Author: admin heyokha

The Chinese word for Crisis (危机, read: Wéi Jī) is the combination of the words “Danger” (危险, read: Wéi Xiǎn) and “Opportunity” (机会,read: Jī Huì) philosophically suggesting that there is always opportunity in every crisis.

The clampdown by the Chinese government and stricter compliance requirements by the US SEC has created a perfect storm for Chinese tech companies.

Hundreds of billions in market value vanished within months as a result. Kraneshares China CSI Internet ETF (KWEB.US) has fallen by 56% from its peak in February to 19 August 2021. Stock prices of big names like Alibaba (BABA.US), Tencent (700.HK), JD (JD.US), Pinduoduo (PDD.US), and the recently publicly listed Didi Chuxing (DIDI.US) have fallen by 40% to 50%. Even more extreme, names like Joyy Inc. (YY.US) and New Oriental Education (9901.HK) saw their stock prices fall by more than 70% from their highs.

Is this big sale justified or does it represent a bargain-hunting opportunity instead?

The Chinese government is exerting its role as a great equalizer

It is clear that the Chinese government possesses the ability to put their local tech companies on their knees. Their clampdown targeted companies in various tech-sectors, such as e-commerce, fintech, gaming, delivery platforms, and edutech. Given the massive consequences, we asked ourselves why this action is necessary in the first place.

The rise of today’s tech titans begun in the US in the 1980s. It was kickstarted by the development of personal computers and the internet. At first, the vision of tech companies was simple. They were addressing the pain points of society. Fast forward several decades later, digital businesses such as e-commerce, social media, digital media, ride-hailing, and XaaS businesses have reduced many frictions in our daily life.

Despite the benefits, tech entrepreneurship has reduced equality. As more capital became available to finance innovative ideas, competition got fiercer. Most tech entrepreneurs must play in a winner-takes-it-all game. The winner will obtain most of the market share with competitors lagging far behind. Winning in the game also means better access to resources like user data and capital that arrives in form of exceptional free cash flows or a generous valuation. Data and capital become the seeds and fruits for venturing into tech businesses.

It is important to note, these tech titans remained agile despite their size. Small businesses only have a slim chance to compete with them.

Considering the improvements that technology companies have brought to the economy, we think it is unlikely that the Chinese government aims to shut down its internet sector. Reflecting on the worsening inequality in the US that is partly driven by tech companies, it is sound for any government try to avoid that trajectory. History has shown that extreme inequality will hinder economic growth and develop social unrest.

From the perspective of building an ideal nation, these clampdowns actually serve a greater good by promoting equitable economic growth, preventing abusive monopolistic power, protecting consumers rights, providing data protection, and enhancing national security. We see these objectives to be similar with what the United States and European Union trying to achieve. However, the Chinese government acted faster because of their single-party system while other legislative institutions in the West were still debating on how they could regulate the tech sector for the last decade.

We should note that the lack of regulation had been facilitating the extraordinary growth of most tech companies. Exploiting user data, avoiding taxation (to some extent), and leveraging ecosystem exclusivity are some of the examples. These advantages will be taken away for Chinese tech stocks and their valuation has adjusted accordingly.

The new regulations on user data security and enforcement of fair trade (i.e- the crackdown) eliminates some of China tech companies’ growth hack tricks. As such, investor’s may justifiably reduce their expectations on the China technology companies’ growth prospects because of the new rule of the game. However, we are of the view that this crackdown is not the end of China tech stocks.

The new regulation could translate into a lower top-line growth rate but a healthier bottom-line and more productive economy. Case in point, imagine if the culture of attracting customers by ‘burning money’ ends. Without excessive marketing and subsidy, China tech companies will have to rely heavily on their product quality and efficiency as the source of customer acquisition. Should this circumstance occur, the incumbent players will now have a better chance to compete as they face the tech companies’ true pricing instead of a subsidised one. Thus, tech companies’ profit margin could be healthier and national productivity also could benefit from efficiency-and-innovation-driven competition.

