I am just back after watching “Money Monster”, a movie starring George Clooney and Julia Roberts. It’s a great drama on how stock market analysts spill out spam from their mouths on TV without knowing the ABCD of that business or promoters. Some of them could be even on pay rolls of promoters/manipulators. And Indian regulators ie SEBI and department of Company Affairs being what they are, toothless tigers — how much of this would be happening on business channels on Indian
Television is anybody’s guess.
It tells the story of a gullible investor Kyle, who has lost every penny on a stock recommended on the famous Money Monster programme hosted on FNN channel by none other than George Clooney, do you hear a familiar rhyming sound of a TV channel? And Kyle believed Clooney when he recommended Ibis Capital as a stock on his programme. He invested all his money and then the stock tanked from $75 to $7 and Kyle wants justice. So , he takes Clooney and his crew hostage on live TV.
The story covers the race for TRPs as a side story, in that the director of the show is Julia Roberts who finds this hostage situation as an exclusive. The movie raises a lot of questions. It is largely spoofy and hilarious but has its thriller moments and sombre and poignant moments especially when Kyle is shot by police bullets.
I was reminded of some famous books like Barbarian at the Gates which is the story of Greed on Wall Street. Another one was Liar’s Poker, the original classic that revealed the truth about ambition, greed and excess in London and Wall Street.
What the movie portrays is what I have been again and again reiterating on my blog —Buy Good Businesses run by ethical managements/promoters/owners.
The movie shows how the promoter manipulates the prices himself and spins a story. Not as brilliant as the Big Short which also dealt with a similar subject or the Wolf of Wall Street but It is a good time pass.
I believe in Galton’s concept of Regression to the Mean. The concept of regression comes from genetics and was popularized by Sir Francis Galton during the late 19th century with the publication of Regression towards mediocrity in hereditary stature. Galton observed that extreme characteristics (e.g., height) in parents are not passed on completely to their offspring. Rather, the characteristics in the offspring regress towards a mediocre point (a point which has since been identified as the mean). By measuring the heights of hundreds of people, he was able to quantify regression to the mean, and estimate the size of the effect. Galton wrote that, “the average regression of the offspring is a constant fraction of their respective mid-parental deviations”. This means that the difference between a child and its parents for some characteristic is proportional to its parents’ deviation from typical people in the population. If its parents are each two inches taller than the averages for men and women, on average, it will be shorter than its parents by some factor (which, today, we would call one minus the regression coefficient) times two inches. For height, Galton estimated this coefficient to be about 2/3: the height of an individual will measure around a midpoint that is two thirds of the parents’ deviation from the population average.
In simple terms, a cricket layer who scores a lot of runs in ten matches, will regress to the mean and his performance will drop. When will it happen? That may be very hard to predict. Similarly in stock markets, when the markets become over heated they turn south, towards the mean PE multiple of the stock markets. And if they have been at low levels for long, they will again rise towards the mean. So the intelligent investor should just wait for regression of stock markets to make their decisions. I had covered this aspect in simple terms in NIfty Demystified.
In Feb 2016, the Index regressed towards the mean. From a high of 30000, the sensex had to turn south. Similarly from 2010 to 2014 it was at 21000 levels, and it had to move up. But the moot point is concepts are very good. When we invest, do we take decisions rationally and were buying stocks from 2010 to 2013 and selling in 2015 and again buying in August 2015/Feb 2016 or not???
These days I am applying the regression to mean theory to THOMAS COOK. In bits and pieces I am nibbling at it below Rs 175/-. How long will it stay below its mean of Rs 200? It will rise. May be the IPO of Quess will be the trigger? In any case I know two things — The promoters under Fairfax and Watsa are ethical businessmen/professionals. And secondly, it is a strong brand leveraging a great business. Meeting two out of three of my parameters. I wanted some forex for someone and I found that Thomas Cook was most convenient and had pretty competitive rates. A thumbs up for the business.
I am waiting for my son’s SSC results and hoping the same regression to mean applies for him too. I mean he did not do so well in Xth and I am expecting him to regress upwards towards his mean in Class XII. Keep laughing. And yes, do go watch Money Monster.