Chaitanya Patel

Note to all of my readers before I start on my main topic: on the morning of 3/12 I give a talk to the American Association of Individual Investors in Baltimore.  If you want to see my slide deck, here it is.

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Okay, time for some secular economic and financial heresy, which is always somewhat fun.  Secondary market liquidity isn’t very important to the functioning of the general economy of the capitalist world, including the US.  (That said, my exceptions to this statement are listed here.)

Finance has an important role in the economy, aiding business in financing the assets of the corporation, and most of the value of that comes from the debt and/or equity financing in the primary markets, or from loan granted by a bank or another entity.

After the primary financing is done, the company has the cash to enter into its projects and produce value.  Then the stocks, occasionally bonds, and rarely bank loans issued trade on the secondary markets if they trade at all. That trading is:

• A lot of noise
• A zero-sum or negative sum game
• sometimes important for future capital raising
• and we pay too much attention to it

The real action of value creation goes on in the companies — occasionally secondary market investing, through activists, M&A, etc., may find ways to realize the value, but the value was already created — the question was who would benefit from it — management or shareholders.

If you are investing, choosing assets to buy is the most important aspect of risk control.  Measure twice, cut once.  Yes, secondary trading may help you do better or worse, but only if the rest of the world takes up the slack, doing worse or better.  There is no net gain to the economy as a whole from trading.

I grew up as a portfolio manager for a life insurance company.  Many assets were totally illiquid — I could not sell them without extreme effort, and only interested parties might want to try, who knew as much or more than me.  Ordinary bonds were still largely illiquid — you *could* trade them, but it would cost you unless you were patient and clever.  In such an environment you made sure that all of your purchases were good from the start, because there was no guarantee that you could ever make a change at an attractive price.

My contention is that most if not all financial institutions could exist the same way, rarely trading, if they paid attention to their initial purchases, matched assets and liabilities, and did not buy marginal securities.  Now some trading will always be needed because individuals and institutions need to deploy new cash and raise new cash to meet expenditures.

But I would not give a lot of credence to those in the banks who complain that a lack of liquidity in the financial markets is harming the economy as a whole, and as such, we should loosen regulations on the banks.  After all, liquidity used to be a lot lower in the middle of the 20th century, and the economy was a lot more perky then.

Don’t let finance exaggerate its role in the economy.  Is it important?  Yes, but not as important as the financial needs of the clients that they serve.  Don’t let the tail wag the dog.

We talk of a great capital market in India. “Technologically India is the second most technologically advanced market in the world – the first is Nasdaq”- not my words, but the words of a white man who has dealt in all the developed countries in the world. He even told me that the FTSE has […]

A few months back, Anupam Manur, a colleague at the Takshashila Institution, had written an Op-Ed in The Hindu that the Maximum Retail Price (MRP) mechanism is archaic and needs to be shelved.

Introduced in 1990 by the Department of Civil Supplies, this regulation governs that the maximum price at which packed goods can be sold be printed on the packet, and makes any transactions at a price higher than this price illegal. This was intended to be a mechanism to protect consumers from usurious shopkeepers (remember this was introduced just before economic reforms were launched), and Anupam’s piece also treats the intention as such.

Having now briefly lived in a country with no such regulations (Spain), I must say that my entire perspective of how retail works has been turned upside down (and this, having spent a year consulting for a major retail chain in India).

The existence of the MRP in India means you tend to look at everything in retail from that perspective – the manufacturer/packager, for example, can set margins (a percentage of the MRP) that each segment of the supply chain can earn. As a consequence, players in the chain have little leverage on what prices to charge – at best, they can forego a part of their (usually tiny) margins in order to drive sales.

Without the existence of MRP, however, the (power) equation is turned upside down. Two supermarkets close to my home in Barcelona (about 200m from each other), for example, charge €0,79 and €0,96 respectively for identical cartons of milk (of the same brand, etc.). This price difference (17% or 21% the way you look at it) of a retail commodity between two nearby stores would be impossible to see in India.

Given the broad similarity in these two supermarkets, it is unlikely that there’s too much difference in what they would have paid to procure these cartons of milk. In other words, one supermarket makes a far higher margin selling this milk (which is possibly compensated by the other’s higher sales).

In other words, in a market without MRP, the manufacturer/brand loses control over the pricing once he has sold products down the chain – it is up to the respective player in the chain to determine what he will charge for from his buyers, and thus manage his own revenues. While free markets mean that prices of products broadly converge across stores, the manufacturer/brand can do little in order to dictate them beyond a point.

