Some of the most fascinating topics covered this week are: Business (Capital allocation guide for CEOs; Inside Saudi Arabia's $360 billion investment fund), Productivity (3 time management secrets you need to know), Technology (Even experts can't agree on whether technology is dangerous for kids), and Decision-making (Benchmarking isn't always good)
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: Business (Capital allocation guide for CEOs; Inside Saudi Arabia’s $360 billion investment fund), Productivity (3 time management secrets you need to know), Technology (Even experts can’t agree on whether technology is dangerous for kids), and Decision-making (Benchmarking isn’t always good).
Here are the ten most interesting pieces that we read this week, ended September 25, 2020-1) Capital allocation guide for CEOs [Source: Behavioral Value Investor] Capital allocation in key to success for any company. Capital allocation is both difficult and very important to a CEO’s job. Many CEOs were never taught a rational, first-principles approach to capital allocation prior to getting their job. Even founder-CEOs who built the business from scratch usually don’t have a lot of relevant capital allocation experience of managing a large, more mature enterprise. What’s worse, as the CEO you are supposed to be the leader, and it can be awkward to admit that there is a part of your job that you haven’t mastered.
So, what are the capital allocation don’ts? 1) Don’t confuse conventional with conservative; 2) Don’t ignore base-rate probabilities; 3) Don’t assume that because others agree with you that you are right; 4) Don’t use buzzwords and fancy lingo in communicating with your shareholders about important capital allocation decisions; 5) Don’t do things that don’t make sense from first principles, regardless of who else is doing them.
Also, you should seek out the mentorship of other CEOs who are already proven capital allocators. There aren’t many of those, but their advice can be invaluable as you build your own framework and struggle with specific decisions. Finally, don’t be afraid to seek the advice of thoughtful long-term investors in your company. Yes, they have never been a CEO of a public company, so perhaps they don’t know exactly what it is like to be in your shoes. However, they likely have seen many CEOs fail at capital allocation and a few succeed, and at the very least their interests are aligned with increasing the long-term intrinsic value per share of your company.
2) 3 time management secrets you need to know more than ever [Source: foxbusiness.com] Managing time in this uncertain time is the key to having a balanced professional and personal life. As a time management coach who has been working with coaching clients around the world throughout this year, Elizabeth Grace Saunders has seen that effective time management is even more important than ever. Here are her three secrets to managing time in 2020. a) Clarify your priorities: Investing your time in alignment with your priorities is always important. But during this time of extra strain and stress, having absolute clarity on what’s most important right now is even more critical. What you prioritize will depend on your situation. If you find that you’re stretched to the max between normal work and home responsibilities as well as your children doing remote learning, your primary goals may be simply getting your work done, trying to keep your kids on track, and getting some sleep and exercise.
b) Set realistic expectations: This is important so that you don’t end up unnecessarily frustrated. Given all that’s going on, expect everything to take longer to figure out and longer to complete. Mentally preparing yourself that things will take longer helps you not to get annoyed. And it helps you to know how much you can actually fit in a day. Maybe you can only get one thing done in an evening instead of three. Needing to adjust expectations is especially true if you have your children at home 24/7. Your work and just getting normal life things done will take much longer than if your kids were in school or in daycare.
c) Make simple routines: When you feel like you can’t control many things in your life, having some very simple routines that you can-mostly-count on can provide an incredible amount of comfort. They could be as simple as a time you wake up in the morning, when you have your morning coffee, the walk you take after work, or the time you wind down for bed. Decide on a few simple things that make you feel good and centered in your day and preferably are independent of external influences, meaning not something a governor could tell you that you could or could not do. Then integrate those into your lifestyle. These simple touchpoints can give you a sense of flow, normalcy, and stability even in the midst of change.
3) The growing fatigue with work from home [Source: Livemint] The current pandemic has made everyone work from home. If not everyone, at least most of them. So, will this trend of working from home continue even after the pandemic is over? Recently, real estate advisory Knight Frank (India) Pvt. Ltd. surveyed 1,600 technology professionals in India and found that 30% of them reported deterioration in productivity and work performance while working from home. A PwC study in the United States suggested that productivity during the pandemic was shored up by super achievers that masked a fall among the rest who struggled with a combination of physical and emotional issues while working from home.
