Mediocre companies and mediocre human beings

In corporate finance you come across theories saying that if you're not as good as your competitor you might be destroying value in certain sectors. This is the case in most natural monopolies (like electricity, water) and certain other sectors where scale is large (like say, cereals). I've asked the question to myself- if a company knows that it's not going to be the best at something why try at all? Why not join these huge corporations and help reduce costs by increasing their scale? If you're worried that these corporations are evil you can either join one of the regulators (which regulate competition/financial markets/whichever area you think they're too evil in) - given that you feel these people add enough value and compensate fairly for your work. No company can systematically do evil things and still be hugely successful anyway. The numerous cases that we here of are companies which do certain things like exploiting poorer economies' labour instead of hiring local people, underpaying wages etc. - but these are just normal decisions making economic sense- which hurt some people but benefit others. One could however argue that big investment banks are truly evil(funding terrorist related activities/helping with money laundering etc. ) but this is probably the only sector (perhaps along with law firms) where even the most successful firms can do truly evil things.

Coming back to the point- although I've thought of why mediocre companies try and compete with established ones for eg. Parle competing with Coke and Pepsi or Tata competing with Ford and BMW(in sectors where acquisition is common, it makes sense to have a local competitor- since the strongest competitors are usually taken over- examples of such sectors include technology, telecom etc. ), I have never asked the same question about human beings. But what do companies and human beings have in common? Well, everything  really. Countries and companies are considered as individual human entities in media, when doing political/corporate analysis and even by law. While it might seem absurd to compare a country of millions of people, industries and companies to an individual person who is just composed of himself, it really is not that big a deal. In the top down approach, it makes sense because after all human beings are made up of billions of cells and hundreds of muscles and dozens of liquids- yet we do not analyse these things when talking about a person.   

The guy who comes 8th in class(who wants to get into academics) is not asked to kill himself. And the coder who came 3rd in the computer coding event isn't asked to either. We have a hundred reasons to give these people in their moments of truth to tell them that they are special and unique and how they contribute their own bit to the world just by being themselves. Just think about it- if people in the stone age(or whenever) were happy with eating raw food and no one questioned it we would still not have invented cooking. And small things like this make your existence worthwhile. If you're a person who gets angry quickly it reminds the calm people to get angry once a while as well to get things done. And it reminds them perhaps how great other calm people are and makes them love these others a bit more. There is no good without evil and no progress without questioning the status quo. It doesn't matter in what way you're different from others- you are still adding something to the world (as long as you're not in ISIS and killings hundreds by the day). The advice goes something along these lines. The same applies to companies as well I believe.

Another comparison between companies and people is with respect to margins/capabilities of a person. We all hear a lot about the lazy guy/girl who doesn't work hard enough. (While this comparison does not have any underlying causative similarity- it is something that can be empirically observed.)   Success for a person is  a mixture of capabilities (which may be intelligence, talent in some field etc.) and hard work. The hard work and the capabilities might come for certain other things such as motivation by parents or training or natural DNA etc. but this is the bottomline. And the bottomline for companies is the ROA/ROE. ROA depends on asset turnover and margins. Margins show the capability of the company to charge high and sustain demand, and turnover shows the amount of work they out in- high asset turnover means that the company works hard to push a large number of products on to the customers. (ROE is closely dependent on ROA- applying leverage on ROA gives ROE). Of course success can be defined as being helpful to others in the case of human beings and contributing to the society in case of corporations,  but I'm talking about financial success.

Too Cool For Work

Well before I got into my first job, I remember teachers talking about how a casual attitude and a 'cool' approach to life affected your career prospects. I never took it seriously at that point of course. I remember a math teacher as far back as 11th and 12th grade talking about this. I don't remember it being mentioned by any of the engineering professors, but come MBA again senior HRs tended to value a serious attitude a lot more than a laid back attitude. I've had interviewers knowingly act over-casual in order to elicit a casual response from me. Something like 'I know you didn't perform that well during Sem 2- It's not a big deal though.. I mean you did top the class in the other Sems and getting low marks once isn't a problem.. you can fail once a while right?' digs a pit in front of you, and he awaits you to jump into the pit by agreeing with him. Having mainly worked on technical fields until the start of the MBA, I had become to a large extent not-so-serious. Now this is not a conscious effort I put in to try and have a chilled out attitude- it is just something that comes naturally. And it had nothing to do with how good I was at whichever thing I worked on. And in technical fields, to a large extent it doesn't matter how chilled out a person is. There are highly eccentric scientists and programmers who have even higher levels of success. Being weird or unsocial does not affect their career prospects too much as long as they are excellent when it comes to subject knowledge. Of course if they end up in managerial positions in the company, it can be more of a problem- even if the field is technical.

