My highlights from Stan Druckenmiller's interview

Stan Druckenmiller is one of the greatest macro traders or investors of our times. Recently a new interview was published at https://thehustle.co/stanley-druckenmiller-q-and-a-trung-phanin

Here are my highlights:

I remember a lot of value managers virtually going out of business in 2000. Julian Robertson threw in the towel and said he couldn’t take it anymore and stopped managing money in the early 2000s. Everything Julian was long, went up many fold and the tech stocks went down a lot. 

Amazon at $3200 is not a bubble stock. Not whatsoever. It’s basically decent value. I don’t just mean Amazon, but a lot of the big FAAMG names.

Biggest Risk:  Without a doubt: inflation strong enough that the Fed responds to it. 

This bubble has gone long enough and it’s extended enough that the minute they start tightening, the equity market should go down a lot. 

Particularly with so much of the cap weighted in growth stocks, which would be hit the worst. 

Don’t confuse a genius with a bull market. [Retail investors could] lose enough money that they’re scarred. 

I like a multi-disciplinary approach. My first boss taught me technical analysis. So, I use fundamental analysis and technical analysis. If there are 1000s of securities out there and my portfolio is only going to have 15-20, I’m never going to buy something that doesn’t have a great chart and fundamentals.

The other thing to me [that makes a good investor] is you have to know how and when to take a loss. I’ve been in business since 1976 as a money manager. 

I’ve never used the stop loss. Not once. It’s the dumbest concept I’ve ever heard. [If a stock goes down 15%] I’m automatically out. But I’ve also never hung onto a security if the reason I bought it has changed. That’s when you need to sell. 

Whether I have a loss or a gain, that stock doesn’t know whether you have a loss or a gain. You know, it is not important. Your ego is not what this is about. What this is about is you’re making money. So, if I have a thesis and it doesn’t bear out — which happens often with me, I’m often wrong — just get out and move on. Because I said earlier: if you’re using the most disciplined approach, you can find something else. There’s no reason to hang on to any security where you don’t have great conviction.

You just have to be disciplined and you’re constantly fighting on emotions. It doesn’t make any sense, but when a security goes up, every bone in your body wants to buy more of it. And when it goes down, you’re fighting and making yourself not sell it. It’s just the nature of the beast. And you cannot get crazy when it’s going up.

Don't waste your time on PE - focus on the business instead

There is a raging debate these days on the PE ratio. This debate is not new. It keeps cropping up typically when markets have been running at a high PE for a few years.

My thoughts on the PE debate is that it is a waste of time.

First, let's put an objective and quantitative hat and attack this problem. What is high PE? Is 15 high? Is 25 high? Is 50 high? Or is 100 high? No one answers this question. We cannot have a debate where what one is debating on is a vague notion. 

Second, let's look at what PE is. In absolutely layman terms, PE is the multiple of earnings one pays to buy a stock. Every asset value can be broken up into two parts - i) intrinsic value, which is derived from its tentative future cashflows and ii) transaction value, which is derived from what value someone else will pay for it in a transaction. For example, a painting or a flower vase has no intrinsic value, but it has a transaction value based on what another person is willing to pay for it. As a brief aside here, this is what is happening in something like Bitcoin today. It has no intrinsic value. Its entire value is derived from the transaction value.

Where investing becomes challenging is, both the intrinsic value and transaction value cannot be reliably estimated for the future. A discounted cashflow method is one of the well-known and practised methods of calculating intrinsic value. This method also needs a large number of estimates and guesses. You need to forecast future cash flows, possible capex, discount rate, terminal growth rate etc. Any major deviations in any of these make the entire DCF exercise near about meaningless. What DCF as a practice is good for, if done well, is it helps in thinking through different scenarios and look at different levers that impact the cashflow of the business. You can get a rough idea of a range in which the intrinsic value could be.

