One Size Fits……………

In his new book “Noise”, Daniel Kahneman gives example of his hypothetical friend Paul who was diagnosed with high blood pressure by his Doctor.

3 Months of different medicine tracks were still not able to bring down the blood pressure of Paul.

Meanwhile Paul had to move to a new city where a different Doctor told him to buy a home blood pressure kit to measure his blood pressure  and note down the readings.

According to the new Doctor, Paul didn’t have any blood pressure, he was suffering from “White Coat Syndrome” that raises blood pressure of an individual when they are in a doctor’s office.

One key task of a doctor is to make a diagnosis and sometimes it involves making a judgement and judgement can go wrong for a variety of reasons.

A thumb rule is often applied to make things simple.

However, the challenge with a thumb rule is that its simplicity itself makes it invalid in many if not all situations.

One Size fits All.

One-size-fits-all describes an item, situation, or policy designed to accommodate a large amount of people.

Something that is one-size-fits-all will not be an exact fit and is not tailored for every circumstance, but it will suffice.

One-size-fits-all came from the garment industry.

In the 1970s, many retailers carried items that were oversized;

They were designed to fit a range of sizes.

However by the 1990s, companies experienced a backlash from people who did not fall within the range of sizes for a one-size-fits-all item.

Most ready-to-wear designers began using the designation: one-size-fits-most.

It was just about this time when the popularity of the expression one-size-fits-all really took off. Note that one-size-fits-all is hyphenated.

One-size-fits in Investing

Recently the conversation on a business channels program on mutual funds made the following suggestion:

Investor should not have more than 8 schemes

2 debt schemes-ultra-short term; corporate bond fund; short-term; banking & PSU

6 equity schemes

– 2 large cap-One index & 1 active

– 2 flexicap-One concentrated on domestic stocks and another one with international exposure

– 1 small or midcap fund, however exposure should not be more than-25% of total exposure; and last but not the least

– 1 tax savings

How about considering the following:

  • What is the risk profile of the investor?
  • What is the investor saving for?
  • What is the time horizon for these goals?
  • Can the customer take the risk of mid/small cap?
  • Should it be mid cap or small cap?
  • Why only 6 equity scheme?
  • Why 2 for large, 2 for flexi but only 1 for mid/small?
  • Is this kind of concentration good for the client’s risk-profile?
  • If you are choosing only 1 scheme what should be the criteria?
  • Why international exposure and why not provide it directly rather than through flexicap scheme?
  • How much international exposure fits into client profile?

I am sure you can think of several other questions in this context.

The challenge of advice on a TV channel is that the advice can only be “one-size-fits-all” because of the very nature of the medium.

It’s just “Noise”.

Just like a garment of a particular size will not fit all, similarly an advice of a certain kind will not fit all.

I believe that time is not far when every portfolio will probably be investor as investor evolution will make them more aware of their specific need.

The key for the investor is to think about their specific situation rather that “follow the herd”.

Remember if you buy a shoe that’s not your size, it will either itch or keeping falling off your foot.

Decision is yours.

For guidance call +919920741569 or contact on manish.verma@manishverma.co.in

Follow my twitter handle @manver1974 for more such shares

Collecting the Dots

Moneyball (a popular book and movie) describes the successful strategy of Oakland A’s (baseball team).
The thesis is simple-Using statistical analysis, small market team can compete by buying assets that are undervalued by other teams and selling ones that are overvalued.

The best-known Moneyball theory was that on-base percentage was an undervalued asset and sluggers were overvalued.

At the time, protagonist Billy Beane was correct. Jahn Hakes and Skip Sauer showed this in a very good economics paper.

From 1999 to 2003, on-base percentage was a significant predictor of wins, but not a very significant predictor of individual player salaries. That means players who draw a lot of walks were really cheap on the market, just as the movie narrates

The DOTS Ignored

The dots were available in open, however were ignored by the bigger teams as they had the funds to buy what they thought were the best players.

The smaller teams were following the strategy of the bigger teams and failing.

There is always a lot of talk about “connecting the dots”, however very limited focus on “collecting the dots”.

When you don’t collect the dots, how would you connect them.

The journey has to start with collecting and not connecting.

If you leave it to luck, you will connect dots by accident.

However, if you start “collecting the dots”, it will become part of the process.

Barriers

Realization can come only when information is available.

However often there can be 4 barriers to information:

  • Awareness of the importance of the information
  • Attention-What is attention being paid and how important is it?
  • Past Experience-Baggage that prevents people from collecting the relevant information
  • Bureaucracy-Information not being shared due to bureaucratic reasons

Solutions

  • Consciousness-being aware of the need to collect the dots
  • Networking- Create a relevant network to keep collecting the dots
  • Collaboration-create community to reinforce collection
  • Categorization – Putting relevant information where it belongs

What it means is that a high level of consciousness and understanding of what information is relevant, collecting that information and processing that information is needed to collect and connect the dots.

While this is all process, what it starts with is knowing that there are dots, that you need these dots to complete the picture and then having the ability to go after this objective as a mission.

