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Thursday 27 January 2022

Weekend Reading: 28-Jan-22

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

You can sign up to https://www.getrevue.co/profile/intelsense to receive all blogs from me directly into your inbox.

Thursday 20 January 2022

Weekend Reading - 21-Jan-22

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


You can sign up to https://www.getrevue.co/profile/intelsense to receive all blogs from me directly into your inbox.

1. Investing wisdom from Terry Smith's 2021 annual letter

In investment, as in life, you cannot have your cake and eat it, so it is difficult if not impossible to find companies which are resilient in a downturn but which also benefit fully from the subsequent recovery. Of course, you could try to trade out of the former and into the latter at an appropriate time but it is not what we seek to do as the vast majority of the returns which our Fund generates come from the ability of the companies we own to invest their retained earnings at a high rate of return because they own businesses with good returns and growth opportunities.


In our view it would be a mistake to sell some of these good businesses in order to invest temporarily in companies which are much worse but which have greater recovery potential.


Consistently high returns on capital are one sign we look for when seeking companies to invest in. Another is a source of growth — high returns are not much use if the business is not able to grow and deploy more capital at these high rates.


Our portfolio consists of companies that are fundamentally a lot better than the average of those in either index and are valued higher than the average S&P 500 company and much higher than the average FTSE 100 company. However, it is wise to bear in mind that despite the rather sloppy shorthand used by many commentators, highly rated does not equate to expensive any more than lowly rated equates to cheap.


2. Winds of Change

The years since then have seen a massive shift in our environment. Today, unlike in the 1950s and ’60s, everything seems to change every day. It’s particularly hard to think of a company or industry that won’t either be a disrupter or be disrupted (or both) in the years ahead. Anyone who believes all the firms on today’s list of leading growth companies will still be there in five or ten years has a good chance of being proved wrong.


For investors, this means there’s a new world order. Words like “stable,” “defensive” and “moat” will be less relevant in the future. Much of investing will require more technological expertise than it did in the past. And investments made on the assumptions that tomorrow will look like yesterday must be subject to vastly increased scrutiny.




3. Efficiency is the Enemy

There’s a good chance most of the problems in your life and work come down to insufficient slack.


If you ever find yourself stressed, overwhelmed, sinking into stasis despite wanting to change, or frustrated when you can’t respond to new opportunities, you need more slack in your life.


Many organisations are obsessed with efficiency. They want to be sure every resource is utilised to its fullest capacity and everyone is sprinting around every minute of the day doing something. They hire expert consultants to sniff out the faintest whiff of waste. Personally, we view sleep, sickness, and burnout as unwelcome weaknesses and idolise those who never seem to succumb to them. This view, however, fails to recognize that efficiency and effectiveness are not the same thing.


Slack consists of excess resources. It might be time, money, people on a job, or even expectations. Slack is vital because it prevents us from getting locked into our current state, unable to respond or adapt because we just don’t have the capacity.


Too much slack is bad because resources get wasted and people get bored. But, on the whole, an absence of slack is a problem far more often than an excess of it




4. Why Your Brain Never Runs Out Of Problems To Find

Why do many problems in life seem to stubbornly stick around, no matter how hard people work to fix them? It turns out that a quirk in the way human brains process information means that when something becomes rare, we sometimes see it in more places than ever.


You can probably think of many similar situations in which problems never seem to go away, because people keep changing how they define them. This is sometimes called “concept creep,” or “moving the goalposts,” and it can be a frustrating experience. How can you know if you’re making progress solving a problem, when you keep redefining what it means to solve it?


It turns out that for your brain, relative comparisons often use less energy than absolute measurements. Human brains have likely evolved to use relative comparisons in many situations, because these comparisons often provide enough information to safely navigate our environments and make decisions, all while expending as little effort as possible.




5. Sleeping well at night is not always the best investment advice

Selecting the right asset allocation is all about trade-offs and one variable is your appetite for risk. But figuring out what helps you sleep at night can be terrible advice for many investors.


