Some of the most fascinating topics covered this week are: Investing (Mastery through deliberate practice), Technology (Why your bank's systems keep failing), Business (Secrets of successful listening), and Obituary (Katharine Whitehorn and Mahinder Watsa - Counsels of imperfection)
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: Investing (Mastery through deliberate practice), Technology (Why your bank’s systems keep failing), Business (Secrets of successful listening), and Obituary (Katharine Whitehorn and Mahinder Watsa - Counsels of imperfection).
Here are the ten most interesting pieces that we read this week, ended January 30, 2021.
1) Investing mastery through deliberate practice [Source: MicroCapClub] It is said that if you wish to master any art, you need to practice for at least 10,000 hours. Some fields like chess, musical performance, mathematics and several athletic sports have highly developed, broadly accepted training methods that, if intensively followed will likely lead to expertise. For other fields, like investing, the training roadmap to expertise is not quite as clear. In The Little Book of Talent, Daniel Coyle wrote about his experience visiting several talent hotbeds. He singled out Spartak, the tennis club in Moscow that is known for developing a number of top Russian tennis stars who have gone on to win Grand Slam titles. Coyle explains: “At Spartak, coaches enforce a simple rule: Young players must practice for three years before entering competitive tournaments. While I can’t imagine that such a rule would fly in America, it reflects Spartak’s determination to build trusty, reliable forehands, and backhands before injecting the distorting pressures of competition.”
If chess players can achieve grandmaster status by spending thousands of hours intensely studying the chess masters’ moves, similarly investors should be able to improve their skills by studying the investing masters by analyzing the masters’ past investing moves. By deeply studying the past investment moves (many of them in microcap companies) of grandmaster investors like Warren Buffett, Charlie Munger, Joel Greenblatt, and Fred Astman, an aspiring investor is able to imprint the patterns of these successful investments into their long term memory to be recalled at a later date as needed.
The purpose of deliberate practice is to figure out where your weaknesses are and focus on getting better in those areas. Deliberate practice is intense, focused practice operating just outside of your comfort zone. This means you should be reaching slightly beyond your current ability making some mistakes. This is the sweet spot of deep practice. Also, often in your training, you will reach a plateau where it feels like you have hit a ceiling in your progress. It will usually be just one or two components of a skill that are impeding your progression. To figure out which components are causing the plateau, try pushing yourself a little harder than normal to figure out where your sticking points are. Once you determine your weaknesses, you could then focus on improving those areas through deliberate practice exercises.
2) Two Worlds: So Much Prosperity, So Much Skepticism [Source: Collaborative Fund] In this blog, Morgan Housel talks about two of the biggest economic stories that aren’t getting enough attention. 1) Household finances might be in the best shape they’ve ever been in. 2) Covid has dumped kerosene on wealth inequality in ways we’ve yet to fully grasp. Last year was the best year for income in American history. A lot of the surge came from stimulus payments and unemployment benefits. But private wages and salaries are back at a new high. So are average hourly earnings. And weekly earnings. These are not small numbers: Americans made $1 trillion more from March to November of 2020 than they did from March to November of 2019.
What do you do when you get a giant stimulus check and you can’t use it to travel because everything’s locked down, or go shopping because the malls are closed, or eat out because the restaurants aren’t open? Millions of Americans used it to pay off debt. The personal savings rate averaged 7% in the quarter-century before 2020. Then Covid hit, and overnight it went to 34%. It’s since dropped to about 14%, which would have been a 50-year high before Covid. The result is that the amount of cash households have in the bank has absolutely exploded.
The idea that Covid took a bunch of existing trends and sped them up is popular. We’ve seen it in everything from ecommerce to working from home. We’ve also seen it in economic inequality. Rising income inequality has been one of the most important stories of the last four decades. Then Covid hit, and the trend was fed rocket fuel. There are flight attendants and waiters whose careers vanished overnight, and lawyers/bankers/consultants/programers who continue earning their nice salaries and benefits from their couch. Inequality has existed forever. But people weren’t nearly as exposed to other peoples’ lives as they are in the digital era. A hard thing to wrap your head around in economics is the idea that two opposite things can be true at once.