With this kind of pricing power missing from retailers in a market like India (with MRP), the retailer is at a greater mercy of the manufacturer. The manufacturer can allow the retailer some leeway in pricing, for example, by setting an artificially high MRP, but the question is whether the manufacturer wants the retailer to have this leeway.

Under the current system (MRP), the retailer is mostly at the mercy of the manufacturer. The manufacturer has bargaining power over how much stocks to distribute to the retailer and when, and there is little leeway for the retailer to manage his stocks intelligently. In fact, for some products, manufacturers even control discounts and don’t allow retailers to sell below a particular price (threatening to stop supplies in case they do so). Without the MRP, this kind of coercion on behalf of manufacturers will be significantly reduced.

In this context, it is useful to look at the MRP as a tool that shifts the balance of power in the packaged goods supply chain in favour of the manufacturers/brands and away from the retailers. As Anupam has established in his piece, customers don’t necessarily benefit from this regulation. They are merely an excuse for manufacturers of packaged goods to exert bargaining power over the retailers.

In other words, the MRP is a conspiracy by the FMCG companies, who stand to benefit most from such regulations (at the cost of retailers and customers).

With the current union government supposedly enjoying support of the trading community, there is no better opportunity for this MRP regulation to go.

Echoing the comments of William Deresiewicz, Charlie Munger offers some sage advice on multi-tasking:

I will say this, I know no wise person who doesn’t read a lot. I suspect that you can read on the computer now and get a lot of benefit out of it, but I doubt it will work as well as reading print worked for me.

I think people that multitask pay a huge price. They think they’re being extra productive, and I think they’re (out of their mind). I use the metaphor of the one-legged man in the ass-kicking contest.

I think when you multi-task so much, you don’t have time to think about anything deeply. You’re giving the world an advantage you shouldn’t do. Practically everybody is drifting into that mistake.

Concentrating hard on something that is important is … I can’t succeed at all without doing it. I did not succeed in life by intelligence. I succeeded because I have a long attention span.

It sounds counter-intuitive but if you want to increase discretionary time and reduce stress you need to schedule time to think. The tiny fragments of time many of us find ourselves with have a negative effect on our ability to think deeply about a problem. Furthermore they impede our ability to learn — we stay at a surface level and never move into a deep understanding.

Deresiewicz warns: “You simply cannot (think) in bursts of 20 seconds at a time, constantly interrupted by Facebook messages or Twitter tweets, or fiddling with your iPod, or watching something on YouTube.”

The opposite approach is to focus on a problem or subject and try to achieve a deep fluency. How many of us, however, have time? We don’t do the work required to have an opinion. Instead we operate with surface knowledge. We tackle problems with the first thought that comes to mind. Because we make a poor initial decision, we spend countless hours attempting to correct it. No wonder we have no time to think. We’re not heeding the advice of Joseph Tussman and letting the world do the work for us.

We sound good and yet and we fail to learn — in part because everyone else is doing the same thing. Well, when you do what everyone else does, don’t be surprised when you get the same results everyone else gets.

If you want to get off the same track that everyone else is on, start scheduling time to think. That’s what Munger did when he sold himself the best hour of his day. Structure your environment in a way that promotes thinking and reduces interruption. And match your energy to your task.

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You have paid all your taxes. You have filed your income tax returns diligently. Even then you get an income tax notice?! Before you cry foul, let us look at the reasons that you might have got one – Learn: How to file Income tax – online Top 7 Reasons you can get an Income […]

I’ve seen a small group of pension articles in the recent past, none happy:

1. Europe Faces Pension Predicament
2. More Companies Freezing Corporate Pension Plans
3. The Tragedy Of California’s Public Pensions
4. Retirement Is Looking Even Worse for Americans

A defined benefit pension is a stream of payments that continues until the beneficiaries die, mainly.  It is funded from the assets set aside by the sponsor, and the earnings that flow from them, as well as additional contributions, should the assets not be enough.  With municipal pensions that means taxes.

Pension benefits are like debt, and sometimes more so.  What I mean is this — pension benefits earned can’t be reduced, except in bankruptcy.  Many states give municipal pension payments preferential treatment, so troubled municipalities can’t compromise pension payments easily, even in bankruptcy, if allowed.  (The main point of the third article is that underfunded pension plans in California will lead to taxes rising further, or, some sort of compromise, with a huge political fight either way.)

In principle, if defined benefit pensions had been funded properly, there wouldn’t be a lot of furor over them.  From inception, funding rules were not conservative enough, particularly in what plans could assume they would earn off investments.

