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Sunday, 9 May 2021

On Hitpicks and the current investing scenario

This post is from Dr Hitesh Patel, my partner in Hitpicks and in my own investing. We have been collaborating for many years and hopefully complement each other and I have learnt a lot from him over the years. He is the most prolific members on ValuePickr and his thread is the most-read thread on the forum, where he shares his thoughts and helps investors. 

Link to the ValuePickr thread.

Friday, 7 May 2021

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.

1. No more of talking politics at work
Today's social and political waters are especially choppy. Sensitivities are at 11, and every discussion remotely related to politics, advocacy, or society at large quickly spins away from pleasant. You shouldn't have to wonder if staying out of it means you're complicit, or wading into it means you're a target. These are difficult enough waters to navigate in life, but significantly more so at work. It's become too much. It's a major distraction. It saps our energy, and redirects our dialog towards dark places. It's not healthy, it hasn't served us well. And we're done with it on our company Basecamp account where the work happens. People can take the conversations with willing co-workers to Signal, Whatsapp, or even a personal Basecamp account, but it can't happen where the work happens anymore. 

2. Does technology create more jobs than it destroys?
Introducing a robot to the factory floor doesn’t automatically send some number of humans to the unemployment line. It can, and it does, but not always. In fact, so-called labor-destroying technologies can actually preserve and create work.  Turns out, in some situations labor-saving tools can actually lead to more work—sometimes due to human meddling, other times due to the new demands of the technology, and often because of both.

More than 60% of jobs performed in 2018 had not yet been invented in 1940, according to a 2020 MIT report that Autor co-authored. Tech-focused roles, like computer engineers, are well-represented among jobs created over this period, but as incomes rose new personal services (e.g., fitness coaching, mental health counseling) emerged as well. 

3. How to think?
Thinking means concentrating on one thing long enough to develop an idea about it. Not learning other people’s ideas, or memorizing a body of information, however much those may sometimes be useful. Developing your own ideas. In short, thinking for yourself. You simply cannot do that in bursts of 20 seconds at a time, constantly interrupted by Facebook messages or Twitter tweets, or fiddling with your iPod, or watching something on YouTube.

I find for myself that my first thought is never my best thought. My first thought is always someone else’s; it’s always what I’ve already heard about the subject, always the conventional wisdom. It’s only by concentrating, sticking to the question, being patient, letting all the parts of my mind come into play, that I arrive at an original idea. By giving my brain a chance to make associations, draw connections, take me by surprise. And often even that idea doesn’t turn out to be very good. I need time to think about it, too, to make mistakes and recognize them, to make false starts and correct them, to outlast my impulses, to defeat my desire to declare the job done and move on to the next thing.

4. China is the world's great emitter of greenhouse gases; India is not far behind
China’s share of global emissions rose to 27 percent of the world’s total, while the United States remained the second-largest emitter at 11 percent. India’s share came third at 6.6 percent, edging out the 27 nations in the European Union, which accounted for 6.4 percent, the report found.

China, India and other developing nations have long noted that over the past century, the United States and Europe grew their economies while generating massive amounts of greenhouse gases, and that requiring the developing world to clamp down on emissions as they industrialize and bring millions of citizens into the middle class is unfair.

China’s emissions reached 14.1 gigatons of carbon dioxide equivalents in 2019, the Rhodium analysis calculated — more than triple 1990 levels and a 25 percent increase over the past decade. Measuring China’s greenhouse gas emissions on a per capita basis also shows a sharp increase. China is home to more than 1.4 billion people, and its per capita emissions have reached 10.1 tons annually, nearly tripling over the past two decades.

5. The importance of useless knowledge
To become the best possible manager, you should invest time in acquiring ‘useless knowledge’. The type of knowledge that does not directly enhance the bottom line, but enlightens the individual.

