Asking the Right Questions

I am a continuous learner. One reason I gravitated towards the stock market was because it gave me a platform to use the learning that I continuously absorbed from all around me a productive and remunerative outcome. It has also helped me in being humble because I keep making mistakes. This is a big difference from academic learning where people tend to learn to get a degree and prove their competence.

Unfortunately, the world is probabilistic and most often than not, we have to face up to the fact that we may not know as much as we thought we did. The markets keep reminding us that our knowledge is never complete and we need to question our learning and inferences all the time.

When we start to learn, most follow a standard process progressive elaboration - of understanding the basics and then going deeper into individual facets. That is what I used to do for the most part of my life. That is how we have been taught in school. But I am following a system that has started working much better for me.

When I start to learn something new, I jot down the questions I want to answer once I go through the topic. I typically take notes in OneNote. I have a box marked “Questions” on the top of the topic page. As I go through the learning process, I keep adding more questions that keep cropping up. Below the “Questions” box, I have my “Notes” box where I keep running notes, usually in bullet points. When I think I have understood the topic, I will revisit my questions and see if I can answer all of them. If not, go back to the learning process. Depending on the topic, it takes weeks or months to go through a topic.

After having followed this process for some time, **I have now come to realize that the learning is not dependent on the notes that I am taking from the material I study.** It is more from the questions I seek the answers to. Because subconsciously I am directing my learning to answer those questions. And therein lies the answer to a better system. **Trying to constantly improve the questions. Asking the more difficult questions. Questioning the questions.**

Just to give an example of a mini-project I am doing now (more on them later) on valuations.

Questions related to business valuation

* What are the most common ways to value businesses beyond DCF and Earnings multiples?

* Can one method be used to value or are multiple methods necessary to be used at the same time?

* Can businesses be valued accurately (even within a range)?

* Why does Buffett not use a spreadsheet? Does he do a DCF in his head? Or is DCF not that important as long as you have a good understanding of the business?

* How good are simple heuristics like PE, PEG, EV/EBIDTA in valuations?

* Can a multi-factor model work for valuations?

* What does history tell us about the correlation between valuations and stock price performance?

* What are the most common assumptions about valuations?

* How to know when my valuation is wrong?

* How are intangibles, corporate governance, management competence etc valued consistently?

* Is buying companies with low valuations better than buying companies with high valuations?

* Does market cycle determine valuation?

* Stan Druckenmiller says interest rate and currency influence valuations more than earnings. Is he right? Is it supported over time and across markets?

* Is narrative more powerful in the short run than valuation?

* Why is there such disconnect between private and public market valuations? Startups with no discernible earnings are being valued astronomically.

* Is there a model to accommodate systemic liquidity into valuation models

* Can valuation be disregarded altogether? How does a coffee-can portfolio generate above-average returns over time? Or a momentum portfolio for that matter.

Standard 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. Nothing in the article should be construed as investment advice. Please do your own due diligence before investing.

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 the collection this consider forwarding it to someone who you think will appreciate.

The story of Parle-G

This is one article which I found fascinating at many levels. Deals with the history of Parle-G and also touches on the complexity of manufacturing and distribution in a constrained time like the Covid lockdown.

Across the country’s varied culinary landscape—where what one eats can signal class, caste, religion, ethnicity, and income—Parle-G biscuits are neutral. Wealthier Indians dip them in milky tea, poorer ones in water. Beyond the product itself, the people who make it illustrate the complexity and interdependent nature of the Indian economy, reliant at once on full-time workers and day labourers, not simply across the supply chain but often at the same company, even on the same factory floor. The Parle-G biscuit is, in many ways, bound up in multiple Indias—that of the formal and informal economy; that of big retail chains with their advanced supply chains and online stores, and mom-and-pop stores that have neighborhood credit systems; that of the rich, and the poor.

https://www.theatlantic.com/international/archive/2020/06/india-biscuits-coronavirus-pandemic-migrant-workers/612619/

 

Deepfakes can be useful - if they don't become a menace

Synthetic media technologies—popularly known as deepfakes—have real potential for positive impact. Voice synthesis, for example, will allow us to speak in hundreds of languages in our own voice. Video synthesis may help us simulate self-driving-car accidents to avoid mistakes in the future. And text synthesis can accelerate our ability to write both programs and prose.