Furthermore, completely shutting down technology companies is inherently counter-productive to what the Chinese government has tried to build. After achieving monumental poverty eradication and industrial revolution since the 1960s, this might be just the right time for the Chinese government to start closing the wealth gap. The Covid-19 pandemic recovery has been K-shaped. A huge chunk of brick-and-mortar and mom-and-pop businesses have been absorbed by e-commerce firms.

On the other hand, the government is promoting ‘new infrastructure’ sectors including semiconductors, renewable energy, and AI as indicated in the 100th anniversary of the Chinese Communist Party. It also has promoted health-tech companies in one of the government policies to improve healthcare quality in the country. This fact shows that the government is not anti-tech but intends to curb the side effects of the inequality it produces.

Investors can benefit from the repositioning of China tech investors’ portfolio instead of a mean reversion

We do not see the current big sale will turn into a classic mean reversion play because the rule of the game for China tech companies has changed. Instead, the Chinese crackdown has caused investors to reconsider their portfolio allocation. Some will remain invested, and some will leave the market entirely.

We believe that those who remain invested might shift their capital into technology names that truly improve the nation’s productivity such as technological infrastructure and deep technology names or the ones with regulatory-compliant business model. Through this rebalancing, they can reduce the regulatory risk in the future while leveraging the growth of China’s economy in the tech space.

Meanwhile, discouraged China tech investors might shift their portfolio allocation towards US tech companies or Southeast Asia tech companies that have a similar high-growth profile and less regulatory risk as they are still in the early days.

How lucrative Southeast Asian tech companies could be?

That will be our discussion for next week. Stay tuned!

“There is a bit of conspiracy, and of authoritarianism, in every democracy; and a bit of democracy in every dictatorship.” – George F. Kennan

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Some context: 

Lumber price went up 244.5% from USD 435.5/mbf January 1^st 2020 to all-time-high of USD 1500/mbf in April 2021.

If we merely rely on periodicity measures, a commodity supercycle is supposed to happen only once in several decades. As the latest supercycle only ended about seven years ago in 2014, a new supercycle should not happen anytime soon.

However, dare we say that this time it’s different? The mix of worldwide synchronisation of government infrastructure spending as a response to COVID-19, a weak USD, underinvestment in the commodity sector, industry consolidation, and extreme weather could result in the perfect cocktail for the next commodity supercycle.

Both the swiftness and magnitude of the recent commodity rally is unprecedented. Within just a few months, the price levels of many commodities have risen to all-time-high and multi-year-high levels after suffered to a multi-year low plunge. This price movement occurred within two years.

In our previous blog, we already discussed the reasons behind the weak USD and inflation scares in the U.S that blame commodity as one of the scapegoats.  Let us explore the other ingredients of the perfect cocktail:

Government spending synchronisation and green infrastructure construction across the world will translate into surging demand for base metals

In 2020, the COVID-19 pandemic has synchronised global government spending. According to Cassim et al. (2020), more than US$ 10 trillion, more than 11 per cent of global GDP, was spent last year to relieve the teetering global economy.

After the relief spending, the classic playbook of economic recovery would suggest increasing spending on infrastructure. This time around, we believe that the grand theme would be green and digital infrastructure as there have been escalating commitments  by governments to battle climate change and to accelerate digitalisation during the pandemic.

Investors should note that these initiatives are metal-intensive.

In our 3Q 2020 report, we discussed plans for large infrastructure spending (New-Deal-inspired policies) by governments to take on the “K-shaped” economic recovery. Historically, high infrastructure spending (measured by gross fixed capital formation) will translate into higher base metals prices as shown by the figures above.

In particular, we believe that base metals such as nickel and copper will benefit the most from digital and green infrastructure development because most of the upcoming projects will hover around electronics, electricity, and energy storage.

