A DeMo of CAS

"The whole village could not sleep. Even I was under stress as to what will happen. I had Rs 2,000 in 500 notes."

This was our young guide Raksha on what was the situation the day government announced demonetisation of 500 and 1000 notes. We were on a village home stay last trip last weekend. Raksha was our guide and was on a long Diwali break from her college in Wada.

When asked what's the impact of demonetisation on the people of small hamlet called Dehene (Maharashtra), she informed that most people here do not have so much money. People have been able to exchange money at a bank in Dolkham, a town 10 kms away from that village. On inquiring with other villagers, it appears that not all of their money is exchanged as yet. They are not able to even withdraw money from banks. Bank has been running low on cash. "Don't know when we will be able to exchange all the money. Who will go Dolkham everyday and stand in queue", said another villager.

They have not been able to move their harvest as well. Predominantly rice and nachni producing region, people here are unable to move goods easily because of cash crunch and uncertainty.

This village though may not be entirely dependent on agriculture. Many males from the village work in Mumbai or other town. Raksha's uncle Dashrath in fact works at a hydro power plant some 15 kms away. Being base village for Aaja parvat trek and such home stay initiatives, people here are not dependent on agriculture for their income. It is a seasonal occupation here and only surplus harvest is sold. Thus, Dehene may not be an ideal rural India to gauge impact of demonetisation in hinterlands.

But people here seemed happy that those with lots of money are losing sleep and being punished for their greed. Just like most salaried and organised players feel in the city. "The adhikaries would be spending sleepless nights. It is a good step by Modi" said Raksha.

Though it emerged that adhikaries there as well seems to be trying to find loopholes and convert their black money into legal tenders by depositing money in different names, distributing among keen, etc. (made me think if these influential people, who can misuse their position, be the reason for cash crunch at banks?)

So what will be the full impact? Will black money cease? Will unorganised economy turn organised? Will corruption go away? Does the costs involved justify potential tangible and intangible benefits?

It appears that I was left clueless even after my short on the road (toll less :-) )trip.

Google search says that the word "Complex", when used as an adjective means:

1. consisting of many different and connected parts.
2. denoting or involving numbers or quantities containing both a real and an imaginary part.

This is indeed a complex situation. An economy in itself is a Complex Adaptive System (CAS). A system made up of many micro level, partially connected structures that intermingle. The result of these intermingling is not a simple aggregation (i.e. not 1+1=2) but something different altogether. These micro level structures self organize to systemic changes or change initiating events with the intent of survival. This process results in increased survivability or robustness of macro structure. Demonetisation is one such change initiating event.

Trying to outguess outcomes or arrive at a linear "logical" consequences can be a futile exercise. Thus statements like "there will be short term pain, but good for the economy over long term" should be read as "I don't know, but this seems to be most likely scenario". Yes, our logic states that things will move from unorganised to organised will be better for the economy over long term. But there can also be any unknown unknowns that can work against this move. How will micro systems learn and reorganise? What impact each micro system will have on others? What will be the end result on the adaptive system called economy when things settle? Only time can tell.

In that sense, as an alternate view, government reacting to situation by bringing in new rules every day, as situations unfold, is a better strategy as compared to "pre-plan" everything and then implement. When we are dealing with CAS, one can never be fully prepared.

How things will unfold, only time will tell. All we can do is try to arrive at most likely scenarios (plural) and adapt accordingly.

As an investor, I have learned that stock market (a complex adaptive system in itself) does not like uncertainty and is currently reacting to that. It will take its time to learn and organise itself from this event. There will be winners and there will be losers as the system tries to improve its robustness. Some people will be able to pick winners (Investing falls towards luck side of luck-skill conundrum) and will be called geniuses few years down the line whereas some will return to mediocrity. All one can try and do is have a process and build a portfolio with enough diversity of robust companies and try and improve portfolio survivability.

