Saturday, June 9, 2012

The Secret of Happiness for Dumb people

The Secret of Happiness for Dumb people
By Waseem

Today, I discovered one of the timeless truths of the universe. It is something all of us have known, but have forgotten as we grew up. I wish someone had told this to me explicitly, and repeated it during times of stress. It would have made my life much easier.

Our "self" consists of three parts: the past, the present and the future.

The past is what we normally define ourselves as. Where we were born, who our parents were, what religion we are, what events have happened in our life, our education etc. This forms are basis of knowledge  – information that we can choose to use should we want to.

The present is all the great things that are happening around us and within us: the clock tick, the day, the temperature, the clothes we are wearing, the color of our skins. The present is nothing, and everything at once.

And the future, which is what we want to become. A Nobel Laureate, a world leader, a cool dad, an entity in heaven, at a tea shop at 5.30… or a combination of all of those, keep extrapolating. The possibilities are endless in the future, simply infinite.

All of that is very well known to us. In fact so well that everyone would agree that these are axioms of life. However, what people fail to understand is how each of these parts interact with each other. We can be all three of them at once or none of them at once. If you are none of them, you are just sleeping. If you are all of them, you tend to be a bit depressed unless you know how to manage that state.

We have the option to choose the states we want to be in. And more importantly, we can use those as gears to change our mood. 

If you live just in the past or just in the future, you don’t exist.

If you live in the present and the past – you are reflective. You think whatever has happened was interesting; try and imagine the point of view of a 100 year old man. You are content because you are just reflecting and not worrying about what happens next.

If you live in the present and the future – you are driven. You think of who you are and try to fit in with your view of what you want to become. Imagine the point of view of an Indian lawyer in South Africa in the early 1900s who wants to bring peace to the world (Gandhi). Or a lawyer who wants to earn a million dollars this year. Or pretty much any ambitious person you can think of.

If you live just in the present, there is nothing to worry about. You have done nothing and plan on doing nothing. You can just be happy and have fun.

None of these above choices are problematic, and each are pretty interesting on their own.

What is a problem is if you are all three of them at once. It is too overwhelming, and often we are not able to manage it well. To top it, society actually trains us to be all three of them at once and expects us to figure out how to manage it. There are three ways of looking at your being:

1. You don't have a vision for the future  – but that is hardly ever true. Everyone has a vision, that is built in our survival instincts. We care whether the sun rises tomorrow or not, we care if we get a meal or not. This state becomes a problem if you believe that you don't have a meaningful view of the future, and stress out about the fact that you need to.

2. You try to fit the vision to your past. Because there are infinite ways to the future, you are worried about taking the best course for yourself, given your capabilities, given your history. Since the paths to the future are truly infinite, you are confused about what is best for you. You incorrectly blame yourself for not being capable of solving the puzzle, when in reality there is never one correct solution – and certainly no "best" option. This is a self-destructive spiral that stops us from enjoying the present, reflecting on the past or planning out the future. And leads to a lifetime of agony and unfulfillment. Most of us end up putting ourselves in this state.

3. And finally the better way: You think of the future first, lay out the shortest route to the future from the present, without stressing over the past. This will give you a sense of direction. The past is only a secondary consideration in this method – something to be kept aside for reflection purposes only. Of course, in order for this to happen you need a vision of the future that you are comfortable with, and you need to be open to that vision morphing (for the better or worse) as your present becomes your past.

The point is that one should know that the gears exist. And then choose how he or she wants to apply them. There are no wrong answers. Life if meant to be enjoyed, and if you are feeling particularly stressed out, it is probably time to switch gears. You can switch the gears as many times as you want, and as frequently as you want. It is particularly helpful for planning and execution purposes.

I think this can be extrapolated to any level of stress – be it in a relationship, in a country, or even in an economic problem such as the Euro crisis.

I really wish someone explained this to me early on. And I hope that someone out there finds this truth to be useful and becomes a slightly happier person in the present.

I would not do justice to my Wharton education if I did not include a 3x3 box diagram. A 3-D diagram would have served it better, but I ll highlight the important 2-D section.

Doesn’t Exist
Fun Zone (Nirvana)
Doesn't Exist

Monday, January 3, 2011


I turned out to be wonderfully lucky in 2010. All the trades I made were great, and the VXX short made me over a 100%.

Just want to jot down my thoughts for 2011.

