Session on “Bridge – The Ultimate Mind Game” by Mr. Sunil Varghese

Contributed By: Meera Siva, CFA

The markets may be likened to a casino – there is a lot of luck (or bad-luck) but a skillful player knows how to make the most of the cards dealt and come out ahead. So, there are many lessons a finance professional could pick up from the world of card games. Especially bridge game that has no betting. Warren Buffet famously said that he would not mind being in jail if his cell mates will play Bridge. Need we say more about its benefits to finance professionals?

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At the CFA Society India, Chennai Chapter’s speaker event on August 9, 2019, Sunil Varghese spoke on this exciting game and its benefits. Sunil is an entrepreneur, TedX Speaker, Bridge Guru, Magician, Mentor for StartUps, Faculty and consultant. Did I say he is a magician?

He is also the Founder of MasterMind, which uses magic and innovative techniques – from launching a FMCG product in an unforgettable way or to drive the message home at the end of heavy seminars or sales conferences. He has been running a small-scale engineering firm for 28 years. Sunil holds a PGDM from IIM-Ahmedabad and a mechanical engineering degree from the College of Engineering, Thiruvanandapuram.

Why Bridge?

Bridge mirrors life (and finance) and playing it develops skills – risk analysis, probability, decision-making with incomplete information, planning and choosing the best from among alternatives. The game helps tap the right and the left brain and hence keeps the brain agile. Various studies show it helps enhance concentration, alertness and analytical ability. As it is a team game (played as two) it also helps understand human nature and psychology.

Unlike chess that takes a long time, the game is short (about 7 minutes). The game is touted by many professionals and leaders including Bill Gates. Many countries such as China, Norway and Holland encourage teaching the game in school for its many benefits.

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The game

Bridge is played with a regular deck of 52 cards. There are 2 players. North and South form a team and they play East-West. Players are given 13 cards each. Teams must not talk to each other. The aim is to win most ‘tricks’ (there are 13 total) by having your/your team-mate’s card as the highest ranked one.

There are further variants to the game, with one player playing open (giving an advantage to their team mate). And there is also trump.

To illustrate, the group played two rounds of game. And after each, the cards dealt were analyzed to figure out which strategy would have worked well and what it the most one could have got. For example, while everyone played the highest card (A), that was not quite the best strategy. Looking at how to make the lower ranked card (for example a 10) win a trick is what one had to think about. The important thing is to have a strategy first that one has put some thought into (for example, which cards would one lead the game with, which ones to risk when there is uncertainty).

Besides having a strategy and sticking to it (if it is rational, your teammate may also have the same strategy and there is alignment), being mindful and paying attention to what cards were played helps one redo the strategy and take some calculated risks. For example, the other team may play their hands differently and your original idea may not be tenable. You need to pivot, again with a strategy.

Three, it helps to be objective through this process. All the cards served are unique and there are infinite possibilities. So, it is fresh and old ideas, as in hoping to repeat a playbook from the past, will not get you very far.

What next?

There are many bridge clubs and associations that conduct tournaments. Learning and playing can be a great way to work-out your mind, well into old-age. And the skills you learn are immediately applicable as a finance professionals – be it in assessing risk, making decisions under uncertainty, sticking to a strategy, analyzing why your thesis did not work.

 

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Session by Mr. Sanjoy Bhattacharyya at Masters at Work (MAW) event, Kolkata-2019

Contributed by : Sidhant Daga

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The rewards of good behavior: Where theory meets practice

The last speaker to grace the CFA Society India Kolkata Chapter’s marquee event was none other than Mr. Sanjoy Bhattacharyya(Managing Partner, Fortuna Capital) himself. Mr Bhattacharyya’s wise words compelled the audience to introspect about their inherent behavioral limitations. Mr. Bhattacharyya explained with great intricacy as to how one must put behavioral finance into practice. During his speech Mr. Bhattacharyya busted various myths, explained various behavioral errors we suffer from and also taught ways to overcome the same. Mr. Bhattacharyya credited his presentation’s (The rewards of good behavior: Where theory meets practice) ideas to Crosby, Zweig,Monteir and Maubossin.

Mr. Bhattacharyya started with a bold statement that “Bhav Bhagwan Che” is a myth. He stressed on how in the markets we need to work against human hardwired nature of seeking social approval. One must work against social coherence, become a rational contrarian to achieve success in the markets. He told how important an another 2008 is to make some handsome amount of money, as buying in the times of distress can help one gain spectacular returns.

The speaker busted few more myths, the myths being

  • Large caps are less risky than mid cap and small cap
  • You are good at a particular skill based on the community you come from

Mr. Bhattacharyya beautifully correlated research facts and how they impact people in the investment field. He told that how brain which is only 2-3% of the body weight consumes more than 25% of our energy and this is the reason why people try to find shortcuts while researching and picking stocks as everyone wants to avoid extra brain activity as we all are inherently lazy.

