Weekend Reading - 17-Dec-21

 

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.

You can sign up to https://www.getrevue.co/profile/intelsense to receive all blogs from me directly into your inbox.

1. The elements of effective thinking

We’re seduced into believing that brilliant thinkers are born that way. We think they magically produce brilliant ideas.

 

Nothing could be further from the truth while there are likely genetic exceptions, the vast majority of the people we consider brilliant use their minds differently.

 

Often, these geniuses practice learnable habits of thinking that allow them to see the world differently. By doing so, they avoid much of the folly that so often ensnares others. Eliminating stupidity is easier than seeking brilliance.

 

The five habits are:

1. Understand deeply

2. Make mistakes

3. Raise questions

4. Follow the flow of ideas

5. Change

https://fs.blog/elements-effective-thinking/

 

 

2. How chemistry is part of the solution to climate change – and not just part of the problem

Chemical-based products often have a harmful impact on the environment, including their CO2 emissions toll. Green chemistry minimizes the use of hazardous substances when designing products and processes. Resulting in more efficient manufacturing processes, green chemistry is also good for business.

 

The chemical industry is also the largest industrial consumer of both oil and gas, using these as the building blocks to create products. This is not only energy-intensive, but it also produces potentially hazardous waste. Green chemistry looks to replace the use of these non-renewable, depleting resources with renewable materials that are less harmful to humans and the environment.

 

One of the most exciting innovations to emerge is the use of CO2 itself as a feedstock for making products such as building materials, chemicals and fuels. Scientists have also developed a process to use CO2 in computer chip preparation, significantly reducing the quantities of chemicals, energy and water required. Turning CO2 into a useful resource rather than just a harmful by-product is a crucial step towards decarbonizing the economy.

 

Besides being better for the environment, green chemistry is also well-placed to benefit the bottom line, with less waste and faster, more energy-efficient manufacturing processes. Add to this higher yields and a move away from a reliance on depleting resources like petroleum products – slowing their depletion – and it avoids the hazards and price fluctuations associated with the use of hydrocarbons.

https://www.weforum.org/agenda/2021/12/green-chemistry-manufacturing-climate-change/

 

3. Toyota vs Tesla - the difference in developmental approach

The auto industry owes Toyota a debt of gratitude. The giant Japanese automaker taught the industry how to run its manufacturing operations to their utmost efficiency, it set the industry standard for product development and it showed that corporate strategy should be measured in decades, not quarters.

 

It took the rest of the auto industry nearly 30 years to accept, learn and finally adopt what Toyota was doing. But they did it and it served them well. They improved their productivity, quality and profitability.

 

One reason the old-time players move slowly is because they copied Toyota’s product development process. Toyota freezes the specifications of a vehicle a year before Job One. And then it typically doesn’t make design changes until two years after the start of production. Under the Toyota doctrine, design changes introduce variability, and variability leads to quality problems. So, by freezing the specs, Toyota and its suppliers have the time to SPC their manufacturing ops to Six Sigma quality.

 

Not Tesla. It doesn’t freeze specs. Just the opposite. It makes design changes on the fly. And it mainly makes those changes – this is a key point – to take cost out of its cars.

 

Tesla’s electronic architecture is a prime example. The architecture in the Model X worked just fine, but two years after it came out the Model 3 debuted with an entirely new architecture.

https://www.wardsauto.com/industry-news/unlearning-what-toyota-taught-us

 

 

4. Reimagining photosynthesis

The more that was discovered about the intricacies of photosynthesis, the more was revealed about its inefficiency. The comparison is often made to photovoltaic cells. Those on the market today convert about twenty per cent of the sunlight that strikes them into electricity, and, in labs, researchers have achieved rates of almost fifty per cent. Plants convert only about one per cent of the sunlight that hits them into growth. In the case of crop plants, on average only about half of one per cent of the light is converted into energy that people can use.

