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Saturday 30 November 2019

Weekend Reading

Reading across disciplines is one of the best ways to improve our investment acumen. Here is a summary of some of the best articles I read this week.

A self-declared space nation called Asgardia is planning a fully functioning space economy
The Space Kingdom of Asgardia is a genuine project to set up a nation entirely in space, with hundreds of thousands of members paying "residency'" fees and a parliament that is in the process of forming the foundations for its society. Asgardia's goal is to transport thousands of people to an enormous space station by 2043, beyond Earth's jurisdictions, to "build a new democratic society." Ambitiously, the space nation is looking to the likes of Tesla CEO Elon Musk and Amazon CEO Jeff Bezos to get them there. Both billionaires have also set up commercial space firms.

It's counterfeit we consume
One estimate of India’s total counterfeit market is Rs 1 trillion. The dummies are often mixed up with originals at the delivery point to escape easy detection. Companies are often reluctant to go public with the fact that the bazaar could be awash with fakes of their brands, though it’s ubiquitous and affects all brands. Interviews with dozens of brand surveillance officials of top companies reveal an estimate: some 25 to 40 per cent products of every available brand is allegedly counterfeit.
The span of fake branded goods takes in a wide variety—besides tea, salt, spices, ghee, paneer and the like, and toothpaste, shampoo, hair oil, conditioner, bathing soap, there’s ­mobile phones, computer hardware, apparel—and yes, liquor. And most dangerously, pharmaceuticals. 
E-commerce offers no immunity. Many reports point towards the large-scale presence of counterfeits in onl­ine buying. The authorised attorneys of some top companies admit some 40-50 per cent of products sold online via top e-commerce sites are fake. They declined to be quoted officially. Smuggling, especially from China, is another route for supply of counterfeits in India.

India to get its second Lion sanctuary
Located in north Madhya Pradesh, Kuno was one of the hunting grounds of the royal families of the region and was notified as a sanctuary in 1981. It has been 29 years since Kuno Palpur was identified as the site for the relocation of Asiatic lions, from their last habitat in Gujarat, to protect them from extinction. Currently, there are 523 (as per the last census carried out in 2015) lions in Gir and this relocation project was supposed to have been completed by 2020. Catastrophes such as an epidemic, an unexpected decline in prey, natural calamities or retaliatory killings could result in the extinction of the lion population when they are restricted to single populations. Gir in Gujarat is the last refuge of the Asian lion population.
Expecting approximately a realised growth that has been observed for recovering tiger populations, along with supplementation every four years from Gir; the lion population in Kuno WLS should reach the current carrying capacity of 40 within 15 years.
To reach the required self-sustaining population size of 80 lions, the time required would be close to 30 years.

Online advertising - is it all mumbo jumbo?
A friend asked me to read up on Affle and also on the online advertising space. This article is a fascinating one and exposes how a lot of metrics around online advertising is just hogwash.
For more than a century, advertising was an art, not a science. Hard data didn’t exist. You put your commercials on the air, you put your brand in the paper, and you started praying. Would anyone see the ad? Would anyone act on it? Nobody knew. In the early 1990s, the internet sounded the death knell for that era of advertising.

Data will take over the world
Yuval Noah Harari is one of my favourite authors. He has a crystal clear mind and extraordinary writing ability where he can make complex subjects appear simple. Here he talks about how authority will shift from humans to Big Data and how authority has historically shifted over time.
For thousands of years, humans believed that authority came from the gods. Then, during the modern era, humanism gradually shifted authority from deities to people.
Now, a fresh shift is taking place. Just as divine authority was legitimised by religious mythologies and human authority was legitimised by humanist ideologies, so high-tech gurus and Silicon Valley prophets are creating a new universal narrative that legitimises the authority of algorithms and Big Data. This novel creed may be called “Dataism”.

Friday 22 November 2019

Weekend Reading

Reading across disciplines is one of the best ways to improve our investment acumen. Here is a summary of some of the best articles I read this week.

