Weekend Reading

Wishing you all a Merry Christmas and a wonderful New Year Ahead.

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.

The economics of the "young old"

The year 2020 will mark the beginning of the decade of the yold, or the “young old”, as the Japanese call people aged between 65 and 75.

Health worsens with age, but the yold are resisting the decline better than most: of the 3.7 years of increased life expectancy in rich countries between 2000 and 2015, says the World Health Organisation, 3.2 years were enjoyed in good health. The yold are also better off: between 1989 and 2013, the median wealth of families headed by someone over 62 in America rose by 40% to $210,000, while the wealth of all other age groups declined.

The yold are busier, too. In 2016 just over a fifth of people aged 65-69 were in work in rich countries, a figure that is rising fast. Working is one of the factors that are helping people stay healthy longer. A German study found that people who remain at work after the normal retirement age manage to slow the cognitive decline associated with old age and have a cognitive capacity of someone a year and a half younger.

https://worldin.economist.com/article/17316/edition2020decade-young-old-begins

8 ways financial statements are manipulated

Every company manipulates its numbers to a certain extent to make sure budgets balance, executives score bonuses, and investors continue to offer up funding. Such creative accounting is nothing new. However, factors such as greed, desperation, immorality, and bad judgment can cause some executives to cross the line into outright corporate fraud. Investors should know how to recognize the basic warning signs of falsified statements. While the details are typically hidden, even from accountants, there are red flags in financial statements that can point to the use of manipulating methods.

https://www.investopedia.com/articles/analyst/071502.asp

Reducing noise helps in forecasting better

In a digital world swarming with fake news and sensationalist content, those who cast about widely for information are sure to reel in some strange fish. To extrapolate, superforecasters’ true edge may be more about discipline – the mental rigour required to distinguish random from revealing data – than innate wisdom or intellectual objectivity.

Whatever the reason, investing in noise reduction may not be a bad idea. One proven, if drastic, noise-reduction solution is to assign predictions to algorithms rather than humans. Bots are programmed to pay attention to patterns in data and discount random information.

https://knowledge.insead.edu/strategy/the-secret-ingredients-of-superforecasting-12721

The silent mobile revolution in India

There are now more than 450 million mobile internet users in India, a number that is expected to grow to 667 million by 2022. Not so surprising considering that India has the lowest data costs in the world and its fixed-line download speeds continue to rise. It’s not just the urban middle class who have benefitted. Nearly half of India’s 250,000 village councils are now connected by fibre optic networks, with the other half scheduled to come online in the next two years. More than 300,000 so-called common service centres have been set up around the country to provide even impoverished villagers with access to digital services.

https://knowledge.insead.edu/blog/insead-blog/indias-quiet-digital-revolution-12956

Always average up

Never double down, always double up. And here’s the interesting thing, so most people think if you’ve done the work and you buy something and it goes against you, you should buy more. And what Julian would say is no, we’re just wrong. Made a mistake and the market’s right, the market’s … this goes back to the efficient markets. It’s not that the market’s always efficient, but when it’s telling you you’re wrong you should listen to it. And there’s the famous picture of Paul Tudor Jones in his dorm room with the losers average losers sign.

Now most people would say, “Well wait a minute, that’s not a value investor.” Well think about it, is it or is it not? So what he’s saying is when he had edge, when he had knowledge about an area, an asset, a company and they made an investment and now the market is coming around to your view, rather than do what most human beings do, which is pull their flowers. They’re so happy to have a win they take profits. He’s like, “Well let’s buy more because it’s working.” And there’s the simple statement of let’s do more of what’s working and less of what’s not. Most of us don’t do that, we do more of what’s not working and less of what’s working, which is why the average person underperforms.

https://acquirersmultiple.com/2019/12/julian-robertson-one-of-the-most-important-lessons-double-up-not-down/

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.

The last decade in pictures

A peek into the happenings of the last decade through the lens. Some stunning pictures remind us of the good, bad and ugly events that shaped the world.

https://www.nytimes.com/interactive/2019/world/decade-in-pictures.html

Zanshin - Focus on the process more than the results

We live in a world obsessed with results. Like Herrigel, we have a tendency to put so much emphasis on whether or not the arrow hits the target. If, however, we put that intensity and focus and sincerity into the process—where we place our feet, how we hold the bow, how we breathe during the release of the arrow—then hitting the bullseye is simply a side effect.

