Blossoming Backyard

International Placements: These two words can cause a lot of excitement in any student aspiring for an MBA degree. The chance to secure a job in a foreign country and start a life there is a very attractive proposition while job-hunting. Starting from higher salaries, better standard of living, opportunity to travel etc there are many reasons why people choose a job offer abroad.

Brain Drain was a serious concern for a country like India but recent statistics reveal a slightly different story. The Indians who have gone abroad in the past few decades and started families are slowly moving back to India. This phenomenon is attributed to the various opportunities that are sprouting up in our country. Gone are the days when people used to move to the ‘land of opportunity’ and try to realize their own version of the ‘American dream’. India, along with few other nations has announced its arrival to the developed world. With Indian firms consistently usurping their global competition, the time has come to realize the potential of a country like ours.

Ironic as it may seem, while hoards of entrepreneurs flock to India looking for an opportunity to start something big, our very own students are more worried about international placements. As a market, the potential for growth in India is extraordinary. The mindsets of our students however are almost ordinary. Moving to a developed country and working a 9 to 5 job was a good option two decades ago. The infrastructure and growth potential of our nation was mediocre at that point of time. Presently India is touted to become a superpower in the next couple of decades! The reason why NRI’s and their children are moving back to India is because in terms of opportunity, we are scaling great heights as a nation. A booming economy with diverse cultures in each state along with a population to match is our USP right now.

As long as students are concerned, there are the ones who don’t want to leave their homeland and there are the others who are aching to go elsewhere and seek fortunes. This article is meant for the latter bunch and all I intend to say is that, if its fortunes you are after, no better place to start than your own blossoming backyard.

Fy13 Guidance: Heed the Warning

This comment was first published in The Free Press Journal, April 14th, 2012

Infosys has never shied away from making tough statements. The events of today are somewhat a replica of what happened on April 15th 2009 too. In that year too, Infosys cautioned the markets about the uncertain economic climate globally and predicted a 3.1-6.7% lower revenues for the next financial year. The share prices dropped on that day by as much as 7.7%.

Similarly, today the markets sent the share price of Infosys spiralling downwards, by more than 9%. Principles of Accounting teach us to be conservative. Given the market scenario today; Eurozone uncertainty, Currency volatility, customers becoming more cost conscious due to the experiences of the past couple of months, all support the guidance given by Infosys.

There are calls by certain analysts who think that TCS should be taken as the benchmark for setting the Industry outlook for the next year rather than Infosys. When a good meaning friend warns you of an impending danger, you have the choice of either analysing the situation and taking heed of the signals that point towards the danger. Or you can change your friend!

Momentum and Overreaction in Indian Capital Markets

This article was first published in the Free Press Journal, April 16th, 2012 one of the most famous theories in Finance, the Efficient Market Hypothesis (EMH), Momentum and Overreaction are two phenomena experienced in different degrees in different markets across the globe.

Momentum refers to a phenomenon wherein the past winners continue to be winners and past losers continue to be losers in the short run, typically three months to one year period. Overreaction or reversal anomaly is that the losers in the past outperform the past winners and past winners turn into losers in the long-term, a period of three to five years.

Studies in the developed markets like the US, UK, Australia and Japan, and developing nations like Turkey and Brazil, have shown that due to the presence of either momentum or overreaction, or both phenomena, significant abnormal returns can be earned by the investors using simple strategies. The support for momentum is weaker in the emerging countries than for the developed countries. Also, Asian countries are found to exhibit weaker momentum than the European and American countries.

While both momentum and overreaction can be attributed to factors like size, risk, macro-economy, data mining biases, liquidity, etc. none of them are conclusive. Another strand of literature relies of the investor psychology to explain the two trends.

Investor Psychology

Psychological characteristics of investors might explain the reasons that could be behind over-reaction or momentum. Indian investors being more emotional in nature, psychological aspects may be very important in explaining the market trends.

One of the most popular investor characteristic is “overconfidence”. Overconfidence makes the investors overreact to any news. If there is good news about a stock, the investors will drive the prices up by buying more, and will continue to keep buying for some time due to overconfidence. According to this logic, the momentum will be higher in Bull markets.

On the other hand, momentum may also be a symptom of underreaction. That is, prices adjust too slowly to news. The underreaction of stock prices due to news (for example, earnings announcements) may cause the momentum, since a slow diffusion of information among investors could make the path to the ‘correct’ value of the stock longer than expected. But, for longer periods, an overreaction of stock prices may occur due to extrapolation of a series of good or bad news, especially if investors are overconfident.

Underreaction could also be a result of either the conservative nature of the investors or lack of confidence. The conservatism bias suggests that individuals underweight new information in updating their expectations. If investors act in this way, prices will tend to slowly adjust to information, but once the information is fully incorporated in prices, there is no further predictability in stock returns. Investors, who lack confidence and hesitate in making a decision, would also underreact to information, causing the prices to take longer to reach their correct value, hence exhibiting momentum.

