Chaitanya Patel

So it’s nearly a week since Uber and Ola drivers in Bangalore went on strike, and there’s no sign of it (the strike) ending. The longer the strike goes on for, the more incredibly stupid all parties involve look.

The blame for the strike should first fall on Uber and Ola, who in some hare-brained madness, forgot that running a platform means that both sides of the market are customers and need to be taken care of. They took good care of passengers, providing discounts and growing their market, but rather quickly pulled the plug on drivers, and there is no surprise that drivers are a rather pissed off lot.

The root cause of driver dissatisfaction has been falling bonus payments, and consequently, incomes. This is a result of Uber and Ola providing too great a subsidy during the time they built up the market.

I don’t fault them for providing those bonuses – when you are building a two-sided market, you need to subsidise one side to solve the chicken-and-egg problem. Where I have the problem is with the extent of bonuses, which gave drivers an income far in excess of what they could make in steady state. This meant that as the market approached steady state and incentives were withdrawn, once side of the market started getting pissed off, undermining the market (Disclosure: I’d once proposed to Ola that they hire me to help them with pricing and incentive structuring. the conversation didn’t go too far).

With Uber and Ola having done their stupid things, the next round has gone to the drivers. In a misguided attempt that a long strike will help them get better deals from the platforms, they are prolonging the strike. They’ve even ransacked Uber’s offices, and gone to the government for help.

What they don’t realise is that having invested what they have in their cars to drive on these marketplaces, their success is inextricably tied to the success of the marketplaces. And the more the jeopardise the marketplaces, the less their incomes in future.

A long strike reduces market size on two counts – it gives people time to adjust to the absence of service and get adjusted to alternate arrangements, and it decreases the reliability of the marketplaces in the eyes of the passengers. Thus, the longer and more frequent the strikers by the drivers, the less that passengers will look to use these services in the future.

A strike can work when the striking employees are protected by some form of labour laws, and there is no way ahead for their employers apart from a negotiated settlement. In case of a marketplace, the platform has absolutely no obligation to the drivers, and Uber and Ola can simply do what Uber and Lyft did in Austin, TX – pack up and move on. And if they do that in Bangalore, the drivers with their shiny new cars will be significantly worse off than they were before the strike.

The other act of stupidity on the drivers’ part has been to involve the government, which, as expected, has responded in a nandelliDLi (“where do I keep mine?”) fashion. The recent ban on shared rides (UberPool/OlaShare) came after a regulator read the rulebook after the last strike by the drivers. Given the complex economics of platform markets, any further regulation can only hurt the drivers.

All in all, the drivers’ stupidity can be traced back to not understanding platform markets, and protesting the way protests used to be done in highly unionised industries. Drivers, whose main skill is in driving cars, cannot be faulted so much for not understanding platform markets. Uber and Ola, on the other hand, have no such excuse!

The post Investing is Simple, but Not Easy appeared first on Safal Niveshak.

    

Two years ago, Mike Carney (Chairman of the Financial Stability Board apart from being Governor of the Bank of England) warned financial regulators that they should:

not be in this position where we’re filling in with prudential regulation after the fact. In other words, facing an Uber-type situation in financial services, which many jurisdictions are struggling with.

(This discussion can be found around 59 minutes into the video from the World Economic Forum Annual Summit at Davos in 2015).

The Uberization of finance does appear to be a probable outcome, and many fintech startups are predicated on this possibility. But then I read the paper by Pollman and Barry on Regulatory Entrepreneurship which they define as:

pursuing a line of business in which changing the law is a significant part of the business plan

Uber and Airbnb are among the prominent examples of regulatory entrepreneurship that they discuss in their paper. Pollman and Barry enumerate several business-related factors, law-related factors and startup-related factors that facilitate regulatory entrepreneurship. Among these are two that appear to pour cold water on the Uberization of finance:

One important factor is the penalty that the law imposes on violators. For example, if the only penalty is a civil fine imposed on the corporation, pushing the boundaries of the law may be an attractive prospect. ... On the other hand, if a law provides for the incarceration of the executives of a company that violates it, that may deter the guerrilla growth strategies that some modern regulatory entrepreneurs employ.

Relatedly, another key element is whether the law in question is determined at the local, state, or national level. Change at the state and local level is often possible more quickly than at the national level.

The authors refer to the shutting down of Napster to highlight the difficulties of regulatory entrepreneurship in the face of national level laws that carry significant criminal penalties. This lesson is clearly quite relevant to much of finance.

Another aspect that Pollman and Barry do not mention is that much of regulatory entrepreneurship has succeeded against incumbents who are not very technology savvy. The finance industry on the other hand is technologically quite sophisticated, and is quite capable of adopting and co-opting any successful innovations that the regulatory entrepreneurs may come up with. Examples of such behaviour include:

• Large investments that the big banks have made in blockchain technology in response to Bitcoin which was a highly anarchist innovation to begin with.

• Integration of peer lending institutions into mainstream finance – extensive use of securitization, reintermediation by hedge funds and other financiers, collaboration with large banks and so on.

A counterpoint to this is that historically some of the truly radical innovations in finance have come from criminal enterprises. Three centuries ago, central banking was created largely by criminals. Johan Palmstruch, the founder of the world’s oldest central bank, the Sveriges Riksbank of Sweden, was sentenced to death before a royal pardon reduced the death sentence to imprisonment. Another great pioneer of central banking was John Law, who escaped from the English prison where he was held on charges of murder, and went on to preside over the French experiment with central banking in the early eighteenth century. John Law was probably the greatest central banker of his generation, but he spent most of his life roaming across Europe as a fugitive from the law. The founder of the Bank of England, William Paterson was an exception in this regard (he was certainly of high integrity), but he was a reckless adventurer who would probably not be acceptable to any modern central bank. A lot of modern finance is actually re-purposed criminality – negotiable instruments (bills of exchange) were originally created to evade usury laws, fractional reserve banking is alleged to have evolved out of goldsmiths fraudulently lending out customer gold which was not theirs to lend (though this has been disputed), and so on. If there is money to be made in fintech, even the threat of a death penalty will not deter would-be entrepreneurs, and it is at this edge of criminality, that we must look for future radical innovations in finance.

In his 2016 annual letter (pdf, 28 pp) to the shareholders of Berkshire Hathaway, Warren Buffett makes this observation about America’s economic dynamism.

“One word sums up our country’s achievements: miraculous. From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.

“You need not be an economist to understand how well our system has worked. Just look around you. See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.”

Buffett is right about the factors that create wealth — ideas (or human ingenuity), ambition, the free market system, and the rule of law. Let’s explore some of these in more details.

Wealth

Buffett estimates the accumulated wealth of the US to be $90 trillion. I assume that it refers to aggregate household wealth.

The accuracy of any estimate related to the total wealth of such a large collective as the US is likely to depend on what one counts as wealth. One way would be to add up the household wealth and government owned wealth. Household wealth is easy enough to estimate using statistical techniques and readily available data. The total value of homes, vehicles, shares of stocks, and savings held by households are easy to aggregate. Estimating government wealth is harder because local, state and federal governments own land which has natural resources that constitute national wealth but cannot be priced.

The 2015 US GDP in 2015 dollars was $18T according to the World Bank. Total world GDP for 2015 was $75T. That is, the US accounted for around 24 percent of world income with only a little over 4 percent of the world population. The question is: why is the US so successful in creating wealth?

(A related question would be why the US tops the rest of the world in the destruction of wealth — through wars and the mass production and stockpiling of a vast array of weapons of mass destruction. I will deal with that in a different piece.)

The one word answer to that question is “Freedom.” Free people create the institutions that help people create wealth. The institution most critically important is what is called “free markets”, and it can only be created by free people. The progression is simple: free people ⇒ free markets ⇒ wealth creation.

Free Markets

We humans exchange all kinds of stuff among ourselves. Why we exchange stuff is because we are not equally good at producing all the things that we want to consume. That is, through exchange individually we are able to consume a larger set of goods than if we were confined to consume only what we individually produce or was available to us. Where exchanges are done is called the market. It need not necessarily be a physical location, although commonly it is, because markets in essence are a mechanism (an institution) where rights are traded, and rights are abstractions. I can buy the right to a piece of land by paying for it by a bank transfer over the web.

Markets are as old as civilization. More precisely, as old as the invention of human laws that established the notion of private property. The important advance was the establishment through some rule the link between something and someone. Without private property, there can be no exchange since what you don’t own, you cannot exchange. A certain set of rules lead to ownership, that creates the possibility of exchange, and therefore markets.

Different sets of rules create different kinds of markets. One special kind is “free markets.” Free markets are those in which there are no barriers to entry or exit. Anyone can participate as a buyer or a seller in a free market, and equally importantly, anyone can exit the market as a buyer or a seller. There is no force or coercion involved in a free market.

Slavery

Examples of not-free markets abound. A slave market is not a free market for one obvious reason: a slave does not own himself. The lack of self-ownership is a consequence of the set of rules in a society that recognizes slavery.

The US used to have a set of rules of that kind until slavery was abolished in December 1865. The UK abolished slavery in 1833 in the British Empire except for the territories held by the East India Company. The Indian Slavery Act of 1843 outlawed slavery in India under East India Company rule.

Self-ownership is a necessary precondition for the existence of a labor market where people can buy and sell labor. But that is not a sufficient condition for free labor market. When there are barriers to entry (or exit) in the labor market, then it is not a free market. These barriers are always created by the government. For instance, a minimum wage is a barrier to entry in the labor market.

British Raj

In India, there are laws that forbid certain firms from letting go of labor at will. That is, there is no free exit from the market as a buyer. This is supposed to help labor but it actually hurts the interests of labor and thus is a major factor that impoverishes India.

For around 150 years until 1947, the British crafted all the rules that governed British India. These rules were understandably designed to keep Indians under British government control, and therefore India lacked free markets. That led to deepening poverty in India. After 1947 when the British left, the Indian leaders took over the task of denying freedom to Indians using essentially those British era rules, including the restrictions on free markets. India’s poverty was engineered by the British and implemented enthusiastically by Indians.

One of the features that distinguishes India and the US, and which explains why India is poor while the US is rich, is that the US has relatively more free markets than India. Of course the lack of free markets is a consequence of a general lack of freedom in India. That’s India’s “license control permit quota raj” that Indian politicians of all stripes absolutely adore.

Competition

Competition is a universal feature of the biological world. Indeed the variety of life on earth is a consequence of that universal biological drive. The origin of species, as Charles Darwin discovered, requires competitive success. Every animal that ever lived has had an unbroken line of successful ancestors.

Humans are not only not immune but are masters of the competition game. Wealth creation depends on competition. Even cooperation — the seeming opposite of competition — is at least partly motivated by the competitive instinct in the sense that absent the necessary cooperation of others, one would be handicapped in any competition.

Free markets, with their characteristic lack of barriers to entry and exit, is the battle ground for competition, and the source of all the wealth that we enjoy. Free markets create wealth through competition.

Look around yourself and see all the material goods that you value. Take the computer that I am using to write this, the internet that will make this piece accessible to anyone who is interested in reading this perhaps on a smart phone. All of them the products of intense competition. The big corporations such as Google, Apple, Tesla, Microsoft etc., and the innumerable small firms all the way down to the little corner stores — all of them products of competition that markets enable. Also note that the greater the extent of free markets, the greater the range and scope of wealth producing firms.

South Korea is a rich country, while North Korea is a poor country. The South Koreans have freedom that the North Koreans don’t have. Hence South Korea produces great wealth. The distinction between the two comes down to the set of rules.

South Korea’s Samsung competes with Apple. Apple is forced to be as good as it is because of Samsung, and vice versa. The same story can be told in any industry. The auto industry keeps innovating and turning out ever better products because of the competition among automotive firms. Boeing and Airbus keep improving their jetliners not because they love airlines but because they want a greater share of the commercial jetliner pie. Airlines compete with each other by providing the best price-services value not because they love airline passengers but because they love to make a profit.