The point is not to worry about hitting the target. The point is to fall in love with the boredom of doing the work and embrace each piece of the process. The point is to take that moment of zanshin, that moment of complete awareness and focus, and carry it with you everywhere in life.

It is not the target that matters. It is not the finish line that matters. It is the way we approach the goal that matters. Everything is aiming. Zanshin.

https://jamesclear.com/zanshin

The wisdom of Nemish Shah

Investing, according to him, is simple and complicated at the same time, in a sense a lot like art. He says while investing in India follows the same rules as elsewhere, there is one crucial difference—here, the quality of the management has to be considered closely. “Abroad one can go by what is there in the books, but here you have to add one additional layer—the management,” says Shah. But as long as the management is focussed and understands allocation of capital, he is comfortable with the business. What he isn’t comfortable with are companies that are hasty and raise capital regularly. In fact, Shah has ignored many companies where the management did not give him the right vibe.

http://www.forbesindia.com/article/investment-guide-2015/why-management-quality-should-matter-for-investors/39477/0#ixzz45fYJPRJh

How to read news

Rather than reading less, portfolio managers must learn to rapidly detect what is nonsense and move on. It’s a necessary skill when confronted with the hype and sensationalism now masquerading as news. Pseudo news and pseudo analysis clutters the web, making it harder to stay well informed.

Turn off your political bias when you read and interpret the news, and be wary of commentators who have political agendas.

Before you read the news, you must have your own framework in place for decision-making. Otherwise, you’ll be unduly influenced by what you read. As Ed Stavetski, founder of PCM Partners LLC, put it, “You must have an independent view of the markets or the media will force a view upon you.”

https://blogs.cfainstitute.org/investor/2016/08/09/how-to-read-financial-news-tips-from-portfolio-managers/

How to Read: Lots of Inputs and a Strong Filter

Most books don’t need to be read to the end, but some books can change your life – means you need two things to get a lot out of reading: Lots of inputs and a strong filter.

If you only pick up books you know with certainty you’re going to like you’ll confine yourself to reading the same authors on the same topics. It gives fresh oxygen to confirmation bias and limits your ability to connect the dots between different fields and different cultures. It’s better to have a low bar in what books you’re willing to try, and even the faintest tickle of interest should be enough to make the cut. Kindle samples are free so excuses are minimal.

Once you’ve flooded your desk with inputs comes the filter. It should be ruthless, taking no prisoners and offering no mercy.

https://www.collaborativefund.com/blog/how-to-read-lots-of-inputs-and-a-strong-filter/

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 drug to cure addiction of other drugs!

MindMed is a company that’s taking psychedelic drugs and turning them into medicine. This could save lives, cure depression, help alcoholism, get people off opioids. Its first drug has the potential to turn a person’s addictions—to cocaine, methamphetamine, morphine, sugar, alcohol—off like a light switch. It has a clear opportunity to help lower the nearly 70,000 annual drug overdose deaths that take place in the U.S. But the compound, 18-MC, has yet to undergo human efficacy trials.

https://www.fastcompany.com/90436824/silicon-valleys-psychedelic-wonder-drug-is-almost-here

Book stores and physical books are making a silent comeback

The industry is much better than it was — the last four to five years have been pretty healthy. The stores have survived the devastation the independent book business suffered after Amazon.com began selling books online and at lower prices in 1995.

statistics from the American Booksellers Association, a trade group for independent booksellers, show a recovery from the industry's darkest days. The ABA had 1,887 member companies as of May 15, up nearly 35% from 1,401 in 2009. The number of members' stores totalled 2,524 in May, up more than half from 1,651. Another sign of improving health: the number of books indies have sold. Book sales rose 5% in 2018 from 2017, and in 2017 they were up 2.6% from 2016.

