This week's interesting finds

The summer reading list: Hot reads and cool ‘casts

Even though there are still travel restrictions, doesn’t mean the Investment team’s latest reading and listening recommendations can’t help you escape some of the summer heat.

Bifurcated market

We guess this makes sense when Apple, Amazon, Microsoft and Google combined are now worth more than the entirety of the Japanese stock market.

When bad things happen to good portfolios

“Can ‘bad’ things happen to an otherwise ‘good’ investment portfolio? To answer this question, I looked at the performance of a very large and well-known investment portfolio that has a long history of exceptional results. This particular portfolio provides a good ‘test case’ because its history goes back more than 50 years. Therefore, its success clearly cannot be attributed to mere luck.”

Over its lengthy tenure the portfolio has widely outperformed its benchmark, adding significant value for investors over time. However, all sorts of bad things happened to this portfolio all along the way:

• There were 11 calendar years over its tenure, where this ‘good’ portfolio would have lost you money. To add insult to injury, in seven of those negative years the portfolio also underperformed its benchmark.
• There were 17 years in total where the portfolio underperformed its benchmark. That’s almost 1/3rd of the time.
• There were 21 years where this otherwise ‘good’ portfolio experienced a calendar year return that was negative and/ or worse than its benchmark.
• There were 20 calendar years where the portfolio returned less than 10%.
• And finally, it also experienced a couple of prolonged periods of particularly poor results. Throughout its history this portfolio experienced two separate periods of time where it had either a negative rate of return and/or underperformed its benchmark for four years in a row. In other words, if you had hired this particular portfolio manager at the start of either of these periods, and looked back at your results four years later, you would have experienced either negative or relative underperformance in each and every one of the previous four years.

In either of these scenarios, many investors would have promptly pulled their money and fired the manager! The “portfolio” we’ve analyzed above is none other than that of Berkshire Hathaway, and the ‘portfolio manager’ you’d have fired would have been the world’s greatest investor himself – Mr. Warren Buffett!


Over the 54 year period from the beginning of 1965 to the end of 2018, Buffett/ Berkshire returned an average of 20.5% per year, more than doubling the S&P500 Index, returned 9.7% per year over the same period


Truly bad things can only happen to good investment portfolios through our own behaviour; i.e. how we react to “bad” events such as temporary underperformance. If the portfolio itself is indeed a ‘good’ one by definition, it won’t do bad things to you. Only you can do bad things with it.


Retail sales


Topline retail activity is now just -0.8% away from the pre-pandemic level.
There is wide dispersion within the sectors and the “work-from-home” theme is clearly visible when we look at the fact that groceries are 11.5% above pre-Covid, e-tailing is sitting at 20.9% higher and now sporting goods etc. has ramped up to 23.1% above the pre-pandemic level.





Household spending


Although average spending fell for all households as the economy shut down at the start of the pandemic, unemployed households actually increased their spending beyond pre-unemployment levels once they began receiving benefits.



Store openings and closures in the US

This week's interesting finds

Fed’s debt traders hit with an instant loss on waste management debt debacle

The central bank bought about $3 million of the company’s bonds due 2024 at around 105 cents on the dollar, but they’ll be redeemed at 101 cents on Tuesday. That will amount to a roughly $120,000 loss in principal on the debt purchased on June 23, according to the Fed’s latest update to its secondary market facilities purchases.

The transaction highlights the risks central banks take when they leave the safety of sovereign debt and venture out into niche corners of the bond market.

Surging internet subscribers in India

The surge in Indian internet subscriptions has been spectacular. A near threefold increase between 2014 and 2020. Google said Monday that it will set up a $10 billion fund to invest in India over the next five to seven years, including investments in other companies, to speed up the adoption of digital service.

India is a largely untapped market: It has 1.35 billion people and only about half of them are online. Digital services from e-commerce to online media are underdeveloped.

Net new retail accounts across major online brokers 

As you can see from the chart below, all the online retail brokers saw a huge swath of new users this year.

