At Ambit, we spend a lot of time reading articles that cover a wide gamut of topics, ranging from zeitgeist to futuristic, and encapsulate them in our weekly ‘Ten Interesting Things’ product. Some of the most fascinating topics covered this week are: Investing (Five levels to become the master investor; Buy-and-hold myth; Green investing has shortcomings), Business (Coronavirus rips a hole in newspapers’ business models; Meet the 13-year-old entrepreneurs), Lifestyle (Why so many smart people aren’t happy) and Geopolitics (Art of war and Sino-Indian business).
Here are the ten most interesting pieces that we read this week, ended June 26, 2020.
1) Five levels of the investing game [Source: grahamduncan.blog]
In this blog, Graham Duncan, co-founder of East Rock Capital, a multi-family investment office, talks about how great investors view investing as a game, and they know exactly what game they’re playing. According to him, investors evolve in five phases, or as he thinks, five levels of the game. Level 1: Apprentice (Learning the game) – At this level, the most efficient way to learn the initial craft of investing is to find a mentor. This is what Robert Greene has called the “apprenticeship” stage, and the person you are apprenticed to is extremely impactful.
Level 2: Expert (Playing the game you were taught) – Many investors plateau at this level, particularly if they practice their craft outside a “cognitively diverse” city like New York or London. They often have a somewhat static sense of identity, such as “I am a value investor like Warren Buffett.” This puts them in competition with the index, playing a game that is defined entirely by their peers. By constructing their identity as an “expert” at investing in certain sectors or companies, they limit their ability to observe change in those areas. Level 3: Professional (Fitting the game to your own strengths and weaknesses) – This level is about expanding your horizon. At this level, an investor begins to consolidate multiple influences into a unique strategy, going beyond his or her original mentor. Warren Buffett may have been at this phase of his development in the 1980’s when he said. “I’m now 15% Phil Fisher and 85% Ben Graham.”
Level 4: Master (Changing the game you play) – The small minority of managers who reach this level are truly “absolute return”-oriented: they define success in terms of what they believe they can achieve over decades, not relative to what others are achieving at a given moment. Level 5: Steward (Becoming part of the game itself) – Level 5 investors have achieved a mastery at investing, and a level of financial success, that allows them to turn some of their attention to taking care of the playing field itself. There are very few Level 5 investors, but Warren Buffet is certainly among them.
2) The buy-and-hold myth [Source: morningstar.in]
In this article, the author explains stock investing using the “Law of the Farm”. The main steps for agricultural practices include preparation of soil, sowing, adding manure and fertilizers, irrigation, harvesting, and storage.” He compares this with investing saying that investing consists of 1) Research on an investment idea and initial due-diligence (preparation of the soil); 2) Buy the stock (sowing the seeds); 3) Maintain due-diligence of businesses, management and valuation (adding manure and fertilizers, irrigating the land); 4) Sell the stock and keep the cash ready for re-investment opportunities (harvesting and storage).
You cannot sow something today and reap tomorrow. It takes time. But as long-term investors, most of the people are good at the first two steps. They tend to fail at the 3rd and 4th. That is because they conflate buy-and-hold with buy-and-forget. Yes, one needs to be patient. But one must never take eyes off the ball. You can hold on to your stocks for years on end with the hope that they will generate a good return on the initial investment. But you cannot take that for granted. The author further explains by giving an example of Mayur Uniquoters. He had invested in the company and planned to stick with it for a long period, but later realised (after due-diligence) that there were considerable sectoral headwinds which would not allow the company to meaningfully grow its sales for some time. Ultimately he changed his mind and sold the shares at a loss.
So what’s the right approach? 1) Select the right seeds to sow. But remember that you cannot buy everything you like. 2) Do thorough due diligence. Always compare your investment with other investible ideas. 3) Wait for the right time to sow the seeds. 4) Post sowing, be alert, and don’t forget the maintenance, continue with due diligence. You do not have to hold everything you buy. 5) Some stocks will have a longer shelf life in your portfolio. And many will not. 6) Your job as a farmer/investor is to observe on a constant basis and act accordingly. 7) Have the courage to take the right decisions. Be prepared to change your mind when facts change or when you realize that you made the mistake in the first place. And that means even selling at a loss.
3) Green investing has shortcomings [Source: The Economist]
The number of takers for ESG investing is growing day by day. Also, it can play an important role in decarbonising the economy. Some 500 environmental, social and governance (ESG) funds were launched last year, and many asset managers say they will force companies to cut their emissions and finance new projects. But, this article throws light on how green finance suffers from woolly thinking, marketing guff and bad data. Finance does have a crucial role in fighting climate change but a far more rigorous approach is needed, and soon.
