Curiosity@Intelsense

Multidisciplinary learning is one of the best ways to improve our investment acumen. Here is a summary of some of the best learnings of the week. This week onwards, I am changing the format of the newsletter. Instead of sharing 5 articles each week, now I will share 3 articles, 1 audio/video and 1 quotation of the week that I am thinking about. Do let me know our feedback on the changed content.

Intelsense Updates

I shared my thoughts with The Economic Times on the markets and the possible sectors that are likely to throw up winners in the medium-to-long term. https://economictimes.indiatimes.com/markets/expert-view/etmarkets-smart-talk-auto-ancillaries-could-do-better-than-auto-stocks-abhishek-basumallick/articleshow/93986633.cms

1. It’s supposed to be hard

Every investor knows, or should know, the truth about money management: More than 80% of professional investors underperform their benchmark (more depending on how you calculate it). Those stats are used in an often cynical way to show how the industry is broken, crowded, and ineffective.   But wouldn’t it be weirder if it were different?   Wouldn’t it be strange if every slightly ambitious investor could pick a few stocks and earn returns capable of generating dynastic wealth with other people’s money? Or even most of them? How and why could that world possibly exist? The reason Warren Buffett is interesting is because there’s only one of him.   About 1% of college basketball players make it to the NBA. That funnel doesn’t seem odd – no one would say college basketball is broken, or a scam, or ineffective at developing great players. It’s obvious that getting to the NBA is really hard, and you can be talented and still not make it. The entire reason pro sports are exciting is because the players do someone almost no one else can do. Michael Jordan is interesting because there’s only one of him. https://collabfund.com/blog/its-supposed-to-be-hard/

2. Truth-seeking is important for self-improvement

Most highly successful people have been really right about the future at least once at a time when people thought they were wrong. If not, they would have faced much more competition.   Self-belief must be balanced with self-awareness. I used to hate criticism of any sort and actively avoided it. Now I try to always listen to it with the assumption that it’s true, and then decide if I want to act on it or not. Truth-seeking is hard and often painful, but it is what separates self-belief from self-delusion.   This balance also helps you avoid coming across as entitled and out of touch. https://blog.samaltman.com/how-to-be-successful

3. A little inefficiency is wonderful

Psychologist Amos Tversky once said “the secret to doing good research is always to be a little underemployed. You waste years by not being able to waste hours.”   A successful person purposely leaving gaps of free time on their schedule to do nothing in particular can feel inefficient. And it is, so not many people do it.   But Tversky’s point is that if your job is to be creative and think through a tough problem, then time spent wandering around a park or aimlessly lounging on a couch might be your most valuable hours. A little inefficiency is wonderful.   Nassim Taleb says, “My only measure of success is how much time you have to kill.” More than a measure of success, I think it’s a key ingredient. The most efficient calendar in the world – one where every minute is packed with productivity – comes at the expense of curious wandering and uninterrupted thinking, which eventually become the biggest contributors of success. https://collabfund.com/blog/inefficient/

Audio/ Video of the Week

The metaverse explained in 14 minutes.

The metaverse explained in 14 minutes | Matthew Ball

Thought of the Week

Huge sums have been lost by investors who have held on to securities after the reason for owning them is no longer valid. In investing it is never wrong to change your mind. It is only wrong to change your mind and do nothing about it. ~Seth Klarman

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.

Investing is an act of arrogance

Investing is an act of arrogance. You are basically saying, “I am right and the person on the other side of the transaction, who is buying a stock from me or selling it to me, is wrong.”   This arrogance requires amnesia of your past successes and failures; it is earned with your current sweat, through thorough research. Your research leads you to conclusions that often disagree but sometimes agree with the prevailing trends in the market. Arrogance – belief in your process and research – allows you to follow through on your conclusions, even if the market scorns them.    This is how we try to close the gap between theory and practice created by volatility. We continuously build and update our financial models, talk to companies and their competitors and to industry insiders, do a lot of reading, and debate companies with our peers. We have to keep earning the right to be thoughtfully arrogant through our hard work. When time passes, facts change, and new information comes out, we have to have the flexibility to change our minds.   When you are making thoughtfully arrogant decisions, you are ignoring both what the crowd thinks and, just as important, your past successes. You are arrogant (I am paraphrasing Seneca here) because through your research you have discovered the truth (what the company is worth) before time did.  https://contrarianedge.com/why-value-investing-requires-thoughtful-arrogance/