Mr. Bhattacharyya gave an important teaching, he told that he doesn’t and others should also not take investment decisions when they are going through the state of HALT ( Hunger , Anger , Loneliness , Tired)

The speaker mentioned how newcomers in the stock markets are always more bullish than the seasoned players, as they haven’t gone through a bear cycle, whereas, seasoned investors who have faced a bear market are cautious because their memory of the bear market haunts them.

One of the key statements he made during the course of his presentation was that “Sensible investing is not about finding multibaggers, it’s about managing risk.” He further elaborated on the concept of risk and subdivided risk into behavioural, market and business risk. One must be managing all 3 well to become successful as an investor.

According to the speaker, the crux of behavioural risk is defined by –

  • Ego– Mr. Bhattacharyya via practical examples showed how ego is the enemy of every investor. He via interactive questions to the audience showed how each one of us suffer from overconfidence which is a by-product of the ego inside us. According to him one must overcome ego to be more successful. The ways he mentioned to do the same are:
  • Diversify
  • Feynman Technique – figure out what you don’t know, educate yourself and teach it to a beginner.
  • Take the outside view, which depends more on probability and facts than convenience and personal experience.
  • Look for the right questions instead of looking for answers because market are uncertain and need a dynamic process
  • Doubt to stimulate through enquiry
  • Manage overconfidence
  • Avoid Confirmation Bias
  • Use the process of thesis – antithesis – synthesis

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  • Conservatism – Mr. Bhattacharyya explained how we prefer sameness over change, even if it is suboptimal because change requires cognitive effort, and has the potential for loss and regret if the decision of activity provides lesser returns than the decision of being status quo. Conservatism causes investors to hold losers too long and to overvalue stocks which they own. Mr. Bhattacharyya also explained how the conservatism bias goes hand in hand with the sunk cost fallacy. The ways to conquer conservatism as per the speaker are :
  • Evaluate risk in terms of long-term rewards rather than short-term harm. Smart Investors buy stocks which seem more risky to the average investor.
  • Portfolio Management should be rule based rather than discretionary
  • When you know your stock idea is a disaster, exit it, don’t seek advice from others
  • Banish the fear of losing
  • Be prepared for the worst. Decisions during the time of crisis should consist 3 elements- denial, deliberation and decisive action.
  • Practice logical thinking

 

  • Attention – Investors sometimes do not rely on information which is factually correct due to recency bias. They also suffer from information overload. In attention bias, the problem is that salience trumps probability when making investment decisions and leads one to rate the unfamiliar one as more risky and show a preference for the familiar regardless of their fundamental qualities. The ways by which Mr. Bhattacharyya guided to face this behavioral risk are :
  • Distinguish between signal and noise
  • Play the odds, ditch the story.
  • Look for simple solutions
  • Examine the deepest motivations behind your thoughts and actions and consistently seek feedback from those with diverse viewpoints
  • Emotion – Mr. Bhattacharyya explained how emotions play an important role in our investment decision making. Emotions cause investors to cut their gains fast, over bet, make irrational decisions etc.The ways by which one can keep their emotions under check as per the speaker are:
  • Meditate
  • Use the concept of RAIN ( Recognise, Ask, Investigate and Negotiate)
  • Automate your processes, use rule based investing
  • Try and understand your emotional state while making a decision

The Speaker interestingly differentiated between the role of luck and skill in the markets.

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(Source-https://www.cfasociety.org/india/Presentations/The%20rewards%20of%20good%20behavior-%20MAW%2029th%20June-%20Sanjoy%20Bhattacharyya.pdf)

Book Recommendation – The Zurich Axioms by Max Gunther

The presentation by Mr. Bhattacharyya was followed by a short panel discussion moderated by Mr. Anirban Dutta(Director, Jet Age Securities). Viewpoints shared during the panel discussion –

  • On how one can be a rational contrarian – One can become a successful rational contrarian investor only when one takes contra bets in companies he/she understands. A deep understanding of the company is essential to take a bet opposite to the crowd, because without a deep understanding one cannot have a strong conviction.
  • On what test will Mr. Bhattacharyya take while choosing a fund manager – Mr. Bhattacharyya told that as per him, a personality and a stress test are the most important criteria, knowledge test being secondary ,as to him having a personality suited to withstand market pressure and still act wisely is important.
  • On how to remain happy in markets – Mr. Bhattacharyya advised the audience to not to get attached to money, if they want to remain happy in the markets. He simply said that the key is “If you have enough, great. And if you don’t, great.”

The link to Mr. Bhattacharyya’s complete presentation –https://www.cfasociety.org/india/Presentations/The%20rewards%20of%20good%20behavior-%20MAW%2029th%20June-%20Sanjoy%20Bhattacharyya.pdf

 

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CFA India Fintech Conference

CFA society organised second CFA India Fintech Conference in Bangaluru on March 8, 2019. Summary of key takeaways :

Session By Mr. Chris Skinner, Author of Digital Bank. Fintech a Global Perspective.

Contributed By – Sandeep Gupta, CIPM, CFA. Conference Co-chair

History of finance goes back 100’s of years with the Knights Templar and the creation of Switzerland as a country.  The rules and regulations created over centuries has led to the modern banking system. Technology cannot replace the rules and regulations that create the trust for cross border trade.

