Nature of truth, Game Theory in Penalty Kicks and Mining Asteroids

First up, this fascinating profile of Marc Andreessen who developed the first graphical browser, co-founded Netscape and is currently a venture capitalist invested in some of the most important technology companies in the world.

Next, an intriguing excerpt from a conversation between Albert Einstein and Rabindranath Tagore where they discuss about the nature of Truth and whether it can exist independently from the human mind.

Moving on to sport and economics, an amazing article on the game theory of penalty kicks in football.

Now, here’s a start up focused on building more than an app, they are trying to mine asteroids for precious metals!

3-D printing does some amazing things, but mostly does some fun stuff, in another example of fun stuff, a team created a way to 3-D print any balloon shape that you wanted to.

The Psy Fi blog tells us about the 6% self inflicted trading tax.

Finally, enjoy this great Roomba ad, which went viral last week.

Have a good weekend!

When you do get shares in another company automatically?

Thiyagu posted an interesting comment the other day where he said that he held some shares of L&T Holdings, and when L&T divested its stake in L&T Finance he expected to automatically get shares in L&T Finance but was disappointed when he didn’t get any.

So, the question is under what conditions should you expect to get the shares of another company automatically?

I think this is most easily understood when you think of yourself as the owner of the company because as a shareholder that’s what you really are.

If you owned L&T which in turn owned L&T Finance – the value of L&T Finance is implicitly accounted for in the value of your L&T holding.  And if you decide to sell L&T Finance to someone you would expect cash for it and not shares of L&T Finance.

In terms of a company doing this — L&T divested a part of its stake in L&T Finance and got cash for those shares which went in their balance sheet. No one got new shares in L&T Finance by virtue of owning L&T itself.

It is most common for shareholders of one company to get shares of another company during takeovers and mergers. It is common for the company that’s buying to pay through cash and shares, and that’s when as a seller you get new shares.

When Facebook bought Instagram, the shareholders of Instagram were paid in cash and stock so if you owned shares in Instagram you would automatically get shares of Facebook because of this deal.

Similarly during merger of two companies, the shareholders of the companies get shares in the new company at a predetermined ratio which is usually based on how big the original entity was compared with the new entity.

As I said earlier, this is most easily understood when you think of yourself as the owner or seller of the company and think in terms of what you would have wanted in this transaction had you owned the whole company instead of a few shares.

This post is from the Suggest a Topic page

S&P cuts India’s credit rating outlook

S&P released a statement today which said that it has revised the outlook on India’s long term rating to negative from stable. They haven’t actually changed the credit rating of the country; just said that there is a one in three chance that the rating might be downgraded in the next 2 years in the current situation doesn’t change.

The current rating is the lowest possible investment grade rating which is BBB- and a downgrade would mean that India’s bonds will come under the “junk” category per their rating.

In the past year or so there has been a lot of talk about ratings with respect to Europe and Greece, and the key thing to remember is that India is significantly different from those countries in the sense that India has not borrowed from private lenders in the international market while those countries have. So, while it was quite common to hear about a Greek debt default, you are not likely to hear about an Indian debt default.

The issues that S&P talks about in their statement that led to the negative outlook are all familiar and should come as no surprise to anyone. In fact, the biggest surprise for me was the fact that the FM said something to the effect that the situation is difficult but there is no need to panic. I was amazed that he acknowledged it because I expected the government to say that S&P is ignoring all the good news or something else to that effect which placed the blame on S&P instead of the government.

To me this was just another reminder that things are going downhill and if they continue at this rate the risk of the economy faltering and growth stalling are very real. I touched upon this a few days ago when I said that the biggest risk to India’s long term growth is the political climate and this S&P’s statement simply reminded me of that and what my investments would look like if that scenario were to materialize.

That was a scary thought but then I was comforted to think that tea would probably be the national drink by that time, and that ought to make up for whatever losses I have in the stock market.

IDBI India Top 100 Equity Fund NFO

IDBI is coming out with a new mutual fund called the IDBI India Top 100 Equity Fund, and this fund will be a diversified equity fund which will invest in stocks selected from the CNX 100.

What will IDBI India Top 100 Equity Fund invest in?