To enlarge and sweeten the fruits of management, professionals need to embrace so-called useless knowledge. This knowledge is not the type of information you get from reading the trivialities on Twitter feeds or Facebook. The canon of useless knowledge is more profound and includes philosophy and its continuous questioning of everything, the lessons of history and appreciation of the arts—the humanities of the liberal arts.

The words “useless knowledge” is problematic because it is a contradiction. There is no such thing as useless knowledge. A more suitable term would be indirect knowledge. This type of knowledge that solves problems by introducing new perspectives from outside the world of business. Wielded correctly, understanding the humanities will make you a better manager by understanding new perspectives.

Managers often equate useful with being practical. There is, however, nothing more practical than a good theory. Besides doing something, managers also need to think. The humanities teach you how to think, how to take a new perspective, think about meaning and purpose, without falling into the platitudes of popular management books.

For building a solid long term portfolio, look at subscribing to www.intelsense.in long term advisory.
For technofunda investing and positional trading, subscribe to our Hitpicks advisory service on www.intelsense.in
For momentum trend following systematic trading, subscribe to Quantamental at www.quantamental.in 
Our Quant systems are also found at https://intelsense.smallcase.com

Tuesday, 4 May 2021

What happens if you start at the wrong time and the market declines after that?

The Quntamental Q30 strategy is up 9.02% month on month in April and up 106.74% since inception 14 months back. Out of the 14 months, 2 have been negative and 12 have been positive months. If you ignore the daily fluctuations in the market, we have been in a bull phase that continues unabated. Month on Month returns over the last 14 months: (Return % of every month is on the capital at the start of the month)

While it is very important to follow the process and take what the market gives us without letting our emotions override the Q30 investing decisions, it is also important to remember that market returns are lumpy in nature. 

In trending markets, the strategy will make a lot. In a downward market, we will give back some portion of it. In a sideways market, we will bleed a little as the market takes its breath and before starting to move in one direction whether up or down. 

What happens if you start at the wrong time and the market declines thereafter and the momentum doesn’t return for few months or several months? 

Framed differently, the question is how long do you need to remain invested to gain a 100% probability of profit? 

If past is any indication, that period could be anything from a couple of quarters to a couple of years. You must be willing to remain invested and follow the process with discipline throughout these periods to come out of the drawdowns, recover your investment value and then make a decent return on your corpus over a longer time frame of 2-3 year rolling return basis. 

To put that into an example from the above table, if one only has a 1-month outlook, one could get anything between (-4%) to +18% return. But if one has a minimum 3-month outlook, the chance and magnitude of losses reduce. Returns between 3 months of March 20 to May 20 period is (-0.35%) whereas returns between 3 months of Feb 21 to April 21 is 34.06%. Stretch that time window to 6 months, a year, 2 years and you get the drift. 

Future is not exactly going to mimic the past. The past does however provide an indication of likely scenarios. Based on data from the 2007 calendar year onwards, below are few inferences: 

  • 1 out of 4 quarters and 1 out of 4 calendar years have resulted in negative returns. 
  • There was no 2 back-to-back years of negative returns but there were 5 to 6 back-to-back negative return quarters/months in different time periods over the last 14 years. 
  • We may do better than past. We may do worse than past. The strategy has built-in safeguards to gradually go in to higher % of cash allocation as we will not get enough stocks to meet our criteria for investments in prolonged conditions of market bearishness. 
  • What we also know is trying to second guess when is the right time to invest and when is the right time to sit out usually results in getting out at the wrong time, missing out on the gains and making far less than what we could have if we just followed the strategy. 

When the Corona crisis hit us in March 20, many of us thought markets would not do well for several months or quarters. In the second half of the year, many were still in disbelief that the market can’t go higher. 

Over the last few weeks, many have been expecting the market to fall like last year. But Q30 has instead gone up 9% in a month like April 21. 

To summarize, we should let the market tell us what to do rather than follow our own opinion. Remain invested for a minimum period for the strategy to play out and let the edge work for us. 

