Wiconomics

This is one of my best investments so far in my short investment career. I made 700% return in little over two years (roughly 300% annualized).

Ratnamani Metals is a company engaged in manufacturing of Pipes used for transportation of oil, gas etc. Initially I came to know about this company through a friend of mine (Lets call him AR). Sometime in July 2005, he called me asked me to buy this stock on his behalf since he doesn’t have any brokerage account. I didn’t know anything about the company at that point of time, but while buying for him, I too bought a small quantity (about 1.5% of my then portfolio). It was trading at around Rs. 130 level. My main rational for buying was that “if you don’t know the horse, know the rider.” AR is quite conservative in nature and this was his first investment. This was good enough reason for me to invest a small amount.

Once I made the investment I started tracking this company. I started understanding the business and industry. It was a small but decent company. Though I didn’t find anything great about the company itself, but it is operating in an industry which has tremendous potential. Simply put, it was an ordinary company in a booming industry.

After about a year or so when stock rose to Rs. 400 level AR asked me to sell his holding. But I asked him to wait which he agreed. Then he completely forgot his stock and I never reminded him as I knew he would be urged to sell it. Finally I reminded him about his investment few months back when he was moving out of India. It was a pleasant surprise to him and he asked me to sell. I was not comfortable with overall market level so I also  liquidate my investment too. So we both sold it at Rs. 950 level and end up making 700% return. I don’t know when I will I hit my next seven bagger. Any tip AR?

Wiconomics (http://www.wiconomics.com) is an economics and investment wiki. I have been working on this site for last couple of months giving it a basic structure. Today it has reach the level where I can introduce the site to you. In the following paragraph, I will try to explain you the concept and the idea behind creating this site as well as how we all can benefit from it.

The Wiki Concept

Wiki differs from a traditional website in a way that it is built around ‘many-to-many’ principle rather than ‘one-to-many’. The main disadvantage of traditional website is that, there are generally large numbers of users, but content is created only by few people and hence the depth and breadth of content become limiting factor. For instance, in terms of content, Wikipedia has fifteen times as many articles as the next largest English-language encyclopedia, ”Encyclopædia Britannica‘ ‘and Wikipedia articles are as accurate as Enclyopedia Britanica as found out by Natures Magazine.

Another great example is how New Zealand police department which is using a wiki platform to draft their new law.

There have been numerous studies which has highlighted the fact that collaborative thinking is far superior to individual thinking. For instance James Surowiecki in his book “The Wisdom of Crowd” has explains Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations. In one instance he said that “Under the right circumstances, groups are remarkably intelligent, and are often smarter than the smartest people in them.” A wiki provides the perfect platform for collabration.

About Wiconomics

Wiconomics is an economics and investment wiki. Wiconomics’s name is a portmanteau of the words ”wiki” (a type of collaborative website) and ”economics”(which is a branch of social science and covers many subjects including Finance and Investing). It is created with an idea of providing one point source for information and resources related to economics, investments and other related area.

Contents

Site is being divided into two major sections. In the first section we are building information and resources on various economics and investment related concept. Second section is devoted to economy and companies, where we are building information on Economy as well as on Industries and Companies.

Also there are various sections like Glossary, Books and People which would supplement above.

Usage

Wiconomics is a free site. You are free to browse, register and contribute. We would like to keep it that way.

We are not interested in knowing or collecting any user information. We don’t want to know from you are coming from or what is your age, gender, country, education level, income level, etc. Since we are not interested in above informations, we don’t require you fill those lengthy forms to use the site. Registration is totally optional. Most of the functions are available (including editing of any article) without any registration.

Though registration is optional, we would recommend it. We have a very simple registration form where all you need to specify is user name and password. Even providing email is optional though highly recommended as it will be used in case you forget the password or getting in touch with other users. Registration will also give you your separate user page where, if you wish, you can share varous information about yourself including your portfolio.

