Author: Naveen

A wonderful article on Finshots explaining what options is in stock trading.

For instance, imagine you see shares of your favourite tech company trading at Rs. 80 today. Now you believe this stock will rally and reach Rs. 120 anytime soon. The only problem — if you wanted to buy 1,000 shares right now, you’d have to cough up Rs. 80,000 — a rather steep amount. But what if you could change the nature of this bet a tiny bit? What if you could find someone who’s willing to hear a different proposition? More importantly, what if you could make him an offer he couldn’t refuse?

So you set the agenda. You ask him what he thinks about your favourite tech stock? He tells you he isn’t very optimistic. He makes it explicitly clear that the upside is fairly limited. He mocks your optimism and offers you his unabashed opinion.  “It won’t cross Rs. 90 in the next 6 months. I’ll give it to you in writing”, he says. You are overjoyed. This is exactly what you wanted to hear. So you ask him to give it in writing — a contract of sorts.

Softbank and the NASDAQ Whale

A wonderful article by Sarah Perry on why our public and private preferences are different. It is from 2015 but I feel it will always be relevant. A long read, but worth it.

Preference falsification is an information theory term for the tendency for people to express a public preference that is different from their private, interior preference. For various reasons, certain preferences may not be publicly acceptable to express; they may be punished by execution, or labor camps, or exile, or social exclusion, or at the very least suspicion and a risk of some of these things. When people do not express their true preferences, they are deprived of the opportunity to coordinate with each other to create a more preferable outcome for both. Preference falsification is not just a political phenomenon, but a product of our dual nature, experiencing ourselves on the one hand from the privileged first-person perspective, and on the other hand from the imagined perspective of others. Pretending to have different preferences than one really does may be necessary to maintain a sense of safety, social belonging, and status.

People’s expressed, public preferences are a function of both their interior preferences and the perceived acceptability of revealing them; other people’s expressed preferences serve as a guide for measuring acceptability. So people’s expressed preferences are in part a function of other people’s expressed preferences. Under certain circumstances, when the distribution of preferences is right, a domino effect may be begun by a single dissenter, toppling the status quo of preference falsification. One dissenter may embolden others, and then together with them give the impression that it is acceptable for others to express their true preferences. On the other hand, people whose preferences are satisfied by the status quo may find it wise to begin to falsify their preferences when a revolution begins to look imminent.

Weaponized Sacredness

An interesting analogy by Tim Harford on how our minds store memories.

Last spring, I returned from the holiday of a lifetime in Japan, and reflected on the richness of the memories it had generated. Time flew by while I was there, but in hindsight 10 days somewhere vividly new had produced more memories than 10 weeks back home.

I likened the effect to the compression of a film. Instead of storing each frame separately, video compression algorithms will start with the first frame of a scene and then store a series of “diffs” — changes from one frame to the next. A slow, contemplative movie with long scenes and fixed cameras can be compressed more than a fast-moving action flick.

Similarly, a week full of new experiences will seem longer in retrospect. A month of repeating the same routine might seem endless, but will be barely a blip in the memory: the “diffs” are not significant enough for the brain to bother with.

Later in the article, the author goes on to emphasise the importance of “place” in building new memories.

I’ve come to realise with renewed force the value of a pre-Covid habit: seeking out new places in which to read and to write, even something as simple as a new café or a new library. Fresher ideas and clearer memories come when one works somewhere different: in a new place, the mind is more alert.

This may be why, when we ask people to recall pivotal moments in history such as the fall of the Berlin Wall or the 9/11 terror attacks in Manhattan, we ask “where were you when you heard?”

Covid-19 may be as significant an episode as any, but it will not trigger the same sharp memories. Where were you during the pandemic? At home. For months. And without a physical change of scene, even new experiences all start to seem the same.

With the COVID-19 pandemic raging on, I read one of the best metaphors on how suddenly the world can change and impact us in ways we would never have imagined. I couldn’t get link to the web article so all I have is an screenshot of the article on Twitter from Business World written by Prakash Iyer.

So when they decided to build a new bridge over river Chohuteca in 1996, they wanted to ensure it would withstand the extreme weather conditions. A Japanese firm was contracted and they built a solid bridge, designed to withstand the powerful forces of nature. The new Choluteca bridge – a modern-day marvel of design and engineering – was thrown open to the public in 1998. And as people drove from one side of the Choluteca river to the other, they couldn’t help but admire the new bridge. It was Choluteca’s pride and joy.

And in October that year, Hurricane Mitch hit Honduras. There was 75 inches of rain in four days – the equivalent of what they receive in six months. There was devastation all around. The river Choluteca swelled and flooded the entire region. 7000 people lost their lives. All the bridges in Honduras were destroyed. All, except one. The new Choluteca bridge remained unaffected.

But there was a problem. While the bridge was intact, the road leading to it and the road leaving it were both swept away. Leaving no sign that there was once a road there. And that’s not all. The flooding forced the river Choluteca to change course. It created a new channel, and the river now flowed beside the bridge. Not under, but beside the bridge. So while the bridge was strong enough to survive the hurricane, it became a bridge over nothing. A bridge to nowhere.

The bridge on the river Choluteca

Well, for starters, the goat is gone. But this Economic Times article by Amit Kapoor & Chirag Yadav sheds a bit more light on why there’s a disconnect between stock market and the economy.

The behavioural aspect of the trend has been recently outlined by Robert Shiller based on his work on how narratives shape economic outcomes. Shiller argues that the initial market resilience in US until mid-February was the lack of familiarity of investors with pandemics as the event had no historical precedent. Moreover, investors had not anticipated the global spread of the disease and the halting of economic activity in response to it at the scale in which we have seen. The following dip was driven by the stories emerging from China and Italy of hospitals having to choose patients and stores running out of essentials. But eventually, when the government swept into action to provide aggressive stimulus, investors found themselves in familiar territory of previous economic crises. The state-led actions reinforced investor belief to return to the markets, which have staged a prompt and promising recovery.

It is later in the article the authors explain the disconnect between capital and real markets over the long run.

The macroeconomic explanation provides a more generalised contextualisation. A prominent change over the last decade has been the excessive liquidity infusion in the global markets driven by the quantitative easing in the developed world, especially US, where interest rates have reached near zero levels. Most of this money has found its way into capital markets for easy returns instead of materialising as real investments. A lot of the money has also flown into the capital markets of developing countries like India. Investors also know that the central banks and government will back their capital with taxpayer money in case of market failure. Thus, capital markets have begun to provide faster and more secure returns than real investments.