It is also found that bad news generally have the effect of making the prices more volatile than good news. Also, people act faster on good news than on bad news, as they are averse to losses. They do not mind realizing profits, but dislike realizing losses, hence keep postponing them. Both small as well as professional traders have been found to hold their losing portfolios longer than their winning ones. This could be interpreted as negative feedback strategy with respect to past returns, which could lead to reversals in prices.

Studies have pointed towards other factors like self-attribution self-deceptions, emotion-based judgments, framing effects, and mental accounting, to explain the momentum and overreaction trends.

In a study which was published in the International Research Journal of Finance and Economics, my peers Chakrapani Chaturvedula and Nikhil Rastogi from IMT Hyderabad and I studied 156 months NSE listed stocks data for indications of momentum and overreaction effects.

Momentum in NSE, India

We find that momentum strategy of buying the winners and selling the losers results in significant positive returns for the interval of 3 months for all categories of stocks, low cap, mid cap and large cap (Table 1). However when we take the higher intervals like 6 months and 12 months, there is no momentum in small cap and medium cap stocks. But, for large cap stocks, it persists for all the intervals up till 12months. This result is surprising since these stocks are tracked more by the analyst and so information should be quickly incorporated into the prices resulting in no momentum for this category of stocks. The result is also in contrast with many previous literatures, which points towards existence of momentum in small cap, rather than large cap stocks.

Overreaction in NSE, IndiaTable 2 shows the results for Overreaction after accounting for size. We find no evidence of over-reaction for the small and the large cap stocks while we consistently find it in the case of mid cap stocks. Our results for the large cap stocks are not at all surprising as the large cap stocks are widely tracked by analysts and any new information would get disseminated very fast. However, the absence of over-reaction in small cap stocks is very surprising because small cap stocks, by virtue of being less traded and having slower dissemination of information than large or medium cap stocks, was expected to show signs of over-reaction.

The evidence for overreaction is present only in mid-cap stocks. This is supported by the under-reaction hypothesis. What we can say is that in India, stocks under-react to new information initially, thereby exhibiting momentum in the short run. But, mid-cap stocks over-react in the long run.

What’s in a Ranking? It Is Just a Lack of Clarity of Thought!

– By Abhinav Kanagat. Abhinav is an alumnus, class of 2012 (IBS Hyderabad). He has just started with his first job. Abhinav is a budding musician and was part of the band, Diatribe. He was also the President of the Sport Club – V.A.P.S at IBS Hyderabad.

Education should never be thought of as a one-sided affair; teachers teaching and students learning. That never happens. Even at school, it is the students who are driven and focused, who score well and make something of themselves. Clarity of thought has to exist to enable learning and application. Without clarity of thought, we’re simply no-good.

There is this lack of clarity that I have seen among our generation. I dare not generalize it, albeit I have seen it, so I know it exists, and in a large chunk of the population. I have met students during my time as an MBA pursuant, who had absolutely no clue as to why they jumped to an MBA right after their under-graduation.

This trend is increasing, and thus is becoming a cause for concern for not just other students, but also managements of various b-schools spread across the country. What doesn’t help is the lack of career counselors in the country or the lack of will of the so-called torch bearers of education to do something about it.

It could still have been easy to tackle had the quality of education being provided to these young impressionable minds been of certain standards. This however has become the Achilles’ heel for the higher education system in India, as more than 2000 institutes have sprouted up for MBA alone, with no set principles on quality education to hold them back.

We have regulatory bodies in place who are probably (and hopefully) working overtime to ensure that certain standards and parameters are met or the colleges which do not meet the requirements are either forced to meet them or are closed down (like many in the recent past). But even they become helpless when students start enrolling into colleges, based on the rankings given by the various consultancies, magazines etc.

What are these ratings/rankings based on? The placements, infrastructure, faculty pool and student pool in general, right? But then how is the rating done? How are the benchmarks set? Who defines what is good or bad, if the benchmarks are worth being benchmarks or not?

I ask these questions because there are many institutes in India which, though not recognized by the governing bodies, still manage crazy placements. These however, won’t even get a mention in the rankings! Why? The answer lies in what the target audience wants to see.

I say this with so much confidence because of the comments people post on the online versions of these ratings and rankings. Wherever one feels the ranking/rating is not up to one’s expectation, it becomes easy to claim bias.

If this is the case, and everybody knows it at the back of their minds, why do people still check rankings before enrolling into institutes? It is simply because the ‘system’ has become as such.

There are hundreds of ‘coaching centers’ across India which declare they know the tricks to crack competitive examinations. Some, no doubt add a lot of value in terms of the new approach they set their students on, but many others are just in it for the money – which mind you is HUGE!