Wiconomics vs, Discussion Board / Groups

There are quite a few of Discussion Boards / Groups which are formed to take the advantage of above mentioned ‘many-to-many’ concept. They are very good for sharing opinions which are subjective rather than information and facts which are objective. Because of lack of structure, information get lost over time. Wiconomics can be a perfect supplement to any of those groups you are part of. You can contribute information and facts on Wiconomics and discuss opinions on your respective Board / Group. For example, you can share your insights about any particular company on Wiconomics company page and discuss your opinion on whether to buy or sell on your respective group or discussion board.

You can always use the discussion (Talk) page associated with every page for the same purpose but with a much wider audience.

Risk Arbitrage provides excellent opportunity to diversify portfolio risk as returns, in such situations, are not linked to market movement but rather on factors like corporate events. Another advantage is that it has limited investment horizon which can be defined with reasonable certainty at the time of entering into transactions. You can look at Value Investing Mindmap to see how it fits into overall scheme of things.

Here I would describe a Risk arbitrage opportunity where I generated 6% return in roughly 25 days (72% annualise). And I guess I sold a bit too early otherwise I would have made a killing.

Sometime back, Vedanta Resources plc made an open offer to acquire a stake in Sesa Goa, an Indian listed company. The offer was made to buy 20% shares of the company at Rs. 2036.30 / share. The offer was made on April 26, 2007 though it came to my knowledge in first week of June. At that time it was trading at around Rs. 1675. The offer was suppose to open on June 21, 2007 and close on July 10, 2007.

In such a situation, if the prevailing market price is less than offer price then one can buy the stock before opening of open offer and later on tender the stock in open offer. But depending upon the terms of offers, sometimes not all shares get accepted. That’s where things gets a bit tricky as one also need to consider acceptance ratio and exit price for remaining shares. I use the probability based sensitivity analysis for different acceptance ratio and exit price.

In this case minimum acceptance ratio worked out to be 41%. Though the actual ratio would have been higher as there are always some brain dead investors. So based on above mentioned probability analysis, my expected gain came to 5.5% (based on then prevailing price of Rs. 1675). Though expected gain was good enough to buy the stock, I also looked at couple of more things to assess the loss. First one is probability distribution of payoffs, which in this case looked good to me. Second one is break even price at minimum acceptance ratio. In this case break even price was Rs. 1425 which in my opinion was good enough price to buy the stock.

After going through the above I find the situation attractive enough to buy the stock and I bought it at Rs. 1675. I had an opportunity to convert this risk arbitrage into a pure arbitrage with a 4% return in one and half months by buying the one month forward (July) put options. But I couldn’t do it as minimum lot size for future transactions was a bit too high compared to my portfolio size.

As it happen in most of these cases, the offer got delayed. But price rose to Rs. 1780 level towards the end of June. I squared off my transaction instead of tendering the shares in the open offer and booked 6% return in about 25 days. Eventually the offer opened on August 31, 2007 and closed on September 19, 2007.

Since at the time of offer I was only interested in the risk arbitrage opportunity, I didn’t pay too much attention to fundamentals of the company. It turns out to be an expensive mistake as can be seen from the above chart.

This was a little incident that happen to me when I was in class VIII, which has changed my life. Few of us were crazy about Math then. Math was the only subject we used to study. Any small time which we used to get, between classes or any empty period, we used to take some math problem and used to compete to solve it first. Sometime it used to take days to solve a problem. There was one friend of us who was better than others. His name is Sanjay. More often than not, he used to be the first one to crack the problem.

Once we were attempting to solve a problem. As usual Sanjay solved it first. After few attempts I gave up and asked him to show his solution. He refused and then told me, “You know, you have the best brain amongst us, the problem with you is that you don’t use it. I have observed that whenever we had a problem which relate to something already thought to us in class, you solve it first. But when something come up which require little bit of thinking and imagination, you just give up. Just keep thinking of various possibilities and one will eventually fit in. Let your imagination fly.”

I immediately realize what he is saying is 100% true (except the “you have the best brain amongst us” part). I wonder where I would have been had he not told me those words. If I am any good, I owe it to him.

