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

Bubbles are not always bad!

The dot-com bubble laid the tracks for the Internet as we know it today. A large number of tech start-ups with seemingly good ideas went out of business after the dot-com flameout. But that era planted the seeds for the next wave of innovation that occurred, which gave us services like YouTube, Facebook, Twitter, Airbnb and Google. Some people create life-changing levels of wealth during manias. Others lose their shirt when the bubbles pop. Yet all bubbles are not bad in and of themselves. The silver lining from a bubble is society often benefits from the sheer amount of money that pours to invest.

https://awealthofcommonsense.com/2021/01/why-bubbles-are-good-for-innovation/

 

The problems of putting everything online - poisoned water at home

Hackers remotely accessed the water treatment plant of a small Florida city last week and briefly changed the levels of lye in the drinking water, in the kind of critical infrastructure intrusion that cybersecurity experts have long warned about.

Sheriff Bob Gualtieri of Pinellas County said at a news conference on Monday that the level of sodium hydroxide — the main ingredient in drain cleaner — was changed from 100 parts per million to 11,100 parts per million, dangerous levels that could have badly sickened residents if it had reached their homes.

The authorities said the plot unfolded last Friday morning, when an employee noticed that someone was controlling his computer. He initially dismissed it because the city has software that allows supervisors to access computers remotely. But about five and a half hours later, the employee saw that different programs were opening and that the level of lye changed.

https://www.nytimes.com/2021/02/08/us/oldsmar-florida-water-supply-hack.html

 

You should not be very rich - for the sake of your children

Growing up in a family where your father’s pretty wealthy is much more complicated than growing up in a family where your father is not wealthy. When your family is not wealthy, you’ve got to really achieve something or you’re not going to get anywhere. You’re on your own.

Whereas my own children, and the children of families like mine, I think have a bit of a disadvantage. As a general rule of thumb, the people running the world are people from blue-collar families who are lower middle class. It’s rarely the case that somebody whose father was a billionaire turns out to be better than his father, becoming a multibillionaire or running the world.

https://www.nytimes.com/2020/03/12/business/david-rubenstein-carlyle-corner-office.html

 

Learning from sports applied in business or investing

There are many connections, similarities, and common underlying principles between sports, war, and business. The main connection between the three is that they represent instances of peak human competition and rivalry. And when there is competition, there are winners and losers. One of the key aspects that differentiate winners from losers, and one we can learn from, is mentality and psychology. However, athletes are some of the greatest peak performers in the world, and they are both alive and have made many mistakes we can learn from. They have many more opportunities for iteration and feedback loops than the rest, which is why sports psychology is highly interesting.

https://www.selfmastered.net/blog/sports-psychology-for-top-performing-entrepreneurs

 

10 Insane Facts From Bill Bryson’s “The Body”

The stratum corneum or the outermost layer of the skin is made up of dead cells. All that which makes us look good — our beauty — is literally dead. The global beauty industry estimated to be worth over $700 billion, is essentially for decorating deceased tissue. Our vanity, confidence, self-respect, ego, self-worth…is a sliver of dead skin.

Race is literally skin deep. Technically, it’s a few millimetres of the epidermis. It isn’t biologically significant or defined. Millimetres of dead skin and an intuition driven brain are the root causes of racism, socio-economic disparity, discrimination, bias, violence, eugenics, caste and slavery.

https://medium.com/illumination/my-body-is-a-temple-of-doom-7d0bf34ece07

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

 

Plants which send emails (& act as sensors)!!!

Through nanotechnology, engineers at MIT in the US have transformed spinach into sensors capable of detecting explosive materials. These plants are then able to wirelessly relay this information back to the scientists.

When the spinach roots detect the presence of nitroaromatics in groundwater, a compound often found in explosives like landmines, the carbon nanotubes within the plant leaves emit a signal. This signal is then read by an infrared camera, sending an email alert to the scientists.

This experiment is part of a wider field of research which involves engineering electronic components and systems into plants. The technology is known as “plant nanobionics”, and is effectively the process of giving plants new abilities.

While the purpose of this experiment was to detect explosives, Strano and other scientists believe it could be used to help warn researchers about pollution and other environmental conditions.

Because of the vast amount of data plants absorb from their surroundings, they are ideally situated to monitor ecological changes.

https://www.euronews.com/living/2021/02/01/scientists-have-taught-spinach-to-send-emails-and-it-could-warn-us-about-climate-change

 

The power of feedback loops

The idea that people like (or hate) what other people like (or hate) is important, because it lets small ideas grow bigger than you’d guess if you assume everything is ranked by quality alone. Social momentum is hard to model on a spreadsheet, so it’s hard to predict or think about in terms that seem rational. But it’s so powerful.

