Facebook: Why it may be a BUY!!

I have decided to initiate a long position in Facebook. Facebook stock has fallen dramatically in price over the last few months. This precipitous fall can be largely attributed to an escalating scandal around Facebook’s alleged mismanagement of user data, concern about the effects of this ‘breach of trust’ on user engagement, and fear of a brewing regulatory backlash against Facebook’s business model. In this post, I will attempt to evaluate some of the significant risks in Facebook, and then explore why I think it is a buy. There are two questions to consider: (i) Is it available cheap? and (ii) is it a good quality business?

Good Price?

Data scandal

There are a few reasons why the scandal - and ensuing concerns - may be overblown. Whilst I am not delusional enough to believe that Facebook is not at fault, I suspect that the extent to which it has mismanaged data is being exaggerated: a headline about how Facebook is selling your personal information will obviously attract more attention than a headline which says that some of Facebook’s practices could potentially be considered to be unethical. Indeed, I think that this scandal will pass. There are two reasons for that. Firstly, the rate at which people moved past the VW emissions scandal suggests that people have a tendency to be forgiving if companies resolve ethical issues. Thus, the impact of the data scandal on user engagement may be less significant than it is perceived to be - provided Facebook resolves issues. Secondly, any regulation arising from the data scandal will only benefit Facebook. It is likely that regulation will legitimise and entrench the data economy. Rules will make it harder for start-ups to enter the space occupied by Facebook (that is the space of a social network, which generates cash by selling targeted advertising products). 

Despite my confidence that the current scandal will not necessarily weaken Facebook’s hand, there are two reasons to be more reserved when one is dismissing the impacts of the data scandal. Firstly, Facebook, which - unlike VW - relied upon the network effect to build its platform, may be unwound by the same forces. Secondly, Facebook may be subject to steep fines for its misuse of data. 

Changing user habits

Whilst the scandal is certainly not to be ignored, as a long-term investor, I am more concerned about Facebook’s ability to retain and monetise user engagement across its different platforms. There are ‘shorter-term’, and longer-term concerns in this regard. 

In the short-term, as people are shifting from posts to (1) personal messaging, (2) stories, and (3) video content, Facebook must rapidly alter its business model. Facebook has already begun to address these issues - Facebook has started placing advertisements in Instagram’s stories feature, and has also launched IGTV (Instagram TV) so users can share video content. The success of these two changes is difficult to assess, but I am inclined to believe that Facebook can deal with these two changes (2 & 3). The shift to personal messaging is more concerning. I struggle to understand how Facebook will be able to deliver targeted advertisements without making people feel that their privacy is being invaded. However, there are at least two positives in this regard as well. Firstly, Facebook has an established personal messaging offering in WhatsApp (they have the users). Secondly, the monetisation of WeChat in China - which I do not fully understand - suggests that Facebook should be able to find a creative solution to this issue as well (they should be able to monetise this existing user base). Overall, I think that Facebook should be able to create more value, as it begins to monetise Instagram, and potentially WhatsApp. They will have to be careful not to over-advertise though, as this may put-off users.

In the longer term, there are two concerns I have. Firstly, with generational changes, people tend to move from one social network to another. For example, people moved from Facebook to Instagram, and may make another shift as time goes on. Thus, generational changes may pose a risk to Facebook: children may not want to use the same social networking platforms as their parents. Secondly, there may be a technological shift - a step change - in the way people share information. However, this is (i) probably very far in the future, and (ii) something Facebook will be able to adopt and adapt to - if it is not leading this change.

Management concerns

The mismanagement of people’s data raises questions about the company’s value system. This may be partly responsible for the decline in share price. However, there is reason for hope. Facebook - by reducing the number of polarising, and provocative posts - is watering down users’ feeds. The reduced availability of ‘juicy’ content could negatively impact user engagement. This may be evidence of Zuckerberg and co. sacrificing the short-term for the long-term. Getting rid of such content may indeed enable the company to grow in a more ‘clean’ manner. Thus, this helps to restore my confidence in Facebook’s management.

Overall
From a valuation perspective, whilst I have not tried to use a D.C.F model, I am fairly confident that Facebook is cheap. A high-growth company with substantial earnings is trading at only 19x P/E.

Good Quality Business?