 

The rate of yield growth for crops like wheat, rice, and corn appears to be plateauing, and the number of people who are hungry is once again on the rise. The world’s population, meanwhile, continues to increase; now almost eight billion, it’s projected to reach nearly ten billion by 2050. Income gains in countries like China are increasing the consumption of meat, which requires ever more grain and forage to produce.

 

To meet the expected demand, global agricultural output will have to rise by almost seventy per cent during the next thirty years. Such an increase would be tough to achieve in the best of times, which the coming decades are not likely to be. Recent research suggests that climate change has already begun to cut into yields, and, as the planet warms, the bite will only get bigger. (Agriculture itself is a major contributor to climate change.) Devoting more land to farming isn’t really an option, or, at least, not a good one. Most of the world’s best soils are already under cultivation, and mowing down forests to plant corn or soybeans would lead to still more warming.

https://www.newyorker.com/magazine/2021/12/13/creating-a-better-leaf

 

 

5. Volatility takes a bite

Feeding stock prices into your brain every day (or worse, multiples times a day) invariably compresses timeframes and makes every day seem important. Then before you know it, you are one of those people who go around with explanations for why such-and-such stock was up (or down) that day. Seems a recipe for madness.

 

“You sit in an ivory tower and think, ‘Oh, all I care about are returns over 5 to 10 years and I don't care about the path to get there. I don't care about volatility.’ That is true in an idealistic sense – the most important risk is always going to be permanent loss of capital. But your clients care about volatility…”

 

Well, I’m not going to say “I don’t care about volatility.” I’d rather have a smooth ride! Who wouldn’t? But that’s not realistic. I will say that I don’t actively manage volatility.

 

What I found most interesting about this interview was its blunt talk about the difference between running a portfolio as a professional and running your own personal portfolio. (I don’t have a personal portfolio anymore. It’s in the fund). At one point he says, “maximize your Sharpe and your Sortino ratios because that is your job as a professional investor. As an individual investor, you should not care at all about those ratios.”

https://www.woodlockhousefamilycapital.com/post/volatility-takes-a-bite

 

 

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. Robots that can reproduce

Now scientists have discovered an entirely new form of biological reproduction—and applied their discovery to create the first-ever, self-replicating living robots.

 

The same team that built the first living robots ("Xenobots," assembled from frog cells—reported in 2020) has discovered that these computer-designed and hand-assembled organisms can swim out into their tiny dish, find single cells, gather hundreds of them together, and assemble "baby" Xenobots inside their Pac-Man-shaped "mouth"—that, a few days later, become new Xenobots that look and move just like themselves.

 

And then these new Xenobots can go out, find cells, and build copies of themselves. Again and again.

 

"With the right design—they will spontaneously self-replicate," says Joshua Bongard, a computer scientist and robotics expert at the University of Vermont who co-led the new research.

https://techxplore.com/news/2021-11-xenobots-team-robots.html

 

2. Animals are already coping with climate change

The author of a new book has seen first-hand the effects of climate change on plants and animals in the wild: the green macaws of Central America migrating along with their food sources, the brown bears of Alaska fattening up on early-ripening berry crops, the conifers of New England seeking refuge from vanishing habitats.

 

Biologists monitoring the lizard species, which survived back-to-back Caribbean hurricanes in 2017, noticed that after the hurricanes, the lizard populations had longer front legs, shorter back legs and grippier toe pads on average than they had before. An experiment with a leaf blower showed that these traits help the lizards cling to branches better — survival of the fittest in action.

 

In the end, the outcomes for species will probably be as varied as their circumstances. Some organisms have already moved, adapted or died as a result of the warming, and many more will face challenges from changes that are yet to come.

 

The author Thor Hanson points out how plants and animals are responding to climate change: by doing everything they can.

https://www.sciencenews.org/article/hurricane-lizards-plastic-squid-review-book-climate-change

 

 

3. Why Meat Delivery Remains a Tough Market To Crack Online

Several meat-delivery start-ups like Licious, FreshToHome are unleashing disruptions to redefine how Indians consume meat. With this fillip, meat delivery startups have chalked up lofty plans. Many are looking to expand to more cities and also go overseas, while others are looking at opening offline stores.