A little momentum early on can grow into something enormous, well beyond what may have been predicted in the beginning. The same thing happens inside companies: Marc Andreessen says 80% of employee culture is just “winning.” The best employees want to work at companies that are winning, and when a company attracts the best employees it tends to win. If you don’t appreciate how powerful that feedback loop is you can be shocked at how dominant and wildly successful a few companies or products can become. Apple, Amazon, Tesla – they’re all enjoying the glorious feedback loop.

https://www.collaborativefund.com/blog/crazy/

 

The difference of being right and being successful in investing

The difference between good advice and effective advice. Good advice is everywhere. You don’t have to look very hard. People generally know what they have to do to improve their health, finances, or lifestyle. But knowledge alone is never enough to change behavior.

Good advice tells you how to succeed at something while effective advice shows you how to succeed. Good advice is about tactics while effective advice helps you build systems.

When all else fails, the go-to excuse for underperformance is “this was a low-quality junk stock rally so our more high-quality businesses were left behind.”

The insinuation here is all those other investors who bid up low-quality businesses must be idiots. It’s the perfect excuse because it makes you feel smarter than everyone else even when they’re making more money than you.

But sometimes low-quality businesses can be a great investment at the right price or valuation. And sometimes high-quality businesses can be a terrible investment at the wrong price or valuation.

Everyone already knows who the great companies are. The challenge comes from figuring out the value of those great companies and the expectations embedded in their price.

https://awealthofcommonsense.com/2019/05/the-difference/

 

Invert to solve big problems

Inversion is a powerful thinking tool because it puts a spotlight on errors and roadblocks that are not obvious at first glance. What if the opposite was true? What if I focused on a different side of this situation? Instead of asking how to do something, ask how to not do it.

Everyone wants to make more money. But what if you inverted the problem? How could you destroy your financial health? Before you worry too much about how to make more money make sure you have figured out how to not lose money. If you can manage to avoid these problems, you'll be far ahead of many folks and save yourself a lot of pain and anguish along the way.

https://jamesclear.com/inversion

 

Changing someone's mind

When we try to change a person’s mind, our first impulse is to preach about why we’re right and prosecute them for being wrong. Yet experiments show that preaching and prosecuting typically backfire — and what doesn’t sway people may strengthen their beliefs.

Instead of trying to force other people to change, you’re better off helping them find their own intrinsic motivation to change. You do that by interviewing them — asking open-ended questions and listening carefully — and holding up a mirror so they can see their own thoughts more clearly. If they express a desire to change, you guide them toward a plan.

https://www.nytimes.com/2021/01/31/opinion/change-someones-mind.html

 

For building a solid long term portfolio, look at subscribing to www.intelsense.in long term advisory.

For technofunda investing and positional trading, subscribe to our Hitpicks advisory service on www.intelsense.in

For momentum trend following systematic trading, subscribe to Quantamental at www.quantamental.in

Tools of the Trade

Every investor has a set of tools that he uses on a regular basis. I also have my toolset. In this post, I will cover these and try to describe how I use each of them. 

Hope you find these useful. Also, if you use any tool which is not in this list and find it compelling, do let me know. I gravitate towards free resources whenever possible, but if there is a great paid resource, then it is fine as well.

Information Management

Microsoft OneNote

This is my primary note-taking app. I have it on my laptop, tab and mobile. I have notebook for investing with the following sections, with each section comprised of many pages. For example, every company that I look at and study have a separate page, where I keep adding my notes over time.

Feedly

I use Feedly as my repository of most of all my online blog subscriptions. Here again, I have separate tags like economics, fundamental, technoquant etc.

Pocket

If I find a good article on the web, I use Pocket to save it for future reference. I use it extensively on all my devices.

Twitter

I used twitter very sparingly before. Recently, I have repurposed my usage. I have made lists like News, Investing, People I know, Technoquant etc. This helps me in segregating my feed. I have also started using twitter as a short term micro note taking app for what I may be reading or thinking at any time. At the end of the week, I review what I have noted and then copy any notes in OneNote.

Gmail

I have a gmail id where I save or forward all reading materials, especially broker reports, that I get from multiple sources like whatsapp or email or on the web. The benefit of using gmail is it is easy to search later.

JioNews App

I have migrated nearly all my reading to electronic form. JioNews app is a great resource where I can quickly skim through newspapers and business and current affairs magazines. 