If I am going to make a long-term investment, I want to buy a good quality business at a good price. So far, I have considered the challenges facing Facebook, and explained why I think that they are less significant than people might think. These factors are very important, as they explain why my view on the company is different to that of the current consensus - the risk-factors considered and my evaluations of these factors explain why I think Facebook may be available at a good price. But, if I am going to make a long-term investment, I must now decide whether it is a fundamentally good business. 

There are two reasons why I think Facebook is a good quality business. Whilst neither is particularly insightful, I think they provide a rudimentary base for thinking about Facebook. Firstly, Facebook’s platforms serve a fundamental purpose. People - being the social creatures they are - need to have a means to communicate with each other from afar, and companies must advertise in order to promote their offerings. Secondly, with a growing world population, rising amounts of free time and increasing internet penetration, the potential market is continuously expanding. Thus, I think Facebook is a good quality business.

Conclusion

I think that there is a range of possible futures for Facebook. I also think that amidst the flurry of recent bad news, people have become overly negative on Facebook. Facebook is not a risk-free investment by any means, and there is a chance that I am being over optimistic. But, I think that despite being challenged, it is a good long term investment. Indeed, it is made more so by the fact that they are investing capital in other projects as well (eg: Oculus, e-commerce). 

Facebook will test my emotional resilience in the time to come. I hope I will live up to the challenge. 

Investor Series - Interview #2

This is the second interview of my Investor Series, and am sure you will find it insightful. In this video, I interview Vinay Agarwal. He is a Director at First State Investments. Vinay manages funds that invest in Asia and the Indian sub-continent.

I stated upon releasing my first video that I intended to focus more on content than production values. With this interview you will find that I have overdelivered on the latter half of that promise. However, going forward, I will need to make sure that the production values do not suffer so much that they detract from the content.

Investor Series

In this video, I interview Vinod Nair. He is a Managing Partner at Altavista Investment Management. I hope this video will prove to be the first of a useful series. I intend to focus more on content than production values.

Investor Howard Marks on Luck, Risks and the Job that Got Away -- Knowledge@Wharton

In this post, I have picked out a few quotations I found interesting from a K@W post. I hope you will find these nuggets of wisdom as insightful as I do! If you take one thing away, let it be that “Success in investing is not a function of what you buy. It’s a function of what you pay.”

Price is king

Investing is ultimately about buying a company for less than you think it is worth, or at least less than what you think it will be worth in the future. That being said, it is probably best to buy great businesses at great prices, because you can then hold your position 'forever'.

The official dictum was if you were buying the stock of a good enough company, it didn’t matter how high a price you paid.” But it did matter, Marks noted, and people were paying about five times what the stocks were worth. “By 1973, the people who held those stocks had lost 90% of their money.”

Citibank had invested in “the best companies in America and lost a lot of money.” Then it invested in “the worst companies in America and made a lot of money,” Marks noted, adding that “it shouldn’t take you too long to figure out that success in investing is not a function of what you buy. It’s a function of what you pay.”

"Not-Loser's Tennis" & "No-called-strike Baseball"
In investing, you don't need to try to hit a winning shot all the time. You just need to stay in the game long enough, that when a winning opportunity you like presents itself, you can take advantage of it. In fact, you never need to hit that winning shot at all; you could even just stay in till your opponent (the market) makes a mistake. This is why investing is such an advantageous game. 

It’s not a crapshoot like — if you’ll pardon the expression — venture capital, where you invest in 10 companies but if one of them turns out to be Google, you’re a success.”

He plays “not-loser’s” tennis. “If you think you can see the future and the world is going to go according to your decisions, go for winner’s tennis. But if you think the world is full of randomness and uncertainty, spend your time trying to avoid losers.” 

If we can make a large portfolio of investments where none of them [strike out], then we’ll have … no bad ones to pull down the average.”

Self-fulfilling Prophecies
Low business confidence - or fears of a recession - can trigger a recession, and high business confidence can cause a boom. Self-fulfilling prophecies occur regularly on the stock-market. 

Sometimes I think confidence is the only thing that determines economic outcomes. Confidence is largely self-fulfilling.

The Stupidity of Spending the Future Today
Borrowing is simply a means for consuming tomorrow's money today. The thing is, (i) you have to pay for this right, and (ii) there is a chance that tomorrow's money will never materialise!

Credit is one of the reasons the world is in trouble now. Countries like Greece, France, Italy, Portugal and Spain have to practice austerity now because that’s what happens when you spend money you don’t have.

