This week's interesting finds

EdgePoint Academy – Sequence of returns: a risk worth learning about

In the fourth installment of our retirement series, we talk about the sequence of returns risk and how to structure your investments so that you give your portfolio a chance to handle any short-term volatility.

It has ‘never been easier to make money’ on small and midcaps, JPMorgan strategist says

As of August 10th, 1 in 5 small and mid-cap stocks are still down more than 30% since the beginning of the coronavirus crisis. According to JPM’s Head of Small and Midcap Equities, many of these businesses have solid balance sheets, all-time low valuations, and are not structurally damaged.

This brings opportunity for active investors who use fundamental analysis and expertise to pick specific investments in an effort to beat the market over the long-term. For every dollar that is managed actively today, there is 80 cents managed passively with no regards for fundamentals. Passive investors are simply tracking an index which today is exacerbating the gap between fundamentals and valuations.

Analyzing the market Rally: Virus-Prompted Impatience

Investors, cooped up and eager for normality’s return, are mistakenly bidding up share prices, Seth Klarman contends—and it won’t end well.

One of the culprits: deluded investors. His assessment, is a nuanced reading of mass psychology amid virus anxieties and isolation. Impatience for a return to a regular, epidemic-free life has made them eager for quick riches through stocks, he believes.

“There is little evidence of thought as to whether the price of a security already reflects current and projected future news flow or whether the opening up of the economy might be premature, a sign not of strength, but of impatience, lack of resolve, and poor judgment.”

A devotee of value guru Benjamin Graham, Klarman has long preached that investors should be patient.

How businesses have pivoted during the pandemic

The shutdown impacted businesses of all sizes. Many proclaimed our old way of life would be changed forever. It would be “the end of commuting,” “the demise of retail,” or “the collapse of globalization”.

The reality of how companies are dealing with the crisis and preparing for the recovery tells a very different story, one of pivoting to business models conducive to short-term survival along with long-term resilience and growth.

Let’s examine the world of restaurants. They have been battered by the lockdown, with many owners pondering whether to close for good. The usual way to think about restaurants includes envisioning a seating area next to a kitchen. However, restaurants are kitchens whose output can be delivered to customers in a number of ways and using various kinds of business models. Eat-in, take-out, delivery, and catering are just the tip of the iceberg.

One pivot would be to offer a flat rate for a set number of meals per week or per month, with limited menu choices. Restaurants could increase their margins as they learned how to manage captive demand. Another pivot would be to offer a combination of precooked dishes with sides or additions that could be prepared at home using ingredients supplied by the restaurant. The restaurant could send a link to a video that walks the customer through preparation, thus incorporating an experiential and learning element. Deliveries could be in amounts large enough for several meals in a given week. Both pivots would lead to a greater variety of business models, which could become a permanent feature of the restaurant landscape, especially if the trend toward remote work from home consolidates over the long run.

The crisis has also led to broken supply chains, as reflected in the ominous images of empty supermarket shelves — a void that presented small farmers with a unique opening. After seeing their sales to restaurants and specialty stores plummet during the lockdown, many small-scale farms have set their sights on the needs of the homebound consumer. This pivot requires investments in information technology, marketing, and logistics that could prove profitable over the long run if the trend toward shorter supply chains gains momentum.

Warren Buffett may have bought back a record $7 billion of Berkshire Hathaway stock in the past 3 months

Warren Buffett appears to have bought back more than $7 billion of Berkshire Hathaway stock over the past three months, underlining the famed investor's willingness to deploy significant amounts of cash and his view that Berkshire shares are a bargain.

Moreover, the buybacks indicate that Buffett views Berkshire stock as undervalued, given his policy is to only repurchase it when it trades below a conservative estimate of Berkshire's intrinsic value. Berkshire's shares are down about 7% this year, lagging the benchmark S&P 500 index's 3% gain.

The company's market capitalization is also about 1.3 times its net assets of $397 billion at the end of June — not far off the 1.2 multiple Buffett has previously quoted as an enticing level to buy back shares.

BRK is a holding in EdgePoint and Cymbria portfolios.

Changing Mix of Light Vehicle Sales

This graph shows the % of light vehicle sales between passenger cars vs trucks/ SUVs through July 2020. Light trucks/SUVs accounted for 76% total light vehicle sales in July 2020.

