Ten interesting things we read this week

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2. The big lessons from history [Source: Collaborative Fund] 

How do people think about risk? How do they react to surprise? What motivates them, and causes them to be overconfident, or too pessimistic? The author of this article offers a few lessons from the history that apply to nearly everyone, and in many fields. 1) Calm plants the seeds of crazy: Per-capita death from infectious disease in the United States declined 94% from 1900 to 2010. It went from the most common cause of death to one of the rarest. Part of what’s made Covid dangerous is that we got so good at preventing pandemics in the last century that few people before January assumed an infectious disease would ever impact their lives. The irony of good times is that they breed complacency and skepticism of warnings. 2) Progress requires optimism and pessimism to coexist: The best financial plan, and the author thinks this extends beyond finance, is to save like a pessimist and invest like an optimist. Embrace that the short run is a continuous chain of setbacks and disappointments, problems and embarrassments, breakages, recessions, depressions, bear markets, pandemics, and errors. But none of those prevent the long run from being able to compound into something glorious. 3) People believe what they want to believe, see what they want to see, and hear what they want to hear: A few things innocently push us to believe what we want to believe. One is that everyone has a model in their head of how they think the world works, and that model is built mostly from what you’ve experienced and what people you trust have told you. A second reason people believe what they want to believe is incentives. 4) Important things rarely have one cause: We desperately want simple answers to explain outlier events, because every good story needs one hero and one villain. But it’s nearly impossible for something big to happen because of one event, one person, or one group. Covid-19 is similar. A virus transferred from animal to humans (has happened forever) and those humans socialized with other people (of course). It was a mystery for a while (small sample size) and then bad news was then likely suppressed (hoping it would soon end). Remove that and 2020 may have looked like a normal year. 5) Risk is what you don’t see: The riskiest stuff is always what you don’t see coming. Nobody saw Covid coming. Two things happen when you’re caught off guard. One is that you’re vulnerable, with no protection against what you hadn’t considered. The other is that surprise shakes your beliefs in a way that leaves you paranoid and pessimistic.

3. The pros and cons of investing global [Source: Livemint] 

Many Indian investors are today able to invest in stock market, directly or indirectly, globally. Ten years ago, investing overseas looked like an offbeat bet—both for fund houses and investors. The top-performing mutual fund in India over the past five years invests outside the country. Motilal Oswal Nasdaq 100 Exchange Traded Fund (ETF) manages ₹1,940 crore of Indian money and has delivered returns of 22.9% since 2015. While Motilal Oswal got lucky with its offbeat bet, the big mutual fund houses have by and large stayed indifferent. One reason was the foreign investment limit of $300 million per fund house and $7 billion for the industry, set by market regulator Sebi in 2008.

Responding to pressure from the industry, the regulator doubled the limit to $600 million on 5 November. The new quota is also relatively small for India’s ₹28 trillion mutual fund industry, but it opens up the possibility of future hikes, particularly as India’s foreign exchange reserves have swelled. There are two principal routes in which Indian residents can invest outside the country. The first is via mutual funds. This is a relatively simple, low-cost option geared towards the small-ticket investor. The second route is by opening a brokerage account outside India. Investors can do this by sending money abroad under the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India which has an annual limit of $250,000.

The LRS limit opens up a lot more possibilities in terms of stocks and funds that an investor can buy from the limited basket that Indian MFs offer. However, transferring money abroad is expensive, requires more paperwork and complicates tax filing for Indian investors, as we explain below. The US markets have risen significantly since last year, with the Nasdaq rising about 50% in rupee terms (as of 10 November), strengthening concerns about overvaluation. For Indian investors, as of now, the mutual fund route is the best option.

4. A useful guide to boardroom behaviour by a cultural veteran [Source: The Economist] 

The job of a company/institution’s board member is a challenging one. The job, Sir John Tusa, a former BBC executive, argues, is not all about free tickets and lavish dinners. He has written a guide based on his extensive experience among Britain’s literati and glitterati. “On Board: The Insider’s Guide to Surviving Life in the Boardroom” is a useful primer for any board member. “There is no difference between governance on a corporate board and an arts board,” he says. “Sitting on a board, let alone chairing one, is one of the most demanding, complex and taxing activities in the world of public life.”

