I got this article on Business Gyan, for original post click here

The way Entrepreneurs Think and Act is a lot more complex than Risk Taking.

Walking the tightrope in the Circus can be very dangerous. Yet why does the Performer do it? As Prof.Manimala of IIM-Bangalore points out in the Businessgyan Panel Discussion, the daring acts of the Circus Performer seems daring to the audience, however the performer himself has taken sufficient safeguards and training to ensure that he does not meet with a fatal fall. The Performer has enough knowledge, training, and safeguards to give him confidence that he is not at risk.

the-spark-82An Entrepreneur to many looks like this Circus Performance, looks daring and macho. This is because for the observer, the Entrepreneur is doing something that he himself possibly will not do. This is the reason why entrepreneurship seems so daring. However look from the entrepreneur's lens: Is he in business because he feels there is a big chance of failure? From his viewpoint is what he is doing risky? If it was will he do it in the first place? Entrepreneurs know how to mitigate and manage risk, they are not risk takers. And even if they lose money or time it is what they were prepared to lose. Sure Entrepreneurs might underestimate the effort required or overestimate the probability of success, but that is another point altogether, a similar expectation mismatch can happen in any new product launch even in a large company.

Prof. Saras Sarasvathy of Darden School adds that "While most people would agree that managers are largely risk averse, they would assume that entrepreneurs are risk-takers. Research has shown, however, that for the most part both are risk averse." Entrepreneurship therefore is not
about dare.

If Entrepreneurship is not risky then there is really no excuse for someone not to be an entrepreneur. However it is important to observe how entrepreneurs do things differently. Instead of setting a goal, and managing resources to meet the goal effectively, entrepreneurs start with the resources that they have in their control and leverage it to create a new reality. Prof. Saras Sarasvathy has a word for this - ‘Effectual Reasoning', "to the extent that we can control the future, we do not need to predict it." She adds that "Consciously, or unconsciously, they act as if they believe that the future is not "out there" to be discovered, but that it gets created through the very strategies of the players." This is very different from the Causal Logic taught at management schools and practiced by managers.

Risk, essentially are events which are not planned; seasoned entrepreneurs, however, know that surprises are not deviations from the path. Instead they are the norm, the flora and fauna of the landscape, from which one learns to forge a path through the jungle. Prof Saras in a research paper observes, "In fact, several of the expert entrepreneurs I studied explicitly stated that being in a market that could be predicted was not such a good idea, since there would always be someone smarter and with deeper pockets who would predict it better than they could." Seen from this light the perception of risk totally changes. Afterall as someone said "Change is the only Constant."

Regarding failures Prof.Saras Sarasvathy says that "Curiously enough, this focus of entrepreneurial thinking on using any and all available means, even the products of apparent "failure" makes the entrepreneur less resource-dependent than the manager." Scarcity of resources may even be seen as an impetus for invention rather than as a constraint. Pierre Omidyar, founder of eBay often mentions that the reason he built such a robust self-sustaining platform on which millions of people could trade at the same time was because he did not have venture capital funding.

Yet we do see big failures around us, and this reminds me of what Waren Buffet had to say about risk taking, of course from an investment context, "To make the money they did not have and did not need they risked money that they did have and did need, that is plain foolish." An expert Entrepreneur does not make this mistake. Effectual reasoning may not necessarily increase the probability of success of startups, but it reduces the costs of failure by enabling the failure to occur earlier and at lower levels of investment.

Does that mean Entrepreneurs do not go through hardtimes? The struggles and the pain? The certainly do, Entrepreneurs are committed to their objectives, have a must do attitude and are willing to go the extra mile, however are these not qualities that you would expect from any other successful professional in any area be it sports, arts, research and management?

Resources :- http://www.effectuation.org/ftp/effectua.pdf

The author is the Chief Catalyst of businessgyan. His area of interest include business strategy and innovation. For feedback and more information, e-mail: www.businessgyan.com/balaji.

