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: Investment (Howard Marks on the current situation; You can be one of the world’s great investors), Lifestyle (Tricking your brain to like doing hard things), Obituary (John Conway – The mathematician and inventor of the Game of Life) and Covid (Turning the epidemic into an epic opportunity; Realty check for India’s unicorns).
Here are the ten most interesting pieces that we read this week, ended May 1, 2020:
1) Howard Marks on the current situation and more
In this memo, Howard Marks talks about how he sees the current crisis. Many ask him for his opinion on the current situation, but he says that even he doesn’t know what the future holds. The only thing you can do is forecast. “People may ask me for my opinion because they think I’m intelligent, think I’ve been a successful investor, or know I’ve lived through a lot of history. But none of that should be confused with expertise on subjects of every kind.” He also broadly discusses the Coronavirus effect on the economy, investors, and monetary and fiscal policy.
There’s no doubt about the fact that the coronavirus represents a major problem, or that the reaction so far has been severe. What really matters is whether the price change is proportional to the worsening of fundamentals. Currently, there’s a lot of pessimism. But, there’s no way to tell whether that pessimism is appropriate, inadequate or excessive. Most investors seem to think in terms of a very simple relationship: bad news > price declines. And certainly we’ve seen some of that over the last week or so. But Mr. Marks has argued in the past that there’s more to the story. The real process is: bad news + decline in psychology > price declines. We’ve had bad news, and we’ve had price declines. But if psychology has declined too much, it might be argued that the price declines have been excessive given the news, as bad as it is.
These days, people have been asking Mr. Marks whether this is the time to buy. His answer is more nuanced: it’s probably a time to buy. There can be no unique time to buy that we can identify. The only thing we can be sure of today is that stock prices, for example, are a lot lower in the absolute than they were few days ago. Buy, sell or hold? He thinks it is okay to do some buying, because things are cheaper. But there’s no logical argument for spending all your cash, given that we have no idea how negative future events will be.
2) Crouching tiger upsets hidden dragon
China has been increasing its investments across other countries in this crisis-stricken world. And that’s why India has blocked the automatic route for investments from nations that share a land border to prevent “opportunistic takeovers/acquisitions" of vulnerable Indian companies as stock markets plunge during the coronavirus pandemic. France, Australia and Germany are among other nations that have taken recent measures to protect undervalued companies.
A decade ago, the Sino-Indian investment corridor wasn’t busy. In 2011, Chinese investment in India was just $102 million and it was difficult to entice Chinese CEOs to attend promotional events for Indian businesses in Beijing. Current estimates of total Chinese FDI in India vary between $5 billion and $8 billion. Chinese investment ranks 18th-highest in India’s FDI inflows from countries, up from 28th in 2014 and 35th in 2011. The Indian Embassy in Beijing estimates $5.08 billion of cumulative Chinese investments in India until September 2019 comes with a rider that “these figures do not capture investment routed through third countries [such as] Singapore [and] Hong Kong, especially in sectors such as startups". Official Chinese data pegs cumulative investments in India at about $8 billion.
Chinese venture capitalists, famous for their willingness to close a deal in two or three days, now face the prospect of waiting for clearances for an unknown period, at least until the rules are clarified in detail. The barriers are the latest outcome of the general lack of mutual trust in Sino-Indian relations. After years of economic dialogue, New Delhi is increasingly impatient with Beijing’s refusal to lower its intangible market barriers to products and services from Indian IT, pharmaceutical and agriculture. China’s debt-trap diplomacy to build, own and control transport corridors on its Belt and Road Initiative (BRI)—which India has refused to join for reasons of sovereignty and lack of transparency—had already demonstrated Beijing’s appetite for strategic assets in 136 nations across Asia, Africa and Europe.
3) Here’s how you can be one of the world’s great investors
Imagine you could generate 40% returns for three decades. Is it even possible today? Jim Simons, the quant whiz who built teams of computer science wizards and math geniuses into Renaissance Technologies, is a once-in-a-lifetime talent. His fund returned an insane 40% annually. Bill Ackman of Pershing Square Capital Management LP hedged the fund’s equity positions by buying credit default swaps on various investment-grade and high-yield indexes. As the markets tumbled 35%, the trade netted the fund more than $2 billion. Oaktree Capital’s Howard Marks was thinking past the housing crisis in 2006-07 when he decided to raise a $3 billion distressed-debt fund. It became so oversubscribed he had to set up a second fund. Oaktree ended up raising $11 billion to buy distressed assets when everyone else was panic selling. The returns were spectacular.