Sir John’s advice to chief executives is to tell the board what they are doing, when, how and why—all in order to persuade board members that the boss deserves support. But CEOs should not deluge trustees or directors with paperwork: “If information is power, it must be remembered that too much information is a smokescreen.” As for board members, Sir John says they should ask questions of the executive, and be careful about accepting the answers too easily. They should also remember that there is no such thing as a stupid question. And it is not their job to develop strategy: “The executive proposes, but the board disposes,” he says. All Sir John’s suggestions seem sensible and most would apply to public companies as well as to arts institutions.

The role of non-executive directors has never been well defined. Most non-executives do their best but are caught between two stools. They do not know enough to challenge the executives properly. But if they push their questions too far, they will not be reappointed. Above all, trustees and non-executive directors cannot do their job unless the management wants their input. Wise bosses should know their limitations and rely on boards for advice.

5. Some business & leadership lessons from past presidents [Source: A Wealth of Common Sense] 

The people who run the country are some of the most talented and skilled people. And in this blog, Ben Carlson, director of institutional asset management at Ritholtz Wealth Management, highlights some important business and leadership lessons that we can learn from the past presidents of the USA. 1) Temperament is the great separator: Intelligence is important but it’s useless if not paired with the correct temperament. Biographer Doris Kearns Goodwin points out the key to Franklin D. Roosevelt’s success as a leader came down to his “self-assured, congenial, optimistic temperament.” Mr. Roosevelt helped guide the country through some dark days following the Great Depression and the years leading up to World War II. His confidence and optimism were a big reason the country made it through those difficult times. 2) Strong opinions, weakly held: When his formal education was cut short at age 9, Abraham Lincoln was forced to educate himself. He read every book he could get his hands on (developing an open mind), a habit he would carry into adulthood when he became a politician, reading books on long train rides as he canvassed the country. He pledged to his constituents early on in his political career that if his opinions on a subject later turned out to be wrong he was more than “ready to renounce them.” 3) Storytelling is more important than statistics: Roosevelt’s Rural Electrification Act in 1936 brought electricity to millions of family farms. But the story behind it is how Lyndon B. Johnson entered the House of Representatives in the late-1930s and convinced the president by his storytelling as he was running out of time. 4) Simple is better than complex: Mr. Lincoln was notorious for his uncanny ability to break down complex issues into their simplest elements. Speaking plain English allowed Mr. Lincoln to get his point across to jurors and voters alike because his stories were so accessible. 5) Timing and luck will always play a role: Teddy Roosevelt, who was a distant cousin of Franklin, once said, “If there is not the war you don’t get the great general; if there is not a great occasion, you don’t get the great statesman; if Lincoln had lived in times of peace, no one would have known his name now.” Luck, both good and bad, often plays a larger role in how things shake out than most are comfortable admitting. This means you have to be ready when an opportunity presents itself.

6. Why Warren Buffett sees investing as a loser’s game [Source: marker.medium.com] 

Warren Buffett in his Berkshire Hathaway letter to shareholders in 2005 said, “Over the years, a number of very smart people have learned the hard way that a long string of impressive numbers multiplied by a single zero always equals zero.” Investment consultant Charles Ellis in his book Winning the Loser’s Game explains how investing is inherently a loser’s game, because most investors who attempt to beat the market (those who try to win) typically underperform in the long run. For example, using excessive leverage or paying high fees for expected outperformance are two common ways in which would-be winners become definite losers.

The warning from Ellis and Buffett alike is crystal clear: Avoid the zeros. Avoid them at all costs. Why? Because the zeros are those things that can set you back years, or decades, in an instant. The author of this article explains how Myron Scholes, the Nobel Prize–winning economist, is far smarter than him, yet the author has the better-performing investment record. Anyone who knows about Scholes’ magnificent losses with Long-Term Capital Management (LTCM) can attest to this. How is it possible that a Nobel laureate can have a worse investment record than a typical investor?

