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Thursday 29 October 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. 

I especially try to not post Corona related articles as that is all one gets to read in all traditional media.

If you like this collection, consider forwarding it to someone who you think will appreciate.

What makes companies great

It’s a safe bet that high organic asset growth is the primary characteristic of great companies. But growth in the company’s cash balance was the most significant. Which is not surprising.

A true compounder is financially strong. It makes cash hand over fist. Which gives good management optionality. It can be reinvested to grow the business, paid out in a steadily increasing dividend, used to buy back stock, pay down debt, or set aside for tough times. All five options show up in the tables below.

The other safe bet is multiple expansion. Investors paid a much higher Price/Book at the end of the decade than at the beginning. The multiple was two to four times higher, on average, compared to the prior decade.

The combination of those two — a growing company and investors that will pay more and more money for said growth — produces unbelievable returns.


Holding two opposing views

Step one is figuring out what your main goal is. 

Is it to make the best return possible? Is it to get a good return with minimal risk? Or something else?

Step two is discerning what the best identity would be that aligns with your goal. 

If the goal is to make the best return possible, an ideal identity would be: I am a money-maker. 

This shocks you out of the inability to sell a stock. If the best decision is to sell, then you will, if your identity supports it. Obviously this is simplistic, but the main idea remains: identity plays a bigger role than we think.

Most of the time we don't specifically realize what our identities are. Instead, they subconsciously affect our choices. If we aren't aware of them, we will resort to making emotional decisions. 


The resetting of retail

Physical retail itself has been a ‘boiling frog’ for 20 years. Every year ecommerce gets a little bigger and the problem gets a little worse, but the growth in any given year was never big enough for people to panic, and you could always tell yourself that sure, people would buy that other industry’s product online, but not yours. I think we all now understand that anyone will buy anything online, given the right experience, and if your retail model is based on being an end-point to a logistics chain then you have an existential problem. 


Permanent assumptions

You can build a business strategy around the things that are stable in time. It’s impossible to imagine a future 10 years from now where a customer comes up and says, “Jeff I love Amazon, I just wish the prices were a little higher.” Or, “I love Amazon, I just wish you’d deliver a little slower.” Impossible.

So we know the energy we put into these things today will still be paying off dividends 10 years from now. When you have something you know is true, you can afford to put a lot of energy into it.


The great silver short squeeze

If you want to know what happens when multiple long positions demand physical delivery of a commodity all at once, you need to look no further than the Hunt brothers silver saga of 1979-1980. They did nothing illegal, the Chicago Board of Trade (CBOT) and COMEX changed the rules in the middle of the game, the Commodity Futures Trading Commission (CFTC) implemented new regulations, and the Hunts were bankrupted, unjustly. All they really did was simply request the delivery of the physical metal for which they held valid, legal contracts. The shorts were unable to meet the delivery at any price because enough deliverable silver did not exist - a classic short squeeze and the panic was on.

This is their story.


Disclaimer: Abhishek Basumallick is the Head of the equity advisory www.intelsense.in for long term wealth creation and a pure quant focused newsletter at www.quantamental.in. The blog posts should not be construed as investment advice. Please do your own due diligence before investing.

Thursday 22 October 2020

What Scam 1992 & Harsha Mehta taught me

The Scam – The Harshad Mehta Story is a recently launched web series on SonyLiv. It is very well made, fast paced, and sticks to the storytelling instead of digressing here and there. It is the best market related movie (I include all video content in this “movie” class) on Indian markets by a long way.

I have read the book on which this is based on. The book had all the original names of the people involved. For some reason, a few people got renamed in the show. So, characters portraying Ajay Kayan, Rakesh Jhunjhunwala, Radhakishan Damani were not called out explicitly.

Although, the book is a great read and the web series is an even better watch, here are some to the lessons that I took away from the whole period and sequence of events.

-        Unbridled Ambition -  I think this was the main reason why Harshad got into trouble. He did not know where and when to draw a line. He came from a modest background and wanted to grow too big too fast. He did not consider the consequences of his actions, because he always wanted more.

-        Leverage Kills – Ultimately, it is when you are over-leveraged is when you get into real trouble. Liquidity is king. Harshad’s efforts were concentrated on leverage to pump in liquidity. The problem is no one is bigger than the market. In his hubris, I think he forgot that.