The whole shebang of “watch out for the rankings” starts here. I’m not saying that the system is wrong and should be done away with. I’m saying we need more forums for students to express the kind of a value addition the institute has provided to them since they joined it. What has been their experience, and in their view, if a) they are now clear about what an MBA stands for and b) if they think that the learning were worth it. This, to not discount how the institute treated them, rather to open up to future students a platform in order to provide them a better insight and understanding in order to set their expectations right from the word “go”. For it is only the ones who have gone through the grind of an MBA degree course who know and truly understand if they were right in taking the plunge right after their under-graduation or not.

Such interactions promise to provide confused young adults with some sort of clarity on what an MBA actually is all about and whether or not it is better to learn the ropes of the corporate world first before jumping on the bandwagon and storming into b-schools. There is a reason why ‘freshers’ are not allowed to enroll in well established b-schools abroad. The is a sense of certain maturity that the course demands, and such maturity comes only after one has been responsible for earning his/her own bread for a while.

Nothing changes over-night for sure, but we do have institutes in India too which follow the same principle. B-schools like ISB Hyderabad are held in such high repute because they take in students who are aware of themselves and their surroundings. This not only helps the employers when they come for campus placements, but the students as well; as their expectations are more or less set based on the market environment and based on their experience.

All I’m trying to say through these examples is that we are in dire need of educational reforms in the country. The fact our society is dependent in nature still, just presses the need more.

When a student joins an institute, s/he picks the best option not just as per them, but also as per the exposure and the opinion others have about it. When a fresher joins an institute, until and unless s/he has an inherent talent to lead, s/he cannot expect packages in the millions. There is always a learning curve involved. Sure most will get into the millions a few years down the line, but that will only happen once they prove their worth to the organization(s) they work for.

Imagine yourself as a recruiter who goes to any campus for recruitment, will you pick a person who has no experience, solely on the basis of his/her grade point average? No. You will want to know if s/he can fit into the work ethic of your company. Agreed it is a little easier to mold freshers into the working environment of most businesses, but it is relatively smarter to hire ones with work experience, because they will bring an aura of maturity along with them to the organization.

Experience teaches one how to live and survive in the toughest of conditions. It is this experience that most MBA pursuants and graduates lack. There have been many comments from CEOs of top Indian and Multi-National companies that the standard of Managers being churned out from the thousands of B-Schools across the country has gone down considerably. This has a bull whip effect on campus placements, and preferences and priorities change.

It is therefore ESSENTIAL that one asks oneself why s/he wants to do an MBA. If the answer to this question is simply to make more money, then I request such individuals to reconsider. Even the best of the best b-schools don’t promise millions of rupees to freshers. It is up to the individual to prove their worth.

If one is so naïve as to think that just because s/he joins an IIM or an FMS, that one’s placement with a 7 figure starting salary is guaranteed, one could not be more wrong. Which brings us back to the first point made in this Blog – Teaching can never be one way traffic.

While deciding which college to enroll for, if one knows their reasons for pursuing MBA and has set practical expectations, I guess it becomes immaterial what the college one is joining is ranked, for even a college ranked 100th on the list has recruiters coming to them. If the aspirant is worth it, s/he will get what s/he deserves.

The only consideration one should have during the admission process is whether or not the institute one is joining, is going to add value to him/her or not. If the aspirant is confused about the answer, it is best s/he look elsewhere.

Ratings may be a guideline that most aspirants go by, but it should not become the sole directive for joining a b-school.

If you know what you want from life, apart from things not under your control, nothing can stop you from achieving your goals. The going may be tougher in some places, but all experience is good experience, as you will then hold an edge over others who have always had a smooth sailing and are put in a tough spot. Going through tough situations makes one sharper and smarter. It opens one’s mind to new ideas.

Such is the kind of managers the world wants, people who can literally think beyond the boundaries of the books, and become visionaries of the future. If average is what one wants to be, then there is no help anywhere for you.

There is another thing that I would like to mention here; once you have made a decision in life, STICK TO IT. There is no point cribbing about what could have been if this or that had happened. You took a decision based on the circumstances you were in, and now is the time to back yourself. Cribbing is very easy, facing difficulties is tough, but true winners and leaders are not born out of easy lives. Strive always to get the best out of wherever you are and add value to yourself.

There is no turning back in life, and there should never be the need to turn back. If you believe in yourself, that is all that the world cares about and respects.

So when you decide to get a post graduate degree in management, be selfish and think! No matter where you go, keep adding value to yourself and your future shall be bright. Laziness has no place in the 21st century.


Written by Kishor Kumar Dash, alumnus of IBS Hyderabad (Class of 2004).

“Delegation” a quite commonly used jargon in professional environment. When you go to your line manager to discuss about how overloadedand stressed you are because of having lots of task in your plate, the simple answer normally you get for this problem is “Delegate”. Delegation a simple word or skill or concept or management style (whatever you may call it) though sounds a very easy solution provided by your manager but this could in reality make or break your head. If applied effectively the benefit you could get is immense and some very small mistakes in delegating could make your life miserable.