The CNX 100 is an index that’s a combination of the Nifty and Nifty Junior so this diversified equity mutual fund will have pick and choose from the 100 biggest companies listed in India. The fund will invest not less than 70% of its assets in equity products, and the remaining in debt products.

So, the fund is geared towards big companies in India, and to that extent the universe of the fund is quite limited. This may be comforting to people who know that the fund won’t invest in smaller more volatile companies, and disappointing to people who think that the fund doesn’t have too many options for diversification and will probably feature the same names that most of the existing funds have today.

I think both point of views are fine as long as you know what you are getting into.

NFO Dates, Investing Options and Exit Loads

The NFO started on the 25th April 2012, and will end on May 9th 2012. You can invest a minimum of Rs. 5,000 in the NFO and there’s going to be a growth and dividend option that you can choose from.

You can set up a monthly SIP for Rs. 500 or more or quarterly one for Rs. 1,500 or more.

There is an exit load of 1% if you sell your fund before a year and this exit load is applicable in case of SIPs also as well as when you switch to another fund.

Expense of the fund

All mutual funds charge expenses to its investors which means that they take a certain sum out of the fund every year to meet expenses. The lower the expenses, the better it is and these expenses are expressed as a percentage called expense ratio.

The expense ratio listed for IDBI Top 100 in its document is 2.50% which is fairly high and I don’t see why someone should pay so much in expenses for a fund that has no track record and that will only invest from stocks that are chosen from Nifty and Nifty Junior.

While I can see how the composition of this fund might be drastically different from a Nifty Index Fund, the reality is that most active funds aren’t able to beat their indices and it’s hard to see why someone should pay a relatively high fee to find out whether this fund will be able to do that when they can invest in other funds that have a lower fee and a much longer track record.


Facebook’s 51 million Indian active users and other interesting numbers

Facebook filed the fourth amendment to its S-1 today and I found some really interesting numbers going through it.

I’m sure everyone has read the 901 million and 500 million number which is the number of active Facebook users and the number of mobile users, and at this rate it only looks inevitable that Facebook hits a billion active users in a month or two.

What’s not so widely reported is the breakdown in subscribers by country, and also where the growth in subscribers is coming from, which makes for some interesting reading as well.

Brazil and India Subscribers Grow By More Than 100%

Brazil and India were two countries where Orkut was initially a lot more popular than Facebook, and while I’m sure all of us know that Indians ditched Orkut for Facebook, it looks like Brazil is doing that at an even faster rate.

Brazil had 45 million active Facebook users as on March 31st 2011, and it grew at a scorching pace of 180% from last year. It seems to me that Brazil showed the highest growth among all the bigger countries.

India grew at a pretty rapid 107% as well, and had 51 million active users as on March 31st 2012.

Another interesting bit of stat related to this was that while they estimate penetration rate of 60% in India, it’s just 30% – 40% in Brazil.

When you think about that number with respect to the total population in both countries (India at over a billion and Brazil at about 200 million) you realize what a huge difference there is in internet access to the population. From these numbers it seems that out of Brazil’s 200 million population, about a 120 million have internet access, and from India’s 1 billion population, only about 90 million people have internet access.

Perhaps the only consolation is that India is ahead of China in at least the number of Facebook users that it has. Facebook says that it has a total of 0% penetration in China!

50% of Revenues from US and Canada

While the subscribers may have grown rapidly in Brazil and India, the bulk of the money is made in US and Canada. In the first quarter, they generated 50% of their revenues from US and Canada, 31% from Europe, 11% from Asia and 8% from the rest of the world.

They calculate a metric called ARPU (Average Revenue Per User) and that’s how much money they generated divided by the number of active users in that period, this number is further broken down into geographies as well, and not surprisingly it shows that the ARPU is much higher in the developed world than it is in emerging markets because advertising rates are higher in the developed markets than they are in developing ones.

The highest ARPU was in US and Canada at $2.86, Europe came second with $1.40, Asia and the ROW were quite below these numbers at 53 cents and 37 cents respectively. The worldwide ARPU was $1.21.