Kindle

I have been reading books on an e-reader for nearly 15 years now. I started with using an Infibeam Pi and then migrated to Kindle when it started becoming available in India. Currently, am on my 3rd Kindle device. I have the basic version with backlight and absolutely love it. nearly all my book reading is on Kindle. Highlights and note-taking are the main features I love in the Kindle.

Portfolio Tracker

Google Sheets

I track my portfolio and watchlist on google sheets. Again, the advantage is I can access it on all my devices and I can customize my views and reports.

Fundamental Analysis

www.screener.in

The first port of call to look up a new company. I have a premium subscription. I use screener extensively for tracking my watchlist stocks, monitoring quarterly results, company announcements etc. Having added my favourite ratios to the company page, I can quickly view and understand the basic fundamentals of a company in under 5 minutes. I have customised the excel download feature and added some basic things I check myself. Although my custom excel is not as beautiful as a lot of others that are available, it seems to work well for me. 

http://forum.valuepickr.com

The second port of call for getting up to speed on any company.

www.trendlyne.com

I use the "Discover" feature extensively. Helps in surfacing specific announcements based on topic/category. Also, their youtube channel now has a lot of concall recordings.

www.tikr.com

Concall transcripts are available here and is very  useful in skimming through.

www.researchbytes.com

Concall recordings

www.tijorifinance.com

I will quickly go through tijori once in a while to see if something comes up  that has been missed in screener.

www.bseindia.com

When in doubt about numbers or while searching for annual reports, BSE site is my port of call.

www.tradingeconomics.com

Data and visualisations for all macro data.

www.ourworldindata.org

Interesting data, visualisations and reports on important topics.

Technical Analysis

www.investing.com

I love tradingview charting but the free version has a lot of restrictions. investing.com uses the same tradingview charts but has no limitations (or at least none that I have found that hinders my usage).

www.chartink.com

Use this for basic explorations or scans.

Metastock

Use Metastock nowadays only for slightly complex explorations which cannot be done on chartink.

Global Investing

www.finviz.com

A very good fundamental and technical scanner for US listed stocks

www.koyfin.com

Perhaps the best dashboard app out there. I use it for looking at global stocks that I own or have on my watchlist.

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

Growing a table in the lab

Researchers at MIT have developed a new method for growing plant tissues in a lab — sort of like how companies and researchers are approaching lab-grown meat. The process would be able to produce wood and fibre in a lab environment, and researchers have already demonstrated how it works in concept by growing simple structures using cells harvested from zinnia leaves.

Forestry has much more obvious negative environmental impacts. If the work of these researchers can eventually be used to create a way to produce lab-grown wood for use in construction and fabrication in a way that’s scalable and efficient, then there’s tremendous potential in terms of reducing the impact on forestry globally. Eventually, the team even theorizes you could coax the growth of plant-based materials into specific target shapes, so you could also do some of the manufacturing in the lab, by growing a wood table directly for instance.

https://techcrunch.com/2021/01/20/mit-develops-method-for-lab-grown-plants-that-eventually-lead-to-alternatives-to-forestry-and-farming/

 

When to follow a system and when to go with your gut feel

Whether we are talking about football, investing, or medicine, decision makers are often faced with the question of whether to fully trust statistical models, go with their gut, or try to come up with a hybrid approach. If you are making a large number of decisions where the consequence of each individual decision is relatively small, perhaps it makes sense to let automation decide — to implement a “pure system”. The trouble arises when you are making a single important decision with enormous stakes. Then it becomes very tempting to disregard the models and go with your gut.

https://rationalwalk.com/monday-morning-quarterbacks/

 

Don’t waste your time on bullshit

Things that lure you into wasting your time have to be really good at tricking you. An example that will be familiar to a lot of people is arguing online. When someone contradicts you, they're in a sense attacking you. Sometimes pretty overtly. Your instinct when attacked is to defend yourself. But like a lot of instincts, this one wasn't designed for the world we now live in. Counterintuitive as it feels, it's better most of the time not to defend yourself. Otherwise these people are literally taking your life.

