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Asking the right questions

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The basis of white collar work is changing rapidly

In the early 2000, with the internet and google, the grunt work around finding information was removed. Value add for any type of work shifted to putting together this information in a valuable format

For investors, this meant that bulk of your effort shifted from finding information to synthesizing it to arrive at an investment decision. The front end of the workflow – Finding annual reports, data points which used to be manual was now available at the click of button.

In the same manner, for jobs like coding, we have repositories for a lot of the boiler plate code. A significant part of such jobs is now is in glueing these components together to achieve the desired outcome

Paradigm shift

The launch of LLMs in 2022 is changing the core of all white collar jobs again. The difference this time is that it is faster and moving up the value chain at the same time

I was initially curious about these new tools and started experimenting with them in early 2023, as I did with the internet and google in the past. For those who saw the early internet, these tools felt like the dial up connection of the late 90s – slow, clunky with limited usage

Google and broadband in the early 2000s made the internet what it is today – cheap, easy to use, ubiquitous. I am seeing the same transformation in the LLMs, but at 10X the speed

The early chatgpt was Realtime and good at answering questions for which the answers already exist on the internet (and thus part of its pre-training). With the launch of the O1 and now O3/O4 models, we have reasoning models which can ‘understand’ your questions, plan the tasks and decide which tools to use to best answer these questions

This is a paradigm shift on how computers work

All other software tools follow a fixed information flow via logic embedded by the developers and system designers. In contrast these tools operate more like us, than traditional systems. They are becoming autonomous agents

Burying head in the sand

There is a lot of chatter around the implications of these tools on the future of work. I will not get into which jobs will or will not get replaced. Time will tell

A few things are, however, clear based on the current state of these tools

  • The base models continue to improve rapidly based on new algorithms and more compute
  • We have new reasoning models which continue to improve based on reinforcement learning techniques
  • The cost of these tools continue to drop exponentially (almost 90% per year)

This means that the cost of performing routine tasks and synthesizing information is dropping rapidly. If the major part of your job is to use existing information and put it together in a different format, you face competition from these tools which can do a good enough job at 5% of the price (and dropping)

This does not mean we are doomed to irrelevance as the tools get better. However it does mean that we need to re-think what is our value add (to get paid well)

This is similar to waves of automations in the past – Farm and factory workers were not happy when machines replaced human labor. They fought this change tooth and nail. We will see the same happen with white collar work.

A lot of pushback is on the following lines

  • The work quality of these tools is poor (same as weavers complaining about the quality of hand-woven cloth versus the machines)
  • They are taking work away from hard working people
  • It is unfair

I am not denying the pain these tools will cause in the workforce, but burying our head in the sand is not going to change reality.

Change your workflow

I personally think we should all take these new tools seriously and start learning as much as we can on how to use them. The next step is to breakdown your own workflow into what can now be done more efficiently using these tools.

Let me take investing as an example

The job of portfolio managers/Investors/Research analyst shifted from finding information to synthesizing it in the last few years. There are screening tools, financial websites, charting tools available where we can get all the necessary information in a few minutes (which used to take hours and days in the past)

The main job for us was to put synthesize all this information and arrive at the final decision – should I buy the stock, how much of it and at what price ?

As an investor, we get paid for our decision, not for the effort we put it. If we can reach a high-quality decision in a few hours versus days then it’s even better. In such a case, these new tools are a great benefit to us. We need to drop the mindset from our school days: grade = amount of homework. In markets, it is always quality over quantity

In the past I would read up a lot of documents and think of questions to answer. I would then dig further for the answers, but generate new questions at the same time.  Invariably there would be a point of diminishing returns after which I would decide with 70-80% of the information

I am no longer constrained

My job as an investor is to read the necessary documents as a starting point and come up with a list of questions. I can feed these questions to one of the LLM tools and  get a detailed answer. I can dig into this output, push my understanding forward and generate a new set of questions

The result is that I can have a better understanding of the company and its industry in a much shorter period of time. What can be better than that?

I will dig deeper in my next post into how I have changed my workflow and incorporated these tools.

The most important change for all of us, including investors, is now to come up with high quality questions. We are getting to the point where our computers will generate better answers than most humans

The price of uncertainty

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The Nifty is down 1% for the week and up 2% in the last 30 days. It is down 3.85% for the year.

If you were out on holiday from 1st jan, did not check the news and looked at your portfolio today, you would not know about the daily chaos. The problem is investors check the news by the hour and that has caused a lot of volatility in the markets

This volatility is great if you are a day trader or high frequency quant. It’s a problem if your horizon is a few months to a year. As your horizon starts lengthening, this day-to-day volatility becomes less of an issue

The first step is to decide your investing horizon and act accordingly

The eventual outcome of this tariff war will have differing impact on each company, but that will be known in years. It’s futile for an investor to analyze the impact in real time when the main actors in the drama keep changing their stance by the hour

FOMO of a sharp recovery

In 2020, we took a slow and steady approach. We justified this approach as follows

How does one invest under such extreme uncertainty? One option is to assume that there will be a quick recovery and go all in. The other extreme is to wait till it is all clear and then deploy the capital. In the first approach one is making a bet on a specific scenario which may not occur, leading to sub-par results. In the second case, we may end up with sub-par returns too because prices will adjust once the uncertainty goes away.

If we assume that 50% of the investors bet on rapid recovery and the other 50% bet on the whole thing dragging on, the first group turned out to be right

You are now hearing from such investors who went all-in, in the month of March/April.

