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Thursday, 29 July 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. America's food monopolies and who actually pays the price

A handful of powerful companies control the majority market share of almost 80% of dozens of grocery items bought regularly by ordinary Americans.

The size, power and profits of these mega companies have expanded thanks to political lobbying and weak regulation which enabled a wave of unchecked mergers and acquisitions. This matters because the size and influence of these mega-companies enables them to largely dictate what America’s 2 million farmers grow and how much they are paid, as well as what consumers eat and how much our groceries cost.

It also means those who harvest, pack and sell us our food have the least power: at least half of the 10 lowest-paid jobs are in the food industry. Farms and meat processing plants are among the most dangerous and exploitative workplaces in the country.

Overall, only 15 cents of every dollar we spend in the supermarket goes to farmers. The rest goes to processing and marketing our food.


2. Swim your way to better brain health

A growing body of research suggests that swimming might provide a unique boost to brain health. Regular swimming has been shown to improve memory, cognitive function, immune response and mood. Swimming may also help repair damage from stress and forge new neural connections in the brain.

Now, there is clear evidence that aerobic exercise can contribute to neurogenesis and play a key role in helping to reverse or repair damage to neurons and their connections in both mammals and fish.

In one study in rats, swimming was shown to stimulate brain pathways that suppress inflammation in the hippocampus and inhibit apoptosis, or cell death. The study also showed that swimming can help support neuron survival and reduce the cognitive impacts of aging. 


3. The world seen through the eyes of Olympic Games

Another point that leaps out is the remarkable consistency of the U.S. compared with other leading nations. The U.S. routinely won 15% to 20% of the medals awarded during most of the 20th century. That figure has been edging down over the past few decades, a reflection that the Games have gone from a Western-dominated event to a more globalized competition featuring the rise of many developing nations. In other words, a lot like world politics and the global economy in general.

China began opening to the world around 1980 and took part in its first Summer Olympics in 1984, where it made a strong initial impression. China's performance has continued to surge dramatically, and it now takes home close to 10% of the medals. When Beijing hosted the Games in 2008, China won more golds than any other country (48), though not as many total medals as the U.S. (100 for China, compared with 112 for the U.S.).

Starting from zero three decades ago, China now has the second-strongest Olympic team — and the world's second-biggest economy — trailing only the U.S. on both counts.

The Soviets invested enormous resources in Olympic sports and quickly surpassed the U.S., winning the most medals at every Summer Games from 1956 to 1992, except for 1968, when the Americans edged them.

Five of the world's most populous countries (India, Indonesia, Pakistan, Nigeria and Bangladesh) have more than 2.1 billion people — almost 30% of the world's total — and won just six medals combined in Rio.


4. Can you survive the next heat wave? Depends on the humidity.

In reasonable heat, the human body is very good at maintaining a constant internal temperature of 97 to 99 degrees. When it gets hot outside, our bodies produce sweat; when the sweat evaporates, its transformation from liquid water on your skin to water vapor in the air requires energy. That energy comes from your body’s heat, so as the sweat evaporates, your body cools down.

A dry heat feels comfortable because the evaporation happens so fast that you don’t even notice the sweat on your skin. 

Now suppose you’re in the same amount of heat, but in Palm Beach, where the air is incredibly humid. The air is already holding all the water vapor it can hold. So your sweat stays on your skin, and the heat that the sweat is supposed to remove from your body … stays in your body, and accumulates.

Your body has lost its ability to shed heat, and so your core temperature starts creeping up to approach the temperature of the air around you. Let the process go on long enough, and body temperature rises from comfortable 98 to deadly 108.


5. How would we invest if we knew precisely what would happen in the future?

Suppose that our crystal ball had told us on December 31, 1999 that, for the next 11 1/2 years through July of 2011, the US Consumer Price Index (CPI) would rise at an average annual rate of 2.5%. Would we have expected the price of gold to rise by 465% while the inflation-adjusted S&P 500 fell by almost 32% over the same period?

Market veterans remember the 1973-1974 bear market when the DJIA's earnings rose 50% while the Dow dropped almost 50% in price, or the '87 crash during which stocks plunged 43% even when earnings hadn't missed a beat. In 1999, when the stocks of companies that actually made money declined 2%, profitless tech startups soared 82%.

In 2016, Brazil's senior leadership has been embroiled in a vast corruption scandal, President Dilma Rousseff's powers have been suspended due to impeachment proceedings, Finance Minister Joaquim Levy has been forced to resign, and inflation is in double digits. Brazil suffered its worst GDP contraction since 1990. Who would have predicted that EWZ, the Brazil iShares ETF, would be up nearly 60% year to date?

Even if we had a crystal ball, the investment implications of future events and conditions are unknowable. That is why we must diversify.


Tuesday, 27 July 2021

Discounting DCF - Why DCF fails most of the time in valuing companies

This post was triggered by a valuation of Zomato. It came as a WhatsApp forward and I laughed out loud when I saw it. I have been a skeptic of DCF (discounted cash flow) and a lot of simultaneous thoughts ran through my mind.

The obvious problems of DCF are many. I will list a few of my pet peeves here:

1) Most of the present value is derived from the terminal value - Terminal value assumes that a firm will be in business forever. May not happen in real life. Secondly the growth assumptions of close to GDP growth rate is also fallacious. Who can determine what the GDP growth rate will be in 2040? India's GDP before 1991 was an average of 4% and that of the last 30 years post-liberalisation at about 6%. Excluding the Covid period, it has varied from about 4% to 11%. So, what value should we take for terminal growth. Try changing it from 4% to 11% and see what a difference it makes to the valuation.