Some fee-hungry fund managers make hyperbolic claims about their influence, even as big-business bashers pin most of the blame for pollution on companies. The reality is more prosaic. Fund managers have some influence over a big slice of the economy, but many emissions occur outside the firms they control. Estimates by The Economist suggest that publicly listed firms, excluding state-controlled ones, account for 14-32% of the world’s total emissions, depending on the measure you use. Global fund managers cannot directly influence the bosses of state-controlled Chinese coal-fired power plants or Middle Eastern oil and gas producers.
Lastly, Governments need to force firms to improve their disclosure. Asset managers need to drop the gimmicks and set coherent and measurable objectives. Most important, widespread carbon taxes would unlock the power of finance, giving investors and banks a strong motive to shift capital away from dirty industries to clean ones and to develop instruments that allow firms to hedge and trade the price of carbon. Climate finance is still in its infancy. There is a lot of room for improvement.
4) Coronavirus rips a hole in newspapers’ business models [Source: Financial Times]
Many newspapers were already struggling when the pandemic hit the world. The subsequent fall in advertising revenue for newspapers was precipitous. According to figures from GroupM, the WPP-owned media buying agency, newspapers and magazines hosted half of all advertising spending worldwide in 2000. Inside two decades their share of that roughly $530bn market has fallen to less than 10%, with platforms such as Google and Facebook scooping up the bulk of local and classified advertising. Coronavirus is dismantling what was left — some newspapers report that advertising was down between 50% and 90% in April.
At least 38,000 news company workers from journalists to commercial staff have been furloughed, laid off or taken pay cuts in the US since March, according to FT estimates. State support in Europe has cushioned the blow, but painful choices may just be delayed. Research group Enders Analysis estimates that the revenue crunch puts a third of UK journalism jobs at risk. Before the crisis some digital publishers were attempting to thrive in the online advertising market, with mixed success. Other old media groups tried over the past decade to draw more money directly from readers, either through subscription paywalls like The Wall Street Journal, or membership models such as that deployed by The Guardian.
The question is how far the subscriber model will stretch and whether it could ever replace the income from advertising. Research by Oxford university’s Reuters Institute for the Study of Journalism has shown that even the minority willing to pay for news largely do so for one publication — creating “winner-takes-most” markets. While the audience for online news jumped to new highs during the pandemic, most sites convert fewer than 1% of website visitors into paying readers. “The big and interesting challenge is not just how the hell we convert . . . this relatively tiny proportion of people willing to pay,” says Tony Haile, the founder of analytics tool Chartbeat and currently chief executive of Scroll, a subscription service offering advertising-free access to news sites. “We have to ask: how zero sum is this for publishers? Is this a war of all against all?”
5) Why so many smart people aren’t happy [Source: The Atlantic]
Everyone today wants to be happy. Larger crowd think that being smart and having all the money makes on happy. But, Raj Raghunathan, a professor of marketing at The University of Texas at Austin’s McCombs School of Business, says that’s not true. In this interview, he talks about his book, If You’re So Smart, Why Aren’t You Happy? He says that many people’s approach to happiness is wrong. “If you take the need for mastery—the need for competence—there are two broad approaches that one can take to becoming very good at something. One approach is to engage in what people call social comparisons. That is, wanting to be the best at doing something: “I want to be the best professor there is,” or something like that.” He says that this approach is wrong. So what’s right?
What he recommends is an alternative approach, which is to become a little more aware of what it is that you’re really good at, and what you enjoy doing. When you don’t need to compare yourself to other people, you gravitate towards things that you instinctively enjoy doing, and you’re good at, and if you just focus on that for a long enough time, then chances are very, very high that you’re going to progress towards mastery anyway, and the fame and the power and the money and everything will come as a byproduct, rather than something that you chase directly in trying to be superior to other people.
He also talks about an interesting concept which he calls, “the dispassionate pursuit of passion”. The concept boils down to not tethering your happiness to the achievement of outcomes. The reason why it’s important to not tie happiness to outcomes is that outcomes by themselves don’t really have an unambiguously positive or negative effect on your happiness. Yes, there are some outcomes—you get a terminal disease, or your child dies—that are pretty extreme, but leave those out.