Independent sellers are doing better even as Amazon continues to thrive online and to open its own stores, so far mostly in big metropolitan areas. The indies are also helped by the fact more people are reading printed books rather than electronic versions — sales of e-books fell 37% between 2014 and 2018

https://abcnews.go.com/Business/wireStory/indie-booksellers-persevere-amazon-rising-costs-67656831

A new ad-model from Hulu binge watchers

Hulu knows many of its viewers watch show episodes back-to-back, and it's determined to bank on that with its advertising. Hulu is rolling out an ad system designed for binge watchers. The approach uses machine learning to predict when you're likely to marathon a show, and then sends "contextually relevant messaging" that acknowledge your viewing spree. When you reach the third episode, however, Hulu pulls out all the stops. It'll either give you an ad-free episode (with an ad beforehand, mind you) or a special offer from one of its sponsors.

https://www.engadget.com/2019/12/12/hulu-ads-for-binge-watchers/

Nestle sells ice-cream business to focus on core competency

For much of the last two years, Nestlé ​has been overhauling its portfolio to capture growth in the food space and shed underperforming or slow-growing businesses. Last year, Nestlé ​​sold its U.S. chocolate business, a deal that included more than 20 American candy brands like Butterfinger and Baby Ruth, to Ferrero for $2.8 billion.

Nestlé made a major bet on the future of plant-based foods with the 2017 purchase of Sweet Earth for an undisclosed sum. In the past few months, Nestlé expanded Sweet Earth into Awesome Burger and Awesome Grounds, the company's first foray into plant-based beef in the United States,. Last week, the company announced it would try the ingredient in its DiGiorno and Stouffer's brands.

It's also spending money to refresh its water business through the introduction of Poland Spring energy water and Nestlé Pure Life Plus, the brand's entrance into functional water.

Another focus has been the expansion of its coffee presence through the purchase of a stake in coffee shop chain Blue Bottle, the acquisition of Chameleon Cold-Brew and the dolling out $7.15 billion for the right to market Starbucks' beans, capsules and other products in stores.

https://www.fooddive.com/news/nestle-sells-us-ice-cream-business-to-joint-venture-in-4b-deal/568904/

The internet is forcing workaholism

A research team has found that hours worked since 1980 increased nearly 10 percent for Americans with bachelor’s and advanced degrees. Leamer told me that he believes this is because computing has shifted much of the economy from manufacturing to neurofacturing, Leamer’s term for intellectually intensive white-collar labor that is often connected to the internet, such as software programming, marketing, advertising, consulting, and publishing.

Neurofacturing jobs lend themselves to long hours for several reasons, Leamer said. They’re less physically arduous, as it’s easier to sit and type than to assemble engine parts. What’s more, the internet makes every hour of the day a potential working hour.

If the operating equipment of the 21st century is a portable device, this means the modern factory is not a place at all. It is the day itself. The computer age has liberated the tools of productivity from the office. Most knowledge workers, whose laptops and smartphones are portable all-purpose media-making machines, can theoretically be as productive at 2 p.m. in the main office as at 2 a.m. in a Tokyo WeWork or at midnight on the couch.

https://www.theatlantic.com/ideas/archive/2019/12/how-internet-enables-workaholism/602917/

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.

E-Sports (competitive video games) is big business

China now boasts a gaming population of over 500 million, and competitive gaming has become big business. Esports-related sales in China hit 51.3 billion yuan ($7.3 billion) during the first six months of 2019 and are on track to top 100 billion yuan for the year.

There are more than 5,000 gaming teams operating in an industry that now employs 440,000 people.

Depending on their contracts, trainees are paid about 10,000 yuan per month, while mid- to upper-ranking gamers earn around $50,000 annually, according to Li Xinyuan, the team manager. Top-tier gamers can earn over $90,000. Those rates mean even trainees make more than average factory workers in Shanghai, whose initial monthly take-home pay is typically around 4,000-5,000 yuan per month.

https://asia.nikkei.com/Business/Media-Entertainment/China-s-500m-gamers-drive-growth-at-Tencent-and-other-IT-giants

Vinod Sethi's prescription to becoming a better investor

Mr. Sethi believes that formal education is a necessity but not sufficient. He believes that education doesn’t teach you about hunger, relationship, courage, inner voice – listening to yourself, feel the present moment and many other aspects. There are many other aspects and skills which one requires in investing business and daily life.

