Law of diffusion of innovation

I learnt about this beautiful law of diffusion of innovation from Simon Sinek. You can adopt it in any walk of life.
https://youtu.be/fT8mhoScU1w

In summary, any adoption of a product, service, idea, investment, integration etc needs to cross the tipping point of 15-18% of the target market. At this stage, the idea is considered successful and ready for an expansion.

The break down on why 15-18% is as follows
2.5% innovators who are the dreamers and thinkers
13.5% early adopters who believe in the beliefs, values of the idea. They also end up becoming the free marketers for the idea
34% early majority
34% late majority
16% laggards

Identify the first 15-18% in your teams and share your ideas with them and watch it grow. Best of luck! 

Reflections of the decade and looking ahead...beyond 2020!

My reflection over the last decade 2010-19:

1. Start of the “digital” revolution. Made possible due to smartphone computing power and internet “WiFi” accessibility. This ushered in modernization in delivery and consumption of entertainment (e.g. Netflix, YouTube), education (e.g. Byju) and overall ease of living (e.g. Amazon, Uber, Airbnb, PayTM etc).

2. Further concentration and polarizing of powers & money in politics and business. Rise of autocratic leaders around the world triggering the process of “nationalization” i.e. reverse globalization.

3. Increase in money supply due to quantitative easing inflating assets, negative yields and making monetary policy ineffective. It’s also given rise to fiat currencies like the crypto-currency bitcoin and the move away from US dollar and US financial systems.

Next decade 2020-29

1. Be prepared for one recession. This is the opportunity for millennial and Gen Z to create maximize wealth.

2. Mature phase of digital revolution and start of robotic revolution. Greater emphasis on ease of living in “unknown” fields. Cyber security and safety gaining prominence.

3. Rise of being “socially responsible” in businesses and citizens. Greater realization of harmful effects of inequality (income & women), climate change, unhealthy foods & habits etc.

One thing I got right - Bitcoins

I learnt that my post on Bitcoins attracted the maximum views. What further astonished me was the view were the highest when Bitcoin was at its peak. I guess anxious investors were seeking confirmation of their bias and mistake in investing in Bitcoin (at the peak) 

Missing the Bitcoin boom and bust was the biggest learning of the year. I am happy I got it right although it may have been just luck by chance. 

My learning from this episode has been more on ‘controlling my emotions’ and urge to make a ‘quick buck’. Investing is a long term process and the feeling that you can multiply you wealth manyfold in a year is a sign of immaturity. 

Lastly, inaction is also an action. It’s good to sit tight and control one’s emotions!!! 

Investing is a mind game  but control your heartbeats!!!

Asset Class

It’s been an ugly year for all asset classes and cash has emerged as the best asset to hold. Cash is King sums up 2018!!!

However during the year the assets have been volatile. This is reflected by the movement across FAANG, Oil, EMs, US bonds and currencies. And frankly no one can predict the future and hence it’s wasteful to spend time and effort crystal ball gazing. 

‘No one knows’ is the mantra one must believe in. I bet even the astrologers would have got things wrong. 

Having said that the better approach to investing is to assess the current environment and investment climate to understand where we currently stand. This has been an idea I have learnt from Howard Marks and seems to work well in all walks of life. I encourage you to read his memos where he succinctly explains his thought process and approach. 

Preparation is better than Prediction!!!

Reflections for 2018

2018 has been a year of learnings. Investors have learnt the most on banking and financial services sector. The PNB - Nirav Modi scam and the asset liability liquidity crunch in the NBFC sector were the highlights of the year.

The year for an investor teaches us to be vigilant about happenings (good, bad, ugly) in the market, sector and companies invested. Good turns to bad to ugly very quickly and without constant portfolio monitoring one cannot sleep peacefully. Obviously even with such review unfortunate events would happen which would force us to take tough decisions. Cutting losses and redeploying capital is much better than running one’s investment operations on the hope of better performance. 

Few things we can do to manage our portfolio:

1. Limit individual holdings to max 5-7% of portfolio value and not shying away from selling / adding to rebalance. 

2. Reviewing ones under performers to assess if a) have you got in at the right price b) has the fundamentals of the business changed impacting valuations. If you got either price or valuations wrong good to cash out. 

