Some interesting stuff we read, watched, and observed today morning…

Investing/Stock Market

• It’s very normal to find such magazine covers appearing in bull markets. They sell well, given the various biases they instantly spark in the brain of the reader..
  By the way, the average P/E of the 25 stocks mentioned in this report is 40x, and there are a few at 69x, 71x, and 85x. Let’s talk about wealth “creation”.  
• A nice post from Morgan Housel on the difference between a bubble and a cycle…
  

  Cycles are one of the most fundamental and normal parts of how markets work. They look like this:

   

  
  This cycle is self-reinforcing, because if assets didn’t get expensive they’d offer big returns, and offering big returns attracts capital, which makes them expensive. That’s why cycles are everywhere and we can never get rid of them.

   

  To me a bubble is when this cycle breaks. I have my own definition: It’s only a bubble if return prospects don’t improve after prices fall. It’s when an asset class offers you no hope of recovery, ever. This only happens when the the entire premise of an investment goes up in smoke.

• Just three things you need on your value investing checklist — good business, good price, and good management.
• It’s one of the ultimate truths when it comes to money – the art is not in making money, but in keeping it.
• Rahul Saraogi’s book Investing in India is a good read and offers an on-the-ground perspective on the country. Although it’s written to familiarize foreign investors with India and its culture, I think every Indian investor would find it immensely useful and informative. Here’s an excerpt from the book –
  

  In my experience in the Indian markets, companies that generate high returns on equity with little or no debt and generate cash from operations in excess of earnings consistently do very well over time. I have a preference for companies that are cash-generating machines and those that pay taxes. Companies that grow rapidly but that continuously need external sources of funding or those that require increasing amounts of working capital and generate less cash from operations than their reported earnings often have aggressive promoters and managements and often overstate the underlying realities of they businesses. Such companies face significant challenges in times of financial and economic stress.

  Saraogi’s conclusion about what makes a good investment in Indian markets isn’t much different from what Warren Buffett has been taking about for decades. Principles of value investing don’t change with countries, you see.

• A lot of people have asked us about a checklist for identifying companies that may turn around. We never had such a checklist, so it was a nice to find it in a post written by Swanand Kelkar of Morgan Stanley, whom we had interviewed for the Value Investing Almanack some time back. Swanand writes…
  

  Successful turnaround stories always make for interesting reading, such as Steve Jobs’ return to build Apple into one of the world’s greatest corporations or Lee Iacocca’s battle for Chrysler’s survival. Straightforward as it may sound, as portfolio managers we can assure you that predicting such winners is far from easy. Stock investors stand to reap outsized returns if they get it right but such opportunities are few and far between. Many stocks are pitched as turnaround stories but the experience is that maybe one in ten actually live up to the hype. The real skill then is to find the prince without having to kiss a hundred frogs.

  It’s a nice post if you are looking to build the skill of finding the prince (companies that will turn around) without having to kiss a hundred frogs (companies under trouble).

• Warren Buffett’s ground rules – Talk at Google by Jeremy Miller…

Reading/Thinking

• Here are one of the dozen things you can learn by reading The Success Equation by Michael Mauboussin…
  

  There’s a quick and easy way to test whether an activity involves skill: ask whether you can lose on purpose. In games of skill, it’s clear that you can lose intentionally, but when playing roulette or the lottery you can’t lose on purpose.

  Skill-Luck continuum is an imaginary linear scale where on the far right are activities that rely purely on skill such as running, swimming, chess, etc. On the far left are activities that depend on luck and involve no skill. Roulette or the lottery are few examples.

  Mauboussin writes that activities like chess rely almost wholly on a player’s skill. He explains that each sport has a different mix of skill versus luck and if you want to understand this point better read the book. You will note that in this picture below investing finds its home closer to luck than skill –

   

  
  Mauboussin argues that in skill dominated situations, following a good process almost always leads to a good outcome. On the other hand, in a luck dominated world a good process also leads to a good outcome but only over time.
• Yuval Harari is one of my favourite authors and his book Sapiens was the best book that I read in 2015. Here’s an interesting excerpt from the book…
  

  Chemists discovered aluminium only in the 1820s, but separating the metal from its ore was extremely difficult and costly. For decades, aluminium was much more expensive than gold. In the 1860s, Emperor Napoleon III of France commissioned aluminium cutlery to be laid out for his most distinguished guests. Less important visitors had to make do with the gold knives and forks. But at the end of the nineteenth century chemists discovered a way to extract immense amounts of cheap aluminium, and current global production stands at 30 million tons per year. Napoleon III would be surprised to hear that his subjects descendants use cheap disposable aluminium foil to wear their sandwiches and put away their leftovers.

  What if gold and diamond also meet the fate of aluminium one day?

Business

• Who hasn’t heard of billionaire businessman Richard Branson? His Virgin brand has presence in numerous industries. Branson is known to have started some five hundred companies. But do you know that he has also shut down two hundred of them that didn’t work? In their book Bold, Peter Diamandis and Steven Kotler, reveal an interesting insight about Branson’s strategy…
  

  Branson runs his empire like a competitive ecosystem – letting some companies live, letting others die, and always, ceaselessly, experimenting. He is quick to rapidly iterate his ideas, and quicker to shut down a failure.

  Branson’s way of runnings businesses is truly antifragile. It gives important clues for stock market investors also i.e., don’t get married to your stocks. Once you realise your mistake, cut your losses and move on to next idea. Branson says…

  I think it looks like entrepreneurs have a high tolerance for risk. But, having said that, one of the most important phrases in my life is ‘protect the downside.’ It should be one of the most important phrases in any businessperson’s life.

Life / Learning

• In her wonderful book, The Artist’s Way, Julia Cameron writes…
  

  As artists, we cannot afford to think about who is getting ahead of us and how they don’t deserve it. The desire to be better than can choke off the simple desire to be. As artists we cannot afford this thinking. It leads us away from our own voices and choices and into a defensive game that centres outside of ourselves and our sphere of influence. It asks us to define our own creativity in terms of someones else’s.

  This compare-and-contrast school of hitting may have its place for critics, but not for artists in the act of creation. Let the critics spot trends. Let reviewers concern themselves with what is in and what is not. Let us concern ourselves first and foremost with what it is within us that is struggling to be born.

  Comparison with others can arouse envy and propel an artist down the path which was never his. In art and in life, your race is always with yourself. Don’t compare yourself with anyone in this world. If you do so, you are insulting yourself.

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