Mr Sethi reads at least one annual report a day. He might read an annual report of a private company in Europe where he won’t be even able to invest. According to him, an annual report is a summary of collective human effort. Hence, it shouldn’t matter what annual report you are reading. One makes money where one sees financial efficiency, an alchemy or something stands out. There is no need to read an annual report to the last line. Over time one can develop sense as to what to read and what not to read. Also, according to him, speed reading helps.

Only way to meet very smart people is by making yourself very smart. No one would give you time unless you give more than they gave you. If you start every meeting thinking I must give more than what I am expected to gain, then you achieve a very high level of evolution at personal level.

Three things are a must do for a good investor:

Pay attention to the Market, Read & Research and Introspect

https://cfasocietyindia.com/2019/12/02/session-by-mr-vinod-sethi-at-value-investing-pioneers-summitvips-new-delhi-2019/

Can mirrors do the trick?

A typical large steel mill might burn through 1.5 million metric tons of coal in its furnaces in a year. It hasn’t been possible to run that type of industrial process on renewable energy, because of the extremely hot temperatures required, making nearly a quarter of global emissions hard to eliminate. But new technology—which concentrates solar thermal energy to 1,000 degrees Celsius for the first time—could transform some of the most polluting industries, including steel, cement, and petrochemical production.

The technology, from a California-based startup called Heliogen, uses an array of mirrors to reflect sunlight.

https://www.fastcompany.com/90431869/this-bill-gates-backed-solar-tech-could-help-finally-decarbonize-heavy-industry

Machine learning determines ghost writer writing for Shakespeare

Literary analysts have long noticed the hand of another author in Shakespeare’s Henry VIII. Now a neural network has identified the specific scenes in question—and who actually wrote them.

For much of his life, William Shakespeare was the house playwright for an acting company called the King’s Men that performed his plays on the banks of the River Thames in London. When Shakespeare died in 1616, the company needed a replacement and turned to one of the most prolific and famous playwrights of the time, a man named John Fletcher.

The new approach is straightforward in principle. Machine-learning algorithms have been used for some years to identify distinctive patterns in the way authors write.

The technique uses a body of the author’s work to train the algorithm and a different, smaller body of work to test it on. However, because an author’s literary style can change throughout his or her lifetime, it is important to ensure that all works have the same style.

Once the algorithm has learned the style in terms of the most commonly used words and rhythmic patterns, it is able to recognize it in texts it has never seen.

https://www.technologyreview.com/s/614742/machine-learning-has-revealed-exactly-how-much-of-a-shakespeare-play-was-written-by-someone/

Podcast: Replacing faulty body organs

Laser-printing organs and vascular systems to give everybody another chance has incredible value. It changes the dynamics of how to handle endemic diseases like diabetes and many other organ issues, liver, kidney and maybe eventually very complex systems like the nervous systems inside our bodies.

https://www.forbes.com/sites/forbesinsights/2019/12/03/lazer-printing-human-organs-a-new-kidney-in-24-hours-its-closer-than-you-think/#4611c241696c

The Man Who Solved the Market by Gregory Zuckerman - My Highlights

I completed the book the week it was out in India. I have been following (reading about, listening to, watching) Jim Simons and a few others over the last two years that I have personally started learning and experimenting with quant systems. (Planning to start writing about my learnings on quant systems, more so that I can understand them better while trying to write).

Simons has always been an enigma and I was certain that the book would not reveal any information which was not known earlier by the public but only supply anecdotes of his personal life. I was more or less right. There are practically no details of his trading system. But then again this book was probably not meant to. Overall, it was a great read. I would urge investors to read it, just to get a perspective of how a quant's view of investing is different from that of others.

The highlights are below. The bold markup is mine to highlight points I found interesting.

A former math professor, Simons is arguably the most successful trader in the history of modern finance. Since 1988, Renaissance’s flagship Medallion hedge fund has generated average annual returns of 66 percent, racking up trading profits of more than $100 billion

No one in the investment world comes close. Warren Buffett, George Soros, Peter Lynch, Steve Cohen, and Ray Dalio all fall short.