The Bermuda Triangle of Valuation (Learning from Damodaran)

As I have mentioned in previous posts, I did a course about Valuation over the summer. This post follows a similar post about the dangers of valuation models. In my previous post - also inspired by an Ashwath Damodaran talk - I explored the importance of 'stories', which necessarily drive every valuation. I would like for this post to serve as a cautionary note for myself - and any readers - about the common errors we might make when valuing a company. I have attempted to capture the main points Damodaran makes in his talk.

The Bermuda Triangle of Valuation is:

• Bias and Preconceptions
• Uncertainty
• Complexity

Bias and Preconceptions

• It is important to distinguish between Pricing and valuation. Most people think of a number first and build a valuation to fit the number. Value cannot precede valuation, because models can only tell you what you want to here. If you want to buy, you will keep fiddling with the inputs till the model says it is a buy. Thus, it is probably useful to question how each input number was derived.

• You start out with an opinion, and then your valuation simply confirms what you learned. The more you know about a company the more biases there are in your valuation. That being said you need to know the business to develop a story.

• If you know the managers of the company, you know too much to value the company effectively. If you get too close to the company, you are less effective.

• When everyone is saying something in the market, it is hard to step back and objectively disagree. The less confident you are the closer your valuation gets to the market. 

• Suggestion bias. If I say I think its worth 15, but value it anyways, you will probably arrive at a similar price.

• When you see decimals in a valuation, the valuer is using decimals to intimidate you. Decimals mean nothing, because you cannot be that precise about the value of a company.

• Small changes have significant effects. Thus, it is important to question each input.

• Don’t let comparable multiples tell you what the price is. If you pick the comparable, you are making several assumptions!

• Several people deny bias. Denial is no good (Stop lying to yourself). Instead, you must think of ways to structure processes that help reduce bias. 

• Ask people to be transparent about where they come from. What was there hypothesis? What were their findings (attempt to disprove the hypothesis?) The hypothesis is full of bias, so you can then take the findings with a pinch of salt. That being said, its much easier to point out the (often small) issues with a hypothesis than it is to create a hypothesis yourself.

• Where M&A is concerned, you don’t ask the deal maker if the deal makes sense; they have bias!

Uncertainty - We often ignore this as we don’t know how to deal with it.

• Every input involves assumption. We make estimates. The difficulty of making estimates is variable. We want companies where it is possible to make estimates. The harder it is to make an estimate, the greater the uncertainty is. Uncertainty is an opportunity, and so the pay-off to doing valuation is greatest when there is greater uncertainty. However, we must be aware that our numbers are only one possibility.

• Estimation uncertainty (Micro uncertainty) can be refined through cashflows and KPI estimates.

• Economic uncertainty (Macro uncertainty) can be accounted for through the discount rate.

• Spending more time doing valuation doesn’t make uncertainty go away.

• Continuous uncertainty is much easier to deal with than discrete uncertainty (bankruptcy, nationalisation). We must deal with discrete uncertainty. This is because these improbable - but not impossible - occurrences, can result in insurmountable difficulties for companies.

• Things we can do to deal with uncertainty:
• Less is more: Aggregate things instead of breaking them down, when you make forecasts and assumptions. That being said, looking at the lines for historical data allows you to spot significant changes, and can help guide your research.
• Make sure your valuation is not at war with itself; be clear what your assumptions are.
• Make sure your assumptions affect all the relevant inputs, (eg. inflation affects interest rates, discount rates, and growth rates)
• Be realistic.
• Even if you disagree with the market, try to understand what the market is telling you.
• Law of large numbers: Use averages to compare. But, blind averages may conceal significant anomalies.
• Don’t use the discount rate to account for fear.
• Use distributions instead of fixed figures. Considers the different possible outcomes. Draw a bell-curve?
• Don’t look for precision. You will be wrong 100% of the time! You are only looking for a ball-park figure to confirm what your story will look like in numbers.

Complexity - As valuations and models are complex, we may lose sight of what exactly it is we set out to achieve.

• Companies are 'tentacled octopuses'. This complexity may make it difficult to understand a company's business.

• Data accessibility means we have more data. However, this means we must filter the useless noise, and hunt for the jewels.

• Legal/accounting complexity also raises issues.

• Build simple models.
• In complex models with lots of variables, input fatigue sets in. (You may start putting random numbers in.)
• So, the model becomes a blackbox. You don't know what went in and don't know why a given output came out.

