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 favorite 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 ‘overvalued US Stocks’, the ‘rising power of tech platforms’ and ‘how networking is overrated’.
Here are the ten most interesting pieces that we read this week.
1) Investors should be wary of overvalued US stocks
US stocks are overvalued. Therefore the decision to commit money (even passively) to the S&P 500 is a bad idea. This is the argument made by James Montier and Matt Kadnar of GMO in a recent white paper. First, their model starts with breaking down the total return on stocks into its constituent parts – dividends, earnings, margins and the multiple that the market puts on earnings. In the long term, nearly all of the total return on stocks comes from dividends: since 1970, the total average annual return on the S&P has been 6.7 per cent, of which multiple expansion makes up 0.1 percentage point. But during the past seven years, returns of 13.6 per cent have been driven primarily by margins and multiple expansion. There is nothing sinister about this. In the short term, dividends tell us little about returns. Excitement is generated over periods of a few years by the noise of the changes in the multiples that investors will pay for earnings, and changes in the margins that companies can command. Multiple expansion can lead growth in dividends for several years in a row. But to buy now you have to hope either that dividends will start growing at a much faster rate or that multiples and profit margins will continue to expand.
2) Ray Dalio turns cautious amid Washington conflict
Ray Dalio – the world’s biggest hedge fund manager – is turning more defensive on concerns that the political drama in Washington will impair the US government’s ability to function and weigh on already wobbly financial markets. The move comes amid Donald Trump’s nuclear brinkmanship with North Korea and White House infighting over the president’s response to neo-Nazi demonstrations in Charlottesville, Virginia. Mr Dalio, who was initially optimistic about the economic impact of Mr Trump’s policy agenda, wrote recently that divisions in Washington meant “conflicts have now intensified to the point that fighting to the death is probably more likely than reconciliation”, pointing to the President’s sharply diverging approval ratings among Democrats and Republicans. The hedge fund manager said Bridgewater was “reducing our risk” because of the likelihood the conflicts will not be “handled well”, arguing that their resolution “will have a greater effect on the economy, markets and our overall wellbeing than classic monetary and fiscal policies”.
3) Content isn’t king
Ben Evans of Andreessen Horowitz in this blog argues that while people in tech and media have been saying that ‘content is king’ for a long time he’s not sure how much of it is true. He says that music and books don’t matter much to tech anymore, and TV probably won’t matter much either. In the past, any music you bought for your iPod could only be played on Apple devices, and the same was true in reverse for music from any other service. Your music library kept you on a device. With streaming these issues mostly go away. All the major services are cross-device and if you do switch to a different service you’re not giving up tracks you’ve paid money for. Unlike in the past, switching has become easy. Since music no longer stops people from switching between platforms, it’s gone from being a moat to a low-margin check-box feature. All services have roughly the same underlying library of tens of millions of tracks, and the differences between them are fundamentally tactics, not strategies. Music is now merely marketing, not a moat. A Taylor Swift exclusive for Apple Music might drive some iPhone sales, just as a cool new ad campaign might, but there’s no strategic lever here – no lock-in. Something similar applies to ebooks. Like Spotify, the Kindle app is on any platform, so it doesn’t stop you switching devices.
4) Future of work: Learning to manage uncertainty
“Change is coming at us with the greatest velocity in human history”. In the single second it took you to read that sentence, an algorithm executed 1,000 stock trades. Computers at the credit card network Visa processed over 3 million transactions. Right now, 56,000 Google searches are returning tens of billions of results links and at this very moment, more than 2.5 million emails are being sent, not all of them by actual human beings. Technology is accelerating the pace of business at unthinkable speeds, so much so that the job you have today is changing as quickly as you read this page. If we can barely imagine one second’s worth digital deluge, how will we get our heads around the stunningly different future of work. For generations, new technologies – from the steam engine to the Internet and beyond – have fundamentally changed the nature of work and the economy. But the change is happening faster now while we are living longer. Where our parents and grandparents might have experienced only one, or even no, significant change in their lifetimes, you have likely already experienced a dramatic technology-driven shift in your career, and your children will likely absorb a major shift every ten to fifteen years across theirs.
5) The era of blind faith in big data must end
In this Ted talk, Cathy O’Neil – an American mathematician and author of several books on data science – says that today algorithms are everywhere. They sort and separate the winners from the losers. The winners get the job or a good credit card offer. The losers don’t even get an interview or they pay more for insurance. We’re being scored with secret formulas that we don’t understand that often don’t have systems of appeal. That begs the question: What if the algorithms are wrong? To build an algorithm you need two things: you need data, what happened in the past, and a definition of success, the thing you’re looking for and often hoping for. She says that in real life everyone uses algorithms. They just don’t formalize them in written code. For instance she uses an algorithm every day to make a meal for her family. The data she uses is the ingredients in her kitchen, the time she has, the ambition she has, and she curates that data. A meal is successful if the kids eat vegetables. However, the definition of success will be different if her kid is in charge – he’d say success is if he gets to eat lots of Nutella. But she gets to choose success. She’s in charge and her opinions matter. That’s the first rule of algorithms.