 

Licious touched the coveted $1 billion valuation mark in October 2021. Naturally, with this sudden turnaround in fortunes—fuelled, in part, by the pandemic—competition in the meat delivery space is intensifying. Experts say that the segment will continue to be dominated by Licious and FreshToHome, making it a two-horse race between them for market leadership, but other players will also make a noticeable mark, considering the massive size that the fish, meat and poultry market represents: $50 billion currently and poised to touch $80 billion by 2024.

 

Despite all the positives, Online meat delivery currently accounts for less than 1% of the overall meat industry, which is still held together by local stores, wet markets and business-to-business suppliers and exporters. Organized offline players in the space—such as Suguna, Venky’s and Godrej Agrovet—have managed to create a Rs. 280 crore ‘processed frozen’ segment in the poultry space, according to a Hindu Businessline report. Complex supply chain is another challenge that online meat delivery startups have to manage.

https://www.livemint.com/companies/start-ups/why-meat-delivery-is-a-stiff-battle-zone-11638290982361.html

 

 

4. The Good & Bad of Daylight Saving Time

On the first Sunday of every November, Americans wake up an hour later than usual. At 2 am, while everyone remains asleep, clocks add an extra hour and reset to 1 am. They now have a 25 hour day!

 

At the start of spring/summer in March every year, countries like America move the clocks ahead. Clocks jump from 2 am to 3 am and in the process, they forego an hour of sleep. They do this because it fundamentally alters the way each day works from that point onwards. For instance, if the sun were to rise at 6 am, right about when spring approaches, you’d be sleeping until 7 or 8 am and “wasting” sunlight. But imagine if it rose an hour later — at 7 am instead? Then you could wake up right around sunrise and feel like you did a lot more. And guess what? This jugglery would also mean the sun would set an hour later — 8 pm instead of 7 pm. So with this one move, you’d have felt like you put all that sunlight to good use.

 

However, by winter, you’d have to undo this change because by then, you’d see the sun rising at 8 am for instance — which is counterproductive. You’d be waking at 7 am and it would be pitch dark outside. So they add an extra hour at 2 am (in some places).

 

But it turns out that moving the clock doesn’t just affect the economy, it also affects health and wellbeing. And this happens because moving the clock ahead affects our natural sleep cycle. It takes time for people to reacquaint themselves with this new order of business and it can be catastrophic in some cases.

 

Studies show that this disruption to sleep increases the risk of stroke and heart attack. Heart attacks increase by 24% in the week after clocks move ahead in March. It even leads to more accidents. In the US, car crashes caused by “sleepy daylight-saving drivers” may have killed at least 30 extra people during 2002–2011. In the mining industry, there’s a 6% rise in injuries which leads to a 67% increase in workdays that are lost. 

https://finshots.in/archive/why-did-america-have-a-25-hour-day/

 

 

5. The Chinese desperation for semiconductor chip tech

The three industry leaders in IC manufacturing – TSMC, Samsung, and Intel – have announced plans to invest over $300 Billion in the next ten years. That’s a big number even for Beijing. (Despite its government support, SMIC has not been able to commit the full amount of the $8.8 billion its 28-nm foundry will require. They’ll still be looking to raise billions from outside investors.)

 

These are all symptoms of China’s structural inability to compete in this industry, to solve the semiconductor problem organically, through internal development. With such a massive investment deficit, it is virtually certain that the technology gap will widen. China will likely fall further behind. 

 

The last few years have added new pressure, as the U.S. has slowly choked off the IC pipeline. American policies directed against unfair trade, technology theft, national security risks, and complicated by geopolitical rivalries and diplomatic conflicts, have tightened the noose. For example, Huawei – China’s champion in the telecommunications sector – has been crippled by the denial of access to American semiconductors. 

https://www.forbes.com/sites/georgecalhoun/2021/09/12/war-with-china-the-economic-factor-that-could-trigger-it/

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.

