Want to be rich? - Part 10

First, I wish to thank all my readers for sending me e-mails presenting their point of view on my series on Want To Be Rich? Some have asked me not to stop at part 9. Others have pointed out different points of view. I have therefore decided to continue the series till I exhaust all my ideas.

But before I restart, please understand that I do not claim any expertise on this subject. These are my views of managing money. It is intended to make you think about money and your future.

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An important ground rule in your path to becoming rich is to understand that high returns are always associated with high risks. Always. So, if someone is promising you high returns but telling you that there is no risk, then that person is making a quick money - from you. So, please venture into high risk-high return schemes only if you have excess money and/or if you are young.

And then there is always the Black Swan.

A relatively safe instrument of making money from stock markets is what in India is called the Mutual Fund Systematic Investment Plan (SIP). This is particularly affective when the share market is in an upheaval. The most important think to remember in an SIP is that you need patience.

The way it works is similar to a recurring deposit schemes. You put in a fixed amount of money to the scheme every month. When the share market is down your money will buy more units. When the share market is up your fixed money will buy you less units. This averages out the fluctuations.

I actually did an experiment. I invested in a mutual fund where I paid a lump sum outright at the beginning and at the same time started investing in an SIP. After a year, the outright payment has given me a return of -14.3% (a loss) and the SIP actually gave me a return of +13.5%.

You will get more information on SIP here and here.

I see SIP as a long term investment plan. I intend to keep it up for about 5 years to see how well it works.

I also see SIP as having better Return on Investment, if you consider the effort and time required to follow the share market directly. Direct investment will most definitely fetch you much better returns, but you need to invest lot more time to understand the share market.

As long as you do not put all your money in SIP, you should be fine.

The thin line between inspiration and plagiarism

Remember the big hoo-haa about a 19-year old author, Kaavya Vishwanathan, accused of plagiarism.

Turns out that best-selling authors get 'inspired' by each other all the time. I recently finished reading The Black Swan by Nassim Nicholas Taleb, categorized under economics by Penguin. And I am now reading The Blind Watchmaker by Richard Dawkins. This is categorized as Popular Science by Penguin.

Read the following passages and tell me what you think of it.

This is from The Black Swan

I've had plenty of cups of coffee in my life (it's my principal addiction). I have never seen a cup of coffee jump two feet from my desk, nor has coffee spilled spontaneously on this on this manuscript without intervention (even in Russia). Indeed, it will take more than a mild coffee addiction to witness such an event; it would require more lifetimes than is perhaps conceivable - the odds are so small, one in so many zeros, that it would be impossible for me to write them down in my free time.

Yet the physical reality makes it possible for my cup to jump - very unlikely but possible. Particles jump around all the time. How come the coffee cup, itself composed of jumping particles, does not? The reason is simply, that for the cup to jump would require that all the particles jump in the same direction, and do so in lockstep several times in a row.

And this is from The Blind Watchmaker

In the case of the marble statue, molecules in solid marble are continuously jostling against one another in random directions. The jostlings of the different molecules cancel one another out, so the whole hand of the statue stays still. But if, by sheer coincidence, all the molecules just happen to move in the same direction at the same moment, the hand would move. If they then all reversed direction at the same moment the hand would move back. In this way it is possible for the marble statue to wave at us. It could happen. The odds against such a coincidence is unimaginably great but they are not incalculably great. The number is so large that the entire age of the universe so far is too short a time to write out all the noughts!

Coincidence! I don't think so. I started reading The Blind Watchmaker because it was referenced in The Black Swan (not in context of the above paragraphs though!)

Picture courtesy: Jaylopez

Black Swan Tipping Over

It is fascinating to see how ideas germinate, take shape and blossom. But what is even more fascinating is how authors use each others ideas as stepping stones to push their own.

What follows is entirely speculation. I am not insinuating plagiarism here.

Malcolm Gladwell brought out his international best seller The Tipping Point in the year 2000. The book is about how trends reach a critical mass and tip over to become an avalanche. Simple example from the book, some young kids start wearing Hush Puppies and suddenly the near-dead brand is a rage.

Fooled By Randomness by Nassim Nicholas Taleb (NNT) is published in 2001. He follows it up with The Black Swan in 2007. The idea of black swan is introduced in Fooled By Randomness and formalised in The Black Swan. NNT rejects Normal Curve as the basis for describing all random activities. He claims and proves that Normal Curve can be used for describing events that are associated with tossing of coins and other similar random phenomena, such as, weight of randomly picked sample of human beings. Power law rules the social and financial world. Thus, events that tip over are basically black swans. NNT also makes the statistical concept, outlier, popular ... but only among those who have read the book.

