Equity Advisory

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Friday 5 April 2019

Weekend Reading: Some Interesting Stuff

A possible ground-breaking discovery in energy storage. An Australian startup says it's built the world's first working thermal battery, a device with a lifetime of at least 20 years that can store six times more energy than lithium-ion batteries per volume, for 60-80 percent of the price.

How IKEA is changing its business model from selling furniture to renting it out. Thus its moving to the subscription economy.

India has announced that it will eliminate all single-use plastic in the country by 2022. The pledge is the most ambitious yet of the global actions to combat plastic pollution that are taking place in 60 nations around the world.

I am always looking for stories on business failures. Here is a recent one.
WOW Air launched in 2011 as a discount regional carrier that offered cheap, no-frills fares designed to undercut legacy players. Along the way, it decided to compete with the bigger airlines, specifically Icelandair, by offering transatlantic flights. That decision required WOW to upgrade its fleet with larger jets capable of making longer trips.
Because of all the variables involved – many of which companies like WOW cannot control – airlines are inherently risky ventures. “In the case of WOW, it’s likely a combination of multiple factors that created difficulties,” Tsoukalas noted. The company’s aggressive expansion “required a large capital investment and not only complicated its operations, but also made it more difficult to fill the extra seats. At the same time, the company had to deal with upward trending fuel prices … and likely increasing wages as its staff started become more senior. In a sense, over time, some low-cost carriers start resembling legacy carriers more and more.”

Amazon is planning to build a network of more than 3,000 satellites federal filings reveal, in an ambitious attempt to provide global internet access.
Project Kuiper is a new initiative to launch a constellation of low Earth orbit satellites that will provide low-latency, high-speed broadband connectivity to unserved and underserved communities around the world.

Friday 29 March 2019

Weekend Reading: Some Interesting Stuff

Interesting fact - In China, under pressure from the government, video game publisher Tencent limited playing time for its most popular game, Honour of Kings, to two hours per day for players under 18 and one hour per day for players under 12.

In Beijing, it’s often cheaper to have food delivered than to get it yourself. Ordering from a local restaurant’s roast duck dish for 20 yuan ($2.99), is about 80 percent less than it costs at the restaurent, via delivery app Meituan.
Alibaba and its various subsidiaries dominate the country’s online retail market for physical goods, but Meituan is leading the way in services. Its app has 600,000 delivery people serving 400 million customers a year in 2,800 cities.
Alibaba is betting it can undercut Meituan to death. Both companies are spending billions in an escalating war of subsidies that is helping people get a "free-lunch"!!

A simple personal finance article that reiterates the ageless rules. Some of the rules are 1) Save atleast 10% of your income, 2) Control expenses, 3) Invest your savings (don't just stash it away in a bank savings account), 4) Understand your risks to your investments, 5) Build assets and equity with your money, 6) Insure yourself, 7) Increase your ability to earn.

A detailed account of the Chinese chemical industry.
The new environmental regulations are having only limited impact on the big upstream petrochemical and chemical intermediates and polymer plants, most of which are built with appropriate emissions controls and waste-treatment facilities. The severe impact is on the thousands of smaller plants that make all the specialty chemicals, from coatings and dyestuffs and pesticides to food ingredients and surfactants, used by Chinese manufacturing and agriculture and by Chinese consumers. These are typically privately owned operations often lacking appropriate waste-management capabilities and located in urban areas. The moves to shut down out-of-compliance plants have affected large numbers of these small operations, but the impact on overall chemical output has been less severe. In Shandong province, for example, the government closed 25 percent of all the chemical companies operating in the province during 2018, but this affected only 5 percent of output.
Looking ahead over the next three to five years, we expect China’s environmental authorities to continue to push enforcement energetically in the designated “radical change” regions, which account for nearly 50 percent of China’s chemical production, as well as push for improvements in the “moderately strengthened” enforcement regions.

Netflix is finally offering Indians the one thing they care most about: cheap subscription plans. On March 26, the video streaming platform launched the test run of a mobile-only plan for Rs250 ($4) a monthhalf the price of its basic plan.
Competition in India’s OTT sector, which is slated to surpass $5 billion by 2023, will become even stiffer. In addition to rivals Amazon Prime Video and Hotstar, new behemoth entrants like Disney and Apple could also come fighting for a piece of the India streaming pie.
The dynamics could change drastically if, say, Disney pulls all its content off Netflix.

Wednesday 27 March 2019

Be Careful of Moats

Moat is a concept that was brought into the forefront of investment discussions by Buffett. He made it famous by describing it as, "But all the time, if you've got a wonderful castle, there are people out there who are going to try and attack it and take it away from you. And I want a castle that I can understand, but I want a castle with a moat around it."

A business with a moat would imply one which has higher earnings power, higher margins and higher returns on capital than one without. A good way to think about moats is by asking yourself, if prices can be increased without loss of customers or can competitors reduce price and take away the customers of the company?

Some sources of sustainable competitive advantage can come from the following:
-     Better products – Google, Apple etc
-     Intellectual capital (Patents / Copyright) – Big Pharma, Disney
-     Lower cost structure – Shree Cement, Tata Steel
-     Captive customers (high switching costs for customers) – Banks, Corporate ERP systems (e.g. SAP)
-     High entry barriers to business (huge capital, license, hazard, geographical dominance etc) – ONGC, Maruti, Microsoft Windows
-     Economies of scale – Incremental cost of production reduces – Android
-     Distribution (ability to reach more customers) – Hindustan Unilever, Amazon etc
-     Better known brands, which help customers reduce search efforts – Nescafe, Levi’s, Pidilite (Fevicol) etc

Just having a well-recognized brand does not comprise a moat. The brand needs to be able to translate into better higher earnings power. For example, in consumer electronics, Sony is a globally well-recognized brand. But will anyone pay a significantly higher price for a Sony TV today? A good brand is one which is able to reduce search costs for alternatives for a consumer. It becomes an automatic choice. And that can become a very powerful tool for a company.