1) Forget 5G, China is starting to look at 6G!!
The world has barely started using 5G, the latest generation of wireless connectivity, but China is already looking ahead to 6G. 5G and 6G refer to the fifth and sixth generation of mobile wireless networks. While 5G is known to have data transmission speeds at least 10 times greater than 4G, rolled out in 2009, it’s too early to say what 6G could be, or what sorts of technologies it would advance. By officially announcing the development of 6G technology, China could cause more consternation in the US national security community over China’s tech capabilities—and lead to more scrutiny of Huawei. While the ministry did not name any of the companies involved with the development of 6G, it’s a fair guess that a national tech champion like Huawei would be on that list.

2) The side-effects of a SoftBank funded economy
Last year, a hospitality start-up called Oyo told that it would turn the Four Sight into a flagship hotel for corporate customers. It guaranteed monthly payments whether the rooms were booked or not, as long as he rebranded the property with Oyo’s name and sold the rooms exclusively through its site.
But corporate guests did not materialize, and Oyo stopped making the payments. Now he is on the verge of eviction.
Many of the young companies used SoftBank’s cash to dangle incentives and other payments to quickly attract as many workers as they could. But when they failed to make a profit and SoftBank changed its tune on growth, the companies often slashed or reneged on those same incentives.
SoftBank’s Vision Fund is an emblem of a broader phenomenon known as “overcapitalization” — essentially, too much cash. Venture funds inundated start-ups with more than $207 billion last year, or almost twice the amount invested globally during the dot-com peak in 2000, according to CB Insights, a firm that tracks private companies.
Flush with the cash, entrepreneurs operated with scant oversight and little regard for profit. All the while, SoftBank and other investors have valued these start-ups at inflated levels, leading to an overheated system filled with unsound businesses. 

3) Google to launch Cache - a effort to expand their payments business to banking
Google is teaming up with two banks, Citigroup and the Stanford Federal Credit Union, to begin offering a “smart checking” account next year. 
For a new product or service to succeed, it has to offer something new and shiny enough to motivate consumers to leave their existing provider.
As people grow more wary of entrusting their personal data to tech companies, persuading them to hand their checking account over to a partnership involving Google may be a hard sell. And customers typically switch bank accounts only when they’re offered something financially valuable, like lower fees, more attractive rewards for spending or higher interest rates. Google and its partners haven’t commented on what kind of terms they might offer.

4) TikTok is taking over India's social media scene
In just two years, TikTok has become India’s most downloaded app. It’s shaping a new youth culture in which millions of young people—in big cities and small villages alike—are trying to be TikTok’s next big star. The results are both magical and nightmarish.
More than half of India’s 1.3 billion people are under the age of 25, and more than 500 million Indians use the internet today, thanks to the growing penetration of cheap smartphones and mobile data. But not all of them can express themselves through neatly worded tweets or self-deprecating captions on Instagram posts. In fact, a large section of India’s first-time internet users—some of them illiterate, others speaking in local dialects—find navigating video-based platforms easier. From 2012 to 2018, the time spent by an Indian watching online videos grew from an average of 2 minutes a day to 52 minutes a day, according to a report by the media agency Zenith.

5) Hiring from tier-2 / tier-3 colleges
When building up his team Jack preferred hiring people a notch or two below the top performers in their schools. The college elite, Jack explained, would easily get frustrated when they encountered the difficulties of the real world.
Graduates from tier 2 or tier 3 schools have a hunger to over-compensate for what they perceive they lack. They have seen their counterparts from larger cities with ‘privileges’ and they want to achieve all that and more. Therefore, they are far more driven.
New entrepreneurs told me about a lesser-known problem with good students, especially those who have been top performers since kindergarten: They don’t know what it is to fail. To build something truly big, a start-up founder needs a team that can handle failure.

