Funny illustrations

The Modigliani - Miller Proposition (in their own words..)

2011-08-28T13:45:00.000-07:00

The Modigliani - Miller results are not easy to understand fully. This point is related in a story told by Merton Miller(Taken from from GSB Chicago, University of Chicago, 1986) "

How difficult is to summarize briefly the contribution of the MM papers was brought home to me very clearly last October after Franco Modigliani was awarded the Nobel Prize in Economics part - but, of course, only in part - for the work in finance. The television camera crews from our local stations in Chicago immediately descended upon me. "We understand," they said, "that you worked with Modigliani some years back in developing these M&M theorems and we wonder if you could explain them briefly to our television viewers."

"How briefly?", I asked.

"Oh, take ten seconds," was the reply.

Ten seconds to explain the work of a lifetime! Ten seconds to explain two carefully reasoned articles, each running to more than thirty printed pages and each with sixty or so long footnotes! When they saw the look of dismay on my face, they said, "You don't have to go in details. Just give us the main points in simple, commonsense terms."

The main point of the first or cost-of-capital article was, in principle at least, simple enough to make. It said that in an economist's ideal world of complete and perfect capital markets and with full and symmetric information among all the market participants, the total market value of all the securities issued by a firm was governed by the earning power and risk of its underkying real assets and was independent of how the mix of securities issued to finance it was divided between the debt instruments and equity capital....Such a summary, however, uses too many short hand terms and concepts like perfect capital markets that are rich in connotations to economists but hardly for the general public. So, I thought of an anology...

"Think of the firm," I said, "as a gigantic tub of whole milk, The farmer can sell the whole milk as is. Or he can separte out the cream and sell it at a considerably higher price than the whole milk would bring. (Thats the analogy of a firm selling low yield and hence high-priced debt securites.) But of course, what the farmer would have left would be skim milk with low butterfat content and that would sell for much less than whole milk. That corresponds to the levered equity. The M&M proposition says that if there were on costs of separation, the cream plus the skim milk would bring the same price as the whole milk."

The television people conferred among themsleves and came back to inform me that it was too long, too complicated, and too academic.

"Don't you have anything simpler?" they asked. I thought of another way....

"Think of the firm," I said, "as a gigantic pizza, diviided into quarters. If now you cut each oquarter in hand into eights, the M&M proposition says that you will have more pieces but not more pizza."

Again there was a whispered conference among the camera crew, and the director came back and said: "Professor, we understand from the press releases that there were two M&M propositions. Can we try the other one?"

After I spoke, once again there was a whispered conversation. They shut the lights off. They folded up their equipments. They thanked and left. I knew that somehow I had lost my chance to start a new career as a packager of economic wisdom for TV viewers in convinient ten-second bites. Some have the talent for it...and some just don't.

Impact of Monetary Policy to a common man: A day in Dec 2011

2011-05-04T05:44:00.000-07:00

A small story which describes the impacts of Monetary policy - 2011-12 of RBI released on May 3,2011:

A day in Dec 2011
Renga and his family:
Ramba: Get up and get ready fast, dear!! Its already 10 o' clock. The banks will get crowded! Then we cant meet the manager for our loan.

Renga (grumbling in sleep): I have already asked the bank guy to come here for loan document verification. No need to go to bank.

Ramba: But, how come?? Documents and details?

Renga: Uffo!! I submitted everything online last night itself!!

Ramba: But this bank doesn't have internet facility, right? Its just a cooperative bank!!

Renga: Oh idiot! It was activated last month itself! All urban cooperative banks can go online as per this year monetary policy!

Ramba: Oh. sorry, I didn't know that.

Renga: What the hell do you know. You don't know to cook a good chicken dish also!!! Now get lost from here and don't wake me up till bank guy turns up.

(At 11 am with the bank guy)

Bank guy: So Mr.Renga, why you want this loan? Can you explain about your previous job?

Renga: I was a stock market trader in Mumbai till July. In new monetary policy, they said they are going to increase repo rates. As a result, bank lending rates went up and production went down and all my stocks also fell down rapidly! So I came back to my hometown here to start a restaurant.

Bank guy: So, why exactly a restaurant?

Renga: Yeah, that's where we get money from customers immediately! And food prices are more or less stabilised and so suppliers wont pose a problem. (thinking in his mind) and I can always rise the menu prices now and then blaming on inflation.

