What I Read

I often get asked what I read and what I would recommend reading. While what one should read is largely a function of area of interest and background and therefore unique to each individual, I have tried to list here the resources I use or have used in the past for my reading. Hope this helps. If reading resources are what you are looking for, please skip the next two paragraphs.

Reading is and has always been my first love. It is a habit my parents inculcated in me in early childhood and my mom made sure to purchase books in bulk from a famous shop located in my birth town of Indore when we went on annual visits to my grandparents’ during summers. She always made it a point to ask my teachers for book recommendations when she came visiting on results day at school. As a result, I was exposed to great reading material in my formative years in both English and Hindi. To this day, I credit my command over Hindi to the foundation that my mom laid for me by making me read the Panchtantra, Hitopdesha, Ramayana, Mahabharata and Premchand in Hindi in their unabridged versions. My general interest and curiosity in the world around was piqued through my reading of the encyclopaedias meant for children of slightly older ages. I consider it the greatest gift my parents have given to me. But enough about that for now. Fast forward to the present.

With time, my reading preferences have shifted and evolved and I read very little fiction now. Not that I don’t like it but with pending reading far outstripping available time, my priorities lie elsewhere. Here’s a near exhaustive list of everything I used to read, still read or plan to read at some point in future. It includes books, magazines, websites, Twitter accounts and Facebook pages I use as the source of my reading material. The volume of material out there I’d like to read is overwhelming and it feels like having to run faster every day to stay at the same place.

Books

My reading is quite eclectic. I read business, economics, finance, strategy, politics, policy, psychology, philosophy, science, biographies, history, oil and gas, mining, military affairs and so on. You can find a list of most of the books I have read in the last 7-8 years or want to read going forward in the following links.

https://www.goodreads.com/review/list/4982245?shelf=currently-reading

http://www.amazon.in/gp/registry/wishlist/?ie=UTF8&cid=A4EVECNEUJ6NC

Goodreads is a platform that I use to chronicle my reading, rate books and write short reviews. Amazon bought it out for a billion dollars some 2-3 years back. If you are not there already, you should be. It is an excellent place to see what readers are saying about a particular book and to browse through other people’s reading lists to see what they are reading and whether it’s aligned to your interests.

I have changed the setting for my Amazon wishlist to public so it’s visible to everyone now. This is the list of books I plan to read at some point and keep adding anything that looks or sounds interesting.

The Financial Times newspaper comes out with a long-list of candidates for its Book of the Year Award every year and it has been a reliable source for me to pick the best books of the year. I also try to keep sourcing recommendations from knowledgeable people at every possible opportunity and add them to my Amazon wish list.

The Blinkist is a new app available for iPhone and Android that offers concise, succinct summaries of books for those who are hard pressed for time. As of now there are only a 1000 books and beyond a 3-day trial period you need to pay a subscription fee. They have received funding and plan to use the money to expand the library to more than 10,000 books.

Newspapers & Magazines

Here’s a list of newspapers and magazines I read either occasionally or frequently.

1) Economic Times

2) Mint

3) Business Standard

4) Financial Times (I follow mostly the Mining/Oil & Gas sections on a regular basis owing to my interest and background)

5) Wall Street Journal

6) New York Times

7) Foreign Policy (gives excellent perspectives on international affairs)

8) The Economist

9) Harvard Business Review (started reading this after coming to SPJIMR and have continued since)

10) The Caravan (India’s only long form journalism magazine)

11) Bloomberg

Some of these like Economist, HBR, NYT, FT, WSJ etc. offer a few articles for free every week/month. If you use Chrome, it is pretty easy to get around this restriction most of the time by switching to Incognito mode. Businessworld and Business India are two Indian business magazines that are good but I have hardly been able to read them in the last two years due to lack of time.

Reading on Technology/Start-up Space

1) http://wired.com

2) http://theverge.com (their Long Form pieces are extremely insightful)

3) http://inc42.com (if you are following the Indian start-up space, this is the single best resource to read that I know of)

Using Social Media

The accounts I follow include a mix of media outlets, financial research houses, private equity funds, well-known faces in the field of journalism, policy, politics, finance and economics and so on. Their tweets either contain useful takes on issues or links to good reading material on the web. If you are on Twitter, here’s the list of accounts I follow:

https://twitter.com/ankit_agrawal88/following

On Facebook, I follow the pages of Bloomberg, National Geographic, Inc42, HBR, FT and The Economist actively. Facebook is the source of most of my reading material these days.