Why staring at screens is making your eyeballs elongate

New research from ophthalmologists shows that our constant screen time is radically changing our eyes. Just like the rest of our bodies, the human eye is supposed to stop growing after our teens. Now it keeps growing.

 

When our eyes spend more time focusing on near objects, like phones, screens or even paperbacks, it makes our eyeballs elongate, which prevents the eye from bending light the way it should. This elongation increases nearsightedness, called myopia, which causes distant objects to appear blurred.

 

Last spring, Chinese researchers tested over 120,000 Covid-quarantined students aged six to eight and found myopia and other vision issues linked to home confinement increased up to three times compared with the previous five years – that’s with as little as 2.5 more hours of e-learning (not counting video games, social media, etc).

 

Most important is taking breaks which help eyes rest, blink and lubricate. Then there’s the 20-20-20 model. “Every 20 minutes, look at a distance 20 feet away, for 20 seconds,” Hariharan advises. “Being on the computer for hours on end isn’t good for your health. Don’t break to play video games or pick up another screen. Go outside!”

https://www.theguardian.com/society/2021/nov/14/eyeballs-screens-vision-nearsightedness-myopia

 

The lure of nationalised banks

“Banks were nationalised at the whim of a Prime Minister, they will be de-nationalised at the whim of another Prime Minister.” ~ Y.V. Reddy, former Governor, RBI.

 

It has now been 50 years since Indira Gandhi, then prime minister of India, took a decision to nationalise 14 private banks. The decision, Reddy says, gave the central government powers that were never envisaged in the constitution. “Suddenly you found that the Union Government had access to public deposits, access to huge financial resources, not contemplated in the constitution. Second, they got huge financial resources outside parliamentary control. Third, they got access to huge administrative machinery in different states, which was not contemplated in the constitution,” Reddy explains.

 

These powers continue to be a big lure for politicians, who may have debated and discussed privatisation of government-owned banks but have stayed far away from giving up control of these lenders.

 

Even today, public sector banks command 66 percent of credit and 65.7 percent of deposits. This network continues to be used by each successive government to push both political and economic objectives.

https://www.bloombergquint.com/business/dont-allow-public-sector-banks-to-whither-away-says-yv-reddy

 

 

Five mistakes people make that keep them from becoming millionaires

There are a few things to learn from people who have achieved a net worth of over $1 million.

 

While there are many articles, books, podcast episodes and thought-leaders preaching what to do if you want to have over seven figures in assets, I recently found myself curious about something not many people speak about: the biggest mistakes people like me make that can keep us from becoming millionaires. Financial advisors list the following reasons:

 

1. Relying on one source of income - focusing on just making income from one source makes it very hard to make millions.

 

2. Not tracking your spending – “Like a leaking pipe can cause massive damage if not found early on, a leaky budget can deprive you from accumulating meaningful savings over your life...”

 

3. Being scared to invest - investing can be integral to making your money grow.

 

4. Not utilizing retirement accounts to their full potential - maximize your retirement accounts and investing your funds wisely so you can add to your portfolio and get the tax advantages.

 

5. Not investing early – make sure to start your investment journey as early as possible.

https://www.businessinsider.com/personal-finance/mistakes-keep-people-from-becoming-millionaires-2021-11

 

The Indiana Jones of Egyptology to harness satellites to uncover long-buried treasures

Exploiting subtle and, to the naked eye, often invisible differences in topog-raphy, geology and plant life, Parcak, a 38-year-old University of Alabama at Birmingham professor of anthropology, has used satellite imagery and other remote sensing tools to expose a stunning array of forgotten sites from multiple lost cultures.