6) These 13-year-old board game creators can teach all entrepreneurs a thing or two [Source: entrepreneur.com]
What does one usually do when they are 13 years old? Have fun and play around with friends. Yes, but Lily Brown and Tait Hansen were curious enough to create their own game! The game won a share of the grand prize for “Most Marketable Concept” at 2018’s Young Inventor Challenge, part of the annual Chicago Toy and Game Week. The game was called Betcha Can’t! (originally called Bet You Can’t in earlier iterations), and it did more than merely entertain friends and relatives. The game of wits invites players into a good-natured gauntlet of one-upmanship to see who can call to mind the most trivial information on a subject (e.g. the various types of vegetables or modes of transport) in a finite amount of time.
It would have been easy developing the game as Lily’s dad invents games. But they didn’t try to look to him too much, because they really wanted to come up with it on their own. When asked whether they could have done anything differently in terms of developing the game, Tait says, “Since we started the game in third grade, I would have kept going then instead of dropping the idea of making a game for two years. Because by now, we could have made multiple games and it would have been better in my mind.”
Talking about being ambitious, they had tried a lot different businesses in an age where most of them enjoy dressing up as princesses. They made a massage chair with totally random materials around the house, like straws and popsicle sticks and ping-pong balls and glue them all together and said, “Look, this is a massager!” At one point they even hung fliers around the neighborhood and were like, “We have a business now.” They were probably 8 or 9. They didn’t get any customers, but they thought they were gonna be super-successful. Looks like these kids surely have a bright career ahead.
7) Avoiding the most common investment pitfalls [Source: Dresdner Kleinwort Wasserstein]
In this longish paper, James Montier, lists 10 things for avoiding the most common investment mental pitfalls. 1) You know less than you think you do: The illusion of control refers to people’s belief that they have influence over the outcome of uncontrollable events. Over-optimism and overconfidence are a potent combination. They lead you to overestimate your knowledge, understate the risk, and exaggerate your ability to control the situation. 2) Be less certain in your views, aim for timid forecasts and bold choices: Once a position has been stated most people find it very hard to move away from that view. 3) Don’t get hung up on one technique, tool, approach or view flexibility and pragmatism are the order of the day: We are inclined to look for information that agrees with us. This thirst for agreement rather than refutation is known as confirmatory bias.
4) Listen to those who don’t agree with you: The bulls should listen to the bears, and vice versa. You should pursue such a strategy not so that you change your mind, but rather so you are aware of the opposite position. 5) You didn’t know it all along, you just think you did: It is now time to move from self-deception to heuristic simplification. Heuristics are just rules of thumb for dealing with informational deluge. In many settings heuristics provide sensible short cuts to the “correct” answer, but occasionally they can lead us to some very strange decisions. 6) Forget relative valuation, forget market price, work out what the stock is worth (use reverse DCFs): When information is presented to us, we aren’t very good at seeing through how it is presented. We tend to take things at face value rather than drilling down to get to the detail.
7) Don’t take information at face value, think carefully about how it was presented to you: Well, people judge events by how they appear, rather than by how likely they are. This is called representativeness. 8) Don’t confuse good firms with good investments, or good earnings growth with good returns: Our minds are not supercomputers, and not even good filing cabinets. They bear more resemblance to post-it notes which have been thrown into the bin, and covered in coffee, which we then try to unfold and read the blurred ink! 9) Vivid, easy to recall events are less likely than you think they are, subtle causes are underestimated: People hate losses (loss aversion) and find them very uncomfortable to deal with in psychology terms. Because losses are so hard to face, we tend to avoid them whenever possible. 10) Sell your losers and ride your winners: Even if we are right (and most of the time we aren’t) that our losers will become winners there will be better opportunities to put the trade on lower down, rather than riding the position all the way down.
8) Four simple things leaders can do to increase their competence [Source: Forbes]
One of the traits or characteristics of a successful leader is that he/she makes people better. And if you cannot manage or develop yourself, you will not be able to manage or develop others. A good leader is always a work in progress. A leader who is a finished product is probably finished. So, here are 4 things that a leader can do to stay ahead: 1) Pay attention to negative feedback: One of the most impactful things leaders can do to get better is to start internalizing critical feedback from others, particularly their direct reports. This means creating enough psychological safety so your employees feel free to critique your ideas, decisions, and actions, as well as prompting them to speak up with constructive suggestions for improvement.
