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 24, 2017. 1) Final call for the research analyst [Source: Financial Times] In the light of recent regulations imposed in Europe around the unbundling of the research and trading commissions, the investment research industry has been plunged into a debate similar to the one raging in the media sector: how to add value; how to get noticed; and how to monetise the content. Getting it right matters, because research is still an important cog of global markets and the real economy, helping direct capital to where it can be most effective. Some money managers say they no longer care about research and are more interested in access to the corporate executives and country officials that analysts cover. Compensation is often tied to how many meetings analysts can arrange, but this encourages them to soften reports to maintain access. Regulators take a dim view of this. Senior analysts argue that the industry will have to evolve beyond being a glorified chaperone service. It will also need to reinvest itself as future will be integrating big data, high-end statistical research and traditional analysis.” Independent research boutiques will be the winners from the new “unbundling” regulations as they will be able to compete more directly with banks for an investment firm’s dollars. But the combination of cost-cutting and regulations is pushing many investment groups to build their own in-house analysis teams. All said, despite sometimes flippant comments on the value of sell-side analysts, most investors will still need research in the future. But what it looks like, who produces it and how it is distributed is likely to change dramatically. The nature of analysis will change and it will become even more computer-based.
2) Change is coming but don’t write off investment research [Source: Financial Times] While the previous piece explained why sell-side research has an uncertain future, this piece provides a contrarian perspective. The author, a sell-side strategist, believes that the outsiders are too pessimistic because they do not have the data that the sell side possesses. Regarding readership, he says, on average, about a third of analyst emails are opened — a significant number. While new technology has reduced the number of employees required in publishing and distribution but areas of importance remain adequately staffed. For example, the top eight global research houses analyse the same number of companies they did a decade ago — 3,150 each on an average. On the risks from the recent “unbundling” regulations announced in Europe, he cites the annual Greenwich Associates survey which asks the buy side — the fund managers and other investors — to apportion its commission payments according to the services received. Year after year, the responses show that clients allocate 45% of commissions for research, 35% for execution and 20% for sales. He does concede, however, that there’s no doubt that research can improve. There is still too much volume versus quality. The sell side must also be better at embracing technology to make our content easier to use. On structural trend he says that while the sell side has suffered alongside active management as the dispersion of total returns declined after the crisis, he expects a renaissance in research now that things are hotting up again.
3) How being wrong can help us get it right [Source: timharford.com] British economist Tim Harford in this piece highlights how an honest feedback when we’re wrong can help us immensely. He cites recent research which showcased people avoiding criticism, especially the kinds wherein when I think I’m doing a good job, you tell me that I’m not. In the jargon, this is “disconfirmatory feedback”. The researchers showed that when disconfirmatory feedback arrived, workers would then avoid contact with the people who had given them the unwelcome comments. This is expected given that we don’t like it when people tell us that we’re failing. The irony is that disconfirmatory feedback is the most useful kind of feedback imaginable. If I’m making serious mistakes while cruising along in a complacent bubble of self-satisfaction, I badly need someone to explain exactly what I’m doing wrong. But what I need and what I might enjoy are, of course, quite different. Ashley Good, the CEO of “Fail Forward”, a consultancy that helps organisations turn failures into more productive experiences describes how to cope with failures and feedback in realtime. The first step after discovering some major screw-up is to take a deep breath and try to calm down. The second step, says Good, is to “be respectful and kind”, particularly when emotions are running high and there’s a problem to be solved. And a third step is to take some individual responsibility: to ask, “What could I, personally, do differently now to avoid this sort of thing in future?” Ultimately, the aim of all this is not to “celebrate” a disaster but to make things better, by fixing the current problem, if possible, and by preventing a recurrence. That means asking cool questions about what the problem really is.
4) Tribal leadership: the key to building great teams [Source: Farnam Street] Organisations are a collection of small towns wrapped into a bigger city. Each small town is full of people from slackers to sherifs. While the people in the towns are different, the roles are similar. In their book, “Tribal Leadership: Leveraging Natural Groups to Build a Thriving Organization”, Dave Logan, John King, and Halee Fischer-Wright, call these small towns tribes. Tribes consist of groups of people from 20-150. When the tribe approaches 150, it naturally splits into two. Importantly, tribes are not (necessarily) teams. Yet tribes are how work gets done in organisations. They have the ability to render the latest corporate culture efforts from CEOs useless. “In companies,” Logan and his co-authors write, “tribes decide whether the new leader is going to flourish or get taken out. They determine how much work is going to get done, and of what quality.” While some tribes want to change the world, others are content to take a lot of coffee breaks. What compels one tribe of people to constantly evolve and move forward and another to stagnate are the leaders of the tribe.
5) Books are back because Amazon likes them [Source: Financial Times] Ten years ago, as Jeff Bezos launched the Kindle e-reader in New York, he declared that “the book is so highly evolved and so suited to its task that it’s very hard to displace”. Amazon’s founder was right: this spring, despite the digital upheaval unleashed by the Kindle, it will open a bookstore in Manhattan. Waterstones, the UK book chain, returned to profit last year after suffering six years of losses. Sales of print books in the US rose by 3%, while those of e-books have fallen. Digital technology has not unleashed the same revolution in publishing that it has for music, television and news; we still like to read books. The book’s enduring popularity is widely hailed as a heart-warming tale of traditional values triumphing over cold, hard technology. This is not the whole story, however. It can equally be read as the narrative of Amazon’s growth: if you cut prices, people buy more and if you raise prices, they buy less. Amazon sold 35 million more print books in the USA last year than in 2015. It signed fresh deals with publishers two years ago that limited e-book discounting and prices rose soon afterwards. Hardbacks and paperbacks are relatively cheap because Amazon discounts them; e-books are expensive because it does so less. The way to view this is as an industry reaching a competitive equilibrium after a decade of disruption, with the main forces — Amazon on one side and the big five publishers on the other — settling on a truce.
