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


It was luck!!
Today Amazon is a powerhouse that sells everything from e-books to diapers, so it’s easy to think its rise was inevitable. But Amazon almost didn’t make it. During the dot-com boom of the 1990s, the company posted larger and larger losses, financed by investor funds that came pouring in. But the mood of the market turned abruptly in 2000, catching many companies off guard.

So how did Amazon survive the bust? History doesn’t necessarily point to having the best idea or the savviest management. To a large extent, Amazon got lucky by raising a ton of money right before the market crashed, giving the company the cushion it needed to ride out the turmoil of the early 2000s. It’s a good reminder that the fate of high-flying, money-losing startups like Uber or Snap may depend as much on luck as on the skill of their CEOs.

If Bezos and his team had waited a few weeks longer to raise those extra funds, people today would lump Amazon in with other dot-com-era failures like Webvan, Kozmo, and Pets.com — big-spending companies with unworkable business models that collapsed under their own weight.
https://www.vox.com/new-money/2017/4/5/15190650/amazon-jeff-bezos-richest


Now Robots are monitoring crops for a better yield
Google's parent company, Alphabet, has unveiled prototype robots that can inspect individual plants in a field, to help farmers improve crop yields.

The robot buggies roll through fields on upright pillars, so they can coast over plants without disturbing them.

The goal is to collect huge amounts of data about how crops grow.

While farmers may have information about the soil content or the weather, the buggy robot was designed to see how plants were "actually growing and responding to their environment", the company said.

"Over the past few years, the plant buggy has trundled through strawberry fields in California and soybean fields in Illinois, gathering high quality images of each plant and counting and classifying every berry and every bean," it said.

And all that data is plugged into a machine-learning system to try to spot patterns and insights useful to farmers.

Checking for bugs, making sure crops were picked and planted at the right time and even picking weeds or moving fences were possibilities, he said.
https://www.bbc.com/news/technology-54538849


Network effects may not lead to a monopoly
Lots of companies that might at the time seemed to have an advantage of "network effects" have faltered: for example, eBay looked like the network Goliath back in 2001, but it was soon overtaken by Amazon. They write:

"The flaw in that reasoning is that people can use multiple online communications platforms, what economists call `multihoming.' A few people in a social network try a new platform. If enough do so and like it, then eventually all network members could use it and even drop their initial platform. This process has happened repeatedly. AOL, MSN Messenger, Friendster, MySpace, and Orkut all rose to great heights and then rapidly declined, while Facebook, Snap, WhatsApp, Line, and others quickly rose. ...

Firms that at their inception had no data whatsoever sometimes displaced the leaders. When Facebook launched its social network in India in 2006 in competition with Orkut, it had no data on Indian users since it didn’t have any Indian users. That same year Orkut was the most popular social network in India, with millions of users and detailed data on them. Four years later, Facebook was the leading social network in India. Spotify provides a similar counterexample. When Spotify entered the United States in 2011, Apple had more than 50 million iTunes users and was selling downloaded music at a rate of one billion songs every four months. It had data on all those people and what they downloaded. Spotify had no users and no data when it started. Yet it has been able to grow to become the leading source of digital music in the world. In all these and many other cases the entrants provided a compelling product, got users, obtained data on those users, and grew.
https://conversableeconomist.blogspot.com/2018/02/network-effects-big-data-and-antitrust.html


The history of the Bombay Stock Exchange
A group of around twenty-two who began trading under a banyan tree opposite the Bombay Town Hall contributing a rupee each to assemble themselves into an institution that came to be known as the Native Share and Stockbrokers Association. The word ‘Native’ in the initial title was a sign of exclusiveness and pride. On 9 July 1875, the entrance fee for new members was fixed as Re. 1 and there were 318 members added to this list. And Bombay Stock Exchange earned the notable distinction of becoming the first stock exchange in Asia.

There was a need for an Index, as a means to measure the overall performance of the exchange. So, a BSE Sensitive Index was started in 1986. It was first published on 2 January 1986, as a “Market Captialisation-Weighted” Index of 30 component stocks representing a sample of large, well-established and financially sound companies. It was the country’s first Equity Index (Base Year 1978-79 =100). But, this Sensitive Index will have to wait till 1989, for the word we use so often. It’s when Deepak Mohoni will coin the word: Sensex.