Well, it turns out that the Nobel Prize winner played a stupid game. In the case of Myron Scholes and LTCM, that stupid game was called leverage. As the saying goes, “Play stupid games, win stupid prizes.” So, don’t play. The better strategy for investors is not to try and win, but to not lose. Too many people in the financial community obsess over the “optimal” way to invest, when their time would be better spent steering clear of actions that could lead to ruin.

7. How venture capitalists are deforming capitalism [Source: The New Yorker] 

In 2008, Jeremy Neuner and Ryan Coonerty, two city-hall employees in Santa Cruz, California, decided to open a co-working space. They named their company NextSpace Coworking. But their company faced a big challenge, finding a venture capitalist (VC) to invest in their firm. All the VCs wanted to have a share of WeWork. When Jeremy Neuner began having meetings with venture capitalists, he said, “their first question was ‘How do you compete with WeWork? Why should we invest with you instead of them?’ ” WeWork was reportedly losing millions of dollars each month, but it was expanding to new locations at a feverish pace. Neumann’s promises to VCs were so wildly optimistic, bordering on ridiculous, that Neuner was convinced WeWork had to be a scam.

Mr. Neuner was building a solid business, but the VCs wanted fantasy. “All we needed was five million dollars a year in revenues, and we would have made money for everyone,” he told me. “That’s enough to earn a living and buy a house and put your kids through school. But no one wanted something that just made a healthy living. They all wanted to find the next Zuckerberg.” Critics of the venture-capital industry have observed that, lately, it has given one dubious startup after another gigantic infusions of money. Increasingly, the venture-capital industry has become fixated on creating “unicorns”: startups whose valuations exceed a billion dollars.

When venture capitalists join a company’s board of directors, they take on a legal duty to protect all shareholders equally, and they must pledge not to prioritize their own gains over the profits of anyone else. This obligation is critical, because directors have ultimate authority over a company’s actions, and they essentially serve as stewards for everyone who hasn’t been invited into the boardroom. Even as many Silicon Valley founders, from Facebook’s Mark Zuckerberg to Uber’s Travis Kalanick, have become public villains, the venture capitalists who have funded and enabled them have escaped scrutiny. For decades, venture capitalists have succeeded in defining themselves as judicious meritocrats who direct money to those who will use it best. But examples like WeWork make it harder to believe that VCs help balance greedy impulses with enlightened innovation.

8. Akash Prakash on characteristics of bubbles [Source: Business Standard] 

The markets have recovered sharply since the March lows. Every day the markets are touching a new record high. Many investors feel that we are in the midst of a huge bubble in growth stocks generally, and US technology stocks in particular. In this article, Akash Prakash of Amansa Capital explains some common characteristics of bubbles, and see how they apply to today’s situation. It is intuitively obvious why investors are worried. Just six stocks in the US — the so-called FAANGM (Facebook, Amazon, Apple, Netflix, Google, and Microsoft) — have accounted for almost all the outperformance of US equities since 2015. They have gone up more than four times in that period, while the remaining (the S&P494) is up just 40%. Their earnings have more than doubled since 2015, while the S&P494 has had almost no earnings growth.

He explains valuation on its own cannot be used to call the top of a bubble. Valuation is a useless timing indicator. Stocks can always become more expensive, and valuation has to be seen relative to other asset classes. Today, equities may be very expensive on an absolute basis; in fact, they have been so for most of the past decade (using the Shiller cyclically adjusted P/E) but they are cheaper than bonds, and hence the party continues. Another point is that all the major asset bubbles in history have inflated during periods of very easy monetary policy. Rates have been kept super low and liquidity in the system has been ample.

The fact is that bubbles almost never burst while liquidity conditions remain very easy and benign. They burst only when liquidity tightens and rates go up. In fact, every major bubble burst only after monetary policy had begun to tighten and all the major bubbles reached their peak within two years of the first rate hike. Monetary policy is going to remain very easy for the foreseeable future. It is not clear as to whether we are in a bubble in technology stocks. What is clear, however, is that there is no reason why this potential bubble will pop anytime soon.

