Curiosity@Intelsense

 

Multidisciplinary learning is one of the best ways to improve our investment acumen. Here is a summary of some of the best learnings of the week. If you like this collection, consider forwarding it to someone you think will appreciate it. You can sign up at https://www.getrevue.co/profile/intelsense to receive all blogs from me directly into your inbox. To subscribe to any of Intelsense Research services, visit www.intelsense.in. If you wish to know more about our PMS offerings, mail us at equity@intelsense.in

The goal is to sit less

A study, which involved more than 3,700 men and women in Finland, found that many dutifully exercised for a half-hour, but then sat, almost nonstop, for another 10, 11 or even 12 hours a day. These were the study’s active couch potatoes, and their blood sugar, cholesterol and body fat all were elevated.   But the study found, too, that men and women who got up and moved around even a little more often, whether by strolling gently or fitting in more exercise, were substantially healthier than the active couch potatoes.   The results tell us that a single 30-minute, daily workout “might not be enough” to alleviate the downsides of prolonged sitting.   The lesson from the research is that in addition to a brisk workout, we need to move lightly and often, cleaning, taking the stairs, strolling the halls or otherwise not remaining still. The sweet spot in this study involved about 80 or 90 extra minutes of light activity, “but any additional movement should be beneficial. https://www.washingtonpost.com/wellness/2022/09/14/meet-active-couch-potato-how-sitting-all-day-can-erase-workout/

Growth is good for stocks

Philip A. Fisher is well known as an advocate of investing in growth stocks, but he was no speculator. He counsels investors to avoid promotional situations and to be cognizant of the danger of paying a price that already discounts very high growth far into the future.   There is no doubt that Phil Fisher’s approach was more venturesome than the policies advocated by Benjamin Graham, but both men demanded rigor in their analytical process. Warren Buffett was clearly more influenced by Graham in his early years but came to appreciate Fisher as well. Charlie Munger’s approach tilts more toward Fisher and less toward Graham.   When asked about the distinction between value and growth during the 2001 Berkshire Hathaway annual meeting, Warren Buffett clearly explained the fallacy of thinking in such terms. Charlie Munger chimed in with the observation that selecting companies with growth prospects reduces the number of decisions that they would have to make over time. https://rationalreflections.substack.com/i/72599198/growth-vs-value

The invention of the x-ray

There is no overemphasizing the profound effect that the discovery of the X-ray had on the broadest range of human existence. The finding was a scientific bombshell that warranted interest from scientists and laymen alike. Newspapers and magazines printed stories, true and false, about the newly discovered rays. Women were cautioned that handheld X-ray devices could peer through their clothes. Men were warned that police would adapt X-rays to spy on nefarious activities. There was even the suggestion that X-rays might be exploited to see through walls into private spaces and spy on people’s intimate activities.   By 1900, the use of X-rays passed beyond simple demonstrations of skeletal ab­normalities or detection of metal objects in the body. It became apparent that X-rays killed rapidly dividing cells, an observation that intrigued cancer researchers and brought about the beginnings of radiation oncology. Although surgeons would no longer be the only practitioners at the forefront of advances in radiology, their early appropriation of the new technology demonstrated that the X-ray machine was an indispensable medical and surgical device. https://www.delanceyplace.com/view-archives.php?p=4674

Relative & Absolute Momentum

At Intelsense.in, we run our own proprietary quant based systems - Q10, Q30 and Quiver (only on smallcase). You can take a look at https://intelsense.smallcase.com

We hear the term momentum investing a lot. Most of us don’t really understand it. What we understand is in momentum investing we buy stocks which are in momentum, meaning, stocks that are going up. But, there are different types of momentum. Absolute (Time Series) and Relative (Cross-Sectional) momentum are the two main types. Let us understand these two with two very simple examples. Imagine you are taking a train ride. Relative momentum is wanting to be in the fastest train. So it compares the train speed with all other trains and tells you the one which is running fastest and you jump on to it. Sometime later you check again. And find out if it’s still the fastest. If some other train becomes faster, you switch to the other train. So in relative momentum, we rank the stocks based on their speed and quality of momentum relative to other stocks and select the top ones. And keep switching by checking periodically.  In comparison, absolute momentum just checks if the train is running and running fast. It doesn’t compare with any other train. If the train slows down, we get off. If the train stops we get off. This train may be among the top ones on relative momentum criteria or it may not be. We are okay as long as the train is moving ahead at a decent speed. If we can’t find such trains we wait.  What does it mean in practical terms? The entry and exit points and holding periods differ basically. To take a simple example, in one of our strategies that I use, we will exit a stock even if it is going up but it has become slower than other stocks. Due to this difference in entry and exit and holding period, it is expected to give a diverse set of stocks and the equity curve is expected to behave differently providing us with a diversified combined basket of stocks which has a smoother equity curve.  It may appear the same because in any case, we are buying stocks which have been going up. The first sentence of Leo Tolstoy’s novel Anna Karenina reads, “Happy families are all alike; every unhappy family is unhappy in its own way”. Stocks also behave in a similar manner. They all look similar when they are in their bull phase. But when studied deep, there are a hundred ways of filtering them with different results.  Gary Antonacci’s book Dual Momentum is a good read to explore this subject in a bit more detail.