Going back to our earlier example in the previous blog on “Multitasking vs. Single-minded focus – continued”, “Effective Delegation” is certainly the perfect solution of addressing your catch 22 situation. For a moment let’s assume you have two brilliant resources who are as good as you are in understanding the essential requirement for your client presentation and also they are quite capable of handling the client issue. What an awesome situation you are in as a Manager? As an obvious choice you would assign the Presentation task to one of your resources and the client issue to the other one. Provide your inputs in between, monitor the progress and and finally have both the assignments reviewed by you. The outcome, you are pretty much prepared for an important presentation and also you made your existing client very happy by providing a very quick resolution to the issue. This is brilliant, isn’t it? Don’t you think this to be a very simple solution for a very complex situation, we were discussing earlier which was so difficult to address and could have serious impact on you as a professional?

The myths, delegation is quite simple and you can invariably identify someone and then do a little bit of monitoring and review which would ensure that your work is done with reasonable quality. This approach which is widely adopted by several professionals, certainly does manage to get the work done for one or few instances, but it lacks the objective and also suffers from lots of limitations (we will discuss later in detail).

However the reality is, this could be made simple but it would not come so easily and certainly a price tag is attached to it. The Price is nothing but the time and effort you need to put to build the team around you who is at least as good as you are, if not better than you. The essence is, to make the delegation effective you need to have (rather build) resources that can be reasonable back up for you (Assuming you are extremely good as a manager/Professional J).

For me delegation is just NOT a finished product/solution rather this is a process to build a finished product/solution. Let me explain a bit further, in my understanding just sharing your responsibilities among two of your capable resources, is NOT necessarily a perfect example of effective delegation. Rather making them capable enough as your back up is Delegation and this does NOT happen overnight, this is a continuous process which involves several steps (will discuss in the later part) to actually build your so called capable resources.

I think we are now fairly clear on what is delegation and its importance for professionals. Then the question comes why people are NOT so comfortable with Delegation which makes their life so easy? One thing is certain that to make your delegation effective you require putting lot of upfront efforts, for which most people would obviously not be very keen on. Some people also do get afraid of losing the importance they used to enjoy as a key resource if they create a good back up for themselves by delegation. Trust me this is also one of the most important factors of not initiating the process of building skilled & capable resources around you. All these concerns can be addressed by making people realize the long term benefit everyone could be enjoying as a result of this whole process of effective delegation.I would be extremely happy if I can contribute a bit through this article on addressing the major bottlenecks and making people see the long term benefit of delegation.

This whole process of Delegation has to go through several steps starting with identifying resources for delegation, identifying the task to be delegated, training, grooming & mentoring, monitoring and closing.

When you start the process of delegation, the very first obvious question you would face is “Which task/activity you can delegate?”.  There are several tasks at your plate, but you cannot just pick up any task that could be delegated. This step needs a fair amount of analysis by addressing the below questions.

– Whether the task is confidential and is not supposed to be shared with anyone?

– Do you really feel there is someone capable of doing the task?

– Whether the task is recurring or not?

– How important is the task and would you be able to take a risk in terms of quality of outcome?

– Would you be able to afford time on mentoring and training the resource?

– Is the task, if given to the resource would add any value to him/her?

– Whether you are going to see any long term benefit for the team, you and the resource with this delegation?

These are few of the many questions you might need to address before you finally select the task to be delegated.

Once you select the task then the next obvious question is “who is the resource?”. Though in quite a few occasions you would already have someone in your mind when you start shortlisting the task you need to delegate. However it is worth discussing the below factors/questions before you finalize the resource.

– Who are the resources you think could be able to take up the task?

– Is the resource (s) really capable of taking up the additional responsibility?

– Was she exposed to the similar kind of task earlier during her current or previous roles?

– Did she possess the basic level of understanding, knowledge and skill set to take up the task?

– What is the bandwidth available with the resource?

– What would be impact on her current/regular tasks assigned to her?

– Would this demand a significant reallocation of tasks within the team?

– Does it by any means supports to meet the long term objective of her career aspirations?

These are few of the many questions you have to address before you select the resource for the task to be delegated. Though you might get favorable response from all or most of these questions still that would not be sufficient enough in identifying the perfect resource. The reason being, the most important question is still not answered, i.e., whether the resource would really be excited to take up this additional responsibility?The resource might be extremely capable and have everything within her to take up the additional responsibility/task, but if she is not excited enough for this, I am sure the outcome of delegation would not be encouraging. Hence we need to be very careful and need to see the bigger picture by taking a combination of potential & willingness of the individual and the alignment of the long term perspective of both the individual and off course of the organization.