The longer you follow the process with discipline, the bad periods and good periods even out and the edge of the strategy plays out and whatever the market will do in longer time frames, we expect to do better and by repeating that over and over again, we let the magic of compounding work in our favour.

Thursday, 29 April 2021

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.

1. In defence of thinking
We’ve lost our familiarity with the concept of “thinking” as a concrete and isolatable activity; something that can be prioritized, and trained, and even cherished as a valuable pursuit in its own right. Today, we’re not nearly as comfortable with this most fundamental of activities. We talk a lot more about information — how we can get more of it, how we can spread it faster — than we do its processing. 

We cannot make sense of ourselves or the world around us without putting in the mental cycles necessary to wrestle this frenetic information into useful forms. Thinking — true, hard, energizing thinking — is not yet another healthy activity to add to a long list of such commitments. It’s better understood as a way of life; one that’s become even more radical in an increasingly shallow world.

2. How envy works
Envy is one of the great struggles plaguing humanity today, and it’s only getting worse. The conditions that allow envy to thrive are being accentuated by technological progress, yet our norms have not updated to accommodate this reality.

You will be envious of those that have reached your desired state, but are not too far removed from it. Those that are too far out will be sources of inspiration, not envy. Envy thrives in the distance between you and someone you once knew. 

The rival seems very relatable to you. You have similar interests, similar outlooks, but the outcomes appear to be wildly different.

3. The post-truth world
The term fake news became widely used during the 2016 US presidential election, when the internet was flooded with inaccurate information. 

Researchers usually talk about disinformation, which is purposefully false, and misinformation, which is unwittingly false (either because the publisher made a mistake or because the person sharing the content did). As false content spreads through social media networks, it can oscillate between the two, and it can manifest in various forms, including memes, tweets, or “imposter” content made to imitate real news stories. 

In 2016, Oxford Languages chose post-truth as its word of the year. The essential characteristic of our age, the accompanying press release stated, was the loss of a distinction between truth and feeling; we were entering an era in which “objective facts are less influential in shaping public opinion than appeals to emotion and personal belief.”

The beginning to a possible solution is to realize that, although the world is politically divided in many ways, the main division is not between rational, intelligent people and irrational, emotional ones. Fact, opinion, and emotion often go hand in hand—in politics, journalism, and any kind of social interaction.

4. The long-term shareholders Buffett cultivated are a huge part of Berkshire Hathaway’s success
An elite corps of about 40 companies are in Berkshire’s league in terms of attracting quality shareholders among stock-picking institutional investors. But Berkshire has the greatest proportion of individual owners, representing an estimated 40% of the Berkshire shares that Buffett doesn’t own.

Having a high density of quality shareholders has contributed to Berkshire’s success over the decades, as it has to the performance of dozens of other major companies.  They support management’s long-term view and contribute to the distinctive reputations, cultures, and moats that characterize great companies. Such a long-term culture trickles throughout the company in everything from acquisitions to operations. 

Since a company’s shareholders influence a company, managers should care about the shape of their shareholder base.  One dominated by short-term investors will induce managers to focus on quarterly targets rather than multi-year performance. One controlled by indexers will tend toward formulaic governance practices even if they do not fit a particular company.

Buffett explained in 1983 how he would achieve his goal: “If we consistently communicate our business and ownership philosophy — along with no other conflicting messages — and then let self-selection follow its course.” Buffett courted quality shareholders by providing an informal education, mainly through an acclaimed annual letter and legendary annual meeting.

5. Negativity is a character trait
You ever notice it’s the same people who spent eight years moping about deflation and disinflation who are now shrieking about inflation?

You ever notice it’s the same people who complained about being “pushed out on the risk curve” due to low interest rates on bonds who are now upset about higher interest rates on bonds?

You ever notice it’s the same noisemakers who’ve been seeing recessions over every horizon for a decade who are now complaining about too much economic growth?

