ET NOW: Key themes for the long term

Will write a more detailed blog on this shortly.

Weekend Reading

 

WEEKEND READING 1. Ray Dalio on Chinese state capitalism To understand what’s going on you need to understand that China is a state capitalist system which means that the state runs capitalism to serve the interests of most people and that policy makers won’t let the sensitivities of those in the capital markets and rich capitalists stand in the way of doing what they believe is best for the most people of the country. Rather, those in the capital markets and capitalists have to understand their subordinate places in the system or they will suffer the consequences of their mistakes. For example, they need to not mistake their having riches for having power for determining how things will go. Also, you need to understand that the global geopolitical environment changing leads to some changes. You can see that reflected in the U.S. governments’ policy shifts such as a) changing its policies about Chinese companies’ listings in the United States and b) threats to prohibit American pension funds from investing in China. Assume such things will happen in the future and invest accordingly. But don’t misinterpret these wiggles as changes in trends, and don’t expect this Chinese state-run capitalism to be exactly like Western capitalism. https://www.linkedin.com/pulse/understanding-chinas-recent-moves-its-capital-markets-ray-dalio/   2. Are high valuations here to stay? For about 120 years from the 1870s to the 1980s, the U.S. stock market reliably reverted to its long-term average valuation, and just as important, it spent roughly equal time above and below that average. Investors could therefore expect an expensive market to become cheaper and a cheap market to become more expensive, a useful assumption when estimating future stock returns. Change in valuation is one of three key components of returns, along with dividends and earnings growth. Since 1990, however, the market has rarely dipped below its long-term average valuation, the notable exception being the period around the 2008 financial crisis. Neither the dot-com bust in the early 2000s nor the Covid-induced sell-off last spring managed to subdue it. The difference between the two periods is striking. From 1871 to 1989, the market traded below its long-term average valuation 47% of the time, as measured by price-to-earnings ratio using 12-month trailing earnings and counted monthly. Since 1990, that percentage has dropped to 10%. As the years go by and the market maintains its elevated valuations, it becomes easier to suspect that something has indeed changed for good. And of course, many things have. Financial markets are accessible to more people than ever before, and it’s much easier and cheaper to buy stocks today than it was three decades ago. Investors are allocating more of their savings to stocks, much of it in index funds that track the broad market, and they appear to be getting better at hanging on to them. Retirement plans also steer billions of dollars to the market every year. It’s not hard to imagine that an increased demand for stocks and a decline in the number of panicky investors has lifted the market’s average valuation.   That doesn’t mean the market won’t crater occasionally, as it did during the financial crisis. But there’s a growing chance that the past 30 years haven’t been an anomaly and that forecasting models need to lift their valuation targets. https://www.bloomberg.com/opinion/articles/2021-07-30/are-stratospheric-stock-valuations-here-to-stay   3. Rainfall in the desert - geoengineering to the fore Cloud seeding has traditionally been done by releasing compounds like silver iodide into clouds. The chemicals function as a sort of scaffold that water molecules latch onto, becoming heavy enough to drop to the ground as rain. Despite its lack of naturally-occurring rain, the UAE does have plenty of clouds, which are generated by moisture and evaporation from the Gulf of Oman, the Persian Gulf, and the Arabian Sea. Amid concern that pumping silver iodide and other chemicals into clouds could cause invisible but harmful pollution on the ground, scientists started to look for new ways to catalyze rainfall. The UAE funded research at the University of Reading in the UK, where meteorologists developed a cloud seeding technology based on electricity. They discovered that when cloud droplets have a positive or negative electrical charge, the smaller droplets will combine and form raindrops. Custom-built drones with a six-foot wingspan fly at low altitudes, with sensors measuring temperature, charge, and humidity. Charge emitters on the drones deliver electric charges to the molecules in clouds. Videos from the last few weeks show it not only raining in Dubai and surrounding areas, but raining so much that some streets started to flood, a rare if not unheard of occurrence there. https://singularityhub.com/2021/08/04/the-uae-is-using-drones-to-zap-clouds-with-electricity-and-make-it-rain/   4. Battling the obesity epidemic through the gut The global obesity epidemic is striking for its prevalence and persistence. Despite mounting attention from the media and governments, obesity rates have risen in every region of the world in recent years. Deeply entrenched attributes of contemporary lifestyles, from the worldwide availability of unhealthy processed food to the sedentary nature of urbanised lives, are often thought responsible. That helps explain why reducing obesity has proved so difficult. The linkages between the food we consume and the ways in which we make decisions go beyond how much we eat. An evolving body of research explores how bacteria composition and hormonal activity in the gut communicate with the brain and vice versa, possibly helping to determine our overall health and well-being. Viewed through the gut-brain framework, food choice is less an independent calculation than the outcome of a feedback loop in which what we eat today implants, at a biological level, the seeds of future meals. On one level, this carries the discouraging implication that existing obesity sufferers – barring serious surgery – will have to battle their own biology to better their metabolic state. In another sense, though, the gut-brain connection is rife with positive possibilities. It points to numerous areas of intervention beyond appeals to willpower. This includes synbiotics to target the gut microbiota composition or supplements that raise serotonin levels, tracking of metabolic base rates and stress levels etc. Further research and experimentation may refine these methods such that they become viable alternatives to invasive weight loss interventions such as surgery for some. https://knowledge.insead.edu/marketing/the-neuroscience-of-eating-17141   5. The business tycoons who fell foul with the law (read the linked article) The post-global financial crisis growth in Indian economy and the rush of corporate expansion activity burned many. Companies. Promoters. Chief Executives. Bankers. For the first time in India’s post-liberalisation economic history, many who once led storied enterprises have gone to jail for alleged improprieties. From Avantha Group’s Gautam Thapar to the Singh brothers of Ranbaxy, Fortis and Religare fame. From Yes Bank Ltd.’s Rana Kapoor to the Wadhawans of Dewan Housing Finance Corp. and Ravi Parthasarthy of IL&FS. Each was influential. Each connected in the corridors of power. Each built business at scale but fell afoul of rules. Each now incarcerated. https://www.bloombergquint.com/business/behind-bars-business-leaders-that-fell-to-the-last-business-cycle Copyright © 2021 www.intelsense.in, All rights reserved.