Love and Self-love

Love is always in short supply relative to demand. Therefore economizing on love is always a great idea. What makes the world go around given the scarcity of love is the desire for the easily attainable commercial profits. The great Scottish enlightenment moral philosopher, Adam Smith, the granddaddy of economics, put it very nicely in his book An Inquiry into the Nature and Causes of the Wealth of Nations, published by happy coincidence the same year that the US became independent, 1776.

Without apology and with great delight, I present an extended quote from Volume 1, Chapter 2 of the book. Smith discusses exchange and cooperation, and how self-interest, far from impoverishing the world, leads to socially beneficial outcomes even though that is not the primary interest of the participants in a market exchange:

“Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that. When an animal wants to obtain something either of a man or of another animal, it has no other means of persuasion but to gain the favour of those whose service it requires. … In civilised society [man] stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons. In almost every other race of animals each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature. But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.“

Not love but self-love that makes motivates people to do what they do, and that creates wealth.

Alice’s Insight

I cannot leave this topic without a respectful nod toward another great mind — the logician, mathematician, author Lewis Carroll (born Charles Lutwidge Dodgson 1832 – 1898). Most people know of his famous books Alice’s Adventures in Wonderland (1865), and Through the Looking Glass and What Alice Found There (1871). But only scholars interested in voting methods know that he is the author of the Dogdson’s Method that selects a Condorset winner in an election.

Don’t bother yourself with what a Condorset winner is. I mention that only BTW. What I really want to point to is that matter of love. In Wonderland, Alice meets the Duchess and in one exchange, the Duchess makes the extraordinary claim that the moral of a particular event is that:

“Oh, ’tis love, ’tis love, that makes the world go round!”

Clearly Alice was not going to buy that leftist bile.

“Somebody said,” Alice whispered, “that it’s done by everybody minding their own business!”

I’d like to believe that it was good ol’ Adam Smith whom Alice was quoting. I will go into minding your own business in part 2 of this piece.

Be well, do good work and please keep in touch. Hat tip Rajan Parrikar for the Buffett letter.

{This is part of a work in progress called “The Wealth of Nations.”}

Bond yields are rising, and fast! You can’t see that in the 10 year bond (which is still at 6.86%) … (Read On...)

The lure of past returns..

Let us assume you had to invest in debt funds a week back, i.e 7th,February 2017. And you are shown the last 3 year returns of the major debt fund categories.

*Compounded annual returns as on 07-Feb-2017 , Source: Value Research

Note: I have considered some sample funds from the major fund houses for ease of explanation

Which fund category would you choose?

Looks pretty obvious right. ~12% compounded annual returns in the last three years for Income funds vs 8% in Liquid Funds.

Wow! Let me invest in Income fund category.

This is precisely how most of us end up taking our investment decisions.

But haven’t we heard the saying “There is no such thing as high returns without risk”

And then 8th February, 2017 happened..

On 8th, February, 2017 something strange happened.

Did I see it right?

Negative returns in income category of debt funds. A fall of ~2% in a single day. Oops!!

What the f&%$??

But weren’t debt funds supposed to be similar to fixed deposits and have stable returns?

Now before we jump into conclusions, let us also check the other categories in debt funds..

The fall seems to be a lot lesser in Short term funds and Ultra short Term funds. Liquid funds seem to have no impact.

But..why??

Returns and Risk – two sides of the same coin..

Investing, unfortunately is a two sided coin.

Most of us only see one side of the coin – ‘returns’, which is obvious as it is concrete and easily available. All you need is value research or morningstar and you have all returns presented to you in a platter.

But the other side of the coin – ‘risk’, is a lot more subtle and hidden from plain sight. And this is where the problem lies as more often than not – it is ignored.

The problem is compounded by the fact that there is absolutely no way in which you can put a concrete number to measure risk. Think about it, what is the risk of you falling from your bike tomorrow. Now based on the traffic, speed etc you can come up with an approximate evaluation.But to come up with a precise number is impossible as it involves a lot of unknowns.

The same thing applies to evaluating risk in investing.

So the key is not to get lost in statistical numbers like standard deviation etc in the quest to quantify risk. Rather the idea is to intuitively understand the drivers of returns and get an approximate sense of the underlying risks. This is more an art rather than science.

The above event is a great opportunity to start appreciating the dynamics between returns and the underlying risks in debt fund investing.

Behind the scenes..

You can go through this earlier article of mine to understand the drivers of debt returns

https://eightytwentyinvestor.wordpress.com/2016/07/26/a-primer-for-investing-in-debt-mutual-funds/

As explained above,

Debt Fund Returns = Interest Income + Price impact due to interest rate changes

1. Returns from interest income for a fund will approximately be = YTM – Expense ratio
2. Returns from interest rate changes = (-1)*Modified Duration*Change in interest rate

Now using the above framework, while the first component (Net YTM) is pretty stable, the modified duration is the component which increases or decreases returns based on interest rate movement (inverse relationship – higher returns when interest rates fall and vice versa).

The higher the modified duration the greater is the degree of rise or fall when interest rates change. 

So let us check the modified duration for our funds,

Are you able to join the dots? (Hint: compare the modified duration and return impact)

Modified duration is the villain..

The funds with higher modified duration have fallen more. This means yields (or interest rates) have gone up. Let us check if that is true.

On 8 th of Feb,2017, the RBI in its policy meet did not cut the interest rates. Further it changed its stance from “accomodative” to “neutral”. This spooked the markets as most of them were expecting rate cuts or at least an accomodative stance.

So yields for various debt instruments increased and as a result the mutual fund returns were down depending on the extent of modified duration.

The below is the yields of the 10Year Indian government bond. It went up from 6.43 to 6.74 i.e ~0.3% on 8th-Feb-2017.

Source: https://www.bloomberg.com/quote/GIND10YR:IND

The math behind the fund returns..

For the income category,let us assume the yields were approximately down 0.20% to 0.30% i.e an average of 025%. (rough estimate)

So for income funds where the average modified duration was 7.5 and Net YTM at 5.4% let us calculate the returns

The return for that day =  (1) +(2)

1) Net YTM/365 = 5.4%/365 =0.015%

2) (-1)*Modified Duration*Change in interest rate = (-1)*7.5*0.25 = -1.875%

Return = 0.015% – 1.875% = -1.86%

which is approximately the fall in income funds on 8th February 2017.

So this is the math behind the fall, and now you can also understand why the fall in other categories were lower as their modified duration was also lower.

The “getting back to square one” arithmetic..

So assuming if the interest rates were to stay at the same levels, how long will it take to recoup my loss

Everyday return is around 0.015%. So to recoup the fall of 1.875% then the fund will need approximately 1.875%/0.015% = 126 days or approximately 4 months.

This is the risk that comes with modified duration. But if the interest rates were to go down you will make far higher returns.

Modified duration – Don’t forget the past hero avatar..

So now you might have a question:

The phenomenal 3 years of income funds which we saw in the beginning. Was that by any chance due to a fall in interest rates?

Bang on!

See the 10Y Indian Government bond yields for the last 3 years – from as high as 8.7% they had fallen to 6.4% !!

Summing it up..

Next time you pick your debt fund make sure you check the modified duration of the fund. If you decide to have a higher modified duration then you also need to take a call on the direction of interest rates.

So that simply means, whenever you invest in an income fund, you must also take a call on whether interest rates will go down or up. 

If you don’t want the headache of trying to predict interest rate movement, stick to Ultra Short Term funds or Liquid funds.

Also for a more detailed approach to debt fund selection please refer the below post

8 factor framework for understanding any debt mutual fund

And if you found the post useful, do subscribe to the blog for regular updates.

P.S:

If the above post made went a little over your head, no worries.

You can try the introductory posts here and it should be fairly intuitive from then on. While it may take up some of your time, it will help you get a solid understanding of the basics and ensure that you don’t get taken for a ride by bad financial advice.

1. A primer for investing in debt mutual funds (Link)
2. 8 factor framework for analyzing any debt mutual fund (Link)
3. Investing Chitra Katha – Understanding the impact of modified duration on debt fund returns (Link)
4. The ultimate guide to liquid funds (Link )
5. Here’s a quick way to select Ultra Short Term Funds (Link )
6. Making sense of Short Term Debt Mutual Funds (Link)
7. Credit funds – Don’t count your returns before they hatch (Link)
8. Here’s why I don’t invest in credit funds (Link)
9. Figuring out a simple do-it-yourself framework for short term investing (Link)

At Farnam Street we believe in the idea that a multidisciplinary approach to big ideas is the best way to form a deeper understanding. Some concepts will intuitively lend themselves to this type of thinking. Something like evolution is an easy one. But there are also times when this cross-pollination is far less intuitive, yet can produce some amazing results.

In Messy: The Power of Disorder to Transform Our Lives, author Tim Hartford walks us through some amazing examples of cross-fertilization and how purposefully adding a measured dose of chaos to your work can benefit you greatly.

Sandpaper Without the Sand

In the 1920s a gentleman by the name of Dick Drew worked as a sandpaper salesman at the Minnesota Mining and Manufacturing Company.

One day Drew was thinking about the challenge of painting a car — it wasn’t a specialty of his but he could appreciate the problem. What he did know inside and out was sandpaper, and he intuitively realized that sandpaper could help solve the problem. What he needed was a roll of sandpaper without the sand.

This became known as masking tape and it transformed more than just how we paint cars.

Presently we call the Minnesota Mining and Manufacturing Company 3M, and Dick Drew’s insight in the early 1920’s wasn’t an anomaly, it is the type of innovation that has defined 3M as a company. What made them so consistently creative and innovative?

…3M has a “flexible attention” policy. In most companies, flexible attention means goofing off on the company dime. In 3M it means playing a game, taking a nap, or going for a walk across an extensive campus to admire the deer. 3M knows that creative ideas don’t always surrender to a frontal assault. Sometimes they sneak up on us while we are paying attention to something else.

3M also rotates its engineers from one department to another every few years. This policy is one that many companies—not to mention some employees—resist. Why make someone with years of expertise in soundproofing or flat-screen displays work on a vaccine or an air conditioner? For the company it seems wasteful and for the employee it can be stressful. But for a company that makes masking materials out of sandpaper… the real waste would be to let ideas sit in their tidy silos, never to be released.

The key term here that Harford hits on is reducing silos.

Many companies, whether by design or by accident, tend to be very compartmentalized. In essence, you are given a tiny box within which to work on your project but you often won’t have a good idea of what’s going on in other areas of the company; the opportunities for cross pollination are limited unless you commit to moving positions/projects.

By adding just a little disorder, a company can give its employees the freedom to think differently and maybe even help them out of a rut that is often caused by looking at something with too narrow a focus. Sometimes we just can’t “see the forest through the trees” — we're stuck in our little box.

Crop Rotation

A company doesn’t have to rotate it’s personnel into wildly varying positions to achieve this goal; it can be as simple as providing an environment which allows employees to easily work on various/differing projects.

Creativity researchers Howard Gruber and Sara Davis see a strong link between the most creative people and their tendency to work on multiple projects. Gruber notes that Charles Darwin is a good example of this.

… throughout his life [Darwin] alternated between research in geology, zoology, psychology, and botany, always with some projects in the foreground and others in the background, competing for his attention. He undertook his celebrated voyage with the Beagle with “an ample and unprofessional vagueness in his goals.”

And then there are the earthworms. Darwin could not get enough of earthworms. This great scientist, who traveled the world, studied the finches of the Galápagos, developed a compelling account of the formation of coral reefs, and—of course—crafted the brilliant, controversial, meticulously argued theory of evolution, studied earthworms from every possible angle for more than forty years. The earthworms were a touchstone, a foundation, almost a security blanket. Whenever Darwin was anxious, puzzled, or at a loss, he could always turn to the study of the humble earthworm.

