Prashanth Krish | Portfolio Yoga

Thoughts on Free Market Capitalism and Minimal Government

In 1997, JTM which was later acquired by Bharti Airtel launched Mobile services in Bangalore. While fixed line call cost was One Rupee at that point of time, JTM launched its service with Outgoing calls costing Rs.32 per minute and Incoming calls costing Rs.16 per minute.

Twenty years later, we have come to a stage where we get Incoming / Outgoing / Roaming, Internet & STD for nearly free. The whole model in Telecom has been turned on its head in a time frame lower than a single generation.

For decades, Price Control in India meant that there was very little of production of anything – from Scooters to Cars to Telephone, not only was choices limited but price control meant that there was a multi-year queue if you wished to get your hands on them.

If one were to take Liberalization of the economy as having started in 1991, we have spent just around 60% of the time we spent under a price control economy. Yet, once in a way, it would seem that we are more happy to go back to the old world of price controls with the only difference being we want the higher level of quality we have got accustomed to but at a lower price.

On Friday, the stock price of multiplex operators went down by 12 – 14% due to an announcement by Maharashtra Food supply minister Ravindra Chavan that outside food will henceforth be allowed to be carried into theatres. But while that itself was a bummber, what panicked the markets was the addendum that they will also ask Multiplex operators to bring the food prices at par with market levels.

Since most multiplex operators generate 30 – 40% of their revenues and more of their profits from selling of food and drinks, investors weren’t wrong about being worried, especially since many of these worthies are trading at pretty high valuation compared to rest of the markets.

Some time back, there was a strong call to the government to intervene and ensure that Bank charges were lower – they are actually pretty low at Public Sector Banks but Private Sector Banks were the target since their charges are much higher.

Last year, the price of Stents used for Angioplasty came under price cap with the National Pharmaceuticals Pricing Authority of India placing a price cap on the same. NPPA is the authority on fixing of prices and availability of the medicines in the country, under the Drugs (Prices Control) Order, 1995.

In late 2017, an Indian Parliamentary panel recommended fixing an upper limit on airline fares even though Indian Airfares aren’t really that expensive and the wide choice has meant that consumers aren’t limited in their options.

Decades before the arrival of discount brokerage firms, SEBI had to come out with rule limiting maximum brokerage that could be charged at 2.5%. Today, we have options of not having to pay a single rupee in brokerage for delivery trades.

While the upper cap didn’t really help for brokers would just pad the price up or down, depending upon whether you were the buyer or seller, competition has ultimately resulted in investors paying lower and lower fee and one where the price of the trade wasn’t padded either.

Wherever there is no competition and the business entirely run by the government, prices while are low, thanks to being subsidized by tax payers, there is very little incentive for better services. The failure of Socialism offers ample proof in this regard.

Incentives are the key to growth, stymie them and there is no growth for no reason to work harder when one gets the same returns regardless. While public sector banks are today under the microscope due to the burgeoning of Non Performing Assets, they have always been a under-performer only hid by their ability to get away by offering low or no interest to large part of their customers.

Solar Electricity is now closing on in terms of price with Coal which has the cheapest for decades and yet, when it comes to our own Electricity Bills, the only path that we see is higher. This once again because there is no competition and most of the electricity boards is public sector enterprises.

Governments intervention can lead to short term good but damage on long term for there are always consequences of disrupting the flow of goods and consideration. What today may seem like a excellent move may tomorrow be blamed as the seed that eventually pushed one back.

China’s government in ways similar to India’s enforces an interest rate that is well below what the markets should be offering. This has led to a concept called “Shadow Banking” which based on estimates are as much as 30% of assets owned by formal banks.

They key focus by government should be to write and enforce rules that foster competition and result in low wastages. It’s not the job of the government to set prices for this only result in more corruption and higher costs for everyone.

Unlike the United States, where choices have over time become smaller and smaller, the choices available to Indians are far from limited when it comes to businesses from Retail to Theatres. So, you can watch a movie in the cheapest of settings – once upon a time used to be a Tent / Temporary Shelter to Multiplexes in malls which offer a wide choice at a premium price.