Bank guy: Blah blah blah (for 1 hr)

Renga: Blah blah / shit / fuck (for 1 hr)

(1 hr later)

Bank guy: Ok sir, we will get back to you in 2 days on loan approval!

Renga: So what are the chances that I get this loan?

Bank guy: Sir, actually, pretty good! We give a lot of loans these days since we have a lot of cash with us through savings accounts. People deposit more money in savings these days because of the increase in interest rate from 3.5% to 4%. And no big companies take loans these days as all productions have dropped. So we give loans to all retail customers.

Renga: Oh, thats good news! And one more thing. my brother is planning to send me some money from US. But its taking long in other banks to clear all the transactions.

Bank guys: Oh is it? We can help you out, sir. All foreign transactions are very simplified and its very easy to clear it through our bank.Give us the details sir.

Renga: That's awesome (he gives the details)

Bank guy: We will call you in a couple of days, sir.

(That evening Renga takes his family for a treat hearing this happy news. And when the bill comes to his table...)

Renga: Oh my god! 4000 bucks! All my extra interest through savings bank is gone in one dinner.

Renga's father: I told you, asshole, that 0.5% interest is nothing! Seriously there is no big benefit in your useless saving account!

(After a couple of days)

Renga: Hello, who is this?

Bank guy: We are calling from the XXX Cooperative bank. We are sorry to say that your loan is not approved.

Renga: But why?

Bank guy: Because your past records online are so fucked up.

Renga: (thinking)Damn it. Now that's the online disadvantage!

Bank guy: And we got your brother's money in your account in our branch. You can withdraw it after 2 months.

Renga: Why the hell you want 2 months?

Bank guy: Because, we have sent your loan application to our head office again. Reapproval request takes longer time - 2 months.

Renga: Who asked reapproval. Just give my brother's money!

Bank guy: No sir. After getting your brother's money we had a second thought to sanction your loan. So we have sent it for reapproval.

Renga: You idiots. I don't get any money for next 2 months?

Bank guy: Til then, we can offer you a credit card sir. We have launched a new chip based card based on the monetary policy. Interest rates are only 24% pa. Would you like to use it for two months, sir?

Renga: Fuck you!

Bank you: Thank you sir and fuck you too!

(Line goes dead)

Glossary of financial terms :D

2011-04-28T23:50:00.000-07:00

Another attempt as glossary to financial terms, on a lighter note!!!

Alimony: The evil curse that chases you even after divorce.

Amortization: Convincing yourself that your expense will be adjusted over a period of time.

Balance sheet: At the end of which you realise that your company's balance is at stake.

Basis Point: Another MBA way to exaggerate decimal points and freakout people.

Bear market: Something that follows always after your huge investments.

Big Mac index: Index that mocks all other stock market indices.

Bull market: Something that follows always after you sold off your investments.

Buy and hold: A strategy adopted when you don know what to do with your money.

Dividend: A sum of money, determined by a company's directors, paid to shareholders to keep their mouth shut!

EBIT: Earnings before irregularities and tampering. (ref: David Bond)
EBITDA: Earnings before I tricked the dumb auditor. (ref: David Bond)

EPS : You realize that "Entire portfolio sucks!!"

Financial planner: An investment professional who helps with financial plans to take over all your money in the long term.

Junk bond: Bonds that are actually, junk!!!

Limit order: An order to buy stock followed by bull market.

Market order: An order to buy stock followed by bear market.

Price to book ratio: Something that shows the real picture of all virtual money.

Real rate of return: Loss rate after rate of return is adjusted for inflation.

Risk: Whose value is zero only after death.

Security analyst: Born to screw yourportfolio.

Stock split: When your ex-wife and her lawyer split all your assets equally between themselves.(ref:David Bond)

Yield to maturity: Something which gets more importance than you from your wife.

Deepwater Horizon Oil spill - The biggest ever made Chocolate fudge !!!

2011-04-20T03:24:00.000-07:00

Its an year over today, since the biggest chocolate fudge was started preparing. On April 20,2010, the British Petroleum's Chocolate fudge preparation in the Gulf of Mexico was initiated by a buildup of abnormal pressure in their oil drilling platform - Deep horizon followed by a jet of methane gas under high pressure getting ignited when trying to escape through the drilling columns. This methane gas explosion started the ignition of the entire platform - which acted as the stove for the fudge preparation.