Dining in the hotspots heading lower

Gasoline consumption up on reopening as well as avoidance of mass transit

78% of the appreciation in S&P500 in last 5 years is attributable to tech and e-commerce

This week's interesting finds

2020 Q2 EdgePoint commentary

This quarter portfolio manager Tye Bousada looks at investors' path to point B and discusses why you need uncertainty and willingness to look wrong in the short term to get to point B.

Equity commentary: We understand the gravity of our responsibility to you (part 2)

Derek Skomorowski talks about risks in fixed-income investing and why it's important to fish where the best investment opportunities are.

Fixed-income commentary: Fish where the fish are

From the street

Re-considering consumer choices

The options market in the FAANGs - we’re not sure what you call this, but we’re pretty sure it's not called investing

July 6th call option volume on Amazon (AMZN) and Microsoft (MSFT).  Most of these are 4-day options!

Makeup and skincare trends

Beauty spending was already shifting from make-up to skincare, and this has accelerated during the shutdown:

The new and incremental buyer of online beauty products is older and wealthier – the highest percentage of first-time online buyers were over 55 and earned over $125k per year.

Dangers of day trading

Robinhood's users buy and sell the riskiest financial products and do so more frequently than customers at other retail brokerage firms, but their inexperience can lead to staggering losses.

One of its users said he had been charmed by Robinhood’s one-click trading, easy access to complex investment products, and features like falling confetti and emoji-filled phone notifications that made it feel like a game. 

Robinhood users traded nine times as many shares as E-Trade customers and 40 times as many shares as Charles Schwab customers, per dollar in the average customer account in the most recent quarter. They also bought and sold 88 times as many risky options contracts as Schwab customers, relative to the average account size, according to the analysis.

At the core of Robinhood’s business is an incentive to encourage more trading.

It does not charge fees for trading, but it is still paid more if its

customers trade more.

This week's interesting finds

EdgePoint Academy: The retirement income balancing act

It's time to start withdrawing the money you've accumulated - but making sure you know how much to withdraw is key. In this installment of EdgePoint's academy series on retirement, we discuss the importance of withdrawal rates, how inflation and investment returns impact them, and ways to make sure money you haven't withdrawn yet can keep growing.

Why is there a belief that Equities and Bonds must be negatively correlated?

It hasn’t always been the case:

CDC Data – COVID Fatality Rate

Based on death certificate data available on July 2, 2020, 5.9% of all deaths occurring during the week ending June 27, 2020 (week 26) were due to pneumonia, influenza or COVID-19 (PIC). This is the tenth consecutive week of a declining percentage of deaths due to PIC. The percentage is equal to the epidemic threshold of 5.9% for week 26.

COVID-19 Demographics in the US Make Death Trends Harder to Understand

An article that summarizes some of the problems with drawing conclusions from the increase in COVID-19 cases in the US.

Mega-cap growth vs the rest 

Mega-cap growth companies make up roughly 28% of the S&P 500. These are growth stocks with a market cap of more than $200 billion. These businesses have had a large impact on performance YTD.  Not surprisingly, the average number of retail investor accounts holding mega-cap growth companies has more than doubled.

This week's interesting finds

Americans have really been embracing the can since the start of the quarantine 

And the 1 week Y/Y data is still strong indicating that this is not just a pantry loading phenomenon.

Vehicle miles driven (VMT) by destination

The pace of onshoring is picking up

Open Table bookings

Tracktherecovery.org

A group of economists at Harvard have built a real-time, publicly available economic tracker. There are many good interactive charts here but below are a few interesting ones.

Consumer spending in the US is down 11.3% since January, but spending cuts by people in the top quartile account for more than half of the total aggregate decline in dollars. As of June 9th, spending by the top quartile was still down 16.8%, whereas spending by the bottom income quartile was only ~3% below where it was in January. 

Stimulus payments increased spending by low-income consumers, but didn’t undo the initial most revenue:

By industry, in-person services were obviously the hardest hit, but the idea of the ‘Roomba effect’ was interesting. In a normal recession, households typically respond by cutting purchases of durable goods like cars, washing machines etc, and the policy response tries to counteract that (cash-for-clunkers, VAT cuts). In this recession, it’s the opposite - people are substituting services for durable goods –buying a roomba instead of hiring a cleaning lady, which they think might have permanent implications for the economy because people are going for a capital solution instead of a labour solution.

