Investor psychology

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Stories play an important part in investing (Link)
Investment decision-making is a domain in which stories assume particular importance in driving, informing and justifying conclusions. Stories aid our comprehension and can lead us to believe that we understand something. They allow investors to both simplify and justify decisions to buy inherently complex investment products. Financial markets can be very unpredictable and uncomfortable. Stories are our surest means of coping with this discomfort to manufacture meaning by forging a relationship between the data and an explanation. They help us explain why the data is what it is and how it got that way. Our focus on narratives during these times of uncertainty is a major driver of some of our most damaging behaviours. We struggle to comprehend that asset prices often move in a random or unpredictable fashion; therefore, we must attach some explanation to it. 

Most of us won’t make an investment decision without it being supported by some form of story, and that’s understandable; stories are effective and can be very valuable.  However, we must also take the time to consider the credibility of the narrative, the data that underpins it and our own role in shaping it.

The Anatomy of a Market Correction (Link)
Market corrections can happen for any reason and sometimes they happen for seemingly no reason at all. Typically, corrections are rooted in psychological factors or fear and are not based on market fundamentals. Here are some quick stats.

The average correction lasts for 71.6 days. On average, there is one market correction that occurs each year. The average correction involves a 15.6% decline.

From 1980 to 2018 there were 36 corrections in the U.S. market, and only 5 (14%) of them resulted in bear markets. Most ended up being just blips on the radar of an otherwise intact bull market.

Wednesday insights

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How boomers are stealing from babies (Link)
Recently, the C.D. Howe Institute used an economic technique called lifetime generational accounting to assess the fairness of Canada's fiscal policies. Every generation pays taxes and gets government provided benefits in return. The cost of broadly shared programs like defense or the bureaucracy, is generally split equally across all generations. But the size and scope of individually focused benefits like health care, education, welfare and public pensions, along with the taxes meant to pay for them can vary greatly over time. These variations will depend on politics and demographics.

In this study all figures are adjusted to birth-year values.

Baby boomers can expect to pay, on a net basis, around $200,000 per person over their lifetimes for all the health care, education and other social services they receive. That might seem like a lot, but it’s nothing compared to the current generation of newborns who are expected to pay $736,000 more in taxes than they will receive in individual benefits. The luckiest Canadians are those born in the 1970s. On average, these kids of boomer parents face a net tax burden of just $27,000 each for their lifetime of social benefits.

This huge discrepancy between newborns and older generations is the result of an aging population, which reduces the proportion of working folk who are available to pay taxes, while increasing the amount of health care and elderly benefits owing, combined with the accumulation of past government debt.

What if you retire at a stock market peak? (Link)
Sam’s entire family has terrible luck when it comes to the timing of their retirement.

Sam’s great-grandparents retired at the end of 1928. Over the ensuing three years or so the stock market would drop close to 90%. Sam’s grandparents didn’t fare much better, retiring at the tail end of 1972. This was right before a brutal bear market which would see stocks cut in half from 1973 to 1974. Inflation also ran at a rate of 121% over the first 9 years of their retirement. Sam’s parents retired at the end of 1999, feeling pretty good at the top of the tech bubble. In the first decade of their retirement, they would witness the U.S. stock market go down by 50% on two separate occasions.

With balanced portfolios let see how Sam’s family actually ended up with an annual 4% withdrawal rate and a starting value of $1,000,000.

Even retiring right around the peak of the market, their portfolios actually ended up in a good position in each case. In each case, the ending market value for the portfolio is higher than the original amount even after accounting for annual withdrawals.

J.P. Morgan 2019 retirement guide (Link)
Here's one chart from this year's guide showing how a $10,000 initial investment fared over the past 20 years depending on whether the investor stayed invested or instead, missed some of the market's best days. As you can see you don't have to miss many good days to feel the impact. Your return quickly goes from positive to negative by missing only the 20 best days.

