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Monday 31 December 2018

ET Article: Investment strategy for election year? Just don't think too much!

2018 has been a very testing year for equity holders. Investors in midcaps and smallcaps have bled profusely. Largecap indices, with the exception of a handful of stocks, have also gone down. This is normal. Equity returns are not linear. Equity as an asset class does not give steady, regular returns. 2017 was a year of super-normal profits. On a two year timeframe investors have still made positive returns. It is the recency effect and the availability bias which plays tricks with our minds and makes us feel that the markets have let us down!
I will not hazard a guess on what the market will be like in 2019. Not because I don’t want to, but simply because I don’t know how to. I know at this time of the year, it is fashionable and probably expected to prognosticate about the next year, but I will refrain from that. Instead let me talk about a few important things that we should keep our eyes out for.
Firstly, let’s talk about the elephant in the room and get it out of the way - the general elections. Historically, Indian markets have had large swings immediately before or after the general elections. However, if we have a 2 year view, elections and its results don’t matter much. In 2004, the Nifty went circuit down post-elections, and yet the market went on to have a great bull rally for the next 3 years. Exactly, the opposite happened in 2009. The market went circuit up and then did not do much for the next 2 years. In the US elections, when Trump won, markets where expected to crash, yet it rallied. Recently, in the state elections, the ruling party lost in 3 of the major states yet the market went up instead of falling as was generally expected. I would argue that not only is it not possible to figure out election results, but it is not important to do so for investing.
Next is the US-China trade war. It is something which is too difficult and complicated to be able to infer its implications. One thing in India’s favour is that most of India’s economy is domestic-consumption driven and not dependent on either US or China.
Oil prices can destabilize our economy to a great extent. How it behaves in 2019 and beyond needs to be on our radar as investors because it can impact the currency and interest rates. We, as a nation, need to start actively looking at renewables and reducing our dependence on oil imports. 2019 is a year as good as any to get started on this.  
Job creation in the age of increasing automation is going to be an ongoing challenge. India needs to be able to support its huge population with jobs. We are in a peculiar situation with a scarcity at both ends of the spectrum. Industry doyens keep talking about unavailability of employable people and on the other hand our youth have no jobs. Should we be focusing on vocational training instead of trying to push everyone to get a graduation degree? What about the quality of education being imparted at various levels?
While these have nothing directly to do with equity investing in 2019, tackling these problems by an enterprise can provide long term mega-themes.
India is a 2.5 trillion dollar economy today. At the current pace, we should double in 8-9 years and then double again in another 8-9 years. In this while, market cap should also go up substantially from current levels because a lot more of the large unlisted players would come to the capital markets through IPOs. At a 100% market cap to GDP ratio, we are looking at approximately 10 trillion market cap in 16 to 18 years.  That is a 5-fold rise at the market level in that time frame. Individual stocks will definitely do much better. So, keep an eye on the longer term wealth creation stories, be invested in a well-chosen portfolio of stocks and fasten your seat belts for a bumpy ride on the way.

This article first appeared in Economic Times on 1-Jan-2019

Friday 21 December 2018

Weekly Reading: Some Interesting Stuff

The creative destruction of capitalism gives it a remarkable advantage over other systems. You sometimes have to be willing and able to tear down in order to build up. The old and proven and venerable must sometimes give way to the new and innovative and transformational.
A capitalist economy should be judged not just on the aggregate economic improvement driven by its innovation but also on the design and strength of the social safety net that cushions the ill, or disadvantaged, or those who simply fail to thrive in their particular setting, geography, industry, or trade. After all, creative destruction is still destruction, even if inevitable and in the service of a net gain to society.

They analyze the DNA in a patient’s cancer cells. Using special algorithms, a computer then scours data on thousands of gene variants, hundreds of anticancer drugs, and millions of drug combinations to find the treatment that best targets the tumor’s abnormalities. It may be a new immunotherapy, old-line chemotherapy, hormonal therapies, or drugs that aren’t specifically approved for cancer.
Precision medicine flips the script on conventional medicine, which typically offers blanket recommendations and prescribes treatments designed to help more people than they harm but that might not work for you. The approach recognizes that we each possess distinct molecular characteristics, and they have an outsize impact on our health.

Third installment on how to write well, by Jason Zweig. This series is a must-read for all those who like serious reading and writing.
The essence of rewriting is destruction.  Journalists and other professional writers almost always call it “killing my darlings.”  Cutting is bloody, but rewriting is what hurts, because it requires brutal self-examination.  Rewriting also hurts more than cutting because, after you already put all that work into striving for perfection, now you have to scan everything you did with a cold, alien, objective eye that focuses on finding every imperfection.  If you can’t find any, you are writing, but you are not a writer.

