Lindy Effect and the Challenges of Long Term Forecasting

In the last few years, Lindy Effect has gained a lot of popularity amongst investors. Ever since Nassim Nicholas Taleb wrote about it in his 2012 book "Antifragile: Things That Gain from Disorder", it has been used in the investing world as a concept that says companies with a competitive advantage that have survived for many years are more likely to survive for many more years.

To quote Taleb,

"If a book has been in print for forty years, I can expect it to be in print for another forty years. But, and that is the main difference, if it survives another decade, then it will be expected to be in print another fifty years. This, simply, as a rule, tells you why things that have been around for a long time are not "aging" like persons, but "aging" in reverse. Every year that passes without extinction doubles the additional life expectancy. This is an indicator of some robustness. The robustness of an item is proportional to its life!"

The concept is named after Lindy's delicatessen in New York City, where the concept was informally theorized. Lindy was a very popular restaurant that started in 1921. A restaurant running for nearly 90 years was supposed to last for another hundred and eighty years as per Taleb's theory.

The irony is Lindy shut its doors permanently in 2017. So much for theory!

And this is not the only example. "Built to Last: Successful Habits of Visionary Companies", a bestseller by Jim Collins and Jerry Porras published in 1994 identified 18 companies that were built to not only built to last but built to excel.

The list of companies identified by the authors was as below:

* 3M

* American Express

* Boeing

* Citicorp

* Disney

* Ford

* General Electric

* Hewlett Packard

* IBM

* Johnson & Johnson

* Marriott

* Merck

* Motorola

* Nordstrom

* Philip Morris

* Procter & Gamble

* Sony

* Walmart

Amongst them are companies like General Electric, Motorola, Ford, Sony, Boeing, Nordstrom, IBM, HP who are mere shadows of their former glorious selves.

The points I am making are simple:

1) Don't listen to pundits giving lectures on durable competitive advantage. Nothing lasts forever. People die. Trends change. Preferences change. If you don't want to lose money, start with the premise that all businesses are fragile and will die sooner rather than later.

2) No one knows much about what is going to happen in the long term future. We are all deterministic beings in a probabilistic world.

3) Have a risk management plan for your investments, which is preferably a quantitative one. Because when things get rough, trust yourself to self-sabotage unless you have a well-defined system.

4) When you are losing money in an investment, don't average down. You may think you know everything about the business. But you don't. You are just kidding yourself. (The only time to average down is when the overall market has corrected and your stock is down along with everything else.)

This article first appeared in The Economic Times.

Weekend Reading: 22-Apr-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. The story of the rice cooker and economic development of women in post-war Japan

The automatic rice cooker was invented at the dawn of the modern Japanese kitchen and commercialised for home-use by Toshiba in 1955. Collaborating engineer Minami Yoshitada of Koushin-sha and his wife Fumiko experimented with temperatures and cooking times before concluding that automatically switching the power off when the water reaches a boil would adequately steam the rice to its optimal tenderness in about twenty minutes. The result: the Toshiba Automatic Rice Cooker model ER-4, designed by Iwata Yoshiharu, was Japan’s first successfully mass-produced rice cooker.

 

In the last century, no domestic space in Japan has been transformed by design and technology more than the kitchen.

 

By combining the dining and kitchen into a single space, Hamaguchi legitimised womens’ labour by making it visible to the head of the household, while also improving efficiency. In doing so, Hamaguchi presented household labour as an important contribution to the economy during a time in which the Japanese government was focused on the economic development of the country.

https://artreview.com/work-of-the-week-toshiba-rice-cooker/

 

2. Reversible & irreversible decisions

Jeff Bezos breaks up decisions into two types: Type 1 and Type 2. He compares them to two types of doors. Type 1 decisions are irreversible. This door only opens one way – once you enter the room you cannot get out. It is very difficult if not impossible to reverse the decision. A Type 2 decision is like a door that opens both ways – you can get in and out easily. Bezos argues that corporations don’t distinguish between Type 1 and 2 decisions. Type 1 decisions should be thoughtfully weighed. Type 2 decisions can be made fast.

 

In your early 20s, some Type 1 decisions require careful deliberation, some don’t. Choosing a career and your soulmate do. Drinking and driving or getting in a car with a drunk roommate at the wheel, don’t. There is an Uber app for that.

https://contrarianedge.com/turning-a-pbs-interviewer-into-interviewee/

 

3. Eat 2-3 times a day while in an intermittent fast

Keeping blood glucose levels down requires eating more regularly than once a day, Manoogan says, as this prevents the body thinking it's starving and releasing more glucose when you do eventually eat in response. 

 

Instead, she says, two to three meals a day is best – with most of your calories consumed earlier in the day. This is because eating late at night is associated with cardio-metabolic disease, including diabetes and heart disease.

 

"If you eat most of your food earlier on, your body can use the energy you feed it throughout the day, rather than it being stored in your system as fat," Manoogan says.

 

But eating too early in the morning should be avoided, too, she says, as this wouldn't give you sufficient time to fast. Also, eating too soon after waking up works against our circadian rhythm – known as our body clock – which researchers say dictates how the body processes food differently throughout the day.

https://www.bbc.com/future/article/20220412-should-we-be-eating-three-meals-a-day

 

4. You have to be a learning machine for the rest of your life

As AI and robotics continue to advance, there are concerns that machines could soon replace humans in a wide range of occupations. Now there’s a new way to tell how likely your job is to be taken over by robots or AI, and what job to shift to if you are at risk.

 

Workers losing out to automation is not a new phenomenon. As the researchers note in a paper published in Science Robotics, the mechanization of agriculture and automation of manufacturing led to significant changes in the structure of the workforce. But they point out that this time around, these changes may be far more disruptive.

