Contracts (Regulation) Amendment Bill is pending approval in the Parliament and once that happens, not just commodity futures but even exotics like weather indices and derivatives off them will start trading. The logic for people long agriculture to trade in weather deivatives is compelling enough. But it still comes back to the point regarding competency. Even if a (fairly liquid) avenue gets created and is readily available in the hands of retail investors like me (no hassles, slightly higher commission online brokerages), I guess I’d still stay away since I don’t think I will be able to understand what moves such markets in this lifetime of mine.

During an exit interview of a past colleague of mine, it was revealed that he had put down his papers to pursue his dream of trading in the commodity markets. I know not of what has happened to him. Hope he is fine and is profiting from his love for cloves.

Value averaging Investment Plans (VIP) – Part II

In a paper titled, “A Statistical Comparison of Dollar-Cost Averaging and Purely Random Investing Techniques,” which appeared in the Journal of Financial & Strategic Decision Making (1994), Marshall and Baldwin investigated market data to address a much deep seated premise: Does DCA (or Rupee Cost Averaging, in our context) really yield superior investment performance compared to a purely random investment technique?” They found, with a 99% confidence, that there is no statistical difference in the Internal Rates of Return (IRR) achieved by the former technique. In other words, rupee cost averaging (brought about by setting in a Systematic Investment Plan (SIP) ) is not superior to random investing. Note the word ‘random’ here. I had written in my previous post on the subject about how asset management companies make an extra effort to sell the SIP route of entry into the markets (via Mutual Funds). Wealth managers too espouse the benefits of SIP since they must be receiving a larger commission for locking in a nice stream of cash inflow for their suppliers (the asset management companies). Well, this particular study clearly does not make SIPs to be an automatic choice for the financially astute. Like the promotional material from the Benchmark Mutual Fund house, the other paper from Marshall titled, “A Statistical Comparison of Value Averaging vs. Dollar Cost Averaging and Random Investment Techniques” also throws up data tables and charts which indicate that VIP scores above SIP, consistently and always. The table alongside (click to enlarge) is from Marshall’s paper on the subject and it shows that the average acquisition cost of shares is always lower in the case of value averaging. Three scenarios were considered for analysis – rising, declining and fluctuating market.

VIP is like those arcade video games which are now distributed as freeware where in one instance you’re flying a helicopter through a rather long undulating tunnel with assorted obstacles in the path. If the chopper is rising, ease up on the throttle else it’ll crash into the roof of the tunnel. If it’s falling then press the throttle well lest it crash to the floor of the tunnel. So, while this analogy is weak, it perhaps visually brings out the problem that I see with value averaging. I guess it forces one to operate in a range. In the arcade game, the chances of your chopper travelling the farthest and therefore reaching the end of a particular level is highest if one manoeuvres it successfully through multiple escalating and de-escalating sinusoidal paths. Similarly, the returns from value averaging come in best when you let the scheme run through at least a couple of up and down market cycles. If the market rises for a good long period in an upward channel then this technique will definitely trump the plain jane SIP option. However, if the investment horizon is smaller – say 1 – 2 years and the market keeps continuously rising, I am not sure if a VIP will give the best returns (as compared to a buy and hold).

The other point is the fairly active monitoring that needs to be done. It clearly is not an option for the masses and even for the nerds who fancy taking this on, this may lead to deliverance. The jury may be out regarding my nerd status but my thinking in this is that if I have to benefit from a systematic investing method which guarantees a low cost of acquisition and requires fairly active monitoring – is there something that I can improvise and build from the scratch. Never mind if countless other nerds may have hit upon the method themselves and written and practised it. That is something I want to develop and write about in my concluding post on VIP. My main aversion to the VIP plans as they now stand in India is that I might have to do a fair amount of running around with banks, fund houses, payment instructions etc. Given the prospect of an escalating workload and a need to find a good long term occupation for my funds I need something which might be equally (if not more) high touch to evaluate but low touch to execute. I have an idea forming – should come out soon.