But these advances can come at a gargantuan cost if we aren’t careful: the same underlying technologies can also enable deception with global ramifications.

https://www.technologyreview.com/2019/12/12/131605/ethical-deepfake-tools-a-manifesto/

 

Negative news is bad for your health

Research shows us that even in normal times, constant exposure to negative news can have a heavy impact on our mental health. Among other things, negative news increases the level of cortisol, the body’s primary stress hormone. Continuous exposure to cortisol has been shown to cause severe side effects, including being unable to naturally regulate blood pressure. Furthermore, negative news stories have been shown to significantly change an individual’s mood and mindset — particularly if there is a tendency to emphasize suffering, death, and other emotional components of the story.

https://sloanreview.mit.edu/article/why-sharing-good-news-matters/

 

Market timing is not possible

Markets are second-order systems. What this means is that in order to successfully implement such market timing strategies you not only have to be able to predict events — interest rate rises, wars, oil price shocks, the impact of the coronavirus, the outcome of elections and referendums — you also need to know what the market was expecting and how it will react and get your timing right. Tricky. When it comes to so-called market timing there are only two sorts of people: those who can’t do it, and those who know they can’t do it. It’s safer and more profitable to be in the latter camp.

https://www.fundsmith.co.uk/news/article/2020/07/02/financial-times---there-are-only-two-types-of-investors

 

Augmented reality used for the first time in spine surgery

Augmedics, a pioneer in augmented reality, surgical image guidance has announced its groundbreaking xvision Spine System has been successfully used for the first time in a spinal fusion surgery in the United States.  The system was used in a spinal surgery procedure by Johns Hopkins University surgeons. xvision, the first Augmented Reality Guidance system for surgery, allows surgeons to visualize the 3D spinal anatomy of a patient during surgery as if they had “x-ray vision,” and to accurately navigate instruments and implants while looking directly at the patient, rather than a remote screen. The xvision Spine System takes the best of surgical navigation systems and improves upon them to meet the needs of surgeons and provide technical confidence in the operating room.

https://orthospinenews.com/2020/06/11/first-augmented-reality-spine-surgery-using-fda-cleared-augmedics-xvision-spine-system-completed-in-u-s/

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.

FAQ answers for Hitpicks - the technofunda advisory

I have been receiving a number of questions on our new Technofunda initiative - Hitpicks. Here are some points that should answer most of the commonly asked questions.

• All communication will be on email.
• It is a long-only strategy. All the ideas recommended would be BUY recommendations but if and when we spot an opportunity of a breakdown/reversal in any stock we would bring it to your notice only as a possibility and not as a recommendation.
• The companies recommended will be companies with decent fundamentals and high liquidity.  
• The time frame for the given trade will be clearly mentioned along with the recommendation. e.g short term means few days to few weeks, medium-term means few weeks to few months and long term for a few months to more than that. 
• Ideal allocation to technofunda trading in the overall portfolio should not exceed 30-40% of total portfolio value. One can gradually begin with smaller sums and get enough confidence to bet higher amounts gradually.  
• We would endeavour to recommend stocks as and when we come across good trade setups and because of that there will be no fixed frequency of recommendations. 
• A minimum of 12 recommendations would be provided but the number is likely to be exceeded provided markets remain good. 
• We would clearly mention the course of action which includes buy/accumulate in a price range, stop loss and targets in each recommendation. Whenever targets are achieved or sometimes slightly before that happens, it would be advisable to book atleast partial if not full profits. 
• Along with technical set up, a brief write up about the fundamentals and possible triggers would be provided with the recommendation. 
• The recommendations are for delivery based trading on the given time frames, but if someone wants to buy in futures or options, he/she can do so at his/her own risk.  
• Investors/traders do not need to trade each and every recommendation made.  They can pick and choose according to their comfort levels based on conviction and time frame mindset.

