Category: Excerpts

Corruption in the central government is gone. There is a tough message out from the Prime Minister’s Office that graft will not be tolerated.

There is an overall drive against black money with various schemes being tried to put a plug on it.

The same hard stand has been taken with bank loans and one place to start has been the process of selection of public sector bank chiefs.

A member of the committee who would interview candidates for public sector bank chairmen told me that after 2014, they stopped getting calls from the power centre on who to hire. The rate used to be fixed, he said, we were just told to pick the name told to us.

Who’d pay? Firms that would then benefit from easy loans and terms. Those calls have stopped.

The hardening stance of the state on black money shows up in the prices of real estate.

Real estate has been the sump of black money in India and the politician-builder-land mafia nexus had raised prices to a level that was beyond any economic logic.

People who bought their Rs.8 crore luxury floors in Gurgaon are unable to find a buyer at half the price.

The winter for real estate is going to last a long time—so if you are still holding on to an investment thinking it will recover, plan on bequests rather than profits in the near future-wrote Monika Halan

When Carl Icahn was a big investor in Apple, he wrote an annual letter to Tim Cook, its C.E.O., urging him to spend the company’s cash on buying back its own stock.

“There is nothing short term about my intentions here,” he wrote in the first letter, in October, 2013.

In October, 2014, he wrote that “Apple is one of the best investments we have ever seen from a risk reward perspective,” and that, while he was urging a share buyback, he was also eager “to preemptively diffuse any cynical criticism that you may encounter with respect to our request.”

In a letter of May, 2015, he said that Apple was “very much a long term growth story from our perspective.” The company represented “one of the greatest growth stories in corporate history, as well as one of the greatest opportunities ever for a company to invest in itself by repurchasing its shares.”

A year later, after the company had spent eighty-seven billion dollars buying back its stock, Icahn announced that he had sold most of his Apple shares, for an over-all profit of around two billion dollars.

Fool me once, shame on you. Fool me twice, and you’re starting to develop a business model.

-from New Yorker

The PSU lodged an insurance claim for an amount of Rs 34.40 lakh under ‘burglary and housebreaking policy’. The insurance firm rejected the claim saying theft did not come under the purview of the policy as there was no evidence to show someone had forcibly broken into the factory premises or threatened employees before making away with the goods. The bench dismissed the PSU’s petition.

Citing a 2004 SC judgment, Justice Rao said, “In the absence of violence or force, the insured cannot claim indemnification against the insurance company. The terms of the policy have to be construed as it is and we cannot add or subtract something. Howsoever liberally we may construe the policy, we cannot take liberalism to the extent of substituting the words which are not intended. “…in common parlance, the term ‘burglary’ would mean theft but it has to be preceded with force or violence. If the element of force or violence is not present, then the insured cannot claim compensation.”-from TOI

Global liquidity seems to be the reason all these relationships are breaking down. With negative rates pervasive across sovereign markets, this is also changing across asset relationships. The markets seem to no longer be heterogenous, everyone is on the same side and looking at the same central bank put, playing the short-term liquidity. Without heterogeneity in markets, short term liquidity overpowers everything else.

With all these relationships breaking down it is no surprise that many investors are confused, doing badly and very worried. I have very rarely seen so many top quality investors all so bearish, across all asset classes, at the same time. Whether it be Soros, Druckenmiller, Singer or others, most of the people with really good long-term records are asking you to exit the markets entirely.

As is typical, markets will keep us guessing, and test the conviction of the bears. I would not be surprised to see continued market gains globally driven by the liquidity. However, be rest assured, this will end badly, and when it does no-one will have time to react. The prudent thing would be to slowly take risk off the table, knowing that one may hurt returns in the short term, but preserve capital for the inevitable bust. If you are a global investor, the responsible thing to do is cut risk and raise cash, no matter how painful it may be in the short term.

India is in a structural bull market, but will also correct if global markets turn turtle. Any correction in India remains a buying opportunity.-wrote Akash Prakash,Amansa Capital

Investing is an inherently social exercise. As a result, prices can go from being a source of information to a source of influence.

This has happened many times in the history of markets. Take the dot-com
boom as an example. As internet stocks rose, investors who owned the shares got rich on paper. This exerted influence on those who did not own the shares and many of them ended up suspending belief and buying as well. This fed the process. The rapid rise of  the dot-com sector was less about grounded expectations about how the Internet would change business and more about getting on board. Negative feedback ceded to positive feedback, which pushes a system away from its prior state.

One of the best models for thinking about this type of behavior is the threshold model from Mark Granovetter, a professor of sociology at Stanford University.

Imagine 100 potential rioters milling around in a public square. Each individual has a “riot threshold,” the number of rioters that person would have to see in order to join the riot. Say one person has a threshold of 0 (the instigator), one has a threshold of 1, one has a threshold of 2, and so on up to 99. This uniform distribution of thresholds creates a domino effect and ensures that a riot will happen. The instigator breaks a window with a rock, person one joins in, and then each individual piles on once the size of the riot reaches his or her threshold. Substitute “buy dot- com stocks” for “join the riot” and you get the idea.

The point is that very few of the individuals, save the instigator, think that rioting is a good idea. Most would probably shun rioting. But once the number of others rioting reaches a threshold, they will jump in. This is how the informational value of stocks is set aside and the influential component takes over.

Great investors don’t get sucked into the vortex of influence. This requires the trait of not caring what others think of you, which is not natural for humans. Indeed, many successful investors have a skill that is very valuable in investing but not so valuable in life: a blatant disregard for the views of others.

Success entails considering various points of view but ultimately shaping a thesis that is thoughtful and away from the consensus. The crowd is often right, but when it is wrong you need the psychological fortitude to go against the grain. This is much easier said than done, especially if it entails career risk (which is often the case).

–By Michael Mauboussin