I had numerous conversations with people who would have slept better at night if they could have sold out of their entire portfolio and went to cash during the depths of the market crash earlier this year. Had they done so they definitely wouldn’t be sleeping better now that stocks have recovered their losses.


The problem is your preference for risk often changes more than your tolerance for risk based on what’s happening in the markets.


You could hold your entire portfolio in cash and sleep like a baby for years only to realise later in life you’ve lost money to inflation over time. Or you could throw all of your money into only the best-performing fad companies at the moment and feel better about your positioning until those investments blow up in your face.


Most good investing should be at least a little uncomfortable at times.



Friday 14 January 2022

Weekend Reading - 14-Jan-22


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


You can sign up to https://www.getrevue.co/profile/intelsense to receive all blogs from me directly into your inbox.

1. Insecurity and envy drives markets

The Fear I see these days is a fear of becoming a relic of the past. A fear of seeing your peers catapult themselves ahead of you. A fear of missing out, which has been well documented and has become the spirit of the times we live in.


The type of fear that now drives most market activity (because it drives most market participants) is something different than the fear we’ve been accustomed to from reading about history. I would label this type of fear Insecurity. The fear of being left behind and looking like a fool. It’s no surprise that Have Fun Staying Poor or #HFSP has become one of the most enduring memes of the moment we’re in now. It’s the anti-Keep Calm and Carry On. Whenever you see people doing inexplicable things with their capital in the markets these days (public or private), the explanation is not as far from your grasp as you might think. Insecurity is probably the answer.


The other driving force in the markets, traditionally, has been Greed. I think we’re witnessing a variation on Greed that I would label Envy.


Envy will make you take wild risks with a portfolio. Especially when all you see around you are so many people you have such little regard for profiting off of things you know they themselves barely understand. The more exposure we have to the way others are investing, the more we begin to look at their returns as though that’s the appropriate benchmark. All sense of reason and perspective is left behind. If that asshole is doing it, I can do it better.




2. There's More to Investing Than Just Risk and Return

Investment researchers have created scores of metrics to help depict how well an investment has balanced risk and return: the Sharpe ratio, the Treynor ratio, the Sortino ratio, to name just a few. We also talk about how investments fit on the efficient frontier--how well they've compensated investors for the volatility they've assumed.


Meanwhile, attributes like whether an investment imparts peace of mind or requires minimal oversight can't be quantified because they're inherently subjective. You might derive peace of mind from knowing that your portfolio is positioned for long-term growth, whereas another investor's definition of peace of mind is more conventional. You might be OK with spending five hours a week researching investments; another investor might say that five hours a year is more time than he cares to give.


creating the right portfolio for you should involve some self-reflection on these softer issues, because optimizing your investment choices isn't just about risk and return. It's about creating a portfolio that can get you to your goals without interfering with the rest of your life. It's also likely that your views on these issues have evolved over time, so you may need to course-correct to ensure that your portfolio reflects your current thinking. The individual-stock-heavy portfolio that engaged you when you were younger may seem too complicated and labor-intensive--not to mention too risky--as retirement approaches.




3. Price matters

This surely will sound quaint and stale to a few readers, but – and I’m sorry – the future value of a thing is ultimately based on the dividends the thing will eventually pay you, or someone to whom you are prepared to sell your shares. Whether the proxies for those dividends are cash flows, earnings, margins, sales, or the dividends themselves, alpha happens when expectations of those future dividends change.


That’s it. That’s the stock-picking game. Stocks are not pieces of art. They are not fiat money.  Cults of personality do not last forever in the stock market. Narratives break. Eventually, everyone figured out that Galileo was right. Eventually, everyone will figure out that Cathie Wood isn’t. And it won’t take as long either.


But for those making money on big investments in these particular securities as they go from unreasonably overpriced to preposterously overpriced, this is not investing. This is greater-fool speculation. Sure, this is fun (for the longs); but calling it anything else is pulling the wool over the eyes of clients, or perhaps over your own. 