Identifying the right resource and allocating the task to the individual is not the end of the identification process. One more important step is clear communication with the resource. I have seen people complaining on several things post to agreeing to take up an additional responsibility. She keeps on complaining like,she is unnecessarily given more work, she is doing a favor for her manager, her manager doesn’t carry his responsibility rather he just passes on his work to others, she is overburdened etc. Also some of them get extremely stressed as they think “can I deliver this task effectively?”.

Before these things come into her mind you need to have a clear communication with her making her understand the rationale behind this delegation, why she is chosen for the same (this would make her feel important), how you would still be involved and what kind of support you would keep on providing (this would add a lot to her confidence level), how this would help her building knowledge and other skill set and most importantly what is the long term benefit she can expect if she does this well. In addition you also need to ensure that the resource is not overburdened, either by sharing some of her tasks with her colleagues or delegating few of her tasks to her subordinates (this would create a chain of delegation process).

With this we are done with the most important and complex part of delegation. Then the process involves training, supporting, grooming &mentoring, motivating, monitoring and tracking till the end. All these steps overlap each other and more or less goes hand on hand.

Let us discuss the key points we need to focus on now to make the delegation very effective.

– Make sure that the person understands the task properly from the very beginning. There should not be any ambiguity and all the necessary information should be shared. (e.g., If you are asking someone to prepare the final client presentation then brief on the background and also pass on all the relevant communication you would have used to prepare the same)

– Define and elaborate the desired outcome of the task very clearly. (e.g., for the client presentation provide a clear map of what are the important factors needed to be included)

– Make her understand the importance of the task and its impact if something goes wrong. (e.g., make her aware that the quality/content of this presentation could make or break the deal for company)

– Set the responsibility and accountability very clearly without impacting her confidence level.

– Define the key milestones and monitor the progress at various milestones at the same time don’t involve yourself into micro management. This might irritate her, at the same time this could impact the creativity she might bring in.

– Ensure that the person is aware of her organizational limitations she needs to adhere to. (e.g., as officially you are the owner of the project/task, she should not reach to some department/ person directly which might not be taken positively by others).

– Do not wait till the end for sharing your observation and feedback. Provide your feedback and observations as and when you come across.

– Keep on motivating and provide her the comfort level that you are always reachable for any query and make her fell that they enjoy your full confidence.

– If the job is well done then give the full credit of the task to her. If the job is not satisfactory then you should also share the accountability equally. Have a very thorough discussion and identify the key learning’s.

If you follow all these steps very diligently I am sure you will get the desired outcome (at times more than desired) in 9 out of 10 cases. As we all know it is easier said than done, it is certainly not an easy thing to follow all the steps to the perfection. At initial stages most of us don’t enjoy the full success of delegation as it is certainly a tricky skill to become a master of. But failure in delegation in certain instances should not stop us indulging in delegation. We must take away the learning’s from our mistakes and should give our best to master this skill. Once we get a strong hold of this, the outcome is certainly immense which we all know.

These days’ successful corporate leaders have certainly mastered this skill and use the same very effectively.  A Leader off course uses delegation and also inspires his teams to use this effectively which ultimately gets implemented at various level across the board. This not only help him grow but also make his team, segment, business grow. However one of the most important contribution of “Effective Delegation” which most of us do NOT realize at the outset is “This creates a pool of professionals providing back up for each other, making the life of HR easier in succession and attrition management and building a sustainable human capital with skilled and talented professionals which ultimately creates value for all the stake holders of the Company”.

There is still a different school of thought against building so much talents around could make your life difficult in managing their expectations and leading to lots of attrition.  However, I completely disagree with this and would like to cite the example of ICICI and K V Kamath which is considered to be one of the biggest ever success story in the Indian corporate world on delegation, mentoring and creating a pool of talented professionals. We all know finally ChandaKochhar became the successor of KVK and what a successful stint she is having till date. Though few of the extremely talented professionals from the team KVK built around, are not serving ICICI now but they are certainly great assets to the Indian corporates and currently heading other Institutions like JPM India (KalpanaMorparia), Axis Bank (Shikha Sharma), and Future Capital (V Vaidyanathan) etc.

To conclude “Effective Delegation” not only contributes to growth of an Individual, Team, Segment, Business, Corporates and Stake holders but it also has a significant contribution on the  growth of the Industry as a whole.

Know Risks Before the Plunge

This article was originally published in Postnoon on April 13th, 2012

On my way to ISB on Monday, I saw a motorcyclist speeding on the Gachibowli road hit a car taking a u-turn. The car was damaged and the motorcyclist suffered good deal of injuries. On enquiry, the rider said that he was in a hurry to meet his sister who was not well.

This got me thinking about the risks people take in their lives. Even though we read about accidents due to speeding very frequently, we still drive fast to save a few minutes. A cricketer tries to hit a six with every ball, taking the risk of getting caught on or near the boundary.