1st session

Chris feels that Banks will continue to be relevant and disagrees with Bill Gates Quote “We need banking, we do not need banks”. Banks may not be necessary for payments, loans, savings and credit. These are things that banks do. But the core of banking is creating a trusted store of value. Also acting as a trusted intermediary for exchange of that value with others that you do not trust. Crypto currencies is a wild west without regulations leading to frauds with no recourse. Regulations are required. Banks are not stupid. They are trying to innovate but it’s very hard.  However, we have to move from analog to digital. There is a great difference between digital and industrial banks. Digital banks are creating change and immense value without requiring as many  people.

Chris presented some interesting statistics on how Fintech and new age banks have caused a change for existing banks in number of employees and total Value. Those statistics seems to suggest that while No. of employees in traditional banks in 2018 vis a vis 2016 are on decreasing trend , this trend is on increasing side for Fintech and new age banks.

Stripe which is valued at $ 20 billion is basically 7 lines of code. It was setup only in 2011. In the same period, JP Morgan has also grown valuation phenomenally while reducing the number of people massively. J P Morgan is getting rid of stupid jobs. Anything that a machine can do is a stupid job.  Fintech communities connect and need not necessarily create.

Fintechs like Stripe makes certain processes at the traditional lenders non-competitive. Stripe is a B2B service which is invisible to customers. If you build an API, other people insert your code into their process and you get a share of the fees and can create immense value. The traditional business model of back office, middle office and front office at banks used to be integrated. Digital can pick-up one part of the process and do it better.

In the US P2P lending is regulated and is reducing the spread between borrowers and lenders. It has been reduced to 150 basis points vs. a difference of 400 basis points at traditional lenders. This makes traditional banks non-competitive. However the traditional bank back office has a wealth of data. But they cannot remain dumb with their data. JP Morgan software now does in seconds what took lawyers 360,000 hours of lawyers time. Every job that can be replaced with technology will be. People have to retrain and reskill. People will become trainers, explainers and sustainers of the technology.

Teams are growing smaller and example of Amazon was shared where they have a concept of a two pizza team. Any team that needs more than two pizzas for lunch is too big. Decisions are to be made faster. Banks are introducing digital when they need to make a cultural transformation and include it into their DNA. Legacy infrastructure and structures have to be regenerated. Technology is business and the business is technology. There can no longer be an IT Department. Data is not oil, a fossil fuel. It is like air which is all pervasive and essential.

Focus is to be on customers. Banks of the future will have different roles. A bank is an asset management company. Historically it was physical assets but in the future it will be digital. Facebook is also a digital vault. But how secure is it? Data is money and is valuable. It needs to be secured. Banks can play a key role in that area. Banks can be partners in life events of customers. Apps and API’s can play a major role in integration and can play a more holistic role. Banks can be a curator of multiple Fintechs.

 

Session By Mr. Kunal Shah, Founder Freecharge / Cred.The Evolving Payments Landscape

Contributed By – Sandeep Gupta, CIPM, CFA. Conference Co-chair

Kunal conducted a well-received session anecdotally without any slides. He highlighted that the lines of payments, banks, ecommerce, chat, smart phones, telecons, fintech are all blurring. He highlighted the power of increased distribution and creation of platforms.

2nd session

He gave an example of the English language which is the global platform of communication. India has benefitted from this platform. Platforms assimilate features. In the past the English did not have good numerical system and they used the inefficient Roman numerals. Trade was inefficient to conduct using roman numerals. The Indian / Arabic system was more efficient and replaced the roman numerals in the English Language. This is the core principle of how a product eats other products.

 

On disruption; he gave an example of Whatsapp payments. The consumers trust on Whatsapp is much more due to its ubiquity. So when Whatsapp launches payments as a feature, it can disrupt the entire landscape.  Whenever a large product which has a large distribution, decides to make a new feature; they wipe out an existing product. Example is digital cameras. A product “the cell phone” which was more distributed and in all our hands (most of the day) killed this product. A digital camera has now become an icon in our smart phones. In fact; most of the icons in our smart phones today are actually products that have been assimilated. Videos are now playing inside Whatsapp.

If potentially a telco which has 500 – 600 million customers decides to start lending; it can potentially disrupt banks. If a hardware company with 300 million devices decides to do investments and mutual funds; they have the distribution to disrupt traditional investment platforms. Some may argue that they do not have the capability. Capabilities can be bought. Distribution is critical. Today reaching 500 million customers is very easy. A telco can build this scale in 4-5 years. The world has become a efficient superconductor. Whenever a good joke is made; in less than 12 hours everyone knows it. Great ideas; jokes, bad news is spreading extremely fast. High distribution and trust can create new features into products very fast.

Malls today attract customers by organising events. Similar analogy was extended to temples of India in the past. The shops around the temple did well when the traffic to the temples increases. They used to compete with other temples. Similarly PayTM has a lot of Daily Average Users (DaU’s). They went into news as it attracts more people onto the platform. This creates scale and distribution reach. Tik-tok in China is loans company. Is it a social media company, fintech or a lending company.The lines are blurring.

