This week's interesting finds

July 20, 2019

How can you shop and save your clients some money?

Check out our EdgePoint store! Purchase some great EdgePoint/Cymbria swag and help lower investors’ fees. All profits from this initiative will go towards lowering Cymbria’s operating costs and the Funds’ MERs.

How the investment landscape has changed 
From Jeffries Equities White Paper, 2019 “When the Market Moves the Market”

The ever-changing landscape in the investment industry is news to no one. Here are some charts and tables reviewing some of the major shifts.

Over the last decade, the proportion of equity trading conducted by different types of market participants has changed considerably. Bank principal trading (in which a bank acts on its own account, taking risk), has cratered by 80% - from more than 12% of trading to about 2.5%.  Different hedge fund strategies have traded places, with quant activity nearly doubling to more than 25% of activity.

Over the last 20 years, the number of public companies in the United States has dropped by nearly 50%. This has happened at exactly the same time as a new form of equity-linked security has exploded: the ETF. So, while single name stocks have cratered, the number of ways to express broader investment views has increased.

Fidelity notes that ETFs now account for more than 18% of US equity trading volume. 43 ETF trading can exceed 2 billion shares per day. 


The decline in the number of individual publicly traded companies and the explosive growth and use of passive products have resulted in investors’ ability to make broader, cheaper, more thematic bets, but have decreased the potential universe of single names in their portfolios. With nearly 400 sector and other narrowly based ETFs, active managers have more tools at their disposal for expressing their views, and for expressing them more cheaply than ever before.

The Price of Admission

Would you miss out on some of the upsides if it means you can avoid the downturn? Here is an experiment. 

Imagine that there is a market “genie” who approaches you every December 31st and only tells you what the maximum intra-year decline will be for the upcoming year. This genie doesn’t tell you what next year’s return will be or anything else. 

How much would the market have to decline at its worst point in the next year for you to forgo investing in stocks (S&P 500) to invest in bonds (5-Year U.S. Treasuries)?

Would it be a decline of 5%, 10% or maybe 20%? Since 1950, the average maximum intra-year drawdown for the S&P 500 has been 13.5%.

Let’s say you tell the Genie that you will avoid stocks in any year when there was a drawdown of 5% or more. Here is how you did since 1950 vs a Buy & Hold investor. 

By 2018 you would have 90% less money than Buy & Hold investor. This is simply because you would be out of the market to often – this strategy would be invested in Treasuries in all but 6 years since 1950 or 91% of the time.  

The ‘Avoid Drawdowns’ strategy doesn’t start to outperform until you can avoid drawdowns greater than 10%. Avoiding any year with 10% declines or more will mean you are invested only 46% of the years.

Nobody has a magic genie that will tell them when to avoid declines in the stock market. You have to experience some downside to earn your upside. This is the price of admission. As Charlie Munger once said, “If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century, you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get”

EdgePoint at a TFC game. It was a great night and our team won 3 -1!

This week's interesting finds

July 13, 2019

Stranded Nation – A documentary that every Canadian should watch

A 68-minute documentary explaining just how much oil and gas resources are integrated into Canadian society. The creator of this documentary, Heidi McKillop, went from growing up in New Brunswick, studying social work and opposing hydraulic fracturing, to making her way west and eventually working for an oil firm in Calgary.

McKillop’s goal is to inform people across Canada, particularly young people, of the importance of the Canadian oil and gas sector and the benefits it provides to all Canadians.


Banks’ cash return yield

Hard to believe the payout yield is 11% for the group a decade after the financial crisis.

A database that details the history of nearly every major North American company


Investment biases

Our investment bias shows up in many different forms but often where we live can influence the way we allocate our assets. For example, investors in the southeastern US on average allocate 14% more of their portfolios to energy-related companies than the national average. This isn’t a surprise as states like Texas and Louisiana are 2 of the 3 largest oil and gas producers in the US. It's important for investors to be aware of these biases and employ a disciplined investment plan that can help minimize them.

