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Good morning. Two more days till chocolate is on sale!


Dividends and buybacks - Fact and Fiction by Aswath Damodaran (Link)
I believe that the shift to buybacks reflects fundamental shifts in competition and earnings risk, but I don't wear rose colored glasses, when looking at the phenomenon. There are clearly some firms that are buying back stock, when they clearly should not be, paying out cash that could be better used on paying down debt, especially in the aftermath of the reduction of tax benefits of debt, or taking investments that can generate returns that exceed their hurdle rates. You may consider me naive, but I believe that the market, while it may be fooled for the moment, will catch on and punish these firms. Also, the data suggests that these bad players are more the exception than the rule, and banning all buybacks or writing in restrictions on buybacks for all companies strikes me as overkill, especially since the promised benefits of higher capital investment and wages are likely to be illusory or transitory. If you are tempted to back these restrictions, because you believe they are well intention-ed, it is worth remembering that history is full of well intention-ed legislation delivering perverse results. 

Share buybacks
There is an argument that stock buybacks reduce the amount companies invest.  This chart shows the actual investments done by companies dating back to the 1940s. It's not obvious there is a problem.

The chart below adds "intellectual property" to the mix.  The world has changed and it's weird to not add spending on life-saving drugs or new apps and software that improves your life.  There is no obvious problem here. 

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Good morning!

Why do we make stupid investment decisions? (Link)
Stupidity is overlooking or dismissing conspicuously crucial information. Here are seven factors which can create situations where stupidity can flourish:

- Outside circle of competence 
- Stress
- Rushing or urgency
- Outcome fixation
- Information overload
- Group/social cohesion
- Presence of authority
- Overconfidence/ego
- External justification

Why time horizon works? (Link)
Two things drive markets over time:
- Earnings, including dividends
- Changes in how much investors are willing to pay for those earnings (valuation multiples)

When earnings compound but changes in valuation multiples don’t, the importance of the latter to your lifetime returns diminishes over time. Which is great, because changes in valuation multiples are the most unpredictable part of investing. Assuming earnings compound over time – an assumption, but a reasonable one – here’s what happens when valuation multiples go up or down by, say, 20% in a given year:

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Good Morning! Here is what piqued our curiosity this week:
 
1. Shopping malls aren't dead yet (Link)
71% of people with household incomes under $50,000 prefer to buy things in a physical store, compared with 54% of people with household incomes of $100,000 or more.  Price matters to consumers.  For 39% of people, price beats out quality, uniqueness, sustainability and convenience as the factor that contributes the most to their purchasing decisions.

2. The death of clothing (Link)
Who needs fashion these days when you can express yourself through social media? Why buy that pricey new dress when you could fund a weekend getaway instead? Apparel has simply lost its appeal. Apparel is being displaced by travel, eating out and activities—what’s routinely lumped together as “experiences”—which have grown to 18 percent of purchases. Technology alone, including data charges and media content, accounts for 3.4 percent of spending. That now tops all clothing and footwear expenditures.

3. The benchmarks we choose determine whether we win or lose (Link)
We tend to measure ourselves against our latest peak or valley. If we have a recent downturn, we’re sad – even if we are doing better overall. A recent uptick creates happiness, even if our trendlines are down overall. It’s better to think of ourselves as a long-hold happiness stock. This helps us get a 10,000-foot view of how we are doing over the long run. Otherwise, we watch the stock ticker go up and down, and our happiness goes up and down with it. This ticker-watching causes us to pick unproductive benchmarks. Instead of measuring ourselves against our progress toward a goal, looking toward a long-term horizon, the ticker is all we can see.

4. Superstocks (Link)  
A study has shown that between 1926 and 2016, around $35 trillion of wealth was created by 25’300 stocks listed in the US. Yet a tiny group of 90 stocks (just 0.3% of the total) collectively generated over half of the stock market’s net gains over the 90-year period. Digging deeper, just five firms (namely Exxon Mobil, Apple, Microsoft, GE and IBM) accounted for as much as 10% of the total wealth creation, each generating over half a trillion dollars in shareholder wealth.