Gruber and Davis have coined a term for this melting pot of different projects at different stages of completion, they call it a ‘network of enterprises'. They argue that the parallel project approach has four benefits:

1. Multiple projects cross-fertilize. The knowledge gained in one enterprise provides the key to unlock unlock another.
2. A fresh context is exciting; having several projects may seem distracting, but instead the variety grabs our attention—we’re like tourists gaping at details that a local would find mundane.
3. While we’re paying close attention to one project, we may be unconsciously processing another—as with the cliché of inspiration striking in the shower. Some scientists believe that this unconscious processing is an important key to solving creative problems. John Kounios, a psychologist at Drexel University, argues that daydreaming strips items of their context. That’s a powerful way to unlock fresh thoughts. And there can be few better ways to let the unconscious mind chew over a problem than to turn to a totally different project in the network of enterprises.
4. Each project in the network of enterprises provides an escape from the others. In truly original work, there will always be impasses and blind alleys. Having another project to turn to can prevent a setback from turning into a crushing experience. The philosopher Søren Kierkegaard called this “crop rotation.” One cannot use the same field to grow the same crop indefinitely; eventually the soil must be refreshed, by planting something new, or simply taking a break.

Gruber and Davis argue that with the right network of enterprises, an impasse in one project can end up feeling somewhat liberating. If you fall down the wrong rabbit hole you have the ability to pivot to something fresh.

The writer can pull out some old jottings, the scientist can turn to an anomaly she had long wanted to investigate. What would have been a depressing waste of time for a single-minded person can become a creative lease of life for someone with several projects on the go. That’s the theory, but in practice it can be a source of anxiety. Having many projects on the go is a stressful experience that can quickly degenerate into wheel-spinning. (Rather than turning to the study of earthworms for a break, we turn to Facebook instead.)

We have written before about the negative aspects of multitasking and dividing your attention and focus. The goal here would be to find out the number and type of projects which give you the benefits outlined by Gruber and Davis but still keep that number manageable enough to not create an undue amount of stress. This will likely take a bit of trial and error.

Harford himself has a strategy that seems to work. It’s a wonderful mix of messy and organized.

I have a related solution myself, a steel sheet on the wall of my office full of magnets and three-by-five-inch cards. Each card has a single project on it—something chunky that will take me at least a day to complete. As I write this, there are more than fifteen projects up there, including my next weekly column, an imminent house move, a standup comedy routine I’ve promised to try to write, two separate ideas for a series of podcasts, a television proposal, a long magazine article, and this chapter. That would potentially be overwhelming, but the solution is simple: I’ve chosen three projects and placed them at the top. They’re active projects and I allow myself to work on any of the three. All the others are on the back burner. I don’t fret that I will forget them, because they’re captured on the board. But neither do I feel compelled to start working on any of them. They won’t distract me, but if the right idea comes along they may well snag some creative thread in my subconscious.

You can organize your projects like Harford, or come up with your own technique that suits your network of enterprises. The key is to create an environment that allows you to cross pollinate and, ideally, to rotate your crops when you stop liking what the harvest looks like.

If you want more, check out our other post on Messy, it’s a great book if you are looking for ways to facilitate a bit more creativity in your life.

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( a long piece- on budget making as well as this current one)

Budgets are wonderful things. They create so much flutter before they are presented and then a lot of debate. Industry captains uniformly praise the budgets (with some brave exceptions like Rahul Bajaj). Others will praise or condemn the budget depending on political leanings and some personal preferences or prejudices.

Before every budget, the stock markets start to go up. They like to forecast which sectors will get some bird droppings from the budget. And then of course, there will be hasty ramp up in prices of some stocks where the punters place their bets.

THE FUDGET MAKING EXERCISE AND SOME THOUGHTS:

I like to call the document as a ‘FUDGET’. This annual document is the annual report and accounts of the national exchequer. Unlike traditional annual accounts of a company, this document is not audited. And there are no uniform accepted accounting standards. Each year, the mandarins who prepare this complex document, will invent some new classification or measure. Their objective is twofold:

1. To manage expectations of global lenders and investors; and
2. Manage expectations of the general public.

Of course, there is something called “Fiscal Responsibility” which is mentioned whenever convenient.

In any household or business, the objective is that we should live within our means. But the nation never does something like this. In a house, if I have a temporary shortfall, I can borrow. But I have to repay it as promised. And, no one will keep on giving me loans indefinitely. Here is where the politicians, bankers and the sovereign budget score. In the last sixty odd budgets, I do not think we have ever lived within our means. We have created a mountain of borrowings that will be the burden on the next generation. And the government can also ask RBI to freely print more currency notes. The government can also ‘borrow’ money by issuing bonds. It is wise not to ask if the government of India can ever repay its debts. The total stock of outstanding debt simply keeps on increasing year after year.

So, there is no point in looking for the budget deficit number or any other big number. It is just arithmetic. The real issue is that the debt mountain keeps growing and as banks, insurance and FIIs have more and more money, they will keep ‘investing’ more and more in to debt issued by the government. Of course, we must not forget that in addition to central government, each state government also is part of this financial wrecking crew. Debt is truly forever. And the world is happy with the system where government profligacy finds takers in the form of fixed income investors. Of course, the sovereign has the highest credit rating when it comes to domestic currency.

BUDGET OF 2017-18

This budget is finely crafted and treads a middle path. I will not go in to the numbers or the various ‘yojanas’ that do not seem to appeal to most of those who will be reading this.

At the outset, every budget, whether household or sovereign, is based on the premise that one should live within the means. Both the sources and the uses keep expanding and it is always a struggle to make one equal to the other. Unlike an individual, a sovereign has the luxury of perpetually being in ever increasing dollops of debt. There are limits to it, beyond which the economy collapses in to becoming a poor state with hyper inflation and misrule, To this extent, we have been fortunate that over the last decade or so, fiscal discipline is talked about and boundaries are generally observed.

This budget sticks to the boundaries of prudence. Fiscal deficit at a modest 3.2% (could become lower if some schemes do not spend everything/revenues are more than expected or could slip if some revenues do not materialize as expected) is manageable given the ownership of the printing press. Economic growth numbers will be shy of eight percent but in today’s global economic situation, anything above five or six is good. Our economic growth is also a function of our entrepreneurial capability, our native intelligence and our fortunate failure to make global trade a big issue. Inward looking is perhaps turning out to be an ugly blessing that has stunted our growth over years, but saving us from pain at this juncture when the world is turning from free trade to protectionism. It is ironic that China is now advocating free trade to America!

What I liked in this budget are:

1. Announcement to do away with the FIPB;
2. A call to State Governments to do away with APMC in respect of perishables (read vegetables). This is interesting. Will help new aggregators and cold chain companies to deal directly with farmers and sell to the consumer/retail outlets. Filing forms, paying two percent cess for the State doing nothing has been the sole function of the APMC. In addition, the APMC creates a cartel of intermediaries who deprive revenue to the farmer and push prices up for the consumer. Companies like Reliance Fresh can directly enter in to Contract Farming and give better and cheaper produce to the consumer.;

• A five percent lower rate of taxation to companies with turnover less than Rs.50 crores is a welcome step. These companies are the true start-ups and entrepreneurs that create jobs. A big boost;

1. The disincentives for cash business with lower rate of income tax on digital or cheque transactions will improve the tax base for sure. This is a far reaching step;
2. The lowering of limit for cash donations to political parties is a good beginning
3. Making it unlawful to deal in cash for transactions above 3 lakh in value is another good move to lower the circulation of black money;

• Raising the threshold of compulsory audit for professionals to Rs.2 crore per year is a good move.

What I can see is that while there is an attempt to clean up and tone up the tax administration system, facilitate small and medium business and boost in government spending, they have not given in to resorting to ad hoc measures to boost revenue. Given that there are uncertainties on GST, they have not tinkered with the Service tax rates. Yes, we can always argue for more administrative reforms.

Today, the economic circumstances of India are wobbly. Just as we were getting healthier, the world is becoming more inward looking and each country is having its set of problems. Globally, there is a slowdown and global capital flows are kind of afraid. The US, with a radical leader at the helm, is having every one on edge. Suddenly, everyone is realizing that a healthy and prosperous US is a precondition for world growth. Even China has to stand up and lecture US on free trade! In this environment, where our largest export earning industry (IT) is facing headwinds and low Oil prices threaten the remittances in foreign currency, it is important that our economic policies give a nudge to capital flows. They also have to encourage domestic asset building. For example, our steel industry, which was in the doldrums thanks to dumping from China, is looking up once we imposed anti-dumping duties.

At the end of the speech, the first reaction was, “Is this a budget at all?”. Then came the feeling that budgets ought to be like this. Reforms are a continuous process. Budget is after all akin to a business plan. I hate to go in to the numbers because then it becomes a “Fudget”. I do not want to go in to the fine print and dig in to the numbers. It is impossible, even in this digital age, to prepare a precise statement of affairs. And given that the previous budget period still has two months to go, the extent of ‘estimation’ is very high. So let us leave the numbers aside. What will be real is the final government debt that will get added up. And it is a rising number.

Given that the budget came after the much-debated ‘demonetisation’, there would have been a logical temptation for Mr Jaitley to be very populist. That he has resisted the temptation itself is a big positive. This budget is only the beginning of the current year. The implementation of GST is the event of 2017 that I am looking out for.

Given that a budget score will start at five on ten, I will give this one seven on ten. For being boring and for brining in incremental administrative reforms.

“Straw Dogs is an attack on the unthinking beliefs of thinking people.”
— John Gray

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We like to think that the tide of history is an inexorable march from barbarity to civilization, with humans “progressing” from one stage to the next through a gradual process of enlightenment. Modern humanists like Steven Pinker argue forcefully for this method of thinking.

But is this really so? Is this reality?

One of the leading challengers to that type of thinking has been the English writer and philosopher John Gray, the idiosyncratic author of books like Straw Dogs: Thoughts on Humans and Other Animals, The Soul of the Marionette, and The Silence of Animals.

To Gray, the concept of “progress” is closer to an illusion, or worse a delusion of the modern age. Civilization is not a permanent state of being, but something which can quickly recede during a time of stress.

He outlines his basic idea in a foreword to Straw Dogs:

Straw Dogs is an attack on the unthinking beliefs of thinking people. Today, liberal humanism has the pervasive power that was once possessed by revealed religion. Humanists like to think they have a rational view of the world; but their core belief in progress is a superstition, further from the truth about the human animal than any of the world's religions.

Outside of science, progress is simply a myth. In some readers of Straw Dogs this observation seems to have produced a moral panic. Surely, they ask, no one can question the central article of faith of liberal societies? Without it, will we not despair? Like trembling Victorians terrified of losing their faith, these humanists cling to the moth-eaten brocade of progressive hope. Today religious believers are more free-thinking. Driven to the margins of a culture in which science claims authority over all of human knowledge, they have had to cultivate a capacity for doubt. In contrast, secular believers — held fast by the conventional wisdom of the time — are in the grip of unexamined dogmas.

And what, pray tell, are those dogmas? They are numerous, but the central one must be that the human march of science and technology creates good for the world. Gray's not as sure: He sees science and technology as magnifying humanity “warts and all”.

Our tools allow us to go to the Moon but also murder each other with great alacrity. They have no morality attached to them.

In science, the growth of knowledge is cumulative. But human life as a whole is not a cumulative activity; what is gained in one generation may be lost in the next. In science, knowledge is an unmixed god; in ethics and politics it is bad as well as good. Science increases human power — and magnifies the flaws in human nature. It enables us to live longer and have higher living standards than in the past. At the same time it allows us to wreak destruction — on each other and the Earth — on a larger scale than ever before.

The idea of progress rests on the belief that the growth of knowledge and the advance of the species go together—if not now, then in the long run. The biblical myth of the Fall of Man contains the forbidden truth. Knowledge does not make us free. It leaves us as we have always been, prey to every kind of folly. The same truth is found in Greek myth. The punishment of Prometheus, chained to a rock for stealing fire from the gods, was not unjust.

Gray has a fairly heretical view of technology itself, pointing out that no one really controls its development or use; making humanity as a group closer to subjects than masters. Technology is both a giver of good and an ongoing source of tragedy, because it is used by fallible human beings.

