Howard Marks. US-China trade war. Friday Humor

Get the Edge - Click here to view an archive of investment education, daily musings, book recommendations and more.
_________________

Don’t ask for his macro forecast - Howard Marks. (Link)
“I don’t think anybody can consistently know the economy, interest rates, currencies, and the direction of the markets better than anybody else. So I swear off forecasting, and one of the elements in Oaktree’s investment philosophy is that we do not base our investments on macro forecasts. That doesn’t mean we’re indifferent to the macro, and our approach is, rather than depend on forecasts of the future, we depend on reading the present. I believe one of the greatest predictors of what the market’s going to do, or influences on what the market’s going to do, is where it stands in the various cycles, and if we can have an idea when the market is at an extreme position, I believe that can help us increase or decrease our aggressiveness or defensiveness in a timely fashion.”

Relative returns of companies exposed to the US-China trade wars

Friday laughs

Get the Edge - Click here to view an archive of investment education, daily musings, book recommendations and more.
_________________

What else matters more than future growth? (Link)
A simple question when thinking about future growth. What else matters more than this? Here’s what happened to a bunch of big economies over the last 30 years:

And here’s what happens over the next 30 years. 

America is leaps ahead of others. But if, aging-wise, China and Europe become the equivalent of Japan, and Japan becomes the equivalent of Del Boca Vista, everyone will feel it.

Life lessons from Blackstone's Byron Wien: (Link)

• If you want to be successful and live a long, stimulating life, keep yourself at risk intellectually all the time.
• The hard way is always the right way. 
• Don’t try to be better than your competitors, try to be different.
• If it pays the most, you’re lucky. If it doesn’t, take it anyway, I took a severe pay cut to take each of the two best jobs I’ve ever had, and they both turned out to be exceptionally rewarding financially.

Gold reserves at major producers over the last 6 years 

The problem of declining gold reserves has not been exclusive to Barrick. Many of the world’s largest gold companies including Newmont, Goldcorp Inc., and Kinross Gold Corp. have also seen their reserves fall. In the recent environment, there is a need to increase gold reserves to take advantage of the rising gold prices. This is providing increased incentive for consolidation among gold producers.

Get the Edge - Click here to view an archive of investment education, daily musings, book recommendations and more.
_________________

China ranks 86th in UN World Happiness Report (Link)
China ranked 86th - below 70th ranked Libya and 59th ranked Russia! The report noted Chinese rural households were much happier than urban households despite lower incomes. With the economy still growing at high levels you wonder why happiness is decreasing? Not too far behind China, is Venezuela, which is now ranked 102nd in the world down from 20th only 5 years ago.

The greatest investor you’ve never heard (Link)
Herb Wertheim may be the greatest individual investor the world has never heard. This once optometrist is a testament to the power of compounding as well as to the resilience of American innovation. Like Warren Buffett, Wertheim believes firmly in doubling down when his high-conviction picks go against him. Instead of concentrating on the metrics in financial statements, Wertheim is devoted to reading patents and spends two six-hour blocks each week poring over technical tomes. “What’s more important to me is, what is your intellectual capital to be able to grow?” Thanks to his engineering background, the technical nature of optometry and his experience as an inventor, the patent library is Wertheim’s comfort zone. Stocks he invested in based on their impressive patent portfolios include IBM, 3M and Intel.“If you like something at $13 a share, you should like it at $12, $11 or $10 a share, and if a stock continues to go down, and you believe in it and did your research, then you buy more”.

Jim Collins — A rare interview with a reclusive polymath (Link)
You likely know Jim Collins from one of his eight books, including Good to Great. Jim seldom gives interviews, so this is a rare window into an especially curious mind. At the end of every single day, Jim opens a spreadsheet with 3 columns and logs the following:1. What he did that day. 2. The number of creative work hours for that particular day (For the past 30 years, he’s clocked more than 1,000 creative work hours for the whole year). 3. A number: either +2, +1, 0, -1, or -2. indicating his overall emotional state for the day (+2 is the highest – aka a really good day).

Your weekend edge - catch up with this week's readings:

Get the Edge - Click here to view an archive of investment education, daily musings, book recommendations and more.
_________________

Putting downturns in perspective(Link)

Buying is easy, selling is hard $(Link)
The researchers looked at more than 4 million trades among 783 portfolios from 2000 to 2016 and found that stock pickers actually showed skill when buying. However, the sales by these institutional investors cost them as much as 100 basis points, or a full percentage point, of yearly returns compared with a no-skill strategy of simply selling holdings at random. Translation: Investors spend way more time analyzing what to buy than what to sell.