Curiosity@Intelsense

Multidisciplinary learning is one of the best ways to improve our investment acumen. Here is a summary of some of the best learnings of the week. This week onwards, I am changing the format of the newsletter. Instead of sharing 5 articles each week, now I will share 3 articles, 1 audio/video and 1 quotation of the week that I am thinking about. Do let me know our feedback on the changed content.

Intelsense Updates

I shared my thoughts with The Economic Times on the markets and the possible sectors that are likely to throw up winners in the medium-to-long term. https://economictimes.indiatimes.com/markets/expert-view/etmarkets-smart-talk-auto-ancillaries-could-do-better-than-auto-stocks-abhishek-basumallick/articleshow/93986633.cms

1. It’s supposed to be hard

Every investor knows, or should know, the truth about money management: More than 80% of professional investors underperform their benchmark (more depending on how you calculate it). Those stats are used in an often cynical way to show how the industry is broken, crowded, and ineffective.   But wouldn’t it be weirder if it were different?   Wouldn’t it be strange if every slightly ambitious investor could pick a few stocks and earn returns capable of generating dynastic wealth with other people’s money? Or even most of them? How and why could that world possibly exist? The reason Warren Buffett is interesting is because there’s only one of him.   About 1% of college basketball players make it to the NBA. That funnel doesn’t seem odd – no one would say college basketball is broken, or a scam, or ineffective at developing great players. It’s obvious that getting to the NBA is really hard, and you can be talented and still not make it. The entire reason pro sports are exciting is because the players do someone almost no one else can do. Michael Jordan is interesting because there’s only one of him. https://collabfund.com/blog/its-supposed-to-be-hard/

2. Truth-seeking is important for self-improvement

Most highly successful people have been really right about the future at least once at a time when people thought they were wrong. If not, they would have faced much more competition.   Self-belief must be balanced with self-awareness. I used to hate criticism of any sort and actively avoided it. Now I try to always listen to it with the assumption that it’s true, and then decide if I want to act on it or not. Truth-seeking is hard and often painful, but it is what separates self-belief from self-delusion.   This balance also helps you avoid coming across as entitled and out of touch. https://blog.samaltman.com/how-to-be-successful

3. A little inefficiency is wonderful

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.   Nassim Taleb says, “My only measure of success is how much time you have to kill.” More than a measure of success, I think it’s a key ingredient. The most efficient calendar in the world – one where every minute is packed with productivity – comes at the expense of curious wandering and uninterrupted thinking, which eventually become the biggest contributors of success. https://collabfund.com/blog/inefficient/

Audio/ Video of the Week

The metaverse explained in 14 minutes.

The metaverse explained in 14 minutes | Matthew Ball

Thought of the Week

Huge sums have been lost by investors who have held on to securities after the reason for owning them is no longer valid. In investing it is never wrong to change your mind. It is only wrong to change your mind and do nothing about it. ~Seth Klarman

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.

Investing is an act of arrogance

Investing is an act of arrogance. You are basically saying, “I am right and the person on the other side of the transaction, who is buying a stock from me or selling it to me, is wrong.”   This arrogance requires amnesia of your past successes and failures; it is earned with your current sweat, through thorough research. Your research leads you to conclusions that often disagree but sometimes agree with the prevailing trends in the market. Arrogance – belief in your process and research – allows you to follow through on your conclusions, even if the market scorns them.    This is how we try to close the gap between theory and practice created by volatility. We continuously build and update our financial models, talk to companies and their competitors and to industry insiders, do a lot of reading, and debate companies with our peers. We have to keep earning the right to be thoughtfully arrogant through our hard work. When time passes, facts change, and new information comes out, we have to have the flexibility to change our minds.   When you are making thoughtfully arrogant decisions, you are ignoring both what the crowd thinks and, just as important, your past successes. You are arrogant (I am paraphrasing Seneca here) because through your research you have discovered the truth (what the company is worth) before time did.  https://contrarianedge.com/why-value-investing-requires-thoughtful-arrogance/