Those who ignore the destructive potential of future technologies can do so only because they ignore history. Pogroms are as old as Christendom; but without railways, the telegraph and poison gas there could have been no Holocaust. There have always been tyrannies; but without modern means of transport and communication, Stalin and Mao could not have built their gulags. Humanity's worst crimes were made possible only by modern technology.

There is a deeper reason why “humanity” will never control technology. Technology is not something that humankind can control. It as an event that has befallen the world.

Once a technology enters human life — whether it be fire, the wheel, the automobile, radio, television, or the internet — it changes it in ways we can never fully understand.

[…]

Nothing is more commonplace than to lament that moral progress has failed to keep pace with scientific knowledge. If only we were more intelligent and more moral, we could use technology only for benign ends. The fault is not in our tools, we say, but in ourselves.

In one sense this is true. Technical progress leaves only one problem unsolved: the frailty of human nature. Unfortunately that problem is insoluble.

This reminds one of Garrett Hardin's idea that no system, however technically advanced, can be flawless because the human being at the center of it will always be fallible. (Our technologies, after all, are geared around our needs.) Even if we create technologies that “don't need us” — we are still fallible creators.

Gray's real problem with the idea of moral progress, technical progress, and scientific progress are they, even were they real, would be unending. In the modern conception of the world, unlike the ancient past where everything was seen as cyclical, growth has no natural stop-point. It's just an infinite path to the heavens. This manifests itself in our constant disdain for idleness.

Nothing is more alien to the present age than idleness. If we think of resting from our labours, it is only in order to return to them.

In thinking so highly of work we are aberrant. Few other cultures have ever done so. For nearly all of history and all prehistory, work was an indignity.

Among Christians, only Protestants have ever believed that work smacks of salvation; the work and prayer of medieval Christendom were interspersed with festivals. The ancient Greeks sought salvation in philosophy, the Indians in meditation, the Chinese in poetry and the love of nature. The pygmies of the African rainforests — now nearly extinct — work only to meet the needs of the day, and spend most of their lives idling.

Progress condemns idleness. The work needed to delivery humanity is vast. Indeed it is limitless, since as one plateau of achievement is reached another looms up. Of course this is only a mirage; but the worst of progress is not that it is an illusion. It is that it is endless.

Gray then goes on to compare our ideas of progress to Sisyphus forever pushing the bolder up the mountain.

He's an interesting thinker, Gray. In all of his works, though he certainly raises issue with our current modes of liberal progressive thought and is certainly not a religious man, one only finds hints of a “better” worldview being proposed. One is never sure if he even believes in “better”.

The closest thing to advice comes from the conclusion to his book The Silence of Animals. What is the point of life if not progress? Simply to see. Simply to be human. To contemplate. We must deal with human life the way we always have.

Godless contemplation is a more radical and transient condition: a temporary respite from the all-too-human world, with nothing particular in mind. In most traditions the life of contemplation promises redemption from being human: in Christianity, the end of tragedy and a glimpse of the divine comedy; in Jeffers's pantheism, the obliteration of the self in an ecstatic unity. Godless mysticism cannot escape the finality of tragedy, or make beauty eternal. It does not dissolve inner conflict into the false quietude of any oceanic calm. All it offers is mere being.

There is no redemption from being human. But no redemption is needed.

In the end, reading Gray is a good way to challenge yourself; to think about the world in a different way, and to examine your dogmas. Even the most cherished one of all.

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Keshav Bedi asked my opinion on “the topic which is very fashionable these days here at Varsities in India, ‘Feminism’.”

I’m not familiar with what’s fashionable in Indian universities, unfortunately. I assume they’re leftist pinko swamps. I will not go there, even metaphorically. But let’s discuss femimism.

I’d like to use the Wiki description of feminism: “a range of political movements, ideologies, and social movements that share a common goal: to define, establish, and achieve political, economic, personal, and social rights for women. This includes seeking to establish equal opportunities for women in education and employment.”

I would not want to live in a society where there is a need for a feminist movement because it implies that the society (and thus the state) discriminates against a female person based on a biological characteristic that is irrelevant in the context of some particular activity, and which characteristic the person has no control over.

My position on feminism flows from one of my core principles which is the principle of generality or non-discrimination. Briefly the principle says that the institution we call “the government” or “the state” must not discriminate among the citizens based on any characteristics that are irrelevant for the task or purpose at hand. All citizens must be considered by the state to be equal in all respects in the eyes of the state. The state must not be allowed to make separate rules, or impose different penalties, or grant special privileges, or deny rights, or impose obligations differentially on citizens.

Whatever the state does, it must do it generally. If it decides that a girl child should be given a bicycle, then all children — boys, girls, girly-boys, tomboys — all children must be given a bicycle. If the state cannot give bicycles to all without discrimination, then it should not be allowed to give bicycles to even one.

This principle of generality restricts the state, not any private citizen or organization. Individuals can, should, and do discriminate all the time, and do so with good reason. The good reason: because that’s what they want to do. We all should have the freedom to do precisely what we want to do, with the only provision that what we do must not interfere with the corresponding right of others to do precisely what they want to do.

To make the notion concrete, I have the right to, say, hire or not hire a Mexican to mow the lawn. Or to hire only female secretaries. Or never to eat at a Chinese restaurant. By doing this, I am discriminating but I am not impinging on anyone’s rights. There is no contract, implicit or explicit, that I had signed that I will hire Mexicans, or employ male secretaries, or buy Chinese dinners. By doing those things I am not preventing others from making their own choices.

As it happens, I do discriminate all the time. It would be silly to do otherwise. I don’t just hire someone for a job without carefully ranking those available along some criteria that matter to me. I choose what and where I eat. I have a fine discriminatory taste in food, in my reading, in my friends, in music — ad infinitum.

If someone discriminates against females, that’s his business. Perhaps his friends and associates would persuade him otherwise. But the government should stay out of it and make no laws that interfere with the freedom of any citizen to discriminate against any person or establishment of his choice.

So what should you do if you find that society systematically discriminates against a particular group of people? What should that particular group do? The operative word there is “systematically” — that the discrimination is encoded in the system. All systematic discrimination originates in rules that the government creates and enforces. An example would be the rule that prevents women from voting (which was the case in most democratic countries, including the US where the 19th amendment gave women the right to vote in 1920.) That’s a glaring example of systematic discrimination.

Feminism that aims to overturn systematic discrimination is good. I would not want to live in a society which suffers allows systematic discrimination. That includes all Islamic countries and India.

The biologist Lewis Thomas, who we’ve written about before, has a wonderful thought on creating great organizations.

For Thomas, creating great science was not about command-and-control. It was about Getting the Air Right.

It cannot be prearranged in any precise way; the minds cannot be lined up in tidy rows and given directions from printed sheets. You cannot get it done by instructing each mind to make this or that piece, for central committees to fit with the pieces made by the other instructed minds. It does not work this way.

What it needs is for the air to be made right. If you want a bee to make honey, you do not issue protocols on solar navigation or carbohydrate chemistry, you put him together with other bees (and you’d better do this quickly, for solitary bees do not stay alive) and you do what you can to arrange the general environment around the hive. If the air is right, the science will come in its own season, like pure honey.

One organization which clearly “gets the air right” is the much lauded Mayo Clinic in Rochester, Minnesota.

The organization has 4,500 physicians and over $10 billion in revenue from three main campuses, and it is regularly rated among the top hospital systems in the United States in a wide variety of specialities, and yet was founded back in the late 20th century by William Worrall Mayo. Its main campus is in Rochester, Minnesota; not exactly a hub of bustling activity, yet its patients are willing to fly or drive hundreds of miles to receive care. (So-called “destination medicine.”)

How does an organization sustain that kind of momentum for more than 150 years, in an industry that’s changed as much as medicine? What can the rest of us learn from that?

It’s a prime example of where culture eats strategy. Even Warren Buffett admires the system:

A medical partnership led by your area’s premier brain surgeon may enjoy outsized and growing earnings, but that tells little about its future. The partnership’s moat will go when the surgeon goes. You can count, though, on the moat of the Mayo Clinic to endure, even though you can’t name its CEO.

Pulling the Same Oar

The Mayo Clinic is an integrated, multi-specialty organization — they’re known for doing almost every type of medicine at a world class level. And the point of having lots of specialities integrated under one roof is teamwork: Everyone is pulling the same oar. Integrating all specialities under one umbrella and giving them a common set of incentives focuses Mayo’s work on the needs of the patient, not the hospital or the doctor.

This extreme focus on patient needs and teamwork creates a unique environment that is not present in most healthcare systems, where one’s various care-takers often don’t know each other, fail to communicate, and even have trouble accessing past medical records. (Mayo is able to have one united electronic patient record system because of its deep integration.)

Importantly, they don’t just say they focus on integrated care, they do it. Everything is aligned in that direction. For example, as with Apple Retail stores (also known for extreme customer focus), there are no bonuses or incentive payments for physicians — only salaries.

An interesting book called Management Lessons from the Mayo Clinic (recommended by the great Sanjay Bakshi) details some of Mayo’s interesting culture:

The clinic ardently searches for team players in its hiring and then facilitates their collaboration through substantial investment in communications technology and facilities design. Further encouraging collaboration is an all-salary compensation system with no incentive payments based on the number of patients seen or procedures performed. A Mayo physician has no economic reason to hold onto patients rather than referring them to colleagues better suited to meet their needs. Nor does taking the time to assist a colleague result in lost personal income.

[…]

The most amazing thing of all about the Mayo clinic is the fact that hundreds of members of the most highly individualistic profession in the world could be induced to live and work together in a small town on the edge of nowhere and like it.

The Clinic was carefully constructed by self-selection over time: It’s a culture that attracts teamwork focused physicians and then executes on that promise.

One of the internists in the book is quoting as saying working at Mayo is like “working in an organism; you are not a single cell when you are out there practicing. As a generalists, I have access to the best minds on any topic, any disease or problem I come up with and they’re one phone call away.”

In that sense, part of the Mayo’s moat is simply a feedback loop of momentum: Give a group of high performers an amazing atmosphere in which to do their work, and eventually they will simply be attracted by each other. This can go on a long time.

Under One Roof

The other part of Mayo’s success — besides correct incentives, a correct system, and a feedback loop — is simply scale and critical mass. Mayo is like a Ford in its early days: They can do everything under one roof, with all of the specialities and sub-specialities covered. That allows them to deliver a very different experience, accelerating the patient care cycle due to extreme efficiency relative to a “fractured” system.

Craig Smoldt, chair of the department of facilities and support services in Rochester, makes the point that Mayo clinic can offer efficient care–the cornerstone of destination medicine–because it functions as one integrated organization. He notes the fact that everyone works under one roof, so to speak, and is on the payroll of the same organization, makes a huge difference. The critical mass of what we have here is another factor. Few healthcare organizations in the country have as many specialities and sub-specialities working together in one organization.” So Mayo Clinic patients come to one of three locations, and virtually all of their diagnoses and treatment can be delivered by that single organization in a short time.

Contrast that to the way care is delivered elsewhere, the fractured system that represents Mayo’s competitors. This is another factor in Mayo’s success — they’re up against a pretty uncompetitive lot:

Most U.S. healthcare is not delivered in organizations with a comparable degree of integrated operations. Rather than receiving care under one roof, a single patient’s doctors commonly work in offices scattered around a city. Clinical laboratories and imaging facilities may be either in the local hospital or at different locations. As a report by the Institute of Medicine and the National Academy of Engineering notes, “The increase in specialization in medicine has reinforced the cottage-industry structure of U.S. healthcare, helping to create a delivery system characterized by disconnected silos of function and specialization.

How does this normally work out in practice, at places that don’t work like Mayo? We’re probably all familiar with the process. The Institute of Medicine report referenced above continues:

“Suppose the patient has four medical problems. That means she would likely have at least five different doctors.” For instance, this patient could have (1) a primary care doctor providing regular examinations and treatments for general health, (2) an orthopedist who treats a severely arthritic knee, (3) a cardiologist who is monitoring the aortic valve in her heart that may need replacement soon, (4) a psychiatrist who is helping her manage depression, and (5) and endocrinologist who is helping her adjust her diabetes medications. Dr. Cortese then notes,”With the possible exception of the primary care physician, most of these doctors probably do not know that the patient is seeing the others. And even if they do know, it is highly unlikely they know the impressions and recommendations the other doctors have recorded in the medical record, or exactly what medications and dosages are prescribed.” If the patient is hospitalized, it is probably that only the admitting physician and the primary care physician will have that knowledge.

