An Investment Classic!

This was yet another book picked up on a whim. And by the time I finished reading it turned out to be classic investment advice book. Needs to be added alongside The Intelligent Investor and Margin of Safety.

The author David Dreman seems to be in the value investor camp and champions contrarian investment strategies. There were some important investment lessons in the book!

He started from basics reminding how it is very difficult to spot a bubble until after the fact when its bursting confirms its existence. And there’s a reason for that. To a crowd few images are more alluring than the promise of instant wealth and everyone FOMO’ing into those asset classes. This is where the human psychology comes into play. Because if the potential outcome of the gamble is emotionally powerful, its attractiveness is insensitive to changes in probability. No wonder psychology becomes an integral part of investment. The book does a good job on reminding the humans cannot process large amounts of info. Investors mistakenly believe that with more data points they can predict/forecast accurately but that's not the case!

The book then delves into the Efficient Market Hypothesis (EMH) and a lot of pages are devoted to why it’s inaccurate backed by many surveys, studies, and contradictions. Although at some point, it started to feel like a rant to me.

David Dreman does share his secret sauce later – describing how low P/E, low P/B, low P/CF and low industry average stocks tend to do well over a long period of time and also remain relatively unscathed during periods of high volatility. I get that this book is a reprint edition of 2012 thus data of most of the surveys referenced is dated up to 2010 alone. I was interested to look for data within the last few years where growth stocks and mega caps like FAANG have been the hot picks. It’s relevant cause they have traded at expensive multiples thus my guess is that Dreman’s strategy would have always excluded them and robbed the investor of crème de la crème. 

I found a fund which runs a portfolio based on David Dreman’s contrarian principles and it seems to have under-performed the market by ~53% since 2003. 

https://www.validea.com/contrarian-investor-portfolio/david-dreman

Nonetheless, the book served as a good refresher of certain key fundamentals-  

• Never FOMO 

• Position Sizing matters a lot

• Never place too much trust in analysts 

• There is a chapter where Dreman goes into lot of detail about how analysts have huge conflicts. The brokerage firm where they work, also has an investment firm which wants underwriting opportunities in offerings. And a lot goes on behind the scenes to curry Buy side recommendations and invites blowback too on Sell side recommendations.

• Valuation matters aka multiples matters.

• Liquidity and leverage together can be huge risks as proven time and time again. Stay away from leverage!

Technologies That Will Change The Future Faster Than One Thinks

The premise of the whole book is that the dozen different technologies in the pipeline - are going to converge and revolutionize the world like never before. The author starts off with the example of how one technology “internet” alone changed the whole world. And then he goes on to imagine how much the world can change from these upcoming technologies.
This coming together of these technologies at the same time is what he calls “convergence”.

The technologies he mentions are as below accompanied by my understanding/take - 

• Digital Payments

• Along with depreciation of cash I include Blockchain as well in this category. Doing away with cash definitely has its own advantage in reducing corruption and having a trail. Benefits of digitization outweigh the cons in my view! But on top of that Blockchain technology adds its own advantages. 

• Having a decentralized ledger which is immutable in itself is a great step above.
  
  

• Artificial Intelligence

• The term has lost its significance because of how much it has been used loosely by companies and everyone. But it still doesn’t diminish its potential.

• For example - A smart-assistant which can take care of things for you keeping in mind your preferences and other things seems too good to be true but that is the long term goal. Yes, it can be eerie in some aspects but will be very handy.
  
  

• Drones/Robots

• Great use in terms of last-mile delivery and other aspects too like medical and rescue missions excluding military uses which is their own can of worms.
  
  

• Space Economy

• Now it is well obvious why it’s important for humans to be interplanetary species, the side benefits are very important as well. In the course of making space travel safer, cheaper and accessible - eventually we will master suborbital travel technology as well. This can reduce the current time to fly via planes from one part of the world to the other. I think this milestone will be crossed much earlier and will have far-reaching effects.

• And we haven’t mentioned electric vertical take-off and landing (eVTOL) vehicles yet! Flying taxis in layman terms.

• Imagine the impact on real estate when one can commute to work 100s of miles away in a matter of minutes and then back.
  
  

• CRISPR/Gene-editing

• Many diseases are caused by gene corruption aka genes are the source of it.

• Through this technology, the idea is to repair those genes once and for all and cure the disease. It can also ensure the disease stops being hereditary. The potential is much more than that - theoretically one can design babies by laying down their characteristics like height, IQ, eye color etc. Here it becomes a moral issue.

• Worth mentioning though that silencing a gene has effects which are not well-understood yet. For ex-  function of a gene is different in a liver v/s in other organs. But nonetheless, lots of companies are working on therapies and research happening on it.
  
  

• 5G

• This one is easy to explain. Faster internet helps in so many ways especially when we are going to have Internet of Things (IoT) i.e every device working with an internet. 

• Also, in certain areas which are in difficult terrain it is hard to lay down infrastructure for communication. There are ambitious projects to beam the internet down to those areas from the sky (space). With that everyone is now connected and can have access to information.
  
  

• Precision Medicine

• This field is about designing medicines and dosage specific to every individual. The same dosage isn’t ideal for everyone. With the advent of this field, we can have medicines designed specifically. Also, also have medicines which are so “smart” that they go in your body and work only on those areas/regions which they are supposed to.

• 3D printing

• "3D printing" can refer to a variety of processes in which material is deposited, joined or solidified under computer control to create a three-dimensional object, with material being added together (such as plastics, liquids or powder grains being fused together), typically layer by layer.

• It can be revolutionary as you can now customize any part and reduce the time to make any product. 

Overall, all the above technologies are quite revolutionary in themselves and with all converging at the same time they are going to have a profound impact. But if I were to rank the sectors most likely to change, they are - 

1. Transportation

2. Real-estate

3. Healthcare

4. Insurance

5. Shopping/Entertainment

The book in itself is a good primer and confirms the belief that the world is on a cusp of huge change. Imagining it is both exciting and a bit terrifying as how everything will shape up. But change has always been inevitable!