All Indians have black or brown eyes. Aishwarya Rai has hazel eyes. Hence, Aishwarya Rai is not Indian. The above is what in Logic is called a tautology. You can use ‘logic’ (which is mathematically sound) to come to some strange conclusions, simply by twisting a little part of the ‘logical premise’.
Declaimer: This article written was originally in October 2009, and some of the data points may be outdated.
Take a look at the first sentence again. If we assume that there are 5000 people with eyes like Aishwarya’s (wow!), then the first sentence is statistically sound, i.e. true for 99.99995% of the Indian population. The use of the word “all” would then be justified, both by the English dictionary and by Statistics.
The subsequent sentence is also an absolute premise, statistically true. Hence, the conclusion follows.
I have a peculiar spin on this. So if you have hazel eyes, does that make you Aishwarya Rai? Well, to the extent that her hazel eyes have contributed to making her what she is, maybe yes, you would say. And if not, what else does it take to make get someone like that?
The Random Walk Theory
The Random Walk Theory says that “stock prices follow a random walk and markets are efficient”, implying that it is therefore impossible to beat the market. Prices reflect all available information, thereby preventing anyone from CONSISTENTLY beating the market.
Now, if there are only 100 billionaires from the financial markets at any given point in time, then that is only 100/ 6.42 billion = some tiny percentage of the world population. Superimpose this on the above-mentioned tautology and you will be able to write a book that will become a bestseller, formulate a theory that could be ‘universally’ true, and maybe even win a Nobel Prize for it.
Unless, of course, you ask Aishwarya Rai what she thinks of all this….! My guess is that she will be nonplussed. She will not be able to argue with any of the premises, but will obviously find the conclusion absurd.
Now don’t get me wrong! I am not pretending to be the Aishwarya Rai of any place, not even of the stock markets. I only write about these things. I am just the little guy who periodically points out that the king is wearing no clothes, something that is obvious to everyone if they only stop looking at each other and focus on the king…!
No doubt market beaters are few in number, too busy actually beating the markets to be going around writing books about how to do it, and just not interested in Nobel Prizes. They may represent just a tiny fraction of the actual population operating in markets, but they represent fully 50% of the behavior patterns seen in markets. One behavior pattern is that you can’t beat markets (a.k.a Random Walkers), and the other behavior is that you CAN. This is why they are more important to markets than Aishwarya Rai is to Indian-ness.
The Market efficiency
Let us look at this concept called “market efficiency” where market prices are supposed to factor in all available information. Everybody thinks “India is shining”, hence everyone is buying stocks. I focus on everyone buying stocks, and I don’t care whether India actually shines or not……
And if everyone is buying stocks, then the supply of (equity) paper will increase and capital (which is in excess supply) will eventually be misallocated, and India will someday stop shining when too much of this capital gets misallocated. I can see this in many stocks, and sectors that are ‘hot’.
There, I have gone and told you my secret. Efficient Markets Theory tells us that this new piece of information should now bring down the markets by 50% tomorrow morning and the Govt will put me in jail for high treason….what?!
Say, power stocks are hot. But all this money is going into coal, even as the world gears up to sign the post-Kyoto Protocol (the Bali Consensus), where the rich nations will force us to accept emission targets. If they don’t, we will stupidly eschew new technology, while the world goes carbonless.
MUCH later, we will find that these new technologies leave us with expensive energy usage, while the world has moved to zero-cost power in wind, wave, tidal, geothermal, etc. Then, we will burn coal to produce aluminum, while they have a smelter in Iceland that imports bauxite from across the Atlantic and is still viable because it operates on free energy.
So now, both NTPC and Hindalco should drop like a stone tomorrow morning, no?!
This ‘insight’ is not enough. I not only have to be right about what I just said, but put my money where my mouth is, and hold on to this belief for 5-10 years till the FIIs and sundry world travelers are done with India. I have to then pay Margin Calls while sundry operators manipulate stocks to squeeze the bears, with the excess liquidity easily available today. Not only do I have to believe something that is at odds with the ‘market hypothesis’, but I have to hang on till the market turns around to reflect (in stock prices) my ‘new’ hypothesis. In other words, I have to get a serious ‘black eye’ before I get a hazel one.
The tenacity of this belief system is really the key to beating the market. By definition, that has to be with the minority in the population. Otherwise, India would shine simply by printing Rupees and distributing it among the population; why do you need a stock market for that?
So which Mutual Fund will do that for you? This entire industry lives on misquoting that tautology I have outlined above. If you wear hazel contact lenses, you can be (or get, depending on your preference) Aishwarya Rai, say the dream-sellers. You can laze on the beaches, go to Singapore, retire at 40, send your child to the US, get yourself a facelift, or whatever……just gimme your money!!!
What is wrong with all this? The underlying premise is that YOU can’t beat the market (which you probably can’t, if you are still reading this dumb article) BUT WE CAN…the implied promise that your money is going to outperform the markets if you give it to us, but will not if you just give it directly to the markets, is where you need to get careful.
Those of you who want to think about this will do so: efficiency is not about ‘information’ and it is known from other studies that insiders don’t make a lot of extra money ALL the time, there is such a thing called ‘insider’s bias’. They have inside information, but they (usually) don’t know enough about human behavior and its quirks, or relative valuation of markets….etc, etc ad infinitum.
So what practical use is this to you? Should you put your money under your mattresses, or should you look for someone who can beat the markets for you? Well, the problem is that if I know how to beat the markets, why would I need your money? So the guys who know how to beat markets, as I said above, are too busy DOING it than talking (or writing) about it.
This is terrible, what have I done? So where does all this leave you, and what is the point of wasting precious trees on this garbage? Well, for starters, just understand why you will not be going to Singapore, that alone is worth the time you have wasted reading this. Read the rest of my articles on the behaviors needed to beat markets, learn to stand alone and look stupid for a long time, sometimes lose your shirt trying to hang on to what YOU think is right, get it right once in a while, and hope for the best. In any case, isn’t what you were doing when you gave your money to professional money managers…?