Modern Portfolio Theory or Finance for the clueless

Modern portfolio theory is claimed by its adherents to be one of the cornerstone of modern finance. This combined with other academic finance jargon such as Beta, Efficient frontier, CAPM, etc are taught as medicine to fools who go to attend MBA classes or choose to take academic finance classes. In case you jump to conclusions at this point, thinking that I am a whimsical egomaniac, let it be known that I was once one of these fools.

To give credit to the theory one might say it is for people who are complete idiots when it comes to business, trading and investing. Because for these people if they create a diversified portfolio - fundamentally that is what MPT boils down to - they should be fine. Engineers can go back to fixing bugs and doctors can go back to fixing patients and all will be fine. By minimizing their risk through diversification or taking an average amount of risk, they will do better than even bigger idiots - folks who think that putting their fiat currency wage earnings under their mattress or in a savings account would save them from the vagaries of inflation.

What is so great about coming up with a huge theory that your grandma already knew by heart - don't put all your eggs in one basket.  But telling people false theories such as EMH etc what these people have done is to lull the masses into a false sense of complacency. Don't even try to understand financial markets. Don't understand trading, don't understand the psychology of investing or markets. None of this matters - just put all your money in a broad market index of stocks and bonds and go home. Its utterly useless to understand psychology of the markets - behaviour of crowds, hurding, pump and dump schemes etc.

To be continued.

Crypto Poem

Aha Bitcoin, Litecoin and Ethereum
Make my head spin with delirium

So many ICOs and so much greed
Remind investors of Tulip breed

When the clouds clear and the future unveiled
Some will survive and some will get buried

Who cares!  enjoy the fun while it lasts
In the end Bitcoin will stand like a signal-mast

Bitcoin for a crazy world!

Lately I have seen a lot of negative news about Bitcoin in financial media. As we all know the financial media is mostly written by MBA types or the types that go for journalism degree. These folks are mostly about superficial things. In the case of MBA types, it suffices to say that they do not appreciate anything but money. In other words, an MBA type has no aesthetic sense for anything - in technology, or in art, etc. All they care about is money and how to use others who are less cunning than them for their own purpose.

For financial journalistic types, it is safer to say that one should not expect this type of folks to write about something completely revolutionary. They would write safe (as understood by their bosses) articles for their conservative readers. Also do not expect this type to be too deep in scientific subjects. The fact they went to journalism degree, after all, is mostly because they were not too good in hard sciences, math or computer science.

There is so much FUD spread by these people on financial media that it is unfathomable. Bitcoin went from 1000 to 17000 in a matter of 11 months, completely ignoring these folks. Still they would not take heed and do their due diligence. Before writing about bitcoin, they should read about cryptography, databases, digital currencies and try to envision a future without banking intermediaries.

My theory is that Bitcoin is an asset class for a crazy world. A world where  arrogance, overconfidence and hubris of the world leaders -- running financial economies with infinitely printable fiat money -- have no bound. It is good to have a few bitcoins in your portfolio for the day when something blows up in the financial world somewhere. Given the way the money is being debased by the central banks, the possibility of a blow-up in the financial world is not too far fetched.

Beware of free

As rational human beings we love free things. But on further reflection it is seen that - many things come to us as free, but end up costing us a lot. An example is reading free news on news media. We are addicted to news these days. It is everywhere - TV, Internet, Newspapers and so on.

Day in day out loners read these news items and respond to them emotionally or in an exaggerated manner. Many of them end up acting on these items and then on average they lose money on the basis of this information.

The reason this happens is that most of us have a 'faulty' biased brain filled with bunch of information and heuristic rules. When we see a news item like -- XXX commodity down 50% from its all time peak, we think based on a rule that was taught in a class, may be by a manipulative asshole instructor, that when you have a 50% sale you should take it usually. This rule might be applicable for broad stock market index like S&P 500 where the risk of a sector permanently going down has been diminished, but it cannot be applied to a specific stock or a sector. Why? Because it could well be that this stock or sector is in a secular decline because of fundamental shift in technological usage or because of a change in consumer tastes. Would you have thought of investing in a typewriter ETF when they were down 50% from their peak? It may very well be that a particular sector/market is on a permanent decline because of the newer technology replacing it.

Many people got burnt looking for a 'sale' in the sector investing. They bought OIL ETFs in 2015 when news media was filled with news of oil prices getting whacked.

There are many such examples of news media and wall street mouthpieces selling 'excitement' to the public. Once when I was booking a room outside a hotel lobby, the place was filled with people going to watch a football game in a nearby stadium. I remember commenting to the attendant that the crowds going to the stadium look really happy. He said, "They look much more happier going then when coming back from the event."

I guess once the excitement of the expectation passes away we become more sober in our assessment of the reality.

Race consciousness in America

I have been traveling outside the U.S. and even though I have been staying away from its politics, I happened to accidentally open ft.com and saw this news:

"Dr Doom’ Faber suffers backlash over racist remarks
"Financial pundit thanks God black people did not settle America in newsletter"

Suddenly the awareness that America is so full of race feeling came back. Glad where I am now, we don't refer to people as white, black, green, yellow. When you think about it - The U.S. is a sickening country obsessed with money and arrogance about the fact that poor people from all over the world keep coming to the U.S. 

THAT IS ALL they have to offer. It is not a country where you will be able to redeem your soul.

Recently I was talking to an old American outside a Starbucks store in California, and I asked him what did he think of the recent biggest mass shooting in Las Vegas, he said blah blah and then what struck me was that he said, "they are doing autopsy of the killer's brain to find out why he decided to kill so many people" in such a cold-blooded manner.