-        The End Do Not Justify The Means Harshad used to say that what he was doing was being done by everyone else. All the big players were following the same corrupt practices. Actually, it makes no difference if everyone is doing the wrong thing. It is still wrong. The problem with being on the wrong side of the law is that it’s a slippery slope. You start with a small digression, and very quickly it snowballs into something out of control. This is exactly what happened with Harshad which led him to eventually claim that he bribed the then Prime Minister.

-        Market Personified – When he was leading the markets he became a media darling, the first real Big Bull. His ostentatious lifestyle, his Lexus, his larger than life image in the media were also major contributors to his downfall. Firstly, it attracted detractors who felt sidelined or spited or were simply envious of his meteoric rise. Secondly, it gave a face to the good and equally importantly, the bad of the markets. So, when the markets crashed, it was Harshad who had to take probably a larger share of the blame. Personification is a concept popularized by Daniel Kahneman and it played out perfectly in this instance.

-        Alternate Histories – Radhakishan Damani, RKD as he is more popularly known is believed to have told a few of his friends: "Agar Harshad saat din aur apni position hold kar leta, toh mujhe kathora leke road par utarna padta." (Had Harshad held his position for seven more days, I'd have taken a begging bowl and walked on the road). At that time, no one knew how the dice will get rolled and that RKD would become a great businessman and investor. The same is true of Rakesh Jhunjhunwala. Always be aware that winners and losers are known only in hindsight and the most intelligent course of action is to be conservative and prudent while investing.

-        Karma Catches UpUltimately, Harshad was running a sort of Ponzi scheme, where increasing amounts of cash was required to keep the markets propped up. His wrongdoings brought down so many people who trusted him blindly and bought shares based on his advice.

A great study in contrast is Warren Buffett and Charlie Munger. More than their investing acumen, I am a great admirer of the way they have conducted their life and business.

Sunday 18 October 2020

Technofunda Investing

Technofunda investing is when you use both fundamental analysis and technical analysis in your research process. For many years, I used to be a purely fundamental investor. My primary focus was on understanding the business as well as possible, its triggers, the management and what impacted their performance, the competition. Over the years, I could figure out that I was missing out on something, but I could not figure out what.

I would buy stocks which would be growing so inevitably my errors of commission were very few and far between. Around ten years back I started the active process of reviewing my portfolio and thought process in an active manner every year (and then every 6 months). I could see that all the stocks I were buying were making money. I started feeling very good about my stock picking abilities. This continued for a few years.

But this changed after two consecutive years of the ValuePickr Goa meets where I and Hitesh Bhai, both being relatively early risers, would get up in the morning and go for a walk on the beach. In those hour-long sessions, I could see a completely different approach that Hitesh Bhai followed. Of taking more frequent and sometimes very large bets, which was something very different from my style. And boy, was it working well for him. Explaining with a cricket analogy, my style was more like that of Dravid, slow and steady, whereas his was more swashbuckling, like Sehwag. And we still remember Sehwag for being the only Indian to have two triple centuries in Test cricket and a double century in the one-day format.

So, I started learning technical analysis (which later led me to the quant side because of my programming background, but that’s a story for another day). What I immediately could see was that the mindset required to do fundamental and technical analysis was different. So, I did the first thing I thought was logical. I decided that I was the most comfortable as a relatively long term participant. I did not want to be stuck in front of a trading terminal throughout the day, so longer timeframe charts was what I started looking at. I could sense that if I could merge the two analytical disciplines together it would be greatly beneficial. I did not like the constant bickering and egoism of the two camps. The fundamentalists thought the technicians were snake-oil salesman and the technicians thought the fundamentalists were prized smug idiots!! I could see that in the annals of investors and traders with great long term track records, I found people across the spectrum of styles. This led me to believe that there is no style which is good or bad, it’s how we use it.

Once I knew both fundamental and technical analysis well enough, I found I could make much better sense of the markets. I could see why something was happening. So, another level of information flow started opening up in front of me. What other market participants were doing. When coupled with your own analysis, it can be a potent force.

Hitesh Bhai and I have been collaborating on our own investing for a while before we started Hitpicks. Hitesh Bhai uses a lot of technical analysis and some proprietary indicators and patterns for identifying stocks that can potentially move up before they make a move. This fascinated me. He called it the Prognostic pattern (after all he is a practicing doctor!!). It is a not a foolproof method but when it works it does really well. Added to good quality stocks and favourable fundamentals, it is a good option for those who want to play a medium-term game (between 3-12 months). That’s what we try in Hitpicks, the advisory service we run.