Focus is the most critical factor of success

The tendency of people and organizations is to lose focus. So one way to identify outstanding people is by their ability to commit and focus on something for a long period of time.   The only people you should hire are focused ones. The only competitors you should worry about are the focused ones.   People naturally lose focus when they forget that focus means saying no to good opportunities and good people. Average ideas are everywhere, and they try to pull you in. The more successful you are, the more people will want to work with you. If you start saying yes to average ideas, you quickly lose the space and time you need to execute on great ones.   Organizations lose focus in many ways, but the one that causes the most damage is bureaucracy. An organization where committees make decisions will always end up losing focus. When an organization loses focus, it opens the door to competitors who can focus.   Focus is hard, and because it’s hard, it also creates a hidden place to find opportunities. https://fs.blog/focus-to-win/

Satisfaction = what you have ÷ what you want

All of our evolutionary and biological imperatives focus us on increasing the numerator—our haves. But the more significant action is in the denominator—our wants. The modern world is made up of clever ways to make our wants explode without us realizing it. Even the Dalai Lama, arguably the world’s most enlightened man, admits to it. “Sometimes I visit supermarkets,” he says in The Art of Happiness. “I really love to see supermarkets, because I can see so many beautiful things. So, when I look at all these different articles, I develop a feeling of desire, and my initial impulse might be, ‘Oh, I want this; I want that.’ ”   The secret to satisfaction is not to increase our haves—that will never work (or at least, it will never last). That is the treadmill formula, not the satisfaction formula. The secret is to manage our wants. By managing what we want instead of what we have, we give ourselves a chance to lead more satisfied lives. https://www.theatlantic.com/magazine/archive/2022/03/why-we-are-never-satisfied-happiness/621304/

Focus on output rather than input

Traditional corporate culture has an obsession with input—hours worked, etc.—when what really matters is the output. It seems obvious, but as a manager or employee, always push for a focus on outputs vs. inputs. It takes time to shift cultures, but it’s worth it in the long run.   As a solo entrepreneur or freelancer, seek to detach earnings from hours. Rather than charging by the hour for your service or offering, charge based on deliverables. As you find new leverage in the system, you’ll be able to scale your time efficiently and rapidly increase your income and wealth creation potential. https://www.sahilbloom.com/newsletter/the-locksmith-paradox-sparking-creativity-more

A simple pain job can save lives of birds from wind turbines

Each year, turbine blades kill hundreds of thousands of birds and bats. As wind power becomes more prevalent, this number may rise into the millions—although it’s important to remember that other power generation methods likely kill far more birds than wind farms do.    This concern has led to a number of proposed interventions, from turning off wind farms during migrations to installing special whistles only bats can hear. A new study presents a relatively low-cost, set-it-and-forget-it option: just paint one of the turbine blades black.    While the raw numbers were quite small, the intervention was effective. “Overall, there was an average 71.9% reduction in the annual fatality rate” at painted turbines, the researchers write. www.anthropocenemagazine.org/2020/09/a-simple-paint-job-can-save-birds-from-wind-turbines/

Can a simple quant system outperform the market?

 

For details on Intelsense services, visit: https://www.intelsense.in

A Simple Trend Following Quant System

I was teaching basic quant to a friend. My effort was to focus on explaining how reasonable returns could be had from investing in a systematic strategy with less churn and low headache 😀   So, what I did was I tried a very basic system. Mark Minervini suggested this combination of moving averages in his book. The idea here is to look for stocks whose current market price was greater than the 50-day exponential moving average (ema), the 50-day ema should be greater than the 100-day ema and that should be greater than the 200-day ema. The strategy then selects the top 20 stocks filtered by specific filter criteria. I tested it with 4 different options - RSI, ADX (both technical indicators), QoQ EPS growth (fundamental indicator) and our own proprietary indicator which we have developed in-house at Intelsense. Additional work is needed to reduce the max drawdown (if required) but we need to keep in mind any efforts to reduce maxDD also reduce the return CAGR. The results are superb. The return CAGR varied from 40% to 56% over 14.3 yrs (before costs and taxes, for which you should deduct around 6-8% since this is a quarterly strategy). The bottom line is that if you can stick to a mechanical strategy there is a lot of returns to be made over the long term. This is primarily a technical system wherein most of the screening parameters are technical in nature. I will be sharing similar fundamental and technofunda strategies in the future which will hopefully be able to showcase why more and more capital globally is moving away from discretionary investing to systematic investing.

Strategy Results

Intelsense Insights - Weekend Reading

 

Intelsense Insights

I shared some thoughts on ET NOW this week on sectors which look interesting and on the overall market & economy. You can watch it on YouTube or if you prefer reading, below is the link to the transcript.

