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.

Upfront

I shared my thoughts on the IT industry.

Global गिरावट के बीच IT Sector से कितनी उम्मीद ? Abhishek Basumallick | Swadesh Hours

Life may not get better. So learn to make the most of it.

You feel overwhelmed by an extremely long to-do list. But it’s worse than you think! You think the problem is that you have a huge number of tasks to complete, and insufficient time, and that your only hope is to summon unprecedented reserves of self-discipline, manage your time incredibly well, and somehow power through. Whereas in fact the incoming supply of possible tasks is effectively infinite (and, indeed, your efforts to get through them actually generate more things to do). Getting on top of it all seems like it would be really hard. But it isn’t. It’s impossible.   We can’t ever get free from the limited and vulnerable and uncertain situation in which we find ourselves. But when you grasp that you’ll never get free from it, that’s when you’re finally free in it – free to focus on the hard things, instead of the impossible ones, and to give this somewhat preposterous business of being a human everything you’ve got. https://ckarchive.com/b/75u7h8hkk9g9e

Investing is an emotional competition

Investing can be looked at as an emotional competition – your emotions and ability to control them versus the emotions of those you buy or sell securities from and to. A primary function of investment strategy is to counteract emotional impulses and thus survive (and take advantage of) adverse market developments. Investment performance is mostly determined by patience, risk management, a willingness to study, and what you do when things go differently than you anticipated. Those factors are personality driven.   In addition to having a clear concept of what their competitive advantage is over others, successful investors, I’ve learned, incorporate into their investment strategy clear concepts of acceptable risk, what constitutes an acceptable level of inactivity and length of holding period after funds are committed. And successful investors stick to their strategy. That strategy – for instance sitting on cash, sitting on losing positions, sitting on winning positions — must be based on self-knowledge. If the strategy is out of sync with the personality, it won’t work, no matter how well it has worked for others. https://microcapclub.com/2015/05/i-passed-on-berkshire-hathaway-at-97-per-share/

And then what happens?

We’re not very good at predicting the future.   We’re very good at being aware of the urgency of the moment, and familiar with our need to deal with emergencies.   Before we react, though, it might be worth asking “and then what happens,” five times.   Five steps from here to there…   If any of the steps involve, “and then a miracle happens,” or “we’ll deal with that later,” it might be worth taking a few more moments to reconsider the first step. https://seths.blog/2022/06/and-then-what-happens-2/

Don't blame the media if you feel they only publish bad news

Life tends to look gloomy between the pages of a newspaper. Journalists are often accused of chasing bad news because it sells papers and attracts viewers. This may be partly true, but researchers have shown that readers are naturally drawn to calamitous tales and are more likely to share them with others. Rumours about potential dangers – even if they are unlikely – spread among people far more readily than rumours that could be beneficial.   In one study, scientists at McGill University in Canada, used eye-tracking technology to study which news articles volunteers paid most attention to. They found that people often chose stories about corruption, set-backs, hypocrisy and other bad news, in preference to positive or neutral stories. People who were more interested in current affairs and politics were particularly likely to choose the bad news, and yet when asked, these people said they preferred good news. https://www.bbc.com/future/article/20220624-why-criticism-lasts-longer-than-praise

Getting wealthy versus being wealthy

I think for a lot of people the process of becoming wealthier feels better than having wealth.   If it’s wealth we were after, most of us would feel great, because most of us are unfathomably wealthier than we were a generation or two ago. Or ten years ago. Or five years ago. Or two years ago!   What feels great is being on an upward path. That’s when dopamine takes over. That’s when you can extrapolate it and assume it goes on forever, and compare yourself to where you were before, and feel like nothing can stop you.   When that path declines – even if it happens when you have a level of wealth you couldn’t fathom a few years ago – the whole sensation shatters. The problem is that an occasional downward path is inevitable in investing. Outside of fraud, it’s completely unavoidable. The reason markets can go up a lot in the long run is because they make you pay the cost of admission of going down a lot in the short run. https://www.collaborativefund.com/blog/wealth-vs-getting-wealthier/

Weekend Reading

 

Upfront

I shared some thoughts with Ajaya Sharma, Senior Editor-Markets, Anchor- ET NOW on how the economy is looking and which industries are shaping up to do well. For those who prefer reading, here is the link to the transcript.