3,539 Full Time Employees and Billion Dollar Revenues

Last year Facebook had revenues of a billion dollars and at the end of this quarter they had 3,539 employees. TCS results were declared today and they clocked revenues of over $10 billion last year, and had over 2 lakh employees. This is an amazing contrast and I think India got really lucky that a sector in the economy emerged that provides large scale employment and in fact Facebook has an office in Hyderabad as well, so a few of those 3,500 odd employees must be in India as well.

These were some numbers that caught my eye reading through the document and I can only imagine India’s share in users, advertisers and employees growing in Facebook in the coming years. Just how much, remains to be seen.

Three Problems

The second problem is that you have money that you want to invest, and there is a range of products that you can choose from. It’s not immediately clear which option deserves  your money and you need to do a lot of research to get to the right decision.

The good news is that the information that you need to evaluate these options is freely available on the internet, and more importantly, you have the inclination and smarts to access this information, patience to go through it, evaluate it and take a well informed decision.

The bad news is that all this is hard work, and you need to spend hours to make the right decision. Unfortunately, most people don’t like spending hours doing this type of research and end up making bad decisions.

The third problem is that you have money that you want to invest, and there is a range of products you can choose from, but unfortunately you don’t have access to the information you need to evaluate these options. You don’t have anyone financially savvy in your circle who can advise you on these things, perhaps you don’t have access to the internet, and aren’t aware how you could find this information in pink papers and business magazines. This is a bad problem to face, but better than the first problem.

The first problem is the worst, you don’t make enough money, and probably never will. You don’t even have a bank account, and know only to write your name. How can you ever be okay with money in this situation? This is the worst problem to have.

In the last week or so I’ve encountered people with all three problems and it felt comforting to know that people struggle with the same things that I do, and it also felt nice to assist someone with something that they had very little clue about and needed some help on.

I’m sure you know people with one or more of these problems and I’m sure you can think of at least one way to reach out to them and help them with something. This is as good a time as any to do it — it gets lonely to have to tackle these things on your own, and a little help goes a long way.

Part 2: Futures and Options – How do Futures work?

Between Options and Futures – I would say that Futures are a lot easier to understand than Options since they pretty much work in the same manner as shares. A Future is a contract between two people that has to be settled sometime in the future and with respect to the Indian stock market, here are the important things that you need to consider.

1. Not all stocks have Futures: There are only a handful of shares that have Futures traded on them and you can buy or sell Futures only on those shares. You can look at the list that your broker offers to see if you can trade Futures in a particular stock or index or not.

2. Futures have an expiry date: All Futures have an expiry date, and in India you can buy Futures of three durations – one that expire in the current month, one that expire in the coming month, and a third one that expires in the third month. All Futures contract expire on the last Thursday of the month. So, while in April you can buy an April contract that will expire on 26th April 2012, the May Future will expire on 31st May 2012 and the June Future will expire on June 28th 2012.

3. Futures are traded in lots: You can buy or sell one share of Infosys but Futures have predetermined lots and you have to buy or sell in those many multiples of shares. For example, an Infosys Future has a lot of 125 so when you buy one Future contract of Infosys – it is like buying 125 shares at a go.

The big difference however is that you won’t have to actually pay the price of 125 shares, but only cough up a margin amount which is usually a lot less and depends from one share to the other. Volatile stocks need more margin and less volatile shares need lesser margins.

4. You pay or get only the difference in value in Futures trading: Say you buy Nifty Futures on April 17 2012 when they were trading at Rs. 5,321; one Nifty lot is of 50 shares. Now, if this moves up by 20 points and reaches 5,352 and you sell the Future – you will net 20 x 50 = Rs. 1,000 as profit. On the other hand if it went down by 30 points and you decided to sell you will have to bear a loss of 30 x 50 = Rs. 1,500. If the margin requirement for this contract is 11% then you should have about Rs. 30,000 (11% of 50 x 5321) in your account to take this exposure. If the exchange or broker finds that the money in your account is less than the margin then it will automatically square your position (they will sell it if you bought the Future and buy it if you sold the future).

You can sell your Future at any time before the expiry and on the day of expiry your Future will be cash settled which means that you will either pay the difference if you are in a loss or you will be paid the difference if you are in profit.