I love to meet and catch-up with friends and acquaintances at Coffee shops. While I am a fan of drinking good coffee, neither of the big format Coffee Shops such as Starbucks or Coffee Day provide me with the best Coffee. Yet, they offer something, and at a price, that is worth the money, the ability to have a decent discussion without being asked to move out once the Coffee Cup has got over.

When it comes to Multiplex, the question that needs to be answered is; are they just another theatre that shows movies or a place where you buy the experience. If you only wish to watch a movie, any movie theatre should do the trick, but if you are for the ambience and look out for quality, shouldn’t one be paying more.

It’s not enough that one votes for a politician promising minimal government, it’s equally if not more important that one also ensures that government interventions are kept to the minimum. Every intention starts with good intentions but end up as a measure that brought only negatives to the Industry as a whole.

Seminars – A Shortcut to Trading Success?

Cutting Onions isn’t tough but one that leaves one teary eyed. Try cutting a few at a time and your eyes will hurt like hell. But, while that doesn’t stop one from using onions, one always wishes for a simpler way to cut onions without the attending irritation of the eyes.

In Exhibitions, one of the few hot selling items are tools that help in minimizing the work in the kitchen and this includes reducing the pain of onion cutting. Many years ago, we bought one such instrument – you kept the onion on a hard board, covered it with the onion chopper and one hard press was all it required to cut the veggie into small pieces. Of course, while they were able to chop the onions with ease in the Exhibition, the damm thing couldn’t do any such thing at home.

A search indicated one such item available even today at Amazon (Link)though it’s not surprising to see buyers being disappointed. Some things never change, no matter how many years go by.

With a booming or not so booming markets, depending on which segment of the markets you are trading, one of the newest yet oldest ways to make money off traders who would love to learn to trade has been in the field of education – seminars and such.

While there a few that are well worth the money, most are organized by people whose only claim to fame is on Social Media. Most of them never manage public money – legally at least, but are happy to showcase how easy it’s to make money and how you can do that by attending their session.

But is that really so easy and if so, have you ever wondered why people are happy to give out the secret for a few thousand bucks?

I haven’t attended any such seminar though one common thread I have found is that most of them aren’t based on Quants. When I say Quants, what I am really indicating are strategies that can be tried and tested using computers.

Trading can be and is generally done in two ways – discretionary approach and systematic approach and there are pro’s and con’s in both. There is no one way to Nirvana but if you are a starter in trading, there is no better way than to approach the markets systematically.

The biggest advantage of systematic trading is that you can test out your rules in the historical context to see if they provided any advantage before actually risking any real money in the markets. It also provides you the context that most discretionary traders work with anyways – they too are rules based, just that instead of having to feed into a system that churns out the signals, they are able to do it in their head or gut depending on what drives them better.

Unfortunately most educational based seminars are held by expert traders where they try to showcase how you can approach the markets like they do. The only problem with such an approach is that you lack the hundreds and thousands of hours they have spent looking at markets and digesting them.

Think it of like Chess – the Grandmasters out there don’t just think about the move ahead but are able to think of the impact of such moves on the next set of moves and the next set. If a Chess Master were to showcase his skills, you know a single path that worked for him for that particular game, but don’t know how and why he chose that particular move versus the alternatives available out there.

Same when it comes to trading – does the Indicator that gave a superb buy at the bottom work in all types of markets? Does it apply for only a certain index or can it be applied across indices and stocks? Does it… I do hope you got the gist here.

A few pre-selected trades rarely mean anything other than Selection Bias. For the indicator to have true value, the only way is if you can test it out rigorously without any biases creeping in. And that means, testing the same Quantitatively.

Books are cheaper than ever before, Information about markets and anything you would love to know about is available free of cost and yet, courses abound.

Courses, especially those concerning trading, are good assuming you are already experienced enough, but if you are a newbie, an 8 hour session will not take you any closer to your goal other than helping the organizer with his monthly target.

Being Different Isn’t A Bad Thing

In the world of me too’s, the only way to stand out is to be different and it’s no different in the world of investment management where your only standing is why you are different from others and hence are attractive as a place to park your capital.

Motilal Oswal whose motto is, Buy Right – Sit Tight for example claims to invest its money following QGLP parameters – Quality – Growth – Longevity and Price.

Parag Parikh Mutual Fund on the other hand claims to be a firm believer in the concept of Value Investing and buy companies that are low on debt, high on cash and are good managements who can be banked upon.

