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.

It has been a while since I have been critical of “value investing”. I have friends who keep harping on value, value all the time and yet the main thing that they are looking at is PE. So, most “value investors” are closet cheap PE investors. Anand Sridharan has written about this extremely well in his article “Business owner, not value investor”.   The term has become an oversimplified label for formulaic buying and selling of cheap crap with little regard for the nature of the underlying business. While this isn’t illegal, it is a misnomer. This activity is better represented by replacing “value” with “cheapness” in all media references. Cheapness investing, cheapness factor, cheapness index, cheapness style-box and cheapness screens. What is called value investing is often neither value nor investing. This confusion is especially severe since the greatest proponent of the term – Warren Buffett – hasn’t practiced cheapness investing in five decades. “Value investing” ends up leading a double life, one referring to Buffett and his disciples and another to the mechanical application of cheapness filters.   The focus is entirely on business, not stock price. Before owning, we spend all our time understanding the nature of the business, the context it operates in, what makes it sustainably good and what risks can spoil the party. Many businesses will drop off our list, either because they’re clearly not worth owning or it’s simply too hard to reliably establish these traits. Likewise, after owning, our focus is entirely on whether the business continues to be worth owning.   Another subject which intrigues me is decision-making. It is an extremely difficult subject simply because you make a decision usually based on incomplete facts and assumptions about the future. The future may or may not turn out as you expected. The decision may or may not turn out to have been a good one but it will only be known in hindsight. One way of looking at decision-making is the one made famous by Jeff Bezos - that of reversible and irreversible decisions.   Once you learn to see decisions through the lens of reversible and irreversible, everything changes. It also changes how you make decisions.   Make reversible decisions as soon as possible and make irreversible decisions as late as possible.   When decisions are reversible, make them fast. Your biggest risk is dragging your feet and not making a decision. The cost to acquire additional information isn’t worth the effort.   When decisions are irreversible, slow them down. The biggest risk is making the wrong decision. The cost to get the information we need to reduce uncertainty is worth the time and effort.

Thought of the Week:

“There will come a time when you believe everything is finished. That will be the beginning.” ​— Louis L'Amour   Every bear market hides the side of a bull market in it. And vice versa.

Audio/Video of the Week:

Complete story of Israel & Palestine conflict | Jews vs Arabs | Jerusalem | Dr. Vikas Divyakirti

This is in hindi. But by far the best and most comprehensive summary of the Israel-Palestine conflict. Dr Divyakirti is a fantastic teacher and explains things in a calm, composed manner starting from the biblical roots and traces down a couple of thousand years to the current events. This is a wonderful watch if you wish to understand the genesis of the longest-standing conflicts of human history.

Lessons from Charlie Munger's Folly

 

It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes. ~ Warren Buffett   This quote has been embedded in my mind since I first read it. So, I try to observe the world and keep reflecting on the mistakes that I and that others around me make. There is a lot to learn. Today, I will discuss one such mistake. And one made by, perhaps, the person I admire most – Charlie Munger. So, when our guru makes a mistake, you should sit up and take notice.

The Alibaba Saga

Here is what happened. Charlie Munger took a bet on the Chinese giant Alibaba. This was just before the Chinese government decided that Jack Ma had grown too big for their comfort and pared his wings. Munger bought his initial stake at around $246 per share. So far so good. Alibaba was a giant in China. It was one of the largest B2B and C2C ecommerce sites in the world. Alibaba was on its way to launching the largest IPO on the Shanghai Exchange in Oct 2020. Just before this, Ma addressed an assembly of high-profile figures in China with a controversial speech that criticised the Chinese financial system. And then suddenly, he practically went missing for three months. This more or less started the crash in Alibaba’s stock. From above $300 it has now crashed to close to $70, an overall fall close to 75%.

Alibaba monthly price chart

source: tradingview.com Munger probably convinced this was a passing phase and things will get back to normal after Jack Ma is “taught” a lesson in adhering to the government line, doubled down and kept adding as the stock kept falling. He added substantial quantities in the Jul-Sep quarter around $182 and again in the Oct-Dec quarter around $145. Each time he nearly doubled his position from before. He probably realised his mistake and sold half his position in the Jan-Mar quarter of 2022 at $115. Today the stock price is around $70.