5. You can sell a Future without owning it first: Since a Future transaction is settled on a upcoming date, it is possible to sell a Future without actually owning it. This is called going short and this is a useful feature of Futures since you can’t go short using a stock.

For example, you could sell a June Future today without owning it first, and you have till June 28th to buy back your Future and square your transaction. In this case you make profit when the price of the share goes down because you have already sold the share and are hoping to buy it back at a lower price.

Theoretically, this is more dangerous than buying a Future because there is no limit to how high a share can go. Practically, the limit is as much money as is present in your account and allocated for margin. Once your margin is triggered – the broker will square your transaction by buying back the share, and I think you should only buy or sell a Future if you are sure you can track it very closely throughout the day and if you can handle the volatility and price difference. If you’re buying so many Future contracts that your margin is close to being triggered you will never be at peace and even daily volatility can trigger a sale and make you lose a lot of money very quickly. In fact, it might just be better to buy Options instead of Futures because then your loss is defined.

I think I have covered the basics of Futures and if you have any questions then a leave a comment and I’ll answer that. In the next part I’ll take up how Options work.

Contra Mutual Funds in India

Contra is short for contrarian and the idea behind contra mutual funds is to invest in shares of companies that aren’t popular and have lost favor with investors.

There are several contra funds in India, and I think it is fair to say that they have not really invested in a contrarian manner. If you look at their top holdings, you will find big names that everyone is aware of and are commonly owned by a lot of other mutual funds as well.

Here is a list of all contra funds that currently exist in India along with their top 5 holdings.

1. Kotak Contra Fund: Here are its top 5 holdings as on February 29, 2012 (the latest data that I could find.

HDFC Bank 6.24%
Infosys 6.03%
ITC Ltd. 5.76%
HDFC Ltd. 4.38%
Power Grid Corporation Limited 4.31%

2. L&T Contra Fund: Here is the top 5 holding data as on March 31 2012.

Reliance Industries 6.15%
ICICI Bank 5.50%
GSK 4.75%
Federal Bank 4.03%
ITC 4.01%

3. Religare Contra Fund: Top 5 holdings of Religare as on February 29th 2012.

Infosys Ltd 6.04%
Reliance Industries 5.39%
ITC Limited 5.03%
ICICI Bank Limited 4.92%
NTPC Ltd. 4.40%

4. SBI Magnum Sector Umbrella Fund – Contra: Here are the top 5 holding of this fund as on February 29, 2012.

ICICI Bank 7.45%
Dr. Reddy’s Labs 4.10%
SBI 4.09%
Bajaj Holdings 4.03%
Exide 3.39%

5. UTI Contra Fund: Here are the top 5 holdings of the UTI Contra fund as on February 29, 2012.

Infosys 7.29%
ICICI Bank 5.73%
ITC 5.58%
Reliance 5.19%
Tata Motors 4.84%

6. Tata Contra Fund: Here are the top 5 holdings of the Tata Contra Fund as on March 30, 2012.

HDFC Bank 6.77%
Infosys 5.44%
Sadbhav Eng 5.37%
CRISIL 5.22%
GSFC 4.68%

If you look at the shares that these contra mutual funds own, nothing remarkable jumps out at you and these are the same names you would expect to find in any other mutual fund that invests in equity in a diversified manner.

I haven’t included the expenses or returns of these funds, but having researched this data – I can see that they aren’t particularly impressive either.

I don’t really think of any of these funds as contra funds, and if I bought them ever I would think that I have bought a diversified mutual fund which has the word “contra” in its name and nothing more.

In fact I’m not quite sure whether you should buy something just because it is contrarian and how sound that philosophy really is. You should buy a share because you see value in it not because no one else owns it or you may just find that there was a good reason why no one else owned it!

Repo Rate Reduced to 8.0% and Other Monetary Policy Highlights

After an upward march for the last 3 years, the RBI has decided to cut the repo rate by 0.50% and bring it down to 8.0% from the existing 8.5%.

This is a bigger change than the 0.25% that was being talked about before the release, but it doesn’t indicate that RBI is in any sort of hurry to bring down the rates.