The transaction value, on the other hand, is purely a function of demand and supply. So, if you think a Da Vinci painting (or Bitcoin or a piece of rock, whatever) will have higher demand tomorrow than supply, and more people will be willing to pay more than what they are willing to pay today, then the transaction value goes up. Sometimes the transaction value depends on the factors that influence intrinsic value as well. If there is a general consensus that a company is likely to do well in the future even though they may not have done well in the recent past, the stock price does not suffer, as the transaction value compensates for the fall in intrinsic value.

In PE as in real-life asset prices, both these components are present implicitly. Two stocks with the same earnings may have completely different PEs. That is because both their intrinsic value and transaction values could be different. We see this phenomenon play out in the private equity market. Companies with no current earnings get a high PE, because either there is an expectation of higher future earnings or there is an expectation that its stock will have higher demand than supply in the future.

One way to practically use the PE ratio, which I personally use, is to look at the relative PE. It is clear from history that some companies which have better governance, management, growth etc are always valued higher (that is, their transaction value is higher) relative to others. So, a way to quantify this is to look at a company's PE to the index PE. If you do this exercise, what you do is you take away the exuberance of a bull market and the despondence of a bear market and normalise the PE ratio.

Another important point to understand is that PE is not a valuation metric that should be relied on solely for decision making. One reason why it is so popular is that it is easily available and everybody can use it, even if they do not understand anything about the business. 

 

My personal experience is that if, as an investor, you focus on understanding the business and its growth levers and leave the academic debates to others, you will probably do much better than if you focus on the PE debate and waste your time.

This article was first published in CNBC-TV18 - 

https://www.cnbctv18.com/market/dont-overanalyse-pe-multiple-understand-business-growth-levers-9439321.htm

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.

1. Align your goals to your habits to make lasting changes
A lot of organizations and individuals that are looking to create change just reach for off-the-shelf solutions that sound nice and that have been written about in other bestsellers before — books about setting big, audacious goals, for instance, or visualizing success. That sounds great, but what’s missing is a real appreciation of what is the barrier to change in your particular situation, because what’s going to work depends on what’s holding you back. That’s a key lesson.

If someone isn’t taking their medications regularly, you might not be able to get them to take those medications that they’re forgetting about by simply saying, “Hey, set a big, audacious goal.” If forgetting is the barrier, then you need to solve for that particular problem, probably with really effective reminders.

If you have a challenge of getting to the gym more regularly or staying off social media, then you probably have a completely different kind of problem. You don’t need reminders, you don’t need big, audacious goals. You need to find a way to make it so that the instantly gratifying choice is aligned with your goals.
https://knowledge.wharton.upenn.edu/article/want-to-get-unstuck-how-science-can-help/

2. If you overwork, you expose yourself to great health risk
People working 55 or more hours each week face an estimated 35% higher risk of a stroke and a 17% higher risk of dying from heart disease, compared to people following the widely accepted standard of working 35 to 40 hours in a week, the WHO says in a study. Between 2000 and 2016, the number of deaths from heart disease due to working long hours increased by 42%, and from stroke by 19%.

The study doesn't cover the past year, in which the COVID-19 pandemic thrust national economies into crisis and reshaped how millions of people work. But its authors note that overwork has been on the rise for years due to phenomena such as the gig economy and telework — and they say the pandemic will likely accelerate those trends.
https://www.npr.org/2021/05/17/997462169/thousands-of-people-are-dying-from-working-long-hours-a-new-who-study-finds

3. When push buttons freaked out people - (People are always scared of the impact of new tech)
Electric push buttons, essentially on/off switches for circuits, came on the market in the 1880s. As with many technological innovations, they appeared in multiple places in different forms. Their predecessors were such mechanical and manual buttons as the keys of musical instruments and typewriters. Before electricity, buttons triggered a spring mechanism or a lever.