This week's interesting finds

July 6, 2019

Our Q2 commentaries are available now

This quarter, portfolio manager Tye Bousada explains the most valuable thing about EdgePoint — its investment approach, while Frank Mullen talks about the futility of trying to predict interest rates and suggests what to do instead.

Fast food working to become faster

McDonald’s is testing voice-recognition software at a drive-through in suburban Chicago. Inside the restaurant, a robot also tosses chicken, fish, and fries into vats of oil. Both technologies are meant to shorten customer wait times. McDonald’s is working to speed up service as it faces tough competition from smaller burger chains and declining fast-food traffic in the U.S. overall.

Competitors are also investing in technology. Last year Domino’s Pizza Inc. began testing voice recognition to take orders over the phone. Other chains are testing self-operating ovens and dishwashers, along with robots that flip burgers and perform other rote tasks.

Technology increases comfort for farmers

For some Midwestern farmers, springtime now means two things: Netflix and farm.

Thanks to GPS-enabled guidance systems and high-speed planters, U.S. farmers can plant and harvest fields faster than ever before, often with minimal human involvement. Self-steering tractors and combines free farmers to monitor seeding rates, haggle on the phone over crop sales, watch the weather—and get bored.

Expanding cellular signal coverage and streaming video apps have helped some farmers to convert these mobile offices into after-hours living rooms on wheels, complete with climate control, leather upholstery and built-in refrigerators. In recent years, massage seats have become available.


One farmer said he didn’t have a Netflix subscription until he started farming full-time about seven years ago. Since his tractor’s already outfitted with wireless-enabled devices and monitors, he said, “it’s too tempting not to”.

Measuring bubbles throughout history

Most Speculative Bubble: If we had to choose the greatest bubble in history based on how speculative it was, the Tulip mania of 1637 takes the cake. No bubble in history has had an object of such low utility (a flower) sell for such a high price.

Largest Bubble: When it comes to BIG bubbles, the U.S. housing bubble of 2007 is the biggest on our list in terms of size. The U.S. residential housing market declined in value from $29.2 trillion at its peak to $22.7 trillion when it hit bottom in 2012.  That is a decline of $6.5 trillion in the span of half a decade.

The greatest bubble of all time: At the peak, the Japanese imperial palace was considered to be worth more than all the real estate in California and the Japanese stock market had grown 10x over the prior decade. 30 years after the peak, both Japanese stocks and residential real estate have yet to recover.

Buy and hold: Simple, NOT Easy

The idea of buying and holding high-quality businesses over a long period of time is simple. Everyone knows that, and even those who don’t practice it appreciate that this works with most high-quality businesses as history has proven time and again.

It’s important to remember that the action of not doing anything over such a long period of time involves hundreds of decisions over months and years that lead to such inaction.

Businesses change, and so do emotions, the behaviours of other investors around us, and conditions in the stock market and our portfolios. And that’s why sitting on stocks – the ones that remain of high quality – is not as simple as it sounds, and why patience is one of the most important yet difficult skills one must cultivate while investing in the stock market.

A pianist's advice

Strategy #1: Avoid Flow. Do What Does Not Come Easy.
“The mistake most weak pianists make is playing, not practicing. If you walk into a music hall at a local university, you’ll hear people ‘playing’ by running through their pieces. This is a huge mistake. Strong pianists drill the most difficult parts of their music, rarely, if ever playing through their pieces in entirety.”

Strategy #2: To Master a Skill, Master Something Harder.
“Strong pianists find clever ways to ‘complicate’ the difficult parts of their music. If we have a problem playing something with clarity, we complicate by playing the passage with alternating accent patterns. If we have problems with speed, we confound the rhythms.”

Strategy #3: Systematically Eliminate Weakness.
“Strong pianists know our weaknesses and use them to create strength. I have sharp ears, but I am not as in touch with the physical component of piano playing. So, I practice on a mute keyboard.”

