Gold and Wishful Thinking

There is much criticism of the current Islamic financial paradigm. One criticism is that an authentic Islamic finance industry is not possible with the proliferation of fiat currency. Since the Prophet’s time, the currency utilised was the dinar or dirham, the gold or silver coin. This bimetallism ensured that the opportunity to keep producing money was limited and therefore the possibility of inflation was reduced, as excessive inflation is when there is too much money chasing too few goods. Moreover, by limiting the amount of money in the economy, inefficient use of money on profligate investment can be reduced.

4 recommended books for equity analysts

For many people who don’t start their careers at top sell/buy side firms in developed nations it is an uphill battle to reach international standards in their work. The only solution then it to leverage on other people’s experiences and try to learn from them. As they say, a book can have a person’s lifetime experience in it. Thus I would like to recommend four books for equity analysts which I consider to be very helpful.

So you want a job in equity research?

One of the very common question experienced analysts get from young graduates goes like this

“I studied XYZ in University. Can I get a job in Equity Research if I complete CFA Level 1? I am very passionate about research.”

I surely can’t answer whether he will land a job after completing CFA Level 1. What I CAN tell is that if someone is truly passionate about a job he should give 300% effort on reaching his goals. He needs to show the recruiter that he seriously means business and the company has to be full of fools to not hire him.

How do you do that?

Big picture vs detail oriented

Consider the following two reviews on someone’s LinkedIn profile.

“She is a very detailed oriented person and seems to miss almost nothing while combing through financial statements. On many occasions this skill of her in finding the small one liner red flags in the notes segment of the reports have played a crucial role in saving our firm millions of dollars”

and

“The ability to think big is what sets him apart. Our entry into the fintech space far ahead of other asset managers was mainly because he was able to figure out how much of a disruptive force this segment could be in our everyday lives”

These are both very rare and useful qualities to have. However, the challenge one phases is that the two can be very contradictory. If I am combing through thousands of numbers and footnotes, it is very hard to be able to focus on the big picture. But to be a great analyst or a top-notch Portfolio Manager we do need to have both these skills. Yes, there are funds which rely almost exclusively on bottom up research and I have also interacted with those who give a lot of emphasis on top down (otherwise equity strategists will be out of business altogether). But, in my view we should try to be good at both.

What is a company’s true value proposition?

While working on a new company, the first thing an analyst tries to figure out is the business model of the company. In simple words, the question we would ask is how does a company generate revenue? A bank makes money by acting as a financial intermediary. A fertilizer company makes money by combining raw materials and selling final products to farmers. A retailer buys finished products and makes money by selling the finished products as well as making money through working capital management.

However, if we want to go deeper into the subject the right question should change a bit. What is the company’s true value proposition to its customers? Lets apply this question to a few industries.

A Seven-Eleven store sells convenience to its customers and thus marks up its price higher. Similar for a Duane Reade Pharmacy. In contrast, a Walmart or a K-Mart is a discounter where the main value proposition to the customer is lower prices. Another example can be shown for an industrial raw material like fabric. In many cases, importing the material from foreign sources can turn out to be cheaper. However, buying it from a local vendor reduces inventory days and makes quality control much easier.

It’s a very good idea to thus understand the qualitative aspect of a business first and then understand the numbers. This is one thing which I learned from personal mistakes. Understanding the business model first allows the analyst to also understand the differences in the financial metrics. It will be easily clear why one company has a higher margin but a lower asset turnover by simply understanding whether the company went for an asset heavy model (capital expansion) versus an asset light model (renting or outsourcing).

Try this out. I can assure you that it will make you a better analyst who understands the big picture as well as the bottom up.

Guest Post: CFA Exam Preparation Tips – Acing the Ethics Section

By Andrew Jones

Andrew delivers both CFA® exam preparation courses and non exam finance training for Fitch Learning. Having passed all three levels of the exam as well as gaining a wealth of experience as an industry practitioner he understands the pressures of studying for this prestigious qualification.

Many CFA exam candidates aren’t quite sure how best to prepare for the ethics section of the test. Sometimes, this uncertainty can cause it to become more of a stumbling block than it needs to be.

But not to worry. With a few straightforward tips, it’s possible to streamline your CFA exam preparation and ensure that you’re adequately prepared for everything the ethics section has in store.

So what steps do you need to take to get ready?

1) Study the ethics section last

The ethics section builds on everything that has come before, so it will make the most sense once you’ve reviewed the other sections. Spending time here before you’ve gone over everything else simply won’t be efficient, and is likely to give you an incomplete grasp of the material.

Since this is the last section you’ll review, you can take advantage of short term memory for this section. This strategy will help you use your time as effectively as possible.

2) Know the case studies

In your CFA exam preparation materials you will have an extensive number of fictional scenarios, with in-depth ethical explorations of those situations’ implications.

