01 December 2012

In short run, even Playboy bunnies can beat fund managers ::Michael J. Mauboussin is Chief Investment Strategist at Legg Mason Capital Management


Michael J. Mauboussin is Chief Investment Strategist at Legg Mason Capital Management in the United States. He is also the author of bestselling books on investing like  Think Twice: Harnessing the Power of Counterintuition, and More Than You Know: Finding Financial Wisdom in Unconventional Places. His latest book, The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing (Harvard Business Review Press, Rs 995)has just come out.
In this freewheeling interview with Vivek Kaul, he talks about how short-term outcomes have a good dose of luck attached to them and how as people get more skillful at doing a particular thing, luck becomes the deciding factor. In this part of the interview, the second part, he explains why a star in one context is unable to perform elsewhere, and why even Playboy Playmates do better than professional fund managers in terms of short-term returns.(Read the first part here)
You write that “organisations tend to overestimate the degree to which the star’s skills are transferrable”.
This argument is an extension of the work done by Boris Groysberg, a professor at Harvard Business School. Groysberg has studied many cases in which stars switch organisations and found that in most cases their performance deteriorates. So skill is not as portable as we tend to think. One example he provides is that of executives from General Electric. GE is well known to have among the best management training programmes in the world. Further, rising to the ranks of GE management undoubtedly requires skill.
Groysberg studied 20 executives who left GE over a two decade span and who took leadership positions at other companies. What he found was that those who went to firms organisationally very similar to GE tended to do quite well, while those that went to firms that were different fared poorly. So it’s not just skills that matter, but the match between skills and the environment.
Firstpost.com
You talk about the Playboy Playmates selecting stocks that generated greater returns than the broader market….
As a promotional stunt, a trading company asked former Playboy Playmates to pick 10 stocks at the beginning of 2006. The best of the Playmates did much better than the market, and a higher percentage of Playmates outperformed the market than did professional money managers. Right away, this should cause you to ponder an important question. How can a handful of presumably untrained individuals outperform diligent and dedicated professionals? In how many fields can amateurs beat the professionals?
What is the broader point you were trying to make?
The broader point I was making is that in fields where there is a good dose of luck, short-term outcomes do little to reveal differential skills. Over a longer period, you would most certainly expect the pros to do better than the amateurs. But it is common in business and investing to use evaluation periods that are simply too short to allow for any kind of concrete conclusions about differences in skill.
What is the paradox of skill?
The paradox of skill says that as skill improves in an activity that includes both skill and luck, then luck becomes more important in determining outcomes. So more skill leads to more luck – the paradox.The paradox of skill says that as competitors in a field become more skillful, luck becomes more important in determining results. The key to this idea is what happens when skill improves in a field. There are two effects. First, the absolute level of ability rises. And second, the variance of ability declines.
Could you explain through an example?
Let me give one example from athletics and then turn to investing. The paradox of skill makes a specific, testable prediction in sports that are measured against a clock. You should see absolute times improve, bumping into the limits of human physiology, and you see relative times cluster, which means that the finishers are all bunched. This is precisely what we see in swimming and marathon. Men today run the race about 26 minutes faster than they did 80 years ago. But in 1932, the time difference between the man who won and the man who came in 20th was close to 40 minutes. Today that difference is well under 10 minutes.
And the investing example?
The idea applies well to investing and has been the subject of discussion for decades. For example, Charles Ellis wrote a famous essay in 1975 called “The Loser’s Game,” which makes the same essential point. Ellis argued that in the 1950s and 1960s, institutional investors could outwit individuals because there was a wide range of skill. But as the markets became dominated by institutions, the difference in skill narrowed, making the game harder to win.
In investing, the idea is that skilled investors are very efficient at reflecting information into asset prices. So only new information, which is by definition random, should affect stock prices. Hence, stocks follow a “random walk.” This is a statement of the efficient market hypothesis. Now, the efficient market hypothesis is not accurate. Stock price movements do not follow random walks, and there is differential skill. But the basic point remains true. Because prices capture the skill of investors, luck is very important in determining results—especially in the short term.
You write “people who work in businesses where social influence operates are often paid for good luck, although they generally don’t suffer symmetrically from bad luck.” Can you explain this statement in the context of the financial crisis. 
I think this idea is why some many people were so upset by the financial crisis. The basic idea is that gains are privatised when times are good and (losses are) socialised when times are bad. In other words, executives make lots of money in good times and taxpayers have to bail out companies in bad times. That feels deeply unfair.
This is also relevant in equity-based compensation. Stock price moves reflect changes in the expectations of a company’s prospects plus macro factors such as interest rates, tax rates, regulation, the perceived equity risk premium, and so forth. Ideally, you want to pay executives for superior performance, but the macro factors can swamp the company-specific factors. In bull markets, that means executives are getting paid handsomely for good luck. In bear markets, it means that even those executives who are skillful fare poorly. Neither outcome serves the core purpose. So the ideal is to figure out how to pay executives for good skill. Indexing options or restricted stock units is a solid first step in achieving this goal.

RR Research: Veto Switchgears & Cables Ltd IPO Note


Dear Reader,
 
Veto Switchgears & Cables Ltd., one of the established brand in North West India is coming with issue of Rs. 25 Cr. The Company has strong dealer network and wide product portfolio....
 
 
For full readings please follow the link below..
 
 
 
 
 
 
Thanks & regards
 
RR Information and Investment Research (P) Ltd.