3) Sorry for the inconvenience: Why your bank’s systems keep failing [Source: The Ken] Failing transactions due to electricity outages (and other such reasons) in the data centres of some big companies have been common lately. Data centres need an uninterrupted power supply, so they have two levels of fail safes. First, a UPS system that will keep the lights on for 10-15 minutes. This is followed by power from a diesel-run AC generator that will ideally keep everything running for at least 2/7 two days. But there have been problems with the backups in the past. Companies such as HDFC Bank, ICICI Bank, and India’s largest bank, the State Bank of India (SBI), have also seen failing digital transactions. Between the three banks, there have been 85 instances of outages in 2020, according to Down Detector. SBI alone accounted for 61 of them.
An hour of failure in a large bank for UPI payments alone can stall over 400,000 transactions, according to NPCI data. There are a host of reasons why transactions may fail—unyielding IT architecture, ineffective systems, skillsets of banks’ IT departments. Banks’ minimal spends on IT are an indicator of their troubles. While IT spending has gone up, it hasn’t been a dramatic shift. Vivek Belgavi, partner at global consultancy PricewaterhouseCoopers, estimated that banks have gone from spending 1-4% of their net income to 2-5% on IT. The lack of robust infrastructure is now being felt. Especially now, as banks’ systems are continually slammed by small-ticket digital payments thanks to real-time payments systems like UPI.
Unlike in our homes, for a data centre to fail even once in a year is a big deal. The reason banks’ disaster recovery is a spectacular failure is because it was fashioned keeping natural disasters like earthquakes or floods. Dealing with a wild animal like round-the-clock digital payments is a whole other game. This is where moving to the cloud begins to appeal as a solution. Banks wouldn’t need to worry about scaling systems when there’s unprecedented demand. No bank has fully migrated to the cloud in India, however. At best, only activities such as email and payroll have moved. Cloud storage could greatly reduce operational hassles for banks, but everyone involved is taking a dim view of the technology. The author sums it up perfectly: If banks are serious about fixing their tech bullet wound, it will take more than just slapping on a quick band-aid, like they’ve done all this while.
4) The secrets of successful listening [Source: The Economist] Listening is key to the success of most businesses. Some firms use a technique known as a “listening circle” in which participants are encouraged to talk openly and honestly about the issues they face (such as problems with colleagues). In such a circle, only one person can talk at a time and there is no interruption. A study cited in the Harvard Business Review found that employees who had taken part in a listening circle subsequently suffered less social anxiety and had fewer worries about work-related matters than those who did not.
Listening has been critical to the career of Richard Mullender, who was a British police officer for 30 years. Eventually he became a hostage negotiator, dealing with everything from suicide interventions to international kidnaps. When he left the force in 2007, he realised that his skills might be applicable in the business world. So he set up a firm called the Listening Institute. Mr. Mullender defines listening as “the identification, selection and interpretation of the key words that turn information into intelligence”. Plenty of people think that good listening is about nodding your head or keeping eye contact. But that is not really listening, Mr. Mullender argues. A good listener is always looking for facts, emotions and indications of the interlocutor’s values.
Another important point to bear in mind is that, when you talk, you are not listening. “Every time you share an opinion, you give out information about yourself,” Mr. Mullender says. In contrast, a good listener, by keeping quiet, gains an edge over his or her counterpart. The mistake many people make is to ask too many questions, rather than letting the other person talk. The listener’s focus should be on analysis. If you are trying to persuade someone to do something, you need to know what their beliefs are. If someone is upset, you need to assess their emotional state. So, next time when you’re trying to solve someone’s problems, you know what you got to do, listen.
5) What’s missing from Howard Marks’ ‘Something Of Value’ [Source: Forbes] In this article, Gary Mishuris, Managing Partner and Chief Investment Officer of Silver Ring Value Partners, an investment firm with a concentrated long-term intrinsic value strategy, discusses Howard Marks latest memo. While he agrees with most of the points, there are some in which his views differ. He disagrees with Marks’ implicit premise that analytical advantage necessarily benefits those analyzing high-growth companies more than those analyzing steady, mature companies. Analytical advantage applies to mature companies just as much as it does to earlier stage ones. A value investor might successfully use her analytical advantage to find those among low-expectations stocks whose fundamentals don’t deserve such low expectations. In other words, it takes nuanced fundamental analysis to find which of many low P/E stocks are actually mis-priced as opposed to deservedly statistically cheap.
He also says that Marks didn’t really address a major source of occasional mis-pricing in the market: behavioral biases. So if the investment markets were populated by purely rationally actors (think Commander Data from Star Trek), then analytical advantage is all that would be left. However, we are humans, and we are all biased in many ways. Market participants are prone to consistently repeating behavioral biases that cause them to shun certain companies en masse at points in time, and heavily favor others. You don’t have to be free of all behavioral biases. Nobody is. However, if you can be significantly better than the typical market participant in this respect then you have a competitive advantage as an investor.