Make sure that you utilize this resource to the fullest. Spend time working through case-study chapters in detail, paying careful attention to the ways ethical standards are explored and applied in each scenario.

3) Familiarize yourself with the question format – as well as the source material

In order to answer questions in the ethics section effectively, you have to know what the test is going to throw at you. That means understanding which keywords to watch out for, recognizing and anticipating common traps, and knowing when to ignore irrelevant information.

The trick here is that ethical concepts aren’t tested individually. Instead, as the CFA levels progress, more and more of these concepts will be introduced into the exam questions. This is why case studies and sample questions are so important – you have to be familiar with how these concepts are applied in a range of different contexts. Practice sample questions extensively as you study to get a feel for how the exam approaches the ethics section.

If you study with these tips in mind, and you take care to build on a solid foundation of knowledge with the other sections of the exam, you should be ready to tackle the test confidently – and to ace the ethics section. Good luck!

Quora – supercommunity of knowledge seekers

‘Put article title here’ has to be Quora. Quora is basically a platform where people can ask questions and answers those posted by others. This feature was once part of Linkedin but for some weird reason Linkedin has decided to remove it.

The quality of questions and answers on Quora has pretty much blown me away. There are also a few famous people answering questions as well. For those who thrive on knowledge this IS the social network to spend time on (and get rid of facebook addiction).

For finance enthusiasts I have found a few good Q/A threads which I am listing below.

Where can web startups learn about financial modeling that accounts for the important metrics and costs?

What are the best practices when modelling in Excel?

What should everyone know about investing?

What should everyone know about mergers and acquisitions?

How does one avoid blowups in (deep) value investing?

 

Thinking and biases

I am reading The art of thinking clearly by Rolf Dobelli. The author has compiled a pretty comprehensive list of biases (99 in total) that effect our decision-making and often lead to incorrect decisions. The biases are explained using meaningful and sometimes quite humorous stories which is useful in retaining the stuff. Quite an entertaining and useful read in my opinion, particularly because many of them can be related to the investment profession.

It is however a coincidence that I started reading this book around the same time as another personal project. That project involves looking back at the mistakes I made as an investment analyst and trying to reduce those mistakes.

One of the mistakes I identified is ‘not thinking enough’. An analyst not thinking enough!!! Let me clarify.

I actually feel that the daily routine goals, the chaos, the deadlines etc does not really leave much time for focused thinking on its own unless we try actively to make time. This is the kind of thinking where we can forget everything else, clear our minds and think about potential investment decision. Most (not all) of my conclusions in the past were drawn quite instantly while I was working on the financial models or interviewing company management. In my opinion this is an inferior method and even though our brain is constantly working at back of our minds, it does make sense to have some dedicated times for thinking.

Dobelli and other people who have written on biases and particularly biases related to investment decisions agree that however hard we try we cannot completely get rid of them. It’s the same case where we happen to be great at giving others, great relationship advice but suck when it comes to our own lives. This is where my second suggestion (to myself) comes handy. Since we can never be bias free, it makes sense to share ideas and conclusions with few others (preferably one or two good honest friends or colleagues) who can give their views.

For now try out these two suggestions (Have more time for thinking and have some devil’s advocate around you). I will write about my other mistakes in another post.

Consolations of philosophy

I mentioned in an earlier post that I had decided to broaden my horizons and start reading up on subjects like philosophy, psychology, history etc instead of only focusing on finance, economics etc. In that quest, I had listened to a great podcast series on some of the greatest philosophers the world has heard of. The name of this series is Philosophy: The Classics and it can be downloaded for free. The author of this series is Nigel Warburton who has authored a number of books on philosophy including one with the same name as the podcast series.

Nigel has done a pretty impressive job of covering the important message by the great philosophers which includes people like Plato, David Hume, John Stuart Mill etc. The best part is that the podcast can be understood by complete beginners to philosophy (I am referring to myself).

One of the key observations was that, the greatest philosophers of different time periods often gave wise messages that are more applicable to that specific time period. Some of the thoughts of Plato or Aristotle can be considered downright cruel if we forget the time in which they were born. This is same mistake we all tend to make when we tend to interpret religious verses. Taken and read out of context, many of the verses from religious scriptures can be taken very out of context.

Now, we come to the key message of this blog post. Amongst all the philosophers in that podcast series, one really caught my attention. Boethius. The reason Boethius really stood out was because I never heard his name before. Secondly, some of his thinking really resonated with me and while listening I could feel myself agree to his theories. The major work of Boethius is the book called “The Consolations oh Philosophy” which he wrote from prison in the year 524 AD. I haven’t read the full book but I thought I would like my readers to get a teaser of what it looks like. To do that I am taking the liberty of providing a summary from Wikisummaries.

Boethius may have written his book, The Consolation of Philosophy, from prison in the year 524 AD, but the issues he addresses are every bit as relevant to modern life as they were to life in the 6th century. A philosopher, statesman, and theologian, Boethius was imprisoned by Germanic King Theoderick on trumped up charges. In his Consolation, Boethius creates a dialogue between his imprisoned self and Lady Philosophy to examine the true nature of happiness.