Invest in REC NCDs and earn up to 7.88%

Rated:  CRISIL AAA, CARE AAA, ICRA AAA & IND AAA from IRRPL                     Allotment on First Come First Serve Basis*
HIGHLIGHTS OF THE ISSUE
 
COMPANY PROFILE
  • Secured, redeemable debentures with tax benefits under  Section -10 of The Income Tax Act, 1961
  • Rated “AAA” by CRISIL, CARE, ICRA & IRRPL respectively
  • Interest Income on the Debentures is tax-free in nature
  • No cap on investment & no lock-in period
  • Who can Apply- Resident Individuals, HUFs, QIBs, Corporates
  • To be listed on NSE & BSE
 
  • Registered as NBFC, REC was incorporated on July 25, 1969 under the Companies Act 1956
  • Committed to financing & promotion of transmission, distribution & generation of energy projects throughout India
  • One of the 16 public sector undertakings to be granted NAVRATNA status
  • Profit After Tax: Rs 2817 crores for the F.Y. 2011-12
  • Net Worth: Rs 14745 crores for the F.Y. 2011-12
DETAILS OF THE ISSUE ARE AS FOLLOWS
ParticularsSeries 1Series 2
Tenure10 years15 years
Issue OpensDecember 3, 2012
Issue ClosesDecember 10, 2012
Issue SizeRs 4500 crores
Face ValueRs 1000/-
Minimum subscription Rs 5000/- & in multiple of 1 Bond thereafter
Rating "AAA" from CRISIL, "AAA" from CARE ,"AAA" from ICRA & "IND AAA" from IRRPL
Listing NSE & BSE
Interest PaymentsAnnual
Who can Apply? Resident Individuals/HUF/QIBs/Corporates

Effective Yield (%)
Corporates7.227.38
QIBs7.227.38
Individuals/HUF (Investments > 10 lac)7.227.38
Individua/HUF (Investments <= 10 lac)7.727.88
Redemption DateEnd of 10 yrs from the deemed date of allotmentEnd of 10 15yrs from the deemed date of allotment
Redemption AmountFace Value plus the interest accrued if any

Basis of Allotment:
CategoryPortionAllotment BasisSize (%)
QIBs  (I)Institutional“First Come First Serve” basis300% of the overall issue size
Corporates (II)Non-Institutional“First Come First Serve” basis15% of the overall issue size
Resident Individuals, HUFs -Investment> 1 Lacs (III)HNIs“First Come First Serve” basis15% of the overall issue size
Resident Individuals, HUFs -Investment<= 1Lacs (IV)Retail“First Come First Serve” basis40% of the overall issue size


IPO Bharti Infratel

Issue Terms
 
Issue price / Floor Price (Rs)
210-240
Application per share (Rs)
210.00
Minimum investment amount (Rs)
10,500.00
Minimum bid (no of shares)
50 shares and in multiples of 50 thereafter
Maximum Shares for Retail
950-800

Veto Switchgears and Cables IPO- all details


Issue Terms
 
Issue price / Floor Price (Rs)
48-50
Application per share (Rs)
48.00
Minimum investment amount (Rs)
144,000.00
Minimum bid (no of shares)
3000 shares and in multiples of 3000 thereafter
Maximum Shares for Retail
3000




Tax-free REC bonds is a good bet for those in 30% tax bracket, say experts


Power sector lender Rural ElectrificationBSE 0.66 % Corporation's (REC) 4,500-crore tax-free bond issue, which opens for subscription on Monday, presents an opportunity for investors to lock in money at higher yields and earn tax-free interest income. REC bonds, with a coupon rate up to 7.8%, will have takers in the secondary market once rates start moving downwards, wealth managers said.

The tax-free bonds, distributed under two series of 10 years and 15 years, offer coupon rates of 7.22% and 7.38%, respectively, for institutional and high net worth investors (HNIs). The company has also offered an additional interest of 0.5% for retail individual investors with investments up to 10 lakh. However, these bonds carry a step-down clause - the coupon gets reduced by 50 basis points for retail investors once the bonds get listed or the ownership of bonds changes hands.

"It is a good issuance... People falling under the 30% tax bracket should invest in these bonds," said Raghvendra Nath, MD of LadderupBSE 0.00 % Wealth Management.

According to Mr Nath, investors should take a long-term view on the bond issuance. It could be a part of the core fixed income portfolio, he said.

"On a pre-tax basis, the yield comes to about 11.4%. This is quite good considering the current interest rate scenario. Also, once interest rates start coming off, there will be higher accruals for bond investors. This being a long-term issuance, investors are also protected from issues like re-investments risks," Mr Nath said.

Last year, issuers offered up to 8.30% on similar tax-free bonds, but that may not be the case as yields on government bonds have come down by about 40 basis points over the last one year. The coupon offered on these tax-free bonds is linked to the yields on government bonds. Currently, the benchmark 10-year G-Sec is trading at 8.19% per annum.

The highlight of this issuance is the fact that REC, as per the directive of the Central Board of Direct Taxes, has set aside 40% of the issue to retail investors. "A 40% allocation is good enough to meet the entire retail investor demand," said a merchant banker involved with the issue.

According to wealth managers, HNIs may split their applications into smaller amounts (and in the names of the family members) to invest through the retail investor quota. "By doing so, they will get 0.5% higher coupon rate than what they would get under the HNI quota," a Mumbai-based debt arranger said.

"The retail portion is attractive because of the higher coupon rates. One has to see how HNIs and institutions react to the issuance. At 7.2-7.3%, these segment of investors have better fixed-income products in the market," said Hrishikesh Parandekar, CEO & group head (broking, wealth management and asset management), Karvy Group.

The REC bond issue is part of the government's budgetary plan to allow 10 state-run companies to raise as much as 60,000 crore selling tax-free bonds before March.

National Highways Authority of India, Housing and Urban Development Corp, National Housing Bank, Indian Railways Finance Corp, IIFCL, Ennore Port, Jawaharlal Nehru Port and Dredging CorporationBSE 1.27 % are among companies permitted by the government to sell tax-free bonds.