Ten interesting things that we read last week

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At Ambit we spend a lot of time reading articles that are not directly relevant to Indian stocks. However, since the Indian economy is now umbilically linked to its global counterparts, the articles that we come across have relevance for Indian stocks and the Indian economy. In that context, this report contains the ten most interesting pieces that we read this week.

Here are the ten most interesting pieces that we read this week, ended February 10, 2017.

1) How the Bogle model beats the Yale model  [Source: awealthofcommonsense.com]
A comparative study of endowment funds’ performance vs. simple Vanguard index (called Bogle model) reveals interesting insights. The Bogle Model portfolio was in the top quartile and even in the top decile of endowment returns. This is insane when you consider the depths these universities will go to try to beat the market and how sophisticated they are in the eyes of other professional investors. They invest across asset classes (including private equity and timber!), employ leverage, use the biggest and most connected consultants and the vast majority of these funds still fail to beat a low-cost Vanguard index fund portfolio. The asset allocation of the endowment funds suggest that they have gone all-in on the Yale Model, which relies heavily on alternative investments. Funds with over $1 billion have the majority of their portfolio in alts, but even funds in the $51-100 million range have almost a quarter of their assets in these complex investment vehicles. Needless to say, it hasn’t paid off very well lately. While it is possible that index funds have simply had a better environment in this cycle, the author believes the Yale Model is going to be a failure for all but a select few top notch institutional investment programmes going forward. The reason: the low-hanging fruit has been picked. The premiums once reserved for those willing to look in the private markets have compressed substantially. Additionally, costs are still prohibitive and the increased competition for money managers in the institutional space has yet to really drive down costs like we’ve seen in the retail world. The key takeaway according to him is not about active vs. passive investing. It’s about simple vs. complex, operationally efficient investment programmes vs. operationally inefficient investment programmes and high-probability portfolios vs. low-probability portfolios.

2) Warren Buffet – thoughts on market forecasting (1966 partnership letter)  [Source:valuewalk.com]
As a value investor, one of the most important free investing resources is Buffett’s earliest partnership letters. This piece highlights Berkshire’s 1966 partnership letter which contained his views on ‘market forecasting’. Few key statements by Warren Buffet from that letter:  a) ”The course of the stock market will determine, to a great degree, when we will be right, but the accuracy of our analysis of the company will largely determine whether we will be right” b) “For our retail investments what really counts is ‘whether December is better than last December by a margin greater than our competitors’ and what we are doing to set the stage for future Decembers” c) ”If we start deciding, based on guesses or emotions, whether we will or won’t participate in a business where we should have some long run edge, we’re in trouble. We will not sell our interests in businesses (stocks) when they are attractively priced just because some astrologer thinks the quotations may go lower even though such forecasts are obviously going to be right some of the time. The availability of a quotation for your business interest (stock) should always be an asset to be utilised if desired. If it gets silly enough in either direction, you take advantage of it. Its availability should never be turned into a liability whereby its periodic aberrations in turn influence your judgement”

3) Lies, damned lies and the dreaded happiness at work survey [Source: Financial Times]
Are surveys really the best way to gauge dissatisfaction at work? The author highlights a Gallup survey that has been running annually since 2000 as a case in point. According to the pollster-cum-HR-adviser, nearly 20% of the US working population is “actively disengaged”. They act out their unhappiness and undermine the accomplishments of their engaged brethren. A further half of the workforce is “not engaged”, sleepwalking through the day and “putting time — but not energy or passion — into their work”. As per the author, the harm such a practice can do if it’s taken at face value is part existential, part practical. On the existential end, it gives the impression that things are worse than they are, which doesn’t benefit anyone. Most national and international surveys carried out by governmental bodies find that 80% or so of the respondents are “fairly satisfied” or “very satisfied” with their jobs. On the practical end, the figures on disengagement may discourage management from making improvements. Why bother if it’s truly that bad? If only 30% of employees are with you? While surveys about job satisfaction are important, the author believes putting together a meaningful method and survey design is difficult for such a complex topic and there is little agreement on best practice. Nevertheless, from the data we have it is generally agreed that higher job satisfaction is correlated with more autonomy and lower “task intensity”, meaning less pressure.

