Earlier this month I had the absolute privilege of addressing Prof Bakshi's class at MDI Gurgaon. Attached is the presentation I shared in the session. I made this presentation specifically keeping in mind students who may not be seasoned investors and for whom, the meta-skills are more important to learn.
Monday, 30 December 2019
Thursday, 26 December 2019
Weekend Reading
Wishing you all a Merry Christmas and a wonderful New Year Ahead.
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.
The economics of the
"young old"
The year 2020 will
mark the beginning of the decade of the yold, or the “young old”, as the
Japanese call people aged between 65 and 75.
Health worsens with
age, but the yold are resisting the decline better than most: of the 3.7 years
of increased life expectancy in rich countries between 2000 and 2015, says the
World Health Organisation, 3.2 years were enjoyed in good health. The yold are
also better off: between 1989 and 2013, the median wealth of families headed by
someone over 62 in America rose by 40% to $210,000, while the wealth of all
other age groups declined.
The yold are busier,
too. In 2016 just over a fifth of people aged 65-69 were in work in rich
countries, a figure that is rising fast. Working is one of the factors that are
helping people stay healthy longer. A German study found that people who remain
at work after the normal retirement age manage to slow the cognitive decline
associated with old age and have a cognitive capacity of someone a year and a
half younger.
8 ways financial statements
are manipulated
Every company
manipulates its numbers to a certain extent to make sure budgets balance,
executives score bonuses, and investors continue to offer up funding. Such
creative accounting is nothing new. However, factors such as greed,
desperation, immorality, and bad judgment can cause some executives to cross
the line into outright corporate fraud. Investors should know how to recognize
the basic warning signs of falsified statements. While the details are
typically hidden, even from accountants, there are red flags in financial
statements that can point to the use of manipulating methods.
Reducing noise helps in
forecasting better
In a digital world
swarming with fake news and sensationalist content, those who cast about widely
for information are sure to reel in some strange fish. To extrapolate,
superforecasters’ true edge may be more about discipline – the mental rigour
required to distinguish random from revealing data – than innate wisdom or
intellectual objectivity.
Whatever the reason,
investing in noise reduction may not be a bad idea. One proven, if drastic,
noise-reduction solution is to assign predictions to algorithms rather than
humans. Bots are programmed to pay attention to patterns in data and discount
random information.
The silent mobile revolution
in India
There are now more
than 450 million mobile internet users in India, a number that is expected to
grow to 667 million by 2022. Not so surprising considering that India has the
lowest data costs in the world and its fixed-line download speeds continue to rise.
It’s not just the urban middle class who have benefitted. Nearly half of
India’s 250,000 village councils are now connected by fibre optic networks,
with the other half scheduled to come online in the next two years. More than
300,000 so-called common service centres have been set up around the country to
provide even impoverished villagers with access to digital services.
Always average up
Never double down,
always double up. And here’s the interesting thing, so most people think if
you’ve done the work and you buy something and it goes against you, you should
buy more. And what Julian would say is no, we’re just wrong. Made a mistake and
the market’s right, the market’s … this goes back to the efficient markets.
It’s not that the market’s always efficient, but when it’s telling you you’re
wrong you should listen to it. And there’s the famous picture of Paul Tudor
Jones in his dorm room with the losers average losers sign.
Now most people
would say, “Well wait a minute, that’s not a value investor.” Well think about
it, is it or is it not? So what he’s saying is when he had edge, when he had
knowledge about an area, an asset, a company and they made an investment and
now the market is coming around to your view, rather than do what most human
beings do, which is pull their flowers. They’re so happy to have a win they
take profits. He’s like, “Well let’s buy more because it’s working.” And
there’s the simple statement of let’s do more of what’s working and less of
what’s not. Most of us don’t do that, we do more of what’s not working and less
of what’s working, which is why the average person underperforms.
Friday, 20 December 2019
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.