A decade of underinvestment in the mining industry could result in a potential supply crunch

The subdued commodity prices in the last decade reduced the appetite for investments in the mining and energy industries. Consequently, there will be a longer lead time from discoveries into production which would translate to lower replenishment of the depleting resources.

Furthermore, the rising ESG scrutiny in these sectors also makes it harder for the industry to obtain financing – which further decelerates the future supply growth.

This structural condition suggests that there would be insufficient supply to respond to the surging demand for mining and energy commodities. Such circumstance would drive prices up even further.

Oil great reset drives worldwide industry consolidation

Many oil companies got burnt in 2020, especially shale oil producers, because of the historical plunge of oil price that was triggered by the sudden global lockdown. WTI oil price went negative for the first time in history. It  forced them to cut production without any hesitation. It reversed the “growth at all cost” mindset to maximizing return on shareholders’ capital.

As oil prices plummeted to a historical negative level in 2020, the great reset of oil industry in 2020 has led to solid worldwide industry consolidation. Industry CAPEX tanked and production was cut significantly altogether. The consolidation enables tighter output control and leads to a more sustainable price increase.

As of February 28th, 2021, the OPEC is producing at 80% of 10Y-average production, 24.87 mn bpd, with a high compliance rate of 110% among OPEC10 members and showing reluctance to raise output amidst the recovering economy and travel ease. Until the recent OPEC meeting in June 2021, the solidarity among the cartel still persists.

Extreme weather conditions and supply chain disruption will also drive soft commodity price up

Despite the (pandemic) lockdown, the global average temperature is back to a record high in 2020. A study   by Zhao et al. (2017) shows that for each degree Celsius increase in global temperature, yields of corn are expected to decrease by 7.4%, wheat by 6%, rice by 3.2%, and soybean by 3.2%.

The robustness of the recent agriculture rally is reflected in the soaring commodity price in the harvest season. Case in point: Indonesia’s corn price in East Java on farmer’s level has increased 42.8% from approximately IDR 3,500 (USD 0.246) at the beginning of the year to IDR 5,000 (USD 0.352) per kilogram in early May 2021, a harvest season for corn. This kind of event is truly rare.

Investors should be aware of weather conditions as it might further boost agricultural commodity prices if it turns to be unfavourable.

Disrupted supply chain is the cherry on top of the perfect cocktail

The uncertainty on travel restrictions has disrupted the global supply chain. To-the-moon freight costs in three months period between December 2020 to February 2021 perfectly reflect the severity of the disruption.

For instance, the cost of shipping a 40-foot container from Asia to Europe rose about 2.5 times from approximately USD 2,200 to over USD 7,900. From the global perspective, the Freightos Baltic Index, represent container-freight rates in 12 primary maritime lanes, has increased about 80 percent from USD 2,200 to USD 4,000 per container.

The uncertainty in the global supply chain has incentivised some producers to hoard feedstocks. Such behaviour is driven by their interest to secure their production continuity that is currently responding to the pent-up demand.

Furthermore, the disruption also meant a higher cost of production for everyone in the value chain. Consequently, every producer, including the commodity producer, is reluctant to sell cheap.

It is a cherry on top of the cocktail.

This perfect cocktail may either taste sweet or bitter

The pent-up demand from economic reopening and robust additional demand from the expansive economic policies will be responded unevenly from the supply side. Both demand and supply forces are driving prices up. As such, we are of the view that the stars are aligned to form a commodity supercycle.

Regardless of the commodity rally being a supercycle or transitory (might be one year, two years, five years- it’s too late to act by then), the cocktail will taste differently for everyone.

Commodity producing companies would certainly re-experience their glory days meanwhile companies who are unable to pass on their increasing production costs will see their profit margins fade. As the majority of costs rise, a period of sustained inflation would also become inevitable.

With rising inflation, a commodity supercycle, and the shift to value stocks becoming the investment backdrop for the upcoming years, could there be a certain region that benefits from all the forces?

