Investing like Federer

Let me start with a story.

One day an elderly couple saw a young man, probably in his early thirties, playing tennis in one of the corner courts of their exclusive country club in Florida. This couple had spent their entire life engrossed in their business and had never really followed the sport. They had sold their business and chose a peaceful retired life. Now that they were retired and extremely wealthy, they thought that picking up tennis would be a good thing. The young man who was playing seemed to be doing it effortlessly. The lady decided to try her hand at the sport. The next day she approached the tennis director at the country club who promptly enrolled her on the tennis program. To her dismay, the lady found that the game was really difficult. She was not able to control the ball. It was either sailing wide of the court or hitting the bottom of the net. She went to complain to the tennis director saying that the game which she saw being played by the young man seemed so easy. The guy did not even seem to be making an effort. And here she was huffing and puffing and yet not able to make a single shot. The tennis director turned around and said, “Maam, yesterday the person you saw here was Roger Federer. He is perhaps the greatest tennis player in the history of the game”.

This is a true incident.

Why am I telling you this story?

Just like studying about or watching Federer on TV will not help you play like him, similarly reading Buffett, Munger, Lynch and others will not make you invest like them.

The availability of information today, especially on social media, is so much that just by repeated exposure people tend to get a feeling of expertise. It is like if you see a cookery show about making an omelet everyday for six months, you will start getting a feeling that you are an expert at it. It may not even occur to you that you may not know how to even light the gas stove. Making a great omelet is really not easy. How hot should the oil be? How much do you beat the eggs? How much salt to add? How long should you fry one side? When do you flip sides? None of this can be learnt from watching omelet-making videos. You need to live through it, experiment with it and then slowly after a few times you will get a hang of it.

The same thing applies in investing as well. Repeated exposure to investment gyan and discussion provides an illusion of knowledge. Investing is a “lived” skill. The legendary trader Paul Tudor Jones once said, “This skill is not something that they teach in business school. I get very nervous about the retail investor, the average investor, because it’s really, really hard. If this was easy, if there was one formula, one way to do it, we’d all be zillionaires.”

Becoming a good investor takes dedication, patience, curiosity and tremendous hard work. It requires building up a network of investors and industry contacts who can help you do the scuttlebutt. Just sitting and reading in a room with no computer screen sounds idyllic but is not the reality. At least not for people when they start off. Maybe, it can be done after spending fifty years in the investment arena.

Here are some pointers for those who wish to learn to play at the top of the league.

• Practice everyday: This means you need to study a business or industry everyday. All knowledge is incremental, so if you keep doing it, it will compound.
• Learn the language of investing: You need to be able to read the financial statements.
• Inculcate the right mindset: The biggest determinant of returns over longer periods comes from investor psychology. Two people buying the same stock at the same time at the same price may end up with completely different results as one may be able to hold on through many ups and downs and the other may sell in panic or euphoria. The way to build the right psychology is to reflect on your past buy/sell decisions, the reasons why you took them and what would you do differently if the same situation arose again. Maintaining a decision journal in the initial years might also be very useful.

In summary, we need to understand that the game of investing requires a lot of hard work and dedicated effort. When the masters play, they make it look easy. But it isn’t. It is actually a very difficult game. And that is why the success rate is very low. To get the odds in your favour, approach it like an elite athlete.

This article first appeared in The Economic Times.

Weekend Reading

 

Upfront

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Stan Druckenmiller on investing

When it comes to investing, I like a multi-disciplinary approach. My first boss taught me technical analysis. So, I use fundamental analysis and technical analysis. If there are 1000s of securities out there and my portfolio is only going to have 15-20, I’m never going to buy something that doesn’t have a great chart and fundamentals.   When I’ve looked at all the investors (that) have very large reputations — Warren Buffett, Carl Icahn, George Soros — they all only have one thing in common.   And it’s the exact opposite of what they teach in a business school. It is to make large concentrated bets where they have a lot of conviction.   They’re not buying 35 or 40 names and diversifying.   I don’t know whether you remember that Icahn a few years ago put $5B into Apple. I don’t think he was worth more than $10B when he did that. https://thehustle.co/stanley-druckenmiller-q-and-a-trung-phanin/