Pre-Register for the Introductory offer for Hitpicks

The introductory offer for "Hitpicks" is here. Please register your email id and we will send you the payment details.

The first 100 registered email ids get a discounted price:

1 yr - Rs 16,000 (instead of Rs 20K)

2 yr - Rs 28,000 (instead of Rs 35K)

Google Forms for pre-registration - https://forms.gle/G1WPJxyqmUBSzVk76

Introducing Hitpicks - our new technofunda advisory

It brings me great pleasure to bring to the fore an old friendship and collaboration between Hitesh Bhai (that's what I and most people I know call Hitesh Patel). 

He is the person who enthused me to learn technical analysis which opened the doors of quantitative investing. I also realized that blending technical and quantitative with fundamentals adds superpowers to regular BHP (buy-hold-pray) investing.

My own results improved significantly after meeting Hitesh Bhai. I also ventured into exploring other investing styles, which I think has helped tremendously in expanding my horizons.

The new offering - "Hitpicks" - is focused on technicals with a technofunda approach with a short-to-medium timeframe.

There may be some confusion for investors on which plan should they chose for a subscription. I have already received a few emails with an hour of announcing the new plan on twitter. So, here are a few pointers to help decide.

1. Intelsense Long Term Advisory is for those who are long term investors.

This is ideal for you if you have a time-horizon of a minimum of 5 years and are typically looking to invest for the next few decades. Here the main focus is compounding capital with comparatively lower risk in quality businesses. It is very well suited for retirement planning, monthly SIPs, goal-based investing for financial goals at least a decade away or wealth creation for the next generation. Transactions are infrequent and there may be months or quarters or even years (less likely, but possible) where we just sit and do nothing to our positions.

2. Quantamental is for style diversification, disciplined high risk-high return.

This is a great compliment to Intelsense Long Term advisory. You can think of taking a 10%-20% part of the portfolio in a strategy like this, which in the long run can generate serious outperformance. But, this is much more involved and hands-on approach and requires making transactions once a month. The risk for an investor also is higher as you would not really know a lot of details of the companies you are buying into. Also, since it invests into high growth, high momentum stocks, in a choppy market you can keep losing money. However, it can generate excellent returns in a trending bull market as shown by the backtested performance and also experienced by me since I have been investing in it. This strategy is also great for people who want to just invest in a product where human biases and mistakes are systematically reduced progressively.

3. Hitpicks is for short-to-medium term discretionary technofunda bets

This is basically meant for those who have a short-to-medium term time horizon. The core is technical analysis with an overlay of fundamentals, which basically means we will be looking only at fundamentally strong companies for technical chart patterns and breakouts. Transactions will be frequent. It requires a hands-on approach to the market.

4. Mix and match based on your preference

Based on your preference and requirement, you can choose what makes sense to you. Or if you feel that you want to apportion a part of your portfolio to each strategy then that is also not a bad idea. That is what I personally do. My personal approach is about a 70:20:10 split with the intention of moving to a 50:30:20 split over time.

5. All existing Intelsense and Quantamental subscribers will be eligible for a discounted subscription rate. Always.

Those who are already subscribers to any Intelsense family plan are automatically eligible for a discounted rate. It will be rolled out to existing subscribers directly. In fact, this will be available across the basket of plans. Any existing subscriber will get a discounted rate for any other plan.

6. All 3 plans are separate and complementary. You choose based on what you need.

I don't pick favourites among the 3 plans. They are complementary styles and complementary time horizons. So, a particular plan may not be suitable for all needs. But between the three, I think, we pretty much cover a large part of the equity investing spectrum. 

