This week's interesting finds

Don’t get caught in a wheel of missed fortunes
Before making decisions about your financial future, check whether what you expect matches reality.

US suburban house prices
For the first time since 2007, the survey shows stronger price gains in suburban regions than in rural or urban ones.

The world of rice

Source: Food and Agricultural Organization of the United Nations

Closing tax loopholes may come first, especially in a post-COVID world

Valuation
The book-to-price dispersion among the largest 1,000 US stocks is at record levels. If we use price-to-book multiples, the gap between the cheapest and most expensive has touched even greater heights than during the dotcom boom:

CFA Institute Virtual Conference: Annie Duke and Morgan Housel
Annie Duke and Morgan Housel talk about demanding certainty in times of uncertainty: 
 - Rather than demanding certainty, take the broadest view of possibilities and their probabilities
- Doing well over the long term is not about being right all the time and finding the right answer, but about being able to survive amongst the broadest range of outcomes
- Humility about what you don’t know and can’t predict is important for doing well as an investor in the long term
- People tend to think in binary terms: a decision is either right or wrong. But you can also make great decisions and have a bad outcome and make great decisions and have bad outcomes.

This week's interesting finds

EdgePoint Video: Bumpy road to long term outperformance
Everyone wants to outperform in the long term, but you can't do that if you invest like everyone else. In our newest video, we explain how looking different might mean short-term underperformance and how that's just part of an investment approach that can pay off over time.

Valuation 
Valuations of S&P 500 companies in the 4th quintile look especially cheap.

An expansion of valuation multiples has driven the rally across global equities, even as earnings expectations contracted across the board, according to BlackRock.

How consumers are spending differently during COVID-19

The onset of changing consumer behavior can be observed from February 25, 2020, when compared to year-over-year (YoY).

As of May 12, 2020, combined spending in all categories dropped by almost 30% YoY. Here’s how that shakes out across the different categories, across two months.

General Merchandise & Grocery

Restaurant

Retail

Travel

The Song Remains the Same
Rapid technological change can trick us into thinking that the fundamental nature of human beings has changed commensurately, but nothing could be further from the truth. In terms of biological evolution, we are not very different from human beings who lived thousands of years ago in hunter-gatherer cultures that bear no resemblance to our current world. We have inherited the psychology of our ancestors and must work within the constructs of that psychology.

Today’s investors are not that different from those who lived nearly a century ago. The “passion for prophecy”, the desire to “get rich fast”, and buying what is “in trend”  have tempted investors for generations.

The trouble with buying what is in trend is that people are buying not necessarily the “best” securities but merely those that are most popular at a given point in time. And that popularity itself accounts for prices that often are out of proportion to business prospects. 

The crucial distinction between future prospects for a business enterprise and prospects for its securities is one that generation after generation of investors fail to make. A business with compelling future prospects can make for a lousy investment if its securities are so popular that its bright future is more than fully reflected in the price one must pay to participate.

As of May 2020, the top five companies in the Standard & Poor’s 500 comprise over 21 percent of the index:

Microsoft, Apple, Amazon, Facebook, and Alphabet are indisputable leaders of our modern economy. Their stocks are also popular not only with active investors but with index funds that automatically purchase these stocks when they receive new inflows of investor funds. Without commenting on the valuation of these companies, we can note that they are undoubtedly popular stocks in 2020. Their popularity might be justified by the underlying business fundamentals or investors may be repeating the “universal habit” of buying what is popular and suffering poor results over time. At the very least, buying popular stocks should always be done with great caution.

Investment resources
Collection of investment articles, books, speeches, videos including some all-time classics.

The week's interesting finds

Cymbria’s 12th annual investor day: Discussing the value of non-obvious survivors
At our 12th annual investor day, we looked at how finding non-obvious survivors helps investors more in the long term than feeling comfortable in the short term does. Watch the full recording from Wednesday’s presentation here.

This week in charts
Infotech, communication services, and health care sectors now account for 52% of the S&P 500 market capitalization.

Energy vs. S&P 500, Relative Price Performance

The relative price performance of the energy sector to the S&P 500 is now at the level of the Great Depression.

Zoom is Now Worth More Than the World’s 7 Biggest Airlines

Howard Marks memo: Uncertainty

In investing, uncertainty is a given – how we deal with it will be critical. In Howard Mark's latest memo he discusses the value of understanding the limitations of our foresight and “investing scared.” Below are some of his closing remarks. 

• The world is an uncertain place.
• It’s more uncertain today than at any other time in our lifetimes.
• Few people know what the future holds much better than others.
• And yet investing deals entirely with the future, meaning investors can’t avoid making decisions about it.
• Confidence is indispensable in investing, but too much of it can be lethal.
• The bigger the topic (world, economy, markets, currencies, and rates) the less possible it is to achieve superior knowledge.
• Even our decisions about smaller things (companies, industries, and securities) have to be conditioned on assumptions regarding the bigger things, so they, too, are uncertain.
• The ability to deal intelligently with uncertainty is one of the most important skills.
• In doing so, we should understand the limitations of our foresight and whether a given forecast is more or less dependable than most.
• Anyone who fails to do so is probably riding for a fall.

