Staying invested

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Fees vs. Fines (Link)
Is market volatility a fee or a fine? Fees are something you pay for admission to get something worthwhile in return. Fines are punishment for doing something wrong. It sounds trivial, but thinking of volatility or drawdowns as fees instead of fines is an important part of developing the kind of mindset that lets you stick around long enough for compounding to work.

A reason market declines hurt and scare so many investors off is because they think of them as fines. The natural response for anyone who watches their wealth decline is to avoid future fines or market declines.

But if you view volatility as a fee, things look different. Returns are never free. They demand you pay a price, like any other product. And since market returns can be not just great but sensational over time, the fee is high. Declines, crashes, panics, manias, recessions, depressions.

The trick is convincing yourself that the fee is worth it. That, is the only way to deal with volatility; not just putting up with it, but realizing that it’s an admission fee worth paying.

Easy money

Since 2009 there have been numerous headlines telling us that the easy money had been made. Avoiding this market noise and staying invested through the drawdowns was hard. Only in hindsight does it look easy.

CEO insights

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Jamie Dimon's 2018 letter to shareholders (Link)
Jamie Dimon released his annual letter to shareholders sharing his insights on some critical issues currently churning in the United States. Jamie speaks up for capitalism, stock buybacks and big business.

"There is no question that capitalism has been the most successful economic system the world has ever seen. It has helped lift billions of people out of poverty, and it has helped enhance the wealth, health and education of people around the world. Capitalism enables competition, innovation and choice."

"We much prefer to use our capital to grow than to buy back stock. We believe buying back stock should be considered only when either we cannot invest (sometimes as a result of regulatory policies) or we are generating excess capital that we do not expect to use in the next few years. Buybacks should not be done at the expense of investing appropriately in our company."

The rise in internal collaboration at Berkshire $(Link) 

Executives at Berkshire subsidiary companies now gather regularly to share strategies and best practices.

“Even though we’re in different industries and have different business models, there’s so much that connects us,” said Mary Rhinehart, CEO of Berkshire’s building-products maker Johns Manville. “Why wouldn’t we take advantage of the talent across the Berkshire Hathaway organization?”

Buffet explains how collaboration among Berkshire companies is largely voluntary. “The best cooperation is voluntary. That’s not a change in the culture, though. It’s sort of a sign of the culture. It really is people thinking like owners and exercising, in a sense, their independence.”

Weekend catch-up

Your weekend edge - catch up with this week's readings:

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This $358 billion pension fund bets on private equity (Link)
With everyone diving in to private equity, future returns may not be as attractive as in the past. Yet the $358 billion California Public Employees’ Retirement system fund (CalPERS) believes it has a competitive advantage. Today, CalPERS has nearly $28 billion, or 8% of assets, in private equity holdings and over the last 10 years, private equity was CalPERS best-performing asset, returning an average of 9% annually, compared with 6.7% on public stocks. CalPERS now believes it may be able to continue this success and on March 18 voted to funnel up to $20 billion more into private equity over the next 10 years.

CalPERS plans to partner with elite private-equity managers, that will make them their sole client. That way, CalPERS would have better control and more transparency to make better investment decisions. The chief investment officer (CIO) of CalPERS believes more private equity is needed to increase the fund's probability of success.

Private equity firms are flocking to Mexico? (Link)
In January of 2018, Mexican regulators eased restrictions on how Mexican pension funds invest their assets. This change allowed foreign private equity managers to tap into the $179 billion worth of pension fund assets for the first time in Mexico. Over the last year many of the world’s top private equity managers have quietly raised billions of dollars from Mexican pension funds.

Well-known names like BlackRock was one of the first foreign asset managers to expand into Mexico, raising $615 million for two funds. Blackstone Group has now also raised $695 million from Mexican pension funds for its first two local private equity funds.

