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 January 6, 2017.
1) To be a great investor, worry more about being wrong than right [Source: WSJ] If all you learn from the stunning surprises of 2016 is that the unexpected will happen, you haven’t learned nearly enough. Great investors like Warren Buffett practice trying to disprove their investing assumptions to determine whether they are correct. This past year showed how tightly most of us cling to our preconceived notions, how fiercely we resist evidence that we might be wrong and how adept we are at deluding ourselves into thinking we were right all along. Instead of opening their minds to the possibility of being wrong, investors often wall themselves off from new information that could threaten their views. When the U.S. stock market produced its worst start to a year in modern history, losing 10.5% in January and early February 2016, terms like “contagion,” “panic” and “fear and loathing” filled the air. Stocks promptly shot up. In the summer, with the world awash in negative interest rates, The Wall Street Journal reported that this “new abnormal” was “here to stay” and that “you will have to lower your expectations” for bond income. Right on cue, the yield on the 10-year U.S. Treasury — then 1.37% — has nearly doubled in less than five months. While yields remain near historic lows, they are widely expected to go up next year as the Federal Reserve continues raising rates to keep the economy from overheating. The common culprits in all this are two quirks of the human mind that psychologists call confirmation bias and hindsight bias. The first drives us to seek and favour evidence that confirms our pre-existing beliefs while ignoring warning signs that we might be wrong. The second compels us, after everyone knows the outcome, to believe we saw it coming all along. A few techniques can help combat these cognitive biases: 1) Shun peer pressure from social media or the Internet 2) Listen for signals you might be off-base.
2) How Amazon innovates in ways that Google and Apple can’t [Source: vox.com] Amazon has shown a remarkable ability to succeed in a wide variety of different product categories. That’s a contrast to most other high-profile tech companies that are really good in one area — Google’s dominant online services or Apple’s extraordinarily profitable hardware — but struggle when the quest for growth pushes them outside their zone of core competency. With respect to google, one of the big problems seems to be that Page and company are a little too focused on solving hard technical problems without relevant focus on viability of the product for end consumer. In contrast, Amazon CEO Jeff Bezos spent almost a decade working for several Wall Street firms before starting Amazon — a background that gives him a more pragmatic outlook that’s more focused on developing products customers will actually want to pay for. Also, Amazon focusses on going small and fast into ay product. By getting customer feedback early, Amazon avoids wasting years working on products that don’t serve the needs of real customers. Amazon’s approach — minimise bureaucracy, start out with small experiments, expand them if they’re successful — sounds so good that it’s almost banal. But it’s surprisingly difficult for big companies to do this, especially when they’re entering new markets.
3) Are employees becoming job ‘renters’ instead of ‘owners’? [Source: Forbes] This articles questions whether in the current era of ‘shared’ economy, job employees too are becoming renters instead of owners of businesses. The authors found in their research that an “owner”—either a loyal employee or customer who takes responsibility for improving relationships, products, and processes as well as referring new employee candidates or customers—can be worth more than a hundred “renters”—those who are only involved with the organisation to complete one or more transactions. These owners are like gold - great organisations seek, develop, and encourage them even though they may sometimes seem troublesome as they point out new ways of doing things or object to a dumb management idea. The authors highlight that the concern here is about psychological, not financial, ownership. The objects in question are organisations and relationships, not real estate or other physical assets. There are many situations where job renting can make good sense. Entire business models, such as Uber’s, are based on job renters. Employee loyalty and referrals are peripheral, not central, to their success. Rather, the concern is about the future of ownership behaviours in organisations increasingly populated by a new generation of managers. This generation is fuelling the psyche of the shared economy, in which physical things are rented and shared.
4) Fifa: the video game that changed football [Source: The Guardian] In many parts of the world, the word “Fifa” is synonymous not with football’s scandal-ridden governing body, but with the video game that licences its name. The series has sold more than 150mn copies, its popularity extending far beyond the world of football. The data Fifa draws upon to build the game has become so accurate that teams have started to use the game to scout for potential new signings or to test out the strengths and weaknesses of upcoming opponents. Fifa is produced by a core team of roughly 100 people working in EA’s 400,000 square foot campus in the Vancouver suburbs. It has grown from being a work of “a few people in their basements” to the work of “a blockbuster-film-sized army.” Going forward, when the current licence expires five years from now, football’s governing body will need to be mindful of the price it quotes to EA. Perhaps the game Fifa could thrive without Fifa. It is no stretch to argue that, just as the game has transcended the governing body from which it takes its name, so, to many, it has become, not an adjunct to, but a vital component of the sport on which it is based.
5) Democracy, inclusion and prosperity [Source: LiveMint] While it is true that people want to live in a safe, prosperous country where they have a freedom of thought and action, former RBI governor Raghuram Rajan asks: how can we be sure that political freedom and economic prosperity go together? He cites American political scientist Francis Fukuyama who has argued that liberal democracies, with their political freedom and economic success, have three important pillars: a strong government, the rule of law, and democratic accountability. Rajan adds a fourth: free markets. According to him, both democracy and free enterprise create and thrive on competition. But, whereas democracy treats individuals equally, the free-enterprise system empowers them on the basis of their income and assets. One reason that the median voter agrees to protect the property of the rich and to tax them moderately may be that she sees the rich as creators of prosperity for all. The more idle or corrupt the rich are, the more the median voter will vote for tough regulations and punitive taxes. A competitive free-enterprise system, with a level playing field for all, minimizes such a risk, by allowing the most efficient to acquire wealth. The process of creative destruction replaces badly managed inherited wealth with new and dynamic wealth.