On Crypto and money Kunal had the following views. Money is an imaginary concept and we have agreed to exchange goods and services based on this.  Demonetisation erodes the trust in the currency. Whenever a regime changes there is demonetisation. India has witnessed over 20 demonetisation events in its history. Currency is introduced through power. If the people don’t trust the regime, they will look at alternate methods of hoarding wealth. Gold creates interoperable trust acceptable by most. If the US government decides to launch its own crypto currency,people may shift to that because it is being endorsed by a powerful backer. Historically when a King adopted a religion; the people also adopted it.  Human behaviour moves from the rich, influential and powerful downwards to the poor. A brand like Kylie is transitioning from a personality to a brand which is trusted by people. Popular Instagram influencers are more effective than a TV Ad.

When there is lack of trust; it gets concentrated to a few trustworthy players who accumulate immense power. Countries with lower trust grow slower. Removing trust barriers is very important. Conglomerates exist in countries with low trust. A company like Tata can put its name across products and people will buy it. Similarly PayTm can now get into multiple businesses using the trust created and its distribution reach. Uber and Ola are not Taxi companies but Trust Companies. Air BnB is a trust company. Strangers can engage with each other without fear. A shoe brand also may not manufacture the shoe themselves; but the moment they put their brand on the product; customers can trust the quality.  Decentralisation is not needing a brand to create trust between two people. If humans can trust each other without requiring an intermediary, wealth will see a massive redistribution.

On the occasion of Women’s day Kunal mentioned that the participation of women in the workforce needs to be increased. Only 10 – 12 % of urban women are working. For a faster per capita growth of the country it is important to improve this metric.

On millennials, Kunal had an interesting insight. In every home there is a Chief Technology Officer who is between 14 – 18 years. That person is showing the rest of the family on how to use technology.The role of this 14 -18 year old is also shifting to that of the chief procurement officer. While the products are being designed for 40-year olds, the influencer is a 14 – 18 year old. Millennials are able to communicate effectively and this generation is disproportionately smarter than ones before.The delta is large because they were born with Internet. They have instant access to information from the internet. They prefer working for new age company and have a disdain for ‘Uncle’ companies.

The session was followed by a very interesting Q&A between Navneet Munot, CFA& Kunal Shah.

Some interesting snippets.

  • How many of us know what is our salary per hour. This is important to understand the value of time. If a company has an IT department, itcan never become a technology company.
  • Once you achieve distribution; companies can be created at will. Amazon was not a tech company. Because of their distribution reach; they were able to create AWS.
  • On innovation & regulations Kunal had an interesting retort. When the first knife was invented; it could have cut someone’s hand. However, it was not banned and we still use knives. Similarly, if Whatsapp has been used to spread fake news; it is not prudent to simply ban it.
  • MRP is bad for the country. Products should be charged more for the rich than what is charged for the poor. This is the ethos of capitalism. Anything else is socialism.
  • You cannot make money anymore from Payments. However, the distribution achieved through payments can be used for creating features that can make money.
  • All businesses are at risk due to cross sells.
  • Anyone who can predict the future more accurately will be able to make more wealth. Technology helps in this. No company is safe from disruption.

 

Session By Mr. Varun Dua, Acko. Insurance in the Digital Economy.

Contributed By – Sandeep Gupta, CIPM, CFA. Conference Co-chair

Key Issues Addressed were

  1. Overview of Indian Insurance Market
  2. What is digital Insurance & the role of technology
  3. How is Acko addressing the gaps in the market.

India is the 4th largest Auto Market in the world. India has only got 30 – 40 odd insurers which is very small compared to markets like China, USA etc who have many more (300 – 400). In India before privatisation there were only 4 PSU’s insurers. Hence the insurance industry in India is very young and has only developed over the last two decades. The penetration of Non-Life Insurance as % of GDP in India is very low (0.9%) currently. However the Market is growing rapidly at 22 % with the private sector outpacing the PSU’s many of whom are now ailing.

3rd session

The Role of Digital / Technology in Insurance can be segmented across 4 parts. Product, Price, Distribution and Claims. Initially in the first phase, digital has worked to put the existing products online. This was done by the likes of Policy Bazaar, cover fox etc.. In the future, the entire value chain is expected to move online. This will happen when data and analytics comes online. It can change the dynamics across all aspects of Product, Price, Distribution and Claims. The amount of data and intelligence that is available creates new products and the possibility of better pricing. The very nature of the product will change as digital can bridge the distance between the insurers and the insured.

The main costs of any insurance company are distribution, opex and claims. The distribution costs of 8 – 10 % cost in the traditional system can be brought down significantly through technology.  The same efficiency can be brought into opex. With regards to claims, the customer credibility can be established to put customers into green channels where claims can be settled more efficiently which has been a bane for traditional insurers.

The three challenges for insurance was Non availability of data leading to blanket underwriting, High Distribution Cost due to all new insurers chasing the same distributors and Investment float incomes (more of an AUM business) vs. an insurance play.

