Weekend Reading

 

Upfront

Sit tight, fasten your seat belts and enjoy the bumpy ride :-) A short note to our investors on the outlook for the future. blog.intelsense.in

Once in a lifetime can be a frequent occurrence

There are about eight billion people on this planet. So if an event has a 1-in-a-million chance of occurring every day, it should happen to 8,000 people a day, or 2.9 million times a year, and maybe a quarter of a billion times during your lifetime. Even a 1-in-a-billion event will become the fate of hundreds of thousands of people during your lifetime. And given the media’s desire to promote shocking headlines, you will hear their names and see their faces.   The idea that incredible things happen because of boring statistics is important, because it’s true for terrible things too.   Think about 100-year events. One-hundred-year floods, hurricanes, earthquakes, financial crises, frauds, pandemics, political meltdowns, economic recessions, and so on endlessly. Lots of terrible things can be called “100-year events”.   A 100-year event doesn’t mean it happens every 100 years. It means there’s about a 1% chance of it occurring on any given year. That seems low. But when there are hundreds of different independent 100-year events, what are the odds that one of them will occur in a given year?   Pretty good. https://www.collaborativefund.com/blog/once-in-a-lifetime/

Why eating at your desk is banned in France

The French labor code prohibits workers from eating lunch in the workplace. The solo work lunch is also shunned in a culture that prizes a change of pace — and scenery — during the midday meal.   As cities grew and more workers had to travel to factories on the other side of town, their eating habits changed. The midday meal, traditionally made to be eaten at home, entered a new carryout phase.   Picture workers picking at their food with their fingers in matchbook factories, seamstress sweatshops and warehouses full of heavy machinery. From airborne tuberculosis to phosphorus fumes, these work sites were far from sanitary. “Even in department stores, there were more microbes and germs per cubic feet than outside.” As diseases spread, doctors discussed how to clean the air in dirty workspaces.   First, you had to get the people out. “The saying was that we have to flush the work sites as we flush toilets,” Bruegel says. “What is the best time to do that? It’s usually when people eat!”   The government’s answer: ban lunch in the workplace. Get the people outside and then open the windows to clear out the germs. That was the idea behind the 1894 decree that banned lunch at the workplace. https://www.npr.org/2022/06/10/1103463809/why-eating-at-your-desk-is-banned-in-france-lunch-law

Lower risk stocks give better returns

Academics define risk, denoted by the Greek letter beta, as how much a stock moves relative to changes in the stock market. A stock with a beta of one will move in line with the market on average, while below one suggests smaller changes and above one bigger changes than the market. The reward is the expected total return of a stock.   The theory is beautiful in principle but doesn’t work in practice. Researchers who put it to the test found that the average returns for low-risk stocks were higher, and those for high-risk stocks lower, than they were supposed to be. https://www.ft.com/content/01ac1d52-6932-486d-9f1b-bcf9d5100600

To succeed, do it for two weeks

Pick a goal. Pick something you feel you want to achieve. Create a daily process or routine you will follow. (Better yet, ask someone who has done what you want to do to create a routine for you.)   Then commit to following that routine for two weeks. For each of the next 14 days, keep your head down and focus solely on what you need to do that day. Not next week. Not next month. Not next year.   Just today.   At the end of two weeks, you’ll know whether you want to keep going. You’ll know whether the goal you chose means something to you or was just a whim. (Either outcome is fine; “wasting” two weeks only to find out you don’t want to run a marathon is better than spending the next 20 years feeling like a failure because you think you want to, but haven’t.)   If you want to keep going, the tough two weeks you just put in will make it much more likely that you’ll stay the course over the long term. Partly because of the improvement you’ve made – improving is always fun, and we all like to do things we’re good at – and because your emotions will start to work for you, not against you. https://www.inc.com/jeff-haden/how-you-can-use-two-week-rule-to-become-remarkably-successful-and-streamline-your-bucket-list.html

Position size your bets for survival

Bill Miller lost $300 million on Enron. It was roughly an 89% loss and the most money he had ever lost in a single position (at that point in his career). It also turned out to be the quickest. It only took 60 days.   One of the biggest mistakes investors make is they fail to consider the downside. They get caught up in how much they can make and size the position accordingly. But if things go south, that oversized position severely handicaps their portfolio. The lesson from the Enron scandal is the risk of having too much money in a single stock.   The important question to ask is: how much can I lose and how might that loss impact my overall portfolio?   For Miller, the loss might have been the biggest but the damage was small. He still beat the market that year because he sized the position based on how a total loss would impact his portfolio. https://novelinvestor.com/bill-millers-biggest-loss/

Sit tight, fasten your seat belts and enjoy the bumpy ride :-)

 

Edited excerpts of communication sent to subscribers on 12-Jun-22

As I have mentioned in all my previous videos and emails in the last few months, the next few months are likely to remain extremely volatile. Markets will fall sharply and when people get really scared and you start hearing doomsday all around you, it will surprise everyone and turn around and rally for a few days.  Markets, as is life, move in cycles. Sometimes, the times are good for us and sometimes they are challenging. The interesting part is people often forget this reality. In good times, they forget that bad times are ahead. And in bad times, they forget that good times are ahead. In Chinese, there is a concept of Yin and Yang. It talks about a system being composed of complimentary but interconnected or interdependent forces. Bull and bear markets are similar.

