Imagination

Imagine there's no heaven, no hell below us, above us only sky

An friend once told us that the type of investment opportunities we had will be arbitrage away by computer programs in the near future.

We simply replied that we see more opportunities now, more so since algorithms came into the financial markets.

The problem we are facing is not that the market had changed drastically, for the market is always changing. What every investor is facing is that as we had grown accustomed to the old ways of doing things and we need to learn to be more expansive in our thinking to imagine more ways of winning in this changing market.

"Imagination is more important than knowledge. For knowledge is limited, whereas imagination embraces the entire world, stimulating progress, giving birth to evolution."

- Albert Einstein

Imagination to build an algorithm:

It is often forgotten that it is AlphaGo team’s imagination that helped to beat 18-time world champion Lee Sedol.

With a limited database, someone in the AlphaGo team had the imagination to apply neural network in which evaluation heuristics are not hard-coded by human beings, but instead to a large extent learned by the program itself, through tens of millions of past Go matches as well as its own matches with itself.

Someone has the imagination to come up with a concept for the program to play against itself!

The thought process is a significant departure from how computer program works in the past. The system does not use a "database" of moves to play!

So we may have reached the peak of neural network for playing Go but what about other aspects of improvement in investment?

• How about using GPT-3 to help us with writing a thesis for an investment?

• What about integrating our physiological markers to track our decision making process?

• Why don’t we link our thoughts to the computer and the computer will assess our quality of our thoughts at the background?

These are some of the things we are thinking about which seems to be good ways to save time and make us as better investors.

Imagination on the possible downside:

We love to buy companies which is un-love. The expectation are so low that any positive news would have trigger them higher.

While we may have a margin of safety baked into our purchase price, it is often useful to imagine what could have make the company a lot worse?

Let’s use Dawnrays as an example.

When we invested in Dawnrays, we knew that the the two invoice system, the national tender would have depressed margin and make turnover fall.

Now, we need to imagine what could possibly make it worst.

• Did they bribe to win the tender?

• Did they go into a bidding without regards for profitability?

• Are they lowering the drugs quality to remain profitable?

We have to assess these possibility and then decide if we could continue to imagine further.

Imagination on the catalyst:

We also like to imagine the possible catalyst that could be happening now and assign some possibility to it. Having more catalysts mean that the waiting period is lower and a higher return.

And by observing what is happening, we could determine the possibility of the catalyst happening.

Possible catalyst for Dawnray include

• Would the acquisition of the rights to distribute the Hyperlipidemia medicine (cholesterol) and Febuxostat tablets (gout treatment) lead to higher volume and revenue?

• Would winning the tender lead to a situation where there is only a few competitors left for each categories?

• Would achieving economies of scale help obtain profitability in a category?

Imagination on the upside:

And finally, we love to have company which have lots of optionality on the upside. Lets imagine the possibility of the upside for Dawnrays.

• With a rock balance balance sheet, they could continue to acquire more drugs or licenses which could possible drive

  • higher revenue?

  • translating into higher ROE?

• Would lesser competition allowing for better margins and a more benign environment?

• Would their superior manufacturing and distribution capability make them an acquisition target?

Human Imagination:

To build an algorithm or a computer program, to understand the downside, the catalyst and the upside require imagination.

Imagination which could now only be initiated by a human and not by a computer.

The stock exchange started with human gaming other humans, then proceeded to having human imagining computer programs to game other humans, before having more humans imagining more scheme to game the computer programs and other humans.

This game will continue as long as human thrive to gain an advantage over others for an economic gain. The game play will always change but the constant remains for now.

It still take human imagination to dream up the next profitable investment/trade.

Happy imagining.

Disclosure: At the time of publishing Wee Hiang has a position in the above company. Holdings are subject to change at any time. This report, and disclosure, should not be considered to be a recommendation.