Stay tuned to our next blog!

“The test of a first-rate intelligence is the ability to hold two opposite ideas in the mind at the same time, and still retain the ability to function”

-F. Scott Fitzgerald –

Reference:

Cassim, Z., Handjiski, B., Schubert, J., & Zouaoui, Y. (2020). The $10 trillion rescue: How governments can deliver impact. McKinsey & Company.

Chuang Zhao, et al. (2017). Temperature increase reduces global yields of major crops in four independent estimates. Proceedings of the National Academy of Sciences of the United States of America Vol. 114 no. 35, 9326-9331.

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For the last fifteen years, value stocks have been underperforming growth stocks. As such, many investors think that either value investing is dead or reversion to the mean is imminent.

With the brewing inflation as the catalyst, we are of the view that second scenario is more likely. We are of the view that the return of the glory days of value investing are near and its outperformance will begin with the closing of the unprecedented relative valuation gap between growth and value stocks.

Growth stocks have outperformed value stocks over the last fifteen years

Value investing had worked well in the past, such as in the post-dot-com bubble era. However, for more than adecade, value has underperformed growth and the valuation gap has been widening instead of narrowing.

As of February 2021, value stocks valuation multiple gaps relative to growth stocks is nearly as high as during the dot-com bubble. MSCI Growth Index P/B multiple is at 240% premium to value P/B multiple. This is compared to around 60% premium a decade ago.

The rising inflation expectations and yields could be the potential catalyst for a reversal in growth-value performance

During the high CPI inflation era in the U.S in the 1970s, with CPI registered at around 7.25% per annum, value stocks significantly outperformed growth stocks by 9 percentage points per annum. Value stocks had earned 6.6%, meanwhile, growth stocks had lost 2.4% annually in real terms (i.e adjusted for inflation rate). Compounded annually, it translated to a 136% cumulative real return difference for the decade. How could such outperformance be explained?

In the previous blog, we have discussed the brewing inflation and its driving factors as US April 2021 CPI inflation hit 4.2% YoY. Inflation causes real asset value to decline. As a result, investors will demand a higher yield on their investment to compensate for this. Hence, the (expectations of a) rising inflation rate will create an upward pressure on interest rates.

The inflationary force and rising interest rates explain how value stocks could outperform growth stocks:

A bird in the hand worth two in the bush – The rise of nominal interest rates hurts high-multiple growth stocks more than value stocks. It reduces the present value of projected future cash flows. The more distant the cash flow is, the more severe the impacts will be. This means that growth stocks, which have a higher cashflow duration than value stocks, will experience stronger downward pressure on valuations as result of rising interest rates.

Being asset-heavy comes in handy given the operating leverage impact – Value stocks tend to be more asset-heavy. As such, during a period of high inflation, their cost structure is less volatile. A big component of their cost is fixed, so less sensitive to inflation. This trait is the opposite of growth stocks.

Investors should consider adding value stocks DNA to their portfolio

Inflation is the kryptonite for growth stocks. Therefore, investors should consider owning value stocks. The brewing inflation favours the out-of-favour value stocks in general.

In the context of today’s inflationary environment, value-commodity stocks would be on the top of the list. Inflation enhances their earning power and they are currently trading at low multiples of book value. Furthermore, some forces drive commodity prices to sustain at higher prices or to push them even higher.

What forces would that be? Stay tuned to our blog.

“Be still like a mountain and flow like a great river“

-Lao Tzu-

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“There are decades where nothing happens, and there are weeks where decades happen.”

-Vladimir Lenin-

Yesterday, the market was surprised with higher-than-expected US’ April CPI inflation data of 4.2% YoY and 0.9% MoM, hitting 13-year high. This is far higher than the consensus of 3.6% YoY and 0.3% MoM. Moreover, the CPI inflation surge was more than just a base line effect. The cumulative CPI Inflation from 2019 would be 3.36%, negating 0.8% YoY deflation last year. Such level is higher than the Fed and 5Y breakeven inflation expectation of 2.4% and 2.7% respectively.

