Ten interesting things we read this week

Some of the most fascinating topics covered this week are: Stock Market (Learnings from analysing 2,800 Indian listed companies; Bubble hunting has become an art), Business (Ironies of luck; Risk is never as simple as it seems), Parenting (3 scariest chemicals to watch out for in your home) and Economy (Nutrition is India's next big headache)

Published: Aug 28, 2020 09:52:16 PM IST
Updated: Aug 28, 2020 10:13:21 PM IST

reading_28th aug_bgImage: Shutterstock

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: Stock Market (Learnings from analysing 2,800 Indian listed companies; Bubble hunting has become an art), Business (Ironies of luck; Risk is never as simple as it seems), Parenting (3 scariest chemicals to watch out for in your home) and Economy (Nutrition is India’s next big headache).

Here are the ten most interesting pieces that we read this week, ended August 28, 2020-

1) 
Learnings from analysing 2,800 Indian listed companies [Source: drvijaymalik.com]
In this elaborative article, Dr. Vijay Malik explains how he analysed 2,800 listed companies using two simple filters. 1) know about what a company does, and 2) see the financial performance of every company over the last 10 years. Then he jots down his learnings. He notes that there is severe shortage of companies with a large market capitalization. And most of the large-capitalization companies have astronomical valuations due to too much money chasing too few companies.

On financial performance of large companies, he analysed that when an investor analyses many large-capitalization companies, then he/she notices that the proportion of companies that impress him/her with their good financial performance is far higher than the companies in lower market capitalization segment. Talking about smaller companies, most of the small companies suffer from delayed receivables collection, and also some of the companies’ business model is interesting with no competing listed peers.

Talking about trends, he writes, when a trend picks up, then share price of almost every company even remotely linked to the theme, goes up. However, more often than not, when the trend is over, then the share price returns to the levels previous to the thematic stock market rally. Also, doing this exercise was nostalgic to Dr. Malik as he discovered some old well-known brands, now lying in the small-cap segment. Most of these companies are barely surviving.

2) Bubble-hunting has become more art than science [Source: The Economist]
Spotting stock market bubbles in real time is trickier—especially when the usual measures of frothiness are out of action. Wall Street types typically pore over price-to-earnings ratios, which compare a firm’s value with its profits, or free cash flow measures, which look at the cash firms crank out after investment. Warren Buffett targets firms with a high return on capital, which compares their profits with the size of their balance sheets. But the COVID-induced economic slump caused earnings to sink even as the Fed and other policymakers have helped buoy share prices. The obvious gauges of frothiness are not much use. S&P 500, a share-price index of America’s biggest public companies, reached an all-time high on August 18th in the middle of perhaps the sharpest ever economic downturn. Without hard numbers to count on, they must interpret the market’s unusual behavioural signals in order to spot the froth.

One such sign is the mystifying moves in some stocks. On August 19th, Apple became the first American company to touch a valuation of $2trn. Tesla, a carmaker that is undertaking a stock split at the end of August, has quadrupled in value so far this year. It is now worth $354bn, more than Ford, Toyota and Volkswagen combined. Nikola, an electric-truck firm (that has yet to make any lorries), has tripled in value since May. Even more perplexing was investors’ fondness for Hertz, a car-rental firm. Its share price rose tenfold after it declared bankruptcy (though this bubble has since popped).

What to do, in the face of all this enthusiasm? Other assets may start to seem more alluring. On August 14th, Berkshire Hathaway, Mr. Buffett’s investment firm, said that it had sold chunks of its stakes in banks and bought up shares in Barrick Gold, a mining company. But gold and other assets have also shot up in value this summer. As markets rise further, it may become even harder to resist joining the fray. Some investors may pile in, and exit with a profit. But even the most brilliant minds can be bamboozled.

3) Ironies of luck [Source:collaborativefund.com]
What’s risk and luck in a market? Many a times, people talk about the risks in the stock market but no one talks about luck. “In a moment of frightening enlightenment in 1993, I knew that I really did not know exactly how and why I had made all the money that I had over the prior 17 years,” Paul Tudor Jones once wrote. “That threw my confidence for a jolt.” If risk is what happens when you make good decisions but end up with a bad outcome, luck is what happens when you make bad or mediocre decisions but end up with a great outcome.