Munger kept averaging down before booking partial losses

Source: gurufocus.com

The Lessons

When I sit and think about this trade, here are the lessons I draw from it. Macro matters - Nothing really changed in the company. The underlying macro factors changed. The company kept doing the same business it was doing in 2019, yet the stock is down 75%. So, those who say that macro does not matter are simply wrong. Psychological Bias Impacts All – Even if you have devoted your life to studying and understanding human biases, no one is immune from them. The steadfast belief, a form of narrative fallacy bias, in the superior “Chinese system” that Munger kept alluding to in many of his talks probably blindsided him. Any autocratic system provides great results but only as long as the system works in your interests. If it works in the opposite interests, then the downside could also be equally large. Authority bias may also have had a role to play. Li Lu recommended Alibaba to Munger. Previously, Li Lu had recommended BYD, a Chinese EV giant, and Munger had invested in it and made significant profits. Li Lu is a Chinese-born American investor and familiarity with Chinese businesses was a major advantage for him. Li Lu is also the only person that Munger has given his own money to manage, so one can understand the trust he has in his views. Thirdly, social proof, also probably played a role. Munger had taken a very large and visible position. He had spoken about the great Chinese system. He had praised the Chinese government for stepping in “preemptively to stop speculation”. The challenge with mental biases is when you have a number of them lined up together, they combine and create a lollapalooza effect which has the potential to completely blindside a person. Lack of risk management system – It does not matter how great an investor you are, you will make mistakes from time to time. There has to be a safety net that you create for yourself when you make a mistake. The one that works well is to use a stop loss. The simple reason is that it puts a floor to the maximum loss to your capital. It lets you get out of your position and then assess more objectively if there is something wrong with your thesis. The worst that can happen is after reviewing your thesis if you think that the stock is still worth buying, you can always buy it back. Otherwise, you are paralysed with a stock with falling prices and keep hoping that something will happen to turn it around. Hope is never a good investment strategy.

Summary

Mistakes will be made. You need to keep your guard high all the time. As Richard Feynman famously said, “You must not fool yourself, and you are the easiest person to fool.” As investors, most of the time we keep fooling ourselves. The best way is to have a focus on building processes that will firstly, prevent you making a mistake, and secondly, even if you do, will protect you from making great damage to your portfolio.

Note: This article was first published on The Economic Times.

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.

China and the US are at the forefront of the new cold war. History teaches us that there is armed conflict when one superpower tries to challenge another existing superpower. This is known as the Thucydides Trap. This time around the conflict could potentially be around technology and commerce. In 2008 China spent a third as much as America did on R&D and about half as much as Europe, after adjusting for differences in the cost of living. By 2014 it had surpassed Europe. By 2020 its spending was 85% of America’s.   The fruits of this investment are becoming apparent: in August a Japanese research institute calculated that China now produces more of the world’s most highly cited academic research than America does. Since 2015 more patents have been issued in China than in America. China’s output of a basket of sophisticated goods including information technology, pharmaceuticals and electronics is expected to surpass America’s this year, according to a report published by the Information Technology and Innovation Foundation, an American think-tank. “China has become a serious competitor in the foundational technologies of the 21st century,” concluded another report last year from the Belfer Centre at Harvard University.   From war to an emerging new trend in commerce. Social commerce, or the act of buying through and after being influenced by social media, is silently growing. Already enormously popular in markets such as China, social commerce remains a small but rapidly growing segment in the United States. In 2021, $37 billion in goods and services were purchased through social-commerce channels.   By 2025, that figure is expected to swell to nearly $80 billion, or 5% of total US e-commerce. Globally, the social-commerce market is expected to grow to more than $2 trillion by 2025.

Sales Growth of Social Commerce in the US

I was interviewed by the Business Today channel and shared some thoughts on the market. The interview was geared more towards the real estate sector. Here is the link to the interview.

Realty Remains Firm In Trade, Analysing Anarock Report On Housing Sales In Top 7 Cities

Thought of the Week:

“The secret to doing good research is always to be a little underemployed. You waste years by not being able to waste hours.” – Amos Tversky This is a very important thought. Time management gurus will tell you to timebox your calendar and pack your schedule, accounting for every hour of your day. But if you are always doing something, when are you thinking? When are you letting your mind wander to make connections between the ideas that may be swirling just beneath the surface of your conscious mind? It is important to have a little slack in your schedule. Just be slightly underemployed.

Audio/Video of the Week: ASML's Secret: An exclusive view from inside the global semiconductor giant

In the Netherlands stands one of the world’s biggest drivers of technological progress: ASML. It supplies machines that make chips on a scale of just a few nanometers. And the world is crying out for chips. ASML makes the most advanced machine in the world; the lithography machine to make computer chips. And with chips as a strategic asset, ASML and its machine are at the center of the world geo-political stage. What is ASML’s secret, and who are the people who build this wondrous machine? This is a wonderful documentary on ASML and how the semiconductor industry is shaping up in the age of geopolitical conflicts.

ASML's Secret: An exclusive view from inside the global semiconductor giant | VPRO Documentary

Intelsense Insights:

Quiver smallcase continued its stellar performance last month. It was up 7.15% in the last month in a turbulent market. To subscribe to Quiver: https://intelsense.smallcase.com/smallcase/INSMO_0005 Min investment is 5 lakhs. The fees are 2% per year. 1/12th of the total fees is deducted every month. So, for a corpus of 5 lakhs, the monthly fees would be around Rs 830-850 (depending on the exact capital value during the month).

Quiver performance (since inception)

Footnote: 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

National Logistics Policy – A Brief Look

National Logistics Policy 2022 is a policy initiative aimed at improving India’s overall efficiency in logistics. Here we take a brief look at what it means.

