Category: Your Money

What does the chart say?

A new piece of academic literature argues that if you are an individual investor trading options on the basis of technical analysis, you have made some very poor decisions. The researchers studied Dutch discount brokerage clients for the period 2000-2006. The key take-away:

Technical analysis costs investors on average approximately 50 basis points per month in raw returns from poor portfolio selection decisions, and 20 basis points from additional transaction costs. Notably, the impact of technical analysis is concentrated among high derivative rollers, where the costs are much higher: 140 basis points in raw returns, and 29 basis points from additional transaction costs.

That translates to a cost of about 8.5% a year for normal traders, and about 20% a year for high rollers.

We had also linked to studies in the past that looked at specific signals. For example, Adam Grimes ran Fibonacci ratios through the grinder. His conclusion: mathematically it does not make sense for traders to use Fibonacci retracements when trading.

When you put these two studies together, it leaves us with an interesting question: why bother with technical analysis when a) it doesn’t work in the aggregate, and b) one of the most popular charts, Fibonacci ratios, have no statistical basis in fact?

In a recent interview with Josh Brown, technician Greg Harmon had this to say:

Most traders or investors that criticize technical analysis do so because they assume that the result of the analysis is a roadmap, a direction with certainty. It is nothing of the sort. Technical analysis is about the possibility. Technical analysts and traders will draw all sorts of lines and spout off support and resistance levels that appear to be full of certainty. Their analysis is not about identifying points of certainty but rather points of reflection, where price history has shown a price level important and so might make it important again. Might.

 
In my mind, looking at a chart is a bit like getting a “hall-ticket” pooja done at the Ganesha temple before the exams. You know you have studied hard and done your home-work, but if not-pissing off the Gods costs just Rs.100, you might as well get that done too.

Source:

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The deadliest buzzwords

dilbert

Aswath Damodaran has an awesome post on wading through the deadliest buzzwords that are most frequently used by investors to distract and delude themselves and others. I am going to give you the headlines here, header over the real deal after the fold.

Optionality

Question that you should ask yourself:

Does the company in question has the exclusive or close-to-exclusive right to expand into new markets? This exclusivity can come from owning a proprietary technology or possessing an exclusive license to operate in a market.

Growth Potential

Question that you should ask yourself:

To create value, you need to earn excess returns while growing, and to earn those excess returns, you need barriers to entry and competition. Does the company’s competitive advantages allow it to create value from that growth.

Strategic considerations

Question that you should ask yourself:

Can you convert the qualitative benefits into earnings and cash flows?

Disruptive

Question that you should ask yourself:

Is there dissatisfaction with the status quo, either on the consumer side or on the producer side?

 
Source: If it is a strategic growth investment in China, the numbers don’t matter! Or do they?
 
 
 

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Leapfrogging Indian Labor Laws

A lot of ink gets spilt on the intractable nature of Indian labor laws. Indian labor laws are considered by many as a retarding factor of growth. Inflexible labor market regulations are believed to be hindering large-scale investments, technology absorption, productivity enhancement and high employment growth in Indian manufacturing. Inflexible labour market could also be one of the reasons for the share of manufacturing in Gross Domestic Capital Formation hovering around 30% since 1970s, and growth in share of services sector in GDCF from 39% in 1970 to 51% in 2010.

hiring and firing

However, what if, we have reached a point where it doesn’t matter anymore?

robots per 10000 employees in manufacturing

Indian labor laws exist to protect current employees. But what if entire new production lines are setup without having to employ labor at all?

What if, instead of this:

people

We start with this:

robots

Industrial robot manufacturers are reporting between 18% and 25% growth in orders and revenue year on year.

Even newspaper articles are being written by algos. An algorithm called Quakebot is programmed to extract relevant data from USGS earthquake reports and plug it into a pre-written template. The story goes into the LAT’s content management system, where it awaits review and publication by a human editor. Narrative Science, a company that trains computers to write news stories, predicts that in the next 15 years, 90% of news would be written by computers.

Connecting the dots, we can imagine a future where our existing idea of a “corporation” might appear quaint.

Corporations can be thought of as information-processing feedback loops. They propose products, introduce them into the marketplace, learn from the performance of the products, and adjust. They do this while trying to maximize some value function, typically profit.
 
So why can’t they be completely automated? I mean that literally. Could we have software that carries out all those functions?
 
The CEO of an automatic corporation will be a devops engineer: fixing software bugs, writing “features” (i.e. new ways for the corporation to behave), watching performance dashboards (imagine all the pretty graphs!), and providing some vestige of human input to tune parameters used by the software. Eventually they can take their hands off the steering wheel, having configured everything to run on auto-pilot, and set up alerts to page their phone if something really goes wrong.

 
Why bother our netas and babus for reforms when we can directly leapfrog in to the “Automatic Corporation”?

Sources:

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Mutual fund positioning: Feb 2014

We are trying to figure out if tracking mutual fund purchase and sell decisions can help us be better investors. What fund managers do, vs. what they say, can provide insights into their decision making process. Here are their biggest moves in February this year:

Added on aggregate
M&M
TATAMOTORS
SBIN
CADILAHC
TCS
GODFRYPHLP
KOTAKBANK
LUPIN
ADANIPORTS
IGL
Removed on aggregate
MCDOWELL-N
NESTLEIND
BHARTIARTL
BANKBARODA
SSLT
CAIRN
IDEA
HDFCBANK
OFSS
ABIRLANUVO

Five month aggregates

mf removed

Reversals: Reliance(+), Bank of Baroda(–), Petronet(+)

mf added

Reversals: TCS(+), State Bank of India(+), Titan(+), Cadila Healthcare(+)
 
 
NOTE:

  • Only open ended funds that were in the “accumulation” phase were considered
  • Funds named “growth” and with the “direct” option alone were considered
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