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. America's food monopolies and who actually pays the price

A handful of powerful companies control the majority market share of almost 80% of dozens of grocery items bought regularly by ordinary Americans.

The size, power and profits of these mega companies have expanded thanks to political lobbying and weak regulation which enabled a wave of unchecked mergers and acquisitions. This matters because the size and influence of these mega-companies enables them to largely dictate what America’s 2 million farmers grow and how much they are paid, as well as what consumers eat and how much our groceries cost.

It also means those who harvest, pack and sell us our food have the least power: at least half of the 10 lowest-paid jobs are in the food industry. Farms and meat processing plants are among the most dangerous and exploitative workplaces in the country.

Overall, only 15 cents of every dollar we spend in the supermarket goes to farmers. The rest goes to processing and marketing our food.

https://www.theguardian.com/environment/ng-interactive/2021/jul/14/food-monopoly-meals-profits-data-investigation

2. Swim your way to better brain health

A growing body of research suggests that swimming might provide a unique boost to brain health. Regular swimming has been shown to improve memory, cognitive function, immune response and mood. Swimming may also help repair damage from stress and forge new neural connections in the brain.

Now, there is clear evidence that aerobic exercise can contribute to neurogenesis and play a key role in helping to reverse or repair damage to neurons and their connections in both mammals and fish.

In one study in rats, swimming was shown to stimulate brain pathways that suppress inflammation in the hippocampus and inhibit apoptosis, or cell death. The study also showed that swimming can help support neuron survival and reduce the cognitive impacts of aging. 

https://theconversation.com/swimming-gives-your-brain-a-boost-but-scientists-dont-know-yet-why-its-better-than-other-aerobic-activities-164297

3. The world seen through the eyes of Olympic Games

Another point that leaps out is the remarkable consistency of the U.S. compared with other leading nations. The U.S. routinely won 15% to 20% of the medals awarded during most of the 20th century. That figure has been edging down over the past few decades, a reflection that the Games have gone from a Western-dominated event to a more globalized competition featuring the rise of many developing nations. In other words, a lot like world politics and the global economy in general.

