At Ambit we spend a lot of time reading articles that are not directly relevant to Indian stocks. However, since the Indian economy is now umbilically linked to its global counterparts, the articles that we come across have relevance for Indian stocks and the Indian economy. In that context, this report contains the ten most interesting pieces that we read this week.
Here are the ten most interesting pieces that we read this week, ended February 17, 2017.
1) An interview with Jason Zweig [Source: safalniveshak.com]
Jason Zweig is the celebrated investing and personal-finance columnist for The Wall Street Journal. He edited the revised edition of Benjamin Graham’s The Intelligent Investor and assisted the Nobel Prize-winning psychologist Daniel Kahneman in writing his book “Thinking, Fast and Slow”. We highlight key takeaways from a recent interview done by personal investing website ‘safalniveshak’ with him. He says the language of finance is often used not to explain, but to obfuscate. Those who know what terms mean can make a lot of money. Those who think they know what terms mean will lose a lot of money. He also believes active management is here to stay as it gives investors someone else to blame. However, index-tracking funds will continue to grow worldwide. On how can an investor improve the quality of his/her decision making he says – “Study the markets. Study history. Study psychology. Above all, study yourself. Successful investing isn’t about picking the right stocks and avoiding the wrong ones. It is about making sure that you don’t let your own emotions deflect you from your strategy at the worst imaginable time. The best investors are those who think constantly about their own shortcomings and how to overcome them.”
2) Sell-side research would be little missed [Source: Financial Times]
Sellside analysts may be a dying breed. Tighter regulation and falling profits are having an impact on the number of analyst jobs which have fallen by a tenth since 2012. Even if the numbers continue to decline, there would be little cause for mourning because most analysts’ research is not very good. Research suggesting random selection would be as accurate as analysts’ predictions continues to proliferate (with possibly the most famous one being the monkey dartboard example). There are many reasons analysts get it wrong. Like other people, they tend to believe that the past is a guide to the future. Further, analysts do not like to break away from the herd. Being an outlier and wrong is much more painful than being close to what everyone else is predicting and wrong. This discourages originality of thought and means convergence to the consensus is the norm. Numerous studies have found that analysts routinely overhype the companies they cover, and that “buy” recommendations outnumber “sell” recommendations, even when the market is heading for a meltdown. The temptations to be bullish are clear. Access to company management gets more difficult with a sell recommendation, and the relationship is often of primary importance to an analyst’s employer, the bank. The author also thinks that the model of “soft” commission, whereby research is provided to fund managers in return for brokerage business, is a profoundly untransparent mechanism behind which a lot of mutual back-scratching takes place — rarely in the interest of the ultimate investor.
3) Obsession with ending poverty is where development is going wrong [Source: The Guardian]
According to this piece, our development strategies will not create sustained growth that leads to prosperity because we are solving the wrong problem. He exemplifies this through the strategic goal of ensuring quality education for all – where primary schools are being pushed onto the poorest countries with marginal developmental impact. In such cases, development practitioners must ask themselves, “What is the incremental value of teaching a five-year-old to read in a country where millions of 25-year-olds are out of work?” Should development organisations not focus more of their efforts on the potentially more dangerous and volatile 25-year-olds than on the innocent five year olds? While one might rightly ask, what about the moral imperative to educate children and the long-term gains a country might experience as a result, those concerns aren’t considering the following. First, when adults have access to gainful employment, they are likely to send their children to much better schools than many of the free public schools in poor countries. Second, in many poor countries, children are attending school, but are not learning. In India, for instance, less than half of the fifth grade students surveyed could not read a simple story and only slightly more than half could do subtraction. Third, even if the schools were providing excellent education, the long-term gains from early childhood education is limited when those children are immersed in a society that is unable to absorb the value of the education. In other words, what does a child do after receiving an excellent primary school education and cannot afford the cost of secondary school?
4) How Warren Buffet learnt to win friends and influence people [Source: Financial Times]
American business adores its legends and Mr Buffett holds Arthurian status. HBO’s recent documentary ‘Becoming Warren Buffett’ will only amplify it. With shots of rolling Nebraskan farmland interspersed with Mr Buffett squinting at dusty old company records, it is a fascinating look at an extraordinary fortune-builder and his methods. Dale Carnegie’s influence in effective public speaking, as Mr Buffett admits, was profound. He says “No business school, to my knowledge, includes Carnegie’s most famous book, How to Win Friends and Influence People, on its curriculum. But they should. Reading it, you can spare yourself hours of flaccid TED talks and reams of self-evident claims from professors in organisational behaviour.” When Dale Carnegie sated teaching in America, the key to his classes was, and remains, getting people comfortable on their feet and talking, conquering their fears by discussing things that are most familiar to them. It is not intended to turn them all into identical tub-thumpers and rambling toastmasters, but to make them more realised versions of themselves. And that is precisely what it achieved with Mr Buffett.