The recent Mint-Bain India CEO survey, in which 105 CEOs were polled on the economy and business scenarios, underlined the temporary nature of remote working. Less than one-third of the CEOs saw over 25% their workforce continue to work from home, post Covid-19. In short, remote work is the present, not the future. The long-term outlook is work from office or a blended model where a minority works out of home. Infosys Ltd., India’s second-largest IT exporter, has over 95% of its workers working remotely at the moment. Depending on when the Covid-19 caseloads ebb, the company plans to get employees back to offices in a phased manner.
A number of companies appear to have tilted towards a hybrid working model, already. RPG Enterprises is allowing all sales employees to work from home permanently. Flipkart, the Essar Group, and the Indian Hotels Company Limited (IHCL) among other corporates are all contemplating the hybrid approach. If this model is to work, trust is the key. And micro management wouldn’t work either and leadership styles need adjustments.
4) How benchmarking impacts your decisions [Source: A wealth of common sense] Benchmarking is something that everyone, knowingly or unknowingly, uses to perform better. Will Danoff of the Fidelity Contrafund has one of the best long-term track records in the entire fund business, handily trouncing the S&P 500 over the past 30 years. In an interview, Barry Ritholtz asked Mr. Danoff why he wasn’t benchmarked to more of a growth-focused index such as the Nasdaq 100. Mr. Danoff said, “Yes. There’s a lot of truth to that. I am much more of a growth investor. I am, in my opinion, a capital appreciation fund with a growth bias. So, I do have a go anywhere — a large grow-anywhere component and it’s just the technology. It’s been such a powerful tidal wave that I’ve probably stayed in technology longer and bigger than I would have expected.”
How you choose to benchmark yourself in other areas of life can impact your decisions as well: a) How other people invest: People who brag about their investment success are often far more willing to share their successes than failures. Benchmarking yourself strictly against other people’s winning investment ideas will make you feel like a failure at all times. No one bats one thousand in this game. b) How other people live: When you see other people buying new cars, boats or other toys it can lead to a sense of entitlement. There’s a huge difference between buying stuff and being wealthy. Unfortunately, when you see those around you buying stuff it’s hard to avoid the temptation because we benchmark ourselves against the stuff we see and wealth isn’t something you can see parked in someone’s driveway.
c) Someone else’s career: We’ve all spent some time day-dreaming what it would be like rich and famous, just like stars or business tycoons, but there is a downside to being one of the most recognizable people on the planet. It’s a cliche at this point to say that money doesn’t buy happiness because money sure can solve a lot of problems. But it sure doesn’t buy contentment or make it any easier to stay out of your own head sometimes. Benchmarking yourself against people who are more successful than you could provide the motivation to get better but it could also blind you to the fact that no one’s life is perfect.
5) 7 strategies for better group decision-making [Source: HBR] Group decision-making results in the clash of minds. Larger pools of knowledge are by no means a guarantee of better outcomes. This article highlights seven simple strategies for more effective group decision-making. a) Keep the group small when you need to make an important decision: Large groups are much more likely to make biased decisions. Research shows that groups with seven or more members are more susceptible to confirmation bias. b) Choose a heterogenous group over a homogenous one (most of the time): Various studies have found that groups consisting of individuals with homogeneous opinions and beliefs have a greater tendency toward biased decision making. Teams that have potentially opposing points of view can more effectively counter biases.
c) Appoint a strategic dissenter (or even two): One way to counter undesirable groupthink tendencies in teams is to appoint a “devil’s advocate.” This person is tasked with acting as a counterforce to the group’s consensus. d) Collect opinions independently: To get the most out of your team’s diverse capabilities, it’s recommended to gather opinions individually before people share their thoughts within the wider group. e) Provide a safe space to speak up: If you want people to share opinions and engage in constructive dissent, they need to feel they can speak up without fear of retribution. Actively encourage reflection on and discussion of divergent opinions, doubts, and experiences in a respectful manner.
f) Don’t over-rely on experts: Experts can help groups make more informed decisions. However, blind trust in expert opinions can make a group susceptible to biases and distort the outcome. g) Share collective responsibility: Finally, the outcome of a decision may be influenced by elements as simple as the choice of the group’s messenger. We often observe one single individual being responsible for selecting suitable group members, organizing the agenda, and communicating the results. When this is the case, individual biases can easily influence the decision of an entire team. The better the quality of the decision-making process and the interaction between the group members, the greater your chances of reaching a successful outcome.