 

While previous waves of automation primarily affected low-skill jobs, the rapidly improving capabilities of machines mean that medium and high-skill occupations are increasingly at risk. The pace of progress also means that jobs may change far faster than before, opening up the prospect that workers will have to retrain and acquire new skills multiple times throughout their lifetimes.

https://singularityhub.com/2022/04/18/theres-now-an-algorithm-to-help-workers-avoid-losing-their-jobs-to-an-algorithm/

 

5. Haptic Touch tech now to be used in robotic surgery

Haptics is the science and technology of sending and getting data through touch. At its generally essential, “haptic” amounts to something connecting with the feeling of touch. (It’s gotten from the Greek word for contact.)

 

Haptic Touch is a particular type of haptic input that utilizes vibrations to imitate sensations like squeezing a button or looking at a rundown when you do it on your screen. For instance, assuming you hold your finger on an application symbol, you’ll feel a vibration as a menu opens.

 

A new robot control technology called haptic technology is being created to give tactile input to the human surgeon while directing the automated movement. Haptic technology gives tactile criticism to the controls and permits clients to actually contact, feel, and control three-layered objects. They can exactly control the placement of the robot’s end-effector (the finish of the robot arm that holds the device).

 

Haptics in Virtual Reality (VR) offers an additional aspect by allowing clients to feel the virtual environment not just through faculties, for example, voice-based or vision-based connection in addition to the feeling of touch. It is basic to consider the drenching and connection parts of VR to get a sensible discernment of the fake world.

https://www.analyticsinsight.net/haptic-technology-is-the-next-big-thing-in-robotics-and-vr/

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FOOTNOTE:

Every month, I take questions sent in from the advisory members and try to answer them. Here is the link for the March monthly Q&A - https://youtu.be/SA33v2tlKCM

Earlier in the week, Scientific Investing's Kumar Saurabh did an interview with me on discretionary versus non-discretionary investing. You can watch that here: https://youtu.be/NchSa871V4E

The IPO Frenzy

 

The IPO market in India is sizzling. Some notable IPOs that are open now or was issued in the recent past. But what has caught the imagination of the investors are the new-age tech startups. The notable ones are as follows:

• One 97 Communications (Paytm)
• PB Fintech (Policybazar)
• Fino Payments Bank
• FSN Ecommerce (Nykaa)
• CarTrade
• Zomato

Let me state it upfront. I believe that the Indian new-age IPO market is in a bubble. A big one at that. And promoters are rushing head over heels to bring their loss-making enterprises to market to secure their own futures. No one is questioning how much of the IPO is an OFS (offer for sale) where the existing promoters and investors are dumping their own holdings onto public shareholders.

But are they to blame? Why are investors ready to pay 30-80 times sales for companies which are not profitable, neither have a path to profitability or where competition is so stiff that whatever meagre profits are being earned can disappear in an instant from external competition or regulation?

The answer to that probably lies in the fabulous run of big tech (FAANG etc) in the US. Indians have seen the phenomenal performance of Amazon, Facebook, Google etc and feel that this time they can make money from such new-age tech stocks. After all, wasn’t Amazon loss-making for a very very long time?

There are two fundamental problems with the Amazon example. And nearly always, Amazon is the example 😊

1. Amazon wasn’t doing very well on their retail front but AWS, which was something no one knew would come along, came in and started spewing cash with a vengeance. That cash is what helped the stock reach the commanding heights it has done today.
2. Amazon is and always was a dominant global player which could use its scale to reduce its cost. It built its business on being a low-cost, consumer-friendly operation that passed on a large part of its scale-gains back to the customer thereby creating a virtuous cycle. People got low prices because of Amazon’s scale and more people bought more goods on the platform which in turn increased its scale. But even this is not enough, because a lot of other players did the same in the offline world – like Costco, Walmart etc. Walmart tried replicating the same in the online world as well but wasn’t very successful.

Look at the Big Tech stocks – can you think of normal lives without Google (search, youtube, Gmail, maps, translate)? Is any of India’s tech companies as dominant in its space as Facebook or WhatsApp? Or have fierce loyalty as Apple? Do we have a Netflix equivalent or a Tesla? Nearly all the US Big Tech have global dominance.

When you dissect each business that is IPOing in India today, you realize that none of these businesses is new. They have been in business for a number of years and are still struggling. Their claim-to-fame is the media PR, which is probably paid for by the companies themselves, and mainly deals with how much money one has raised from its investors. Can you live if Paytm is down for a day? Of course, you can. Most probably you won’t even miss it. Can Zomato be profitable if labour regulations harden or if (and when) restaurants start their own ordering app?

And in the typical incentive-caused bias of media and sell-side analysts come in. Nobody wants to put their neck out and say that these IPOs are priced ludicrously. Investors are happy if they get an allotment and get an initial pop. No one is looking to buy and hold these businesses for the next 10 years. In fact, for a lot of promoters, bringing their company to market is the end-game and not really a step along the long and arduous journey of building an institution.

I am not someone who obsesses over valuations. I think good things are always expensive. But paying a scaringly high price for buying something where the promoters are willingly selling and which have a questionable business model with a very hard-to-fathom path to long term profitability scares the hell out of me.

Since I come from a middle-class background and believe that capital is sacred and irreplaceable, I am very sceptical about the entire IPO scenario in India today. The bubble is there, it is acknowledged in hushed tones but no one wants to leave the party. For the simple reason that no one knows if the party s nearing its end or just beginning. I am not applying for any of these overpriced and overhyped IPOs as of now. I am ready to forego of listing gains and looking foolish (in reality, can’t actually be sure if I am foolish or not!!). 

But let this be my caution to you. Participate in this frenzy only if you know what you are doing.

This article appeared in The Economic Times