Collecting the DOTS-Investing

Investing has been a big pre-occupation for investors at large since the beginning of the pandemic.

Those who came after the fall got fantastic returns and created a template for those who missed to be part of the “Great Investing Game”.

Everyone became an investor and those who were not buying equities directly got “FOMO”.

India has been opening 1.8Mn broking accounts every month since the beginning of 2021.

The great rush to own equities and emulate the success of others is a big motivation.

Just reading this makes you understand the flaw in the thinking.

It’s not about investing but about participating in the “Gold rush”.

And we know how that ends.

Step Back-Look at the DOTS

Investing and success in doing investing is about taking a step back.

Understanding your objectives-and no it can’t be “make the same returns as your neighbor”.

You are not getting into gambling.

Your first objectives have to be to understand what you are getting into, why and what is your risk-reward.

This requires serious advisory and not “following the herd”.

It’s about “collecting the dots” and “connecting them”.

Advisor/Coach

Having a good advisor who can help you manage your instincts while getting you exposed to what you intend to do is important.

However even more importantly if you are looking to be a serious investor, understanding the process and you is very important.

This requires “deep thinking” and investment of time.

If you don’t/can’t invest this time, think about doing something else.

This is a dangerous place to discover yourself if you don’t know who you are.

“Collect the Dots” before you “Connect them”

Crypto 101-Part VI-Regulations Around the World

Crypto was envisaged as democratic, decentralized concept beyond the outreach of governments and central banks.

However, adaption on a widespread has multiple triggers:

  • Utility
  • Trust
  • Framework that’s understood easily

There is a legal framework that goes beyond the concept that requires recognition of any activity as either a business, investment, speculation and basis that categorizing any income accruing from these activities so that they can be taxed.

While the crypto believers wanted to avoid this very system, any wide-spread adaption will require enough number of people to have clarity on such matters to ensure there are no legal challenges as well as safety of their investments/activities against being declared illegal.

What Can the Govt. Do?

There are 3 different kind of reactions that can come:

  1. Adapt- Countries like Switzerland, El Salvador are good examples of adapters
  2. Regulate-Australia, Canada, Singapore, Thailand, South Africa, Indonesia, Germany, EU, Japan are countries that have taken early steps to regulate the crypto
  3. Ban-China, Vietnam, Ecuador, Macedonia, Qatar, Morocco, Bolivia are some of the countries that have banned crypto

There are still several countries obviously which are making up their mind with respect to crypto like India USA to count a few prominent ones.

The tables below provide a good summary of what’s happening in countries that have adapted/regulated crypto Vs. the others.

