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 Unsung Hero

Please read this. It is the story of an unsung hero who has left an indelible mark in the world with his contributions.

https://12mv2.com/2020/07/13/transcript-peter-kaufman-speech-at-the-redlands-forum/amp/

 

Meditation changes your brain

As science begins to dig into the long-term impacts meditation has on the brain, researchers are turning to the minds “Olympic-level” meditators for answers—people who have done up to 62,000 hours of meditation in their lifetime.

Davidson found their brainwaves showed never-before-seen levels of gamma, one of the strongest types of brain waves,  theorized to appear when the different regions of the brain harmonize.

The typical person will have a gamma wave very briefly, for example when we’ve solved a problem we’ve been grappling with, and for a second all of our sensory inputs come together in harmony. The brainwaves of long-term meditators, however, show gamma all the time as a lasting trait, no matter what they are doing. “It’s their everyday state of mind,” says Goleman. “Science has never seen this before.”

https://www.mindful.org/the-remarkable-brains-of-high-level-meditators/

 

China's ballooning debt problem

An Institute of International Finance report published in May 2020 suggested that China is now the world’s largest creditor to low income countries, with China’s outstanding debt claims on the rest of the world having risen from US$875 billion in 2004 to over US$5.5 trillion in 2019 – more than 6 per cent of global gross domestic product (GDP). The Institute of International Finance (IFF) estimated that China’s total domestic debt hit 317 per cent of gross domestic product (GDP) in the first quarter of 2020, up from 300 per cent in the last quarter of 2019 – the largest quarterly increase on record. China’s consumer debt is the fastest growing segment of overall debt, particularly in the form of mortgage and consumer loans. Household debt rose to 54.3 per cent of China’s GDP in the last quarter of 2019 compared to 51.4 per cent in the last quarter of 2018.

https://www.scmp.com/economy/china-economy/article/3084979/china-debt-how-big-it-who-owns-it-and-what-next

 

From Rags to Riches

Few consumers, anywhere, have heard of the wiping-rag industry. But it bails out everyone. Approximately 30% of the textiles recovered for recycling in the U.S. are converted to wiping rags. And that’s probably an undercount. The 45% of recycled textiles that are reused as apparel eventually wear out, too. When they do, they’re also bound for the wiping-rag companies. Nobody counts the number of wiping rags manufactured in the U.S. and elsewhere every year. But anyone who knows the industry acknowledges that the numbers are in the many billions—and growing. The oil and gas industry, with its network of pipes and valves, requires hundreds of millions of rags per year to wipe leaks, lubricants, and hands. Hotels, bars, and restaurants need billions of rags to clean glasses, tabletops, and railings. Painters need them for spills and drips. If these businesses can’t reuse clothes and sheets, they’ll opt for disposable paper towels, synthetic wipes, and new cloth rags, complete with all their environmental and financial costs.

https://www.bloomberg.com/features/2019-wiping-rags/

 

An Introduction to Booneisms

From walking off my first job to start my first company to closing down Mesa Petroleum and to opening up my own hedge fund at 68, it’s three quarters of my life laid bare.

The book is built around little bits of advice I’ve been known to give over the years. At some point, family, friends and staff began writing them down and they became their own genre, now known as “Booneisms.” Many of them are about life and leadership, and other lessons I’ve learned through my ups and downs over 90 years.

https://www.forbes.com/sites/tboonepickens/2018/05/11/ninety-years-of-lessons-learned-t-boone-pickens-letter-to-the-class-of-2018/#6f26bf18e3c6

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.

The great investors who no one knows about

Two secretive brothers from New Zealand have perhaps THE best long-term track record in the investing world. Starting in 1986, the two turned $10 million of family money into over $5 billion just 20-years later. That’s an astounding 36% CAGR. The two brothers have gone to great lengths over the years to maintain a low profile and keep their faces out of the news. They were amongst the first investors to plunge into emerging markets like Russia, Brazil, and the Czech Republic. They are the Chandler brothers: Richard and Christopher. They ran the Sovereign Global Fund for 20-years (the two have since split off to manage their own money with Legatum and Clermont Capital).

https://macro-ops.com/the-chandler-brothers-the-greatest-investors-youve-never-heard-of/

 