Thoughts on the current market environment from Stanley Druckenmiller at The Economic Club of New York

This week's interesting finds

Berkshire Hathaway Annual Shareholders Meeting 2020 
As most of you might know, Berkshire Hathaway had their annual shareholders’ meeting this past weekend, with the highlight being Warren Buffett speaking and answering questions for more than 3 hours on topics ranging from his views of the post-COVID-19 market, economic trends, and his current investment strategy. Here are links to the full video and meeting transcripts.

Personal Saving Rate and U.S. Household
Savings rate hits its highest level in 40 years, as Americans are accumulating cash.

When You Have No Idea, What Happens Next
Do we know more about what’s going to happen in the next 12 months today than we did in January? We now know there’s a pandemic that shut the economy down. We didn’t know that in January.

We’ve learned this year that the assumptions you have about the future can be destroyed overnight. That’s true for the poorest to the most successful, the old dry cleaner to the tech startup. It was true in January, and it’ll be true again in the future. 
If that’s the lesson, the question is: what do you do about it? 

Read more history and fewer forecasts. Think of all the 2020 market forecasts published in December. Accepting that forecasts have little use doesn’t mean you become a blind fatalist. When you pay more attention to history than forecasts you pick up on the patterns that guide how people respond to unforeseen events, which – given how stable behavior is over time – is the next best thing to knowing what will happen next. 

Have more expectations and fewer forecasts. Forecasts rely on knowing when something will occur. Expectations are an acknowledgment of what’s likely to occur without professing insight into when it will happen. Expectations are healthier than forecasts because they provide a vision of the future stripped of all false precision. If you know a recession will occur at some point, you won’t be that surprised whenever it arrives – which is a huge benefit. But if you assume you know exactly when it will occur you’ll be tempted into all kinds of dangerous behavior, leveraged with overconfidence.

COVID-19 internet search trends

Streaming Services Face an Economic Reckoning After Covid-19
The race to attract and retain subscribers — and turn a profit — was challenging enough before the coronavirus shut down entire swathes of our economy. Now, the U.S. is in a recession, and consumers are rethinking how much content they need and what’s a worthwhile household expense. When all a country can do is sit home and gorge on movies and TV, a free trial to stream Netflix or any other services is worth its hours of content in gold. (Look no further than Netflix’s recent spike in subscriptions.) The question is, will users just ditch once those free trials are up?

Because of Netflix, viewers have become accustomed to not having to sit through ads, and they like it. But that approach probably can’t work long-term if consumers want an affordable service with a constant flow of fresh content.

This week's interesting finds

EdgePoint Academy: The big day has arrived
“Am I ready for retirement?” and “How do I get ready?” are questions on the minds of many. Our latest article in the Retirement series discusses four things you need to consider to help answer these questions when planning for retirement with your financial advisor.

Advice for young people from Buffet
The best advice Warren Buffett can offer to young people who want to invest is to learn accounting. Furthermore, he warns investors against obsessing over stock price charts and urges them to focus on buying good businesses instead.

This week in charts
Nasdaq-listed stocks were briefly worth more than the entire developed market ex-USA.

The largest US tech stocks (FANMAG) aggregate market cap trails only the US (ex-FANMAG) and Japan. 

The tech-heavy Nasdaq is now above its outperformance trend versus the S&P 500 (the ISM Composite is a measure of US business activity). 

Investing in "top dog" stocks globally (largest stocks by market cap) returned considerably less than the overall market over the past 50 years.

Cities face 100 million 'new poor' in post-pandemic world
About 100 million people living in cities worldwide will likely fall into poverty due to the coronavirus pandemic. Densely populated cities are poised at the frontline of the contagious outbreak, hard-hit, where people live in poverty with little or no running water, sewage systems, or health care access, said experts at the World Bank. "Our estimate is that there will be possibly upward of a 100 million so-called 'new poor' on account of losses of jobs and income," said Sameh Wahba, global director for the World Bank's urban, disaster risk management, resilience and land global practice. He warned that cities will see a drop of between 15% to 25% in tax revenues next year, making it difficult for authorities to invest in improving slum areas.

Wealthy New Yorkers flee Manhattan for suburbs and beyond
New York’s wealthy are moving their money — and often their families — into surrounding suburbs as they look to escape a crowded lifestyle and reduce their risk of contracting coronavirus. “I can’t remember the last time we were this busy,” said real estate advisor Owen Berkowitz. Eighteen people are waiting to see a home in Greenwich, Connecticut, that is renting for $65,000 a month, another broker said.