In investing, a huge amount of effort goes into identifying and managing risk. But so little effort goes into doing the same for luck. Investors hire risk managers; no one wants a luck consultant. Companies are required to disclose risks in their annual reports; they’re not required to disclose lucky breaks that may have led to previous success. There are risk-adjusted returns, never luck-adjusted returns.

So what can we learn about luck from risk? 1) Good investors attempt to quantify risk. They should do the same for luck. 2) People are good at discounting risks that threaten the continuation of their past success. They are equally good at discounting the role of luck in their past success. 3) Risk is hard to define, and means different things to different people. Luck is, too. 4) Experiencing risk reduces confidence when it should merely highlight reality, which can make people more conservative than they should be. Luck increases confidence without increasing ability, which also magnifies how people respond to it.

4) Risk is never as simple as it seems [Source: awealthofcommonsense.com]
In this blog, Ben Carlson shows how risk management can help protect you from the worst-case outcomes. But that reduction in risk often comes with a cost by enhancing other risks. For some investors, risk reduction in one area can actually lead to more risk-taking elsewhere. He starts with his personal experience of how egg shells chocked up his house drainage pipeline. After flushing the pipe with many blasts of water to clear things up the plumber gave them some advice: Never put any food down your garbage disposal. Garbage disposals are what keeps me employed. He said the garbage disposal gives people a false sense of security that they can just put anything down their sink and it will magically disappear.

There are plenty of examples like this where safety measures can offer a false sense of security, thus introducing additional risks to the equation. A study in Norway found new cars, despite having better safety measures and more advanced technology, get into more crashes than old cars. And this takes into account the fact that there are more new cars on the road. Safety measures in the world of finance are sure to have unintended consequences as well. The measures enacted during the current crisis, as necessary as they may have been, are sure to change the way investors view risk in the years ahead.

This year has been an event-driven crisis. We all know why these bonds sold off. And if you’ve been following along, you know why they have come back so strongly — the Fed. The Fed back-stopped the credit markets both financially and psychologically to keep the system functioning. The markets are doing much better than the economy through this crisis and the Fed is a huge reason why. Ben says that these market-saving measures are sure to have unintended consequences going forward.  And he has a few questions like will investors take more risk going forward because of a perceived Fed backstop? Will investors be coerced into taking more risk than they are comfortable with? And so on.

5) When the magic happens [Source: collaborativefund.com]
When and why do big innovations happen? This question is what this article tries to answer. And maybe that’s the reason why hopefully you’ll see why 2020, for all the hell it has brought, could be the new beginnings of something promising. When cars were invented no one looked at a car and said, “Oh, there’s a thing I can commute to work in.” Few saw a plane and said, “Ah-ha, I can use that to get to my next vacation.” It took years and decades for people to see that potential. What they did say early on was, “Can we mount a machine gun on that? Can we drop bombs out of it?”

The Army’s early interest in cars and planes wasn’t a fluke of lucky foresight. Go down the list of big innovations, and militaries show up repeatedly. Are militaries home to the greatest technical visionaries? The most talented engineers? Perhaps, but more importantly they’re home to really big problems that need to be solved right now. Militaries are engines of innovation because they occasionally deal with problems so important – so urgent, so vital – that money and manpower are removed as obstacles, and those involved collaborate in ways that are hard to emulate during calm times.

Big, fast, changes only happen when they’re forced by necessity. World War II began on horseback in 1939 and ended with nuclear fission in 1945. NASA was created in 1958 two weeks after the Soviets launched Sputnik and landed on the moon just 11 years later. Stuff like that rarely happens that fast without fear as a motivator. The hardest thing about stress-induced innovation is reconciling that positive long-term trends can be born when people are suffering the most. But think of what’s happening in biotech right now. Many have pessimistically noted that the fastest a vaccine has ever been created is four years. But we’ve also never had a new virus genome sequenced and published online within days of discovering it, like we did with Covid-19. And what could come from that besides a Covid vaccine? New medical discoveries? New manufacturing and distribution methods? Newfound respect for science and medicine?