What may even have started as a reasonable and strong fundamental reason for ownership must be tempered if the share price of the thing is 10x higher than it was when you first established your thesis. Price matters. There is a difference between a company and its share price. This gravity of this logic has not dropped on many market participants. But it will. It always does.



4. The nothingness of money

Everyone knows that your bank account doesn’t go with you upon death. But for most of life, that knowledge is theoretical, meaning that it’s not real enough to influence your day-to-day behavior. The mere awareness of your mortality isn’t enough to cease your pursuit of wealth.


For most people, the Nothingness of Money strikes when the finish line is a few yards away. In this moment, a pursuit that once seemed all-consuming fades into the background. All that matters are the memories you have, the people you love, and the memories you can still make with them. The use of your finite time to squeeze out an extra dollar is laughable, as no one with a sound mind would expect that of you.


And finally, in this brief section of life, something profound happens. The Nothingness of Money is truly understood.


The core idea of retirement is this: You frontload your attention spent on money to generate wealth. You then offload your wealth to spend your attention on leisure, purpose, or love.


Retirement is our clever way of extending the Nothingness of Money out while we are healthy enough to appreciate it.



5. Automate basic financial actions to avoid the "Ostrich Effect"

In behavioral economics, the "Ostrich Effect" refers to the tendency to avoid negative financial information. From a psychological standpoint, the Ostrich Effect is the result of the conflict between what our rational mind knows to be important and what our emotional mind anticipates will be painful.


The ostrich’s method for solving financial problems is to ignore them for as long as possible, and then to respond in utter panic and agonizing stress when they are finally forced to act. Not only does avoiding uncomfortable truth keep them from solving those problems: It compounds them.


Habits are hard to change. Give yourself grace and start small. Automate just one account. Pay just one bill. You know which baby step is the right one for you. Just do it. Take five minutes and do it now.



Thursday 6 January 2022

Weekend Reading - 7th Jan 2022


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

You can sign up to https://www.getrevue.co/profile/intelsense to receive all blogs from me directly into your inbox.

1. The world is irrational

The first step to accepting that some things don’t compute is realizing that the reason we have innovation and advancement is because we are fortunate to have people in this world whose minds work differently from yours. People like Elon Musk and Steve Jobs, whose personalities are equal parts brilliant and absurd, and the absurd can’t be separated from the brilliant – you have to accept the full package. We’d never get anywhere if everyone viewed the world as a clean set of rational rules to follow.


The next is accepting that what’s rational to one person can be crazy to another. Everything would compute if everyone had the same time horizon, goals, ambitions, and risk tolerances. But they don’t. Panic selling stocks after they’ve declined 5% is a terrible idea if you’re a long-term investor and a career imperative if you’re a professional trader. There is no world in which every business or investing decision you see should align with your own view of the world.


Third is understanding the power of incentives. Bubbles are technically irrational, but the people who work in bubbles make so much money from them that there’s a powerful incentive to keep the music playing. They delude not only their customers, but themselves. Nothing gets people to look the other way like easy money.


Last is the power of stories over statistics. If you look, I think you’ll find that wherever information is exchanged – wherever there are products, companies, careers, politics, knowledge, education, and culture – you will find that the best story wins. Great ideas explained poorly can go nowhere while old or wrong ideas told compellingly can ignite a revolution.



2. The rule of awkward silence

Tim Cook and Jeff Bezos run two of the most valuable companies in the world. From the outside, they seem to exhibit very different personalities. But within their companies, both men are known for a fascinating practice: They each embrace the rule of awkward silence.


When faced with a challenging question, instead of answering, you pause and think deeply about how you want to answer. This is no short pause; rather, it involves taking several seconds (10, 20, or longer) to think things through before responding.


We live in a world that demands instant gratification. But there's a major problem with all of this instantaneous communication:  It doesn't leave time to think. Critical thinking calls for deep and careful consideration of a subject. It requires introspection and retrospection. It involves weighing and analyzing facts, and careful reasoning. And it results in making insightful connections. None of this is possible without time.


