Weekend Reading

HAPPY NEW YEAR to all the readers!

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.

I especially try to not post Corona related articles as that is all one gets to read in all traditional media.

 

If you like this collection, consider forwarding it to someone who you think will appreciate it.

 

Experiences, not appearances, make us happy

Most of us try to make decisions intended to bring us greater happiness. The problem is that we misunderstand how our choices really impact our well-being and end up making ones that have the opposite effect. We buy stuff that purports to inspire happiness and end up feeling depressed instead. Knowing some of the typical pitfalls in the search for happiness—especially the ones that seem to go against common sense—can help us improve quality of life.

It’s an old adage that experiences make us happier than physical things. But knowing is not the same as doing.

We maximize our chances at happiness when we prioritize our experience of life instead of acquiring things to fill it with.

https://fs.blog/2020/07/appearances-vs-experiences/

 

Keep it Simple: Aditya Puri

I have been a big fan of Aditya Puri. He is without doubt one of the greatest bankers in the world along with being a tremendous institution builder. A true legend. An interview with McKinsey.

Noting that HDFC Bank delivered total shareholder returns of more than 16,000 percent under Puri, the Economist suggested that he might be the “world’s best banker.”

To hear Puri tell it, HDFC Bank’s success comes from keeping its business simple by hewing to its founding principles: customer focus, risk management, technology-led innovation, and a “first among equals” culture.

We developed a standard rule that we wouldn’t bet the bank. We also said that credit would be a separate structure from sales and marketing, to keep credit independent. We decided there’s no point having a credit person if that person is going to report to the sales or business leader, because then sales will always prevail. Constructive tension between these functions worked for us.

https://www.mckinsey.com/industries/financial-services/our-insights/keep-it-simple-aditya-puri-on-hdfc-banks-path-to-market-leadership

 

The true picture of two wheeler sales in India

 As per SIAM, a total of around 9.64 million units of two-wheelers were sold in India during this financial year. FADA puts the number at 6.19 million units, almost 36% lower. This is a difference of close to 3.45 million units.

 A small part of it stems from the fact that FADA sales numbers do not take into account sales made in the states of Andhra Pradesh, Telangana and Madhya Pradesh, which aren’t yet on the government’s Vahan 4 database, which FADA uses to publish the retail sales numbers. But retail sales in just three states can’t explain a difference of 3.45 million units between the SIAM sales number and the FADA sales number.

This basically means that while manufacturers have been selling two-wheelers to retailers and retailers haven’t been able to sell a significant portion of what they have bought from manufacturers to the end consumer. Channel stuffing has been carried out and now the retailers have ended up with a significant amount of inventory. FADA suggests that the average inventory of two-wheelers with dealers is at 45-50 days. This is at the end of the festival season. Last year, at the end of the festival season the two-wheeler retailers had an average inventory of 35-40 days.

https://vivekkaul.com/2020/12/12/the-curious-case-of-indias-two-wheeler-sales-or-why-nothing-is-the-way-it-seems/

 

People will keep taking their vitamin pills

This year the dietary supplement industry is forecast to grow as much as 20%. Why? Because the pandemic is encouraging people to consume more and more multivitamins to try to boost their immunity, so they don’t contract COVID-19. So what we’ve seen is tremendous increases in vitamin C, vitamin D, E3 and probiotics. It’s a great time to be in the supplement market.

People who have now increased their usage of multivitamins will continue to do so. It’s reinforcing. They didn’t get sick during the pandemic when they took more supplements, so they’ll continue to take more supplements after a vaccine is found. We’re very encouraged that the growth we’re experiencing this year in multivitamins and in vitamins overall will continue in the foreseeable future.

https://glginsights.com/articles/nutraceutical-industry-update/

 

Learnings from nature

In undisturbed ancient forests, youngsters have to spend their first two hundred years waiting patiently in their mothers’ shade. As they struggle to put on a few feet, they develop wood that is incredibly dense. In modern managed forests today, seedlings grow without any parental shade to slow them down. They shoot up and form large growth rings even without a nutrient boost from added nitrogen. Consequently, their woody cells are much larger than normal and contain much more air, which makes them susceptible to fungi—after all, fungi like to breathe, too. A tree that grows quickly rots quickly and therefore never has a chance to grow old.

https://blas.com/the-secret-wisdom-of-nature/

For building a solid long term portfolio, look at subscribing to www.intelsense.in long term advisory.

 

For technofunda investing and positional trading, subscribe to our Hitpicks advisory service on www.intelsense.in 

For momentum trend following systematic trading, subscribe to Quantamental at www.quantamental.in

A Big Milestone for Q30 (the Quant System)

Today is indeed a happy day for me. When I started the Quantamental service, I was in two minds. Firstly, it was obvious to me that it was a very different approach and something that I did not have a great deal of experience with. For example, I have been investing with a long term quality focus for pretty much the last 20 years but the quant side has cropped up in the last 2-3 years. 