This oil leak which lasted for 5 months leaked almost 5 million barrels of oil in to the sea and USA got the proud certification of the world's best polluter of the environment. The effects of this chocolate fudge in sea couldn't be explained in words!!! What more cruel can man do to nature!!

British Petroleum was blamed for not having followed adequate safety norms before explosion and for not able to control the leak after it started. The job that they had to do is to put a cap on the pipe where the leak was happening. But its not as simple as putting on a condom!!
It required strenuous scientific efforts by the entire team and US government. The leak part before and after the sealing of the cap is shown below:

The leak had so many lessons to teach to the mankind! And one year after one of the worst accidents, the Food and Drug Administration has found only 13 out of 1735 tissue samples from sea food show traces of oil residues. And that the sea food is safe to consume. Other than teaching us lessons, and giving huge losses to BP, this incident atleast helped some small scale industries to grow by printing t-shirts on this theme. Some hit t-shirt designs were:

This chocolate fudge is not only the biggest but also the most expensive one to mankind and nature!!!

Let's pray that we don't face such a disaster atleast in our lifetime.

Bread is more liquid than beer!!!

2011-04-19T04:08:00.000-07:00

How come bread is more liquid than beer when it is comes under solids according to 6th grade physics? Well, this is possible in finance, under the topic liquidity!!

A businessman committed suicide because of stock market crash leading to overload of debts and loans. The responsibility to repay the debts fell on his son, Shahrukh's head. Shahrukh was hoping to settle all the debts by the left over assets in their business - huge crates of beer and a few loaves of bread. Now, after the stock market crash, no one had enough money to buy beer in the market, which was costing 200 bucks. But they could buy bread which sold only for 20 bucks. So Shahrukh could make money only through selling breads as he could not sell any beer. Only bread yielded money and not beer, though he had lots of beer crates to settle all his debts. So, here we can say bread is more liquid than beer.

Liquidity, at its simplest and best definition is - the probability that an asset can be converted into an expected amount of value within an expected amount of time without making any losses. If beer can be traded within the time Shahrukh expected and at the price he expected, it would have been more liquid. But now, all Shahrukh could do is to drink a few bottles of beer now and then to forget the pain of debts.

Note that both time and value are important in defining liquidity. Many banks crashed in the sub-prime crisis because they couldnot convert their assets into liquid cash whenever they wanted. One hilarious quote to be mentioned here is George W. Bush's serious statement on liquidity in the markets in 2008 - "This thaw -- took a while to thaw, it's going to take a while to unthaw." It was also quoted that the sub-prime crisis was worse than divorce for traders because, you lost more than half of your wealth and still couldn't get rid off his wife!!!

A bank account holder goes to an ATM and it says "insufficient funds". He starts wondering if its his funds or the banks funds that is insufficient. Imagine the height of liquid crisis that when robbers go to rob a bank and they find nothing in the bank's vault. Robbers will be cursing the bank for poor liquidity management!

One good thing about this crisis is that the bankers when questioned about this credit crunch, they dont ask back - "which flavour is that candy-bar?"

We have another simpler definition for liquidity for those die-hard accounting fans -"Liquidity is when you look at your retirement funds and wet your pants."

How to KISS???

2011-04-13T04:22:00.000-07:00

Now I am not teaching you how to kiss but to KISS.
KISS stands for Keep it simple, Stupid!!!

Let me follow this KISS principle. Let me "Keep it Simple and Sweet". Let me "Keep it simple and straightforward."

Use Occam's razor always. By the way, this razor doesn't shave your beard. But it shaves off the beard-like-unwanted-stuff from the problem you are looking at. Meaning, it is just a complicated explanation of KISS principle instead. Stupid Occam (actually Ockham) didn't keep it simple here.

Some big times comedies that failed to follow KISS principle are here:

PizzaHut introduced new sizes for their Pizzas to attract more customers. Those sizes were - large and big. Now here the confusion starts that whether the large one is bigger than the big one or the big one is larger than the large one. They just complicated it and confused their customers.

RJ Reynold's smokeless cigarettes were a terrible flop in 1988. How do you expect to sell a cigarette without

smoke in the market? Why cant they just "KISS"?

A 2009 survey by British Telecom Home IT support reveals that 71% of Britons have upto 10 electronic gadgets that are unused because of their complicated features and so called "user-friendliness".