2) Arbitrary discount rate and cost of capital - The discount rate applied varies vastly over time and has a large effect on the DFC calculation. People use basic approximations like 10 or 30 year US treasury rates or some such risk-free rate. Again a few percent difference can make a huge difference in the final value, so much so that the entire valuation becomes redundant.

3) False precision bias - The entire process is full of assumptions. And it has to be because it deals with the future and as such cannot deal with any levels of certainty. But a DCF done in an excel gives a double digit precise value. People misunderstand accuracy for precision.

4) World is dynamic and things change - The world is changing all the time. I don't think we need to remind ourselves of that in pandemic times. Like I keep saying no annual report had pandemic as a risk before 2019. So, making revenue, cash flow projections for the next 10 years is not only extremely difficult but, in my mind,foolhardy. People who were valuing Amazon had no clue that AWS would turn out and be as profitable as it has become. Similarly, glance back at DCF valuations done of Nokia in 2005-06 period. You will know what I am saying.

5) Gives a false sense of security - Because you think you have done a valuation, you believe you know what the business is worth. But that does not help you in real life. What do you do if the stock price falls below your calculated value? You buy more? Or sell? What if you buy more and it keeps falling? How long do you buy? What happens if the price goes up 2x-3x-5x from the calculated value? Do you sell because it's overvalued? Do you hold on for more gains? So, you see valuation is just one small part of the whole.

6) It ignores market sentiments - Valuation depends on the sum of all future cash flows and also the "prevalent market sentiment". The second part is actually equally important. The same company will be valued differently in a bear and bull market even if their underlying business performance is not impacted. Case in point is say Infosys in 2000 and 2001. Same company, doing the same thing, but market value is a fraction of the past.

Every asset value can be broken up into two parts—i) intrinsic value, which is derived from its tentative future cash flows and ii) transaction value, which is derived from what value someone else will pay for it in a transaction. For example, a painting or a flower vase has no intrinsic value because there is no cashflow, but it has a transaction value based on what another person is willing to pay for it. This transaction value keeps changing from time to time based on many other factors like liquidity, political and social situation etc.

Now having said so many negative things about DCF, it leaves us with two practical questions. Firstly, does it mean that we should completely ignore that process and secondly, if not DCF, then what?

Let's try to answer them one by one.

The process of doing a valuation, especially one as rigorous as DCF, is very useful. It helps you walk through many aspects of the business and make your assumptions explicitly. Like what could be the revenue growth over time, what would be its components, at what margins etc. This helps in the understanding of the business in a much better manner.

And for the next question, I will let the great masters speak.

Munger: “Warren often talks about these discounted cash flows, but I’ve never seen him do one. If it isn’t perfectly obvious that it’s going to work out well if you do the calculation, then he tends to go on to the next idea.”

Buffett: “It’s true. If it doesn’t just scream out at you, it’s too close."

To summarize, you need to focus on understanding the business and its various levers well enough to figure out it is screaming at you to buy or sell. If you need excel for it, you don't know the business well enough.

This article first appeared in: https://www.cnbctv18.com/market/stocks/zomato-valuation-why-one-should-discount-dcf-method-of-valuing-stocks-10089761.htm

Friday, 23 July 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. The bold new next step on human advancement
Proteins are the minions of life. They form our bodies, fuel our metabolism, and are the target of most of today’s medicine. They start out as a simple ribbon, translated from DNA, and subsequently fold into intricate three-dimensional architectures. Similar to Transformers, many protein units further assemble into massive, moving complexes that change their structure depending on their functional needs at the moment.

Misfolded proteins can be devastating, causing health problems from sickle cell anemia to cancer and Alzheimer’s disease. One of biology’s grandest challenges for the past 50 years has been deciphering how a simple one-dimensional ribbon-like structure turns into 3D shapes, equipped with canyons, ridges, valleys, and caves. It’s as if an alien is reading the coordinates of hundreds of locations on a map of the Grand Canyon on a notebook, and reconstructing it into a 3D hologram of the actual thing—without ever laying eyes on it or knowing what it should look like.

Deciphering protein folding is bound to illuminate an entire new landscape of biology we haven’t been able to study or manipulate. The fast and furious development of Covid-19 vaccines relied on scientists parsing multiple protein targets on the virus, including the spike proteins that vaccines target. Many proteins that lead to cancer have so far been out of the reach of drugs because their structure is hard to pin down.

With these new AI tools, scientists could solve haunting medical mysteries while preparing to tackle those yet unknown. It sets the stage for better understanding our biology, informing new medicines, and even inspiring synthetic biology down the line.

2. Rajiv Bajaj talks about why we are failing to compete with the Chinese businesses
Indian businessmen are characterized by a myopic vison—it’s both short term as well as geographically limited. Of course, the government also does not help. So, who is responsible for the Chinese dominance—the government, the people or the Corporates?

I think it's all the three.

When even ITI trained turners and fitters refuse to work in a shop floor, when a Stock Broker is paid more than an Engineer, when typing code is mistaken for technology, when governments refuse to amend antique labor and land laws when corporates think local and not global and finally when you, yes you, will not send your son to work on the shop floor, each one of this factor is as responsible for the Chinese dominance as much as their “Ethical Corruption” We have been looted because we left our doors and windows open.

No, this article is not supporting the Chinese. How dare they work so hard? And how dare they obey a communist government? We should stop buying all their goods and we will make everything in our country. But we will work nine to five with a three- day weekend. 

3. The highest form of wealth is controlling your time
There’s a difference between working hard because you want to and working hard because someone else told you you had to, and how to do it, and when to do it. Even if you’re doing the same work, the independence of doing it on your own terms changes everything in the same way that sleeping in a tent is fun when you’re camping but miserable when you’re homeless.