Major hurdles in the logistics industry:

India’s logistics costs amount to 13% to 15% of GDP. The country ranks 44th in logistics, while the economy ranks fifth in the world. Indian long-haul logistics is dependent largely on road transport as bottlenecks in their means of transport like railways and waterways abound. Trucks in India run around 300 kms in a day compared to a global average of 400-500 km. Out of this, the empty drive rate is as high as 40% - the primary reason being a lack of information and coordination. The railway is the second most opted medium in the country. However, both goods trains and passenger trains are run on the same rails and the passenger trains are given higher importance. Safety from damage and theft is inadequate and leaves businesses open to liabilities during goods transport. Moreover, dependency on other modes to transport goods through rail as the railway network is not always closely integrated with manufacturing and warehousing hubs.

Cost per ton-km across various modes in India

What is the government trying to achieve with the New Logistics Policy?

The main objective is to reduce costs incurred in logistics from 15% to around 8% of the GDP in the coming years. This should help in building an efficient warehousing system and creating hubs or centres for streamlining the entire supply chain process and reducing the bureaucracy and promoting cooperative federalism in trade and commerce. Reduced logistics costs should help in the accelerated growth of enterprises, SMEs and MSMEs thereby generating more employment opportunities and the development of human capital. It should also help in the emphasis on “Supply Chain Management” as an area of study and career.

Methods proposed under the policy

NLP proposes a Unified Logistics Interface Platform(ULIP) - a single portal comprising all the digital services related to logistics bringing together the unorganised service providers to standardise cost.   A common tracking of inventory levels to better facilitate the demand addressing capacity and introduction of advanced technology in tracking and coordination of various services. Ease of Logistics Service (ELOG) will be launched for grievance redressal and support to aid the continued smooth functioning of operations. ULIP is also to be well integrated with digital tools across the logistics value chain to provide an end-to-end dashboard for efficient planning and execution. 30 logistics systems of 7 Ministries/Departments have been integrated through 102 APIs with ULIP. The aim is to create a UPI kind of structure in which every single transaction of the logistics department can be authenticated.

Integration of ULIP with other digital tools

Possible hurdles that must be addressed

Huge costs are needed for the initial infrastructure developments primarily in roads, trucks, rails, warehouse development and technology implementation. Logistics is largely a disorganised market and implementation of uniform systems can be initially challenging. Reduction of tax revenue on various fronts for the government might cause bias in the effective implementation of this policy. As a digital system, system availability, efficient and fast operation, maintaining resilient and reliable backup facilities and cybersecurity are very important for smooth functioning. Any disruption that causes a delay could cause higher losses under the hub system.

How will it help?

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 who you think will appreciate it.   You can sign up to https://www.getrevue.co/profile/intelsense to receive all blogs from me directly into your inbox.   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

Narrative becomes important in the absence of earnings

In speculative periods when stock prices soar, investors frequently ignore the underlying earnings, balance sheets, etc. of stocks they own. Instead, recent price momentum dictates investors’ buy/sell decisions. Thus, a rising stock price alone is often enough justification to warrant buying shares.   One advantage that these unprofitable companies arguably have is that without existing profits, it’s impossible to compare the practicality of future profit projections.   In Simple Principles of Investment, published in 1919, the author joked: “If there is nothing to compare, there is nothing to criticize.”   Consequently, companies in this camp have more “gray area” to stir up enthusiasm, as it’s harder to disprove the feasibility of their narratives and projections. As a result, without actual profits, the company narrative becomes increasingly important for attracting capital. https://canvas.osam.com/Commentary/BlogPost?Permalink=why-fundamentals-matter

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.   The thing to keep in mind is that in any endeavor that has the potential to deliver big rewards, the best you can do is put the odds of success in your favor, which means recognizing that if you make 100 attempts at something, 99 of them might be failures but one might be an enormous win. https://collabfund.com/blog/its-supposed-to-be-hard/

Psychological investing

If your horizon stretches ten years or more, then owning a good business is one of the safest places to be. Even better: own a portfolio of such businesses. Thank goodness we have public equity markets, where we can easily buy pieces of some of the best businesses on the planet.    What makes investing hard is that things don’t unfold in an even, or predictable, manner. There are some great runs, there are nasty drawdowns and there are extended periods where you seem to go nowhere. Each presents lots of opportunities for investors to make costly mistakes.   You can lower the risks of making mistakes, too, by severely limiting the kinds of businesses you own in the first place. Investors usually focus on trying to find ideas that will perform, or perhaps where they feel they won’t lose money. But I will suggest another, less appreciated angle: think about the psychology involved in owning the name.   We have to admit part of investing is psychological - maybe the most important part. And we know the market will test us along the way. So, we have to look for businesses we would be comfortable holding even during bad times. https://www.woodlockhousefamilycapital.com/post/a-safe-place-to-hide

Quote of the Week:

“Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much-loved hand— you must learn to handle mistakes and new facts that change the odds.” ~Charlie Munger

Audio/Video of the Week: How to Time the Market

🔴 How to Time the Market (w/ Milton Berg)

Insights@Intelsense

Quiver smallcase https://publisher.smallcase.com/smallcase/INSMO_0005 has been performing well since its inception with a CAGR of 25.78%. It has been able to outperform consistently over the entire duration.

CAGR of 25.78%

Consistent Outperformance