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. Your side projects (hobbies) are more powerful than you think 

It's easy for something new to feel like a project of your own. That's one of the reasons for the tendency programmers have to rewrite things that don't need rewriting, and to write their own versions of things that already exist. This sometimes alarms managers, and measured by the total number of characters typed, it's rarely the optimal solution. But it's not always driven simply by arrogance or cluelessness. Writing code from scratch is also much more rewarding — so much more rewarding that a good programmer can end up net ahead, despite the shocking waste of characters.

Remember that careless confidence you had as a kid when starting something new? That would be a powerful thing to recapture.

If it's harder as adults to retain that kind of confidence, we at least tend to be more aware of what we're doing. Kids bounce, or are herded, from one kind of work to the next, barely realizing what's happening to them. Whereas we know more about different types of work and have more control over which we do. Ideally we can have the best of both worlds: to be deliberate in choosing to work on projects of our own, and carelessly confident in starting new ones.

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

2. Why do we get misled by misinformation?

Why do people — and by “people” I mean “you and I” — accept and spread misinformation? The two obvious explanations are both disheartening. The first is that we are incapable of telling the difference between truth and lies. In this view, politicians and other opinion-formers are such skilled deceivers that we are helpless, or the issues are so complex that they defy understanding, or we lack basic numeracy and critical-thinking skills. The second explanation is that we know the difference and we don’t care. In order to stick close to our political tribe, we reach the conclusions we want to reach.

There is truth in both these explanations. But is there a third account of how we think about the claims we see in the news and on social media — an account that, ironically, has received far too little attention? That account centres on attention itself: it suggests that we fail to distinguish truth from lies not because we can’t and not because we won’t, but because we are simply not giving the matter our focus.

Pay attention; get some context; ask questions; stop and think. Misinformation doesn’t thrive because we can’t spot the tricks. It thrives because, all too often, we don’t try. We don’t try, because we are confident that we already did.

https://timharford.com/2021/06/what-magic-teaches-us-about-misinformation/

3. A good shareholder report

There's a reason everybody reads Buffett and Bezos—they give insight into interesting financial concepts, economic outlooks, managerial insight that is far ahead of anything being taught in business school, and more.  So, what are the traits of a best shareholder letter? Specifically, there are five: 

(1) Define the company and its strategy, 

(2) be candid, 

(3) educate, 

(4) tell a story (the investment thesis story), and 

(5) entertain. 

The shareholder letters have impact on stock price. Companies with the best shareholder letters outperformed the Index. If you skip through the corporate jargon phrases and pretty much skim the rest, it will hardly take about two minutes to go through it. A good chunk of companies won’t even have a letter. And the truly great letters could actually save you time in the long run.

https://www.toptal.com/finance/equity-research-analysts/best-shareholder-letters

Note: At Intelsense, we have decided to go through as many annual reports as possible and summarise them. Link here: http://blog.intelsense.in/2021/06/summary-of-annual-reports.html

4. Mistakes while managing risk (an old but relevant article by NN Taleb)

Instead of trying to anticipate low-probability, high-impact events, we should reduce our vulnerability to them. Risk management, we believe, should be about lessening the impact of what we don’t understand—not a futile attempt to develop sophisticated techniques and stories that perpetuate our illusions of being able to understand and predict the social and economic environment.

To change the way we think about risk, we must avoid making six mistakes:

1. We think we can manage risk by predicting extreme events.

2. We are convinced that studying the past will help us manage risk.

3. We don’t listen to advice about what we shouldn’t do.

4. We assume that risk can be measured by standard deviation.

5. We don’t appreciate that what’s mathematically equivalent isn’t psychologically so.

6. We are taught that efficiency and maximizing shareholder value don’t tolerate redundancy.

No one should have a piece of the upside without a share of the downside.

https://hbr.org/2009/10/the-six-mistakes-executives-make-in-risk-management

5. Nassim Taleb explains his views on Bitcoin 

“In its current version, in spite of the hype, bitcoin failed to satisfy the notion of “currency without government” (it proved to not even be a currency at all), can be neither a short or long term store of value (its expected value is no higher than 0), cannot operate as a reliable inflation hedge, and, worst of all, does not constitute, not even remotely, safe haven for one’s investments, shield against government tyranny, or tail protection vehicle for catastrophic episodes.”

