Ten interesting things that we read this week

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 ‘Importance of first principles’, ‘Over-pessimism regarding traditional carmakers’ and ‘Artificial leaf producing storable fuel’.

Here are the ten most interesting pieces that we read this week, ended July 21, 2017.

1) Simple maths is why Elon Musk’s companies keep doing what others consider impossible [Source: Quartz]
Physicist Richard Feynman was famous as a student for redoing many of physics’ early experiments himself to build a foundational understanding of the field. By mastering these first principles, Feynman often saw things that others did not in quantum mechanics, computing, and nuclear physics, earning him the Nobel Prize in 1965. Elon Musk’s companies approach problems in a similar way. Whether it’s reaching Mars or boring tunnels through the earth, the CEO of Tesla and SpaceX loves to talk about basic math. For instance, at the TED conference on Apr 28, Elon Musk explained his proposal to deploy continuous tunnel-boring machines that link cities through a network of deep underground tunnels. He wants to do all this for one-tenth of today’s costs compared to the estimated $1 billion per mile price tag for Los Angeles’ new subway extension.  To illustrate his idea, Musk did some back-of-the-envelope calculations outlining a straightforward series of steps involving reducing size of tunnel, faster pace and reaching limits of drilling. He applied the same logic to increase the production at Gigafactories and Tesla. He used simple equation of output = volume x density x velocity to fill up as much of the factory’s volume possible with equipment. Instead of using 3% of the volumetric space, Tesla plans to use at least 30% to get more production per unit of space. Also to increase production he plans to increase the speed up the assembly line by a factor of seven from its typical 0.2 meters per second to 1.5 meters per second.

2) While Tesla’s share price has soared, the gloom surrounding traditional carmakers seems overdone [Source: Financial Times]
Tesla’s Model 3 is likely to face completion from traditional carmakers like GM, BMW and Audi. Also, even if the Model 3 succeeds, it is hard to imagine Tesla ever matching the sales of the biggest carmakers. Yet it is valued as if it will. VW, GM and Toyota each sell about 10m cars a year and make a combined $34bn in net income between them. Tesla, with consistent losses and less than 1 per cent of its volume, overtook GM this year to become the most valuable US carmaker. Finding another way to live up to its enterprise value requires a leap of faith that Tesla can attain and exploit an advantage in some other technology — batteries or autonomous cars perhaps. Interestingly, while Tesla soars, the broader industry is being treated as if it is seriously ill, with a price/earnings multiple that is about the lowest in 20 years. Traditional carmakers have inspired no faith in their ability to adapt to new technology. Even though the likes of GM have been proactive- paying $581m for Cruise Automation, a San Francisco-based autonomous driving company and investing $500m in Lyft, it trades at a depressed multiple of five times expected earnings. Investors believe in future car technologies, but not that the current carmakers will profit. The same divide is reflected among suppliers. The gloom surrounding the incumbents seems overdone. Ford’s free cash flow is about $13bn, enough to buy back all of its own depressed shares within three years. Low interest rates have helped prolong a period of bumper sales. While investors become excited by electric cars, Ford is selling gas-guzzling pick-up trucks in record numbers. Change will come, but judging the pace is crucial. Estimates vary widely about number of electric vehicles on road after a decade and if investors remain so down on the industry, private equity firms should be able to strike bargain deals for cash generative companies – something that’ll be of immense benefit if technological forecast miss the mark.

3) Every great investment hurts [Source: Collaborative Fund]
Finding above-average investments requires either being smarter than others, or willing to endure more discomfort and uncertainty than others. It’s natural to focus on the former, because the industry is full of people who are either very smart or think they are. But most edges are found in the latter, specifically because the “I’m-really-smart” edges get competed into the ground. Where there’s consistent performance there’s usually intelligence. But there’s almost always a willingness to make more painful decisions than competitors. Former Benchmark partner Andy Rachleff recently told Patrick O’Shaughnessy: Obviously you don’t make money if you’re wrong. What most people don’t realize is that you don’t make money if you’re right in consensus. Returns [or alpha] get arbitraged away. The only way you make money is by being right in non-consensus - which is really hard.

