An Efficient Millionaire in an Inefficient Market

How to become a millionaire? This is literally the million-dollar question that many have sought an answer for, but only a handful who actually is successful in the search. Stock exchanges around the world have made instant millionaires out of many Toms, Dicks and Harrys. We are now seeing Saravanans, Ah-Hocks and Rizals joining this club too.

However, with stock markets too, one can as easily turn from millionaire to a pauper. The more interesting question is whether one can avoid the risks that a potential millionaire encounters. To phrase it economically, "Are stock markets efficient?"

From the little that I gather, my guess is that stock markets are not efficient. And this means only one thing: Profits CAN be made without undertaking much risks. Like the experience of going to Chatuchak Market, you only need to spend a bit of time to research and sift out the bargains from the overpriced goods.

Rule: Under-researched companies are likely to represent better opportunities because their lack of coverage implies that the potential may not have been fully uncovered. Likewise, if a company with little news coverage faces problems, the market may also be slow to react and this in itself, represents another opportunity (e.g., by selling the stock).

Example: GrandBanks Yachts Ltd. This company's share price plunged 22.6% in a single day, apparently with no good reason. On the surface, the company has very strong cashflows and even if businesses may not be good, it does not warrant a reduction in market value by more than one-fifth. The problem, however, was that on 6th Sept 2007, it announced that earnings for the first half FY will be materially lower than both the first and second FY of prior year. As the diagram clearly shows, this FACT was not taken into account at all until almost 2 months after the announcement. Conclusion? Under-researched companies represent opportunities because inefficiencies exist.

And this is but one common source of inefficiency found in the markets today. So if anyone tries to convince you again that the stock market is efficient, you know what to say.

Monty Hall Problem

I am an avid puzzle solver, and I would like to share this really interesting one that I read about many years ago. This puzzle is famously known as the Monty Hall problem, based on the name of the host of a game showin the United States.

What happens during the show is this: A contestant is shown 3 doors. He then decides on a door to open, and behind 1 door will be the grand prize of a car (the other 2 doors reveals a goat). After the contestant decides on a door, the host, who has prior knowledge of where the car is, will open 1 of the door that the contestant did not choose, to reveal a goat. This leaves 2 remaining doors unopened, one of which will reveal the car. The host then proceeds to pose a simple question to the contestant: Do you want to change your choice?

The solution to this puzzle is counter-intuitive. By changing one's choice, the contestant actually increases his original chance of winning from 1/3 to 2/3. Many people, including some famous mathematicians who challenged this proposition when it was first suggested, thought that the probability is 50-50 and it did not matter whether you change your choice or now. But they were wrong. By changing his choice, the contestant improved his chance of winning from 1/3 to 2/3.

The thing I like about puzzles is that they sometimes reveal the biases or tendencies that people generally have. It helps you understand what these biases are, and you can avoid them when making day-to-day decisions. After all, life is about making decisions. Knowing the odds well always improve your chances.

In the long-run, the person who makes the most of his choices is likely to fare way better than his peers. Call it compound consequences if you like. They stack up slowly, and by themselves look insignificant, but put together will become consequential.

Hey Dude, Where's My Taxi?

End taxi rigmarole
Sun, Oct 21, 2007
The Straits Times

TAXI drivers who hustle visitors by quoting fixed charges that are several times the equivalent metered fare must be dealt with firmly. They should be banned by the Land Transport Authority (LTA) from holding a licence for a number of years. Three years should do it. That will teach them. Little is to be accomplished by the taxi company they are contracted to dismissing them. They can switch to another quite easily. Licence suspension? A written warning? Let's not get wimpish. These are cheats who have brazenly expanded their territory of operation from the race course, where pickings are good, to hotel and shopping zones where tourists are a catch. Locals are being denied an equivalent service as a result. A visitor cited in a Sunday Times report assumed that not going by the meter was standard practice in South-east Asian cities. Not this city, never. The message must go out loud and clear to the small number of cabby diddlers.

That said, the LTA ought to consider if the insidious practice is an indication of market failure. Fares are too low, which places huge demands on the service. Cabbies' earnings are not commensurate with the time and energy put in, and going without leave, medical and CPF benefits on top of that. Taxi operators bump up drivers' earnings through all manner of surcharges and the phone booking charge. This has caused more confusion and dissatisfaction among commuters than is worth the trouble. Once and for all, the LTA could take an executive decision by reclaiming the price-setting prerogative in the deregulated service. Raise the flagdown fare substantially (50 to 70 per cent, say) and increase the rate of kilometre charges. That should cut out the mischief and preserve earnings, even if demand drops initially. Taxi companies have no incentive to make the move as income from daily rental is assured, whatever the level of commuter demand.

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While the Straits Times editor correctly identified that market failure has occurred, I do not think that the proposal to increase flagdown fares and rate of km charges will not solve the perennial taxi problem. He failed to consider the off-peak period where we have a case of too many taxis on the roads with too few passengers. Also, there are cases where passengers want to be picked up from far-off locations but they are not able to find a willing driver. The same goes for passengers who wish to be dropped off at similar far-off places.

Some commuters complain that taxi drivers should never "choose" passengers, but who can blame them for wanting to do so? After all, this is their bowl of rice, and like insurance agents or other types of sales persons, they would prefer to serve clients that offer a better deal.
Singapore once faced an insurmountable task when addressing city-area traffic congestion during peak period. But our brilliant civil servants came up with the great Electronic Road Pricing system which many modern cities are now eager to copy (if LTA had this idea patented, our Government may be sitting on a growing pile of royalties). Perhaps it is time to consider using technology to resolve the taxi issue, an increasing source of frustration to many Singaporeans.

What I suggest is this: Have a central booking agency undertake all call bookings. This agency will receive booking instructions from commuters and relate the bookings to all taxis via the device. On top of the usual booking information, the agency will also request that the commuter provide a price range which he or she is willing to fork out like say, $3 to $6. This price range, of course, is not communicated to the drivers, but the agency will indicate to the drivers first the lowest price, with increasing bids of $0.50 or $1 every time interval for which there is no taker. To ensure fairness and accuracy, it can be mandated that all communications be made via a simple device which serves to display the going rate for any pick-up. The driver willing to answer the call can then click a simple button on the device to indicate this.

With this move, all surcharges can be abolished, perhaps with the exception of the surcharges for pick-ups from Changi Airport since we still need a steady supply of taxis for our foreign tourists. I also propose that Government not regulate the high-end market for taxis such as the mercedes cabs. That they offer a level of comfort and service beyond that of the normal cabs is a sufficiently good reason to allow a separate market. Commuters willing to pay a premium should not be prevented from doing so.

The one problem that this solution may encounter is the mindset of the commuters. I suspect that not many will relish the feeling of the price uncertainty. However, the people need to recognise that they have substituted price uncertainty with time-waiting uncertainty. In other words, if I am willing to pay, I will be guaranteed a taxi. Otherwise, I may be better off taking the MRT home instead of waiting indefinitely to get a booking confirmation from the call centre.
Singapore has invested much money in our public transport system for buses and trains. It is time to do something about our taxis in order for our transport system to be truly world-class.

P/S: I intend to patent this idea. Anyone keen to invest in it?