This week's interesting finds

Big 5 stocks dominate markets

Over the past year, the 5 largest S&P 500 companies (AAPL, MSFT, AMZN, GOOGL, FB) returned 58% vs. 1% for the rest of the market.

At $6.2 trillion, the combined market cap of Apple, Amazon, Microsoft and Google is now greater than the GDP of every country in the world with the exception of the US and China.

Howard Marks latest memo: Time For Thinking

In his latest memo, Howard Marks dissects the impact of the COVID-19, Fed policy, and the long-term implications of low-interest rates in equity markets.

Marks concludes with some thoughts on today’s extreme valuations and the current market darlings:

On one hand, we have the surprisingly rapid recovery of the stock and credit markets to roughly their all-time highs, despite the fact that the spread of Covid-19 hasn’t been halted, and that it will take a good number of months for the economy to merely return to its 2019 level (and even longer for it to give rise to the earnings that were anticipated at the time those market highs were first reached). Thus p/e ratios are unusually high today and debt yields are at unprecedented lows. Extreme valuations like these are usually justified with protests that “this time it’s different,” four words that tend to get investors into trouble.

On the other hand, John Templeton allowed that when people say things are different, 20% of the time they’re right. And in a memo on this subject in June of last year, I wrote, “in areas like technology and digital business models, I’d bet things will be different more than the 20% of the time Templeton cited.” It certainly can be argued that the tech champions of today are smarter and stronger and enjoy bigger leads than the big companies of the past, and that they have created virtuous circles for themselves that will bring rapid growth for decades, justifying valuations well above past norms. Today’s ultra-low interest rates further justify unusually high valuations, and they’re unlikely to rise anytime soon.

But on the third hand, even the best companies’ stocks can become overpriced, and in fact they’re often the stocks most likely to do so. When I first entered the business in 1968, the companies of the Nifty Fifty – deploying modern wonders like computing (IBM) and dry copying (Xerox) – were likewise expected to outgrow the rest and prove impervious to competition and economic cycles, and thus were awarded unprecedented multiples. In the next five years, their stockholders lost almost all their money.

We reach our conclusions, limited by the inadequacy of our foresight and influenced by our optimistic or pessimistic biases. And we learn from experience how hard it is to get the answer right. That leads me to end with a great bit of wisdom from Charlie Munger concerning the process of unlocking the mysteries of the markets: “It’s not supposed to be easy. Anyone who finds it easy is stupid.”

Seth Klarman on the Fed

Seth Klarman said the Federal Reserve is treating investors like children and is helping create bizarre market conditions that are unsupported by economic data. “Surreal doesn’t even begin to describe this moment,” Investor “psychology is surprisingly ebullient even though business fundamentals are often dreadful”. “Investors are being infantilized by the relentless Federal Reserve activity. “It’s as if the Fed considers them foolish children, unable to rationally set the prices of securities so it must intervene. When the market has a tantrum, the benevolent Fed has a soothing yet enabling response.”

Performance chasing is dangerous

Taking the the best managers over the past 10 years in Canadian equities. These are the ones that have crushed it over a decade of measurement and are in the top position among their peers. But, during that same 10-year period, almost all of them spent a three-year period or longer with below average results. (chart 2) Half spend at least a three-year period in the bottom quartile. If you are prone to chasing performance, you would likely have bailed on these managers when they were underperforming

Alternatively, we looked at Canadian equity funds that were in the top quartile in June 2014 based on their three-year trailing performance (June 2011-June 2014). Some 69% of these funds were not positioned in the top quartile in the next three year period (June 2014-June 2017) – 44 % were actually below average. Similarly, 65% of the top-quartile funds in June 2017 were not top quartile during the next three-year period (2017-2020). See Chart 3.

Looking to the past for signs a bubble may be forming

A narrow group of companies or business models is perceived to be so valuable that any company that is seen as belonging to this group is valued at extraordinary levels.

In the 1920s it was the radio stocks. In the 1960s it was the conglomerates and the Nifty Fifty. In the 1990s it was the Internet stocks. Now it’s “platform companies”.

Company "stories" become more impactful than financial results.

Many of the current market darlings don’t have amazing financials to lean on. What they do have is stories, and perhaps some period of revenue growth which is yet to translate into substantial profits. So which do you think will help them promote their stock: the stories or the numbers?

Securities are purchased based on belief rather than thorough analysis.

This sign refers to which part of the brain investors are using to make decisions: the part they use to figure out which refrigerator offers the best value for the money, or the one that makes some of their heads turn when a really attractive sports car drives by.