Focus is the most critical factor of success

The tendency of people and organizations is to lose focus. So one way to identify outstanding people is by their ability to commit and focus on something for a long period of time.   The only people you should hire are focused ones. The only competitors you should worry about are the focused ones.   People naturally lose focus when they forget that focus means saying no to good opportunities and good people. Average ideas are everywhere, and they try to pull you in. The more successful you are, the more people will want to work with you. If you start saying yes to average ideas, you quickly lose the space and time you need to execute on great ones.   Organizations lose focus in many ways, but the one that causes the most damage is bureaucracy. An organization where committees make decisions will always end up losing focus. When an organization loses focus, it opens the door to competitors who can focus.   Focus is hard, and because it’s hard, it also creates a hidden place to find opportunities. https://fs.blog/focus-to-win/

Satisfaction = what you have ÷ what you want

All of our evolutionary and biological imperatives focus us on increasing the numerator—our haves. But the more significant action is in the denominator—our wants. The modern world is made up of clever ways to make our wants explode without us realizing it. Even the Dalai Lama, arguably the world’s most enlightened man, admits to it. “Sometimes I visit supermarkets,” he says in The Art of Happiness. “I really love to see supermarkets, because I can see so many beautiful things. So, when I look at all these different articles, I develop a feeling of desire, and my initial impulse might be, ‘Oh, I want this; I want that.’ ”   The secret to satisfaction is not to increase our haves—that will never work (or at least, it will never last). That is the treadmill formula, not the satisfaction formula. The secret is to manage our wants. By managing what we want instead of what we have, we give ourselves a chance to lead more satisfied lives. https://www.theatlantic.com/magazine/archive/2022/03/why-we-are-never-satisfied-happiness/621304/

Focus on output rather than input

Traditional corporate culture has an obsession with input—hours worked, etc.—when what really matters is the output. It seems obvious, but as a manager or employee, always push for a focus on outputs vs. inputs. It takes time to shift cultures, but it’s worth it in the long run.   As a solo entrepreneur or freelancer, seek to detach earnings from hours. Rather than charging by the hour for your service or offering, charge based on deliverables. As you find new leverage in the system, you’ll be able to scale your time efficiently and rapidly increase your income and wealth creation potential. https://www.sahilbloom.com/newsletter/the-locksmith-paradox-sparking-creativity-more

A simple pain job can save lives of birds from wind turbines

Each year, turbine blades kill hundreds of thousands of birds and bats. As wind power becomes more prevalent, this number may rise into the millions—although it’s important to remember that other power generation methods likely kill far more birds than wind farms do.    This concern has led to a number of proposed interventions, from turning off wind farms during migrations to installing special whistles only bats can hear. A new study presents a relatively low-cost, set-it-and-forget-it option: just paint one of the turbine blades black.    While the raw numbers were quite small, the intervention was effective. “Overall, there was an average 71.9% reduction in the annual fatality rate” at painted turbines, the researchers write. www.anthropocenemagazine.org/2020/09/a-simple-paint-job-can-save-birds-from-wind-turbines/

Can a simple quant system outperform the market?

 

For details on Intelsense services, visit: https://www.intelsense.in

A Simple Trend Following Quant System

I was teaching basic quant to a friend. My effort was to focus on explaining how reasonable returns could be had from investing in a systematic strategy with less churn and low headache 😀   So, what I did was I tried a very basic system. Mark Minervini suggested this combination of moving averages in his book. The idea here is to look for stocks whose current market price was greater than the 50-day exponential moving average (ema), the 50-day ema should be greater than the 100-day ema and that should be greater than the 200-day ema. The strategy then selects the top 20 stocks filtered by specific filter criteria. I tested it with 4 different options - RSI, ADX (both technical indicators), QoQ EPS growth (fundamental indicator) and our own proprietary indicator which we have developed in-house at Intelsense. Additional work is needed to reduce the max drawdown (if required) but we need to keep in mind any efforts to reduce maxDD also reduce the return CAGR. The results are superb. The return CAGR varied from 40% to 56% over 14.3 yrs (before costs and taxes, for which you should deduct around 6-8% since this is a quarterly strategy). The bottom line is that if you can stick to a mechanical strategy there is a lot of returns to be made over the long term. This is primarily a technical system wherein most of the screening parameters are technical in nature. I will be sharing similar fundamental and technofunda strategies in the future which will hopefully be able to showcase why more and more capital globally is moving away from discretionary investing to systematic investing.

Strategy Results

Intelsense Insights - Weekend Reading

 

Intelsense Insights

I shared some thoughts on ET NOW this week on sectors which look interesting and on the overall market & economy. You can watch it on YouTube or if you prefer reading, below is the link to the transcript.

