Saturday, June 4, 2016

Capital Cycle

why do investors and corporate managers pay so little attention to the inverse relationship between capital spending and future investment returns? The short answer is that they appear to be infatuated with asset growth. Corporate expansion fires the imagination of both managers and shareholders. This mistaken fetishism for growth is reflected in the historic poor performance of stocks with higher growth expectations (higher valuations). Behavioural finance suggests that investors (and corporate managers) are prone to overconfidence when it comes to making forecasts. As Yogi Berra says, "It's tough to make predictions, especially about the future." As we shall see, this is especially the case when it comes to predicting future levels of demand

eg. PSU banks, Infrastructure as a sector is flawed investment theme, 

The main behavioral explanation for value stocks' long-run outperformance is excessive extrapolation by investors of multiyear growth rates. In reality, growth mean reverts faster than the market expects, making growth stocks more likely to disappoint.

eg. Why does Indian market prove otherwise? Growth has almost always worked out well for investors

Focus on supply than demand:

A rash of IPOs concentrated in a hot sector is a red flag; secondary share issuances another, as are increases in debt. Conversely, a focus on competitive conditions should alert investors to opportunities where supply conditions are benign and companies are able to maintain profitability for longer than the market expects. An understanding of competitive conditions and supply side dynamics also helps investors avoid value traps (such as US housing stocks in 2005–06).

eg. Microfinance in the Public markets and Tech startups in the private space

 The value/growth dichotomy is false. Companies in industries with a supportive supply side can justify high valuations

eg. How many branded consumer goods companies are coming up everyday?




Capital returns

Assessing management...

3 Value Investing World / by Joe Koster 

/ 2 days ago

From Capital Returns (the excerpt below was from a Marathon letter in June 2014, and provides some good pointers to help in assessing management teams):

Over the last two years, Marathon has engaged in nearly two thousand meetings with company management. This activity, along with preparation and the writing of notes, consumes most of the investment team's working hours. Yet many commentators view such meetings as a waste of time. One can see their point. Managers are now so well prepared by PR advisers that meetings can seem like a promotional exercise. Investors still turn up. But for many of them, we suspect, their purpose is to gain an informational advantage about the short-term outlook for the business – in our view, a fruitless endeavour. Given the long-term nature of our investment approach, capital allocation is of paramount importance. The prime purpose of our company meetings is to assess the skill of managers at investing money on behalf of their shareholders. 

Meeting management is not a scientific process. Rather, it involves making judgements about individuals, an activity which is prone to error (witness the rate of divorce). We go into meetings looking for answers to questions such as: does the CEO think in a long-term strategic way about the business? Understand how the capital cycle operates in their industry? Seem intelligent, energetic and passionate about the business? And interact with colleagues and others in an encouraging way? Appear trustworthy and honest? Act in a shareholder-friendly way even down to the smallest detail? 

To assess such questions, the format of the meeting is important. In general, the smaller the number of people in attendance the better. Having fewer attendees on both sides of the table – large meetings often include company managers, investor relations personnel, financial PR types, stock brokers, and other hangers-on – encourages a more open and friendly dialogue. It also reduces the risk of attendants showing off, which can result in the conversation becoming hopelessly bogged down in detail. A new and dreadful manifestation of the quest for redundant detail is the "fireside-chat" format used at many sell-side conferences, which typically involves a CEO being quizzed by the specialist analyst. The conversation generally turns into a "deep dive" into factors impacting short-term earnings, which can be of no interest to long-term investors. Questions of this sort can be ludicrous. At a recent conference we attended, the boss of a major industrial firm was asked whether we could expect that same pattern of seasonality as the year before. 

Large delegations from a company can be a sign that the CEO lacks confidence, resorting to a safety-in-numbers approach. This is often the case when dealing with companies in difficulty, as well as with many Japanese, Spanish and Italian firms. Contrast this with Geberit, the highly successful Swiss plumbing equipment company, whose CEO tends to arrive alone at our offices, having seemingly made his own travel arrangements, fitting us in between meetings with plumbers, architects and other customers. 