Thus the second article is no surprise.  From my start in investment writing over 20 years ago, I predicted that more corporate pensions would get frozen, terminated, and replaced with defined contribution plans.  Plans assumed too much in the way of investment earnings. Sponsors contributed too little, encouraged by the IRS, that wanted more tax revenue, and thus limited the amount sponsors could contribute.

Things could always be worse, though… many nations in Europe will undergo a lot of strain trying to pay all of the benefits that were promised.  Here’s a quotation from the first article:

“Western European governments are close to bankruptcy because of the pension time bomb,” said Roy Stockell, head of asset management at Ernst & Young. “We have so many baby boomers moving into retirement [with] the expectation that the government will provide.”

Even the U.S., with a Social Security trust fund of $2.8 trillion, faces criticism for promising more than it can afford. That is because the fund—which is mostly in the form of IOUs from the Treasury—is projected to fall short of the sums needed to cover all benefits in a dozen years or so, and run out in 2035. Europe’s situation is much worse.

When taxes are already high, and because of demographics, the ratio of workers to pensioners is falling, it gets difficult to figure out what many European governments will do.  It will be a political fight.  Think Greece — but more widespread.

And from the article, one thing that all should expect is that older people will work to supplement their economic needs — the homey example was the lady raising berries to sell, and rabbits for her personal consumption.

The fourth article had a lot of pension factoids:

• New York is the worst state to retire in, by one survey.  (But no state is that well off.)  Wyoming, South Dakota, Colorado, Utah, and Virginia are supposedly the five best states for retirement.
• The odds for a woman of being in poverty after age 65 are high.  Part of that is that women live longer.  Also, the private pensions of most women are smaller.  Another part is that joint pensions for the often higher-earning husband drop in amount paid after he dies.  Two *do* live more cheaply than one, so that *is* a loss.
• Most people think they won’t have as comfortable a retirement as their parents. (Probably true.)

Altogether, many are worried about retirement.  That is a rational fear.  I have older friends who have thought ahead, and retrained for lower-impact occupations.  If you don’t have assets, you will probably end up working.  Best to think about that sooner, rather than later.  After all, many Americans get to age 65 with less than $100,000 saved.  In this low interest rate environment, getting less than $4,000/year from your savings won’t do much to pad old age, but maybe working in a nice place could.

This isn’t the advice that many want to hear, but for 75% of Americans reaching 65, it is realistic.  Be grateful if you get to retire.  Be more grateful if you don’t get bored.

India's banking system, according to media reports, has stressed assets of about Rs 800,000 crore or about 11% of total assets. NPAs are a little over 4% and the rest are restructured assets. A quarter of restructured assets typically turn into NPAs. That means an NPA level of around 6%. That is way below the level of 15% in 1996-96. The NPA situation is challenging but not alarming, as the RBI governor himself has pointed out.

But that's not the impression you would get going by screaming newspaper headlines and raucous discussions on TV. You would also think that all of the NPAs reflect crony capitalism and are the work of crooked politicians and businessmen, aided and abetted by public sector banks (PSBs). Two solutions are being prescribed accordingly. Privatise PSBs- the government has ruled these out. Instead, the government would prefer consolidation of banks: as the FM puts it, we need strong banks, not many banks.

Let me deal with the diagnosis first. It's sheer nonsense to say that all or most of the NPAs are the result of poor judgement or mala fide decisions. Banking is a play on the economy. NPAs at PSBs reflect larger problems in the economy:

i. The global economic crisis is still unfolding and banks the world over are feeling the impact. European banks especially are in poor shape. A large number of banks are trading below their book value- as the papers mention, HDFC Bank is today worth more than global giant, Deutsche Bank.  The Indian economy, like other emerging markets, is facing the lagged impact of the global crisis. Banks are impacted as a result.

ii. More than half the stressed assets arising from five sectors- mining, iron steel, infrastructure, textiles and aviation. It was PSB finance that drove the infrastructure boom of 2004-08. So PSBs are more exposed to these sectors than private banks. They are more impacted as a result.

iii. Maybe PSBs should have been as clever as private banks and take a lower exposure to key sectors of the economy? Maybe they too should have focused on retail assets? Well, we don't have deep enough corporate bond markets. And we wound up development financial institutions years ago. So, if the PSBs don't fund key sectors, who's going to fund them?

iv. The infrastructure and related sectors have been impacted by several factors which could not have been anticipated: delays in land acquisition, problems with environmental clearance, adverse court judgements, a sudden slowdown in the Indian economy, etc. It's not that private banks judged these risks better because they too are exposed to the very groups and companies to which PSBs are exposed. It's just that they had lower exposures because their business focus is on other assets.

