Friday, April 11, 2008

Duality

Traffic is something that is less researched, less discussed but something that affects everybody’s lives. It has a direct effect on productivities. You will appreciate more of this when we are done with this post. As with other things in the world, traffic perfectly follows a free market concept. More of which I will explain by exploring the duality of traffic and stocks (Some day I will write a research paper on this one).

The objective of an individual in traffic is to minimize the time he spends to reach his destination. An investor (equity alone for simplicity) would like to maximize his returns and wealth. The duality does not end there. In a perfect equity market, there is no strategy that can make money consistently. All stock prices take random walk. Similarly in traffic (perfect conditions), no shortcut can get you quicker to your destination as enough people will know about it and hence will crowd the shortcuts.

In investments, bigger the investment size, the more you have the potential to affect prices by your buy/sell decision. Similarly in traffic, bigger your vehicle, you affect the overall traffic (Others' time savings and wastage) more. And similarly smaller the investment or the vehicle, it is possible to maximize returns or reach destination quickly. (This explains motorbikes darting across quickly)

Apart from the fundamental strength of a company and its business model, what can explain the stock price of a company is ‘Herd behavior’. And similarly with traffic, apart from concentration of companies and other institutions in locations, ‘Herd behavior’ can explain congestion in the time all people choose to commute and the routes they prefer to take.

The role of regulators can also be thrown light on in parallel. The stock market watchdog (SEBI) would like to aid investors in enhancing their wealth by improving efficiency and transparency. They would prevent creation of cartels and monopolies. They tax the profits moderately to keep themselves functioning and to balance out the earnings. The traffic regulator works to improve overall efficiency. It penalizes offenders. It uses duties on new vehicles to control the number of new vehicles that are added to the roads every day.

And as investments (stock picking), to succeed in traffic (without accidents and be quick), you need to regard traffic as an art as well as a science. I am trying hard at both. :P

P.S : The post can be utterly meaningless to a lot of people, but it gave me tremendous satisfaction penning it down. But I am confused if that really is a blogger’s objective or should play to the crowd.

3 comments:

Sriram said...

Srini, nice post da. You have turned out to be one finance freak !!!

As a response to your question, I think it should be your thoughts in black and white, and still make the reader reach the end of the blog and comment on it ! So, I guess it is a bit of both, with emphasis on the former (Btw, Ayn Rand would disagree to my viewpoint, quoting that your posts should ENTIRELY lie on your satisfaction level)...

Unknown said...

i wd like to know if ther is any sort of expessway or freeway in stockk market?
and, tis post wd be useful for the reader if u can brief on 'how to use driving lessons to invest in the market'!!!

Srinivasan said...

Expressway hummm....
yeah y not...
the derivatives... or commonly called futures and options. they offer great returns but involving greater risks. But people can sensibly hedge their position and playdown the risk in it, in the sense drive according to the rules and limit losses.
Driving lessons for investing... sounds koool...
if all the technical analysis can help in investing, why not driving lessons :D