A central result (even principle) in the rational expectations and securities pricing literature is that, thanks to the law of iterated expectations, if we  expect that we will expect the price to vary, then by backward induction such a variation must be incorporated in the price now. When there are no dividends, as with growth companies, there is still an expectation of future earnings, and a future expected reward to stockholders–directly via dividends, or indirectly via reverse dilutions and buybacks. Earnings-free assets are problematic. The implication is that, owing to the absence of any explicit yield benefiting the holder of bitcoin, if  we expect that, at any point in the future, the value will be zero when miners are extinct, the technology becomes obsolete, future generations get into other such "assets" and bitcoin loses its appeal to them, then

the value must be zero now.

https://www.academia.edu/49313911/Bitcoin_Currencies_and_Bubbles

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. China's tech workers are pushed to limits by surveillance software

In China, technology adoption promises its swelling middle classes an easier, more productive life. But as companies bring productivity-enhancing tools into everyday office life, their efficiency is being channeled, not into leisure time, but into squeezing ever more value from employees.

This is particularly the case in China's tech industry, where rapid technological development, paired with poor labor regulations, has created a potential for labor abuse. The big tech companies themselves, locked in cutthroat competition for new business opportunities, are pioneering these technologies and tools in their own operations. From hiring and goal-setting to appraisal and layoff, productivity-enhancing technologies look to quantify workers' behavior by collecting and analyzing extensive amounts of personal data.

Some scholars warn that some practices can be unethical, invading employees' privacy and burdening them with greater workload and mental stress. Others draw parallels to the fatigue faced by factory laborers during industrial revolutions, where workers chased the pace of machines.

The harsh conditions synonymous with China's sweatshop factory culture have come to be identified with the country's technology companies, where workers often endure slavishly long hours to hit objectives set by big data analytics. The environment of intense pressure has, in some cases, created a lethal environment for office workers.

https://asia.nikkei.com/Spotlight/The-Big-Story/China-s-tech-workers-pushed-to-limits-by-surveillance-software

2. The future belongs to the intangibles

Investment in intangible assets that underpin the knowledge or learning economy, such as intellectual property (IP), research, technology and software, and human capital, has risen inexorably over the past quarter-century, and the COVID-19 pandemic appears to have accelerated this shift toward a dematerialized economy.

Investing in intangibles correlates with productivity and sector growth. Regardless of the sector, companies that invest more in intangibles grow more. 

The evidence is stacking up in an age increasingly driven by innovation and knowledge that firms and sectors that invest most heavily in intangibles are reinforcing and deepening their competitive advantage and achieving the highest rates of growth in gross value added. Fast-growing companies invest 2.6 times more than slower-growing counterparts. But investment in intangibles is only a starting point. The full potential of these game-changing assets will not be realized unless companies are smart about how they deploy them to create synergies and scale, and enhance a range of capabilities that can deliver on growth.

https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/getting-tangible-about-intangibles-the-future-of-growth-and-productivity

3. What's wrong with processed food?

One of the reasons sugar is so prevalent in packaged foods is that ultra-processing tends to eliminate flavours found in nature. Something needs to fill the void: “Sugars are used in large quantities by the food industry to give flavour to foods that have had their intrinsic flavours processed out of them and to mask any unpleasant flavours in the final product. These sugars are not only used as sweeteners but have important technological functions in foods, providing texture, bulk, colour and acting as preservative agents.”

"The problem is that, in the past half-century, a different type of food processing has been developed," says Fernanda Rauber, a nutritional epidemiologist at the University of São Paulo, Brazil, about what we now call "“ultra-processed foods”. "These substances would not be found in our kitchen. Usually, they contain little to no proportion of real foods."

"Very commonly, they use what we call cosmetics additives – colours, flavours, thickener, emulsifiers, gelling agents – to improve the sensory properties of the food, to give something to the substance that otherwise would taste like nothing, just plain starch," says Priscila Machado, a public health nutritionist at Deakin University in Geelong, Australia. "The problem when you think about these substances, in isolation they don’t add anything particularly nutritious to the food. Food is more than the sum of the nutrients they contain. There are no antioxidants and phytochemicals that we find in whole foods if they are stripped out in processing." Even when nutrients are added back in, like cereals fortified with iron or fibre, food might not be as healthy as it seems. Added nutrients don’t work as well as those found in whole foods, she says.

https://www.bbc.com/future/article/20210608-what-were-the-first-processed-foods

4. The fall of GE ... By Bill Gates

My first big takeaway is that one of GE’s greatest apparent strengths was actually one of its greatest weaknesses. For many years, investors loved GE’s stock because the GE management team always “made their numbers”—that is, the company produced earnings per share at least as large as what Wall Street analysts predicted. It turns out that the culture of making the numbers at all costs gave rise to “success theatre” and “chasing earnings.” In Gryta and Mann’s words, “Problems [were] hidden for the sake of preserving performance, thus allowing small problems to become big problems before they were detected.”