The biggest advantage that I have seen in using a Technofunda approach is to be able to concentrate significantly when both the fundamentals and technicals are aligned. That provides a much higher CAGR to the portfolio than otherwise possible. But it also has its downsides as well. This approach does have higher churn than a simple buy-and-hold strategy. Some like I keep saying, only those with a particular mindset can use a strategy like this.

Disclaimer: Hitesh Patel and Abhishek Basumallick have a  technofunda advisory at www.intelsense.in. The blog posts should not be construed as investment advice. Please do your own due diligence before investing.

Friday 16 October 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.

I especially try to not post Corona related articles as that is all one gets to read in all traditional media.

If you like this collection, consider forwarding it to someone who you think will appreciate.

It was luck!!
Today Amazon is a powerhouse that sells everything from e-books to diapers, so it’s easy to think its rise was inevitable. But Amazon almost didn’t make it. During the dot-com boom of the 1990s, the company posted larger and larger losses, financed by investor funds that came pouring in. But the mood of the market turned abruptly in 2000, catching many companies off guard.

So how did Amazon survive the bust? History doesn’t necessarily point to having the best idea or the savviest management. To a large extent, Amazon got lucky by raising a ton of money right before the market crashed, giving the company the cushion it needed to ride out the turmoil of the early 2000s. It’s a good reminder that the fate of high-flying, money-losing startups like Uber or Snap may depend as much on luck as on the skill of their CEOs.

If Bezos and his team had waited a few weeks longer to raise those extra funds, people today would lump Amazon in with other dot-com-era failures like Webvan, Kozmo, and Pets.com — big-spending companies with unworkable business models that collapsed under their own weight.

Now Robots are monitoring crops for a better yield
Google's parent company, Alphabet, has unveiled prototype robots that can inspect individual plants in a field, to help farmers improve crop yields.

The robot buggies roll through fields on upright pillars, so they can coast over plants without disturbing them.

The goal is to collect huge amounts of data about how crops grow.

While farmers may have information about the soil content or the weather, the buggy robot was designed to see how plants were "actually growing and responding to their environment", the company said.

"Over the past few years, the plant buggy has trundled through strawberry fields in California and soybean fields in Illinois, gathering high quality images of each plant and counting and classifying every berry and every bean," it said.

And all that data is plugged into a machine-learning system to try to spot patterns and insights useful to farmers.

Checking for bugs, making sure crops were picked and planted at the right time and even picking weeds or moving fences were possibilities, he said.

Network effects may not lead to a monopoly

Lots of companies that might at the time seemed to have an advantage of "network effects" have faltered: for example, eBay looked like the network Goliath back in 2001, but it was soon overtaken by Amazon. They write:

"The flaw in that reasoning is that people can use multiple online communications platforms, what economists call `multihoming.' A few people in a social network try a new platform. If enough do so and like it, then eventually all network members could use it and even drop their initial platform. This process has happened repeatedly. AOL, MSN Messenger, Friendster, MySpace, and Orkut all rose to great heights and then rapidly declined, while Facebook, Snap, WhatsApp, Line, and others quickly rose. ...

Firms that at their inception had no data whatsoever sometimes displaced the leaders. When Facebook launched its social network in India in 2006 in competition with Orkut, it had no data on Indian users since it didn’t have any Indian users. That same year Orkut was the most popular social network in India, with millions of users and detailed data on them. Four years later, Facebook was the leading social network in India. Spotify provides a similar counterexample. When Spotify entered the United States in 2011, Apple had more than 50 million iTunes users and was selling downloaded music at a rate of one billion songs every four months. It had data on all those people and what they downloaded. Spotify had no users and no data when it started. Yet it has been able to grow to become the leading source of digital music in the world. In all these and many other cases the entrants provided a compelling product, got users, obtained data on those users, and grew.

The history of the Bombay Stock Exchange
A group of around twenty-two who began trading under a banyan tree opposite the Bombay Town Hall contributing a rupee each to assemble themselves into an institution that came to be known as the Native Share and Stockbrokers Association. The word ‘Native’ in the initial title was a sign of exclusiveness and pride. On 9 July 1875, the entrance fee for new members was fixed as Re. 1 and there were 318 members added to this list. And Bombay Stock Exchange earned the notable distinction of becoming the first stock exchange in Asia.

There was a need for an Index, as a means to measure the overall performance of the exchange. So, a BSE Sensitive Index was started in 1986. It was first published on 2 January 1986, as a “Market Captialisation-Weighted” Index of 30 component stocks representing a sample of large, well-established and financially sound companies. It was the country’s first Equity Index (Base Year 1978-79 =100). But, this Sensitive Index will have to wait till 1989, for the word we use so often. It’s when Deepak Mohoni will coin the word: Sensex.