In 2008, Malcolm Gladwell publishes a book called, guess what, Outliers.

It is as if the two authors draw energy from each other to expand their thesis. Unless they are the same author writing under pseudonyms, in one avatar the author establishes a formal basis of an idea and in another avatar he comes up with a popular version of the idea. (Yes! I have seen their photographs, they look different :-))

If I remember it correctly, NNT makes a one line mention of The Tipping Point in The Black Swan.

The approach and styles vary widely but they both talk of the same thing.

Picture courtesy: Nicole Shackelford

Taking Decisions with a Twist in the Tale

I am context man! I find solace in setting up events in their context. And though The Black Swan has done its best to destroy my confidence in context ("narrative fallacies"), I still find taking decisions easier when context is clearer.

Let me try to explain what I mean by context. This is my favourite.

Suppose you have just arrived at a village and you hear that a boy has been killed by a wild animal. The most horrific thing is that none of the villagers rushed to rescue of the boy. What would be your reaction? Outrage? Small boy done to death because of apathy on part of the villagers. But then you rationalize. Perhaps the animal was big, leopard or tiger. It wouldn't have helped even if the villagers had tried. But then you hear it was just a wolf. Now you are angry. This is not on. You curse the villagers silently.

But being a "contextual person" you dig deeper. You find that the boy was naughty and like to play pranks. Just to entertain himself, he used to cry out wolf. The villagers would rush to his rescue every time just to see him laughing his head off and their consternation when they would find there was no wolf.  He had done so twice before and this time the villagers thought he was pulling a fast one once again.

Yes, dear readers, this is the old "The Boy Who Cried Wolf" story. Twisted around. You begin to understand more when the context is clear.

The problem with our education is that we are presented with narration that flow naturally - from the beginning to the end. As a result we are not trained to see beyond. What is presented is fact. And that's that. It is a helpful device to teach morals to a child, but awful device to teach us to think.

 
Unfortunately life is much more complicated and in many cases the reverse trace leads to a beginning that suits the narrator the most. In fact, you could end up with more than one narration depending on who is telling you the story.

Decisions based on context could be wrong or right. But decisions based on snapshots can never be right (Now don't quote me Blink!)

Picture courtesy: Patrice Dufour

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The Black Swan Predicted Financial Collapse

If I had pots of money, I would buy a copy of The Black Swan and distribute a copy of The Black Swan to every banker, economist and policy maker and all those hanging out at Davos.

Now, you have to remember that this book was published in 2007 and I am assuming the book would have taken about 15 months to complete (or more!) Read this extract ...

A similar effect is taking place in economic life. [G]lobalization; it is here, but it is not all for good: it creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial institutions have been merging into a smaller number of very large banks. Almost all banks are now interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks ... - when one falls, they all fall. The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard.

And then in the footnote, Nassim Nicholas Taleb goes on to say ...

As if we did not have enough problems, banks are now more vulnerable to the Black Swan and ludic fallacy than ever before with "scientists" among their staff taking care of exposures. ... [T]he government sponsored institution Fanny Mae, when I look at their risks, seems to be sitting on a barrel of synamite, vulnerable to the slightest hiccup. But not to worry: their staff of scientists deemed those events "unlikely."

Spooky or what?

Just one clarification.
The Black Swan is not about prediction. It is about the unpredictable. The above extract is an example of how one should anticipate the unpredictable.

Picture Courtesy: 'Rolve'

9 Blurbs For 9 Books

Movies have them, so do comics. Why not books?

The one movie blurb that has stuck at the top of my mind goes like this:

Once in a lifetime comes a movie that makes you feel like falling in love all over again. This is not that movie.

This is from The War Of The Roses, a dark comedy. (You haven't see it yet; get a DVD today!)

Or consider Spiderman - I tell this to myself, every time I start My SUV:

With great power comes great responsibility.

So here are 9 blurbs for 9 books:

1) The Black Swan:

All you need is a one single black bird

2) The Purple Cow:

Safe is risky

3) Survival of the sickest:

Somewhere in your genetic code is the tale of every plague, every predator, every parasite, and every planetary upheaval your ancestors managed to survive

4)Illusions:

Don't turn away from possible futures before you're certain you don't have anything to learn from them. You're always free to change your mind and choose a different future, or a different past.

5) The Goal:

Management, Schmanagement. It is all about constraints

6) Fooled By Randomness:

You can't explore your future. Or your past. It is completely random.

