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How open-source software took over the world (Link)
"By the time the open-source software gets to production it is rarely, if ever, displaced. Fundamentally, the software is never “sold”; it is adopted by the developers who appreciate the software more because they can see it and use it themselves rather than being subject to it based on executive decisions. The developers basically vote with their feet. This is in stark contrast to how software has traditionally been sold."

CPP takes bigger bite from Canadians (Link)
"Many expansion proponents assume that an expanded CPP will result in a net increase in savings for retirement. Both theory and empirical evidence indicate this is not the case. Instead, higher mandatory CPP contributions will likely result in less private savings in pensions and RRSPs. A 2015 study found that between 1996 and 2004, when CPP contributions were raised from 5.6 to 9.9 per cent, for every $1 increase in CPP premiums, the average Canadian household reduced its private savings by almost $1 because people have a preference for how they split their income between saving and consuming. Mandating an expanded CPP doesn’t change that preference. Thus the overall rate of savings will likely remain unchanged but the mix will change to favour more CPP and less private savings."

Buy high, buy low (Link)

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Don't have a crystal ball? Base rates are the next best thing (Link) 
"Obviously, it would be great if we were all psychic and could know how the future would turn out. But we aren’t. Knowing the base rate is the next best thing to psychic ability. How often something has occurred in the past is usually a good indicator of how often it will occur in the future. Base rates are like having a crystal ball. Seeking out the base rate in our decision process reminds us to not put so much weight on our own experience and own opinions. Always asking, “how often does this typically happen?” helps us view the decision from the outside in, rather than the inside out."

The paradox of uncertainty - Counter intuitively, being more uncertain leads to greater accuracy
"When we're aware of our own uncertainty, we're looking for why we're wrong. We're more likely to consider other opinions. We're less likely to be overconfident in whatever answer we find. When we're more uncertain and less confident, we're more likely to be open-minded, leading us to take the outside view. A study found that bringing uncertainty into a group increased the group's ability to correctly identify the perpetrator in a "Murder Mystery" scenario. They were both more likely to be right and, at the same time, more open to the idea that they might be wrong. That might seem to be a paradox, but there turns out to be a strong correlation between astute decision-making and a willingness to recognize—and even embrace—uncertainty. These findings echo the famous Dunning-Kruger effect from cognitive psychology, in which low-ability individuals have a tendency to overestimate their skills. Sometimes the easiest way to be wrong is to be certain you are right."

Investment grade bond returns

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Too busy during the week? Catch up with last week's articles and charts:

Investing

While investors display clear skill in buying, their selling decisions underperform substantially (Link) 

50 reasons why we don't invest for the long-term (Link) 

Forecasting - the attempt to predict the unknowable by measuring the irrelevant (Link)

Things I'm pretty sure about (Link) 

The Big Mac index shows currencies are very cheap against the dollar (Link)

Q&A with Daniel Crosby, the author of "The Behavioral Investor" book (Link) 

Other

CPP ads on one of the most expensive TV spots for Canadian TV. (Link)

With an aging population spurring an ongoing economic revival, Japan is proving demographics aren't always destiny $(Link)

We're hiring! We understand that extraordinary human ability is a scarce resource in high demand. If you know someone who would be interested in joining our investment team, please refer them to the posting above. (Link)

Charts

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Forecasting - the attempt to predict the unknowable by measuring the irrelevant (Link)
"The most important thing to know to accurately forecast future stock prices is what mood investors will be in in the future. Will people be optimistic, and willing to pay a high price for stocks? Or will they be “bummed out” and unwilling to do so? You have to know that. It’s the most important variable when predicating future stock returns. And it’s unknowable. So why do we bother with the forecasting game? Market strategists would say there is a demand for price targets and the like and that they have little choice but to cater to this demand. As for those forecasters who make especially eye-catching predictions, they know inaccurate forecasts will quickly be forgotten, while the occasionally correct one can be milked for years."

We're hiring! (Link)
We understand that extraordinary human ability is a scarce resource in high demand. If you know someone who would be interested in joining our investment team, please refer them to the posting above.

Friday humour 

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Q&A with Daniel Crosby, the author of "The Behavioral Investor" book (Link) 
"I, along with many others in the industry, now believe the primary benefit of financial advice to be behavioral. The tricky thing about good financial decision-making is that education is a fairly weak predictor of behavior. There are all sorts of educational resources available to the retail investor today – blogs, white papers, all the way to robo-advisors that will automatically create a near perfect asset mix – but none of these things can prevent the panicked investor from being their own worst enemy. I liken it to nutritional information which is widely available and widely ignored. In fact, some research suggests that restaurants that list calorie counts on the menu actually lead diners to eat slightly *more* than those that don’t list them. Investors do not need an advisor to tell them how to invest; a long weekend of reading the right books would point the average investor in a good direction that could be implemented simply and cheaply. However, that very same investor is highly unlikely to stick with that plan through thick and thin, which is the only thing that matters in the long-term."

From the EdgePoint archives....June 24, 2016  - The pros of hiring a pro (Link) 

Syd and Montana's griddle greatness 

When Syd and Montana made pancakes to celebrate their anniversary at EdgePoint a few weeks ago, they weren't the only ones flipping! We all flipped out over the gooey, chocolate-y decadence. A hot pancake would be perfect on this chilly Thursday morning...

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50 reasons why we don't invest for the long-term (Link) 
"Adopting a genuinely long-term approach to investing is one of the few genuine edges or advantages any investor can hope to exploit.  Unfortunately, it can feel as if everything is conspiring against our attempts to benefit from it – but that does not mean we should not try."

1: Because it is boring.
2: Because markets are random and it’s difficult to accept.
3: Because of short-term benchmark comparisons.
4: Because we are remunerated based on annual performance.
5: Because of quarterly risk and performance reviews.
6: Because there is always something/somebody performing better.
7: Because we watch financial news.
8: Because we think we can time markets.
....

Buy Canada?

Diversification? (Link) 

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Things I'm pretty sure about (Link) 
"Market behaviors feed on themselves. We all see the same market price and read the same commentary, the latter of which acts like gasoline on the flames of herd behavior. So investing misbehaviours can snowball. The consequence is that markets rarely sit at “average” valuations; they spend far more time in areas that look historically cheap or historically crazy. Underestimating adaptation and reversion to the mean is the greatest cause of pessimism. If you can stick around long enough to stomach the adaptations, optimism should virtually always the default assumption."

The Big Mac index shows currencies are very cheap against the dollar (Link)
"The Big Mac index is based on the theory of purchasing-power parity (PPP), which states that currencies should adjust until the price of an identical basket of goods—or in this case, a Big Mac—costs the same everywhere. By this metric most exchange rates are well off the mark. In Russia, for example, a Big Mac costs 110 roubles ($1.65), compared with $5.58 in America.  That suggests the rouble is undervalued by 70% against the greenback."




With an aging population spurring an ongoing economic revival, Japan is proving demographics aren't always destiny $(Link)
"Japan is refreshing its labor force from three often-neglected pools: the elderly, women and foreigners. This offers important lessons for the many other countries that now, or will soon, face similar demographic pressures."