Daniel Kahneman on Confidence.

• The Loss Illusion is noteworthy. We fear the downside more than we desire the upside. This may lead us to be unnecessarily risk-averse. As a result, we may be unable to take advantage of opportunities. As humans, we have optimistic and risk-averse tendencies. These two tendencies conflict, and one must monitor them.

• 'Expert'-opinion must be treated with skepticism, because people are generally over-confident.

Identifying Long-term winners.

• Your circle of competence is where you can 'understand' the future economics of the business. You must define your circle of competence and stay inside of it. You don't need to be smart; if you are strong is some spots and you stick around these spots, you will do well.

• It is hard to identify the winners even in a winning industry. Industries and companies are different things. (cars, airlines: both industries have consistently lost money) 

• It is easier to identify the losers than the winners, when change is coming. 

• The aristocrats of business change over time. Today's Giants will eventually be giant no-more.

Dangerous, Faulty Memory

In this brief, insightful video, Daniel Kahneman talks about the experiencing and remembering selves, and how happiness can potentially be measured.

Investing related take-away:
Our memories are not a true representation of reality. We tend to forget most things we experience. This is important to be aware of in a field where history, current affairs, and effective links between the two, can be used to make significant decisions.

One may forget the thought-process which drove an investment-decision of the experiencing self. That is to say, one may forget the initial reason why the reflective-self made an investment decision. Instead, we may become victims of bad experiences (bad earnings or bad press) in the short run. Thus, we may exit a good long-term position due to short-term discomfort and uncertainty. This is partly a case of being unable to recall exactly why you did something.

Furthermore, we only remember inflection points in a story. Thus, it is important to be careful when one is inclined to do something based on past 'experience'.  We must consequently question any comparison we make and any story we begin to tell ourselves. However, experiences are still useful; One cannot question each memory indefinitely, as this questioning could potentially prevent you from making big, bold bets, even when they are 'right'. In effect, we must be aware of our limitations and biases, but must also not get overwhelmed and encompassed by how little we really 'know'.

In order to (partially) resolve the issues raised by our dangerous, faulty memory, it may be a good idea to document our thinking and conclusions on an ongoing basis. This will give us something to hold onto when we are feeling uncomfortable; it will enable our remembering self to remember more of what the experiencing-self thought. Thus, we can see how our thinking has changed over time, and we do not have to rely solely on your unreliable memory.

The Importance of Stories

My Take-Aways:

I recently did a course on Corporate Valuation at Columbia University. In my view, it is very easy to get drawn into the intricate details of the numbers when you learn how to do D.C.F. models. However, this is something to guard against. Constructing any financial model requires you to make several assumptions, which can have significant effects on your expected share price. As a result, it is very important that there is a reasoning behind each assumption. This reasoning is your story.

Coming at it another way:
Investing is about buying a part of a (good) company for less than it is worth. The market price represents the views of the entire market put together. Things can only seem 'cheap' when your view about the future is brighter than others' view about the future. Hence, you must have either, fantastic insight, or fantastic foresight, to arrive at a valuation different to that of the market. Thus, the value you see in a company is determined by your opinion of the company's future. Hence, there must be a story driving the numbers.

So what?
Let this serve as a reminder about the importance of the story. Remember, that the numbers are never really precise, and a story is the foundation upon which every valuation is built. Indeed, stories will also give you conviction in your investment. Conviction is the most important tool, if you are intending on waiting - patiently - for the market's acknowledgement of this 'value' you noticed. It is worth noting, that your story may change over time: When the facts change, you must change.

The blurb on Youtube:

The world of investing/finance is divided into two camps. In one, you have the number-crunchers, who believe that the only things that matter are the numbers and that imagination/creativity are dangerous distractions. In the other, you have the storytellers, who build on the stories they tell about companies and how these stories will bring untold wealth. Each side believes it has a monopoly on the truth and looks with contempt at the other. Prof. Damodaran contends that stories matter, but only if they are connected with numbers. And numbers are empty, unless they are connected with narratives. In this talk, he looks at the process by which one might build narratives, check them against reality and convert them into valuations. Uber and Ferrari examples are used to illustrate the process.

Other resources to look at:

• Slides for the talk: https://goo.gl/zKVaQL
• Check out the book on Google Play: https://goo.gl/tnGlDe

Stocktrak Learnings: Problems With Stock Market Simulators.