At the end of the nineteenth century, many laypeople had a “working knowledge not only of electricity, but also of the buttons they pushed and the relationship between the two,” according to Plotnick. Those who promoted electricity and sold electrical devices, however, wanted push-button interfaces to be “simplistic and worry-free.” They thought the world needed less thinking though and tinkering, and more automatic action. “You press the button, we do the rest”—the Eastman Company’s famous slogan for Kodak cameras—could be taken as the slogan for an entire way of life.

People worried that the electric push button would make human skills atrophy. They wondered if such devices would seal off the wonders of technology into a black box: “effortless, opaque, and therefore unquestioned by consumers.”
https://daily.jstor.org/when-the-push-button-was-new-people-were-freaked/

4. Entertainment companies are changing the way they do business
In the 1960s, Theodore Levitt, a resident economist and professor at Harvard Business School unveiled his theory of “marketing myopia”. Specifically, he postulated that too many companies define themselves through their products rather than the need(s) they fulfill. This mindset exposes these companies to displacement and disruption. The classic example here is the petroleum industry, which, in its obsession with fossil fuels, has missed out on solar, nuclear, geothermal, etc. Another focuses on the major railway companies of the early 20th century, which missed out on buses, cars, and trucking due to their focus on trains not transportation.

It’s clear today that these company definitions are no longer right. Disney’s theatrically-focused film studio is inarguably the best in the world (it had roughly twice the revenue and three times the margin of the #2 player in 2019). However, Disney’s parks division generated more than twice the revenue and profit of its studio division. Disney’s future, meanwhile, depends on a direct-to-consumer video platform that’s mostly growing through television series not feature films.
https://www.matthewball.vc/all/what-is-an-entertainment-company-and-why-does-the-answer-matter

5. Why stock markets are not falling due to the pandemic
You would never know how terrible the past year has been for many Americans by looking at Wall Street, which has been going gangbusters since the early days of the pandemic. Even as hundreds of thousands of lives were lost, millions of people were laid off and businesses shuttered, protests against police violence erupted across the nation in the wake of George Floyd’s murder, and the outgoing president refused to accept the outcome of the 2020 election — supposedly the market’s nightmare scenario — for weeks, the stock market soared. After the jobs report from April 2021 revealed a much shakier labour recovery might be on the horizon, major indexes hit new highs.

To put it plainly, the stock market is not representative of the whole economy, much less American society. And what it is representative of did fine.

“No matter how many times we keep on saying the stock market is not the economy, people won’t believe it, but it isn’t,” said Paul Krugman, a Nobel Prize-winning economist and New York Times columnist. “The stock market is about one piece of the economy — corporate profits — and it’s not even about the current or near-future level of corporate profits, it’s about corporate profits over a somewhat longish horizon.”
https://www.vox.com/business-and-finance/22421417/stock-market-pandemic-economy

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

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Our Quant systems are also found at https://intelsense.smallcase.com

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.

1. Smaller, faster, better
IBM introduced what it says is the world's first 2-nanometer chipmaking technology. The technology could be as much as 45% faster than the mainstream 7-nanometer chips in many of today's laptops and phones and up to 75% more power efficient, the company said. To put that in perspective: Dario Gil, IBM's SVP and director of IBM Research, told us it’s like using a state-of-the-art iPhone for four days straight on a single charge.

Making the switches very tiny makes them faster and more power efficient, but it also creates problems with electrons leaking when the switches are supposed to be off. Darío Gil, senior vice president and director of IBM Research, told Reuters in an interview that scientists were able to drape sheets of insulating material just a few nanometers thick to stop leaks.