Some may take comfort in the Fed’s Jerome Powell and the US Secretary of Treasury Janet Yellen statement that inflation would be transitory. Also, the historical reality that suggests the post-GFC QE has failed to produce in inflation in the traditional CPI sense.

Still in the spirit of applying a growth mindset, we do not want to rule out the possibility of inflation to be more structural. Instead, we rather ask ourselves, what could be different this time?

The recent money printing is structurally different.

The non-existent CPI inflation of post-GFC was due to the design of QE that benefits the upper class. The surging wealth effect did not lead to higher consumption but was reinvested by the rich. There is a lot of inflation if you look at the asset prices.

This time around, the stimulus checks directly target low-medium income groups who have a much higher propensity to consume. They spend the money rather than to reinvest it. Furthermore, now we have a credit guarantee scheme that spurs commercial banks’ money creation process along with the fusion of fiscal and monetary policy by modern monetary theory.

In 2020, the FED Balance Sheet registered an expansion that matched the previous entire decade of expansion. The US budget deficit in 2020 was 16% of GDP, only comparable to those experienced during World War II.

Such actions have led to two achievements: (1) 24.6% of the global U.S dollars printed last year and (2) the U.S won the most significant worldwide increase in YoY money supply by a landslide. The greenback simply becomes the U.S greatest export commodity as the result of modern monetary theory.

The advent of Modern Monetary Theory to push more money creation

In early March 2021, the U.S government has passed the American Rescue Plan Act, a stimulus bill of USD 1.9 Tn. Now, the Biden administration also proposing another USD 3 Tn green energy infrastructure plan and USD 1.8 Tn American Families Plan. All of these initiatives would be equal to 35% of the U.S 2019 GDP.

U.S monetary policy side also suggests that the Fed shows no sign to stop pouring liquidity into the financial market. Year-to-May 2021, the Fed balance sheet has expanded about 6%, USD 230 Bn from USD 7.3 Tn in December 2020. That is equal to an 18.2% annualised growth rate. After such a massive expansion in 2020, U.S M2 is now growing at the annualised pace of 12%.

This habit of printing money seems to be addictive and the word trillions have become more frequently mentioned these days. What is the point of working hard and financially responsible to save and not invest your money recklessly?

Commodity prices are going through the roof

Food, energy, and raw material commodities are soaring. With surging commodity prices, production costs are destined to rise. As people now have money in their hands, the inflationary forces are spiralling from the demand and supply side. Most of the commodities experienced a shortage from agriculture to base metals as shown by backwardation on their future contracts. As direct costs are rising, prices have to rise. Will people demand salary rise too?

We will discuss more on the factors behind the rally in the future, stay tuned.

Neo-protectionism, escalating geopolitical tension might further escalate commodity prices

The way we look at it, Biden’s Made in America is just a flattering version of Donald Trump’s Make America Great Again (MAGA). Made in America will likely result in an increase in prices as companies face diseconomies of scale. It reverses the efficiency obtained through the specialisation of free-trade.

Surging geopolitical contests also could cause commodity prices to go ballistic. Two-centuries worth of data suggest that every major war and geopolitical contest have been associated with high-level commodity prices and inflation rates. We see no cool-down on U.S-China tension. In fact, the strain in the South China Sea has escalated even further.

Financial repression has induced the hunt for yield

A manifestation of early inflationary era is higher risk investment appetite in the search for yield. At the moment, the market has been digesting two things: (1) expected inflation of 2.7% for the next 5 year, higher than Fed target of 2.4%, and (2) negative real yield climate whereas 5Y expected inflation of 2.7% is only compensated by 0.78% of 5Y U.S treasury bond yield, implying -1.92% expected real yield for the next five years. Of course the negative real yield is even lower if we compare it to the recent inflation of 4.2%.

