This week's interesting finds

We hope everyone enjoys the holidays and we look forward to seeing you in the new year. 

This week in charts

Large caps versus bonds

Household debt

Canadian population

Canadian housing

Retail 

Asset classes 

The 4% rule could be true in 2024

Retirees can now draw 4% per year from a U.S.-based investment portfolio that is between 20% and 40% equities and still have a 90% probability that there will be money left after 30 years, according to a November Morningstar study.

This is the highest safe-withdrawal rate since the research began in 2021. Based on similar assumptions, the rates were 3.3% in 2021 and 3.8% last year.

The results came from researchers who sought the highest withdrawal rate for each combination of time horizon and asset class, where at least 900 of 1,000 computer simulations showed a positive balance at the end of the period.

The higher withdrawal rate was made possible by more attractive bond yields and a lower inflation forecast, allowing for a more conservative asset allocation.

In the 20th century, stocks averaged about a 7.5% real return rate a year, but it has dropped since then, and Morningstar predicts it will go to 4.5% in the current era, said John Rekenthaler, Morningstar’s research director.

“If we thought history was going to repeat itself, we would recommend more equity-heavy portfolios. We don’t think that’s realistic,” he said. “Prospective stock returns are relatively low.”

With equity returns looking less favourable, an all-equity portfolio would only allow for a 3.3% safe withdrawal rate compared to 4% for a 40% equity portfolio. However, with the all-equity option, a $1 million investment is expected to yield a median remaining balance of $4.5 million at the end of the 30-year period, compared to just $1.5 million for the conservative approach.

“We’re testing for a 90% success rate. So, the number that we’re focusing on is not the median result,” Rekenthaler said. “You only get one shot at retirement; you don’t get to roll the dice again if it’s a bad number. We think [retirees] should take a relatively conservative approach in terms of the odds.”

He said retirees may be able to take a chance on a higher-equity portfolio if they are willing to cut back on their spending during difficult years. The report shows that the safe-withdrawal rate falls only slightly — to 3.8% — when a portfolio consists of 70% equities.

In previous years, Morningstar calculated all withdrawal percentages assuming the retiree would spend the same amount of money each month. However, some financial advisors suggest clients use a variable withdrawal rate and retirees may adjust spending to reflect inflation.

This year, Morningstar added a new methodology that assumes retirees increase spending by 1% less than the annual inflation rate. Under this method, people could take out 5% in early retirement with a lifetime withdrawal rate of 3.9%.

Regulator Urges Chinese Companies to Boost Dividends, Buybacks

China’s securities regulator is asking publicly traded companies to boost dividends to reward investors and said it will increase supervision of those that don’t pay.

China Securities Regulatory Commission said on Friday it will strengthen disclosure requirements for companies that aren’t paying dividends. It also encouraged listed firms to increase the frequency of their dividend payouts and streamline interim distribution processes.

China has taken a tougher stance on firms that refuse to issue dividends to investors over the years. In 2017, then-CSRC Chairman Liu Shiyu said the regulator would take steps against “those iron roosters which have the ability to offer cash dividends but never plucked a feather.”

CSRC issued rules to ease conditions for companies’ share buybacks. It also warned it would crackdown on using buybacks for illegal activities including insider trading and market manipulation.

Japan Plans 10% Reduction in Debt Issuance Next Fiscal Year

Japan plans to reduce debt sales by about 10% in the fiscal year starting April 1 as the government tries to lower the world’s biggest debt load for a developed nation.

The finance ministry aims to issue ¥171 trillion ($1.2 trillion) of debt to the market, marking a fourth straight year of planned decreases in sales, with 20-year bonds and shorter notes seeing the big cuts.

Japan has been trying to reduce general government debt that has soared to a size equivalent to 255% of its economy, according to the International Monetary Fund. Bond issuance jumped in 2020 to finance stimulus measures during the pandemic, and the government has been cutting sales in the following years. But next fiscal year’s planned issuance still remains above pre-2020 levels.

Expectations that the Bank of Japan will end its negative interest rate policy next year has weighed on demand for bonds as investors anticipate increases in yields.