2) Be more self-critical: Even if you can’t get much negative feedback from others, you can produce it yourself. By becoming your own harshest critic, which is something every extraordinary achiever has learned to do. Indeed, if there is one thing that makes exceptional performers stand out from others – other than their talent of course – that’s their ambition, defined as the ability to remain dissatisfies with their accomplishments (or the inability to be satisfied). 3) Be more humble: Being more self-critical should boost your humility, but regardless of how positively or negatively you think of yourself, you will probably benefit from getting others to see your actual leadership talent as greater than your self-perceived leadership talent, even if you are male. The best leaders are not insecure, but they still learn to keep their egos in check, even if it means faking humility.
4) Measure and track progress: You can only manage what you measure, so ultimately the key to any self-development plan for leaders is to look for evidence to track those improvements. It’s no different from any other change program: how do you know if your sleep quality, fitness level, healthy eating habits, or productivity output is improving? By measuring progress. For the typical leader this will only boil down to: (a) higher levels of team engagement, (b) higher levels of team performance (productivity, profits, revenues), (c) better feedback from others (reports, peers, and bosses), and (d) wider measures of positive impact on the organization. Even small incremental improvements around these metrics will end up having a big long-term impact on the organization and the leader’s talent.
9) The art of war and Sino-Indian business [Source: Livemint]
Whenever there’s a tussle between India and China on the border, its repercussions are seen on business as well. And this time too, it’s no different. Several Chinese venture capital funds had just filed their applications to invest in Indian industry and startups. The Narendra Modi government had made clearance for foreign direct investment (FDI) flowing from China and bordering nations into India mandatory since April. Chinese firms have invested up to $8 billion and created 200,000 jobs in India, according to official Chinese figures. Some firms were busy hiring Indian lawyers to help them comply with the latest rules. Then the unprecedented border crisis on 15 June seemingly brought business to a grinding halt.
20 Indian soldiers, including a commanding officer, lost their lives that night in Galwan Valley in Ladakh in the worst Sino-Indian territorial clash in nearly half a century. The Chinese casualties were undisclosed. Now the question is, how far will this be stretched and how much will it cost the two nations. “It can take five to ten years for Sino-Indian ties to recover,” estimates Srikanth Kondapalli, professor of Chinese studies at the Jawaharlal Nehru University (JNU) in Delhi. “The damage is substantial.” Both governments have kept a door open to ease tensions. “The official statements are designed to keep the diplomatic channels going,’’ points out professor Alka Acharya at JNU.
“Tit-for-tat retaliation might result in China imposing new quality restrictions for Indian exports, particularly agriculture and seafood exports,” said Amitendu Palit, research lead in trade and economics at the Institute of South Asian Studies, National University of Singapore. “While there might not be specific restrictions on Indian companies in China, there might be tighter scrutiny of business and student visas for Indians travelling to China.” “Business sentiment is bad now, but Chinese companies familiar with doing business in India in the last two to three years know that these sentiments eventually subside,” said Santosh Pai, partner and head of the China desk at Link Legal India Law Services. “It could take six months or more for firms to readjust to a new business equilibrium.”
10) How winning big football matches promotes peace [Source: The Economist]
In 2005, Ivory Coast’s national football team was on the brink of qualifying for the World Cup for the first time. Having won its final qualifying match, it just needed Cameroon to lose or draw the match it was playing against Egypt. The awarding of a late penalty set the Cameroonians up for a win. But Pierre Womé hit the post. The ball flew wide. Ivory Coast was in. Listening on the radio, the Ivorian players erupted. Then they pleaded for peace in their war-torn country. “We proved today that all Ivorians can coexist and play together,” said Didier Drogba, the captain.
The team knelt. “We beg you on our knees…please lay down your weapons and hold elections,” said Mr. Drogba. The clip was played again and again on Ivorian television. In the months that followed the warring parties began talking and, eventually, agreed to a ceasefire. In 2007 they agreed to peace. According to a new study, the outcomes of important football matches can have a dramatic effect on national unity and, thus, civil wars. The study’s authors, led by Emilio Depetris-Chauvin of the Pontifical Catholic University of Chile, say that the bigger the match, the bigger the boost to national solidarity and trust. This does not merely reflect a general post-victory euphoria.
The authors compared countries that narrowly qualified for the African Cup of Nations in recent years with those that narrowly missed out. The countries that squeaked in experienced almost 10% less conflict in the next six months than those that did not. So could more football reduce conflict in Africa? Perhaps, but the positive results only hold for high-stakes matches, not friendlies (matches unrelated to a competition). And the bonhomie can be fleeting. A second civil war broke out in Ivory Coast in 2010. Calm returned in 2011, after Mr. Drogba and many others again appealed for peace.
BY: AMBIT RESEARCH
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