Equity Advisory

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Friday 27 March 2020

Weekend Reading

I am personally tired of reading, watching and listening about the Coronavirus. So, this week there is nothing related to it or to its impact on the economy or anything like that. Stay indoors. Staf safe. We shall overcome.

Deep thinking works
Put bluntly, facts don’t exist. Versions of them do. Even if we could agree on facts, different versions of facts exist for each individual. And that’s a big reason many of us like to simplify this disparate view into numbers/financial statements, albeit losing perspective and nuance. In the world of big data, robots may arbitrage headlines, but they can’t (at least yet) ponder multiple subjective arguments like we can do. Counterintuitively, stretching investment horizons simplifies our job is in spite of additional possible outcomes. At least we are an order of magnitude right instead of precisely wrong.

Jay Leno always saved money from his second income
From the moment he entered the working world, “I always had two incomes. I’d bank one and I’d spend one.” Leno continued relying on this strategy even after he started hosting “The Tonight Show” in 1992, even though he reportedly earned as much as $30 million a year at the height of his career.
“When I got ‘The Tonight Show,’ I always made sure I did 150 [comedy show] gigs a year so I never had to touch the principal,” Leno says. “I’ve never touched a dime of my ‘Tonight Show’ money. Ever.”

The story of friendship amidst competitors
When one industry stalwart, B.K.Birla, invites two his biggest competitors in the tea industry, B.M Khaitan and G.P.Goenka, to the board and they stay on for 33 & 43 years!
There is nothing unusual in founder shareholders inviting other businessmen to join a company’s board to expand management bandwidth, but what Birla did was unique: he invited two key industrialists from Kolkata who were invested in the same business to join his company’s board.

10,000 Experiments Beat 10,000 Hours of practice
Following the 10,000-experiment rule means starting your day with not just a to-do list but a “to-test” list like Leonardo Da Vinci. According to Walter Isaacson, one of Da Vinci’s biographers, “Every morning his life hack was: make a list of what he wants to know. Why do people yawn? What does the tongue of a woodpecker look like?”
As you go through your day, following the 10,000-experiment rule means constantly looking for opportunities to collect data rather than just doing what you need to do. It means adding a deliberate reflection process based on reviewing data before the day ends.

Taking a break makes you stronger. Ask Federer.
Just three weeks before his 36th birthday, Roger Federer won his eighth Wimbledon and 19th career Grand Slam. Among all his other remarkable achievements, the two Grand Slams he has won in 2017 stands out – not because it proves how ridiculously talented he is but simply because they have come against the run of play. For a while now, sportsmen have been walking away from the sport they so obsessively love, taking a break and coming back even stronger.

Sunday 22 March 2020

The Corona, Credit & Crude Conundrum

I shared this with Intelsense advisory members earlier.

You can download the document from https://intelsense.in/Saved/200322103826658_The_C3_Effect.pdf

or view it on Scribd (needs you to be logged in)

Tuesday 17 March 2020

The Index Fund Bubble

The global order for investment management firms has changed in the last 5 years. Index investing now more or less accounts for 20-40% of the global capital deployed whether through index funds, ETFs or index-hugging funds. Since an index does not have a cash allocation, there is no buffer when it starts going down. While going up, it feeds into the frenzy and the index constituents get more than their fair share of capital flows. And no one complains. When the tide reverses, the exact opposite happens. Stocks fall because they have fallen a lot. A virtuous cycle turns into a vicious cycle.

This is what we are seeing now. 

The way it possibly ends is when other investors (discretionary/quant/alpha-oriented funds) decide that some factor they are tracking (could be valuations, could be any other metric like volatility, global macro, relative strength, overbought/oversold indicators etc) is now in their comfort zone and start buying. The other possibility is that large investors will get scared of the fall in the indices and full out money thereby starving the passive funds of their fuel.

This is a reason why we are seeing such increased volatility in the global markets.

From a fundamental perspective, earnings are going to be severely hit, supply chains dented (maybe permanently for some, which I have discussed in my previous post). People still are trying to assess how bad things are going to be. 

One thing I am sure. We will now be extrapolating our fears.

No one said investing was easy. Equity gets a risk premium over other asset classes. Yes. A risk premium. Because it is risky!! 

To end let me quote, my friend and fellow VP member @zygo23554:
This virus is God's wrath that brings to the fore fragilities and frailties in your health, relationships and portfolios. 
Fear yourself, not the virus. All it does is show you the mirror so you realize who you truly are. 

Monday 9 March 2020

What is changing in the business world with the coronavirus?

Just wanted to note down some thoughts on the possible impacts of the current Coronavirus pandemic and the resultant global market crash. I am not an economist, neither a political analyst but merely an observer of human and system behaviour.

Supply chain optimisation likely to incorporate redundancy and failover
The current global supply chain is optimised based on cost and time. That is manufacturers tend to get their components or parts built in places where it is cheapest t produce and ships it to the factories just-in-time. With a large-scale pandemic like situation, which comes right on the heels of US-China trade war, large (and small) corporates will rethink their supply chain and dependency on China. They will now need to build in inventory costs as the supply chain would need to factor in redundancy and supply disruption constraints. This will, in turn, increase the cost structures and reduce margins. Some industries, like electronics, which ran of wafer-thin margins, may find it very difficult to survive or will need to take price hikes.

Move from globalisation to localisation may get accelerated

The last few decades had seen an unprecedented wave of globalisation with free movement of people and products. This is increasingly facing headwinds as resistance builds up in local communities leading to economic and social strife. The rise of the right-wing globally and Brexit are manifestations of these social shifts. As more business shifts inwards, global companies will need to have a better local presence in countries they wish to do business in. Second-order impacts may include a decline of tax havens and higher taxes for global companies as they would need to pay taxes for profits in each individual country they operate out of.

New work culture building up

Working from home was prevalent in only a few industries like IT. With a lot more people getting used to working from home, it is likely that more companies will realise that they can actually run their businesses when employees do not come to one centralised office. This is a very profitable move for companies as they would be able to reduce expensive office space, maintenance, electricity and other such costs. Second-order consequences are too many to list here but a few prominent ones are negative sales impact on auto, petroleum, real estate prices. Shorter-term it would also have a negative impact on all crowded places like restaurants, shopping malls, movie theatres.

Ecommerce likely to get a boost

Online sales have already started getting bigger and is likely to expand much further once more and more people hesitate to go out in public places like crowded shops and malls.

Government & Central Banks have limited options

Respective governments and central banks essentially have two policy actions that they can use – fiscal and monetary. That is, they can tinker with taxes, government expenditure and interest rates. The issue is you cannot fix a supply-side issue with a demand-side solution. That is, if you are running say an automobile factory and don’t have the necessary supply of engines from China, then reducing interest rates will not solve your problem. This is the same reason why when food inflation shoots up, you can’t really do much by cutting rates, simply because the food is just not there. Similarly, neither does cutting taxes, both corporate and individual, help in any way. What these measures do is to price the risk in the market. With reduced interest rates, central banks (and governments) push the people to invest in riskier assets or fuel consumption or both. The last option that the government has is spending out of this problem. Government expenditure has the potential to create employment, provide a sense of security to corporates and basically spur the economic engine to start working once again, with the hope that it leads to a positive spiral of higher consumption and sustained growth coming back.

The Indian government gets a Godsend as crude prices collapse

India, as a major crude importer has just received a Godsend with crude oil prices collapsing due to the fight between Russia and OPEC (Saudi). The government finances are in a mess with no money to spend at all. With this fall in crude, the government can potentially use the money saved and channelize into infrastructure development. There are large areas where India can and should invest in for future global competitive advantage. Now is the time to get into those areas like green energy, increasing healthcare facilities, schools, colleges, railways, airports, inland waterways, ports, defence. The list can go on.

China is in a precarious situation

China is a very insulated country. But rumours are that the banking system in China is under stress and the coronavirus has only exacerbated the situation. Unless it can demonstrate that it has been able to successfully contain the outbreak and are getting back to normalcy, they will be the biggest sufferers as the global manufacturing supply chain will readjust and leave them behind. This will have a large long term impact on the social and political situation in China. But with an authoritarian government in place, it is likely that China will be able to show the resolve required to quickly get back to normal.

First global crisis in the age of social media and fake news

This is perhaps the first major global crisis in the age of social media. Social media amplifies and distorts messages, so the impact of people is very different from when all media was state-controlled or influenced.

Flight of capital to safety

There is a flight of capital towards safety and security. Unfortunately, in India, last 2 years has seen multiple critical situations in the banking and financial sector, one of which is currently underway. This has severely eroded the faith that investors have in banks. With a possibility of further rate cuts from RBI, bank deposits will become more unattractive. IN such a scenario, gold and US dollar tends to do well.

Investment horizon reduces during crashes

Market crashes have a way of reducing our time horizon from decades or years to weeks and days. If an investor just sticks to thinking about the underlying businesses and how they can get impacted by the change in the context, and maintain the long-term horizon, it will perhaps help in reducing the stress and anxiety.

Better to stick to your investment plan

All crises finally come to an end. This too shall pass. And when there is a global crisis, governments tend to take coordinated action. I would be very surprised if we do not see significant quantitative easing (reduced interest rates) and other policy measures announced by governments across the world.

So, fasten your seat belts and enjoy the ride. After a few years, you will probably tell the next generation of market participants, “Heck! I lived through that!”

Friday 6 March 2020

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.

In Amazon we trust!!
Amazon and Google are still the two most trusted internet companies. Facebook and twitter the worst!!

So, Amazon has decided to deliver your food in India
Amazon does not care for timing... You can be last in a market and still win. Of any consumer technology product in the country, food delivery gets maximum traction, followed by grocery, fast moving consumer goods and general ecommerce. Last year, Amazon shut down its four-year-old Amazon Restaurants delivery service in the United States, while it invested in food delivery platform Deliveroo in Europe, indicating the complexity of running this business at feasible unit economics.

This one does not breathe
Scientists discover first known animal that doesn't breathe. This is the first animal on Earth proven to have no mitochondrial genome and no way to breathe. A microscopic and genomic analysis of the creature revealed that, unlike all other known animals, H. salminicola has no mitochondrial genome — the small but crucial portion of DNA stored in an animal's mitochondria that includes genes responsible for respiration.

An app knows who you are
These two are must-read articles to understand where we are headed in consumer tech as well as concerns related to personal privacy.
Clearview was unknown to the general public until this January, when The New York Times reported that the secretive start-up had developed a breakthrough facial recognition system that was in use by hundreds of law enforcement agencies. The company quickly faced a backlash on multiple fronts. Facebook, Google and other tech giants sent cease-and-desist letters. You take a picture of a person, upload it and get to see public photos of that person, along with links to where those photos appeared. The system — whose backbone is a database of more than three billion images that Clearview claims to have scraped from Facebook, YouTube, Venmo and millions of other websites — goes far beyond anything ever constructed by the United States government or Silicon Valley giants.

Copying your hero
Early in my career I tried to emulate Buffett and spurned the use of spreadsheets and models. But here’s the thing: Buffett has a supercomputer in his head and I don’t. I need to visualize financial statements by building financial models. I get to feel them by building them; Buffett doesn’t. We all learn differently.
Also, the Buffett of the past is not the Buffett of the present or the future. First of all, the investing environment of 40 years ago was very different from the current one. Thus 40 years ago Buffett was fighting different battles and had different constraints. (He definitely did not have to think about negative interest rates.) The investing environment changed and Buffett evolved. He avoided airlines and technology – until he became the largest shareholder of airlines and Apple. So which Buffett do you want to emulate, the one of the past, present, or future?

Thursday 27 February 2020

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 ends of the world are melting
he ends of the Earth are melting at a rate not seen in at least 115,000 years.  And over the past few months, there’s been increasing evidence that the changes we’re seeing at our planet’s poles are only growing more severe. These changes in the most remote places on Earth have huge consequences for our daily lives because our daily lives have huge consequences for the most remote places on Earth. Decades of routine human activities – going to work, driving a car, eating a hamburger, choosing a stock portfolio – have transformed the frozen parts of this planet on a scale never seen before. If we do not change our behaviour drastically to slow down and eventually stop the Arctic melt, rising sea levels and even faster rising global temperatures will threaten our very way of life.

The Japanese toilet - a marvel of technology
Japanese toilets are marvels of technological innovation. They have integrated bidets, which squirt water to clean your private parts. They have dryers and heated seats. They use water efficiently, clean themselves and deodorize the air, so bathrooms actually smell good. They have white noise machines, so you can fill your stall with the sound of rain for relaxation and privacy. Some even have built-in night lights and music players. It's all customizable and controlled by electronic buttons on a panel next to your seat.

The last great thing about the internet
Wikipedia is the eighth-most-visited site in the world. The English-language version recently surpassed 6 million articles and 3.5 billion words; edits materialize at a rate of 1.8 per second. It is the only not-for-profit site in the top 10, and one of only a handful in the top 100. It does not plaster itself with advertising, intrude on privacy, or provide a breeding ground for neo-Nazi trolling. Like Instagram, Twitter, and Facebook, it broadcasts user-generated content. Unlike them, it makes its product de-personified, collaborative, and for the general good. More than an encyclopaedia, Wikipedia has become a community, a library, a constitution, an experiment, a political manifesto—the closest thing there is to an online public square. It is one of the few remaining places that retains the faintly utopian glow of the early World Wide Web. A free encyclopaedia encompassing the whole of human knowledge, written almost entirely by unpaid volunteers: Can you believe that was the one that worked?

Subscription for your monthly coffee!
Panera Bread is hoping to disrupt the morning coffee. The company is unveiling a subscription plan for its most popular caffeinated drinks. For a flat rate of $8.99 a month, customers can get unlimited coffee (hot or iced) and tea at all of its stores nationwide. Coffee is an imperative component of the breakfast wars. Both Starbucks and Dunkin’ have been seeing a surge in coffee sales, thanks to the steady growth of mobile orders placed via smartphone apps. But coffee is only the start. Having a menu that reflects Americans’ desire for healthy, protein-rich breakfast items is now an industrywide mandate.

Online buying in India is fuelled by discounts
Digital buyers in India are going to reach 330 billion by the end of 2020. The phenomenon of online shopping has taken India by a storm. What sets online shopping from traditional offline stores is the practice of discounts.  Online stores, save a few exceptions, do not have to pay sales taxes- the explanation being the absence of a physical sales storefront, an office or a warehouse. While major players like Amazon and Flipkart do have warehouses, not paying sales taxes means a great deal for smaller sellers, resulting in lower prices automatically.

Thursday 20 February 2020

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.

Augmented reality comes to car workshops
Porsche Cars North America is completing the rollout of its Tech Live Look program at its 189 U.S. dealerships. The effort uses online augmented-reality technology to enable dealership techs to communicate directly with Porsche's Atlanta-based technical support team about thorny repair issues in real-time in such a way that the factory experts see what the tech sees.
The new technology enables a precise recalibration of cameras to specific distances and heights to capture needed images. It also permits precise measurement of high-voltage batteries on electric and hybrid vehicles.

Union in a tech firm
Employees at crowdfunding platform Kickstarter voted Tuesday to form a union, the first of it's kind in the technology industry, after an 18-month battle with the company’s management.
Kickstarter United will now be formally recognized by the management after a vote held by the National Labor Relations Board, in which workers voted 36 to 47 in favour of unionizing. It is the first union comprised of white-collar, full-time employees in the technology industry. Toward the end of the dot-com bubble in 2001, customer service workers at a website called etown.com successfully voted to unionize with the Communications Workers of America, which was reported by The New York Times as the first dot-com union, but the company folded the next month after it failed to secure more venture capital funding.

A brief history of advertising
In the 1830s, New York City’s most popular newspaper was just 4 pages and circulated to fewer than 3,000 people in a city with a population fast-approaching 300,000. News was a luxury item, costing 6 cents an issue, which was too expensive for most people at the time.
Then 20-something Benjamin Day had an idea. He would sell his own newspaper for just a penny, undercutting the competition. To make up for a lower price, he would sell advertisements. The idea, which was novel at the time, was not just to sell newspapers to his readers, but to sell the attention of his readers.
It may be harder than ever to get people’s attention these days because our entertainment options are now seemingly unlimited.
But the leaps forward in technology have given advertisers more avenues to reach us than ever before. And they have the ability to personalize to the end-user because so much of our lives are now available for everyone to see online.
The avenues will change and things will become more personalized. The advertisers understand human nature as well as any other industry.

When the security guard is the thief
Avast, the multibillion-dollar Czech security company doesn’t just make money from protecting its 400 million users’ information. It also profits in part because of sales of users’ Web browsing habits and has been doing so since at least 2013.
That’s led to some labelling its tools “spyware,” the very thing Avast is supposed to be protecting users from. Avast claims it recognizes customers use Avast to protect their information and so it can’t do anything that might “circumvent the security of privacy of the data including targeting by advertisers.”

The rise and reign of Jeff Bezos
The last one today is not an article, but a documentary. I have always been fascinated by Amazon and Jeff Bezos. He is a person who has shaped how today's generation view shopping. He has even changed our behaviour patterns. Very few people I know of, who do not check amazon while making a buying decision. His next big ambition of space expedition is another big and audacious goal. The recent donation of $10 billion dollars to combat climate change is another remarkable gesture. On the other hand, he also has his detractors. Those who paint him and Amazon as the villain. The documentary explores some of these aspects. Worth a watch for those who love documentaries.