The two-nanometer node will allow engineers to build 50 billion transistors into a chip the size of a fingernail. Each transistor is thinner than a single strand of human DNA.
https://www.reuters.com/technology/ibm-unveils-2-nanometer-chip-technology-faster-computing-2021-05-06/


2. Make work meaningful
Money is important, but it’s not the most important factor in leading a fulfilling life. In his book Outliers, Gladwell posits: “If I offered you a choice between being an architect for $75,000 a year and working in a tollbooth every day for the rest of your life for $100,000 a year, which would you take?” Probably the former. There are three things he says we need for our work to be satisfying: 1) autonomy, 2) complexity, and 3) a connection between effort and reward. Remember, he says, “Hard work is a prison sentence only if it does not have meaning.”
https://theprofile.substack.com/p/the-profile-dossier-malcolm-gladwell

3. Why People Who Have It Easy Claim They Had It Rough
People who benefit from their skin color, family wealth, or connections face a dilemma because their privilege clashes with the hallowed American notion that success is — or should be — achieved exclusively through a combination of talent and hard work.

“If we lived in a society with an aristocracy, we’d justify it on bloodlines,” Lowery says. “You wouldn’t have to say, ‘I earned it.’ ” Instead, Americans who’ve benefited from their complexion or networks are under psychological pressure to prove their personal merit. If someone accepts that achievement and virtue are intertwined, Lowery notes, “It feels bad to believe that is not how you achieved your outcomes.”

How do those at the top deal with that potentially guilt-inducing dissonance? One way is by making exaggerated claims about hardships that they overcame on the way to achieving their success. If they’re not given the opportunity to portray themselves as having overcome adversity, they’ll switch to claiming that they’ve worked really hard to get ahead.
https://www.gsb.stanford.edu/insights/why-people-who-have-it-easy-claim-they-had-it-rough


4. Cut yourself some slack
If you ever find yourself stressed, overwhelmed, sinking into stasis despite wanting to change, or frustrated when you can’t respond to new opportunities, you need more slack in your life.

As individuals, many of us are also obsessed with the mirage of total efficiency. We schedule every minute of our day, pride ourselves on forgoing breaks, and berate ourselves for the slightest moment of distraction. We view sleep, sickness, and burnout as unwelcome weaknesses and idolize those who never seem to succumb to them. This view, however, fails to recognize that efficiency and effectiveness are not the same thing.

Many of us have come to expect work to involve no slack time because of the negative way we perceive it. In a world of manic efficiency, slack often comes across as laziness or a lack of initiative. Without slack time, however, we know we won’t be able to get through new tasks straight away, and if someone insists we should, we have to drop whatever we were previously doing. One way or another, something gets delayed. The increase in busyness may well be futile
https://fs.blog/2021/05/slack/


5. How the Personal Computer Broke the Human Body
Decades before “Zoom fatigue” broke our spirits, the so-called computer revolution brought with it a world of pain previously unknown to humankind. There was really no precedent in our history of media interaction for what the combination of sitting and looking at a computer monitor did to the human body. Unlike television viewing, which is done at greater distance and lacks interaction, monitor use requires a short depth of field and repetitive eye motions. And whereas television has long accommodated a variety of postures, seating types, and distances from the screen, personal computing typically requires less than 2-3 feet of proximity from monitor, with arms extended for using a keyboard or mouse.

Forty years later, what started with simple complaints about tired eyes has become common place experience for anyone whose work or school life revolves around a screen. The aches and pains of computer use now play an outsized role in our physical (and increasingly, our mental) health, as the demands of remote work force us into constant accommodation. We stretch our wrists and adjust our screens, pour money into monitor arms and ergonomic chairs, even outfit our offices with motorized desks that can follow us from sitting to standing to sitting again. Entire industries have built their profits on our slowly curving backs, while physical therapists and chiropractors do their best to stem a tide of bodily dysfunction that none of us opted into. Our bodies, quite literally, were never meant to work this way.
https://www.vice.com/en/article/y3dda7/how-the-personal-computer-broke-the-human-body



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
Our Quant systems are also found at https://intelsense.smallcase.com

On Hitpicks and the current investing scenario

This post is from Dr Hitesh Patel, my partner in Hitpicks and in my own investing. We have been collaborating for many years and hopefully complement each other and I have learnt a lot from him over the years. He is the most prolific members on ValuePickr and his thread is the most-read thread on the forum, where he shares his thoughts and helps investors. 