Thursday 14 November 2019

Weekend Reading - Some interesting stuff

1) The economic future of negative interest rates
A great article on how negative interest rates are affecting global economy.
Denmark was the first country to adopt negative interest rates (July 2012), but it was Japan, which had been wrestling with the fallout from the twin forces of an aging population and a credit bubble since 1989, that became the petri dish in which financial alchemy was tested. Quantitative and Qualitative Easing (QQE) followed, allowing the Bank of Japan (BoJ) to buy corporate bonds and even equities. Negative–interest rate policy followed in January 2016.
For finance ministries, zero interest rates on government bonds are a blessing and a curse. For the first time in history, they can raise capital for nothing or even receive an interest payment for their trouble. 
The effect that an artificially low interest rate has on an economy is pernicious. Asset markets are supported, and it raises the point at which they clear, but it also reduces the need for companies to improve internal efficiency. For corporates, borrowing becomes preferable to issuing equity. Firms become more leveraged. The managers of these businesses have an incentive to improve profitability per share by issuing debt and retiring equity capital. They are deterred from raising new capital for other purposes; stock buybacks are safer than speculative projects, especially when you cannot divine what discount rate to use in order to assess the potential of a project.

2) Shopify is fighting Amazon! And doing a good job!
Anyone who has been following my weekend reads would know that I follow Amazon very closely. So, found this article very insightful.
Shopify’s ascent corresponds to the rise of direct-to-consumer brands, and the shift of [small businesses] to online storefronts. Stores want to maintain a direct relationship with their customers; they want to create unique branding experiences versus shipping Amazon-cloaked boxes; and businesses worry that Amazon will one day create lower-priced knockoffs of their products.
Last month, Shopify took another big step toward becoming a viable alternative to Amazon. It unveiled the Shopify Fulfillment Network, which will give merchants the ability to offer timely deliveries under their own branding, along with affordable shipping rates.

3) Aha! Cola-Cola's new product!
At a time when consumers are increasingly looking for healthier alternatives to sugary soft drinks, AHA won't have calories or sodium. But its citrus and green tea, and black cherry and coffee flavor combinations will contain 30 mg of caffeine.
Coca-Cola mixed and matched 50 pairs of flavors before coming up with the eight that will be on store shelves. They include orange and grapefruit, blueberry and pomegranate, and peach and honey.

4) Screen time slows down cognitive development in children
The scans revealed that kids who spent more time in front of screens had what the authors call lower “white matter integrity.” White matter can be roughly thought of as the brain’s internal communications network. The integrity of that structure is associated with cognitive function, and it develops as kids learn language. There’s a clear link between higher screen use and lower white matter integrity in the children. That structural change appears to be reflected in the results of the cognitive test the kids took as well, which showed high screen time associated with lower levels of language and literacy skills. 

5) Goa village to charge tourists for clicking photos. [I wish they did this for selfies!! :-) ]
Tourists visiting North Goa's Parra village will now be charged for taking photographs of its picturesque landscape. Parra Village, which is the birth place of late Goa Chief Minister Manohar Parrikar, has introduced 'Swachhta tax' for the tourists. The fee for clicking pictures of Parra's landscape ranges from Rs 100 to Rs 500.
The incumbent sarpanch of Parra village, Delilah Lobo said the tourists create a mess on the coconut-lined road. Levying tax would cut town nuisance created by tourists in the village. "Indian mentality only understands fines. Therefore we have imposed a fine to cut down on this nuisance caused by tourists," Lobo added.

Thoughts on the auto industry slowdown - 12 Sep 2019

Shared Some Thoughts on ET Now.


Friday 8 November 2019

The Quality Conundrum

This note is more to myself and for other small investors. Last few years, I have had the opportunity to interact with a very large number of small investors and have seen first hand atleast a thousand different portfolios. This note is more to reassert to me the importance of looking for quality first and price thereafter.

People are deriding quality companies and saying that quality is in a bubble.

But let’s take a step back and ask what is quality? Is it defined only by high PE stocks? Does quality exist in midcaps and small caps or is only large/mega-cap companies’ quality? Can quality exist in companies whose stocks are cheap? Are all expensive stocks good quality businesses?

Secondly, why is there a premium to perceived quality companies today? Or conversely, why have small & mid-cap stocks corrected so much? Are they all poor quality?