Issue BG82 Jan 08

These days I am reading a book named "Less Is More", this is THE amazing book I have read in the field of management...
I am just putting exact word to word copy of some paras which I feel like sharing...

This is form a chapter named "No LAYOFFS"

Highly productive companies have realized the pitfalls that await a firm when it attempts to balance its books by resorting to payoffs as a tactical response. The CEOs interviews cited four undesirable consequences of doing so.

It was the BEST OF TIMES, it was the worst of times”-- Charles Dicken’s description in A Tale of Two Cities perhaps best describes the scenario facing Indian Companies today. On the one hand, unprecedented growth in the Indian economy has led companies to post record revenue and profits. On the other hand, the spectre of a world recession threatens to play spoilsport.

At Earnst & Young, we have been studying corporate performance over many years. Our research tells us that while business goes through cycles of boom and bust, some companies are successful in riding the boom periods and defying the period of bust. These companies consistently outperform the market and deliver superior results on an ongoing basis. These successful companies cut across industries, have disparate backgrounds, some are mature and established, and others are newer and younger.

These companies are more successful because of the quality of their management processes. As we conducted a study of India’s best managed companies, our aim was to identify what is it that makes one company better managed than another and what are the leading practices that India’s best companies adopt to outperform industry and competitors.

Our survey revealed several common threads that run through India’s best managed companies. We summarized these as “10 mantras” of management success. Many companies focus on one or some of these mantras, but when practiced together, these mantras churn out a “best managed” company.

Mantra #1: Be audacious in your vision

Sam Walton once famously said, “Capital isn’t scarce: vision is.” However, looking at the best managed companies of this year, there seems to be no dearth of vision. In fact, these companies have displayed a boldness of vision that was quite unimaginable for Indian companies a decade ago. If one were to select the leading beacon for its vision, it would undoubtedly be Tata Motors. Who would have thought that a company, which started making passenger cars barely a decade ago, could even think of making the world’s least expensive car, and that too half the price of the cheapest car available in the market. But this should not come as a surprise. Over the past few years, Tata Motors has time and again set out to achieve targets that skeptics have proclaimed to be unattainable. But every time it has delivered on these promises—be it in Indica or the Ace.

ITC is another interesting case in point. A strong vision not only helped it recover from not-so-successful forays into finance, trading and real estate but also galvanized the company to brace for a new round of Growth. It sets itself an ambitious target to become India’s biggest FMCG Company and then went on to launch a product blitzkrieg, unleashing a new product in the Indian market every quarter. Today, after successful competing against the FMCG majors in the foods arena, ITC is entering the highly-competitive personal care market with a new-found confidence. This new approach of Indian industry is perhaps best summed up in Ratan Tata’s modest words: “We rescaled our thinking in term of growth and cajoled our business to make this happen.”

Mantra#2 : Focus on what you know Best

In a rapidly expanding economy like India’s, diversification into unrelated but high growth sectors becomes a tempting proposition for companies. However, if one looks at the best managed companies, they have largely achieved growth by leveraging their value chain inter-relationships or through geographical expansion. The classic example of growth through backward integration is Reliance Industries. Starting with textile in the late ‘70s, Reliance pursued a strategy of backward vertical integration in polyester, fiber intermediates, plastics, petrochemicals, petroleum refining and oil and gas exploration and production—to be fully integrated along the materials and energy value chain, while also emerging as a leader in each of the industries it entered.

On the other hand, a remarkable case of sharpening focus through divestiture is L&T. In 2003, L&T’s cement business accounted for more than a quarter of L&T’s turnover, but it was still proving to b a drain on resources that could otherwise have gone into growing the core businesses. As L&T’s top boss A.M.Naik says: “It was only because of cement that the company’s financial parameters were depressed. L&T could have grown much faster without the cement business.” Finally in 2004, L&T bit the bullet and divested its cement business and decided to focus on engineering. The success of the measure was evident in the financial results of that year when, despite the divestment, the company’s revenues saw a minor dip and the profits actually grew by 23%.