Acko is tackling these challenges by alternative distribution challenges. Better underwriting through better data and analysis. The key is to identify better customers. Acko is focussed on the insurance business and on how to acquire good customers. There are now 100 million insurance customers online in India. Acko have sold low value products of Rs 1 or 2 to over 18 million customers. Acko covers customers of Ola and they compensate passengers for things like missed flights etc. Acko captures detailed information like flight times, cab arrival timing etc. which powers their claims processing.  Another focus is Online Auto Insurance which currently is only 6 % of total market. This is expected to grow to 15 – 20 % in the next few years.

Availability of data through multiple sources of information like Amazon, Ola etc. can help price products better in future. As an example; if a customer is using Ola & Uber more than 25 times a month, he deserves a better insurance premium on his car which is not being used much. Trustworthy customers should get their claims processed immediately. In the US; facial recognition that can detect truth vs lie’s is being used to process claims instantaneously.

The world of insurance is evolving rapidly and the existing players may soon face a Blackberry Moment.

 

 

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Session by Mr. Kuntal Shah- Masters at work (MAW) event, Kolkata-2019

Contributed by Soham Das, CFA

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On 29th of June 2019, Kuntal Shah, founder of Pune based Oaklane Capital Management spoke on “Investing Frameworks and Learning from the Markets”. His talk covered over 300 years of financial market history and was filled with specific anecdotes of the major financial market crashes of history.

Spanning over 35 odd minutes, Mr. Shah walked the audience through bubbles and crashes, highlighting the extent to which investing public can and do go manic. His talk started with a declaration that “investing is the last liberal art” and pressed how investors should try to establish a mental latticework to figure out unfolding developments. He repeated, that navigating financial markets requires a composite knowledge of multiple knowledge domains, specifically an understanding of business cycle, economic cycle, investor psychology cycle, interest rates and fiscal cycle.

The first part of his talk focused on the investor psychology cycle. He remarked that there is a general tendency of fund managers to fail agreeably and “amicably”. In other words, failing by conforming is more accepted than staying out of the herd. Mr. Shah, credited, Ralph Wagner’s book, “A Zebra in the Lion Country” to highlight the difference between “eat-well” zone and “sleep well” zone. While, when fund managers herd, they sleep well, knowing that collective failure is acceptable, but content in settling for average returns. On the other hand, he quipped that, those fund managers who break out of the mould earn handsome returns.

Kuntal Shah, thrusted his point further when he focused exclusively on the idea that bubbles have to be navigated successfully to avoid the ensuing wealth destruction. Thus he pivoted completely towards analysis of financial bubbles.

He begun with the Tulip Mania of 1637, where the price of a gouda tulip soared 60x in 3 years. He pulled up a data table on the screen in front, which highlighted the extraordinary rise and price of a tulip bulb. At its peak, a bulb of tulip could have been exchanged vis a vis a fairly rich and big basket of essential commodities.

He talked through the bubbles and crashes of the next 200 years, and narrated out how seemingly geniuses like Isaac Newton, Charles Mackay etc. fell for them. Mississippi Bubble, South Sea Bubble, Railway Boom all were visited briefly, till he reached the episode of Great Depression.

He narrated how the errors in policy increased the pains of depression and lengthened the depression. Bringing out the folly of a trade war, he quoted history to remind audience of a particular tariff act called Smoot-Hawley Act, which deepened the crisis and delayed recovery from the Great Depression of 1929.

The mania of 1970’s US market, Japan Asset Bubble, Russian Crisis were showcased and interesting facts about each of those crises were narrated. To buttress his message, that valuations can soar extraordinarily high, he mentioned that during Japan’s real estate bubble, area around the Royal Palace was valued higher than the entire state of California.

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Mr. Shah spent some time on the debacle of Long Term Capital Management (LTCM), Myron-Scholes team in LTCM and how their world-view differed, quite radically from that of Robert J. Shiller. He argued that the extent of volatility and frequency of extreme events in financial markets proved that Efficient Market Hypothesis doesn’t quite work as well as expected. When the turn for 2008 and the Global Financial Crisis came, he dwelled less on the study of the crash but more on the lessons he derived from them. His biggest lesson, he admitted was realizing how risk travels across the asset classes.

Profitless IPOs, peaking conspicuous consumption, rising frauds- all were signs as per him of an impending asset bubble. Veering towards investor psychology once again, he talked about the most dangerous 4 worded statement in investing – “this time is different”. This he mentioned is a general feeling often characterized by 3 composite world views: a, financial crisis is something that happens in other countries to other people, b, an overly and often unfounded faith in our own abilities to prevent a crisis and finally, a renewed confidence in our ability to predict one, long before it actually happens.

Mr. Shah’s slides intermittently recommended quite a few books, noteworthy among which were the following – “This Time is Different” by Kenneth and Rogoff and “Why it’s different this time”, by Robert Zuccaro, CFA. Both the books stand at the opposite end of their world view.

