Category Archives: Finance

Critique of Daniel Kahneman – Decision Making Theories

That’s a very bad heading but I could not think of anything else .

What is evil — “ Evil is Knowing Better but doing worse “

Mr. Daniel Kahneman(the nobel winner) is one the most amazing   thinkers of modern era who has just completely changed the way we look at the world and the decisions taken by people in the world. His brilliant book(http://www.amazon.com/Thinking-Fast-Slow-Daniel-Kahneman/dp/0374275637 )  is a 20 times read. You can just keep reading again and again and again – discovering new things every time you do that. It makes you understand why probably you took a decision when ideally/rationally you should not have done so. So why the critique post ??

Well having read the brilliant book Thinking Fast and Slow by Mr. Daniel Kahneman I noticed something strange in every single question he had ever asked for framing his theories mostly related to monetary gambles/chance/risk taking . They  will NOT  apply completely to the thousands of Bankers, Traders, Lenders, Insurance Sellers(who are or should I say were too big) –who are taking decision under risk . The reason the theories will NOT apply is NOT because decisions are complex or theories completely wrong or they are using System 1 instead of System 2 but because the crucial elements (situations/conditions) are almost always neglected in almost all questionnaires for any psychology/logic tests undertaken by any researcher.

I searched for various of his articles and the references he himself used for writing those and  I could not find the most important factors which affect decision making under risk in real life organization/situation .

The choice of picking a decision using rational calculations or System 1(intuitive) based on prospect theory or whatever is secondary to the conditions surrounding the decision making. The conditions surrounding decision making are NEVER extraneous or too unimportant in real life.

This analysis will look at the financial risk taking while showing that  prospect theory(http://en.wikipedia.org/wiki/Prospect_theory)  cannot explain the decision making in financial world today when complete picture of conditions which leads to reckless risk taking is taken into account i.e. the incentives (bonuses), Superiors’ orders, managing other peoples’ money, too big to fail and implicit guarantee from all Central Banks around the world that you will be saved even if you completely screw up (the whole firm or consequently even the economy).

I would love if Mr. Daniel Kahneman applies all his theories of decision making to the bankers and financial industry as we know today to show how effectively it predicts the actual actions of these Lords of Finance. I am sure the theories cannot be applied to decision making of bankers which have brought terrible misery to millions around the world and amazing riches to bankers and financial institutions.(if you do not believe this stop reading!!)

I argue that what happens in REAL world more than 99% of the time when real people (almost all in some sort of organizational set up) are taking real decisions in organizations which can be observed by anybody is not explainable completely by theories like prospect/certainty effect/loss aversion/utility/System 1 or 2,  etc.

I am not a professor who can catch 50 students and give them a sheet of paper with 5 logic questions (each with 2 choices) and then extrapolate them to real life decision making. I will ask the same questions which have been asked in the book Thinking Fast and Slow  at the end of the write up. The only difference will be – I will use context/surrounding events before anyone has to decide which option to choose. The responses I am sure will be exactly normal as what happens in real life but the responses will violate most of the existing theories regarding decision making under risk.

Read the rest of this entry

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Shoppers Stop Analysis – Investors in for a Low Return over long term– Guaranteed !!

(NSE 532638 | SHOPERSTOP)
Shopper’s Stop Analysis and Future Expected Returns (Investors Stop???)

Here is kind of analysis which I guarantee that you would have never read or heard anywhere else on Shoppers Stop (Organized Retail), its future growth potential limits and the expected return from point of view of equity investor in Shoppers Stop or Pantaloons or Trent (Westside).

For a better read download this Shopper’s Stop   and Data Shopper’s Stopwith data in it :

Please read the below analysis and always keep in mind the following 4 simple facts:
• Indians on an average spend close to 60% of their expenditure on FOOD.
• Organized Retail have just 1% or even less share of FOOD sales in India.
• Indians spend around 10%-11% only on clothes, beauty products and footwear.
• Almost 80%-90% of sales of Shoppers Stop or Pantaloons or Trent (Westside) are clothes , beauty , accessories and footwear products and less than 10%-15% comes from food sales and that too comes from great brands of food (Nestle-Maggi , Cold Drinks , Biscuits ,Milk products ,etc which are razor thin margin business)or commodities which are again almost zero margin products.

With the above thoughts firmly in mind here goes my analysis.

With Organized Retail currently being around 6-7% of total retail sales I am predicting that in next decade or two it will not reach even close to 18-20% of total retail sales and I’ll back it up with logic.

This prediction is completely opposite (downright negative if you want to say) compared to every single projection available in India and abroad by any institution on future of Organized Retail. The prevailing wisdom is Organized Retail will soon by 2015 or so (add 1-2 years more if you like) capture almost 15%-18% of total retail sales in India and in the process the companies like Shoppers Stop or Pantaloons or Trent (Westside) are great buys even at P/E of 35+. Again I have not seen sell ratings on any of these companies except one by Nirmal Bang. Rest all are positive on this sector as a whole factoring in years of future growth at a return on capital which is at least twice of what these companies have shown in last decade of phenomenal growth when in fact for 4-6 years credit was as cheap as air.

The consultants , analysts , investment bankers and investors may have got it all wrong in trying to figure out how much expansion can the Organized Retail logically have in India given India’s unique expenditure pattern , infrastructure , real estate and electricity situation which is completely different from anywhere in the world .

This happens because a typical person who is consultant/analyst working in a company which brings out studies on growth potential of Indian retail may have say a package of minimum 12/15 lakhs per annum and his spending is less than 10% on food but he buys jeans at Rs. 4000, shirts at 2000 ,shoes at Rs. 5000 , perfumes at 3000 , LED TV at 50000 and some furniture at 25000 from the mall and he just cannot connect with how real India spends money on even though the data is right infront of his eyes.