The last decade in pictures
A peek into the
happenings of the last decade through the lens. Some stunning pictures remind
us of the good, bad and ugly events that shaped the world.
Zanshin - Focus on the process more than the results
We live in a world
obsessed with results. Like Herrigel, we have a tendency to put so much
emphasis on whether or not the arrow hits the target. If, however, we put that
intensity and focus and sincerity into the process—where we place our feet, how
we hold the bow, how we breathe during the release of the arrow—then hitting
the bullseye is simply a side effect.
The point is not to
worry about hitting the target. The point is to fall in love with the boredom
of doing the work and embrace each piece of the process. The point is to take
that moment of zanshin, that moment of complete awareness and focus, and carry
it with you everywhere in life.
It is not the target
that matters. It is not the finish line that matters. It is the way we approach
the goal that matters. Everything is aiming. Zanshin.
The wisdom of Nemish Shah
Investing, according
to him, is simple and complicated at the same time, in a sense a lot like art.
He says while investing in India follows the same rules as elsewhere, there is
one crucial difference—here, the quality of the management has to be considered
closely. “Abroad one can go by what is there in the books, but here you have to
add one additional layer—the management,” says Shah. But as long as the
management is focussed and understands allocation of capital, he is comfortable
with the business. What he isn’t comfortable with are companies that are hasty
and raise capital regularly. In fact, Shah has ignored many companies where the
management did not give him the right vibe.
How to read news
Rather than reading
less, portfolio managers must learn to rapidly detect what is nonsense and move
on. It’s a necessary skill when confronted with the hype and sensationalism now
masquerading as news. Pseudo news and pseudo analysis clutters the web, making
it harder to stay well informed.
Turn off your
political bias when you read and interpret the news, and be wary of
commentators who have political agendas.
Before you read the
news, you must have your own framework in place for decision-making. Otherwise,
you’ll be unduly influenced by what you read. As Ed Stavetski, founder of PCM
Partners LLC, put it, “You must have an independent view of the markets or the
media will force a view upon you.”
How to Read: Lots of Inputs and a Strong Filter
Most books don’t
need to be read to the end, but some books can change your life – means you
need two things to get a lot out of reading: Lots of inputs and a strong
filter.
If you only pick up
books you know with certainty you’re going to like you’ll confine yourself to
reading the same authors on the same topics. It gives fresh oxygen to
confirmation bias and limits your ability to connect the dots between different
fields and different cultures. It’s better to have a low bar in what books
you’re willing to try, and even the faintest tickle of interest should be
enough to make the cut. Kindle samples are free so excuses are minimal.
Once you’ve flooded
your desk with inputs comes the filter. It should be ruthless, taking no
prisoners and offering no mercy.
Saturday, 14 December 2019
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.
A drug to cure addiction of other drugs!
MindMed is a company
that’s taking psychedelic drugs and turning them into medicine. This could save
lives, cure depression, help alcoholism, get people off opioids. Its first drug
has the potential to turn a person’s addictions—to cocaine, methamphetamine,
morphine, sugar, alcohol—off like a light switch. It has a clear opportunity to
help lower the nearly 70,000 annual drug overdose deaths that take place in the
U.S. But the compound, 18-MC, has yet to undergo human efficacy trials.
Book stores and physical books are making a silent
comeback
The industry is much
better than it was — the last four to five years have been pretty healthy. The
stores have survived the devastation the independent book business suffered
after Amazon.com began selling books online and at lower prices in 1995.
statistics from the
American Booksellers Association, a trade group for independent booksellers,
show a recovery from the industry's darkest days. The ABA had 1,887 member
companies as of May 15, up nearly 35% from 1,401 in 2009. The number of
members' stores totalled 2,524 in May, up more than half from 1,651. Another
sign of improving health: the number of books indies have sold. Book sales rose
5% in 2018 from 2017, and in 2017 they were up 2.6% from 2016.
