Inside Edge – special edition

 

This special edition of Inside Edge provides an overview of the videos, commentaries and Academy pieces published by EdgePoint in 2020. The next Inside Edge will be published on Friday, January 8th.

Short videos

Embracing the unknown: To achieve pleasing long-term returns, investors sometimes need to feel the discomfort of owning businesses that don't offer the short-term peace of mind that most of the market craves. This video explains why successful investors embrace times of uncertainty. 

Short-term declines: Short-term pullbacks in the market will happen, but they're only temporary. What matters most is how you react during these tough times. 

Bumpy road to long term outperformance: Everyone wants to outperform in the long term, but you can't do that if you invested like everyone else. In this 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. 

Worth your while – knowing the value of what you own: We believe that the best way to avoid falling into an emotional trap is to act like a rational business owner and differentiate between what the business is really worth versus what the market thinks it's worth. 

EdgePoint's investment approach: We believe the most valuable thing about us is the application of our investment approach. Our primary goal is making money for our investors but pleasing returns over the long term are more likely if you understand and believe in the EdgePoint investment approach. 

Commentaries

In 2020, our portfolio managers wrote about: 

• Uncertainty, and things we know to be true even in an uncertain environment (We understand the gravity of our responsibility to you – part 1) 

• Your path to point B and why you need uncertainty and willingness to look wrong in the short term to get to point B (We understand the gravity of our responsibility to you – part 2) 

• The high price that investors are willing to pay in search of certainty and why investors should crave uncertainty in investing (The certainty of uncertainty) 

• The rarely seen high-yield opportunities in the volatile fixed-income environment at the beginning of the year (Glass half full) 

• The risks in fixed income investing and the importance of fishing where best investment opportunities are (Fish where the fish are) 

• The changing outlook for fixed income and how you can ensure it plays the right role for you in the future (Play your part – the role of fixed income in your portfolio) 

• And what helped them sleep at night at the beginning of the year (What helps us sleep at night – Part 6) 

EdgePoint Academy: Planning for retirement 

A series of articles focusing on retirement, specifically on topics and issues faced by investors preparing to retire or already there: 

1. Are your retirement savings on track? Compound your money, not your problems. 

2. The big day has arrived: the right investments can help meet your income needs. 

3. The retirement income balancing act: the impact of withdrawal rates. 

4. Sequence of returns: a risk worth learning about. 

5. Your retirement preparedness temperature check.

This week's interesting finds

 

Borrowing more to pay more

Leveraged buyout (LBO) - A leveraged buyout is the acquisition of a company, either privately held or publicly held, as an independent business or from part of a larger company (a subsidiary), using a significant amount of borrowed funds to pay for the purchase price of the company. 

How much gas is left in the tank? 

FATMAN-G is Facebook, Amazon, Tesla, Microsoft, Apple, Netflix, and Google. Owners of these shares should consider that they own them at the current share price. A decision to hold the shares, or to not sell them - even if purchased a thousand percent ago - is effectively a decision to buy them today. Let’s say we are 30, have a three-year old and want to use our FATMAN-G investments to pay for college in fifteen years. Or maybe we are 50 and want our FATMAN-G investments to pay for our retirement at 65. Let’s also say we expect to make 15% a year in these great businesses. Sure, they’ve done much better than that historically, and these indeed are amongst the best businesses in the world, but let’s not be greedy, and just shoot for 15% a year. Let’s also assume that these great businesses will always have tremendous growth opportunities and thus instead of paying dividends, these companies will use excess cash to invest in those lucrative projects. 

The table above shows the market caps they would need to sport by 2035 in order to achieve our financial goals. Tesla would need to have a market cap of $6 trillion, Google $10 trillion, and Apple $17 trillion. And for each of them in aggregate to generate 15% annual returns over the next fifteen years, they would need a combined market cap of over $70 trillion. In 2035, that will be greater than the combined GDPs of the US and Europe. 

Interest rate sensitivity of major fixed income indices

Source: SunTrust Private Wealth Management 

Interest rate sensitivity is a measure of how much the price of a fixed-income asset will fluctuate as a result of changes in the interest rate environment. Securities that are more sensitive have greater price fluctuations than those with less sensitivity. 

Gamification

Robinhood Markets drew millions of users to investing with a colorful app that makes trading seem empowering instead of intimidating. That very appeal thrust it into the regulatory crosshairs yet again on Wednesday. Massachusetts securities regulators filed a complaint against Robinhood. It focuses on the tactics that Robinhood employs to keep consumers engaged, alleging that it encourages them to use the platform through what it calls “gamification.” One Robinhood customer with no investment experience made more than 12,700 trades in just over six months, according to the complaint. 

S&P 500 FY2 P/E ratio with and without Tesla

This week's interesting finds

 

Valuation of momentum

 

Demand for gasoline
 
While there is some seasonality in this, this is interesting given that the consensus was that this would recover a lot faster when we were in February/March. 

Trading can be addictive
 
Is the stock market a form of entertainment? Here is a story of a reporter signing onto Robinhood, the popular stock-trading app, to find out. 

“My editor and I decided that I should see what the fuss is all about. I started trading on Robinhood on Oct. 27, expensing my $100 investment. Any profits I made would go to charity; any losses would go toward public humiliation. I closed all my positions on Nov. 17. I never did any research; the companies would be just ticker symbols to me. Such insanely risky, wildly fluctuating stocks would either make—or lose—a ton of money. That was the plan. In the end, after three hectic weeks, I finished with $95.01. I’d lost 5% of what I’d put in. Counting the free stock I’d gotten, I was down 10.2%. Over the same period, the S&P 500 went up 7%” 

The lesson? 