As such, the Fed’s commitment to continue buying government bonds could be translated as a quasi-price cap at a higher price level. Price cannot fall to adjust the demanded market yield that compensates inflation. It is an attempt of global asset price fixing and causing dislocation of asset price and allocation. A yield cap in an inflationary environment is essentially a form of financial repression. The outcome is that the hunt for yield has now begun.

To shelter from a highly inflationary environment, investors buy assets. Cash becomes trash. The higher risk appetite as the result of yield hunt has been reflected on various asset prices. We are not surprised with how risk-loving the current market is given the S&P500 dividend yield of 1.8% is even higher than the US 10Y bond yield of 1.6%.

Several notable asset price movements:

Junk bond spread is at an all-time low. No incentives to be financially prudent (?)

U.S home prices continued to skyrocket. +12% as of Feb’21 since Dec’19

Stock markets are around record high level – it is all in the news.

Cryptocurrencies, a joke-intended crypto that was made in a Sunday afternoon (Read: DogeCoin) in early May’21 market capitalisation reached USD 87 Bn, bigger than British Petroleum, General Motors, FedEx, BASF, Sinopec, and Conoco Phillips. Now, the total market capitalisation of cryptocurrencies reached USD 2.1 Tn. To put it into context, this is twice the size of Indonesia’s GDP in 2019.

One can always be prepared.

In the early stage of inflation, equities have always been a beneficiary. Such companies would be: (1) superior companies with moat and unquestionable pricing power, (2) commodity producers, or (3) companies whose business model is designed to pass on the cost to the consumer. Another thing for sure, cash or bond is not the place we want to be.

However, the story could be different in galloping inflation or hyperinflation time. Nowhere is safe, since social and political unrest might rise and causing economic instability. Companies’ pricing power might be maxed out. As printing money is not the answer, taming inflation will cost GDP to decline. Asset prices then will start to deflate.

Since early signs of inflation is already here, the next question to ask is what should we do in the case of inflation spiralling upwards in a more persistent manner?

Well, it has something to do with value stocks but that’s a story for another day.

As a side note, in case the world is going to see hyperinflation, our team has spent a considerable amount of time and energy to study about the Weimar Era Inflation and differences between QE and MMT. Read our 2Q20 report.

“After the printing press, comes the guillotine.”

-French Revolution Anecdote-

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Most of the world greatest investors such as Phillip Fisher, Warren Buffett, and Peter Lynch have stressed the importance of thinking independently and recommended investors to take a solitude path of their own.

For example, Peter Lynch, ex-fund manager of Magellan Fund, once said “If no great book or symphony was ever written by committee, no great portfolio has ever been selected by one, either”. Hmm, is there any good reason to work as a group then?

Groups could outperform experts

Evidence suggests that with the right structures and culture in place, group and team decision-making can be far better than that of even the wisest and most expert individual.

Case in point, Psychologist Tetlock and Gardner (2015) compared how teams performed in forecasting tournaments in comparison to individuals. The teams which got some training in teamwork where on average 23% more accurate than individuals.  This means there is a lot to gain by getting it right.

Conflict-avoidance culture instills groupthink

It is not working as a group that becomes a problem, groupthink is. As human beings, we have desire to live in harmony. This preference however tends to cause irrational decisions when we work in a group. We tend to compromise decision outcomes for the sake of peace.

The danger of groupthink lures in any organisation. While groupthink is an international phenomenon, we feel we are especially vulnerable to this given many of our team members are from Indonesia.

The Indonesian culture is very conducive to groupthink as relationships, harmony, and hierarchy play a large role in Indonesian business culture.

For example, subordinates may feel uncomfortable to speak up and bring bad news or true information. In such culture, when leadership claims that the sky is green, his subordinates may concur. This obviously limits the potential to improve investment decisions by aggregating many views.

We try to mitigate this by hiring analysts who dare to speak up, but this does not solve the problem entirely. We are still exploring how we can best improve on this. However, we have several potential solutions as explained below.