Notes from Durgesh shah's talk at the second Value Investing Pioneer's Summit organised by the CFA Society, New Delhi.

New York Times' collection of the 100 most notable books of 2018

Friday 14 December 2018

Weekly Reading: Some Interesting Stuff

This is one of the best articles' I have read this year. So many wow moments in this. Here are some excerpts:
When a supernova explodes, the blast wave creates high-energy particles that scatter in every direction; scientists believe there is a minute chance that one of the errant particles, known as a cosmic ray, can hit a computer chip on Earth, flipping a 0 to a 1. The world’s most robust computer systems, at NASA, financial firms, and the like, used special hardware that could tolerate single bit-flips. But Google, which was still operating like a startup, bought cheaper computers that lacked that feature. 

They were relentless optimizers. When a car goes around a turn, more ground must be covered by the outside wheels; likewise, the outer edge of a spinning hard disk moves faster than the inner one. Google had moved the most frequently accessed data to the outside, so that bits could flow faster under the read-head, but had left the inner half empty; Jeff and Sanjay used the space to store preprocessed data for common search queries. 

A list of the best scientific innovations of 2018. A fascinating peek into where we as humans are going. Things like the Iron-Man jet suit, indoor smart garden, shape-shifting vehicle wheels and the world's first migraine prevention drug make the list interesting and entertaining.

New technology is the key reason for today’s high equity valuations, he said: “It’s created this vision of a world for all of us where we can have high growth and no inflation forever.” But the United States has had many periods of technological change since the late 1800s and none ever produced permanent high growth and low inflation.
So China will abandon its link to the dollar. “It’s just not conceivable that the second-biggest economy in the world would take its monetary policy from Washington, DC,” Napier said. He expects an initial devaluation, then a free-floating RMB that allows China to inflate away its debt. And when the currency relationship ends, so will the nirvana of high US growth, low inflation, and high equity valuations.

A fascinating article on how Sweden has managed to be great at creating new start-ups in business and the changes it has put in place over the last 30 years to get where it is today.

How can 2018 be complete without something about graphite ;-)
Over the next five years, demand for graphite electrodes is expected to outstrip supply, keeping prices high. (Capacity is expected to grow by 8 percent annually, but demand should grow by 12 percent.) “We see this uplift as structural,” noted Sumangal Nevatia in a Macquarie Research report in June. “With no substitute, growing demand and limited new supply, graphite electrodes are now more a ‘strategic resource’ than a ­‘commodity.’ ”

Thursday 29 November 2018

Weekly Reading - Some Interesting Stuff

A beautiful glimpse into the Bombay Plan, a powerful planning document created by the most powerful businessmen and technocrats of India in 1944, and what it wanted to achieve.
The Bombay Plan’s targets were overwhelmingly more ambitious than anything the Planning Commission of the government of India ever attempted. It had envisaged the doubling of per capita income over fifteen years and proposed appropriate sources of finance for that ambitious target. 

Brian Acton, the founder of WhatsApp, walked away from $850m when he resigned and moved out of Facebook. He speaks at length about that and other aspects. Paints a very poor picture of Facebook as a company. Fascinating read.

Google employees have renewed their public protests against “Project Dragonfly,” a censored and surveillance-enabling search app that Google is reportedly building for the Chinese market.  oogle has said little about Dragonfly, but numerous reports have detailed its planned features, which reportedly range from blocking specific keywords like “human rights” to linking searches with users’ phone numbers.

Verily Life Sciences, a research organisation run by Alphabet, Google's parent company, plans to infect thousands of male Aedes aegypti mosquitoes with Wolbachia, a common bacterium, and release them out in the open. This breed of genetically altered male mosquitoes, which don't bite humans, would then mate with the females, and pass on Wolbachia. Now, if the female mosquitoes lay eggs, those eggs will not hatch!

Food-delivery sites can, in the long run, switch customer loyalty from restaurants to the platform itself. A Swiggy user, for instance, may go for the cheapest or closest option rather than picking a restaurant deliberately. “Once the platforms have enough clout, they can dictate prices or even set up their own kitchens".

This is something which is very concerning and scary for the country, and unfortunately is not getting the importance it deserves from both policymakers and the media.
Employability across education domains are less than 50% across board.