6) Even experts can’t agree on whether technology is dangerous for kids [Source: Quartz] Technology has developed a lot in the past two decades. And that has radically transformed what childhood looks and feels like, and parents are having a hard time adjusting. The truth is that we don’t yet fully understand the effect that living, learning, loving, and making friends in a digital world is having on children. “There is a lot of discrepancy, and it’s not exactly clear because this is all brand-new,” says Adam Pletter, a child psychologist and founder of iParent 101. Excessive screen time in children has been associated with everything from developmental delays to behavior problems and learning disabilities—though it’s important to note that many of the studies showing these links document correlation, not causation.
Beyond the mental health and cognitive impacts, there are also very real dangers online: While young kids are up in their bedrooms, on their phones or laptops, not drinking or partying, they could be hanging out on Houseparty, an app that allows them to join a virtual “party” by video-chatting groups of people, including total strangers trolling around the Internet for access to minors. They could be exposed to violent and offensive language on Discord, a chat room for gamers, for example, or watching hours on end of conspiracy videos on YouTube. So, after reading this, if you are planning to delete all the apps on your kid’s phone, then you need to know that even on these questions, experts disagree.
Psychiatrist Richard Friedman wrote that “there is little evidence of an epidemic of anxiety disorders in teenagers,” and that the evidence that does exist mostly relies on parents or kids self-reporting their own feelings or their kids’ feelings. Many other experts note that anti-screen hysteria is not always justified. They say screens and the internet, like anything else, should be used in moderation; in excess, they can harm more than they help. “When children use technology,” read a recent New York Times headline, “let common sense prevail.”
7) Inside Saudi Arabia’s $360 billion investment fund [Source: barrons.com] In this interview, Yasir al-Rumayyan, the governor of the Saudi Arabia’s $360 billion sovereign-wealth fund, the Public Investment Fund (PIF), talks how he wants to wean the kingdom off its reliance on oil, which accounts for nearly two-thirds of its revenue. Al-Rumayyan, 50, was the head of an investment bank in Riyadh. Now, he is also the chairman of Saudi Aramco and a top adviser to Crown Prince Mohammed bin Salman. On their investment strategy, Al-Rumayyan says, “Historically, we were only in Saudi Arabia. We started in 1971 and invested for developmental purposes only. In 2015, we changed our strategy. The board was changed, even the reporting lines were changed. We did a full diagnostic. What have we been doing in the past decades? We started with benchmarks—what are other long-term investment funds and sovereign-wealth funds doing? And what do we want to do? We looked at the diagnostic, the benchmark, and we saw the gap.”
And that’s how they came up with six pools of investments. Two of them are international, and four of them are domestic. Initially, their investment was 98% in Saudi and less than 2% international. Today, it’s about 82% Saudi and about 18% to 20% international. The strategic asset allocation that they want to have is 25% international versus 75% domestic. Talking about the kind of investor they are, he says, “If you look at most of the asset managers that we are dealing with, we are the top one or two investor. We don’t like to put in $50 million or $100 million. We like to be the top investor, or one of the top two investors, in that fund. And that’s the case right now.”
When asked what one would be surprised by if he travels to Saudi Arabia in 10 years, he says that the land of Saudi Arabia is like a big secret. Everybody thinks Saudi Arabia is all desert, but it’s more than that. “The population of Saudi is leaning toward the younger generation. Generation Y and newer generations—I think these generations are more global generations. So, in 10 years’ time, I think most of the people you’ll see in Saudi Arabia, they’re more global citizens. You cannot tell them apart from the people that you see in New York or London or Mumbai or anywhere else in the world. So, they’re going to be amazingly surprised by the people, by the proposition that the Saudis have to offer to others, like companies, infrastructure, quality of life.”
8) Investors wonder if the 60/40 portfolio has a future [Source: Financial Times] The traditional 60/40 portfolio, mix of equities and bonds that has been a mainstay of investment strategy for decades, is at risk of becoming obsolete as some investors predict years of underperformance by both its component parts. A “nuclear winter” beckons for the 60/40 portfolio in the 2020s, said Vincent Deluard, global macro strategist at StoneX Group, who predicts inflation-adjusted returns could be just a fraction of the 8.1% enjoyed in the past decade. “It is hard to see where your equity return comes from,” he said, and “low bond yields will not help offset a poor performance from the share market. It’s just the math.”
Developments this year have prompted warnings on the outlook from many of the biggest names in the investing world. Tony James, vice-chairman of Blackstone, recently predicted a “lost decade” for stocks as companies struggle to recover from coronavirus. Stanley Druckenmiller, a veteran of the hedge fund industry, said markets were suffering from a “raging mania” after interventions by the Federal Reserve caused the US stock market to add back all its coronavirus losses and more.