Porinju Veliyath, a small PMS fund manager running a PMS fund from Kerala (Quick, Name the Capital of Kerala) too wanted and for a time has been different. While others swear by quality managements, Porinju believed in investing in companies that had good business but bad promoters / managements.

The concept in itself isn’t new for in developed countries, Hedge funds try to build stakes in companies handicapped by an indifferent management but one which otherwise has a great business. Once they acquire a significant stake, the next move is to try and get into management to enable them to change the behavior of the company.

From Bill Ackman to Carl Icahn to Daniel Loeb, activist fund managers for a time have been a huge hit in the United States as they went about breaking down the old companies in search for the elusive alpha.

Porinju model in my opinion was quite similar with the only difference being that in India, promoters own much larger stakes and it’s tough to take on an activist role. Yet, he was able to generate returns way above what could be gained by an do it yourself investor in the markets.

Here is the snapshot of his returns from the Disclosure Document

While Nifty is not the ideal benchmark given his penchant for investing in small cap and micro-cap stocks, the fact remains that, his fund returns are higher versus the correct benchmark – Nifty Small Cap 100 Index.

Unfortunately, great returns also meant that more investors got attracted to the fund. More the investors, tougher it’s to deploy and generate returns of the past.

One of the most quoted busts in history has been Long Term Capital Management. While there were many a wrong with the fund, what actually cooked the goose was the fact that they had reduced capital while continuing to hold positions which meant leverage ratio went up even further & one small spark and the whole empire came tumbling down.

The reason much of the active fund industry in America can hardly beat the Indices is that with huge money at their disposal, it’s tough to be different.

To be different means to take risks out of the ordinary – when it clicks, one is hailed as the next god of finance but when it fails, everyone is happy to take pot shots at how stupid (in hindsight) the strategy was.

Assume for a moment Soros went bankrupt in his campaign against the British Pound. Rather than being called the man who broke the Bank of England, he would have been consigned to history as a fool who tried to take on the Central Bank.

Micro Cap Investing comes with its risks and if the investor isn’t prepared for that kind of risks, he is invested in the wrong place.

DSP BlackRock Small Cap Fund (Erstwhile DSPBR Micro Cap) was the top performing fund a few months ago – but go back 10 years earlier and you will see that the fund was very nearly wiped out in the bust of 2008. While most investors would have dumped their holdings seeing such a loss, notional it maybe, they were again begging to be let in when the fund delivered humongously in this bull run to the extent that the fund house had to close new subscriptions.

Value funds under-perform in strong bull markets, Momentum funds under-perform in bear and sideways markets, Quality stocks of today can turn out to be Fraud stocks of tomorrow. But since they are all different from a plain vanilla market capitalization based Index fund, the probability is that they will turn out different results – hopefully for the better but could be worse too.

The reason for money getting attracted to Hedge Funds / Portfolio Management Schemes are for the reason that the fund manager has much more independence versus mutual fund managers who are mandated on what they can buy, how much they can buy, how much cash they can keep among others.

Difference is also the reason for funds to charge a higher fee than plain vanilla Index Funds or ETF’s which come at a fraction of those. If a fund behaves like a closeted Index fund, why pay 10x the fees?

Fund Management is no fun. It’s tough to manage one’s own emotions, let alone manage the emotions of hundreds of investors who have their own views. While wrongs need to be pointed out, mocking when one is down helps no one.

Disclaimer: I work as a Compliance Manager at a Portfolio Management Company. Views expressed here are my own. Consider me as biased in favour of Active Management.

The Search for Investing Nirvana

Investing can be pretty simple and yet we assume simple isn’t good enough and keep searching for elegant solutions even if they are complex and have risks of an unknown nature. Free is discarded in favour of paid solutions even though the free ideas may have as much value as the paid ideas.

We are a product of our beliefs and biases and no matter what others say, we refuse to cow down and accept that maybe we are looking at the wrong direction.

In 2003, I had amassed enough money to become a broker at a regional stock exchange. Since at that point of time, I was also looking at investing the same into Real Estate (specifically a house), I have always wondered how life would have evolved if I had followed that direction than the one that led me to markets, full time.