Coordinating all of these doctors takes time and energy on the part of the patient. Repeat, follow-up visits are done days later; often test results, MRI results, or x-ray results are not determined quickly or communicated effectively to the other parts of the chain.

Mayo solves that by doing everything efficiently and under one roof. The patient or his/her family doesn’t have to push to get efficient service. Take the case of a woman with fibrocystic breast disease who had recently found a lump. Her experience at Mayo took a few hours; the same experience in the past had taken multiple days elsewhere, and initiative on her end to speed things up.

As a patient in the breast clinic, she began with an internist/breast specialists who took the medical history and performed an exam. The mammogram followed in the nearby breast imaging center. The breast ultrasound, ordered to evaluate a specific area on the breast, was done immediately after the mammogram.

The breast radiologist who performed the ultrasound had all the medical history and impressions of the other doctors available in the electronic medical record (EMR). The ultrasound confirmed that the lump was a simple cyst, not a cancer. The radiologist shared this information with the patient and offered her an aspiration of the cyst that would draw off fluid if the cyst was painful. But comforted with the diagnosis of the simple cyst and with the fact that it was not painful, the veteran patient declined the aspiration. Within an hour of completing the breast imaging, the radiologist communicated to the breast specialist a “verbal report” of the imaging findings. The patient returned to the internist/breast specialist who then had a wrap-up visit with the patient and recommended follow-up care. This patient’s care at Mayo was completed in three and one-half hours–before lunch.

So what are some lessons we can pull together from studying Mayo?

The book offers a bunch, but one in particular seemed broadly useful, from a chapter describing Mayo’s “systems” approach to consistently improving the speed and level of care. (Industrial engineers are put to work fixing broken systems inside Mayo.)

Mayo wins by solving the totality of the customer’s problem, not part of it. This is the essence of an integrated system. While this wouldn’t work for all types of businesses; it’s probably a useful way for most “service” companies to think.

Why is this lesson particularly important? Because it leads to all the others. Innovation in patient care, efficiency in service delivery, continuous adoption of new technology, “Getting the Air Right” to attract and retain the best possible physicians, and creating a feedback loop are products of the “high level” thought process below: Solve the whole problem.

Lesson 1: Solve the customer’s total problem. Mayo Clinic is a “systems seller” competing with a connected, coordinated service. systems sellers market coordinated solutions to the totality of their customers’ problems; they offer whole solutions instead of partial solutions. In system selling, the marketer puts together all the services needed by customers to do it themselves. The Clinic uses systems thinking to execute systems selling that pleasantly surprises patients (and families) and exceeds their expectations.

The scheduling and service production systems at Mayo Clinic have created a differentiated product–destination medicine–that few competitors can approach. So even if patients feel that the doctors and hospitals at home are fine, they still place a high value on a service system that can deliver a product in days rather than weeks or months.

[…]

Patients not only require competent care but also coordinated and efficient care. Mayo excels in both areas. In a small Midwestern town, it created a medical city offering “systems solutions” that encourage favorable word of mouth and sustained brand strength, and then it exported the model to new campuses in Arizona and Florida.

If you liked this post, you might like these as well:

Creating Effective Incentive Systems: Ken Iverson on the Principles that Unleash Human Potential — Done poorly, compensation systems foster a culture of individualism and gaming. Done properly, however, they unleash the potential of all employees.

Can Health Care Learn From Restaurant Chains? — Atul Gawande pens a fascinating piece in the New Yorker about what health care can learn from the Cheesecake Factory.

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We have to admit that India’s education system gets an F grade. India does not feature in any of the world rankings of universities. Sure there is a lot of hype about the IITs but aside from the delusions of the seriously uninformed, the IITs don’t add up to a hill of beans. I have been writing about IITs on this blog for a over a decade. Here’s one — IITs are not what they are cracked up to be, which is likely to stick in the craw of many IITians.

If India’s education system, including higher education, is so poor then how is it that it is one of the fastest growing large economy?

Let’s unpack that question, starting with what growth rates mean.

Fastest growing merely means something is growing faster than others. That’s a relative measure of the rate and does not imply anything about absolute increases. My income grew at a respectable 200 percent last year over the previous year, while Bill Gates’ income grew at a dismal 5 percent. Impressed? You shouldn’t be. My income went up from $1000 in the previous year to $3000 the next — an increase of $2000; in the same period Bill Gates’ income went from $2 billion to $2.1 billion, an increase of $100 million, but only a 5 percent increase. Not much of a choice, is it? (I made up those numbers but the real numbers doesn’t change my argument.)

The point here is that the base over which growth is computed matters. India could grow at “the fastest rate” and still be dirt poor relative to other countries that aren’t growing as fast. India could grow at 7 percent and be counted a failure, while the US could grow at only 3 percent and be considered respectable.

Fact is that very poor countries can grow much faster than very rich countries (as illustrated by the concocted example of widely divergent personal incomes.) Poor countries start off from a very small base and therefore they have the potential to have higher growth rates. Rich countries have much less room for growth in incomes because they are already as rich as they are potentially capable of.

Poor countries have the potential to grow faster than rich countries because it is easier to remove inefficiencies when you are really inefficient than it is to increase efficiency when you are already very efficient. If someone is wasting stuff, they can be better off by stopping being wasteful. If someone is not wasting any stuff, they would be hard pressed to reduce waste.

Rich countries are richer because they are on the “efficiency frontier” — they are operating at the peak that is technologically feasible. Poor countries are poor because they are not where they could be in the technological frontier, and hence they can be more efficient than they presently are.

India is, and has been thanks to you know who, a socialist economy. Socialism strongly implies poverty and general social malaise. India’s economy was operating far below its potential for decades. It grew at a dismal long-run “Nehru Rate of Growth” of about 3 percent annually from 1950 to 1991. Inefficiencies had built up over 40 years. Even the little “liberalization” around 1991 that Prime Minister PV Narasimha Rao introduced released the Indian economy from some of the insane Nehruvian socialist policies.

(For having deviated from Nehruvian insanity, the Congress party did not forgive PV Narasimha Rao. He was abused by the Congress and consigned to the rubbish bin when he died. Every member of the Congress Party is a despicable moron. That category includes some who are prominent leaders of the current BJP.)

The little bit of liberalization that PVNR achieved allowed the Indian economy to grow at a somewhat respectable 7 percent a year. That’s impressive but not when it is considered relative to China. China started growing at double-digit GDP growth rates starting in 1978, thanks to Deng Xiaoping, and persisted at that incredible rate for over three decades. That left India in the dirt. I estimate that China’s income is about six times that of India’s and its wealth is around 40 times that of India. India is really, really very poor compared to even China (which by any per capita measure is really poor.)

China is poor but it is significantly richer than India. It can outspend India on everything, and it does. It spends more on weapons in a year than India could afford to spend in years. Honestly speaking, India cannot match China’s manufacturing capacity and nor can India match China militarily. Socialism in action. Nehruvian socialism did to India’s education system what it did to India’s industries, its financial system, infrastructure and the rest of it — namely, FOOBAR.

GDP growth rates matter, certainly. They do convey information but it has to be properly interpreted. GDP is a gross measure of how much an economy produces (and therefore how much it consumes) on the aggregate, measured at market prices of all final goods and services bought and sold in the market. Therefore it does not count those activities that are not mediated by the market mechanism. Unpaid household work, for example, does not figure in the GDP accounts.

GDP grows when more gets produced. The increase in production can be due to higher productivity of labor (more production for the same number of labor hours) and/or capital, or more labor and/or capital input, or a combination of both. Therefore, you could have GDP growth without any increase in labor or capital productivity by simply increasing the amount of labor.

If the population of a country were to increase, its GDP will also increase, all else remaining the same. To control for the effect of population increase, it is helpful to consider the per capita GDP growth rate. If the GDP grew at 7 percent but the population itself grew at 2 percent over the same period, then the per capita GDP grew at 5 percent.

Since India’s population grows at around 2 percent per year, India’s per capita GDP grows 2 percentage points lower than the GDP growth rate.

The factors that are involved in economic growth (which is what GDP growth rates measure) are many such as human capital (skilled labor force), physical capital (infrastructure, machines), natural resources (land, water), energy, etc. All of those factors are necessary but none of them is sufficient. Education is a necessary factor because it contributes to economic growth through greater labor productivity.

So now we can answer the question. India may be the “fastest growing” large economy and yet have a poor education system. India’s GDP growth rate in isolation does not imply anything about India’s higher education system. India’s GDP growth rate is partly explained by a growing population, partly due to a greater availability of physical capital (through domestic and foreign investment), and partly due to increase in available technology (which increases the productivity of both labor and capital.)

Indeed it is quite possible for the educational system to be entirely dysfunctional and yet have GDP growth.

{Hat tip: Shail Kumar for suggesting the question.}

Related posts: 

1. Notes on GDP, Money and Wealth. A bit more on what GDP is.
2. Money, Wealth, the Lion and Albert. The distinction between money and wealth. And also the tragic tale of the lion that ate Albert.
3. Money is the root of all evil. More on the distinction between money and wealth. I should note that the adage “money is the root of all evil” should be more accurately quoted as “the love of money is the root of all evil.”

(this appears in today’s Deccan Chronicle   http://epaper.deccanchronicle.com/articledetailpage.aspx?id=7223761)

(Sharing some experiences in collecting my own money on maturity)

Long-term investment is an essential part of one’s financial planning. It could include things like PPF, insurance products (hopefully you will NOT have any insurance investment product), long term bonds, fixed deposits, company deposits etc. This time I do not want to talk about investment selection or return on investment but focus on a mundane thing like return OF investment.

When we invest, the entry is very easy. All rules are relaxed, the salesman helps with filling the forms, taking your cheque, doing the running around and then get you enrolled in to the scheme. KYC requirements are waived or partly exonerated. The sellers of products and their agents are at their best behavior when they collect your money.

Some investments can run durations of forty years. For example, it could be a PPF with five extensions of five years each. You can deposit your money physically or electronically in to your account. Over the course of these years, you will undergo changes. Physically, geographically and so much that your signature of forty years ago may be even forgotten by you. When it comes to collecting maturity proceeds, PPF is funny. Each bank has its own set of rules. For example, when I closed someone’s PPF in Bank of Baroda, it was a simple process. I had to give a self-certified PAN card, proof of Bank account and the request form signed. The payee’s banker verified the signature. The Bank did not mind the fact that someone else submitted the request for closure of the account. The proceeds were sent to the beneficiary’s account by RTGS. No pain at all.

State Bank of India has a different approach. They want the beneficiary to physically visit the “Home” branch (the branch where the account is). Re-submit all KYC forms and then the maturity proceeds will come. This talk of ‘anywhere banking’ and digital age does not make sense to them. In forty years, if you have left the city, you have to spend money and spend a few days to complete the process. Here, the process is open ended and can be quite a nightmare if you are one of those who cannot be bothered to fill up forms, submit documents etc. My advice is that in the last five years, when you apply for your final extension, please make sure that you transfer the account to a branch that is located close to where you stay. So that becomes the “Home” branch. Make sure you resubmit the documents including your signatures etc. I hear that SBI is generally kinder if you have your personal account with the bank. That will help you to collect your maturity proceeds. And yes, during the life of the PPF, make sure you have ‘nominated’ a beneficiary. And if you have nominated your mother as your nominee when you opened the account and then you got married, change the nomination.

With traded investments, it is generally easy. Fixed Deposits with companies unfortunately need to be discharged (keep the original receipt. Surrender it a fortnight before maturity after signing across a revenue stamp etc to the broker or the office of the company) and you need to preserve physical records. Some of the companies will issue cheques or drafts for repayments, so if you have changed homes, fresh proof will be demanded. In bonds, most issuers give you the “Demat” option, which makes life simple. Proceeds move in to our bank accounts on maturity or sale.