Yet these are one-of-a-kind experts with unique skill sets, deep insights and decades of experience that make them inimitable. The same thing happens when we watch our favourite athlete play. We think, “that’s simple even I can do that”. But is it really that simple? Can you be like them? Here is the thing: You don’t need to be. At least, you don’t need to be any of these people in order to achieve the investment returns that will ensure a comfortable retirement. Your temperament is different from that of Munger or Simons or Buffett or Marks or whomever. We look at these fantastic wealth-creating trades and waste our time wondering, Why not me? Instead, find an investment style.
All of these Hall of Fame investors are accessible via podcasts or YouTube. You can spend countless hours listening to the likes of Ray Dalio, Felix Zulauf, Bill Miller, Jeremy Grantham, Jeff Gundlach, Bill Gross — just about anyone you care to learn from. For the curious investor, you can hear how they found a process that suited them, their skills and their own unique capabilities. In the "The Money Game," Adam Smith wrote “If you don’t know who you are, the market is an expensive place to find out.” Instead of trying to imitate the greats, understand your own personality: Find a style that emphasizes your strengths while working to address your weaknesses. Be like you.
4) Turning the epidemic into an epic opportunity
This piece gives five important messages amid the current crisis: 1) The best way to attract businesses is not to repel them explicitly: India is seeking to attract companies purportedly keen on leaving China since the latter has gone out of its way to betray trust, to put its foot into its mouth. In any case, even before it did all of that, it had become a progressively costlier place to do business in. Governments may not be able to help sway private sector decisions in its favour but they have the power to turn them away with their actions. 2) Fiscal support: The government is keeping its fiscal cards close to its chest. It might yet play them in the near future but the damage to confidence and sentiment caused by mounting anxiety and uncertainty could have been and should have been avoided. 3) Fundamental reforms: This is the best opportunity to overcome entrenched resistance and push through reforms to the banking sector and to factor markets. In the banking sector, bad assets should be taken off bank balance sheets so that they can commence lending. Government-owned and private sector banks must face the same regulatory environment. 4) Experts are poor at predicting: Many are predicting that India is in for tougher times. Current and prospective stress in the financial sector and India’s stretched public finances vindicate such sagely warnings. Experts must remember the limitations of their predictive power. To be more honest, predictive power is non-existent. 5) Stoicism combined with optimism is a rare asset: More important is India’s unheralded strength is the innate stoicism and resilience of the public in the face of adversity. A recent Mckinsey survey noted that Indian consumers are far more optimistic than most others of a return to normalcy sooner rather than later. In times of crises, society looks for guidance and leadership from the rulers. This is time-tested. Therefore, the onus is on the government to demonstrate clarity in thought and purpose in action.
5) The economic crisis will expose a decade’s worth of corporate fraud
[Source: The Economist
It is said that downturns are the worst enemies of the accounting crooks. Booms help fraudsters paper over cracks in their accounts, from fictitious investment returns to exaggerated sales. Slowdowns rip the covering off. Take Luckin Coffee, which had expanded to take on Starbucks in China, attracting big-name investors like Blackrock and Singapore’s sovereign-wealth fund. On April 2nd the Nasdaq-listed Chinese chain announced an ongoing internal probe amid allegations that its chief operating officer and other employees may have fabricated over 2bn yuan ($280m) in sales.
These revelations have revived fears over the flaky corporate governance of Chinese firms listed on foreign exchanges, whose audits, conducted at home, China’s government makes it hard for outsiders to inspect. A gaggle of fraud-hunters like Citron and Muddy Waters, which outed Luckin, claimed numerous scalps after the first wave of such listings a decade ago. This time they are looking beyond China. Only a small minority of firms resort to outright fraud. Far more prettify profit-and-loss statements with accounting wheezes that fall in a grey area. This accounts for much of what John Kenneth Galbraith, an economist, called “the bezzle” and “psychic wealth”: gains that appear real but prove illusory.