Finance Related

The following are some of the best sources of Finance related reading material on the web that I am aware of.

1) http://valuewalk.com (if connected to or interested in the world of investing, this is THE resource of resources)

2) http://zerohedge.com (What you find here cannot be found anywhere else on the web. Seasoned finance professionals follow this blog religiously for its boldly cynical take on markets and financial institutions. Many of the predictions made here about disastrous events have turned out to be prescient.)

3) http://advisorperspectives.com (a platform similar to Project Syndicate but for Finance related stuff only)

4) http://mauldineconomics.com (The newsletters are an absolute gem and free of cost. With George Friedman (the founder of Stratfor) joining John Mauldin, the new Geopolitics newsletter from them is essential reading for anyone connected to markets.)

5) http://aswathdamodaran.blogspot.com (This is the famous Musings on Markets blog of Aswath Damodaran, the acclaimed valuation practitioner)

6) http://doubleline.com (The website of Double Line Capital run by Jeff Gundlach. He is the guy any practitioner in the Fixed Income space follows religiously)

7) http://vccircle.com (For the latest dope on funding, capital raising and M&A deals in the Indian start up/PE space)

8) http://visualcapitalist.com (Purely for the mindblowing graphics they use to explain everything)

Apart from these, I am subscribed to newsletters from McKinsey, BCG Perspectives, Knowledge@Wharton, Absolute Return Partners, Biharilal Deora (the guy who heads the Indian chapter of the CFA Institute), VCCircle, TechCircle and Project Syndicate among others which largely serve the function of clogging up my inbox even though I take a look at them every now and then. It’s amazing how much of the top-notch stuff one can get for free these days. 

In case you are wondering, I DON’T read all of the above regularly. The MBA program doesn’t afford the luxury of time to be able to read even a fraction of what I’d like to. Most of the links I open these days go into a repository in the forlorn hope that I’ll get around to reading them at some point. The tool I use for this is Pocket. It is available as a simple extension for Chrome and any link you want to read later can be saved along with relevant tags to make it easy to search later. Pocket is not just a repository; it’s also a curated content platform. You can choose your areas of interest and get mails with links to the best content available on the web in that genre.

If you haven’t closed this tab already and endured this long winded post up to this point, a big thank you and happy reading J

Finance through the Prism of Culture

Financial markets keep getting complex with every passing day and as they do, they make lesser and lesser sense. Seemingly unrelated events, in hindsight, turn out to be highly correlated in the unlikeliest ways. One is left scratching one’s head, wondering what possibly could have given a clue to the relationship before-the-fact. Experts come up with all kinds of sophisticated after-the-fact analyses and theories, often involving mathematical rigor. Amidst the chaos, the human element is completely ignored and disregarded. Human behavior and psychology is assumed to be homogeneous across nations and borders for it seems inconceivable to imagine that which defies conventional logic and belief.

Every finance textbook starts with an assumption that the investor is rational and always makes predictable rational choices. In a basic course on portfolio management, the first thing taught is the Capital Asset Pricing Model (CAPM) which completely hinges on the belief that all investors have homogeneous expectations and will always choose one particular portfolio over all others. This chosen portfolio becomes the market portfolio which is then used to derive equations and perform the remaining mathematical calculations of parameters that further feed as inputs into still more equations. Yet, what if the most fundamental assumption weren’t true? The whole model would crumble and the results become meaningless. It turns out that hardly anybody in the industry uses this model in a professional setting, instead relying on much more nuanced and complicated ones-none of which can be claimed as infalliable. These are mostly proprietary in nature owing to the sheer effort involved in guessing and quantifying investor and market psychology before a winning one can be constructed even if for a short term- for the notoriously fickle investor mindset influenced by events can never be relied upon. The point here being that guessing the investor mindset is the basic ingredient of the recipe and that requires a sound understanding of cultural context.