Further, Howard Marks in his memo argues that this time is different than the three best known stock market bubbles of the 20th century: the late 1920s, the late 1960s and the late 1990s. The main difference he sites it that this time we have an emergence of companies with real cash flows, durable competitive advantages and a long runway for growth ahead of them. But, the author elaborates how each time is different. That’s why these manias reoccur. What isn’t different is human nature. And human nature causes investors to react emotionally far more than rationally in financial markets, which in turn causes it to price securities, even of very deserving companies, at highly irrational levels from time to time. Lastly, the author says, learn from others, but don’t worry about whether where you come out as an investor is the same or different than where they do.
6) Rethinking our vision of success [Source: edge.org] In this video, Dr. Robert Pollack, a professor of biological sciences, talks about how we threaten our planet by our success. He and also serves as director of the University Seminars at Columbia University, and is the author of The Course of Nature, a book of drawings by the artist Amy Pollack, accompanied by his short explanatory essays. He says, “Our entire history since the emergence of our species, with its ability to have language and conversation, has been in the direction of limiting our ability to hear and understand each other. Our species has hundreds, maybe thousands, of languages. If you don't speak someone else's language, you do not know them as a person; they're not quite human.”
Google has an automatic translator, but it's only for about a half a dozen languages. How do we recover or perhaps invent species self-awareness? He believes humans lack a human language. Language is part of the process of human self-isolation into subpopulation so that we can care only for the ones that we care about. No human has an obligation to care for the species. We became 100,000 times in excess of natural numbers by caring only about the ones closest to us. How do we make a statement which is immediately understood, disagreed with is fine, but heard by everybody? Who are we talking to?
According to Dr. Pollack, there are three pathways. 1) Web: it doesn't speak one language. 2) Teaching: It is a global phenomenon. 3) How may we begin to experiment with what it looks like, what it sounds like, when two people who never met each other can converse over their common interest in their grandchildren's survival? Lastly, he says, “I have experienced the power of a non-biological family structure. I would like to scale that up to make the species a non-biological family. And that is a technology question that I would love to work on with others.”
7) Battered infra dream awaits a new deal [Source: Livemint] The long-awaited ramp-up in infrastructure spending has been derailed by the pandemic. The proof is the grim picture of a Hyderabad-based public works contractor’s company’s fortunes that have turned in the past year. Three out of five state governments that he works with—in western and southern India—have stopped paying bills for ongoing irrigation and urban water supply projects. Because of this, the company has chosen to slow down the pace of work on its order book, valued roughly at ₹7,500 crore. “I had to use the company’s free cash reserves last year to pay workers. For us, this is like selling the family silver," the contractor said.
Given the quagmire that many private infrastructure firms find themselves stuck in, expectations of redemption via the upcoming Union Budget are quite high. Despite the finance minister announcing a ₹25,000-crore stimulus in October, actual spending dropped by a further ₹1.6 trillion in the second quarter over a disastrous first quarter. Without the government building new highways, railway lines, power distribution and water supply networks, the private sector has little incentive to invest in boosting its capacity.
For now, Govinda Rao, a public finance expert and a former Finance Commission member, recommends a simple approach: lowering one’s sights and focussing on a list of infra projects that are already under implementation. A December report from the ministry of statistics and programme implementation showed cost overruns of ₹4.34 trillion in a fourth of the 1,671 ongoing infra projects it studied. “There are too many (projects) stuck in implementation now," Rao said. “But ultimately, the Budget is a political document. And there are always constituencies seeking new projects."
8) Is it time to get off the equity gravy train? [Source: Outlook Business] From the low of 7,511 hit in March 2020, post the Covid-19 scare, the Nifty recently went above 14,500. This all-time high comes on the back of a continuous pullback which most domestic institutional investors have sold into. If one looks at mutual fund activity for CY20, they have turned net sellers after five years. Conventionally, the domestic fund managers’ reading of the ground reality has always trumped that of foreign investors. Will it be the same this time as well? Shankar Sharma, co-founder, First Global puts the runaway rally into perspective and says what we have seen so far is not a fairy tale run.