While the business barely broke even even after a decade, no thanks to lack of my marketing skills, Real Estate took off like no other. But here is an interesting thought that came about when I was having a talk with a good friend of mine.

We both have been in markets for more than two decades and yet, neither of us had even invested into mutual funds – either lumpsum or systematic investing. Its not that we didn’t know of the advantages, my family first big non UTI mutual fund investment was in the year 1994.

Yet, our beliefs in our own abilities made us invest directly and while some investments worked, some didn’t, I for one never came to create a portfolio of a size that I could have had by just investing a small sum regularly. I didn’t have to buy the best fund or the second best one, all I had to do is get that nudge to invest a small sum and forget about it.

My friend wondered what if we had invested a small sum of money in funds managed by others. While returns may be more or less depending on the fund we invested, the fact would have been that we would now be the proud owners of a few millions and all this without any effort.

As he recounted this old joke,

There’s an old story about a guy taking a smoke break with his non-smoking colleague.

“How long have you been smoking for?” the colleague asks.

“Thirty years,” says the smoker.

“Thirty years!” marvels the co-worker. “That costs so much money. At a pack a day, you’re spending $1,900 a year. Had you instead invested that money at an 8% return for the last 30 years, you’d have $250,000 in the bank today. That’s enough to buy a Ferrari.”

The smoker looked puzzled.

“Do you smoke?” he asked his co-worker.

“No.”

“So where is your Ferrari?”

Many of us don’t smoke or drink, but do we really have saved more than those who spend money on such activities? There is always something else that catches our fancy and attention and onto which we would have very likely spend the money. Knowing is not the same as Doing.

On Twitter, I see financial advisors ridiculing people who invest in a large number of SIP’s. The CEO of a fund house has multiple times commented that by investing in one too many a fund they will earn nothing more than the market.

But I think what is being missed out here is the fact that, what if they aren’t really looking at beating the markets in the first place. What if the rationale for them investing in ‘n’ number of funds which has a large over-lap is to ensure better sleep at night?

Assume you have a Crore of Rupees and wish to invest in the Debt market, specifically Liquid Funds. Liquid fund returns of most fund houses are close to each other which means that you aren’t likely to do better by trying to choose one over the other.

Given that info, would you feel comfortable investing all the money in one fund or deploying the same in multiple. When the basic objective is to park money that can grow safely, would you try to maximize or diversify and ensure sounder sleep even though returns maybe a bit less or more than what you could have achieved otherwise.

If maximization of returns is your requirement, you are better off investing directly in stock versus mutual funds since you may by pure chance be invested in a stock that shoots off like nobody’s business providing you with riches you didn’t dream of obtaining.

Dynamic / Tactical Asset Allocation is a very new idea. But for long term performance, do they really add value or are they just bells and whistles that are nice to speak about but imperfect when it comes to applying them in real life?

Harry Markowitz won the Nobel Prize in Economics for his pioneering work in Modern Portfolio Theory and yet when it came to his own asset allocation, went onto allocate it equally between Equity and Debt regardless of the wonders he could have achieved by just following his own strategy.

We keep searching for the best mutual fund and the top fund of this year is not the same in the next year forgetting that simply investing in the cheapest ETF can over time maybe provide as much returns as all the constant churn would provide.

In the past I have been critical of blindly sipping into mutual funds. But thinking on lines of this being a nudge to save, a SIP in expensive markets is better off than having no SIP for we are unlikely to save the money elsewhere and instead spend in on things we may not cherish the day after purchase.

On the other hand, those who SIP forming estimations of grandeur returns thanks to historical data are likely to be disappointed as well. SIP is a nice way to shove money into savings that may otherwise end up being spent. Will it really help you take the Trip to Europe is a different question altogether.

Practice and Application in the arena of Investing

Before the invention of the Printing Press, Education was privy of a select few for the cost of getting educated was an expensive affair and with much of the knowledge passed on through Oral or Scrolls made of papyrus and ones which required to be handled carefully and hence available to a select few.

The Printing Press changed all that as it made it easy for anyone to access the vast literature of knowledge that was the privy of the select few. After Johannes Gutenberg invented the printing press, literacy levels increased and people started to challenge their beliefs about the world.

We spend more than a quarter of our life trying to get educated by formal methods of education. Once we complete formal education, we start acquiring practical education which we keep acquiring through the rest of the life.