China began opening to the world around 1980 and took part in its first Summer Olympics in 1984, where it made a strong initial impression. China's performance has continued to surge dramatically, and it now takes home close to 10% of the medals. When Beijing hosted the Games in 2008, China won more golds than any other country (48), though not as many total medals as the U.S. (100 for China, compared with 112 for the U.S.).

Starting from zero three decades ago, China now has the second-strongest Olympic team — and the world's second-biggest economy — trailing only the U.S. on both counts.

The Soviets invested enormous resources in Olympic sports and quickly surpassed the U.S., winning the most medals at every Summer Games from 1956 to 1992, except for 1968, when the Americans edged them.

Five of the world's most populous countries (India, Indonesia, Pakistan, Nigeria and Bangladesh) have more than 2.1 billion people — almost 30% of the world's total — and won just six medals combined in Rio.

https://www.npr.org/sections/tokyo-olympics-live-updates/2021/07/28/1020780003/how-the-olympic-medal-table-explains-the-world

4. Can you survive the next heat wave? Depends on the humidity.

In reasonable heat, the human body is very good at maintaining a constant internal temperature of 97 to 99 degrees. When it gets hot outside, our bodies produce sweat; when the sweat evaporates, its transformation from liquid water on your skin to water vapor in the air requires energy. That energy comes from your body’s heat, so as the sweat evaporates, your body cools down.

A dry heat feels comfortable because the evaporation happens so fast that you don’t even notice the sweat on your skin. 

Now suppose you’re in the same amount of heat, but in Palm Beach, where the air is incredibly humid. The air is already holding all the water vapor it can hold. So your sweat stays on your skin, and the heat that the sweat is supposed to remove from your body … stays in your body, and accumulates.

Your body has lost its ability to shed heat, and so your core temperature starts creeping up to approach the temperature of the air around you. Let the process go on long enough, and body temperature rises from comfortable 98 to deadly 108.

https://slate.com/technology/2021/07/climate-change-wet-bulb-temperature.html

5. How would we invest if we knew precisely what would happen in the future?

Suppose that our crystal ball had told us on December 31, 1999 that, for the next 11 1/2 years through July of 2011, the US Consumer Price Index (CPI) would rise at an average annual rate of 2.5%. Would we have expected the price of gold to rise by 465% while the inflation-adjusted S&P 500 fell by almost 32% over the same period?

Market veterans remember the 1973-1974 bear market when the DJIA's earnings rose 50% while the Dow dropped almost 50% in price, or the '87 crash during which stocks plunged 43% even when earnings hadn't missed a beat. In 1999, when the stocks of companies that actually made money declined 2%, profitless tech startups soared 82%.

In 2016, Brazil's senior leadership has been embroiled in a vast corruption scandal, President Dilma Rousseff's powers have been suspended due to impeachment proceedings, Finance Minister Joaquim Levy has been forced to resign, and inflation is in double digits. Brazil suffered its worst GDP contraction since 1990. Who would have predicted that EWZ, the Brazil iShares ETF, would be up nearly 60% year to date?

Even if we had a crystal ball, the investment implications of future events and conditions are unknowable. That is why we must diversify.

https://www.ohiggins.com/single-post/2016/07/26/if-we-had-a-crystal-ball

Discounting DCF - Why DCF fails most of the time in valuing companies

This post was triggered by a valuation of Zomato. It came as a WhatsApp forward and I laughed out loud when I saw it. I have been a skeptic of DCF (discounted cash flow) and a lot of simultaneous thoughts ran through my mind.