All the while, Mr. Shah reminded that, the hardest bubble to spot might be the one, that an investor finds himself in. He commented that expansion of a particular sector within an asset class can be a good sign of an impending bubble. Additionally, he considered the length of the tallest skyscrapers, magazine covers as “contra” indicators and symptomatic of an easy liquidity and an impending asset bubble.  Signs of extreme behaviors at inflexion points were discussed at length by Mr. Shah. He listed out a pack of 13 signs that together can help to understand if, a market is showing signs of “topping” or “bottoming out”. A few of the ominous signs, as per him are, increasingly large number of IPOs, rapidly rising prices, excessive leverage, free availability of credit, unchecked optimism in popular media, historically high valuations and very high trading volumes, booming conspicuous consumption etc.

Conversely as per him, a few of the optimistic signs preceding a turnaround in the economy are,a complete absence of any activity in IPO market, M&A or VC arena, low valuations, official declaration of recessions, the fall of previously favorite sectors, low cost of credit etc.

Quickly spanning across Soros’s theory of reflexivity, Minsky model and 5 lens framework of Vikram Mansharamani, Kuntal Shah quickly landed on the topic of the current day. He highlighted that the elevated debt levels and rock bottom interest rates as the sources of risk in today’s world. Mr. Shah drew the attention of the audience towards a surprising fact – in 2018, 84% of all IPOs were of profitless companies.

He further plied on with his view that not everything is hunky dory by a slide which had “Easy Money and Congenial Interest Rates are necessary conditions for bubbles”, written boldly across the top. The slide showcased 4 panels of separate charts, that showed how valuations can rise extraordinarily and sharply during financial bubbles.

Wrapping up the presentation, Mr. Shah noted the following:

  1. Gold Standard, its absence or return is not the solution. Bubbles existed before its demise, bubbles will exist after it as well.
  2. Bubbles are decreasing in duration but increasing in frequency
  3. Inflation can rise quickly
  4. Fed Tightening event usually ends up with a financial event

In a moderated session with Raunak Onkar, the research head of Parag Parikh Financial Advisory Services, Kuntal Shah was asked by Onkar, how does he read the current market temperature as. Mr. Shah replied, that he sees signs of rising conspicuous consumption. He remarked, while unicorns are supposed to be rare, today they are a dime a dozen. He concluded his reply by adding, he does foresee the market becoming warm and frothy, and at the verge of a crisis.

Onkar, veered towards more specific ideas, when he asked Mr. Shah about his views of capital allocation skills of Indian promoters. Mr. Shah, declined to take names who are doing a good job, adding that he would rather not perform a hero worship as no one is infallible. However, he also added that majority of Indian CEOs are poor capital allocators.

In conclusion, Mr. Shah’s presentation talked in detail about the anatomy of bubbles, the mass psychology around them and the idea that human behavior is fallible. The three key takeaways from his talk was, while the general temperature of the market is rising, it is hard to say when the bubble will burst. Secondly, there are a handful of investors in Indian context who are doing capital allocation properly and finally, with investing being the last liberal art, it is important for us to have a sense of history to navigate the future.

Link to the full presentation – https://www.cfasociety.org/india/Presentations/History%20of%20Capital%20Markets-MAW%2029th%20June-Kuntal%20Shah.pdf

 

 

 

 

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Session by Raamdeo Agrawal- Masters at work (MAW) event, Kolkata-2019

Contributed By : Sidhant Daga

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The first speaker to impart knowledge and wisdom to the audience was none other than Mr. Raamdeo Agrawal- Joint MD and Executive Director, MOSL. Mr. Agrawal took us through his life journey, showcasing how he started with a very humble background and now how he has built such a big empire. It was quite motivational for the crowd to listen to his “Buy Right, Sit Tight” philosophy which has helped him to garner enormous amount of wealth overtime. Mr. Agrawal’s presentation revolved around few themes supplemented by his experience on the same.

The major themes were:

Power of CompoundingThe speaker explained how compounding can work wonders in prolonged periods of time. He gave the example of how Warren Buffett is the living example of how if wealth is compounded slowly and steadily, one can become immensely rich. Mr. Agrawal exclaimed that making money in the share market is a slow process. The fact that there is a dearth of young billionaires is because investing in stock market is not a ‘get quick rich scheme’ and wealth will accumulate over a long period of time. Even Warren buffet who started investing at a young age of 11 years could become a billionaire at the age of 60 only. He jokingly said that one can only become a billionaire in the stock markets by the age of 30, if one starts with a capital of 5 billion.

Positive AttitudeThe speaker stressed on how investor’s attitude plays an important role in the investment field. He said that knowing how to be happy is very important. He gave an example of his wealth journey to show how he kept an optimistic view during the tough times.

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Never Speculate Mr. Agrawal spoke in detail about his humble beginnings. He told how earlier, when he started MOSL, he used to buy thin registers rather than fat ones, just to save on cost. Mr. Agrawal said that as he had only a small amount to invest, he would never speculate. He would spend hours reading photocopied annual reports to find out the right investment bet. He requested everyone in the audience to never speculate.