Strategy #4: Create Beauty, Don’t Avoid Ugliness.
“Weak pianists make music a reactive task, not a creative task. They start, and react to their performance, fixing problems as they go along. Strong pianists, on the other hand, have an image of what a perfect performance should be like that includes all of the relevant senses. Before we sit down, we know what the piece needs to feel, sound, and even look like in excruciating detail. In performance, weak pianists try to reactively move away from mistakes, while strong pianists move towards a perfect mental image.”

Nick’s and Frank’s anniversaries! 

This week's interesting finds

June 29, 2019

Next will be net store closures? Real estate implications 

• The rise of online sales has triggered a re-allocation of capital from retailers
• Walmart, for instance, is only selectively expanding their network
• The company, however, is investing more in IT, supply chain and innovation
• Interestingly, it is also investing more to upgrade and transform its existing stores

Banks’ cash return yield

Most predictions turn out to be wrong.

In 1967, the Keuffel & Esser Co. commissioned a study of the future. Keuffel & Esser was a leading manufacturer of slide rules and was thought to be ahead of the curve in innovation. Their "visionary" study ended up being a huge dud, with most of their predictions being completely wrong. One thing they failed to predict was that within five years the company's own slide rule would be obsolete, falling victim to the electronic calculator. Keuffel & Esser would cease production only a few years later.

Steven Schnaars wrote a book “Megamistakes” that goes over the story of Keuffel & Esser and countless other examples of predictions that turned out to be very wrong. His message in the book was simple. Don’t be fooled by prevailing opinion, and don’t extend trend lines into the future. Instead, challenge your assumption and think for yourself. Work hard to distinguish fad from growth markets.

Today's low interest rates mean the risk is on and caution is old-fashioned. Companies selling at 20 times revenues instead of earnings (Beyond Meat is at 43 times its 2019 sales forecast, and Tableau Software recently sold for 16 times its 2018 revenue.) How long will this last?

Failed bond yield predictions

The makeup of the world’s largest companies from 1999 to 2019

Brand loyalty and online shopping trends: Shopify’s State of Commerce Report

• 73% of North American respondents agree that once they find a product or brand they like they stick with it. 
• 36% of North American respondents agree that they often buy things to cheer themselves up. 
• Americans shop most frequently, Germans the fastest, and Japanese shoppers are the biggest spenders. 
• November is the most popular shopping time worldwide. This is likely due to big retail events like Black Friday, Cyber Monday, Singles Day and pre-holiday shopping.

Investment Placebo Effect

• The placebo effect is both fascinating and real, with compelling evidence of its impact in both a medical and marketing context. What about in the investment context?
• An investment placebo is an activity or action taken to make us feel better when there is no evidence that it will have a positive impact. Often investors feel better over the short-term as they satisfy that urge to act and do something when the market makes its volatile swings. In the investment industry, there is a strong preference for action over inaction amidst the incessant news flow, erratic price fluctuations and obsession with the latest headline risk, the urge to do something can be irresistible. What if things go wrong and I have done nothing? How can I just sit here when all of this is happening?
• While placebos in other areas can actually deliver a positive end outcome, in investing these activities do not assist in meeting our end objectives and in fact, often come at a long term cost. 

Announcing the winner of the EdgePoint Photo Contest, Part III-Even Furrier: Olivia (and Winston)

This week's interesting finds

June 22, 2019

Check out our Investment team’s latest summertime reading & listening picks (Here) 


Early stages...but the value in Japan will start to get recognized if this continues

The Japanese stock market is one of the most inefficient in the world, largely because corporate governance has been bad for a very long time. But if the corporate governance reforms stay on the right track the value in Japan could start to get recognized.

Management and investors are slowly embracing dialogue as seen by the increase in the number of shareholder proposals at shareholder meetings. Another positive sign is the increase in the number of foreign activist funds in Japan which can push to continue corporate governance reforms.

Stability is being highly prized

The market is willing to pay higher prices for large-cap companies with the highest fundamental stability scores. Fundamental stability score is a measure of the volatility of the key financial metrics.

Advising professional athletes
Finding real financial advice can be difficult for professional athletes as many “yes men” only associate with these athletes for self-serving reasons.