Most of you who signed up for my Long Term Advisory did so because you would have read my posts on Valuepickr, or Economic Times or maybe on Twitter. And I was known (whatever little) as someone who had a long term investment focus. So, I was a bit apprehensive about launching something completely different. Though I always maintain that I identify myself more as a learner than anything else. And quant is just another thing I learnt along the way to try and make sense of this investment puzzle.

Well, a large number of people did sign up for the Quant advisory just based on the trust they had in me. And we started on the 1st of March. It was simply what I call a trial by fire. Within a couple of weeks, there was mayhem in the markets and our system and the conviction in our system got seriously tested. 

And today, I am happy to say that we crossed the 50% return mark at the portfolio level for Q30.

So, what's so great about that, you may ask? The markets are in a tearaway rally and a lot of the stocks are up 40, 50 even 100% from the lows. 

Well, firstly this is a milestone. 

Secondly, it is a very difficult thing for a portfolio of 30 stocks to give this kind of results. The Nifty is up 26.4% in this period and the Nifty 500 is up 24.6% (1st Mar to today). Beating the index by nearly 100% when the index itself has done so well is by no means a small feat. 

Thirdly, all this happened with very low risk. The maximum drawdown and the maximum loss are both reasonably low.

The numbers are all there. And for those who have been part of the journey, you would have witnessed it yourself.

There are only two things I can say, "Thank You"  

For details of Q30 and for subscribing, please check www.quantamental.in

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. 

I especially try to not post Corona related articles as that is all one gets to read in all traditional media.

If you like this collection, consider forwarding it to someone who you think will appreciate.

How Russian opposition leader Alexey Navalny was poisoned?

John Le Carre passed away last week. Here is a real life incident happening now which Le Carre would have been proud to write.

A Russian agent sent to tail opposition leader Alexey Navalny has revealed how he was poisoned in August -- with the lethal nerve agent Novichok planted in his underpants.

The stunning disclosure from an agent who belonged to an elite toxins team in Russia's FSB security service came in a lengthy phone call following the unmasking of the unit by CNN and the online investigative outfit Bellingcat last week.

In what he was told was a debriefing, Konstantin Kudryavtsev also talked about others involved in the poisoning in the Siberian city of Tomsk, and how he was sent to clean things up.

https://edition.cnn.com/2020/12/21/europe/russia-navalny-poisoning-underpants-ward/index.html

 

Good old decency pays

Decency is one of the attributes that leaders should possess. The core message in David Bodanis’ book, “The Art of Fairness”, can be found in the subtitle: “The power of decency in a world turned mean”. The Empire State Building was constructed in just 13 months, and that included the dismantling of the Waldorf-Astoria hotel that sat on the site. Paul Starrett, the builder, treated his workers rather well by the standards of the time, paying much attention to safety and paying employees on days when it was too windy to work. Daily wages were more than double the usual rate and hot meals were provided on-site. The concept is known as “efficiency wages”. Companies that compensate workers well and treat them fairly can attract better, more motivated staff.

https://www.economist.com/business/2020/12/12/why-fair-play-pays

 

 

The bank robbery capital of the world

In 1980s Los Angeles, a bank was robbed every hour of every day. Between 1985 and 1995 the approximately 3,500 retail bank branches in the region were hit 17,106 times. 1992, the worst year of all, there was an almost unimaginable 2,641 heists, one every 45 minutes of each banking day. On a particularly bad day for the FBI that year, bandits committed 28 bank licks.

With more than six million vehicles and more than 1,000 miles of freeway upon which to roam, Los Angeles has created a landscape ideal for bank robberies. By hitting a bank near a freeway onramp, a holdup man can jump on and off and be anonymously cruising surface streets miles away in a completely different police jurisdiction before the cops even get to the crime scene. Switch to a cold car or swap your stolen plates for legal ones and… see ya.

https://crimereads.com/the-rise-and-fall-of-the-bank-robbery-capital-of-the-world/

 

 

Why behavioural economics is itself biased

We spend too little time questioning our understanding of the decisions or observations other people make. If we believe they are in error, we should first question whether the error is ours. we need to inject some humility into our assessment of other people’s decisions. We need stop underestimating the intelligence of other people. We need to tone down the glee we have in communicating sexy, counterintuitive experimental findings that demonstrate errors by others. We need to stop making glib assumptions about what other people want and how they can best achieve their objectives. And importantly, we need to stop being lazy storytellers who don’t subject ourselves to the same critique that we would apply to someone else.

https://evonomics.com/why-behavioral-economics-is-itself-biased/

Compound capital over long periods of time for wealth creation

Buffett’s secret is that he’s been a good investor for 80 years. His secret is time. Most investing secrets are.