Mantra#3: Trim flab to achieve operational excellence

For the best managed companies, cost efficiency is more than a source of competitive advantage. This has pervaded the companies’ philosophy to become an ongoing exercise. Innovative solutions are helping the best managed companies reduce costs without compromising on quality. Though a blend of backward integration, competitive sourcing strategies and efficient systems, these companies have managed to significantly rein in costs.

The best managed company in the material sector, Grasim Industries, is the lowest cost producer of viscose staple fiber in the world. According to the management, the company is the most-integrated fiber producer, with the chain stretching right from forest to pulp to fiber to yarn. Almost all the intermediate inputs are captive. Besides, Grasim’s in-house engineering division enables the company to grow in the most cost-effective way. Other winning companies are also undertaking several initiatives to trim the flab.

Tata Motor’s landmark exercise conducted in the wake of a Rs 500 crore loss in 2001 helped it return to the “black” and gave it the confidence to produce the world’s cheapest car. Tata Steel has long maintained its position as one of the lowest-cost producers of steel in the world.ITC’s e-Choupal initiative has revolutionized the agricultural supply chain, creating value not only for the company but also for the farmers.

In an increasingly globalize playing field, operational excellence, as the best managed companies illustrates, has become a necessity. Cost efficiencies are instrumental in helping these companies defend their turfs from foreign players. More importantly, these companies are now taking the war abroad by effectively wielding the cost advantage to emerge as a serious threat to global incumbents.

Mantra#4: Good governance makes business sense

Corporate Governance has become a priority for a world recovering from the shocks of scandals such as those as Enron and WorldCom. In India itself, Clause 49 of the listing agreement, which contains the corporate governance requirements, has been revised at least four times in six years. Most Indian companies have been struggling to comply with the mandatory requirements of this clause. However, we noted that the winning companies go much beyond what is mandated by the law. All but one of these companies has a documented Corporate Governance Policy and a
Whistleblower policy. Most of these companies provide formal training to their Directors and have instituted mechanisms to track the performance of their Boards.

The Tata Group stands out as leading practitioner of good Governance. It claims that adherence to ethical business conduct is rooted in the vision of its founder, Jamsetji Tata, for whom the ‘end’ of entrepreneurial triumph was always secondary to the means’ by which it was achieved. It is this very reputation for honesty and integrity that has helped the Tata Group immensely in its bid to grow internationally. This was reflected at the time of the corus acquisition; when Jim Leng, the Chairman of Corus, went on to call Tata the right partner at the right time for Corus shareholders and employees alike.

Mantra#5: Develop leaders from within

A common feature across the best managed companies is that their leaders have grown from within. A.M.Naik started his career as a Junior Engineer with L&T in year 1965. Y.C. Deveshwar, the CEO of ITC, began his career as a management trainee in the company in 1968. K.M Sheth joined Great Eastern Shipping in 1952. B Muthuraman started off as a Graduate Trainee with Tata Steel. The list goes on. These companies have made a conscious effort towards creating talent pools within the organization and grooming employees for leadership positions.
L&T has launched a company-wide endeavor covering more than 4000 managers to enable them to hone their abilities in people management, and translate those skills into effective leadership and motivation. To ensure quality and depth of leadership, L&T has linked the leadership process with consistency of performance. Select employees are also sent to premier business schools and management institutes to gain experience and knowledge through their Advance Management Programs.Another best managed company, Grasim, believes in identifying and grooming management talents as also undertaking leadership development across levels through various initiatives such as ‘Competency Honing and Leadership Development’ programme at Gyanodaya, the company’s institute of Management and learning.