Link to the ValuePickr thread.

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.

1. No more of talking politics at work

Today's social and political waters are especially choppy. Sensitivities are at 11, and every discussion remotely related to politics, advocacy, or society at large quickly spins away from pleasant. You shouldn't have to wonder if staying out of it means you're complicit, or wading into it means you're a target. These are difficult enough waters to navigate in life, but significantly more so at work. It's become too much. It's a major distraction. It saps our energy, and redirects our dialog towards dark places. It's not healthy, it hasn't served us well. And we're done with it on our company Basecamp account where the work happens. People can take the conversations with willing co-workers to Signal, Whatsapp, or even a personal Basecamp account, but it can't happen where the work happens anymore. 

https://world.hey.com/jason/changes-at-basecamp-7f32afc5

2. Does technology create more jobs than it destroys?

Introducing a robot to the factory floor doesn’t automatically send some number of humans to the unemployment line. It can, and it does, but not always. In fact, so-called labor-destroying technologies can actually preserve and create work.  Turns out, in some situations labor-saving tools can actually lead to more work—sometimes due to human meddling, other times due to the new demands of the technology, and often because of both.

More than 60% of jobs performed in 2018 had not yet been invented in 1940, according to a 2020 MIT report that Autor co-authored. Tech-focused roles, like computer engineers, are well-represented among jobs created over this period, but as incomes rose new personal services (e.g., fitness coaching, mental health counseling) emerged as well. 

https://www.morningbrew.com/emerging-tech/stories/2021/04/25/myth-automation-eliminates-work

3. How to think?

Thinking means concentrating on one thing long enough to develop an idea about it. Not learning other people’s ideas, or memorizing a body of information, however much those may sometimes be useful. Developing your own ideas. In short, thinking for yourself. You simply cannot do that in bursts of 20 seconds at a time, constantly interrupted by Facebook messages or Twitter tweets, or fiddling with your iPod, or watching something on YouTube.

I find for myself that my first thought is never my best thought. My first thought is always someone else’s; it’s always what I’ve already heard about the subject, always the conventional wisdom. It’s only by concentrating, sticking to the question, being patient, letting all the parts of my mind come into play, that I arrive at an original idea. By giving my brain a chance to make associations, draw connections, take me by surprise. And often even that idea doesn’t turn out to be very good. I need time to think about it, too, to make mistakes and recognize them, to make false starts and correct them, to outlast my impulses, to defeat my desire to declare the job done and move on to the next thing.

https://fs.blog/2015/08/how-to-think/

4. China is the world's great emitter of greenhouse gases; India is not far behind

China’s share of global emissions rose to 27 percent of the world’s total, while the United States remained the second-largest emitter at 11 percent. India’s share came third at 6.6 percent, edging out the 27 nations in the European Union, which accounted for 6.4 percent, the report found.

China, India and other developing nations have long noted that over the past century, the United States and Europe grew their economies while generating massive amounts of greenhouse gases, and that requiring the developing world to clamp down on emissions as they industrialize and bring millions of citizens into the middle class is unfair.

China’s emissions reached 14.1 gigatons of carbon dioxide equivalents in 2019, the Rhodium analysis calculated — more than triple 1990 levels and a 25 percent increase over the past decade. Measuring China’s greenhouse gas emissions on a per capita basis also shows a sharp increase. China is home to more than 1.4 billion people, and its per capita emissions have reached 10.1 tons annually, nearly tripling over the past two decades.

https://www.washingtonpost.com/climate-environment/2021/05/06/china-greenhouse-emissions/

5. The importance of useless knowledge

To become the best possible manager, you should invest time in acquiring ‘useless knowledge’. The type of knowledge that does not directly enhance the bottom line, but enlightens the individual.

