Health, Wealth & Leadership [28 Apr 2024]

The dose makes the poison, quant funds vs traditional funds, and 28 lessons from the founder of Netflix.

Apr 28, 2024

Every Sunday I share lessons on how to be healthier, make more money and lead by example. This week we talk about the impact of sweeteners on your insulin, the difference between quant funds and traditional funds, and the 28 lessons I learnt from the co-founder of Netflix.

You can access previous editions of my weekly emails here.

(1) Do you consume beverages which have sweeteners?

Would you not want to know the impact these sweeteners have on your insulin sensitivity, the hormone which helps clear sugar from your blood?

Here is a study which measures the effects of Consuming Beverages Sweetened with Fructose, Glucose, High-Fructose Corn Syrup, Sucrose, or Aspartame on Insulin Sensitivity in Young Adults.

131 adults with an average age of 26 were studied. The results were that:

(1) consuming sugar-sweetened beverages does worsen insulin sensitivity

(2) But by how much depends on the type of sweetener used and the quantity consumed.

The negative effects of fructose for example, occur when 25% of your daily energy intake comes from sugar-sweetened beverages. [25% is an insanely high percentage!]. If you are not consuming such a high level of energy through energy sweetened drinks then fructose in not a concern.

Here is the study: https://pubmed.ncbi.nlm.nih.gov/38201980/

(2) What is the difference between a quant fund and a traditional fund?

There are two types of quant investing.

(1) The first type does number crunching and statistics analysis on just share prices. Based on this investment strategies are created. This is also called high frequency trading.

For example, if the ratio between Maruti's share price and Tata Motors share price grows beyond a certain level, sell Maruti and buy Tata.

(2) The second type of quant investing combines analysis of share prices with fundamental analysis. Other rules are added like profit, leverage, cash flow, valuation, etc.

So while the algorithm is testing the rules given historic data, the rule itself is a product of human insight.

In the US, quant funds now make up 30% of market cap. In India it's only 0.1%.

The advantages of quant funds over human funds are:

(1) RATIONALITY - Machine is more rational. No human emotion involved. Human fund managers have inherent biases and subconscious choices that they aren't even aware of.

(2) WIDTH - You can do this over a very large investment universe. Thousands of securities. Whereas a human fund manager has a limitation on what he can focus on. The bigger the universe to choose from, the better for the quant fund to choose his rules based winners.

(3) FREQUENCY - You can analyse and adjust more frequently.

What's the downside?

(1) The unknown unknowns. If something hasn't happened in the past it's hard for the quant fund to react to the event. Like COVID.

(2) Secondly if lots of people do the same thing, the advantage will be competed away. That's why a lot of quant funds are secretive.

(3) Quant funds also struggle when regime shifts happen.

(4) There are also these unquantifiable information like how do you assess if management is hard working and honest?

In short, the quant fund tries to simplify the complexity of the world inside a computer. The gap is the risk. The quant fund manager must truly understand the assumptions being made. There should not be an overreliance on the model.

If you are keen to explore rule based investing through a quant fund then you can consider MeritorQ. MeritorQ is Marcellus' one and only quant fund. It gave 40% returns in the last year.

You can also dive deeper into this podcast episode between Saurabh and Krishnan to learn more about quant funds.

(3) 28 lessons I learnt on a flight from Reed Hastings, the Co-Founder of Netflix

HAVE A PROCESS
1. Good process helps you get more done. Like weekly meeting where everyone shares context and moves forward as opposed to just meeting.

2. And a process tries to prevent error. In most fields, not like medicine or airplanes, you want to move fast and some things don't work and you fix them fast.

3. One way door vs two way doors. One way doors need more thought. Two way doors require quick decision making because you can return.

CULTURE EATS STRATEGY FOR LUNCH
4. How do you get human beings to work well together and accomplish amazing things? One of the aspects to that is being around incredible performers.

5. Adequate performance gets a generous severance package. Adequate is good enough. Having a good severance package makes it easier for managers to let non performers go while also giving the employees a parachute to land with.

6. When we shared our culture deck with everyone, those who wanted high performance teams were into us and those who wanted job security were not into us. So it helped people self select in a positive way.

TEAM NOT FAMILY
7. In a company, family can be disfunctional.

8. Loyalty is good but we are about performance. Just like championship or wanting to be championship sports teams.

9. To disagree silently is disloyal

10. It's an incredible feeling when everyone is amazing.

11. We wanted to fill the company with people we would fight to keep. And if we wouldn't fight to keep someone then we should proactively give them a generous severance package and try to find someone that we might fight to keep.

12. generally we would let people go and then begin the search.

13. We would want to let people go the way we would want to be let go if we were on the other side.

FOCUS
14. People who focus on a few things get the most done.

15. Once in a while you get an Elon Musk who can do many things but that's very rare.

16. How to say no is just be honest about it - "I can't do that because I'm focused of Y."

FARM FOR DESCENT
17. Because it's not normal to disagree with your boss.

18. Your job shouldn't be to please your boss. It should be to help the company grow. Sometimes that would mean arguing with your manager. And that's ok!

19. What are 3 things you would do differently if you were doing my job?

IN HUMAN BEHAVIOR YOU NEED TO ASSIGN MEANING OR CAUSALITY TO THINGS
20. It's not very effective to say that we are a great soap. We are a great soap because of the green crystals and we are the only ones that have these green crystals spread through the dish washing fluid.

21. When you have a big competitive battle and you have all these investors and employees asking "why are you going to win? How are you going to win?" We got to talk about the green crystals.

22. We ourselves need to believe in the green crystals.

23. and sometimes the focus should be less on the green crystals and more on just making the core better. Better shipping, less breakage, etc.

BEYOND ENTREPRENEURSHIP BY JIM COLLINS
24. I read first 80 pages every year. It's the first management book that made me feel like I could succeed.

25. For example - caring about the organisation first over yourself. This gave me permission to be myself. That's why it was so impactful.

ON BIG DECISIONS
26. We make the team, top 100 people, rate from +10 to -10 on the ideas.

WHAT ABOUT CUSTOMER SATISFACTION
27. We are about customers and growing operating income. Having this duel context is great to determine why we make certain decisions.

28. Customers would want things for free but we can't run a business that way.

Podcast:

Harsh Batra

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