Importance of Patience Mr. Agrawal spoke on how patience is important. He used George F. Bakers quote in the Thomas Phelps book “100 to 1 in the stock market”: To make money in stocks you must have the “the vision to see them, the courage to buy them and the patience to hold them”. and patience is the rarest of the three. Mr. Agrawal told that success is a very rare phenomenon, so once a person has identified a successful company with good fundamentals and good management, one must stay invested and not keep shifting their portfolios to newer companies.

Management QualityThe speaker emphasized the importance of management quality. He said an investment’s success = Quality of Management * Quality of Business. So, even if one aspect is zero, the investment will fail.

Mr. Ramdeo said that the management can be judged by 3 parameters- integrity, demonstrable competence and growth mindset.

Portfolio construction and position sizingMr Agrawal took the audience through his journey of holding 200+ stocks at a time and how now he never holds more than 20 stocks at a time.

He advised the audience to buy only companies which they understand, because conviction and large stakes can only be built in companies which one understand.

On position sizing, Mr. Agrawal spoke of his concept of T+1, T+2, that he buys and adds positions in a stock only when the company achieves the desired success. 

Other takeaways from Mr. Ramdeo Agrawal’s speech were:

  • Mr. Agrawal spoke on the changing dynamics of the market and how this time the markets are “very new” in nature as index is near all time highs and the broad markets are not indicative of the same.
  • Mr. Agrawal explained how one must not live in anxiety and should follow the “buy right, sit tight “philosophy. He said that people who look at their portfolios less often tend to gain more than those who keep checking their portfolios very frequently.
  • The speaker explained as to how he earned from value migration stories and how he keeps trying to identify value migration stories to identify investment bets. He gave example of Infosys – the Boston to Bangalore value migration and HDFC Bank- The public bank to private bank value migration.
  • Mr. Ramdeo sees huge opportunity in insurance and banking companies in the future.

After the presentation, a panel discussion was held which was moderated by Mr. Sunil Singhania, Founder – Abakkus Asset Manager LLP. Here are the key takeaways from the same :

SS- How should one survive in such noisy markets?

RA-Technically speaking, we can’t complain as index is near all time highs, we need to be patient. Good opportunities only come in bad market conditions. We will play every ball even if wicket is good or bad.

SS- How to spot good management and good business when the company is small?

RA- One must know exactly what one is looking for, conviction is also necessary.

SS- What is important good stocks or good companies?

RA- Bad companies never make good stocks. It is necessary to buy good companies at reasonable prices. As per a study if one buys companies with a peg ratio of more than 3, the returns are sub par.

SS- What are the mistakes you have made in your investment journey?

RA- One of the biggest mistakes were made in identifying the integrity of the management ( Manpasand and companies in financial technologies). As soon as one understands he has made an error, one must run away from the stock.

SS-What’s your take on disruptions?

RA-I believe that disruptions are overhyped. Is there a digital way to get drunk? I’m continuously looking for value migration stories. EV can be a space to look out for.

SS- Any book recommendations?

RA-Buffett letters, Snowball, Michael Porter’s Competitive Strategy , Value Migration, Art of execution

Link to the presentation- https://www.cfasociety.org/india/Presentations/Limited%20downside%20Unlimited%20upside%20-MAW%2029th%20June-%20Raamdeo%20Agrawal.pdf

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Book Review – “An Economist walks into a Brothel ” by Allison Schrager

Contributed By : Jitendra Chawla, CFA

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What is common between investing in early-stage start-ups, producing Hollywood movies and breeding horses on a stud farm? All have long tails (no pun intended) i.e. range of outcomes that have a skewed distribution – with a high probability of outcomes which lead to losses and a ‘long tail’ of successful but unlikely or low probability scenarios. You’ll learn this and lots of other interesting ways to understand risk in this very interesting new book – “An Economist walks into a Brothel”

Allison Schrager’s book takes a unique and fresh approach to explain concepts associated with risk, how people from all walks of life (not just investors) understand and deal with it, and what lessons one can take from these risk warriors.

Her writing is easy to read and devoid of all the jargon. Even those who have little or no background in economics will understand and immediately relate to their personal circumstances.

The most interesting thing about the book is the unusual settings Allison has picked. Allison interviewed sex workers and brothel owners to understand how they deal with risk in their business and price it. She studied the life and career of Kat Cole – who was once a waitress at Hooters and is now the COO of Focus Brands – parent of the American chain of baked goods stores and kiosks – Cinnabon. Allison says “Cole learned about managing risk by making unconventional choices early in life”. And then goes on to explain her life choices so far.

She explains how the movie-making business is inherently fraught with risk and returns that do not follow a normal distribution. In her words, “A movie is like an airport trip that will take anywhere between ten minutes and two hours.

Allison explains the difference between idiosyncratic risk and systematic risk by giving life story of a New York-based paparazzo – Santiago Baez. She likens his strategy to manage the risk he must confront to earn his livelihood to “low-tech version of what finance mavens employ”.