4) The neuroscience of inequality: does poverty show up in children’s brains? [Source: The Guardian]
Dr Kimberly Noble at Columbia University is among the handful of neuroscientists and pediatricians who’ve seen increasing evidence that poverty itself – and not factors like nutrition, language exposure, family stability, or prenatal issues– may diminish the growth of a child’s brain. In 2005, Noble and renowned cognitive neuroscientist Martha Farah, along with University of Pennsylvania colleague Frank Norman, recruited 60 children from Philadelphia public-school kindergartens (30 middle-class kids and 30 who were at or just above the poverty line) and gave them a series of cognitive tests, each of which has been linked to a specific brain circuit. Among other things, the tests measured language development and executive functioning – the set of mental processes responsible for working memory, reasoning and self-control. It turned out that low-income children performed moderately to significantly worse than their middle-class peers in both areas. The results, which Noble and Farah reported in a 2005 paper, were the beginning of what they call a “neurocognitive profile” of socioeconomic status and the developing brain. Farah, Noble and other scientists soon began using magnetic resonance imaging (MRI) scans to examine the brains of children across the socioeconomic spectrum. The results were striking. In one study, Farah looked at 283 MRIs and found that kids from poorer, less-educated families tended to have thinner subregions of the prefrontal cortex – a part of the brain strongly associated with executive functioning – than better-off kids. That could explain weaker academic achievement and even lower IQs. The data also indicated that small increases in family income had a much larger impact on the brains of the poorest children than similar increases among wealthier children.

5) We should never stop making new friends [Source: Financial Times]
The author, Nilanjana Roy proposes a new theory of making friends: although it’s good to retain old, close, friends, it’s both possible, and desirable, to forge deeper friendships as we age. When you set aside the nostalgia that accompanies the idea of retaining friends from childhood, you start to realise that the person at work who knows what you’re passionate about today might actually know you better than the one who remembers you at a less formed stage of selfhood.  She says that she’s known some of these “new” friends for more than a decade now. Founded first on a base of common interests, most of these friendships have deepened slowly and tentatively, as they added glimpses into each other’s lives. A key pleasure of friendships forged in your adult years is that you know yourself better. Plus, there’s the element of choice. These friendships are formed more cautiously, invested in more carefully, often with more deliberation. By contrast, childhood friends can be as close as family, but they can also be just like family — you’re in each other’s life because of proximity, not because you sought each other out. This doesn’t make one better than the other; it’s just that the grain of the wood differs. It occurs that the literature on relationships, family, love and dating excludes the complexity of this kind of friendship. Perhaps that’s because we don’t yet fully recognise that, as you grow older, your circle of friends is at least as important to your life, if not more, than family is supposed to be.

6) Teleportation: Photon particles today, humans tomorrow? [Source: BBC]
Chinese scientists say they have "teleported" a photon (fundamental particle of light) particle from the ground to a satellite orbiting 1,400km (870 miles) away. Simply put, teleportation is transmitting the state of a thing rather than sending the thing itself. Some physicists give the example of a fax machine - it sends information about the marks on a piece of paper rather than the paper itself. The receiving fax machine gets the information and applies it to raw material in the form of paper that is already there. What it is not is teleportation in the Star Trek sense - transferring matter instantly from one location to another - which is how many instinctively see it. Instead, it relies on a phenomenon known as quantum entanglement. The phenomenon arises when two particles are created at the same time and place and so effectively have the same existence. This entanglement continues even when the photons are then separated. It means that if one of the photons changes, the other photon in the other location changes too.  If a third particle interacts with the first entangled particle, the change that occurs in the entangled particle is mirrored in its twin. So the twin contains information about the third particle and effectively takes on its existence. Till now, it has been impossible to create a long-distance link between two entangled particles. The Chinese team created 4,000 pairs of quantum-entangled photons per second at their laboratory in Tibet and fired one of the photons from each pair in a beam of light towards a satellite called Micius, The main goal for quantum teleportation at present is the creation of unhackable communications networks. The Chinese city of Jinan has already begun trials of a secure network based on quantum technology and a network linking Beijing and Shanghai is under development with so-called "trusted nodes" every 100km where the quantum signal is measured and sent again. Such a quantum network could be used for sensitive financial or electoral information.