What To Expect From The Market

There is a possibility of a sharp down move in the next month or so, probably led by global cues. However, it is a possibility only and not a certainty. You would have noticed that both in Hitpicks and Quant, we have a large part of the portfolio in cash. The reason is that these are short-term oriented and I would want to be a bit more certain of the overall market trend before committing fully. In the long-term service, we have about 15% in cash. I am not inclined to sell more and go to cash aggressively even though the possibility of a sharp downswing cannot be ruled out. One reason for that is, as the name suggests, it is based on the long term, and most of the stocks do look good from a two-three year perspective and if I just ignore the immediate next one-two months of concern. So, the objective for me is to look out over a 1-3 year horizon in the long term service and calmly accumulate stocks which can give me a decent return over the next 2-3 years. For those who are in our PMS service, you would have seen that we are deploying your capital in a slow, steady and systematic manner. We will continue to do so.

The Medium-to-Long Term Outlook

I am actually fairly positive. Maybe unusually so. I see a fair deal of optimism in the management of companies during concalls. As long as we don’t see another bout of Covid flare-up or a nuclear war or some such black swan event, the Indian economy actually seems to be on a very strong wicket compared to what is happening in the world around us. Inflation is a concern, but 75% of Indian inflation is related to food and I expect it to come down with the monsoons. Inflation also will start cooling down once the base effect of last year kicks in. The rate hikes which everyone talks about are a non-event for me. We are just correcting the Covid era rate cuts. It is unlikely to have a great deal of effect on corporate growth. Bank credit to commercial enterprises is steadily going up signifying underlying recovery in the business.

The China + 1 theme is playing out very strongly on the ground in multiple sectors like chemicals, textiles, engineering and electronics. Over the next few years we are likely to see a silent out move of MNCs from China and into other sourcing markets like India, Vietnam, Indonesia, Malaysia etc. Covid and the Ukraine-Russia war coming back-to-back has necessitated a major strategic shift in single country sourcing. While this is going to be long term inflationary in nature, countries like India, with abundant manpower and natural resources can benefit. A lot of sectors are looking good and some cyclical sectors are at the cusp of recovery - autos, real estate, infrastructure, engineering and capital goods, agrichem to name a few. My promise of some changes in the Long Term stocks still remains unfulfilled. I have multiple good stock ideas but am waiting and twiddling my thumbs because I think we will get a better entry point :-)  As I mentioned in my previous mail, those who are doing SIP can continue to do so. Just spread it out a little bit more if possible. And if you are a bit active in the markets, try and buy a little on days when the world seems to be ending :-)  My sense is that we are headed for a very good 2-3 year period once we cross this volatile period in the next couple of months. So, sit tight, fasten your seat belts and enjoy the bumpy ride :-)

Footnote:

My past article in The Economic Times somehow seems to have caught the fancy of a lot of people and I received a lot of mails, DMs and WhatsApp messages on it. You can read it here if you haven’t already: http://blog.intelsense.in/2022/06/investing-like-federer.html Also, last week I shared some views on the LIC IPO on ET NOW 9pm news. You can watch it here:

Weekend Reading

Where to focus?

Everyone knows that focus matters. Most people don’t know where to focus. Telling people “to focus more” is about as helpful as telling them to “make better decisions.” Common advice but useless in practice.   Not all focus is equal. Some focus is asymmetric. Knowing where to focus makes a difference.   How do you know where to focus? The answer is a deep fluency in the problem. You need to embed yourself in the problem and the details. You need to try things, reflect, and learn. Sooner or later, you start to understand the hidden asymmetry.   A lot of business people treat all decisions the same, no matter the implications. They’ll spend as much time trying to decide a trivial decision as a major one. A lot of authors focus on the work and miss that how it’s positioned for the audience matters more. A lot of people go to the gym 4 days a week only to miss that what goes into their body and the amount of sleep matter more.   The visible problem might appear to be a lack of focus, but the invisible problem is often not knowing where to focus to get the best results. https://fs.blog/brain-food/june-5-2022/