Global inequality - it ain't what it used to be (Link)
On the planet as a whole, inequality has fallen dramatically. Not only has it fallen in terms of income, but it’s fallen in other dimensions of human well-being such as life expectancy and schooling. This is a poorly known fact in need of greater coverage. The poorest of the world have since experienced large increases in incomes. In fact, their living standards increased more rapidly than those of the richest in the world. Thus, there has been a fall in inequality. Depending on the methodology, the indicators of global income suggest falls between 9% and 33% since the 1970s.

A record number of Americans are 90 days behind on their car payments (Link)

More than 7 million Americans are at least 90 days behind on their auto loans, according to the New York Fed. That's higher than the peak in 2010 as the country was still reeling from the devastating financial crisis.

What happens when Canada ignores incentives and competitiveness (Link)
Between 2013 and 2017, Canadians increased investment outside the country by 74.0 per cent while foreigners investing in Canada declined by 55.1 per cent. Encana, one of the country’s premier energy companies now invests more outside of Canada than in it. And the company’s CEO recently moved to Denver and indicated that headquarter activity would become less-concentrated in Calgary. One of the country’s largest gold companies, Goldcorp, has just been purchased by an American company and much of its headquarter activity will now shift to the United States. TransCanada Pipelines recently announced it would change its name to TC Energy in part to try to attract more investors leery about investing in a perceived Canadian-only focused company.

Fossil fuels
Only 24% of Canada's total electricity generation comes from fossil fuels, ranking it sixth best out of 42 countries measured.

Emissions
Replacing coal with the large increases  in domestic natural gas production and replacing dirty imported oil with a domestically supported oil industry is apparently the biggest factor towards the U.S. leading the world in emission change. No misguided global initiative required for the US to lead the world.  Maybe it requires a new government, supportive of investment and local industry,  for us to be environmental leaders?  

Source: BP Statistical Review of World Energy 2018

Household saving rate
German household saving rate is on the rise. Most of real wage gains are being saved, not spent.

What is GDP in China? (Link) 
"And yet, when you speak to Chinese businesses, economists, or analysts, it is hard to find any economic sector enjoying decent growth. Almost everyone is complaining bitterly about terribly difficult conditions, rising bankruptcies, a collapsing stock market, and dashed expectations. In my eighteen years in China, I have never seen this level of financial worry and unhappiness." - Michael Pettis

A building binge leaves cities with 65 million empty apartments (Link)

Celebrating with Liz, Sarah, and Theo on their 2nd anniversary! 

Get the Edge - Click here to view an archive of investment education, daily musings, book recommendations and more.
_________________

Buying is easy, selling is hard $(Link)
The researchers looked at more than 4 million trades among 783 portfolios from 2000 to 2016 and found that stock pickers actually showed skill when buying. However, the sales by these institutional investors cost them as much as 100 basis points, or a full percentage point, of yearly returns compared with a no-skill strategy of simply selling holdings at random. Translation: Investors spend way more time analyzing what to buy than what to sell.

Global inequality - it ain't what it used to be (Link)
On the planet as a whole, inequality has fallen dramatically. Not only has it fallen in terms of income, but it’s fallen in other dimensions of human well-being such as life expectancy and schooling. This is a poorly known fact in need of greater coverage. The poorest of the world have since experienced large increases in incomes. In fact, their living standards increased more rapidly than those of the richest in the world. Thus, there has been a fall in inequality. Depending on the methodology, the indicators of global income suggest falls between 9% and 33% since the 1970s.

Household saving rate
German household saving rate is on the rise. Most of real wage gains are being saved, not spent.

Get the Edge - Click here to view an archive of investment education, daily musings, book recommendations and more.
_________________

What is GDP in China? (Link) 
"And yet, when you speak to Chinese businesses, economists, or analysts, it is hard to find any economic sector enjoying decent growth. Almost everyone is complaining bitterly about terribly difficult conditions, rising bankruptcies, a collapsing stock market, and dashed expectations. In my eighteen years in China, I have never seen this level of financial worry and unhappiness." - Michael Pettis

A building binge leaves cities with 65 million empty apartments (Link)

A record number of Americans are 90 days behind on their car payments (Link)

More than 7 million Americans are at least 90 days behind on their auto loans, according to the New York Fed. That's higher than the peak in 2010 as the country was still reeling from the devastating financial crisis.