The forward price-to-earnings ratio for the S&P 500 stands at 21.7 times, according to FactSet, versus an average of 15.4 times over the past 20 years, with tech valuations among those looking particularly stretched. Analysts at Bernstein wrote that valuations imply returns of about 5% per annum on the S&P 500 for the next decade and that “today's unprecedented low level of yields means that future returns are likely to be low and interest-rate risk is higher than ever before”. Investment strategists have suggested alternative sources of stable income to replace Treasuries, although all have additional risks that US government debt does not. The list includes private equity, real estate, infrastructure, inflation-linked bonds and dividend-paying equities. David Kelly, chief global strategist at JPMorgan Funds, said “the standard 60/40 portfolio is not very well suited for today’s financial market environment”.
9) So many young adults living with parents will have ‘serious consequences’ for financial markets: Deutsche Bank [Source: Yahoo Finance] Mostly as a result of being priced out of the housing market, the majority of young adults under 30 are living with their parents. While this trend was evident prior to the coronavirus shutdown, the pandemic has exacerbated that trend by packing the one-two punch of making it harder for young college graduates to land a job in a recession while simultaneously triggering layoffs that disproportionately impact them. According to a new report by Deutsche Bank, a worsening generational wealth divide risks ushering in a new “Age of Disorder.” “The widening generational divide should be a key source of alarm for investors, financial markets and society as a whole,” wrote Deutsche Bank analyst Henry Allen, adding that there could be “serious consequences for asset markets” if the gap between older and younger Americans’ wealth isn’t addressed.
The past decade has been brutal for young adults. The 2008 financial crisis led to a nearly 20% unemployment rate for Americans aged 16-24. While their employment prospects gradually improved, the coronavirus pandemic has wiped away such progress. “The pandemic sent youth unemployment to its highest levels in over 70 years of recorded data,” Allen wrote. The unemployment rate for young Americans was 26.9% in April at the height of the government coronavirus shutdown related layoffs, compared to 14.7% for the general population. While the youth unemployment rate has since dropped to 18.5% in July, it continues to surpass the 10.2% rate for the overall workforce during that same time period.
Making matters worse, historical evidence has shown that the effects of recessions are long lasting for young adults as their wages “suffer for years afterwards” and they become far less picky when it comes to accepting job offers,” wrote Allen. Deutsche Bank warns of dire consequences for investors and financial markets if this trend continues. “Investors can expect an abrupt, and significant upheaval in housing and asset markets, tax systems, climate policy, and many other areas,” Allen wrote. “This scenario becomes more likely towards the end of this decade as Millennial and younger voters start to exceed those in older generations.”
10) More neurotic, less agreeable, less conscientious: How job insecurity shapes your personality [Source: The Conversation] If you are having a job, you are lucky! At least that’s what this article says. With unemployment at its highest rate in three decades, almost a million Australians are experiencing the anxiety of being out of work. A large-scale study, tracking the experience of more than a thousand Australians over nearly a decade, suggests job insecurity over a prolonged period can actually change your personality. To explore the possible personality effects, the study used data from the Household, Income and Labour Dynamics in Australia survey, a national survey that collects information from a large and representative sample of Australians each year.
They analysed nine years of data from 1,046 Australians working in a range of occupations and professions. Every four years (years 1, 5 and 9) participants completed a well-established personality measure, asking them to describe their characteristics against adjectives such as “talkative”, “moody”, “warm”, “orderly” and “creative”. So, what did they find out? The analysis showed that workers who experienced job insecurity over several consecutive years became less emotionally stable, less agreeable and less conscientious. The three personality traits affected most severely by chronic job insecurity are those most associated with healthy personality growth. As we age and mature, we generally become more emotionally stable, more agreeable and more conscientious. The research shows chronic job insecurity can stunt this emotional growth, interrupting the healthy mellowing of our personalities.
So, what should one I do? The first step is to “know thyself” and be aware of the pitfalls, then to cultivate a growth mindset by accepting change and being open to new opportunities. Focus on things you can control. Look for solutions rather than dwell on problems. Be willing to learn new skills or take on new tasks. Research has shown that being proactive in managing your career, such as plotting a career plan, actively building a network of contacts for career advice, and talking with peers and boss about future opportunities, all help to cope with insecure work conditions.