 

In Egypt, her specialty area, she and her team have expanded the civilization’s known scope, spotting more than 3,000 ancient settlements, more than a dozen pyramids and over a thousand lost tombs, and uncovered the city grid of Tanis, of Raiders of the Lost Ark fame. After the Arab Spring, in 2011, she created, via satellite, a first-of-its-kind countrywide looting map, documenting how plundered tombs first appeared as little black pimples on the landscape and then spread like a rash. She has pointed out the ruins of an amphitheater at the Roman harbor of Portus to archaeologists who had spent their whole careers digging above it, mapped the ancient Dacian capital of what is now Romania, and—using hyperspectral camera data—aided in the ongoing search for prehistoric hominid fossils in eroded Kenyan lake beds.

 

This year alone, her satellite images revealed, in desolate Newfoundland, what many believe to be the second-known Viking site in North America, as well as a mammoth ceremonial platform in Petra that millions of visitors to the famous Jordanian city, not a few of them professional excavators, completely missed. She is now busy satellite-mapping the whole of Peru for a crowd-sourcing project called GlobalXplorer, set to debut in early 2017, that may yield her most audacious set of revelations yet.

https://www.smithsonianmag.com/innovation/space-archaeologist-sarah-parcak-winner-smithsonians-history-ingenuity-award-180961120/

 

What Happens When You’re the Investment

So Masmej did something few 23-year-olds would think to do: He tokenized himself. That is, he created a financial instrument known as a social token, a form of cryptocurrency whose value revolves around a person, to sell shares in himself. Holders of $ALEX would receive 15 percent of Masmej’s income for the next three years, capped at $100,000 overall, and would be able to exchange tokens for special privileges: 10,000 $ALEX bought a retweet from Masmej on Twitter; 20,000 $ALEX, a one-on-one conversation with him; 30,000 $ALEX, an introduction to someone in his network. In five days, Masmej raised $20,092, enough to send him across the Atlantic to San Francisco to launch his start-up.

 

To be clear, the financialization of everything isn’t an unalloyed benefit. The phenomenon has a dark side. If everyone becomes an investor, the inverse is also true: Everything—and everyone—becomes a potential investment. As part of $ALEX, Alex Masmej designed a “Control My Life” component. Token-holders could vote on his life decisions—whether he should run three miles every day, stop eating red meat, wake up at 6 a.m. Token-holders had a financial stake in his success, so Masmej followed through on their commands. (To be fair, Masmej admits this was just “a fun experiment.”)

 

We’ll have to answer two key questions. First, at what point does human agency give way to financial obligation? And second, at what point does a relationship become a transaction?

https://www.theatlantic.com/ideas/archive/2021/11/financialization-everything-investment-system-token/620804/

 

 

Revision of Quantamental Subscription

More Options. Better Options

Hoping to bring you some good news at the end of the year :-)

Since launching Quantamental, a number of investors had suggested that I have a two-year option for it. Since, both the long term and Hitpicks, have both one and two-year subscription offerings, that idea made sense to me. 

My only issue was that since Quant was priced slightly higher, a two-year subscription might actually end up being very expensive for a lot of people. And it is difficult to afford it if one had a smaller capital to invest in the strategies.

Considering that I am making the following changes:

1. Quantamental package from www.intelsense.in (Direct subscription) - This is going to be Rs 20,000 for a year and Rs 35,000 for two years. This includes access to both the Q30 and Q10 strategies.

2. Q30 on smallcase - I am reducing the price to Rs 15,000 for 1 year. Smallcase does not have a 2-year option.

3. Q10 on smallcase - The price continues to remain at Rs 15,000 for 1 year.

NOTE:

For all existing direct subscribers, you will get a 3-month free extension on renewal. 

For all smallcase Q30 annual subscribers, we will be giving you access to Q10 on intelsense.in for a proportionate duration.

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. Retrofitting Older Cars with Electric Motors Could Transform Transport

The higher purchase price of electric vehicles is one reason that they are still a small fraction of all cars sold, but retrofitting older cars and trucks with electric motors could be the fix needed to turbo-charge electric vehicle uptake.