This week’s fun finds

Nike staff memo from 1977

Why Gift-Giving Makes You Anxious

Gifts are so meaningful that some people identify “receiving gifts” as their primary “love language.” Many believe that gifts from their romantic partner are a big way they can understand how much their partner loves them. Indeed, on the surface, gift-giving occasions seem like wonderful opportunities to experience and create delight. But according to a 2023 survey by Preply, gift-giving and receiving is actually the least popular love language overall.

Part of the problem is that occasions that involve gift giving are steeped in uncertainty. If it’s an occasion like Christmas, where people are simultaneously shopping for each other, people might be nervous about whether the gift they give will be in the same category as the gift they will also receive. For instance, you don’t want to give someone a gag gift when they’re giving you a sincere, heartfelt gift—or vice versa. It’s what game theorists call a “coordination game”: your main objective is simply to use whatever strategy you think your partner is using. Mismatched approaches to gift-giving are a recipe for awkwardness. Fans of The Office might recall how Michael’s outlandish Yankee Swap gift—an iPod (highly coveted at the time)—made the entire event uncomfortable for everyone.

There can also be tremendous uncertainty around how your gift will be experienced by the recipient. For example, imagine that someone you’re close to is showing some signs of Seasonal Affective Disorder, and you’re considering giving them a light therapy lamp as a holiday gift. Indeed, the recipient of such a gift may very well be appreciative, indicating that this is “just what they needed.” At least, that’s how it’s all likely to unfold in the hopeful imagination of the lamp-giver. But what if the lamp-recipient interprets the gift as an unwelcome piece of commentary on their affective state? One could imagine a reaction along the lines of “Gosh, I’m sorry I’ve been so unpleasant to be around. Thanks for the feedback.” The message we send with gifts (or emails, texts, or just about any form of communication) is not necessarily the same as the message received.

Worst of all, there’s the anxiety that comes with receiving gifts. If you’re anything like me, you may have, on occasion, found yourself in a setting where you expect that a lot of well-meaning but disappointing gifts are headed your way. There can be some dread that comes with knowing that you’ll soon need to perform joy and appreciation. Even worse, you might worry that the gift-giver will detect your insincerity, wounding them in the process.

It’s not all bad, of course. When done carefully, gift-giving can be a wonderful way to communicate to loved ones that we appreciate and understand them. Gifts can absolutely draw people closer together, in a lasting way.

This week's interesting finds

Robert, partner since 2013 (Toronto, Ontario)   

This week in charts 

CPI 
Table: CPI breakdown by province & category 

Savings by income group   

Retail

Labour market 

Debt 

VC Firm OpenView Collapsed Because Two Senior Leaders Quit, Sources Say 

This week, OpenView Venture Partners shocked its employees and the venture capital industry by suspending new investments and laying off half its staff, including all its vice presidents and associates. With the future of the Boston-based firm uncertain, Forbes has learned that the fund made the decision because two of its three leaders — Mackey Craven and Ricky Pelletier — departed, just months after it raised a new fund, sources told Forbes. 

Most of its investing partners are staying on — including the firm’s third leader Blake Bartlett, founder Scott Maxwell and about 10 lower-level partners — and the firm may resume new investments in the future, a source said. 

So far, the firm has only drawn about $80 million out of its new $570 million fund, the seventh in its history, which it closed in March, a source said. Its remaining employees are planning to spend the next few months providing support to portfolio companies, as well as formulating a new plan to present to limited partners about the future of the firm. 

The sudden and unexpected decision this week came after a chaotic several months that had left the firm with a leadership void. Shortly after OpenView announced its new fund earlier this year, Pelletier stepped down from his role and decided to leave the venture capital industry entirely (he is now investing in small businesses around New England, including car washes). In November, Craven told the remaining leaders that he wanted to step down, shocking his colleagues, two people said. It’s unclear what spurred the decision, but two sources say it appears to be driven by personal circumstances. Leaders told stunned employees at an all-hands meeting Tuesday that Craven wasn’t leaving to invest elsewhere. 

Bartlett had been on sabbatical, but was pulled back last month in an emergency attempt to rescue the firm, the sources said. Ultimately, Craven could not be persuaded to stay on and Bartlett found it untenable to move forward as the sole leader. 