4) Brexit as a game of chicken [Source: timharford.com]
British economist Tim Harford in this piece summarises what he believes would’ve been acclaimed economist Thomas Schelling’s insights on the Brexit negotiations. First: To be an effective negotiator often means accepting some risk of disaster. He likens this scenario to the game of “Chicken”, in which two leather-clad rebels get into their cars, and drive towards each other at a furious pace. The first one to veer off the road loses his dignity, unless neither of them swerve, in which case both of them will lose a lot more than that. While it’s an idiotic game, it teaches us that you can gain an advantage by limiting your own options. Both the UK and the EU are currently playing this game without budging. Second: There’s a difference between deterrence and what he called “compellence”. Deterrence dissuades action, but compellence means persuading or threatening someone so that they do act. The process specified under Article 50 leaves the UK in the awkward position of trying to achieve compellence. The default option is the car crash, a disorderly fracture with the EU. Anything else requires all 28 countries involved to take prompt constructive action. May and her chancellor Philip Hammond have made some (faintly) threatening noises about how the EU should play along, but such threats can only work if they compel an energetic and active response. While a broad, constructive trade agreement is in everyone’s interest and the EU should embrace free trade in goods and services with the UK, it’s far from certain. The third insight alludes to this point: just because a mutually beneficial deal is achievable doesn’t mean it will be achieved. Mutual benefit isn’t enough. If it was, we wouldn’t need a free-trade deal at all. Every country would have unilaterally abandoned all barriers to trade long ago. Back in the real world, trade deals are stubbornly difficult and time-consuming to negotiate. To add to the difficulty, May badly needs to sign a deal with someone — Trump, perhaps, or China’s president Xi Jinping. But neither Trump nor Xi badly need to sign a deal with her. This is not a great starting point.

5) Satya Nadella on why robots are the future of work [Source: Financial Times]
The way Satya Nadella, Microsoft’s CEO handled the disaster of Tay, Microsoft’s teenage girl-inspired bot, encapsulates his management style — frank, decisive and forgiving. When he took the role in 2014, analysts viewed him as a safe option — a classic engineer and company man who had been with Microsoft since 1992. There was doubt that he was bold enough to right the ship at Microsoft, which had spent decades producing flops including the music player Zune and Windows Mobile. Yet three years in, Microsoft’s stock has jumped nearly $200bn in value to more than $492bn. Current and former workers say this new Microsoft is unrecognisable from the one under Steve Ballmer. It may be down to times changing, while Mr Nadella emphasises curiosity, Mr Ballmer has prioritised defending the group’s PC business. Mr Nadella, a voracious reader whose interests cover game theory, German philosophy, global macroeconomics and English classical poetry, likes to quote from Mindset, a book by Stanford psychologist Carol Dweck: most people fall into one of two groups: learn-it-alls, who are life-long students, and know-it-alls, who act on presumed knowledge. “Even if the learn-it-all starts with less innate capability, they will always do better than the know-it-all,” says Mr Nadella. He further adds “Given our success, there were times when we [Microsoft] acted like know-it-alls. One of the things that has been a real learning for me is how important it is to have a learning culture that fosters true innovation.”

6) Has the one-child policy created a generation of egoists? [Source: theage.com]
It has been called China's "behavioral time bomb", the unforeseen fallout from 35 years of the one-child policy. As a generation of coddled and adored only children enter their mid-30s, these "little emperors" and "princesses” are often ill-equipped for the real world. Raised under huge pressure to succeed academically and financially, they are left to look after ageing parents and revered grandparents. A new collaboration between experimental Chinese director Wang Chong and award-winning Sydney playwright Lachlan Philpott aims to examine this unfolding cultural dilemma through Little Emperors, a play that follows a brother and sister, the brother is the family's second child, kept "secret" from the authorities, while his sister is dealing with the fact that she is "Sheng nu", meaning "leftovers", a title given to women in their late 20s who remain unmarried. Philpott travelled to Beijing to work with Wang, and met dozens of children born under the policy – but it took time for many to open up. One Beijing teenager eventually told Philpott about her "secret brother". "She was first born then her mum got pregnant and didn't want to get rid of the child, as was pretty common. So they had the child in Hong Kong and he was kept as a secret child, who didn't have an identity in China. Imagine being brought up like that – and there are thousands and thousands of these people born under the policy who could never have an identity because their parents couldn't afford the fines, or were too afraid to admit it." The play explores this phenomenon of "secret" children alongside the "little emperors", and their lack of empathy, as well as their sense of self-importance.