Value averaging Investment Plans (VIP) – Part I

Some days back a colleague alerted me to the existence of VIPs as being a better and smarter alternative to the Systematic Investment Plans (SIPs) offered by mutual funds. Mutual fund houses push the SIPs a lot. The benefits touted are that average investors are not adept at timing the market and therefore a rupee cost averaging approach provides a measured entry into the equity markets. The obvious benefit to the fund houses is that they lock in a steady stream of investments. Almost every interview of a asset management company official nudges investors towards the SIP method of investing. The premise being that average invstors are scared of the riskiness of investing in equity markets. I don’t feel that SIPs greatly reduce the risk in invetsing but yes, they do nudge it down a peg or two.

VIPs are considered to be an improvement to SIPs in that instead of rupee averaging, they average out the “portfolio value” such that the inflows into a VIP scheme get adjusted based on the performance of the portfolio. A target rate of return is fixed at the outset (say 15%) so is the monthly level of investment into the fund. A 15% return is the same as a sequential  increase of 1.25% in the portfolio value. So, what VIP does is that if in a month, the portfolio performance is greater than 1.25%, the 2nd month’s investment installement is reduced to the extent that 2nd month’s goal is already met. In case if the underlying drops in value in the 1st month, and the 1st month’s return is less than 1.25% then this shortfall is added to the 2nd month’s installment to make up for the loss. And so on for the subsequent months.  

So, Monthly Investment Amount = Target portfolio value – Actual portfolio value.

Investors get to specify a maximum limit on each monthly investment. Benchmark mutual fund has one such scheme in the market since mid 2009. Now, the NIFTY has climbed up from 4,000 level to 6,000 during the past 18 months. I wonder how this investment option into this scheme of theirs has fared (Benchmark S & P CNX 500 Fund) during this period. For sure, SIP option would have fared worse since inVIP, the investor can ‘choose’ to annul his monthly investment in case the market is rising like there is no tomorrow but a SIP is a series of post dated cheques signed by you. Marketing material from Benchmark suggests that every 3 year rolling period from April ’97 to April ’09 sees the VIP option beat the SIP one. Click on the picture of the table to magnify.

The VIP concept is fairly easy to understand but I am not sure it works for me, if I look at how the market has behaved in the past 18 months. If the market is to zig zag and oscillate in a bad for the next year whilst maintaing a modest upward bias, then this option will shine, I guess. I am not saying that indexing does not work in India. Many people who shun indexing aver that the Indian markets are ‘inefficient’ and that good fund managers will outperform indices consistently – which I obvisouly do not agree with. But I suspect that a DIY approach can work better for me. One good thing about the scheme run by Benchmark Fund is that does give investors an option to choose their target rate of return. If that facility was there, I am sure many investors would have chosen a target return greater than 15% and ended up straining their cash flows. That’s one dichotomy here – the marketing material from Benchmark stresses on the point that it is simple to understand – that is inserted there to win as many small ‘uns as possible. While, it may be simple to understand, it is definitely high touch for the investors. Cash outflows are not fixed and it does require active management on part of the investors. It is perhaps for this reason (customisation of monthly investment limits) that this option is not available through online share trading websites (I use Icicidirect’s). I don’t have time to run around cutting cheques or giving ECS instructions, etc so that puts me off. Certainly not on my ‘active funds’

I have been thinking of setting up two streams of investments for each of my two kids and might think of this thing there. I do not want to do any active investment management there and the horizon is definitely 10+ years. That brings me to the other important point about the VIP from Benchmark – I feel that the real value of VIP would come out when the investment is held across a couple of market cycles. A couple of bull and bear runs would make VIP stand out. The Benchmark scheme does not charge an exit load for withdrawals after a year and that to me might tempt many to actually redeem after the 12 months are up. Something like the temptation to sell a share that you are holding as soon as 12 months are up since no taxes would then apply. When I say VIP, I may not necessarily go after the Benchmark’s VIP option. I might do a DIY using an Exchange Traded Fund (ETF) using quarterly rolls instead of monthly rests. I need to work out how the schematic will work but it will most certainly be an ETF since these cost less and might post about what I decided. So, a second “installment” of VIP is in order!