OpenView was founded in 2006 by Maxwell, a former investor at Insight Partners. The firm has some $2.4 billion in assets under management. Maxwell is still part of the firm’s leadership circle, but has taken a step back in the last several years after coordinating a transition to the management triumvirate of Bartlett, Craven and Pelletier. Its partners and backers have cashed out in recent years, most notably through Craven’s investment in New York-based cloud software company Datadog, which went public in 2019 (the investment helped him make Forbes’ 30 Under 30 list for Venture Capital in 2017). That may have made retiring from VC more enticing, particularly for OpenView’s team which is not located inside Silicon Valley’s insular tech bubble. 

The Road to China-Free Supply Chains Is Long. Warning: Legless Lizards Ahead. 

Building China-free supply chains is tough. Sometimes it means dealing with lizards that don’t have legs and sands that are radioactive. 

That is the case with making rare-earth magnets—a powerful piece of tech that is as crucial to jet fighters and wind turbines as it is to smartphones and electric cars. 

 For decades, China has dominated every step in the process of making rare-earth magnets. It is the only nation capable of producing the magnets from start to finish at scale. 

Now, with demand growing for China-free magnets in the U.S. and Europe, a diverse group of companies are stitching together globe-spanning supply chains and encountering all kinds of obstacles as they attempt to break China’s grip on the market. 

An Australian company has spent years relocating protected pink-tailed reptiles from its rare-earths mine site to unlock a new source of the minerals outside China. Meanwhile, the company is trying to find other sources of rare earths, from countries such as Vietnam and the U.S., for its processing plant in South Korea. 

On the other side of the world, the hunt for rare earths has led a Canadian company to use ones that have been extracted from the mineral-rich sands in the U.S. state of Georgia. The rare earths there had to be brought to Utah to be stripped of radioactive uranium, and then shipped to Estonia to be ready for magnets. 

Two-thirds of the world’s rare-earth mining occurs in China. It processes around 85% of the ore, and it builds more than 90% of the magnets. 

The new ventures can’t deliver prices as low as China’s. But the companies say some Western automakers and defense manufacturers are willing to pay more for magnets largely untouched by China.  

This week’s fun finds 

We’ll miss you, Sylvie! 

After 13 years, Sylvie is retiring to enjoy her post-EdgePoint life. Although she’s no longer an internal partner, she’ll always be part of the family.

Hot sauce reviews 

The test team tried out a hot sauce collection from Costco. Review: 

• “Looks interesting, but it just tastes like vinegar.”

• “Only the last one has any heat.” 

Luckily, someone had some hot sauces they found at a farmers' market, Purple Tongue Hot Sauce made in Ontario!

• Way spicier than I thought!

• Why are there so many types of pepper in there? Some of those have to be made up names.

• Great flavour…and the heat lingers. 

Houston, we have a tomato: ISS astronauts locate missing fruit (or vegetable) 

It's gotta be hard to lose something when you're swirling around the Earth on the International Space Station — right? Well, apparently not. A missing tomato sparked a lighthearted mystery for the astronauts on board the ISS – and it's finally been solved after months of accusations and intrigue. 

What is likely one of the first tomatoes ever harvested in space was plucked by astronaut Frank Rubio in March, shared in a post on X (formerly known as Twitter) by NASA. So when it makes sense that when it vanished, all finger pointing was directed at Rubio. 

He explained that NASA is conducting botany studies onboard the ISS so astronauts could figure out ways to grow fresh food in space for longer term missions. 

"I put [the tomato] in a little bag, and one of my crewmates was doing [an] event with some schoolkids, and I thought it'd be kind of cool to show the kids, 'Hey guys, this is the first tomato harvested in space,' " he said. "Then, I was pretty confident that I Velcroed it where I was supposed to Velcro it, and then I came back and it was gone." 

Rubio estimated he spent between 8 and 20 hours of his own time searching for the lost fruit. (Whether tomatoes are fruits or vegetables depends on who you ask. In the 19th century, the Supreme Court came down on the side of vegetables — sort of.) 

Rubio said he hoped someone would find it one day — and that hope was finally realized more than eight months later. 

"We might have found something that someone has been looking for quite a while," astronaut Jasmin Moghbeli said in a NASA video talk from the ISS earlier this week. 

"Our good friend Frank Rubio who headed home has been blamed for quite a while for eating the tomato — but we can exonerate him: We found the tomato." 