Let me now address the prescriptions.

•  Privatising PSBs is no insurance that the tax payer will not have to foot the bill arising from failed banks. Just look at the recurrent bouts of banking crises in over 100 economies worldwide. The media cost of recapitalising banks has been 6.8% of GDP. In India, the total recapitalisation cost over a two decade period of 0.5% of GDP. The cost of recapitalisation is not the real cost of banking failure. The real cost is lost economic growth. This cost can amount to 3% of GDP every year. India has not had a banking crisis. The cost of recapitalising PSBs is thus miniscule in relation to the larger cost arising from a banking crisis.
• Consolidation does not necessarily lead to a stronger bank. It's hard to make a success of mergers even in economies where the labour market has flexibility. Here, the HR issues would be very difficult to surmount. Since almost all PSBs are in a stressed state, it is not meaningful to add to the stress of an SBI or BoB by merging an even weaker bank with it. We must first rationalise and restructure all the weak banks. Then, we can take a view on which can continue on its own, which can be merged and which may be privatised.

 There is more to the banking sector than Kingfisher and Mr Mallya. The problems are fundamental and require addressing with a cool head. Hysteria will take us nowhere.

More in a couple of pieces I wrote recently:

http://thewire.in/2016/02/28/sense-and-nonsense-about-bank-losses-22972/

http://qz.com/626955/there-is-only-so-much-arun-jaitleys-budget-can-do-to-fix-the-rot-in-indias-banking-system/

“The rabbit runs faster than the fox, because the rabbit is running for his life while the fox is only running for his dinner.”
— R. Dawkins

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Simply put, incentives matter a lot. Incentives are at the root of a lot of situations we face and yet we often fail to account for them. They carry the power to distort our behavior and blind us to reality.

Even accounting for them is often not enough. As Charlie Munger cautions, “I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. Never a year passes that I don’t get some surprise that pushes my limit a little farther.”

In Pebbles of Perception: How a Few Good Choices Make All The Difference, Laurence Endersen writes:

We can only see a situation with true clarity when we take the time to carefully consider the interests at hand. And we understand it even better when we consider how the situation might be different if the underlying interests were different.

But … just as we often fail to understand them, we can also overly focus on them. To the man with a hammer, everything looks like a nail.

Imagine the nature of a football game where the first goal scorer took all the spoils. There would be one hell of a scramble to score the first goal and it might make compelling viewing. The carrot is effective, but it is too pointed. We suddenly focus on the incentive and forget about the second order consequences. What we see is that narrow incentives influence performance, but they may not improve it. Studies of loan officer approvals during the recent US mortgage crisis showed that the loan officers actually believed the cases with the highest commission were more creditworthy. The effect was worse than naked self-interest: the incentive actually blinded their judgement.

Understanding incentives comes through second-and-third-level thinking. Many incentive systems have backfired because people failed to consider other interests and incentives.

An example is monetary rewards offered to help exterminate unwanted animals such as rats and snakes. What authorities failed to foresee was that people would start to breed the rats and snakes. Forcing people to have overly complex passwords can be another perverse incentive. When faced with this complexity we simply write down our passwords somewhere “safe”.

As to good incentives, money is not enough.

Good incentives acknowledge recognition, public perception, and the value of pursuing work that we can be proud of. So yes, if we want to persuade, we should appeal to interests not reason. But when it comes to interests, appeal not just to net worth but also to self-worth.

There are a few things worth keeping in mind.

First, the behavior you see is usually the result of incentives you don’t see. Consider the sharp elbows you see in a typical workplace. Looking at this behavior in isolation it makes little sense. However, odds are, this is rewarded in some way.

Second, we generally get the behavior we reward.

Third, creating effective incentive systems is hard work. We need to consider not only the first level of incentives but also the second and third and how they will impact the system.

Enderson concludes:

Incentives matter greatly – underestimate them at your peril. People will navigate the shortest path to the incentive. The curious among us will pay particular attention to incentives, monetary or otherwise.

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“People often overestimate what they can accomplish in one year.
But they greatly underestimate what they could accomplish in five years.”
— Peter Drucker

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Self-motivated, self-starting individuals are incredibly motivated to find their weaknesses. It’s not far-fetched to say that some of us actually seek to make ourselves perfect — rational, calculating beings making the right type of decisions at just the right times. But we’ve learned from Star Trek; we don’t look to eliminate emotion either and turn ourselves into Mr. Spock. We want just the right amount of emotion in our lives.