Independent brands and bookstores

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Private label sales dominate national brands (Link)
In 2018, the mass retail channel topped supermarkets for the first time in annual private label dollar sales volume in food and nonfood consumables. Data revealed that private label dollar volume in the mass retail channel surged 41% over the last five years, compared to a gain of only 7.4% for national brands.

Costco’s, Kirkland Signature brand pulled in $39 billion in 2018 which dwarfed those of Kraft-Heinz, which generated $26 billion last year.

Why independent bookstores are thriving in spite of Amazon (Link)
Before Amazon even existed, many mom-and-pop independent bookstores were supposed to disappear by the entrance of Barnes & Noble. But today, it’s Barnes & Noble that is trying to survive the Amazon retail apocalypse, while independent bookstores are doing just fine. The number of independent bookstores in the US is up 31% since 2009 and book sales at independent bookstores grew 7.5% annually over the past five years.

Books still make up about 80% of sales for independent bookstores sales so why are they doing so well? Many of these independents attract a loyal base of customers who seek a social hub outside of the online world. They offer anything from ukulele lessons to speed-dating events. These customers come to hang out but also buy books too.

Weekend catch-up

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

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

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Investment decision making - Ten advantages everyday investors have over professionals (Link)
If we think about some of the main challenges encountered by investors around issues such as time horizons, over-trading, overconfidence, misaligned incentives and benchmark obsession, these problems are often exacerbated when investing in a professional context. Everyday investors are not immune from these behavioural issues that lead to poor investment decision making but it is important to acknowledge that the investment industry has certain structural features that serve to inflame a particular set of behavioural shortcomings. Many of these structural shortcomings are much harder to avoid when investing in a professional context versus the everyday investor. Here are a few of the advantages everyday investor have.
- There is no need to check your portfolio on a daily basis
- You can make decisions consistent with your own time horizon
- Your incentives are perfectly aligned
- There is no need to chase performance
- There is no requirement to be constrained by arbitrary benchmarks
- You don’t need to worry about what other people are doing

Notable quotes from Amazon's Annual Letter (Link)
From very early on in Amazon’s life, we knew we wanted to create a culture of builders – people who are curious, explorers. They like to invent. Even when they’re experts, they are “fresh” with a beginner’s mind. They see the way we do things as just the way we do things now. A builder’s mentality helps us approach big, hard-to-solve opportunities with a humble conviction that success can come through iteration: invent, launch, reinvent, relaunch, start over, rinse, repeat, again and again. They know the path to success is anything but straight. 

It’s critical to ask customers what they want, listen carefully to their answers, and figure out a plan to provide it thoughtfully and quickly (speed matters in business!). No business could thrive without that kind of customer obsession. But it’s also not enough. The biggest needle movers will be things that customers don’t know to ask for. We must invent on their behalf. We have to tap into our own inner imagination about what’s possible.

As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn’t growing, you’re not going to be inventing at a size that can actually move the needle. Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures. Of course, we won’t undertake such experiments cavalierly. We will work hard to make them good bets, but not all good bets will ultimately pay out. This kind of large-scale risk taking is part of the service we as a large company can provide to our customers and to society. The good news for shareowners is that a single big winning bet can more than cover the cost of many losers.

Debt-laden Canadians (Link)
Household debt in Canada has reached levels that could be qualified as excessive. Canadians owe C$2.16 trillion which as a share of gross domestic product, is the highest debt load in the G7.

Canada's personal savings rate is near its lowest in recorded history

The Canadian mutual fund industry experienced its weakest RRSP season in 10 Years
Over the first three months of 2019, the Canadian mutual fund industry captured net sales of $5.9 billion, down significantly from net sales of $17.6 billion during the 2018 RRSP season.

Price elasticity of chocolate
Among consumers in the US, the demand for premium chocolate is less price elastic than for mainstream chocolate brands. Premium brands like Lindt exhibited less volume decline relative to mainstream brands like Hershey. For every 1% increase in pricing, Lindt experiences a 1% decrease in volume, while Hershey's volume decrease is more pronounced at 1.7%.