Forbes & Co is the oldest company that is still trading. It was started as a Scottish agency and mercantile business in 1797. And, now is owned by Shapoorji Pallonji Group.
https://www.thebizdom.in/the-story-of-bombay-stock-exchange/


Time is the true price you pay
Time was the only significant scarcity in a world of free minds and imaginations.

Amazon was important because it was a “life-span extender.” It radically reduced the search and fetch times of buying books and other goods. Now, with far more competition, it is making similar gains in the provision of services, such as music and video.

In touting Amazon, I was near to defining time-prices

The time-price of anything is the hours it takes to earn the money to buy that thing. Time-prices are the only true prices.
https://dailyreckoning.com/the-theory-that-will-revolutionize-economics/




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

The reading habits of Marc Andreesen

On how does he manages to read so much, Mr. Andreesen says, “I’ve really read all the time since I was a little kid, it’s been a lifelong thing. It’s basically trying to try to fill in all the puzzle pieces for the big discrepancies. A great term is “sense-making”. Essentially, what the hell is happening and why? The world’s an incredibly complex and erratic place and trying to figure that out is kind of a lifetime occupation. The thing I’ve tried to do the last few years is really “barbell” the inputs. I basically read things that are either up to this minute or things that are timeless”. He also says how he struggles with finishing every book that he picks up. “I have a whole bunch of books that I haven’t finished which I really should just toss,” he says.

On how and what he does on improving himself, he says, “What you’re always struggling with is to understand what’s actually happening. Like, what’s actually happening on the ground. An obvious example is if you ask an entrepreneur how the company is, they’re always going to say “great”. And that’s probably not right. You’re probably dealing with a hurricane because that’s generally the job. So, what’s actually happening inside a company? What are customers actually buying? What’s actually being adopted? What’s actually happening with the technology? What’s happening with the competition?”

https://a16z.com/2020/09/07/on-productivity-scheduling-reading-habits-marc-andreessen/

The oil economy of Venezuela is in shambles

For the first time in a century, there are no rigs searching for oil in Venezuela.

Wells that once tapped the world’s largest crude reserves are abandoned or left to flare toxic gases that cast an orange glow over depressed oil towns.

Refineries that once processed oil for export are rusting hulks, leaking crude that blackens shorelines and coats the water in an oily sheen.

Venezuela’s colossal oil sector, which shaped the country and the international energy market for a century, has come to a near halt, with production reduced to a trickle by years of gross mismanagement and American sanctions. The collapse is leaving behind a destroyed economy and a devastated environment, and, many analysts say, bringing to an end the era of Venezuela as an energy powerhouse.

https://www.nytimes.com/2020/10/07/world/americas/venezuela-oil-economy-maduro.html

Real life and fantasy world are merging together on social media

Social media has made conspiracy theorizing so addictive and immersive that the line between story and reality can become incredibly blurry.

Science (which, you could argue, is also a form of fact checking) has been around for centuries trying to debunk most religious beliefs – and yet religion still plays a major role in Western society. If entire education systems teaching millions of people about science haven’t worked, why do you think adding a small fact check disclaimer below a YouTube video would?

Silicon Valley is not just creating new fantasy worlds, it is building tools that allow others to create their own fantasy worlds. Enter social media.

If TV has taught us to think of ourselves as characters in the story of our lives, then social media has allowed us to actually write and edit the script and build fictional characters. Social media is essentially the democratization of virtual world building.

Twitter, Snapchat and Facebook are just massive virtual status arenas that allow us to build social capital through signaling. Some of that social capital might be built on top of real stories and actual achievements, but most of it is not based on reality. Every time you are applying an Instagram filter, you are already changing reality.

https://julian.digital/2020/09/25/is-this-real-life/

Shinzo Abe’s elusive Japanese Dream

Abe did not start out as an economic reformer. His aim was to restore Japanese people’s pride, sorely battered by the country’s defeat in World War Two and the subsequent U.S. occupation. He wanted Japan to have the sort of global respect it enjoyed after the Meiji Restoration that restored imperial rule in the late 19th century, when the country industrialised, its military defeated Russian forces, and its woodcuts inspired French Impressionists. For Abe that goal meant less dwelling on past war crimes. It also meant legal revisions to allow Japanese troops to come to the aid of allies and support international peacekeeping operations.