What a joke! As if science can tell why the killer did what he did. Rather than focusing on real cause of such tragedies - Arrogance, Egoistic Culture, Fascination with Guns, Widely Pervasive Loneliness and Alienation in the country, Race consciousness and racism, Worship of money etc etc...No the real cause will be found by the autopsy.  

The proverbial elephant in the room

It was Saturday evening. When he came back to his apartment, he thought of finishing off all the boring chores he usually tended to procastinate. Of course doing laundry was one such drudgery he had to do. As he came back to his room from the laundry room, he turned on the radio while waiting for the washer to be done.

The radio was talking about terrorists acctivities in a major city in the world.  'Not again!' he thought. This was just after a week where another follower of the so called 'peaceful religion' had killed bunch of girls in a concert in the same country. 'What is going on in the world,' he thought. And even though a part of him told him to ignore these events and focus on the goals he was pursuing, the another part could not resist spending couple of hours on the news media. By the end of it, he had already spent 3 hours going through various news websites and reading comments by genuinely outraged trolls. He had been to this city multiple times and the images from there flashed back in his mind. He thought he could have been one of the victims. It must have been pure misfortune of those who were killed or hurt to be in the wrong place at the wrong time.

The radio was going on and on about what different politicians had to say about the tragic events. But you could see that nobody was saying what was the obvious. How could these crimes against humanity be perpetrated again and again by the same community. What was going on! How could these people be so cold  and ruthless! How could they invoke their so called 'god of arabia' while commiting these henious acts. What was about this so called religion which gave the world so much misery and violance. Isn't monothesism a contradiction in terms! As soon as you say, God is one, aren't you setting yourself up for an argument you cannot win. How could the followers of monothestic religions be so dumb and stupid.

If you think deeply you will realize that all this violance in the name of this so called 'religion'  is probably natural. A static mode of thought fixed in time, which is what this 'religion' was, had to confront the modern world soooner or later. You cannot have a large majority of people following this antiquated mode of thinking while Internet and modern technologies make the world an ever smaller place. The conflict was bound to happen. Perhaps this is the 3rd world war, except this time it is not between the countries, but between peoples. Between those who have moved on and between those that are still living in the mental models created by a 7th century desert religion.

USA: A country of random shootings!

Just last week there was a random shooting couple of miles away from my work place. The community where it occurred is an upscale apartment complex with very high rental rates and quite desirable place to live in an affluent neighborhood. So far I had been listening about these random shootings in the newspapers and online media and they used to happen at remote far off places, but this one happening just few miles from my daily existence rattled me quite a bit. Does it portend a trend? Does it mean the next random shooting might be too close to be harmless to me personally.

This made me think about a social science research where the person analyzing the data can look at the number of random mass shootings in the different kinds of political systems. For example; one data point is to find out if there were any shootings like these in The Soviet Union in the heyday of communism. Cuba is another data point. How about looking at a country like India and taking a few decades worth of data to see if random mass shootings have happened there or not.

Is capitalistic system with no safety net responsible for the rise in mass shootings? Were there any such incidents in 18th and 19th centuries? What is it about American society that these incidents happen with alarming regularity in this country? Why are people so jaded? hateful of fellow humans and harboring so much mistrust for each other in this country. I have no idea. It is indeed sad to see these unfortunate things happen where innocent people lose their life.

Is there a problem?

I wanted to title this post as what is wrong! But that would have meant making a judgement. I was going over some news recently from India and I came across this headline -- Modi while addressing the party workers exhorted them to be like Hanuman, Just as Hanuman had never questioned Rama, they (the party workers) should not question the leadership.

I thought about this for a while and an interesting parallelism came to attention. Isn't this what we teach our children too in Village India. Is that why they are raised to follow and blindly respect their parents, teachers, leaders, managers and the list of authority figures goes on. And then some of us ask the inevitable question: How come we did not produce Newtons and Einsteins in this country. How come a Jewish college dropout from Harvard can start a brain dead company like Facebook, while we Indians, even though being such a socially inclined people, cannot come up with Facebooks, Googles or Apples of the world.

A culture that takes away confidence of its children cannot produce original thought and great leaders. A static culture with no scope of progress and no idea of where to go next stays where it is and that is what has happened in India. In village India people are like sheep blindly doing their duties and the "unthinking worship" of the heroes of the eras gone by. And some of these people also have half educated middle classes in small towns where they can see money and the glitter of the West without knowing or even wanting to know what it took to produce it. Power is respected all over the world, and any fool can appreciate the scientific and economic progress of the Western world inhabited by white people, without knowing how and why those country were able to pull it off.

My favorite movies of all time

Every once in a while one comes across top ten of a certain category of things. It happens a lot in the U.S. where you will see Forbes top 10 list of each and everything under the Sun and especially for the things which are hyped for the common folks to emulate. Forbes top 10 list of billionaires, Time's 100 best movies and the list goes on ... The media and common consumer culture in America want to feed the young generation a way of life that is good for the profit of the corporations, even if the reality is far far away from that. It requires a lot of experience in life to discern the wheat from the chaff.

So in this vein or along the same lines, I came up my own list of top 10 movies. I will list the movies and then write a sentence or two to describe why I liked the movie:

1. The Chess Players (Shatranj Ke Khilari (original title))
One of the finest movies of all time. It shows how defeat looms for those who spend their time lavish and luxurious lifestyle, while the combination of hard work and an application of brain (intelligence) pays off. One can argue that the British are not shown in the movie working hard, albeit they are shown to be a cunning and conniving type who use their intelligence in a  cold-blooded manner to grab the planet from the simple minded fools who live less evil lives. If that is your reading of the movie, welcome to the reality of the world!

2. The Girl on the Bridge (La fille sur le pont (original title)) 
This is more of an art movie that shows how compatible relationships can make all the difference and incompatible relationships can wreak all havoc.

Stay tuned, more to come soon ....