Insurance investments are a tricky area. The agent who sold you the policy is unlikely to be around when the maturity happens. You are on your own. Here I had very good experience with LIC of India. They understand and can solve practical issues without creating too much fuss. However, with private insurers, it can be a nightmare. I had a not very good experience with PNB-Metlife. They wanted me to physically come to their branch, submit PAN card copies, blank cheque leaf and photographed me!! Luckily I remembered the maturity date, so I went to them after being bounced off walls when I spoke to their call centre. The original agent had ceased to be one, Metlife refused to give me another one to help out and when I asked them to stop paying commission to the agent, they refused. So be prepared to face rough times. Private insurers try to delay. Also, their branch office was not empowered to disburse, unlike LIC where the branch handles the claims. Private insurance companies are poor for customers.

What my experiences are may not be universal. I just want you to be aware of the processes that you will have to be prepared for. Keep a “maturity calendar” for your investments and take timely action to get your money back in time. No agent or company executive will do anything unless you go and ask. Getting our money back is our problem, not theirs.

R Balakrishnan

by Suyash Rai.

One of the most interesting questions in Indian macroeconomics today is: how are we faring since late 2016? In this article, I seek to analyse data on tax revenues and obtain some clues about the performance of the economy.

In a press release published on January 9, the central government reported the following increases in tax collections during April-December 2016, compared to the corresponding period of previous year:

1. Central excise duty: 43 percent.
2. Service tax: 23.9 percent.
3. Customs duty: 4.1 percent.
4. Corporation tax: 4.4 percent.
5. Income tax: 24.6 percent.

These are large values. Holding other things constant, they suggest buoyant economic activity. However, when looking at tax data, we have to look at the extent to which other things are indeed constant. When analysing tax data, in order to read the state of the macroeconomy, we need to adjust for the part of the tax revenues which are on account of 'Additional Revenue Mobilisation' (ARM). Two kinds of ARM are:

1. An increase in tax rate: additional revenues due to higher rate do not indicate robustness of the underlying activity.
2. An administrative measure: additional revenues from one-time administrative measures (eg. a tax amnesty scheme) may not reflect the underlying economic activity.

Let us walk through the major taxes, and see what we can tell, and what we do not know.

Excise duty

The biggest increase in tax collection has come from excise duty. The collection during April-December 2016 was 43 percent higher than the corresponding period in 2015. Collection grew by 45 percent in April-October, 33.7 percent in November, and 34.8 percent in December, compared to the corresponding periods of previous year.

Excise duty rates during the reference period

Were the rates constant? Between April-December 2015 and April-December 2016, there have been certain changes in excise duties. Basic excise duties on these products were increased in five steps between November 6, 2015 and January 30, 2016. The detailed notifications can be found on the CBEC website. The cumulative impact of these increases is:

• Unbranded petrol: increased from Rs.5.46 to Rs.9.48 per litre
• Branded petrol: increased from Rs.6.64 to Rs.10.66 per litre
• High speed diesel: increased from Rs.4.26 to Rs.11.33 per litre
• Other diesel: increased from Rs.6.62 to Rs.13.69 per litre

Taxation of petroleum products is unfortunately the backbone of India's excise duty collection; we have failed to build a more broad-based indirect tax system. In 2015-16, the total excise duty (including cesses) collected was Rs.2,84,142 crore. From this, about Rs.1,94,061 crore, or 68.3 percent, was from crude oil and petroleum products (including cess on crude oil).

The increases in the specific rates for the four products would thus have an important impact upon the overall excise duty collections. Consider the excise duty on unbranded petrol. Since five rounds of rate increases happened between November 2015 and January 2016, when we compare collections in April-December 2015 versus April-December 2016, we are comparing periods with different applicable rates. During April-December 2015, the basic excise duty per litre on unbranded petrol was Rs.5.46 between April 1 and November 6, Rs.7.06 from November 7 to December 16, and Rs.7.36 from December 17 to December 31. However, throughout Apri-December 2016, the basic duty per litre of unbranded petrol was Rs.9.48. So, while comparing collections during these two periods, we need to deduct the additional revenue due to the higher rates.

Increase in collection during April-October

A press release on December 9, 2016 reported the indirect tax (excise duty, service tax, and customs) collection with and without ARM. During April-October 2016, the growth in indirect tax collection with ARM was 26.6 percent, while without ARM it was 8 percent. So, the total ARM was 18.6 percent of indirect tax collection during the same period of previous year. This is Rs.71,315 crore.

To the best of my knowledge, there has been no ARM in customs. ARM in service tax collections can be estimated by comparing applicable rates during the two periods being considered. During April-October 2015, the applicable rate for April and May was 12.36 percent, and it was 14 percent for June-October. So, the average rate during the period was 13.53 percent. During April-October 2016, the rate was 14.5 percent for April and May (Swachch Bharat Cess of 0.5 percent was introduced in November 2015), and 15 percent for June-October (Krishi Kalyan Cess of 0.5 percent from June 1, 2016). So, the average rate was 14.86 percent. The estimated increase in service tax collection due to ARM was (14.86-13.53)/13.53 percent = 9.8 percent of collection during corresponding period of previous year. This is Rs.11,059 crore. So, the remaining ARM, i.e. Rs.60,256 crore is estimated to have come from excise duty increases. Since the total increase in excise duty collection during April-October 2016 was Rs.66,485 crore, the increase without ARM was Rs.6229 crore, or 4.22 percent higher than excise duty collection in April-October 2015 (Rs.1,47,670 crore).

Increase in collection during November and December

During November 2016, the growth in indirect tax collection with ARM was 23.09 percent, while without ARM it was 8 percent. This suggests that, in November 2016, indirect tax collection from ARM was 15.09 percent of indirect tax collection in November 2015. This is Rs.8259 crore. Customs collections had no ARM. The effective service tax rate during November 2015 can be assumed at 14.25 percent, as half of the month had 14 percent rate (effective from June 1 to November 15, 2015) while the other half had 14.5 percent rate (0.5 percent Swachch Bharat Cess introduced on November 15, 2015). In November 2016, the rate was 15 percent (including Krishi Kalyan Cess of 0.5 percent). So, the ARM in this November's service tax collection is estimated to be (15-14.25)/14.25 percent = 5.26 percent of service tax collection in November 2015 (Rs.14,870 crore). This is about Rs.782 crore. Deducting this, we get Rs.7477 crore of ARM for excise duty in November. The total reported increase in excise duty collection in November 2016 was Rs.7477 crore. So, the increase in excise duty collection in November without ARM is estimated to have been zero. This suggests a deceleration from 4.22 percent growth in the preceding months..

Since these are nominal values, in real terms, collection may have declined in November. Excise duty becomes due at the time goods leave the factory. One did not expect any significant demonetisation impact on excise duty collection for November, as production and factory clearance schedules for the month were not likely to have been significantly affected by a decision taken in second week of the month. We saw this in the auto sector data, where November data showed a decline in sales but an increase in production, while the December data shows a decline in both sales and production. The latest IIP numbers, which show an increase in industrial production in November, also confirm this. So, the estimate of excise duty collection without ARM in November is surprising. Further, since retailers of petroleum products were allowed to accept old notes, the impact on these products should have been lower. So, to the extent increase in excise duty collection is an indicator of underlying economic activity, the news from November may be worse than expected.

It is difficult to make a reasonable estimate of excise duty collection without ARM in December, because, unlike the press release on December 9, the press release on January 9 does not include details about ARM, not even in the aggregate. When government releases December's data about excise duty collected without ARM, we can do this analysis for December.

Service tax

During April-December, 2016, service tax collections were up 23.9 percent compared to the corresponding period last year. During April-October, the increase was 27 percent, while it decelerated to 15.5 percent for November and 3.67 percent for December. This deceleration is significant, but we need to understand the increase without ARM.

Service tax rates during the reference period

1. June 1, 2015: rate increased from 12.36 percent to 14 percent
2. November 15, 2015: Swachh Bharat Cess of 0.5 percent took the rate to 14.5 percent.
3. June 1, 2016: Krishi Kalyan Cess of 0.5 percent took the rate to 15 percent

Increase in collection during April-October

In the section on excise duty, I estimated that ARM for service tax during April-October was 9.8 percent of service tax collection during the corresponding period of previous year. The overall increase in service tax collection in April-October was 26.9 percent. So, the increase without ARM would have been about 17.1 percent.

Increase in collection during November and December

In November 2016, collection increased by 15.52 percent compared to November 2015 - from Rs.14,870 crore Rs.17,178 crore. In the previous section, I estimated that about Rs.782 crore of service tax collection in November 2016 may have been on account of ARM. After deducting this ARM from collection in November 2016, the increase without ARM was 10 percent.

The increase in service tax collection in December 2016 (Rs. 22,449 crore) was 3.67 percent higher than that in December 2015 (Rs.21,655 crore). Since, the service tax rate applicable in December 2015 was 14.5 percent, while that in December 2016 was 15 percent, ARM is estimated to have led to 0.5/14.5 percent = 3.45 percent increase in service tax collection in December. So, in this estimate, the increase in service tax collection without ARM was 0.22 percent. If this analysis is correct, it shows a significant deceleration in rate of increase in service tax collection without ARM: from 17.1 percent in April-October, to 10 percent in November, to 0.22 percent in December.

Customs duty

During April-December 2016, customs duty collection has increased by 4.1 percent, compared to the same period in 2015. During the corresponding period in previous year, the growth in collection was 17 percent. For November 2016, collection increased by about 16 percent. Partially, this may have been because this year Diwali was in October, while last year it was in November. Customs collections are mostly done on working days. November 2015 had fewer working days than November 2016. This effect might explain a part of the increase. Still, growth in customs collections in November was significant. This is along expected lines, as import orders usually do not get cancelled with a short notice. However, for the month of December, the customs collection was 7.6 percent lower than the same month in 2015. It is too early to say what this decline means. In the past also, there have been months when customs collections declined even when there was no obvious explanation.

Corporation tax

Corporation tax collection during April-December was 4.4 percent higher than the corresponding period last year. Last year, during the same period, the growth in corporation tax collection was 11.74 percent. Collection in December 2016 was 4.7 percent lower than that in December 2015. December is one of the months for deposit of advance taxes. This low collection may indicate that firms have revised their profit forecasts downwards. However, it is difficult to draw a conclusion, as there may be other explanations. For instance, disproportionate refunds may have been made in December. We do not have the data to draw a conclusion.

Income Tax

During April-December, income tax collection was 24.6 percent higher than that in the corresponding period of 2015. However, a key factor here is the income declaration scheme that ended on September 30, 2016, and had mandated payment of tax, surcharge and penalty by November 30, 2016. The expected tax inflow from the scheme was about Rs.30,000 crore. This is a form of additional revenue mobilisation. Hence, unless we know the increase without this ARM, it is difficult to interpret the number. For instance, if Rs. 25,000 crore was collected under the scheme, the increase in income tax collection during April-December would be just over 8.3 percent.

Conclusion

The analysis presented here suggests that the reading of tax collection numbers as signifiers of robust economic activity may be too optimistic. I have had to estimate some of the numerical values above because the data releases on tax collections have been parsimonious on details. This is especially true of the release on January 9. The consistent inclusion of details about additional revenue mobilisation for different taxes for each month would make it easier to conduct economic analysis using tax data.

Update: MR Madhavan pointed me to another source of additional collection under direct taxes this year. From this year, 75 percent advance taxes have to be paid by December 15, while till last year, this was 60 percent. This may have been a significant source of additional collection in December. So, the fact that corporation tax collections this year have been lower than they were in December 2015 is much more indicative of decline in economic activity.

The author is a researcher at National Institute of Public Finance and Policy. Views expressed here are personal.