Abe’s renaissance required a stronger state centred on a powerful prime minister who could drive painful economic and political changes to enable the attitude shift he wanted. He continued his predecessor Junichiro Koizumi’s push to end the system by which the Liberal Democratic Party – in power more or less since 1955 – diverted resources and investment to inefficient companies and regions in exchange for electoral support. He also increased the government’s influence over the Bank of Japan, which was reluctant to aggressively reflate prices. And he pushed through contentious reforms to corporate governance and labour markets.

https://in.reuters.com/article/us-japan-politics-abe-breakingviews/breakingviews-review-shinzo-abes-elusive-japanese-dream-idINKBN26U02U

Common causes of bad decisions

Incentives can tempt good people to push the boundaries farther than they’d ever imagine. 

Tribal instincts reduce the ability to challenge bad ideas because no one wants to get kicked out of the tribe. 

Ignoring or underestimating the full range of potential consequences, especially tail events that seem rare but have catastrophic effects. 

Lots of little errors compound into something huge. 

Underestimating the need for room for error, not just financially but mentally.

Being influenced by the actions of people who are playing a different game than you are. 

Wrongly assuming that the information you have at your disposal tells a complete picture of what you’re dealing with. 

https://www.collaborativefund.com/blog/bad-decisions/

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.

Book Review - A Piece of the Action

History doesn't repeat itself, but it often rhymes. ~ Mark Twain

I love reading financial and market history, in addition to general history. So, when Pradyumn said he wanted to do a long-form summary of the book "A Piece of the Action" by Joseph Nocera, I was really excited. This is a book on how the US financial markets shaped up in the 20th century. It was written in 1993. 

You can see how products like credit cards, mutual funds, NBFCs took shape in that period in the US and get glimpses of how things can turn out in India. 

It is a long read but absolutely worth your time.

Open / Download it from here - www.intelsense.in/Saved/201006121344396_Book_Summary_-_A_Piece_of_the_Action.pdf

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

Benchmarking

When you see other people buying new cars, boats or other toys it can lead to a sense of entitlement. There’s a huge difference between buying stuff and being wealthy. Unfortunately, when you see those around you buying stuff it’s hard to avoid the temptation because we benchmark ourselves against the stuff we see and wealth isn’t something you can see parked in someone’s driveway.

It’s a cliche at this point to say that money doesn’t buy happiness because money sure can solve a lot of problems. But it sure doesn’t buy contentment or make it any easier to stay out of your own head sometimes. Benchmarking yourself against people who are more successful than you could provide the motivation to get better but it could also blind you to the fact that no one’s life is perfect.

https://awealthofcommonsense.com/2020/09/benchmarking/

Wave to Pay

Amazon is unveiling a new biometric technology called Amazon One that allows shoppers to pay at stores by placing their palm over a scanning device when they walk in the door or when they check out. The first time they register to use this tech, a customer will scan their palm and insert their payment card at a terminal; after that, they can simply pay with their hand. The hand-scanning tech isn’t just for Amazon’s own stores — the company hopes to sell it to other retailers, including competitors, too.

https://www.vox.com/recode/2020/9/29/21492351/amazon-one-hand-scan-payments-palm-checkout-whole-foods

Your mobile makes you dumb(er)!!

The authors of the paper report the results of a straightforward experiment. Subjects are invited into a laboratory to participate in some assessment exercises. Before commencing, however, they’re asked to put their phones away. Some subjects are asked to place their phone on the desk next to the computer on which they’re working; some are told to put their phone in their bag; some are told to put their phone in the other room. 

Each subject was then subjected to a battery of standard cognitive capacity tests. The result? Subjects measured notably lower on working memory capacity and fluid intelligence when the phone was next to them on the desk versus out of sight. This was true even though in all the cases the subjects didn’t actually use their phones.

https://www.calnewport.com/blog/2020/09/22/do-smartphones-make-us-dumber/

Save 50% of your increments to retire on schedule

Lifestyle creep is when someone increases their spending after experiencing an increase in income.  So that new raise quickly becomes a fancy new object or an expensive new habit, and it’s gone.  Some lifestyle creep can be very satisfying.  After all, what’s the point of working so hard if you can’t enjoy the fruits of your labor? Once you spend more than 50% of your future raises, then you start delaying your retirement.

https://ofdollarsanddata.com/lifestyle-creep/

The relentless focus on the long game

I brought Michael Jordan a deal three years ago for $100 million,” Falk said. “And all he had to do was, other than giving his name and likeness, make one two-hour appearance to announce the deal and he turned it down. And God bless him. He’s been so successful, it gives him an opportunity to do whatever the hell he wants or not to do things he doesn’t want. And I really admire that. He’s very, very selective in the things that he wants to be involved in.