The majority of private equity sales are now to other private equity firms (SBO)

German house prices are up only 8% (cumulative) since 1970

Germany’s mortgage market saw little growth in the past 18 years.
Germany's mortgage market was equivalent to 40.5% of GDP in 2017. This is not surprising as Germany has one of the lowest home ownership rates in Western Europe at 51.9%.

Looking at the Canadian mortgage market we see a different story. The Canadian mortgage market expanded from 39% of GDP in 2000 to over 68% of GDP in 2017.

It is their job to entertain. It is your job to ignore (Link)
Every day media outlets try to tell investors how the markets are doing. This question commands far too much attention given how little it actually matters in most people’s day-to-day lives. Since January 17, 2018 the Dow Jones Industrial Average has seen absolute daily changes add up to over 58,000 points.

Yet over this time, the index has gained less than 100 points.

Why outperforming can be so difficult (Link)

Most assume picking the big winners is the key to outperforming the market for a stock-picker, but it’s likely more important to avoid those distressed stocks that can be so damaging to performance. Since 1980, over 320 companies were removed from the S&P 500 for business distress reasons.

How many individual U.S. common stocks outperform the S&P 500 over rolling 10-year periods? On average 43%. You can see the number got as high as 70% in the 1980s and as low as 25% in the late 1990s.

Avoiding headlines and distressed companies

Get the Edge - Click here to view an archive of investment education, daily musings, book recommendations and more.
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It is their job to entertain. It is your job to ignore (Link)
Every day media outlets try to tell investors how the markets are doing. This question commands far too much attention given how little it actually matters in most people’s day-to-day lives. Since January 17, 2018 the Dow Jones Industrial Average has seen absolute daily changes add up to over 58,000 points.

Yet over this time, the index has gained less than 100 points.

Why outperforming can be so difficult (Link)

Most assume picking the big winners is the key to outperforming the market for a stock-picker, but it’s likely more important to avoid those distressed stocks that can be so damaging to performance. Since 1980, over 320 companies were removed from the S&P 500 for business distress reasons.

How many individual U.S. common stocks outperform the S&P 500 over rolling 10-year periods? On average 43%. You can see the number got as high as 70% in the 1980s and as low as 25% in the late 1990s.

Joel and Allie celebrating their 5th work anniversaries!

Housing charts

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German house prices are up only 8% (cumulative) since 1970

Germany’s mortgage market saw little growth in the past 18 years.
Germany's mortgage market was equivalent to 40.5% of GDP in 2017. This is not surprising as Germany has one of the lowest home ownership rates in Western Europe at 51.9%.

Looking at the Canadian mortgage market we see a different story. The Canadian mortgage market expanded from 39% of GDP in 2000 to over 68% of GDP in 2017.

Private equity topics

Get the Edge - Click here to view an archive of investment education, daily musings, book recommendations and more.
_________________

This $358 billion pension fund bets on private equity (Link)
With everyone diving in to private equity, future returns may not be as attractive as in the past. Yet the $358 billion California Public Employees’ Retirement system fund (CalPERS) believes it has a competitive advantage. Today, CalPERS has nearly $28 billion, or 8% of assets, in private equity holdings and over the last 10 years, private equity was CalPERS best-performing asset, returning an average of 9% annually, compared with 6.7% on public stocks. CalPERS now believes it may be able to continue this success and on March 18 voted to funnel up to $20 billion more into private equity over the next 10 years.

CalPERS plans to partner with elite private-equity managers, that will make them their sole client. That way, CalPERS would have better control and more transparency to make better investment decisions. The chief investment officer (CIO) of CalPERS believes more private equity is needed to increase the fund's probability of success.

Private equity firms are flocking to Mexico? (Link)
In January of 2018, Mexican regulators eased restrictions on how Mexican pension funds invest their assets. This change allowed foreign private equity managers to tap into the $179 billion worth of pension fund assets for the first time in Mexico. Over the last year many of the world’s top private equity managers have quietly raised billions of dollars from Mexican pension funds.