The obvious problems of DCF are many. I will list a few of my pet peeves here:

1) Most of the present value is derived from the terminal value - Terminal value assumes that a firm will be in business forever. May not happen in real life. Secondly the growth assumptions of close to GDP growth rate is also fallacious. Who can determine what the GDP growth rate will be in 2040? India's GDP before 1991 was an average of 4% and that of the last 30 years post-liberalisation at about 6%. Excluding the Covid period, it has varied from about 4% to 11%. So, what value should we take for terminal growth. Try changing it from 4% to 11% and see what a difference it makes to the valuation.

2) Arbitrary discount rate and cost of capital - The discount rate applied varies vastly over time and has a large effect on the DFC calculation. People use basic approximations like 10 or 30 year US treasury rates or some such risk-free rate. Again a few percent difference can make a huge difference in the final value, so much so that the entire valuation becomes redundant.

3) False precision bias - The entire process is full of assumptions. And it has to be because it deals with the future and as such cannot deal with any levels of certainty. But a DCF done in an excel gives a double digit precise value. People misunderstand accuracy for precision.

4) World is dynamic and things change - The world is changing all the time. I don't think we need to remind ourselves of that in pandemic times. Like I keep saying no annual report had pandemic as a risk before 2019. So, making revenue, cash flow projections for the next 10 years is not only extremely difficult but, in my mind,foolhardy. People who were valuing Amazon had no clue that AWS would turn out and be as profitable as it has become. Similarly, glance back at DCF valuations done of Nokia in 2005-06 period. You will know what I am saying.

5) Gives a false sense of security - Because you think you have done a valuation, you believe you know what the business is worth. But that does not help you in real life. What do you do if the stock price falls below your calculated value? You buy more? Or sell? What if you buy more and it keeps falling? How long do you buy? What happens if the price goes up 2x-3x-5x from the calculated value? Do you sell because it's overvalued? Do you hold on for more gains? So, you see valuation is just one small part of the whole.

6) It ignores market sentiments - Valuation depends on the sum of all future cash flows and also the "prevalent market sentiment". The second part is actually equally important. The same company will be valued differently in a bear and bull market even if their underlying business performance is not impacted. Case in point is say Infosys in 2000 and 2001. Same company, doing the same thing, but market value is a fraction of the past.

Every asset value can be broken up into two parts—i) intrinsic value, which is derived from its tentative future cash flows 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 because there is no cashflow, but it has a transaction value based on what another person is willing to pay for it. This transaction value keeps changing from time to time based on many other factors like liquidity, political and social situation etc.

Now having said so many negative things about DCF, it leaves us with two practical questions. Firstly, does it mean that we should completely ignore that process and secondly, if not DCF, then what?

Let's try to answer them one by one.

The process of doing a valuation, especially one as rigorous as DCF, is very useful. It helps you walk through many aspects of the business and make your assumptions explicitly. Like what could be the revenue growth over time, what would be its components, at what margins etc. This helps in the understanding of the business in a much better manner.

And for the next question, I will let the great masters speak.

Munger: “Warren often talks about these discounted cash flows, but I’ve never seen him do one. If it isn’t perfectly obvious that it’s going to work out well if you do the calculation, then he tends to go on to the next idea.”

Buffett: “It’s true. If it doesn’t just scream out at you, it’s too close."

To summarize, you need to focus on understanding the business and its various levers well enough to figure out it is screaming at you to buy or sell. If you need excel for it, you don't know the business well enough.

This article first appeared in: https://www.cnbctv18.com/market/stocks/zomato-valuation-why-one-should-discount-dcf-method-of-valuing-stocks-10089761.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. The bold new next step on human advancement

Proteins are the minions of life. They form our bodies, fuel our metabolism, and are the target of most of today’s medicine. They start out as a simple ribbon, translated from DNA, and subsequently fold into intricate three-dimensional architectures. Similar to Transformers, many protein units further assemble into massive, moving complexes that change their structure depending on their functional needs at the moment.

Misfolded proteins can be devastating, causing health problems from sickle cell anemia to cancer and Alzheimer’s disease. One of biology’s grandest challenges for the past 50 years has been deciphering how a simple one-dimensional ribbon-like structure turns into 3D shapes, equipped with canyons, ridges, valleys, and caves. It’s as if an alien is reading the coordinates of hundreds of locations on a map of the Grand Canyon on a notebook, and reconstructing it into a 3D hologram of the actual thing—without ever laying eyes on it or knowing what it should look like.