The crew laughed. No word on where it was hiding or what it looked like when it was discovered, though.

This week's interesting finds

Juan, partner since 2016 (Amsterdam, The Netherlands) 

The Dutch “tulipmania” of the 1600s was one of the most famous asset bubbles in history, with some bulbs reaching extreme prices due to speculation and greed.   

This week in charts 

Korean investors   

Provincial monetary policies 

Oil production 

Steel production 

Retail spending   

Jobs

What’s Missing From Amazon’s Big New AI Product; OpenAI’s Interest in Human Brain-Inspired Chips 

For those of you who didn’t spend last week in Las Vegas for Amazon Web Services’ Re:Invent conference, I’m here to fill you in on Q, an artificial intelligence chatbot and assistant that the company hopes will change the public perception that it’s behind in AI. Q aims to compete with Microsoft’s AI tools, dubbed “copilots,” and OpenAI’s ChatGPT. On price, Q will undercut Microsoft’s productivity copilot by $10 per person per month. 

Q, which isn’t yet broadly available to customers, is expected to serve several different purposes. One of them is particularly striking: AWS said customers can connect Q to their corporate data so that employees can use it to answer business-related questions, summarize documents and draft emails. AWS doesn’t sell productivity apps (a longtime Achilles heel), but Q will be able access information from applications such as Gmail, Slack, Jira, and Microsoft 365. Those apps already have embedded generative AI features, but AWS hopes Q will be attractive because it can access information across all of them. That assumes enterprises want AWS to access all their data, which has to be a question in a time of pitched concerns about data leakage via large-language models. 

Poor Charlie’s Almanack – The Essential Wit and Wisdom of Charles T. Munger 

I first came across Poor Charlie’s Almanack in my 20s, when I was trying to learn everything I could about what made successful businesses tick. As I leafed through its oversize pages, I found it to be a refreshing rebuttal of conventional financial wisdom, delivered with unusual simplicity and candor. Never before had I heard a venerated businessperson express such trenchant insights about investing, finance, and the world more broadly, and with such—to use a favored Munger phrase—chutzpah. One can’t help but read a line like “Without numerical fluency… you are like a one-legged man in an ass-kicking contest” and come away not only chuckling but also a little bit wiser. 

Poor Charlie’s Almanack is a testament to the power of thinking across disciplines. It’s not just a book about investing; it’s a guide to learning how to think for yourself to understand the world around you. Charlie [Munger’s] philosophy combines insights from nearly every discipline in which he’s ever taken even a passing interest—not only business and finance but also mathematics, physics, history, ethics, and more—delivered with a characteristic irreverence that has persisted for 99 years (and counting). His essays extol the virtues of free enterprise, yes, but also of doing business the right way, with integrity and rigor. Of taking your work very seriously, but never yourself. 

Whether you are a seasoned investor or an enthusiastic newcomer, whether you run a business or are seeking to improve your decision-making skills in everyday life, I encourage you to read Charlie’s speeches and essays with an open, curious mind. You will be rewarded with insights that stay with you for a lifetime. As Charlie once said, “There is no better teacher than history in determining the future. There are answers worth billions of dollars in a $30 history book.” The same might be said of Poor Charlie’s Almanack. It is the ultimate value investment. 

Postscript: Charlie died on November 28, 2023, at the age of 99, one week before this website was due to go live.   

China’s Exports Snap Half-Year Slide 

China’s exports grew in November after six straight months of declines, though economists cautioned the uptick in trade wouldn’t be enough to offset weakness in the world’s second-largest economy. 

China’s exports in recent months have been supported by the country’s manufacturers slashing prices to gain global market share, economists said, as elevated interest rates and wars in the Middle East and Ukraine weigh on global demand. Trade volumes have been hitting record highs, even as exports, as measured by value, had been falling prior to November. 

A steep drop in the price of some goods shipped from China has already drawn concerns in the U.S. and Europe. European Union regulators unveiled an antisubsidy probe in September over concerns China was undercutting its producers by flooding the market with low-cost electric vehicles. European officials are expected to raise the issue with Chinese leaders in Beijing on Thursday. China has said its manufacturers are competing fairly. 