You ever notice it’s the same folks who lamented the lack of growth who are now crying about how the acceleration of growth is unsustainable?

It’s the same people. They have no overarching point. There’s no comprehensive philosophy for how things should be. It’s just bitching and moaning, regardless of past, present or future circumstances. Everything’s wrong, everyone else is making all the wrong choices, with suspect motives, to keep me down and hurt my feelings. 

For building a solid long term portfolio, look at subscribing to www.intelsense.in long term advisory.
For technofunda investing and positional trading, subscribe to our Hitpicks advisory service on www.intelsense.in
For momentum trend following systematic trading, subscribe to Quantamental at www.quantamental.in 
Our Quant systems are also found at https://intelsense.smallcase.com

Friday, 23 April 2021

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.

1. Trying hard not to be stupid
It is not enough to think about difficult problems one way. You need to think about them forwards and backward. Inversion often forces you to uncover hidden beliefs about the problem you are trying to solve. “Indeed,” says Munger, “many problems can’t be solved forward.”

Inverting the problem won’t always solve it, but it will help you avoid trouble. You can think of it as the avoiding stupidity filter. It’s not sexy but it’s a very easy way to improve.

Inversion helps improve understanding of the problem. By forcing you to do the work necessary to have an opinion you’re forced to consider different perspectives.

If you’re to take anything away from inversion let it be this: Spend less time trying to be brilliant and more time trying to avoid obvious stupidity.

2. The North Korean cyber criminals
Foreigners find it profoundly difficult to understand what is happening inside North Korea, but it is even harder for ordinary North Korean citizens to learn about the outside world. A tiny fraction of one per cent of North Koreans has access to the Internet. Yet, paradoxically, the North Korean government has produced some of the world’s most proficient hackers.

North Korea, moreover, is the only nation in the world whose government is known to conduct nakedly criminal hacking for monetary gain. Units of its military intelligence division, the Reconnaissance General Bureau, are trained specifically for this purpose. In 2013, Kim Jong Un described the men who worked in the “brave R.G.B.” as his “warriors . . . for the construction of a strong and prosperous nation.”

North Korea’s cybercrime program is hydra-headed, with tactics ranging from bank heists to the deployment of ransomware and the theft of cryptocurrency from online exchanges. It is difficult to quantify how successful Pyongyang’s hackers have been. Unlike terrorist groups, North Korea’s cybercriminals do not claim responsibility when they strike, and the government issues reflexive denials. Nevertheless, in 2019, a United Nations panel of experts on sanctions against North Korea issued a report estimating that the country had raised two billion dollars through cybercrime. Since the report was written, there has been bountiful evidence to indicate that the pace and the ingenuity of North Korea’s online threat have accelerated.

3. Active vs Passive reading
Passive readers forget things almost as quickly as they read them. Active readers, on the other hand, retain the bulk of what they read. Another difference between these two types of readers is how the quantity of reading affects them differently. Passive readers who read a lot are not much further ahead than passive readers who read a little.

The more that active readers read, the better they get. They develop a latticework of mental models to hang ideas on, further increasing retention. Active readers learn to differentiate good arguments and structures from bad ones. Active readers make better decisions because they know how to get the world to do the bulk of the work for them. Active readers avoid problems. Active readers have another advantage: The more they read the faster they read.

4. Is fund management a business or a practice?
"The distinction between an investment practice and investment business. A business gives to the customer what they want. The manager creates a product to fill a need. A practice, like a medical or law practice, is there to give a client what they need." - Anthony Deden.

The business solves the customer’s problem and maximizes wealth creation for the owner. The practice serves the customer in a way that reflects the uniqueness of the practitioner, their process and personality. The business’s natural drive is to grow and generate cash. For the practice, it is to allow the owners to practice their craft in service of the client.

5. It is going to get dumber
I also worry 2020 and 2021 may have broken the brains of a large number of young investors. Once you associate degenerate gambling with actual investing in the markets it’s going to be difficult to turn that part of your brain off to invest in a reasonable manner.