9. Why can’t the world’s greatest minds solve the mystery of consciousness? [Source: The Guardian] 

One spring morning in Tucson, Arizona, in 1994, an unknown philosopher named David Chalmers got up to give a talk on consciousness. The young Australian academic was about to ignite a war between philosophers and scientists, by drawing attention to a central mystery of human life. The brain, Chalmers began by pointing out, poses all sorts of problems to keep scientists busy. How do we learn, store memories, or perceive things? How do you know to jerk your hand away from scalding water, or hear your name spoken across the room at a noisy party? But these were all “easy problems”, in the scheme of things: given enough time and money, experts would figure them out. There was only one truly hard problem of consciousness, Chalmers said.

By the time Chalmers delivered his speech, science had been vigorously attempting to ignore the problem of consciousness for a long time. Evolution might have produced creatures that were atom-for-atom the same as humans, capable of everything humans can do, except with no spark of awareness inside. As Chalmers explained: “I’m talking to you now, and I can see how you’re behaving; I could do a brain scan, and find out exactly what’s going on in your brain – yet it seems it could be consistent with all that evidence that you have no consciousness at all.” He said, “If you were approached by me and my doppelgänger, not knowing which was which, not even the most powerful brain scanner in existence could tell us apart. And the fact that one can even imagine this scenario is sufficient to show that consciousness can’t just be made of ordinary physical atoms. So consciousness must, somehow, be something extra – an additional ingredient in nature.”

Chalmers knows how wildly improbable his ideas can seem, and takes this in his stride: at philosophy conferences, he is fond of clambering on stage to sing The Zombie Blues, a lament about the miseries of having no consciousness. The consciousness debates have provoked more mudslinging and fury than most in modern philosophy, perhaps because of how baffling the problem is: opposing combatants tend not merely to disagree, but to find each other’s positions manifestly preposterous. It would be poetic – albeit deeply frustrating – were it ultimately to prove that the one thing the human mind is incapable of comprehending is itself. An answer must be out there somewhere. And finding it matters: indeed, one could argue that nothing else could ever matter more – since anything at all that matters, in life, only does so as a consequence of its impact on conscious brains.

10. Inside the great NBA bubble experiment [Source: gq.com] 

Rudy Gobert was the first basketball player to be affected by Covid-19. And within hours after knowing this, commissioner Adam Silver would announce that the rest of the season was suspended indefinitely. Basketball would not officially resume until 141 days later, on July 30, inside what would come to be called the NBA bubble, in Orlando, Florida: the daring, temporary, artificial home of the world's greatest basketball players. In early July, 22 NBA teams descended on Disney World in central Florida to take part in a once-in-a-lifetime experiment. More than 300 athletes boarded a series of repurposed Mickey Mouse tour buses and were scattered among three different hotels—the Gran Destino, the Yacht Club, and the Grand Floridian—each designed to cater to the needs and wishes of the kinds of people who travel vast distances for the immersive family fun of the Magic Kingdom.

Pro athletes are already creatures of habit, but the limitations of the bubble forced a lot of the people inside it to adopt routines in order to preserve their sanity. But for all the loneliness, for all the outside life that the players missed, there were some moments of real joy inside the bubble, memories they say they'll never forget. There was Ja Morant, taking his first legal drink—a bottle of Don Julio 1942 tequila—when his teammates and coaches threw him a surprise party for his 21st birthday. There was LeBron James and Anthony Davis, rushing back to the hotel after a win so they could celebrate their victory with a big glass of red.

“We're [in the bubble] going crazy, the testosterone levels are through the roof, no one's significant other is there, and the single men are probably really going crazy because they're used to just doing what they want,” says CJ McCollum of the Portland Trail Blazers. “So it was just like a lot of tension and stress. And then, Houston Rockets assistant coach John Lucas, just comes out and starts saying what everybody was thinking.” When his speech concluded, the players all erupted and gave Lucas a standing ovation. The bubble experience was something different for all present.