Falk said this was the norm for Jordan at a certain point adding, "By 1991 every deal that I signed with was at least 10 years." Falk said Jordan "never did one-off appearances" and would only sign deals where there was a long-term investment involved.

https://www.sportingnews.com/us/nba/news/michael-jordan-turned-down-100-million/14hh2vkbtpau11831dq0k4rlee

May We Live In Interesting Times

The markets currently are at a dicey juncture.  After the phenomenal rally in the past few months from the lows of 7500, there has been a phenomenal rally in the nifty and broader markets. And this has happened in the backdrop of investor disbelief.  Most market participants have wondered why markets are going up and have always been sceptical.  

We ourselves also have been sceptical about the rally but while a lot of investors have been sitting on the sidelines and worrying about correction, we have tried to focus on individual companies and sectors where we see strong business tailwinds and which are reflected in strong chart formations.  Whenever we see clear cut trade setups,  we apply our techno funda approach to uncover potential trade setups for the short to medium term.  

Our focus has been to identify fundamentally good companies with strong business tailwinds and good charts and try to recommend them.  The idea of HITPICKS is to provide recommendations in good companies where breakouts have happened or are imminent.  The idea is to recommend stocks where we feel the waiting period for up moves is reduced. This requires us to recommend strong breakouts or imminent breakouts.

As with all investment approaches, our approach is also not infallible. As seen in the past we also have had our share of stop losses being triggered. But we believe in the concept that it doesn’t matter how many times you are right or wrong. (The idea is to be wrong as infrequently as possible). But its important how much money we make when we are right and how little we lose when we are wrong. Hence our adherence to stop losses despite the selected companies being good companies with decent business prospects. 

Coming to the current levels of markets and the patterns seen in the past few days, we have had a big bar reversal on 31st August which marked a short term top for the markets. This was followed by a head and shoulders breakdown in the nifty. The target for this pattern was 10600. But the first port of call was the 200 day exponential moving average at around 10800 levels. As we saw today on 25th September, that level provided a strong support and we saw a strong market bounce from the important support level. Next few days should be crucial to determine the market direction. If markets take out the recent swing high of 11794, we could see another bout of strong upmove will a lot of broad market participation. If the market hesitates after a brief rally and starts falling, then the head and shoulders pattern of 10600 would come soon and our guess is the fall would not stop at the expected level. It could extend much lower, though we would take a call when we get there. Till then we would be on the lookout for reasonably high probability tradeable opportunities and recommend it if we see a good risk-reward potential.

Wishing you all the best in your investment/trading journey.  May we prosper together.

From the Desk of Dr Hitesh Patel

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

The secrets of a fulfilled life

I usually do not read such bullet pointed summaries titled "8 points to great happiness" nonsense. But this article is a culmination of The Guardian columnist Oliver Burkeman's long career so is worth reading. Some main points:

- There will always be too much to do – and this realisation is liberating.

- When stumped by a life choice, choose “enlargement” over happiness.

- The capacity to tolerate minor discomfort is a superpower.

- The advice you don’t want to hear is usually the advice you need.

- The future will never provide the reassurance you seek from it.

- The solution to imposter syndrome is to see that you are one.

- Selflessness is overrated. 

- Know when to move on.

https://www.theguardian.com/lifeandstyle/2020/sep/04/oliver-burkemans-last-column-the-eight-secrets-to-a-fairly-fulfilled-life

Are you wealthy? Depends on your friends and relatives! 

People gauge their wellbeing relative to those around them. And rising income tends to raise the gaze of your aspirations as much as your bank account.

A thing that’s obvious but easily overlooked is that feeling wealthy has little to do with what you have. It’s more about the gap between what you have and what you expect. And what you expect is driven by what other people around you have.

There are a million ways to get more money. But the only way to feel wealthy is to maintain a gap between what you have and what you expect. The expectation part has to be managed as much as the income part. It’s easy to ignore the expectation part because focusing on the income side alone is much more intuitive.

https://www.collaborativefund.com/blog/obvious-things/

Investing isn't easy (Yeh aag ka daariya hai….!!)

If investing were as easy as looking at market cap to revenue or PE ratio or book value and declaring “It’s cheap” or “It’s overvalued”, then anyone with a calculator would be immensely wealthy.