These guys’ brains just short circuit and use System 1 (part of type of thinking of brain which uses shortcuts to make things easy) as opposed to System 2 (which is purely rational and calculative) as explained brilliantly by Daniel Kahneman in his amazing book http://www.amazon.com/Thinking-Fast-Slow-Daniel-Kahneman/dp/0374275637

Infact there would actually be a complete limit on how much Organized Retail can ever grow and capture the total retail expenditure in India (My guess is around from 6-7% today to 18-22% in coming 2 decades and that’s being too positive)
Read more for completely different way to look at Shoppers Stop !

Dish TV India Analysis- Bright Future ??

Dish TV India – A Critical Analysis

Why would a Senior Management Personnel Not answer what is Debt/Equity ratio of company

I was randomly just watching business news channel (whenever I want some fun I put on Biz channels in morning at around 9 AM when guys give ways to make money in next 3-4 hours!!!) and came across startling fact whereby a Dish TV senior management personnel on TV did not answer – what the debt to equity ratio of the company is and gave an evasive reply . (Early week of December)

Couple of days later I heard same thing from someone senior from a company WWIL refuse to answer the Debt to equity ratio question . It was amazing and that led me to dig a bit deep into what are these companies where the management just DOES NOT answer the most basic question – What is the Debt Equity Ratio of your Company ?

Ben Graham’s Advice

I will start off this analysis by quoting the real Guru (Benjamin Graham) who laid down rules of investment around 80 years ago which are:

 “You may take it as an axiom that you cannot profit on Wall Street (or Dalal Street) by continuously doing the obvious or the popular thing.”

“What seems to be obvious and simple to the people in Wall Street, as well as to their customers, is not really

Obvious and simple at all . You are not going to get good results in security analysis by doing the simple, obvious thing of picking out the companies that apparently have good prospects — whether it be the automobile industry, or the building industry, or any such combination of companies which almost everybody can tell you are going to enjoy good business for a number of years to come. That method is just too simple and too obvious — and the main fact about it is that it does not work well.”

  Read why Dish TV does Not have Bright future for Investors !!

Why the government of India has been increasing petrol prices freely and will continue to do so in future despite common sense that it aggravates voters


A simple but tricky question – In a country of almost 120 crores people how many people do you think are directly and materially affected by petrol price hike ? Get the answer at the end .

With another round of increase in petrol price (almost 40% increase in price in last 1 year) I sat and thought as to why the government is so bold in increasing petrol prices?

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Would you invest in this Company ?? (Indian Bankers love it)

Here is a tricky and tough(if you can call it with these terms) question for you regarding investing in a particular stock –Will you invest your money to buy stocks of a company whose performance summary is following :

  • Talking about consistency it has made consistent losses(Negative Net Profit) for last 7 years with losses increasing from Rs.16 crores to 1600 Crores.
  • The cumulative total Net Profit it has made is grand sum of Rs.2 crores on a cumulative 3 year sales of Rs.105 Crores in years 2002-2004.
  • Total cumulative losses for last 7 years are equal to almost Rs. 5248 crores ONLY.
  •  It has NEVER been a free cash flow company in its entire history of existence and its almost impossible that it will have a free cash flow in the coming near future.
  • It has a negative net worth for last 3 years and almost sure to have negative net worth in coming 2 years at least.
  • It has NOT paid a dividend till date (don’t start to argue that it is behaving like Microsoft, Google or Berkshire) not because it was investing the profit for greater return in business but purely because it just CANNOT pay dividends.
  • It is unable to pay back and manage even its working capital to an extent that it has changed working capital limits to working capital term loan(in plain English not enough money to pay you now ,come back after some years).
  • Forget working capital it is even unable to pay interest on the loans taken and hence it converted interest on loans from banks funded interest term loan repayable in 9 years including 2 years moratorium (plain English I am bankrupt to an extent I cannot even pay interest even in next two years, and banks happily said YESSS. Try saying to ICICI or SBI that you cannot pay EMI on your home loan because of some emergency in your family for say 6 months or so and see the fun!!!!They will first grab your collar, then your neck, then your house and then they will start talking!!!)
  • After being unable to pay money due on time and amazingly ‘requesting’ and getting banks to postpone paying up, the company has in fact been able to secure even more debt from the same bankers.(Try doing that with your car loan or house loan where after you default on payment of even miniscule amount or just a small delay– you are going to be kicked out of office of any bank where you go for loan almost forever or charged a rate which would be absurd).
  • Forget paying someone whom you owe money to, the company has gone a step further in NOT paying the TDS (worth 422 crores) and service tax for such a long term(greater than 6 months) that auditor had to mention it in Annual report . (You poor salary earning individual , you do not have a choice , you get the money only after the govt had its cut through the company. Alas the govt can also be fooled by companies like that who take your money and keep using it for as long as possible. )
  • A company which actually tried to raise more money than its whole market cap via GDR. Can you believe the ambitions and positive outlook of the company??(Of course you guessed it right what would have happened to GDR )
  • The company is so asset starved that security includes intangibles like the Brand name of company(Word secured has a different meaning for these bankers who have lent money).
  • Its a company (not a bank) where its Chairman says “realistic estimation of total assets both quoted and unquoted (carried in the Balance Sheet at cost) would exceed Rs 12,000 crores but the market value of the company is around 1/10th of the estimate by the Chairman.(So either market is stupider by 10 times and Chairman is wiser by 10 times or vice-versa ).
  • It is perhaps the only company which in its annual reports shows performance comparison to NSE and BSE by showing the ‘Volume’ of shares traded. Yes that’s volumes of share traded and NOT the price because if it shows the price then it would look ‘interesting’ to the say the least.   Read further to know about this “Great” company