Deciphering protein folding is bound to illuminate an entire new landscape of biology we haven’t been able to study or manipulate. The fast and furious development of Covid-19 vaccines relied on scientists parsing multiple protein targets on the virus, including the spike proteins that vaccines target. Many proteins that lead to cancer have so far been out of the reach of drugs because their structure is hard to pin down.

With these new AI tools, scientists could solve haunting medical mysteries while preparing to tackle those yet unknown. It sets the stage for better understanding our biology, informing new medicines, and even inspiring synthetic biology down the line.

https://singularityhub.com/2021/07/20/new-protein-folding-ai-just-made-a-once-in-a-generation-advance-in-biology/

2. Rajiv Bajaj talks about why we are failing to compete with the Chinese businesses

Indian businessmen are characterized by a myopic vison—it’s both short term as well as geographically limited. Of course, the government also does not help. So, who is responsible for the Chinese dominance—the government, the people or the Corporates?

I think it's all the three.

When even ITI trained turners and fitters refuse to work in a shop floor, when a Stock Broker is paid more than an Engineer, when typing code is mistaken for technology, when governments refuse to amend antique labor and land laws when corporates think local and not global and finally when you, yes you, will not send your son to work on the shop floor, each one of this factor is as responsible for the Chinese dominance as much as their “Ethical Corruption” We have been looted because we left our doors and windows open.

No, this article is not supporting the Chinese. How dare they work so hard? And how dare they obey a communist government? We should stop buying all their goods and we will make everything in our country. But we will work nine to five with a three- day weekend. 

https://nextbigwhat.com/the-chinese-dragon-by-rajiv-bajaj-must-read-for-those-building-global-products-from-india/

3. The highest form of wealth is controlling your time

There’s a difference between working hard because you want to and working hard because someone else told you you had to, and how to do it, and when to do it. Even if you’re doing the same work, the independence of doing it on your own terms changes everything in the same way that sleeping in a tent is fun when you’re camping but miserable when you’re homeless.

Wealth can lead to time independence, but it’s never assured. It can be the opposite, as whatever created the wealth – whether a company or an inheritance – creates a claim on your time in equal proportion to its financial reward. A great number of CEOs fall into this category: They have an abundance of wealth and not a moment of free time or scheduling control even when it’s desired, which is its own form of poverty.

Charlie Munger summed it up: “I did not intend to get rich. I just wanted to get independent.” It’s a wonderful goal, and harder to measure than net worth.

https://www.collaborativefund.com/blog/the-highest-forms-of-wealth/

4. The Amazonification of space

The Amazonification of space has begun in earnest. What was once largely the domain of big government is now increasingly the realm of Big Tech. The people who sold you the internet will now sell you the moon and the stars. 

Bezos, the founder of Amazon and still its largest shareholder, made clear at the news conference after Tuesday’s flight that Blue Origin was open for business. Even though tickets were not generally available, sales for flights were already approaching $100 million. Bezos didn’t say what the price for each was but added, “The demand is very very high.” 

All of this space activity is the start of something new but also a replay of the 1990s. At the beginning of that decade, the internet was government property devoted to research and communication for a few. By the end, thanks to Bezos more than anyone, it was a place for everyone to buy things. Over the next 20 years, tech grew up and became Big Tech, provoking bipartisan fears that Amazon, Facebook, Google and Apple are now too powerful. 

Outer space might now be embarked on a similar journey from frontier to big business. 

https://www.forbesindia.com/article/global-news/the-amazonification-of-space-begins-in-earnest/69305/1

5. The progress on mobile tech

Your cell phone is a result of over a hundred years of commercial and government investment in research and development in all of its components and related technologies. A significant portion of the cutting-edge development has been funded by the military. 

The story of military investment in technology becoming game-changing commercial products and services has been repeated again and again. Famously, the Defense Advanced Research Projects Agency developed the technologies behind the internet and speech recognition. But DARPA also made enabling investments in advanced communications algorithms, processor technology, electronics miniaturization, and many other aspects of your phone.

