Monday, February 8, 2010

A sad drag at nicotine

Did you notice that all those smokingly bright people, - King, Russell and Einstein were all smokers? Russell once said – “smoking saved my life”. Henry Allingham, once the oldest living man on the planet (died in 2009 at age 113) stated the secrets to his long life were "Cigarettes, whisky and wild, wild women — and a good sense of humor". Till the seventies, people used to smoke everywhere – in the flights, in the offices and inside the mosquito nets.

If you look at the pattern of tobacco consumption in the US, it shows the rise and fall of smoking. It has been declining almost as rapidly as it grew, peaking in the mid-sixties. Coincidence: those were the years of highest triumph in our modern history, since when our HPI (Happy Planet Index) has dropped by 30%. Well, more than 30% smokers have quit since then. Wanna misapply statistics again? There is a brilliant correlation between the number of inventions and per capita cigarette consumption in the US. God knows if man could ever land on the moon if there were no cigarettes. Just kidding, buddies. Smoking does not save your life - unless your arch rival is a chain smoker or Russell is your only source of sustenance.

Saturday, January 16, 2010

Tiger Woods Scandal: Loss in Shareholder Value?

John Edwards, ND Tiwari, David Letterman, and Tiger Woods; - yes, I am thinking scandals, - the most highlighted sex scandals of 2009. Admittedly, that's quite an atrocious phrase to be linked to these very stalwartly individuals. But, unfortunately, that’s how our society, our minds and our media work. Despite their phenomenal accomplishments at different points of their lives, Google trend shows that number of hits on each of them has gone up manifolds after the scandals broke. The only exception was for John Edwards when Kerry picked him for Vice Presidency in 2004. That’s the power of a sex scandal.

Let’s put things in perspective. How do we value Martin Luther King Jr., Bertrand Russell and Albert Einstein? King was quoted to have a “compulsive sexual athleticism”, Russell allegedly suffered from "galloping satyriasis", and Einstein was a “prodigious lover with a string of mistresses”. And then there are FD Roosevelt and JF Kennedy and B Clinton and many more. We know them as people who defined our world as we live it. How would it detriment having Picasso as the iconic brand ambassador for Google or Electronic Arts?

I am not trying to justify or criticize anybody’s sexual acts beyond or far-beyond marriage. The point is that personal life is personal and effects usually stay personal (unless you are in politics). For public figures, it’s natural that any aberration from societal norms stirs up public excitement, but then they fade away quite quickly. People value what matters to them and discard what does not. It's a matter of time.

I was amused by the recent study carried out by UC Davis concluding that the Tiger debacle resulted in destroying $5-12 Billions in Shareholder Value.

The fundamental flaw in this study is that the concept of “Shareholder Value” has been brutally abused. Assuming shareholders are not only day-traders, assessment of shareholder value destruction is strategically insignificant 15-days after any event - an earthquake or a security alert or a car crash. It may even be insignificant 15 days after a one-off poor quarterly performance report. “Shareholder Value” is a long term thing, and must not be associated with short term market volatility.

Without juggling the esoteric model that spit out the strategically significant evidence of the demonic destruction, let me run a common-sense hypothesis test. Assume for a moment that you are the CIO of a Fortune 500 company venturing into an enterprise-wide technology transformation initiative and Accenture (ACN) is at the top of your bidder’s list. In your right mind, would you stop awarding the project to ACN just because Tiger allegedly slept with multiple ladies?

Well, understandably, an overly sensitive buyer planning to buy a Nike may go buy a Reebok instead on an emotional impulse. So, if this is worth any financial analysis, it should be done bottom-up, accounting for the shifted consumer behavior. However, these behaviors would be very short-lived because of fading excitement and discontinued endorsements. I think it’s too ambitious to assume that our market is efficient enough to capture this information so quickly with any reasonable accuracy.

I am a big fan of statistical models, but then I agree with this quote by Gregg Easterbrook: "Torture numbers, and they'll confess to anything." Screening models through commonsense is the first step for any financial analysis. Otherwise, someone can even claim that it’s not the stimulus funds but the prodigious Portuguese dog that is working on the economy. Indeed, there is an amazingly high correlation between the growths of S&P index and Obama’s Bo since April 2009.