Wealth can lead to time independence, but it’s never assured. It can be the opposite, as whatever created the wealth – whether a company or an inheritance – creates a claim on your time in equal proportion to its financial reward. A great number of CEOs fall into this category: They have an abundance of wealth and not a moment of free time or scheduling control even when it’s desired, which is its own form of poverty.

Charlie Munger summed it up: “I did not intend to get rich. I just wanted to get independent.” It’s a wonderful goal, and harder to measure than net worth.

4. The Amazonification of space
The Amazonification of space has begun in earnest. What was once largely the domain of big government is now increasingly the realm of Big Tech. The people who sold you the internet will now sell you the moon and the stars. 

Bezos, the founder of Amazon and still its largest shareholder, made clear at the news conference after Tuesday’s flight that Blue Origin was open for business. Even though tickets were not generally available, sales for flights were already approaching $100 million. Bezos didn’t say what the price for each was but added, “The demand is very very high.” 

All of this space activity is the start of something new but also a replay of the 1990s. At the beginning of that decade, the internet was government property devoted to research and communication for a few. By the end, thanks to Bezos more than anyone, it was a place for everyone to buy things. Over the next 20 years, tech grew up and became Big Tech, provoking bipartisan fears that Amazon, Facebook, Google and Apple are now too powerful. 
Outer space might now be embarked on a similar journey from frontier to big business. 

5. The progress on mobile tech
Your cell phone is a result of over a hundred years of commercial and government investment in research and development in all of its components and related technologies. A significant portion of the cutting-edge development has been funded by the military. 

The story of military investment in technology becoming game-changing commercial products and services has been repeated again and again. Famously, the Defense Advanced Research Projects Agency developed the technologies behind the internet and speech recognition. But DARPA also made enabling investments in advanced communications algorithms, processor technology, electronics miniaturization, and many other aspects of your phone.

The first mobile phone service, for 80-pound telephones installed in cars, was demonstrated on June 17, 1946, 75 years ago. The service was only available in major cities and highway corridors and was aimed at companies rather than individuals. The equipment filled much of a car’s trunk, and subscribers made calls by picking up the handset and speaking to a switchboard operator. By 1948, the service had 5,000 customers.

Friday, 16 July 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. Market prediction is a worthless exercise
I don’t have an outlook on the market as I think it is more useful to try and understand what is going on than to try to predict what is going to happen. The future is about probabilities and the current situation is about facts and interpretations. No one has privileged access to the future and market forecasts tend to be about as accurate as calling a coin toss. There are, of course, analogies that can be drawn about how the current environment maps onto previous historical data, but success in that depends crucially on how the future will, in fact, resemble the past, and whether the cited analogies turn out to be the governing ones. The record seems to show that sometimes they will and sometimes they won’t and we are back at the coin toss.

I recall George Soros saying in 2008 that he had predicted that financial crisis. He then wryly noted that he had predicted many financial crises over his career that never materialized.

A recent study of inflation forecasts by economists, consumers, and the bond market found no significant ability to make value added predictions. “As far as major shifts in inflation go, we are all in the dark, just as we are essentially clueless about where the stock market is heading or the price of oil in 2022, or the date of the next recession".

2. Reducing carbon footprint by burning wood!! 
In 2009, the European Union (EU) pledged to curb greenhouse gas emissions, urging its member states to shift from fossil fuels to renewables. In its Renewable Energy Directive (RED), the EU classified biomass as a renewable energy source — on par with wind and solar power. As a result, the directive prompted state governments to incentivize energy providers to burn biomass instead of coal — and drove up demand for wood. 

Earlier this year, the EU was celebrated in headlines across the world when renewable energy surpassed the use of fossil fuels on the continent for the first time in history. The EU directive that encouraged the pivot to biomass also left a loophole — it did not prevent the leveling of rooted trees for wood pellet production.

“I can’t think of anything that harms nature more than cutting down trees and burning them,” said William Moomaw, professor emeritus of international environmental policy at Tufts University.

Yet by burning wood, European power plants can reduce their carbon footprint — at least on paper.

3. A little inefficiency is efficient!
So many people strive for efficient lives, where no hour is wasted. But an overlooked skill that doesn’t get enough attention is the idea that wasting time can be a great thing.

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.

Same in investing. Cash is an inefficient drag during bull markets and as valuable as oxygen during bear markets, either because you need it to survive a recession or because it’s the raw material of opportunity. Leverage is the most efficient way to maximize your balance sheet, and the easiest way to lose everything. Concentration is the best way to maximize returns, but diversification is the best way to increase the odds of owning a company capable of delivering returns. On and on, if you’re honest with yourself you’ll see that a little inefficiency is the ideal spot to be in.

Just like evolution, the key is realizing that the more perfect you try to become the more vulnerable you generally are.

4. Just because you are rich, doesn't mean you are intelligent :-)
Wealth might be a sign of good decisions, but can those decisions be repeated? And do good decisions in one field translate to wisdom in other areas of life? Maybe, maybe not – that’s the best we can say. And there are times where exceptional wealth can prevent empathizing with ordinary people, making insight more precarious.

The big blowups in any field aren’t typically caused by a lack of smarts. The catastrophes are typically caused by extreme intelligence that causes people to believe their own dangerous stories – that you can predict with accuracy, use leverage because your prediction must be true, and ignore warning signs that would have been obvious to a normal person who’s less adept at mental gymnastics.