Adapters/Regulators

S. No.CountryCrypto-friendly normsRegulations addressing concerns of illicit use of cryptocurrencies 
1FranceFrance currently does not regulate cryptocurrency trading. However, it is slowly moving towards regulation.To combat anonymity of cryptocurrency transactions, it has proposed a new Ordinance is proposed with stricter AML and CFT norms, ensuring mandatory compliance with standards of the Financial Action Task Force (FATF).
2Switzerland1) Classifies cryptocurrencies as assets
2) Accepts Bitcoins as legal tender in some regions.
3) requires a license for DLT trading facilities.
4) It is home to the ‘Crypto Valley’, which is a fintech hub catering to cryptocurrency businesses in Switzerland and Liechtenstein.
5) It houses more than 900 companies, and the combined valuation of the top 50 companies is around USD 37.5 billion.
6) Switzerland’s principal stock exchange, SIX Swiss Exchange, announced in January that its trading turnover for crypto products crossed USD 1 billion in 2020.
Cryptocurrencies and operation of trading platforms come under the scope of Switzerland’s AML law. Persons who exchange cryptocurrencies for fiat money and vice versa are also regulated under this law.
3GermanyCryptocurrencies are treated as financial instruments under a recently enacted German law. It introduces new licensing requirements for cryptocurrency businesses.Pursuant to the new law, cryptocurrency businesses are subject to Germany’s AML law.
4NetherlandsTrading in crypto-currency is regulated in the Netherlands. In May 2020, the Dutch AMLD5 Implementation Act was passed. The Act requires crypto-exchanges and crypto custodian wallet providers to register with the Dutch central bank to offer services in the Netherlands.The Dutch Implementation Act also updated the existing anti-money laundering rules to implement EU’s AMLD5 directives in the Netherlands. TCrypto service providers in the Netherlands have to record and verify customers identity, monitor transactions and file Suspicious Activity Reports (SARs) with local law enforcement agencies.
5European Union (EU)The EU Commission has introduced a directive on ‘Markets in Crypto-assets’ to regulate trading in crypto-assets and support digital finance in all EU states.All EU states have to follow the AML Directive 5 which has strict rules to combat money laundering. Member states are required to include cryptocurrency businesses within the ambit of these AML obligations. EU has also introduced an Action Plan to prevent money laundering and terrorist financing, beyond the standards adopted by the FATF.
6USASome states in USA have regulated cryptocurrencies while others are considering laws to regulate. 
New York has proposed a conditional licensing framework to make it easier for start-ups dealing in virtual currencies to operate.
Wyoming has already passed a bill allowing the creation of a bank which is specially meant to allow business to hold digital assets safely and legally.
Oklahoma has introduced a bill authorizing the use, sale and exchange of cryptocurrencies within government agencies. 
The Financial Crimes Enforcement Network of the US Treasury Department has issued a draft law requiring virtual currency operators to maintain records, and verify the customer’s identity in transactions involving virtual currencies or digital assets. The US Department of Justice has also suggested future strategies to combat illicit uses of cryptocurrencies including promoting law enforcement awareness and expertise in cryptocurrency technology to efficiently conduct investigations.
7Australia[3]The Australian Taxation Office has a guidance document on tax treatment of virtual currencies.
The guidance states that the transactions related to crypto-currencies are “akin to a barter arrangement, with similar tax consequences”.
As per the guidance, the digital currencies are not money. The Australian Securities and Investment Commission has issued a guidance on regulation of certain crypto-currencies as ‘financial products’ under its securities law. The guidance indicates that entities carrying on a cryptocurrency business need to be licensed.
In 2017, the Australian government amended its AML/CFT law to require digital currency exchanges to register with the Australian Transaction Reports and Analysis Centre. They must also implement the necessary AML/CFT measures to mitigate the risks of money laundering, and to identify and verify their customers’ identity.
8CanadaIn 2018, the Canadian Securities Administrators (CSA) issued a notice clarifying that securities law requirements will apply to crypto-businesses offering coins or tokens.
In January 2020, another notice clarified the situations where securities law would apply to platforms facilitating trading of crypto-assets. 
From 01 June 2020, Canada’s money laundering law requires all entities dealing in virtual currency to registerwith the Financial Transactions and Reports Analysis Centre of Canada (‘FINTRAC’) and implement the applicable AML/CFT measures.
9SingaporeTrading in cryptocurrencies is legal and is regulated by the Monetary Authority of Singapore under Singapore’s Payment Services Act, 2020.
Cryptocurrency businesses have to obtain a license to operate a cryptocurrency exchange.
Public offerings or issues of digital coins are also regulated under Singapore’s Securities and Futures Act, 2001. 
10South KoreaIn March 2020, the South Korean Parliament amended its ‘Act on Reporting and Use of Specific Financial Transaction Information’ to extend the AML/CFT obligations to crypto asset service providers, including crypto-currencies and crypto-exchanges.
The amended law requires crypto asset service providers to register with the Financial Services Commission and partner with one regulated bank for handling deposits and withdrawals.
The law requires crypto asset service providers to comply with enhanced KYC and AML rules. Crypto asset service providers will have to file suspicious transaction and currency transaction reports with the Korean Financial Unit, and conduct customer due diligence.
11South AfricaIn April 2020, South Africa’s Intergovernmental Fintech Working Group (‘IFWG’) released a position paper on regulation of crypto-assets recommending South African government to employ clear “policy stances”, “enforce” strict oversight and codify AML measures for policing crypto-businesses.
In November 2020, South Africa’s Financial Services Conduct Authority released a draft declaration of crypto-assets as a financial product under South Africa’s financial services law.
If enforced, this law will require crypto asset service providers to apply for authorisation as a financial services provider.
There are no AML/CFT compliances specifically for crypto-currency currently in South Africa. South Africa’s AML law requires all businesses including crypto asset service providers to report suspicious and unusual transactions to its Financial Intelligence Centre.The IFWG’s position paper has recommended the government to introduce enhanced AML/CFT requirements for crypto asset service providers. This will include conducting customer identification and verification, customer due diligence, keeping records, monitoring for suspicious and unusual activity on an ongoing basis, and reporting of suspicious transactions to the Financial Intelligence Centre.
12ThailandThailand passed a law in May 2018 to regulate businesses relating to crypto-currencies and digital tokens under the supervision of the Office of the Securities and Exchange Commission (SEC).
Any entity interested in offering digital tokens has to obtain approval for offering from SEC.
On the other hand, all entities wanting to operate as digital asset business operators have to obtain a license from the finance minister on the recommendation of the SEC.
In November 2020, Thailand’s finance ministry notified the Digital Asset Business Notification to recognise new categories of digital asset businesses, and the Digital Asset Business Licensing Notification to introduce additional licensing requirements for such businesses.
Digital asset business operators and digital token portal service providers are regulated as financial institutions under the Anti-Money Laundering Act B.E. 2542 (1999) and are required to implement AML measures prescribed therein.
13IndonesiaThis is a unique example of a country which initially banned cryptocurrency, and then legalized it.
In January 2018, Indonesia banned all payment system and financial technology operators from processing virtual currency transactions.
However, in 2019, the Indonesian government published regulations to regulate trading of crypto assets as commodities under the supervision of its Commodity Futures Trading Regulatory Agency.
Any entity dealing in crypto assets as commodity futures must comply with AML/CFT norms.
The entities are also required to report to Indonesian Financial Transaction Reports and Analysis Center.
14Japan[5]Under Japanese law, crypto-assets are defined and regulated under the Payment Services Act, 2009 (PSA 2009). All business entities interested in operating crypto-asset exchange services are required to be registered with the Financial Services Agency of Japan. Security Token Offerings and Initial Coin Offerings are regulated under Japan’s Financial Instruments and Exchange Act (FIEA).Under the Act on Prevention of Transfer of Criminal Proceeds, crypto-asset exchange services have to comply with advanced KYC procedures. These businesses are required to verify identity of customers, record and verify transaction records and report suspicious transactions to the concerned authorities.