The real-life stories are riveting and make it easier for the reader to understand the message and apply the lessons easily in their own circumstances.

In the book, Allison walks the reader through “five rules for better assessing and employing risk in your life”. Each of these rules “describes a different risk concept “from financial economics, illustrated through people and places testing its limits, and then shows you how to apply this concept in your everyday life”.

These five rules are :

  1. No risk, no reward – explains how to assess what you want, how much risk you need to take to achieve it, and different types of risk
  2. I am irrational, and I know it – How it is difficult for us to think in probabilities because of our inherent biases and why we tend to underestimate the risks involved in our decisions.
  3. Get the biggest bang for your risk buck – Why and how we should assess the risk involved in comparison to expected rewards and how we should choose the option that leads to achieving our objective by taking minimal risk
  4. Be the master of your domain – How to improve our odds by eliminating unnecessary risk and even further reducing the risk by using tools of hedging and insurance
  5. Uncertainty happens – Difference between risk and uncertainty and how to protect oneself from uncertainty.

Allison Schrager pursued her Ph.D. in Economics as she had been drawn to the subject. But she struggled a lot early on, which made her even more determined to work hard. She chose economic of retirement as her research topic as she thought it was “the purest and most beautiful of all economic problems”.

She says the default “risk-free” option for her like most Ph.D. candidates was a job in academia. But when she started sitting for job interviews, she realized that – that was not what she wanted to do. She wanted to “avoid math, have fun and spend time with people”. So she chose journalism and started working for the Economist for no money. After that, she went on to work with Robert C. Merton – the Nobel prize-winning economist and together they worked on developing strategies to help people invest for retirement.

Taking her own career choices as an example, Allison explains how people make mistakes in calculating risk, in understanding what they want and then taking on less or more risk than they should have. “When we chase the wrong goal and take a risk, odds are it won’t go well”.

While they were working on the retirement problem together, Merton reframed the retirement problem for her – “by spelling out what risk-free means in retirement and from there how to manage risk.” “This strategy changed how I saw everything”, says Allison.

I think this book has been able to achieve its objective – that of making it easier for the reader to understand and analyze the risks – in choices they confront and decisions they make. That too while avoiding math, having fun and using real stories of real people. Personally, for me, the book provides an easier framework to understand risk, weigh my options and make an informed decision in a wide range of situations – career choices, saving for retirement, buying a house, moving cities, allocating investments and many more.

The book is not just suitable for novices – who don’t know much about the subject and may start looking the world through a different lens after reading it – but also experts, who understand the concept of risk very well, as they get to understand it from a new, easier and fresh perspective.

You can buy the book online at – https://www.amazon.in/Economist-Walks-into-Brothel/dp/0593086724/ref=sr_1_1?keywords=book+-+An+Economist+walks+into+a+Brothel&qid=1562232907&s=gateway&sr=8-1

 

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Volunteering Workshop-Delhi

IMG-20190618-WA0014Contributed By: Parvez Abbas, CFA

The Delhi Chapter of CFA Society India organized the Volunteer Orientation Workshop at IBIS hotel, Delhi on 9th June 2019. The event kick-started with a welcome note from Ms. Shivani Chopra, CFA -an active volunteer from Delhi- who shared her volunteering experience. She informed the audience about the numerous events conducted by the Delhi Chapter in the last two years. Mr. Gaurang Trivedi, CEO of CFA Society India took the first session. He talked about the role of volunteers in CFA Society. CFA Society thrives on the contribution and untiring energy of its volunteers globally. They are at the helm of all activities and events. He broadly talked about four pillars of volunteering:

  • Know Yourself – What you are good at and what do you want to improve in yourself?
  • Passion – zeal to work selflessly
  • Time commitment – volunteers need to devote time
  • Building Network

Ms. Arati Porwal, Director, Society Relations, India enlightened the audience about how one can become a volunteer. She explained how one can take benefits of affiliate membership without being a regular member. She narrated anecdotes and experiences of various volunteers. She emphasized on the importance of keeping volunteer profile updated on the CFA Institute website. It was followed by address from Ms. Mansi Panchal, Consultant, who explained the structure of the CFA Society and its various committees. Currently, there are 152 CFA Societies across the globe and volunteers play a key role in their functioning. She advised how one can be a part of the five committees based on ones area of interest.

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The last session of the day was taken by Mr. Jitendra Chawla, CFA and Director of CFA Society India who has been an active volunteer from Delhi for many years. He recounted his volunteer journey and apprised the audience of his learning in all these years. He further explained how volunteering helped him in honing his organizational skills, team management skills and in making lots of friends. He said that unlike the demanding jobs where performance is evaluated on a number of parameters, a volunteer is not judged on his work. Rather volunteering gives an opportunity to contribute to the CFA Society and provides benefits like recognition, sense of achievement, developing leadership, communication and other skills and building connections.

Many people attended the event beating the blistering Delhi heat. They asked a lot of questions which were patiently answered by all the speakers. Thereafter, many signed up for the volunteering opportunities and would be assigned mentors to guide them.

-PA

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