However when it comes to working in non technical fields, a casual attitude is a huge issue. And to be honest, after having a few months of work experience I can see why. There is an incredibly huge correlation between casual attitude and not doing your work properly. At this point I think I should clarify what I mean by casual attitude , so that the previous statement doesn't seem too obvious. Someone who plays Ludo in office irrespective of whether his manager sees him has a casual attitude even if he is the most hardworking guy and does his job way better than a pretentious guy who acts as if  he's working while browsing through facebook. Now that we have that clear, let me go through the reasons.

Firstly, it is relatively more difficult for non-technical fields to quantify how good a person is at his job. Thus we are forced to look at things like seriousness, attitude, language, dressing and so on- whereas a programmer might be hired just for his coding skills(which can easily be measured). And to be fair to HRs, fields such as sales and in fact any field which involves direct interaction with the client DOES require people to be well groomed, serious and all of that in order to be successful. Secondly, since people know that having a casual attitude is not looked upon favourably, it results in naturally less self-conscious people also acting serious. Thus, only those who really don't care about their career prospects end up with the casual attitude, along with a few hard working people who still haven't figured out the importance of acting serious.

And because of these two reasons (and possibly more), I do find that casualness is an amazing measure of a person's seriousness towards work. There seems to be a very strong empirical link. And So, I will try to be as serious as possible during my next interview which is up soon.  

Selling to the succesful

During my first few marketing classes during MBA (I'm a finance major btw) I noticed the word 'positioning' being thrown around about the same way 'synergy' would have been- had it been a class on valuation. While there were other aspects to marketing being mentioned, such as targeting and what not, positioning is probably what seemed most important. And at the time, Apple was the favourite case for the everyone. You just could not talk about positioning without talking about Apple and how it had positioned itself succesfully (a year later when Samsung beat Apple across most global markets, the hype died down). I had just bought a new phone and also done some research on new laptops though I didn't buy one and for me, the only thing that mattered were specifications- things like brand value did not mean much to me, unless of course the brand meant that I would face equipment failure. This meant that I would not really have the courage to buy a Micromax (and these days, a Xiaomi- however it's spelt) but I wouldn't bother much with the esteem that comes with owning an Apple product for instance.

After sitting through a few of these classes, I became convinced that there was no point in going for the premium products just because they were being positioned as premium products, and that I should only look for tangible value. What's the point getting fooled by marketers and their advertisements, right? But as time passed by, I noticed how our marketing professor would prefer premium products even though he knew all about branding strategies. The same was the case with my colleagues- for instance, some would die for a bottle of coke but would never touch pepsi. And of course there was the decent number of apple fanboys. From the point when I started realising this, even I started to value the intangible value that comes with owning something that others look up to.

So, why does this happen? Why does positioning work, even when we know deep inside that there is no practical difference between the features of some products? One reason (which isn't the main one) is probably that successful grown ups can simply afford to spend that bit more on the higher positioned product. There are people who want the best and they don't want to really compromise on brand image when they have the money. As a kid, I used to look for an enormous amount of value and do weeks of research before buying a new phone, but as of now I would just buy the phone which is most suggested by colleagues. A second reason (which still isn't the main one) is the frequency of purchase of certain products. Notice how even at moderately highly priced restaurants, you tend to see lower middle class people. In a country like India, this can happen due to the sheer size of population. People go out as a family to eat once a while, and when they do go out- they want to eat at a place that makes them feel good- a place which is slightly above their means. Which is why you tend to see slightly poorer people than you would expect at a restaurant of a particular class. The same applies to products, and keeping a product at a slightly higher price than you should keep tends to encourage such kind of customers (and the number of such customers is substantial). A third (not yet) reason is that a product/brand which can afford to spend a lot on advertising and has successfully been in the market for a large number of years is a relatively safer product/brand. This is particularly important in the case of services and not THAT important when it comes to products. I would get a loan from an SBI and sleep properly at night but I would probably be a bit worried if I took it from a co-operative society or something which might cheat me in the future and charge high interest rates. This isn't that relevant for products- Micromax phones for instance can be thrown away if they stop working, so it doesn't really affect your sleep that much. The third point is relevant to risk-averse customers in general (like me) and not so much for others.

The fourth and possibly the most important reason is that practical, successful people do not look at all the features and such things while buying a new product. For them, brand image is the most important- if people talk about it in a good way and look up to a product, then you buy it. Unless you want to be different- then you buy a super high priced product which no one talks about. Either way, you cannot go wrong while targeting successful people (By successful, I mean people who work hard earn high incomes). The world is never going to run out of successful people, and to add icing to the cake- they have all the money. So the bottom-line when you're setting up a brand is - target the 'successful' and position it as premium. Like BMW.  And while you're at it make sure that the product has features at least comparable to those of competitors (it's the hygiene factor).