One of the most profound thoughts I’ve ever read on the child-parent relationship comes from the noted Lebanese-American artist and poet Kahlil Gibran, who wrote the following under the title “On Children” –

Your children are not your children.
They are the sons and daughters of Life’s longing for itself.
They come through you but not from you,
And though they are with you yet they belong not to you.

You may give them your love but not your thoughts,
For they have their own thoughts.
You may house their bodies but not their souls,
For their souls dwell in the house of tomorrow,
which you cannot visit, not even in your dreams.
You may strive to be like them,
but seek not to make them like you.
For life goes not backward nor tarries with yesterday.

You are the bows from which your children
as living arrows are sent forth.
The archer sees the mark upon the path of the infinite,
and He bends you with His might
that His arrows may go swift and far.
Let your bending in the archer’s hand be for gladness;
For even as He loves the arrow that flies,
so He loves also the bow that is stable.

The first time I read these thoughts, my first reaction was – “If my children are not my children, then whose are they? And what do you mean they are not mine?”

Being a parent in itself is a hard, bumpy process, and then when I was presented with the idea that my kids were not truly mine, and that I did not control them or their future in any ways, was not welcome.

These thoughts from Gibran shook up the obsessive involvement I had with my own children and also the thought that they would become what I as a parent want or guide them to become.

“You cannot control your child’s destiny,” said my elderly morning walk partner as I discussed Gibran’s thoughts with him, “but you can only choose to accept or reject their natural evolution. And if you remain in rejection mode, you would only harm yourself because as Gibran said you are just a bow that must be stable if your children – the arrows – must go away swift and far.”

Our Biggest Fear
Fear of losing control is one of the biggest and most widespread fears people have. The fear is that if you don’t manage to control the outcome of future events, something terrible will happen.

Keep parenthood aside for a moment, and consider the world of investing.

The crux of most of the biggest problems investors face is that they demand certainty in a world that is always tentative and uncertain.

They think they must accurately predict and manage the future, not just have some probabilistic and uncertain handle on it. And it is precisely this unrealistic demand that causes them to make dumb mistakes repeatedly.

Consider the formula of compounding, where –

The two variables that are under an investor’s maximum control are ‘present value’, or the initial investment and ‘time’, or the amount of time the money is allowed to compound. And these are the two variables, especially ‘time’, most investors choose to ignore in their race to earn the maximum return.

You Are Your Choices
Here is what Jeff Bezos of Amazon said in one of his best interviews I’ve read so far (emphasis mine)…

We do a lot of unusual things there. We don’t meet with our biggest investors. We meet with investors who have low portfolio turnover. Many investment funds have very high portfolio turnover. They’re not really investors – they’re traders. There’s nothing wrong with that: It’s just a different thing.

Where you are going to spend your time and your energy is one of the most important decisions you get to make in life. We all have a limited amount of time, and where you spend it and how you spend it is just an incredibly levered way to think about the world. If you’re going to spend time explaining the company, you should do it with people who are long-term investors, rather than traders. That’s our point of view.

Note that Bezos is talking about choosing what you wish to do with your limited time as one of the most important decisions you get to make in life.

Then, you must have heard about Warren Buffett’s 25-5 rule. If not, here is how James Clear described it in one of his posts…

Mike Flint was Buffett’s personal airplane pilot for 10 years. According to Flint, he was talking about his career priorities with Buffett when his boss asked the pilot to go through a 3-step exercise.

Here’s how it works…

STEP 1: Buffett started by asking Flint to write down his top 25 career goals. So, Flint took some time and wrote them down.

STEP 2: Then, Buffett asked Flint to review his list and circle his top 5 goals. Again, Flint took some time, made his way through the list, and eventually decided on his 5 most important goals.

STEP 3: At this point, Flint had two lists. The 5 items he had circled were List A and the 20 items he had not circled were List B.

Flint confirmed that he would start working on his top 5 goals right away. And that’s when Buffett asked him about the second list, “And what about the ones you didn’t circle?”

Flint replied, “Well, the top 5 are my primary focus, but the other 20 come in a close second. They are still important so I’ll work on those intermittently as I see fit. They are not as urgent, but I still plan to give them a dedicated effort.”

To which Buffett replied, “No. You’ve got it wrong, Mike. Everything you didn’t circle just became your Avoid-At-All-Cost list. No matter what, these things get no attention from you until you’ve succeeded with your top 5.”

Note that Buffett too was advising Flint to choose the most important things he wished to do in his limited time instead of focusing on everything.

Control Your Choices
My early investing life is a testimony to how I wished hard to control the uncontrollables, especially the return I thought I must earn from my stocks, and how I was humbled quite a few times. Thankfully, given my little investments, my mistakes did not hurt me big time.

In hindsight, I realize that each time I was humbled was because I had made a bad choice. Sometimes it was the choice of bad businesses, sometimes bad price, and sometimes giving in to bad advice.

Then, my job as an analyst – which made me think highly of my intelligence (how foolish was that!) – also created an illusion of control that whatever I would do would be right. Or that I had complete control over the outcome of my personal investments as also my stock recommendations.

It is painful for me to reflect on some of these grave mistakes I made in the past because I did not understand the difference between what I controlled (just my choices and process) and what I didn’t (the outcomes).

But I feel lucky to have made these mistakes early, and then constantly reading the likes of Buffett and Munger, and some Hindu and Stoic philosophy, that have helped me ingrain in my mind this basic difference on what I control vs what I don’t.

In Stoic philosophy, for instance, this is what I read of the Greek philosopher Epictetus…

The chief task in life is simply this: to identify and separate matters so that I can say clearly to myself which are externals not under my control, and which have to do with the choices I actually control. Where then do I look for good and evil? Not to uncontrollable externals, but within myself to the choices that are my own…

I would leave you with this beautiful little video from the 2008 movie Kung Fu Panda, where the wise old tortoise Master Oogway explains the illusion of control to its disciple Shifu, who is charged with training the unlikely Po, a giant panda, to become the next great kung fu Dragon Warrior.

The master says – “My friend, the panda will never fulfill his destiny, nor you yours until you let go of the illusion of control.”

Also, if you understand Hindi, here is a video from the epic Mahabharata, where Lord Krishna tells Arjuna how he has the right to perform his actions, but is not entitled to the fruits of the actions…and thus he must not let the fruit be the purpose of his actions (getting over the illusion of control over the results).

How often in our lives do we try to force an apple or an orange out of something whose essence is a peach?

You see, when it comes to investing, the stock ticker is not in your control, so there is no point looking at it or at your stock prices several times a day.

The returns you are going to make are also not in your control, even in the long run. And so are the 100-to-1 baggers that you wish to invest in when they are 1.

These are all beyond your control, and mostly appear in hindsight. So there is no point stressing about them.

But if you can focus on making clear and sticking to the parts of your investing that are within your control – your investment process, the kind of businesses you choose to invest in today, and your investment horizon – I am sure the returns will take care of themselves.

Plus, by making the distinction between what you control and what you don’t in your investing, you will remove all stress from the process and also have a distinct advantage over most other investor who fail to realize that they are fighting an unwinnable battle in their minds, with their actions, and with their hard-earned money.

• Warren Buffett’s “2 List” Strategy
• When I Asked Jeff Bezos The Tough Questions

The post One Big Investing Lesson I Learned Late in My Life appeared first on Safal Niveshak.

    

Perhaps it’s time for new champions of democracy, liberty and open economies

I was in a panel discussion with Steve Coll, dean of the Columbia Journalism School and T K Arun, senior editor of the Deccan Herald at the Deccan Herald Spotlight, Taj West End, Bangalore on 9th January 2017. The topic of discussion was Trump and geopolitics. The following is an outline of my initial remarks. (Read the newspaper report here)

1. The bases for US global leadership have become uncertain
   • Resilience of its democracy is uncertain (more than merely risky)
   • Its status as a magnet for the world’s most talented people is also uncertain
2. Trump’s rhetoric and posturing will cause others to adopt protectionist policies and withdraw behind walls and fences, at least in the short term.
   • This might reverse in the longer term but we can’t be sure how long that will take and what we’ll have to endure in the meantime
     
3. For the first time, the factors that propelled India’s & China’s unprecedented growth will come under a cloud. China is luckier because it started earlier and was most focused.
   • For India the challenge will be to generate 8% growth without a benign external environment
   • How fast can India integrate domestically and iron out the kinks regarding movement of people, goods and capital across state boundaries
   • How fast can India create external relationships that will allow growth to take place?
4. In geopolitics, it all the more clear that India will have to become a swing power. This means selective alignment with the US and China where interests coincide, without joining any one camp.
   • Better relations with US and China than they have with each other
   • Ability and willingness to inflict pain and give pleasure
5. Finally, a more mischievous point: if the West is ceding leadership of values of democracy, liberty and free markets, then India should stake its claim to that leadership.
   • Do we really need so many illiberal democracies and authoritarian states in the permanent membership of the UNSC?
   • Do we need four or five Putins in the UN Security Council

“A man who chooses between drinking a glass of milk and a glass of a solution of potassium cyanide does not choose between two beverages; he chooses between life and death. A society that chooses between capitalism and socialism does not choose between two social systems; it chooses between social cooperation and the disintegration of society. Socialism is not an alternative to capitalism; it is an alternative to any system under which men can live as human beings. To stress this point is the task of economics as it is the task of biology and chemistry to teach that potassium cyanide is not a nutriment but a deadly poison.”

Source: Human Action. Ludwig von Mises. Yale University Press. 1949, 1998, 2010

“I am certain in the belief that the average man who scrupulously follows this course of action is bound to win great success.”

***

George Marshall must be one of, if not the most under appreciated leaders in American history, and certainly of the 20th century.

Not only was he the military genius in charge of the US Army during World War II and the most directly responsible for its success, he was considered the primary leader of the Allied War effort by every major Allied leader. Roosevelt found him indispensable as his Army Commander, Winston Churchill called him the “true architect of victory” in the War, and even Stalin claimed he’d personally trust his life to Marshall. General and future President Dwight D. Eisenhower was his disciple.

It was Marshall who, from a standing start of a few hundred thousand soldiers, raised an army of millions and oversaw the major operations that would lead to the liberation of Europe. (Brilliantly recounted by Rick Atkinson in his three volume series.)

Churchill put Marshall’s best qualities — his leadership in the worst of times — on display when he wrote:

There are few men whose qualities of mind and character have impressed me so deeply as those of General Marshall … He is a great American, but he is far more than that … He has always fought victoriously against defeatism, discouragement and disillusion. Succeeding generations must not be allowed to forget his achievements and his example.

Sadly, outside of military circles, that example does seem a bit forgotten.

Marshall is now mostly known for his genius Marshall Plan, which sought to re-build Europe (including Germany) in the aftermath of the war. But he was much more than that.

Before World War II, Marshall had a long and distinguished military career, including as the primary aide to General John J. Pershing, the Commander of the American Expeditionary Force in World War I. And during this time, Marshall wrote a letter that perfectly exemplifies the qualities of a great leader. It would go on to be included in his posthumously published World War I memoir, Memoirs of My Services in the World War, 1917-1918.

Here, Marshall lays out the four qualities required to be a successful leader in a war situation.

What strikes us most about them is that they are neither complicated nor available to a select few nor specific to war at all. They are simply hard. And if Marshall’s life is a testament to anything, it’s that the ability to do hard things at the right time is the essence of a great leader.

***

November 5, 1920

General John S. Mallory
15 University Place
Lexington, Virginia

My Dear General Mallory,

Last summer during one of our delightful rides I commented on the advice I would give a young officer going to war, based on my observation of what had constituted the success of the outstanding figures in the American Expeditionary Forces, and you asked me to write out what I had said. A discussion with Fox Conner this morning reminded me of my promise to do this, so here it is.

To be a highly successful leader in war four things are essential, assuming that you possess good common sense, have studied your profession and are physically strong.

When conditions are difficult, the command is depressed and everyone seems critical and pessimistic, you must be especially cheerful and optimistic.

When evening comes and all are exhausted, hungry and possibly dispirited, particularly in unfavorable weather at the end of a march or in battle, you must put aside any thought of personal fatigue and display marked energy in looking after the comfort of your organization, inspecting your lines and preparing for tomorrow.