Independent sellers
are doing better even as Amazon continues to thrive online and to open its own
stores, so far mostly in big metropolitan areas. The indies are also helped by
the fact more people are reading printed books rather than electronic versions
— sales of e-books fell 37% between 2014 and 2018
A new ad-model from Hulu binge watchers
Hulu knows many of
its viewers watch show episodes back-to-back, and it's determined to bank on
that with its advertising. Hulu is rolling out an ad system designed for binge
watchers. The approach uses machine learning to predict when you're likely to marathon
a show, and then sends "contextually relevant messaging" that
acknowledge your viewing spree. When you reach the third episode, however, Hulu
pulls out all the stops. It'll either give you an ad-free episode (with an ad
beforehand, mind you) or a special offer from one of its sponsors.
Nestle sells ice-cream business to focus on core
competency
For much of the last
two years, Nestlé has been overhauling its portfolio to capture growth in the
food space and shed underperforming or slow-growing businesses. Last year,
Nestlé sold its U.S. chocolate business, a deal that included more than 20 American
candy brands like Butterfinger and Baby Ruth, to Ferrero for $2.8 billion.
Nestlé made a major
bet on the future of plant-based foods with the 2017 purchase of Sweet Earth
for an undisclosed sum. In the past few months, Nestlé expanded Sweet Earth
into Awesome Burger and Awesome Grounds, the company's first foray into
plant-based beef in the United States,. Last week, the company announced it
would try the ingredient in its DiGiorno and Stouffer's brands.
It's also spending
money to refresh its water business through the introduction of Poland Spring
energy water and Nestlé Pure Life Plus, the brand's entrance into functional
water.
Another focus has
been the expansion of its coffee presence through the purchase of a stake in
coffee shop chain Blue Bottle, the acquisition of Chameleon Cold-Brew and the
dolling out $7.15 billion for the right to market Starbucks' beans, capsules
and other products in stores.
https://www.fooddive.com/news/nestle-sells-us-ice-cream-business-to-joint-venture-in-4b-deal/568904/
The internet is forcing workaholism
A research team has
found that hours worked since 1980 increased nearly 10 percent for Americans
with bachelor’s and advanced degrees. Leamer told me that he believes this is
because computing has shifted much of the economy from manufacturing to neurofacturing,
Leamer’s term for intellectually intensive white-collar labor that is often
connected to the internet, such as software programming, marketing,
advertising, consulting, and publishing.
Neurofacturing jobs
lend themselves to long hours for several reasons, Leamer said. They’re less
physically arduous, as it’s easier to sit and type than to assemble engine
parts. What’s more, the internet makes every hour of the day a potential
working hour.
If the operating
equipment of the 21st century is a portable device, this means the modern
factory is not a place at all. It is the day itself. The computer age has
liberated the tools of productivity from the office. Most knowledge workers,
whose laptops and smartphones are portable all-purpose media-making machines,
can theoretically be as productive at 2 p.m. in the main office as at 2 a.m. in
a Tokyo WeWork or at midnight on the couch.
Friday, 6 December 2019
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.
E-Sports (competitive video games) is big business
China now boasts a
gaming population of over 500 million, and competitive gaming has become big
business. Esports-related sales in China hit 51.3 billion yuan ($7.3 billion)
during the first six months of 2019 and are on track to top 100 billion yuan
for the year.
There are more than
5,000 gaming teams operating in an industry that now employs 440,000 people.
Depending on their
contracts, trainees are paid about 10,000 yuan per month, while mid- to
upper-ranking gamers earn around $50,000 annually, according to Li Xinyuan, the
team manager. Top-tier gamers can earn over $90,000. Those rates mean even
trainees make more than average factory workers in Shanghai, whose initial
monthly take-home pay is typically around 4,000-5,000 yuan per month.
Vinod Sethi's prescription to becoming a better
investor
Mr. Sethi believes
that formal education is a necessity but not sufficient. He believes that
education doesn’t teach you about hunger, relationship, courage, inner voice –
listening to yourself, feel the present moment and many other aspects. There
are many other aspects and skills which one requires in investing business and
daily life.