1. Gold is gonna go down. People will book profits early in the year. My guess is a 20% decline in Q1 2011. On that note, I just shorted a bunch of DGP.

2. US Stock market will likely go up in Q1 and Q2 and then stay flat. Will need to exercise caution before getting into new positions. even though valuations, by some historic P/E measures seem very high, I think earnings are gonna be strongly positive for the year and that ratio is justified.

3. China is going to soft-land. Too many people are worried about it already. Good move by Chinese central bank in allowing the currency to appreciate. I think there are some good value buys in China, but one should exercise caution before buying them. Note to self: check cash flow statements thoroughly.

4. Heed Jim Chanos and avoid construction materials companies supplying to China.

5. Oil... is going to skyrocket.

Tuesday, May 18, 2010

5 reasons why we wont see a 1987 crash

Everyone seems so pessimistic these days. It's almost as if the market is unsure of its own worth, and feels sinful for returning so much in 2009. The DOW is at the same place as it was a decade ago -- but that hardly tells the story.

Anyhow, the prime concern of the day seems to be that we will witness a crash-a-la-1987 very soon (in the next 2 weeks). It's sounds rather stupid to be honest. I know that I should not be offering opinions on the market, anything, literally can happen. However, let me state why I don't think it will happen. Recognize, these are the same reasons why I am bullish on America right now.

1. The 1987 came at the end of a 7 year bull market. If someone thinks that we are in a bull market, they should think again. Dividend yield on the S&P is hovering around 3.5%, much higher than the 1.5% we have seen over the last decade. Of course, in 1986, dividend yield was also 3.5%. However, dividend yields have fallen significantly over the last three decades -- partly because of a different interest rate regime, partly because of the increased use of stock buybacks- - and the last time the dividend yield was above 3% was in 1991!

2. There is so much cheap money around. Interest rates all over the world are at levels possibly never seen before. Sure we are headed for a currency crisis. But, given that people can borrow money rather cheaply, it makes equities supremely attractive.

3. Greek crisis is over stated. I simply can not connect the dots between a Greek default and a crash of the stock market. If European governments default, why on earth should stock prices suffer. IF anything, people should be selling their debt instruments. I recognize that there is an argument for contagion and that if European banks stop lending, things could turn out to be pretty bad. But, the risks are overstated. The memories of 2008 have still not faded, Governments will do anything and everything to keep the ball rolling. And people who think that this will cause the Euro to break -- well, really, the costs of breaking the currency is just too high. I don't think Governments in Europe have the political capital/will to do so. And it would be a terrible waste of resources.

4. If the case of human affairs, if you predict an outcome it changes the outcome. In other words, if everyone has prepared for something, it just won't happen. Of course, the caveat is that everyone may be thinking the same things as I am. Hence, no one is really prepared. We shall have to see. However, I think its safe to bet against the media in affairs such as this -- and the media, or rather people who get highlighted in the media, seem very gloomy about things in general. I really wonder what George Soros is thinking... Apparently he sold of some of his Gold holdings, so I guess that reduces the risk of a currency crisis, but he has also stated that "Humpty Dumpty can not be put together again". But if everyone is attending to Humpty Dumpty, he's unlikely to break under the spotlight.

5. What we are underestimating here is the strength of the Asian savings. Over the last decade Asia has saved like there's no tomorrow. Just look at the reserves. Those things will sooner or later lay claim to "real" assets of the West, rather than just paper bonds. Might be a sad day for the US dollar, but if you want to protect your wealth, equity is the best place to be in.

Oh, one final note. America is NOT Japan. The reason why Japanese equities have lagged is because return on capital vanished from the country. The marginal utility of capital in Japan is pretty much 0. The same can not be said about America. Just compare the Japanese consumer to the American consumer and you'll know why. And, in general, I think its easier for American businesses to establish footing in other countries than it is for Japanese companies (thanks to the British Empire).

Tuesday, April 27, 2010

Level III and VIX

I started studying for Level III exams 2 weeks ago. So far I have finished just one of the books (out of 6). The material here isn't tough (so far), but its mostly new for me. It deals a lot with behavioral finance and portfolio allocation, which I hadn't studied properly in school. Because of all the new things, I am finding Level III to be a lot more interesting.

But I must say that the writers of the curriculum waste waaaay too many words. They can't seem to get to the point. There is probably a hidden purpose to the elaborate discussions other than making me want to go to sleep. But then again, I went through some of the abridged Schweser notes that people keep talking about, and didn't find them to be helpful at all.