If we’re night owls, we seek to become early risers. (Ben Franklin did it!). If we’re procrastinators, we look to become doers. If we’re always late to meetings, we look to be early to meetings. We want to eliminate our weaknesses and become a little More.

This is, of course, a laudable goal and one of the prime reasons for Farnam Street’s existence. But the self-starters among us have probably all run into the same problem: We don’t actually follow through on the things we know will make us better. We get a little too robotic. We get up at 8:30 when we said we’d do 5:30 from here on out. We leave that essay until the last second even though that was was never going to happen again. We’re five minutes late. We don’t become More at all, and the failure to get there makes us feel like Less.

The culprit, I think, is the thought that any important change happens quickly. It doesn’t matter whether you’re trying to get up early or pick up and implement the Psychology of Human Misjudgment. Anything important happens pretty damn slowly.

And why should it be otherwise? If you were to truly understand, in depth, and apply the Psychology of Human Misjudgment to your dealings, you’d be way far out ahead of your peers and your former self. The advantage of understanding human nature is incredible. But it takes deep, repeated study and a long gestation period to get there. It takes applying the ideas to the world, feeling them out, forgetting them, re-doubling yourself, and trying again. Not giving up when you forget or fail. It is through the process of refinement that one learns new habits and ideas.

The visual mental model I like for self-improvement is imagining something like a Lathe.

A lathe, for the non-engineer, is a tool that molds a piece of material into some shapely form. A machinist would use a lathe to take a hunk of metal and turn it into a useable engine part, for example. The lathe takes something with potential and shapes it into something useful by slowly refining it and shaving away the excess.

The way I think about it, if I can get 5% wiser and better every year, then I will be about twice as wise as I am now in less than 15 years. (Go ahead, grab your calculators.) In less than 30 years, my return will be 4x. This is how the non-gifted among us can surpass otherwise more intelligent people.

Before you go off trying to figure out how one can measure such an unmeasurable thing as Wisdom or Usefulness, or whatever it is we’re really aiming at in the self-improvement game, let me be clear that the numbers don’t matter so much as the concept: Small improvements add up to massive differences. Compounding works in other arenas besides money. And we want to compound worldly wisdom.  

These little mental tricks like the Lathe and the idea of 5% yearly improvement are just ways to remind myself that I’m not going to wake up wiser/nicer/healthier/smarter tomorrow morning, or the morning after. And just as importantly, if I backslide on a goal I’ve set or I forget something I thought I’d learned well, that it’s really not the end of the world. I don’t need to give up and call it hopeless. All I have to do is figure out where I slipped, re-double my efforts, and go after it again. All I need is 5% a year to become 4x better in my adult lifetime.

The truth is that whatever bad habits you have or whatever things you’re struggling to learn, there’s probably a good reason. Your biology and your experiences to date have set you in stone to a certain extent, and the older you are, the more likely that is to be true. Warren Buffett likes to say that The chains of habit are too light to be felt until they are too heavy to be broken. Billion-dollar industries have been built on convincing you that it’s easy to make big changes or to get a lot wiser and better. But it honestly isn’t. It’s hard work. But a study of great individuals reveals that the work is worth doing.

So just imagine if you could make slightly better decisions every year. Whether it’s 5% better consideration of all of your decisions, or making 5% of your decisions differently, or some permutation thereof, it doesn’t really matter. Every year you’ll look back at some part of your old self and wonder how you could’ve been so dumb. And one day, in less than 30 years, you’ll look back and see your old self as almost unrecognizably stupid.

What more could you ask for?

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Syndicate Bank has been under the radar for quite a few years now. First its CEO was arrested in 2014 and  now its officials have been arrested in a Rs 1000 cr fraud. As a learning student of Indian financial/banking history, one feels really sad to see such developments.   Syndicate Bank which started as The Canara Banking and […]

Jindal Steel and Power Limited has been downgraded to “default” (D) by Crisil. The rationale is simple: 

The rating downgrade reflects delays by JSPL in payment of interest on its term loans; the delays were due to weakened liquidity. Liquidity deteriorated significantly as the steep fall in steel realisations coincided with high debt repayment obligations. Pressure on liquidity intensified further due to delays in materialisation of asset monetisation plans and refinancing of debt.  