This week's interesting finds

Why you need uncertainty

Who actually likes uncertainty? For most people, it’s pretty bothersome really, particularly when it concerns someone’s hard-earned savings and investments. It’s difficult for investors to understand how uncertainty could be a very good thing for their investments. Geoff MacDonald explains why investors need uncertainty in this excerpt from our 2020 Cymbria Investor Day Q&A session.

Investors approaching retirement face painful decisions

Nearly a third of investors ages 65 and up-sold all of their stocks at some point between February and May, compared with 18% of investors across all age groups.

Howard Marks: The Anatomy of a Rally

U.S. stocks have managed a remarkable advance in the past several weeks as optimism outweighed concerns about the economic recovery and worsening COVID-19 cases. Has this been appropriate or irrational? Howard Marks thinks investors should ponder the following questions:

• Are investors weighing both the positives and the negatives dispassionately?
• What’s the probability the positive factors driving the market will prove valid (or that the negatives will gain in strength instead)?
• Are the positives fundamental (value-based) or largely technical, relating to inflows of liquidity (i.e., cash-driven)? If the latter, is their salutary influence likely to prove temporary or permanent?
• Is the market being lifted by rampant optimism?
• Is that optimism causing investors to ignore valid counter-arguments?
• How do valuations based on things like earnings, sales and asset values stack up against historical norms?

Latest Charts

Technology stock valuations

Investors have come to believe in the sustainability of free cash flow, bringing down yields.

Shares of companies popular with individual investors have outperformed.

While it's not clear how much of the recent rally was driven by retail investors/traders, their increased presence in the market has been signaling a spike in speculative behavior.

Online grocery sales

Grocers charged into delivery to meet a surge in demand sparked by the coronavirus crisis, though many haven’t figured out how to get food to customers’ homes profitably and some wonder if they ever will. Retailers have modified their operations to manage the jump in delivery demand, hiring thousands of additional workers and devoting some stores to fulfilling online orders. That work is pushing up costs that eat into the margins on delivery sales.

Some comic relief

This week's interesting finds

Stats on re-opening
Only a handful of states have reopened bars and restaurants, and of those, most were in the past week. Montana was one of the earliest to reopen. The stay at home order in Montana was lifted on April 27th and bars and dine in restaurants reopened on May 4th at half capacity with social distancing measures. They move to 75% capacity tomorrow. Gyms reopened May 15th.

Buffett and Charlie Brown are due some relief
A resurgence of value implies an optimistic outlook for the economy. If growth returns, then cheap value stocks won’t look so risky (because even their boats have been raised). Value tends to do well at the beginning of recovery — although note that the last great period of value outperformance, in the early ’00s, came amid the onset of a recession and a bear market. As value stocks still include a lot of banks, a strong period for value also implies a steepening yield curve. This could be a dangerous bet to make when the Federal Reserve is discussing deliberately controlling the yield curve. And a second viral wave could change everything.

For now, the recovery of value would help to confirm that investor confidence, justified or otherwise, is really back.

There are many reasons to doubt that optimistic scenario. But the mere fact that advocating for value makes me feel like I might turn into Charlie Brown is perhaps the strongest reason for believing there is an opportunity here. One behavioral investor once told me that he adopted a “sharp intake of breath” test for potential investments. If a name provoked that reaction, the chances were that sentiment had moved too far and it was now too cheap. It is at this point that value investors can make a killing. Put differently, to quote Oaktree Capital Group’s Howard Marks from an interview with me earlier this month, “every great investment begins in discomfort.”

The week in charts 

Bubble behavior during a depression
The dot-com bubble made the stock market too tempting to pass up for aspiring day traders. This type of behavior makes sense during a mania. But what about during a depression?

This is one of the strangest economic crises in history. Stocks continue to surge higher in the face of the worst economic data of our lifetime. Housing demand has already surpassed pre-crisis levels. And even though the first quarter was the most volatile period since the Great Depression, people opened new brokerage accounts at a record pace. Major brokerages — Robinhood, Charles Schwab, TD Ameritrade, and Etrade — saw new accounts grow as much as 170% during the first quarter.