Moat comprises of two components - sustainable competitive advantage and competitive advantage period. Most of the time, investors focus on only the first. In real life, the second (the duration of time when the competitive advantage period plays out) is equally or sometimes, more important. As we have seen over history, very few companies are able to sustain for very long. We only have a handful of companies which used to operate a hundred years back. In the US, which has a much longer documented history of capital markets, General Electric is the only company which remained a constituent for over a hundred years. If we look at the Sensex when it was first constituted, the list of companies was as follows:
Asian Cables, Ballarpur Industries, Bombay Burmah, Ceat Ltd, Century Textiles, Crompton Greaves, Glaxo Smithkline, Grasim, GSFC, Hindalco, Hindustan Motors, HLL, Indian Hotels, Indian Organics, Indian Rayon, ITC, Kirloskar Cummins, L&T, M&M, Mukand, Nestle, Reliance Industries, Scindia Shipping, Siemens, Tata Motors, Tata Power, Tata Steel, Zenith.
A large number of these companies either have ceased to exist or are a pale shadow of their former selves. This just goes to prove that a competitive advantage does not last indefinitely. A company needs to continuously work at widening its moat. As an investor, even if we identify a company with an apparent moat, we need to continuously keep an eye out for the changes to its competitive position.

Friday 22 March 2019

Weekend Reading - Some Interesting Stuff

Just like low-cost airlines charge us for every additional feature, apparently, Boeing does the same to them! There were 2 critical safety features that Boeing sells as optional, which could have prevented the recent catastrophic crashes. Standard 737 Max planes are not equipped with a so-called angle of attack indicator or an angle of attack disagree light. 

Amazon is planning to launch close to 2000 brick-and-mortar retail supermarkets in the US. It will be Amazon’s sixth physical retail format after Whole Foods, Amazon Books, Amazon Go, Amazon 4-Star and Amazon Pop-Up. Though Amazon is a behemoth in online retail, it's market share in overall retail in the US is small (between 5%-8% based on estimates). Now, it may be gearing up to challenge that position.

While on the topic of Amazon, here is a detailed look at how Amazon progressively improved its online retail business to get where it is today.

I have found that being able to do the basic things well lead to excellent results. Now there is research which proves me right.

We are now very close to having the technology to bring back extinct animals. Here is an article on why it does not make sense to do so (other than of course the horrors of a Jurassic Park kind of tragedy!!)

Friday 15 March 2019

Weekly Reading - Some Interesting Stuff

A wonderful article on St├ęphane Breitwieser, who robbed nearly 200 museums, amassed a collection of treasures worth more than $1.4 billion.
When it comes to stealing from museums, St├ęphane Breitwieser is virtually peerless. He is one of the most prolific and successful art thieves who has ever lived. Done right, his technique—daytime, no violence, performed like a magic trick, sometimes with guards in the room—never involves a dash to a getaway car. 

A detailed look at how the shared economy is shaping the traditional business model and how the hotel business is adapting and changing to the new situation.

Delivery robots can, over time, also become "goods-shifting" robots.
If the arrival of automated delivery robots could lower the effort to sell or return goods to the minimal amount it now takes to buy them, users might exchange products through a new kind of logistical network that would make the process of acquiring and trading physical objects as frictionless as that of downloading and deleting digital files. Users might trade products among themselves through new kinds of logistical networks — a kind of peer-to-peer sharing for physical objects.

Algorithms can now make your psychological profile from your social media interactions! That has major commercial ramifications like advertising targeted to your specific moods. This, and other kinds of profiling, are not limited to only social media.
There are systems today which automate a job interview: job seekers speak with a computer by telephone, which then creates a detailed psychogram based on their responses.  Software that analyzes faces for clues to mood, personality or other psychological features is being explored as well. 

A fascinating glimpse into the thought process of Vaclav Smil.
Confusing models with reality is a cardinal sin of clear thinking. If you believe too strongly in your models of the world, you can start to ignore evidence that your model is wrong.

Sunday 3 March 2019

Improving Investing Acumen

My presentation in today's VP Kolkata meet

Attributes of a Great Investor by abhishekbasumallick on Scribd

For those having difficulty accessing the above link, please try this:

Friday 1 March 2019

Weekly Reading - Some Interesting Stuff

This is an article on how independent hotels may be better off than their branded brethren in the hotel industry. They can offer a better customer experience by being niche and exclusive.

Bill Gates is one of the most intelligent and prescient people alive. His annual letters are a treat to read. They remain optimistic about the future of the world. This year they have picked nine areas which have surprised them. Overall, a very nice read.

Bata India has been the ubiquitous show brand that nearly all of us grew up with. Now they are reinventing themselves.

India and Bangladesh are a study in contrast, though not directly comparable. Bangladesh follows a labour-intensive manufacturing model for development. India, on the other hand, is progressing as a services-oriented economy. But there is a twist in the tale.

The developing world is at risk of premature deindustrialization. If Bangladesh fails due to competition from rich-world robots, it will bode ill for countries such as Ethiopia that are looking to hop on the escalator to prosperity. That would leave India’s service-centric development model as the only feasible path.

We need to wake up to the alarming situation that we are pushing ourselves into. Air pollution, water scarcity need to be attacked with major policy initiatives and also at personal levels for all of us.