Early on, Simons made a decision to dig through mountains of data, employ advanced mathematics, and develop cutting-edge computer models, while others were still relying on intuition, instinct, and old-fashioned research for their own predictions.

By early 2019, hedge funds and other quantitative, or quant, investors had emerged as the market’s largest players, controlling about 30 percent of stock trading, topping the activity of both individual investors and traditional investing firms.

“If we have enough data, I know we can make predictions,” Simons told a colleague.

Unlike his rivals, Simons didn’t have a clue how to estimate cash flows, identify new products, or forecast interest rates. He was digging through reams of price information. There wasn’t even a proper name for this kind of trading, which involved data cleansing, signals, and backtesting, terms most Wall Street pros were wholly unfamiliar with.

“The lesson was: Do what you like in life, not what you feel you ‘should’ do,” Simons says. “It’s something I never forgot.”

The paper didn’t try to identify or predict these states using economic theory or other conventional methods, nor did the researchers seek to address why the market entered certain states. Simons and his colleagues used mathematics to determine the set of states best fitting the observed pricing data; their model then made its bets accordingly. The whys didn’t matter, Simons and his colleagues seemed to suggest, just the strategies to take advantage of the inferred states.

Simons and the code-breakers proposed a similar approach to predicting stock prices, relying on a sophisticated mathematical tool called a hidden Markov model.

Simons and his colleagues weren’t alone in suggesting that stock prices are set by a complex process with many inputs, including some that are hard or even impossible to pin down and not necessarily related to traditional, fundamental factors.

“Sometimes I look at this and feel I’m just some guy who doesn’t really know what he’s doing,” Simons said.

“If you make money, you feel like a genius,” he told a friend. “If you lose, you’re a dope.”

Stochastic equations model dynamic processes that evolve over time and can involve a high level of uncertainty.

“Just follow the data, Jim,” he said. “It’s not me, it’s the data.”

Dennis himself is said to have made $80 million in 1986 and managed about $100 million a year later. He was crushed in 1987’s market turbulence, however, the latest trader with a style that bore a resemblance to Simons’s to crash and burn.

No one ever made a decision because of a number. They need a story.

“Any time you hear financial experts talking about how the market went up because of such and such—remember it’s all nonsense,”

“LTCM’s basic error was believing its models were truth,” Patterson says. “We never believed our models reflected reality—just some aspects of reality.”

“We’re right 50.75 percent of the time . . . but we’re 100 percent right 50.75 percent of the time,” Mercer told a friend. “You can make billions that way.”

The goal of quants like Simons was to avoid relying on emotions and gut instinct. Yet, that’s exactly what Simons was doing after a few difficult weeks in the market.

By the summer of 2019, Renaissance’s Medallion fund had racked up average annual gains, before investor fees, of about 66 percent since 1988, and a return after fees of approximately 39 percent.

Another lesson of the Renaissance experience is that there are more factors and variables influencing financial markets and individual investments than most realize or can deduce.

Simons and his colleagues generally avoid predicting pure stock moves. It’s not clear any expert or system can reliably predict individual stocks, at least over the long term, or even the direction of financial markets.

“Work with the smartest people you can, hopefully smarter than you . . . be persistent, don’t give up easily. “Be guided by beauty . . . it can be the way a company runs, or the way an experiment comes out, or the way a theorem comes out, but there’s a sense of beauty when something is working well, almost an aesthetic to it.” 

Education of an Investor

In the last webinar I conducted for the members of Intelsense advisory, there was a question on what should one read to start off and become a better investor. 

I took some time and have identified some books, courses, magazine, newspapers that can help you in learning more about investing. I have categorized them so that you can pick and choose. Of all the books I have read over the years, these are the ones I have found useful and have read most of them more than once. 

The list is big. But do not get overwhelmed by it. Remember, this is not school homework you need to finish in a timebound manner. Go through them slowly but methodically. 

I have found that reading every day for a fixed period, say 30 mins, at a fixed time, makes it easier to form and stick to the reading habit. Also, importantly, do not feel compelled to complete a book. If you do not like a book or feel it is not adding much value to you, feel free to skim through or put it down all together and move on to the next one.

Lastly, this is by no means a comprehensive list and I may have missed some very good books. If you think there are any that I have missed, please let me know.