The drop in imports reflects weak domestic demand. China’s economy has long suffered from an imbalance, relying more heavily on demand from overseas than its own consumers. That was particularly the case during the pandemic, when exports, buoyed by demand in the West, helped to prop up China’s economy. But that demand was curtailed as policy makers raised interest rates to combat inflation. 

November’s growth in exports won’t be enough to meaningfully boost China’s economy, economists said, with the country suffering from a protracted downturn in the property market, mounting government debt and sluggish consumer spending. 

On Tuesday, Moody’s Investors Service lowered its outlook for China’s credit rating from stable to negative, warning that the financial stresses of some regional and local governments will require Beijing to provide support to them. 

Hedge funds and mutual funds have been chasing the same tech stocks, Goldman analysis finds 

The world’s major hedge funds and mutual funds have upped their exposure to equity markets in 2023 after investing heavily in a selection of popular tech companies, according to new analysis from Goldman Sachs. 

The shift saw hedge funds exposure to stock markets increase up to 66% in the year-to-date 2023, up from long-time lows of 61% at the start of the year. 

Levels of exposure to equity markets, however, remained below long-time averages of 70%, as investments in stocks remained significantly lower than in 2021 during the COVID-19 stock market boom. 

The uptick in exposure to stock markets was driven by trends that saw both hedge funds and mutual funds plow money into the info tech sector as they piled into popular stocks that have repeatedly given strong returns over extended periods of time. 

The strategy has seen hedge funds generate solid returns in the year so far as they benefited from the recent rally in mega-cap stocks, even as crowding and concentration among hedge funds hit all-time highs. 

The strategies taken by hedge funds and mutual funds, however, diverged in relation to the energy sector. This saw hedge funds reduce their exposure to the energy sector even as mutual funds increased their holdings in energy stocks, the Goldman analysis finds.  

This week’s fun finds 

Those are some spicy meatballs! 

Andrew’s moai (our version of bringing EdgePointers together for a meal) came from a family-run Italian restaurant that he’s been going to since his childhood. Thanks to him, we all carb-loaded for the upcoming winter weather.   

Questionable conversion rates 

 What dollar-cost averaging (DCA) / systematic investment plan (SIP) feels like   

‘How do you reduce a national dish to a powder?’: the weird, secretive world of crisp flavours 

Reuben and Peggy are not their real names. Reuben is a snacks development manager and Peggy is a marketer, and they work for a “seasoning house”, a company that manufactures flavourings for crisps. 

I meet the pair on Zoom, hoping they can answer a question that has consumed me for years. In January 2019, I was visiting Thailand when I came across a pink packet of Walkers with layered pasta, tomato sauce and cheese pictured on the front. Lasagne flavour, the pack said. You can’t get lasagne Walkers – or Lay’s, as they are known in most of the world – in Italy. Relatively speaking, Italians have a small selection of Lay’s – paprika, bacon, barbecue, salted and Ricetta Campagnola, a “country recipe” flavour featuring tomato, paprika, parsley and onion. I’ve sampled Hawaii-style Poké Bowl crisps in Hungary and chocolate-coated potato snacks in Finland; I have turned away from Sweet Mayo Cheese Pringles in South Korea. So why can you get lasagne flavour Lay’s in Thailand but not in Italy, home of the dish? Who figures out which country gets which crisps? 

For more than 75 years, Leicester has been the place where British potatoes become crisps. Its Walkers factory produces 5m packets a day, steam billowing from behind big blue security gates. Just down the road sits its HQ, where 300 marketers, scientists and chefs decide which crisps the world needs next.

This week's interesting finds

Ben, partner since 2017 (Sarnia, Ontario)   

Rest in Peace, Charlie Munger

‘Take a simple idea and take it seriously’: CharlieMunger in his own words.

Charlie Munger, who has died aged 99, was instrumental in helping Warren Buffett turn Berkshire Hathaway into an investment powerhouse.

Munger laid down the principles on which the pair built Berkshire, Buffett has said, helping him refine a philosophy that was initially shaped by value investing pioneer Benjamin Graham.

“The blueprint he gave me was simple: ‘Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices’,” Buffett, 93, said.

