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Saturday, 2 May 2020

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.

Signalling as a service: A super article
Most of our everyday actions can be traced back to some form of signalling or status-seeking. Our brains deliberately hide this fact from us and others (self-deception).
eBooks have never caught up with paper books despite being more convenient. On the contrary, physical book sales have remained stable (and in some markets even increased) in recent years. Interestingly though, people spend less time reading them. Their value seems to stem from lying around the house to impress visitors (see also coffee table books) – a benefit digital books simply can’t offer.

The hidden agenda in reporting and the secret to reading critically
The secret to reading critically? Ask yourself this:
Why am I reading this article NOW?
Just do that. You’re not saying that the article is a lie. You’re not saying that the article isn’t important. You’re saying that there is a metagame at play here with the author and the sources of that article. You’re saying that you are aware of that metagame and you’re going to take that into account before deciding your behaviour in reaction to that article.
Who are the Writers of the World-As-It-Is? They are Republicans. They are Democrats. They are central bankers. They are pundits. They are politicians. They are oligarchs. They are in every nation on Earth. They have ONE thing in common. They’re Writing for their own political and economic advantage. And they’re really, really good at shaping our behaviours with their words.
It’s never been more important to read critically and think critically. Not because you’re a nihilist or you believe in nothing. But because you believe in yourself. Because you’re smart enough and wise enough to make up your own damn mind.

Why is Xerox (or others) making hand sanitizer?
Xerox is going to soon start manufacturing hand sanitizer. It's also getting into the ventilator business. Earlier this month, a partnership with a technology firm was announced that will help Xerox manufacture a specific type of ventilator and monitor for hospitals and emergency response units.
If you asked their executives a year ago if they planned to get into the hand sanitizer or ventilator business, they would react as if you'd lost your mind. But now these businesses might turn out to be potential longer-term revenue streams. Who knows?
Hand sanitizer might be the foundation of a new strategy to make and sell other office-related supplies that could be positioned to dovetail nicely with Xerox's workplace offerings. The manufacture of ventilators will certainly keep the company’s workforce engaged and thinking during these slower times, and who knows what new techniques for making office equipment will be discovered while in the process of making hospital equipment? And hey … with Xerox’s existing infrastructure, maybe manufacturing ventilators is more profitable than manufacturing printers. This could be an entirely new venture. Again, who knows?

What drives private markets in India - growth or alpha?
The growth we computed as the return in the financial performance of the investee company from the time of entry to the time of exit. We determined Alpha by calculating the difference between overall IRR and Growth. This represented the PE/VC fund’s ability to invest at a valuation multiple lower than that at which it could exit from the investee company.
Since private transactions incorporate something of a discount for lack of marketability (DLOM), our initial hypothesis was that Alpha’s contribution to IRR would be substantial. Instead, we found Growth accounted for 31.3% and Alpha just 5.1% per year of IRR (Total IRR = [(1+ growth%) * (1+alpha%) -1].
So to return to the question posed in our title, our analysis of PE/VC backed Indian IPOs since 1 January 2015 gives a clear answer. Funds generated the vast majority of the 38% average IRR because they invested in high-growth companies in their early years.
Growth, not Alpha, then is the key driver of PE/VC returns in India.

The new digital currency in China
China will begin trialling payments in its new digital currency in four major cities from next week. In recent months, China’s central bank has stepped up its development of the e-RMB, which is set to be the first digital currency operated by a major economy. State-media outlet China Daily said it had been formally adopted into the cities’ monetary systems, with some government employees and public servants to receive their salaries in the digital currency from May.

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