6) How viruses shape the world [Source: The Economist]    
Viruses have caused a litany of modern pandemics, from covid-19, to HIV/aids to the influenza outbreak in 1918-20, which killed many more people than the first world war. The influence of viruses on life on Earth, though, goes far beyond the past and present tragedies of a single species, however pressing they seem. Though the study of viruses began as an investigation into what appeared to be a strange subset of pathogens, recent research puts them at the heart of an explanation of the strategies of genes, both selfish and otherwise. Viruses are parasites of the purest kind: they borrow everything from the host except the genetic code that makes them what they are. They strip down life itself to the bare essentials of information and its replication.

Viruses—often of many different sorts—have adapted to attack every organism that exists. One reason they are powerhouses of evolution is that they oversee a relentless and prodigious slaughter, mutating as they do so. This is particularly clear in the oceans, where a fifth of single-celled plankton are killed by viruses every day. The other reason viruses are engines of evolution is that they are transport mechanisms for genetic information. Some viral genomes end up integrated into the cells of their hosts, where they can be passed down to those organisms’ descendants.

Humanity’s unique, virus-chiselled consciousness opens up new avenues to deal with the viral threat and to exploit it. This starts with the miracle of vaccination, which defends against a pathogenic attack before it is launched. Thanks to vaccines, smallpox is no more, having taken some 300m lives in the 20th century. Polio will one day surely follow. New research prompted by the covid-19 pandemic will enhance the power to examine the viral realm and the best responses to it that bodies can muster—taking the defence against viruses to a new level.

7) 5 questions you should always ask before taking anyone’s advice [Source: Forbes]
The author of this article feels that advice is cheap because it is typically given by people who, to paraphrase the author Nicholas Nassim Taleb, have no skin in the game. So, as a leader, how do you know whose advice is worth listening to? Here are five questions, drawn from over 20 years’ experience on both sides of the table, that will help you separate the sages from the snake-oil salesmen. 1) Is the advisor’s experience directly relevant to my situation? Taking advice from someone about a situation of which they have limited or no direct experience can be a high-speed road to ruin.

2) Are our incentives aligned? Start with money, and Taleb’s point about skin in the game. If your advisor is incentivized to keep the invoices landing, then the client who is motivated by budgetary constraints or cost-efficiencies in delivery should be wary. 3) Do we share similar values? Advice is only useful when it is in service of a shared set of values. Someone seeking advice on, say, fostering diversity will not be well served if his advisor believes in strength through conformity. Similarly, someone who cares deeply about customer service excellence may not receive helpful insight from an advisor who cares deeply about maximal short-term profits.

4) Do they have a strong track record with me and my business? Advisors who have a strong track record of delivering results for your organization (or you personally) are the ones whose advice is usually worth the most. Care for your proven advisors the way that they have so often cared for you. Loyalty brings countless rewards. 5) Are they telling me something that I don’t want to hear? Our best advisors are rarely our best friends—and in fact sometimes a healthy advisory relationship can be characterized by a high degree of conflict or dissent. It often falls to advisors to tell us the things that we don’t want to hear which are holding us back from achieving our goals. One sign of good advice is that you may not enjoy receiving it.

8) The Chinese scientist who sequenced the first COVID-19 genome speaks out about the controversies surrounding his work [Source: time.com]
Everyone is blaming China for the outbreak of the ongoing pandemic. But, what actually went through after the virus was discovered? This article tells the story of Professor Zhang Yongzhen. Over the past few years, he has made it his business to sequence thousands of previously unknown viruses. It was about 1:30 p.m. on Jan. 3 that a metal box arrived at the drab, beige buildings that house the Shanghai Public Health Clinical Center. Upon first obtaining the genome, Zhang says he immediately called Dr. Zhao Su, head of respiratory medicine at Wuhan Central Hospital, to request the clinical data of the relevant patient. “I couldn’t say it was more dangerous than SARS, but I told him it was certainly more dangerous than influenza or Avian flu H5N1,” says Zhang.

