Knowledge Corner – Newsletters

Ashmayu: Rays of Light (sanskrit)

At Tamohara, we take reading seriously, and go through a variety of analyses, perspectives and news from across the world. What you see here is a distillation of the insights that arise as a result of all that reading. We hope you enjoy these newsletters that our team puts together and give you a different perspective of thinking about investing and on certain industries!

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The Role of Normalisation in Forecasting

December 29, 2017

Sitting on a couch on a Sunday evening with friends and watching an India – Pakistan match is always fun. The entertainment quotient is even higher when Virat Kohli is at the striker’s end and everyone is predicting the target India would set for Pakistan. However, such predictions are not limited to a cricket or a football match. At some point of time, every one of us would have made predictions on the weather during the day, the winner of a sports tournament or the level of Nifty/Sensex a year down the line. These predictions come from extrapolation of the recent past or just a hunch. But unlike a prediction, forecasting is based on formulation derived from studies of measured results of similar incidences over time. For example, meteorological departments all over the globe use decades of time series data to come up with a forecast for a location which would give various parameters on real time basis like probability and quantum of rain, humidity, and temperature. Similar is the case when economists forecast GDP growth or economic cycles. Financial projections however, tend to remain off the mark more often than not, mainly due to the extension of recent trends into the future. Such acts ignore the tendency of chance-based events to mean revert, as we had highlighted in our October 2017 Newsletter – Mean Reversion and the Role of Normalisation in Investing. We further advocated the importance of normalisation in dealing with such events to avoid the trap of ‘extending the trend’. In this note, we elaborate on the process of normalisation in financial forecasting.

The Painful Multibagger

November 30, 2017

Recent news flow around China’s Tencent Holdings surpassing Facebook by market capitalisation was almost unmissable. The stupendous rise of more than 500x in the share price of the company over the last ~14 years would have left a lot of investors envious. One often wishes when looking at such a chart that one could go back in time and invest in that security. While the lure of making big money from a single investment is hard to resist, we argue that even with the benefit of hindsight, not many investors would be able to ride such a journey.

Mean Reversion and the role of Normalisation in Investing

October 31, 2017

Imagine that you are offered a 3:1 return for every correct heads/tails call on a coin toss i.e. if you call heads and the coins lands head, you win 3x the amount you bet and vice versa. For the sake of simplicity, assume that you have nothing to lose until the first 20 turns. On the 21st turn, you are offered a double or nothing bet i.e. you bet all your winnings and if you call the outcome correctly, you take home double the amount, whereas if you lose, you give up all your gains (you cannot quit the game mid-way). As you reach the 21st turn, you have observed that the coin landed heads up in 15 of the first 20 turns. What would your call be? Heads or Tails (you are told that this is a fair coin that has not been modified in any way)? . Based on the results of the first 20 calls, you may be tempted to call Heads. However, you are aware that this is a fair coin, and therefore the probability of it landing heads up and tails up is the same. Since the coin has landed heads up more than tails up, ideally, it should have a higher chance of landing tails up and therefore Tails would have been a better call to make. This is based on a phenomenon called Mean Reversion – we explore this in more details in our note this month.

Financialization of India’s savings and its implications

September 29, 2017

Last month, we touched upon the growing trend of systematic investments into equity mutual funds. We highlighted that the growth in the SIP book was not a recent phenomenon, but a trend that was in the making for a few years at least. This month, we look at some other similar trends in data that points towards a financialization of Indian household savings and contemplate upon the implications of the same.

The Fallacies of Our Mind – III

August 31, 2017

Under the ‘Fallacies of Our Mind‘ series, we have established that many of our instincts are detrimental to our investment outcomes. While we cannot re-wire our brains, it is important that we understand its shortcomings, and design an investment process that helps us overcome these emotional hurdles. Towards this end, in this installment of the ‘Fallacies of Our Mind’ series, we discuss two mental shortcomings – the inability to notice small incremental changes and the inability to comprehend non-linear relations.

Notes from the Road: Travelogue from Uttar Pradesh

July 31, 2017

An integral part of our research process is to conduct road trips to assess ground realities. On ground interactions render a better understanding of the state of the economy, the effectiveness of government policies, the reality of business practices, as well as the psyche of the consumer. These, in our view, are one of the better ways to identify gaps between perception and reality. Last month, Sheetal Malpani from our Research Team spent 5 days traversing around 500 kms across six districts in the state of Uttar Pradesh. As Sheetal recounts his journey in this newsletter, he offers some interesting insights from the ground up.

Direct Benefit Transfer: Analysing progress and potential impact

June 30, 2017

In continuation of our series of newsletters, where we analyse the government’s game changer reforms (like PM crop insurance scheme in the month of April), this month, we discuss and analyse yet another government reform – Direct Benefit Transfer across various government schemes, assess their progress so far and examine what benefits it can bring to the Indian economy.

Predictions, Timing, & Time in Market

May 31, 2017

Predictions give us a sense of control in an otherwise ambiguous system like the stock market. Since the human brain does not like uncertainty, we tend to look for patterns to make sense of such complex systems. In our attempt at simplification, however, we usually end up with over-simplification. One such over-simplification is the attempt to time stock market corrections. Such activities are presumed to be of value add to long term investment results. However, we believe that to understand the true value-add of timing, investors need to answer the following four questions:

PM Crop Insurance Scheme – A Potential Game Changer?

April 1, 2017

As the summer temperatures soar in India, a lot of attention shifts towards the rainfall predictions of the meteorological department (IMD). Monsoon forecasts gain prominence given India’s high dependence on agriculture (~18% of GDP and ~60% of the population being directly or indirectly linked to agriculture) along with relatively low penetration of irrigation facilities (nearly 80% of India’s farmlands depend on rainfall for water supply). An irregular rainfall leads to many socio-economic issues like farmer suicides, demand for farm loan waivers, high food inflation, etc. It is therefore imminent that policy makers focus on reducing the reliance of farm incomes solely on rainfall. Towards this goal, one of the measures taken by policy makers is in the form of a Crop Insurance Scheme. Attempted thrice in the last three decades – 1999, 2010 and 2016 – the scheme had seen limited success hitherto. With each scheme addressing the shortcomings of its predecessors, we believe that the recent scheme stands a chance at making a difference.

Economic Moats

March 1, 2017

The concept of the ‘economic moat’ has been popularised by legendary investor Warren Buffett. Traditionally, a moat is a wide body of water or even a large dry ditch that surrounds a castle. The purpose of such a moat would be to prevent unauthorised entry into the castle. Metaphorically, Warren Buffett compares a high return generating business with a castle and the factors that help the business sustain or improve its returns as moats.

Demystifying Valuations

February 1, 2017

In our October 2016 communiqué – Cash is King – we argued that cash flows are a better measure of a company’s profitability rather than margins. This month, we take this thought forward to argue that cash flow based valuation metrics are a better investment tool compared to earnings based valuations.

The Fallacies of Our Mind – II

January 1, 2017

Traditionally, the change in a calendar year has been associated with: (a) reflecting on the year gone by; (b) looking forward to opportunities in the New Year; and (c) resolving to change an undesired trait or behavior. While we touched upon the former two in last month’s Change is the Only Constant in Life, we focus our attention on the latter this month.

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