Doubters have been wrong for a long time and are largely disregarded as people who "just don't get it”.

When a group of people have been warning about danger for a prolonged period of time, a certain fatigue sets it. Kind of like the story about the boy who cried wolf.

Ironically, in stock market as prices rise higher and higher without the fundamentals to support that increase, the longer the warnings have been sounded and ignored, the more relevant they become. Only they do not appear so. These naysayers become largely discredited and ignored. Usually just as what they have been warning about is on the cusp of wiping out a large chunk of investors’ portfolios…

The specifics change, but the general pattern reoccurs throughout investing history. The most expensive words in investing are “this time is different.” Yet investors think and say these words every few decades. In large part, they do this because every time is different. The details change. What doesn’t change is that in the long-term, stock prices are determined by weighing the cash flow streams of the underlying companies, not by stories or by popularity of these companies for a period of time with investors.

This week's interesting finds

Valuing the Buffett stub

We are looking at one share of Berkshire B relative to one share of Apple. Three years ago, one share of BRK was enough to buy 1.2 shares of Apple, whereas today, one share of BRK would be sufficient to buy less than half a share of Apple.

Meanwhile, Berkshire owns 250 million shares of Apple, which have a market value approaching $100 billion. So, while the number of shares of Apple that one share of Berkshire can buy has been steadily falling, BRK’s stake in AAPL (which should positively impact BRK’s stock price) has been steadily rising.

Berkshire is also renowned for its large cash hoard.

What does one get in the Buffett Stub? Essentially, it would be all the insurance assets, Burlington Norther Santa Fe (BNSF) and all the other investments public and private that Berkshire has made ex-Apple.

If we strip out AAPL, the cash and BNSF, the rest of Berkshire – mainly insurance and the remaining public and private investments essentially have a negative value.

You are essentially getting much of the company for free.

*BRK is a holding in EdgePoint and Cymbria portfolios.

The precarious rise of subscription payments

Given the high number of consumers working from home, especially those with school age children, it should come as no surprise that one-in-three Americans signed up for a new subscription service in the first few weeks of the shelter-in-place lockdown in the U.S.

Nearly 60% of parents with children under the age of 18 signed up for a new subscription of some kind in the first few weeks of the national emergency.

Baby Boomers stood out as the least likely group to sign up for new services, with just 10% of those surveyed saying they had signed up recently.

By May, a new trend was becoming evident in the subscription industry — subscriber fatigue. In Deloitte’s Digital Media Trends Survey, it was apparent that churn was becoming a major factor as companies were rapidly onboarding and offboarding customers at an alarming rate.

Almost a third of consumers had added a new streaming video service or added one while canceling another since mid-March. Further, when looking at cancellations since mid-March, 14% had either cancelled a service outright with no replacement or cancelled a service and picked up a competitor’s service instead. All-on-all, almost four-in-ten U.S. consumers had made a change to a video streaming service in the first two months of the pandemic.

Charlie Munger in WSJ

Will Berkshire step up now to buy businesses on the same scale?

“Well, I would say basically we’re like the captain of a ship when the worst typhoon that’s ever happened comes,” Mr. Munger told me. “We just want to get through the typhoon, and we’d rather come out of it with a whole lot of liquidity. We’re not playing, ‘Oh goody, goody, everything’s going to hell, let’s plunge 100% of the reserves [into buying businesses].’”

On the airlines:

“They’ve never seen anything like it. Their playbook does not have this as a possibility.”

“Nobody in America’s ever seen anything else like this. This thing is different. Everybody talks as if they know what’s going to happen, and nobody knows what’s going to happen.”

Is another Great Depression possible?

“Of course we’re having a recession,”

“The only question is how big it’s going to be and how long it’s going to last."

“I don’t think we’ll have a long-lasting Great Depression. I think government will be so active that we won’t have one like that. But we may have a different kind of a mess. All this money-printing may start bothering us.”

Photo contest: Winner!

In this quarter’s EdgePoint photo contest, we chose the theme of “Home Life” to make sure our partners stayed safe while trying to find new ways to look at things they saw every day. The Committee had to look through some strong submissions, including family photos, restaurant-quality dishes and several artistic endeavours.

After some debate, this quarter’s winner is Québec’s very own Marc-Andre for his close-up of some latte art that showed us home truly is where the heart is.

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.