Once you accept that compounding is where the magic happens, and realize how critical time is to compounding, the most important question to answer as an investor is not, “How can I earn the highest returns?” It’s, “What are the best returns I can sustain for the longest period of time?”

That’s how you maximize wealth.

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

For building a solid long term portfolio, look at subscribing to www.intelsense.in long term advisory.

For technofunda investing and positional trading, subscribe to our Hitpicks advisory service on www.intelsense.in

For momentum trend-following systematic trading, subscribe to Quantamental at www.quantamental.in 

Highlights from 25th MOS Wealth Creation Study

There are two annual publications hat I eagerly await - Buffett's annual letter and Raamdeo Agarwal's (Motilal Oswal) Wealth Creation Study (MOSWCS). And to be fair, their quality has been going in divergent directions in the last few years. Buffett's letters have become increasingly boring and repetitive and the MOSWCS have come more and more elaborate and engaging. 

This year's study is a treat. Not only has the time horizon been increased from 5 years to 25 years for the base study but the focus on creating a detailed QGLP checklist is a great help to the investment community. As I have said many times, QGLP  is an primary investment framework that I use very often and think is one of the best and since I am also a checklist driven investor, it would help  me personally immensely. I also have 3 separate checklists and I would try to integrate all of them into 1 sometime.

My Highlights

- Stock returns are slaves of earnings power and growth. In the very long run, valuations matter less.

- Most businesses are cyclical in character. As is said, a rising tide lifts all boats. Most sectors do well when the economy is on the upswing. Thus, at the peak of the economic boom in 2007, 29 of 37 sectors recorded RoE>13%. However, for the last 7 years, that number is down to between 7 and 11.

- Only 3 sectors – Consumer/Retail, IT and Paints – maintained RoE>13% for each of the last 25 years.

- Corporate Profit to GDP has stagnated for the last 5 years. This is similar to 1999 to 2003, after which corporate profits took off for the next 5 years. 

- Permanent change in long-term interest rate band (from 12-14% to 6-8%) is leading to change in valuation expectations. Current valuations are supported by expected PAT revival after 5 years of stagnation and high liquidity led by low interest rates.

- Valuations are frothy with market cap around 100% of GDP. 

- Characteristics of wealth creators of last 5 years

○ Were small to mid in size in the base year 1995

○ Were consumer-facing, bestowing them a secular business model

○ Were very profitable (average base RoE was a robust 17%)

○ Grew to emerge as market leaders (among top 3) in their respective business

○ Had management with high integrity and competence. 

The QGLP Checklist

BUSINESS CHECKLIST

Q#1 What is the history of the company and management?

Q#2 Is the company’s business model understandable? How does it make money?

Q#3 Is the company profitable? If not, is it expected to emerge?

Q#4 Are the company’s terms of trade favorable? Is Cash flow healthy?

Q#5 What is the company’s cost and margin structure? How has it changed in the past?

Q#6 How’s the Du Pont Analysis for the company?

Q#7 What is the competitive landscape? What is the role of regulation in the business?

Q#8 Does the company enjoy an Economic Moat? What are its sources?

GROWTH CHECKLIST

Q#9 What is the addressable market opportunity and its key drivers?

Q#10 What is the company's growth plan? How sustainable is the growth?

MANAGEMENT CHECKLIST

Q#11 Is the management high on Integrity & transparency?

Q#12 Is the management competent?

Q#13 Does the management have passion / growth mindset?

Q#14 Does the company have a rational capital allocation policy?

Q#15 Does the company have a suitable organization structure and depth of management?

Q#16 What is the organization culture?

Q#17 Does the company have a sound succession plan?

Q#18 Do the owners have enough skin in the game?

Q#19 Have the promoters pledged a large portion of their holding?

PRICE CHECKLIST

Q#20 Has the financial modeling been done with earnings estimates for at least 3 years?

Q#21 Is it a QGL stock?

Q#22 Is valuation reasonable?

Q#23 Is there enough Margin of Safety?

Q#24 Is the stock reasonably liquid?

RISK CHECKLIST

Q#25 What can go wrong with the company narrative & numbers? 

 

I would strongly recommend all serious investors to read the checklist section of the MOSWCS - page 39 to 87 if they are short of time and can't go through the entire document.

Some Interesting Technical Charts

 

Here are this week's interesting technical charts. You can download the document from here

Disclaimer: These charts are for educational purposes only. It could be used to idea generation for both trading and investing purposes.

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.

I especially try to not post Corona related articles as that is all one gets to read in all traditional media.

 

If you like this collection, consider forwarding it to someone who you think will appreciate.