Ways to prevent Groupthink in investment decision

So, what steps can we take to “de-bias” our (investment) team’s decision-making? Psychologists Cass R. Sunstein and Reid Hastie (2014) propose various ways to make “dumb groups smarter”.  Here are some of them:

Silence the leader – When leaders refrain from expressing their views at the outset, team members are less inclined to self-censor contradicting views and information.

“Prime” critical thinking – When people are given a “getting along” task, they shut up. When given a “critical thinking” task, they are far more likely to disclose what they know. The key is for the leader to promote disclosure of all information, critical thinking, and thoughtful disagreement.

Appoint a devil’s advocate or a “red team” – ask some group members to defend a position that is contrary to the group’s inclination (the devil’s advocate) to discipline and strengthen collective reasoning.

Or take it to the next level by creating a red team whose job is to construct the strongest possible case against a proposal or a plan. Such team should sincerely try to find mistakes and exploit vulnerabilities and be given clear incentives to do so.

The Delphi method – This approach involves several rounds of unanimous estimates (or votes) followed by group discussions until the participants converge on an estimate. The anonymity insulates group members from reputational pressures and thus reduces the problem of self-silencing.

Two other ways we came across were promoted by Psychologist Gary Klein and fund manager Ray Dalio:

Premortem – Psychologist Gary Klein proposes to conduct a premortem. This is an exercise in which team members purposefully imagine that the project they are planning just failed and then generate plausible reasons of its demise. The very structure of a premortem makes it safe for team members to identify problems.

Weighted decision making – Ray Dalio shows in his book Principles that he goes to great lengths to prevent Groupthink. He believes that thoughtful disagreement by independent thinkers can be converted into believability-weighted decision-making that is better than the sum of its parts. For this purpose, they use an app in meetings that provides a polling interface and a back-end system of believability weighting. This allows the team to make decisions based on voting results – both on equal-weighted and believability-weighted scores.

Combining the best of us in the group

Groupthink handicaps any group’s decision-making process and outcome. Therefore, acknowledging it is our first step to improve our group performance. We could significantly take our organisation’s performance to the next level just by avoiding its pitfalls. Creating a conducive environment that encourages thoughtful and respectful discussion may unleash critical thinking and spurs the best of us in the group.

After all, what is the point of a discussion if there is only one man allowed to speak?

”If everybody is thinking alike then somebody isn’t thinking” – George S. Patton Jr.

References:

Dalio, R. (2017). Principles: life and work. New York: Simon and Schuster.

Klein, Gary. (2007). Performing a Project Premortem. Harvard Business Review.

Sunstein, C.R., & Hastie, R. (2014). Making Dumb Groups Smarter. Harvard Business Review.

Tetlock, P. E., & Gardner, D. (2015). Superforecasting: The art and science of prediction.  Random House.

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We are what we believe we are

After decades of research, Stanford University psychologist, Carol Dweck discovered a simple but ground-breaking idea: the power of mindset.

In her classic book “Mindset: The New Psychology of Success”, she showed how success can be dramatically influenced by how we think about our talents and abilities.

Dweck summarised, “Individuals who believe their talents can be developed (through hard work, good strategies, and input from others) have a growth mindset. They tend to achieve more than those with a more fixed mindset, i.e., those who believe their talents are innate gifts. This is because they worry less about looking smart and they put more energy into learning.”

According to Dweck, believing that your qualities are carved in stone — fixed mindset — creates an urgency to prove yourself over and over. The fixed mindset makes you concerned with how you will be judged; the growth mindset makes you concerned with improving.

The good news is that we can change our mindset.

For example, a study in the United States showed that a short (less than one hour!), online growth mindset course improved grades among lower-achieving high school students (Yeager, D.S., Hanselman, P., Walton, G.M. et al., 2019). This is great because having a growth mindset can also improve investment success.