One guy who seems to be doing right by his clients is a former Arizona college basketball player Joe Mclean. Joe manages the wealth of professional athletes, including big names like Klay Thompson. McLean’s main goal is to help his athletes achieve long-term financial stability and avoid the financial pitfalls many athletes with a lot of money fall into.

To retain his services, each player must agree to put aside at least 60% of every dollar he earns, with the rate climbing to 80% if he’s fortunate enough to land a long-term deal. Or they’re gone. Mr. McLean has fired two clients for ignoring the policy. He hates it, because “in my mind, it means I’m giving up on them,” he said. “But they didn’t buy into it.”

None of us will ever have to worry about how to make our 9-figure contract last a lifetime, but there are a few lessons from Joe McLean’s story that apply more broadly to financial management.

Making your money last
In the US, the average 65-year-old has enough savings to cover about 9.7 years of retirement income (8.3 years for men and 10.9. years for women). In Japan, this number jumps to 15 years for men and almost 20 years for women.

Japanese workers are good savers so why do they have the largest gap? First, they tend to live much longer than the rest of the world and second, they avoid return-seeking assets, so the amount they do save ultimately produces few gains over time.

GE's new CEO, Larry Culp is attempting the largest "turnaround" in American history
For the first time in its 126-year history, an outsider will lead GE to attempt to clean up a mess that took decades to create. Larry Culp is a proven leader and mostly known for transforming Danaher Corp. from an industrial manufacturer into a science and technology firm. Culp took the helm at Danaher at the age of 37 in 2001 and quintupled the company’s revenue over the next 14 years.

He now faces a monumental task to restore GE to its former greatness. Since taking over in October 2018 he has avoided the company’s Boston headquarters and opted for frequent visits to GE units around the world. Gary Wiesner, who runs GE’s wind-turbine-blade factory in Florida, was shocked to get an email from the new CEO. Larry Culp wanted to stop in and walk the factory floors, something that hadn’t been done by a GE executive in over 18 years.

Raptors and Noodle champions 

This week's interesting finds

June 15, 2019

What share of public companies have interest coverage below parity in China?

It's estimated that 15% of Chinese bank loans will be non-performing in the next credit cycle. This would be worse than any previous US crisis but on par with the late 1990s Asian debt crisis in Korea.

The diversity of the Chinese customer base

Chinese exports to all destinations are up 6% YTD in 2019 with exports to the U.S. down about 5%. The US is only 1/7th of all Chinese exports allowing overall Chinese export growth to hold up.

Howard Marks Memo: This Time It's Different

Howard Marks rarely attends a meeting these days where someone doesn’t propose a new theory of why this market cycle could be different. Mark’s latest memo broaches this very topic where he outlines nine of these hypotheses that have become far too prevalent among investors:

• There doesn’t have to be a recession
• Continuous quantitative easing can lead to permanent prosperity
• Federal deficits can grow substantially larger without becoming problematic
• The national debt isn’t worrisome
• We can have economic strength without inflation
• Interest rates can remain “lower for longer”
• The inverted yield curve needn’t have negative implications
• Companies and stocks can thrive even in the absence of profits
• Growth investing can continue to outperform value investing in perpetuity

What do all nine of these theories have in common? That’s easy: they’re optimistic. Each one provides an explanation of why things should go well in the future, in ways that didn’t always go well in the past. Mark argues that it should be very worrisome if these are the guiding principles of investors today. It’s important to keep up with current developments and those that will shape the future, but it’s also important to not unlearn the lessons of the past.

How elite NBA athletes handle pressure

From Larry Bird's nausea to Stephen Curry's butterflies, throughout history, the NBA’s brightest stars have had to manage and learn from pressure in a variety of ways.  The most elite basketball players are not immune to stress but instead mastered how to channel it, and in some cases thrived from it.

The truly great ones know there's pressure, so they don't consider consequences. If they did, they'd cave all the time. If you succumb to those consequences, you will never reach your potential. Just like with refining your shooting stroke, the more reps under pressure and stress, the more your body will learn to cope.