Forbes & Co is the oldest company that is still trading. It was started as a Scottish agency and mercantile business in 1797. And, now is owned by Shapoorji Pallonji Group.

Time is the true price you pay
Time was the only significant scarcity in a world of free minds and imaginations.

Amazon was important because it was a “life-span extender.” It radically reduced the search and fetch times of buying books and other goods. Now, with far more competition, it is making similar gains in the provision of services, such as music and video.

In touting Amazon, I was near to defining time-prices

The time-price of anything is the hours it takes to earn the money to buy that thing. Time-prices are the only true prices.

Disclaimer: Abhishek Basumallick is the Head of the equity advisory www.intelsense.in for long term wealth creation and a pure quant focused newsletter at www.quantamental.in. The blog posts should not be construed as investment advice. Please do your own due diligence before investing.

Saturday 10 October 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. 
I especially try to not post Corona related articles as that is all one gets to read in all traditional media.

If you like this collection, consider forwarding it to someone who you think will appreciate.

The reading habits of Marc Andreesen
On how does he manages to read so much, Mr. Andreesen says, “I’ve really read all the time since I was a little kid, it’s been a lifelong thing. It’s basically trying to try to fill in all the puzzle pieces for the big discrepancies. A great term is “sense-making”. Essentially, what the hell is happening and why? The world’s an incredibly complex and erratic place and trying to figure that out is kind of a lifetime occupation. The thing I’ve tried to do the last few years is really “barbell” the inputs. I basically read things that are either up to this minute or things that are timeless”. He also says how he struggles with finishing every book that he picks up. “I have a whole bunch of books that I haven’t finished which I really should just toss,” he says.
On how and what he does on improving himself, he says, “What you’re always struggling with is to understand what’s actually happening. Like, what’s actually happening on the ground. An obvious example is if you ask an entrepreneur how the company is, they’re always going to say “great”. And that’s probably not right. You’re probably dealing with a hurricane because that’s generally the job. So, what’s actually happening inside a company? What are customers actually buying? What’s actually being adopted? What’s actually happening with the technology? What’s happening with the competition?”

The oil economy of Venezuela is in shambles
For the first time in a century, there are no rigs searching for oil in Venezuela.
Wells that once tapped the world’s largest crude reserves are abandoned or left to flare toxic gases that cast an orange glow over depressed oil towns.
Refineries that once processed oil for export are rusting hulks, leaking crude that blackens shorelines and coats the water in an oily sheen.
Venezuela’s colossal oil sector, which shaped the country and the international energy market for a century, has come to a near halt, with production reduced to a trickle by years of gross mismanagement and American sanctions. The collapse is leaving behind a destroyed economy and a devastated environment, and, many analysts say, bringing to an end the era of Venezuela as an energy powerhouse.

Real life and fantasy world are merging together on social media
Social media has made conspiracy theorizing so addictive and immersive that the line between story and reality can become incredibly blurry.
Science (which, you could argue, is also a form of fact checking) has been around for centuries trying to debunk most religious beliefs – and yet religion still plays a major role in Western society. If entire education systems teaching millions of people about science haven’t worked, why do you think adding a small fact check disclaimer below a YouTube video would?
Silicon Valley is not just creating new fantasy worlds, it is building tools that allow others to create their own fantasy worlds. Enter social media.
If TV has taught us to think of ourselves as characters in the story of our lives, then social media has allowed us to actually write and edit the script and build fictional characters. Social media is essentially the democratization of virtual world building.
Twitter, Snapchat and Facebook are just massive virtual status arenas that allow us to build social capital through signaling. Some of that social capital might be built on top of real stories and actual achievements, but most of it is not based on reality. Every time you are applying an Instagram filter, you are already changing reality.

Shinzo Abe’s elusive Japanese Dream
Abe did not start out as an economic reformer. His aim was to restore Japanese people’s pride, sorely battered by the country’s defeat in World War Two and the subsequent U.S. occupation. He wanted Japan to have the sort of global respect it enjoyed after the Meiji Restoration that restored imperial rule in the late 19th century, when the country industrialised, its military defeated Russian forces, and its woodcuts inspired French Impressionists. For Abe that goal meant less dwelling on past war crimes. It also meant legal revisions to allow Japanese troops to come to the aid of allies and support international peacekeeping operations.
Abe’s renaissance required a stronger state centred on a powerful prime minister who could drive painful economic and political changes to enable the attitude shift he wanted. He continued his predecessor Junichiro Koizumi’s push to end the system by which the Liberal Democratic Party – in power more or less since 1955 – diverted resources and investment to inefficient companies and regions in exchange for electoral support. He also increased the government’s influence over the Bank of Japan, which was reluctant to aggressively reflate prices. And he pushed through contentious reforms to corporate governance and labour markets.