Arguing online is only incidentally addictive. There are more dangerous things than that. As I've written before, one byproduct of technical progress is that things we like tend to become more addictive. Which means we will increasingly have to make a conscious effort to avoid addictions to stand outside ourselves and ask "is this how I want to be spending my time?"

http://www.paulgraham.com/vb.html

 

The next wave of AI will be based on language

The 2020s are going to bring major advances in language-based AI tasks. GPT-3, a state-of-the-art natural language processing tool developed by OpenAI, will soon be able to produce short stories, songs, press releases, technical manuals, text in the style of particular writers, and even computer code. Cloud-AI services will enable the development of a new class of enterprise apps that are more creative (or “generative” — the “G” in GPT) than anything we’ve seen before. They will make the process of synthesizing words, intentions, and information in language cheaper, which will make many business activities more efficient, stimulating growth and innovation. In light of these coming changes, companies will not only need to rethink IT resources, but also human resources.

https://hbr.org/2020/09/the-next-big-breakthrough-in-ai-will-be-around-language

 

The art of doing nothing

The idea that “doing nothing” is actually an event in and of itself. The idea that we no longer run on a treadmill of activity from getting the kids ready for school, to brushing our teeth, to conference calls, to picking up kids, fixing dinner, and bed- only to start over again. The idea that our actions day to day become influenced by our instincts and no longer by routines, shoulds, and musts.

Fighting that urge to just do, that puritan work ethic instilled in all of us at an early age, is just as much effort as going to the gym and doing the stair climber. Yet the results of our restraint are well worth the hassle.

The kind of relaxation we are looking for, and we all yearn for, does not exist on the side of a volcano, in a rare flower, or on a desolate island far away. That kind of relaxation exists within each of us and is ours for the taking if we’re willing to put in the effort.

That kind of relaxation. The sweetness of doing nothing and enjoying where we are in the present moment is the greatest thanks we can give for the lives and blessings we have.

https://www.psychologytoday.com/us/blog/the-happiness-rx/201409/the-art-doing-nothing

For building a solid long term portfolio, look at subscribing to www.intelsense.in long term advisory.

For technofunda investing and positional trading, subscribe to our Hitpicks advisory service on www.intelsense.in

For momentum trend following systematic trading, subscribe to Quantamental at www.quantamental.in

Budget - the next media spectacle

The next few days will see a lot of volatility. The annual budget is around the corner and although in most years it is a damp squib, yet all financial “experts” will spend or have already spent a great deal of time to tell the finance minister what to do or ask for favours from her. Most of it is a waste of time. So, productivity tip number one. Just skip over any pre-budget discussion in the newspaper or TV channel.  

The budget is not supposed to be a spectacle. And perhaps it wasn’t before the tyranny of the 24x7 media cycle. Now, the TV channels need something to talk about and they keep moving from one event to another. The only worthwhile thing to do for the budget is to either listen to it or better still read the synopsis in the next day’s newspaper. Everything else is a waste of time and effort.

The budget should not even be an event. Previously, people were interested in the tax measures announced in the budget. Now, the major part of it has moved under the GST council and the budget will not have anything to really say about indirect taxes. Direct taxes should not be tweaked every year so maybe once every five years there should be some minor changes to it.

The rest is all accounting. And boring. Because we all know that a lot is being left out and is financed through off-balance-sheet routes. That’s how it has always been. 

Yet, markets become volatile before budgets. People try to pre-empt different policy decisions and sectors or companies that are likely to benefit or lose out and then take positions accordingly. Some people sell and lighten up their portfolios due to event risk. The thing to remember is maybe once in many years we get a budget where some path-breaking decisions are taken. Rest of the time it’s just volatility. And for investors focused on holding businesses for the long term, it is just noise. The best thing to do is to ignore it.

Lessons from the Japanese Great Depression

I have been fascinated by the “Great Depression” and the lost decades of Japan for a long time now. I have a personal fascination for Japan because it was the first foreign country I ever visited. It is intriguing because here is one example of one of the foremost economies in the world, with world-leading companies and yet they ended up in nearly 20+ years of economic depression. Bank of Japan had tried “pump-priming” which is a convoluted way of saying they tried to money-print their way out of the problem. Despite having near zero or very low interest rates for decades there has been no effective pick up of the economy.

I always thought it was a result of the socio-politico-economic structure of Japan that led it such a prolonged slump. A few days back I tweeted about this and asked twitterati about any good suggestions to read on this topic. @Relax_Cap suggested I read The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession by Richard Koo. The book and a few interviews of Richard Koo has been a wonderful revelation to me and I very thankful to @relax_cap for the great suggestion.