The first mobile phone service, for 80-pound telephones installed in cars, was demonstrated on June 17, 1946, 75 years ago. The service was only available in major cities and highway corridors and was aimed at companies rather than individuals. The equipment filled much of a car’s trunk, and subscribers made calls by picking up the handset and speaking to a switchboard operator. By 1948, the service had 5,000 customers.

https://singularityhub.com/2021/07/22/the-first-mobile-phone-call-was-75-years-ago-how-technologies-go-from-breakthrough-to-big-time/

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. Market prediction is a worthless exercise

I don’t have an outlook on the market as I think it is more useful to try and understand what is going on than to try to predict what is going to happen. The future is about probabilities and the current situation is about facts and interpretations. No one has privileged access to the future and market forecasts tend to be about as accurate as calling a coin toss. There are, of course, analogies that can be drawn about how the current environment maps onto previous historical data, but success in that depends crucially on how the future will, in fact, resemble the past, and whether the cited analogies turn out to be the governing ones. The record seems to show that sometimes they will and sometimes they won’t and we are back at the coin toss.

I recall George Soros saying in 2008 that he had predicted that financial crisis. He then wryly noted that he had predicted many financial crises over his career that never materialized.

A recent study of inflation forecasts by economists, consumers, and the bond market found no significant ability to make value added predictions. “As far as major shifts in inflation go, we are all in the dark, just as we are essentially clueless about where the stock market is heading or the price of oil in 2022, or the date of the next recession".

https://millervalue.com/bill-miller-2q-2021-market-letter/

2. Reducing carbon footprint by burning wood!! 

In 2009, the European Union (EU) pledged to curb greenhouse gas emissions, urging its member states to shift from fossil fuels to renewables. In its Renewable Energy Directive (RED), the EU classified biomass as a renewable energy source — on par with wind and solar power. As a result, the directive prompted state governments to incentivize energy providers to burn biomass instead of coal — and drove up demand for wood. 

Earlier this year, the EU was celebrated in headlines across the world when renewable energy surpassed the use of fossil fuels on the continent for the first time in history. The EU directive that encouraged the pivot to biomass also left a loophole — it did not prevent the leveling of rooted trees for wood pellet production.

“I can’t think of anything that harms nature more than cutting down trees and burning them,” said William Moomaw, professor emeritus of international environmental policy at Tufts University.

Yet by burning wood, European power plants can reduce their carbon footprint — at least on paper.

https://edition.cnn.com/interactive/2021/07/us/american-south-biomass-energy-invs/

3. A little inefficiency is efficient!

So many people strive for efficient lives, where no hour is wasted. But an overlooked skill that doesn’t get enough attention is the idea that wasting time can be a great thing.

Psychologist Amos Tversky once said “the secret to doing good research is always to be a little underemployed. You waste years by not being able to waste hours.” A successful person purposely leaving gaps of free time on their schedule to do nothing in particular can feel inefficient. And it is, so not many people do it. But Tversky’s point is that if your job is to be creative and think through a tough problem, then time spent wandering around a park or aimlessly lounging on a couch might be your most valuable hours. A little inefficiency is wonderful.

Same in investing. Cash is an inefficient drag during bull markets and as valuable as oxygen during bear markets, either because you need it to survive a recession or because it’s the raw material of opportunity. Leverage is the most efficient way to maximize your balance sheet, and the easiest way to lose everything. Concentration is the best way to maximize returns, but diversification is the best way to increase the odds of owning a company capable of delivering returns. On and on, if you’re honest with yourself you’ll see that a little inefficiency is the ideal spot to be in.

Just like evolution, the key is realizing that the more perfect you try to become the more vulnerable you generally are.

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

4. Just because you are rich, doesn't mean you are intelligent :-)

Wealth might be a sign of good decisions, but can those decisions be repeated? And do good decisions in one field translate to wisdom in other areas of life? Maybe, maybe not – that’s the best we can say. And there are times where exceptional wealth can prevent empathizing with ordinary people, making insight more precarious.

