Weekend Reads from India: Telecom Wars, Coffee Can Portfolios

Edwin Lefèvre’s 1923 classic Reminiscences of a Stock Operator, the fictionalized biography of the renowned stock trader Jesse Livermore, offers lively investment insights, the wisdom of which remains relevant almost a century later. For example: “Whatever happens in the stock market today has happened before and will happen again.”

In this context, India’s latest telecom war, which broke out earlier this month, is nothing new.

Reliance Jio’s debut as a telecom service provider, announced at the annual general meeting of its parent company, Reliance Industries, triggered the latest conflict. The move was expected, but the underlying details — free domestic voice calls and messaging as well as exceptionally low-cost data plans — are overwhelming in scale and significance.

The end consumer appears to have benefited for the moment, but Reliance Industries shareholders and those of other Indian telecoms are not faring so well, while Jio’s accelerated shift towards “data in abundance” may constitute a structural change that could echo into other markets.

India’s telecom industry accounts for 3% of total global mobile revenues. But the sector has enabled the rise of several fast growing sectors including e-commerce and fintech. It is also the world’s second largest mobile phone market, with almost a billion subscribers. However, low return on investment, an increasing debt burden, and intense competition have made themselves felt, loudly and clearly. Telecom connectivity is patchy, call drops are not uncommon, and customer-care help desks provide intolerably poor service.

Because of its cash-rich parent company, Jio has the financial muscle that its competitors lack, but echo-system constraints could make delivery and execution difficult. For now, Jio’s entry is expected to hasten ongoing consolidation within India’s telecom space, according to research analyst Vivekanand Subbaraman, CFA. The sector’s high operating cash flow to revenue ratio may appear attractive. But uncertain capex drawdowns caused by competition or infrastructure investment demand make free cash flow volatile.

India’s telecom industry has played a crucial role as a driver of innovation and access, connecting hundreds of millions of subscribers to the internet and the world of e-commerce. But if past sectoral weights in the S&P are any guide, the industry may be more useful as a means of understanding evolutionary changes than for generating shareholder return.

So where should portfolio managers look to generate returns these days?

One pathway stands out: Robert G. Kirby’s “Coffee Can” portfolio.” Today, active managers are pressured to focus on shorter term performance relative to a benchmark. The biggest insight from the coffee can portfolio is that managers might be best served by developing a sensibly constructed portfolio and leaving it untouched.

This approach offers an inbuilt mechanism to overcome behavioral biases and magnifies the potentially out-sized alpha that a reasonably good portfolio can generate over time. While Kirby’s astute observations are not new, his coffee can portfolio ought to be in wider use as an investment strategy.

Below is a summarized list of online resources that I came across in the last several weeks. Happy reading and enjoy the weekend.

Wisdom on the Markets

• Larry Summers: “The Fed’s Complacency about Its Current Toolbox Is Unwarranted” (Larry Summers’ Blog)
• “Buttonwood’s Notebook: The Age of Stagfusion” (Economist)
• Jayanth R. Verma: “Shanghai to Hangzhou: Does G20 Run Monetary Policy?” (Professor Jayanth R. Verma’s Financial Markets Blog)
• Ben Bernanke: “Should the Fed Keep Its Balance Sheet Large?” (Brookings)
• Joseph Stiglitz: “A Better Economic Plan for Japan” (Project Syndicate)

Investing

• Keith P. Ambachtsheer: “Pension Solution Lies in Long-Term Thinking” (Financial Times)
• Aswath Damodaran: “Superman and Stock, It’s Not the Cape (CAPE), It’s the Kryptonite!” (Musings on Market)
• Robert G. Kirby: “Coffee Can Portfolio” (The Journal of Portfolio Management)
• Arvind Subramanian: “The Case for Cautious Optimism” (The Indian Express)
• “Seek and We Shall Fund” (Economist)

On the Telecom Sector

• The consolidation of the Indian telecom industry. (The Hindu BusinessLine)
• “Wireless Competition: There’s No Magic Number of Operators” (Financial Times)
• “Reliance Jio 4G Launch: Mukesh Ambani’s Full Speech at RIL AGM” (Financial Express)
• “Indian Telecom Industry Analysis” (India Brand Equity Foundation)
• Another merger in the Telecom sector. (NDTV Profit)
• “Is Telecom Still a Monopoly?” (Livemint)

Lighter Reading

• “Excerpt: The Hidden Life of Trees” (Livemint)
• “An Exam Paper from the Future” (Financial Times)
• “The Anthropocene Epoch: Scientists Declare Dawn of Human-Influenced Age” (The Guardian)
• “Must See: Spectacular Office Spaces in the World” (The Economic Times)
• Alpha handshakes and lemon ideas. (Financial Times)

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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