Dating outside your league

If all of us could think objectively about other people with absolutely no bias, there is a fair chance that a guy's favourite girl may not be his girlfriend and the person he admires the most may not be his dad, but an uncle or even a distant acquintance. However, thankfully for us, we have our weird biases which ensure that it is indeed our childhood sweetheart (or the arranged marriage spouse) whom we love the most in the world and by some amazing co-incidence, we all have, individually, the best parents in the world. The probability that we all believe this at an objective level is very low- and if so, would greatly undermine human capabilities for reasoning. And I strongly believe that we know better than to be so naive.

I say 'thankfully for us', because had a person not had this bias, he would be completely shunned by the society. A guy who doesn't love his home-made food more than anything else? A guy who likes his aunt more than his mom? A guy who likes a girl he last talked to 10 years back more than his current wife? What kind of idiot would he be considered as? An honest idiot, but the degree of idiocy is unquestionably monumental. A completely logical(a person who thinks in black and white, without the grays) human being would really struggle to survive in this world. There should be an evolutionary explanation for loving all that is related to yourself- your town, family, close friends etc. more than things that you haven't experienced yet, or things that you have experienced but are not close to- for example people beyond your league. And the explanation is probably just selfishness- you like people more when there is a higher likelihood of them being useful to you, and not because of them being good human beings.

When it comes to a guy's relationship with his girlfriend, while there can be moments when the guy sincerely believes that there is this one person he came across due to sheer coincidence and happens to be the most amazing female in the world, it is unlikely that he thinks the same for a majority of his life. Think about it- out of 7 billion people, and around 3.5 billion females- say around 800 million of an age you can marry- of which say 100 million can communicate with you- and you think you found your dream girl after meeting a few dozen? The times when you sincerely feel so can be attributed to errors in human judgement (which are helpful at several instances, including at this aspect of loving your not-so-perfect partner) . A point to be noted here is that there may be people who do not really care if their partner is their ideal match, and a good number of people I am sure fall in this category- but I am a dreamer, and I write for dreamers.

As you might have figured out by the previous para, I do tend to think relatively more in black-and-white than the average person.

One thing to consider, given the things I've mentioned above is what you would do if you met a girl (or a guy in the case of girls; I've not mentioned counterparts elsewhere but please consider everything as being applicable to guys and girls) who is amazing and you do not think that you deserve her? On one side, you can try and 'get' her and if you were right initially, she might end up being worse off than she otherwise would've, with a 'better' guy and a happier life in general. And on the other side you can ignore her and not take the risk of (i) trying and failing to woo her (ii) successfully wooing her and making her life miserable. Point number two may not be considered by a lot of people, but a person who thinks in black-and-white- a person who believes in objective truth, will. Human (and animal instinct) is to go after her and so, it is not very feasible to not try wooing her, since your heart often doesn't understand our brain. Meanwhile, your judgement about the girl being in your league can always be wrong and hence it might be correct to err slightly on the side of trying to woo girls than to not. After all, losing out on a girl because of your mis-judgement is a bigger loss than trying for a girl and not getting her because she's out of your league.

 Unlike my other posts, I do not preach 'answers' in this post, and I'm still looking for an answer to this question. I've obviously tended to 'try' outside my league, but I've always had my reservations (and probably will continue to have them) and never gone ahead with 100% commitment. Perhaps the fact that such a question has popped up in my head will cause me to be inadequate for the girl in concern. But should it? This, and the other questions I leave to the reader to figure out. And as a friendly advice, even though it is good (probably) to think about such things, when it comes to practice, always go for it :P And in case you don't think you'll find the perfect girl/guy, the only thing I can say is that reading this post was a complete waste of time for you, unless you start dreaming because of it.