6) Good news for young strivers: Networking is overrated
Adam Grant, in this piece, reminisces how he has been stunned by the lengths people will go to at tech and business conferences to make a connection with a big name: sneaking backstage for a selfie, slipping business cards into briefcases, chasing them out the exit. However, he says, if the very thought of networking makes you throw up in your mouth, you’re not alone. Networking makes us feel dirty — to the point that one study found that people rate soap and toothpaste 19 percent more positively after imagining themselves angling to make professional contacts at a cocktail party. Yet we’ve all been warned that it’s not what you know, it’s who you know. Success is supposed to come to the suave schmoozers and social butterflies. Grant says that while it’s true that networking can help you accomplish great things, it obscures the opposite truth: Accomplishing great things helps you develop a network. He puts forward the case in point of George Lucas and Justin Bieber. The former became a mentee of Francis Ford Coppola after he won first prize at a national festival and a scholarship to be an apprentice on a Warner Bros. film. Bieber too didn’t network his way in but taught himself to sing and play four instruments, put a handful of videos on YouTube, and a manager ended up clicking on one.
7) Japan in race to build driverless tractor
Greying farmers, a rural exodus and low food self-sufficiency have thrust Japan’s biggest agricultural machinery giants into a national race to build a driverless tractor. The quest to perfect the “robo-tractor”, which has been encouraged by the Cabinet Office and is viewed as a way to stem the demise of Japanese agriculture, is expected to see the first generation of machines go on sale next year. The technology — estimated to add 50 per cent to the cost of a normal tractor — seeks to boost the effective manpower on Japan’s farmland, firstly by working fields with driverless tractors running alongside those piloted by humans to allow emergency intervention. As artificial intelligence, tracking and safety technologies improve, the vehicles will increasingly be left alone to till the farmerless expanses on the islands of Hokkaido and Kyushu. Unlike other countries where autonomous tractors are being designed to work huge fields of wheat, corn and soyabeans, Japan’s focus is on more intricate business of smaller, waterlogged rice paddies.
8) India’s perverse political equilibrium
One of the central concepts of modern governance is that only the state has the right to use violence. The state, in turn, may delegate the use of force to other agencies but if it begins to lose its monopoly over the use of force, say to crime syndicates, drug cartels or terror groups, its foundations begin to erode and its viability comes into question. Yet, there have been innumerable instances in India wherein the state has wilfully ceded its monopoly over violence, and in doing so, also stepped away from its primary responsibility to provide law and order to the citizenry. This was precisely the case when Dera Sacha Sauda chief Gurmeet Ram Rahim Singh was convicted of rape last Friday and his supporters ran amok, spreading mayhem in Haryana as well as in parts of Punjab and Delhi that cost 38 lives and injured close to 250. The state was unprepared and inefficient, if not indulgent—though, admittedly, it managed to somewhat get its act together over the last weekend, as a result of which the situation was much better handled on Monday, after the court handed down a 20-year prison sentence to the self-styled godman. Still, the fact remains that the state capitulated—yet again, and shamefully so.
9) Narendra Modi’s illiberal drift threatens Indian democracy
As India completes 70 years of its independence, its polity’s performance between elections is acquiring profoundly illiberal traits says political scientist, Ashutosh Varshney. In political theory, an illiberal democracy is defined as one that only pays attention to elections, while it violates, in the years between elections, some core democratic principles, especially freedom of expression. It views elections as the only measure of democracy and once elected, it seeks unrestrained power, often on behalf of the majority community. The India of Narendra Modi, prime minister, is beginning to resemble this description.
10) Game theory explains how Veeru broke every rule of courtship and still won Basanti in Sholay
The enduring charisma of Sholay – a 42 year old Bollywood blockbuster ¬– needs explanation. Besides crisp dialogue, its deft portrayal of human emotions — from sublime loyalty to visceral revenge — has received critical acclaim. What has probably escaped the attention of critics is its portrayal of rational decision-making. One sequence, in particular, stands out. The context of this scene is as follows: petty criminals Jai (Amitabh Bachchan) and Veeru (Dharmendra) are engaged by the former cop Thakur Baldev Singh (Sanjeev Kumar) to clean up the bandit-infested ravines of Ramgarh. In this ‘mission’, Veeru is infatuated by vivacious village belle Basanti (Hema Malini) who reciprocates his feelings. The only problem in matchmaking is Basanti’s mausi (aunt), who dislikes Veeru due to his bad habits. Jai’s ill-fated and tragicomic interventions on behalf of his friend worsen the situation. To overcome mausi’s resistance, Veeru hatches a convoluted plan. He climbs atop a water tank and threatens to jump to his death unless his demand for Basanti’s hand in marriage is met.