 

AI is coming to your home

Last week researchers showed it is possible to squeeze a powerful AI vision algorithm onto a simple, low-power computer chip that can run for months on a battery. The trick could help bring more advanced AI capabilities, like image and voice recognition, to home appliances and wearable devices, along with medical gadgets and industrial sensors.

The researchers essentially devised a way to pare down deep learning algorithms, large neural network programs that loosely mimic the way neurons connect and fire in the brain. Over the past decade, deep learning has propelled huge advances in AI, and it is the bedrock of the current AI boom.

Deep learning algorithms typically run on specialized computer chips that divide the parallel computations needed to train and run the network more effectively.

https://www.wired.com/story/ai-algorithms-slimming-fit-fridge/

 

The Cold War version 2

Regarding the trade talks themselves, what really riles both the Trumpsters and the Democrats (moderates and progressives alike) is the very way China does business: stealing intellectual property, acquiring sensitive technology through business buyouts, fusing public and private sectors so that their companies have an unfair advantage (at least by the mores of a global capitalistic trading system), currency manipulation, and so on. Trade talks, however successful, will never be able to change those fundamentals. China can adjust its business model only at the margins.

What we really have to fear is not a rising China but a declining one. A China whose economy is slowing, on the heels of the creation of a sizable middle class with a whole new category of needs and demands, is a China that may experience more social and political tensions in the following decade.

https://foreignpolicy.com/2019/01/07/a-new-cold-war-has-begun/

 

Tech retailing gets into luxury retail

Traditionally, high-end brands have been cautious about selling online. While they were growing rapidly, digital transactions were a relatively low 12% of global luxury sales in 2019. They are expected to hit 23% in 2020 and up to one-third by the middle of the decade, according to Bain & Co. projections.

Boundaries between store and website sales also blurred in new ways this year. With boutiques closed, shop assistants resorted to contacting customers through messaging apps or arranged digital consultations to drive business. Gucci’s parent company, Kering, expects these so-called “distance sales” to stick. In the future, store workers may log on during quiet times and interact with online shoppers to improve the low sales conversion rates that afflict many luxury-brand websites.

Big brands that have already poured cash into their e-commerce businesses are in the best position to control what happens next. The ideal setup for a luxury brand is to sell mostly on its own website, where margins are highest. Roughly 75% of LVMH’s e-commerce sales flow through this channel, for example. The company only works with outside platforms that give it full control over the presentation and pricing of its products.

Tech companies have spotted the opportunity. Amazon launched a new luxury store in September. Social-media platforms, too, have ambitions to turn themselves into e-commerce sites. Instagram, where many luxury shoppers already go for inspiration about what to buy, recently introduced a checkout button in the U.S. that allows them to purchase goods without leaving the app. Terms are very attractive: Instagram will take a 5% cut of transactions, compared with the 30% average charged by online luxury retailer Farfetch.

https://www.wsj.com/articles/to-sell-luxury-online-deep-pockets-matter-more-than-ever-11607682603

 

The key to a successful business is its people

Successful businesses have strong management teams which value and empower their people, they promote innovation and risk taking, encourage ownership, and adopt appropriate incentives through the full rank and file of the organisation. It’s little wonder the world’s top CEO’s and the investment industry’s sharpest minds focus on people and culture.

Even a business with product differentiation, valuable intellectual property or patents must evolve; competitors innovate, patents expire and technological advantages become redundant. The necessary process of constant evolution is ultimately driven by people.

Finding the historical financial numbers to fill a spreadsheet isn’t hard. Discovering the qualitative aspects of the business which will determine the future numbers is a little more challenging. In large part, these numbers will be determined by the people.

http://mastersinvest.com/newblog/2018/10/4/people

 

What comes after the smartphone?

We’ve spent the last few decades getting to the point that we can now give everyone on earth a cheap, reliable, easy-to-use pocket computer with access to a global information network. But so far, though over 4bn people have one of these things, we’ve only just scratched the surface of what we can do with them. There’s an old saying that the first fifty years of the car industry were about creating car companies and working out what cars should look like, and the second fifty years were about what happened once everyone had a car - they were about McDonalds and Walmart, suburbs and the remaking of the world around the car, for good and of course bad. The innovation in cars became everything around the car. One could suggest the same today about smartphones - now the innovation comes from everything else that happens around them.

https://www.ben-evans.com/benedictevans/2020/12/13/what-comes-after-smartphones

For building a solid long term portfolio, look at subscribing to www.intelsense.in long term advisory.

For technofunda investing and positional trading, subscribe to our Hitpicks advisory service on www.intelsense.in

For momentum trend following systematic trading, subscribe to Quantamental at www.quantamental.in

Some Interesting Technical Charts

Here are this week's interesting technical charts. You can download the document from here

Disclaimer: These charts are for educational purposes only. It could be used to idea generation for both trading and investing purposes.