Make a point of extreme loyalty, in thought and deed, to your chiefs personally; and in your efforts to carry out their plans or policies, the less you approve the more energy you must direct to their accomplishment.

The more alarming and disquieting the reports received or the conditions viewed in battle, the more determined must be your attitude. Never ask for the relief of your unit and never hesitate to attack.

I am certain in the belief that the average man who scrupulously follows this course of action is bound to win great success. Few seemed equal to it in this war, but I believe this was due to their failure to realize the importance of so governing their course.

Faithfully yours,

George C. Marshall
Major, General Staff
Aide-de-Camp

*     *     *

If you’re interested in learning about Marshall, there are several good books written about him including Leonard Mosley’s biography, his own WWI memoirs in which this letter is printed, and Winston Groom’s book about Marshall, Patton, and MacArthur and the winning of the war.

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There are some who believe that market can be timed. They think that they can enter and exit at correct time capturing highs and avoiding lows. We believe that timing is not possible. Even if we get it right once or twice, it is very difficult to be consistently right.

We believe that markets are unpredictable and trying to time it is futile. We also believe that the best thing to do is to be in the markets through both ups and downs. This is the only way to get the long term returns offered by equity as an asset class.

I saw a small illustration in yesterday’s issue of ET Wealth and thought of sharing the same with you.

They have taken the period July 2011 to June 2016 where an investor invests Rs.10,000 every month in Birla Sun Life Frontline Equity Fund. He would have invested totally Rs.6 lakhs over a 5 year period. The value at end of June 2016 was Rs.9.26 lakhs providing an annualised return of 17.3%.

The above investor is someone like you who invest regularly with discipline irrespective of the market conditions.

Then comes the market timer A. He is smart enough to identify big falls beforehand. So he withdraws investments before 10 biggest falls and reinvest in the next SIP date. For him, the value of investment at end of June 2016 was Rs.8.91 lakhs with an annualised return of 15.62%.

Then comes the market timer B. He times his SIP in such a way that he is able to invest on the days of big fall, by advancing the SIP dates. For him, the value of investment at the end of June 2016 was Rs.9.33 lakhs with an annualised return of 17.27%.

The disciplined investor has earned better returns than both the market timers. Even assuming market timers can earn few percentage points more than disciplined investor, how to predict big falls or ups? We would not be able to predict even once leave alone consistently predicting ten such falls.

Time, discipline and patience are the essence for success in equity market. Continue to stick to these.

Also do not look at short term performances. For equity, look at 5 year averages. For debt funds like MIP, look at 3 year averages.

Also do not compare one fund in the portfolio with another. Only look at overall portfolio performance. In a given year a midcap fund and a large cap fund may show a completely different performance and it is absolutely ok to be so. Portfolios are consciously designed like that.

Let me complete this piece by sharing what Charlie Munger said in this regard.

“It is in the nature of stock markets to go way down from time to time. There is no system to avoid bad markets. You can’t do it unless you try to time the market, which is a seriously dumb thing to do. Conservative investing with steady savings, without expecting miracles, is the way to go.”- Charlie Munger

Going through an old piece I’d written for Mint, while conducting research for something I’m planning to write, I realise that I’d come rather close to staking claim as a great election forecaster. As it happened, I just didn’t have the balls to stick my neck out (yes, mixed metaphors and all that) and so I missed the chance to be a hero.

I was writing a piece on election forecasting, and the art of converting vote shares into seat shares, which is tricky business in a first past the post system such as India. I was trying to explain how the number of “corners of contests” can have an impact on what seat share a particular vote share can translate to, and I wrote about Uttar Pradesh.

Quoting from my article:

An opinion poll conducted by CNN-IBN and CSDS whose results were published last week predicted that in Uttar Pradesh, the Bharatiya Janata Party is likely to get 38% of the vote. The survey reported that this will translate to about 41-49 seats for the BJP. What does our model above say?

…

If you look at the graph for the four-cornered contest closely (figure 4), you will notice that 38% vote share literally falls off the chart. Only once before has a party secured over 30% of the vote in a four-cornered contest (Congress in relatively tiny Haryana in 2004, with 42%) and on that occasion went on to get 90% of the seats (nine out of 10).

Given that this number (38%) falls outside the range we have noticed historically for a four-cornered contest, it makes it unpredictable. What we can say, however, is that if a party can manage to get 38% of the votes in a four-cornered state such as Uttar Pradesh, it will go on to win a lot of seats.

As it turned out, the BJP did win nearly 90% of all seats in the state (71 out of 80 to be precise), stumping most election forecasters. As you can see, I had it all right there, except that I didn’t put it in that many words – I chickened out by saying “a lot of seats”. And so I’m still known as “the guy who writes on election data for Mint” rather than “that great election forecaster”.

Then again, you don’t want to be too visible with the predictions you make, and India’s second largest business newspaper is definitely not an “obscure place”. As I’d written a long time back regarding financial forecasts,

…take your outrageous prediction and outrageous reasons and publish a paper. It should ideally be in a mid-table journal – the top journals will never accept anything this outrageous, and you won’t want too much footage for it also.

…

In all probability your prediction won’t come true. Remember – it was outrageous. No harm with that. Just burn that journal in your safe (I mean take it out of the safe before you burn it). There is a small chance of your prediction coming true. In all likelihood it wont, but just in case it does, pull that journal out of that safe and call in your journalist friends. You will be the toast of the international press.

So maybe choosing to not take the risk with my forecast was a rational decision after all. Just that it doesn’t appear so in hindsight.

“A journey of a thousand miles must begin with the first step.”
— Lao Tzu

***

Change is hard. But what if we could make it a little easier? As Lao Tzu so eloquently puts it, maybe we just need to focus on that first step.

This is the time of year for New Year’s resolutions. It shouldn’t surprise you that we tend to be pretty terrible at following through on them.

The average American makes the same resolution ten years in a row without success. Within four months, 25 percent of resolutions are abandoned. And those who succeed in keeping their resolutions usually do so only after five or six annual broken promises.

With a track record like that, it definitely seems like time to look at the problem differently. There is an interesting short book by Robert Maurer called, One Small Step Can Change Your Life: The Kaizen Way; in it, he uses his experiences as a clinical psychologist using something called Kaizen to help people make changes in their lives.

Kaizen has two definitions:

• Using very smalls steps to improve a habit, a process, or product.
• Using very small moments to inspire new products and inventions.

For this discussion let’s focus on using it to help remove roadblocks to the behavior we are seeking, or to add roadblocks to behavior we are trying to discourage. As Maurer puts it, “using small steps to accomplish large goals.”

Thinking About Change

First, let’s take a look at change. Meaningful change is pretty hard. Our lives are homeostatic systems — they want to come back in alignment with what is comfortable.

We also live in a culture that tends to feel that bigger is better. We think that big steps or big dramatic changes will produce big results. And while this may be true a small percentage of the time, or may seem logical, it’s very rare and difficult to implement. Smaller steps are more doable both for our mind and for our body.

Let’s use the example of exercise for health. Many people want to live healthier lives and there is plenty of evidence that movement helps us to achieve those goals. However, we are often pushed to believe that only a certain type or certain level of exercise will get us where we need to be. We decide to make a drastic change to get a drastic outcome.

The issue is it’s very hard to go from no exercise to an hour at the gym everyday. The gym is expensive, you have to fit it into your schedule (travel and time there) and you have to stay motivated to go regularly to get those results you want.

The Kaizen way would be to pick one small step. It should be something relatively easy, something that takes little time and effort. For example, if you drive a car to work, purposely park as far away from the door as possible. If you bus, get off one stop earlier. But, initially, choose only one thing and do that one thing until it becomes habitual. Maurer suggests thirty days.

It almost seems too simple; so simple that you might think that you are effecting little to no change. But these changes are additive. Imagine if every month for a year you added a healthy habit to your life.

Those changes may come about slowly but they can end up being quite dramatic. In combination, they can be exponential. A total change.

The quick extreme change can actually cripple people into inaction. We reason, why bother if I can’t succeed 100%?

Too often, you meet with success in the short term, only to find yourself falling back into your old ways when your initial burst of enthusiasm fades away. Radical change is like charging up a steep hill – you may run out of wind before you reach the crest, or the thought of all the work ahead makes you give up no sooner than you’ve begun.

There is an alternative… another path altogether, one that winds so gently up the hill that you hardly notice the climb. It is pleasant to negotiate and soft to tread. And all it requires is that you place one foot in front of the other.

So let’s make our way back to New Year’s. These types of resolutions don’t work because we command ourselves to implement them in their entirety starting the very next day. It’s almost like setting yourself up for failure on purpose. So, instead of looking at the resolutions the traditional way, let’s look at some of them Kaizen style.

In the book Maurer walks us through some of the common resolutions he’s seen and the small steps that his clients have used with success in the past. Just don’t forget that any change requires eating the broccoli.

Small Steps for starting to exercise:

1. If you can’t bring yourself to get off the couch, purchase a hand grip to squeeze while watching television (or squeeze old tennis balls). This will burn a few calories and get you accustomed to the idea of moving your body again.
2. When you’re ready to get moving, walk around the block once a day, or take one flight of stairs instead of the elevator.
3. Pass one additional house per day, or repeat one extra step on the staircase until you find the habit growing solid.
4. To further increase your appetite for exercise, think about the activity you would most like to engage in – swimming? Skiing? Tennis? Find an attractive picture of that activity and place it on the refrigerator, on top of the television, or in the corner of a mirror.

Small Steps for saving money:

1. Set yourself the goal of saving just one dollar per day. One way to do this is to modify one daily purchase. Perhaps you can downgrade from a large, relatively expensive latte to a small, plain coffee. Maybe you can read a newspaper for free online instead of buying one at the newsstand. Put each saved dollar away.
2. Another tactic for saving a dollar a day is to share a daily indulgence with a friend. Buy one large coffee and pour it into two smaller mugs. Buy one newspaper and swap sections.
3. If you save one dollar each day, at the end of the year you’ll have $365. Start a list of things you’d like to do with that extra money and add one idea each day. You’ll learn to think about far-off, more sizeable financial goals rather than immediate cheaper pleasures.

Small Steps for asking for a raise:

1. Start a list of reasons you deserve more money for your work. Every day, add one item to the list.
2. Spend one minute a day practicing your request to your boss out loud.
3. Increase this time until you feel ready to make your request in person.
4. Before you actually ask for the raise, imagine that the boss responds poorly – but that you walk out the door feeling successful anyway, feeling proud of our effort. (This step – really a form of mind sculpture – helps you manage any lingering fears.)

Small Steps for using time more productively:

1. Make a list of activities that take up your time but are not useful or stimulating to you. Watching television, browsing through stores, and reading things you don’t find pleasant or productive are frequent sources of poorly used time.
2. Make a list of activities you would like to try that you feel would be more productive than your current ones. Each day, add one item to the list.
3. Once you have identified more-productive activities that you’d like to try, go ahead and give them a whirl – but in a very limited, nonthreatening manner. If you want to keep a journal, do so – but promise yourself to write just three sentences per day. If you’d like to take a yoga class, you might begin by just sitting in the studio’s lobby and watching students pass in and out. Soon, you will find yourself participating more fully in your activity. And you’ll hardly notice that you’re spending less time in front of the television.
4. Each day, write down the name of one person who you feel is living a productive life. Then write down one thing that person is doing differently from you.
   (If you want to me more productive might we suggest – Productivity That Gets Results)

You will notice that some of these steps themselves are additive in nature. It’s helpful to look at the behavior you are trying to change and break it out into bite sized pieces. This will serve two purposes: it will give you more insight into the behavior itself; and it will break out the problem into sensible small steps for you to tackle.

One Small Step Can Change Your Life is a small book filled with big ideas. Much has been written about Kaizen and how it has revolutionized business practices, but it’s also interesting to look at this idea from a more personal perspective.

But first, let’s take just one small step. Good luck with your New Year’s resolutions.

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