Balance Sheet Recession

Richard Koo’s main premise is as follows. Asset prices got inflated during the bubble years and corporates took on large debts to either acquire assets or fuel growth. Once the bubble burst, corporates were straddled with the debt and much less valued corresponding asset value as the market prices of the assets they owned had crashed. The initial tendency of the corporates was to save from their cashflow to repair their balance sheet. Central bank step in to bolster growth and starts by reducing rates. But there is no demand for debt as the corporates (and households) are trying to reduce their existing debt burden and are in no mood to add on to debt even at ridiculously low rates. This results in economic growth to falter and slacken and it continues in this manner till the corporate balance sheets are repaired. Richard Koo termed this as a “balance sheet recession”.

He has gone on to explain this in a lot of detail and has lots of examples related to US and Eurozone.

Indian Situation

I think we are seeing a part of this being played out in India as well post the 2008 Great Financial Crisis (GFC). We have seen a large reduction in corporate debt. Most of bank debt growth has come from the retail segment led by consumer spending. That explains the dream run of consumer-facing NBFC like Bajaj Finance. In India, IBC is another policy is likely to increase this balance sheet recession further. With erstwhile big businesses and “connected” promoters now losing their companies due to the new bankruptcy code. Add this to a post-Covid situation where both corporates and households suddenly realize the value of cash, it is possible that people increase their savings to shore up their cash balances. The only saving grace for India, unlike US or Europe, is that India is much less debt-ridden and so we are unlikely to get into a prolonged recession.

The implications could be:

• Inflation will unlikely to pick up even though most “experts” think so
• Financial savings and investment products like mutual funds or insurance companies to do well
• Banks will have better CASA and deposits

PE ratio can mislead. Use the PI (price-to-index) ratio instead.

PE ratio, perhaps the single most used, and abused, metric in the stock market, is a simple one. And perhaps that is why it has such widespread use. People use it as a shortcut for valuing companies. So, a company with a PE of 10 becomes cheap and one with a PE of 50 becomes expensive.

PE ratio is the ratio of profit after tax to the total number of shares outstanding. Another way of calculating it is the share price divided by the EPS. The share price is simple. The complexity starts with the earnings. It could be TTM (trailing twelve month earnings), current / previous year or the upcoming year (future). 

The PE ratio tells us the number of years at constant profits it will take to return the investment. So, a stock with a PE of 30 means, if the profit remains the same, it will take 30 years for the investment amount to come back to the buyer.

One of the biggest challenges of earnings is that it does not look at the capital structure of a company. In simple terms, it means **it completely disregards the debt taken by a company.**

PE ratio tends to capture the “agony and ecstasy” of the market. When the market is in a bear phase and investors are despondent about the future, the PE ratios of companies and indices will contract. Exactly the opposite happens during a bull phase. 

Ben Graham used PE ratio to determine a “*moderate upper limit to stay within the bounds of conservative valuation*”. On the other hand, William O’Neill, the father of CANSLIM, said “contrary to most investors’ beliefs. PE ratios were not a relevant factor in price movement”. In his detailed study of stocks between 1953 to 1988, O'Neill found that the average PE before a stock made a major bull move, had a PE of 20 as opposed to the average Dow PE of 15. Even in the Indian markets, I have seen enough anecdotal evidence to support the fact that there are some perpetual high PE stocks – Asian Paints, Berger, Nestle, Page Industries, Symphony, Pidilite, Dmart, Titan and many many more come to mind.

Use the PI ratio (PE to Index)

The way I use PE is to divide a company’s PE with that of the index (Nifty). For example, Asian Paints has a PE ratio of about 125 as I write this. The Nifty PE is about 37. That is, a ratio of 125 / 37 = 3.3 times. In January 2006, the same ratio was 28 / 17 = 1.6. In Jan 2015, it was 60 / 21 = 3. If I do this exercise, I find that Asian Paints usually trades between 1.5 – 3.5 times of my PI (PE to Index) ratio. You can do a similar exercise for the stocks you are interested in and find the range. 

The PI ratio tells me how much a stock is being "valued" by the market with respect to the general market.

Never sell on valuations

Another practical experience that I have had is to never sell a stock on high valuations. It is always best to have a trailing stop (a stop loss that keeps trailing the price as the stock price moves upwards), because, stocks can remain at a high PE or can go to a higher PE during a major bull phase and selling out early often means I am not participating in the most explosive of price rise phase. Again, if you followed this suggestion, you would be comfortably riding stocks like Dmart even at 100+ PE and earning the wrath of closet value investors!!! The only exception to this is if you are invested in a very illiquid stock, where you may need to start liquidating on the way up.

** This first appeared in https://economictimes.indiatimes.com/markets/stocks/news/what-to-do-when-high-pes-give-you-jitters-heres-the-answer/articleshow/80400796.cms