7) Artificial leaves hold the promise of a clean energy future [Source: Financial Times]
For years, scientists have tried to emulate the process of photosynthesis- the process of taking in carbon dioxide, plus water, and using sunlight to convert it all into carbohydrates. Finally, those efforts are blooming. The magazine Scientific American, together with experts from the World Economic Forum, has named the artificial leaf one of the breakthrough technologies of 2017. Laboratory-based efforts are attempting to go one better on nature by generating not plant food but fuels that can be stored for later use. Such projects offer the promise of making new forms of energy while mopping up carbon dioxide, an unwanted greenhouse gas, from the atmosphere. That makes artificial photosynthesis one of the potentially cleanest technologies on the energy horizon. Daniel Nocera and Pamela Silver, from Harvard University, have taken early steps along this road. Their system — the “leaf” is actually a container — uses a catalyst, activated by sunlight, to split water molecules into hydrogen and oxygen molecules. The container is home to hydrogen-eating bacteria, which feast on the newly liberated molecules plus carbon dioxide to churn out liquid fuel. While even the fastest-growing plants manage to convert about 1 per cent of sunlight into food, the Harvard scientists managed an efficiency of 10 per cent when using pure carbon dioxide. The efficiency drops to about 4 per cent when pulling carbon dioxide from the air. Alongside the US Department of Energy, there are also a number of start-ups dedicated to transforming light energy into a storable, chemical alter ego. One challenge, among many, is to find cheap and plentiful catalysts; some techniques use platinum. The excitement over artificial photosynthesis stems from its potential to create “dispatchable” renewable fuels, which can be stored and used when needed. In contrast, wind turbines and solar panels generate energy intermittently. That hurdle has hampered the bid to put renewables more firmly into the energy mix. There is another bonus to solar fuels: they need no infrastructure. They can be whisked to even the remotest rural locations, with obvious implications for the developing world.

8) Traders on a hot winning streak risk a double fault [Source: Financial Times]
John Coates, a former trader-turned-neuroscientist, and Lionel Page, a behavioural economist crunched the results of hundreds of thousands of closely fought matches from the men’s and women’s grand slam circuit over two decades. The results were striking. Male tennis players demonstrate a clear “winner effect”: when a male tennis player wins the first set of a match after a close battle, they have a 57 per cent probability of winning the next set (after controlling for other differentials). But what is notable is that this pattern does not occur among women: a female player who wins a set does not appear to have a higher-than-expected chance of winning the next set. That might reflect physical factors, or mere chance. Coates and Page blame hormones: men, unlike women, have high levels of testosterone and these surge after a victory. And since high testosterone fuels risk-taking and confidence, that may give tennis players an edge. Furthermore, they think this pattern may apply elsewhere but with less benign consequences. “A winner effect among traders,” they write, “may account for the dangerous and frequent phenomenon where a star trader, increasing his trading size while on a winning streak, eventually suffers losses of such magnitude that they threaten the existence of his employing firm.” Even if the theory is partly right, it raises three important points. First, it should remind us that it is foolish to try to explain markets solely through the prism of rational self-interest. Second, regulators and bank executives need to rethink how they control financial traders and risks. When traders win they are normally given more funds and higher risk limits. However, it might be wiser to scrutinise winners, rein them in and impose mandatory breaks when they are on a winning streak. Third, the research raises questions about gender. Since the crisis, banks have tried to recruit more female traders, often for reasons of political correctness. However, the Coates and Page analysis suggests that this is the wrong approach: the real reason banks would do well to have more women is to offset surging testosterone levels.