Views on Markets & Investing

Endurance is the key for long term returns

The most important investing question is not, “What are the highest returns I can earn?”   It’s, “What are the best returns I can sustain for the longest period of time?”   Compounding is just returns to the power of time. Time is the exponent that does the heavy lifting, and the common denominator of almost all big fortunes isn’t returns; it’s endurance and longevity. “Excellent returns for a few years” is not nearly as powerful as “pretty good returns for a long time.” And few things can beat, “average returns sustained for a very long time.”   That’s the biggest but most obvious secret in investing: Average returns for an above-average period of time leads to magic. https://www.collaborativefund.com/blog/keep-it-going/

How fund managers talking their book is actually trying to get you to buy their holdings

While other firms go out of their way to hide their investments, ARK is an open book. This is also uniquely tailored to our current market environment. It’s effectively pushing a press release to the entire world every day. The financial media eats it up, while it dominates social media. They remain in the conversation every single day.   That simple push of numerical information catalyzes an army of investors, all looking for guidance, affirmation, and just something to think about, to think about your stocks. Every day you manage to live, as the saying goes, rent-free in all of our heads.   It’s become pretty clear in the past decade there’s a correlation between power and the space you occupy in our collective consciousness. This is even more applicable in financial markets (than, say, politics) as this kind of feedback loop can result more directly in a desirable outcome. Cathie Wood’s sole job is to get others to buy the stocks she owns, and with one email push, it’s magically done. https://www.readmargins.com/p/cathie-wood-and-content-strategy

Road Wirelessly Charges Electric Cars as They Drive

Stellantis isn’t exactly a household name as far as car makers go, but it’s the parent company for iconic brands like Jeep, Chrysler, Dodge, Ram, and even Maserati. It recently unveiled a unique new test track in Chiari, Italy, called the “Arena del Futuro” circuit (Arena of the Future) that could potentially allow EVs to run laps forever without ever needing to stop and charge.   Along with a handful of partnering companies, they have embedded a series of coils just below the track’s asphalt surface as part of a system called Dynamic Wireless Power Transfer, or DWPT. It’s more or less a similar approach to the charging pad that lets you simply set your smartphone down to charge its battery without having to plug anything in, with DWPT using a long chain of coils to transfer power while a vehicle is still in motion.   To take advantage of the track’s power-sharing capabilities, an EV simply needs to be upgraded with a special receiver that sends the power directly to its electric motor. In testing, a Fiat New 500 was able to maintain highway speeds while circling the track without having to use any of the power stored in its batteries. https://gizmodo.com/wireless-charging-road-electric-cars-street-stellantis-1849058448

Is cultured meat the next step in the evolution of meat-eating?

Cultured meat—not to be confused with plant-based meat—is grown from animal cells and is biologically the same as meat that comes from an animal. The process starts with harvesting muscle cells from an animal, then feeding those cells a mixture of nutrients and naturally-occurring growth factors (or, as Good Meat’s process specifies, amino acids, fats, and vitamins) so that they multiply, differentiate, then grow to form muscle tissue—in much the same way muscle grows inside animals’ bodies.   “Cultivated meat matters because it will enable us to eat meat without all the harm, without bulldozing forests, without the need to slaughter an animal, without the need to use antibiotics, without accelerating zoonotic diseases,” Tetrick said.   Meat can be “harvested” (their word, not mine) just four to six weeks after initiating the growth process—but it’s not a matter of plucking a ready-to-package breast from a vat and shipping it off to the grocery store. Besides going through safety and regulatory reviews, the harvested cells need to be turned into something resembling traditional meat. Good Meat says it uses 3D printing, extrusion cooking, and molding to refine the shape and texture of the product. https://singularityhub.com/2022/06/01/the-worlds-biggest-cultured-meat-factory-will-soon-be-built-in-the-us/

Peter Lynch’s Rule for Dealing with Mistakes

Lynch has a rule for dealing with his mistakes. The instant he realizes he’s made a mistake, he gets out.   Unfortunately, many investors turn one mistake into many. They compound the problem.   Our first reaction toward losses is to make the money back. So the next mistake starts with wanting to get back to even. Which rarely goes as planned. Instead, we turn a small loss into a bigger loss. But that’s compounded by the opportunity cost of putting those dollars to work somewhere else.   So Lynch’s rule is difficult to follow but the best solution for mistakes is to sell immediately. Cut your losses. Learn from it, if you can. Move on.   It’s never easy to deal with mistakes but the goal with any mistake is to limit the damage. https://novelinvestor.com/peter-lynchs-rule-for-dealing-with-mistakes/