Well-known names like BlackRock was one of the first foreign asset managers to expand into Mexico, raising $615 million for two funds. Blackstone Group has now also raised $695 million from Mexican pension funds for its first two local private equity funds.

The majority of private equity sales are now to other private equity firms (SBO)

Weekend catch up

Your weekend edge - catch up with this week's readings:

Get the Edge - Click here to view an archive of investment education, daily musings, book recommendations and more.
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Saudi oil production to peak......in just over a decade? (Link)
Saudi Arabia has produced 160 billion barrels of its 430 billion barrels of ultimate recoverable reserves, or nearly 40%. If Saudi Arabia produces at 10.5 million barrels a day, it would hit the 50% mark in approximately 14 years. After this point, according to the Hubbert curve, production would enter its period of structural decline.

Barbers are cashing in on this West Texas oil boom (Link)
A gusher of crude production has transformed the Permian Basin into America’s hottest oilfield. The Permian produced 3.9 million barrels per day as of January and could top 5 million barrels a day by 2023, surpassing Iraq. Fortunes are being made in this fracking-related gold rush, and money and workers are flooding in. Finding a haircut or grabbing a plate of good Texas barbecue is hard because demand outstrips supply. 

Pete McGarity opened Headlines Barber Shop in Odessa in 1998 and has ridden the boom-bust cycle before. In this latest boom he decided to capitalize on it and spent about $25,000 to retrofit a trailer into a custom, mobile barber shop. He drove it about an hour west to Pecos, Texas, and parked in front of the town’s only grocery store, hoping to catch oil field workers between shifts. It was an instant success. A cut costs as much as $40, more than the $25 he charged before the boom. There is usually a long waiting list, but patrons can cut the line if they pay $60, or $75 with a shave. Mr. McGarity’s barbers are raking it in making anywhere from $130,000 to $180,000 per year. He is considering investing in additional trailers to send to farther-flung towns in the oil patch and says the additional revenue may allow him to retire soon.

More global energy demand predictions (Link)
Oil demand peaking in the 2030’s, 2 billion electric cars on the road by 2050, 50% of power generation by renewables by 2035, and many other predictions which may or may not be accurate.

Behavioral coaching ranks last on what investors value most from their advisors. (Link)
On a list of 15 attributes, “helps me stay in control of my emotions” was ranked dead last by the 693 investors surveyed about what they value most from their financial advisors.

Many advisors believe that helping to control investor emotions is one the most valuable things they bring to the table making it clear that there is a disconnect between what advisors believe investors want and what investors are looking for. Could the perception of behavioral coaching’s stem from ego? Behavioral coaching has the opposite impact on advisor and client egos. As the purveyor of behavioral coaching, the advisors ego is boosted. Advisors get to be the “responsible adult” in the relationship, which feels gratifying. Conversely, the client’s ego must seemingly be checked to admit that behavioral coaching is necessary.

Gradual improvements go unnoticed (Link)
Since stocks bottomed in 2009, there have been so many potential reasons to sell, making it very easy to fill this chart in. The hard part was choosing what to leave off.

We’ve seen a thousand versions of this chart, but we haven’t seen the opposite, one that plots all of the positive developments over the last nine years. This was a much harder task as bad news makes headlines while gradual improvements go unnoticed. The fact that bad news is disseminated 10x as fast as positive news is one of the biggest reasons why it’s so difficult to just capture market returns for the average investor.

Stop feeding them cheese!
There are still over 3 million "extra" young adults living at home. If they all enter the housing market over the next 15 years, that would boost housing demand by 200 thousand per year. A reason to be secular bullish on housing. But again, the pace is likely to remain slow to moderate.

Who owns US government debt?
China, the world’s second largest economy, is the world’s biggest single country foreign owner of US government debt. Pensions & Insurers (17.4%), mutual funds & ETFs (12.7%) and the Federal Reserve (12.6%) hold the most securities outright.

Commercialized building sales continue to decline in China