Newsletter: Mutual Funds investing in loss making IPOs, Thinking in odds, Measuring quality & More

5x5: Five articles summarised in five lines 🌟

• Insights: MFs investing in tech stocks that tanked. How bad is it?

• **Psychology: **Thinking in odds

• **Pandemic: **This time it’s different?

• Experiment: The wisdom of crowds

• **Framework: **How do you define quality?

• Pop Quiz #9: Guess the jargon and win a hamper!

Mutual Funds and fancy IPOs ☘️

• Mutual funds are getting a lot of bad for investing in start-up IPOs that tanked after listing. How big a deal is it?

• Analysis of five fancy start-ups indicates that funds didn’t go overboard while buying these stocks

• Even though these stocks are battered now, some funds did manage to get handsome listing gains.

• Funds didn’t hold on to losers and actively reduced stakes when the tide started to turn.

• While these investments may seem like bad decisions in hindsight, there’s little evidence of mismanagement of unitholders funds.

Read More - Mutual Funds investing In loss-making company IPOs: Is it a big deal?

Probabilities over certainties 🎯

We don’t think of evens in terms of odds because it is difficult and does not make for good storytelling.

Talking about a multi-bagger is far more exciting than talking about the odds of success of a company

Calculating odds is a much better approach to gauge the efficacy and effectiveness of a decision

Base rate - base rate return for a mutual fund should be lifetime annual returns of Nifty and not the last 2-year performance of power stocks.

Difficulty level - finding the next Asian Paints out of all the listed stocks is very difficult against betting on a portfolio.

**[Read More - What Are the Odds of Making a Good Investment?

](https://behaviouralinvestment.com/2022/05/17/what-are-the-odds-of-making-a-good-investment/)**

Economic effects of the pandemic 😷

Saying “this time it’s different” has never aged well rather things tend to stay the same. Four things, that changed, as per JP Morgan

One: The re-emergence of inflation after a long and managed hibernation.

Two: A virus made the world stop and exposed the fragility of globalization.

Three: Days of cheap labor and cheap commodities are over. Businesses with better efficiencies and technologies will thrive.

Four: Political shift from small to bigger and more interventionist government (lockdowns, policies, handouts, etc)

**[Read More - Is the investing landscape really different this time?

](https://www.firstlinks.com.au/investing-really-different-time)**

Investing is more in your mind, than markets 😇

The crowd at a county fair paid a small entry fee to guess the weight of an ox, with the closest guess being awarded a prize.

The median guess of these 787 people was within one percent of the ox’s actual weight.

If the same experiment was done where the crowd would know other people’s guesses the results would be lousy.

Because “so-called experts” would influence the independent guesses and skew the results.

This makes Investing in speculative assets a social activity that eventually plays out in the markets.

Read More - The Experiment

How to measure quality? 💸

Different people mean different things when they talk about the Quality of business.

Analyzing the quality of a business on four parameters - Profitability, Earnings, Safety & Investment intensity

Individually, better profitability seems to give outperformance among the top-quality stocks

All four factors show uncorrelated behavior when compared wrt different quality businesses.

However, a combination of all four factors seems to be a better approach while determining the quality

**[Read More - What’s a quality stock?

](https://klementoninvesting.substack.com/p/whats-a-quality-stock?s=r)**

Pop Quiz #8 ⚡️

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**Question: **

• In 2010, Kraft reduced its 200g Toblerone bar to 170g.

• Coffee sold in 1lb (453.6g) bags shrank to 400g or smaller in the 1980s

• Tetley tea bags were sold in boxes of 88 instead of 100.

• In 2016, Mondelez International again reduced the size of the UK 170g Toblerone bar to 150g, while the 400g bar was reduced to 360g. This was done by enlarging the gap between the chocolate triangles. (Cruel, isn’t it?)

There’s a term used to define these product changes. Name the term or jargon.

Last week’s quiz results****💡

Answer: Amazon!

Quiz Winner - Ajay Mahendru 🎉

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