Thursday 22 November 2018

Market View: Be cautious, be on the lookout for sustainable earnings growth

Since the last time I wrote in ET Markets, the biggest macro headwind for India has now taken a few steps back. Oil prices are down from its recent highs and keep going down, bringing down the USD-INR down along with it. The macro analysts continue to fret about the impending state elections, general elections next year, US-China trade war and very recently the US market fall. Somehow, I have always seen that there is something or the other to worry about in the global economy. But as the world has seen, companies have survived and thrived over the last century despite two world wars and countless natural and man-made calamities. The challenge is that everyone wants to get rich in a short period of time. No one has the patience and mental fortitude required to hold on to good businesses over their business cycle. Business results, in general, tend to be mean-reverting, which means over time, great results become mediocre and poor results get better.

Now that quarterly results have mostly come in, they indicate a total revenue growth of 20% on aggregate and around 78% of companies have a positive or flat growth. The results of the universe of stocks I track have been improving in the last two quarters and although everything is not hunky-dory as yet, things are not drastically bad as well. Valuations, however, are still on the higher side. Good businesses with long-term earnings visibility continue to be expensive.

Domestic mutual funds continue to see strong inflows. The share of equity-oriented schemes is now 41.2% of the industry assets in October 2018, up from 38% in October 2017. Equity and equity-linked schemes attracted Rs 12,622 crores, besides, Rs 55,296 crore was invested in balanced funds in October. Inflows into SIP funds were at 7,900 crores, up 42% from last year. A sustained inflow of retail capital into the India markets and especially through mutual funds is a good indication of retail participation. This trend is unlikely to wane in the near future as more and more retail investors get used to their monthly SIPs. I see a lot of similarity between India of today and the early 1980s in the US when the retail investment boom was fueled by the 401(k) plan. The 401(k) in my opinion was one of the main catalysts of the biggest 20-year boom in US markets till 2000 dot-com bust.

An investor makes money essentially by earnings growth and PE expansion. The case for PE expansion in India as of now seems limited as we are already above the average historical PE. Incremental returns in the near future are more likely to come from earnings growth, so as active investors we need to focus on those businesses which are able to generate above-average earnings growth. Some sectors such as Chemicals, Hotels, Paper, IT, Optical Fibre and Cables seem to be doing well and should be kept on our watchlist for deeper study.

This article first appeared in Economic Times ET Market Moghuls section on 22-Nov-2018.

Monday 19 November 2018

Weekly Reading - Some Interesting Stuff

A breakthrough, if it happens, that has very large consequences to humans. Xenotransplantation using genetically modified pigs for organ "farming" can be a life saver for people.
After years of setbacks, the past two years have seen a cascade of record-breaking xenotransplants using primate models, and researchers are working with regulators to prepare for clinical trials with humans. The first pig-to-human skin graft using live cells is set to take place this month in Boston. At the same time, Tector is readying a clinical trial in which he will install his triple-knockout pigs’ kidneys in dialysis patients who are unlikely to be considered for human-donor organs.

A critical review of "All is well" book factfulness by Hans Rosling. This article argues that Rosling only cherry picked the "good" data and left the difficult and bad data out of his study to present a rosy picture of the world.

Apple is increasingly "milking" its captive user base to sell services and is unable to sell more gadgets.

A wonderful collection of pictures to remind us how smartphones have become all pervasive in our lives.

An article on Shane Parrish, who runs the best blog in the world, in my opinion, and how he got to doing this.

An interesting article on how labour reforms, specifically wage reform, can improve the capitalist system.

Friday 9 November 2018

Weekly Reading: Some Interesting Stuff

Here is wishing everyone a very Happy Diwali.

Wonderful article on the search for investment edge. Has some wonderful anecdotes.
In 1834, however, the signal from a similar optical telegraph system in France lost its edge when the data became corrupted.
In the world’s first cyber-attack, two bankers bribed a telegraph operator to transmit false information about the bond market to unsuspecting investors in Bordeaux, which would benefit the banker’s positions.

We are not just using plastic, we are eating them too!
If the pieces of plastic were in these people’s digestive tracts, nobody is sure yet how they got there. Some might be coming up the food chain — ingested when we eat creatures that ate plastics, or when we eat creatures that ate creatures that ate plastic, etc. Some may be coming from water bottles and food containers. Other studies have shown that both tap water and bottled water are contaminated with microplastics. A story in National Geographic points out that carpeting and other household items can shed plastic fibers, and that fibers from synthetic clothing are floating around our homes.
Also unknown are the health ramifications, if there are any. In studies of sea birds, ingesting plastic had exposed them to chemicals called phthalates, which are known hormone disrupters.

A very interesting new research on how the potato, brought back by the Spanish from South America in the 16th century to Europe, ushered in an era of high farm productivity, which in turn reduced armed conflict significantly in the following 200 years.

The difference on being humble and being humble :-)

A wonderful compilation of corporate misdemeanors in India by Rudra Chowdhury.

And now, bottled air!!