5. The willpower paradox: when confident self-talk becomes counterproductive
The researchers wanted to understand the relationship between intention, motivation, and actual goal completion. In their own words: “How does the way in which you talk to yourself shape your future actions? What if asking yourself a question about your potential behavior increased the likelihood of that behavior?”

By switching from declarative self-talk to interrogative self-talk, you will consider whether you really want to start that diet, or if you really want that promotion. If the answer is yes and you start working towards these goals, you are more likely to succeed as you will be driven by intrinsic motivation.

Next time you want to set a new goal, keep an open mind and ask yourself: “Will I?” As strange as it may feel, treating the future as an open question will increase your intrinsic motivation and thus your chances of achieving your goals.

Sunday, 11 July 2021

Going Down The Quality Curve

We are in a bull market. We have been in one since the cataclysmic fall of March 2020. In the technical sense, markets have been making higher highs. Nearly all technical indicators are bullish, which is usually the case in a bull market. There are a large number of sceptics waiting for a market correction. The market is obliging them once in a while with some pause, sideways consolidation and correction for a few days. 

In the last one year, we have been seeing a very healthy sector rotation which has prevented any linear rise in any sector or a particular stock. The exception had been the Adani group stocks, which has also had their share of fall recently. 64% of stocks are still below Jan 2018 highs created by a booming mid & small cap bull rally.

Looking at the sectors which are rallying will give you a sense of the market. Commodity cyclicals like sugar, steel, cement have been at the forefront of the current rally. But other more "secular growth sectors" like IT, pharma, specialty chemicals have also participated in the rally in the last year. In such a market context, there are two completely divergent thought processes that run in the minds of investors. The first is the fear-of-missing-out. We want to be in the hot stock or the hot sector and ride the rally. We do not want to miss out on the rally that is happening where everyone else seems to be minting money. The opposite fear is that the market valuations are very high and makes us hesitate to deploy our capital fully. We are pulled at one time in two opposite directions and do not know what to do.

In a bull rally, the first casualty becomes the quality of the portfolio. Usually, the best quality companies rarely run spectacularly. They tend to be, what I call, "peaceful compounders". It is the companies a few notches below in the quality curve that runs the hardest. And people with FOMO gravitate towards that. As any market veteran will tell you, you end up with a clutch of poor companies in your portfolio when the ensuing bear market comes. 

So, the first and perhaps the most important thing to remember is to not dilute the portfolio quality. Does that mean you forego the rally and resign yourself to a more flaccid investment performance? Of course not. You can definitely participate in a sectoral rally but ensure that you are buying into the top one or two companies in that sector. And make sure you position size conservatively. Always, think of the downside first. Every bull market brings with it some narrative on why a particular cyclical industry has turned the corner and will henceforth be a secular growth story. Don't fall for that. You should be able to understand both the bull and bear case before you invest.

The second part of investment hesitancy can be avoided by two simple rules. This bull phase may end tomorrow and it may go on for the next five years for all we know. It is important to have a well thought out "systematic" strategy before we invest in a market like this. The first rule of investing in a market like this is by investing slowly, in tranches over time. Take a few months to deploy your capital. Keep nibbling at the stocks you have shortlisted and accumulate them. The second is to have an exit strategy ready. You need to know when and how much you will sell and where you will put the cash. You also have to plan for when and how to get back into the market subsequently. If all that seems very complex and difficult, just buy good quality businesses and try and ignore the short term market gyrations.

This post first appeared in https://economictimes.indiatimes.com/markets/stocks/news/how-to-survive-when-a-bull-market-takes-the-u-turn/articleshow/84256907.cms

Saturday, 10 July 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. Changing your mind
When it comes to the idea that we are wrong, or that we should change our opinions, we are incredibly adept at resisting. We possess an astonishing array of cognitive biases telling us, You are right—disregard all evidence to the contrary. These include confirmation bias (we focus on and preferentially remember information that reinforces our beliefs); anchoring bias (we over-rely on one key piece of information—usually the first one we received); the illusion of validity (we overestimate the accuracy of our own judgments and perceptions); and many other related tendencies. These biases are like a crocodile-filled moat around the fortress of our beliefs. They turn us into hermit kings, convinced that any counterarguments that break through our walls will bring us misery.

If your goal is to find the truth, admitting you are wrong and changing your beliefs based on new facts makes you better off in the end. 

2. Why is China attacking its US listed tech giants?
They’re specifically targeting large tech companies that have gone to list on the US — like Alibaba for instance. And while on the face of it, this makes no sense, you have to pay close attention to what China is up to. Sure, the likes of Didi bring in foreign currency and carry the Chinese flag with pride. But China doesn’t need the money. Nor the validation. They need data. And they’ll go to extreme lengths to protect their digital assets.

Government intervention has never worked well in the past because the task simply proved too overwhelming. Bureaucrats failed to micromanage the economy because they didn’t have access to real-time information. They couldn’t stay on top because the free markets did it better. But with the data revolution, the old constraints may no longer apply. With digital currency, you can decide how people get to use their money. With surveillance, you can decide how people socialize with their communities. With better real-time information, you can decide how to lend to businesses and individuals. And the only common denominator here is 'data'. With data, you can do anything that you want and the real threat to these ambitions seem to stem from the ambitions of tech overlords like Didi.

3. Obesity reducing drug from the venom of the Gila monster!!
After learning that the venom of a Gila monster lizard contained hormones that can regulate blood sugar, Daniel Drucker started wondering why. 
Ten years later, a synthetic version of a hormone in the venom became the first medicine of its kind approved to treat type 2 diabetes. Known as a GLP-1 (for glucagon-like peptide-1) receptor agonist, the medicine set off a cascade of additional venom-inspired discoveries.

