Ten interesting things we read last week
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 October 14, 2016.
1) The most overlooked trait of investment success [Source: collaborativefund.com]
All of us are used to viewing great managers as intelligent, well-read and sagacious individuals who possess insights not available to the average Joe. This article says that whilst all of that might be true, great fund managers who end up running large investment firms also have to possess one more trait – communication skills. “There is a huge difference between being a great investor and running a great investment firm. The difference is the latter realizes that no amount of good advice or strong performance matters to the client who doesn’t follow it, or stick around long enough to benefit from it…. Good advice is worth multiples of what a client pays for it. Mediocre advice is not worth a little less, it’s worth nothing because it won’t be adhered to…. Those who run great investment firms bridge this gap with a simple trick: Clear and honest communication that ensures clients know what you’re doing, what to expect, and addresses the psychological barriers that push them away from adhering to good advice.
2) Why Narasimha Rao is suddenly a star [Source: LiveMint]
2016 is the 25th anniversary of the turning point in India’s economic history: 1991. Until recently, the consensus view was that the India’s Finance Minister in 1991, Manmohan Singh, was the architect of the economic reforms launched in 1991. The mistake these Singh groupies made is that they ignored a fundamental fact: history is continuous and not some disjointed connect of random dates. While 1991 was the moment that India chose to hit the accelerator on reforms, the heavy lifting, especially the alteration of the political mindset, was done in the previous decade. Now, 25 years on, three books have been published which are trying to set the record straight. However, this being India, opinion has now swung to the other extreme, painting Rao as the star of the historic turnaround which began in 1991.
3) Mistry’s elephant - India’s most important business group is socially responsible but financially disappointing [Source: The Economist]
As per this article one of the most respected business houses in the country, the Tata Group, runs the risk of using its long-term emphasis and ethical ways of doing business as an excuse to tolerate underperformance. The article says that barring two of the businesses that have been very successful (JLR and TCS) rest is a mixed bag. Seven of the nine-largest listed Tata entities in terms of capital employed have negative economic value added, meaning that their earnings before interest and tax translate into a return below their overall cost of capital. The ownership structure at Tata makes it harder to enjoy the benefits of being a diversified group. Silos are hard-wired into it. At least seven different Tata companies vie for defence contracts but must do so separately. While Tata Group presentations advertise healthy overall financial metrics, such as net debt levels that are barely higher than equity, they do so assuming the net cash on TCS’s balance sheet can be used to service, say, Tata Steel’s debt. Outside shareholders however make that impossible.
4) Gunter Faltin: The man behind world’s largest importer of finest Darjeeling leaf tea [Source: LiveMint]
This remarkable piece highlights the story of Günter Faltin, an economics professor at Freie Universität in Berlin, who became an entrepreneur in the 1980s. In fact, it was unlawful, for a tenured professor to do such a thing. However, becoming an entrepreneur was a way for him to prove to his students that he wasn’t all talk; that he could put into practice the principles of entrepreneurship, which he taught in class. His efforts resulted in the birth of Teekampagne, the world’s largest single importer of high-quality Darjeeling leaf tea, a small and unorthodox company that cashed in on a big idea. He was able to circle around the long line-up of middlemen and was able to bring down tea prices which were 10 times more expensive in Germany than in India or other tea-producing countries! Interestingly, his company has become one of the few sources for the best quality Darjeeling tea, which is shipped out of the country.