So, here goes the list.

 Building the Base

1. Rich Dad, Poor Dad – Robert Kiyosaki

2. One Up On Wall Street – Peter Lynch

3. The Most Important Thing Illuminated – Howard Marks

4. Margin of Safety – Seth Klarman (only pdf available; google for pdf; book out of print)

5. The Warren Buffett Way - Robert Hagstrom

6. Fooled by Randomness – Nassim Taleb

Fundamental Analysis

1. Beating the Street – Peter Lynch

2. The Five Rules for Successful Stock Investing - Pat Dorsey

3. Capital Returns – Edward Chancellor

4. Contrarian Investment Strategies: The Next Generation - David Dreman

5. How To Lie With Statistics – Darrell Huff

6. The Financial Numbers Game Detecting Creative Accounting Practices – Charles Mulford, Eugene Comiskey

7. The Art of Execution – Lee Freeman-Shor

8. The Manual of Ideas – John Mihaljevic

9. The Investment Checklist - Micheal Shearn

10. Common Stocks & Uncommon Profits – Philip Fisher

Valuation

1. Aswath Damodaran course on valuation https://www.youtube.com/watch?v=znmQ7oMiQrM&list=PLUkh9m2BorqnKWu0g5ZUps_CbQ-JGtbI9

2. Financial Statement Analysis and Reporting from IIT Roorkee  - https://www.youtube.com/channel/UCw4SlTWA7bpiUK-b6FssPlg

3. Financial Statement Analysis and Security Valuation  - Stephen Penman 

4. Investment Valuation - Aswath Damodaran.

Technical & Quantitative Analysis

1. What Works on Wall Street – James O'Shaughnessy

2. Quantitative Value – Wesley Gray, Tobias Carlisle

3. Quantitative Momentum – Wesley Gray, Jack Vogel

4. Dual Momentum Investing – GaryAntonacci

5. The New Trading for a Living - Alexander Elder

6. How to Make Money in Stocks – William O’Neill

7. Technical Analysis of The Financial Markets – John Murphy

8. Come Into My Trading Room - Alexander Elder

9. Mechanical Trading Systems – Richard Weissman 

10. Trade Like A Stock Market Wizard – Mark Minervini

11. Trend Following – Michael Covel

Investing Psychology

1. Poor Charlie’s Almanac – Peter Kaufman

2. Against the Gods: The Remarkable Story of Risk – Peter Bernstein

3. Influence by Robert Cialdini

4. Drunkard’s Walk – Leonard Mlodinow

5. Little Book of Behavioral Investing - James Montier

6. Psychology of Intelligence Analysis – Richards Heuer

7. Think Twice: Harnessing the Power of Counterintuition – Michael Mauboussin

8. More Than You Know – Michael Mauboussin 

9. The Disciplined Trader - Mark Douglas

Other Reading

1. Seeking Wisdom - Peter Bevelin

2. Tap Dancing to Work – Carol Loomis

3. The Market Wizards (all the books in the series)- Jack Schwager

4. Reminiscences Of A Stock Operator – Edwin Lefevre

5. The Ascent of Money - Niall Ferguson

6. Zurich Axioms - Max Gunther

7. The Snowball – Alice Shroeder

8. When Genius Failed – Roger Lowenstein

9. Deep Work – Cal Newport

10. The Personal MBA – Josh Kaufman

Magazines, Newspapers, Blogs

1. https://www.fs.blog/blog/

2. http://www.collaborativefund.com/

3. https://fundooprofessor.wordpress.com/

4. http://blogs.cfainstitute.org/

5. http://hbr.org/

6. http://knowledge.wharton.upenn.edu/

7. https://www.brainpickings.org/

8. http://investorfieldguide.com/

9. www.thinkmentalmodels.com

10. http://www.tweedy.com/research/papers_speeches.php

11. https://www.project-syndicate.org/

12. http://qz.com/

13. https://www.nytimes.com

14. https://www.bloomberg.com/

15. https://www.theguardian.com/uk/business

16. Forbes India

17. Outlook Business

18. Business Today

19. Business Standard

20. Mint

21. Economic Times

22. The Economist

23.   http://www.investopedia.com/university/all/basics/

24.   https://zerodha.com/varsity/

As Munger always says, investing is simple, not easy! Hope this helps.