Residents of some countries are more conservative with regards to their investment philosophy than others. For some people, religious beliefs and strictures prevent investment in companies belonging to certain sectors so for this group of investors, these companies are as good as non-existent from a market portfolio perspective. Cultural taboos such as gambling cause aversion to use of derivatives with the result that markets for these instruments are not well-developed in such countries, India included. In India, even many High-Net Worth (HNI) individuals prefer to park their money in more traditional forms of investment such as real estate than succumb to the temptation of exotic but incomprehensible products peddled to them by suave bankers. Hedge funds in Asia have had a hard time getting business even in places like Hong-Kong and are essentially non-starters. None exist in India.

Indians have had a strong cultural affinity for gold for centuries. Gold resonates strongly with our cultural ethos and forms an integral part of our ceremonies. Along with real estate, it is one of the most commonly exercised investment options. Periodic bouts of high inflation since independence and absence of banking facilities in rural areas have only served to enhance its perception as a safe investment option. Yet, until recently, there was a strong stigma attached to pawning gold jewellery to meet immediate liquidity requirement owing to the strong emotional connect with family jewellery. The perception that pawnbrokers seek to profit from the distress of their customers didn’t help matters. Yet, in the last few years companies like Muthoot Finance and Manappuram Gold have built big businesses out of nothing but loans against gold. These companies made a thorough study of cultural mindsets and prejudices and sought to remove the stigma by advertising aggressively and bringing in ethics and professionalism to an unorganized sector. As a result, mindsets are undergoing a shift and traders are increasingly seeking to use gold to meet working capital requirements due to the flexibility and hassle-free experience these companies offer. Manappuram has sought to persuade customers through the argument that gold kept idle in safes and vaults is dead investment and a drag on the economy whereas if used to issue loans it generates economic activity and contributes to economic growth. This is an example of how a sound understanding of culture allowed entrepreneurs to build multimillion dollar businesses out of nothing.

Reams and reams of pages have thus far been filled over the financial crisis raging in Europe. Mainstream newspapers and magazines have been competing to offer analyses and forecasts by various pundits in the field. Theories and arguments continue to be proffered for causes, effects and solutions. Despite having kept a close eye on a number of mainstream publications, I have been hard put to come across pieces focusing on cultural traits as a cause of the whole affair. Conceded, oblique references continue to be made to the profligate tendencies of the Greeks and their bloated public sector but that’s about it. There has been no effort to delve deep and connect the dots across countries under siege. It was left to the story-telling acumen of financial journalist Michael Lewis to point out the real culprit in cultural factors of every country that finds itself in trouble today. All of his knowledge comes from first-hand experience gained through his journey to these places and interaction with politicians, financiers, tax officials and the common men and women. In his recently released book “Boomerang” he describes his journey in detail with trademark wit and humour. This book takes us to five countries- Iceland, Greece, Ireland, Germany and the State of California in the US. The one sentence of his that succinctly sums up the book is “All these different societies were touched by the same event but each responded to it in its own peculiar way.”

Lewis begins by describing how Icelanders wanted to give up their traditional craft and profession of fishing and become investment bankers overnight. Highly educated young men who had studied in elite American universities, found it beneath them to engage in fishing. In keeping with their aspirations they introduced their fellow-countrymen to the world of high-finance. Enticed by the possibility of mind-boggling returns though currency trading, all fishermen sought to become traders. The typical Icelandic male suffers from an alpha-male tendency, owing to the tales of heroism and conflict he has been brought up on. This attitude was reflected in the behavior of its banks which spent huge sums on buying up assets abroad, without an iota of due diligence or research. Needless to say, it was only a matter of time before the banks would collapse, taking the economy down in their wake.

Lewis’ next destination is Greece. He talks about an institutionalized culture of fiscal recklessness and a system that facilitated tax evasion and irresponsibility. He describes how the Greek government understated its fiscal deficit figures by a factor of five to be in compliance with EU norms simply by cooking up whatever numbers it found convenient to report. He tells us that an independent statistical service or an equivalent of the US Congressional Budget Office simply doesn’t exist. The party in power simply reports whatever numbers it wants to. Non-payment of taxes has become a cultural trait, with the only people paying taxes being those who can’t get out of it i.e. salaried employees of corporations whose wages are paid net of tax. Nobody is ever punished for tax evasion which is seen as just another cavalier offence, akin to a gentleman not opening the door for a lady. The “don’t-give-a-damn” attitude of the Greeks and the cause of their woes are wonderfully summarized in this quote from the ancient orator Isocrates: “Democracy destroys itself because it abuses its right to freedom and inequality. Because it teaches its citizens to consider audacity as a right, lawlessness as a freedom, abrasive speech as equality, and anarchy as progress.” The lenders to this country seem to have been totally unaware of the Greek mindset while generously doling out funds year after year. Puzzlingly, nothing seems to have changed even now, with a multi-billion dollar bailout on the cards. It would simply be a case of throwing good money after bad and won’t do anything to resolve the fundamental issue- the Greek mindset.