Countries that Have Banned

S. No.CountryStatus of ban
1ChinaAccording to a notice issued by various Chinese government agencies jointly, ‘fundraising and trading platforms’ such as crypto-exchanges are prohibited in China. All initial coin offerings in China are also illegal and prohibited. However, there is no law or regulation which prohibits Chinese people from holding or transacting in crypto-currencies.[2] Thus, the ban envisaged by the Indian government will likely be wider in scope than that imposed by China.
2EcuadorIt passed a law banning Bitcoin and decentralized digital currencies in 2014. The Central Bank of Ecuador clarified that Bitcoin and other decentralized digital currencies are effectively banned in Ecuador. It also clarified that the purchase and sale of crypto-currencies through the internet is not forbidden, but the same do not qualify as legal tender.
3MacedoniaIn 2016, the National Bank of Macedonia issued a statement prohibiting Macedonian residents to have investments in cryptocurrency.
4Saudi ArabiaThe Saudi Arabian Monetary Agency has issued statements warning against trading in virtual currencies as they are out of government supervision. It was further clarified that virtual currencies are not approved as official currencies. In 2019, the finance ministry reiterated its warning against dealing or investing in virtual currencies, including crypto-currencies.
5MoroccoThe Moroccan Exchange Office informed the public that transactions through virtual currencies constitute a violation of the exchange regulations and are subject to penalties and fines. However, the press release also stated that various financial institutions in Morocco are following the evolution of virtual currencies in Morocco with interest.
6QatarIn February 2018, Qatar’s Central Bank issued a circular to banks declaring Bitcoin as illegal, and prohibited all banks from dealing with crypto-currencies. In January 2020, the Qatar Financial Centre (QFC) also announced that it will ban activities related to cryptocurrency.
7VietnamIn October 2017, the State Bank of Vietnam issued a decree on cryptocurrency outlawing the issuance, supply and use of cryptocurrencies. It also imposed fines up to 200 million dongs. The directive became enforceable in 2018. In March 2020, the Vietnamese finance ministry reportedly established a Digital Asset Research Group to propose guidelines and regulations on crypto-related activities.
8BoliviaThe Central Bank of Bolivia effectively banned crypto-currency, stating that the use of coins not issued or regulated by countries or zones, as well as the processing of electronic payment orders in currencies and monetary denominations not authorised by it in the field of the national payment system, are illegal and prohibited.

Between the adapters, regulators and those who are banning the crypto, it is an evolving space.

However given the numbers of prominent countries that have chosen regulation, means that this asset-class is here to stay and will continue to retain its space.

For guidance contact on manish.verma@manishverma.co.in or +919920741569

Follow my twitter handle @manver1974 for more such shares

What the Books Don’t Teach You?

Post is inspired by a Twitter Thread by @sahilbloom regarding the book “Good to Great”. This is not a criticism.

It’s just a look at how you think about what can be applicable to you Vs. looking at things that sound good but might not be for you.

Jigsaw Puzzle

The beauty of a jigsaw puzzle is that it makes you think of possibilities and combinations that stir your imagination and the thrill of putting it all together even if you have solved the puzzle hundreds of times.

Every time it seems like there is a new dimension to the problem.

You randomly pick up pieces and try to put them together to see if they fit in.

Sometimes they do and at others they don’t.

Through this hit & trail method you arrive at the right combination.

There are similarities that our life and whatever else we do to a jigsaw puzzle.

However, the challenge in life is that the life-puzzle is infinite and hence pieces never seem to fit together.

The same thing happens with business, there are so many moving parts that to think that you can solve the jigsaw puzzle when life and business is changing by the moment around you is giving yourself too much power that you don’t actually possess.

What Characterizes a Business?

Products, brand, technology, intellectual property give competitive edge to the company to succeed in the marketplace.

However, the piece of the puzzle that makes and keeps a business a running ship is its culture and its biggest bane that ultimately can push it back.

When a company is successful, its culture is hailed and when it stops being a market leader or fails, the same culture is reviled.

Who is talking about GE today?

In Management meetings, often the CEO asks, how do I improve the efficiency, productivity, growth of the Company?

Focus groups are created, and initiatives are laid down, often times without realizing that the pieces being created do not fit the puzzle and maybe not even required.

Then there is lure of the “Latest Management FAD” that a consultant with a best-selling book behind brings to the table.

Good to Great

11 companies participated in “Good to Great” original list-

Wells Fargo, Nucor, Kroger, Abbott, Gillette, Circuit City Store, Fannie May, Kimbery Clarke, Philip Morris, Pitney Bowes & Walgreens.

This is apart from the 6 companies that the author says could not sustain “Greatness”.