Investors bought into the notion that the company’s world-renowned training made it better at managing things than anyone else, and that GE could produce consistent profits even in highly cyclical markets. And GE successfully persuaded people that its generalists could avoid the pitfalls that had tripped up big conglomerates in the past. In reality, those generalists often didn’t understand the specifics of the industries they had to manage and couldn’t navigate trends in their industries. 

https://www.gatesnotes.com/Books/Lights-Out

5. Oxford University Press shuts down after 500 years

Oxford University’s right to print books was first recognised in 1586, in a decree from the Star Chamber. 

Oxuniprint’s closure will mark the final chapter for centuries of printing in Oxford, where the first book was printed in 1478, two years after Caxton set up the first printing press in England. There was no formal university press in the city over the next century, but the university’s right to print books was recognised in a decree in 1586, and later enhanced in the Great Charter secured by Archbishop Laud from Charles I, entitling it to print “all manner of books”.

OUP has existed in a recognisable form, with its own printing division, since the 17th century, printing everything from the King James Bible to scholarly works. 

https://www.theguardian.com/books/2021/jun/09/oxford-university-press-to-end-centuries-of-tradition-by-closing-its-printing-arm

How are the markets positioned? ~ Post by Hitesh Patel

This blog has been penned by Dr Hitesh Patel. Hitesh & Abhishek work together for Intelsense Hitpicks Advisory.

Thoughts on current markets - Money9 live session

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. Play your own game

If you view investing as a single game, then you think every deviation from that game’s rules, strategies, or skills is wrong. But most of the time you’re just a marathon runner yelling at a power lifter. So much of what we consider investing debates and disagreements are actually just people playing different games unintentionally talking over each other.

A big problem in investing is that we treat it like it’s math, where 2+2=4 for me and you and everyone – there’s one right answer. But I think it’s actually something closer to sports, where equally smart and talented people do things completely differently depending on what game they’re playing.

What you want might not be what I want.

https://www.collaborativefund.com/blog/play-your-own-game/

2. From Facts to Fake News: How Information Gets Distorted

The scholars analyzed data from 11,000 participants across 10 experiments and concluded that news undergoes a stylistic transformation called “disagreeable personalization” as it is retold. Facts are replaced by opinions as the teller tries to convince the listener of a certain point of view, especially if the teller considers himself more knowledgeable on the topic than his audience.

The effect is amplified on social media. Followers don’t always click on shared content to read the original work for themselves, yet they often accept the conclusion or opinion proffered by the person who posted it.

Another disturbing result the researchers found was the trend toward negativity, even if the original story was positive, and stories tend to become more negative with each reiteration.

“The further removed a retelling is from the original source — again, think of the telephone game — the more negative and more opinionated it becomes,” Melumad said. “It’s really hard to turn this effect off, actually.”

https://knowledge.wharton.upenn.edu/article/from-facts-to-fake-news-how-information-gets-distorted/

3. The Psychological Benefits of Commuting to Work

Many people liberated from the commute have experienced a void they can’t quite name. In it, all theaters of life collapse into one. There are no beginnings or endings. In a 2001 paper, two researchers at UC Davis attempted to divine the ideal commute time. They settled on 16 minutes. To be sure, this was a substantial shortening of the study participants’ actual commutes (which were half an hour, on average). But it was not zero. In fact, a few wished for a longer commute. Asked why, they ticked off their reasons—the feeling of control in one’s own car; the time to plan, to decompress, to make calls, to listen to audiobooks. Clearly, the researchers wrote, the commute had some “positive utility.”

Consider the morning drive in. While superficially a matter of on- and off-ramps, it also initiates a sequence in which the feelings and attitudes of home life are deactivated, replaced by thoughts of work. This takes time, and if it doesn’t happen, one role can contaminate the other—what researchers call “role spillover.” 

Naturally, he has come up with some rituals to replace the commute and mark the beginning and end of each day. The ideas he’s proposed to clients include lighting variations, warm-up stretches, cell phone-free walks, and, as he demonstrated to me over Zoom, shrouding your computer in a fine blue cloth when you log off, as if it, too, needs a good night’s sleep.