Mr Sethi reads at
least one annual report a day. He might read an annual report of a private
company in Europe where he won’t be even able to invest. According to him, an
annual report is a summary of collective human effort. Hence, it shouldn’t
matter what annual report you are reading. One makes money where one sees
financial efficiency, an alchemy or something stands out. There is no need to
read an annual report to the last line. Over time one can develop sense as to
what to read and what not to read. Also, according to him, speed reading helps.
Only way to meet
very smart people is by making yourself very smart. No one would give you time
unless you give more than they gave you. If you start every meeting thinking I
must give more than what I am expected to gain, then you achieve a very high level
of evolution at personal level.
Three things are a
must do for a good investor:
Pay attention to the
Market, Read & Research and Introspect
Can mirrors do the trick?
A typical large
steel mill might burn through 1.5 million metric tons of coal in its furnaces
in a year. It hasn’t been possible to run that type of industrial process on
renewable energy, because of the extremely hot temperatures required, making
nearly a quarter of global emissions hard to eliminate. But new
technology—which concentrates solar thermal energy to 1,000 degrees Celsius for
the first time—could transform some of the most polluting industries, including
steel, cement, and petrochemical production.
The technology, from
a California-based startup called Heliogen, uses an array of mirrors to reflect
sunlight.
Machine learning determines ghost writer writing for
Shakespeare
Literary analysts
have long noticed the hand of another author in Shakespeare’s Henry VIII. Now a
neural network has identified the specific scenes in question—and who actually
wrote them.
For much of his
life, William Shakespeare was the house playwright for an acting company called
the King’s Men that performed his plays on the banks of the River Thames in
London. When Shakespeare died in 1616, the company needed a replacement and
turned to one of the most prolific and famous playwrights of the time, a man
named John Fletcher.
The new approach is
straightforward in principle. Machine-learning algorithms have been used for
some years to identify distinctive patterns in the way authors write.
The technique uses a
body of the author’s work to train the algorithm and a different, smaller body
of work to test it on. However, because an author’s literary style can change
throughout his or her lifetime, it is important to ensure that all works have
the same style.
Once the algorithm
has learned the style in terms of the most commonly used words and rhythmic
patterns, it is able to recognize it in texts it has never seen.
Podcast: Replacing faulty body organs
Laser-printing
organs and vascular systems to give everybody another chance has incredible
value. It changes the dynamics of how to handle endemic diseases like diabetes
and many other organ issues, liver, kidney and maybe eventually very complex
systems like the nervous systems inside our bodies.
Thursday, 5 December 2019
The Man Who Solved the Market by Gregory Zuckerman - My Highlights
I completed the book the week it was out in India. I have been following (reading about, listening to, watching) Jim Simons and a few others over the last two years that I have personally started learning and experimenting with quant systems. (Planning to start writing about my learnings on quant systems, more so that I can understand them better while trying to write).
Simons has always been an enigma and I was certain that the book would not reveal any information which was not known earlier by the public but only supply anecdotes of his personal life. I was more or less right. There are practically no details of his trading system. But then again this book was probably not meant to. Overall, it was a great read. I would urge investors to read it, just to get a perspective of how a quant's view of investing is different from that of others.
Simons has always been an enigma and I was certain that the book would not reveal any information which was not known earlier by the public but only supply anecdotes of his personal life. I was more or less right. There are practically no details of his trading system. But then again this book was probably not meant to. Overall, it was a great read. I would urge investors to read it, just to get a perspective of how a quant's view of investing is different from that of others.
The highlights are below. The bold markup is mine to highlight points I found interesting.
A former math professor, Simons is arguably the most successful trader in the history of modern finance. Since 1988, Renaissance’s flagship Medallion hedge fund has generated average annual returns of 66 percent, racking up trading profits of more than $100 billion
No one in the investment world comes close. Warren Buffett, George Soros, Peter Lynch, Steve Cohen, and Ray Dalio all fall short.