Some of the reasons that I think of are as follows:
  • Failure of companies, including in large and famous corporates – Zee, NCLT cases
  • Governance deficit in large well-known companies – Infosys whistle-blower, Yes Bank, DHFL
  • Frauds and other issues – PNB, PMC Bank, IIFL
  • Lack of ready information about small and mid-cap companies
  • Midcaps & smallcaps had rallied to obscene valuations by 2017
  • Weakness in the economy impacts the smaller companies slightly more than the larger ones

Investors are scared. Return of capital has taken precedence over return on capital. That is why stocks of companies which investors think are safe is at a premium. And everything else is relatively cheap.

Now, let me look at over-pricing. A lot of companies are at very high PE multiple. Though I am not a very strong believer in looking at PE in isolation, it does help in understanding the overall market sentiment when used as a collective. I had tweeted a couple of days back about people talking about high PE are ignoring the interest rate reduction. All things equal, if you reduce interest rates from 12% to say 6%, the fair value that a DCF will throw up is about 4 times. Now, you might argue that if interest rates fall, all other things can’t remain equal. Fair point. So, lets discount that 4x to 3x. Heck, let's reduce it some more, say 2x or 1.5x. The broad point I am making is that the median PE of stocks as a whole rise. And we have seen this play out in real life as well. The NIFTY PE, for example, has moved up from 16-17 a few years back to now about 26-27.

Now think from this angle, 10 years back, people were ready to pay a 2.5-3x premium on median PE for the so-called high-quality companies. Now, my contention is that that multiple for perceived quality will not change. Even now investors would pay a similar markup. So, a high-quality company used to be available at 30-40 PE when the market was at 15-16PE. How has that ratio changed now? It is more or less the same.

I am for sure not making a case for buying a stock with very high multiples or which is expensive based on its future earnings. But I do have a problem when people are saying that quality is expensive, what remains unsaid is “therefore move to cheaper, poorer quality businesses”.

Perhaps the most important thing is for those who can identify great companies at cheap prices, then they should do precisely that. But a vast majority of people can’t do that and end up buying mediocre or poor companies just because they fixate on cheapness.

In my personal experience, retail investors are much much better off being in quality companies with longevity than poorer companies which can cause permanent capital damage. If you can find equally great kind of companies at cheaper prices, then it is a no-brainer and no need to discuss at all.

So, the next question is what happens next? I don’t know. My take is this phenomenon will also mean revert. It may take some time, but it surely will. We are going through a massive exercise of cleaning up corporate India and also a sort of formalisation of the economy. As the good quality smaller companies come up on governance as well as consistency of results, the premium for others will reduce. People will then not take refuge in only a handful of stocks. 

Are there bubble-like valuations there today? Sure, a lot of stocks to me definitely feel that way. But like any phase, this phase of over-valued quality stocks will also change facilitating a more broad-based rally.

I am, like always, trying to find good quality companies which are cheap based on their earning potential. But quality comes as the first filter and cheapness next. I am willing to compromise on cheapness but not on the quality of the business. Because history and my personal experience tell me that buying and sticking to good quality does not hurt. 

Another example of holding on to quality that most people often cite is HUL’s flat returns for 10 years. Trust me, I was there. I bought and finally sold HUL at about the same price after a decade. Now, as a retail investor, the way I look at it is this. 
  • I did not only have HUL in my portfolio, but there were also other stocks which did much better (or worse). 
  • I kept getting good dividends and also a good debenture, 
  • I did not lose money. I know a lot of people who put money in JP Associates, DLF, Unitech and other similar companies and lost 40-50% or more during the same period, 
  • If I had put a basket of 10 such strong business companies, I would actually have done quite well. I actually did this exercise much later after found that even well discovered fundamentally sound strong businesses have given exceptionally good CAGR returns over 20-25-year periods.

Another very important point to remember is that we invest in a portfolio of stocks. Peter Lynch, one of the most successful money managers, had different categories of stocks in his portfolio – slow growers, stalwarts, fast growers, asset plays, turnarounds and cyclicals. So, in a diversified portfolio is not about having only one or two categories of stocks but a mix of different types of stocks.

