This week's interesting finds

August 17, 2019

U.S. mortgage debt hits a new record
U.S. mortgage debt reached a new record in the second quarter, exceeding its 2008 peak. The steep drop in mortgage rates boosted borrowers’ incentive to take out a mortgage or refinance. Alongside higher home prices, a factor behind rising mortgage debt balances is homeowners tapping into home equity for cash when they refinance. Still, the household debt picture is different in 2019. Despite the higher debt levels, Americans appear to be keeping up with their payments.

EdgePoint bond desk: Four more rate cuts might be excessive
Core prices rose 2.2% versus a year earlier in July, the largest increase since December. Even this increase counts as tame and suggests that the Fed's preferred measure of core prices may remain below the 2% inflation target. Still, after the two largest back-to-back monthly increases in core prices since 2006, when the Fed was on the inflation-fighting warpath, it is harder to get worked up about “too low” inflation. Especially with the unemployment rate at 3.7%. 

It's never been cheaper to borrow in Denmark
Banks in Denmark are now effectively paying qualified homebuyers who take out a 10-year fixed-rate mortgage. Jyske Bank, the third-largest bank in Denmark, will now lend to prospective homebuyers at an interest rate of -0.5%.

Risk in investing
Risk is the four-letter word of investing, but it is poorly understood. Consider, for example, the two different investments in the accompanying table: Investment A and Investment B.

Which investment would you prefer? A or B?

Everyone would prefer investment A. After all, you end up with more money after three years. But, which investment is riskier? According to investment orthodoxy, Investment A is riskier! Why? Because it has a higher standard deviation (or volatility of returns) at 23.6% than Investment B at 0%. Doesn’t that strike you as odd? In investing, if you don’t want volatility, then you have to accept that you won’t have much upside potential.

Sandro's movie recommendations 

We asked Sandro, the most passionate movie buff at EdgePoint, for his top 10 movie picks of all time. After agonizing for days over this list, this was his response:

Films have had a profound influence on shaping the man I am. In fact, great films have the power not only to entertain but more importantly to transform the way we see the world. Truly great films, like a great vintage wine, get better with age. Each subsequent viewing reveals new pleasures and they become more socially and culturally relevant.

Ok. That’s enough with my ramblings. Keep in mind that if you asked me next week, it might be a completely different list. I didn’t even include a foreign film. I love foreign films!

Sandro’s Top 10 of All Time… more specifically on August 13, 2019

Citizen Kane (1941) - Welles
Casablanca (1942)  - Curtiz
Vertigo (1958) – Hitchcock
The Good, the Bad & the Ugly (1966) - Leone 
The Godfather (1972) – Coppola
Annie Hall (1977) - Allen
Goodfellas (1990) – Scorsese
Pulp Fiction (1994) – Tarantino
Boogie Nights (1997) – Anderson
The Social Network (2010) - Fincher

This week's interesting finds

August 10, 2019

Half the world’s bonds have yields that can’t match inflation

About $30.2 trillion of bonds offer yields below zero after accounting for inflation. The amount has surged from $25 trillion less than a month ago. The figures are based on the bonds in the Bloomberg Barclays Global Aggregate Bond Index, which has a market value of $55.6 trillion.

10-year yields
There are now 12 countries whose government debt sports negative 10-year yields. Switzerland leads with a 10-year yield of -0.92% followed by Germany, with a 10-year yield of -0.53%, down to Slovenia in 12th position with a 10-year yield barely in the negative of -0.04%.

The US, with its 10-year yields of 1.73% is in 30th position of the 51 countries. This puts the US two places behind Italy, in 28th place, with a 10-year yield of 1.51%. The list has only 51 places, and the US already has a low 10-year yield of 1.73% is all the way down in 30th position! Greece, which defaulted on its debts in 2012 and imposed big haircuts on holders of Greek government bonds, is in 33rd place with a 10-year yield of 2.02%. 

10 years of US stock market prices
Below is a visualization of the US stock market in the past 10 years returns. Every day for the past 10 years is captured in the graph. The worst day of the market in the past decade was August 8, 2011, which was a response to the credit rating downgrade of the US sovereign debt. The S&P 500 Index dropped nearly 7% that day.

One of the best days was on December 26, 2018, where the S&P 500 rose to 4.9%. This was the first trading day after the dramatic Christmas Eve sell-off.

The Psychology of Prediction
Here are some notable flaws, errors, and misadventures that occur in people’s heads when predictions are made.

The distinction between “wrong” vs. “early” has less to do with analytics than the social ability to prevent listeners from giving up on you. Say it’s 2003 and you predict the economy is going to collapse under the weight of a housing bubble. In hindsight, you got that right. But it’s 2003. So those who listened to your predictions have to wait four years for that prediction to come true. 

Credibility is not impartial: Your willingness to believe a prediction is influenced by how much you need that prediction to be true.
History is the study of surprising events. Prediction is using historical data to forecast what events will happen next.