Lewis then goes on to describe the plight of Ireland where the real estate frenzy did it in. Flush with money due to factors not yet fully understood, Irish banks embarked on a lending spree especially to the real estate sector. So much so, that real estate loans formed 28% of all credit on banks’ books. It was madness all around with almost a fifth of the population employed in the construction business and scores of houses being constructed all around despite lack of evidence of demand. Everybody Lewis asked gave vague answers, not being sure himself or herself. But why did this real estate boom come about all of a sudden? Lewis says that Irish people told him that because of their sad history of dispossession, owning a home is not just a way to avoid paying rent but a mark of freedom. What is also surprising is that when the banks finally went down, there was no uproar on the part of the populace, only the merest of whimpers. In any other country, citizens would have flayed their politicians alive, given half a chance. Here, not only the people didn’t protest, they agreed with their politicians whole-heartedly when told that they couldn’t afford to not pay back their creditors anything less than hundred cents on the dollar (the creditors themselves had already braced themselves for a loss and written down their investment).

In the eurozone, Germany has been the one country that remains fiscally strong. Yet, it is staring at massive losses if their borrowers default. Banking in this country has largely been a boring affair, just like the old days when banks the world over were all the same. Owing to the German culture of taking at face value everything on paper that has supposedly been verified, its banks have gotten themselves into a mess. They didn’t have the required sophistication to gauge the quality of instruments they were investing in and lending against and were used by financial institutions around the world to dump their trash. Germans took rules at face value and were blind to the possibility that the Americans were playing the game by something other than the official rules. The only reason they agreed to the Maastricht treaty that created the euro was the fact that it had “rules”. The same instincts allowed them to trust American bond salesmen, the promises of the French regarding a “no-bailouts for sick member countries in EU” and the sworn statements of Greeks that their budget was balanced.

Despite such overwhelming evidence for a case against bringing together nations so culturally diverse, talk has been going around of a more tightly “fiscally-integrated” Europe, as a last-ditch measure to save the Euro. That’s a euphemism for sanctioning profligate practices of the irresponsible countries, subsidizing them, giving free lunches and leaving the responsible ones to pick the tab.
These instances make one wonder whether it’s time to write the epitaph of financial theory as we know it. Clearly, a one size fits all kind of a thing doesn’t work and only ends up causing needless agony and pain. Perhaps it’s time that we started factoring in culture as one of the myriad variables when coming up with sophisticated models and business strategies and estimating risk and return relationships. A simple theory grounded in basics would do much more good than one using meaningless stochastic calculus.

Fault Lines - II

Continuing from the last post, here I'll try to deal with the second set of fault lines which emanates from trade imbalances between countries and these in turn stem from prior patterns of growth. Countries like Japan, Germany and China are overly dependent on exports for their own growth on account of low domestic demand in their own countries. This excess supply slushes around in the world market, looking for countries that have the weakest policies and the least discipline and tempts them to spend until they simply cannot afford it and succumb to crisis. But why opt for a export-led growth strategy at all? Why not simply strengthen your domestic market which will consume this supply? Why in the first place would other countries spend so much on buying this excess supply when it knows that the end result is going to be doom? Neither are these easy questions to answer nor are the choices easy to make. I shall try to elaborate in the next few paras.