The greatest threat to results are boredom and impatience

The only way to become good at something is to practice the ordinary basics for an uncommon length of time. Most people get bored. They want excitement. They want something to talk about and no one talks about the boring basics. For example, we know that dollar-cost averaging into an index fund is likely to generate wealth, but cryptocurrency will give us a bigger thrill. Boredom encourages you to stop doing what you know works and do something that might work.   Another way to mess up a good thing is to try and accelerate the natural pace of things into an unnatural one. A good idea taken to the extreme is always a bad idea. Working out for 15 hours a day won’t make you healthier, it will get you injured. Investing with a lot of leverage won’t make you rich faster, it will wipe you out. A lack of patience changes the outcome.   It’s hard to be above average if you can’t find a way to do the same thing over and over again. As Bruce Lee observed, “I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.”   In a world of social media, we glorify the results and not the process. We see the kick that knocked someone out but not the years of effort that went into perfecting it. We see the results, not the hard work.   The difference between good and great results is often found in consistently doing the boring things you know you should do exactly when you feel like doing them the least. https://fs.blog/brain-food/may-22-2022/

How to be great

The first step in becoming great is recognizing that you’re likely not already great. In fact, it comes from recognizing that there is no such thing as greatness at a specific instance in time. Greatness is instead a reflection of a period of effort, since greatness in a single instance can be reduced to luck.   There’s a false impression that success or notoriety comes with being flashy. This notion comes from the media focusing on outliers, whether it be events or personalities which diverge from the norm. Not only can this encourage people to aim for notoriety just for the sake of it (think Elizabeth Holmes), but it makes the rest of us believe that correlation (of those outliers) is causation; in other words, success of those individuals is due to their offbeat ways. But here’s another storyline: the most sure and therefore the best way to “success” is through consistency.   If you don’t have the opportunity to “do great things”, focus on consistently achieving small wins. These small things in fact do not need to be done in a great way, but a good way, repeatably. In fact, I would advise not to focus on perfection, as it is often the enemy of the successful.   There’s glimmer and hoopla around unpredictability, but in reality, it’s much more difficult and therefore impressive, to be predictably good. https://blog.stephsmith.io/how-to-be-great/

Beware of the bear market psychology

Bear markets are an inescapable feature of equity investing. They are also the greatest challenge that investors will face. This is not because of the (hopefully temporary) losses that will be suffered, but the poor choices we are liable to make during them. Bear markets change the decision-making dynamic entirely. In a bear market, smart long-term decisions often look foolish in the short-term; whereas in a bull market foolish long-term decisions often look smart in the short-term.   As share prices fall, hindsight bias will run amok. It will seem obvious that this environment was coming – the warning signs were everywhere. We will blithely ignore all the other periods where red flags were abundant and no such market decline occurred.   Bear markets induce panic, which means our time horizons shorten dramatically. We stop worrying about the value of our portfolio in thirty years and start thinking about the next thirty minutes. Being a long-term investor gets even more difficult during a bear market. https://behaviouralinvestment.com/2022/05/24/what-we-should-remember-about-bear-markets/

Build in slack into your routine for better effectiveness

Many organizations are obsessed with efficiency. They want to be sure every resource is utilized to its fullest capacity and everyone is sprinting around every minute of the day doing something. They hire expert consultants to sniff out the faintest whiff of waste.   As individuals, many of us are also obsessed with the mirage of total efficiency. We schedule every minute of our day, pride ourselves on forgoing breaks, and berate ourselves for the slightest moment of distraction. We view sleep, sickness, and burnout as unwelcome weaknesses and idolize those who never seem to succumb to them. This view, however, fails to recognize that efficiency and effectiveness are not the same thing.   Having a little bit of wiggle room allows us to respond to changing circumstances, to experiment, and to do things that might not work.   Slack consists of excess resources. It might be time, money, people on a job, or even expectations. Slack is vital because it prevents us from getting locked into our current state, unable to respond or adapt because we just don’t have the capacity. https://fs.blog/slack/

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Upfront

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And now on to the weekend reading...