After doctors noticed mice and humans on the drug for diabetes appeared to lose weight, they began to consider its use in obesity science. In June 2021, another effective treatment, this one for obesity, got Food and Drug Administration approval. Called semaglutide and marketed as Wegovy, it also takes its structure from the lizard’s venom.

4. Software is modern day alchemy
A common criticism of software is that it’s not something that takes physical form in the real world. For example, software is not a house, or a school, or a hospital. This is of course true on the surface, but it misses a key point.

Software is a lever on the real world.

Someone writes code, and all of a sudden riders and drivers coordinate a completely new kind of real-world transportation system, and we call it Lyft. Someone writes code, and all of a sudden homeowners and guests coordinate a completely new kind of real-world real estate system, and we call it AirBNB. Someone writes code, etc., and we have cars that drive themselves, and planes that fly themselves, and wristwatches that tell us if we’re healthy or ill.

Software is our modern alchemy. Isaac Newton spent much of his life trying and failing to transmute a base element -- lead -- into a valuable material -- gold. Software is alchemy that turns bytes into actions by and on atoms. It’s the closest thing we have to magic.

5. Working hard
What I've learned since I was a kid is how to work toward goals that are neither clearly defined nor externally imposed. You'll probably have to learn both if you want to do really great things.

The most basic level of which is simply to feel you should be working without anyone telling you to. Now, when I'm not working hard, alarm bells go off. I can't be sure I'm getting anywhere when I'm working hard, but I can be sure I'm getting nowhere when I'm not, and it feels awful. 

Once you know the shape of real work, you have to learn how many hours a day to spend on it. You can't solve this problem by simply working every waking hour, because in many kinds of work there's a point beyond which the quality of the result will start to decline.

The only way to find the limit is by crossing it. Cultivate a sensitivity to the quality of the work you're doing, and then you'll notice if it decreases because you're working too hard. Honesty is critical here, in both directions: you have to notice when you're being lazy, but also when you're working too hard. And if you think there's something admirable about working too hard, get that idea out of your head. You're not merely getting worse results, but getting them because you're showing off — if not to other people, then to yourself.

Friday, 2 July 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. The coming regime shift towards capital-heavy companies
Investors used to invest in capital-light business models, but now they are flocking towards capital-heavy business models. The trend towards more capital-heavy companies is driven by four structural themes: investment in “reshoring”; a shift from investment in information to infrastructure; the need to develop climate-transition technologies and, finally, investment in technologies needed to secure geopolitical leadership. These all require shifts from investing in ideas and information to investing in stuff. 

Investing in infrastructure, not information, is a theme for governments, companies and investors. The Global Infrastructure Hub estimates global infrastructure needs $94tn of investment over the next 20 years to keep pace with demographics and replacing ageing infrastructure. After decades of neglect, this will boost demand for commodities and capital-heavy companies. The shift towards capex-heavy business models will initially be driven by those sectors that have been starved of capital over the past 20 years as they benefit from reshoring and increased infrastructure spending. However, longer term it could be the nascent technologies required for the climate transition and geopolitical “proxy wars” that deliver increased returns to investors from capital-heavy companies. 

2. How 'Chaos' In The Shipping Industry Is Choking The Economy
In the early days of the pandemic, global trade hit an iceberg and sank into the abyss. Then the economy rebounded, and American consumers unleashed a tidal wave of demand that swept through the shipping industry when they started shifting their spending patterns. Unable to spend money on going out, many started spending their money (and their stimulus checks) on manufactured goods — stuff that largely comes from China on container ships.

At first, it wasn't the ships that were the problem; it was the containers. When the buying spree began, Chinese exporters struggled to get their hands on enough empty boxes, many of which were still stranded in the U.S. because of all the canceled trips at the beginning of the pandemic. More importantly, processing containers here has been taking longer because of all the disruptions and inefficiencies brought about by the pandemic. Containers have been piling up at dockyards, and trains and trucks have struggled to get them out fast enough.

With so much shipping capacity bogged down, importers and exporters have been competing for scarce containers and vessels and bidding up the price of shipping. The cost of shipping a container from China/East Asia to the West Coast has tripled since 2019, according to the Freightos Baltic Index. 

Rising shipping costs and delays are starving the economy of the stuff it needs and contributing to shortages and inflation. It's not just consumers and retailers that are affected: American exporters are complaining that shipping companies are so desperate to get containers back to China quickly that they're making the return trip across the Pacific without waiting to fill up containers with American-made products. 

3. Can literary books predict the next war?
Three years ago, a small group of academics at a German university launched an unprecedented collaboration with the military. The name of the initiative was Project Cassandra: for the next two years, university researchers would use their expertise to help the German defence ministry predict the future.

The academics weren’t AI specialists, or scientists, or political analysts. Instead, the people the colonels had sought out in a stuffy top-floor room were a small team of literary scholars led by Jürgen Wertheimer, a professor of comparative literature.

The group decided instead to focus on what it calls “literary infrastructure”: what happens around the text? How is it being received? “We became interested in what hit a nerve,” Rogge says. “Was a book heaped with awards and state prizes? Or was it banned and the author had to leave the country?”

When Azerbaijan gave anti-Armenian books to Georgian libraries, the project predicted conflict. A year later, war broke out.

4. China tries to take on the US on EV
Fuelled by government largesse, China’s electric-vehicle sector has raced ahead of America’s, sparking fears that the United States has fallen dangerously behind its chief rival in a crucial future industry. China’s “state capitalism” (Beijing prefers “socialism with Chinese characteristics”) is rewriting the rules of how countries and companies compete in the global economy. All governments place their thumb on the scale to favour home grown firms—recall the Obama administration’s bailout of General Motors—but China bends entire markets to a degree unimaginable in the more laissez-faire U.S. By offering funds and protection for nascent, high-tech industries including electric cars, as well as chips, AI, and a host of other futuristic sectors, the Chinese government could potentially swamp the world with subsidized products.