 

Ford and General Motors are among the big names offering electric conversion kits for drivers looking to keep their current car on the road while drastically lowering its emissions. General Motors announced its motor, battery, and converter kit in 2020. Ford is readying a drop-in 281 horsepower electric crate motor for sale.

 

Transitioning from fossil fuel cars to electric will take time and retrofitting needs regulation oversight for it to be safe and effective. Electrification of car stock brings its own complications. Carmakers are in the midst of a chip shortage, better rapid charging infrastructure needs to be put in place, and the national electric grid will need an upgrade likely costing more than $100 billion.

 

On top of that, there are likely to be shortages of essential metallic elements like nickel and lithium used in EV batteries. Analysts say that forces EV makers to look at alternative battery technologies, including solid-state batteries with faster charging times and longer life, and the auto industry has invested heavily to find solutions.

https://www.discovery.com/motor/retrofitting-older-cars-with-electric-motors-could-transform-tra

 

2. Carbon Pricing: Social cost of CO2 emission

Carbon pricing is an instrument that captures the external costs of greenhouse gas (GHG) emissions—the costs of emissions that the public pays for, such as damage to crops, health care costs from heat waves and droughts, and loss of property from flooding and sea level rise—and ties them to their sources through a price, usually in the form of a price on the carbon dioxide (CO2) emitted.

 

A price on carbon helps shift the burden for the damage from GHG emissions back to those who are responsible for it and who can avoid it. Instead of dictating who should reduce emissions where and how, a carbon price provides an economic signal to emitters, and allows them to decide to either transform their activities and lower their emissions, or continue emitting and paying for their emissions. In this way, the overall environmental goal is achieved in the most flexible and least-cost way to society

 

When damages from sea level rise, extreme weather and other effects are taken into account, the global social cost of carbon is $180 to $800 per tonne, rather than the $12 to $62 range used by the US Environmental Protection Agency.

 

India’s country-level social cost of carbon emission was estimated to be the highest at $86 per tonne of CO2. It means the Indian economy will lose $86 by emitting each additional tonne of CO2. India is followed by the US, where the economic damages would be $48 per tonne of CO2 emission. Saudi Arabia is close behind at $47 per tonne of CO2 emission.

https://carbonpricingdashboard.worldbank.org/what-carbon-pricing

https://www.downtoearth.org.in/dte-infographics/social_cost_corbon/index.html

 

3. The End of Trust

Trust is to capitalism what alcohol is to wedding receptions: a social lubricant. In low-trust societies (Russia, southern Italy), economic growth is constrained. People who don’t trust other people think twice before investing in, collaborating with, or hiring someone who isn’t a family member (or a member of their criminal gang). The concept may sound squishy, but the effect isn’t.

 

The economists Paul Zak and Stephen Knack found, in a study published in 1998, that a 15 percent bump in a nation’s belief that “most people can be trusted” adds a full percentage point to economic growth each year. That means that if, for the past 20 years, Americans had trusted one another like Ukrainians did, our annual GDP per capita would be $11,000 lower; if we had trusted like New Zealanders did, it’d be $16,000 higher. “If trust is sufficiently low,” they wrote, “economic growth is unachievable.”

https://www.theatlantic.com/magazine/archive/2021/12/trust-recession-economy/620522/

 

4. Why Investors’ Memories May Be Bad for Their Wealth

Overconfidence can be bad for markets and bad for investors. You just need to look at the recent crash in cryptocurrencies to see what can happen when investors believe they simply can’t lose. It’s certainly not a new phenomenon in the world of investing. From Tulip Mania in 17th-century Holland, to the dot-com bubble of the late 1990s, history is littered with examples of investor bravado leading them blindly into big losses when their sure-fire bet goes south.

 

Yet the reality is that overconfident investors don’t really make for good investors. They tend to trade more frequently despite losing money doing so, over-react to market signals and suffer from the “winner’s curse” in which they purchase overpriced investments. They are also more likely to commit investment errors such as under-diversification and overconcentration on familiar stocks. 