I have about a month left to study, and at the rate I am going I probably will end up cramming.

On a separate note, I wanted to bring attention to VXX. I looked up the documentation by Barclays a month or so ago, and decided to short it to 0. I have made over 20% in a month, and I am fairly certain its gonna continue.

VXX was basically designed to mimic the Volatility Index, but the way it mimics it is kind of dodgy. It does so by trading one and two month futures, and needless to say it fails terribly. The cost of rolling over the contracts can be quite significant (5%-10% a month), and even if volatility rises sharply in a day, its highly unlikely that the 1 month future on the vix will react in the same way. The best part is that volatility is not even a real asset and the expected return on it is 0.

To be on the safe side, I have decided to not let the short exceed 20% of my portfolio. But who knows if everything starts going down, I may be forced out of my position due to a short squeeze when volatility peaks. And in the process lose my shirt.

I have read blog posts touting the virtues of VXX as a portfolio insurance. Personally, I think the writers have no clue what they are talking about. Buying the VXX is a very very inefficient way to hedge your portfolio. If you want portfolio insurance, you are likely better off shorting the VTI or buying some puts or just taking your cash/gold and putting it under the mattress.

Wednesday, August 26, 2009

The Hype about Natural Gas

Apparently the ratio of crude oil to natural gas is at an all-time high, literally. Its perplexing to a lot of people... 100 year events usually are.

For all I know, it may well be some ghastly anomaly. But I can see some rationale for not jumping into the long-natural-gas-short-crude wagon.

To begin with, how exactly do you long natural gas? Do you store it in a cave? You could if you owned one -- you will probably need some insurance though. And you'll need to create a pipeline to your cave. More likely, you would be doing it through one of the ETFs -- which employs some trading vodoo with futures contract. However, I really doubt that the price of natural gas futures and crude futures are really as divergent. Note to self: check before you write.

Now, what if the futures prices are actually that bad? There is stil a possibility that they may not converge. Utilities and natural gas producers can predict what the demand for natural gas will be in December. Barring some extreme weather, it should be pretty pretty easy to predict. And if it is predictable, then futures prices should be reflecting that -- ok, not in theory, because then future price is just a function of interest rate, current price and storage cost.

But what happens when natural gas can not be stored anymore? The relationship above simply breaks down and future price becomes a function of expected demand and supply in the future. There are reasons to believe that this may be the case. According to the chart here.

I actually have a feeling that the price of oil and gas wont converge. In fact, natural gas prices might drop in the winter! The speculators who are entering the market now, buying natural gas futures because they are so cheap, would sell their contracts at a fire sale when they are faced with the prospect of taking delivery of natural gas. :)

Pairs trading works pretty decently, but there is always a peso risk. You cant arbitrage two things that aren't, in essence, convertible. It's not arbitrage, its speculation.

I also have one other explanation for this phenomenon. Since the price of natural gas that everyone is pumped up about is the price of US natural gas, it is entirely possible that this price is suppressed because US's energy demands are suppressed. The price of this gas depends mainly, if not entirely, on domestic demand. However, oil isnt as geographically constrained as natural gas. US demand has an impact on the price of oil surely, but its not the only country affecting the price of oil.

So if the World's demand for energy is growing at a faster rate than that of the United States, it is entirely possible that this divergence would persist for a long time to come -- and in fact, the prices could diverge even further.

Just food for thought.


Upon further discussion with my colleague, I think I should span out this doomsday scenario a bit more.

Apparently, a barrel of oil produces produces 5.8 mmBTU of energy. Natural gas contracts are in mmBTU -- so in a world where energy was just energy, one would expect the price of a oil contract to be 5.5x-6.5x the price of a gas contract. Obviously this is a rather simplistic assumption because oil is easier to store, and requires less of an instrastucture, is used in cars etc. I am just stating the number for the sake of context. Right now, the ratio is closer to 23x -- which is the highest it has been in 100 years. For December delivery the ratio is 15x -- not really as bad, but according to some it is.

Anyway, so here is the doomsday scenario:

Assuming that natural gas is really cheap for December delivery -- everyone who needs it for December would buy enough future contract today to offset their expected requirement in December. Effectively this shuts down the spot market for gas in December because there wont be any buyers. By buyers here, I mean genuine buyers -- entities that will actually use that gas, such as utilities. Might be too much of a sweeping generalisation, but its easier to explain the point.