During the three week course on Corporate Valuation at Columbia University, we used Stocktrak, which is a stock market simulator. Whilst using this simulator, I realised how a pressure to perform in the short-term can cause you to make mistakes. On the Monday afternoon of the third week, the professor urged us to 'shuffle our portfolios' and look at the ranking. Being roughly tenth or twelfth out of fifteen, I was overcome by the urgency instinct, and proceeded to make decisions poor decisions; they were so bad that I immediately reversed some of them!

This experience reaffirmed my belief that stock market simulators are useless in terms of teaching people how to make money in the real world. They encourage you to be speculative and short-term oriented and make decisions based upon superficial analysis. This is all because without the fear of losing real money, there is an inclination to ignore the downside and focus on the upside. That being said, they are arguably a useful way of reminding yourself about the common errors made by asset managers.

Principle 5

A continuation of the series of posts relating to 'Factfulness'.

The fear instinct and panic-selling.

Investing is often driven by emotion; in particular, greed and fear are often said to drive investors - and ruin their financial returns. In this post I will mention and discuss some of the interesting things Hans Rosling had to say about fear, and how they connect with investing. 

• "When we are afraid we do not see clearly."
• "Critical thinking is always difficult, but its almost impossible when we are scared. Theres no room for facts when our minds are occupied by fear."
• "Get calm before you carry on. When you are afraid, you see the world differently. Make as few decisions as possible until the panic has subsided."

Basically fear is equal to factlessness. If you are scared, you act without analysing facts. In investing, you want to always analyse facts. Letting fear grip you is like taking your wallet and throwing its contents around you. This is why it is better to not act when you are feeling fearful; in investing it is more important to know when not to act than when to act. If you sell out of fear, you are probably losing an opportunity and giving others money. 

• " 'Frightening' and 'dangerous' are two different things. Something frightening poses a perceived risk. Something dangerous poses a real risk. Paying too much attention to what is frightening rather than what is dangerous - that is, paying too much attention to fear - creates a tragic drainage of energy in the wrong directions."
• "Risk = danger x exposure. How dangerous is it? And how much are you exposed to it?"

Risk and fear must be distinguished between. One is real, and the other is imaginary, and investing is about what is real. Mixing these up will lead you to behave irrationally and may result in you selling after a correction offers a golden opportunity. As Howard Marks said, in uncertain times - when you are likely to be more afraid - is the time when the best bargains are available.

'Great' Investors

I'm doing a 3 week summer program at Columbia University. We have watched a few videos which provide an insight into the investment principles of some of the world's most respected investors. I am attaching the videos of the first two, and my thoughts...

1. Warren Buffett - The Oracle of Omaha.

Have a concentrated portfolio, and only invest in businesses you understand. Buffett says that investing is a very advantageous game, because you don’t need to hit each ball; instead you can wait for a ball to come into your sweet spot.

2. George Soros.

I agree with his thought process that when you think you are right, you should bet big. Overall, however, I disagree with Soros’ philosophy as presented by this video, because he was willing to take on a large amount of leverage, and essentially ‘bet the ranch’. This seems to ignore the fact that leverage magnifies both upside and downside. Soros’ risk-tolerance appears to be bigger than mine! 

3. Ray Dalio. (Unable to find exact video)
In order to make money you have to have a different view to that of the consensus AND be right. When you take on such a contrarian point of view, there is a high risk of being wrong. In order to reduce this risk, you have to stress-test your investment thesis. At Bridgewater this is achieved through discussion. In Dalio's opinion, you learn more this way. Overall, I agree with Dalio that it is important to engage in debates with smart people, who a different point of view, and that we have to learn to love mistakes.

4. Paul Tudor Jones. (Unable to find exact video)

• FOCUS ON THE DOWNSIDE: If you spend 90% of your time figuring out how much you can lose, and how you might come to lose it, you are unlikely to lose a lot of money in the long run. In investing, though, you still have to be willing to catch a falling knife.
• It's good to have some hard boundaries at which you will almost certainly exit a position.
• A CONFIRMATION for me: As traders you are trying to predict what’s going to happen on the market in the next five minutes. I do not think anyone is good enough to do that.