Vikram’s new Diwali

We live in an age that’s called Vikram. Meaning one that has a strong stride or momentum. The stock markets certainly looked like that leading into the onset of Samvat 2067, the Hindu new year that befell most parts of India this Diwali. Astrologers, who are in demand during such auspicious times dole out their forecasts busily. Actually, astrologers are quite active in India during other times as well. They can predict market movements as well. There are intra-day prophecies, NIFTY vedic tips, astrological commodity futures, currency trading, etc. ‘Astrotraders’ idolise W. D. Gann and perhaps follow his theories. I read an astro forecast of the market technicals just before typing this post and the head reeled!

The head had reeled in a similar way during previous Diwali owing to the incessant din of firecrackers in the area where I (also) stay in Bombay. This year, suprisingly was quite sedate in comparision. Is that an indicator? I know not. Many people I know logged in during the special one hour Muhurat trading window that remains open on this holiday and did some token trades. Many traders in India believe that if the one hour Muhurat trading closes positive, then the year ahead is going to be gainful. That certainly seems to be a popular indicator. The intra-hour chart of this year’s Muhurat trading is above – please draw out your conclusions and your chequebooks accordingly!

I am sure many Muhurat eyes must have travelled to the fireworks on the Coal India Limited counter. It had listed a day before Diwali and as I and everyone else expected, the listing was a bang. I winged out with a 40% gain in 15 days. As I had written in a previous post, I had expected to make a modest 15% which was easily surpassed. It was money on the table really – like the time when the Ambanis had decided to split up and create listed baby Reliances for some serious value unlocking. Except that in case of reasonably priced, popular and monopolistic businesses, the bang for the buck comes in double quick time. On my part I continued to stare at Gitanjali Gems chart and given the festive spirit could not resist putting up the two images above – one is the price chart of GG and the other is the trajectory of a Diwali rocket. Which is which?

I did not put in any trades nor did I unwind any – just skimmed and glossed over the tickers and then sat down for Laxmi (Goddess of wealth a la Copia-the Roman & Renenet-the Egyptian ) Puja. To many, such astrological prognostications may seem utter madness. I, on my part certainly do believe in astrology but not in its predictive powers about the collective writ of humanity (and even some machines) that is the market. But then a few days after Diwali, I read somewhere that Leos would benefit the most this year if they wore yellow (which I did by chance) and faced north during Laxmi Puja (I faced east). So, if I go by that then I will remain flat this year? 🙂

Here’s wishing you a very profitable trading year ahead. More importantly, here’s wishing you that you increase your knowledge and learn many new things about investing/trading this year. That’s key to making money, I feel.

The Price of Food

I stopped by at a local grocery store on my way back home to pick up something for breakfast. The idea was to wedge an  oregano infused, golden brown double omlette inside slices of whole wheat bread layered in garlic and chilly-garlic mayonnaise. The ensuing breakfast was bearable, but the previous evening commerce gave me something to write about: the escalating prices of food in India. The egg at INR 3 per egg is a lot of egg in the face and the whole wheat bread leavened me with its INR 22 tag. I would recommend heading to the nearest kirana store, especially if you haven’t personally shopped for a while. I am sure the prices will shock you. Any crescendo that escalates at c15% per annum would.

I am sure Humpty Dumpty would have an even mightier fall today than during the early 19th century when he/it was conceived as being perched on that wall. The reason is simple – eggs are dearer since poultry feed prices (corn, et al) are increasing fast both in local as well as international markets. And that may not bode well for companies like Godrej (Real Good chicken, sob sob) and Venky’s India Limited.