Weekend Reading

 

Upfront

Sit tight, fasten your seat belts and enjoy the bumpy ride :-) A short note to our investors on the outlook for the future. blog.intelsense.in

Once in a lifetime can be a frequent occurrence

There are about eight billion people on this planet. So if an event has a 1-in-a-million chance of occurring every day, it should happen to 8,000 people a day, or 2.9 million times a year, and maybe a quarter of a billion times during your lifetime. Even a 1-in-a-billion event will become the fate of hundreds of thousands of people during your lifetime. And given the media’s desire to promote shocking headlines, you will hear their names and see their faces.   The idea that incredible things happen because of boring statistics is important, because it’s true for terrible things too.   Think about 100-year events. One-hundred-year floods, hurricanes, earthquakes, financial crises, frauds, pandemics, political meltdowns, economic recessions, and so on endlessly. Lots of terrible things can be called “100-year events”.   A 100-year event doesn’t mean it happens every 100 years. It means there’s about a 1% chance of it occurring on any given year. That seems low. But when there are hundreds of different independent 100-year events, what are the odds that one of them will occur in a given year?   Pretty good. https://www.collaborativefund.com/blog/once-in-a-lifetime/

Why eating at your desk is banned in France

The French labor code prohibits workers from eating lunch in the workplace. The solo work lunch is also shunned in a culture that prizes a change of pace — and scenery — during the midday meal.   As cities grew and more workers had to travel to factories on the other side of town, their eating habits changed. The midday meal, traditionally made to be eaten at home, entered a new carryout phase.   Picture workers picking at their food with their fingers in matchbook factories, seamstress sweatshops and warehouses full of heavy machinery. From airborne tuberculosis to phosphorus fumes, these work sites were far from sanitary. “Even in department stores, there were more microbes and germs per cubic feet than outside.” As diseases spread, doctors discussed how to clean the air in dirty workspaces.   First, you had to get the people out. “The saying was that we have to flush the work sites as we flush toilets,” Bruegel says. “What is the best time to do that? It’s usually when people eat!”   The government’s answer: ban lunch in the workplace. Get the people outside and then open the windows to clear out the germs. That was the idea behind the 1894 decree that banned lunch at the workplace. https://www.npr.org/2022/06/10/1103463809/why-eating-at-your-desk-is-banned-in-france-lunch-law

Lower risk stocks give better returns

Academics define risk, denoted by the Greek letter beta, as how much a stock moves relative to changes in the stock market. A stock with a beta of one will move in line with the market on average, while below one suggests smaller changes and above one bigger changes than the market. The reward is the expected total return of a stock.   The theory is beautiful in principle but doesn’t work in practice. Researchers who put it to the test found that the average returns for low-risk stocks were higher, and those for high-risk stocks lower, than they were supposed to be. https://www.ft.com/content/01ac1d52-6932-486d-9f1b-bcf9d5100600

To succeed, do it for two weeks

Pick a goal. Pick something you feel you want to achieve. Create a daily process or routine you will follow. (Better yet, ask someone who has done what you want to do to create a routine for you.)   Then commit to following that routine for two weeks. For each of the next 14 days, keep your head down and focus solely on what you need to do that day. Not next week. Not next month. Not next year.   Just today.   At the end of two weeks, you’ll know whether you want to keep going. You’ll know whether the goal you chose means something to you or was just a whim. (Either outcome is fine; “wasting” two weeks only to find out you don’t want to run a marathon is better than spending the next 20 years feeling like a failure because you think you want to, but haven’t.)   If you want to keep going, the tough two weeks you just put in will make it much more likely that you’ll stay the course over the long term. Partly because of the improvement you’ve made – improving is always fun, and we all like to do things we’re good at – and because your emotions will start to work for you, not against you. https://www.inc.com/jeff-haden/how-you-can-use-two-week-rule-to-become-remarkably-successful-and-streamline-your-bucket-list.html