6) Robots taking away jobs should pay taxes – Bill Gates [Source: qz.com] Robots are taking human jobs. But Bill Gates believes that governments should tax companies’ use of them, as a way to at least temporarily slow the spread of automation and to fund other types of employment. Such a tax could finance jobs taking care of elderly people or working with kids in schools, for which needs are unmet and to which humans are particularly well suited. He argues that governments must oversee such programmes rather than relying on businesses, in order to redirect the jobs to help people with lower incomes. “You ought to be willing to raise the tax level and even slow down the speed” of automation, Gates argues. That’s because the technology and business cases for replacing humans in a wide range of jobs are arriving simultaneously, and it’s important to be able to manage that displacement.
7) Banks look to cell phones to replace ATM cards [Source: NY Times] For decades banks have battled “skimming,” in which criminals sabotage ATMs to steal the information off a card and use it to clear out people’s accounts. The replacement of magnetic stripe cards with chip cards significantly reduced that problem, but mobile access brings in new worries. One Chase customer recently had $2,900 stolen from her account through the bank’s new cardless system — which she had never used. This could be because unlike most cardless systems, Chase’s does not require customers to enter their four-digit PIN at the cash machine. Chase refunded the customer’s lost money and immediately made security changes. The bank’s system still does not require PINs, but Chase is confident it can now detect and prevent similar attacks. Other banks have fared better, and say their fraud rates on mobile ATM transactions are significantly lower than those for traditional card-swipe withdrawals. Some banks have gone further and let customers ditch even their phones. With biometrics, a unique body part is enough to unlock cash. At Banco Bradesco, one of Brazil’s largest banks, customers can gain access to an ATM by tapping their palm on a scanner, which reads the pattern of their veins. Banks in Japan, India and elsewhere have used fingerprints for authentication. Citibank too experimented two years ago with an iris-scanning ATM. The only issue - a compromised bank card can be reissued. However, if a hacker figures out how to imitate someone’s eyeball — which has been done in laboratory settings — it can’t be replaced.
8) The anatomy of Charisma [Source: Nautil.us] This piece describes how charisma has two halves. It’s a relationship between the person who possesses it and the people who respond to it. Jochen Menges, a lecturer in organisational behaviour at the University of Cambridge, terms the emotional impact of charisma on the audience the “awestruck effect.” In a TED Talk, Menges explained that charismatic leaders put us in awe. “And because we admire them so much, we tend to hold back our emotions in an almost instinctive effort to show our deference to them, to acknowledge their superior status,” he said. Richard Boyatzis, a student of organizational behavior and psychology and Anthony Jack, an experimental psychologist, have demonstrated that emotional speakers engage with a neural pathway called the default mode network (DMN). This pathway is associated with daydreaming, thoughts about others, and remembering things in the past. Interestingly, its activation is often found to be negatively correlated with the very circuits we rely upon for analytic thinking. In fact, beyond shutting down our ability to reason, some scientists have found that under the right circumstances, charismatics—especially if that charisma stems from our perception of them as a “leader”—can induce a state akin to hypnotism.
9) Work like Obama – Management secrets from world’s toughest job [Source: LinkedIn] By examining the daily habits the former US President developed over his eight years in one of the most intense working environments in the world, we can all learn some important life management lessons. We highlight few key ones below a) Put Your Body to Work: Although it doesn’t have to be as soon as you wake up, all of us need to incorporate exercise in our lives. Studies show that it slows aging, and improves cognition, among a slew of other benefits b) Preserve Decision Making: Form habits and routines that eliminate tiny and inconsequential decision from your day, so you can focus on the important stuff c) Understanding How You and Others Think: Knowing your biases and approach to decision making, allows you make better decisions and understand competitors, partners, and employees’ mindset c) Compartmentalise to Survive: Have the discipline to compartmentalize the challenges and roles you need to play in your professional life d) Seek Advice: Broaden and nurture your network e) Communicate Decisions: If you have people relying on your decision, make sure you are clear in both what your decision is and the way you communicate it f) Focus on Your Customer: Know your customers and develop strategies to make sure you hear them no matter how high up you rise.
10) Why ISRO has a legacy of success [Source: Livemint] The 39th flight of the Indian Space Research Organisation’s (ISRO) Polar Satellite Launch Vehicle was justifiably lauded. The playing up of the record-breaking nature of the flight—104 satellites is by some distance the most a single launch has ever managed—echoes the bouts of self-congratulation that follow every major ISRO success, and there have been a fair few of those. This article examines why ISRO has managed to deliver on a level that few other comparable government agencies like Defence Research and Development Organisation (DRDO) have. They share a number of similarities. Both work in areas where technological and research capital is paramount. Both deal with targets that require advanced application of that capital. Both, importantly, work on projects that can take decades to come to fruition, with all the uncertainty that it engenders. Yet the gulf in outcomes between them is amply clear. This article explore three key reasons for this.
- Saurabh Mukherjea is CEO (Institutional Equities) and Prashant Mittal is Analyst (Strategy and Derivatives) at Ambit Capital Pvt Ltd. Views expressed are personal.