Peter Lynch's sell mantra

What I try and do is I try and sell stocks because something else is more attractive. Stock A is simply more attractive than Stock B. I don’t try and find out the last quarter, the last eighth, the last 10 points.   And my second rule – this is the hardest one to follow – if I make a mistake, I try and sell it. If I’m looking for something to happen – some product to work, the business to get better – and it’s clear that I’m wrong – this is the key thing – you really have to sell it. It’s difficult to do. But you just want to just hope and pray because you can wait for years to go on.   And the third thing, I think, is what I call bottom fishing. A stock, Avon Products, goes from 150 to 90. On that basis alone, they buy the stock. And then, you know, it can go to 18 as far as we know. A stock that’s down combined with a good fundamental story is good but just buying on that basis alone is very dangerous. https://novelinvestor.com/peter-lynchs-rule-for-dealing-with-mistakes/

Wining. Losing. Learning.

“There’s a phrase out there that says, ‘Sometimes you win. Sometimes you learn.’ I can’t stand that phrase. And the reason I can’t stand that phrase is because it implies two things. It implies that you can’t learn from winning. Like you win or you learn? No, you can learn a lot from winning. Success leaves clues.   What it also implies, losing is some word that no one says of, ‘Oh, I didn’t lose. I learned.’ No, you lost. Own it. You lost, you got beat today, and that’s life you’re going to lose sometimes. And instead of flowering it up and saying, “No, no, I didn’t lose. I just ran out of time. I didn’t lose.” No, you lost.” https://fs.blog/brain-food/may-22-2022/

Pivoting by startups was there even hundred years back

The Wrigley Co. didn’t start out making chewing gum. In 1891 at age 30, William Wrigley Jr. opened a branch of his father’s Philadelphia-based soap company in Chicago. To each purchaser of Wrigley’s Scouring Soap the young salesman gave a free sample of baking powder. The promotion was so successful Wrigley soon switched to selling baking powder, including two free packs of chewing gum with each order. The gum was so popular that by 1893 Juicy Fruit and Wrigley’s Spearmint chewing gum became the company’s chief product.   The old business saying “innovate or die” doesn’t always hold true. Yet many great American companies that took sharp detours to survive ended up flourishing in unforeseen and spectacular new ways. Whether the result of relentless innovation or a happy accident, the detour turned out to be the best part of the journey. Side roads always offer the prettiest scenery. https://www.wsj.com/articles/when-product-lines-take-a-sharp-turn-innovation-pivot-companies-horse-clippers-11652906403

Expertise can be a hindrance for learning

Investor Dean Williams once said, “Expertise is great, but it has a bad side effect. It tends to create an inability to accept new ideas.”   Marc Andreessen explained how this has worked in tech: “All of the ideas that people had in the 1990s were basically all correct. They were just early.” The infrastructure necessary to make most tech businesses work didn’t exist in the 1990s. But it does exist today. So almost every business plan that was mocked for being a ridiculous idea that failed is now, 20 years later, a viable industry. Pets.com was ridiculed – how could that ever work? – but Chewy is now worth more than $10 billion.   Experiencing what didn’t work in 1995 may have left you incapable of realizing what could work in 2015. The experts of one era were disadvantaged over the new crop of thinkers who weren’t burdened with old wisdom.   There is one set of skills that comes from being an expert, and another that comes from being a novice, unburdened by the weight of experience or incentives. The former is obvious, the latter too easy to ignore. https://www.collaborativefund.com/blog/trying-too-hard/

Avoid thinking about money and disputes

I’ve found there are two types of thoughts especially worth avoiding in the way they push out more interesting ideas. One I’ve already mentioned: thoughts about money. Getting money is almost by definition an attention sink. The other is disputes. These too are engaging in the wrong way: they have the same velcro-like shape as genuinely interesting ideas, but without the substance. So avoid disputes if you want to get real work done.   Even Newton fell into this trap. After publishing his theory of colors in 1672 he found himself distracted by disputes for years, finally concluding that the only solution was to stop publishing: I see I have made myself a slave to Philosophy, but if I get free of Mr Linus’s business I will resolutely bid adew to it eternally, excepting what I do for my privat satisfaction or leave to come out after me. For I see a man must either resolve to put out nothing new or become a slave to defend it. http://www.paulgraham.com/top.html

Weekend Reading

 