The unknown Pharma billionaire investor

If discovering blockbuster drugs is the pinnacle of pharmaceutical industry success, then the next best thing is getting rich by earning pennies from every pill sold. For 24 years, that is exactly what a little known Wall Street investor named Pablo Legorreta has been doing. Few have heard of him, but millions have benefited from the top selling drugs his company Royalty Pharma draws income from. Names like Humira for sufferers of Crohn’s disease, Lyrica, the most successful anti-epileptic remedy and blood cancer treatment Imbruvica. The giant companies behind these drugs, names like Pfizer, Johnson & Johnson and AbbVie, do all the heavy lifting— producing and marketing the drugs while Legorreta sits back and collects his mailbox money.

https://www.forbes.com/sites/nathanvardi/2020/06/12/meet-the-secretive-wall-street-investor-with-the-billion-dollar-medicine-cabinet/#10051c92c361

 

How to reduce imports from China?

The larger structural question is whether we can permanently reduce the share of Chinese imports. This must be seen in context. India typically incurs a current account deficit, which means that we typically import more goods and services then we export. There are two reasons for this. We export when the price and quality of what we sell is attractive to foreigners. We import because the same is attractive to us. This, in essence, is the theory of comparative advantage and a current account deficit simply means that our overall comparative advantage is lower than that of our trading partners. However, as an economy evolves, there is another reason why this may happen, which is that our pattern of consumption becomes more import-intensive.

https://www.nipfp.org.in/blog/2020/07/03/myth-indias-import-dependence/

 

A gift of love from father to daughter made her a multimillionaire

When Hiroe Tanaka’s father died, he left behind something that would change her life: a recipe for fried meat on a stick. It was an act of love. His daughter adored the Japanese street food known as kushikatsu, and he’d spent endless hours working out how to make it just right.

The handwritten memo, which detailed how to cook the seemingly simple dish, helped save a restaurant business from bankruptcy in 2008, elevated Tanaka from part-time employee to vice president of a company named after her, and made her a multimillionaire. The university dropout who once worked as an office lady now sets strategy for the $82 million Kushikatsu Tanaka Co.

https://www.japantimes.co.jp/life/2017/05/13/food/kushikatsu-hiroe-tanaka-millionaire/

 

A therapy for permanently reducing LDL & Triglycerides

A novel gene-editing experiment seems to have permanently reduced LDL and triglyceride levels in monkeys. In the first gene-editing experiment of its kind, scientists have disabled two genes in monkeys that raise the risk for heart disease. Humans carry the genes as well, and the experiment has raised hopes that a leading killer may one day be tamed. But it will be years before human trials can begin, and gene-editing technology so far has a mixed tracked record. It is much too early to know whether the strategy will be safe and effective in humans; even the monkeys must be monitored for side effects or other treatment failures for some time to come.

https://www.nytimes.com/2020/06/27/health/heart-disease-gene-editing.html

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.

Using a Regime Filter

A regime filter or a market regime filter is a tool to help us conceptually understand the kind of market we are in. As a systematic investor, we can increase our odds of success by adding a regime filter to our arsenal. It tells us, based on how we have defined it if we are in a bull market or a bear market. We would think differently about market risk in different market scenarios.

A simple example of a regime filter is using the 200 day moving average. If the index of your choice is above the 200 day moving average, then you define it as a bull market and below it as a bear market. You can design your portfolio strategy to hold full allocations in stocks if you are in a bull market and 50% allocated in a bear market.
So, with that basic logic you can start constructing a slightly more realistic and slightly more nuanced regime filter.

First, define the market conditions you want to address – superbull, bull, bear, superbear. The reason for doing that is you want to be cautious in the market extremes of superbear and superbull conditions and aggressive in the bear and bull conditions (for long-short strategies). Then use a combination of indicators like RSI and 50 & 200 day moving average to define the selected conditions. For example, above 200 dma and 70 RSI you define as superbull and above 200 dma and above 50 RSI as bull phase.

Another trick that can be used is to use multiple indices. For example, you can use the average of Nifty, Nifty Next 50 and Nifty 500 in equal proportions to define your market. For a long-only investor, it may increase the odds of success to be buyer only when the regime filter is indicating a bull market.

Note: For exploring quantitative systems, check out www.quantamental.in, a quant-based newsletter. 

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

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The first 100 registered email ids get a discounted price:

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