5) Pep Guardiola says his career is Cruyff’s legacy [Source: Economic Times]
Manchester City’s legendary coach Pep Guardiola credits his success to Johan Cruyff. According to him, “Most coaches say many things, but what he said was completely different. He taught us, not just me, but a number of players, a new generation”. This is the central insight of Cruyff and also of Guardiola: that good play and good coaching is an intellectual exercise, beyond technical and athletic skill, as important as they are. The coaching success of so many Cruyff players — himself, Frank De Boer, Marco van Basten, Ronald Koeman, Luis Enrique, Oscar Garcia and so forth — is Cruyff’s great triumph. “People think that the best managers win the prizes, but that is a huge mistake. The big managers win titles because they’re at the big clubs with big players. The best ones influence the next generation” says Guardiola
6) Pre-Suasion: A Revolutionary Way to Influence and Persuade [Source: Market watch]
Robert Cialdini – the author of the bestseller ‘Influence: the psychology of persuasion’ in this interview talks about the technique of ‘Pre-suasion’ which is also the topic of his next book ‘Pre-Suasion: A Revolutionary Way to Influence and Persuade’. Warren Buffet uses this technique to ensure that Berkshire Hathaway’s investors stick with the company in spite of a bad quarter or two. He says that a pre-suasive encounter works like this: make me feel that we are family — we are one together, cut from the same cloth. After you’ve made that connection, then make your request. Having been sufficiently pre-suaded, I will be more receptive to your product, politics or plan. He says that Warren is able to make a connection with his audience as he’s able to showcase his authenticity and trustworthiness through his letters. He does this by mentioning a weakness or a drawback in the case he has to make for Berkshire Hathaway, and follows it with a strength.
7) Smart beta: An investment strategy that risks eating itself [Source: Financial Times]
Smart beta has become the catch-all phrase for funds that use techniques developed by passive index funds to make active attempts to beat the market. Like index funds, their costs are low, with lower trading costs and little need to pay for research. And yet they stand a good chance of beating the market. The article highlights three possible problems, such smart beta funds can have – 1) Data-mining: While the past performance for a strategy is great, the same strategy’s performance versus the market roughly halves once it has been published; 2) Timing: Much like valuations, continuously buying a strategy on the basis of most expensive factors, underperforms the market while continuously buying the three cheapest would have beaten the market; 3) Performance-chasing: The fund industry revolves around looking for the funds that have performed the best recently. Such a strategy of buying factors with best recent performance underperforms the markets whereas the one with worse performance beats the market.
8) The idiolect of Donald Trump [Source: Scientific American]
Jennifer Sclafani, a sociolinguist, defines idiolect as an idiosyncratic form of language that is unique to an individual. This piece analyses Donald Trump’s idiolect and how it’s led to extreme views about his personality. According to her, this has to do with individual preferences based on our personal experiences with language. Donald Trump often introduces topics abruptly with non-substantive words like “so,” “you know,” or “anyway”. These are words that everyone uses in everyday conversation, and while they have little referential value on their own, linguists have shown that they play an important role in the organization of talk. In fact, without them, conversation sounds stilted and unnatural. To some of his audience it gives the impression that he is having an intimate conversation with individual voters rather than giving a prepared speech to a mass audience. On the other hand, when others hear this same idiolect, they connect these conversational devices with social meanings like “casual,” “unreflective,” “unprepared,” and even “reckless”—certainly not qualities of an ideal presidential self.
9) Big decision ahead? Just roll the dice… [Source: Financial Times]
In a mind-blowing piece, British economist, Tim Harford says that most of us could do with a little more randomness in our lives. Taking decisions on the basis of rolling a dice or the toss of a coin can actually help us make better decisions. The reason for this is that by pre-committing to follow a random instruction, we can end up making decisions that we should have been making all along. The status quo has a strange hold over us. By deciding to take a decision on the basis of a ‘random’ result, we break through the inertia and make tough decisions.
10) Clayton Christensen moves on from the dissing of disruption [Source: Financial Times]
In an interview about his new book, Competing Against Luck, Harvard Professor Clayton Christensen talks about how a searing piece in 2014 by Jill Lepore, a fellow Harvard colleague, led him to improve upon the idea of Disruptive innovation, which describes new products that come from the lower end of a market that incumbents have neglected. He describes the “jobs to be done” theory, which he has been teaching, and develops a link between the two ideas. The “jobs to be done” theory aims to look at the reverse problem of disruption, i.e. how do successful companies keep growing? He identifies that customers “hire” different products for different reasons and figuring this out can help companies compete better. Rather than making a series of hit-and-miss bets on innovation, companies can thus “compete against luck” and introduce new products that were more likely to hit the target market.
- Saurabh Mukherjea is CEO (Institutional Equities) and Prashant Mittal is Analyst (Strategy and Derivatives) at Ambit Capital Pvt Ltd. Views expressed are personal.