He died few years later in an accident. Today all I can think of is following words from the movie The Shawshank Redemption

“I have to remind myself that some birds aren’t meant to be caged. Their feathers are just too bright. And when they fly away, the part of you that knows it was a sin to lock them up DOES rejoice. Still, the place you live in is that much more drab and empty that they’re gone. I guess I just miss my friend.”

Have you ever wonder why some ordinary movie become a blockbuster hit while other far better movies struggle to go to second weak. You can find some answers from “Cumulative Advantage” theory by Duncan J. Watts (author of “Six Degrees: The Science of a Connected Age“).

Sometime back I witness the same thing though I didn’t had a term to describe it then. I stay in an apartment which is part of a complex with some 100 residents. Our society, which takes care of maintenance of complex, decided to repaint the entire complex. They shortlisted couple of color combination (Cream and Green) and then took a poll to decide on one. They used the old paper technology. They gave a plain sheet of paper along with couple of sample snaps of how the complex will look like with each of the color combination, to the watchman of our society. Watchman went to all the resident of society to take their preferences. We were third in the order when watchman came to us. When I looked at the color combination, I found both of them equally good and I was indifferent between them. So I randomly decided on Cream. When I was about to write it as my preference, I had a glance over preference of the previous two residents. Both of them had chosen Green. I don’t know why but I also changed my preference to Green. After the watchman went, I gave a thought on what I just did and what could be the implication.

Suppose if all or most of the resident were indifferent and took the decision like me (which I guess would be the case as), the end result would have been somewhere around 90% to 100% in favor of Green. But if one would have asked each resident individually without letting them know of preference of other residents, the outcome would have been around 50:50. This make me realize the power of, what now I know is, Cumulative Advantage. Just for the curious min, our complex did got painted with green color combination.

You can quickly browse through the concept of “Cumulative Advantage” and associated concept of “Butterfly effect” from chaos theory from our main site.

Thanks Arpit Ranka for citing this paper.

How many career advises you have received so far in your life? And when was the last time when your uncle bragged about his success and told you to do X or you will end up with a miserable life. We keep receiving such advises from all tom, dick and harry’s of the world. So, how about receiving an advise from a comic writer?

Couple of months back I was browsing through internet and came across this post from Scott Adam’s (creator of Dilbert Comics) Blog. Believe me, this is one the best career advise I have ever received. Here is a snippet:

If you want an average successful life, it doesn’t take much planning. Just stay out of trouble, go to school, and apply for jobs you might like. But if you want something extraordinary, you have two paths:

1. Become the best at one specific thing.
2. Become very good (top 25%) at two or more things.

The second part i.e. “become very good at two or more things” caught my attention and I started thinking about what multiple skills I have and can I create something out of it.

I already have a career in Finance and I believe I am reasonably good at it. Apart from it, I am reasonably good with Technology, particularly web / internet technology. I have designed dynamic websites in the past, all by myself. I have also helped in redesigning my Business School’s website . I don’t know any programming language as such, but I have a decent decent functional understanding of key web technologies. Generally speaking, I understand following elements:

• Wiki
• ASP
• PHP
• SQL
• Ajax
• XML
• Perl
• Phyton
• HTML / CSS
• SEO
• pings
• RSS/syndication
• SSL
• Regex

Initially I thought, what’s so big deal if I understand above. There would be thousands, if not millions, of people out there, who not only understand all of above, but are far better than me. But thats were Scott Adam’s advise came in. How many of those millions also understand followings:

• Spin Off
• LBOs
• Risk Arbitrage
• Reverse Merger
• Clean Price / Dirty Price
• Yield Pick-up
• ABS/MBS/PTC
• Sub Prime
• Carry Trade

and so on.

Simply put, how many people can analyze Risk Arbitrage opportunity in stock market and at the same time hack a PHP code.

I surely wont be the only one, but I guess there would not be too many. So I started thinking about how can I put both of these (and possibly more) skills to use. And thats where an idea was born, which led me to create Wiconomics.