 

The good news is our research was also able to identify a relatively straightforward way of tackling the issue. In the final part of our study, we split our investors into two groups. Half were asked to look up the results of their past investments at the start of the experiment. This showed them exactly how they had previously fared. The other half had to rely on their memory as before.

 

Those who had seen their past results behaved much more cautiously. They made fewer trades and spent less of the US$500 stake they had received than those just relying on their memory. While not removing memory bias and overconfidence completely, this simple step did go a long way towards minimising their impact.

https://knowledge.insead.edu/marketing/why-investors-memories-may-be-bad-for-their-wealth-17726

 

 

5. The Perils of Social Media

Social media has addictive qualities that I think surface primarily in two ways. First, as a passive consumer of information, social media platforms are skilled at “curating” your feed in a way that learns your interests and presents a never-ending stream of content tuned to what you have proven you will click on in the past. This can result in a consumer of information falling into an echo chamber resembling an intellectual monoculture — a recipe for confirmation bias. Second, once a user starts posting on social media, the feedback loop comes into play. Human beings like attention, and the likes and retweets become addictive.

 

From the standpoint of a consumer of information, I am convinced that the worst aspect of technology in general is that interrupts the state of flow by leading to endless context switching.4 All meaningful productivity occurs in a flow state. If you are picking up your phone a dozen times an hour to check how many likes you got on your latest tweet, there is zero chance of entering a state of flow.

https://rationalwalk.com/81240-2/

Equity Returns Are Lumpy In Nature

Markets were weak last week and both Q30 and Q10 gave back most of the moderate gains accumulated in the previous 2 weeks. We remain about  8-10% down from the peak value in mid-October. While both Q30 and Q10 are outperforming the market handsomely over a longer duration, few members who have joined in the last few months have not seen any gains whatsoever. That may feel disappointing when the Q30 CAGR is 70% plus since inception on March 2020 and Q10 is still up more than 50% for the current FY. 

Here is an excerpt from one of the past quantletters that is relevant to repeat once more: 

Excerpts from May 21 Quantletter: (All figures and numbers mentioned are as written in May 21) 

"While it is very important to follow the process and take what the market gives us without letting our emotions override the Q30/Q10 investing decisions, it is also important to remember that market returns are lumpy in nature. In trending markets, we 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 a 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 the 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 to 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%. But if one has a minimum 3-month outlook, the probability and magnitude of loss 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. 

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

•1 out of 4 quarters and 1 out of 4 calendar years have resulted in negative returns. 

•There were 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 in the past. We may do worse than in the past. The strategy has built in safeguards to gradually go into 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 couldn'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 wrap it up we should let the market tell us what to do rather than follow our own opinion so far as Q30 is concerned and 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 by a margin and by repeating that over and over again, we let the magic of compounding work in our favour.

Trailing returns for different periods and drawdowns are below: 

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. A fascinating story of the world's first org chart

In 1855, the New York and Erie Railroad Company had a problem.

 

Railroads were now the biggest operations the country had ever seen, both in terms of capital investment and the complexity of the organization. Just as new physical technologies, such as the telegram, were changing the game for businesses, the size and scale of the railroads meant it needed organizational technology too.

 

Keeping reporting lines organized not only helped keep track of the hundreds of different managers out on the front lines of the tracks, but was quite literally a matter of life and death.

 

The railroad’s superintendent Daniel McCallum, who was also a leading management thinker at the time, was tasked with coming up with a solution. McCallum drew out an answer — a complex, layered, tree-like org chart. The first the modern world has ever seen.

https://theorg.com/insights/how-the-rise-of-the-railroads-gave-way-to-the-worlds-first-org-chart

 

 

2. Hydrogen Ready to Ignite as Transport Network and Technology Takes Off

Transport is undergoing a massive transformation so it can meet society’s demands for a low-carbon economy. Introducing electric vehicles (EVs) and declining gasoline and diesel use are helping, but zero-carbon hydrogen can speed up both the transition and long-term de-carbonisation of transport.