3. My all time favourites. Increase aggression by buying more into your winners.

Happy Investing for 2019!!!

Gold 2018

The human fascination for gold will never end. This statement would have been true. But if one looks at the historic prices of gold *2013-2017) its largely been flat to falling. The redemption from Gold ETF are gathering pace with record money outflows. Without fresh allocations and no price appreciation gold has run out of flavor for the investors. The only folks buying gold in tonnes is the Governments of China, Russia and Turkey.

The prices of gold are negatively correlated with the US dollars. As we have seen the USD depreciate with US Fed increasing rates the prices of gold have rallied.

What does all this pessimism mean for gold? An opportunity to keep it on ones radar.

With the world equity market in over-heated territory in addition to rising interest rates will mean, logically investors will run for a safe havens. Eyes wide open!!!

Contrarian Thinking

One of the important aspects that help investors outperform the crowd is ‘contrarian thinking’. All successful long term value investors have facets of this quality which have helped in significantly outperforming markets and crowds. If I have to explain this through the poison curve; we need to be in the extremes rather than in the majority.

Investing is a game of opportunities and probabilities and profits are a resultant of being right and avoiding big mistakes. 

What does contrarian thinking mean in the market context? The explanations are swimming against the tide or being greedy when others are fearful and vice-versa or making more money than the crowd and losing lesser than the crowd. All this feels like the right approach to investing but how can we all incorporate this in our investment approach. Being contrarian is more a mindset that one more cultivate and this can be stretched to life 'beyond investing'.

I recommend three simple approaches that will help you gain this mindset and observe when your thinking is following the crowd.

1. Avoid the noise
By noise I refer to 'distractions'. These come from multiple sources (TV Channels, Social Media, Research reports, watsapp groups among many others. These noises force us to react and over-trade when all one needs to do is keep calm and be on the lookout. Unfortunately we tend to spend too much time creating and spreading the noise which refrains us from thinking independently and focusing on the controllable (which are usually only few!).

2. Know the cycles
All companies follow a cycle of performance. These cycles are either driven by external forces (like commodity prices, weather, government policies etc) and company factors (like management changes, product launches, mergers & acquisitions, debt restructuring etc. All these factors cause resultant prices to move up or downwards and catching them at the 'right' time up or down could be beneficial.   

3. Ask yourself 'why' are your right or wrong
We all like to be correct with our perspectives, predictions and views. This coupled with confirmation bias results in us reading and following views that confirm our thinking. Effective thinking would be to ask why is it wrong and why we must not listen to our confirmation bias. Reading sell reports of stocks you own are an excellent way to start! 

In the investment business, avoiding the pitfalls or unforced errors is as important in a game of average players. Happy Investing !!!  

Bitcoins

As Howard Marks said, first the innovators followed by the imitators and finally the idiots. This though has stuck in me every time I evaluate an investment decision. It was the case for Bitcoin too. I first heard about investing in Bitcoin in early November 2017 when the price was rallying and had touched $7500. Not knowing much on what was the fair price I curiously asked question on the value. Got a bunch of funky answers by the millennial speculators and I resisted the temptation to add myself to the list.

By end of 2017, prices had doubled and and at some point touched $ 20000. I seriously felt I am missing something. 

But then experts everywhere were rubbishing this as the bubble of the century, comparing it with Tulip mania, governments started banning the exchanges and putting out caution statements, and my father-in-law asked me What is Bitcoin and how it works?...And then the prices started to crash, every expert and persons who missed the rally (including me) feeling vindicated. I must say it’s been one hell of a rally and crash...

Now where is the bottom? I do not know but it will be when no one is concerned about the price of Bitcoins and the world has forgotten about the latest financial innovation and caught on to the next ones....till then it will be volatile!!!

PS: I have purposely not gone into the merits of valuing Bitcoin since I still do not understand it completely and cannot imaging how it will be used. My low IQ could be blamed for this behaviour. 

India Budget 2018

The Union India Budget was announced on Feb 1, 2018, a good month ahead of its historic schedule.

As investors, long term capital gains tax was imposed which caused some ruffle and disappointment. I must say the Rs 1 lac relief to the small investors was a welcome respite. 

Investors over a period of time will adjust to this new normal with a higher risk return ask to compensate for taxes. I personally believe taxes are part of life and it does not change the long term opportunity and potential of the Indian economy and promising companies. 