You can’t invest without trading, but you can trade without investing. Even the most patient and meticulous buy-and-hold investor has to buy in the first place. A short-term trader, however, can make money—for a while, by sheer luck—without knowing anything. And thinking you’re investing when all you’re doing is trading is like trying to run a marathon by doing 26 one-mile sprints right after the other. To invest means, literally, to clothe yourself in an asset. That gives a stock the chance to work for you over the years it may take for a company to prosper. It also minimizes your tax bills—and your stress. 

Why do investor returns differ from mutual fund returns?

Why do Investor Returns vary from the profits of mutual fund houses? Investor Returns depend on: 

• When you made your investment 
• The price you paid 
• Your holding periods 

There are a few reasons why the mutual fund's returns are higher than your returns. 

Most people invest in the fund when the market is soaring, and they see the fund performing well. A well-performing fund has a high NAV. So, the investor buys at a high price. 

When the market reaches a low and the fund's performance drops, investors panic and sell. Optimism and despair control the investor's financial decisions. Situations lead investors to speculate rather than invest. 

Over the years, the retail investor's holding period has reduced. You do not benefit with reduced holding period as you are unable to reap the rewards of compounding. Exponential results are possible only because of compounding which takes time to work.

This week's interesting finds

 

Why did renewables become so cheap so fast? 

 For the world to transition to low-carbon electricity, energy from these sources needs to be cheaper than electricity from fossil fuels. The fundamental driver of this change is that renewable energy technologies follow learning curves, which means that with each doubling of the cumulative installed capacity their price declines by the same fraction. 

The learning rate of solar PV modules is 20.2%. With each doubling of the installed cumulative capacity the price of solar modules declines by 20.2%. The high learning rate meant that the core technology of solar electricity declined rapidly. The price of solar modules declined from $106 to $0.38 per watt. A decline of 99.6%. 

The made-in-Canada carbon solution we refuse to promote 

Replacing China’s coal with our liquefied natural gas (LNG) would be equal to taking 80% of all cars off Canadian roads. 

Exporting LNG to displace coal is a powerful way for Canada to be a leader in helping reduce global emissions. And yet one of the most perplexing barriers for LNG project sponsors is the fixation of Canadian regulators on the project’s domestic emissions, which are miniscule in comparison with their enormous global reduction. 

The impact of replacing coal with natural gas is clearly illustrated south of the border where it has helped drive down U.S. emissions by 14% since 2005. 

Stop sending pointless emails, the planet will thank you 

Millions of unnecessary emails sent every day, including those that say nothing more than “thanks” are a threat to the planet, scientists believe.

With the 2021 United Nations Climate Change Conference (26th session of the Conference of the Parties) taking place in Glasgow, Scotland next year, organisers are looking at innovative ways to cut carbon emissions — and the footprint left by web users has drawn its attention. 

British officials have been particularly taken by research suggesting that, in the UK for example, more than 64 million unnecessary emails are sent every day, pumping thousands of tonnes of carbon into the atmosphere owing to the power they consume. 

The carbon footprint of an email comes from the electricity that is used to power the devices on which it is written and read, the networks that transmit the data, and the data centres that store it. 

One piece of open source information referred to by officials relates to research commissioned by Ovo Energy last November, which suggested that if each person in the UK sent one fewer email a day it could cut carbon output by more than 16,000 tonnes a year. 

The research claimed that would be the equivalent of more than 80,000 people flying from London to Madrid. It found that the 10 most “unnecessary” emails included messages saying only “thank you”, “appreciated”, “cheers” and “LOL”. 

Americans of all ages are spending more on video games 

An interesting study showing where the increases in time spent playing video games has come from.

Older demographics are turning to games more often as they find themselves with money they can no longer spend on dining out or attending live events. 

Spending on video games for Americans 45 years old-to-54 years old increased 76%. People age 55-to-64 increased their spending 29%. 

How a once-dismissed idea became a leading technology in the Covid vaccine race 

Before messenger RNA was a multibillion-dollar idea, it was a scientific backwater. And for the Hungarian-born scientist behind a key mRNA discovery, it was a career dead-end. 

Katalin Karikó spent the 1990s collecting rejections. Her work, attempting to harness the power of mRNA to fight disease, was too far-fetched for government grants, corporate funding, and even support from her own colleagues. 

“Every night I was working: grant, grant, grant,” Karikó remembered, referring to her efforts to obtain funding. “And it came back always no, no, no.” 

By 1995, after six years on the faculty at the University of Pennsylvania, Karikó got demoted. She had been on the path to full professorship, but with no money coming in to support her work on mRNA, her bosses saw no point in pressing on. 

She was back to the lower rungs of the scientific academy. 

“Usually, at that point, people just say goodbye and leave because it’s so horrible,” Karikó said. There’s no opportune time for demotion, but 1995 had already been uncommonly difficult. Karikó had recently endured a cancer scare, and her husband was stuck in Hungary sorting out a visa issue. Now the work to which she’d devoted countless hours was slipping through her fingers. 

“I thought of going somewhere else, or doing something else,” Karikó said. “I also thought maybe I’m not good enough, not smart enough. I tried to imagine: Everything is here, and I just have to do better experiments.” 

In time, those better experiments came together. After a decade of trial and error, Karikó and her longtime collaborator at Penn — Drew Weissman, an immunologist with a medical degree and Ph.D. from Boston University — discovered a remedy for mRNA’s Achilles’ heel. That discovery, described in a series of scientific papers starting in 2005, largely flew under the radar at first, said Weissman, but it offered absolution to the mRNA researchers who had kept the faith during the technology’s lean years. And it was the starter pistol for the vaccine sprint to come. 

And even though the studies by Karikó and Weissman went unnoticed by some, they caught the attention of two key scientists — one in the United States, another abroad — who would later help found Moderna and Pfizer’s future partner, BioNTech.