The second half of humanity is joining the internet

Today, over 50% of the planet’s population is online, a mere quarter of a century after the web first took off among tech-savvy types in the West. Most of the recent growth in users has come from the emerging world where 726 million people came online in the last 3 years. Countries like China are still growing fast, but much of the rise is coming from poorer places, notably India and Africa.

As these countries come online businesses now have access to a vast pool of new customers. The one challenge here is that most of these new users are too poor to spend very much.

For example, the average Facebook user in Asia generates only $11 of advertising revenue a year, compared with $112 for a North American user. The combined revenue of all the internet firms in emerging markets (excluding China) is perhaps $100 billion a year. That is about the same as Comcast, America’s 31st-biggest listed firm by sales.

Flocking climbers and investors

Climbers are flocking to Mount Everest, making for increasingly dangerous climbing conditions as inexperienced climbers crowd the peak.  In 2019 at least 11 people have been killed on the mountain, which is the highest death toll since 2015. Why the sudden rush? People didn’t suddenly become braver and the mountain didn’t become less steep.  What happened was a slow but steady amount of progress in the technology and equipment needed to make the climb, thus opening the way for more and more people to attempt it.

Climbing Mount Everest still has cache, of course, but compared to ten years ago? Or 30 years ago? Not really. More and more are reaching the peak every year.

We see this phenomenon play out in the investment markets all the time. The first people to discover something exploitable and profitable are treated better than the subsequent people that come rushing in. This is what crowds do to opportunities. No matter how good you are, if what you’re doing is very profitable, others will copy you and will be “good enough” to impinge on your game. Which is why the best investments are those with moats – companies that are so good at something that their abilities and assets literally act as a barrier to those who would follow and imitate.

EdgePointers celebrate the Toronto Raptors' unbelievable NBA championship!

Weekend catch-up

We heard your feedback and we don’t want to clutter your inboxes. We’ll proceed with posting our collection of reads on Inside Edge on a weekly basis. On Saturday mornings, pour yourself a mug of coffee, get comfortable and enjoy a few of the most interesting pieces that we came across during the week.

Interview insights from Graham & Doddsville quarterly issue 

Yen Liow discusses compounding and durable businesses. 
Compounding is the most important framework in investing. Your business model, portfolio and structure should be built around it. You must find durable compounders which are businesses with a substantial and repeatable advantage that allows them to grow more briskly than the broader market.

How do you find these durable compounders? Many believe that they need the largest possible investment universe to find opportunities when in fact the opposite is true. You need to find a rich vein of repeatable inefficiency in a finite universe that you can focus on, so when price dislocation occurs you can exploit it.

Most of the market will revert to the mean over time as excess profit gets eroded away by competition. Focusing on the small percentage of stocks that resist the mean-reversion forces is where you should spend all our time and resources. These are called durable growth businesses. Durable growth businesses are often more predictable businesses because history often holds when faced with new dynamics. Businesses or industries where there is a loose link between history and the future are often defined as lower quality, as your ability to find repeatable situations is low. 

Our job is to find situations where history does hold and to constantly ensure that new dynamics and threats do not jeopardize the durability of that moat. When the moat breaks down, our ability to predict breaks down.

When your ability to predict breaks down, it is hard to know what to do with volatility. Is it an opportunity or is it risk? When your portfolio is highly durable and volatility hits, at worst you know to hold through, and at best you know to exploit it.

Q&A with Howard Marks

What are qualitative measures you use to take the temperature of the market? 
You want to assess the emotion that is prevalent in the market. When investor optimism is high, assets tend to sell above their intrinsic value.

When people are more concerned about FOMO then the fear of losing money then you must assume that prices will be high relative to intrinsic value.

When bullish prognosticators are in high demand on TV, when bullish books are written, when financial articles tout the last great time to buy before things go to the moon or when first-time fund managers easily raise funds. All these things are strong qualitative indicators of a hot market and that investor emotion is running high.

Timing the market is impossible, so to what extent can you predict market cycles if the timing is unknown?