There was a lot of attention to the Reserve Bank of India’s (RBI) winging up of its repo rates in a bid to contain inflation. Whether this move has its desired effect or not remains to be seen (in media). Actually, such causality might be difficult nee impossible to establish. Since a section of the intelligentia remains convinced that monetary tricks do not influence food prices and therefore the hesitant intervention by the RBI may not really amount to anything. While you may have certainly caught the story of the repo rate hike, this sagacious comment by Montek Singh Ahluwalia may have escaped your notice:

Rural areas have benefitted from the economic prosperity seen in the country. Demand for foodgrain, milk, vegetable and protein have gone up. It is a good development

Of course it is! But our preparedness to tackle the implication of that (i.e. a higher price level) may not be. The Deputy Chairman’s (of the Planning Commission) comment reminds me of a similar observation by the President of the United States (was it Clinton?) that countries like India should eat less! Here are some facts: per capita income in India has increased from 24,095 in 2004/05 to 43,749 in 2009/10 – that’s a CAGR of 13%. Agricultural productivity has lagged this rapid growth in incomes – growing at only 2% per annum. The large transfer of purchasing power via the Rural Employment Guarantee scheme has indeed ushered in a new found prosperity in rural India. In my native village, I never used to see the local folk eat vegetables and fruits. It was always variations of millets and pulses. They now have started to add variety to their cuisine, and as Mr. Ahluwalia says, what’s wrong with that?

There is an expectation of rice prices coming down this year due to the copious amount of rainfall that we received this monsoon but that might be washed out too. For since 2005, there has been a continuous rise in prices regardless of the monsoon. So what gives? It has to be basic demand and supply. If demand goes up and supply remains constant then the prices have to increase, right? How I wish our planners get this right – the re-rating possibilities for the fertilizer industry (if it can get it’s gas supply worries sorted!), micro finance organizations, irrigation sector (Jain Irrigation, Yo!) would be significant.

Our production is focused largely on basic food grains which are certainly not income elastic – i.e. one does not start consuming more rice or chapattis if one’s income rises. However, things like eggs, butter, fruits, vegetables, milk, meat etc are most certainly in greater demand if income rises. This will be difficult for someone from the industrialized world to understand, but in India, these food articles are aspirational to many. There are 370 million people currently in India living below the poverty. Forget an apple a day, even if they have consumed an apple in a lifetime till today, they’d be lucky. But all that will change and is changing…slowly. We need good old Keynesian artifacts in Indian agriculture, not RBI’s intervention. The focus should be on the Agricultural Ministry and not the Ministry of Finance.

And while Shri Sharad Pawar remains overworked and occupied by the political flux in Maharashtra, I do not think he is the only one to blame. The reason for the rotting mountains of grain in the Food Corporation of India’s (FCI) godown is less a consequence of callous administration as much as it being a fallout of India’s federal structure of government. It’s a states of the Union vs. the Union issue. The center just cannot get the states to lift off the stocks – I do not know why but I can guess that it must be due to pricing issues. FCI’s hoards cannot be culled by a mere addition of storage capacity. That’s a long term process – the short term measure is getting trucks to line up at FCI’s godowns are carting the stuff away. At least Sonia Gandhi did admit that the responsibility of bringing down food prices is as much the responsibility of the center as it is of the states.

The other important aspect is the cost of farming. In my village, a daily wage woman labourer was paid INR 50 a day to plant onion seeds. This year she is getting paid Rs.100. Male labourers are demanding INR 150. Just like the BPO industry, cheap labour that gave Indian agriculture its competitive edge is blunting rapidly. Cotton is another crop that is sown by my cousins in their farms. They are paying farmhands Rs4.50 for picking cotton this year, again double from last year. They tell me that the total labour cost for cotton has touched INR 15 per kilo this year. I can only imagine the plight of the farmland owners in rich Punjab and Haryana! This again comes back to the point – if a business has to start paying more per unit of labour then it needs to extract greater productivity per unit of labour. The fracas over the modest brinjal shows how arduous the path to this goal will be. Our farms need more mechanization, drip irrigation (Jain Irrigation, yo!), better seeds, non-urea fertilizers and understanding politicians.

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