5. How retail investor behaviour changed when a major mutual fund platform in China upgraded their smartphone app to allow instant trading from anywhere. (Link)
“Going mobile” raises investor attention and trading volume through aggravating investors’ over-confidence and self-control problems. The mobile app significantly boosts flow volatility and makes investor flow more sensitive to short-term fund returns and market sentiment. As a result, fund performance suffers due to heightened liquidity costs. The funds more exposed to the shock see a greater decline in abnormal returns, attributed to incremental fund flows through the trading app.

Charts

Saying goodbye to Heather with delicious hot chocolate as she goes on maternity leave!

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Large-cap stock correlations

Why are expectations for 2019 earnings growth so much higher than other regions? Another round of downgrades for European equities?

Celebrating Chinese New Year's!  Don't recognize the friendly face on the far right?
Adam is the newest EdgePointer joining our Compliance team. Judy & Sayuri are thrilled! 

Get the Edge - Click here to view an archive of investment education, daily musings, book recommendations and more.
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Good Morning! Here is what piqued our curiosity this week:
 
1. Howard Marks: America should be worried about the rising tide of anti-capitalism (Link)
"What I'd like to do is get some of the progressive politicians and the less-capitalist young people in a room and ask them a simple question: To what do you attribute America's preeminence in the world over the last hundred years and the generally superior living standards of its people? In short, what has been behind the United States' progress to the top of the heap? What's absolutely clear to me is what it's not: that we're superior people, smarter, better, more virtuous or more deserving.  Instead, I think it's our democracy, our freedoms, and our less rigid social and financial structures.  But, extremely importantly, I also think there have been enormous contributions from capitalism/free enterprise, the free-market system, economic incentives, private ownership of property, individual economic opportunity and the very limited involvement of government in the economy.

2. We are now up to 25% of Albertans that want to separate from Canada $(Link)
"The province’s future promises to be one of barely contained civil war with its fellow Canadians. If $13 billion a year in payola can’t appease Quebec, the cause is probably beyond salvaging. A Donald Trump re-election could invite talk of becoming the 51st U.S. state. If Obama-like pipeline opponents are returned to power in Washington in 2020, the squeeze will be even worse. Then what? A weak state with enormous fossil energy resources caught in the West’s culture wars over climate and energy? The cash cow of Canada up for grabs? We could spin lots of scenarios."

3. What do the oil sands look like? You'd be surprised (Link)

4. Oil bull markets past & present, and yellow jackets (Link)
Interesting comments on probable overestimation of electrical vehicle penetration, sunspot impacts and Saudi reserves.

5. Hustle culture $(Link)
"Millennials are just desperately striving to meet their own high expectations. An entire generation was raised to expect that good grades and extracurricular over achievement would reward them with fulfilling jobs that feed their passions. Instead, they wound up with precarious, meaningless work and a mountain of student loan debt. And so posing as a rise-and-grinder, lusty for Monday mornings, starts to make sense as a defense mechanism."

Charts & graphs 

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Has Trudeau destroyed Canada's resource future? (Link)


200 years of stock market history (Link) 


The basis of technical analysis (Link) 

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

Investing

Don't have a crystal ball? Base rates are the next best thing (Link)  

CPP takes bigger bite from Canadians (Link)

Putting in the reps (Link)

Interview with Bob Rodriguez, the former CEO of First Pacific Advisors (Link) 

Risk is where you're not looking (Link)

Why we look for scapegoats after a market decline (Link)

Seth Klarman offers a warning. Davos should listen. (Link) 

The rich are getting richer? Maybe, but they're also getting younger! (Link)

Businesses

How open-source software took over the world (Link)

Survival is the ultimate performance measure of a business (Link)

How to invest for the long-term in a turbulent market (Link) 

The world's biggest brands want you to refill your orange juice and deodorant $(Link)

Charts