The US blames China for hiding facts and everything else. But, Zhang insists he first uploaded the genome to the U.S. National Center for Biotechnology Information (NCBI) on Jan. 5—an assertion corroborated by the submission date listed on the U.S government institution’s Genbank. “When we posted the genome on Jan. 5, the United States certainly knew about this virus,” he says. But it can take days or even weeks for the NCBI to look at a submission, and given the gravity of the situation and buoyed by the urging of colleagues, Zhang chose to expedite its release to the public, by publishing it online. Dr. Dale Fisher, head of infectious diseases at Singapore’s National University Hospital, says he doesn’t think that any delay by the Chinese authorities was malicious. “It was more like appropriate verification,” he says.

It was only on Jan. 20 that China officially confirmed community transmission. Two days later, Wuhan’s 11 million residents were placed on a bruising lockdown that would last for 76 days. Even while the WHO publicly praised China for transparency, internal documents seen by the Associated Press suggest health officials were privately frustrated by the slow release of information. One joint study by scientists in China, the U.K. and U.S. suggests there would have been 95% fewer cases in China had lockdown measures been introduced three weeks earlier. Two weeks earlier, 86% fewer; one week, 66% fewer.

9) Nutrition is India’s next big headache [Source: Livemint]
The coronavirus pandemic has already created a havoc world over. But this article shows how the long shadow of the pandemic may stay with India for many years to come. Hunger and malnourishment is tragic in any case, but in the long run, they also strike at the root of the demographic dividend that India has been banking on. Even if the eventual covid death toll is low, the disease could still play havoc with India’s prospects if it triggers a rise in the share of the population that grows up without adequate nutrition, resulting in an inevitable spike in wasting and stunting.

The roughly 12 million new entrants into the workforce every year and the 26 million new babies need quality education and, more importantly, adequate food and nutrition to be productive and independent. Neglecting these two requirements will turn the dividend into a disaster. In the aftermath of the pandemic, Oxfam estimates that an additional 100 million Indians are vulnerable to food distress. Surveys and estimates indicate that 30% of urban India has run out of all savings, which means that their food distress will only grow substantially in the months ahead. Efforts made through public food distribution programs typically deliver non-perishable staples, oils, and pulses, which could only increase the inclination toward poor-quality diets.

So what can India do? 1) India needs to monitor food insecurity closely in the months ahead. Large datasets generated by the national sample survey (NSS) should include detailed questions on people’s food and nutritional distress. 2) The Integrated Disease Surveillance Program (IDSP) is India’s central disease monitoring network. Curiously, the IDSP’s weekly updates have disappeared after the twelfth week of 2020. The IDSP must continue to publish weekly updates to help keep a check on future disease outbreaks. 3) On the agriculture front, India’s godowns are stocked and overflowing with 77 million tonnes of food grains. If not now, when is the government going to use this reserve?

10) The 3 scariest chemicals to watch out for in your home [Source: The New York Times]
This article shows how out houses are filled with many harmful chemicals that can impair fertility and interfere with child development. The author of this piece wanted to know the three biggest chemical threats to his family’s safety? So he asked Liza Gross, an award-winning science writer who has covered toxic chemicals for more than two decades, to pick the worst chemicals that parents encounter each day and write about them. “I mean, there are so many thousands of unregulated chemicals and even regulated chemicals,” she said. “It’s not as if we’re like lab rats that are exposed to one chemical all the time.”

Liza called leading scientists, advocates and physicians who, after laughing in her earpiece, helped compile a list of 10 or so of the best candidates. She then painstakingly whittled the list to three: phthalates; PFAS, or per- and polyfluoroalkyl substances; and flame retardants. All three groups of chemicals appear throughout our homes and can disrupt our hormone, or endocrine, systems. Phthalates can impair fertility, PFAS can affect pregnancy and flame retardants can interfere with child development. The triple crown of toxicity.

She also says that a chemical that is safe for a 25-year-old woman may not be safe for a fetus or a child. Something she encounters as a kid may have effects decades later. It’s not fair that parents need a Ph.D. in biochemistry to read labels. It’s not fair that companies often don’t disclose potentially harmful chemicals in their products. But this is the world we live in.

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