You could make the case this is the dot-com bubble all over again. And there are some similarities.

But I think the main driver here is something completely different. The internet has changed the game forever and we’re finally seeing a generation of people who grew up online come into the markets. I don’t think the internet has fundamentally changed human nature but it sure does amplify it.

Everything is now gamified. Money doesn’t seem real when transactions occur with the push of a button on your phone. Memes are now a form of currency in 2021. What you invest in has always been about status in many ways but now people are trying to prove a point with their trades. Crypto wealth was essentially created from out of thin air (and coding).

My biggest worry is the number of young people who are witnessing meme stock gains and joke crypto currencies going to the moon are going to develop bad habits and attitudes about the markets that will be impossible to fix.

I also don’t think we’ve seen the end of this. It’s probably only going to get dumber.

For building a solid long term portfolio, look at subscribing to www.intelsense.in long term advisory.
For technofunda investing and positional trading, subscribe to our Hitpicks advisory service on www.intelsense.in
For momentum trend following systematic trading, subscribe to Quantamental at www.quantamental.in
Our Quant systems are also found at https://intelsense.smallcase.com

Sunday, 18 April 2021

The Perils of the 2020 Rally

We all will remember 2020 as the year of the Covid pandemic. When the first realisation hit our markets, lockdowns became a reality, markets fell off the cliff. The economies across the globe have remained weak. Every country has tried, based on its capability, to pump in liquidity and prop up their individual economies. In the last year, the US Fed has nearly doubled its balance sheet to more than $7.7 trillion through around $3.4 trillion in bond purchases. That extraordinary intervention, along with near-zero interest rates, has a single point agenda - to keep money flowing through the US banking system. As per data from IMF, countries have given stimulus between 2.5% to 10% of GDP.

This has resulted in an across the board asset price bubble. Nearly every asset class has been on the rise for the last year. Bitcoin, equity markets, oil, metals - you name it and they are up. The main reason is that there is a lot more money in the hands of people and it is flowing into various asset classes.

The second thing that has happened, at least in India, is a very large migration of mutual fund investors to direct equity. 10.8 million new demat accounts were opened by investors in India post-April 2020. Retail holding in NSE listed stocks is currently around 7%, which is an all-time high. Since July 2020, mutual funds have seen an outflow of 45,000 crs.

I believe that the market condition when a person starts his investing journey has a very large impact on the kind of investor he ends up becoming. For example, most people who started in the 2000-2007 period, ended up becoming growth-oriented buy-on-dips investors (I would put myself in this camp). People who started post-2008 to about 2013-14 were value investors. It is because those factors worked well in the period when they took their first steps.

What I fear is that the influx of a large number of new investors in the markets coinciding with a huge market rally despite weak economic conditions, sends the wrong message to this set of new investors. They may come away with the realisation that markets never go down and central banks can and will always support the market so there is nothing to worry about. And sometime in the future, this is likely to come back to haunt them.

This article first appeared on https://www.cnbctv18.com/views/the-perils-of-the-2020-rally-8953391.htm

Friday, 16 April 2021

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.

1. Antiscience is rising and needs to be curbed
Antiscience has emerged as a dominant and highly lethal force, and one that threatens global security, as much as do terrorism and nuclear proliferation. Antiscience is the rejection of mainstream scientific views and methods or their replacement with unproven or deliberately misleading theories, often for nefarious and political gains. It targets prominent scientists and attempts to discredit them.

Public refusal of COVID-19 vaccines now extends to India, Brazil, South Africa and many low- and middle-income countries. Thousands of deaths have so far resulted from antiscience, and this may only be the beginning as we are now seeing the impact on vaccine refusal across the U.S., Europe and the low- and middle-income countries of Africa, Asia and Latin America. Containing antiscience will require work and an interdisciplinary approach. The stakes are high given the high death toll that is already accelerating from the one-two punch of SARS CoV2 and antiscience. Antiscience is now a large and formidable security issue.