Beijing’s goal is to leapfrog Western powers into the forefront of next-generation technologies, dominance that could hand China’s leaders the political clout to shove the U.S. aside and become the world’s premier superpower. In the process, they would pulverize a key tenet of the American worldview—that free markets and free people are inseparable, and the sole route to national success—and thus legitimize Beijing’s illiberal policies and practices. The contest over electric cars is therefore a proxy war between the West and China, between their economic models and political ideologies.

5. Having a fun portfolio on the side can help you with your long term investment 
One of the reasons 95% of all diets end in failure is it’s impossible to be perfect at all times. That’s why the best diets allow for a cheat day here and there, to let yourself go wild and eat what you want. The same concept applies to portfolio management. Carving out a small piece of your portfolio, call it anywhere from 5% to 20%, offers the ability to cheat on your investment diet.

As long as you have the majority of your portfolio following a long-term plan, you can go nuts in your fun portfolio. You can pick stocks or other speculative investments, time the market, or invest in things you wouldn’t dare put your money in with your non-fun portfolio. Willpower is fleeting because the human brain is like a muscle in many ways: Eventually, it needs to rest. This is why it pays as an investor to automate good decisions ahead of time. The best investment advice the majority of the time is to do nothing and simply follow your long-term investment plan and get out of your own way.

With a small allocation to a fun portfolio, you could test your abilities as an active investor by comparing it with your more boring, low-cost, long-term investments. That way you know whether you’ve got what it takes, or you have a front-row seat to how hard it can be to outperform the market.

Saturday, 26 June 2021

Quantamental - Updates for the month

Q30 is having a flattish month after giving up gains notched up in the 1st half of the month. up 1.98% so far in June. Trailing returns for different periods are below: 

Q10 is having another stellar month and is up 8.48% so far in June. Trailing returns for different periods are below 

During bull phases, multi-cap momentum portfolios are usually dominated by smallcaps as they tend to have stronger momentum. A balanced portfolio should also have a fair allocation to large and mid-caps as this segment often continues to do well even in periods, in which smallcaps underperform. Q10 accordingly is built as a complementary strategy to the multi-cap diversified Q30 strategy. A mix of Q30 and Q10 ensures diversification across large, mid and small caps and smoothens the equity curve making it easier to stick to the portfolio and enjoy better long-term returns. 

You may follow @quantindia or my handle @a_basumallick Twitter handle for periodic updates. For any queries or feedback, please email us equity@intelsense.in 

Thursday, 24 June 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. Your side projects (hobbies) are more powerful than you think 
It's easy for something new to feel like a project of your own. That's one of the reasons for the tendency programmers have to rewrite things that don't need rewriting, and to write their own versions of things that already exist. This sometimes alarms managers, and measured by the total number of characters typed, it's rarely the optimal solution. But it's not always driven simply by arrogance or cluelessness. Writing code from scratch is also much more rewarding — so much more rewarding that a good programmer can end up net ahead, despite the shocking waste of characters.

Remember that careless confidence you had as a kid when starting something new? That would be a powerful thing to recapture.

If it's harder as adults to retain that kind of confidence, we at least tend to be more aware of what we're doing. Kids bounce, or are herded, from one kind of work to the next, barely realizing what's happening to them. Whereas we know more about different types of work and have more control over which we do. Ideally we can have the best of both worlds: to be deliberate in choosing to work on projects of our own, and carelessly confident in starting new ones.

2. Why do we get misled by misinformation?
Why do people — and by “people” I mean “you and I” — accept and spread misinformation? The two obvious explanations are both disheartening. The first is that we are incapable of telling the difference between truth and lies. In this view, politicians and other opinion-formers are such skilled deceivers that we are helpless, or the issues are so complex that they defy understanding, or we lack basic numeracy and critical-thinking skills. The second explanation is that we know the difference and we don’t care. In order to stick close to our political tribe, we reach the conclusions we want to reach.

There is truth in both these explanations. But is there a third account of how we think about the claims we see in the news and on social media — an account that, ironically, has received far too little attention? That account centres on attention itself: it suggests that we fail to distinguish truth from lies not because we can’t and not because we won’t, but because we are simply not giving the matter our focus.

Pay attention; get some context; ask questions; stop and think. Misinformation doesn’t thrive because we can’t spot the tricks. It thrives because, all too often, we don’t try. We don’t try, because we are confident that we already did.

3. A good shareholder report
There's a reason everybody reads Buffett and Bezos—they give insight into interesting financial concepts, economic outlooks, managerial insight that is far ahead of anything being taught in business school, and more.  So, what are the traits of a best shareholder letter? Specifically, there are five: 
(1) Define the company and its strategy, 
(2) be candid, 
(3) educate, 
(4) tell a story (the investment thesis story), and 
(5) entertain. 
The shareholder letters have impact on stock price. Companies with the best shareholder letters outperformed the Index. If you skip through the corporate jargon phrases and pretty much skim the rest, it will hardly take about two minutes to go through it. A good chunk of companies won’t even have a letter. And the truly great letters could actually save you time in the long run.

Note: At Intelsense, we have decided to go through as many annual reports as possible and summarise them. Link here: http://blog.intelsense.in/2021/06/summary-of-annual-reports.html

4. Mistakes while managing risk (an old but relevant article by NN Taleb)
Instead of trying to anticipate low-probability, high-impact events, we should reduce our vulnerability to them. Risk management, we believe, should be about lessening the impact of what we don’t understand—not a futile attempt to develop sophisticated techniques and stories that perpetuate our illusions of being able to understand and predict the social and economic environment.