Upfront I was invited on ET NOW 9 pm primetime news on 17th to discuss LIC IPO. You can watch the interaction here. ET Now - India Development Debate - 17-May-2022 I also published the monthly Q&A for April where I take questions on investing and finance from our subscribers. Monthly Q&A - April 2022 And now onto the weekend readings... The four-day workweek Businesses across the globe are becoming increasingly interested in the benefits of giving employees an extra day off, encouraged by Microsoft’s August 2019 trial of a four-day workweek in Japan, which resulted in a 40% rise in productivity. Since then, many other organizations have followed suit. The British arm of camera company Canon is among the latest to try a four-day workweek without a pay cut. In the U.S., Kickstarter and Bolt are among the many companies experimenting with four-day weeks, as is Unilever, which announced last November that it would be piloting such a schedule in New Zealand.   Of businesses already implementing a four-day workweek, 68% (up from 63% in 2019) said flexible work arrangements are helping them to attract the right talent by demonstrating the organization’s forward-thinking approach to work, such as greater autonomy stemming from meeting-free days. These businesses also recognize that their potential employees expect the norm to be “portfolio careers” of more than one job. https://sloanreview.mit.edu/article/what-does-the-four-day-workweek-mean-for-the-future-of-work/ Data is not information Data is everywhere, but turning it into information isn’t free.   It takes focus, effort, consultation and time.   More information is only useful if it helps you make a decision. Knowing the temperature on Saturn isn’t useful. Knowing it to even more accuracy is less useful. That’s because we’re not making any decisions that involve the temperature on another planet.   We’re surrounded by data that our spreadsheets or networks or cohorts seem to want us to be aware of. How many people clicked yesterday, or what someone wrote in a comment, what a backlist book sold or the foot traffic in that store vs. this store.   But if you’re not going to use the data to make a decision, don’t spend the time to expose yourself to it. It’s resistance at work.   If you can’t do anything with the data, it’s never going to be information. https://seths.blog/2022/05/data-information-and-decisions/ Google's supercharged Ctrl+F for the world around you Google announced new enhancements for its Lens multisearch tool, which lets you conduct a search with just an image and a couple of words.   A new mode, called “near me,” will let users take a photo of an object and then find results locally. As Raghavan explained, you’ll be able to take a photo of a dish and then search for restaurants that serve that specific food. Google will then display a list of relevant restaurants near you. To make this feature happen, Google scans relevant photos from websites, as well as those posted by reviewers, and then matches them to the one you uploaded. Near me will be available in English later this year and will expand to more languages “over time.”   Google is also rolling out something called scene exploration. This will allow users to pan their camera and then enter a search phrase about the objects in front of them. When explaining the feature, Raghavan used the example of trying to find a nut-free chocolate bar in a supermarket. You’ll be able to scan an entire shelf of chocolate bars and then see overlays that provide “helpful insights,” like reviews about each object. We think Raghavan’s description of the feature sums this up quite nicely: “This is like having a supercharged Ctrl+F for the world around you.” https://www.theverge.com/2022/5/11/23063809/google-lens-multisearch-feature-ai-io-near-me-scene-exploration Environmentally Friendly LEDs Created Using Rice Husks Scientists searching for a scalable method to fabricate quantum dots have developed a way to recycle rice husks to create the first silicon quantum dot (QD) LED light.   This new method transforms agricultural waste into state-of-the-art light-emitting diodes in a low-cost, environmentally friendly way.   Milling rice to separate the grain from the husks typically produces about 100 million tons of rice husk waste globally each year.   The technology makes use of porous silicon (Si), a material that is non-toxic and found abundantly in nature with photoluminescence properties, stemming from its microscopic (quantum-sized) dot structures that serve as semiconductors. Waste rice husks have been found to be an excellent source of high-purity silica (SiO2) and value-added Si powder. https://eandt.theiet.org/content/articles/2022/04/environmentally-friendly-leds-made-from-rice-husks/ Deal with the unexpected Unforeseen circumstances happen to us all. We have disappointments and challenges. We all have reversals and those moments when, in spite of our best plans and efforts, things just seem to fall apart. Challenging circumstances are not events reserved for the poor, the uneducated or the destitute. The rich and the poor have marital problems. The rich and the poor have the same challenges that can lead to financial ruin and personal despair. In the final analysis, it is not what happens that determines the quality of our lives, it is what we choose to do when we discover that the wind has changed directions.   How quickly and responsibly we react to adversity is far more important than the adversity itself. Once we discipline ourselves to understand this, we will finally and willingly conclude that the great challenge of life is to control the process of our thinking. https://www.success.com/how-to-deal-with-the-unexpected

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.