Common causes of bad decisions
Incentives can tempt good people to push the boundaries farther than they’d ever imagine. 
Tribal instincts reduce the ability to challenge bad ideas because no one wants to get kicked out of the tribe. 
Ignoring or underestimating the full range of potential consequences, especially tail events that seem rare but have catastrophic effects. 
Lots of little errors compound into something huge. 
Underestimating the need for room for error, not just financially but mentally.
Being influenced by the actions of people who are playing a different game than you are. 
Wrongly assuming that the information you have at your disposal tells a complete picture of what you’re dealing with. 

Disclaimer: Abhishek Basumallick is the Head of the equity advisory www.intelsense.in for long term wealth creation and a pure quant focused newsletter at www.quantamental.in. The blog posts should not be construed as investment advice. Please do your own due diligence before investing.

Tuesday 6 October 2020

Book Review - A Piece of the Action

History doesn't repeat itself, but it often rhymes. ~ Mark Twain

I love reading financial and market history, in addition to general history. So, when Pradyumn said he wanted to do a long-form summary of the book "A Piece of the Action" by Joseph Nocera, I was really excited. This is a book on how the US financial markets shaped up in the 20th century. It was written in 1993. 

You can see how products like credit cards, mutual funds, NBFCs took shape in that period in the US and get glimpses of how things can turn out in India. 

It is a long read but absolutely worth your time.

Friday 2 October 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. 

I especially try to not post Corona related articles as that is all one gets to read in all traditional media.

If you like this collection, consider forwarding it to someone who you think will appreciate.


When you see other people buying new cars, boats or other toys it can lead to a sense of entitlement. There’s a huge difference between buying stuff and being wealthy. Unfortunately, when you see those around you buying stuff it’s hard to avoid the temptation because we benchmark ourselves against the stuff we see and wealth isn’t something you can see parked in someone’s driveway.

It’s a cliche at this point to say that money doesn’t buy happiness because money sure can solve a lot of problems. But it sure doesn’t buy contentment or make it any easier to stay out of your own head sometimes. Benchmarking yourself against people who are more successful than you could provide the motivation to get better but it could also blind you to the fact that no one’s life is perfect.


Wave to Pay

Amazon is unveiling a new biometric technology called Amazon One that allows shoppers to pay at stores by placing their palm over a scanning device when they walk in the door or when they check out. The first time they register to use this tech, a customer will scan their palm and insert their payment card at a terminal; after that, they can simply pay with their hand. The hand-scanning tech isn’t just for Amazon’s own stores — the company hopes to sell it to other retailers, including competitors, too.


Your mobile makes you dumb(er)!!

The authors of the paper report the results of a straightforward experiment. Subjects are invited into a laboratory to participate in some assessment exercises. Before commencing, however, they’re asked to put their phones away. Some subjects are asked to place their phone on the desk next to the computer on which they’re working; some are told to put their phone in their bag; some are told to put their phone in the other room. 

Each subject was then subjected to a battery of standard cognitive capacity tests. The result? Subjects measured notably lower on working memory capacity and fluid intelligence when the phone was next to them on the desk versus out of sight. This was true even though in all the cases the subjects didn’t actually use their phones.


Save 50% of your increments to retire on schedule

Lifestyle creep is when someone increases their spending after experiencing an increase in income.  So that new raise quickly becomes a fancy new object or an expensive new habit, and it’s gone.  Some lifestyle creep can be very satisfying.  After all, what’s the point of working so hard if you can’t enjoy the fruits of your labor? Once you spend more than 50% of your future raises, then you start delaying your retirement.


The relentless focus on the long game

I brought Michael Jordan a deal three years ago for $100 million,” Falk said. “And all he had to do was, other than giving his name and likeness, make one two-hour appearance to announce the deal and he turned it down. And God bless him. He’s been so successful, it gives him an opportunity to do whatever the hell he wants or not to do things he doesn’t want. And I really admire that. He’s very, very selective in the things that he wants to be involved in.

Falk said this was the norm for Jordan at a certain point adding, "By 1991 every deal that I signed with was at least 10 years." Falk said Jordan "never did one-off appearances" and would only sign deals where there was a long-term investment involved.