These are- Burroughs, Chrysler, Harris, Hasbro, Rubbermaid, Teledyne.

A very quick google search will tell you that none of these companies can be characterized as market leaders today.

If anything, they have lost market share as well as market cap from their heady days.

Circuit City Store went bankrupt.

Pitney Bowes all time high was in 1999. Its trading at 20% of that all time high right now.

What Happened?

Whatever method a book advocates is what I described above as bringing more pieces to the puzzle rather than making it easier to join the current pieces together and sometimes they could make you believe you have changed, improved basis criteria like share price gain which might not have anything to with you perse.

If the market is in a positive territory, it is not extraordinary for share prices to go up, but you cannot use share price as a barometer of greatness.

As Jeff Bezos said-“my share price is not my company”.

Bumper Sticker Management

To be seen to be doing something and failing is considered better than “Not to be seen doing something and failing”.

This creates the pressure to hire consultants and create company-wide initiatives.

In the 1999 anniversary issue of “Business Today” (Indian publication), there was stories of companies that had put in place transformational processes and succeeded.

When I met the HR-Head in 2000 of once such company and asked him how things were now-he couldn’t even re-call what was it that I was referring to.

In another instance Head-HR of a large Indian Insurance company was gushing to me about the transformational journey of his company and support from the CEO.

After 6-months I learnt that he had left the company as under revenue pressures all his initiatives were abandoned unceremoniously.

Adapting the lessons from a book is like adapting bumper sticker philosophy to run your life.

It sounds good but it might be a piece that is not part of your puzzle.

Long back I heard an Indian Actor talk about his process and he said and I quote-“I listen to the Director, however when I am enacting I out it all at the back of my mind so that my emotions seem genuine on screen and convey my interpretation”.

This is solid advice-you read books, you listen to consultants and experts, however, you do what is applicable to you rather than adapting something that your system revolts against-like an ICE engine will not run on CNG, it will need petrol/diesel to operate.

Bullshit Acceptability

“It is impossible for someone to lie unless he thinks he knows the truth. Producing bullshit requires no such conviction.” – Harry Frankfurt

The Oxford English Dictionary defines bullshit as, simply, “rubbish” and “nonsense”, which unfortunately does not get to the core of bullshit. Consider the following statement:

“Hidden meaning transforms unparalleled abstract beauty.”

It sounds very meaningful but hardly conveys anything to the reader.

In philosophy many times you come across statements like this:

“Attention and intention are the mechanics of manifestation.”

This is an actual tweet from Deepak Chopra.

Is there any meaning that you can ascribe to this statement at all?

In On Bullshit, the philosopher Frankfurt (2005) defines bullshit as something that is designed to impress and seems to convey a deep profound philosophy. However in reality it is nothing but a meaningless collection of buzzwords put together to impress the hell out of people.

Every day when you deal with people you come across bullshit in the garb of fancy sounding words or statements that actually have no meaning.

When Smart people don’t have answers, instead of saying I don’t know, they give you a profound sounding statement that has no meaning but sounds goods

Bullshit in Investing

Look at these statements, for example:

This time it’s different…

John Templeton famously said, the 4 most dangerous words in investing are-“This time it’s’ different”

This statement starts coming into play more at stock market peaks or bottoms especially tops when it is used to justify higher prices.

When the market is at its peak you will get compelling reasons why stock prices should go higher, why the bull market should last considerably longer than any other in history, why this boom will not be followed by a crash and hence why “this time it’s different.”

There is always some truth here and that’s why the arguments sound compelling. As even Mr. Templeton said, 20% of the times these statements are indeed true.

However the danger lies in thinking that this “Different” will be uninterrupted.

Look at what’s happening with Tech stocks-it seems that there will be no end to tech adoption and companies can continue to grow at very high levels for ever;

However we forget that its “Gravity” that holds us together and “gravity” does come into play if not today than tom.

There are no Buyers, there are only Sellers

If there is no buyer there will be no sale and hence no seller;

However what it really means is that there is no buyer at a stated price; As the asking price goes down, buyers emerge;

Look at everyone’s whipping boy-DLF, it has perpetually been an volatile stock, however even on its worst fall day it has found buyers.

Since it was listed, its average volume on days that it fell has been around 78 million a day. On days that it rose, the figure was 83 million.

Time in the Market and Not Timing the Market

Ask those who invested at the peak of the stock market; Investors who invested in January-2008 had to wait 5 years to cross the peak of Jan-2008 even though they came in striking distance of crossing it within 3 years too.

The statement used to dissuade investors from staying out of the markets so the managers can continue to make money;

However in reality it has not played out very well for the investors and hence for investors keeping some cognizance of the market levels is important to ensure disappointment

Cash on the sidelines

On a net basis, there is no side-line.

People who use this statement seem to suggest that there is some stockholder who sold his stake and is now awaiting re-investment.

However for the market, an equal amount of money get invested back by the buyer so there is no incremental cash.

When the seller comes back as a buyer, he/she would need a seller to re-enter.