So the simple message is that always keep KISSing. Another small pick from my favorite novel- "Deception point" (Dan Brown) says - "When multiple explanations exist, the simplest is usually correct." Very true!!!

Mother earth has started spinning faster!!!

2011-03-12T13:46:00.000-08:00

Check out the wiki-page for list of earthquakes in Japan here - http://en.wikipedia.org/wiki/List_of_earthquakes_in_Japan.

It shows the foreshocks on March 9th 2011 and the Sendai earthquake on March 11th with an 8.9 magnitude. Of course, followed by plenty of aftershocks. This earthquake is the fifth largest ever since man knew how to measure earthquake. Probably, if Noah had this Ritcher scale with him, he might have recorded more earthquakes with higher magnitudes. So what exactly did this earthquake do to our Mother earth other than creating a huge Tsunami and killing thousands of people?? Here is a little bit of academic review.

According to experts, this earthquake has moved the main island of Japan by 8 feet (2.4 meters) and shifted the Earth on its axis. This shift in the axis is 10 centimeters according to National Institute of Geophysics and Valcanology. This shift is so small for a ball of 6370 km radius which is spinning at 30 km per second. But it has some impact which only experts claim to understand. There is one major impact. Mother earth has started spinning faster, now!!! Yeah, which makes our everyday shortened by 1.6 microseconds. (A microsecond is the equivalent of 1/1,000,000 of a second).

Imagine a girl, coming out of a shopping mall with loads of shopped items in her hands, asked to spin about her own centre in an ice skating pond. She will spin at a speed slower than she could spin before entering the mall. It is not because she is tired shopping, it is because of the bags she is carrying in her hands. Those bags increase her momentum during spinning and it decreases the speed of spinning or rotation, technically. Holding a bag of 3 kgs in each hand keeping it stretched to the maximum and then slowly bringing it close to the body will increase the speed of spinning. This is because the moment of inertia falls as she brings the bags close to her body and so her angular velocity increases. This is why ice skating dresses are designed taking care of this angular momentum. The more they are close to the body, they can spin faster and faster, when they do ice skates. In fact, if she was spinning nude in the ice pond, she will be spinning the fastest for sure but making the entire world literally slower for the men audience.

This exactly happened here in Sendai earthquake. The quake has pulled in some of the tectonic plates close to its centre and pushing others outside(lets not bother the names now). So now its like, earth is spinning with her shopping bags close to her body. And she started spinning faster - thereby reducing our day by 1.6 microseconds. Previously, 2004 Indian Ocean quake reduced our day by 6.8 microseconds and
2010 Chilean earthquake reduced our day by 1.3 microseconds. There is no direct impact to a common man because of these negligible changes, which is like a sparrow hitting a flying Boeing Airbus 380 both at their maximum speeds.

So therefore there is not much to hype on this topic as many news channels claim. Even the experts are not sure what long term impacts they may cause. But media makes the common man feel that the world is towards its end. One of the news channels claimed that this earthquake was a result of global warming and related shit. I expect them to telecast how dinosaurs gone mad using cars and refrigerators millions of years ago to cause global warming and earthquakes. Or even how manufacturing industries in Atlantis caused global warming making the continent disappear into the ocean.

Finally, on a lighter note, if the earth keeps increasing its speed of rotation and reaches 30 times its present speed, one good thing is that we can get the paycheck everyday!!!

India Googled !@!

2011-03-02T12:56:00.000-08:00

When there is a continuous change happening around you, which one do you would you notice first? I would notice the one that is rapidly changing! When I made a search to know what other people google in the google, I came to understand more that is getting changed!

Here is the most popular searches in India for the year 2010 on "how to" (http://www.google.com/intl/en/press/zeit
geist2010/regions/in.html)

Just take another look at the list before proceeding. So, lets derive our inferences from the bottom of the list.

#10 - How to meditate - People have started getting tensed more with work pressure or personal life imbalance and are trying to seek a way out. Or, it could be because, people don't want to pay for meditation, as it goes, at least peace of mind should be free of cost!

#9 - How to make money - People are trying to make shortcuts to earn a second income. Or, many entrepreneurs are growing up. Or people are short of ideas and their creativity quotient is going down to make or innovate business. Or the inflation level of the country is so high that they want to make more money.

Reasons could be many more too!!!