Interesting sectors to invest in

abhishek basumallick: Can't rule out 5-8-10% corrections over next couple of months; market to be stronger by Diwali: Abhishek Basumallick - The Economic Times “ We cannot rule out some 5-8-10% corrections over the next couple of months but somewhere, close to the end of September-October, we should see better inflation numbers coming in primarily because of base effect. The narrative also will start changing. We are more likely to see a much stronger market by Diwali time.” economictimes.indiatimes.com

Thinking clearly and independently

By definition, we’re blind to what we can’t see. When looking for answers, we’re like the proverbial drunk who only looks for their keys in places where the light is shining. This Spotlight Effect distorts our thinking and limits the ideas we can discover.   Jumping to conclusions limits your ability to discover the truth, because you can’t jump to conclusions outside the spotlight. By law, you can say just about anything. But that’s not the case in practice. There’s a frame around the range of acceptable opinions, which allows for lively debate only within that range. That’s how thought control happens. The assumptions of a culture determine the aperture of mainstream thinking. Knowing that axioms will mold the ultimate shape of an idea, good philosophers tend to critique the premise of an idea—the frame—instead of the conclusion.   F. Scott Fitzgerald, who wrote The Great Gatsby once said: “The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.” https://perell.com/essay/how-philosophers-think/

Use inversion for better outcomes in life

The Stoics believed that by imagining the worst case scenario ahead of time, they could overcome their fears of negative experiences and make better plans to prevent them. While most people were focused on how they could achieve success, the Stoics also considered how they would manage failure. What would things look like if everything went wrong tomorrow? And what does this tell us about how we should prepare today?   This way of thinking, in which you consider the opposite of what you want, is known as inversion.    Inversion is a powerful thinking tool because it puts a spotlight on errors and roadblocks that are not obvious at first glance. What if the opposite was true? What if I focused on a different side of this situation? Instead of asking how to do something, ask how to not do it. https://jamesclear.com/inversion

How to be happy?

Happiness is your responsibility, not Mother Nature’s. That means you need to curtail your worldly appetites, and instead pursue what truly brings enduring happiness: a faith or life philosophy, family relationships, real friendship, and meaningful work.   You can’t choose how much love you will get, but happiness depends more on how much you give. And what you give your love to matters just as much. To be happy, a person “neither loves what he ought not love, nor fails to love what he ought to love.” Here’s a handy formula to go by: Happy people love people and use things; unhappy people use people and love things.   Happy feelings are evidence of happiness, which is a combination of enjoyment, satisfaction, and purpose. Improvement in these areas requires commitment and effort, like anything else that is worthwhile. But if you do the work, you will most definitely see substantial results. https://www.theatlantic.com/family/archive/2022/07/pillars-of-happiness-from-100-lessons-on-how-to-be-happy/670586/

Observe the shift in industry dominance on football jerseys

Sponsoring a football club is about using the world’s most watched sport to promote your brand. Getting your company’s logo on the shirt of a team like Liverpool or Real Madrid means tying your brand to a global icon. And for decades, it’s been a route taken by emerging tech companies, flush with cash to burn and a name to earn.   But these sponsorships actually reveal something about the tech industry as a whole: when you trace the history of these commercial deals across the decades, patterns emerge. Entire sectors of the industry — from cars to consumer tech to gambling websites — seem to jump into the sport at once, signalling their rise to, or the desire to, dominate global markets where football is also part of everyday life.   Japanese consumer electronics brands were among the first tech companies to dive into shirt sponsorship. Their logos adorned the shirts of clubs from England to Italy across the ’80s and ’90s, mirroring the rise of those companies in the wider world.   Believe it or not, Samsung Mobile was a small player in the world of handsets when their deal began with Chelsea in 2005. By the time it ended in 2015, Samsung was the biggest smartphone maker in the world. https://restofworld.org/2022/football-shirt-tech-sponsorship/

Don't play the game of life

While relationships are complex, at their core all healthy fulfilling relationships require genuine mutual affection. Simply put, you should be rooting for the people in your life to succeed, happy if they get a promotion or their kid gets into Harvard. This is next to impossible if you view your life as a competition and the people in it as competitors.   When you view life as a game, you want others to fail — or at least to be slightly less successful than you are. Viewing life as a competition converts friends and family from people you care about to these uneasy, ambiguous relationships where you’re partially rooting for these people…but simultaneously also trying to beat them at the game of life.   You’re a unique individual, with your own strengths and weaknesses, your own goals and preferences. The good life is about trying to live according to your values and make the trade-offs that maximize your happiness. This simply isn’t possible when you abide by what the game values: money, consumption, academic prestige, youth athletic excellence. The moment you enter the game, you’ve surrendered your autonomy and are prioritizing what others deem important. You’re chasing life goals that you had no role in formulating but which now you’re pursuing for the sake of “winning.” https://www.getrichslowly.org/life-is-not-a-game/