Sameer Arora, founder, Helios Capital says the FY21 forward P/E looks off the charts as “earnings have never been crushed this much, due to a one-off event. The market seems to have overestimated the length of the problem. That has now adjusted as for India, the market is now willing to accept high fiscal deficit.” With businesses restarting post lockdown, investors are banking on an economic recovery spurred by government spending. He also feels that the expectations from budget would be different this time. He points out, “Nobody is talking of Budget expectations. Yet, if one is tempted to call it ‘Great Budget’, there has to be something around personal taxes.” For now, he doesn’t see any reason to be overtly negative on Indian equities.
Redemption pressure aside, domestic mutual funds continue to sell into the rally. Whether Indian fund managers will be proven prescient will be clear as 2012 unfolds. Neelesh Surana, CIO Mirae Asset, says because the market has moved so fast from the March 2020 low, consolidation is long overdue. “I don’t see it more than 5-7% but our situation could get delicate if crude oil moves up. Hopefully, there is no adverse taxation in the Budget,” he trails off.
9) Fabozzi: Finance must modernize or face irrelevancy [Source: CFA Institute] Frank J. Fabozzi, an academic, researcher, author, and editor, sheds light on the current state of academic finance and financial theory. He has long been an eloquent critic of how finance and economics are taught in colleges and universities and how conventional theory fails to explain actual market behavior. Talking about his criticism of academic economics, he says, “…the models built by economists basically treat market agents as robots. They make decisions according to defined rules, and the constructed models are labeled “rational models.” Since finance is a field within economics, the same criticism applies to the models built by financial economists. The key tools used by economists are calculus and higher-level mathematical analysis. The “rational models” in finance have been attacked by the behavioral finance camp, which has demonstrated the disconnect between model behavior and real-world investor behavior.”
On the misuse of calculus and higher-level mathematical analysis in economics, he says over-reliance on calculus is symptomatic of the subject’s stagnation and a disservice to the students who aspire to work in asset management. “Economists should combine sophisticated mathematical tools and empirical techniques while recognizing the limitations of a field where experiments are rarely possible. In “Who Needs a Newtonian Finance?” Marcos López de Prado and I explained why the adoption of calculus by economists was a historical accident and question economists’ mechanical vision of the world.” But, calculus has not been effective in describing economic and financial phenomena.
Talking about the way forward for teaching finance, he believes that this is an open topic that university economics and finance departments need to have a conversation about. Typically, university curricula in economics and finance today are divided: There are programs with mathematics and programs without mathematics. Those with mathematics teach sophisticated calculus and stochastic calculus. Those without mathematics still feel it’s necessary and try to teach diluted and simplified versions of calculus and stochastic calculus, mostly in the form of econometrics. This situation is unsatisfactory. Students of highly mathematical curricula end up feeling like they are in an ivory tower and do not develop the hard data discipline of the empirical sciences. In contrast, students of non-mathematical curricula come to believe that logic and mathematics are optional and do not apply to real life.
10) Counsels of imperfection: Katharine Whitehorn and Mahinder Watsa [Source: The Economist] A young Katharine Elizabeth Whitehorn, a British journalist, columnist, author and radio presenter, realised that the cookery books of the time were no use. So was born “Cooking in a Bedsitter” (1961), a bible for the cookery-challenged for decades afterwards, with its cheery insistence that yes, you could cook cabbage, if you chucked in a crust of bread to stop the smell getting into the curtains; and yes, you could knock up a delicious little dinner à deux out of packets and tins, as long as you got rid of the evidence.
Such down-to-earth advice, practical, witty and, if necessary, sharp came equally from Mahinder Watsa in Mumbai, who realised that an increasing amount of his time as an obstetrician-gynaecologist was taken up with counselling people who knew little or nothing about the birds and the bees. In 2005, at 80, when counselling had long overtaken his medical practice, he became the daily “Sexpert” on the tabloid Mumbai Mirror. Could a woman get pregnant, ran one enquiry, if a man and a woman sleeping alone thought of making love at the same time? His answer: “There are no angels to carry your sperm to the person you dream of.”
Both she, and he, cut through the confusion with a strong sense of mission. Ms. Whitehorn was the first columnist in Britain to give a voice to ordinary, non-decorative, muddling-through women, and became the model for the dozens of confessional columns that followed. As for Dr. Watsa, his campaign, almost single-handed at the start, was to talk plainly and naturally to Indians about sex. From 1974, when he joined the national Family Planning Association, he promoted sex education in schools, trained teachers, wrote manuals and ran workshops, daring to raise against considerable hostility a subject that people too often wouldn’t face. Both columnists continued to a great age, thriving on long and generally happy marriages. Wisdom seemed to gather around them until both were national treasures.