Incremental liquidity or re-allocation could come in and push upward pressure on prices, however somebody will have to sell for somebody to buy, unless corporates create new equity.

All of these statements sound “Smart”.

However these are used by market commentators as they need to say something to the Media and when there is no other explanation.

These explanations sounds extremely plausible.

Be Aware and “Stick to your Course” and keep your “Bullshit Filter” on.

For guidance contact manish.verma@manishverma.co.in or on +919920741569.

Follow my Twitter handle @manver1974 for more such shares.

When Price Rules

Heard a comment on a business news channel yesterday

“Nobody cares about valuations these days so no point talking about”.

In 1999 at the peak of the Dotcom frenzy, there were 457 IPO’s of which 117 doubled on the listing day.

Technical and momentum ruled the roost at the cost of fundamentals of the stock.

FOMO send Nasdaq to a record high of 5132.52 by March, 2000.

However just after the peak, markets started to get sold off and by Oct, 2002, Nasdaq had lost 78% from the peak amidst the realisation that billions of dollar market cap without any earnings is not justifiable.

It took Nasdaq 15 years to get back to its highs of 2000.

The frenzy was such that if you just added Dotcom to your name, share prices would jump up-Computer literacy inc changed its name to fatbrain.com and stock went up 33% the next day.

When Appnet System decided to IPO under stock symbol APPN, stock of an inactive company Appian tech started getting demand.

Retail investors dominated the market and business news papers were even recommending leaving job and starting day trading.

News Channel used to present stock news like reading a mystery novel.

Today after over 20 years, retail investors are again ruling the roost;

70% of all trading in June-21 was by retail investors in India. Last time such retails participation was seen in June-2006.

While in the US 40% of all retail investors made their 1st investment during 1996-2000, In India over 1 crore (10 Mn) investors bought their first stock in 2020.

Of-course now a lot more people are aware of looking at management quality, growth or at-least think that they are looking at it.

However how many people are just buying the name, price and the headline and many are there so they don’t miss out.

As they say-“History doesn’t repeat but it does Rhyme

Every tech company looks like a winner;

Every chemical & pharma company is a winner;

Undervalued stocks are being chased.

The true objective of investing is to grow your wealth to meet your Goals.

However in times like these after a good ride, the objective becomes “to be in the GAME”.

As one Investor told me-

“I need some excitement”

and another one said

“This investment is not exciting enough”

It is now like being on a “Roulette”.

As it is said

If you don’t know who you are, this is the wrong place to find”

I have a simple message for those who are adopting this style

Calculate your XIRR for the last 3 or 5 years on your stock portfolio and just find out if you have done dramatically better than a Fund or even a portfolio of names that are commonly known instead of the names that are a “Fad Today” and then decide if this Game is for you and if the stress is worth it.

Crypto 101-Part V-Hash Function Explained

In the first 4 parts of the Crypto 101 series, we have discussed the basics, mining and mining processes, which is available here to revisit- Part I, Part II, Part III, Part IV

Today I am doing a post on the “Hash” function that’s crucial to mine a crypto and essential to the blockchain security infrastructure.

The “Explain It Like I’m Five” Version

Consider the following example:

I tell three friends that I’m thinking of a number between one and 100, and I write that number on a piece of paper and seal it in an envelope. My friends don’t have to guess the exact number; they just have to be the first person to guess any number that is less than or equal to the number I am thinking of. And there is no limit to how many guesses they get.

Let’s say I’m thinking of the number 19. If Friend A guesses 21, they lose because of 21>19. If Friend B guesses 16 and Friend C guesses 12, then they’ve both theoretically arrived at viable answers, because of 16 < 19 and 12 < 19. There is no “extra credit” for Friend B, even though B’s answer was closer to the target answer of 19.

Now imagine that I pose the “guess what number I’m thinking of” question, but I’m not asking just three friends, and I’m not thinking of a number between 1 and 100. Rather, I’m asking millions of would-be miners and I’m thinking of a 64-digit hexadecimal number. Now you see that it’s going to be extremely hard to guess the right answer.

Here is an example of how the Hash is used

If we take the sentence “Donkeys live a long time” and wish to encrypt it

We apply hash algorithm to it, we will get 6e04f289.

This value is known as a hash.

 What Is a “64-Digit Hexadecimal Number”?

Crypto miners need to solve for a 64 digits hexadecimal number provided to them to reach the solution

Here is an example of such a number: 

0000000000000000057fcc708cf0130d95e27c5819203e9f967ac56e4df598ee

The number above has 64 digits.

As you probably noticed, that number consists not just of numbers, but also letters of the alphabet. Why is that?

To understand what these letters are doing in the middle of numbers, let’s unpack the word “hexadecimal.”

As you know, we use the “decimal” system, which means it is base 10. This, in turn, means that every digit of a multi-digit number has 10 possibilities, zero through nine.

“Hexadecimal,” on the other hand, means base 16, as “hex” is derived from the Greek word for six and “deca” is derived from the Greek word for 10. 

In a hexadecimal system, each digit has 16 possibilities. But our numeric system only offers 10 ways of representing numbers (zero through nine). That’s why you have to stick letters in, specifically letters a, b, c, d, e, and f. 