Bullshit and the cost of success

There are three important facts about bullshit: It’s everywhere, it’s influential, and it’s dangerous. Bullshit can go unnoticed because people are more concerned with lies. Lies, once spotted, are unmistakable and their damage is obvious. But bullshit stops just short of a lie, mixing the integrity of the truth with the deceit of a lie in a way that leaves both the bullshiter and his recipient feeling satisfied.   The whole history of investing is simple: Long-term returns can be extraordinary but to achieve them you must put up with an endless parade of volatility, mania, and panic. Two sides of the equation. When anyone presents the one side (potential return) without the other (volatility, chaos) they are bullshitting about the entire arrangement. It’s as if someone says, “Ferraris are really nice,” without any mention, or even knowledge, that they’re nice because they cost a third of a million dollars.   Lots of things fall into this category, and it’s a key source of unhappiness in people’s lives.   The assumption that you’ll be happier with more money leads to disappointment because we overemphasize the reward (money) with no regard to the cost (working longer hours, student debt, the risk of entrepreneurship, etc.). It’s a package deal, and you can’t pick and choose the reward while ignoring the cost.   The saying, “Never meet your heroes” is true because the way we imagine people we admire, or the successes we desire, tends to be a bullshit construction that emphasizes advantages while discounting the associated costs. https://www.collaborativefund.com/blog/bs/

The fall of Cathie Wood

Cathie Wood’s willingness to make such calls so far ahead of reality — and so out of step with Wall Street’s old guard — has earned her a rockstar reputation among stonks-obsessed retail investors, making her a mascot for buy-the-fucking-dip Robinhood traders, some of whom have dubbed her “Cathie Bae” on Reddit. In an industry loath to make guarantees about the future, Wood’s brand was like price-prediction porn: To hear her talk was to feel your mind liquefy in a clickbait-like flood of dopamine-inducing buzzwords — her portfolio a cornucopia of self-driving cars, crypto, genomic cancer cures, AI, streaming, and gaming. She told risk-drunk investors exactly what they wanted to hear. In her view, it seemed, tech stocks only went up and to the right.   Wood’s collapse has started to seem emblematic, not just of the current bear market in tech, but of the excesses that fed into what now appears to be a pandemic bubble. A professional who espoused the “to-the-moon” mentality of many amateurs, Wood may now be unintentionally teaching them a valuable lesson: Stocks (and cryptocurrencies) do, in fact, go down, too. There’s a generation of young traders that has yet to experience a true crash in their investing lives — the COVID bear market of 2020, after all, lasted only two weeks — and now, through Wood, has a front-row seat to a bona fide true bear market. https://nymag.com/intelligencer/2022/05/the-rise-and-fall-of-cathie-wood.html (BTW, there is a reason why this article is right after the one on bullshit!! )

The start of a new cycle of bond rates

The most important price in the world is the price of money: namely, interest rates. And interest rates are suddenly on everyone’s minds, as rates shoot upward for the first time in decades. The effects or this rise will be felt in the markets, the economy at large, in households, and at the election booth.   The striking thing about the bond market and interest rates is that they tend to rise and fall in generation-length intervals. No other financial security that I know of exhibits that same characteristic. But interest rates have done that going back to the Civil War period, when they fell persistently from 1865 to 1900. They then rose from 1900 to 1920, fell from 1920 or so to 1946, and then rose from 1946 to 1981—and did they ever rise in the last five or 10 years of that 35 year period. Then they fell again from 1981 to 2019-2020.   So each of these cycles was very long-lived. This current one has been, let’s say, 40 years. That’s one-and-a-half successful Wall Street careers. You could be working in this business for a long time and never have seen a bear market in bonds. And I think that that muscle memory has deadened the perception of financial forces that would conspire to lead to higher rates. https://octavian.substack.com/p/the-end-of-an-era-jim-grant-on-interest

Life form is back in Chernobyl

Chernobyl has become a byword for catastrophe. The 1986 nuclear disaster, recently brought back into the public eye by the hugely popular TV show of the same name, caused thousands of cancers, turned a once populous area into a ghost city, and led to an exclusion zone 2,600 sq km (1,000 sq miles) in size.   But Chernobyl’s exclusion zone isn’t devoid of life. Wolves, boars and bears have returned to the lush forests surrounding the old nuclear plant in northern Ukraine. And when it comes to vegetation, all but the most vulnerable and exposed plant life survived. Even in the most radioactive areas of the zone, vegetation was recovering within three years.   Humans and other mammals and birds would have been killed many times over by the radiation that plants in the most contaminated areas received.   Life is now thriving around Chernobyl. Populations of many plant and animal species are actually greater than they were before the disaster.   Given the tragic loss and shortening of human lives associated with Chernobyl, this resurgence of nature may seem surprising. Radiation does have demonstrably harmful effects on plant life, and may shorten the lives of individual plants and animals. But if life-sustaining resources are in abundant enough supply and burdens are not fatal, then life will flourish. https://www.bbc.com/future/article/20190701-why-plants-survived-chernobyls-deadly-radiation

Bottomline: Quiver - a concentrated smallcase

https://intelsense.smallcase.com/smallcase/INSMO_0005

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

Intelsense Equity Research Services

And now on to the weekend reading...

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/