7) Computer outbluffs world’s top poker players [Source: Financial Times]
After chess, the quiz show Jeopardy and the board game Go, one of the last remaining pastimes where humans still held sway has fallen to the robots: poker. An artificial intelligence system developed at Carnegie Mellon University has just racked up $1.8mn worth of chips against four of the world’s top professional players after a marathon 20-day poker binge. Among the claimed breakthroughs was the computer’s success in outbluffing its human opponents — a new milestone in the ongoing contest between man and machine. Poker, unlike chess and Go, tests different mental muscles, since it involves strategising using imperfect information in a way that is more akin to the real world. The technology developed at CMU could be used to compete against humans in business negotiations, military strategy, and the high-frequency trading systems used by the biggest banks.

8) How the brain resets during sleep [Source: neurosciencenews.com]
A four-year research project by Drs. Chiara Cirelli and Giulio Tononi of University of Wisconsin offers a direct visual proof of the “synaptic homeostasis hypothesis” (SHY). Striking electron microscope pictures from inside the brains of mice suggest what happens in our own brain every day: Our synapses – the junctions between nerve cells – grow strong and large during the stimulation of daytime, then shrink by nearly 20% while we sleep, creating room for more growth and learning the next day. This hypothesis holds that sleep is the price we pay for brains that are plastic and able to keep learning new things. When a synapse is repeatedly activated during waking, it grows in strength, and this growth is believed to be important for learning and memory.

9) Autonomy for IIMs: Government must make accountability a key condition  [Source: Economic Times]
Samir Barua, former director of IIM(Ahmedabad), comments on the Union cabinet’s recent approval of the IIM Bill, 2017 – a Bill that promises to provide ‘complete autonomy to the institutions, combined with adequate accountability’. Such a step is fraught with risks as the landscape of management education has seen a major shift in the last five years. While the number of IIMs has grown to 20, several management schools have closed down due to a moderation in the craze for MBA. Most new IIMs however are mere nameplate institutions, several with no director, no permanent faculty or administrative staff. The shortage of qualified teachers plagues even the established IIMs. The proliferation of IIMs without concern for qualified academic resources to run them has meant severe dilution of brand IIM. Complete autonomy to the fledgling IIMs without academic rigour is likely to be counterproductive. The temptation to start a plethora of programmes opportunistically, including doctoral and bachelor’s programmes, may further hurt the cause of management education that is already reeling under onslaught on quality. Even for established IIMs, autonomy could lead to mindless expansion without controlling the quality of offerings. Already, the academic rigour of teaching programmes is also on the decline with the emphasis shifting to revenue generation rather than transfer of cutting edge knowledge. Complete autonomy in such an environment is likely to accelerate the movement of established IIMs on the path to becoming pedestrian institutions.

10) How ‘Baahubali’ paved the way for films like ‘The Ghazi attack’ [Source: Livemint]
The makers of Rana Daggubati and Tapsee Pannu’s upcoming war film, The Ghazi Attack, should be thankful to the director of 2015’s blockbuster “Baahubali”, S.S Rajamouli. The underwater movie, releasing simultaneously as Ghazi in Telugu and set during the Indo-Pakistan conflict of 1971, is co-produced by PVP Cinema and Matinee Entertainment, both south India-based companies and has no major Bollywood names featuring in the cast. Usually, a film with such strong regional appeal would hardly find takers in the north Indian market but trade experts say Rajamouli’s 2015 blockbuster Baahubali: The Beginning has done much to change all of that. Grossing about Rs600 crore worldwide, nearly Rs120 crore of which were made by the Hindi version alone, the epic historical fiction film changed the perspective towards regional content. For a long time, the only south Indian films dubbed and released in Hindi were the big Rajinikanth and Kamal Haasan-starrers, that too three to four months after their initial release, making a maximum of Rs5-10 crore in box office collections. While the trend has changed for the positive, it is very clearly limited only to larger-than-life productions that stand apart from the usual south Indian potboiler.

- Saurabh Mukherjea is CEO (Institutional Equities) and Prashant Mittal is Analyst (Strategy and Derivatives) at Ambit Capital Pvt Ltd. Views expressed are personal.