“When there are no recessions, people get confident. When they get confident they take risks. When they take risks, you get recessions.” - Morgan Housel
The Prosperity Puzzle - Isn’t this the multi-million dollar question most investors are trying to solve? The ones who have very little, are hustling and aspiring to make more. And the ones with everything, are creating alliances and partnerships to ensure they keep their wealth while adding more to it. And the philanthropists are working for causes that aim to create the right environment for the underprivileged so that they too have a shot at success and happiness.
Though one would hope for a permanent solution to problems like prosperity, there always will be a temporary one till a new problem emerges. The solution might work for some time, giving an impression of changing times and a brighter future, until the same future comes to bite in the back, and a new cycle begins again.
Let’s take a look at the “too good’ effects of globalization -
The biggest benefit of trading between countries has been the deflationary pressures that have kept prices low for many household commodities. Manufacturing moved from the US to China, making shoes, clothes, gadgets, and toys extremely affordable to all. Services moved to English speaking countries like India & Philippines, making many backend tasks efficient at very low rates. Mining of fossil fuels and metals was outsourced to other countries so that western economies could have a greener environment and meet their ESG goals.
All this worked well for decades, resulting in the West increasing their GDP per capita y-o-y, while the citizens got to enjoy the best that the world had to offer in terms of products and services.
Capitalism is based on the desire to maximize income. Globalization allows production to be performed where the costs are lowest. The combination of these two powerful forces has had a profound influence on the world over the last half-century.- Howard Marks
But the same prosperity also made the west believe that these cordial relationships could last forever and life would go on smoothly. It’s only after the Russia Ukraine War, is it dawning on the west that they have become vulnerable to the supply of fossil fuels, metals & minerals from hostile countries. Not only have they outsourced the carbon-producing work to others, but they have also prevented their Oil & Gas giants from building reserves of supplies by any form of acquisition or partnerships abroad.
As Stephen Gill of Pala Investments, a VC firm, states “ Supply Growth has almost become a dirty word.”
Policy & Social Constraints to Supply Growth, added to increasing demand for energy sources, has brought us to the point where the west (especially E.U) dominantly depends on Russia for its energy needs.
During a briefing earlier this month, a U.S. senator told the nonpartisan political organization No Labels, “The energy issue regarding ‘Putin’s war’ has four components: energy, climate, security, and economics (both national and at the household level).” Security doesn’t seem to have received much consideration in the deliberations that led to Germany’s energy dependency on Russia. Just one of the four factors – climate – appears to have motivated the decision. Choosing to count on a hostile neighbor for essential goods is like building a bank vault and contracting with the mob to supply it with guards. But that’s what happened. - Howard Mark’s recent memo
And that dependency is being questioned, urging global powers to form new alliances to secure sources of supply closest to home or with friendly governments. This ain’t a weekend affair. It takes decades of mining and construction to create commercial supplies and hence the current form of globalization seems to be nearing its end, till a new world order with new treaties and alliances start turning the wheels of economic progress again.
Till then, it will be a messy affair. Rising inflation is just a symptom of this changing order. The ripple effects could be even more devastating for many poor communities and emerging economies.
The success of globalization has sowed the seeds of ambition in the leaders of Russia & China, and its this ambition that has entered into a tug of war with capitalism, sowing the seeds of slowing down globalization and capitalism as we know it.
It was too good a ride, but it wasn’t a permanent one.
Let’s look at the “too bad” effects of a business failure -
I came across a video yesterday wherein Abhishek Bachan talks about his father’s difficult days during the failure of ABCL (Amitabh Bachan Corporation Limited). What struck me the most was the conversation he had with his father -
Amitabh - Nothing’s working out. My movies are not working. But I got to find a way to get back on my feet.
Abhsihek - I’m there for you dad.
Amitabh - If nothings working, then go back to basics. I have to start acting again. I have to find a role to do.
The very next morning, Amitabh Bachan walks across the road to the house of Yash Copra, India’s legendary movie producer, and asks him for a role in one of his movies, so that he could bounce back professionally. Just imagine, India’s biggest star and most well-known personality globally, in the depths of despair, muster the courage to walk up to a friend asking for a chance to perform.