7) The Harry Potter series:

That scar on your forehead could be magic

8) The DaVinci Code:

The blood of Jesus is alive and amongst you

9) The Long Tail:

You know it is modern economy when the tail wags the dog

10) This is for you. Come up with something.

But books do not have blurbs. Just as well. I would hate to read a book with a blurb.

Picture courtesy: Ana Labate

Internal Dynamics Of Criticising

How often do we question ourselves?
We go by impressions.
We judge others.

Just this after noon someone told me that a person was corrupt. Why? Because he is rich? Because he is an aggressive sales person? Because he is in the real estate business?  

Want to know how our mind works? I quote from my favourite book The Black Swan.

We use reference points in our heads ... and start building beliefs around them because less mental effort is required to compare an idea to a reference point than to evaluate it in absolute.

So when we judge others, what is the reference point?
Ourselves?
Be very careful when criticizing others. You might well be projecting yourself on to that person.

The Hedgehog and The Fox

I first read about the hedgehog and the fox in Good To Great by Jim Collins. The fox is clever and knows many thing. The hedgehog is a simple soul but knows one big thing.

When I first read Good To Great I was heavily impressed. Of course, by then I hadn't laid my hands on two trend busting business books: Hard Facts, Dangerous Half-Truths And Total Nonsense, and Fooled By Randomness. I now know that what was done in Good To Great was backward fact-fitting and was inspired by a desire to find a cause for success while in fact it might just have been a case of being at the right place at the right time. (Read Blue Ocean Strategy for a small critique on Good To Great).

But just because I prefer books like Fooled By Randomness over Good To Great, doesn't automatically translate into Good To Great is crap. There are elements in Good To Great which could be some value, right? Ok, I reject the theory in Good To Great that companies that are led by silent, determined type CEO's make the leap and those that are led by aggressive but not exactly humble don't. (Where in actual fact the CEO's personality may have no bearing on a company's good performance.) But one cannot, off hand, reject the fact that companies that follow the hedgehog concept are more likely to emerge superior to those who do not. The hedgehog concept looks suspiciously like core competency, doesn't it? So isn't focusing on core competency good for a company? Or for that matter should being a hedgehog help an individual. Jack or all trade, master of none sort of thing.

It does ... but only if tomorrow is identical to yesterday. Meaning, only if you can extrapolate the future based on past data.

The Black Swan on the other hand pumps for the fox. Too much focus makes a person myopic. Hedgehog is myopic. Fox has a more broader vision. The fox takes in many more inputs from the world that exists outside its own and does not take its future as granted.

Now one might want to justify the both are necessary. When things are going smooth, hedgehog is a better strategy, while in turbulent times being a fox is advantageous.

Wrong.

A Black Swan event can happen exactly when going is smooth. That is why it is a block swan event. So being a fox is always a better proposition. A fox might survive the black swan event but a hedgehog will not.

Do you agree? What is your take on the hedgehog and the fox?

Prediction by Experts

I continue to be impressed by what Taleb has to say in The Black Swan and how it can be applied in real life. (One immediate impact on me has been the reduction of TV viewing time. That helps me a great deal in the domestic front too.)

In any case, this is about how good (or poor) are predictions by experts.

[Psychologist Philip] Tetlock studied the business of political and economic "experts." He asked various specialists to judge the likelihood of a number of political, economic, and military events occurring within a specified time frame (about five years ahead). The outcomes represented a total number of around twenty-seven thousand predictions, involving close to three hundred specialists. Economists represented about a quarter of his sample. The study revealed that the expert's error rates were clearly many times what they had estimated. His study exposed an expert problem: there was no difference in results whether one had a PhD or an undergraduate degree. Well-published professors had no advantage over journalists. The only regularity Tetlock found was negative effect of reputation on prediction: those who had a big reputation were worse predictors than those who had none.

Now this is interesting as I have made some predictions for 31st December 2009 and I am no expert.

But what is more important is to check out the predictions made by economists on the present crisis. I have seen in innumerable news reports that the present economic crisis is likely to last throughout the 2009 and most possibly into the first few months of 2010. The good news: these predictions were made by experts. So, they are bound to be wrong. The bad news:, they could err on both sides: perhaps the economic gloom will lift with the next few months ... or last for the next few years.

Ditto with the environmental predictions.

In any case, you can track my predictions by subscribing to it. We shall know by end-2009, how far I was from reality.

Note: The picture used here belongs to Gabriel Bulla. For more such pictures visit his gallery.

