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.
_________________
Investment decision making - Ten advantages everyday investors have over professionals (Link)
If we think about some of the main challenges encountered by investors around issues such as time horizons, over-trading, overconfidence, misaligned incentives and benchmark obsession, these problems are often exacerbated when investing in a professional context. Everyday investors are not immune from these behavioural issues that lead to poor investment decision making but it is important to acknowledge that the investment industry has certain structural features that serve to inflame a particular set of behavioural shortcomings. Many of these structural shortcomings are much harder to avoid when investing in a professional context versus the everyday investor. Here are a few of the advantages everyday investor have.
- There is no need to check your portfolio on a daily basis
- You can make decisions consistent with your own time horizon
- Your incentives are perfectly aligned
- There is no need to chase performance
- There is no requirement to be constrained by arbitrary benchmarks
- You don’t need to worry about what other people are doing
Notable quotes from Amazon's Annual Letter (Link)
From very early on in Amazon’s life, we knew we wanted to create a culture of builders – people who are curious, explorers. They like to invent. Even when they’re experts, they are “fresh” with a beginner’s mind. They see the way we do things as just the way we do things now. A builder’s mentality helps us approach big, hard-to-solve opportunities with a humble conviction that success can come through iteration: invent, launch, reinvent, relaunch, start over, rinse, repeat, again and again. They know the path to success is anything but straight.
It’s critical to ask customers what they want, listen carefully to their answers, and figure out a plan to provide it thoughtfully and quickly (speed matters in business!). No business could thrive without that kind of customer obsession. But it’s also not enough. The biggest needle movers will be things that customers don’t know to ask for. We must invent on their behalf. We have to tap into our own inner imagination about what’s possible.
As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn’t growing, you’re not going to be inventing at a size that can actually move the needle. Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures. Of course, we won’t undertake such experiments cavalierly. We will work hard to make them good bets, but not all good bets will ultimately pay out. This kind of large-scale risk taking is part of the service we as a large company can provide to our customers and to society. The good news for shareowners is that a single big winning bet can more than cover the cost of many losers.
Debt-laden Canadians (Link)
Household debt in Canada has reached levels that could be qualified as excessive. Canadians owe C$2.16 trillion which as a share of gross domestic product, is the highest debt load in the G7.
Canada's personal savings rate is near its lowest in recorded history
The Canadian mutual fund industry experienced its weakest RRSP season in 10 Years
Over the first three months of 2019, the Canadian mutual fund industry captured net sales of $5.9 billion, down significantly from net sales of $17.6 billion during the 2018 RRSP season.
If we think about some of the main challenges encountered by investors around issues such as time horizons, over-trading, overconfidence, misaligned incentives and benchmark obsession, these problems are often exacerbated when investing in a professional context. Everyday investors are not immune from these behavioural issues that lead to poor investment decision making but it is important to acknowledge that the investment industry has certain structural features that serve to inflame a particular set of behavioural shortcomings. Many of these structural shortcomings are much harder to avoid when investing in a professional context versus the everyday investor. Here are a few of the advantages everyday investor have.
- There is no need to check your portfolio on a daily basis
- You can make decisions consistent with your own time horizon
- Your incentives are perfectly aligned
- There is no need to chase performance
- There is no requirement to be constrained by arbitrary benchmarks
- You don’t need to worry about what other people are doing
Notable quotes from Amazon's Annual Letter (Link)
From very early on in Amazon’s life, we knew we wanted to create a culture of builders – people who are curious, explorers. They like to invent. Even when they’re experts, they are “fresh” with a beginner’s mind. They see the way we do things as just the way we do things now. A builder’s mentality helps us approach big, hard-to-solve opportunities with a humble conviction that success can come through iteration: invent, launch, reinvent, relaunch, start over, rinse, repeat, again and again. They know the path to success is anything but straight.
It’s critical to ask customers what they want, listen carefully to their answers, and figure out a plan to provide it thoughtfully and quickly (speed matters in business!). No business could thrive without that kind of customer obsession. But it’s also not enough. The biggest needle movers will be things that customers don’t know to ask for. We must invent on their behalf. We have to tap into our own inner imagination about what’s possible.
As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn’t growing, you’re not going to be inventing at a size that can actually move the needle. Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures. Of course, we won’t undertake such experiments cavalierly. We will work hard to make them good bets, but not all good bets will ultimately pay out. This kind of large-scale risk taking is part of the service we as a large company can provide to our customers and to society. The good news for shareowners is that a single big winning bet can more than cover the cost of many losers.
Debt-laden Canadians (Link)
Household debt in Canada has reached levels that could be qualified as excessive. Canadians owe C$2.16 trillion which as a share of gross domestic product, is the highest debt load in the G7.
The Canadian mutual fund industry experienced its weakest RRSP season in 10 Years
Over the first three months of 2019, the Canadian mutual fund industry captured net sales of $5.9 billion, down significantly from net sales of $17.6 billion during the 2018 RRSP season.
Price elasticity of chocolate
Among consumers in the US, the demand for premium chocolate is less price elastic than for mainstream chocolate brands. Premium brands like Lindt exhibited less volume decline relative to mainstream brands like Hershey. For every 1% increase in pricing, Lindt experiences a 1% decrease in volume, while Hershey's volume decrease is more pronounced at 1.7%.
What are the main drivers behind people's chocolate choices? “Taste and good flavors” and “good quality” tops the list of reasons. “Low price” is less of a consideration which would favour premium players like Lindt.
Coffee bean – Record low prices with record high consumption (Link)
Although coffee has never been more popular, the price of coffee beans is at their lowest point in over a decade. Why? Factors include technological advances that have boosted production and the collapse in the currency of the world’s largest coffee producer, Brazil.
Today, the Brazilian Real is 60% less valuable against the USD than it was in 2011, and has depreciated over 12% in just the last year. Since Brazil’s currency is so cheap, so is the coffee that Brazil sells in US dollars to the rest of the world. These unsustainable low prices are sending coffee farmers out of business.
However, these low coffee bean prices have not translated into cheaper cups of coffee at your local café. The average cup at many major cities around the world is close to $3. Coffee prices remain high due to strong demand and rising costs of producing the drink, alongside things such as rent, overheads, labor, milk and sugar.
Among consumers in the US, the demand for premium chocolate is less price elastic than for mainstream chocolate brands. Premium brands like Lindt exhibited less volume decline relative to mainstream brands like Hershey. For every 1% increase in pricing, Lindt experiences a 1% decrease in volume, while Hershey's volume decrease is more pronounced at 1.7%.
What are the main drivers behind people's chocolate choices? “Taste and good flavors” and “good quality” tops the list of reasons. “Low price” is less of a consideration which would favour premium players like Lindt.
Coffee bean – Record low prices with record high consumption (Link)
Although coffee has never been more popular, the price of coffee beans is at their lowest point in over a decade. Why? Factors include technological advances that have boosted production and the collapse in the currency of the world’s largest coffee producer, Brazil.
