Desicritics Author: Ranjan Varma
Superior South Asian bloggers on Culture, Media, Politics, Sport, Business, and Technology.
- Book Review: Optimizing Corporate Portfolio Management by Anand Sanwal
As Indian companies continue to emerge and gain prominence on the world stage, those that outperform will be the ones that make better resource allocation decisions. Companies that do this consistently over time will lead their industries. It is time for corporates to optimize their Portfolio Management for competitive advantage and outperformance.
Optimizing Corporate Portfolio Management, authored by Anand Sanwal, is a useful book whose main premise is that where an organization allocates its resources is what truly drives it strategy and financial returns. So while company leaders issue strategy in presentations or in speeches, this is really not what creates strategy - it is where money gets spent that determines this.
Anand explains,Let's take a very simple example of a company which has $100 to invest and whose leadership says that their main strategy is to focus on customer loyalty. However, when you look at where they invest their money, you see that $75 is spent on customer acquisition and $25 is spent on initiatives focused on customer loyalty. So even though the stated strategy is customer loyalty, the true strategy is one of acquiring new customers if you look at the resource allocation.
Optimizing offers a practical methodology to bring this powerful discipline to your organization. The book is targeted at any organization struggling to figure out how to better allocate resources - this is every company and any sub-organization within a company, e.g., Information Technology (IT), marketing, R&D, sales, operations, product groups, etc who manage discretionary resources.
The book can be used to help general managers decide which product they should invest in or which country/region deserves more investment versus another. It advocates treating all investments as part of a portfolio whose risk and reward must be balanced - similar to the way a person tries to manage their money as a portfolio of investments.
The focus of the book is not on describing why CPM is important but in showing people how to implement a CPM strategy. It also features case studies of successful companies deploying this discipline including AmEx, Cisco, HP, TransUnion and the State of Oregon. The case studies demonstrate that the CPM discipline can be used across organization of all types, across industries and also across for profit and not for profit (government) organizations.
Anand believes that the complexity of decision-making cannot be boiled down into two dimensions or some overly simplistic framework. Decisions within organizations require using data and are much more complex. CPM understands this complexity and is about providing a way to make better decisions in a more holistic, complete way.
Anand holds a degree in finance and accounting from the Wharton School of Business and a degree in chemical engineering from the University of Pennsylvania. He is currently handling the American Express' CPM effort which spans the entire organization and captures over $4 billion of per annum discretionary investment spend. He is in fact also the holder of a CPM patent.
So Optimizing Corporate Portfolio Management is a book from the horse's mouth and is a pragmatic approach on how to link capital allocation to strategic planning. Anand's approach to enterprise portfolio management is lucid for a beginner, practical for a practitioner, and provides a lot of insights for the experts of CPM.
- Economics for Dummies: By a Dummy
I am both intrigued and fascinated by Economics. Maybe because Economics is the only field in which two people can get a Nobel Prize for saying exactly the opposite thing. Or is it that Economists get to do it with Models?
So even though I'm a dummy with Economics, I've been busy reading and trying to fathom some aspects. Honestly, my interests have soared high after I discovered a treasure trove of Economics in the form of a friendly blog by Ajay Shah and an amazing series by Walter Williams.
To start with I'll attempt to ask and answer three basic questions about economics: Why, What and Where?
Why? Economics provides a framework for taking decisions by Governments and the Management of firms. While it studies the production, distribution and consumption of products and services, Economics also studies human behaviour to address issues of demand and supply.
To me, this makes Economics an important subject to get serious about. Despite the horrible jargon and graphs. Incidentally, I don't have any problems with the curves!
What? Economics can be analyzed in two ways, Micro Economics and Macro Economics. The macro-economic environment (tax, monetary and fiscal policies, etc) defines the setting within which the firms operate. The micro-economic environment (e.g. cost analysis, marginal analysis, etc) provides the conceptual underpinning for the tools of financial decision making. Simple, no?
Where? This one is easy. Just head to Ajay Shah's Blog for an Indian perspective. You'll learn much more from them rather than any thing else because there you don't find the intimidating mumbo jumbo of Economics. And I found this amazing series on Economics for the citizen, which is very useful.
Enough for now. I'll come back with more on this "interest"-ing subject! Read this amazing explanation about exploitation where Walter Williams tries to understand economic behaviour:By no means do I suggest that you purge your vocabulary of the term "exploitation." It's an emotionally valuable term to use to trick others, but in the process of tricking others, one need not trick himself. I'm reminded of charges of exploitation Mrs. Williams used to make early on in our 44-year marriage. She'd charge, "Walter, you're using me!" I'd respond by saying,"Honey, sure, I'm using you. If I had no use for you, I wouldn't have married you in the first place." How many of us would marry a person for whom we had no use? As a matter of fact, the problem of the lonely hearts among us is that they can't find someone to use them.
- The Fundamentals of Exchange Traded Funds
Despite giving the highest returns last year and also being the least costly, Exchange Traded Funds or ETFs are hardly known to the general public. The irony is that ETF managers don't incentivize their products, which other regular mutual funds do very aggressively, hence there is no one pushing it.
But internationally what has happened that over a period of time people have found out that ETFs are ideal instruments and it has become very popular.
Basically, Exchange Traded Funds (ETFs) are open-ended index funds that can also be traded on the stock market.
Compared to Mutual funds, there are many advantages of ETFs; one is real time pricing, secondly long term investors are protected from short term traders. Hence it proves to be an ideal instrument for both long term as well as short term investors and also it is easy to buy and sell from the exchange.
One major disadvantage of ETF is that the investor should have a demat account and a broking account.
There are two types of advantages over index funds - one is the expense ratio which is currently lower in ETFs as compared to normal index funds. The second advantage is the distribution costs- the other index funds have to pay commission to the broker, while ETFs do not pay the same. So the ETF costs will be lower.
In addition to the above-mentioned expenses, there also exist some 'hidden' costs like transaction costs. Such costs do not form a part of the expense ratio like brokerage and STT. The transaction costs however, are incurred by index funds but not by ETFs. This is another area where ETFs score over regular index funds.
Did I tell you that in India the ETFs have outperformed the actively managed funds over the last year (2006-07)?
Even though the actively managed funds have done better on a 3/5 year scale, the net difference would be lower or non existent because of the higher cost. The active funds charge you 2-2.5% while the ETFs charge around 0.5% only. The extra Fund management charges will even out the difference, I guess.
I wonder why a good product like index funds do not sell like hot cakes. Comparatively an expensive product like ULIP is selling like hot cakes even though it is much more expensive than the MFs.
I guess it boils down to lack of adequate knowledge and information and unwillingness on the part of the agents have no interest in selling them.
- The Fundamentals of Stocks
I must claim my place as a successful stock investor since I have made huge profits. How? By not investing a single penny, and investing with my instincts!
Well, this (technical) analysis stems from the fact that my elder brother who is an IIT(D)/IIM(A) product has invested a lot and has lost a lot. Since I didn't have any money to invest, naturally I profited with the absence of loss. This part of the story happened when the markets were down in the dumps.
Now cut to a later date when I had some money and I invested them