Lofty Business

It's festival time. Festivities results in one very important annual ritual in every Indian household. The ritual of cleaning your house! It's time when every nook and corner of the house is turned upside down to make it spotless. There are many things associated with cleaning the house before Diwali. It is done to welcome Goddess Lakshmi or to welcome new year with the motto of "doing away with old and bringing in new".

This ritual happens in my home as well. It's a family affair. Things that require climbing and reaching out is done by male members. Recently, I was given the responsibility to clean the loft. Loft, an area of home that remain untouched for rest of the year. This is the time when old boxes and bags are removed and checked.

I realized there are 3 types of boxes or bags...

While some bags contain things that are kept with the hope of using them next year, there are also certain things that are no longer relevant and needs to be "donated" to maids and watchmen. Some items can be scrapped, providing that source of money to pay for bakshis to maids and watchmen.

Sometimes we also come across a third category are those boxes that brings the thought of "What the hell is that?" to mind. Boxes that are not touched for ages or we do not have any recollection of..

Some of these find their way to one of the above two categories and are either dumped back or scrapped.

On the other hand, there are some pleasant surprises in store too. Things that you've been looking for for a long time. Your favourite jacket or some memories. This year I stumbled upon the my childhood photographs, back from the days when photos were physical, rare and very valuable. Certainly cleaning the loft was worth the effort!

Something similar goes with investments as well. There are a set of investors, whom I call as "Closet Investors" (can probably be rechristened as "Lofty Investors"), who get active during bull markets and shy away from it after making losses when market crashes. They just resurface every bull market. They hold shares of 100s of companies in their closet, some dating back to pre-demat days as well, hard, physical share certificates, forgetting they ever existed or were left behind by parents.

Like Diwali, when bull market returns, these investors conduct the ritual of checking their lofty portfolio. Some companies that are making them some money are sold of for whatever profits they have made for them while other loss making ones are kept back on the loft, hoping they will pay back some day!

There are some positive surprises in store too... 

Have heard quite a few cases where old forgotten investments for some people turned out to be worth millions. Physical shares of Bajaj Auto found while moving houses worth Rs 80 lakhs, investment in yester year's bluechip textile company turned out to be worth Rs 60 lakhs on account of real estate boom, a mis-selling by a private bank sales person of Rs 25000-30000 in some closed ended real estate fund turned out to be worth Rs 4.5 lakhs (a structured product by a prominent AMC!).

One of the veteran from the industry had once told me that all this analysis and strategy is meaningless. Over the years, he has observed that it is wise to stick to 15-20 stocks based on informed decision making. One should be ready to lose money in some of them whereas let winners make up for that and over the years most of us will be much better off than investing very actively.

However, I have also seen many other portfolios that has probably done a mediocre job for investors. They hold nothing but collector's edition stocks and have done a mediocre job for the investors. 

Michael Mauboussin has defined success as : 

Success = Skill + Luck

Great Success = Skill + Great Luck

I think all these anecdotes and experiences largely are a function of the luck element involved with investing. They are more towards luck as compared to skill. In his book "The Success Equation", Michael has placed investing success more as a function of luck vs skill. This should not be taken in wrong context. Skill is very much required for investing success, but it plays out over a long period of time. In the interim, luck can play a major role in driving portfolio returns.


Picture source

Thus, some of those lofty investors have an interesting dinner table conversations on how they had great vision in identifying those great investing trends while some continue to hope for being right every bull market.

As for the lessons, I hope to make "checking my portfolio" a systematic affair rather than just during Diwali (bull markets). Just like we do not clean our loft everyday, it also does not make sense to check the portfolio everyday. But whenever we do, just need to ensure to properly identify useful things from the hopeful things. If things are not used for say 2 or 3 years, they ought to be scrapped away to pay for bakshis or other useful things. In the same way, if investment thesis has not played out over last 2 or 3 years, instead of hoping to be right, it might be beneficial to have a re-look at it altogether.

Happy Cleaning...