The pattern of a cycle can be understood. We can have a sense of when we are high in a cycle or low in a cycle. We can have a sense that something will happen, but we will never know when.

If we believe a security is overvalued, we will either underweight it or eliminate it entirely from the portfolio. When a security is overvalued in our estimation it is more likely to go down then up, but we will never know when it will go down.

If overpriced meant that a stock will go down tomorrow, then nothing would ever become overpriced. In the real world, we see things go from overpriced to more overpriced to maximally overpriced. That’s how we get bubbles which proves that prices are not self-correcting.

We sometimes understand what’s going on in the market and understand its implications for the future, but we never know when these implications will take effect.

Returns are almost never average
It seems rational to assume that stock and bond market returns would be clustered around the average with a few outliers. If we go back to 1926 we clearly see this is not the case. The average return for stocks during the 92-year period from 1926 to 2017 was 10.3%. How many times during those 92 years do you think the annual return fell between 8% and 12%? Incredibly, that only happened 6 times based on the chart below.

Why do investors underestimate their vulnerability to bias?
Below are five (of many) possible explanations:
Overconfidence: Our belief that we are better than others is probably the most obvious explanation; this issue is exacerbated for professional investors as there is undoubtedly a selection bias into fund management roles toward those with exaggerated levels of confidence in their own capabilities.

Cognitive dissonance: Whilst the overconfidence explanation focuses on how we perceive ourselves relative to others, cognitive dissonance is focused on how we judge ourselves internally.

Too complex / too difficult: It may simply be a case that dealing with personal biases is too difficult.

Personal narratives: When objectively and dispassionately observing another person’s investment decisions it is often easy to identify the potential biases that are likely to be influencing their judgment.

The sales message: Perhaps the reticence of professional investors to engage with their own bias is related to a general reluctance to acknowledge mistakes.


None of these potential justifications are a reasonable excuse for understating our own behavioural limitations or failing to actively mitigate them. Given how few genuine edges are available in the investment industry, it is baffling that this one remains widely neglected.

What Buffett’s short-termism critics don’t tell you 

There are still critics today claiming Buffett's old-school style won't last in today's “new era” of investing and that Mr. Buffett has lost his edge.

In today's climate of short-termism, the demand for immediate results makes it hard to preach Buffett's long-term style of investing. Lagging the S&P 500 Index in recent years just gives those pundits something to talk about but their arguments don’t hold any truth when evaluating Berkshire’s performance over the longer periods. If you had purchased $100 worth of Buffett’s stock in 1987 it would be worth more than $8,000 today. The same investment in an ETF tracking the S&P 500 Index would have earned you $1,700. Almost 80% less in 32 years.

Many compare Buffett's performance against bull market cycles and willingly leave out how Buffett performed during bear markets. The graph below shows that Buffett outperformed the S&P 500 Index in all of the last three bear-bull market cycles.  Berkshire lost only 41% in the 2007–2009 financial crisis, while the index fell 51%. In the 2000–2002 dot-com debacle, when the S&P 500 Index collapsed 45%, Buffett pulled off a gain of 28%. Without loading up on tech stocks, his portfolio outperformed.

Jeff Bezos - Big ideas

What we’re really focused on is thinking long-term, putting the customer at the center of our universe and inventing. Those are the three big ideas to think long-term because a lot of invention doesn’t work. If you’re going to invent, it means you’re going to experiment, you have to think long-term.

We don’t take a position on whether our way is the right way, we just claim it’s our way. Bezos quotes one of Warren Buffett's sayings, “You can hold a ballet and that can be successful and you can hold a rock concert and that can be successful. Just don’t hold a ballet and advertise it as a rock concert. You need to be clear with all of your stakeholders, are you holding a ballet or are you holding a rock concert and then people get to self-select in.” 


You can’t skip steps, you have to put one foot in front of the other, things take time, there are no shortcuts but you want to do those steps with passion and ferocity.

From the Bond desk: 
New all-time low in 10-year German bund yields at -0.20%