7. Bottomline is to provide honest, effective and good quality advice to retail investors.

Right from our initial ValuePickr days, we have been driven to participate in empowering the small investors. Even today, both Hitesh Bhai and I continue to spend hours every day on ValuePickr doing just that. And we get a lot more in return - in terms of great ideas, points we may not have thought of, scuttlebutt from across the country and so much more.

After having interacted with literally tens of thousands of retail investors in the few years, I have realised that there is a dire need for actionable advice which was honest and where you are not being "duped" into buying bad companies by fly-by-night advisors. 

The love and affection we have received and continue to receive from fellow members of ValuePickr and the investing community in general, remain the prime mover for us.

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 the collection this consider forwarding it to someone who you think will appreciate.

The innings that changed Indian cricket forever

One of the greatest innings of modern times began 18 minutes past 11 o’clock with no television camera to record its brilliance. A bareheaded Kapil Dev, in a full-sleeve sweater and droopy moustache, “squinted up at the sun”, wrote R Mohan in Sportstar, as he walked in to bat.

In his hands a Slazenger V12. On his mind thoughts of survival. A few minutes on, Yashpal Sharma’s dismissal left India at 17 for 5.

Walking in at No.7, Roger Binny remembers Kapil saying: “We’ve got 53 overs to go.”

https://wisdenblog.wordpress.com/2019/07/04/kapils-crazy-day-out-in-kent/

 

A sneak peak at the developments of manufacturing artificial organs, at scale

Betting on success for growing organs, Kamen compares scaling their manufacturing to the way Silicon Valley turned an understanding of semiconductors into creating transistors so small and cheap that the tech industry now churns out phones by billions. “So I thought, why don’t we do the same thing for living tissues,” he says. “There ought to be a way to make a high quantity of them, a high quality of them, and at a realistic cost for the American public that’s in desperate need when they have an organ failure.”

https://onezero.medium.com/the-segways-inventor-has-a-new-project-manufacturing-human-organs-7a6a2da7c8f4

 

The phenomenon called Robinhood

Robinhood took the trend to its logical conclusion — trades that cost $0 — and converted it into an opportunity to connect around money with members of a 90-million-strong generation. It was shrewd: Not only is it easier to reel in newcomers than to peel users away from other services, there’s an opportunity to make them lifetime customers, gradually adding new (fee-based) services. That’s why lots of businesses, including brokerage and financial firms, are interested in young HENRY — “high earners, not rich yet” — clients.

https://marker.medium.com/how-robinhood-convinced-millennials-to-trade-their-way-through-a-pandemic-1a1db97c7e08

 

The Big Cycles - Ray Dalio's mega serial soap opera continues

I am not a fan of Ray Dalio. I think he tends to oversimplify complex situations and overcomplicates simple ones!!! Nevertheless, this storytelling on the long cycles is good learning. Also, would urge everyone to read Niall Fergusson's The Ascent of Money or watch the documentary on youtube (link: https://youtu.be/fsrtB5lp60s). The documentary does have some stunning visuals and shooting locations. Worth the 4-odd hours.

https://www.linkedin.com/pulse/big-cycles-over-last-500-years-ray-dalio/

 

Cyber-mercenaries on the rise

Israel is a world leader in private cybertechnology, with at least 300 firms covering everything from banking security to critical infrastructure defense. But while most of these firms aim to protect companies from cyberattacks, a few of them have taken advantage of the thin line between defensive and offensive cybercapabilities to provide clients with more sinister services.

The privatization of this offensive capability is still in its infancy. But it raises broad concerns about the proliferation of some very powerful tools and the way governments are losing the monopoly over their use. When state actors employ cyberweapons, there is at least the prospect of regulation and accountability. But when private companies are involved, things get more complicated.

