Saint Rantic

Sow the seeds of change today.

Fight with perseverence, smartness and patience

Tommorow, you will find yourself standing at the roots of a revolution!!!!!!

This is in response to the comments I got for the previous post. The comments are very legitimate and the arguments are strong. The point of difference however is in the core of the message that I was trying to drive home. The points of assumptions in those arguments were totally different from what i was trying to portray. So here is the exact(and mathematcial) message of what I wanted to give.
***************************************
Assume that you have some very limited amount of rice(You are poor that is). Assume that you are hungry and assume that you have a BIG field. Assume that the field can be fertile randomly(it can be infertile too).

My question is: Given that you are poor/average, how much will you EAT and how much will you SOW?

The answer is : Eat only as much is neccessary to keep you alive, and sow as much as you can.

In other words when u are poor and u have limited amount of money do not invest in luxury…. invest in growth and invest as much in neccessities to keep u alive. That is the sure shot strategy to get rich later.
***************************************
A more mathematical discussion is provided below

Its simple :–>

assume that you have some capital. Given the conditions of your organization how would you allocate it ?
This is the stuff that CEO’s are payed for.

The answer : In such a way that long term growth is ensured.

Given that u have are poor and u have a very limited capital; where would u invest it in order to grow?

The answer to this can be multi-leveled. I will give u a simple one. One that makes concrete logical sense (and one that i am comfortable handling from the financial engineering sessions i have been attending in USC).

One of the most fundamental questions in economics AND the CRUX of an MBA program is the question above.

Put in other words : Would you invest in a potential liability or would you invest in a potential growth asset, given that you are poor? (or in some rare cases; given that u have truck loads of money, but thats not what we are talking about here) .

Here are some fun facts:
Any asset(not a liability) which makes a profit of say ‘D’ with a growth rate of ‘g’ would be priced as of today as D(1+g)/(r-g). This is a simple form of a concept called Rational Asset Pricing (which infact is used to determine the value of stocks of a company for example). Where ‘r’ is the risk free interest rate.

All this stems from the most important mathematical equation known to mankind :-

S = p(1 + R)^n –> The compound interest equation (applies to a liability too in such a case put p as the present value of the liability and r as negative); ‘S’ is the value after ‘n’ years.

If the interest is compounded every second the equation turns into an exponential one.

S = p*exp(Rn) –> where exp is the exponential function. note that if ‘R’ is negative ‘S’ becomes ZERO in NO TIME.

Another fun fact is that the same things have been used to infer two things about markets

• Markets are effecient almost always
• (Stock) Markets vibrate randomly by a phenomenon called brownian motion(which got Einstien a Nobel prize in Physics and Scholes a Nobel Prize in Economics).

Coming back to our issue let us say we buy a potential liability: say a car which has a depreciation rate each year and hence a negative growth rate. Its easy to show that with a fixed linearly increasing income this car would be eat into the regular income of an individual. Where in the money he could have invested in growth somewhere would be instead going into the maintainence of the car.

Its easy to prove (using the central limit theorem, by the assumption that each individuals economics is an independent identically distributed random variable) that on an average this would result in a LOSS in the income of an individual thereby pulling down the growth rate of the market. The result is an economic disaster –> it could be seen as one of the reason for the existence of a HUGE underperforming middle class in India. Because we have built ourselves as consumers who tend to spend ourselves more on potential liabilities than on growth assets.

Thus we see that we have incurred a factor of negative growth with a liability which has a negative growth value. We also see that because of ‘care free’ investment strategies the middle class ‘on an average’ of India REMAINS middle class and stagnates in income.

Lets compare it with a growth engine or in economic terms a growth asset whose value grows over the years. The argument is exactly the same as that of the one i gave above. The best example would be a tractor.

Even though a cheap tractor is a liability its easy to see that it increases the productivity of the farmer on an average and hence it has a positive rate of growth. Since the tractor is cheap, even people below poverty line can afford it. Now since i am sure that the tractor is a positive growth engine for a farmer i would be more than happy to give a loan to him. This would mean that I am increasing the growth asset of the farmer as well as mine too.

Now consider the class of poor farmers who can afford the tractor. Their growth asset value will increase(in other words –> they will grow rich) hence according to the Central Limit Theorem the poor man will be more and more richer. And since on an average the poor man grows richer we have national wealth being created because on an average the whole population gains wealth. This is the alchemist’s secret –> To create gold from nothing.

I am not arguing for OR against anything here. My point is to state that instead of making liabilities cheaper so that every one will afford the luxury and make themselves poorer by the day, we have to make growth assets cheaper so that everyone can grow rich and hence they can afford to spend on whatever they want.

This is just one example. Of course there are other factors which we have to comsider which i have not done.

The essence is this. You have an infinite field (the market potential) where u can sow whatever u want. You have a limited amount of rice. The question is how much will u sow and how much will u consume.

The crux of my argument was that we should focus on sowing the rice as much as we can and consume only as much as we require, so that tommorow we grow into the worlds strongest power.

The NID is designing a car worth less than 100,000.

All this seems great and ’sounds great’, but it fails to answer one question…. Why?

It is not my intention to state that developing a car is less of a noble deal. I am saying that it does not make economic sense.

Let us try to understand why this concept is an economic stupidity.

The purpose of a car is to make travel time lesser. It is to give a convenience to the user. In short more than luxury it is a device to increase the productivity of life. All this sounds great and seems to be in great coherence with the concept of a dirt-cheap car.