Henning Holck-Larsen, the co-founder of L&T, couldn’t have been more correct when he said: “ If you want to belong to a country that is becoming a nation, you have to keep the economy growing by creating jobs. And you can only do that by investing in tomorrow, and tomorrow is made by people.” Quality and commitment of workforce can make a significant contribution to the company’s success. India Inc. is becoming well aware of this and is making an effort to take care of people through initiatives that range from providing better facilities at offices, regular trainings and development programs as well as liberal leave policies. Findings from the survey
reinforce this trend: 67% of the best managed companies have specifically documented policies offering sabbaticals to employees and 78% of the best managed companies have institutionalized ‘Fast Track’ programs to recognize high performers. This year’s best of best winner, L&T, has been the recipient of number of awards for its innovative HR practices. One such initiative is the Hitori Yatai Seisan or the Single Workman Station, at L&T’s electrical engineering division. Employees are challenged to take complete responsibility for a product instead of letting them work on individual components. “Ever since we introduced the concept of the Single Workman
Station, our productivity has increased, as the employee has a sense of ownership for the final product. This is a great motivation,” said R.N. Mukhija, President (Operation), L&T. Best managed companies use a variety of approaches to reach out to their employees and go beyond the conventional offering of responsibility, security and salary. They create work environments in which their employees can flourish and dream the organization’s dream.

Mantra#6: Forge stronger partnerships with your supplier base

The top companies in India realize that their performance is inextricably linked with that of their partners. As one of the CEOs put it, “The strategic vision of the company must get absorbed and assimilated across the entire value chain.” To this end, companies are increasingly sharing their vision with partners and seeking active participation in realizing their growth objectives. Our study shows that the best managed companies in India view development of vendors as a key investment towards value creation. It was interesting to note that each of the best managed companies conducts quality audits at vendor sites and has structured systems for vendor performance appraisal. Indian companies are also actively partnering their suppliers in planning, procurement, research and development, quality assurance mechanisms and process improvement initiatives. Two-third of the best managed companies is actively investing in enhancing the technology of their vendors.

Bharti Airtel exemplifiers this mantra in that it has integrated the partnership approach in its business model. Deviating from the conventional model wherein telecom companies owned network equipment, Bharti strategically outsourced the entire network infrastructure to its vendors and incentivised the arrangement by offering 1% of the company’s revenues through SLAS. To allay vendor concerns regarding sustainability of the business, the company further outsourced network management to vendors.

The results that the partnership approach can yield are perhaps best visible in the case of Tata Motor’s breakthrough car, the Nano. Auto component suppliers played a key role in the development of the car and ensured that it met the cost target.

Mantra#7: Pursue quality with Zeal

Best managed companies use quality to do what they do best—create values. These companies devote significant efforts towards achieving the highest levels of quality. Our study confirms that quality is a concept that pervades all sectors and each business. Each of the best managed companies had process quality certifications and 78% of these companies had undertaken organization-wide six sigma exercises. Importantly, all of these companies’ strategic plans include targets for process improvements.

At ICICI Bank, increasing customer grievances and service lapses made the management set up an organizational excellence group (OEG) in 2002. Its aim was to engage in building, sustaining and institutionalizing quality in the bank by facilitating development of skill and capabilities in various quality frameworks. In the industrial products sector, L&T’s Heavy Engineering Division is focusing on improving manufacturing operations through automation, TPM, Six Sigma and ITenabled re-engineering.Tata Steel’s focus on quality led it to launch the ASPIRE program, incorporating best practices of different improvement initiatives such as TOC (Theory of Constraints),TQM(Total Quality Management) and technology. Unrelenting commitment to quality, which is a defining features of each of the best managed companies, creates that all important value among stakeholders—trust.

Mantra#8: Innovate to create value for customers

L&T’s definition of technology “as the springboard for the future and a bridge between aspiration and accomplishments” typifies the new-found attitude of business in India. The new mantra is to indigenize technology, which is evident from the increased R&D expenditure incurred in better managed companies. Companies are increasingly emphasizing on R&D for reducing costs and developing new products. A case in point is Tata Motors, whose new business strategy is focused around the development and production of technically advanced commercial vehicles and passenger cars of world-class quality. The recent launch of the first of its kind goods career, Ace, and its passengers-carrying variants, is the result of the company’s aggressive new product development programme. Innovation in products and services has helped ICICI address the needs of various customer segments. A recent example is the introduction of an end to end technology solution in rural geography that provides customers with biometric -enabled smart cards.

