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Monday 31 December 2018

ET Article: Investment strategy for election year? Just don't think too much!

2018 has been a very testing year for equity holders. Investors in midcaps and smallcaps have bled profusely. Largecap indices, with the exception of a handful of stocks, have also gone down. This is normal. Equity returns are not linear. Equity as an asset class does not give steady, regular returns. 2017 was a year of super-normal profits. On a two year timeframe investors have still made positive returns. It is the recency effect and the availability bias which plays tricks with our minds and makes us feel that the markets have let us down!
I will not hazard a guess on what the market will be like in 2019. Not because I don’t want to, but simply because I don’t know how to. I know at this time of the year, it is fashionable and probably expected to prognosticate about the next year, but I will refrain from that. Instead let me talk about a few important things that we should keep our eyes out for.
Firstly, let’s talk about the elephant in the room and get it out of the way - the general elections. Historically, Indian markets have had large swings immediately before or after the general elections. However, if we have a 2 year view, elections and its results don’t matter much. In 2004, the Nifty went circuit down post-elections, and yet the market went on to have a great bull rally for the next 3 years. Exactly, the opposite happened in 2009. The market went circuit up and then did not do much for the next 2 years. In the US elections, when Trump won, markets where expected to crash, yet it rallied. Recently, in the state elections, the ruling party lost in 3 of the major states yet the market went up instead of falling as was generally expected. I would argue that not only is it not possible to figure out election results, but it is not important to do so for investing.
Next is the US-China trade war. It is something which is too difficult and complicated to be able to infer its implications. One thing in India’s favour is that most of India’s economy is domestic-consumption driven and not dependent on either US or China.
Oil prices can destabilize our economy to a great extent. How it behaves in 2019 and beyond needs to be on our radar as investors because it can impact the currency and interest rates. We, as a nation, need to start actively looking at renewables and reducing our dependence on oil imports. 2019 is a year as good as any to get started on this.  
Job creation in the age of increasing automation is going to be an ongoing challenge. India needs to be able to support its huge population with jobs. We are in a peculiar situation with a scarcity at both ends of the spectrum. Industry doyens keep talking about unavailability of employable people and on the other hand our youth have no jobs. Should we be focusing on vocational training instead of trying to push everyone to get a graduation degree? What about the quality of education being imparted at various levels?
While these have nothing directly to do with equity investing in 2019, tackling these problems by an enterprise can provide long term mega-themes.
India is a 2.5 trillion dollar economy today. At the current pace, we should double in 8-9 years and then double again in another 8-9 years. In this while, market cap should also go up substantially from current levels because a lot more of the large unlisted players would come to the capital markets through IPOs. At a 100% market cap to GDP ratio, we are looking at approximately 10 trillion market cap in 16 to 18 years.  That is a 5-fold rise at the market level in that time frame. Individual stocks will definitely do much better. So, keep an eye on the longer term wealth creation stories, be invested in a well-chosen portfolio of stocks and fasten your seat belts for a bumpy ride on the way.

This article first appeared in Economic Times on 1-Jan-2019

Friday 21 December 2018

Weekly Reading: Some Interesting Stuff

The creative destruction of capitalism gives it a remarkable advantage over other systems. You sometimes have to be willing and able to tear down in order to build up. The old and proven and venerable must sometimes give way to the new and innovative and transformational.
A capitalist economy should be judged not just on the aggregate economic improvement driven by its innovation but also on the design and strength of the social safety net that cushions the ill, or disadvantaged, or those who simply fail to thrive in their particular setting, geography, industry, or trade. After all, creative destruction is still destruction, even if inevitable and in the service of a net gain to society.

They analyze the DNA in a patient’s cancer cells. Using special algorithms, a computer then scours data on thousands of gene variants, hundreds of anticancer drugs, and millions of drug combinations to find the treatment that best targets the tumor’s abnormalities. It may be a new immunotherapy, old-line chemotherapy, hormonal therapies, or drugs that aren’t specifically approved for cancer.
Precision medicine flips the script on conventional medicine, which typically offers blanket recommendations and prescribes treatments designed to help more people than they harm but that might not work for you. The approach recognizes that we each possess distinct molecular characteristics, and they have an outsize impact on our health.

Third installment on how to write well, by Jason Zweig. This series is a must-read for all those who like serious reading and writing.
The essence of rewriting is destruction.  Journalists and other professional writers almost always call it “killing my darlings.”  Cutting is bloody, but rewriting is what hurts, because it requires brutal self-examination.  Rewriting also hurts more than cutting because, after you already put all that work into striving for perfection, now you have to scan everything you did with a cold, alien, objective eye that focuses on finding every imperfection.  If you can’t find any, you are writing, but you are not a writer.

Notes from Durgesh shah's talk at the second Value Investing Pioneer's Summit organised by the CFA Society, New Delhi.

New York Times' collection of the 100 most notable books of 2018

Friday 14 December 2018

Weekly Reading: Some Interesting Stuff

This is one of the best articles' I have read this year. So many wow moments in this. Here are some excerpts:
When a supernova explodes, the blast wave creates high-energy particles that scatter in every direction; scientists believe there is a minute chance that one of the errant particles, known as a cosmic ray, can hit a computer chip on Earth, flipping a 0 to a 1. The world’s most robust computer systems, at NASA, financial firms, and the like, used special hardware that could tolerate single bit-flips. But Google, which was still operating like a startup, bought cheaper computers that lacked that feature. 

They were relentless optimizers. When a car goes around a turn, more ground must be covered by the outside wheels; likewise, the outer edge of a spinning hard disk moves faster than the inner one. Google had moved the most frequently accessed data to the outside, so that bits could flow faster under the read-head, but had left the inner half empty; Jeff and Sanjay used the space to store preprocessed data for common search queries. 

A list of the best scientific innovations of 2018. A fascinating peek into where we as humans are going. Things like the Iron-Man jet suit, indoor smart garden, shape-shifting vehicle wheels and the world's first migraine prevention drug make the list interesting and entertaining.

New technology is the key reason for today’s high equity valuations, he said: “It’s created this vision of a world for all of us where we can have high growth and no inflation forever.” But the United States has had many periods of technological change since the late 1800s and none ever produced permanent high growth and low inflation.
So China will abandon its link to the dollar. “It’s just not conceivable that the second-biggest economy in the world would take its monetary policy from Washington, DC,” Napier said. He expects an initial devaluation, then a free-floating RMB that allows China to inflate away its debt. And when the currency relationship ends, so will the nirvana of high US growth, low inflation, and high equity valuations.

A fascinating article on how Sweden has managed to be great at creating new start-ups in business and the changes it has put in place over the last 30 years to get where it is today.

How can 2018 be complete without something about graphite ;-)
Over the next five years, demand for graphite electrodes is expected to outstrip supply, keeping prices high. (Capacity is expected to grow by 8 percent annually, but demand should grow by 12 percent.) “We see this uplift as structural,” noted Sumangal Nevatia in a Macquarie Research report in June. “With no substitute, growing demand and limited new supply, graphite electrodes are now more a ‘strategic resource’ than a ­‘commodity.’ ”