Predictions are easiest to make when patterns are strong and have been around for a long time – which is often when those patterns are about to expire.

Predicting the behavior of other people relies on understanding their motivations, incentives, social norms and how all those things change. That can be difficult if you are not a member of that group and have a different set of life experiences.

If you refuse to make predictions because you know how hard they are you may become suspect of everyone else’s predictions even if they have insight and skills you don’t.

The effort put into a prediction may increase confidence more than accuracy. There are stories of Tiger Woods hitting 1,000 balls at the range without a break. And of Jason Williams practicing dribbling for hours on end without ever shooting a ball. That’s how you become an expert.

This week we all combined for a midsummer potluck! 

This week's interesting finds

August 3, 2019 

Oxymoron Alert: some high yield bonds go negative

In the latest sign of financial markets going into uncharted territory, more than a dozen junk bonds, which usually carry high yields, now trade in Europe with a negative yield.

China accounting scandal threatens corporate fundraising

An accounting scandal rocking corporate China is drawing comparisons with the collapse of the US firm Arthur Andersen, as dozens of Chinese companies are forced to halt public listing work.

China is trying to clean up its stock market and they are finding big problems with the way that auditing is being done. A string of auditing scandals this year has shaken investor confidence in Chinese equities at a time when global investors are increasing their allocation to the Chinese market through the MSCI emerging markets index.

MSCI recently increased the weighting for Chinese stocks in its EM index, a move that is expected to lead to an inflow of more than $100bn as investors are obliged to allocate more to China. But critics have said the increase has also increased investors’ exposure to many of the accounting irregularities on the Chinese stock market.

When to Ignore a Fund Manager

The active asset management industry is overpopulated and hugely competitive, and as with any sales activity, delivering the ‘appropriate’ message to prospective and clients is hugely important.  These messages often feel as if they are intended to cultivate a certain image or manage client concerns, rather than present a realistic assessment of crucial issues. 

The types of statements listed below should be considered with a liberal dose of skepticism:

“ESG factors have always been at the heart of our investment process”.
“Markets are not rewarding fundamental analysis”
“I think that interest rates are going to…” 
“I spend 95% of my time at my desk on pure investment work”
“I don’t think we suffer from any biases in our recruitment policy, it just so happens that the best candidates all went to the same universities and look the same”.
“The merger/acquisition/ restructure has not been a distraction”.

If all firms and teams present themselves with a similar sheen, then there is a significant cost to being an outlier that is frank about problems, challenges, and limitations. 

The overplayed world of artificial intelligence

Today’s buzzword is AI. It’s difficult to find a manager that doesn't claim to be using artificial intelligence to improve its investment process.

The generally poor performance of the active management community and the existential threat from “the machines” have managers grasping for a quick fix. Many seem to think that AI offers that solution. 

But many are more likely than not to find their experiments with AI to be expensive distractions. For this reason, don’t discount managers who are avoiding the hype. A manager that honestly admits that it doesn’t see an application for AI in its process may be a realist rather than a Luddite. 

Friday funnies: an EdgePoint partner submission

A major divergence has opened up in my proprietary quant model. Historic correlations are breaking down, presenting a unique opportunity for investors brave enough to take advantage of the temporary dislocation. Yes, it is time to sell avocados to buy Bitcoin!

G(LOW)bal bond yields:

This week's interesting finds

July 27, 2019

The balance sheet isn’t what it used to be 
Today, the relative importance of tangible assets compared to intangibles has completely flip-flopped from what it was 40 years ago. Intangibles now account for over 80% of the average company’s market value. Intangibles like brand names, customer lists, R&D spending, and patents have become increasingly more important to how we value companies.

For companies in the S&P 500 today, the correlation between stock price and tangible book value has become quite small, just 14%. This is a very big change from 25 years ago when that correlation was 71%.

The expensive getting more expensive

Only once before have the most expensive stocks been relatively more expensive and that was during the internet bubble.

Source: Exane BNP Paribas estimates

Small-cap balance sheets looking riskier than large-cap

How different generations react to volatility

With four generations of retail investors now involved in financial markets, attitudes and approaches to investing are beginning to diverge. How did different generations of investors react to recent bouts of volatility in the market?

China scrambles to stem manufacturing exodus 
Many companies, alarmed by the prospect of a prolonged trade conflict, are hedging their bets. While looking for alternative production sites for U.S.-bound goods, many will keep factories operating in China for the domestic Chinese market. Thus, many manufacturers will be forced to set up dual supply chains: one for China and one for other markets, raising their costs and denting profits.

The trade dispute is beginning to show up in flows of goods and capital. In the first five months of the year, exports from China to the U.S. fell 12% on the year in value terms, while those from India, Vietnam and Taiwan logged double-digit gains.

Much of the shift is to Southeast Asia, especially Vietnam, which is becoming home to many manufacturers of electrical and electronic equipment.

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!