To sustain strong growth rates companies need to look for creating know-how in new areas by building in-house technological expertise and the best managed companies are constantly working towards this very goal.

Mantra#9 Give back to the Society

Corporate social responsibility (CSR) in India can probably be traced back to when the Tata Iron and Steel Company was floated in 1907. the Jamshedpur plant today can be described as a mammoth social out reach programme that covers 600 hundred villages in and around its manufacturing and raw materials operations through initiative in the areas of income generation, health care and education, a good example of linking business goal with a larger societal cause is ITC’s e-Choupal initiative, which has proven to be a digital revolution and has been reshaping the lives of farmers in remote Indian villages.

The Aditya Birla Group believes that CSR id textured into the group’s value systems. The group has created a whole parallel organization to focus on CSR under the stewardship of Rajshri Birla. Its vision is “to actively contribute to the social and economical communities in which we operate. In so doing build a better, sustainable way of life for the weaker section of society and raise the country’s human development index.”

L&T believes that the true and full major of growth, success in progress lies beyond balance sheet or conventional economic indices. It is best reflected in the difference that business and industry make to the lives of people. Today, it views itself as a company engaged in a higher cause of Nation building. In the case of Tata Motors, Singur was chosen by Ratan Tata as the location of the new plant because he believed that eastern India should not be deprived of the economic development enjoyed by the rest of the company. His decision may not have been an economically-prudent one, but it was backed by a strong commitment to the cause of social development. The CSR agenda of Indian companies, indeed, boarders on the extraordinary in vision. The leading Indian companies do not view CSR as an instrument of enhancing their reputation; instead they display an earnest desire to gives back to society and to contribute to the Nation’s progress.

Mantra#10 The Indian Edge

Management thinkers have often talked about the differences in management philosophy and practices as developed in the US, Europe, Japan and even China. Of late, there have been calls to identify what can be termed as the “Indian Approach to Management.” While we can not venture to define the Indian approach to management here, we noted one key difference that distinguishes the approach Indian companies from those of others. This difference lies in their inclusive nature and manifests itself in the way Indian Companies deal with their stakeholders. Today, as companies the world over struggle to show their more humane face and find the balance between profitability and social responsibility, Indian companies are comfortably partnering with their stakeholders to create value for society. Our companies often allude to their business partners as part of the larger corporate family. Employees are treated with respect and hardly any Indian company hands out pink slips in times of diffic ulty. Indian companies often engage in societal upliftment and nation-building projects, not due to any regulatory pressures but from a natural sense of duty. It is this attitude of inclusiveness that is giving Indian companies a strategic advantage in areas where other companies failed. Indian companies are far more successful in reaching out toward sly different customer segments-reach and poor, urban and rural. So they endeavor to globalize, they gain easier acceptance across diverse countries. The support they get from the extended organization multiplies their capabilities. Their strong talent pools par them to successfully compete with the best companies in the world. The mutually-beneficial relationship that the companies have with the community preempts conflicts and ensures smooth conduct of their businesses.

We believe that the inherent trait of inclusiveness that Indian companies posses, in addition to the “10 Mantras”, could well be the defining factor of their tremendous success in the years to come.

The fall of the rupee against the dollar is hitting hard the Indian companies that had relied on the relatively cheaper dollar funds to fund their growth in the boom time. Telecom major Reliance Communications' debt stood at Rs 25,820 crore on December 31, 2008. It was Rs 17,440 crore at the end of March 2007. Significantly, about 70 per cent of the debt is in foreign currency. "Although the company has benefited in terms of competitive interest rates on foreign currency debt, adverse movements in currency rates have affected its financial profile," says a release by credit rating agency ICRA on Reliance Communications. As the rupee continues its downward march, many companies are faced with the prospect of an inflated debt on its balance sheet.