But when you embrace the rule of awkward silence, you steal back time. Time that used to be wasted on nonsense answers. Time that used to be wasted on telling another person what you think they want to hear, as opposed to what you truly believe.



3. Sea ice and how it impacts the climate

One way that scientists monitor climate change is through the measure of sea ice extent. Sea ice extent is the area of ice that covers the Arctic Ocean at a given time. Sea ice plays an important role in reflecting sunlight back into space, regulating ocean and air temperature, circulating ocean water, and maintaining animal habitats.


Arctic sea ice minimum extent is now declining at a rate of 13% per decade. The pace is likely to accelerate because of climate change-induced warming and the ice-albedo feedback cycle. The albedo effect describes the white ice surface’s ability to reflect Earth-bound sunlight back to space.


Sea ice acts as a “blanket,” separating the ocean from the atmosphere. Every year, some ice survives the summer melt. Once winter hits, more water freezes and it becomes thicker and stronger “multiyear ice.”


Melting sea ice in the Arctic does not dramatically change sea level. Melting land ice, for example from the Greenland or Antarctic ice sheets, does contribute to sea level rise. That’s because when land ice melts, it releases water that was previously trapped on land and adds to the water in the oceans.




4. How Driverless Cars Will Change Our World

Self-driving vehicles are steadily becoming a reality despite the many hurdles still to be overcome – and they could change our world in some unexpected ways.


The promise of driverless technology has long been enticing. It has the potential to transform our experience of commuting and long journeys, take people out of high-risk working environments and streamline our industries. It's key to helping us build the cities of the future, where our reliance and relationship with cars are redefined – lowering carbon emissions and paving the way for more sustainable ways of living. And it could make our travel safer.


There will be challenges to tackle like regulations, rethinking the highway code, public perception, improving the infrastructure of our streets, towns, cities, insurance and the big question of ultimate liability for road accidents.


One new space we can expect to see driverless technology deployed in is high-risk environments, from nuclear plants to military settings, to limit the dangers to human life.


Much in the same way that electric charging stations have slowly entered car parks, side streets, and service stations, so too will autonomous vehicles eventually make their way into our everyday worlds. Years from now, we may well be wondering how we ever lived without them.




5. Influencer marketing: The new wave in marketing

Influencer Marketing has changed the entire course of how marketing is perceived now. Today, any campaign starts from setting an appropriate tone for the brand to getting the right influencers on board to maximize reach.


From celebrity endorsements to micro-influencers across multiple platforms, brands have worked their way up to rationalize every expenditure by reaching out to the right target audience. Earlier, influencer marketing was aimed to reach the masses via television ads or radio or newspaper ads, without giving a second thought to who the buyers are, but now even the trend has changed drastically. Brands have changed drastically.


Social media platforms like – Instagram, YouTube, and others, are among the chief platforms where an Influencer marketing campaign begins. And, it has been found out that 74% or more people discover new products or make a purchasing decision while using social media.


The Indian influencer marketing industry is estimated at $75-150 million a year, according to a digital marketing agency. Today, the Indian audiences are consuming more online content (images, videos, or blogs) than ever before, which explains the increase in reach and engagement of several brands, who are frequently creating content to allow their potential consumers to discover and interact with them on a daily basis.



Monday 3 January 2022

Welcome 2022

2021 started with hope. Hope that the pandemic would be behind us and we would be able to get on with our lives. That bubble burst midway through the year. May-June this year was one of the most difficult times that we as Indians have seen in a long time.

Economic growth inches back

In terms of the economy, India inched back to growth relative to the previous year. PLI schemes were announced which are likely to have a long-term impact on manufacturing in India. On the negative side, income inequality has continued and probably gone up with new reports of increased uptake of MNREGA jobs in total and also by people of a lower age than before. The SME sector has seen a lot of hardship in the last two years, especially large job-generating ones such as hospitality, entertainment, aviation and transportation. The other big event which dominated the political and the economic landscape in India was the three agriculture reform bills, the prolonged farmer protest and the eventual repeal of the laws. This also is likely to have longer-term repercussions as politically difficult reforms will become more challenging to pass.