Philosophy initially finds Boethius despondent because of his changed circumstances. A respected scholar and politician, he has lost everthing: his wealth, his position, his friends and even all contact with his family. He is bemoaning his fate and the false charges that have put him in prison. Lady Philosophy diagnoses his illness: he has forgotten who he truly is and exactly what is his nature and purpose. She reminds him that the world was not created by chance but by a divine creator. She then turns her attention to human happiness. Fortune she asserts, cannot bring true happiness because the things fortune brings are transient: wealth, power,and honor. She reminds Boethius that although he is not with his family they are still alive. She then goes on to examine the ways in which people seek happiness and shows that when humans have those things they tend to become slaves to them for fear of losing them. She further asserts that bad fortune is actually good because it frees one from bondage to transient, earthly things.

All people are seeking happiness, Philosophy asserts, but most of them are seeking in the wrong places. She then equates happiness with the good and further asserts since God the creator is the Supreme Good, all people are actually seeking him even if they do not know it. Boethius counters with the questions: how then can there be evil in the world with if it has a Good and Perfect creator? Philosophy says that evil is really nothing because it has no power over good, because all men seek good and those who are evil cannot achieve that which they seek. Every action she says, requires will and power. Those men who seek good but do not achieve it thus have no power. Boethius still questions this because he is unable to understnd why it often seems that the evil prosper and the good suffer. This is a one of the most difficult problems a philosopher will face, Lady Philosophy admits. She then explains that what we see as fate, God sees as Providence. We cannot always understand what God intends but his intentions are always good for the correction of evil and the reward of good. However, this only brings Boethius to another question: If God knows all things and his Providence guides all actions, then how can man possibly have free will? Philosophy explains this by showing that just because God knows what will happen does not mean he wills what will happen. She says that man cannot put our own limitations on God. He is outside of time so all times look the same to him and his view is different: he sees a never changing present.

Thus Lady Philosophy provides consolation to Boethius for his situation. God foreknew it and it is part of his providential plan. Boethius happiness can be based in his virtue and in his knowledge of truth rather than in the ups and downs of circumstances. And indeed, good did come out of Boethius’ imprisonment even though he never left his prison save to escape to death, he left us this book to help us learn to rise above our circumstances and never to let our circumstances controll us. Boethius may have phisically died in prison but in addition to a place in paradise, he gained immortality through his message which is still providing consolation to readers today.

Thailand trip and a few comments

Last month I went to Thailand for a 8 day vacation. It was my first trip to Thailand and second in the region (I have been to Malaysia before). The trip went very well and completely fulfilled my expectations. I had a few simple observations about the trip and I wanted to share those in this post.

  1. The Thai people are well-mannered and humble: In tech terms, Thailand is the most ‘user friendly’ place I have visited. For the first time visitor like me, everything was super easy. Full marks to the Thailand government for making this such an excellent tourist destination. However, more than the government I feel that there is a cultural/religious angle to it. The people were genuinely nice.
  2. The Indian influence in the culture cannot be missed: Starting from their names to architecture, I could see many similarities between Thailand and India. Once I came back to Dhaka, I decided to investigate this further and did a bit of digging. There was indeed clear linkages between India and Thailand in the forms of marriages and other ways. Therefore, there is no wonder that the culture looked similar.
  3. There are clear trade-off to growth of foreign tourism: Tourism can bring in a lot of foreign currency and ultimately become a massive driver of the economy. However, I do not see that happening in the case of Bangladesh even if infrastructure (roads, hotels etc) improves significantly. The reason is once again cultural and religious because alcohol and swimwear are considered taboo in Muslim majority countries like Bangladesh.

These are simple observations of a tourist and might not be of particular interest to my readers. Since, my blog focuses on finance I thought I should add a few more lines on the tourism industry that are more relevant to finance and economics students.

The hotel business is heavier on the fixed cost side. They have to incur these cost regardless of whether they get visitors or not. Therefore, in off-seasons they would prefer to price the rooms in such a way that they get most room occupancy (as long as marginal revenue>marginal cost). That is why, room rates fall so sharply in off-seasons and you see exceptional ‘value deals’ in online booking sites like Agoda and Booking.com. HOWEVER, if the tourist goes without a hotel booking and asks for room rates physically, rates will invariably be higher. With the absence of the ability to compare room rates, the scope of price discrimination is much higher.

The pricing mechanism of tourist attractions and packages are also interesting. The prices quoted in the brochures are always the peak season rates. In fact I would guess that they even put a premium on the going rate and then quote that in the brochures. When a tourist goes to buy a trip or a tour they would first show the brochure and ensure that we are ‘anchored’ to the high rates quoted there. Then they slowly offer small discounts giving the illusion of a bargain to the unknowing tourist.