One of the few fields of knowledge which is not really imparted at School / College level in one which actually holds the key to unlock our potential like no other – the Knowledge of Investing. Success in ability to invest right can unlock wealth like no other avenue of work can.

In the pre-internet era, it was literally impossible to learn the intricacies of investing for there were very few a book that could be easily acquired by common folks or experts we could come in touch with personally. Much of the learning was due to being in the right place, Mumbai in India for example or being in the right network.

Internet changed things like the Printing Press did Centuries ago – it democratized and freed education from the clutches of the select few to literally everyone who had any interest.

In recent times, with other avenues of investing being under pressure, the business of investing in the stock markets seems to be the only way out. This has meant mushrooming of teaching / training business – whether be it of the 1 hour variety or the 1 month course.

While there now plenty of resources – both paid and free available to learn more, that hasn’t meant much has changed. We still continue to see investors rushing in at peaks and rushing out at bottoms regardless of how many books and videos and podcasts of Behavioral Scientists they may have read.

As someone once said, the toughest thing to learn is our own nature when we face hurdles we aren’t prepared for, we fold up pretty quick.

From Blogs to Academic Papers to Books, there are a lot of resources available for free. But then again, reading is just one part of the equation, it’s the application that counts and here, regardless of the amount of reading most of us do, we are barely able to lift ourselves to not do things that we know can be harmful for us.

There aren’t many such mistakes that we can find without it already being found and written about and yet, when we make the same mistake, we feel that the whole world had conspired against us to bring us down to our knees.

Last week, one of the leading brokerage houses and one which runs everything other than pure advisory faced the heat on twitter due to their Buy recommendation on one stock that turned out to be toast.

While they over the year come out with hundreds of reports, the failure of one stock was all it took for many to assume that their research was crap.

A few months back, when another stock – Vakrangee started to fall drastically, the company that faced heat was a fund that had invested in this company and while the fund did make a quick exit well before the exit door got locked, this did not stop the twitter mob from ganging up on them.

And just a month or so back, a famous fund manager was facing the heat for having been hit with losses and since there is no data out there to validate our beliefs, we extrapolated his letter to his investors to believe that something had really gone wrong.

Research has shown countless times that Reward doesn’t come without an amount of Risk. As long as one is rewarded, everything is fine but the moment the risk that enabled the reward in the first place starts to show its face, all hell breaks loose.

Reading Howard Marks on the relationship between Reward and Risk is easy but not enough. It’s how you act when you go through the Risky (which is showcased by Draw-downs) that really shows the mettle.

In our formal education system, we choose a stream post the 10^th Standard and this stream literally defines what we do for the next 35 year. Investing is not much different – you choose a philosophy that appeals to you and all you can do is keep adding evidence that can add value to our beliefs.

One way to learn is to apply our learning’s and learn from the outcomes even though this could in itself lead to other biases. Theory and Practicals go hand in hand during college, investing should be no different.

Playing the Russian Roulette by Selling Options

There is a new game in town – it’s called let’s play the Russian Roulette with a million chambers. The game itself isn’t new, it’s just that the players are. Unlike the real Russian Roulette with 6 chambers, in this game, you don’t know either the number of chambers that are empty nor the number of bullets that are packed.

So, how does one play this game?

Its actually very easy thanks to NSE who have introduced something called Weekly Options. Every Thursday, you wake up early, brush your teeth, sit in front of the terminal and wait for the markets to open.

Once markets are open, start selling shit load of out of the money options. Now, since these expire on the same day, you will not get much – may Rs.40 per lot or Rs.80 in case you are able to sell at Rs.2. Selling one or two of course will barely pay for a good cup of Coffee let alone lead you on to the road to riches.

You instead need to sell lots and lots of options. If you sell 100 lots, you make 4K – good but not really awesome. But what if you sell 1000 lots – 40 * 1000 = 40K, now we are onto something. And what if you can sell 10K lots?

Since you have started the day early, if markets trend in one direction, the options will crater like anything in a few minutes to an hour. You can then cover these options and sell new set of options that will give you a Rupee or Two at that point of time.

By the end of the day, all out of the money options go down to Zero and voila, all the money you made by selling those options are yours to keep. Thank the suckers who are on the other side of your trade, post your Marked to Market numbers on Twitter and you are in business.