In their 2012 – 13 Monetary Policy, they have specifically stated that the trend rate of GDP growth has come down from former years, and that’s largely due to structural issues. They can’t ease rates a lot more without risking the rise of inflation, and the statement shows that the RBI is still very concerned about inflation getting out of hand again.

RBI Reduces Repo Rate to 8 Percent
RBI Reduces Repo Rate to 8 Percent

There were several interesting things that came out from the report and they were all largely comments on the deteriorating state of the Indian economy.

None of this is new, and you would have heard about this before as well. The whole report is a quick read and I’m listing down some points that caught my attention.

Inflation in protein based items

This is something that has featured in RBI reports for at least a couple of years now, and it comes up yet again. They see high inflation in protein based foods like eggs, fish, meat and milk which show a structural imbalance between demand and supply in these items.

General concern about inflation

Though inflation is not hitting headlines as it used to a year or two ago, RBI is still clearly concerned about it especially because the modest decline seen recently seems to be reversing course.

Worsening Domestic Numbers

I see a lot of worsening numbers related to the domestic economy in the RBI report. IIP has moderated taking GDP growth down, capital formation has contracted, private demand has grown by just 2%, Manufacturing Purchasing Manager’s Index has moderated, corporate sales are up but profits are down, liquidity is tight, current account deficit is higher, and forex reserves have depleted.

GDP Growth Projection

They project GDP growth of 7.3% which is lot higher than what we see today and the rationale for that is industry is expected to perform better this year as leading IIP indicators are positive, and the global economy also looking better than last time.

Not enough room for rate cuts

Although they have cut repo more than expected today, they say that there isn’t much room for further rate cut without risking the rise of inflation again, and the moderation in growth has been due to supply bottlenecks in areas like infrastructure, energy etc.

Unsustainable Current Account Deficit for last quarter

This is straight from the report:

“For the quarter ended December 2011, the CAD was very high at 4.3 per cent of GDP. This level is unsustainable and needs to be contained. With global capital flows to emerging markets projected at lower levels in 2012, financing of the CAD will continue to pose a major challenge.”

Very strongly worded, and perhaps a warning to the political class to do something about subsidies, policy inaction and all the other factors that are constraining growth from taking off and are also drying up funds from abroad.

These were just some of the things that caught my eye, and you can breeze through the report fairly quickly, and you should definitely give it a read as well.

Important Indian Economic Numbers and their Release Date

Given how much excitement there is over the possibility of a repo rate cut during RBI’s Monetary Policy announcement tomorrow I decided to take a look at some other major economic numbers that were declared recently, and found that it is really cumbersome to get a snapshot of the major economic numbers at one place.

In a bid to overcome that – I’ve prepared this table which keeps tab on some of the important economic numbers that people generally talk about and I’ll try to keep this page updated as frequently as I can.


S.No. Name Source Periodicity Last Declared Last Number Next Due Date
1. IIP MOSPI Monthly June 11 2012 -0.1% for March 2012 12 July 2012
2. Monthly data on India’s International Trade in Services RBI Monthly May 10 2012 Exports $24.5 bnImports $37.9 bn for April 2012 Unspecified but probably mid June
3. India’s Foreign Trade Ministry of Commerce Monthly April 2, 2012 Trade Deficit of $166.7 bn Unspecified but probably early May
4. WPI Inflation Data Office of the Economic Adviser Monthly May 14 2012 7.23% provisional for the month of April 2012 14 June 2012
5. GDP MOSPI Quarterly August 31 2012 5.5% Q1 2012 – 13 (Apr – Jun) 30th Nov 2012
6. Monetary Policy RBI Quarterly April 17 2012 Repo Rate 8.0% 18th June 2012
7. External Debt Ministry of Finance Quarterly March 2012 $ 334.9 bn as on end Dec 2011 Unspecified
8. FDI DIPP Monthly February 2012 $ 2,211 mn as Unspecified
9. HSBC PMI Index HSBC Monthly April 2012 54.9 1st June 2012

These numbers are in no particular order and I want to add a few more like the CPI numbers, foreign tourist arrivals, HSBC PMI index but had to stop here today because I was having a hard time tracking the original source of all these numbers.

Which other numbers do you think I’ve missed here and would like to see included?