Having said that, overall valuations are remarkably higher than one can stomach and corrections would be healthy to keep everyone on their toes and accept volatility and risks as part of equity investments. I feel this has been forgotten due to the stellar returns of the past year. 

So what next from here? It’s going to be a bumpy ride full of volatility. This will indeed give some good bargain opportunities to the patient, curious and observant investors. 

Happy investing!!!

Portfolio strategies

The UP elections 2017 have given a formidable mandate to the Modi's NDA Govt. Predictions have also been made on this momentum continuing on to the 2019 general assembly elections paving the way for a stretch of strong government focusing on execution, creating jobs and improving the quality of life in the country.

The euphoria of the elections were carried to the stock markets with 5+% moves and BSE SENSEX making an all time high. I do believe this is just the tip of the iceberg and start of a long term bull cycle for India.

However, as an investor I would like to have some stock caps to ensure I manage overall portfolio risk exposures.

An important risk management process I follow is; No stock in the portfolio has a weight-age of over 5%. (Depending on ones risk-appetite one may keep this between 5-20%, but not over 20%)

Now why is this important? Risk management would mean ensuring your portfolio is well balanced to prevent any downside portfolio risks. This just ensures when there are bad days (and there will always be) your diversified stock holdings with capped risk exposures protect your overall downside risk and allow you to sleep peacefully.

Another more structural portfolio approach is to have a clear weight-age between large, mid and small caps. I follow a 30-40-30 allocation strategy.

This strategy does force me to sell companies I truly love and believe in, but it gives me a good nights sleep!

Economic Moats

My learning for this weekend is based on the book 'Little book that builds wealth' by Pat Dorsey.

The book is all about identifying economic moats which are companies which have a competitive advantage in the market they operate, protected from competition and ability to earn more money for a long time.

Economic moats can be broken down into three categories
1. Intangibles either in the form of brand, patent, technology, regulatory environment etc
2. Network effects through multiplying customers through ones reach in manufacturing, distribution and reach.
3. Customer switching costs which ensures hanging on to the customer giving it pricing power.
4 Cost advantages from process, location, scale or access to a unique market.

A caveat is one of the above characteristics with a reasonable valuation and you have found an economic moat...Let's find a few!

Soft skills for a successful investor

A few basic skills one needs to be a successful investor:

1. Patience to work through mountains of financial informations and invest & hold on to what you truly believe. 

2. Discipline is following a consistent and hard working approach coupled with a diligent investment ethic. 

3. Perseverance would be having an independent approach and not shying to stay away from the crowd. 

All of this starts with knowledge of once investment operation and humility and gratitude for the results achieved. 

India Budget 2017

Last week India had the much anticipated and hyped financial budget 2017. My initial reaction is the budget was practical (not populist despite elections around the corner) and paved the path for job creation. Given the sluggish private sector investments the Govt needs to step on the gas and invest for the future. I firmly believe the growth pause cause by demonetization is behind us as we see pick up in sales for vehicles, mutual funds, insurance policies, oil etc. I must confess some sectors run through the parallel economy would need to change their operating model to start complying with the laws and taxes. With GST in the anvil and lower tax rates for SME I do see tax collections to be robust and compliance to be even better.

Globally the Dow crosses 20000 and Nifty is headed to 10500 obviously with a few bumps which would be good buying opportunities.

All set for the all important UP elections which would give a good sense on future pace of reforms. 

Localizations

Over the last years we have seen countries starting to look inward; focusing on local jobs, stimulating local businesses and giving a sense of power to the people of the country. This has been seen in India with the 'Make in India' initiative; in USA with Trump's victory and 'Make America great again!';  Brexit with rural U.K. voting for opportunity, change and control vis-a-vis London. All these point to the fall of globalization. Now onwards good and services will be produced / procured based on 'political' economics rather than traditional economic theories.

The Trump era like the Modi era will mark the increased polarization of issues and greater mud-slinging politics. Get ready for spicy breaking news!!!

Retirement Planning 2020

Planning for retirement is the most difficult question faced by most of the people.

Although its easier said than done here are three questions one most ponder and decide to have a comfortable retirement life.

1. When do you want to retire?
2. How much do you want to save?
3. How much minimum percentage of your final salary do you wish to target?