Growth mindset unlocks investment success

Adopting a growth mindset can improve our lives in many aspects, such as becoming better partners in a relationship, better parents, better managers and of course, better investors.

We found there are at least three reasons why growth mindset is an important concept for investors:

Improve our stock picking – companies with growth-mindset leadership perform better. Thus, recognising such leadership in companies can improve our stock-picking game and improve our investment outcomes.

For instance, a five-year study by Jim Collins in 2001 suggests that the stock returns of companies run by growth-mindset leaders were more likely to rise than those of rival companies.

Improve our forecasting skills – research has revealed that the best forecasters have growth mindset. For instance, in the book “Superforecasting: The Art and Science of Prediction”, the authors conclude from analysing forecasting tournaments that the strongest predictor of becoming an exceptional forecaster is the degree to which one is committed to belief-updating and self-improvement.

Improve our team’s decisions – when our own (analyst) team operates in growth mindset, forecasting performance will improve dramatically.  For instance, in Superforecasting, it was found that the so called “superteams” do well by avoiding the extremes of groupthink and by fostering mini cultures that encouraged people to challenge each other respectfully, admit ignorance, and request help.

Adopting a growth mindset is especially important for us at our organization. Such mindset guides us in how we should change, how we should look at new areas and finetune our investment strategy.

You don’t get growth mindset by proclamation. You move toward it by taking a journey.

In the wake of Dweck’s findings and the success of her book, “growth mindset” has become a buzzword among educators and business leaders, even working its way into mission statements.

However, after publishing her book, Dweck discovered that people often confuse growth mindset with being flexible or open-minded or having a positive outlook — qualities they believe they’ve simply always had.

She calls this a ‘false growth mindset’. The point is that your “process” needs to be tied to learning and progress. It’s also false in the sense that nobody has a growth mindset in everything all the time.

Dweck clarifies that everyone is a mixture of fixed and growth mindsets: sometimes we’re in a growth mindset, and sometimes we’re triggered into a fixed mindset by what we perceive as threats.

These can be challenges, mistakes, failures, or criticisms that threaten our sense of our abilities. As such, a “pure” growth mindset doesn’t exist; it is a lifelong journey. Below is the summary of the journey that Dweck proposes.

The journey to a (true) growth mindset:

1. Embrace our fixed mindset – We need to acknowledge that we are a mixture of both mindsets. Even though we have to accept that some fixed mindset dwells within us, we do not have to accept how often it shows up, and how much havoc it can wreak when it does.

2. Become aware of our fixed-mindset triggers – Understand in what situations your fixed-mindset “persona” makes its appearance. As we come to understand our triggers and get to know our persona, don’t judge it. Just observe it.

3. Give our fixed-mindset persona a name. Yes, a name. Perhaps we might give it a name we don’t like, to remind us that the persona is not the person we want to be.

4. Educate our fixed-mindset persona. The more we become aware of our fixed-mindset triggers, the more we can be on the lookout for the arrival of our persona. Don’t suppress it or ban it. Just let it do its thing. When it settles down a bit, talk to it about how we plan to learn from the setback and go forward. Take it on the journey with us.

We feel that Dweck’s emphasis on the journey, instead of solely on the outcome, is a key point.

The more we learn the more we earn

Knowing the advantage of growth mindset could spark our lives, the choice to implement it is now in our hands. Anyone can develop a growth mindset and get ahead in their lives or fields of work. It is simply a treasure that everyone can possess through a perpetual journey. By applying growth mindset in investing, there are more opportunities we can seize and more vicissitudes we can evade.

“I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines.” – Charlie Munger

References:

Dweck, C. S. (2006). Mindset: The new psychology of success. New York: Random House.

Yeager, D.S., Hanselman, P., Walton, G.M. et al. A national experiment reveals where a growth mindset improves achievement. Nature 573, 364–369 (2019). https://doi.org/10.1038/s41586-019-1466-y

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