When it comes to discussing a company's strategy, it is alarming how frequently one finds managers confused on the topic. Too often, the CEO mistakes a short-term target – say an earnings per share target or a return on capital threshold – with a strategy. "Our strategy is to deliver a 15 per cent return on capital," they say. Real strategy, whether military or commercial, involves an assessment of the position one finds oneself in, the threats one faces, how one plans to overcome them, and how opponents might in turn respond. During his tenure at General Electric, Jack Welch required managers of GE's divisions to prepare a few simple slides describing their operating environment in terms of: what does your global competitive environment look like? In the last three years, what have your competitors done to alter the competitive landscape? In the same period, what have you done to them? How might they attack you in the future? What are your plans to leapfrog them? 

Getting CEOs to open up about their competitors can be difficult. They fear that too much openness may lead to a breach of confidentiality (professional investors are a thoroughly untrustworthy bunch) or that revelations about the firm's true market dominance might raise anti-trust issues. Besides, many managers are so fixated on growth, they fail to anticipate the likely competitor response (another example of the "insider view"). Still, on occasions something useful slips out. When a management team compliments a competitor, this can be like gold dust to investors. Learning that DMGT, the UK media company, found it hard to compete with Rightmove, the property listings website, contributed to our decision to invest in the company. 

Discussing how a firm uses investment bankers and how it makes acquisitions (e.g., whether it prefers friendly negotiated deals to contested auctions) can be revealing. Unexpected diversifications into an unrelated area may suggest that something is not right in the core business. Views on share buybacks can also be highly informative. Very few CEOs see this as a legitimate investment on a par with capital expenditure or M&A decisions, presumably due to an aversion to shrinking any aspect of the company. Many fear that buybacks are an admission that the company has run out of investment ideas. On this subject, we like to hear managers justify buybacks based on an internal valuation model, as this can then lead to an interesting discussion about valuation of their business. 

Forming impressions of the CEO's character, intelligence, energy and trustworthiness can be gleaned using a variety of questioning techniques. Intellectual honesty can be tested by asking the CEO to pick out what he or she thinks is important. To unsettle the more promotional CEOs, we like to ask what is not working and wait to see whether they have given the matter much thought. Sometimes the boss will seek to evade responsibility by asking a colleague to talk about a problematic area of the business. The CEO in denial often blames problems on a divisional boss and follows up by saying that management has now been changed. How the chief executive interacts with colleagues, such as the CFO or investor relations personnel, often reveals their leadership qualities. We like to see signs of individual curiosity at meetings – revealed, for instance, by their taking an interest in our own business. Signs of humility – say a recognition of past mistakes – give us some confidence that the chief executive has a grip on reality. 

Appearances can also be revealing. A CEO of an industrial company who wears expensive shoes, or a snappy suit, is more likely to enjoy the expensive company of investment bankers than spend his time visiting factories and customers. Signs of vanity are generally off-putting. One CEO was spotted before a meeting carefully adjusting his elaborate bouffant hair style in our washroom. Several months later, he launched a large and foolhardy acquisition. 

Meetings can also provide insights into a management's approach to costs. This frequently comes out in discussions about compensation. Learning about something as mundane as corporate travel policy can also tell us a lot. After Brazil's AmBev took over the Belgian-based Interbrew, its managers told us about a new edict limiting business-class flights to those lasting six hours or more. This insight into corporate frugality was a pointer to the same management's ability to cut costs at Anheuser-Busch – which prior to the merger sported a fleet of eight Falcon executive jets – and increase the US beer company's operating margins by a massive ten percentage points (between 2005 and 2011). We were equally impressed to learn that senior executives at another company preferred the underground to chauffeured limousine when travelling around London. The number of IR representatives in attendance is a good indicator as to how carefully a company counts its pennies. Of course, we have made mistakes when assessing management teams. But, in our view, trying to spot a great manager remains a game very much worth playing.