Another point that is missed in this discussion is the time horizon. For fund managers and advisors, usually, the time horizon is a problem because they get “judged” by the returns in the short term. And quite a few times, what is good in the short term ends up being harmful in the long term. Individual investors can and should have much longer time horizons. As a retail small investor, you don’t need to do anything all the time. If you are in the market for the next 20-30-40 years, you are much better off with a collection of great businesses than trying to get in and out of iffy companies because they are cheap by some arbitrary parameter. For example, one approach to this is to just pick 9-10 industries you like and which have long term growth characteristics and pick either the best or two best companies in that industry and build a portfolio. And then do nothing. Re-look at the portfolio once every year. If you think the businesses are doing well in their respective industry, again, do nothing. After 10 years, you are likely to end up much better than most people who are trying to get in and out of stocks and markets by giving the flavour-of-the-month reasons.

Bottom line, if you are a small investor, and do not know how to pick great stocks, then you are better of building a basket of strong businesses, focusing on quality first and price second (but don’t ignore price altogether), have a long investing time horizon and follow the business cycle. 

Happy investing.

Friday 1 November 2019

Weekly Reading - Some Interesting Stuff

1) Target fights back against Amazon, and wins!
In March 2017, Target made a huge announcement: It planned to invest over $7 billion in a turnaround strategy that would include:
 - remodeling existing stores (and opening smaller ones in urban areas);
 - introducing new, private label brands; and,
 - enhancing its digital shopping experience.
Wall Street thought the plan was a disaster. On the day of the announcement, Target suffered its largest stock plunge in almost a decade.
But fast-forward to today, and Target is thriving. First-quarter results for 2019 beat analysts' expectations. The store's private-label lines are exploding. And as comparable store sales continue to rise, the stock price is trading at an all-time high.

2) Using Sequential Market Identification for identifying stocks
In 1977, we financed Apple… It was an era where knowing about microprocessors made the evolution of the PC obvious. Steve Jobs was an employee at Atari in its early days. So I had the advantage of all that knowledge before anybody else.”
It became very apparent that Apple needed a different memory system. So Sequoia financed a guy by the name of Jugi Tandon to go into a small five-inch disk drive business. That decision was clearly driven by an application need in the PC which required a solution that was faster, far more reliable, and had greater density than an audiocassette. So we financed Tandon. And it was a spectacular investment.” Tandon became a pioneering company in the PC disk drive industry.
In 1987 we started the internetworking industry with Cisco. We had previously invested in 3Com and other similar companies, so we understood the connection of the Internet, and all that it encompassed, probably better than most people. So we were looking for Cisco when they were looking for us. That is how we prefer to invest, in an anticipatory way.
The identification of Ethernet and Internet infrastructure, specifically routers, were the third and fourth successful applications of the the Sequential Market Identification Model. 

3) The skill of managing luck
Algorithms are often much better at many decision tasks than humans. Yet, research shows we’re more likely to choose a human forecaster than an algorithm. And it’s ever worse when we see how an algorithm performs, especially if it occasionally makes a wrong call. This is called algorithm aversion.
epitomize the skill of managing luck: they’re never certain, but constantly improving the odds.
That’s boring! It’s not memorable or exciting. You don’t root for an algorithm. They never surprise you on the upside. They’re never a hero, defying the odds. They don’t ‘try hard’. They don’t offer a narrative.

4) What is happening in Venezuela?
Consumer prices have skyrocketed, and the International Monetary Fund expects the inflation rate to reach 10 million percent in 2019, which would be one of the worst cases of hyperinflation in modern history.
Violence and hunger are widespread. Food shortages have reached new highs in recent months, and 80 percent of Venezuelan households don’t have sufficient access to food, according to monitoring groups. Grocery store shelves are bare. Hospitals struggle to treat severely malnourished children.
The country’s public health system has collapsed, leaving many without access to lifesaving medicine. The rates of several preventable diseases have risen.
The migration of Venezuelans out of the country has reached levels not seen before in modern history. More than three million people have left since 2014

5) Why don't rich people stop working?
Studies over the years have indicated that the rich, unlike the leisured gentry of old, tend to work longer hours and spend less time socializing. And they continue to diversify. Many of these people have been navigating work and life in sixth gear for decades. Once they have no financial need to work they have trouble shifting into lower gears.