Now, we are on the road to happyness. Do this every week and by end of a few years, thanks to Compounding you will soon be knocking on the doors of Forbes to ask them enter your name in the Top 100 list.

Wait, you would say – Selling Options require margin and most brokers provide anywhere between 4 – 8 times the capital as exposure. So, how does one go about selling hundreds if not thousands of contracts

Well, that small issue of margins is for ordinary mortals like us – extraordinary traders get extraordinary exposure. With brokerage business having gone to dogs, the only way for brokers who want to make something out of nothing is to hope that they can give the client the exposure he is asking for and by end of the day, make it out alive.

Now, you may wonder – why do people buy those out of the money options for a Rupee or two when they very well know that the chances of it going to zero are very high?

Options are like Insurance – you buy them in the hope that if things blow up, you get back something – if they don’t, all you lose out is the premium paid. This doesn’t mean that the buyers are really hedging their risks – most likely most of them are speculators who are willing to bet a Rupee in the hope that if the market cracks, they can make multiple times their investment.

While option buyers, especially those buying out of the money options do lose out, its once again just a probability and not a guarantee. Every once in a way, when things go wrong and they usually do, you don’t want to blow up because you were too busy picking up nickels to observe the speeding monster truck that are hurtling down the road.

How big is the Risk:

There are basically two kinds of Risk.

First is the risk that markets trend one sided through the day and you get caught. While this is a general risk, the probability that you will get caught badly is not since you have enough time to adjust your position and while you may still end the day in a loss, you know it is not a killer.

The real risk is one that comes unknown – assume a big negative news flows in at 2:30. You are neck deep with shorts most of which you think will go down to zero and the market suddenly dips 10% even before you know what is happening.

While your call shorts shall go down to zero, the same cannot be said about Puts and your or rather your broker’s nightmare has just begun.

To start with, NSE imposes circuits for options which mean that almost immediately all put options will all be locked in upper circuit way below the price where they should be traded. While they will keep opening, the fastness of the move and the depth of fall means that its unlikely you will get a seller to buy back your shorts.

The bigger issue is the size of the loss. Do remember, we aren’t leveraged small. Brokers I am told are giving 40 times exposure (Don’t ask me how, they can but they are essentially bending if not breaking a few laws). So, for every Crore of Rupee you put in as Capital, you can take Notional Exposure of 40 Crores.

Yesterday being an Expiry Thursday and let’s take real prices and based on an interview, real strikes where you would have gone short.

Bank Nifty Futures opened at 25,640 yesterday. With trend being up, you decided to sell multiple lots of 25,400 put options. Now these were trading around Four Rupees and lets assume you get the same price even though your own quantity may push down the price.

Since you are a big trader, you start off with 1000 lots which yields you a good 1.6 Lakh in Premium. Yesterday was a good day and you ended the day with the options going down to zero which meant that you made the total premium.

But what if you were holding the option at 2:30 (the real trader closed out his position at 0.05, a price he could have got only post 3 PM) and a flash news triggered a market fall of 5%. Bank Nifty is now at 24,350

A 1,280 fall is bad enough, but the problem for you is that the options you had sold for a princely sum of Rs.4 are now (theoretical since they would be frozen will zero trades taking place) costing a grand price of just Rs.1050.

Since you are having a total position of 1000 lots which equals 40000 (40 * 1000), your loss is now Rs.4.20 Crores (nice round figure, Right?) .

Hell with you would be your thought – I would have placed a stop and exited well before such a force majeure ever happened.

Unfortunately, the problem with stops is that they will not get executed at times like these when prices speed off one way. Even though it takes just a few milliseconds for the Stop Order to get converted to a Sell Order, markets would have moved way away from the execution price leaving up hanging in the air so to speak.

In 1995, the Singapore head Trader of Barings Bank was in a fix. He had lost a great deal of money and something had to be done. He didn’t want to take a huge risk to recover the money and hence he executed what he thought was the safest strategy – Straddles on the Nikkei with the hope that with Nikkei not moving much, he could eat up the premium and make good the loss.