The big blowups in any field aren’t typically caused by a lack of smarts. The catastrophes are typically caused by extreme intelligence that causes people to believe their own dangerous stories – that you can predict with accuracy, use leverage because your prediction must be true, and ignore warning signs that would have been obvious to a normal person who’s less adept at mental gymnastics.

https://www.collaborativefund.com/blog/too-smart/

5. The willpower paradox: when confident self-talk becomes counterproductive

The researchers wanted to understand the relationship between intention, motivation, and actual goal completion. In their own words: “How does the way in which you talk to yourself shape your future actions? What if asking yourself a question about your potential behavior increased the likelihood of that behavior?”

By switching from declarative self-talk to interrogative self-talk, you will consider whether you really want to start that diet, or if you really want that promotion. If the answer is yes and you start working towards these goals, you are more likely to succeed as you will be driven by intrinsic motivation.

Next time you want to set a new goal, keep an open mind and ask yourself: “Will I?” As strange as it may feel, treating the future as an open question will increase your intrinsic motivation and thus your chances of achieving your goals.

https://nesslabs.com/willpower-paradox

Going Down The Quality Curve

We are in a bull market. We have been in one since the cataclysmic fall of March 2020. In the technical sense, markets have been making higher highs. Nearly all technical indicators are bullish, which is usually the case in a bull market. There are a large number of sceptics waiting for a market correction. The market is obliging them once in a while with some pause, sideways consolidation and correction for a few days. 

In the last one year, we have been seeing a very healthy sector rotation which has prevented any linear rise in any sector or a particular stock. The exception had been the Adani group stocks, which has also had their share of fall recently. 64% of stocks are still below Jan 2018 highs created by a booming mid & small cap bull rally.

Looking at the sectors which are rallying will give you a sense of the market. Commodity cyclicals like sugar, steel, cement have been at the forefront of the current rally. But other more "secular growth sectors" like IT, pharma, specialty chemicals have also participated in the rally in the last year. In such a market context, there are two completely divergent thought processes that run in the minds of investors. The first is the fear-of-missing-out. We want to be in the hot stock or the hot sector and ride the rally. We do not want to miss out on the rally that is happening where everyone else seems to be minting money. The opposite fear is that the market valuations are very high and makes us hesitate to deploy our capital fully. We are pulled at one time in two opposite directions and do not know what to do.

In a bull rally, the first casualty becomes the quality of the portfolio. Usually, the best quality companies rarely run spectacularly. They tend to be, what I call, "peaceful compounders". It is the companies a few notches below in the quality curve that runs the hardest. And people with FOMO gravitate towards that. As any market veteran will tell you, you end up with a clutch of poor companies in your portfolio when the ensuing bear market comes. 

So, the first and perhaps the most important thing to remember is to not dilute the portfolio quality. Does that mean you forego the rally and resign yourself to a more flaccid investment performance? Of course not. You can definitely participate in a sectoral rally but ensure that you are buying into the top one or two companies in that sector. And make sure you position size conservatively. Always, think of the downside first. Every bull market brings with it some narrative on why a particular cyclical industry has turned the corner and will henceforth be a secular growth story. Don't fall for that. You should be able to understand both the bull and bear case before you invest.

The second part of investment hesitancy can be avoided by two simple rules. This bull phase may end tomorrow and it may go on for the next five years for all we know. It is important to have a well thought out "systematic" strategy before we invest in a market like this. The first rule of investing in a market like this is by investing slowly, in tranches over time. Take a few months to deploy your capital. Keep nibbling at the stocks you have shortlisted and accumulate them. The second is to have an exit strategy ready. You need to know when and how much you will sell and where you will put the cash. You also have to plan for when and how to get back into the market subsequently. If all that seems very complex and difficult, just buy good quality businesses and try and ignore the short term market gyrations.

This post first appeared in https://economictimes.indiatimes.com/markets/stocks/news/how-to-survive-when-a-bull-market-takes-the-u-turn/articleshow/84256907.cms