JSPL’s steel business remains vulnerable to volatility in demand and in prices of metal, while its power business is susceptible to demand and price volatility in the merchant market and lack of raw material integration. The group is also exposed to risks related to regulatory changes in the mining sector. However, it has a healthy market position in the steel industry, value-added product profile, and proximity to raw material sources. Successful debt refinancing and asset monetisation will be critical for the group and will assist in tiding over the current liquidity constraint.

… (Read On...)

Let me do a very text bookish kinda post. What are the big broad steps and the small steps in the Investment consulting process? I am sure if you have / had a good adviser you would have gone through the whole process..or the IFA may have done away with some steps thinking you do […]

The post Latticework of Mental Models: Network Effect appeared first on Safal Niveshak.

You go out on a Saturday morning for a game of cricket. Your team wins the toss and you start batting. It is 10 overs a side and your side scores 55. You consider this a good score, and are happy with that. You are a little disappointed with the 4 LBW decisions which went […]

A note by Guillaume Vandenbroucke on Russia;’s demographic profile.  Russia is one of those countries whose death rates has been rising for quite some time now: After the collapse of the Soviet Union in 1989, Russia’s gross domestic product declined by more than 5 percent per year for 10 years, its birth rate sharply declined, and […]

Just as we think things are getting stable in the rest of the world, Austria has fallen into a strange situation. There was a bank, Heta. It failed. Six years ago.

And when it did, its bonds were guaranteed by the province, Carinthia, which now has to pay back around 11 billion euros worth (Bloomberg) After years of status quo, the province has offered 75 cents on the Euro for the senior bonds (and 30 cents on the junior bonds) to the creditors. Meaning, people who’ve given them 100 euros should settle for 75.

Except they’re not happy. Carinthia gave a guarantee, one that the Austrian government too said was as good as sovereign debt, and therefore they should make good that obligation, say the creditors, which are largely German banks. They’ve rejected the deal, and the group that’s vocally done so owns 5.5 billion euros worth of bonds which can stymie any forced deal (which needs 2/3rd or more of bondholders to accept). … (Read On...)

Before I start this evening, I want to add one follow-up to last night’s piece on Berkshire Hathaway.  My summary was that it wasn’t a great year, and the profit margins are likely to shrink in insurance, because BRK is being conservative there.  So why do I still own it for my clients and me?

BRK is trading maybe 8% over the level at which it would begin buying back stock.  Even in a pessimistic year, I expect BRK’s book value to rise to the level that triggers the buyback.  Thus, I think the floor for the stock is pretty close below me, and there is a decent possibility that Buffett could do some things with the cash that are even better than buybacks, especially if the market falls into bear territory.

It is positioned well for most market environments, even one where insurance gets hit hard.  BRK is “the last man standing” in any insurance crisis — they have the ability to prosper when other companies will have their capital impaired, and can’t write as much business as they want.

That’s why I own it.

Long BRK/B for my clients and me

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Onto tonight’s topic.  This is partially spurred by an article at Bloomberg.com entitled Angry Americans: How the 2008 Crash Fueled a Political Rebellion.  There was one graph that crystallized the article.  Here it is:

Incomes have not improved for the bottom 80% of Americans over the last decade.  Before I go on, recognize that the income distribution is not static.  The same people are not in each decile today, as were in 2006.  Examples:

• Highly skilled students in a field that is in demand graduate and get jobs that pay well.
• Highly skilled immigrants in a field that is in demand come to the US and get jobs that pay well.
• Less skilled people who relied on the private debt culture to keep getting larger no longer have jobs that pay well in finance, construction, real estate, etc.
• Workers and businessman who expected the commodities and crude oil boom to go on forever have seen their prospects diminish.
• Some people have retired and their income has fallen as a result.
• Layoffs have come in some industries because many people did not realize that they were lower skilled workers, and as such the work that they did could be automated or transferred to other countries.
• Manufacturing continues to get more efficient, and we need fewer jobs in manufacturing to produce the same output (or more).  This is true globally; manufacturing jobs are being reduced globally.
• Technology firms that apply the advantages of the internet gain value, while legacy firms lose value.  Whole classes of goods go away because they are replaced, and in other cases, some firms find that they can’t price their products to make a decent profit, while other firms can.
• Some effects are demographic, like mothers ceasing work to raise children, or industries with a lot of older workers becoming uncompetitive because their pension plans are too expensive to fund.
• Divorce usually ruins the prospects of the wife, if not the husband.
• Throw in death, disability, substance abuse, and serious diseases.
• And more…

Thus there is a lot of reason to look at the graph and not say, “The rich are getting richer,” but, “Those who are getting rich today are doing so faster than those who were getting rich back in 2006.”

