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Thursday, 16 September 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 birth of the ubiquitous QR code

Denso engineer Hara Masahiro invented the QR code 25 years ago. Hara says that the company previously used barcodes to keep track of parts, but that the system was inefficient. “There were upward of ten barcodes on any one box,” Hara recounts. “Employees got tired of having to scan boxes multiple times, and this led us to come up with a code that would enable a large volume of information to be conveyed in a single scan.” From the need to keep better track of car parts sprang the QR code.

 

A QR code is characterized by a two-dimensional pattern of square black and white dots. With this pattern, it is possible to imbed 200 time more information than a standard barcode.

 

Hara explains that the inspiration for the technology came from his penchant for playing strategy games: “I used to play go on my lunch break. One day, while arranging the black and white pieces on the grid, it hit me that it represented a straightforward way of conveying information. It was a eureka moment.”

https://www.nippon.com/en/news/fnn20191214001/the-little-known-story-of-the-birth-of-the-qr-code.html

 

2. Steve Martin's method for greatness

Steve Martin is arguably one of the most important figures in 20th century comedy. In Martin’s recent memoir, Born Standing Up, we gain unprecedented insight into this process.

 

“Be so good they can’t ignore you.”

 

Forget all the frustration, the tricks, and the worry. Just focus on becoming good. Really damn good. Outstanding. Unlike anyone who has come before you. If you can figure out how to do this one thing, recognition will follow. It will, like it did for Martin, probably come so fast that it will overwhelm you.

 

The restless urge to understand then innovate led him to be outstanding. Without it, he would have just become another good comedian. Like hundreds of others.

 

Martin credits “diligence” for his success. Staying diligent in his interest in the one field he was trying to master; being able to ignore the urge to start working on other projects at the same time. If you don’t saturate your life in a single quest, you’ll dilute your focus to a point where becoming outstanding becomes out of reach.

https://www.calnewport.com/blog/2008/02/01/the-steve-martin-method-a-master-comedians-advice-for-becoming-famous/

 

 

3. Getting comfortable with uncertainty

We feel ambivalence when we simultaneously hold contradictory beliefs or opinions. In fact, we can lean both toward and against a decision, perhaps for the same reason or different reasons. Humans are funny this way. We often hold incongruous views that stir conflicting emotions, and this experience is uncomfortable. But our need for certainty means we jump to one side of the issue or another.

 

Surprisingly, we do this even when we don’t know the cause of our ambivalence. When experiencing discomfort, our focus is generally on stopping it rather than exploring its causes.

 

Getting unstuck and being more open to hearing points of view that don’t make sense to us requires us to build capacity to withstand cognitive discomfort.

 

By seeking out different challenges, greater nuance and care in how we characterize points of view that are different from our own, we expand our capacity to withstand the cognitive discomfort that comes from ambivalence. We become stronger and more flexible as both individuals and organizations.

 

And then we repeat the process the next day, and the next.

https://sloanreview.mit.edu/article/the-problem-with-certainty/

 

 

4. Perspective on life

If you had twenty five years left to live, how much time would you spend worrying about the daily ups and downs of the stock market?

If you had fifteen years left to live, how much time would you spend trying to buy or sell a specific stock at the perfect price?

If you had five years left to live, how much of it would you spend obsessing over financial news and its unforeseeable impact on your portfolio?

If you had one month left to live, with whom would you spend those final days? What activities would you pursue?

If you had 24 hours to live, what would you want the people who knew you to remember most?

How much time do you think you have left?

Take a guess….

Okay, let’s assume you’ve guessed right. Now what?

What do you want to do today?

https://thereformedbroker.com/2013/07/28/how-much-time-do-you-have/

 

 

5. Cement's effect on climate change

Not many want to fret over cement, the world’s second-most consumed material behind water, and how its use in this economic transition might prevent our society from achieving its climate goals. The Carbon Disclosure Project recently released a report, “Building Pressure: Which cement companies will be left behind in the low-carbon transition,” warning the cement industry — cement being the main binder in concrete — that “in its current form, it will not be compatible with” any nation’s commitment in the Paris agreement; and if radical changes do not occur the world will “risk missing [its] climate goals.”

 

According to the CDP report, the cement industry is the second-largest industrial emitter of carbon after the steel industry. And when accounting for its use in human-made structures, it is responsible for more than a third of the world’s carbon emissions.

 

For cement companies, lowering emissions would mean either developing a whole new material or investing in carbon-capture systems, a technology that can capture and store the carbon dioxide emitted by an industrial process. Yet the CDP found the industry to be unwilling or unable to finance the research required to develop a low-cost, low-carbon alternative to cement.