Till early 2008, companies which had left their foreign currency positions unhedged had emerged gainers. As the rupee appreciated against the dollar to below-40 levels, their dollar debt fell significantly in rupee terms. But in 2008, the rupee was the second worse performing currency, falling 19.2 per cent against the dollar. This calendar year, it has already seen a markdown of 5.7 per cent, says a Kotak Mahindra Bank research report. "For a lot of companies whose debt is largely in dollars, repayment obligations would increase in a similar magnitude if they have left their positions open," says Vikas Aggarwal, senior vice-president, ICRA.

Companies that have hedged their currency risks are safe to the extent of the cover. "But we see that it is difficult to hedge oneself on long-term loans fully as the market is very illiquid and one does not get good rates and quotes for that," says the chief financial officer of a large public sector bank. Also, there was the belief that the rupee would appreciate.

Many companies borrowed using foreign currency convertible bonds. FCCB is a debt instrument with an option to convert to equity. But if this option is not exercised, it remains as a bond to be repaid on maturity. "Given the buoyancy of the stock market, the issuers would have expected the bonds to be converted into equity. And expecting this conversion, most companies would not have hedged these positions," says the treasury head of a private sector bank. Between 2004-05 and 2007-08, Indian companies are estimated to have raised about $20billion through FCCBs.

The erosion in FCCB prices prompted the Reserve Bank to allow Indian companies to buy back them. "However, due to limited funding, companies have found it difficult to buy back FCCBs. Reports indicate that just 9 of the 156 companies that raised FCCBs have exercised the premature buyback option so far," says a Citigroup report. Companies are not allowed to borrow from Indian markets to buy back these bonds. With other funding sources drying up, they would have to turn to banks to help them repay the loans on maturity.

Meanwhile, a Kotak Mahindra Bank research report expects that "by end-December, the rupee would recover to 50.5-52 a dollar." According to a Credit Suisse research report, "beyond 2009, the rupee could rally below 50 per dollar, as capital inflows potentially pick up and growth accelerates."

The uncertainty about the direction of the rupee has resulted in companies hesitating on taking a hedging call. Says Aggarwal, "Companies are wondering whether to hedge at current levels because what if the rupee comes back to 48 level. A prudent company would be one that is largely hedged."

A simple triangle can integrate all market theories. Can we spot it?

While writing ‘Theory of Moral Sentiments’ in 1776, Adam Smith would never have thought that after two centuries people will find it oxymoronic to see morals and sentiment in the same phrase. Now, sentiment creates the popular news, lack of morals are ascribed to capitalists and what is left of the father’s work are fragmented theories.

Today, markets and prices are believed to be efficient, inefficient, random and/or ordered. All efficiency experts won’t subscribe to the mathematical order and some believers of inefficiency will call randomness preposterous.

If this was not enough, we even have a few thinkers defining a new model of finance different from economics. Unlike the coherent attempt to find a universal scientific string theory, there is no attempt to look for an integrated market model. A few behaviourologists are trashing efficiency theorists, who in turn call behavioural finance as nothing more than ‘anomalies dredging’.

Meanwhile the other two viz. random and order experts tune their trumpets. It is a cacophony out there, exacerbating the confusion as the historical crisis unfolds.

There is one thing common in all these market specialisations. Implicitly or explicitly they all look at patterns. Behaviourologists are trying to model human emotion. Fundamentalists attempt to model market information. Random experts wait for the recurring odd event.

And, order driven experts call the market model a pattern or fractal. Behaviourologists raise some questions like, “Can the human mind count?” There are of course limitations to the human minds computing ability, the very reason we cannot be called pure rational beings.

This is the same reason why even if there was complete order till infinity, we would find it muddled with randomness. What if the whole debate regarding market type is because even specialists, like rest of us all suffer from biases? What if markets were efficient, inefficient, ordered and random on the same scale but on a different time? What if order or chaos was a factor of time?

If we assume this to be true, we start answering most of the discrepancies between the various theories. Behaviourologists say humans suffer from an extrapolation bias, suggesting that we can’t see the future and we judge the past and present to estimate the future. This is why when we are on the efficient side of the market mountain, we just see efficiency. Simply putting it, we just see positivity when we are on a rising trend.