Let us say the poor man is called a ‘farmer’. It’s a slightly wrong term to use and it is an insult to the farmers of India. But since our very own politicians cautiously keep them poor; I am a bit forced to use the term ‘farmer’ as an example of the poor man in India.

Let us try thinking in a slightly different manner. Any entity that is growing should obviously produce more than it consumes. So any attempt of anything done “for the poor man” should be in such a way as to increase the productivity of the nation. Which is the way to create national wealth.

To achieve such productivity I would invest money into a tractor, which is dirt-cheap so that every farmer can afford. This would increase the agrarian productivity.

How does that help?

The farmers will produce more than they consume. Which in turn will make them richer. Enabling them to pay more taxes and thus making the govt. richer. Which in turn will help the govt. to make better roads and infrastructure (making an impossible assumption that the government is not corrupt). Which in turn will help more cars run and trucks and transportation run fast and smooth and hence increasing the productivity of the nation.

We SHOULD NOT overlook the fact that since the farmers get rich they would be able to buy cars which ARE costly…. defeating the VERY purpose of building a dirt-cheap car.

Another problem of a car is that for every cheap car introduced into the market will demand more OIL (which will decrease our Foreign exchange reserves) AND for every new car there is a MINIMUM increment of infrastructure a govt. has to undertake in order to keep the vehicle population under control and in order to keep the transportation system under control (the lack of which is a recipe for disaster and can be seen happening in BANGALORE)

So instead of making things CHEAP and affordable so that people don’t know that they live in poverty make the people rich enough so that they can AFFORD the luxury. This is the way to make poverty history.

Or in other words a tree looks best when its roots are within the soil and the leaves are in the air. What we have in India is an Inverted tree. A system built on charity.

An Inverted tree does not live.

************************************************************************************
i had to update this because i think i did not drive home the point i was trying to make.

Its simple :–>

assume that you have some capital. Given the conditions of your organization how would you allocate it ?
This is the stuff that CEO’s are payed for.

The answer : In such a way that long term growth is ensured.

Given that u have are poor and u have a very limited capital; where would u invest it in order to grow?

The answer to this can be multi-leveled. I will give u a simple one. One that makes concrete logical sense (and one that i am comfortable handling from the financial engineering sessions i have been attending in USC).

One of the most fundamental questions in economics AND the CRUX of an MBA program is the question above.

Put in other words : Would you invest in a potential liability or would you invest in a potential growth asset, given that you are poor? (or in some rare cases; given that u have truck loads of money, but thats not what we are talking about here) .

Here are some fun facts:
Any asset(not a liability) with that makes a profit of say ‘D’ with a growth rate of ‘g’ would be priced as of today as D(1+g)/(r-g). This is a simple form of a concept called Rational Asset Pricing (which infact is used to determine the value of stocks of a company for example). Where ‘r’ is the risk free interest rate.

All this stems from the most important mathematical equation known to mankind :-

S = p(1 + r)^n –> The compound interest equation (applies to a liability too in such a case put p as the present value of the liability and r as negative); ‘S’ is the value after ‘n’ years.

If the interest is compounded every second the equation turns into an exponential one.

S = p*exp(rn) –> where exp is the exponential function. note that if ‘r’ is negative ‘S’ becomes ZERO in NO TIME.

Another fun fact is that the same things have been used to infer two things about markets

• Markets are effecient almost always
• (Stock) Markets vibrate randomly by a phenomenon called brownian motion(which got Einstien a Nobel prize in Physics and Scholes a Nobel Prize in Economics).

Coming back to our issue let us say we buy a potential liability: say a car which has a depreciation rate each year and hence a negative growth rate. Its easy to show that with a fixed linearly increasing income this car would be eat into the regular income of an individual. Where in the money he could have invested in growth somewhere would be instead going into the maintainence of the car.

Its easy to prove (using the central limit theorem, by the assumption that each individuals economics is an independent identically distributed random variable) that on an average this would result in a LOSS in the income of an individual thereby pulling down the growth rate of the market. The result is an economic disaster –> it could be seen as one of the reason for the existence of a HUGE underperforming middle class in India. Because we have built ourselves as consumers who tend to spend ourselves more on potential liabilities than on growth assets.

Thus we see that we have incurred a factor of negative growth with a liability which has a negative growth value. We also see that because of ‘care free’ investment strategies the middle class ‘on an average’ of India REMAINS middle class and stagnates in income.

Lets compare it with a growth engine or in economic terms a growth asset whose value grows over the years. The argument is exactly the same as that of the one i gave above. The best example would be a tractor.

Even though a cheap tractor is a liability its easy to see that it increases the productivity of the farmer on an average and hence it has a positive rate of growth. Since the tractor is cheap, even people below poverty line can afford it. Now since i am sure that the tractor is a positive growth engine for a farmer i would be more than happy to give a loan to him. This would mean that I am increasing the growth asset of the farmer as well as mine too.

Now consider the class of poor farmers who can afford the tractor. Their growth asset value will increase(in other words –> they will grow rich) hence according to the Central Limit Theorem the poor man will be more and more richer.

I am not arguing for OR against anything here. My point is to state that instead of making liabilities cheaper so that every one will afford the luxury and make themselves poorer by the day, we have to make growth assets cheaper so that everyone can grow rich and hence they can afford to spend on whatever they want.

This is just one example. Ofcourse there are other factors which we have to comsider which i have not done.

The essence is this. You have an infinite field (the market potential) where u can sow whatever u want. You have a limited amount of rice. The question is how much will u sow and how much will u consume.

The crux of my argument was that we should focus on sowing the rice as much as we can and consume only as much as we require, so that tommorow we grow into the worlds strongest power.