Value addition by finance professionals

For certain jobs and those particularly in finance, the value addition that a person can do doing a job can seem very minimal. In some professions such as, say front-end investment banking, I do not find much value at all. Their job is essentially to sell their clients large deals to ego-hungry acquirers who have too much cash, and to sugarcoat these deals with the word 'synergy'. Now, you (and everyone else) are allowed to disagree with this, but my opinion is based on studies which prove my point of view. It has to be said however that there ought to be studies which prove the exact opposite point of view as well. Investment banking jobs are the cream of the crop of course in the world of finance and are sought after by a pretty large majority, mainly because of the enormous pay and to a smaller extent the lifestyle. Do investment bankers add value individually that can amount to hundreds of thousands of dollars per year (or millions in some cases)by 'valuing' a few companies and doing a bit of math? Highly questionable, and even those who disagreed with me on the earlier point- at least some of them may agree with me here. The huge salaries paid to them are a mixture of the success of the firm as a whole (investment banking is an oligopoly and dominated by a few banks which can bend the rules and at some places even create the rules by lobbying). It comes down to the fact that there is demand for investment banking services and someone has to do it. In spite of all the hatred for investment bankers (kind of), I would myself consider say a Goldman Sachs to be the strongest contender to do a deal if I had to raise an IPO for my company, instead of doing it with some academics. It's a matter of experience in dealing with the lawmakers, the brand appeal that they have etc. and the technical expertise while important is not the most important thing. If investment banking is so lucrative(and pays big- seemingly irrespective of the number of people in the industry), what prevents everyone from being an investment banker and earning big? It's not really a technical field in any case (at least at the front end). Firstly, we know that these banks have so much demand that they can afford to pick the highest IQ people and those with the best backgrounds. This automatically makes them the best people to take up the job in the first place. But all intelligent people do not end up in these institutions. The amount of pressure- from peers as well as clients is so high that not everyone can survive. This ensures that the demand for such jobs never increases disproportionately and if it does, fellow bankers will become still more competitive to retain their jobs in case the low performers are kicked out. In summary, although the value added by investment bankers is low (and generally negative), there will be a continuous need for deal-making and thanks to their oligopoly and vast experience, investment banks will continue to add some kind of value in some way.

There are other jobs such as in technical analysis which are essentially useless. Technical analysis, as any academic with any sense will tell u- is a bit like homeopathy. It might seem to work for those who believe in it, but it has absolutely no scientific background. In such a case, a technical analyst adds zero value in general (negative if you pay them something for their research). Unlike in investment bankers' case where they got paid partially because of the oligopoly, partially because of their experience (which in turn is arguably because of the oligopoly), and partially because of just the demand- technical analysts earn money ONLY because of the demand for such research. And this demand comes from ill-informed clients who are unaware of the pointlessness of technical analysis. I would like to mention that I'm not a big fan of fundamental analysis (or any kind of analysis) since it is difficult to come up with accurate estimates of price- the basic methods of discounted cash flow or gordon growth are very simple (and using trading/transaction multiples for pricing is simpler) and can be used by any 10th standard student. There are no advanced formulae that have been proved to work consistently, but at least there is some sort of theory backing the analysis of fundamentals. If the reader is unfamiliar with academic finance, I would like to mention here that I'm not talking gospel- Efficient Market Hypothesis is one of the strongest theories in finance and was suggested by the Nobel Prize winning Eugene Fama- and it essentially says the same thing. One may also refer to the bankruptcy of LTCM, which had the biggest geniuses of finance managing a the hedge fund.

Many people are under the impression that finance is a technical field where you need to know formulae and theories and numbers and be extremely intelligent. This is false to a reasonable extent. Unlike the founder-CEO of a software firm - who would know the inside out of most of the technical details related to programming, the CEO of a big bank would have little idea about the technical details of risk management within the bank. He would obviously know a whole lot of things relevant to him, but even the CRO (Chief Risk Officer) of a bank may not know how to, say, apply extreme value theory to calculate the losses beyond a certain limit. What he will be good at is dealing with people, knowing the mood of the market, being a good managers and in general- having good intuition and ability to convert empirical evidence into sound decision (something I mentioned in my immediately previous post). To be honest, there are no formulae in finance that help you make money by applying them- it is definitely more of an art and less of a science. Even in the most technical risk management practices, (which I went through in FRM part 2) risk managers end up using empirical formulae for the best results. While, say a Black-Scholes can be assumed to be a near-perfect model (some assumptions regarding the distribution of a share price etc. are not 100% accurate), it cannot be used to make money in any way since the whole world knows about it. It is worth mentioning that the earliest traders who adopted the Black-Scholes formula DID make a lot of money but in a few months, everyone became aware of it. A CAPM formula or a Gordon-Growth formula are, needless to mention- useless in adding value to anything by themselves. But when in the hands of someone with experience working in an monopolistic kind of firm; when the guy understands how things are shaping up in the market and can make sound judgements based on his experiences- the formulae and the guy become more than a sum of their parts, and value is created and money is made.

I would argue that fund managers of mutual funds add zero value as well. In this case, the majority of studies point to the fact that the market as a whole tends to beat the top global fund managers well more than 50% of the time. However it must be noted that although an individual fund manager adds little value when you put your money with him, if fund managers were suddenly wiped out from this world, the markets would suddenly lose a major portion of their efficiency in pricing products and providing liquidity and so on. While individual fund managers do not add much value, fund managers as a whole are an integral part of the global markets. Similarly in the case of those who speculate with say derivatives on behalf of clients (like a derivatives trader or a hedge fund managers) also add value in a similar way. Although these people do not build physical assets such as a house or a car, or even a software- they do add enormously to the world of financial markets and thus to the world. The contribution of the financial markets to our well-being is of course beyond the scope of this writing!