An investor faces similar risks. In order to earn higher returns, investors often take risks which may not be compatible with either their risk appetite or risk taking ability.

Taking a sip of the coffee, Prof. Nicky asks Srikanth, “Have you watched the movie 3 Idiots?”

Srikanth: Of course. Who hasn’t?

Prof. Nicky: Do you remember the scene where ‘Virus’, summoned Raju and Farhan to his office and told them to leave the company of Rancho?

Srikanth, proudly: I remember the entire movie, dialogue by dialogue. I’ve watched it 23 times.

Prof. Nicky: And how many times have you read Yasaswy’s book on investments?

Srikanth, descending down to the earth: Uhhh… Prof. I was about to start reading it the coming weekend… I Uhhh… thought… uhhhh…

Prof. Nicky: Ok. Coming back to 3 Idiots. So what was ‘Virus’ trying to explain to Raju and Farhan by comparing the income of their families with that of Rancho’s?

Srikanth: Ummm… I guess he was trying to tell them that they cannot afford to be thrown out of the course as passing and getting a good job was very important for them. Their families were not as well to do as Rancho’s.

Prof. Nicky: Exactly. This means that they do not have the risk taking ability, even though they have the appetite. Generally youngsters, with lesser responsibilities, single status, have more appetite to take risk.

Srikanth: But an investor wants returns. How are all this connected to returns?

Prof. Nicky: Alas, that what the investors don’t understand and that’s what I am trying to explain to you. There are different asset classes like Bonds, Equities, Commodities, Gold, Derivatives, Art and Artifacts, Real-Estate, etc, available for an investor to invest in. Each one of them has a risk profile of their own.

I can see that I am losing you. Let me explain.

Risk has a negative connotation in our day to day life, but not entirely so in the case of Investments. The uncertainty or deviation from expected returns is known as risk in the case of investments. For example, if you invest in the shares of Reliance Industries Limited, with an expectation to earn 20 per cent return in one year, an actual return of — 30 per cent is a deviation from the expectation, just as a return of 30 per cent.

If you take the case of fixed deposit in a bank, you get as much as you expect. So it is riskless, unless the bank goes bankrupt. But in the case of Reliance, your returns would depend on the performance of the company, the dividends, the future projects etc. So the uncertainty is much more.

Srikanth: I get it. So if I do not have the risk taking ability, I should not put my money in risky assets. But if I do have the risk taking ability as well as the appetite for it, I can invest in risky assets, though I should be aware of the risks that I am taking.

Prof. Nicky: Ah… there you go… Perfect… I couldn’t have put it better!

Digital Responsibility


The advent of the internet has led to a lot of significant changes in our lifestyles. Starting from our personal networks to shopping everything has been digitized, so a simple tap on a phone screen can do wonders in today’s era. The level of connectivity has increased to such a large extent that people are unable to survive without their gadgets. Not being connected simply translates to missing out on the innumerable opportunities that can arise. As a society that has traditionally given high value to socializing and networking, Indians are exploiting the fruits of the digital era to the maximum.

However the internet does bring with it certain complications which are yet to be understood by the greater public. The level of content monitoring in India, as of now is very low as the system has just been put in place and miles behind passing acts like the SOPA in the USA. There have been many instances wherein employees and students have been punished for posting negative comments about their organization on Facebook. This has not deterred people from posting personal information which need not be publicized. Blame it on the excitement of receiving good news or the nonchalant attitude of Indian netizens but the issue remains that people are not concerned regarding the permanence of their digitized data.

Some may argue that they aren’t ashamed of anything posted online and thus not worried about any repercussions, the fact remains that the information is available on the web. It might just fall into the wrong hands at any point of time and the consequences would be disastrous. Marketers are using the online medium to reach more customers nowadays. Platforms like Google and Facebook help advertisers reach specific segments of customers based on all the available information that people voluntarily upload. Google actually customizes advertisements based on keywords in a user’s email! The Will Smith starrer “Enemy of the State” comes to mind where a governmental agency spies on its citizens, Google however is not the government and that isn’t comforting to know!

These views might seem overtly cynical or paranoid but the point I’m trying to drive home is that, when it comes to online information sharing people have to learn to be more responsible. Thanks to our smart phones loaded with applications our movements, choice of restaurants, entertainment avenues etc can all be tracked on a hourly basis. Our world is quickly morphing with the digital space and self-censorship seems to be the only way to preserve the sanctity of privacy.

Value Investing and the Margin of Safety

Co-Author: Mallikarjun Gaddam

This article was originally published in the business section of on April 13th, 2012

During early 2009, a mutual friend, Nicky, who is an expert on Value Investing, asked us to invest in the shares of Patni Computer Systems Limited.

Each of us bought 100 shares on his insistence. The share price of Patni was around Rs 97 on the day we traded. Today, the price of Patni shares are Rs 490 each and each one of us has made a cool profit of over 400 per cent in about two years.