As the market recovered sharply from April 2020, we slowly deployed the cash with the following thinking

Under the circumstances, my approach is that of ‘regret minimization’. That’s a fancy way of saying that I will do something in middle, so that I can avoid FOMO (fear of missing out) if the first scenario occurs, but at the same time have enough dry powder available in case the economic recovery takes longer

We had a weaker 2020, but made up for it in the subsequent years. The reason for this hedged approach is because I think Survival is the ultimate prize

I don’t want to be a hero with our subscribers or on social media by calling the bottom and going all in. Our goal is to invest in a measured fashion and make decent returns over the long term

Pricing the imagined risks

I am not advocating burying head in the sand and waiting for all uncertainty to clear up. As investors, we think the future is clear sometimes and cloudy at others.

This is just a mirage. The future is always cloudy

When investors think the future is clear, they bid up the price of stocks. At that time, it makes sense to remind yourself that the future is unknown and reduce your risk by selling down the overpriced stocks

Conversely when investors get frightened and over discount uncertainty, we should become active in the market. The key word is over-discounting the risk

At such times, stock prices reflect real and imagined risks. This is the time to take your hard earned money and deploy it in the market. Your emotions will scream at you to get out as the market keeps proving you wrong in the near term

I am not waiting for the uncertainty to clear (it never does), but the market to ‘price’ in the uncertainty in specific stocks of interest

Actions in the Fog of war – Redux

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The following note was published to all our clients today


We have feelings of Déjà vu. To know why, read these two updates from March 2020

Actions in the Fog of war

And

How do i execute ?

The first post was written deep into the Covid crisis. I used the term ‘Actions in the fog of war’ as a metaphor for decision making under extreme uncertainty. This term is used by generals who make major decisions with uncertain and conflicting information in the middle of a war

We are a literally in a war, except its an economic war on a global scale. It started last week when the US announced tariffs on all countries around the globe. There is a lot of analysis and commentary on it and I will not rehash or analyze it.

I personally think it will do us no good as this is a very fluid situation and who knows how all of this plays out. This could get resolved soon with each side declaring victory, spiral into something worse or we keep muddling through this chaos for the next few years. No one can put any probabilities against each scenario for now. Its too early to tell

Not burying head in the sand

We are however not advocating burying our head in the sand. As we shared at the start of the year, we decided to pull back and went into cash as part of the risk management process.

As the market zigzagged over the last few months, we have rejigged our portfolio a bit and added some positions. In other words, we have not been in a hurry and will take our time.

That said, we laid out a few action items in our posts in 2020, which remain true today. Let me share the same with minor edits

  • Please ensure that you have at least 6-9 months of cash or FDs so that you can take care of your expenses if there is a loss of income. This will help you remain rational and avoid panic selling to meet expenses.
  • It is going to emotionally tough and gut wrenching to remain invested. Your mind and emotions will scream at you to get out. It will be a torture to put money into the market and lose 20-30% in a matter of weeks
  • We maintain a list of 200+ companies which we track from time to time. The buy candidates will be from this list. We are in no hurry to rush in.
  • It is a given that we will get the timing wrong. we will either buy too early or too late. I hope you have already realized that and are fine with it

On the question on how to execute, we laid out the following points which remain true today

  • Please review your asset allocation (yourself or with your financial advisor) and plan how much you are willing to allocate to equities. This allocation is based on individual situation and there is no fixed percentage. That said, one should not exceed this allocation.
  • Once you know the amount you can allocate, one of the options is to invest it as per the model portfolio. If that is the case, the amount per position is based on the position size in the model portfolio (multiply position size % with the amount you want to invest)
  • If the current price is below the buy price , you can add that position to your portfolio.
  • I would suggest going for a staggered approach. Start with 25% of the final size and keep adding to it over the next few weeks/months (as long as it is below the buy price). You won’t get the absolute bottom for each position, but should get a decent average price

There is no assurance that things will work out equally well, but history shows that equities offer the best long term returns when there is a lot of uncertainty.

Agency and Fun

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I came across this word recently and resonated with me. On reading about it, I realized that I have always admired this behavior and strived for it. So what is agency?

As per google,

In a person, “agency” refers to the capacity to act independently, make free choices, and exert power to shape one’s own life and experiences. It’s about having control and influence over one’s actions and the outcomes they produce

In India, we call this jugaad

As I look back on my own life and those around me who have done well, I find almost all have had high agency – a drive to improve their life

In my generation, India had started opening up and we experienced the first technology revolution – Internet. A lot of young people in the late 90s joined IT services companies (making switches from other careers), some started online businesses, some moved to the US and some like me started a blog on investing on a whim

I enjoyed reading and investing. Pre-internet it meant getting annual reports from brokers and reading the newspaper. There were no Indian blogs (only US based such as the Motley fool bulletin boards). When I found this new medium, I started writing my own thoughts for no particular reason

Today its called content marketing, but then it felt like writing to myself with no one reading it

One thing led to another – I eventually started an advisory with my friend – Kedar which we have been running for 12 years. I still get surprised to hear from people that they have followed me for years and were reading what I was writing. I never realized that this would happen

The new revolution

We now have another shift in the making – Artificial intelligence. I am equally excited about it. As in the late 90s I get the same tingly Spidey sense of something exciting.

How will it evolve and where will it lead us?

I don’t know, but as I did earlier, I am learning about it and playing with it

I am sure it will be an exciting and fun journey as it happened with the internet. I keep saying to anyone willing to listen to do the same but be less timid

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