 

As long as the world clamors to build, the cement industry has little incentive to disrupt the status quo.

https://theoutline.com/post/5124/are-we-stuck-with-cement-environmental-impact

 

Thursday, 9 September 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. Get better at problem solving

  1. Be ever-curious - Natural human biases in decision making, including confirmation, availability, and anchoring biases, often cause us to shut down the range of solutions too early. Better—and more creative—solutions come from being curious about the broader range of potential answers.
  2. Tolerate ambiguity—and stay humble! - The real world is highly uncertain. We have to be comfortable with estimating probabilities to make good decisions, even when these guesses are imperfect.
  3. Take a dragonfly-eye view - Dragonflies have large, compound eyes, with thousands of lenses and photoreceptors sensitive to different wavelengths of light. They see multiple perspectives not available to humans. The idea of a dragonfly eye taking in 360 degrees of perception is an attribute of “superforecasters”—people, often without domain expertise, who are the best at forecasting events.
  4. Pursue occurrent behavior - In an emerging segment—such as electric cars or autonomous vehicles, where the market isn’t fully established—good problem solving typically involves designing experiments to reduce key uncertainties, not just relying on existing data.
  5. Tap into collective intelligence and the wisdom of the crowd - It’s a mistake to think that your team has the smartest people in the room. They aren’t there. They’re invariably somewhere else. Nor do they need to be there if you can access their intelligence via other means.
  6. Show and tell to drive action - start by being clear about the action that should flow from your problem solving and findings: the governing idea for change. Spell out the risks of inaction, which often have a higher cost than imperfect actions have.

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/six-problem-solving-mindsets-for-very-uncertain-times

 

 

2. We are children of our times

Let’s say you have two people, Person A and Person B. They are both value investors who follow the strategy laid out by Benjamin Graham in the 1930s.

 

Person A was born in 1930. Person B was born seventy years later, in 2000. They both start applying the Graham investing strategy at a very early age, let’s say when they were 15 years.

 

Person A becomes Warren Buffett, once the richest man on earth, who experienced one of the biggest booms in value stocks when he was young. Person B loses half of their money because value stocks are out of favor in the 2010s. And picking winning value stocks is almost impossible.

 

Same strategy, same actions, different times, different outcomes. Becoming rich and famous is mostly a matter of luck.

 

Once we let go of outcomes, we can look inward and focus on the things that truly matter: To become a good person with values, who has character, and is good at what they do.

https://dariusforoux.com/rich-and-famous/

 

3. The Chinese Government key determinant of success in a Chinese venture

For the last two decades, China has been the dominant story for both the global economy and capital markets, as the country's immense growth and infrastructure investments have sustained commodity prices, and altered the balance of world economic power. That growth has come (or should have come) with the recognition that in almost every venture in China, public or private, the Chinese government is not just a player, but often the key player determining the venture's success and failure. Afraid of being shut out of the biggest, growth market in the world, companies operating in China have accepted limits and constraints that they would fight in almost every other part of the world, including in their own domestic markets.

http://aswathdamodaran.blogspot.com/2021/09/chinas-tech-crackdown-market-adjustment.html

 

4. Don't interrupt compounding unnecessarily

You don’t want to interrupt that compounding lightly. You better have a pretty darn compelling reason to sell a winning business just because the stock doubled in a year and looks “expensive.” Otherwise, your sale is going to look really costly some years later.

 

Trimming is one of those things that sounds so sensible, so smart. It also satisfies that itch to “do something.” Yet, if you own a really good business and take the long view, you’re probably better off leaving it alone.

 

There is a similar idea to trimming that sounds smart, but doesn't hold up if you’re a long-term investor. It goes like this: “X stock is too expensive, I need a 10% [or 20%] correction before I buy.”

 

If you’re a long-term investor, 10% or 20% is a rounding error.

https://www.woodlockhousefamilycapital.com/post/the-first-rule-of-compounding

 

5. Growth trumps over high PE over the long term

The reason that Wal-Mart produced a fantastic return from 1974 to now is not that it was cheap relative to its present or near-term future earnings.  By the standards of 1974, it was actually a growth stock–priced at almost twice the market multiple.  In the current market, an equivalent valuation would be something like 30 or 40 times earnings–for a business with uncomplicated earnings that had already been in operation in Arkansas for three decades.  It produced a fantastic return because it was a fantastic business, with miles and miles of growth still in front of it.