5) How to ask for what you want – and get it every time [Source: Financial Times]
Lucy Kellaway in this piece describes the best way in her opinion to get people to comply with her wishes. While saying ‘please’ and ‘thank you’ matters, she says most people are not aware of how to do it properly. She says the only truly effective way of saying please is to butter people up. There is no danger of ever laying it on too thick. There is no level at which flattery stops working, according to a study by Jennifer Chatman of the University of California, Berkeley. In addition to being flattering, the perfect please has to make you feel not only wanted, but also needed. Getting thank you right is just as easy, though just as uncommon. She lists three principles her other practiced during Christmas: a) you thank specifically for the thing; b) you say why you liked it; and c) you must thank promptly.
6) Does depression have an evolutionary purpose [Source: nautil.us]
One in six Americans will suffer a major depressive disorder at some point in life. That word—disorder—characterizes how most of us see depression. It’s a breakdown, a flaw in the system, something to be remedied and moved past. Some psychologists, however, have argued that depression is not a dysfunction at all, but an evolved mechanism designed to achieve a particular set of benefits. The design of depression is to pull us away from the normal pursuits of life and focus us on understanding or solving the one underlying problem that triggered the depressive episode—say, a failed relationship. If something is broken in your life, you need to bear down and mend it. Even suicidal behavior might serve a design function. There are two models proposed for this theory. The first model is called inclusive fitness, and it relies on the notion of the “selfish gene”: The most basic unit of reproduction in natural selection is not the individual organism but the gene. Your genes don’t care if you survive to reproduce, as long as they do, and they exist in more people than just you. So they might lead you, their host organism, to sacrifice yourself if it sufficiently benefits your family members, who share many of your genes. The second strategic model of suicidality is the bargaining model, which relies on the notion of “costly signaling.” Consider baby birds. They don’t need to chirp for food if their mother is right there, and chirping attracts predators, making it costly. But the more hungry or sickly a chick is, the less it has to lose by being eaten, and the more it has to gain by being fed. So chirping louder is an honest signal of greater need for food, and the mother responds. Whereas the goal of suicidality in the inclusive fitness model is death, the goal in the bargaining model is help. Crucially, the vast majority of suicide attempts are not fatal.
7) Why cross pollinating your work, works [Source: Farnam Street]
A multidisciplinary approach to big ideas is the best way to form a deeper understanding. Some concepts will intuitively lend themselves to this type of thinking. Something like evolution is an easy one. But there are also times when this cross-pollination is far less intuitive, yet can produce some amazing results. The author provides example of the Minnesota Mining and Manufacturing Company came to be known as 3M, which follows a “flexible attention” policy. In most companies, flexible attention means goofing off at the company’s expense. In 3M it means playing a game, taking a nap, or going for a walk across an extensive campus to admire the deer. 3M knows that creative ideas don’t always surrender to a frontal assault. Sometimes they sneak up on us while we are paying attention to something else. 3M also rotates its engineers from one department to another every few years. This policy is one that many companies resist. Why make someone with years of expertise in soundproofing or flat-screen displays work on a vaccine or an air conditioner? However, creativity researchers Howard Gruber and Sara Davis argue that working on parallel projects has four benefits: a) multiple projects cross-fertilize. The knowledge gained in one enterprise provides the key to unlock unlock another; b) a fresh context is exciting; having several projects may seem distracting, but instead the variety grabs our attention—we’re like tourists gaping at details that a local would find mundane; c) while we’re paying close attention to one project, we may be unconsciously processing another—as with the cliché of inspiration striking in the shower. Some scientists believe that this unconscious processing is an important key to solving creative problems; d) Each project in the network of enterprises provides an escape from the others. In truly original work, there will always be impasses and blind alleys. Having another project to turn to can prevent a setback from turning into a crushing experience.
