Making Mistakes

Imagine running a company where every time an employee makes a mistake that loses money for the company, the employee gets fired.  Or worse yet, the employee is prosecuted and goes to jail.  Such a company would not be very successful.  Employees would not have an incentive to do anything.  There are very few actions that one can take in life that have a zero probability of a negative outcome.  If one’s mandate is to avoid negative outcomes, one will give up taking action altogether and forsake all potential positive outcomes as well.

Successful companies need honest, hardworking and intelligent people who are willing to take calculated risks in the interest of the company based on information available at the time.  Situations change, the environment changes and business realities change. Sometimes things work out and sometimes they don't.  But all companies that desire to be successful need their employees to continuously make decisions and to take reasonable risks.  Successful companies train and inculcate this attribute in their employees.

However, if the culture of the organization changes such that employees’ interests become misaligned with the interests of the company and if employees deliberately make poor decisions that are likely to cause loses for the company while enriching themselves personally, the organization is doomed.  Such actions of employees become grounds for them getting fired, prosecuted and potentially jailed.

The difference between the honest mistake and the deliberate poor decision is identified by the intent of the action taken, the misalignment of interests and the unjust enrichment by the action.  In the absence of looking at these three things, both actions are likely to look identical from a distance.

What is true for successful businesses and their employees is true for successful governments and their employees as well.  Governments that desire to succeed and fulfill the aspirations of people, need government employees who are intelligent, honest, hardworking and who make lot of decisions and take reasonable risks.

In 1988 India enacted a law called the Prevention of Corruption Act that did not distinguish between erroneous decisions of government employees and those that caused them unjust enrichment (via bribes or corruption). The intent of the act should be to prevent a misalignment of interests between government employees and public interest and should not foster a culture of indecision which has become the norm in government.  In 2013 the UPA government proposed amendments to the PCA but the act could not be passed. The NDA government has proposed further changes and the amendment is currently in Parliament. If the dysfunction in Parliament ends, it is likely that the amendment will get passed.  I believe that in time, this will prove a landmark amendment that will reduce the culture of indecision in government and will encourage (at least a few to begin with) honest, intelligent, hard working and motivated officers to take potentially disruptive and game changing decisions in the public interest.  Some of those decisions will fail, but a few will succeed and that will in turn potentially change the trajectory of the country.

The Lonely BRIC

I would like to take this opportunity to wish all readers of my blog a very happy and profitable new year. The world is a crazy place and seems to be getting crazier. Stay safe, stay optimistic and in the words of Johnny Walker, "Keep Walking!"

In the words of Yogi Berra, "It is tough to make predictions, especially about the future." But, it is even tougher to write a new year blog post without making predictions. So, continuing with the clichés, here I go putting my foot in my mouth and painting myself into a corner.

Despite my optimistic predisposition towards life in general, some things are clearly visible to the naked eye and refusing to believe them makes one delusional. Therefore, 2016 is going to be a tough year for Brazil, Russia, China, South Africa (the BRICS minus India) and as a result for emerging and frontier markets across the board. They have a lot of structural issues to sort out and these things by their nature take time. India has been sorting out its structural issues for the last few years and the light at the end of the tunnel is now visible. This makes India the lonely BRIC that is likely to have a stable economy in the first half of 2016 and a potentially accelerating economy into the second half of 2016 and well into 2017 and 2018 in a cohort that is in trouble.

The interesting challenge for investors in India will be dealing with the duality of a downward drag from emerging markets and an upward pull from domestic growth. The result, in my opinion, will be a market that is likely to completely divide into two. Any industry/sector that is uncoupled from imports and exports either directly or indirectly (pricing power) is likely to see a wall of money descend on it. And those that are affected by the goings on in other emerging markets are likely to wallow in misery. Given that the supply of domestically driven stocks is limited and their float is even smaller, ridiculous valuations will drive a gigantic revival of the primary markets in the such sectors. To the envy of public markets investors, this will make venture capital investors look like rock-stars. This will likely funnel even more money into early stage investments leading to a frenzied blow-off. The nearest analogue in history to the scenario that is likely to play out is the technology, media and telecom (TMT) boom of the late nineties. Those looking for a repeat of the broad based emerging market (and easy money) driven run of 2004-2007 are likely to be left holding a lot of lemons. India therefore will be an exciting and difficult place for investors in 2016 and it will behave like a lonely survivor in stormy waters. The financial markets as always will give us plenty to do and will keep us busy in 2016.

My concluding cliché then; may your stocks go up in 2016 and if they don't, may you not buy them!

Chinese Overcapacity is Everyone's Problem

The problem with economics is that economic theories work for a while until they stop working. Unlike the natural sciences which are dependent on the laws of nature, economics is a social science and is dependent on the behavior of millions of individuals. The problem with human beings is that they are prone to mass hallucinations and group think. More...