 

The next time we see an excellent business trading at 40 times earnings, or 75 times earnings, or 100 times earnings, or wherever, and we shy away, it might help to remember the example of Wal-Mart.  High multiples can be entirely justified, provided that the growth potential is real.

https://www.philosophicaleconomics.com/2014/03/wmt/

Tuesday, 7 September 2021

Doubt is Good

 


"Doubt goes with me everywhere - to the arena, to the practice range, it's there when I awake and when I sleep. Doubt is my enemy because it unnerves me, makes me overthink, but it's also, in some weird way, my friend because it helps me become a sharper shooter." ~ Abhinav Bindra.

The future is uncertain
Investing is based on what will happen in the future. The future is inherently uncertain and probabilistic. It can never be known with certainty. The most that people can do is to forecast based on their knowledge and pattern recognition abilities. Their knowledge, in turn, is based on their past experiences. Someone who has lost a lot of money in the stock market in the past is likely to see investing with a very different tinted lens from someone who has amassed a lot of wealth from it.

When you are investing there are so many questions that crop up. Is the market overvalued now? Should I wait for some time before investing? Is this company that I am investing in going to give me good returns? Is the price going to crash after I buy? It is already up so much, should I chase the price? It is down from previous highs, should I buy now? How will the US taper affect the Indian markets? Why are there no brokerage reports on this company? Is it a fraud? Do I know enough about the company? The industry has a major tailwind, so should all the stocks in this sector do well?

The questions go on and on...

And unfortunately, there are no definitive answers.

When I started investing, I used to feel that this doubt that I always have must be because I am not very knowledgeable. The more I know the less doubt I will get. But in reality, it turned out exactly the opposite. The more I learn and practice, the more doubts I get. And the root cause is simple - the future is unknowable.

Doubt is good

All the great investors I have been lucky to interact with are very doubtful about their picks. Rarely have I seen someone to be very sure. Even after holding a stock for many years, there are some niggling doubts that persist. Should I hold on? Should I add to my position? Should I sell and book profits? Should I sell partially?

Doubt comes mainly from three sources - macro concerns, stock-specific issues and our own past track record of investments, usually recent ones. And no amount of studying or interacting with management or channel checks can help you in removing your doubt. I have seen so many cases where even the management deludes themselves, perhaps unknowingly, about the future prospects of the business. It just goes to reiterate the basic point that the future is unknowable.

I have seen investor friends sitting on the sidelines with cash since 2017 citing the fact that the markets were overvalued or large macro investors taking large cash calls because a certain index level has been surpassed. Market timing in the face of an uncertain future adds a layer of complexity to the process (and is mostly wrong!!).

Using a Quant mindset to develop an end-to-end process
Then what is the way out? One simple way is to have a well-defined process. I have been a process-driven investor for most of the twenty odd years I have been at it. But my process was limited to a checklist, although it was quite extensive. That is what I got from reading a lot from the processes of great value investors. Then I chanced upon quantitative systems and investing. From there I picked up the notion that the process needs to be all-encompassing. It has to start from the universe selection. This simply means which stocks I will research and keep tabs on. Buffett calls it the circle of competence. Quants call it universe selection :-) It is the same thing.

The next is what stock to buy. 99% of the focus on investors are in this. Here you should be clear what time frame you are looking for investing, what is your risk appetite, how much drawdown can you withstand etc. Your fundamental or technical checklist fits in this step.

The next step is the most ignored or least thought through. It is about position management. You need a process for adding more or reducing your positions. This should not be a knee jerk reaction but a result of a thought-through process.

The next step is the sell decision. Again, having a well thought-through process is very important.

The last step, which is something I have never seen talked about by anyone, is should you retain the stock in your watchlist. There are pros and cons to it and it is also dependent on why you bought and subsequently sold the stock.

Doubt is good. It helps you focus on your process. In investing, you will never get it right all the time. You need to get probability on your side. And that's where having a well-defined process helps.

Thursday, 2 September 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. Building new eyes in the lab

The human brain is one of the most ridiculously complex things nature has ever concocted, so to help us understand it better, scientists have been making miniature versions in the lab. Skin cells are taken from adult donors, reverted back into stem cells, and placed into a culture that mimics the environment of a developing brain, encouraging them to form different brain cells. The end result is a pea-sized, three-dimensional brain model that can be used to study development, disease or the effects of drugs.