8) Personal identity is (mostly) performance [Source: The Atlantic]
We all rely on cues to make snap judgments when we meet new people, and those judgments can often be accurate, at least in broad strokes. Physical attractiveness, race, gender, facial symmetry, skin texture, or facial expressions and body language are all factors that contribute to how we form our impressions of people. According to social psychologist Sam Gosling, certain items function as “conscious identity claims,” things we choose based on how we wish to be perceived by others—the posters, artwork, books, or music we display, for example, or the tattoos we ink onto our bodies. We also ﬁll our personal spaces with “feeling regulators”: photographs of loved ones, family heirlooms, favorite books, or souvenirs from travel to exotic locales—anything that serves to meet some emotional need. Finally, there is what he terms “unconscious behavioral residue,” cues we leave behind in our spaces as a result of our habits and behaviors. A highly conscientious person may alphabetize their books, while the books of someone who is less conscientious would be more haphazard and disorganized. Gosling’s research showed that it is possible to scan the objects in someone’s personal space to make indirect inferences about certain personality traits. He measured his results using the Big Five personality traits: openness, conscientiousness, extraversion, agreeableness, and neuroticism. People who score high on openness, for example, tend to ﬁll rooms with a greater variety of books and magazines, while those who score high on conscientiousness tend to have clean, well-lit, meticulously organized bedrooms.
9) Free play is serious business [Source: Livemint]
Being a parent in the 21st century is about constantly revising your world views and trying to maintain a sense of balance. However, even the most open-minded parent would be aghast to see the academic pressure heaped upon children these days and the monumental increase in the number of hours spent at school. According to a 2009 study by OECD the average Class VIII student in India spent 130 hours more in school than her peers in other advanced countries. In contrast, Finland has significantly shorter school days (at roughly five hours), no ranking system, lot of play, little homework. And yet, the country has seen significant long-term performance from their students—helping it routinely top rankings of global education systems. The author describes a disturbing side effect of this phenomenon. One of her friends, a special educator who uses many strands of free play in her lessons, told the author that when she once asked her students to just stop studying and play, they were stumped. They just did not know how to go about playing with anything they could lay their hands on, or even improvise. They asked for a game with rules and structure. Free or unstructured play is important for kids. Research done by Dr Peter Gray, a research professor of psychology in Boston College, has shown some startling results—that a decline in play has led to a well-documented increase in depression and other serious mental health implications during teenage and adult years. Research from the University of Lethridge in Alberta, Canada, points to how free play is more important for brain development than studying, because it triggers crucial changes in the prefrontal cortex during childhood. In particular, free outdoor play sharpens a child’s survival instinct, something that Gray calls “the hunter gatherer instinct” but with the decline of outdoor play, children are losing this crucial evolutionary skill.
10) Self-sufficient boltholes tempt global super-rich to New Zealand [Source: Financial Times]
Lake Hawea Station, a 4,605 hectare property in Central Otago, is one of a growing number of self-sufficient estates on the market in New Zealand. They are typically pushed to offshore buyers and, according to some commentators, are the latest craze for a global super-rich hedging against the collapse of the capitalist system. Sustainable properties like these generally come with their own water supply, power source and the ability to grow food and are the favoured destination for rich “survivalists” preparing for apocalypse. The government granted approval for the purchase of 465,863ha by foreigners in 2016, an almost sixfold rise on the previous year. Net migration also hit a record 70,588 last year, with 1,286 US citizens granted permanent residence. In the week after Donald Trump’s election victory, Immigration New Zealand reported 13,000 US citizens registered an interest in working or studying in the country — 17 times the typical weekly level. But many New Zealanders reject the suggestion the rich are flooding to the country to hedge against domestic disaster. According to them, there seems to be an increasing number of US residents who consider it a good place to own an alternative home given the growing political instability in the US — but mainly people are attracted here for what New Zealand has to offer.
The factors that pull foreigners include - a pristine environment, open-minded society and a legal system that westerners understand. Political stability and a prosperous economy are also big draws. New Zealand has long been a popular destination for foreigners to stash money owing to its secretive foreign trust rules. There are more than 11,000 foreign trusts, which are not liable to New Zealand tax and have limited disclosure requirements. The economy is growing at an annual rate of 3.5 per cent, while house prices surged an average of 52 per cent from January 2013 to August 2016.
- Saurabh Mukherjea is CEO (Institutional Equities) and Prashant Mittal is Analyst (Strategy and Derivatives) at Ambit Capital Pvt Ltd. Views expressed are personal.