To enlarge and sweeten the fruits of management, professionals need to embrace so-called useless knowledge. This knowledge is not the type of information you get from reading the trivialities on Twitter feeds or Facebook. The canon of useless knowledge is more profound and includes philosophy and its continuous questioning of everything, the lessons of history and appreciation of the arts—the humanities of the liberal arts.

The words “useless knowledge” is problematic because it is a contradiction. There is no such thing as useless knowledge. A more suitable term would be indirect knowledge. This type of knowledge that solves problems by introducing new perspectives from outside the world of business. Wielded correctly, understanding the humanities will make you a better manager by understanding new perspectives.

Managers often equate useful with being practical. There is, however, nothing more practical than a good theory. Besides doing something, managers also need to think. The humanities teach you how to think, how to take a new perspective, think about meaning and purpose, without falling into the platitudes of popular management books.

https://empirics.asia/the-importance-of-useless-knowledge-in-business/

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 

Our Quant systems are also found at https://intelsense.smallcase.com

What happens if you start at the wrong time and the market declines after that?

The Quntamental Q30 strategy is up 9.02% month on month in April and up 106.74% since inception 14 months back. Out of the 14 months, 2 have been negative and 12 have been positive months. If you ignore the daily fluctuations in the market, we have been in a bull phase that continues unabated. Month on Month returns over the last 14 months: (Return % of every month is on the capital at the start of the month)

While it is very important to follow the process and take what the market gives us without letting our emotions override the Q30 investing decisions, it is also important to remember that market returns are lumpy in nature. 

In trending markets, the strategy will make a lot. In a downward market, we will give back some portion of it. In a sideways market, we will bleed a little as the market takes its breath and before starting to move in one direction whether up or down. 

What happens if you start at the wrong time and the market declines thereafter and the momentum doesn’t return for few months or several months? 

Framed differently, the question is how long do you need to remain invested to gain a 100% probability of profit? 

If past is any indication, that period could be anything from a couple of quarters to a couple of years. You must be willing to remain invested and follow the process with discipline throughout these periods to come out of the drawdowns, recover your investment value and then make a decent return on your corpus over a longer time frame of 2-3 year rolling return basis. 

To put that into an example from the above table, if one only has a 1-month outlook, one could get anything between (-4%) to +18% return. But if one has a minimum 3-month outlook, the chance and magnitude of losses reduce. Returns between 3 months of March 20 to May 20 period is (-0.35%) whereas returns between 3 months of Feb 21 to April 21 is 34.06%. Stretch that time window to 6 months, a year, 2 years and you get the drift. 

Future is not exactly going to mimic the past. The past does however provide an indication of likely scenarios. Based on data from the 2007 calendar year onwards, below are few inferences: 

• 1 out of 4 quarters and 1 out of 4 calendar years have resulted in negative returns. 
• There was no 2 back-to-back years of negative returns but there were 5 to 6 back-to-back negative return quarters/months in different time periods over the last 14 years. 
• We may do better than past. We may do worse than past. The strategy has built-in safeguards to gradually go in to higher % of cash allocation as we will not get enough stocks to meet our criteria for investments in prolonged conditions of market bearishness. 
• What we also know is trying to second guess when is the right time to invest and when is the right time to sit out usually results in getting out at the wrong time, missing out on the gains and making far less than what we could have if we just followed the strategy. 

When the Corona crisis hit us in March 20, many of us thought markets would not do well for several months or quarters. In the second half of the year, many were still in disbelief that the market can’t go higher. 

Over the last few weeks, many have been expecting the market to fall like last year. But Q30 has instead gone up 9% in a month like April 21. 

To summarize, we should let the market tell us what to do rather than follow our own opinion. Remain invested for a minimum period for the strategy to play out and let the edge work for us. 

The longer you follow the process with discipline, the bad periods and good periods even out and the edge of the strategy plays out and whatever the market will do in longer time frames, we expect to do better and by repeating that over and over again, we let the magic of compounding work in our favour.