Playing around with earnings and revenue-recognition metrics is this generation’s equivalent of dotcoms using bots and other tricks to boost “eyeballs” 20 years ago, says Jules Kroll of K2 Intelligence, the doyen of corporate sleuths. “When an area is hot to the point of overheated, there is a growing temptation to juice the numbers.” Besides exposing old schemes, the pandemic is likely to give rise to new ones. When economic survival is threatened, the line separating what is acceptable and unacceptable when booking revenues or making market disclosures can be blurred. Mr. Kroll reckons that “amid such massive dislocation, some will inevitably cheat.”
6) Why it will be so hard to return to ‘normal’
All have been staying home for almost more than a month now. With limited exposure to people, physically. Most of the time is spent online watching recipes/web-series, surfing the net or checking social media. Around us, local economies are faltering. Healthcare systems are strained. People continue to unexpectedly lose their loved ones, and regret that they couldn’t be with them in their final moments. So when will the things return to ‘normal’? The word “normal” appears straightforward enough. But like many of our words, as soon as we begin thinking about it, it starts to fall apart at the seams.
In a fascinating Philosophy Talk podcast, philosopher Charles Scott notes that the word normal possesses a certain kind of authority or “power to divide and distinguish things”. The word sneakily passes from description to prescription. The fact with which we started our process of categorisation becomes the standard or norm, and everything that diverges from that norm is not just different but abnormal and therefore less than normal. The new normal will mean that most of us will go back to most of what we were doing before the pandemic struck, but that our societies will make changes for the better, which will end up being good for the survival of our communities.
In the past 500 million years, our planet has witnessed five mass extinctions. Many scientists believe we are currently living through a sixth. At some point in the future, our species will no longer be considered the pinnacle of evolution, human beings having been surpassed by other forms of life. And yet despite the enormous challenges we face on individual, local and global levels, we will remind ourselves and each other that we will get back to normal.
7) Tricking your brain to like doing hard things
[Source: YouTube; Better Than Yesterday
This interesting video has the power to turn your life around, of course for good. It shows how you can make boring tasks like reading, work-out, writing and other such tasks interesting in a unique way. You probably don't have a problem playing video games or browsing social media on your phone. You could sit in front of a screen and do both of those activities for 2 hours, or even longer without breaking your concentration.
But what about half an hour of studying? That might be too hard. How about working on your side business for another hour? Doesn't sound too appealing. Even though you logically know that studying, exercising, building a business or something equally productive, will bring you more benefits in the long run, you still prefer watching TV, playing video games and scrolling through social media. One activity is easy and doesn't require much effort, while the other activity is difficult and it requires you to apply yourself. But some people seem to have no problem studying, exercising, or working on their side projects, regularly. So why these people are more motivated to tackle difficult things?
Our brain releases dopamine when we play video games, spend time on social media, etc. The rewards make us keep going on and on till we are exhausted. Have you ever played a video game for hours at length? Now you know the reason why! So what you need is dopamine detox. Now what’s this? It’s like cleansing programme. You set a target for yourself. Like, if I study for 4 hours, I can play that video game or check social media for 30 minutes. Or you can have one day where you don’t login to your social media accounts, or don’t play video, something like this. Instead, you can read, watch your favourite investor’s interview, exercise, work on your side business, etc. Though it sounds tough, you can take it step by step.
8) Creative ways of training staff
[Source: The Economist
If you’re working for a corporate, it is likely that you must have attended some sort of training programme. The group-bonding exercise. The overenthusiastic guest lecturer who constructs a lengthy and banal presentation out of a series of random nouns. The debate about the company’s future which turns into an exercise in Stalinist self-criticism. It all resembles one of those nightmares when you find yourself marooned back in the school classroom. If there is one good thing about the current pandemic, it is that no one is being sent to an awayday event at a seaside resort or a country retreat. Perhaps the whole idea will become less fashionable. Thankfully, there are inventive ways to undergo training online.