Now, given that prices are so low, natural gas producers would be inclined to sell more volume to remain profitable. So they keep selling their futures contracts to whoever wants to buy them.

That takes care of the genuine parties. Now there is a group of speculators who want to make money from trading natural gas. Given that natural gas prices are at an all-time low, more speculators are likely to belong to the buying side of the trade than on the selling side of the trade. By speculators, I mean people who are buying futures -- not those who are in the business of storing gas from Summer to December.

In the absence of enough sellers of futures contracts, a significant amount of speculative purchases would lead to increase in prices in the short run. However, if the natural gas producers are selling futures contracts, the price could remain unchanged. Assume that the latter scenario happens.

So we are now left in a market where there is actually a mismatch between real demand and real supply. The speculators have no use for gas, but their counter-parties are gas producers who are willing to settle on their contract by actually delivering gas in December. There are no real buyers as the utilities have enough futures to satisfy their needs.

So, in December, on the on set of the freezing period -- the speculators would be rushing to close their contract. But their wont be many counterparties around. Eventually what may happen is that the natural gas companies would buy back most of these contracts -- but only at prices for which it is profitable for them to not produce.

And the natural gas prices would diverge even further from oil prices.

Not saying that it will happen, or I expect this to happen. Just that it can.

Thursday, August 20, 2009

So I passed Level II

I got my results yesterday, and guess what, I passed. I actually had a feeling after the exam that I would. Not at all surprised that I got less than 50% in Fixed Income -- as I hadn't taken Fixed Income classes at school. So there, no PIMCO for me.

Now I have one year to study for Level III. I have decided that I will not even think of it until after December. The exams take a mental toll, not because I study hard for them -- but because I am thinking of them most of the time. In any case, I cant seem to prepare for them until the week before the exam. And setting mental benchmarks don't help at all, I always manage to procrastinate.

I may well pass Level III next year. But the charter will probably take a bit longer. Not sure if they hand out charters for specifying the underlying mechanism behind a software.

I do have bits and pieces of rants to write about. But I feel no motivation to do it. Who really would read it? Yes, yes procrastination. It always gets to me.

Tuesday, July 14, 2009

Back Again

I have realized that I am not very passionate about writing. While I do have a bit of a philosophical dent, writing is not my way of expressing it. In fact, "not expressing it" is probably my way of expressing it.

But I do value good writing and hope to be a good writer some day. Why? Because its a allows me to organize my thoughts, and more importantly, remember them. Thoughts like "DOW at 9644 is surreal". Well, I still think 9644 is surreal, but not exactly for the same reasons.

Anyways. Enough meandering. To update my non-existent readership:

I passed my Level I CFA exam. I honestly felt that it was a very easy exam. I studied for 80 hours and voila. I also sat for my CFA Level II in June and am waiting for my results. But that was an easy exam too. I was expecting to fail it, but now I am hopeful about actually passing it.

People make too much of a deal out of these exams. Ok, I can see how it might have been difficult had I not had finance as a major. But still.

Speaking of which, people make too much of a deal out of financial knowledge. I wont profess to have a lot of it, but I think the most important lesson in finance is common sense. And the formal curriculum just does not focus enough on it.

Take investment banking for instance: despite being touted as a hardcore financial profession, the most important skill required for banking is not financial knowledge, it is people skills. The excel models that the bankers build are just tools for negotiations. The profession boils down to people skills and showmanship: figuring out what someone wants, behaving nicely with the clients, fuzzing their brains with complex models, creating nice "books". I daresay one could be a pretty good i-banker without ever studying valuation. At the end of the day, the value really is not what the model says but what you can bargain it to be. If investment bankers really had any superior skill in valuation, they would not have to spend so much time on creating presentations and complex models.

In my humble opinion, most models have way too much assumptions built into them to be of any use than to show someone else that the banker has put some thought behind it. It builds confidence in the banker and his/her clients -- and stops others from accusing them of hasty decision making.

Consider on the other hand, Warren Buffett who can decide on an investment in 5 minutes. I am pretty sure that he does not have msft excel implanted in his brains. He doesnt spend brain power deciding whether to use weighted average cost of capital (WACC) of 5% or 6%, because he knows that its useless. And the gibberish about CAPM, he hates it.

I ll have to end here and catch some zzzzzzs. But I know what to write on next.