My life is even an example of that… I make less than 30% of what I was making in 2006.  On an income basis, I’ve gone from the top of the graph to the middle.  I’m not upset, because I’m debt free, and manage my finances well.  I’m grateful to have my own little firm, and every client that I have.

Resentment

That said, many feel that the comfortable life that was theirs has been denied to them by forces beyond their control. They think that shadowy elites want to turn previously well-off people into modern serfs.

It’s a tempting thought, because most of us don’t like to blame ourselves.  Myself included, we all make mistakes.  Here is a sampling:

• Did we make a bad decision in the industry in which we chose to work?  The particular firm?
• Did we choose a bad field of study in college?  Rack up too much student loan debt?
• Did we borrow too much money at the wrong time?  (Remember, debt is always a risk.  If you don’t know that, you shouldn’t borrow money.)
• Did you make bad decisions regarding your assets, and get too greedy or fearful at the wrong times?
• Did you spend too much during your good years, and not save enough for the future?
• Did you not buy the insurance that would have protected you from the disaster that hit you?
• Throw in relationship errors, etc.

The truth is, changes in technology, and to a lesser extent demography, affect the entities that we work in, and affect our personal economics as a result.  There are some politicians blaming immigrants for our problems, and that’s not a major source of our difficulties.  Most people don’t want to do the work that unskilled immigrants do, and skilled immigrants get hired when there aren’t enough people seeking those positions.

There is a need for retraining, but even that has its difficulties, as technology is changing rapidly enough that more areas may face job reductions.  Again, this is a global thing.  Those that think that making trade less free will help matters are wrong.  It’s not trade; it’s technology.

Some think that matters can be fixed by changing government taxes and spending.  That would only help limitedly, if at all.  Businesses and people can move to other countries.  In an era of the internet, many more things can move than ever did previously.

Now, if the developed  countries collaborated to unify tax policies, some of that would end.  But cheating under such a regime is too tempting, just as Indiana and Wisconsin try to attract businesses to move out of Illinois.  The relatively healthy governmental entities have advantages that allow them to prosper at the expense of the sick ones.

You’re Going to be Disappointed

Politicians live to promise.  I can tell you right now that not one of the surviving candidates for President has a realistic proposal that could be voted up by the next Congress or the buyers in the US Treasury market.  It’s all airy-fairy… just as most politicians have been since we stopped running balanced budgets.

I would encourage you therefore to look at your own situation and resources soberly, and assume that the next government will do nothing better for you than the current one.  All of the main drivers of what could improve matters for the middle class are outside the power of any individual government, so plan your own situation accordingly and adjust your economic expectations down.  After all, there is no place in the world that can promise its people prosperity.  Why should the USA be any different in this matter?

While on Social Media a couple of days ago I saw a news item about Urmila Matondkar’s wedding. Normally this would not have caught my attention as a news item, but I saw this one – and decided to read the comments. They were so harsh!! Imagine a girl/lady says ‘I am getting married / […]

The post Latticework of Mental Models: Liking Bias appeared first on Safal Niveshak.

Every Hindi movie buff has heard the dialog ” tum koi karodpati ho kya” – like the word ‘millionaire’ in the US. Lets face it once you have a house in a city like Mumbai, and your loan paid off, the chances are that you are a ‘Crorepati’ as we call it. I guess that […]

Matthew Frederick teams up with Michael Preis to offer some important learnings from the world of business — which isn’t really a discipline in and of itself but rather, as they write in the introduction to 101 Things I Learned in Business School, “a broad field of endeavor encompassing such diverse disciplines as accounting, communications, economics, finance, leadership, management, marketing, operations, psychology, sociology, and strategy.” Here are some lessons gleaned from a trip to business school. (Some of them, at least.)

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A mission or vision statement driven by consensus is probably so watered down it becomes meaningless. Part of the reason this happens is that when you seek consensus you end up with something that no one at the table can disagree with so you don’t really end up saying anything important.

A mission statement describes the current central purpose and goal of an organization, to guide daily decision making and performance.  A vision statement describes what an organization seeks to become, or the ideal society to which the organization seeks to contribute.

When drafting and evaluating potential mission and vision statements, ask if the opposite of a proposed statement is obviously undesirable. If it is, the statement is obviously undesirable. For example, a university mission statement that says the institution “seeks to produce highly effective productive citizens” is unlikely to have any real influence on employees or students, since no university seeks to produce its opposite—ineffective, unproductive citizens. A more meaningful statement will assert that which is truly specific to the organization; it describes what the organization seeks to do that many or most of its peers do not.