Interesting sectors to invest in

abhishek basumallick: Can't rule out 5-8-10% corrections over next couple of months; market to be stronger by Diwali: Abhishek Basumallick - The Economic Times “ We cannot rule out some 5-8-10% corrections over the next couple of months but somewhere, close to the end of September-October, we should see better inflation numbers coming in primarily because of base effect. The narrative also will start changing. We are more likely to see a much stronger market by Diwali time.” economictimes.indiatimes.com

Thinking clearly and independently

By definition, we’re blind to what we can’t see. When looking for answers, we’re like the proverbial drunk who only looks for their keys in places where the light is shining. This Spotlight Effect distorts our thinking and limits the ideas we can discover.   Jumping to conclusions limits your ability to discover the truth, because you can’t jump to conclusions outside the spotlight. By law, you can say just about anything. But that’s not the case in practice. There’s a frame around the range of acceptable opinions, which allows for lively debate only within that range. That’s how thought control happens. The assumptions of a culture determine the aperture of mainstream thinking. Knowing that axioms will mold the ultimate shape of an idea, good philosophers tend to critique the premise of an idea—the frame—instead of the conclusion.   F. Scott Fitzgerald, who wrote The Great Gatsby once said: “The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.” https://perell.com/essay/how-philosophers-think/

Use inversion for better outcomes in life

The Stoics believed that by imagining the worst case scenario ahead of time, they could overcome their fears of negative experiences and make better plans to prevent them. While most people were focused on how they could achieve success, the Stoics also considered how they would manage failure. What would things look like if everything went wrong tomorrow? And what does this tell us about how we should prepare today?   This way of thinking, in which you consider the opposite of what you want, is known as inversion.    Inversion is a powerful thinking tool because it puts a spotlight on errors and roadblocks that are not obvious at first glance. What if the opposite was true? What if I focused on a different side of this situation? Instead of asking how to do something, ask how to not do it. https://jamesclear.com/inversion

How to be happy?

Happiness is your responsibility, not Mother Nature’s. That means you need to curtail your worldly appetites, and instead pursue what truly brings enduring happiness: a faith or life philosophy, family relationships, real friendship, and meaningful work.   You can’t choose how much love you will get, but happiness depends more on how much you give. And what you give your love to matters just as much. To be happy, a person “neither loves what he ought not love, nor fails to love what he ought to love.” Here’s a handy formula to go by: Happy people love people and use things; unhappy people use people and love things.   Happy feelings are evidence of happiness, which is a combination of enjoyment, satisfaction, and purpose. Improvement in these areas requires commitment and effort, like anything else that is worthwhile. But if you do the work, you will most definitely see substantial results. https://www.theatlantic.com/family/archive/2022/07/pillars-of-happiness-from-100-lessons-on-how-to-be-happy/670586/

Observe the shift in industry dominance on football jerseys

Sponsoring a football club is about using the world’s most watched sport to promote your brand. Getting your company’s logo on the shirt of a team like Liverpool or Real Madrid means tying your brand to a global icon. And for decades, it’s been a route taken by emerging tech companies, flush with cash to burn and a name to earn.   But these sponsorships actually reveal something about the tech industry as a whole: when you trace the history of these commercial deals across the decades, patterns emerge. Entire sectors of the industry — from cars to consumer tech to gambling websites — seem to jump into the sport at once, signalling their rise to, or the desire to, dominate global markets where football is also part of everyday life.   Japanese consumer electronics brands were among the first tech companies to dive into shirt sponsorship. Their logos adorned the shirts of clubs from England to Italy across the ’80s and ’90s, mirroring the rise of those companies in the wider world.   Believe it or not, Samsung Mobile was a small player in the world of handsets when their deal began with Chelsea in 2005. By the time it ended in 2015, Samsung was the biggest smartphone maker in the world. https://restofworld.org/2022/football-shirt-tech-sponsorship/

Don't play the game of life

While relationships are complex, at their core all healthy fulfilling relationships require genuine mutual affection. Simply put, you should be rooting for the people in your life to succeed, happy if they get a promotion or their kid gets into Harvard. This is next to impossible if you view your life as a competition and the people in it as competitors.   When you view life as a game, you want others to fail — or at least to be slightly less successful than you are. Viewing life as a competition converts friends and family from people you care about to these uneasy, ambiguous relationships where you’re partially rooting for these people…but simultaneously also trying to beat them at the game of life.   You’re a unique individual, with your own strengths and weaknesses, your own goals and preferences. The good life is about trying to live according to your values and make the trade-offs that maximize your happiness. This simply isn’t possible when you abide by what the game values: money, consumption, academic prestige, youth athletic excellence. The moment you enter the game, you’ve surrendered your autonomy and are prioritizing what others deem important. You’re chasing life goals that you had no role in formulating but which now you’re pursuing for the sake of “winning.” https://www.getrichslowly.org/life-is-not-a-game/