To change the way we think about risk, we must avoid making six mistakes:
1. We think we can manage risk by predicting extreme events.
2. We are convinced that studying the past will help us manage risk.
3. We don’t listen to advice about what we shouldn’t do.
4. We assume that risk can be measured by standard deviation.
5. We don’t appreciate that what’s mathematically equivalent isn’t psychologically so.
6. We are taught that efficiency and maximizing shareholder value don’t tolerate redundancy.

No one should have a piece of the upside without a share of the downside.

5. Nassim Taleb explains his views on Bitcoin 
“In its current version, in spite of the hype, bitcoin failed to satisfy the notion of “currency without government” (it proved to not even be a currency at all), can be neither a short or long term store of value (its expected value is no higher than 0), cannot operate as a reliable inflation hedge, and, worst of all, does not constitute, not even remotely, safe haven for one’s investments, shield against government tyranny, or tail protection vehicle for catastrophic episodes.”

A central result (even principle) in the rational expectations and securities pricing literature is that, thanks to the law of iterated expectations, if we  expect that we will expect the price to vary, then by backward induction such a variation must be incorporated in the price now. When there are no dividends, as with growth companies, there is still an expectation of future earnings, and a future expected reward to stockholders–directly via dividends, or indirectly via reverse dilutions and buybacks. Earnings-free assets are problematic. The implication is that, owing to the absence of any explicit yield benefiting the holder of bitcoin, if  we expect that, at any point in the future, the value will be zero when miners are extinct, the technology becomes obsolete, future generations get into other such "assets" and bitcoin loses its appeal to them, then
the value must be zero now.

Friday, 18 June 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. China's tech workers are pushed to limits by surveillance software
In China, technology adoption promises its swelling middle classes an easier, more productive life. But as companies bring productivity-enhancing tools into everyday office life, their efficiency is being channeled, not into leisure time, but into squeezing ever more value from employees.

This is particularly the case in China's tech industry, where rapid technological development, paired with poor labor regulations, has created a potential for labor abuse. The big tech companies themselves, locked in cutthroat competition for new business opportunities, are pioneering these technologies and tools in their own operations. From hiring and goal-setting to appraisal and layoff, productivity-enhancing technologies look to quantify workers' behavior by collecting and analyzing extensive amounts of personal data.

Some scholars warn that some practices can be unethical, invading employees' privacy and burdening them with greater workload and mental stress. Others draw parallels to the fatigue faced by factory laborers during industrial revolutions, where workers chased the pace of machines.

The harsh conditions synonymous with China's sweatshop factory culture have come to be identified with the country's technology companies, where workers often endure slavishly long hours to hit objectives set by big data analytics. The environment of intense pressure has, in some cases, created a lethal environment for office workers.

2. The future belongs to the intangibles
Investment in intangible assets that underpin the knowledge or learning economy, such as intellectual property (IP), research, technology and software, and human capital, has risen inexorably over the past quarter-century, and the COVID-19 pandemic appears to have accelerated this shift toward a dematerialized economy.

Investing in intangibles correlates with productivity and sector growth. Regardless of the sector, companies that invest more in intangibles grow more. 

The evidence is stacking up in an age increasingly driven by innovation and knowledge that firms and sectors that invest most heavily in intangibles are reinforcing and deepening their competitive advantage and achieving the highest rates of growth in gross value added. Fast-growing companies invest 2.6 times more than slower-growing counterparts. But investment in intangibles is only a starting point. The full potential of these game-changing assets will not be realized unless companies are smart about how they deploy them to create synergies and scale, and enhance a range of capabilities that can deliver on growth.

3. What's wrong with processed food?
One of the reasons sugar is so prevalent in packaged foods is that ultra-processing tends to eliminate flavours found in nature. Something needs to fill the void: “Sugars are used in large quantities by the food industry to give flavour to foods that have had their intrinsic flavours processed out of them and to mask any unpleasant flavours in the final product. These sugars are not only used as sweeteners but have important technological functions in foods, providing texture, bulk, colour and acting as preservative agents.”

"The problem is that, in the past half-century, a different type of food processing has been developed," says Fernanda Rauber, a nutritional epidemiologist at the University of São Paulo, Brazil, about what we now call "“ultra-processed foods”. "These substances would not be found in our kitchen. Usually, they contain little to no proportion of real foods."

"Very commonly, they use what we call cosmetics additives – colours, flavours, thickener, emulsifiers, gelling agents – to improve the sensory properties of the food, to give something to the substance that otherwise would taste like nothing, just plain starch," says Priscila Machado, a public health nutritionist at Deakin University in Geelong, Australia. "The problem when you think about these substances, in isolation they don’t add anything particularly nutritious to the food. Food is more than the sum of the nutrients they contain. There are no antioxidants and phytochemicals that we find in whole foods if they are stripped out in processing." Even when nutrients are added back in, like cereals fortified with iron or fibre, food might not be as healthy as it seems. Added nutrients don’t work as well as those found in whole foods, she says.

4. The fall of GE ... By Bill Gates
My first big takeaway is that one of GE’s greatest apparent strengths was actually one of its greatest weaknesses. For many years, investors loved GE’s stock because the GE management team always “made their numbers”—that is, the company produced earnings per share at least as large as what Wall Street analysts predicted. It turns out that the culture of making the numbers at all costs gave rise to “success theatre” and “chasing earnings.” In Gryta and Mann’s words, “Problems [were] hidden for the sake of preserving performance, thus allowing small problems to become big problems before they were detected.”