When Cherished Ideas Crash

Ever had a feeling that your carefully constructed world view is crashing all around you as you read a more potent argument against it. You then scramble to qualify your world view so that it remains intact because you have seen it work before - but you are not so sure. Of course you can always have a fall back option (see Fickle) but not before giving a fight.

My basis for determining the validity of any information has always been to evaluate the information against a context. I keep asking, "what is the context?"  So, if some one says, "such and such HR initiative has worked in, say, Infosys." I would always ask, "Let's first examine the context."

And if the context is similar to mine, I would adopt it. To me context represents the sum of all independent variables that matters.

Similarly, story telling, to me at least, has always been the best way of passing information. But apparently narrating is too simplistic a tool and has the impact of forcing certain post-hoc causality on an event where there might be none or many that escapes detection.

Reading The Black Swan and before that Fooled By Randomness has been an humbling experience.

Context matters, but only up to certain extent. Actually only up to a small extent. Ditto with evidence. Because for every evidence and/or context there are many more that are not obvious or hidden.

No I have not given up on my context based filtering of information, but what does one do to counter this:

I propose that if you want a simple step to a higher form of life, ..., then you may have to denarrate, that is shut down the television set, minimize time spent reading newspapers, ignore the blogs. Train your reasoning abilities to control your decisions ... This insulation from the toxicity of the world will have an additional benefit: it will improve your well-being.

Mr. Taleb, would you reconsider leaving "ignore the blogs" bit out from the above quote? We actually help you detect black swans! How? By presenting counter points. If that does not help detect black swans, nothing will.

Curious Coincidence of the Black Swan

This must be pure coincidence ... but more of that later.

In his book, The Black Swan, Nassim Nicholas Taleb discusses the reasons for our being blind to Black Swans (defined as events that we unable to predict due to our tendency to extrapolate historical data or past events.) I am still reading the book and have reached a very interesting point (from this posts point of views, that is; actually the whole book is extremely interesting) where the author discusses human tendency to simplify data and facts. Humans, rather quickly, simplify a set of facts as per their convenience / upbringing and come to a conclusion. We weave for ourselves a story and assign a cause to an event post-facto. For obvious (or not so obvious) reasons, we cannot assimilate all the data that is available. But worse we do not know that we do not assimilate all the data and pick ad choose as per convenience. This tendency is obviously not limited just to the humans. Even machines would do so (or do so more than humans as machines are built to supply closed form answers.

That got me thinking. What if there were people who take in all information that is made available. Or at least take more information than normal humans do. Then BAM. I realized that I know what would happen. Pure coincidence. I did not realize this when I listed The Curious Incident of the Dog in the Night-Time as a gift in my previous post. The protagonist, a child with 'special needs' takes in all information he gets (has a photographic memory) and does not take a judgment call (takes every information at face value) and is brilliant at Mathematics (perhaps, that's why). He is obviously a social misfit (his character is more complicated that can be described in two lines).

So, is it impossible for a normal human being to predict Black Swan?

Hmmm...

I haven't finished reading. Will update after I complete reading The Black Swan.

And then need to re-read The Curious Incident of The Dog in The Night-Time after I finish reading The Black Swan. I am glad I buy books.

Note: The picture used here belongs to Claudia Meyer. To see more such pictures, please visit her gallery.

Removing Bias

I am thrilled to bits!
I wish you could see the grin on my face as I type this.
Some time ago, I had proposed a new mechanism of studying companies.
I repeat my conclusions here:

If I were to conduct a scientific study on business strategies, I would report the context and the decisions live, recording the thought process (as revealed by behaviour) as it happens, without drawing any conclusion. Very much like the National Geographic or such similar recordings of wild life.

I might have just hit upon a new field of management study :-))))
Remember, you read it here first!

Now why am I thrilled?

I just started reading The Black Swan by Nassim Nicholas Taleb (those who have been following my blog already know that I have become a big fan of his after reading Fooled By Randomness. I have quoted from Fooled By Randomness here, here and here.)

Anyways, a few pages into the Black Swan and what do I see?
This:

"While we have a highly unstable memory, a diary provides indelible facts recorded more or less immediately; it thus allows the fixation of our unrevised perception and enables us to study later events in their own context."

Taleb is trying to introduce a method of removing what he calls,

"the retrospective distortion, or how we can assess matters only after the fact, as if they were in a rear view mirror (history seems clearer and more organised in history books than in empirical reality."

I am pleased as a punch to know that I am thinking on same lines as Taleb.

Note: The picture used here belongs to Neil Gould. To see more of his pictures visit his gallery.