Sunday, May 15, 2016

A mind for numbers


  • Procrastination is the key for math, creativity and investing!
  • Combine bursts of focus with frequent breaks - a bit like chess players taking breaks in the midst of an intense game
  • Huge dividends for focused intensive work
  • Solitary walk is worth a week in front of the computer trying to notch up solutions - I agree:0
  • Focus -> Diffuse->Focus-> only problem is Focus with smartphones/mails/watsapps et al
  • Edison would hold a marble in his hand and doze off in a chair sitting until the marble bounced off the floor and got him out of his nap
  • Keep your working sessions short - much like working out at the gym
On Creativity:

  • ok to be disagreeable, external feedback critical to improve, attempting to be creativity bolsters creativity, redo if you falter the first few times
  • Learning a new language is a mumbo jumbo of focused attention followed by a super diffused mode of plugging the words into one's conversation
  • Key to assimilation - Move chunks of interpretation into long term memory not so much into working memory


Tuesday, March 1, 2016

Saturday, February 27, 2016

Multi tasking

A few weeks ago, I returned to the classroom of Dennis Dalton, the most important college professor of my life. From the back of an amphitheater seating several hundred students, I realized how much things had evolved at Columbia and Barnard. The lecture hall was now equipped with a wireless sound system, webcams, video projectors, wireless internet. Students were using computers to record the lecture and to take notes. Heads were buried in screens, the tap tap of hundreds of keyboards like rain on the roof.

On this afternoon, April 16, 2008, Dalton was describing the satyagraha of Mahatma Gandhi, building the discussion around the Amritsar massacre in 1919, when British colonial soldiers opened fire on 10,000 unarmed Indian men, women and children trapped in Jallianwala Bagh Garden. For 39 years, Professor Dalton has been inspiring Columbia and Barnard students with his two semester political theory series that introduces undergrads to the ideas of Gandhi, Thoreau, Mill, Malcolm X, King, Plato, Lao Tzu. His lectures are about themes, connections between disparate minds, the powerful role of the individual in shaping our world.

Dalton is a life changer, and this was one of his last lectures before retirement.

Over the course of a riveting 75-minute discussion of the birth of Gandhian non-violent activism, I found myself becoming increasingly distressed as I watched students cruising Facebook, checking out the NY Times, editing photo collections, texting, reading People Magazine, shopping for jeans, dresses, sweaters, and shoes on Ebay, Urban Outfitters and J. Crew, reorganizing their social calendars, emailing on Gmail and AOL, playing solitaire, doing homework for other classes, chatting on AIM, and buying tickets on Expedia (I made a list because of my disbelief). From my perspective in the back of the room, while Dalton vividly described desperate Indian mothers throwing their children into a deep well to escape the barrage of bullets, I noticed that a girl in front of me was putting her credit card information into Urban Outfitters.com. She had finally found her shoes!

When the class was over I rode the train home heartbroken, composing a letter to the students, which Dalton distributed the next day. Then I started investigating. Unfortunately, what I observed was not an isolated incident. Classrooms across America have been overrun by the multi-tasking virus. Teachers are bereft. This is the year that Facebook has taken residence in the national classroom.

Students defend this trend by citing their generation’s enhanced ability to multi-task. Unfortunately, the human mind cannot, in fact, multi-task without drastically reducing the quality of our processing. Brain activation for listening is cut in half if the person is trying to process visual input at the same time. A recent study at The British Institute of Psychiatry showed that checking your email while performing another creative task decreases your IQ in the moment 10 points. That is the equivalent of not sleeping for 36 hours—more than twice the impact of smoking marijuana. But to be honest, on the educational front, multi-tasking feels to me like a symptom of a broader sense of alienation.

I know what it is like to be disengaged. In fact, the crisis that played a large role in ending my chess career was rooted in becoming disconnected from my natural love for learning. 

Throughout my youth, I had been a creative, aggressive chess player. I loved the battle, and wild, dynamic chess felt like an extension of my being. Then, in my late teens a coach urged me to play in the opposite style, his style of quiet, positional, cold-blooded prophylaxis. Instead of cultivating my natural strengths, he boxed me into the cookie cutter mold he knew. In time, I lost touch with my intuitive feeling for chess, and without an internal compass I foundered in the swells of fame and high-pressure competition.

I see myself in the eyes of so many kids today. Too many primary, elementary, and high schoolers are being boxed into the mold of conformity required by big classes, competition for grades, tests with multiple-choice questions.