The are countless of other questions and bets one will have to take like long term inflation, interest rates, cost of living, medical costs etc to come up with the right pension amount. And I am sure at the end it will feel you should have done more.

My simple advice is take life (professional career, personal life etc) in 5 year buckets. Its much easier to break down long term goals into shorter term targets which are easier to predict, manage and remember!!!

Think about where you want to be in 2020!!!...

Inflation in US

The US FED decided to keep the interest rates low for an extended period due to subdued inflation trends.
The core inflation rate in the US has fallen from 2.5% in mid 2008 to around 1.8% currently.
However this may be misleading.
In the computation of core inflation number a weigtage of 40% is for rent for owners. This basically refers to cost of home ownership by what someone would have to pay in order to rent the house one owns.
In the past two years due to falling house prices and increased vacancy the rental rates have got pushed down. This has in turn brought down the core inflation.

Excluding housing and rent the core inflation has actually increased from 1.8% in mid 2008 to 2.8% currently.

The US FED would be forced to increase the interest rates by Jul-Sep this year since trend would ease out in the coming months.

In India, in contrast the inflation number does not include any housing impact (other than raw materials used for construction). If we bring in the housing impact into the inflation number the number would surely be much higher that what is currently being reported.

China Bank Lending

The total Chinese banks lending in Jan and Feb of 2010 has been around $ 300bn as per the reports of the People's Bank of China (PBOC), the central bank.

This is on the back of a $ 1.4 trillion lending in 2009 by Chinese banks.

Comparing this to our Indian Banking system. In India the total loan outstanding as on Feb 2010 is $ 650bn.

Lets ponder on this number and understand what ramifications this kind of credit in the economy can do. Will write on this later.

Futures Market in China

In China the Futures and Options market started on February 22 2010.
Some of the pre-conditions which need to be satisfied to trade in the F & O Market are
1. One needs to have an investible surplus of RMB 5,00,000 (US$ 73,000 or INR 37.5 lacs)
2. One needs to attend 20 mock trading sessions and must have executed 10 mock transactions.
3. One further need to undergo 10 mock commodities transactions.

Only when you satisfy all the above conditions you are permitted to trade in the Futures.....
India is way ahead in financial reforms....

Food Problem

I recently read an interesting piece of statistics
In terms of R&D specing on food;
95% of the spending is done on pre-harvest R & D initiatives like seeds, fertilizers, irrigation, etc.
Only 5 % of the spending is on post-harvest initiatives like logistics, storage,market-making etc.

This is after we all know that more than half of the food grain output is lost to reasons like improper storage resulting in food grains being consumed by rodents.

The problem identification in this area has gone completely wrong else we would have enough grains to feed the entire world twice.

Bubble Trouble

My biggest learning over the past month has been that a many guys in the investment world could predict the recent stock market fall. That means the future direction after this correction would be severe.

The second big question I kept getting asked these days is how does one play the budget.

My answer is hold cash and short the market on ever high.

My entire hypothesis flows from two thoughts on the stimulas package in the US economy and its effect on the interest rates and with it currency flows and world trade and asset prices. With this hypothesis we are already in a bubble situation.

1. If the economy has surely recovered from the recession then interest rates would need to go up in order control the inflationery position and the US FED would need to withdraw the stimulas package else it would create an asset buble in stocks, commodities and property as cheap money would be avaliable in the system to splash over all assets.

However if it increases interest rates there would be a fall in consumer confidence which will pull down consumer spending and with it industrial production and the entire GDP. If GDP falls the job creation in the economy would be delayed.

2. If the economy has still not recoverd from the recession then the US FED would stick to its cheap money policy. Given the low interest rates scenario this money would be pushed into equities, commodities and property. This increase in asset prices would make them unaffoardable and expensive to justify the current valuation.

This would result in the fall in global asset prices and with it consumer confidence and spending and GDP.

We are currently in scenario 1. The world economy is slowly withdrawing the stimulas and we would see the repercussions in the months to come.

The above hypothesis is also supported by the fact that the last quatere US GDP increase has entirely been due to inventory build up in the system in anticipation of future consumer spending.

We are surely going to fall. When is a question of time. And we would know that in April / May when a $ 51bn of soverign debt of Greece comes for repayment. We can surely expect a default on this count.