Get the Edge - Click here to view an archive of investment education, daily musings, book recommendations and more.
_________________

Good morning & happy family day!


Putting downturns in perspective(Link)

What happens when Canada ignores incentives and competitiveness (Link)
Between 2013 and 2017, Canadians increased investment outside the country by 74.0 per cent while foreigners investing in Canada declined by 55.1 per cent. Encana, one of the country’s premier energy companies now invests more outside of Canada than in it. And the company’s CEO recently moved to Denver and indicated that headquarter activity would become less-concentrated in Calgary. One of the country’s largest gold companies, Goldcorp, has just been purchased by an American company and much of its headquarter activity will now shift to the United States. TransCanada Pipelines recently announced it would change its name to TC Energy in part to try to attract more investors leery about investing in a perceived Canadian-only focused company.

Fossil fuels
Only 24% of Canada's total electricity generation comes from fossil fuels, ranking it sixth best out of 42 countries measured.

Emissions
Replacing coal with the large increases  in domestic natural gas production and replacing dirty imported oil with a domestically supported oil industry is apparently the biggest factor towards the U.S. leading the world in emission change. No misguided global initiative required for the US to lead the world.  Maybe it requires a new government, supportive of investment and local industry,  for us to be environmental leaders?  

Source: BP Statistical Review of World Energy 2018

Your weekend edge - catch up with this week's readings:

Why do we make stupid investment decisions? (Link)
Stupidity is overlooking or dismissing conspicuously crucial information. Here are seven factors which can create situations where stupidity can flourish: outside circle of competence, stress, rushing or urgency, outcome fixation, information overload, group/social cohesion, presence of authority, overconfidence/ego and external justification.

Why time horizon works? (Link)

When earnings compound but changes in valuation multiples don’t, the importance of the latter to your lifetime returns diminishes over time. Which is great, because changes in valuation multiples are the most unpredictable part of investing. Assuming earnings compound over time – an assumption, but a reasonable one – here’s what happens when valuation multiples go up or down by, say, 20% in a given year:

Short money rules (Link) 

- Above-average results requires not being afraid of looking wrong
- Most people are afraid of looking wrong
- Good investing is 50% psychology, 48% history, 2% finance
- Obvious risk: not having three months of emergency savings
- Underappreciated risk: having three months of emergency savings when the average duration of unemployment is six months
- People like weekends because it’s when they have the most control over their time; financial goals should keep this in mind

Who is on the other side? - by Michael Mauboussin (Link)

Perhaps the biggest source of market inefficiency remains the human being. As groups, we repeatedly veer to extremes in our optimism or pessimism, leaving mispriced securities in our wake. 

Dividends and buybacks - Fact and Fiction by Aswath Damodaran (Link)

I believe that the shift to buybacks reflects fundamental shifts in competition and earnings risk, but I don't wear rose colored glasses, when looking at the phenomenon. There are clearly some firms that are buying back stock, when they clearly should not be, paying out cash that could be better used on paying down debt, especially in the aftermath of the reduction of tax benefits of debt, or taking investments that can generate returns that exceed their hurdle rates. You may consider me naive, but I believe that the market, while it may be fooled for the moment, will catch on and punish these firms. Also, the data suggests that these bad players are more the exception than the rule, and banning all buybacks or writing in restrictions on buybacks for all companies strikes me as overkill, especially since the promised benefits of higher capital investment and wages are likely to be illusory or transitory. If you are tempted to back these restrictions, because you believe they are well intention-ed, it is worth remembering that history is full of well intention-ed legislation delivering perverse results. 

Share buybacks
There is an argument that stock buybacks reduce the amount companies invest.  This chart shows the actual investments done by companies dating back to the 1940s. It's not obvious there is a problem.

The chart below adds "intellectual property" to the mix.  The world has changed and it's weird to not add spending on life-saving drugs or new apps and software that improves your life.  There is no obvious problem here. 

Can China stimulate while not adding leverage? (Link) 

Primarily a word used in the UK, cakeism is the belief that it is possible to enjoy or take advantage of both of two desirable but mutually exclusive alternatives at once. China's version of "cakeism", centers around the leadership's conflicting commitments to de-risking the financial system on one hand and on the other, hitting elevated growth targets north of 6 per cent. You can't really have a determined effort to deleverage the economy and not expect it to have a material impact on economic growth.