What are the factors that differentiate rich countries from the poor? Physical capital i.e infrastructure such as roads,airports,high-tech machinery,gadgets is the most obvious one. Next comes human capital i.e the level of education among the people which will enable them to derive the best benefit out of this physical capital. You can't hand over a tractor to a tribal and expect him to increase his productivity by giving up on slash-and-burn style of agriculture. But the most important differentiating factor is organizational capital i.e the capability to deploy the available physical and human capital in a complex environment with maximum productivity and efficiency. The countries that developed early i.e Australia, Canada and the United States developed organizational capital slowly over a long period of time. Industries typically began with a number of small firms of which only a few managed to survive over the years and become leaders. Governments simply didn't have the capacity(as in understanding of industry) to intervene and it didn't, except for lending a helping hand by way of trade barriers and tariffs to keep away competition from abroad. It was in short, the purest form of capitalism.

The late developers on the other hand,such as Japan,Germany,Korea,Taiwan and India, realised that in order to catch up with the advanced nations they needed a high annual growth rate on a consistent basis. They simply couldn't afford to spend a lot of time to allow organizational capital to develop all by itself. Competition from advanced economies to domestic producers made it all the more difficult. These countries therefore chose the path of managed capitalism which these days is a more benign term for "crony capitalism" (handing out of favours to a selected few). These countries had two options- they could either create government enterprises to undertake business activity or they could intervene in the functioning of the markets to create space for a few cherry-picked private firms which they felt were the most competitive and likely to do well. In either case,all the country's capital and resources were available to only a select few firms. Some countries chose the first path and some the second. India, as it should be obvious,chose the first. (Recall our Public Sector Undertakings or PSUs?)In either case, the governments ensured that these firms had access to loans at low interest-rates, and subsidised power,water and other natural resources which act as raw materials. Managed capitalism however, comes with its own set of problems.

First is nepotism. There is nothing to stop a government from distributing favours to family,friends and relatives who in turn being assured of official largesse tend to become lazy and inefficient,thus defeating the very purpose of protection. The second problem is that households get a raw deal so domestic consumption tends to be low. For starters, wages are low because supply of labour is abundant owing to the large number of people looking to move from low-productivity agriculture into factory jobs. Also,governments might intervene on behalf of manufacturers to keep wages low in order to keep them competitive and profitable. Since the firms are also paying less for energy and minerals,governments tend to boost revenue by taxing households even more. And all this while the firms are charging high prices for their goods in the domestic markets where they enjoy a monopoly.Since the loans made to businesses are at low interest-rates, banks keep deposit rates for households low as well,adding insult to injury.In short,producers are favoured at the expense of consumers and consumption is constrained. This prompts the government to encourage firms to export.Here,it should be noted however that as a end result we do get some strong domestic champions and domestic industry does become mature and competitive.

It is however,not always easy to encourage firms to export. For countries like Taiwan where the domestic market is small, an export orientation is unavoidable if firms are to grow. But the case of a country like India is different. As has been said earlier,India followed a path of developing a strong PSU sector serving the domestic market.Also,large business houses like Tatas,Birlas and others who were early players had been accorded special privileges, while preventing competition by way of the infamous "license-permit raj".India should have made the switch to exports in the 1960s.But because the protected Indian market was large,these firms were perfectly happy exploiting their home base despite government attempts to encourage exports.Government efforts themselves weren't very strenuous given that the protected firms were important financial sources for the ruling party to fight elections.In this case,democracy proved to be India's undoing as opposed to countries like Singapore and Korea whose leaders had no such irritations to bother about. As a result, India stayed closed,poor and uncompetitive for a long time until 1991 when it was left with no choice but to change or perish.

The excess supply generated by these now export-oriented economies looks for countries with weak policies that are disposed to spend but also have the credibility to borrow the finance to fund the spending. But there is a limit to which one can spend and take on debt.

This post has grown too long already so the effects of what happens when a country can no longer spend will be dealt with in the next post.Also,I shall attempt to summarize this discussion in a few sentences at the end.I'm aware that questions raised in the first para have still not been clearly answered.I hope however,that I have been successful to some extent till this point.

PS: Couldn't resist adding this in the end. The manner in which 2G spectrum was distributed, mining leases are being given out all over the country and land is being distributed to developers by politicians, have all led political commentators to observe in newspaper editorials that India is turning into a "crony capitalist" state.