Early on, Simons made a decision to dig through mountains of data, employ advanced mathematics, and develop cutting-edge computer models, while others were still relying on intuition, instinct, and old-fashioned research for their own predictions.
By early 2019, hedge funds and other quantitative, or quant, investors had emerged as the market’s largest players, controlling about 30 percent of stock trading, topping the activity of both individual investors and traditional investing firms.
“If we have enough data, I know we can make predictions,” Simons told a colleague.
Unlike his rivals, Simons didn’t have a clue how to estimate cash flows, identify new products, or forecast interest rates. He was digging through reams of price information. There wasn’t even a proper name for this kind of trading, which involved data cleansing, signals, and backtesting, terms most Wall Street pros were wholly unfamiliar with.
“The lesson was: Do what you like in life, not what you feel you ‘should’ do,” Simons says. “It’s something I never forgot.”
The paper didn’t try to identify or predict these states using economic theory or other conventional methods, nor did the researchers seek to address why the market entered certain states. Simons and his colleagues used mathematics to determine the set of states best fitting the observed pricing data; their model then made its bets accordingly. The whys didn’t matter, Simons and his colleagues seemed to suggest, just the strategies to take advantage of the inferred states.
Simons and the code-breakers proposed a similar approach to predicting stock prices, relying on a sophisticated mathematical tool called a hidden Markov model.
Simons and his colleagues weren’t alone in suggesting that stock prices are set by a complex process with many inputs, including some that are hard or even impossible to pin down and not necessarily related to traditional, fundamental factors.
“Sometimes I look at this and feel I’m just some guy who doesn’t really know what he’s doing,” Simons said.
“If you make money, you feel like a genius,” he told a friend. “If you lose, you’re a dope.”
Stochastic equations model dynamic processes that evolve over time and can involve a high level of uncertainty.
“Just follow the data, Jim,” he said. “It’s not me, it’s the data.”
Dennis himself is said to have made $80 million in 1986 and managed about $100 million a year later. He was crushed in 1987’s market turbulence, however, the latest trader with a style that bore a resemblance to Simons’s to crash and burn.
No one ever made a decision because of a number. They need a story.
“Any time you hear financial experts talking about how the market went up because of such and such—remember it’s all nonsense,”
“LTCM’s basic error was believing its models were truth,” Patterson says. “We never believed our models reflected reality—just some aspects of reality.”
“We’re right 50.75 percent of the time . . . but we’re 100 percent right 50.75 percent of the time,” Mercer told a friend. “You can make billions that way.”
The goal of quants like Simons was to avoid relying on emotions and gut instinct. Yet, that’s exactly what Simons was doing after a few difficult weeks in the market.
By the summer of 2019, Renaissance’s Medallion fund had racked up average annual gains, before investor fees, of about 66 percent since 1988, and a return after fees of approximately 39 percent.
Another lesson of the Renaissance experience is that there are more factors and variables influencing financial markets and individual investments than most realize or can deduce.
Simons and his colleagues generally avoid predicting pure stock moves. It’s not clear any expert or system can reliably predict individual stocks, at least over the long term, or even the direction of financial markets.
“Work with the smartest people you can, hopefully smarter than you . . . be persistent, don’t give up easily. “Be guided by beauty . . . it can be the way a company runs, or the way an experiment comes out, or the way a theorem comes out, but there’s a sense of beauty when something is working well, almost an aesthetic to it.”
Tuesday, 3 December 2019
Education of an Investor
I took some time and have identified some books, courses, magazine, newspapers that can help you in learning more about investing. I have categorized them so that you can pick and choose. Of all the books I have read over the years, these are the ones I have found useful and have read most of them more than once.
The list is big. But do not get overwhelmed by it. Remember, this is not school homework you need to finish in a timebound manner. Go through them slowly but methodically.
