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Saturday, January 24, 2009

Slumdog Millionaire - Lesson in non-linearity

Slumdog Millionaire offers a great example in non-linearity which is so prevalent in the world but so difficult to fathom or make ourselves come to terms with it.

Here we were believing that the only source of an Oscar for India is in the 'Best Foreign Movie' category and then came Slumdog (a good movie no doubt) a de-facto Indian movie with not 1 but a stagerring 10 Oscar nominations with three nominations for AR Rahman including one jointly with Gulzaar. It has already won 4 Golden Globe's including 1 for AR Rahman.

What a remarkable turn of events!

It is this non-linearity (life jumps; does not progress steadily in a linear manner) which is what I find most difficult to come to terms with. Non-linearity is everywhere, take financial markets (who predicted such staggering collapse of world economy), politics (see how the terrorist attack of 26/11 was a non-linear event in regional politics), sports (who predicted India of all teams would win the T20 world cup that too in bouncy grounds of SA).

Unfortunately our minds are by design extremely incapable of handling non-linearity; something we witness on almost daily basis - which causes a lot of problems and frustrations!

Friday, January 23, 2009

Some food for thought...

Almost nobody predicted even a simple recession leave predicting a recession of this magnitude, but almost everyone is predicting a recovery beginning 2H of this year…

If I look up on Bloomberg's January economic survey, out of 60 respondents, just 11 expect US economy to contract in 3Q of this year and just one contributor expects US economy to contract in 4Q of this year (In contrast almost everyone expects US economy to contract in 1Q and 2Q of the year).

Similarly almost nobody predicted a fall in equity prices of this magnitude, but almost everyone now thinks that they have fallen so much, that we are close to the bottom if not already at the bottom. They however did not apply reverse logic. When equity markets rose sharply between 2004-2007, they did not expect equity market to fall simply because it had risen so much :)

What does that say about the skill of 'analysts' in forecasting?

Thursday, January 22, 2009

Satyam saga...

Firstly, what is NOT surprising about the Satyam saga is that an Indian company has acknowledged that it has cooked its books. What IS surprising is that it was an IT company (listed on NYSE and subject to SEC regulations et al) which sprang the confession.

What IS also surprising is the shock that has been expressed by investors and regulators et al. It is common knowledge that a whole bunch of companies employ aggressive accounting at the minimum and do outright fudging in some cases.

What IS surprising is the swiftness with which the central government has acted (leaving aside the laxity in the first couple of days; but that largely reflects not knowing what to do as they have never faced such a situation before.), replacing its board with a new board which carries significant credibility - Kudos to the govt for their actions so far.

The SEBI proposal to have a peer audit of all large companies (Sensex, Nifty) is welcome but that audit needs to be truly independent and it must be paid for by the SEBI or the exchanges. In fact this is a good time to revist the practice of annual audit being paid for by the company (the management effectively). Its also a good time to increase disclosures...

Overall this will obviously create a negative impact about India globally amongst investor community but the speed with which the situation is resolved and guilty punished and steps taken to reassure that other large companies' books are not cooked is crucial in determining how long lasting the impact would be...