5. Guest Speaker: 

• "There are no good or bad assets, only good or bad prices." This statement is true. However, if you want to invest in companies which you will never sell, you also have to focus on the fundamentals of the business. That being said, anything is a good investment at a low enough price.
• "Spend 99% of the time thinking about what you don't know, and other risks." This statement essentially tells you to be humble and risk-aware. However, to invest, one must be an optimist.
• "When the facts change, you must change; new information may well change your thesis, or significantly impact a business' fundamentals." This essentially is something to be aware of, so that you change your thesis when there is a significant change. On the flip-side, however, letting one insignificant thing completely change your view would also be a bad thing.

6. Howard Marks.

• We pay a high price for certainty. At a time of certainty and confidence, a value investor should be uncomfortable; you will find better bargains in uncertain times.
• It takes an insight to feel better when the share price of a company goes down temporarily.
• Companies which will endure, but most importantly, which are selling below their worth.
• Look for things people think are improper(e.g. Junk bonds); you are likely to make more money here.
• Emotional Control; be cautious, conservative, risk-averse and stick to your strategy even when you are tempted to deviate from it.

7. Peter Lynch.

• Invest in an industry which you know a lot about; Buy ONLY what you know and understand.
• Buying just because it has fallen is stupid; you can’t call the bottom. Relatively low [prices] doesn’t mean low [prices]. So, you do NOT have to react just because there has been a correction.
• When things look high - and there is too much confidence - that’s when it MAY turn.
• You must be patient and take a long-term view, to make money in this business.

8. Stanley Drucken Miller.

• Put your eggs in a few baskets and monitor it carefully; don’t diversify.
• Think out of the box; the present is already priced into the market valuation.
• The obvious is obviously wrong.
• Think about status quo. Why is this going to change? What will this mean?

10 Things I Learned At First State

I spent two weeks at the Singapore office of First State Investments this summer. During this period, I attended meetings/calls with eight companies, and two team meetings. These meetings have allowed me to gain exposure to the banking sector in India, to a few Chinese, Philippine, Indonesian, and Japanese companies, and to understand the importance of good governance. At First State, I noticed that a significant amount of time and effort is spent on deciding whether one can trust the management. I am confident that this will – and has already begun to – strongly influence the way I will think about companies too.

In the second week, I began to understand how profit and loss statements link with balance sheets. This introduction to numerical analysis will serve as a useful base from which I can further my understanding of accounting, and will also allow me to do some more numerical analysis before I make an investment. 


I am very grateful to the entire team at First State, and look forward to more experiences like this in the future. Here are 10 Important Things I Learned:

1. You have to be able to trust the management, and feel that their interests are aligned with those of minority shareholders. Also look to see if there are enough checks and balances in place.
2. A good quality management is risk-aware, honest, open to new suggestions, and willing to acknowledge mistakes.
3. A culture of accountability, which can be created through employee-ownership of the company, is important. Growth opportunities within a company also create a more competitive work-environment. 
4. Questioning an investment thesis is very important. Being surrounded by a group of people who think differently and are willing to ask difficult questions allows people to see things from different perspectives, and reduces the effects of confirmation bias.
5. Investing is an art; there will always be positives and negatives, and the key is to decide whether you think the positives outweigh the negatives or not.
6. Look for companies with a moat, and see how the moat is evolving.
7. Look for a company with a solid long-term track record.
8. High ROCE, good governance and growth are 3 key factors to look at.
9.  Look for structural shifts and changes in consumer behavior and secular trends.
10.  It is difficult to differentiate between what the management wants you to see and what is real.

Principle 4

Beware 'Straight-line Trends'.

1. "Anything that keeps doubling grows much faster than we first assume."
The power of compounding really does speak for itself.



2. i. "Assuming the trend will continue along a straight line is obviously ludicrous."

To throw this phrase into the most simple investing situation, just because a particular stock's price has been rising, that doesn't mean that it will continue to rise.



2. ii. "An apparently straight upward trend could be part of a straight line, an S-bend, a hump, or a doubling line. An apparently straight downward trend could be part of a straight line, a slide, or a hump. Any two connected points look like a straight line but when w have three points we can distinguish between a straight line (1, 2, 3) and the start of what may be a doubling line(1, 2, 4)."

This is important to keep in mind, because it is very tempting to join two points together and announce a trend. In reality, you have to look at a ridiculous number of data sets to be vaguely sure of anything.

In investing, considering the impacts of structural shifts in consumer behaviour or the overall economy, may present opportunities. For example, recognising that e-commerce was going to be significant, or recognising the fact that video streaming was taking-off would've allowed you to avoid losses, and may even have allowed you to make a lot of money. However, it is still important to note that just because the e-commerce and streaming fields have grown so rapidly in the last few years doesn't mean that they will always continue to grow at that rate; the growth rate for both is probably a bit like an S-curve.