I have found that reading every day for a fixed period, say 30 mins, at a fixed time, makes it easier to form and stick to the reading habit. Also, importantly, do not feel compelled to complete a book. If you do not like a book or feel it is not adding much value to you, feel free to skim through or put it down all together and move on to the next one.
Lastly, this is by no means a comprehensive list and I may have missed some very good books. If you think there are any that I have missed, please let me know.
So, here goes the list.
Building the Base
1. Rich Dad, Poor Dad – Robert Kiyosaki
2. One Up On Wall Street – Peter Lynch
3. The Most Important Thing Illuminated – Howard Marks
4. Margin of Safety – Seth Klarman (only pdf available; google for pdf; book out of print)
5. The Warren Buffett Way - Robert Hagstrom
6. Fooled by Randomness – Nassim Taleb
Fundamental Analysis
1. Beating the Street – Peter Lynch
2. The Five Rules for Successful Stock Investing - Pat Dorsey
3. Capital Returns – Edward Chancellor
4. Contrarian Investment Strategies: The Next Generation - David Dreman
5. How To Lie With Statistics – Darrell Huff
6. The Financial Numbers Game Detecting Creative Accounting Practices – Charles Mulford, Eugene Comiskey
7. The Art of Execution – Lee Freeman-Shor
8. The Manual of Ideas – John Mihaljevic
9. The Investment Checklist - Micheal Shearn
10. Common Stocks & Uncommon Profits – Philip Fisher
Valuation
1. Aswath Damodaran course on valuation https://www.youtube.com/watch?v=znmQ7oMiQrM&list=PLUkh9m2BorqnKWu0g5ZUps_CbQ-JGtbI9
2. Financial Statement Analysis and Reporting from IIT Roorkee - https://www.youtube.com/channel/UCw4SlTWA7bpiUK-b6FssPlg
3. Financial Statement Analysis and Security Valuation - Stephen Penman
4. Investment Valuation - Aswath Damodaran.
Technical & Quantitative Analysis
1. What Works on Wall Street – James O'Shaughnessy
2. Quantitative Value – Wesley Gray, Tobias Carlisle
3. Quantitative Momentum – Wesley Gray, Jack Vogel
4. Dual Momentum Investing – GaryAntonacci
5. The New Trading for a Living - Alexander Elder
6. How to Make Money in Stocks – William O’Neill
7. Technical Analysis of The Financial Markets – John Murphy
8. Come Into My Trading Room - Alexander Elder
9. Mechanical Trading Systems – Richard Weissman
10. Trade Like A Stock Market Wizard – Mark Minervini
11. Trend Following – Michael Covel
Investing Psychology
1. Poor Charlie’s Almanac – Peter Kaufman
2. Against the Gods: The Remarkable Story of Risk – Peter Bernstein
3. Influence by Robert Cialdini
4. Drunkard’s Walk – Leonard Mlodinow
5. Little Book of Behavioral Investing - James Montier
6. Psychology of Intelligence Analysis – Richards Heuer
7. Think Twice: Harnessing the Power of Counterintuition – Michael Mauboussin
8. More Than You Know – Michael Mauboussin
9. The Disciplined Trader - Mark Douglas
Other Reading
1. Seeking Wisdom - Peter Bevelin
2. Tap Dancing to Work – Carol Loomis
3. The Market Wizards (all the books in the series)- Jack Schwager
4. Reminiscences Of A Stock Operator – Edwin Lefevre
5. The Ascent of Money - Niall Ferguson
6. Zurich Axioms - Max Gunther
7. The Snowball – Alice Shroeder
8. When Genius Failed – Roger Lowenstein
9. Deep Work – Cal Newport
10. The Personal MBA – Josh Kaufman
Magazines, Newspapers, Blogs
12. http://qz.com/
16. Forbes India
17. Outlook Business
18. Business Today
19. Business Standard
20. Mint
21. Economic Times
22. The Economist
As Munger always says, investing is simple, not easy! Hope this helps.
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