This is reminiscent of the approach Ken Iverson took at Nucor: The company needs a specific call to a specific action. Otherwise, you’re wasting everyone’s time with a watered down message.

There are no called strikes.

Billy Beane, who offers compelling insight on making better decisions and avoiding biases,  is quoted in Moneyball to have said “You can always recover from the player you didn’t sign. You may never recover from the player you signed at the wrong price.” This is reminiscent of what Warren Buffett had to say on the same subject: “In investments, there’s no such thing as a called strike. You can stand there at the plate and the pitcher can throw the ball right down the middle, and if it’s General Motors at $47 and you don’t know enough to decide General Motors at $47, you let it go right on by and no one’s going to call a strike. The only way you can have a strike is to swing and miss.” Turns out we can learn a lot about decision making from baseball star Ted Williams and the fictional character Mr. Market, who was invented by Benjamin Graham.

Adding to our knowledge on Feedback Loops, Frederick and Preis distinguish the difference between positive and negative feedback loops.

In a negative feedback loop, the system responds in the opposite direction of a stimulus, thereby providing overall stability or equilibrium. The Law of Supply and Demand usually functions as a negative feedback loop: When the supply of a product, material, or service increases, its price tends to fall, which may lead to raising demand, which will drive the price back up.

In a positive feedback loop, the system responds in the same direction as the stimulus, decreasing equilibrium further and further. For example, a consumer who feels prosperous after making new purchases may end up making even more purchases and take on excessive debt. Eventually, the consumer (Ed. or Government) may face financial ruin and have to make a major correction by selling off assets or declaring bankruptcy (Ed. read A Parable About How One Nation Came To Financial Ruin). Because positive feedback loops restore equilibrium in their own, often dramatic way, it is sometimes suggested that positive feedback loops occur within a larger, if not directly visible, negative feedback loop.

Speaking of The Law of Supply and Demand: It doesn’t always apply.

The Law of Supply and Demand says that if the supply of a given product or service exceeds demand, its price will decrease; if demand exceeds supply, its price will increase. Rising and falling prices impact demand similarly. When supply and demand are exactly equal, the market is at an equilibrium point and acts most efficiently: Suppliers sell all the goods they produce and consumers get all the goods they demand.

Not all products have historically adhered to the Law. When the prices of some luxury or prestige items have been lowered, demand has fallen due to reduced cache. In other instances, rising demand for a product has led to improvements in technology, increases in production efficiency, and the perfection of distribution challenges, all of which have driven prices down. Electronic technologies have tended to follow this pattern.

Experts are not always the best people to solve problems – it’s more about combinatory play — A point not lost on Seneca, Steve Jobs and James Webb Young.

Experts are expected to know a lot, but often it is better to know how to organize and structure knowledge than to simply have knowledge. Innovative thinkers don’t merely retain and recite information; they identify and create new patterns that reorganize known information.

When you don’t think about what you’re doing, you tend to promote the best performer to manager, which is often a mistake. Echoing James March, Preis writes:

Employees who excel in one area of business are often promoted to supervisory positions. But in management, one’s achievements are measured through the actions of others. A first-rate lab researcher promoted to lab supervisor, for example, has to coach, mentor, manage, and help other researchers make discoveries—something that may be beyond his or her abilities or interests. Compounding the problem for the organization is that the department no longer has its best researcher making discoveries on the bench.

Contrary to conventional wisdom, the higher one rises in an organization the longer it takes to implement a decision. (The decisions are more consequential, though.)

Front-line managers can effect immediate changes by directly instructing workers. A sales manager can redirect the activities of sales people immediately, and an accounting manager can make immediate changes in bookkeeping practices. At higher levels of an organization, where employees are more concerned with strategic matters, decisions take more time to implement. If the vice president of marketing wishes to change the style of a product being produced, considerable time will be required to engage feasibility studies, explore design alternatives, investigate the technical methods required, and alter manufacturing practices.

Further to this, the higher one rises in an organization the more one must be a generalist. At the front-line level you often only need direct knowledge of specific activities. Managers need a broader understanding in addition to this knowledge, and they are often missing one or the other.

101 Things I Learned in Business School is a good read; however reading The Letters of Berkshire Hathaway (also freely available) is a better way to understand what an MBA should be teaching. This site, after all, wouldn’t exist without the failed education of an MBA.

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