The first grader who leaps to his feet when he figures out the math problem is diagnosed as ADHD and medicated to sit quietly with the class. Young learners have immense pressure to perform, to get good grades, but no one is listening to the nuance of their minds. They feel suppressed, they are suppressed, and by the time students get to college, they have become disconnected from the love of learning. Then they are asked to read 1000 pages in a week and skimming is the only solution. Many of the students who actually were engaged in the Gandhi lecture, the ones who wanted to learn more than to shop, were taking notes on their computers in a frenzy, researching events online while Dalton described them, typing every last word of the lecture. But Dalton had already supplied them with a detailed course packet with all the relevant dates and facts. His classroom is an environment for reflection, introspection, and letting resonant themes sink into your being. Unfortunately, to these college students, the notion of delighting in the subtle ripples of learning is almost laughable. Who has the time?

The societal implications of this educational crisis are huge and the issue must be addressed creatively.

We cannot afford to lose a generation to apathetic disengagement. Part of the responsibility lies in public policies like No Child Left Behind, the standardized tests that are turning education into a forced march, and a culture that bombards us with so much stimulation that it is difficult to know what to focus on. But part of the burden also lies with parents, teachers and coaches, and with students themselves. I recently tried to persuade two smart 11-year-olds to give up video games for three weeks. One agreed to the experiment and also agreed to send me a description of how the process felt. The other simply couldn’t imagine life without the PSP, even for a day. Here was an eleven-year-old self-proclaimed incorrigible video game addict!

This story has a happy ending. In the final month of classes, Dennis Dalton discussed the issues of multi-tasking with his students, and many responded. Last week when I went back to hear the final lecture of Dalton’s Barnard career, there were only a few kids surfing the internet—nearly all the students seemed riveted. Many told me they were relieved to have turned off their computers and relaxed into listening. A number of my old classmates came, and afterwards we threw a party for our teacher. After four decades inspiring college minds, he has decided to nip apathy in the bud by teaching younger kids. He will start with high school, but Dennis Dalton, one of our culture’s greatest minds, dreams of teaching kindergarten.

Afterword from Josh:

Thanks to all of you for the powerful responses. I want to address a couple of the issues raised.

We obviously live in a world that bombards us with information, and we feel the need to respond to stimulus as it comes in. The problem with this is that we get stretched along the superficial outer layers of many things. I believe in depth over breadth in the learning process. Let’s say we have three skills to learn. The typical approach is to take them all on at once. It is much more effective to plunge deeply into one, touch Quality, and then transfer that feeling of Quality over to the others. A martial artist, for example, should internalize one technique very deeply instead of trying to learn 10 or 15 superficially.

This approach engages the unconscious, creative aspects of our minds, and we start making thematic connections which greatly accelerate growth. It is also important to point out that deep presence is required for a state of neural plasticity to be triggered—our brain does not re-map effectively when we are skipping along the surface.

As for Jose’s question—“How do you remain focused all the time?”—you don’t. It’s useful to build triggers for the zone, so you can slip into it at will. Then, once we know we can attain a state of intense concentration, we are free to let it go and recover.

I learned this lesson in my late teens/early twenties trying to stay concentrated for 8 hours a day, two weeks at a time in world chess championships—I would burn out. When I started taking mini breaks, my endurance and quality of focus surged. Stress and recovery should be our rhythms, and physical interval training can be an excellent tool for improving mental recovery. One of many problems with multi-tasking is that the frenetic skipping leaves little room for relaxation, and thus our reservoir for energetic presence is constantly depleted.

Tim, now I think it’s important for us to home in on the root of the problem. Multi-tasking, in my opinion, is just a symptom of a broader cultural disconnect that emerges from too much rigidity and too little creativity in our educational and corporate worlds. If we love what we are doing, odds are we will want to focus on it. So the solution is two pronged—help people discover the love, and arm them with strategies to zone in when they want to. The second I addressed above. The first, I will tackle below:

The path to mastery and to engagement is highly individualized—this is a truism that much of our educational system ignores. Those who succeed at the elite levels of any discipline have built relationships to learning around subtle introspective sensitivity. They understand how their minds work, and both cultivate strengths and take on weaknesses through their unique natural voice. They have learned to open communication between their conscious and unconscious minds, and construct repertoires around moments of creative inspiration. They have built triggers for their peak performance state, learned how to funnel emotion into deep focus, turned adversity to their advantage as a way of life—and they have done all of this in a manner and language that feels natural to them. That is how they seem so unobstructed, so fluid…they are just being themselves. Like children.