9) The need for lateral entry in Indian civil services [Source: Livemint]
One of PM Modi’s first attempts to improve governance— an attempt to allow lateral entry from academia and the private sector at the joint secretary level—was quietly abandoned in Jul’14. And last year, minister of state in the Prime Minister’s office (PMO), Jitendra Singh, noted in the Lok Sabha, in response to a query by Shashi Tharoor, that there was no proposal for studying the feasibility of lateral entry into the civil services. The government seem to have changed tack again: the PMO has instructed the department of personnel and training to prepare a proposal for middle-rung lateral entry in ministries dealing with the economy and infrastructure. Promising as this is, such proposals have been made before. For instance, in 2005, the second Administrative Reforms Commission (ARC) recommended an institutionalized, transparent process for lateral entry at both the Central and state levels. But pushback from bureaucrats, serving and retired, and the sheer institutional inertia of civil services that have existed largely unchanged for decades have prevented progress. That stagnation means the civil services as they exist today—most crucially, the Indian Administrative Service (IAS)—are unsuited to the country’s political economy in many ways. In a 21st century economy, a quarter century after liberalization, the need for specialized skills and knowledge to inform policy-making and administration is more important than ever. Diving deep into the available data, Milan Vaishnav and Saksham Khosla find in “The Indian Administrative Service Meets Big Data”, a 2016 Carnegie Endowment for International Peace paper, that while there is a higher chance of junior officers who have acquired specialized knowledge and skills gaining much-prized Central government postings, there is no correlation between the postings and their area of specialization. That correlation comes into existence only at a late-career stage. Political interference and the use of transfers as carrot and stick further complicate the picture, often making it difficult for bureaucrats to stay in a posting long enough to gain relevant expertise. Lateral entry is both a workaround for the civil services’ structural failings and an antidote to the complacency that can set in a career-based service.

10) A raja’s 43 year battle to reclaim ancestral property [Source: Livemint]
This piece talks about how since 1974, Mohammad Amir Mohammad Khan, better known as the Raja of Mahmudabad, has been petitioning the government for the return of his properties but apart from a brief respite in 2005, the Raja’s heritage, spread across parts of Lucknow, Sitapur and Nainital, has been mired in litigation with him challenging the highest authority in India; the Indian government itself. In 1962 when war broke out between India and China, the government confiscated what it referred to as “enemy properties”, namely properties that belonged to a person or a country who or which was an enemy. This included not just Indian citizens of Chinese ethnicity but also those who had migrated to Pakistan during the partition. The same act was applicable during the 1965 India-Pakistan war. One of the people to migrate was Raja’s father.  The Enemy Property Act, 1968, categorically defined enemy property as belonging to a citizen of a country which was an enemy and with the passing of the Raja, the properties were bequeathed to his son who was an Indian citizen. In 2005, the Supreme court too gave what became a landmark and eventually a very contentious judgement. Declaring that enemy property is only vested with the custodian and that the Raja is a bona fide citizen of the state and not an enemy as defined by the Act, all of the Raja’s properties were returned to him. But this was just the beginning of another round of struggle. For while properties like the heritage hotel Metropole in Nainital and Butler Palace in Lucknow were returned to the Raja, the holdings in Lucknow’s prime commercial area were occupied by tenants, most of whom were paying a pittance of Rs 500-100  a month as they’d been given a lease of 90 years by Raja’s father. Rest of his properties we taken back after an ordinance was passed by the United Progressive Alliance government which sought to amend the 1968 Act and expand the definition of enemy from the 1968 Act to include citizens of India who are the legal heirs and successors of the enemy or enemy subject. The amendment also gave the government the right to sell the property, thereby implying that the owner of an enemy property was the state.

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