Fault Lines - I

I recently started reading the book Fault Lines written by Prof. Raghuram Rajan of the Chicago Booth School of Business. This book is an attempt at explaining the possible causes of the economic crisis, by showing how a myriad number of factors came together to produce this outcome.Rajan says that it would be naivete and short-sightedness to blame just a few greedy bankers who took irrational risks to precipitate this crisis. Something much more was involved, the causes were more systemic in nature, and the outcome was the collective result of choices made by bankers,politicians and homeowners. Rajan talks about a flawed and fragile global economic order that provided perverse incentives for those in control. Although a fault line is more of a geological term, here it has been used as a metaphor to represent the deep flaws inherent in the global economy. Rajan goes about detailing those flaws, shows the interplay amongst them, and suggests possible remedies - all of which involve making hard choices for long-term benefit.This post will try to concisely explain what Prof. Rajan terms the first set of fault lines.

Rajan starts by noting that over the years, income inequality has widened humongously in the US. The rich i.e. those in the top 1% income bracket, have become richer over the years while those in the middle and low-income segments have seen their real incomes stagnating or even dwindling. For those who may not know, real income compares the income today to income some years back after taking into account inflation. So, if I earned $100 in 2000 and earn $110 today with overall rate of inflation being 12%,my real income has actually dwindled. I would need to earn $112 today just to keep up with my real income in 2000. The primary factor behind this growing chasm has been unequal access to quality education. This is because technological progress over the years has resulted in ever growing demand for workers more skilled than before; those lacking these skills have found themselves out of jobs, and have not been able to upgrade owing to lack of financial resources to afford college.Most of these now redundant workers possess only a high-school diploma which used to be deemed sufficient for their job some years back. As a result, they have been forced to do jobs much more menial in comparison,and of a lower pay-grade. The falling standard of education in high-schools in US has only served to exacerbate the problem, with a large number of pupils dropping out early and even those obtaining diplomas possessing insufficient skills.

Data shows that the optimism regarding social mobility(moving from one income class to a higher one)amongst Americans used to be very high in the past but has steadily dwindled. Gone are the days when America used to be seen as the land of equal opportunity for all. The growing resentment and pessimism worried politicians who instead of going for long-term reforms in education chose to appease the voters by throwing easy credit at them, a time tested short-term fix but as history shows, disastrous in the long run. Education reforms today will show their effect a decade or so later but hey, no politician can afford to wait that long.The government control of agencies responsible for disbursing credit made them ready tools in politicans' hands to achieve their goals. Politicians sought to expand home-ownership,an integral part of the typical American dream, by facilitating home loans at cheap,affordable rates. It was a laudable initiative in itself, but somewhere down the line, intent and outcomes diverged as the programme was scaled up. Agencies like Fannie Mae, Freddie Mac and FHA were pressured to do more. Being under Congressional oversight and control which enjoyed leverage by way of threatening to expose accounting malpractices, the agencies protested only a bit. To fulfill their mandate and prescribed targets, they bought subprime loans from banks and when these were not available in sufficient quantity, they even bought subprime mortgage-backed securities. However, they had no experience in dealing with this category of loans and hence failed to adjust for the higher risk. The private sector saw this and rushed to cash in by taking out as many loans as possible without checking the borrowers' creditworthiness. This led to deterioration of credit quality.

Everything was hunky dory until house prices suddenly stopped rising. Then came a flood of defaults from borrowers who couldn't pay up and that resulted in foreclosures. The housing market tanked. This had a domino effect. Banks who held these loans on their books couldn't recover their money by selling the collateral against the loan i.e houses because there were no buyers. This resulted in massive losses for the banks who stopped lending out money altogether,even to the corporate sector. In absence of working capital to run their businesses or fund their expansion, companies resorted to cost-cutting and firing employees. People were left homeless and jobless. It turned out that financial institutions across the world had these kind of loans on their books, all of them went down simultaneously and the same scenario was played out in other countries across the world. All the wealth invested in real estate eroded almost overnight, leading to collapse of banks which faced a yawning asset-liability mismatch.

Prof. Rajan however, doesn't blame one person or a set of persons. He rather opines that everybody involved exercised rational choices in the face of the circumstances they faced. What gave rise to these conditions was a skewed global financial order that generated perverse incentives.

The next post will deal with the second set of fault lines. Comments, suggestions and questions are all welcome.

PS: Fault Lines has been a best-seller on Flipkart ever since it was released and its author has not only been the Chief Economist at the IMF from 2003-07 but is also an Economic Advisor to the Prime Minister of India.