Ten interesting things that we read this week

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At Ambit, we spend a lot of time reading articles that cover a wide gamut of topics, including investment analysis, psychology, science, technology, philosophy, etc. We have been sharing our favourite reads with clients under our weekly ‘Ten Interesting Things’ product. Some of the most interesting topics covered in this week’s iteration are related to ‘Why a tranquil VIX poses a huge danger for the equity markets’, ‘How informal economy affects the economic prospects of a country’ and ‘Game theory in International diplomacy’.

Here are the ten most interesting pieces that we read this week, ended May 5, 2017.

1)    Warren Buffet’s 1991 letter perfectly explains ESPN’s troubles [Source: Business Insider ] 
ESPN's current troubles was pretty excellently summed up by Warren Buffett in a 1991 letter to Berkshire Hathaway's shareholders. "The economic strength of once-mighty media enterprises continues to erode as retailing patterns change and advertising and entertainment choices proliferate," Buffett said. Buffett noted that the media business had come to "resemble businesses more than franchises in their economic behavior." These are two terms that Buffett uses to describe businesses built to last versus those that are not. He said "an economic franchise arises from a product or service that: (1) is needed or desired; (2) is thought by its customers to have no close substitute; and (3) is not subject to price regulation." With those advantages, Buffett said, a business can increase its costs without much concern and tolerate poor management. "In contrast, 'a business' earns exceptional profits only if it is the low-cost operator or if supply of its product or service is tight," Buffett wrote. Additionally, the letter said, these businesses have no room for poor management.  Essentially, ESPN for years was the only place to find things like sports highlights and many live sporting events. While it still commands a considerable number of live sports rights, the need to watch programmes like SportsCenter - once ESPN's flagship programme - has diminished with the advent of online highlights and social media. Additionally, the once hard-to-find analysis provided by ESPN has spread to a bevy of sports media start-ups and even well researched posts on places like Reddit.

2)    Famed stock picker who spotted his big Amazon error [Source: Financial Times ] 
William Danoff saw the potential in Amazon’s burgeoning cloud computing platform, which by 2013 was beginning to be a big contributor to the online retailer’s bottom line. But concerned at signs of budding price pressures on Amazon Web Services, the Fidelity fund manager began dumping his position. From a peak of 7.3mn shares at the end of 2013, valued at almost $3bn at the time, his $108bn Contrafund more than halved its holdings in the retailer by the end of 2014. But Amazon’s shares kept rising — and eventually the famous Fidelity stock picker dove back in. “It turned out costs were also coming down and they were growing their customer base.” The episode reinforced one of Mr. Danoff’s core beliefs. “You’ve got to be flexible, and you’ve got to be humble, and you’ve got to be willing to admit mistakes.” Unusually for mutual funds of Contrafund’s size, Mr Danoff roams broadly in his search for opportunities, including into unlisted companies — an area that many fund managers eschew, given the riskiness and lack of liquidity. Some of his current private investments include Pinterest, WeWork and Uber. The Fidelity fund manager argues that having a broad remit helps him understand industries, disruptive forces that may shake them, and occasionally help spot and nurture humble seedlings into mighty oaks. Facebook is a good example of the latter where Mr Danoff bought consistently even amidst concerns over whether it could manage the shift from desktop computing to mobile. His faith in Facebook has paid off handsomely. Contrafund is now one of Facebook’s biggest shareholders and its 51mn of stock is valued at $6.9bn — making it the fund’s largest holding, ahead of Berkshire Hathaway, Amazon, Alphabet and Apple.

3)    Linear thinking in a non-linear world [HBR ] 
Decades of research in cognitive psychology shows that the human mind struggles to understand non-linear relationships. Our brain wants to make simple straight lines. In many situations, that kind of thinking serves us well, but in business there are many highly non-linear relationships, and we need to recognize when they’re in play. This is true for generalists and specialists alike, because even experts who are aware of nonlinearity in their fields can fail to take it into account and default instead of relying on their gut. But when people do that, they often end up making poor decisions. We’ve seen consumers and companies fall victim to linear bias in numerous real-world scenarios. A common one concerns an important business objective: profits. Executives often focus too much on volume and costs instead of getting the price right to increase profits. Why? Because the large volume increases they see after reducing prices are very exciting. What people don’t realize is just how large those increases need to be to maintain profits, especially when margins are low. This fact becomes clear by using an example of 1,000 paper towels with marginal profit of 15 cents (50 cents price) each to be sold under two promotions: an 80% increase in volume for a 40% decrease in price or a 20% increase in volume for a 20% cut in price. Which is better? While the first option might look better it is not. In fact, both promotions decrease profits, but first option’s negative impact (profit reduction by $80) is much bigger than the second’s (profit reduction by $50). The article then discusses four types of non- linear relations seen in the business world.

4)    What will the future look like – Elon Musk at TED 2017  [Source: TED ] 
What a mind! – You can’t help but get this recurring thought when you hear Elon Musk speak of his vision. In this TED talk, he discusses his new project digging tunnels under LA, Hyperloop, Tesla, SpaceX and his dreams for what the world could look like.