 

Hydrogen is not considered a true replacement for gasoline or diesel as a combustion engine fuel for cars because it is harder to store safely. And while fuel cell electric vehicles (FCEVs) that turn hydrogen into electricity can compete with EV performance — and even out-compete them on range and refill time — extra energy is needed to produce the hydrogen needed for fuel.

 

Finding investment for storage, pipelines and fuel stations is still a challenge. Until there is excess capacity in renewable energy to make green hydrogen, without using methane from natural gas, hydrogen-powered cars could have a negative climate impact. Happily, prices for producing green hydrogen are expected to be a fraction of their current level by 2030, cheaper than so-called gray hydrogen from natural gas.

 

Even wastewater and solid waste can create green hydrogen. Researchers are using sunlight to isolate hydrogen from industrial wastewater. Chemical plants and refineries that currently face high costs for cleaning wastewater could transform it into clean hydrogen supplies.

https://www.discovery.com/motor/hydrogen-ready-to-ignite-as-transport-network-and-technology-tak

 

 

3. Your behavioural biases are causing more financial harm than you realize

Some of your behavioural tendencies might be causing harm to your financial wellbeing, research suggests. Regardless of factors such as age, income and education, there’s a connection between certain biases and financial health.

 

The research focuses on four common biases:

• Present bias: Tendency to overvalue immediate smaller rewards at the expense of long-term goals.
• Base rate neglect: Tendency to ignore the probability of something happening and instead judge its likelihood by new, readily available information.
• Overconfidence: Tendency to overweigh one’s own abilities or information when making an investment decision.
• Loss aversion: Tendency to be excessively fearful of experiencing losses relative to gains.

While you may not be able to eliminate your own biases, there are things you can do to minimize their potential to negatively impact your financial life, Wendel said. For instance, you can set up what he calls “decision-making speed bumps.”

 

“It’s doing something to slow the decisions down,” he said.

https://www.cnbc.com/2021/05/25/some-of-your-biases-could-cause-you-financial-harm-study-suggests.html

 

 

4. Humans are driving one million species to extinction

Up to one million plant and animal species face extinction, many within decades, because of human activities, says the most comprehensive report yet on the state of global ecosystems.

 

Agricultural activities are also some of the largest contributors to human emissions of greenhouse gases. They account for roughly 25% of total emissions due to the use of fertilizers and the conversion of areas such as tropical forests to grow crops or raise livestock such as cattle. Agricultural threats to ecosystems will only increase as the world’s population continues to grow.

 

The next biggest threats to nature are the exploitation of plants and animals through harvesting, logging, hunting and fishing; climate change; pollution and the spread of invasive species.

 

An estimated 5% of all species would be threatened with extinction by 2 °C of warming above pre-industrial levels — a threshold that the world could breach in the next few decades, unless greenhouse-gas emissions are drastically reduced. Earth could lose 16% of its species if the average global temperature rise exceeds 4.3 °C.

https://www.nature.com/articles/d41586-019-01448-4

 

5. Focus on reducing errors, not seeking brilliance

In expert tennis, about 80 per cent of the points are won; in amateur tennis, about 80 per cent of the points are lost. In other words, professional tennis is a Winner’s Game – the final outcome is determined by the activities of the winner – and amateur tennis is a Loser’s Game – the final outcome is determined by the activities of the loser. The two games are, in their fundamental characteristic, not at all the same. They are opposites.

 

… if you choose to win at tennis – as opposed to having a good time – the strategy for winning is to avoid mistakes. The way to avoid mistakes is to be conservative and keep the ball in play, letting the other fellow have plenty of room in which to blunder his way to defeat, because he, being an amateur will play a losing game and not know it.

 

If you’re an amateur your focus should be on avoiding stupidity, not seeking brilliance.

https://fs.blog/avoiding-stupidity/