Over a career spanning more than 70 years — most of which spent alongside the Sage of Omaha — Munger became famous for his sharp wit about investing and life delivered during Berkshire’s annual shareholders meetings. Some of Munger’s best-known “zingers”

“Capitalism without failure is like religion without hell.”

“Take a simple idea and take it seriously.”

“Show me the incentive and I will show you the outcome.”

“Every time you hear EBITDA, just substitute it with bullshit.”

“There is more dementia about finance than there is about sex.”

“To say accounting for derivatives in America is a sewer is an insult to sewage.”

This week in charts 

Household debt

Inflation

Housing and Immigration 

Source: Statistics Canada 

Economy   

Unicorns   

China   

ESG   

2022 and 2023 YTD Returns 

Source: Goldman Sachs FICC & Equities, Custom Baskets, Bloomberg, as of 30-Nov-2023. Past performance is not indicative of forward returns  

Decarbonization in Alberta

Canada's main oil-producing province Alberta on Tuesday said it would provide a 12% grant on eligible capital costs associated with building new carbon capture utilization and storage (CCUS) projects to help industry cut emissions that cause climate change. 

The incentive from Alberta, which the provincial government has been working on since January, comes on top of a federal government CCUS tax credit announced last year and is designed to spur investment in the costly technology. 

Alberta Energy Minister Brian Jean said CCUS is the "only viable option" to cut emissions of hard-to-abate industries, such as oil and gas, cement and petrochemicals. 

"Not only will this technology help preserve our position as a major bitumen producer, but our whole economy will depend on CCUS for large volumes of reduced emissions reductions," Jean told a news conference. 

Alberta Premier Danielle Smith said the incentive program was expected to help attract C$35 billion ($25.80 billion) in capital investment and cost the province between C$3.5 billion and C$5.3 billion. 

Chemical maker Dow said federal and provincial government CCUS incentives contributed to its board's decision on Tuesday to approve a C$6.5 billion investment in its existing Fort Saskatchewan, Alberta, facility. 

The Path2Zero project includes building a new ethylene cracker and increasing polyethylene capacity by 2 million metric tonnes per annum, and will use CCUS to help meet net-zero emissions. 

More than twenty new CCUS projects have been proposed in Alberta, including a C$16.5 billion project put forward by the Pathways Alliance, a consortium of Canada's six biggest oil sands producers.   

Half Of All Skills Will Be Outdated Within Two Years, Study Suggests 

Executives believe nearly half of the skills that exist in today’s workforce won’t be relevant just two years from now, thanks to artificial intelligence. And a lot of that includes their own skills. This startling proclamation came out of a recent survey of 800 executives and 800 employees released by edX, an online education platform. 

The executives estimate that nearly half (49%) of the skills that exist in their workforce today won’t be relevant in 2025. The same number, 47%, believe their workforces are unprepared for the future workplace. Identifying skills shortages is not a surprising result to come out of an educational platform provider, but the short timespan is an eye-opener. 

Executives in the survey estimate that within the next five years, their organizations will eliminate over half (56%) of entry-level knowledge worker roles because of AI. What’s more, 79% of executives predict that entry-level knowledge worker jobs will no longer exist as AI creates an entirely new suite of roles for employees entering the workforce. On top of that, 56% say their own roles will be “completely” or “partially” replaced by AI. 

However, there are industry leaders who are skeptical of such heavy-handed doom-laden predictions. "In my view, the immediate impact of AI on career goals is likely to be minimal," says Richard Jefts, executive vice president and general manager at HCL Software. "While many companies claim to be leveraging AI, the reality is that most are still in the early stages of adoption.” Expect more of a longer-term impact on careers as AI matures, he says. 

While AI will redirect jobs and career prospects, its impact on jobs and tasks is murky — it’s not a simple matter of swapping out tasks with AI and you’re done. "The challenging part is that it is very difficult to predict precisely where and when that redirection will occur,” says Frederico Braga, head of digital at Debiopharm. “Almost every professional whose day to day is somehow connected with a digital activity will need to re-adjust their career goals as they — and the people around them — will begin to see changes in their daily work-related activities and processes.”   

This week’s fun finds 

Giving the gift of financial literacy 

Several EdgePointers presented at our financial literacy “kids camp” in Montréal to help the youth capitalize on their incredibly long-time horizons.