But it isn’t that easy. Because cheap stocks get that way for a reason – deteriorating fundamentals or existential business model threat. The hard part is deciding whether or not the issues are temporary.

Expensive stocks get that way for a reason too.

Sneering at optimism and turning your nose up at momentum doesn’t make you the superior investor. It doesn’t signify that you’re the more high quality market participant. In fact, over the last ten years it’s made you a laughing stock.

https://thereformedbroker.com/2020/09/02/how-dare-you-sir/

The Dunning-Kruger Effect - The less you know, the more you think you know 

The least competent participants in a study conducted by Dunning and Kruger — the ones that scored in the bottom quarter—were more likely to overestimate their performance. The least they knew, the more they thought they knew. Meta-ignorance (or ignorance of ignorance) arises because lack of expertise and knowledge often hides in the realm of the “unknown unknowns” or is disguised by erroneous beliefs and background knowledge that only appear to be sufficient to conclude a right answer.

How to get better?

- Block time for self-reflection.

- Use second-level thinking to make decisions. 

- Take smart notes. 

- Be aware of cognitive biases that may cloud your judgement.

https://nesslabs.com/dunning-kruger-effect

Creativity is not a 9-to-5 job

Creativity is the culmination of experiences we have in our lives and simply cannot be forced: “We tend to believe that the act of creating is what defines creativity, but creativity starts long before anything is made. The first word you write is a distillation of the knowledge you’ve accumulated over time. The first brushstroke you paint is a reimagining of the experiences you’ve stored somewhere in the mind.”

https://moretothat.com/creativity-starts-before-anything-is-made/

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.

Want a smoother ride? Diversify your investment style!

Investors are known for their style of investing. The moment you hear of value investing, Warren Buffett leaps to mind; Peter Lynch reminds us of growth investing; Howard Marks of distressed debt; George Soros or Stan Druckenmiller are known for their macro trades; Jesse Livermore, a trader. And the list goes on.

It is important to know your own dominant style of investing. There would be something where you would be most comfortable in. For example, my natural inclination is to buy stocks which are compounding in nature and then sit and do nothing as long as they keep performing both on the business and stock price fronts.

The problem starts when we become slightly successful in your way of investing. Due to our ego, we tend to believe that our way of investing is the best and others are subpar. And then we look for confirmation from the external world. If we are a trader, we deify eminent and successful traders, if we are investors we do the same with the famous investors. And that is why you will find fundamental based investors deriding technical chartists and vice-versa. This also puts subtle biases into our mind based on the authority and commitment & consistency biases. For example, a generation of investors blindly followed Buffett and avoided tech stocks just because he said it was not within his circle of competence. And guess what, they missed the best companies and winners in the last 20 years – Google, Apple, Microsoft, Amazon etc.

Most of the people who start investing typically start with either the technical or fundamental side, based on how they started their journey and what influenced them. And over years, they keep getting better at their craft. Very few have the curiosity and courage to take a peek at the other side. And even for those that do, it is not easy to be successful. Trading and investing require two completely different and mostly complimentary mindset and very few can actually do well in both.

I have friends who are so deep-value oriented that they find even entertaining the idea of studying a company with a PE of greater than 15 repugnant. Similarly, others would not even look at stocks which are not growing above a 15% CAGR rate.

The table is from the book “Excess Returns” by Frederik Vanhaverbeke. The book is completely ignorable other than this one table! It captures the CAGR returns of investor-trades with long term track records. When I chanced upon this table a few years back, it triggered a major change in my thought process and I actually started delving into alternate styles of investing. In fact, if you look closely, the people who have the best long term public track records (greater than 10 years), it is the traders who more or less win hands down. And yet their longevity was not there. The moment you increase the investment duration to more than 20 years, the investors and quant guys started taking over.

My main takeaway from this table was that it is important not to deride other styles and get “style-boxed”. Style diversification is as important as portfolio diversification, probably much more important. Since my own style was primarily a buy-compounders-and-sit kind, I was perennially missing out on shorter-term upswings in stocks of companies which may not merit a buy in a concentrated quality portfolio. But even those stocks had a great potential of giving decent returns.

I started exploring how the people on this list made money. That opened up technical analysis and quantitative investing up for me. Now, I try to improve my skills in those areas as much as I spend time doing fundamental research. And the main motivation is to be able to marry my fundamental, technical and quantitative methods together to get a smoother return profile over time.

 

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.