Weekend Reading

 

Intelsense Insights

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One investment style does not work all the time

This learning is continuous but the basic framework of what kind of stocks you like would not change, at least in me. Every style will have its own time, every style does not work throughout. In ten years the same style will never work. So styles will go out of favour. Like the same cricket team does not work, what was top of the charts last year are bottom of the charts this year! Look at IPL, the top two teams are the bottom two teams.   If you get deep bargains and that happens in chaotic markets like what happened in Covid times, then the whole thing gets dislocated. The earnings are not right. The companies which are hugely profitable, were not having sales, profits or losses and all and then the market gets confused about how to value the company.   That is the point of time when if you have superior understanding of the companies, you can pile on. Even managements lose faith. I know enough stories in Covid times where managements lost faith in their own companies and the investors and mutual fund managers had more faith in the story than the management themselves. https://economictimes.indiatimes.com/markets/expert-view/every-investing-style-does-not-work-throughout-but-odds-are-always-with-long-term-investors-raamdeo-agrawal/articleshow/93596464.cms

A legend on channeling her anger towards greatness

The winner of 23 singles Grand Slams, Williams is one of the greatest athletes the world has ever seen. She is also a black champion in an overwhelmingly white sport. A female champion in a space where the GOAT (Greatest of All-Time) discussion seems to be limited to three men, Roger Federer, Rafael Nadal and Novak Djokovic, all of whom have, so far, won fewer titles than her. In 2016, Williams said that almost all through her career she was “undervalued and underpaid”. Her greatness lies in the way she has been able to rise above, not just far above the competition but also the odds and the prejudices stacked against her.   “There were so many matches I won because something made me angry or someone counted me out,” she wrote in an essay for Vogue earlier this month, which served as her farewell note. “That drove me. I’ve built a career on channelling anger and negativity and turning it into something good.” https://lifestyle.livemint.com/news/big-story/how-serena-williams-transformed-tennis-111660660287300.html

If Lithium is the new oil, then the governments of producer countries want control

A few years ago, Chile was the world’s largest lithium producer, turning out slightly more than Australia. While Chile has expanded output at its existing operations by 80% since 2016 to about 140,000 tons annually, it hasn’t opened a new mine in about 30 years. It now produces about half as much as Australia, which has quadrupled its output in the past five years, according to the USGS.   Unlike oil, which is produced all over the globe, lithium is less common. South America, Australia and China are the key locations. Outside South America, it’s extracted from hard-rock. In the region, lithium is found in salty, underground water that is evaporated by the sun after being pumped into large man-made ponds. South America’s lithium is less expensive to produce, but miners say the drawback is it takes far longer to build a mine—about eight years.   With economies battered by the pandemic and people grappling with soaring inflation, officials in some Latin American nations say robust state control over lithium will help boost local development and pad public coffers. https://www.wsj.com/articles/electric-cars-batteries-lithium-triangle-latin-america-11660141017

Knowledge compounds

The benefits of recognizing just a tiny more knowledge and skill gradually compounds over time. To read, exchange ideas with others, ask questions, be curious and open for opposite/contracting arguments are all contributing to compounding. A boat sailing one degree off-course will over short distances hardly be noticeable, but over long distances the mistake compounds and the boat misses its destination completely.   The benefit is not immediate, but gradual.   To compound knowledge, we need to refrain from confirmation bias. It’s all too easy to seek a group of people who share the same views as you, be it in investing or politics. Our views need to be challenged and destroyed from time to time to remove our biases. It’s hard to learn from history, experience and knowledge if you don’t get challenged. Therefore, be skeptical of information that agrees with your viewpoint. Empirical evidence suggests that we are biased to accept conforming evidence (confirmation bias) more easily than conflicting evidence.   Most investors have biases which lead to “wrong” allocations and thus less total returns: confirmation bias, anchoring, a rigid mindset, not willing to have an open mind or inflexible for other ideas to name a few. https://seekingalpha.com/article/4294569-what-investors-can-learn-from-reading-annie-dukes-thinking-in-bets

The Covid-19 pandemic has turned sewage into gold

People who are infected with the coronavirus shed the pathogen in their stool. By measuring and sequencing the viral material present in sewage, scientists can determine whether cases are rising in a particular area and which variants are circulating.   People excrete the virus even if they never seek testing or treatment. So wastewater surveillance has become a critical tool for keeping tabs on the virus, especially as Covid-19 testing has increasingly shifted to the home.   The institutions and localities that invested in wastewater surveillance over the last two years are discovering that it can be used to track other health threats, too. The Sewer Coronavirus Alert Network has already begun tracking the monkeypox virus in wastewater. https://buff.ly/3Avblk2