#8 - How to Create a website - Many entrepreneurs, many companies, many businesses, many forums... all go online!!! and they want to create a website by themselves before outsourcing to someone else. And nothing much interesting here, in fact!!!

#7 - How to Tie a tie. This shows that plenty of Indians now move to white collared job or get them first shot. Or even blue collared jobs deserve a tie nowadays here. Or people weren't taught how to tie a tie in schools. But whatever the reason may be, what we can infer is that, we are getting aligned to the so called "western culture" more and more. People wear tie even in hot sun here!

#6 & #5 - How to gain weight & how to reduce weight - Both these results have had quite close hits. So the number of people obese and thin are quite close. People are more worried about their bodily features. May be if Google can release results gender wise, ideally, hits on reduce weight would be more from women and to gain weight would be more from men. But without proper evidence, they don't stand concrete. And its quite obvious that unhealthy and junk food is more prevalent in the country. Or unhealthy eating habits is prevalent. Or poor awareness on healthy eating habits is in place. All the same, it implies that people are atleast more concerned on themselves at one point of life and trying to find a shortcut.

#4 - How to improve spoken English - People want to learn and speak better English. Reasons - More jobs demand people speaking English. Or people want to impress someone by their hi-fi English. Or the culture around them is getting changed to a common language called English. Or the regional languages are no more considered as barriers to communicate with this still emerging language in India. Or atleast, it is considered as a sort of status to speak good English. Or people travel more to foreign countries. And many more inferences can be derived.

Now, that we saw some healthy and unhealthy changing cultures being inferred from the list, what is more changing is inferred from the top 3 hits:

#3 - How to impress a girl - How can a google search help on this is topic is unclear to me. But reasons may be that girls demand something extraordinary from guys (what guy's believe). May be there are lot many competitions for a girl and many men are trying to impress and googling to find the best way. Or may be men are getting more dates with women, implying the increased dating culture in India. Or men who had had dates might have had bad experiences and don't want them to be repeated. Or more men are planning to propose women and want them to be impressed during their proposals. Or men have become dumb that they have to google such topics. Really the state of those girls with boyfriends who had googled this topic is pathetic.

#2 - How to kiss - This is getting more interesting. People want to know how to kiss someone properly and passionately. Or they really want to know the art of kissing. Ideally, we can infer that all those who hit the "hot to impress a girl" should have tried this also. And this hit gives results with video, and apparently, people would have chosen videos for better illustration on kissing.

#1 - How to get pregnant - Now this is totally unclear, because it is not "how to make pregnant". Reasons may be, people are still unclear of the whole "hole in that wall" story. Or people are having many complicated medical problems that they don't get conceived. Or guys are very cautious that they understand the "game" fully so that they don't become fathers too early. Or people are still feeling shy to ask such questions to others and they prefer googling to discussing with someone. My overall inference is that Sex education is bad in India.

From the above set of results, one can very easily capture the change happening around us. The change that happens in our culture. Whether such a change is welcome or not is not being discussed right now, but let it be an eye - opener towards the path we are drifting.

Pareto Principle

2011-01-29T13:12:00.000-08:00

Hello my dear friends,

To begin with my first blog, let me use a simple concept - the Pareto principle. Here I am going to illustrate what it is, assuming that you have never understood what is Pareto principle! Here we go...

The law of vital few and trivial many!!!
No, I am not talking about Indian politics. Its the Pareto principle itself!!! Going by my funny logic, it simply says to score 80 % (or percentile) marks in an exam (assuming that its an open book test) you need to put in only 20% effort. But for scoring the remaining 20%(or percentile), you need to put the himalayan 80% effort!!!

Wherever you go, this law can be applied. Say you go to a supermarket with a list from your wife, you will finish shopping 80% of the items in almost 20% time. But to shop the remaining 20% (including her napkins or like), it will take 80% time!! The vital few eat up lot of time and even cost!!!

Or, lets say you wanna finish a pizza. 3/4ths of the pizza goes inside a hungry stomach pretty fast compared to the last quarter!

Such simple logics are applied in industries, wherein, 20% of the people - the so called managers sit and brush their seats and take home 80% of the company's profits. And 80% of the rest of the staff toil themselves for the remaining 20% income!!! And to conclude, I would like to add this famous management lesson - "To sit idle and do nothing, you should be on the top(20%)!!!"