Happy Friday! The word of the day is Cakeism. 

Can China stimulate while not adding leverage? (Link) 
Primarily a word used in the UK, cakeism is the belief that it is possible to enjoy or take advantage of both of two desirable but mutually exclusive alternatives at once. China's version of "cakeism," centers around the leadership's conflicting commitments to de-risking the financial system on one hand and on the other, hitting elevated growth targets north of 6 per cent. You can't really have a determined effort to deleverage the economy and not expect it to have a material impact on economic growth.

Short money rules (Link) 
- Above-average results requires not being afraid of looking wrong
- Most people are afraid of looking wrong
- Good investing is 50% psychology, 48% history, 2% finance
- Obvious risk: not having three months of emergency savings
- Underappreciated risk: having three months of emergency savings when the average duration of unemployment is six months
- People like weekends because it’s when they have the most control over their time; financial goals should keep this in mind

Who is on the other side? - by Michael Mauboussin (Link)
Perhaps the biggest source of market inefficiency remains the human being. As groups, we repeatedly veer to extremes in our optimism or pessimism, leaving mispriced securities in our wake. 

It was a week of celebrations for EdgePointers 
Joel's 50th, Teresa and Matilde's 9th anniversary, Nancy's 3rd anniversary, Kris's birthday and Alexandra's 6-month anniversary! Everyone brought delicious goodies and our waistlines are paying for it. 

Get the Edge - Click here to view an archive of investment education, daily musings, book recommendations and more.
_________________

Good morning. Two more days till chocolate is on sale!


Dividends and buybacks - Fact and Fiction by Aswath Damodaran (Link)
I believe that the shift to buybacks reflects fundamental shifts in competition and earnings risk, but I don't wear rose colored glasses, when looking at the phenomenon. There are clearly some firms that are buying back stock, when they clearly should not be, paying out cash that could be better used on paying down debt, especially in the aftermath of the reduction of tax benefits of debt, or taking investments that can generate returns that exceed their hurdle rates. You may consider me naive, but I believe that the market, while it may be fooled for the moment, will catch on and punish these firms. Also, the data suggests that these bad players are more the exception than the rule, and banning all buybacks or writing in restrictions on buybacks for all companies strikes me as overkill, especially since the promised benefits of higher capital investment and wages are likely to be illusory or transitory. If you are tempted to back these restrictions, because you believe they are well intention-ed, it is worth remembering that history is full of well intention-ed legislation delivering perverse results. 

Share buybacks
There is an argument that stock buybacks reduce the amount companies invest.  This chart shows the actual investments done by companies dating back to the 1940s. It's not obvious there is a problem.

The chart below adds "intellectual property" to the mix.  The world has changed and it's weird to not add spending on life-saving drugs or new apps and software that improves your life.  There is no obvious problem here. 

Get the Edge - Click here to view an archive of investment education, daily musings, book recommendations and more.
_________________

Good morning!

Why do we make stupid investment decisions? (Link)
Stupidity is overlooking or dismissing conspicuously crucial information. Here are seven factors which can create situations where stupidity can flourish:

- Outside circle of competence 
- Stress
- Rushing or urgency
- Outcome fixation
- Information overload
- Group/social cohesion
- Presence of authority
- Overconfidence/ego
- External justification

Why time horizon works? (Link)
Two things drive markets over time:
- Earnings, including dividends
- Changes in how much investors are willing to pay for those earnings (valuation multiples)

When earnings compound but changes in valuation multiples don’t, the importance of the latter to your lifetime returns diminishes over time. Which is great, because changes in valuation multiples are the most unpredictable part of investing. Assuming earnings compound over time – an assumption, but a reasonable one – here’s what happens when valuation multiples go up or down by, say, 20% in a given year:

Get the Edge - Click here to view an archive of investment education, daily musings, book recommendations and more.
_________________


Good Morning! Here is what piqued our curiosity this week:
 
1. Shopping malls aren't dead yet (Link)
71% of people with household incomes under $50,000 prefer to buy things in a physical store, compared with 54% of people with household incomes of $100,000 or more.  Price matters to consumers.  For 39% of people, price beats out quality, uniqueness, sustainability and convenience as the factor that contributes the most to their purchasing decisions.