Investors bought into the notion that the company’s world-renowned training made it better at managing things than anyone else, and that GE could produce consistent profits even in highly cyclical markets. And GE successfully persuaded people that its generalists could avoid the pitfalls that had tripped up big conglomerates in the past. In reality, those generalists often didn’t understand the specifics of the industries they had to manage and couldn’t navigate trends in their industries. 

5. Oxford University Press shuts down after 500 years
Oxford University’s right to print books was first recognised in 1586, in a decree from the Star Chamber. 

Oxuniprint’s closure will mark the final chapter for centuries of printing in Oxford, where the first book was printed in 1478, two years after Caxton set up the first printing press in England. There was no formal university press in the city over the next century, but the university’s right to print books was recognised in a decree in 1586, and later enhanced in the Great Charter secured by Archbishop Laud from Charles I, entitling it to print “all manner of books”.

OUP has existed in a recognisable form, with its own printing division, since the 17th century, printing everything from the King James Bible to scholarly works. 

Thursday, 17 June 2021

How are the markets positioned? ~ Post by Hitesh Patel

This blog has been penned by Dr Hitesh Patel. Hitesh & Abhishek work together for Intelsense Hitpicks Advisory.

Friday, 11 June 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. Play your own game
If you view investing as a single game, then you think every deviation from that game’s rules, strategies, or skills is wrong. But most of the time you’re just a marathon runner yelling at a power lifter. So much of what we consider investing debates and disagreements are actually just people playing different games unintentionally talking over each other.

A big problem in investing is that we treat it like it’s math, where 2+2=4 for me and you and everyone – there’s one right answer. But I think it’s actually something closer to sports, where equally smart and talented people do things completely differently depending on what game they’re playing.

What you want might not be what I want.

2. From Facts to Fake News: How Information Gets Distorted
The scholars analyzed data from 11,000 participants across 10 experiments and concluded that news undergoes a stylistic transformation called “disagreeable personalization” as it is retold. Facts are replaced by opinions as the teller tries to convince the listener of a certain point of view, especially if the teller considers himself more knowledgeable on the topic than his audience.

The effect is amplified on social media. Followers don’t always click on shared content to read the original work for themselves, yet they often accept the conclusion or opinion proffered by the person who posted it.

Another disturbing result the researchers found was the trend toward negativity, even if the original story was positive, and stories tend to become more negative with each reiteration.

“The further removed a retelling is from the original source — again, think of the telephone game — the more negative and more opinionated it becomes,” Melumad said. “It’s really hard to turn this effect off, actually.”

3. The Psychological Benefits of Commuting to Work
Many people liberated from the commute have experienced a void they can’t quite name. In it, all theaters of life collapse into one. There are no beginnings or endings. In a 2001 paper, two researchers at UC Davis attempted to divine the ideal commute time. They settled on 16 minutes. To be sure, this was a substantial shortening of the study participants’ actual commutes (which were half an hour, on average). But it was not zero. In fact, a few wished for a longer commute. Asked why, they ticked off their reasons—the feeling of control in one’s own car; the time to plan, to decompress, to make calls, to listen to audiobooks. Clearly, the researchers wrote, the commute had some “positive utility.”

Consider the morning drive in. While superficially a matter of on- and off-ramps, it also initiates a sequence in which the feelings and attitudes of home life are deactivated, replaced by thoughts of work. This takes time, and if it doesn’t happen, one role can contaminate the other—what researchers call “role spillover.” 

Naturally, he has come up with some rituals to replace the commute and mark the beginning and end of each day. The ideas he’s proposed to clients include lighting variations, warm-up stretches, cell phone-free walks, and, as he demonstrated to me over Zoom, shrouding your computer in a fine blue cloth when you log off, as if it, too, needs a good night’s sleep.

“Rituals are friction,” he told me. Like the commute, “they slow us down. They’re so antithetical to most of our life, which is all about efficiency and speed.”

4. Control your attention instead of controlling your time
Despite the fact that we all have 24 hours a day, we realized that the way we spent those hours resulted in dramatic differences in outcomes. Person A and Person B both experience the same duration of day, but Person A may be much healthier, much wealthier, and much happier at the end of that day than Person B.

With this realization, we figured out how to hack time. How to temporarily cheat the expiration date that we all have. And it can summed up this way: Control your attention instead of controlling your time.

Time follows laws that we have no say over. An hour will be an hour, no matter what. Attention, on the other hand, can be stretched and contracted upon will. We have agency over how we use it, and it gives us a godlike ability to shift our perception of time. An hour may feel like a minute, or it may feel like a day. It all depends on how we use the hour in question.

By using our attention in innovative ways, we learned how to extract incredible value out of preset blocks of time. We used concentration as a tool to power technological progress. 

5. Biodegradable mobile cover
Pivet is a new company that makes smartphone cases. You might think it's a crowded field, however, not only is Pivet a Black-owned business in an industry that has shown little progress with diversity, but its plastic cases are also unusual. Unlike most plastics that take hundreds of years to decompose, Pivet's cases can biodegrade in around two years, according to the company. 

The plastic in Pivet's cases is embedded with a proprietary material called Toto-Toa. This material is comprised of natural and non-toxic ingredients, but Pivet wouldn't specify those ingredients as it's currently seeking intellectual property protection. This mixture purportedly speeds up the natural biodegradation process by attracting micro-organisms when the case enters microbe-rich environments, like landfills or oceans. (No, it won't start to biodegrade when you're still using the case.) These microbes colonize on the surface of the case and then break the plastic down into its raw components.

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