Use in the Mining Process

If you are mining crypto, you do not need to calculate the total value of that 64-digit number (the hash).

In crypto mining terms, that metaphorical undisclosed number in the envelope is called the target hash.

What miners are doing with those huge computers and dozens of cooling fans is guessing at the target hash.

Miners make these guesses by randomly generating as many “nonces” (number only used once) as possible, as fast as possible and the nonce is the key to generating these 64-bit hexadecimal numbers.

In Bitcoin mining, a nonce is 32 bits in size—much smaller than the hash, which is 256 bits. The first miner whose nonce generates a hash that is less than or equal to the target hash is awarded credit for completing that block and is awarded the spoils of 6.25 BTC.

The difficulty level of the most recent block at the time of writing is about 17.59 trillion, meaning that the chance of any given nonce producing a hash below the target is one in 17.59 trillion. Not great odds if you’re working on your own, even with a tremendously powerful mining rig.

As this is a slightly complex subject, I will stop here and let you digest.

More to follow

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Folding your Cards

On the surface, poker seems like it is a game about cards, and on the surface it is.

However, you don’t need to get much below surface-level to see that poker is primarily a game about the behaviour of the other players. The player on your right just put in a big bet: Does he have a big hand? Is he bluffing? What does he think you have, and how does he think you will respond? Given what he might have and what he thinks you might have, if you put in a huge re-reraise, how will he respond?

The key characteristic of a poker game is limited information.

Neither player knows the other players face-down cards, but each can guess based on the other player’s behaviour.

So, while neither player knows exactly where they stand, they have cues from the patterns of betting within this hand, from the patterns of betting in past hands, and from any “tells” they can pick up by observing their opponent carefully.

As in poker so in investing you have limited information from which you draw probabilistic cues on how to proceed further.

A company’s business, demand for its products, past performance of the management, future for the business is information available for most of the good companies.

However, future is uncertain, at the start of 2020 calendar year nobody knew the world will be turned upside-down.

No-one is aware of the kind of issues that can come in short-term to disrupt your journey.

So, you are working with a lot of hindsight bias in an uncertain environment.

This is what makes investing interesting.

Exit Decision

In discussion with most of the investors, one question often comes up-how do I decide when to sell a stock?

Micro Reasons

These are stock specific reasons which could prompt a sell decision.

Let’s learn from the best:

Warren Buffett mentioned two main reasons he’ll sell a stock.

  • The first is when he feels Berkshire needs the money for a more attractive opportunity. “We would sell if we needed money for something else — I would reluctantly sell something terribly cheap to buy something even cheaper,” said Buffett. 
  • The second, and more common, reason Buffett sells stocks is because of changing fundamentals, or a changing competitive landscape.

For example “We think McDonald’s has a fine future, we think Disney has a fine future, and there are others. But we don’t think their competitive advantage is as strong as we thought it was when we initially made the decision”.

Here are some instances of when Buffet some of his holdings

IBM- Original thesis no longer applicable; Buffett says he misjudged IBM’s competitive challenges, and as a result, it has revalued the stock lower.

Wells Fargo-To remain under regulatory limit of 10%

Freddie Mac– The company was taking on far too much risk to keep its earnings growing at a double-digit rate.

Exxon Mobil– However, Buffett realized that oil prices weren’t likely to stay as high as he originally thought, so Berkshire’s entire stake was abruptly sold.

Goldman Sachs– To  raise capital for the pending Precision Castparts acquisition.

Bad reasons to sell

To be thorough, there are some bad reasons to sell a stock that investors should avoid. These include, but aren’t necessarily limited to:

Because the stock’s price plunged 

Because the stock’s price increased sharply

Because a billionaire sold

Rebalancing Conundrum

When the market does well, your stated asset-allocation changes in favour of the asset that’s out-performing.

There are always 2 options available to an investor:

  • Sell high-performing investments and buy lower-performing ones.
  • Allocate new money strategically. For example, if one stock has become overweighted in your portfolio, invest your new deposits into other stocks you like until your portfolio is balanced again.

I  prefer the second option because rebalancing in the “traditional” way — without investing any additional money — requires you to sell your highest-performing assets.

I am generally fan of the second option since rebalancing by contributing new funds enables you to leave your winners alone to (hopefully) continue to outperform.

The crucial steps to consider are

  • Re-balancing or the decision to sell a performing holding is not a blind robotic exercise; it requires careful consideration of why?
  • Review the portfolio for winners and losers from the perspective of reasons you first bought them rather the price at which they are trading or profit/loss that you have made
  • If there is a change in fundamental of the business or your thesis is not working or you have a better deployment opportunity, consider selling out and re-deploying;

Remember more than “Knowing” what’s important is to “Know why

For guidance contact on manish.verma@manishverma.co.in or +919920741569

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Crypto 101-Part IV-Mining a Crypto

For those new to this post refer to Part I, Part II and Part III

Last week we had learnt about the 2 key methods of crypto mining “Proof of Work” and Proof of Stake”.