This piece throws light on how organisations are merging comedy/poetry with their training plan. One management course used the skills of an improvisational-comedy troupe, the Second City. Fortunately, the actors at the Second City created a sitcom, “The Feedback Loop”, to illustrate the ideas. In the video, people are made to endure a version of “Groundhog Day”, in which they keep reliving the same situations until they learn from their mistakes. The fictional workers learn not to be “obnoxiously aggressive” and “manipulatively insincere”; managers realise it is hopeless to be “ruinously empathetic”. The training was originally designed for use in workshops, something that would be impossible at a time of social distancing.
Like-wise many companies hired Gary Turk, a poet, to make videos, as his videos get the message over in two to three minutes and may lead to a more open discussion than if the subjects were presented more formally. A little bit of poetry and comedy goes a long way. One wouldn’t want an entire training day to consist of jokes or rhymes. But online or offline, these kinds of innovative techniques can enliven those endless seminars when the clock never seems to reach 5pm.
9) Obituary: John Conway – The mathematician and inventor of the Game of Life
[Source: The Economist
John Conway liked to feel he had about him everything he might require. Pennies in his pockets, to set spinning on the edge of a table to prove that more would fall heads than tails. A pen and paper for his game of Sprouts, which required spots to be joined up with curves that passed neither through old spots nor old curves. A board with a grid and stones, or peanuts at a pinch, to plot more of the games that fizzed from him continually. A couple of bits of rope for Twists and Turns, where four players, each holding an end, would change places turn by turn into nicely tangled permutations.
The game for which he had become world famous, though, needed no players and never ended. It was called the Game of Life, and was played out on a grid where “live” or “dead” cells interacted with their neighbours, second by second, according to three rules. If a cell had four or more neighbours, it died of overcrowding. If it had no neighbours, or only one, it died of isolation. If a dead cell had three live neighbours, it became a live cell. As cells lived and died, the formation moved. The game had taken 18 months of coffee-times to think up, plotting with pen and paper, but when it was described in 1970 in Scientific American it became a sensation.
But the Game of Life came to overshadow the more important things he had done in mathematics. He had made contributions to algebra, geometry, knot theory and coding theory, as well as game theory, and in two respects he had certainly got further than anyone had before. But he was poor at publishing his work, and simply liked to go wherever curiosity took him. In his younger years this bothered him, but the Leech-lattice work cleared his head, and he made “The Vow”: “Thou shalt stop worrying and…do whatever thou pleasest.”
10) Covid reality check for India’s unicorns
The Covid-19 crisis has disturbed each and every company in India. Also, used to skyrocketing growth, internet companies have been stunned by the near complete collapse of their businesses during the lockdown. The crisis presents a particularly vexatious problem for many of India’s 20-odd unicorns, or startups with billion-dollar valuations. While India’s unicorns have together raised more than $21 billion in capital, according to Tracxn, they still do not generate profits. According to estimates by RedSeer Management Consulting, India’s internet economy is set to decline by as much as 90% this month compared with April 2019.
Apart from vanishing revenues, the Covid-19 outbreak has made it tougher for unicorns to raise capital. Already, the proposed funding rounds at transportation app Ola and gaming app Dream11 are being delayed because of the crisis. “New investors are saying: let’s talk later," an early-stage venture capitalist said. A lot of rounds are on hold because of the uncertainty around Covid-19. Even before covid-19 hit India, new investors were unwilling to match the valuation expectations of companies, including Ola, Swiggy and Zomato. The three companies had been trying to raise $400-$500 million from the second half of last year, but Swiggy and Zomato had to settle for far lower cheques, while Ola is still scrambling to secure fresh capital.
The situation has worsened. Faced with a near-complete collapse in business, unicorns have adopted some common tactics. Swiggy, Zomato and Udaan have cut jobs while Oyo has put thousands of employees on temporary leave. While Oyo, Ola, Swiggy, Zomato, Lenskart and Firstcry would be impacted the most, BigBasket, Grofers, Byju’s and Policybazaar would be the beneficiaries. Over the long-term, however, the crisis is expected to speed up digitization in many sectors. Some analysts expressed optimism that this will lead to faster expansion for many start-ups.