Principle 3

The Importance of Comparing Effectively With The - Often Rose-tinted - Past

I am using this opportunity to consider the use of comparisons with historical performance in relation with investing. Following that, I will consider the implications of Hans Rosling's view that we look upon history through a 'rose-tinted' lens.

In investing, an effective comparison with the long term historical track record, serves as a reference point. Similarly, when we think about the world today, we are – often subconsciously – comparing it with the past. For example, when we say that the word is really well connected, we are subconsciously comparing the level of connectivity today, with the level of connectivity in the past. There is one significant difference, however, which is that in investing, a relative comparison with the past -- although it is used as a reference -- is somewhat meaningless; history never exactly repeats itself, and the markets ‘move’ randomly. We are forced to use historical data - cautiously - as they are the only reference points we have. 

Before I proceed to consider how we rose-tint the past, and how we distort it, I must stress that in investing, any attempt to time the market based on historical highs or lows does not work. For example, someone may say, that Company X is a great investment, because of a solid long-term track record, and because the shares are trading at a 52-week low. This would be foolish. Just because a company is trading cheaper than it has for the last year, doesn’t mean it is trading cheap. 

This is because of two reasons. Firstly, changes in price are theoretically supposed to be - although they aren’t necessarily in reality - a result of changes in the economics of a business. So, when you see a company trading at a 52-week low, you should first wonder if there has been any substantial change in the business’ economic position. If the company is now worth less due to the changes in its profitability, then the reduced share price may be correct. In fact, when this happens, the company could even remain slightly overvalued, as people may get anchored to the original price and value of the company. 

Now, to understand the second reason the above thesis for investing in X is incorrect, let us assume there has been no change in the business’ economics. Then you must consider whether it was previously over-valued; just because the price is lower than it used to be, it doesn’t mean it is low enough. Indeed, the business may now – finally – be valued fairly, or might still be overvalued, depending on the previous price and the percentage change. To exemplify this, let us say Company X’s shares – which we believe are worth $9.40 each - were trading in a range between $9.90 and $9.70 per share for a period of 364 days. Now, on the 365^th, they are trading at $9.60 per share. That is a 52-week ‘low’, but is not really a low price. If you buy shares in company X, you will be overpaying, and as the price slowly converges with the value, you will make a loss. So, the best way of making a good investment is determining how much a company is worth, and buying a part of it for less than this value.

This is not to say that a 52-week low is not a useful way of looking for companies which may well be undervalued due to short-term ‘turbulence’. However, it is a useful - and simple (and arguably superficial) - way of finding out where to look for a bargain. Treating it as any more than one of many screening processes you could use to identify potentially undervalued companies would result in traumatic failure.


...and finally...the principle and one its implications

The above paragraphs about the misuse of a comparison with the past are very important. There is, however, another noteworthy instinct, which one must be aware of. This is what Hans Rosling refers to as the human tendency to reflect upon the past through a ‘rose-tinted’ lens. Essentially, this human instinct is the “good old days-attitude”. On the non-investing side of things, this instinct causes us to underestimate progress, and not recognize how the world is slowly improving. In investing, the “rose-tint” may lead people to forget how horrifying and frightening a stock market crash can be. This ability to forget the cyclical, boom-bust nature of the stock market leads to an irrational euphoric epidemic of exuberance, as the stock market booms. Remembering how bad things can be will probably encourage a more cautious investing approach during ‘bubbles’.

Principle 2

"Stories about gradual improvements rarely make the front page" 

This means that significant but slow changes in the world sometimes get missed - and are rarely acted upon.

As an investor, you need to identify these significant but slow shifts in the world, because they provide opportunities; noticing and acting upon fundamental changes in consumer behaviour or structural changes in the world, is difficult, but - if done correctly - will result in profits. For example, if someone had noticed the potential for e-retail as Amazon began delivering books, they may have invested early - long before Amazon became a FAANG and a household name. At the very least, someone who had noticed these changes could have avoided losses, by exiting positions in brick and mortar retailers. Similarly, if someone had noticed the trend of moving away from cotton to synthetics before others, they could have invested heavily in companies which were involved in the  manufacture of synthetic garments - or at the very least, avoided losses by exiting positions in textile manufacturers. Another example is the disruption of the TV industry, which has moved from cable to on-demand streaming; this change is discussed a lot nowadays. But, if someone had noticed the change early enough, they could have benefitted greatly from the shift - or at the very least avoided losses, by exiting positions in cable companies.