“If you want to take down a plane, if you want to ground air power, you don’t go through the front door, the cockpit,” said Ben Efraim, a former fighter pilot. “You go after the airport. … You go after the logistics systems. You go after the iPads the pilots take home.” There are no “stand-alone entities anymore—everything is part of a network,” Ben Efraim added.

https://foreignpolicy.com/2018/08/31/the-rise-of-the-cyber-mercenaries-israel-nso/

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.

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 the collection this consider forwarding it to someone who you think will appreciate.

Stop using old models to understand a new world

There is a parallel between today’s stock market and Fischer random chess. The last time we faced a global pandemic was in 1918, and this might as well have been in the BC era. Few of us were alive then, but even the history books are not that useful, as the structure of the US and global economy, the central bank system, the diversity and dynamism of society, and the state of technological progress are nothing like the world knew then. Most of the mental models we as investors rely on are based on an environment that no longer exists. The only common denominator between now and then is that humans have not really changed that much – it takes a few millennia to rewire our DNA and thus our fundamental behaviour.

We need to confront this environment on its own unique terms: we have never been here before. We have to incredibly careful not to fall back on using old mental models. With every move we make, we have to reexamine our assumptions.

https://contrarianedge.com/the-fischer-random-chess-stock-market/

 

Rise of Livestream Shopping

Livestream shopping is a natural confluence of several current tech trends—streaming, influencers, social, commerce—and offers companies a new path to consumers' hearts and wallets.

In April, Huang Wei—known professionally as Viya—sold a rocket launch for around 40 million yuan ($5.6 million). The live, online shopping extravaganza the 34-year-old hosts most nights for her fans across China is part variety show, part infomercial, part group chat. Last month, she hit a record-high audience of more than 37 million—more than the “Game of Thrones” finale, the Oscars or “Sunday Night Football.”

Each night, Viya’s audience places orders worth millions of dollars—typically for cosmetics, appliances, prepared foods or clothing, but she’s also moved houses and cars. On Singles Day, China’s biggest shopping event of the year, she did more than 3 billion yuan in sales. The spread of coronavirus, which put most Chinese people under stay-at-home orders, doubled her viewership.

https://www.bloomberg.com/features/2020-viya-china-livestream-shopping/

 

Robinhood investing is here

Professional investors have largely abandoned the stock market amid the coronavirus pandemic, but sports bettors and bored millennials have jumped into the retail stock trading market with both feet.

They may be a driving force pushing U.S. stocks to their recent highs — and potentially driving them further.

43% of North American men aged 25-34 who watch sports also bet on sports at least once per week, and that's the same group that has flocked to Robinhood.

https://www.axios.com/sports-betting-stock-market-surge-0e945773-d676-4f0a-a6a0-a0f92611b10b.html

 

John Bogle did not invent the index fund - A lesson in history of the index fund

In the January 1960 issue of the Financial Analysts Journal, Edward Renshaw and Paul Feldstein published an article entitled, “The Case for an Unmanaged Investment Company.”

The fundamental problem facing individual investors in 1960 was that there were too many mutual-fund companies: over 250 of them. “Given so much choice,” the authors wrote, “it does not seem likely that the inexperienced investor or the person who lacks time and information to supervise his own portfolio will be any better able to choose a better than average portfolio of investment company stocks.”

The solution suggested in this paper was an “unmanaged investment company”, one that didn't try to beat the market but only tried to match it. “While investing in the Dow Jones Industrial average, for instance, would mean foregoing the possibility of doing better than average,” the authors wrote, “it would also mean that the investor would be assured of never doing significantly worse.”

https://www.getrichslowly.org/history-of-index-funds/

 

Newton's Law of Productivity

In many ways, procrastination is a fundamental law of the universe. It's Newton's first law applied to productivity. Objects at rest tend to stay at rest. It works the other way too. Objects in motion tend to stay in motion. When it comes to being productive, this means one thing: the most important thing is to find a way to get started. Once you get started, it is much easier to stay in motion.

https://jamesclear.com/physics-productivity

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.