Fooled by randomness

It was a 7 hour flight from Zurich to Delhi. I met a Gujarati accountant who had survived the stock market for 20 years while waiting at Delhi airport. His wife didnt like him talking to a stranger about investments. Still we had time to pass and so he spoke. I would rather that he spoke because he took a paternal liking to me! One of the pearls was to exit at 20-30% profit and try to profit recursively and diversify risk. It vindicated me as I took lower risk. I didnt make 5 times the money but twice the invested money in the boom time between 2004-2007. I sold my 2000 shares of ICICI @ Rs 74 booking a profit of Rs 24. Today ICICI trades somewhere near Rs 900. Sometimes I look back and wonder if took the right decision by selling. Reading Nassim Taleb doesnt make me feel better. The subject matter of the book is on profiting from increased uncertainity and volatility (The black swan). Make small losses and a huge infrequent profit. The mirror image is making small gains and a huge infrequent loss. Are there zones which are in between ?

Fooled by randomness is a non-fiction book on probability in markets and profiting from uncertainity and volatility. Nassim Taleb gives illustrations of the boom and bust cycles(wrong choice of word) to illustrate that the past is not neccesarily a predictor of the future. Its a must read for those who want to preserve capital . It is also for those who are watching agog as the newspapers extoll readers that sensex will reach 25,000.

I was amazed at the insights presented by Nassim Nicholas Taleb. These were illustrated in class at IIM like birthday coincidences and non symmetric distributions. Some concepts were beyond my understanding in class :(. In his book Nassim brings probability concepts to life.
I decided to order the book on exotic derivatives by Nassim from Amazon.com. The irony is that the publisher is charging $110 for a book in India which costs $70 in the US!

Back to Nassim, there is intellectual arrogance in the book which makes me confront my own subconscious thoughts on knowing it all which results in rigidity of thought. I had frequent arguments with my father where I would ask him to back up loose statements with intellectual rigour. Reflecting at myself, I realized that seldom had I subject my ideas to internal censure before blurting them out from the tip of my tongue.

Why do FII's and MF's prefer GAIL & Bharti

Based on the last 5 year monthly returns for GAIL and Bharti, We see that these stocks lie very close to the Efficient frontier as per Capital market line theory. No wonder FII's and MF's are stocking on this low risk high returns stock of Bharti Airtel which is the yellow triangle bounded by red in the graph shown above.



The distribution of returns over the last 5 years are shown in the RED graph above


Kurtosis and skewness adjustments will have to be done for Standard deviation (Risk) of Bharti.

Covered call versus Protective put

Covered call is selling a call option ie. you are obligated to sell your stock to the buyer of the call option. Covered it is because u have the underlying security in your portfolio or a cross hedge. Covered call would need repeated skimming of premiums. Hence I opted for the protective put on the NIFTY july futures. It all boils down to probability that how many options get exercised and who gets to be on the receiving end.

A covered call would be adopted in cases where the market is moving listlessly and you have to make your margins. For the long term investor, the protective cross hedge put looks better as continuous monitoring is not required.
That is the advantage of European options and in India, the Indice based options are european options which are exercisable only on expiry. The share based options are American options which can be exercised anytime before expiry. Hence an option pricing model would have to profile the investors.

Fusion 9 at Hyderabad happened at 6 am

The Nizams city
early in the morning
waiting for the Bus
So early in the morning
Its already crowded.

There stands a man
with sackful of things
Some for his livelihood
and some which cling on.

The man was a mason
His wife stood at the front door
and both would yell about
what to pay the conductor.

The conductor would tell
Put the sack someplace
So the mason man put
the sack on my toes.

I put my bag on the sack
and waited for a place
a place to sit and watch
as the morning commuters
gathered their lives.

Got down from Godavari
Travelled over Godavari

IIM K Rowdy gang's Holi and Munnar trip

Munnar was a treat , time just flew and I got the name of giidh aka. vulture for spotting somebody on the road. It was fun, always fighting for the window seat as the panaromic scenery flew by. Munnar is truly truly pretty !nothing like I have watched before. The lakeside is the best I have seen, its not as large as lake Tahoe but on a smaller scale and the scenery here is much prettier. Once you get there you will see the speedboats trying to scare the honeymooners, how can i forget threee years b4 I had been here for my honeymoon....sweeeeeet
HOLI HAIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII
I Was holed up in the library trying to escape the holi heat. I decided to play holi and boy was it fun. Wet Wet Wet with sweets and thandai and Color.

Repo rate and Reverse repo rate surya@iim k

The repo is the rate at which the RBI lends to banks while the reverse repo is the opposite. For a bank, repo is the borrowing rate SOCI security out, cash in, you can remember by thinking about the Russian resort SOCHI. The mirror image for the central bank(RBI) is SICO security in cash out. The other terms used for Repos are SFT and overnight borrowings
Follwing has been taken from a reverse repo auction notice on RBI site:
11. The successful tenderer’s Current Account with RBI will be debited as per the current procedure under Reverse Repo facility. Securities will be credited into the tenderer’s RRC SGL Account simultaneously. On the date of reversal, the tenderer’s RRC SGL Account will be debited and Current Account credited with the reverse repo amount and interest earned. For instance, in a Reverse Repo auction where bid amount accepted is Rs.420 crore at a rate of 4.75 per cent the calculations of amount of cash outflow in the first leg and amount of cash inflow in the second leg (with interest) will be as under.

Leg 1: Tenderer’s Current Account Dr. Rs. 420 Cr.
Tenderer’s RRC SGL Account Cr. Rs. 441 Cr = (Amt.of bid * 105) /100

Leg 2: Tenderer’s RRC SGL Account Dr. Rs. 441 Cr
Tenderer’s Current Account Cr. Rs 420,05,46,575 = (Amt. of bid + Interest for 1 day at 4.75%)

Lending rate > Borrowing rate
I have been grappling and googling with these terms. Central bank gives money"Hard Liquid CASH!!" to Banks who pledge government securities.
Repo(Repurchase):RBI Lends money: A short loan with security as collateral
Mirror Image
Reverse Repo: RBI Borrows money: Money deposited with RBI by Buyer of the security


Now any money making machine would want to keep the inflow of cash more than the outflow. So it charges more for outflow than for inflow and there-in lies the arbitrage.This is similar to currency traders who will give less rupees for $ , but when you go to buy $ you have to pay more rupees.