Of course, we are grateful to our friend. But we are also very intrigued by the concept of value investing. We went back to Nicky with loads of questions.

Nicky: Value Investing is basically putting your money in stocks which are trading at prices lower than they are worth.The important thing to keep in mind is that, the market may take a long time to realise the worth of the stock and hence you might have to wait for a long time before you can sell the stocks and realise the profits. During this period, you must not panic even if the stock price falls, as that would be a temporary phase.

Nupur: But how do you know which stocks fall in this category?

Nicky: The key is the balance sheet. Start looking for smaller companies, small-to-mid-cap, that are trading at a discount to their intrinsic values. These stocks are generally.

Mallikarjun: But how do we know which stocks are trading at a discount to their intrinsic value?

Nicky: Let me take you through how I discovered that Patni was a ‘value’ investment. Patni had a market capitalisation of Rs 1,300 crore (Rs 13 billion) in February 2009, with almost zero debt. They had investments and cash worth Rs 1,177 crore (Rs 11.77 billion) and Rs 293 crore (Rs 2.93 billion) respectively. This alone translated to Rs 108 per share, 11 per cent more than its market price per share at that time.

Nupur: That is excellent from our investment perspective. But why was their stock price lower than Rs 108 then?

Nicky: That is because a lot of really good companies are often neglected and are out-of-favour with the investors due to their lack luster performance in a particular period. They are often a misunderstood group of companies.

Mallikarjun: So we must thank you for identifying Patni and believing in the company and its long-term potential.

Nicky: Actually Benjamin Graham would frown on me for asking you to make the investment at Rs 97.

We both looked at Nicky, perplexed by his last statement. We clearly thought that we bought at a great price!

Nicky: Graham, the father of value investing, believed in a rule of thumb. He called it the “margin of safety”. He would buy companies which traded at a minimum of 33 per cent discount on their Net-net working capital.

Mallikarjun: Net-net Working Capital?

Nicky: Yes. Graham calculated Net-net Working Capital as the difference between the Current Assets of a Company and its total liabilities (long term plus short term). Then he would take 67 per cent of this value to calculate the stock price at which he would want to buy the stock.

Adopting this method, Graham would buy the shares of Patni at Rs 90 only, calculated as per the balance sheet of Patni on December 31, 2008.

Graham did this to avoid any risk of losing money. Intrinsic value is often very subjective, and depends on the assumptions of the person doing the calculation. In order to protect ourselves from the uncertainty of the true intrinsic value, the margin of safety should be large enough.

You must not feel that you took any unnecessary risk though. As in the case of Patni, the investments and cash made up for almost 65 per cent of the total assets. This means that the quality of assets that Patni had, was very high.

In contrast, there are other stocks which might meet the margin of safety requirements as per Graham, but their assets might constitute more of inventory and debtors. Inventory might become obsolete and debtors might become bad debts.

Thus the quality of assets and the industry also needs to be considered before deciding if the stock is a ‘value stock’ or not.

Nupur: Your explanation does not mention earnings anywhere. Does it mean that earnings are not a consideration in value investing?

Nicky: No way am I stating that earnings are not relevant to value investing. Earnings reflect the efficient use of assets deployed, represented by asset turnover, inventory turnover ratios.

The analyses of these are important to know if the company has the potential to perform in the long term. Earnings and balance sheet figures together go a long way in ensuring that as investors we do not lose.

Nupur and Mallikarjun chuckle together: Well, as the sage of Omaha says: “The first rule is not to lose. The second rule is not to forget the first rule”!

Nupur Pavan Bang is a Senior Researcher at Centre for Investment, Indian School of Business, Hyderabad. Bang can be reached at Mallikarjun Gaddam is a Researcher – Value Investing, Indian School of Business, Hyderabad. Gaddam can be reached at

Innovation: the solution to all swords

Each and every one of us is a result of four billion years of evolutionary success; still many of us die as copies of others.

Have you ever thought why is there not an Einstein within you or for that matter an Aryabhatta of the modern age? Why is it so that you are not able to give the society something that has not been given by anyone else?

When many of us run around finding magic swords to turn the world upside down in a single day, surprisingly there are some flip side thinkers that bring the anti-conventional yet the best solutions. How many of us know the fact that Mr. Ratan Tata started his career on a steel shop floor, Mr.Sunil Bharti MIttal started his career going around on a scooter at the age of 18 selling telephones. In the world where we all are fiercely fighting the battle royal of Entrepreneurs, infectious impatience is what is driving the market, the marketers are constantly on the move trying to find the next big fix, being conventional is almost equal to being nobody. It’s time to unleash the inner innovator, differentiate from others to make an identity. The world is all gates with endless opportunities its time to explore. We are living in a world where we have thousand’s chasing us and many on the wait to copy and rip apart the concepts. Give it a thought: is it not true that many desire your failure intern to gain success. It’s those who think beyond the conventional to innovate, feel the sensations and pass the adrenalin with a gush, generally win the battle.