That very evening, Aditya Chopra (son of Yash Chopra) shows up at Amitabh’s house with a role in the movie Mohabbatein, alongside Shahrukh Khan. Not only did the movie gross in excess of INR 100 crores at the box office, but it also won Amitabh Bachan many awards for Best Supporting Actor role.
This was a turning point in Amitabh Bachan’s career, and he never had to look back. He won many Best Actor awards and was critically praised for his performances in multiple movies. My favorites are Sarkar & Piku.
Too Good & Too Bad - It’s temporary…
You might be wondering at the contrast of my examples i.e. Globalization at one end and a movie star’s professional bounce back. But both these examples emphasize the cyclicality in everything. And once you realize that, you would look at making investing choices differently.
In a rising Bull Market, you would have to ask yourself the question “how long will this peak margins sustain?” or “what kind of growth is factored into the price of the company?”
For e.g., Asian Paints’ current valuations would be justified if you believe that the company will continue its earnings growth @ 25.10% for 10 years, or 17.50% for 20 years, or 15.90% for 30 years. Even the terminal multiple and discount rates are an assumption, but the reverse DCF at least provides you with the information that is baked into the price.
If the earnings are at an all-time high and the price has soared to its all-time high (ATH), the position would have made you decent profits but you will need to re-assess your thesis for holding onto the position or deciding to sell.
If your research shows that the earnings momentum will sustain and there is a huge runway ahead, then you continue holding the position. If not, then ‘Exit’ the position and lock in your profits.
Even if you are a long-term investor, you still need to question the longevity and durability of the business at all times. You can’t just buy into a company, and forget your position because it’s a great BUY today. Even Nokia was a great buy once, but it eventually lost its entire business to smartphones like Apple & Samsung. Investors in Nokia were left holding the bag.
“Too Good” may not be too good forever…
In a bearish scenario, there might be a company that has been impacted severely due to current technological changes or environmental challenges e.g. Facebook has lost 37% since December 21 but has the business got adversely impacted in a significant way? Has the business run into a hole from where there is no way out? Is the Apple ATT restrictions a death blow for a company that has almost 3 billion people using it in some shape or form on daily basis?
If your research shows that the company has the ability to bounce back by altering its tech stack for effective advertising, then the revenues will creep back up. If you believe in the founder’s ability to adapt and innovate irrespective of the challenges, then the current crash will only be a buying opportunity for you, while the world panics around Meta’s business model. If you believe in owning businesses with optionality built-in, then the AR/VR business could unleash a new stream of revenue and profitability in time to come.
“Too Bad” - may not be too bad forever…
This piece reminds me of an image I saw online -
“When alcohol from fermentation reaches a certain point it kills the yeast that made it in the first place. Most powerful trends end the same way. And that kind of force isn’t intuitive, requiring you to consider not just how a trend impacts people, but how that impact will change people’s behavior in a way that could end the trend.” - Morgan Housel
Think about this again.
Reevaluate those strongly held beliefs.
Revisit your assumptions that you have been holding on to for too long.
Don’t get seduced into believing that A, B, or C is permanent and will remain so.
It’s all cyclical. Let’s profit from it instead of letting the ups and downs affect you emotionally & financially.
Recommendations for the week #
I am an avid listener of podcasts and my daily consumption runs between 2-3 hrs. This habit has transformed my learning experience and made every drive of mine a super productive affair. This week’s favorite show was Marc Zuckerberg’s interview on Tim Ferriss Show. It’s an hour and a half long but it gives you an insight into one of the brightest minds in the tech space, his personal protocols for energy management, the culture he’s building within META, and his perspective on AR/VR/Web3 and more. I really enjoyed this one.
Another home run by Morgan Housel. This piece was the one that triggered my thinking towards the topic of my current piece shipped today i.e. 26th March ‘22. This piece by Morgan should be bookmarked for monthly reference for many reasons - it makes you wiser, it makes you think long term, and it increases your sense of awareness for the choices you make and the repercussions it has👌
I am thrilled to have been accepted into the Public Awareness Committee for CFA Society India, and I had my first zoom session with them in the morning. They are a committed bunch of professionals and I am looking forward to contributing to the society in the best manner possible.
I share this news with you all as it’s your feedback and encouragement that has contributed immensely to my weekly writing habits. And I will be leveraging this very skill for my association with CFA Society India. So thanks again for making this happen !!!
Wishing you all a fantastic weekend ahead.
Stay Safe 🤝