Position size your bets for survival

Bill Miller lost $300 million on Enron. It was roughly an 89% loss and the most money he had ever lost in a single position (at that point in his career). It also turned out to be the quickest. It only took 60 days.   One of the biggest mistakes investors make is they fail to consider the downside. They get caught up in how much they can make and size the position accordingly. But if things go south, that oversized position severely handicaps their portfolio. The lesson from the Enron scandal is the risk of having too much money in a single stock.   The important question to ask is: how much can I lose and how might that loss impact my overall portfolio?   For Miller, the loss might have been the biggest but the damage was small. He still beat the market that year because he sized the position based on how a total loss would impact his portfolio. https://novelinvestor.com/bill-millers-biggest-loss/

Sit tight, fasten your seat belts and enjoy the bumpy ride :-)

 

Edited excerpts of communication sent to subscribers on 12-Jun-22

As I have mentioned in all my previous videos and emails in the last few months, the next few months are likely to remain extremely volatile. Markets will fall sharply and when people get really scared and you start hearing doomsday all around you, it will surprise everyone and turn around and rally for a few days.  Markets, as is life, move in cycles. Sometimes, the times are good for us and sometimes they are challenging. The interesting part is people often forget this reality. In good times, they forget that bad times are ahead. And in bad times, they forget that good times are ahead. In Chinese, there is a concept of Yin and Yang. It talks about a system being composed of complimentary but interconnected or interdependent forces. Bull and bear markets are similar.

What To Expect From The Market

There is a possibility of a sharp down move in the next month or so, probably led by global cues. However, it is a possibility only and not a certainty. You would have noticed that both in Hitpicks and Quant, we have a large part of the portfolio in cash. The reason is that these are short-term oriented and I would want to be a bit more certain of the overall market trend before committing fully. In the long-term service, we have about 15% in cash. I am not inclined to sell more and go to cash aggressively even though the possibility of a sharp downswing cannot be ruled out. One reason for that is, as the name suggests, it is based on the long term, and most of the stocks do look good from a two-three year perspective and if I just ignore the immediate next one-two months of concern. So, the objective for me is to look out over a 1-3 year horizon in the long term service and calmly accumulate stocks which can give me a decent return over the next 2-3 years. For those who are in our PMS service, you would have seen that we are deploying your capital in a slow, steady and systematic manner. We will continue to do so.

The Medium-to-Long Term Outlook

I am actually fairly positive. Maybe unusually so. I see a fair deal of optimism in the management of companies during concalls. As long as we don’t see another bout of Covid flare-up or a nuclear war or some such black swan event, the Indian economy actually seems to be on a very strong wicket compared to what is happening in the world around us. Inflation is a concern, but 75% of Indian inflation is related to food and I expect it to come down with the monsoons. Inflation also will start cooling down once the base effect of last year kicks in. The rate hikes which everyone talks about are a non-event for me. We are just correcting the Covid era rate cuts. It is unlikely to have a great deal of effect on corporate growth. Bank credit to commercial enterprises is steadily going up signifying underlying recovery in the business.

The China + 1 theme is playing out very strongly on the ground in multiple sectors like chemicals, textiles, engineering and electronics. Over the next few years we are likely to see a silent out move of MNCs from China and into other sourcing markets like India, Vietnam, Indonesia, Malaysia etc. Covid and the Ukraine-Russia war coming back-to-back has necessitated a major strategic shift in single country sourcing. While this is going to be long term inflationary in nature, countries like India, with abundant manpower and natural resources can benefit. A lot of sectors are looking good and some cyclical sectors are at the cusp of recovery - autos, real estate, infrastructure, engineering and capital goods, agrichem to name a few. My promise of some changes in the Long Term stocks still remains unfulfilled. I have multiple good stock ideas but am waiting and twiddling my thumbs because I think we will get a better entry point :-)  As I mentioned in my previous mail, those who are doing SIP can continue to do so. Just spread it out a little bit more if possible. And if you are a bit active in the markets, try and buy a little on days when the world seems to be ending :-)  My sense is that we are headed for a very good 2-3 year period once we cross this volatile period in the next couple of months. So, sit tight, fasten your seat belts and enjoy the bumpy ride :-)

Footnote:

My past article in The Economic Times somehow seems to have caught the fancy of a lot of people and I received a lot of mails, DMs and WhatsApp messages on it. You can read it here if you haven’t already: http://blog.intelsense.in/2022/06/investing-like-federer.html Also, last week I shared some views on the LIC IPO on ET NOW 9pm news. You can watch it here: