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Thursday 19 May 2022
Weekend Reading
The US Housing Industry - A Snapshot
The Federal Reserve (US Fed) is done watching inflation run away and has made it a priority to cool down one of its biggest drivers: the housing market. With rising mortgage rates, Americans will not have the easy money to purchase real estate which is expected to cool down the real estate in the US.
In December, the average 30-year fixed mortgage rate sat at 3.11%. That rate is up to 5.27%—its highest level since 2009.
During much of the pandemic's housing boom, historically low mortgages shielded homebuyers, to a degree, even as home prices shot up nearly 35% over the past two years.
An analysis provided by Moody’s Analytics finds that 96% of regional housing markets are overvalued, and 27% of markets are overvalued by more than 30%.
- The most overpriced markets are Boise (by 75%); Austin (66%); Ogden, Utah (63%); Las Vegas (60%); and Atlanta (60%).
Case in point: The metros of New York City and San Francisco are overpriced by just 3% and 13%, respectively.
Why did the market rates of houses move up?
- Work-from-home made houses more important than ever
- Home prices continued to rise to create a Giffen effect on the population which created a FOMO effect on them, coaxing them to purchase a property
- Demand is concentrated in specific areas, especially the suburbs as the rates in metro cities like NYC and Detroit were already high.
- Inflation forced people to buy real assets like houses
- The migration to suburbs to find peace and better quality of life has become more real than before during the pandemic
- The continuous increase in housing prices has also reduced the supply of houses in the market. Homeowners are unwilling to sell their houses even though the prices have started to cool down from March.
- The price of labour, housing materials and other expenses have also risen sharply in recent times
Monthly supply of houses in the US
30-Year Fixed-Rate Mortgage Average in the United States
As per JP Morgan, the nationwide nominal house price index is now 40% above its 2012 low-point and 4% above the peak reached in 2006.
Challenges faced by the industry
- Rising Prices of materials, labour
- Improper suburban settlement plans
- Improper tax distribution across government states
- Prices went on a bidding spree with only the upper class and upper-middle class being able to safely bid for a house in the market
- The skyrocketing prices have led to a fall in demand as people are simply not able to afford the house
- Homeowners are not interested in selling the house at current levels either, Supply is still shorter than demand thereby increasing the prices in the long run.
In summary: Although housing is a very local-driven market and aggregate data does not show the true picture, it definitely looks like the US housing market could be in for a period of consolidation and pause. Implications for businesses that are part of the US housing supply chain could see a definite fall in revenue growth and contraction in margins.
Thursday 12 May 2022
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. 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.
Risk is something that you don't really foresee
The biggest risk is always what no one sees coming. If you don’t see something coming you’re not prepared for it. And when you’re not prepared for it its damage is amplified when it hits you.
Look at the big news stories that move the needle – Covid, 9/11, Pearl Harbor, the Great Depression. Their common trait isn’t necessarily that they were big; it’s that they were surprises, on virtually no one’s radar until they arrived.
One truth is that if you’re only saving for the risks you can envision, you’ll be unprepared for the risks you can’t imagine every time. So the right amount of savings/security/liquidity is when it feels like it’s a little too much.
It should feel excessive; it should make you wince a little.
Most of the time someone’s caught unprepared it’s not because they didn’t plan. Sometimes it’s the smartest planners in the world working tirelessly, mapping every scenario they can imagine, that end up failing. They planned for everything that made sense before getting hit by something they couldn’t fathom.
https://www.collaborativefund.com/blog/never-saw-it-coming/
Enjoy yourself, it's later than you think
Our time together is finite, but we fail to recognize it until it's too late.
Time is cruel. You’ll love it with all of your being, you may even pray for more of it, but the reality is that time doesn’t care about you.
Your relationship with time is the ultimate unrequited love.
We spend most of our lives playing a game.
Everything we do is in anticipation of the future. When that future comes, we simply reset to think about the next future.
It’s natural, but it’s a dangerous game—one that we will lose, eventually.
Time is our most precious asset and the present is all that’s guaranteed. Spend it wisely, with those you love, in ways you’ll never regret.
https://sahilbloom.substack.com/p/its-later-than-you-think
Importance of patience
Patience requires endurance against obstacles, both known and unanticipated. The longer your time horizon, the more disasters you’ll experience. Most people don't bear hardship well and quit. Depending on luck, periods of extreme hardship and under-performance may come before any success, leading to an expectation of failure.
And even if you’ve experienced a bit of success, or even a lot of success, the naysayers will always come out against you. See the many, many hit pieces on Warren Buffett at various stages of his career. The man has been “washed up” more times than a three-year-old’s t-shirt.
https://www.permanentequity.com/writings/how-patience-pays-off
The case for optimism
Since we cannot be certain of the future, optimism is only a belief -- a stance that could be incorrect. On the surface, an optimistic belief might seem no more valid than the stance of pessimism. But the deep history of new ideas makes it very clear that the optimistic stance of believing something is possible is a requirement to make anything new real, and is thus more powerful than pessimism. In the long run, optimists shape the future.
All the evidence so far indicates that there are no limits for knowledge or improvement. We’ve encountered nothing we can’t potentially improve. Every question answered by science generates at least two new questions, two new territories of unknown things that we now know we don’t know. In this way our ignorance expands faster than our knowledge, which is healthy. Because behind this expansion there is a great asymmetry: what is knowable but still unknown will always be larger than what we already know, meaning there are more possibilities waiting to be discovered than have already been discovered. This asymmetry in knowledge is reason to be optimistic, because it means there are no limits to our improvement. We can always imagine a better way -- and we are also always improving what/who the “we” is. Optimism recognizes that our potential for improvement is infinite in all directions.
https://www.warpnews.org/premium-content/kevin-kelly-the-case-for-optimism/
Market return are non-linear
This is an old blog but we need to keep reminding ourselves of the message
Returns will not be linear. Some quarters and years will be great. Some others will be horrible. If you don’t stick through the horrible, you will not be there to see the great.
If you join at the wrong time and don’t stick long enough, you may actually lose money. Wrong time or right time is known only in hindsight no matter what is the market level, global news, or under/overvaluation. If you try to get in or out, you may end up doing worse.
The right question to ask is not what is the highest return strategy that is available anywhere but what is a high a return strategy that I can stick with for long periods and let my investment compound without getting scared out of it either due to volatility or my temperament not matching with something to do with the strategy be it the kind of stocks, buying/selling frequency etc. And this is something only you can decide.
http://blog.intelsense.in/2022/02/would-you-invest-in-strategy-if-you.html
Friday 6 May 2022
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. If you like this collection, consider forwarding it to someone who you think will appreciate it.
UPFRONT
My first interview in Hindi on ET Swadesh regarding the LIC IPO - https://youtu.be/UdNbPULYyNs
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Being wealthy, not rich
I’m always interested in the difference between getting rich and staying rich. They are completely different things, and many of those skilled at the former fail at the latter.
Part of this topic is knowing the difference between rich and wealthy.
Rich means you have cash to buy stuff. Wealth means you have unspent savings and investments that provide some level of intangible and lasting pleasure – independence, autonomy, controlling your time, and doing what you want to do, when you want to do it, with whom you want to do it with, for as long as you want to do it for.
I want to be rich, because I like nice stuff. But what I value far more is to be wealthy, because I think independence is one of the only ways money can make you happier. The trick is realizing that the only way to maintain independence is if your appetite for stuff – including status – can be satiated. The goalpost has to stop moving; the expectations have to remain in check. Otherwise money has a tendency to be a liability masquerading as an asset, controlling you more than you use it to live a better life.
https://www.collaborativefund.com/blog/the-rich-and-the-wealthy/
The wealthy mindset
All the energy you put into things you can’t control comes at the expense of things you can control. And because they focus on what they can control, the second mindset is far more resilient and adaptable than the first. And that makes all the difference.
When I talk to people about this, they often bring up the wealth gap. I hear things like, “It’s easy for the rich to hire tutors and teachers and childcare and keep their kids working hard.” Yes … and that misses the point.
It is easy to overestimate the role of money and underestimate the role of mindset. Often, we convince ourselves that if only we had the resources, we would apply the second mindset. But the second mindset isn’t a luxury of the rich, it is a necessity to build wealth in the first place.
When you focus on the money you miss the leverage of mindset hiding in plain sight.
https://fs.blog/brain-food/may-1-2022/
Extreme Air Pollution Hampering India’s Solar Electricity Generation
India will struggle to meet a target of generating 100 gigawatts of solar power this year as high levels of atmospheric pollution are hindering the country’s ability to generate energy, a study has found.
Atmospheric pollution reduces solar power generation because it both absorbs and scatters the Sun’s rays, as well as leaving deposits on solar panels that reduce their efficiency.
A study carried out by IIT Delhi calculates that between 2001 and 2018 India lost 29 per cent of its solar energy potential as a result of atmospheric pollution - equivalent to an annual loss of £635m.
“Put simply, aerosols - which include fine particulate matter, dust, mist and fumes suspended in the air - significantly reduce incoming solar radiation in what we call the ‘atmospheric attenuation effect’,” said study author Sagnik Dey. “This needs to be factored in when undertaking large solar energy projects.”
Acid rain can also corrode solar power equipment and support structures which increases maintenance costs. Acid rain is caused by pollutants like sulphur dioxide and nitrogen oxides, released mainly through industrial and vehicular emissions, rising high into the atmosphere and mixing with water, oxygen and other chemicals to form corrosive acid droplets before falling back as rain.
The Library of Mistakes
The best investors learn from their mistakes. Even the most successful are wrong nearly half the time, which gives them plenty of material to dwell upon. A willingness to admit to errors, says Napier, indicates an open mind. Richard Oldfield, an experienced British fund manager, opens his witty and wise book on investment, “Simple But Not Easy”, with a chapter on his personal howlers. The investment advice imparted by Oldfield’s former employer, the merchant banker Siegmund Warburg, was to “always cry over spilt milk.” Every mistake makes one a fractionally better investor, says Oldfield.
George Soros places mistakes at the heart of his investment process. The Hungarian-born billionaire claims to have an acute sense of his own fallibility. “To others, being wrong is a source of shame,” Soros wrote. “To me recognising my mistakes is a source of pride. Once we realise that imperfect understanding is the human condition, there is no shame in being wrong, only in failing to correct our mistakes.” Soros’s approach as a hedge fund manager was to first establish a position and then consider how he might be wrong. In his view, the recognition and rectification of mistakes constitute the hard job of investing. The rest is a cinch.
https://www.reuters.com/breakingviews/global-markets-breakingviews-2022-05-05/
Learning is a series of sprints, not a marathon
People often complain that there just aren’t enough hours in the day. That they have too many things to do, and not enough time to complete all of the work. The proposed solution is better time management: organize the hours in your day better and you’ll get more done.
Time isn’t what’s limited in the day (otherwise you wouldn’t waste so much of it) but your energy is. Energy runs out faster than time, which is why it’s easy to procrastinate, even when you have a lot of work to do.
This theory explains personal productivity much better than time management. If time were the limited resource, procrastination wouldn’t be an issue, only scheduling would be. It also explains why many new productivity systems work for a couple weeks and then fail. You can burn your energy reserves intensely for some time before they get used up and you slide back to a lower operating efficiency.
This also explains why focusing is so difficult. Focus requires a lot of energy to be used in a short burst. Learning is tough mental work, just as sprinting is tough physical work. Just as you can only sprint so long before needing to stop, or slow to a light jog, you can only learn intensely for a short period before you start getting distracted.
If you’re studying full-time, I recommend establishing a policy of not doing any studying on one weekend day and on evenings, after a certain hour. If you’re juggling a job and learning, I recommend picking specific hours to learn, in advance, and don’t study outside of them. Many people I’ve spoken with have found early morning most efficient, since they’re not exhausted from the day’s work yet.
Learning, when done well, is like a series of sprints, not a marathon. That means you have bursts of focus, followed by periods of rest. Both are essential.
Thursday 5 May 2022
What to do now?
The last few days have been extremely volatile. If you have watched the last interview I gave on ET NOW, I had mentioned that my sense is we will remain extremely volatile in the next 4-6 months before things get better. For those who might have missed it, here is the link. Margin pressure will ease because raw material prices are likely to stabilise. Inflation will also start looking better because last year's high base rate will come into the picture and year-on-year growth in inflation will look lesser. Also, with the passage of time, the knee-jerk reaction of market participants will also likely reduce.
One interesting phenomenon to watch for is the FII / DII / retail investor flows. My sense is, and I could be completely wrong, that we will see a reversal in trend and see FII inflows and DII/retail outflows. FIIs will come looking for a safe haven and where there is some semblance of growth in an inflationary world. Retail investors, many of whom are first-timers, will be seeing their portfolios taking a beating and their fundamental assumption that making money in the market is easy will get challenged. Also, with normalisation post-Covid, people would return back to their professions and free time and mind space to dabble in trading will reduce which is more than likely to reduce their fund flows.
Another point which I tell often and probably is a great time to reiterate now is that market returns are non-linear. A 20% CAGR does not mean you will get a 20% return every year. Returns over shorter periods will be all over the place. Some years we will see negative returns and some years we will see very large returns. In general, if you are investing in equities, always keep in mind that a 10% correction is likely every year, 20% every 3 years and 30% every 7-8 years.
As investors with a 3-5 year view, I think it is a great time to remain disciplined. Those who sip into the portfolio stocks, keep doing it. One slight modification you may want to do is increase the frequency of deploying your capital. If you were buying once a month, do it 3-4 times a month now. Buy on the days when the markets are crashing. That way you are likely to benefit in two important ways:
1) you will get a better average price
2) you will feel happier that you have bought at a lower price (and this point is actually psychologically more important)
We are now going through a regime change. Years of easy liquidity policy is ending globally along with forces of deglobalisation and higher inflation. Any transition is painful, but fundamentally, I think India is placed in a much better position today than at probably anytime in the past.
I am hopeful for the future.
Sunday 1 May 2022
Are these returns real?
The bane of any momentum portfolio is slippage. You might see a particular return being displayed by the system but when you actually go and run it yourself with real money you find that you are not getting the returns. And at times, it is not even close to what the system promises.
Returns lag due to many reasons. High cost of brokerage and transaction costs is one. This is why we always suggest using discount brokers to keep costs as low as possible. Slippage is also another major concern. Especially for "breakout momentum" systems. We do not use a breakout momentum system precisely because of this reason.
Are these returns real? We have often been asked this question. But first some context. Q30 was launched on 28th Feb 2020 (2 years and 2 months) and has been live on the Smallcase platform since 17th Aug 2020 (1 year 8 months). We were using our own model portfolio sheet to calculate and report returns till Aug 20 and switched to reporting returns based on smallcase provided numbers from thereon, as it is a reliable third party and we can’t report inaccurate numbers even by mistake.
Smallcase so far was taking prices of stocks on the day of upload of rebalances, whereas subscribers were buying and selling on the next trading day and there was a lingering doubt in our minds as to how much is the loss due to slippage and how different is the actual returns for investors compared to the model portfolio.
Smallcase has made changes to their method and now it will now take prices as on the day when it is available for action by users. It would also take the average of OHLC (open high low and closing prices) so that price is fairly representative of actual user transacted prices during the day.
The CAGR numbers that you see below are now based on prices on the day when rebalance was available for users to execute. Since 17th August 20, Q30 CAGR is ~47%. This is after taking into account slippage. And it has beaten the benchmarks by a huge margin.
But what about brokerage? How much is being lost in churn due to brokerage?
Starting with 10 lakhs on 17th Aug 20, the capital has compounded at ~46% CAGR in the last 1 year 8 months post all slippage, brokerage and advisory fees. Few conclusions
1. Annualized brokerage comes to about 1.6% well within 2% estimates we have communicated based on our churn %
2. Advisory fee comes to less than 1% annualized. Of course, this would be lower if higher capital is invested and higher if much smaller capital is invested. But it does give you a very clean and clear perspective of what the actual scenario is.
We will dissect this more in another article soon, however, some takeaways are very clear:
1. Q30 is one of the lowest slippage portfolios around.
2. Doubts on post slippage and post brokerage returns have been laid to rest with change in returns calculation methodology.
3. Over longer rolling periods we expect Q30 to perform better than the market and provide reasonable returns with minimal effort (less than 15 mins a month).
Next week we will look into similar data for Q10.
Friday 29 April 2022
Weekend Reading
UPDATES:
I shared some thoughts on ET NOW yesterday. You can watch it here: https://youtu.be/
In case you prefer reading, you can read the transcript of the session here: https://economictimes.
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You can sign up to https://www.getrevue.co/
1. 10,000 steps has no scientific basis, but is still good for you
Mobility is everything, or so the fitness gurus would have you believe. But the focus on mobility and movement isn’t new. It’s as old as 1965, when a Japanese firm launched the pedometer and popularised the idea that taking 10,000 steps daily leads to better health. The company was Yamasa Clock and Instrument Company, and its pedometer was called Manpo-kei, which translates to “10,000 steps meter” in Japanese. A 2019 study on daily step count by researchers from Harvard Medical School, surmised that this is where the magic number of 10,000 steps comes from. In a separate study published in Lancet last month, researchers wrote that, “Although 10,000 steps per day is widely promoted to have health benefits, there is little evidence to support this recommendation.”
For this study, published in the Lancet, researchers analysed 15 studies that covered the health and fitness of over 47,000 people, over a period of seven years. They found that while “10,000 steps” is a myth, there are health benefits for adults who clocked more steps. Adults who walked more had a 40% to 53% lower risk of mortality. They also found that taking more steps per day was associated with a progressively lower risk of all-cause mortality but varied by age. There was progressively lower risk of mortality among adults aged 60 years and older who walked about 6,000–8,000 steps per day, and among adults younger than 60 years who walked about 8,000–10,000 steps per day.
2. Autonomous taxi is now starting off in China
Pony.ai has received a license to operate its autonomous taxi service in China, making it the first company to win the country’s approval (via Reuters). Starting in May, the Toyota-backed robotaxi service will operate 100 autonomous vehicles in the Nansha district of Guangzhou, and will later expand to serve other portions of the city.
Pony.ai says riders can hail and pay for rides from the company’s app between 8:30AM to 10:30PM, and that its fares will align with the “standard taxi pricing” in Guangzhou. The autonomous vehicles will also have a driver present in the car for safety purposes, but plans to remove them over a “short to intermediate time frame.”
https://www.theverge.com/2022/
3. Playing status games
Status is one of humanity’s great poisons, but it’s so deeply engrained in our evolutionary makeup that we continue to drink from its fountain whenever we can. It’s an unsurprising fact that animals arrange themselves based on hierarchical power structures, but what’s surprising to me is how readily human beings follow that same behavior without much thought.
Much of the “creator economy” has less to do with what one creates, and more to do with the status one exudes. Perhaps in the beginning, the work has to speak for itself, but after a certain point, what matters more is the identity of the person creating the work as opposed to the work itself.
https://moretothat.com/the-
4. How to be happy?
The modern world almost universally tells us that what will make us happy is acquisition of some kind. The raison d'être of modern life seems to be to receive. To go further even, to take. Just think of that dehumanizing label given us by advertisers: “consumer”. As if we were mere locusts. Alas, it is a great sadness that many of us have allowed ourselves to become just that, we but hope not irredeemably.
“He who dies with the most toys wins” is meant to be a dark joke, not wise counsel to be pursued.
Selfishness is a great plague on the human spirit. A life of self-denial is simply one in which getting what you want is not the axis on which the world spins. You may get what you want, you may not, but you no longer make that the condition for your well-being. Ideally, you abandon the concern altogether and seek to give of yourself and what you have as much as possible.
Treat everything you do as if it is the most important thing you could possibly be doing. You’ll soon find that it is. Give everything you’ve got to it. That’s purpose. That’s the path to true happiness that everyone is seeking. We just have to remember this and walk in it. Simple, if not always easy.
https://thinkonthesethings.
5. The quest for superhuman healing
Mammals, from tiny rodents to humans, never usually recover from serious spinal cord or other central nervous system injuries. Except, it seems, for the African spiny mouse.
In recent years, scientists have discovered that this creature, found in arid habitats in African countries including Kenya, Somalia and Tanzania, has an extraordinary gift for regeneration. It can overcome devastating injuries to its skin, heart, kidneys and spinal cord.
The African spiny mouse joins a special list of otherwise non-mammalian species known to be able to regenerate important parts of their bodies. Regeneration is a specific form of wound healing that replaces lost tissues more or less like-for-like, avoiding excessive scarring, so that the body part in question can function just as well as it did before. Axolotls, flatworms, zebrafish and some jellyfish can regenerate relatively large and complex parts of their bodies, for instance. And newly hatched alligators can regrow severed tails, according to a study published in 2020. But none of these animals are as closely related to us, genetically speaking, as the African spiny mouse.
https://www.bbc.com/future/
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