This week in a shorter post I want to dive a bit deeper into basic mining process and functions.

Will be doing a Part II of this next week for more details

What’s Crypto Mining?

Crypto mining is the process through which new crypto are entered into circulation.

Who’s Mining?

Bitcoin miners are the ones who are engaged in mining fresh bitcoins.

Miners get rewarded with the crypto being mined; for example bitcoin miners get rewarded with bitcoins for completing blocks of verified transactions that get added to the blockchains.

Mining rewards are paid to the miners who discovers a solution to the complex hashing puzzle first. However the probability that a miner will solve the problem first depends upon the total mining power on the network.

A miner needs a GPU (graphic processing unit) or ASCI (application specific integrated circuit) to set-up a mining circuit.

Miners are getting paid for their work as auditors. They are doing the work of verifying the legitimacy of Bitcoin transactions. 

To earn the crypto, you need to meet two conditions. One is a matter of effort; one is a matter of luck.

1) You have to verify transactions. This is the easy part.

2) You have to be the first miner to arrive at the right answer, or closest answer, to a numeric problem.

This process is what we described as the proof of work in the Part III of this series.

“What do you mean, ‘the right answer to a numeric problem’?”

Miners are not solving any complex mathematical problems- What they’re actually doing is trying to be the first miner to come up with a 64-digit hexadecimal number (a “hash”) that is less than or equal to the target hash. It’s basically guesswork.

Mining is essentially guesswork, but with the total number of possible guesses for each of these problems being on the order of trillions, it’s involves a lot of hard work.

Successful mining requires a high “hash rate,” which is measured in terms of megahashes per second (MH/s), gigahashes per second (GH/s), and terahashes per second (TH/s).

What’s crucial here is that there is no other process for creating a crypto coin. Mining is basically printing new currency.

Hash Function

  • A hash is a mathematical function converting an input of arbitrary length into an encrypted output of a fixed length.
  • Hashes are of a fixed length since it makes it nearly impossible to guess the length of the hash if someone was trying to crack the blockchain.
  • The same data will always produce the same hashed value.

A crypto “hash” has 3 properties:

  • They are “collision-free.” In simpler words every answer has only one question;

No 2 questions can produce the same answer, something that can happen in other fields

  • They can be hidden.

In simpler words you cannot guess the answer looking at the question. 

  • They should be puzzle-friendly.

It should be difficult to select an input that provides a pre-defined output. Thus, the input should be selected from a distribution that’s as wide as possible.

Here is an example to understand this better:

Let’s go with the sentence, “don’t be a jerk,” 

Becomes ciphertext- Grqwehdmhun

I will leave it here for today and elaborate further on mining technicalities in the post of next week.

For queries contact manish.verma@manishverma.co.in or +919920741569

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The Crowd Within

In 2008, Vul and Pashler (2008) conducted an experiment where they asked participants eight general knowledge questions, all of which required an estimate of a percentage (e.g., What percentage of the world’s airports are in the United States?).

Participants were then unexpectedly asked all eight questions again, either immediately or three weeks later. The average of both guesses was more accurate than either the first or second guess alone, especially for the participants who waited three weeks between guesses.

That is strange. Until now, psychologists have assumed that when people make a guess, they make the most accurate guess that they can. Ask them to make a second and it should, by definition, be less accurate. If that were true, averaging the first and second guesses should decrease the accuracy. Yet Edward Vul at the Massachusetts Institute of Technology and Harold Pashler at the University of California, San Diego, have revealed in a study just published in Psychological Science that the average of first and second guesses is indeed better than either guess on its own.

What’s happening here?

Individuals use their subjective reality base on their perception of the information available to make a decision and that can impact their response.

The subjective reality is an outcome of the environment and experiences that an individual has gone through along with a mix of their fears and motivations.

The bias that creeps in is use much like a child with use a short-cut to solve a math problem.

The first level thinking about a decision is impacted by this background and intuitively a decision is taken.

The rest of the process is really about finding a reason to justify the decision and make it look rationale.

For example I have a compensation issue in hiring but I can’t be seen to say that due to fear of being seen as cheap so as soon as I get a candidate who is high cost, my decision is made to reject, however then I look for a good enough reason to make it look rationale and I say-“oh, you are not conversant in my mother-tongue so sorry it will not work-out”

Investment Decisions

When individuals make investment decisions they are always looking an anchor to justify that decision to themselves.

Merit often is created for rejecting/accepting a decision to make it look rationale.

An investor once told me I will invest in “Equity” of this company but not in “Debt”.

This is convoluted as “debt default” is sure to wipe off the equity of the company too.

However it seems like a very smart thing to say and makes the decision seem rationale even when it is not.

The subjective reality/risk-perception/risk-profile-whichever name is used helps individuals make quick decision which might not always be leading to a good process.

Whether it will lead to a good decision or not only time tells-however removing subjectivity has to be a constant endeavour for a good decision-making process to fall in place.

This is what requires an advisor who can act like a doctor and give you an objective pros & cons of a decision rather than playing up your own subjective reality.

For guidance contact on manish.verma@manishverma.co.in or +919920741569

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