Recognising these structural shifts is even more important for companies than investors. Incumbents, which resist change and ignore slow changes are inevitably faced with problems. A large number of retailers, and several cable companies did not change their business models till it was too late. This was despite the fact that Netflix and Amazon have been spoken about on all media outlets. Today, they are undertaking radical re-structuring just to stay afloat.

Warren Buffett says, "chains of habit are too light to be felt until they are too heavy to be broken". Similarly, structural changes are too insignificant to be noticed until they have already taken place and hindsight enables us to realise that they have occurred.

Principle 1

The Bell Curve and the Gap Instinct - Beauty and the Beast.

The gap instinct is our tendency to - often incorrectly- separate everything into two groups. Groups such as rich & poor, developing & developed, left wing & right wing, good & bad, and "short" & "long", or "sell" & "buy". This stems from a human need to differentiate between things. In investing, such categories can be dangerous, and will result in traumatic failure. This is because such categories encourage you to act. If a company can only be a "buy" or "sell", then you will inevitably hold a strong opinion, and concurrently a position; being either a buyer, or a seller - or even a short seller. This will lead you to put companies in one group or the other, when in reality, there are both, factors which make each company a "buy", and factors which make it a "sell". Hence, if for example you are clubbing a company as a "buy", you will likely be ignoring the reasons it is a "sell", and focusing on the reasons it is a "buy", or vice versa. Of course, any action taken without facts, is unlikely to be successful. 

This is where the bell-curve comes to the rescue. If we consider that everything lies on a range, and identify where the majority lie, we can be better judges of everything. We would find, that most people are on middling incomes, that most countries are quite developed but still developing in tandem, that most people lie about the centre of the political spectrum, that mot things are  simply, "okay", that most companies are neither "longs" nor "shorts", and that most companies are neither "buys", nor "sells"! In investing, such a thought process would lead you to act less frequently. Indeed,  it encourages you to be more cautious, and will probably result in you having a much more concentrated portfolio. 

Indeed, the caution and selectivity induced by the bell curve into portfolio management is crucial. Howard Marks says, "If we avoid the losers, the winners will take care of themselves". Similarly, Warren Buffett recommends a 20-slot rule, where you make only 20 investments in your entire lifetime, and punch a hole in a card each time. Both of there principles recommend a more selective, cautious approach to investing. In brief, the bell curve is great, because it - like the 20 slot rule - encourages us to be more selective - and cautious - and recognise that very, very few companies are actually "good" companies to invest in - most are just "okay"!!

Applying the Principles of "Factfulness" to Investing.

Factfulness: Ten Reasons We're Wrong About the World - and Why Things Are Better Than You Think

The book is an eye-opening, marvellous work of art. The book symbolises the late Hans Rosling's final attempt to change the way we view the world. The book is a guide to existence in a busy world, where we have an unprecedented level of access to information. 

In the next few posts, I will attempt - sometimes at a stretch - to apply some of the principles recommended by Hans Rosling to investing. In my view, this is important, because investing requires you to use information, and decide whether or not you want to act based upon the aforementioned information. 

If you do not have the curiosity and energy to read Factfulness, I recommend that you should - at the very least - watch one of the talks given by Hans (below), and visit Gapminder.

Bill Ackman on Investing

'Everything' You Need To Know About Finance And Investing In Under An Hour

Key Learnings:

1. Start investing early, in order to benefit fully from the power of compounding.

2. Higher returns are usually compensating you for higher risk. You should be able to find bargains where people are overestimating the likelihood, and potency of risk, as this usually results in undervaluation. Conversely, if you are planning to short a company (this is arguably much harder to do in a successful manner over a very long period of time), you must believe the opposite. i.e You must believe the people have underestimated risks.

3. William Ackman's "Keys to Successful Investing":

• Understand how the company makes money.
• Is it a reasonable-or bargain-price?
• Invest in a company that could last forever.
• Find a company with limited debt.
• Look for high Barriers to entry, and consider how these barriers are changing.
• Invest in a company immune to extrinsic factors.
• Invest in a company with low reinvestment costs.
• Avoid Businesses with controlling Shareholders