2. The death of clothing (Link)
Who needs fashion these days when you can express yourself through social media? Why buy that pricey new dress when you could fund a weekend getaway instead? Apparel has simply lost its appeal. Apparel is being displaced by travel, eating out and activities—what’s routinely lumped together as “experiences”—which have grown to 18 percent of purchases. Technology alone, including data charges and media content, accounts for 3.4 percent of spending. That now tops all clothing and footwear expenditures.

3. The benchmarks we choose determine whether we win or lose (Link)
We tend to measure ourselves against our latest peak or valley. If we have a recent downturn, we’re sad – even if we are doing better overall. A recent uptick creates happiness, even if our trendlines are down overall. It’s better to think of ourselves as a long-hold happiness stock. This helps us get a 10,000-foot view of how we are doing over the long run. Otherwise, we watch the stock ticker go up and down, and our happiness goes up and down with it. This ticker-watching causes us to pick unproductive benchmarks. Instead of measuring ourselves against our progress toward a goal, looking toward a long-term horizon, the ticker is all we can see.

4. Superstocks (Link)  
A study has shown that between 1926 and 2016, around $35 trillion of wealth was created by 25’300 stocks listed in the US. Yet a tiny group of 90 stocks (just 0.3% of the total) collectively generated over half of the stock market’s net gains over the 90-year period. Digging deeper, just five firms (namely Exxon Mobil, Apple, Microsoft, GE and IBM) accounted for as much as 10% of the total wealth creation, each generating over half a trillion dollars in shareholder wealth.

5. How retail investor behaviour changed when a major mutual fund platform in China upgraded their smartphone app to allow instant trading from anywhere. (Link)
“Going mobile” raises investor attention and trading volume through aggravating investors’ over-confidence and self-control problems. The mobile app significantly boosts flow volatility and makes investor flow more sensitive to short-term fund returns and market sentiment. As a result, fund performance suffers due to heightened liquidity costs. The funds more exposed to the shock see a greater decline in abnormal returns, attributed to incremental fund flows through the trading app.

Charts

Saying goodbye to Heather with delicious hot chocolate as she goes on maternity leave!

Get the Edge - Click here to view an archive of investment education, daily musings, book recommendations and more.
_________________

Large-cap stock correlations

Why are expectations for 2019 earnings growth so much higher than other regions? Another round of downgrades for European equities?

Celebrating Chinese New Year's!  Don't recognize the friendly face on the far right?
Adam is the newest EdgePointer joining our Compliance team. Judy & Sayuri are thrilled! 

Get the Edge - Click here to view an archive of investment education, daily musings, book recommendations and more.
_________________


Good Morning! Here is what piqued our curiosity this week:
 
1. Howard Marks: America should be worried about the rising tide of anti-capitalism (Link)
"What I'd like to do is get some of the progressive politicians and the less-capitalist young people in a room and ask them a simple question: To what do you attribute America's preeminence in the world over the last hundred years and the generally superior living standards of its people? In short, what has been behind the United States' progress to the top of the heap? What's absolutely clear to me is what it's not: that we're superior people, smarter, better, more virtuous or more deserving.  Instead, I think it's our democracy, our freedoms, and our less rigid social and financial structures.  But, extremely importantly, I also think there have been enormous contributions from capitalism/free enterprise, the free-market system, economic incentives, private ownership of property, individual economic opportunity and the very limited involvement of government in the economy.

2. We are now up to 25% of Albertans that want to separate from Canada $(Link)
"The province’s future promises to be one of barely contained civil war with its fellow Canadians. If $13 billion a year in payola can’t appease Quebec, the cause is probably beyond salvaging. A Donald Trump re-election could invite talk of becoming the 51st U.S. state. If Obama-like pipeline opponents are returned to power in Washington in 2020, the squeeze will be even worse. Then what? A weak state with enormous fossil energy resources caught in the West’s culture wars over climate and energy? The cash cow of Canada up for grabs? We could spin lots of scenarios."

3. What do the oil sands look like? You'd be surprised (Link)

4. Oil bull markets past & present, and yellow jackets (Link)
Interesting comments on probable overestimation of electrical vehicle penetration, sunspot impacts and Saudi reserves.

5. Hustle culture $(Link)
"Millennials are just desperately striving to meet their own high expectations. An entire generation was raised to expect that good grades and extracurricular over achievement would reward them with fulfilling jobs that feed their passions. Instead, they wound up with precarious, meaningless work and a mountain of student loan debt. And so posing as a rise-and-grinder, lusty for Monday mornings, starts to make sense as a defense mechanism."

Charts & graphs