6) Drunken monkeys and the evolution of boozing [Source: Bloomberg] Nothing rings in the new year like a solution of bubbling, neurotoxic ethanol. However, humanity’s longstanding relationship with alcohol poses an evolutionary puzzle: surely natural selection would weed out those of our ancestors with a taste for something that clouds judgment, slows reflexes, dulls the senses and impairs balance. Animals in such a state would likely be the first picked off by predators, if they hadn’t already fallen out of a tree! And yet humans all over the world drink ethanol in various concoctions. As an answer to this puzzle, what scientists have learned recently is that among our fellow mammals, just humans, gorillas and chimpanzee share a mutation that improves the way our stomachs break down ethanol. The way the mutation spread suggests there was an advantage to those who had it. Ten million years ago our ancestors lived on fruit, and there’s evidence that around this time the African climate cooled off, forests became savannahs, and our ape ancestors spent more time on the ground, where they’d probably encounter a lot more fermented fruit than they would in the trees. Those who could eat the fermenting fruit without becoming impaired had a big advantage over those who couldn’t stomach it -- or those who could but got wobbly afterwards.
7) Why sex is mostly binary but gender is a spectrum [Source: nautil.us] The fact that genes have anything to do with the determination of sex, gender, and gender identity is a relatively new idea in our history. By sex, the author means the anatomic and physiological aspects of male versus female bodies. By gender, he is referring to a more complex idea: the psychic, social, and cultural roles that an individual assumes. By gender identity, he means an individual’s sense of self (as female versus male, as neither, or as something in between). For ages it was thought that semen produced in the right testicle gave rise to male children, while semen produced in the left testicle gave rise to females. It was only in 1903 that Nettie Stevens found that variation in just one chromosome correlated perfectly with the worm’s sex. She termed it the sex chromosome. The article also describes how genes are vastly more influential than virtually any other force in shaping both sex identity and gender identity. He describes cases of children born with XY (male) chromosomes—who had been assigned to female gender at birth, typically because of the inadequate anatomical development of their genitals to have experienced moderate to severe gender dysphoria during childhood. Most notably, when “genetic males” born with ambiguous genitals were brought up as boys, not girls, not a single case of gender dysphoria or gender change in adulthood was reported. To answer the question that if a single genetic switch dominates one of the most profound dichotomies in human identity, how is it that human gender identity in the real world appears in a continuous spectrum, the points to the make-up of our identity. He says that what we call gender is an elaborate genetic and developmental cascade, with gender determining gene at the tip of the hierarchy, and modifiers, integrators, instigators, and interpreters below. This geno-developmental cascade specifies gender identity.
8) The open society needs defending [Source: Project Syndicate] Renowned investor George Soros in this piece emphasises through his early life experiences the importance of the political regime prevailing in a certain period. He talks about the twin pillars of fallibility and reflexivity developed under the influence of philosopher Karl Popper. Using these he distinguishes between two kinds of political regimes: those in which people elected their leaders who were then supposed to look after the interests of the electorate, and others where the rulers sought to manipulate their subjects to serve the rulers’ interests. He labels the first kind of society open, the second, closed. Soros says that the current moment in history is very painful. Open societies are in crisis, and various forms of closed societies, from fascist dictatorships to mafia states, are on the rise. The explanation for this is that elected leaders failed to meet voters’ legitimate expectations and aspirations and that this failure led electorates to become disenchanted with the prevailing versions of democracy and capitalism. Quite simply, many people felt that the elites had stolen their democracy.
9) What “The organization man” can tell us about inequality today [Source: New Yorker] There is a retort to the prevalent gloomy diagnosis that inequality will always be with us: it was not always so. There was a period in recent American history when not only was inequality less dire but the trend was moving, culturally and economically, toward greater equality. The golden age of the two decades after the Second World War is, in some ways, the “great” America that Trump wants to restore. On its sixtieth anniversary, this article recollects the takeaways from the most famous book on corporate life during that golden age: William Whyte’s “The Organization Man”. The book is full of explanations of how that period of rising equality worked. 10) The economist’s guide to gift giving [Source: Financial Times] Joel Waldfogel, a professor of economics at the University of Minnesota, explains in his brief and witty book, Scroogenomics how gifts typically destroy value. This is so because the giver had to pay more to buy the gift than the recipient would ever have been willing to spend on it. The total deadweight loss of Christmas in the US alone was $12bn. According to British economist, Tim Harford, the problem that Waldfogel quantifies is quite real. If you give someone a jumper that doesn’t fit, a book they’ve already read or a box of chocolates when they’re on a diet, this is a waste of valuable resources. Fossil fuels have been burnt, tedious hours have been worked, trees have been felled, all to produce products that were unwanted. The same resources could have been devoted, instead, to goods that people actually do value. Interestingly, Dan Ariely, a psychologist at Duke University and author of behavioural economics books including Payoff, rejects the basic Waldfogel premise. Economists, he says, just don’t get it. They are seduced by their own training to be selfish and narrowly focused on efficiency. Giving gifts, says Ariely, is “inefficient economically but efficient socially”. One approach, which can be both economically and socially efficient was advocated by Kimberley Scharf of the University of Warwick and Francesca Gino of Harvard Business School - to buy only what has been explicitly requested. This idea has some science behind it. “Gift recipients prefer to receive items they’ve asked for, and they think givers who fulfil this ideal are more thoughtful,” says Gino. “Yet when we’re the one who is doing the giving, we fail to realise that people tend to prefer receiving what they told us they want.” Basically, when we’re the giver, we scorn the wish list and get creative, imagining that we’re smarter choosers than we really are; when we’re the receiver, we would simply be delighted to receive exactly what we asked for.