 

Now, research led by the University Hospital Düsseldorf has taken it a step further. The team has grown brain organoids complete with optic cups, vision structures found in the eye where the optic nerve meets the retina. They grew symmetrically at the front of the mini-brain, giving the organoid a striking visage.

 

But most importantly, these optic cups were functional. They contained a diverse range of retinal cell types, which formed neuronal networks that actually responded to light and sent those signals into the brain. Lens and cornea tissue was also formed.

https://newatlas.com/biology/lab-grown-mini-brain-organoid-eye-see/



2. Will we eat our vaccines in the future?

Using plants as replacement biofactories started with a simple calculation: they’re cheap and easy to grow. Plants only require three things: light, water, and soil. Add in fertilizer if you’re feeling fancy. Greenhouses, if needed, are still far more economical than stainless steel bioreactors.

 

With thousands of years of collective agricultural know-how under humanity’s belt, it’s relatively easy to gauge the best way to grow an antibody-producing tobacco leaf, antitoxin potato, or herpes vaccine-making soybean.

 

Add in the recent boom in gene editing tools, and molecular farming is on a roll. The process is similar to genetically modified (GM) crops. It starts with introducing a vector into the whole plant or plant cells, which carries the genetic code to make a protein or a vaccine. Depending on the type of vector, the new DNA can integrate into the plant’s own genome—something called “stable expression”—or it can float around for just long enough for the plant to carry out its protein-making instructions.

 

The latter, dubbed “transient expression,” is especially tantalizing for its rocket speed. It’s possible to extract vaccines and therapeutic proteins within weeks. The other benefit came as a surprise. Plant-produced vaccines and monoclonal antibodies—for example, those used to treat severe Covid-19 cases—are far more potent.

So far, monoclonal antibodies produced by plants against HIV and Ebola showed very few side effects, with the most common ones being a low fever in three clinical trials.

 

Perhaps the most tantalizing promise of molecular farming in the near future is crops that contain a vaccine.

https://singularityhub.com/2021/08/17/the-next-vaccine-could-be-edible-and-grown-in-a-plant/

 


3. How to get lucky

You might think of serendipity as passive luck that just happens to you, when actually it’s an active process of spotting and connecting the dots. It is about seeing bridges where others see gaps, and then taking initiative and action(s) to create smart luck. Serendipity is a guiding force in great scientific discoveries but it’s also present in our everyday lives, in the smallest of moments as well as the greatest life-changing events. It’s how we often ‘unexpectedly’ find love, a co-founder, a new job, or a business partner – and it’s how inventions such as Post-it Notes, X-rays, penicillin, microwaves and many other innovations came about.

 

To be lucky, it’s often essential to be open and alert to the unexpected. Although being alert to the unexpected is vital for creating smart luck, there is another key factor: preparation. reparation is about developing the capacity to accelerate and harness the positive coincidences that show up in life.

https://psyche.co/guides/how-to-open-up-to-serendipity-and-create-your-own-luck



4. Entrepreneurship is hard grinding work

Netflix co-founder Marc Randolph says that the "glorification of entrepreneurship" has given many aspiring entrepreneurs a mistaken perception about the true reality of building a company. "They think it's all pitching, going to parties and launches - it is not. It's a very, very repetitious, grinding, scary and sometimes disappointing career, where you're doing things that don't work over and over and over again. It becomes problematic however, when people start to believe that this education alone is sufficient to launch a business.

He said it's the equivalent to people thinking they can learn how to play golf simply by watching YouTube videos and reading books.

https://www.businessinsider.in/tech/news/netflix-cofounder-marc-randolph-said-the-glorification-of-entrepreneurship-has-set-up-a-mistaken-perception-of-what-it-takes-to-launch-a-business/articleshow/85690435.cms

 


5. The history of food processing

From the moment one innovative ancient human decided to cook their meat on a fire at least 400,000 years ago, to the advent of agriculture 10-15,000 years ago, people have processed foods. Our ancestors fermented (essential for alcohols and dairy products), milled and baked (breads and pasta), and worked out how to preserve meat by salting or brining. The early history of food processing was both useful and tasty.

 

Food processing was essential to the expansion of human civilization. It’s very difficult for our bodies to extract anything useful from a kernel of wheat, but ferment it into beer or mill it into flour and you can make a calorie-rich food. Techniques like salting or pasteurisation make foods safer and last longer. This allowed humans to travel further and survive cold winters or harsh famines.

 

Much of food processing is about making foods safer and longer-lasting, which is better for the environment as it means less food waste.

https://www.bbc.com/future/article/20210608-what-were-the-first-processed-foods