When the Gods are Crazy, even the unthinkable things happen and it was no different for Nick Leeson. On January 17, 1995 at 05:46:53 JST, Kobe was struck with a magnitude 7 earthquake. While Nikkei drifted downwards and Nick tried his best to adjust the position with the hope that a reversal would take place when things returned back to normalcy, in hindsight that was the only time he could have exited taking a loss smaller than what he eventually did.

On 23^rd January with markets getting to know the full extent of the devastation, Nikkei plummeted 5.6% which more or less close out all options of ever being able to come back. Ironically, markets did recover that day’ losses a few days later but by that time the game was long lost. But rather than cut positions, he waited in the hope of recovery which never came. Eventually, on February 23, 1995, Barings was not able to meet its margin requirements on SIMEX. The total loss accumulated by Leeson was US$1.4 billion.

Selling out of the money options for a pittance is a stupid game and what amused me was the fact that the anchor of the TV Channel covering the event was all gaga about it. Taleb has a nice chart to depict the end result of the same – 1000 and 1 day in the Life of a Thanksgiving Turkey. DON’T BE THAT TURKEY, YOU WILL END UP IN THE OWEN.

Striking Gold – Some Risks can Pay off Brilliantly

This week was a good one for many a Flipkart Employee as they finally were able to convert their paper wealth into real wealth. While startup’s getting acquired by bigger companies is common in the United States, Mergers and Acquisitions are pretty low in number out here in India.

From Angel Funders who funded the company when it was just an idea to employees who joined late but yet early enough to earn their stripes and Esop’s in the company, this one exit is a game changer when it comes to their lifestyle and personal choices they otherwise would have tended to make.

Saurabh Mukherjea who is a well-known name in the Investment Circles in an interview with Bloomberg Quint suggested that for a comfortable retirement, Retirees need at least Rs 150 Million of corpus for generating an income of Rs 5 Million to to Rs. 10 Million.

While it’s false to equate that everyone requires such a stupendous amount of money to retire and live a comfortable life, having such a sum can really change a lot of things and give you different perspectives on how you want to spend the rest of your life.

Of course, the money didn’t drop by without most of them taking risks, some really big risks. Working in a start-up is like no other job. Taking the job early on generally means taking a salary cut for no start-up can afford market salaries and the only way they can compensate for the loss is by way of Shares.

But shares are literally pieces of paper worth a big zero if the firm doesn’t succeed in its venture. Its like the Banks that owned the Kingfisher Airline Brand as a collateral – when the company failed, the brand failed too regardless of the highs it had reached in better times.

The only way to safe retirement one is told is to save more, spend less and try and ensure that the savings earn the best possible return without having to take risks that can hurt the capital enormously.

For anyone who will be retiring in say 2050, Vanguard recommends 90% in Equities and 10% in Bonds. This is based on the belief that over time markets will provide a much higher return and given the time span remaining on the clock, the investor can take higher risks than normal.

Of course, theory is always easy, the tougher part is to actually be able to execute and be invested even 60% of one’s assets in equity for it Scares the shit out of most people who would rather play safe with a lower allocation to equities, higher allocation to bonds and Real Estate hoping things will turn out fine the time of their eventual retirement. Then again, who knows what the future holds?

One of the standouts of the Flipkart sale was Ashish Gupta who invested 10 Lakhs when Flipkart started and now stands to reap 130+ Crores on the sale.

While such opportunities will never be available for the general public at large, we do have opportunities creep up once in a while in the public markets that offer a high risk reward relationship.

I believe its Taleb who has outlined the idea of risking a small part of capital to ventures that can offer a very high return. If the venture fails, the risk to capital is small enough to not impact you on a longer term and if the return is great, it bumps up the total return of the portfolio by a solid margin.

When Elon Musk sold his stake in Zip2, much of the money went into a new high risk ventures that subsequently got merged into Paypal. In turn, when Paypal was sold, much of the money went to high risk ideas such as SpaceX and late by way of a Series A investment into Tesla (among other companies).

Of course, not all risks pay off which is why it’s still called a High Risk Venture. But unlike private markets where the risk is all or none with little or no liquidity, secondary markets offers the best of both worlds.

As Investment Advisers and Agents start crowding around the new Millionaires and Billionaires created by the Flipkart sale offering safe investments (with a nice commission inbuilt for themselves), I do hope most remember that they are there because of the risks they took, not because they turned out to play it safe.

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