2. The Rise and Fall of the Missed Call
The missed call emerged in India as a critical means of communication for those who counted every rupee spent on recharge credit. But the practice soon spread, became trendy, and, even as call rates plunged in the 2000s to among the lowest in the world, evolved into a general tool of convenience: a missed call could mean “I miss you,” “Call me back,” or “I’m here.” The fact that the missed call demanded only basic numeric literacy made them accessible to the third of India’s population that was illiterate. In 2008, one study estimated that more than half of Indian phone users were in the habit of calling people with the expectation that they wouldn’t pick up.

The internet revolution has brought about vast benefits for India: digital connectivity defines nearly every aspect of Indian life, a trend that has only accelerated during the pandemic.

3. Irrigation has been stopped in Taiwan to make semiconductors (apparently mankind can live without food but not without their cell phones!!)
Chip makers use lots of water to clean their factories and wafers, the thin slices of silicon that form the basis of the chips. And with worldwide semiconductor supplies already strained by surging demand for electronics, the added uncertainty about Taiwan’s water supply is not likely to ease concerns about the tech world’s reliance on the island and on one chip maker in particular: TSMC.

More than 90% of the world’s manufacturing capacity for the most advanced chips is in Taiwan and run by TSMC, which makes chips for Apple, Intel and other big names.

In recent months, the government has flown planes and burned chemicals to seed the clouds above reservoirs. It has built a seawater desalination plant in Hsinchu, home to TSMC’s headquarters, and a pipeline connecting the city with the rainier north. It has ordered industries to cut use. In some places it has reduced water pressure and begun shutting off supplies for two days each week. Some companies, including TSMC, have hauled in truckloads of water from other areas.

But the most sweeping measure has been the halt on irrigation, which affects 183,000 acres of farmland, around a fifth of Taiwan’s irrigated land.

4. We are breathing in microplastics
Take a deep breath. While you might feel clean air passing through your nose, tiny bits of plastic from packaging and soda bottles that we throw away all too often might be hitchhiking to the depth of our own lungs.

A recent study examined the sources of atmospheric microplastics that are increasing at an alarming rate of around 4% per year. The study discovered that India, Europe, Eastern Asia, the Middle East, and the United States are among the hotspots for terrestrial microplastic sources and accumulation.

Moreover, closer to home, these plastic fragments have become so pervasive that they are embedded in our fields, water supply, and even in the air that we breathe. From the human bloodstream to the guts of small insects in Antarctica, they are leaving a trail in every corner available.

While there is a consensus that inhalation of plastic particles can be irritating for internal tissues of organisms, further research needs to be conducted in order to understand whether plastic is more toxic in comparison to other aerosols.

5. Jamsetjee Jejeebhoy - one of India's first crorepatis (in the 1820s!)
Opium wasn’t just another trade good for the British Empire. It was the necessary corollary to another commodity: tea. The British were importing tens of millions of pounds of tea from China every year. There seemed to be no end to the demand and everyone involved was making huge profits. There was just one problem. They didn’t have the cold hard cash or rather, cold hard silver to pay for it.

With all of the Empire’s physical currency disappearing into China, the British were running a huge trade deficit. They needed something that the Chinese wanted as much as they wanted tea. Opium was the answer. And it was essential to keeping the Empire’s entire economy afloat.

By the time he was 40, Jamsetjee Jejeebhoy had allegedly made more than ₹2 crore — in the 1820s. He was already one of the richest men in the entire country, but he had his eye on even greater prizes.

For building a solid long term portfolio, look at subscribing to www.intelsense.in long term advisory.
For technofunda investing and positional trading, subscribe to our Hitpicks advisory service on www.intelsense.in
For momentum trend following systematic trading, subscribe to Quantamental at www.quantamental.in 
Our Quant systems are also found at https://intelsense.smallcase.com