The ability to distinguish between the noise and the signal is a rare skill within the confines of the financial markets and investment world. In our modern times, there is too much emphasis on the stock market while this particular market may tend to disguise macroeconomic realities, especially when isolated in the broader context of indices. Especially for a retail investor, there are many other investment vehicles ranging from physical assets such as real estate and precious metals to commodities and other diversified portfolios the underlying assets of which may still be the physical assets. In this article, I will introduce other important financial markets that will be utilized as reliable proxies to understand current market conditions and are generally ignored by retail investors. In these perilous times, ignoring these fundamental markets and solely focusing on stocks may ruin your wealth and derail your plans to financial freedom. The content can also be used as a blueprint for understanding different set of investment vehicles and comprehending the fundamental differences between markets, as well as increasing your financial acumen with respect to removing the noise from the signal.
Category Archives: Management Science
Solution to Management Science Series #216: Should Condor launch a new website?
An online video games store named ‘Condor’ needs to test its old and new web designs. Condor randomly redirects a sample of customers to either site and measures the sales information of customers who purchase.
Condor will launch the new website only if it is 90% confident that the new site generates more sales per transaction (i.e. average transaction amount) than the old website.
Below are shared the data for the sample of customer transaction amounts from the new site and that from the old site.
a) Could you make an educated guess on what Condor should do without calculating anything?
b) Design a hypothesis test and determine whether Condor should roll out the new website.
c) Solve the same problem by using Excel.
On economics you have been taught wrong 🧭
Unfortunately, the dismal science taught in our schools and universities rests on many blatantly wrong assumptions.
From the definition and calculation of inflation to investment management and worshipping only a small subset of assets while ignoring those that would lead to greater financial freedom, the economics, as a subject, is losing ground while being mired in farfetched quant analyses and losing its connection with the realities of daily life and our changing world.
In this article, I elaborated on the most common misconceptions that are being perpetuated through the teaching of economics. The reality appears to be quite different from what you are being told every day.
Solution to Management Science Series #215:Real-world example: Cornell Endowment
Selim Hasagasioglu Academy and Consulting Services agreed with Cornell University’s Office of University Investments on increasing the average donation per Cornellian including alumni and current students.
Last year, average donation value was $200 per Cornellian. Selim’s company designed a new digital donation platform and was additionally tasked with assessing whether the new platform increases the average donation amount. The company investigated a random sample of 60 disparate donations and the sample’s average was calculated as $225 while the sample standard deviation was $100.
a. Help the company construct the Null and Alternative Hypotheses.
b. At a significance level of α=0.05, what should Cornell do, considering the results of this marketing experiment?
c. What kind of information is provided through this hypothesis testing project?
On E-commerce: Can every category be offered through e-commerce?
E-commerce and traditionally analog incumbents, especially those that are unspecialized, have been trying to penetrate into different industries and categories, thinking that many such offerings can be provided digitally.
Were they able to make it happen?
Of course, retail operations specific to some products have quickly utilized e-commerce practices, as well as omni-channel applications.
While computer software and video games have been moving into the “digital shelves” in a profitable way as they are innately digital, many other categories are lagging behind again because of their inherent analog nature.
There are only a few category killers and niche players that have been profitably disrupting innately analog businesses despite the presence of powerful, albeit unspecialized and broad-based, incumbents.
What are the categories that are/were tried and could not still be fully streamlined through e-commerce?
In this article, I draw on my experience at Amazon and elaborate on what it takes to be a profitable and viable e-commerce business. Furthermore, I also analyze companies such as 1stdibs, Etsy, and Wayfair and what kind of a future befall these companies, also expanding on what they were doing right and wrong. This article is intended to be another blueprint for those who plan to go online and launch their e-commerce business.
Solution to Management Science Series #214: Real-world example: Berserk Toy Company improving its QC processes
Berserk Toy Figures is a toy company producing its copyrighted Guts figures.
The manufacturing process owned by the company creates the head part of the figure that is designed to be 19 mm wide with a standard deviation of 1.5 mm.
Head part of the figure is an important feature of the figure and regularly goes through the Quality Control. QC sample size is 35 parts. A recent batch of head parts appeared to have an average width of 18mm.
1.What is the probability of getting an average width equal to or less than 18mm?
2. Is there a quality problem? Use your finding in 1.
3. Berserk Toys is a boutique toy maker that could not afford to stop production and run a root cause analysis. How can the company tackle this problem and increase the confidence?
Which company is this?
Which company is this?
Hints:
-It operates in a traditionally analog business that is tested by digital challengers.
-However, it continues to beat every one of them in terms of profitability.
-Operational excellence, efficient cash flow management, customer loyalty, and customer service are their hallmarks.
-It also started its digitization initiative, currently comprising 16% of its total net sales at maximum (does not disclose exact number)
-It has a positive book value, so do not mistake it for other companies that are technically accounting insolvent.
-Its stock is currently traded at a P/E of 45-50.
-Its stock is currently traded at a P/B of 15.
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Note: This article is based on a social media post I wrote almost 4 years ago. In the article, I will unveil the company and dissect its operations and its stock. Moreover, we will try to look into whether much has changed since the first time I published my post.
Solution to Management Science Series #213: Real-world example: Marbella Call Center
Marbella Call Center is a contractor assessing the quality of calls to the customer services of top global brands. Recently, Marbella agreed with Eldorado, a global retailer, on assessing the quality of the customer service of Eldorado.
Marbella has been periodically recording a random sample of customer calls to Eldorado. Calls are evaluated on whether the employee taking the call abides by Eldorado’s customer support policies.
Historically, 80% of all calls conformed to the policy. A recent sample of 120 calls found that 70 adhered to the policy.
1. What is the sample proportion?
2. Is the normal distribution a good approximation?
3. What is the expected value and standard deviation of the sample proportion?
4. What is the probability of getting 70 or fewer calls that adhered to the company policy?
5. Do you see any problems concerning the adherence to the company’s customer support policies?
On Scaling Service Businesses and Digitization 💻
“Many businesses gain only limited advantages as they grow to large scale.
Service businesses especially are difficult to make monopolies.
If you own a yoga studio, for example, you’ll only be able to serve a certain number of customers.
You can hire more instructors and expand to more locations, but your margins will remain fairly low and you’ll never reach a point where a core group of talented people can provide something of value to millions of separate clients, as software engineers are able to do.”
➡️ Taken from Peter Thiel’s Zero to One
In this article, I try to disprove Thiel’s claim, providing a number of companies that are services businesses and have scaled through digitization successfully let alone have become monopolies despite inherently being service businesses. I elaborate on how these companies reinvented their business models and became successful while also sharing what they could have done better and some potential risks looming large in the future. I also demonstrate how these exceptional companies destroyed established trends and biases.
Solution to Management Science Series #212: Real-world example: Determining Portfolio Returns
An ETF created by the investment management firm, Gold Returns (GR) has a normally distributed expected monthly return with μ = 2% and σ = 8%.
a)What is the probability that the return is positive next month?
b)What is the probability that the portfolio’s return exceeds 10%?
c)What is the median return?
d)What is the first quartile of return?