Geopolitics plays a critical role

Some of the biggest global news was about the US presidential elections and the return to power of the Taliban in Afghanistan. Renewed focus on climate change with the 2021 United Nations Climate Change Conference, more commonly referred to as COP26, being held in Glasgow, will shape large parts of business in the coming years.

China has now emerged as the foremost adversary of the ‘western world’. With the second largest economy in nominal GDP terms and already the largest in PPP terms, although like India it lags a lot in per capita terms simply because of its huge population. And this year China has been at the forefront of economic and political news right from its real estate crisis starting with the Evergrande group, its crackdown on its education sector, restricting foreign listing of its domestic companies and the back-to-socialistic values has impacted both global business and investment sentiment. There are a number of articles in respected global newspapers on businesses that are quietly reducing their China operations and expats leaving China.

I have written about the four megatrends before and it is interesting to observe the changes in narratives across those areas.

IPO market continues to sizzle

The primary market in India and globally has been red hot in 2021. Globally companies raised $1.44 trillion in equities alone which was 24% more than 2020, which in itself was a record year. In India we saw for the first time loss-making entities as well as some new-age businesses starting their market journey. Zomato, CarTrade, Nykaa, Paytm, Policybazaar and Fino Payments were notable among them. The depth of the market increases with every new IPO as investors get an opportunity to invest in something new. Valuations for new IPOs have been steep, sometimes ridiculous, but over time they tend to fall in line with the company’s performance.

NSE and LIC are the two big IPOs expected in 2022. Other notable ones expected are SBI Mutual Fund, Delhivery, Byju’s, PharmEasy, Oyo and Ola. All of this will happen provided the secondary market holds up as investor sentiment in IPOs is directly proportional to gains being made in direct equities.

Even though valuations are stretched in public listed markets, there seems like a bubble in the private markets.

2021 saw a total of 65 IPOs (incl REIT, INVIT) and raised 131,437crs. The record IPO collections were driven by Zomato, Paytm, Nykaa and Policybazaar collecting nearly 39,000cr.

An equal-weighted IPO portfolio would have given a 24% return, which is the same as Nifty in 2021. So, the IPO investors did not do much better than the good-old index in generating returns.

The future, as always, us uncertain

The “Covid” rally that we have seen over the last two years was fueled largely by large doses of liquidity. Now, with persistent inflation across the world, central banks are slowly and reluctantly pulling the plug on the liquidity flow. This can definitely temper down the rally in risk-assets like equities and commodities.

The ever-changing virus keeps us guessing. At times, to me it seems to behave like the market!! The moment you think you have it under control, something new crops up and you are back again where you started. I just hope that 2022 sees the last of the virus.

I believe that 2022 could be a difficult year to make money from equities. Not that any other year is particularly easy, but once in a while, you get a few years where it becomes slightly less daunting. Like cricket, once in a while, you get a full toss on the leg stump 😉

On the bright side, Indian companies have deleveraged extensively over the last 5 years. Corporate balance sheets are now looking better after a long time. Credit growth is picking up, investments are also picking up. The government has managed to garner up revenues and reduce expenditure such that the fiscal deficit at 6.6% is lower than planned. This is likely to lead to some expenditure from the government side on infrastructure and other social sectors. Traditional “value” sectors are likely to revive after many years of sub-par performance.

My job as an investor remains the same. Trying to find good quality businesses for the long term, keeping an eye out for medium term opportunistic bets and try out new quant-based strategies. All this while trying to learn new things like NFTs, DeFi, CBDC and such things. All while trying to ensure that we don’t lose money.

Thank you all for being part of my journey. Wishing you a very Happy New year.