When markets are inefficient or say falling, we just look down and are unable to see the bottom or impending order. This extrapolation bias also explains why humans under-react or over-react. When we cannot see the top of the market mountain, we cannot judge how far the high is, this is why we under-react. And, when we are on the declining face, we just can’t seem to place the low and we tend to over-react.

Behaviourologists call it momentum and reversal dichotomy as they don’t see the market mountain. We can explain every other behavioural human error of loss aversion, disposition, ambiguity, validity, representativeness, winner’s curse, gambler’s fallacy, heuristics, framing, risk return distortion, over and under confidence, hope and anxiety, optimism and pessimism, if we continue to look at the market as a two dimensional triangular pattern, a face up and down, a low- high - low, cycle. One can see how the errors start getting polarized along the positive and negative slope, order being the positive and flip side of the negative uncertain chaos.

The triangle also explains why behaviourologists see the fundamentalist’s conservatism in earning predictions as the reason positive surprises tend to be followed by further positive surprises. The unanticipated surprise is the hallmark of overconfidence, a positive slope characteristic of the cycle.

The three-phased glitter and stock selections linked to excess volume, recent news and extreme price reaction is another up cycle character. The unending debate of the Fama and French three factor model, one side talking about efficiency and other side challenging it are also on different slopes of the same triangular cycle. Psychologists say fundamentalists select stocks like bonds, “good stocks are stocks of good companies”.

The reason they follow thumb rules and extrapolation is because the ongoing polarity of the up cycles, makes them comfortable and complacent. This is why a high degree of sentiment interest is followed by subsequent low returns. The turn down catches a majority by surprise. This is why psychologists compare option traders to farmers, taking more risk with cash crops after planting sustenance crops and hedging the downside. It is our way to take more risk, inefficient risk when we feel hedged. This is the reason we always misprice options.

The same triangle can explain why buybacks happen more at market lows and cause under-reaction compared to over-reaction, meaning though buy backs end up performing better, they get less attention from investors, investors under-react. Possession and dispossession of dividend also leads to over-reaction and under-reaction. When investors feel they own a dividend, they tend to over-react and take more risk and vice versa.

The behavioural criticism that humans are naive trend watchers is because humans don’t understand cyclicality. It is this same lack of understanding of cyclicality why past performance fails. The holistic pattern can also explain why prices will always keep oscillating between efficiency and inefficiency? Why riskless pair trading done on price will never be riskless? Why long-short funds playing on price are not hedged like LTCM thought and can fail? Why there will always be psychologists writing ‘trading is hazardous to your health’? Why existence of markets is linked with our inability to see the triangle? Why flipping coins can explain randomness, order, efficiency and inefficiency? Why there will always be a conflict and challenge to earn profits in economics? Why capitalism will always be driven by crisis? Why correlations are cyclical like performance? Why behavioural strategies have more tests to pass?

Why saving for tomorrow is a hindsight bias? Why we save when we should invest, and why we invest when we should save? Why Mandelbort and Taleb work together, though one is the father of mathematical order and the other claims to be the philosopher of randomness? Why ordered fractals are very close to chaotic randomness? Why the Nobel Prize winning prospect theory is about ownership and disposition that blinds humans against cyclicality? Why Prechter-Parker’s Financial-Economic dichotomy in social behaviour dynamics is not the new model of finance, but the other face of the mountain? Why demand sensitivity to price can rise and fall? Why we can make money in markets through physics, mathematics, history, psychology and so on? Why access to information and belief in it is triangular?

The two-faced cycle links everything. We are not trying to simplify 200 years of market knowledge. It was always like this, simple. Psychologists are as biased as everybody else, even if they claim to be otherwise.

Time contrarianism is not for everyone, as the preordained harmony kills all the beautiful stories.

The author is CEO, Orpheus CAPITALS, a global alternative research firm.