Why India Boomed? And Why Are We Now In Trouble?

The Indian economy is in bad shape. All the macro indicators and fast-moving indicators show this at this point in time. Every news article or program in the media is highlighting this.

Let me take a step back to analyze how and why India boomed and what are the factors that are changing today.

My hypothesis is that India's boom was initiated and driven by the IT sector for the major part. It all started with the rise of the It companies like Infosys, Wipro, TCS. These companies hired young Indians out of college and paid them salaries which were in multiples of the traditional industries at the time. Another important point is that these companies hired in very large numbers. At no time in industrial India, had such large number of middle class educated Indians got such highly paid jobs. All labour intensive industries in the past had low salary levels. The fortunes of the companies and its employees kept being boosted by a continuously depreciating rupee over the years.

A fair number of people went abroad and brought back their saved dollars. They also brought back a yearning for products and services of global standards. They got used to eating at McDonalds and Pizza Hut, shopping at Walmart and Amazon, driving cars. Back to India, they were looking to replicate their US lifestyle in India.

With the opening of the economy in the 90s, some of these global companies also started coming to India. Indian industry also picked up cues from the global ecosystem and started improving their quality standards. This period also coincided with the starting of cable TV in India. Suddenly, a much larger section of people started getting exposed to the latest happenings, fashions, products, services and lifestyles of people across the world.

The combination of significantly higher purchasing power in the hands of many at the same time and global aspirations is what started the consumption boom.

The real estate sector was one of the first to get seriously benefited. The skylines in cities like Bangalore, Hyderabad, Pune, NCR started changing completely. The secondary and tertiary job generation from this consumption-led growth kept fueling the Indian economy. The other fallout of the IT boom was that other industries had to start paying higher salaries to retain and attract talent as everyone made a beeline to the IT companies.

India became a global IT services powerhouse. We were acknowledged to the global leader. Books such The World is Flat by Thomas Friedman further cemented the perception of Indian domination in the knowledge economy in global minds.  The fact that we missed the bus completely on higher-value products and platforms is a topic I am reserving for another day.

There was another softer aspect of this global domination in IT services. India became a “known” entity for the global business people. No longer were we a country of elephants and snake charmers. This mindshare within global business leaders helped the BPO industry and later the Pharma industry walk on the same footsteps of the IT industry did with considerable success. The same is now happening in the Chemicals industry where India is becoming a country of choice for global players.

The last few years has not been very good for the Indian IT industry. Growth has tapered. Downsizing in large companies has been consistently in the news and on social media. Employees, especially mid and senior level, are not as secure in their jobs as they were a decade back. Salary increments have reduced from twenty-thirty percent a 10-15 years back to single digits in the last few years. Starting salaries for employees have not gone by significantly in the last 10-15 years. Obviously, if the largest high-paid “labour-force” in the country are concerned about their jobs or are not very confident of increments, it will take a toll on consumption. It will, in turn, have a cascading effect on other allied services.

So, what is the way out? How can the economy actually do well? What is needed is a second wave of employment generation like what we saw in the IT boom years. Where can it come from? The way IT industry is looking, it will no longer be able to boost economic growth. It is now a stable, mature industry which has lost the ability of large-scale new employment generation. We need to start looking at new age sectors – electronics, education, healthcare, pharma and tourism.

These sectors have the potential for large scale stable employment generation. Just as an example, inviting global schools and colleges into India could help boost the perception in the education sector. Similarly, making it easier to open and run medical colleges and hospitals in district towns, can also be a long-term game. A little focused effort, with some policy interventions and tax incentives to nudge entrepreneurs in the desired direction is needed. Both industry and government need to prioritize stable employment generation across sectors for the economy to do well once again. There is no other way.

Disclaimer: The author is the Founder and Chief Equity Advisor at www.intelsense.in and nothing in the article should be construed as financial advice.

This article first appeared in The Economic Times - https://economictimes.indiatimes.com/markets/stocks/news/india-boomed-how-why-we-lost-the-plot-on-the-high-growth-path/articleshow/72291116.cms