Then comes up the main question how do we do it?

Creativity is learnt throughout the life, it’s about those who can join the threads together in a proper manner to build a shelter. In the running world where we maximize the process of repetition rather than improvising we all come down under the same umbrella. Most of us go to the same workplaces use the same process, design the same charts, and perform the same task and finish up the day: we never tried to find what could have been a better way to sort the task. The process of exclusion becomes more prominent than the process of inclusion. So the main task of innovation is ripping apart the fruit to gain knowledge, act like a child, we should be completely open to expand the learning curve. It’s these experiences only that form a sound base of brainstorming when we innovate. If replicas were to win the battle, age would have been the only key to success. Innovation lies in hands of those who can mix and match the unorthodox, think like a newly born kid and those willing to open the prisons of their mind for ideas to flow in.

In the modern era where individuals have transformed into groups, where personal goals have become secondary to organisation goals, creating a mark has become very important. It’s about those who have the competency to match the organisational chemistry, are the one’s calling the final shots. Most of the individuals are defined to operate in two modes: open and close. It’s the basic combination of democratic and autocratic rule respectively. The ones in the closed act like a tunnel pass and pass feel no change, while the open act like skies: no boundaries.

The great Mr. Steve Jobs “Innovation Distinguishes between a leader and a follower”

Do Cash Holdings Impact Funds’ Performance?


Co-author: Dhruva Raj Chatterji, Senior research analyst at Morningstar India

This article was originally published in the Economic Times, April 12th, 2012

The debate whether cash calls of actively managed funds have worked in their favor or not has been on for a long time. We tried to delve deeper and check if equity funds in India observe better performance when holding higher cash during market downturns; or do they end up missing out on sudden upturns in the market.

In India, fund houses like Escorts, Reliance, Sahara and Taurus are known to take cash calls, with cash holdings in excess of 20% on many occasions. It should be noted here that the excess cash holdings played out mostly in the period of 2008-09, when the financial crisis was underway.

Post that period, cash calls by most funds have tempered down substantially-but then again, so has the adversity in stock markets.

On the other hand, fund houses like Fidelity, Franklin Templeton, HDFC and Tata have maintained lower cash holdings, in the range of 4-8%, over the past five-year period, across most of their funds.

Taking two categories of equity funds -large-cap and small- & mid-cap -we compared the highest cash holding funds with the lowest cash holding funds. In the case of large-cap funds, the numbers reveal that the top 20 high cash holding funds held about 9% more cash on average than the bottom 20 cash holding funds over the past five years, but have earned about 1.2% lower returns (annualised) than them over the same period.

The performance is particularly poor over the 3-year period, where their returns are about 7% lower than those funds with lesser cash holdings, within the large-cap category.

We find a similar pattern in the case of small- & mid-cap funds – although much starker. It seems that the top 10 funds with the highest cash holding within this category earned about 5.5% less (annualized) than the bottom 10 funds with lower cash holding over a five-year period. Over three- and one-year periods, they earned approximately 9% (annualized) and 6% lesser, respectively.

Cash also seems to have a varying impact, depending on the category of funds. Large-cap funds, by virtue of investing in more large and liquid stocks, are able to buy and sell the shares quickly, and hence the role of cash becomes less important.

On the other hand, in the case of small- or mid-cap funds, keeping excess cash might mean losing out on an upswing, as the lower liquidity of these shares would result in the prices zooming up due to any sudden demand. The vice-a-verse is also true.

That is, in the case of illiquid stocks, selling might not be easy when there is a redemption pressure or a downturn. This probably explains the higher historical average cash holdings of mid-cap funds when compared to their large-cap peers.

We observe that the key risk in taking cash calls lies in deploying it at the right time. Fund managers often miss out on a sudden upturn.

Clearly higher cash holdings have resulted in lower fund returns in the following months, especially when the markets have turned around very suddenly. Again, here the impact seems to be starker within the small/mid cap fund category, where there are instances when the funds with high cash holdings have underperformed those funds with lowest cash holdings, by more than 3% (on average) in the following month.

On a closing note, besides the cash holding, there are other important factors, too, which have a bearing on the performance-like the quality of the fund management team, the processes in place etc.

However, avoiding high cash calls and remaining more invested across market cycles do point towards a more disciplined approach in investing. Moreover, the approach helps to neutralize the risk of being caught on the wrong foot, especially in the event of a sudden upswing in the market.

As legendary fund manager Peter Lynch once said: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

Dhruva Raj Chatterji is senior research analyst at Morningstar India

Nupur Pavan Bang is senior researcher at Centre for Investment, Indian School of Business, Hyderabad