5)    Reversal of fortunes have random roots [Source: Financial Times ] 
For statistical reasons, outstanding performances tend to be followed by something less impressive. This is because most performances involve some randomness. On any given day, the worst observed outcomes will be incompetents having an unlucky day and the best observed outcomes will be stars having a lucky day. Observe the same group on another day and, because luck rarely lasts, the former outliers will not be quite as bad, or as good, as at first they seemed. This phenomenon is called “regression to the mean.” Daniel Kahneman, psychologist and winner of the Nobel memorial prize in economics, was advising the Israeli air force when he noted a memorable example of how regression to the mean can mislead us. A flight instructor told Mr Kahneman that when the instructor praised cadets for a skillful landing, they usually did worse next time; when he bawled them out for clumsiness they tended to improve. The instructor concluded that harsh criticism worked; Mr Kahneman pointed out that a more likely explanation was sheer chance. “Because there is regression to the mean, it is part of the human condition that we are statistically punished for rewarding others and rewarded for punishing them,” Mr Kahneman wrote. Regression to the mean probably explains why many award winners subsequently disappoint. And the disappointment will be spectacular if some people are taking bigger risks than others.

6)    The Dugout: Cricket’s new war room [Source: Indian Express ] 
Cricket is no stranger to analytics. Almost every cricket team across all levels and age-groups these days has someone working furiously on a laptop. These days however, it’s not simply about telling them that a Jos Buttler struggles against spin at the start and saying “this is how he gets out”. It’s about giving the bowlers various options based purely on historical data and research to get him out.  Identifying and delivering the data from the plethora available that helps the team make an informed decision is an art and a science. “Trend analysis” is the buzzword these days. While a lot of focus is laid on the powerplay overs and the death overs, it’s the period between the 7th and 10th overs that the dug-outs are now focusing on as being the period that has the maximum impact on the match. That’s the trend. On an average, most teams get to nearly 55 or 60 in the first six overs. And regardless of how powerful the bowling team, the death overs invariably fetch nearly 50 runs. Hence, teams have begun preserving their key bowlers for the four-over period right after the powerplay.  The actual work for the analysts though starts some 30 days before the season commences. Each franchise has a contracted backend provider, who’ll provide nearly 60-70 GB worth video footage of every opposition player once the auction is complete. Then begins the rigorous work of scouring through nearly 2000 balls of each batsman and bowler before zeroing in on their precise observations.

7)    Facebook is more than just a pipe – it is a publisher too  [Source: Financial Times ]
The recent incident involving Cleveland resident Steve Stephens posting a Facebook video of him shooting a random stranger highlights the abject failure of big technology groups to take responsibility for their role in spreading illegal, hateful and false content around the world. Google, Facebook, Twitter and the likes have long benefited from the principle, established in a 1996 law, that internet content providers are not responsible for user postings. At the time, the law made sense. Telephone companies were not liable for threats made using their services, so why should a broadband provider or blog hosting site be held responsible when some nut posted a terrorist rant? Not surprisingly, many countries and the EU have similar immunity rules. But the growing power of social media and search companies raises questions about whether this legal framework still makes sense. The big tech groups do more than just host third-party content. Their algorithms actively promote some posts and disfavour others. Given that these companies are no longer mere conduits, they should have to take at least partial responsibility for the content that appears on their sites and alongside their adverts. The tough question is how far to go. The big companies already have mechanisms to take down copyrighted material — a 1998 US law requires them to. Congress should pass a similar law that makes social media companies liable unless they quickly remove illegal postings — child porn, hate speech and libel. That would force the groups to invest more money in scanning for and removing criminal content.

8)    Book review: The everything store: Jeff Bezos and the age of Amazon [Source: Washington Post ] 
Brad Stone’s book has plenty of gems for anyone who cares about Amazon, Jeff Bezos, entrepreneurship, leadership or just the lunacy it took to build a company in less than two decades that now employs almost 340,000 people and sold $136 billion worth of, well, almost everything last year. Stone recounts how he pitched Bezos on the idea of a book. Bezos — who eventually encouraged friends, family and executives to talk to Stone, but didn’t himself cooperate — asked the author how he was going to deal with the concept of “narrative fallacy.” He was talking about Nassim Nicholas Taleb’s contention in his book “The Black Swan,” which is required reading for all Amazon senior executives, that humans use narrative to turn “complex realities into soothing but oversimplified stories.” It’s hard to accuse “The Everything Store” of being overly simplistic, perhaps because Bezos defies easy description.

9)    ‘Evaporated people’ could be disappearing from Japanese society by the thousands  [Source: Business Insider ] 
In Japanese, the word is johatsu, or "evaporated people." Tormented by the shame of a lost job, failed marriage, or mounting debt, thousands of Japanese citizens have reportedly started leaving behind their formal identities and seeking refuge in the anonymous, off-the-grid world. That's according to a recently-published book called "The Vanished: The 'Evaporated People' of Japan in Stories and Photographs," by French author-photographer pair Lena Mauger and Stephane Remael. The book features a collection of vignettes from people who have fled modern society in search of a more secretive, less shame-filled life.

10)    IIT Roorkee scientists create low-cost solar cells using Jamun [Livemint.com ]
Scientists at Indian Institute of Technology (IIT) Roorkee have used the juicy, delectable Indian summer fruit ‘Jamun’ (called black plum or Indian blackberry in English) to create inexpensive and more efficient solar cells. Researchers extracted dyes from jamun using ethanol. They also used fresh plums and black currant, along with mixed berry juices which contain pigments that give characteristic colour to jamun. The mixture was then centrifuged and decanted. The extracted coloured pigment called anthocyanin was used as a sensitiser. “Natural pigments are way economical in comparison to regular Ruthenium-based pigments and scientists are optimising to improve the efficiency,” said Satapathi, who is also a visiting professor at the University of Massachusetts Lowell in the US.