My road from innocence to alienation to a renewed childlike love for learning is the catalyst for my writing, my educational nonprofit, and my commitment to helping kids shine. As parents, teachers, and coaches, we must reach children when they are young, nurture their natural curiosity, help them understand their minds. Teachers have a responsibility to listen first—is a child auditory, kinesthetic, or visual? Are they naturally extroverted or introverted? What excites them? What gets their creative juices flowing? How can we take that unique potential and help it grow? How can we help our child enjoy learning instead of being paralyzed by external pressures?

In my case, I had to let go of a life’s work and start over. It wasn’t until I left chess behind and became a beginner again, meditating, studying philosophy and psychology, and ultimately taking on my second discipline, Tai Chi Chuan, that I began to regain a feel for the art within the learning process. I had to release myself from the desperate need to live up to the expectations of others, and in its place grew presence to a natural creativity that had been smothered by baggage. I started discovering connections again, chess and the martial arts became one in my mind, and I could transfer my ideas, my feeling of Quality from one to the other. Learning became an expression of my being. After years of slogging, I was being true to myself once more. Hopefully, the lessons gleaned from the painful end of my chess career can help others avoid similar pitfalls—and perhaps my rediscovery of a passion for learning holds some solutions to the crisis we face in our schools.

A note for teachers and parents: I am researching the effect of video games on young minds. If you think it might be a healthy experience for your kids, please ask them to give up video games for two or three weeks, and write me about the experience at TheArtofLearning(at)gmail(dot)com.

Thank you!


-Josh Waitzkin

Tuesday, February 9, 2016

Technology Investing

In the last 7-8-years since we have been investing, we have invested in a very diverse range of companies, it has not just been limited to classifieds or one or two sectors alone.

We have got to a point where we are converging and focusing. So, for example, we are reluctant to do e-commerce although we have done ‘Happily Unmarried’ and that is tracking well and we continue to support that. But other than that we are most likely going to stay away from e-Commerce.

We have done 99labels earlier if you recall. We like the Information Arbitrage businesses, we like businesses that will have some technology build on IP we like Classified businesses, we like businesses where we enable handshakes we do not like businesses where we carry inventory and so on.

So there are patterns that we sort of follow, but having said that it is a good management team, good company scaling up well, good gross margins, high operating leverage, marketed on its space we would look at it, whether or not we have our internal competency in that area or not.

Source: Sanjeev Infoedge earnings call

Saturday, January 30, 2016

Past Cycle - Kenneth Andrade

How is the current cycle placed compared to what happened in the last two decades?
India pulled through in the last cycle because of the global recovery. The capacities [in the 1990s] around textiles, metals and other commodities gave companies the ability to price products in the international market in dollar terms. I remember steel prices going all the way down to $160 per tonne between 1998 and 2000 and then rally to $1,000 per tonne midway through the last decade. This, plus the rupee depreciation, helped these companies/assets become financially solvent in 2008, a recovery exactly a decade from where these assets got laden with financial excesses (high debt and low equity). Large commodity companies, notably Tata Steel, had RoEs in excess of 40 percent for almost two years, something they had not seen for a very large part of the company’s history.

In short, India depreciated itself out of the problem in the last cycle.

However, power and fertiliser plants set up in that era did not see as much benefit compared to export-oriented companies or firms which manufactured commodities, which linked their prices to landed costs. Power and fertilisers were sold in the local market which was rupee-denominated and they clearly could not make supernormal profits to get through the excesses of the ’90s. 

We have a larger part of the latter problem this time around. Infrastructure assets have to earn revenues based on the earning capacity of the domestic economy. They are rupee-linked. So even if there is depreciation of the currency, a lot of these companies will not see a rise in turnover or asset prices connected to the fall.  

Another thing that does not help is that India again had a number of commodity companies that acquired assets at the peak of the cycle, and all through debt. This plays out very negatively at a time when commodity prices have virtually halved in value.

Read more: http://forbesindia.com/article/investment-guide-2016/choose-the-volatility-you-are-happy-to-live-with-kenneth-andrade/42027/2#ixzz3yi03xxOy