“Rituals are friction,” he told me. Like the commute, “they slow us down. They’re so antithetical to most of our life, which is all about efficiency and speed.”

https://www.theatlantic.com/magazine/archive/2021/07/admit-it-you-miss-your-commute/619007/

4. Control your attention instead of controlling your time

Despite the fact that we all have 24 hours a day, we realized that the way we spent those hours resulted in dramatic differences in outcomes. Person A and Person B both experience the same duration of day, but Person A may be much healthier, much wealthier, and much happier at the end of that day than Person B.

With this realization, we figured out how to hack time. How to temporarily cheat the expiration date that we all have. And it can summed up this way: Control your attention instead of controlling your time.

Time follows laws that we have no say over. An hour will be an hour, no matter what. Attention, on the other hand, can be stretched and contracted upon will. We have agency over how we use it, and it gives us a godlike ability to shift our perception of time. An hour may feel like a minute, or it may feel like a day. It all depends on how we use the hour in question.

By using our attention in innovative ways, we learned how to extract incredible value out of preset blocks of time. We used concentration as a tool to power technological progress. 

https://moretothat.com/multi-tasking/

5. Biodegradable mobile cover

Pivet is a new company that makes smartphone cases. You might think it's a crowded field, however, not only is Pivet a Black-owned business in an industry that has shown little progress with diversity, but its plastic cases are also unusual. Unlike most plastics that take hundreds of years to decompose, Pivet's cases can biodegrade in around two years, according to the company. 

The plastic in Pivet's cases is embedded with a proprietary material called Toto-Toa. This material is comprised of natural and non-toxic ingredients, but Pivet wouldn't specify those ingredients as it's currently seeking intellectual property protection. This mixture purportedly speeds up the natural biodegradation process by attracting micro-organisms when the case enters microbe-rich environments, like landfills or oceans. (No, it won't start to biodegrade when you're still using the case.) These microbes colonize on the surface of the case and then break the plastic down into its raw components.

https://www.wired.com/story/pivet-toto-toa-biodegradable-plastic-phone-case/

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Summary of Annual Reports

Ever since I left my full-time job and started investing full time, one of the most important things I have looked forward to is reading annual reports, especially of lesser-known companies. But I spent a lot of time in the last two years honing my skills in technical analysis and quantitative analysis.

This year my team at Intelsense and I have decided to read as many annual reports as well and summarize the main qualitative parts into 2-3 page documents. It will help in two ways:

1. Increase the coverage of stocks and understand the stories behind a large number of companies
2. Have an archive that can be referred to later for a quick review of what happened.

The reason I have focused on the qualitative side is that it is fairly easy to just look up the financials on screener.

I will be posting the summaries on the respective company threads on www.valuepickr.com and also on this blog. In case, the company thread does not exist on VP, I will put it on my catch-all thread (link here: https://forum.valuepickr.com/t/aa-abhisheks-attic-place-to-store-stuff-to-clear-my-head/26195)

If there is any particular AR that anyone is looking to read a summary of, do let me know on and I will try to put it in priority in the queue.

The link to all the reports is http://blog.intelsense.in/p/ar-summaries.html

Quantitative Thinking

Quantitative way of thinking is very critical in today's day and age. For example, if we say an industry has high returns on equity, it is technically a meaningless statement. We should dig deeper. How do we define high? Is high to be defined in absolute terms or relative terms. If relative, relative to what and for how long? The moment you start making an effort to quantify things, you will see a lot more clarity. You will need to spell out your assumptions. There is no place to hide behind vague terminology. 

There is a lot of discussion on the market being in bubble territory. Again, we should stop ourselves and ask, what is a bubble? How do we quantify a bubble? There are a lot of academic papers on quantifying bubbles but suffice it to say that there is no universal definition or quantifying methodology of a bubble. So, we should try and define what we would think a bubble would be in our own terms. A bubble is when a particular asset price goes up significantly over a short period of time without the underlying cashflow (if any) of the asset changing meaningfully. 

So, from a stock market perspective, we could think of a finding out how many stocks are trading say 2x-3x above their 200-day moving average. Another similar approach could be to look at the number of stocks that are above 3 standard deviations of their 200-day moving average. Couple that with a valuation metric like say 3 times PE or PEG or EV/EBIDTA over their mean for 3-5 years. And voila, you have a framework to understand what a bubble looks like. It may not be perfect, but you can keep refining it over time. But your understanding of markets will increase significantly more than listening to random people bandying such terms all over the place.