What are the main drivers behind people's chocolate choices? “Taste and good flavors” and “good quality” tops the list of reasons. “Low price” is less of a consideration which would favour premium players like Lindt.

Coffee bean – Record low prices with record high consumption (Link)
Although coffee has never been more popular, the price of coffee beans is at their lowest point in over a decade. Why? Factors include technological advances that have boosted production and the collapse in the currency of the world’s largest coffee producer, Brazil.

Today, the Brazilian Real is 60% less valuable against the USD than it was in 2011, and has depreciated over 12% in just the last year. Since Brazil’s currency is so cheap, so is the coffee that Brazil sells in US dollars to the rest of the world. These unsustainable low prices are sending coffee farmers out of business.

However, these low coffee bean prices have not translated into cheaper cups of coffee at your local café. The average cup at many major cities around the world is close to $3. Coffee prices remain high due to strong demand and rising costs of producing the drink, alongside things such as rent, overheads, labor, milk and sugar.

Chocolate & Coffee

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

_________________

Price elasticity of chocolate
Among consumers in the US, the demand for premium chocolate is less price elastic than for mainstream chocolate brands. Premium brands like Lindt exhibited less volume decline relative to mainstream brands like Hershey. For every 1% increase in pricing, Lindt experiences a 1% decrease in volume, while Hershey's volume decrease is more pronounced at 1.7%.

What are the main drivers behind people's chocolate choices? “Taste and good flavors” and “good quality” tops the list of reasons. “Low price” is less of a consideration which would favour premium players like Lindt.

Coffee bean – Record low prices with record high consumption (Link)
Although coffee has never been more popular, the price of coffee beans is at their lowest point in over a decade. Why? Factors include technological advances that have boosted production and the collapse in the currency of the world’s largest coffee producer, Brazil.

Today, the Brazilian Real is 60% less valuable against the USD than it was in 2011, and has depreciated over 12% in just the last year. Since Brazil’s currency is so cheap, so is the coffee that Brazil sells in US dollars to the rest of the world. These unsustainable low prices are sending coffee farmers out of business.

However, these low coffee bean prices have not translated into cheaper cups of coffee at your local café. The average cup at many major cities around the world is close to $3. Coffee prices remain high due to strong demand and rising costs of producing the drink, alongside things such as rent, overheads, labor, milk and sugar.

Debt-laden Canadians

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

_________________

Debt-laden Canadians (Link)
Household debt in Canada has reached levels that could be qualified as excessive. Canadians owe C$2.16 trillion which as a share of gross domestic product, is the highest debt load in the G7.

Canada's personal savings rate is near its lowest in recorded history

The Canadian mutual fund industry experienced its weakest RRSP season in 10 Years
Over the first three months of 2019, the Canadian mutual fund industry captured net sales of $5.9 billion, down significantly from net sales of $17.6 billion during the 2018 RRSP season.

Monday reads

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

_________________

Investment decision making - Ten advantages everyday investors have over professionals (Link)
If we think about some of the main challenges encountered by investors around issues such as time horizons, over-trading, overconfidence, misaligned incentives and benchmark obsession, these problems are often exacerbated when investing in a professional context. Everyday investors are not immune from these behavioural issues that lead to poor investment decision making but it is important to acknowledge that the investment industry has certain structural features that serve to inflame a particular set of behavioural shortcomings. Many of these structural shortcomings are much harder to avoid when investing in a professional context versus the everyday investor. Here are a few of the advantages everyday investor have.
- There is no need to check your portfolio on a daily basis
- You can make decisions consistent with your own time horizon
- Your incentives are perfectly aligned
- There is no need to chase performance
- There is no requirement to be constrained by arbitrary benchmarks
- You don’t need to worry about what other people are doing

Notable quotes from Amazon's Annual Letter (Link)
From very early on in Amazon’s life, we knew we wanted to create a culture of builders – people who are curious, explorers. They like to invent. Even when they’re experts, they are “fresh” with a beginner’s mind. They see the way we do things as just the way we do things now. A builder’s mentality helps us approach big, hard-to-solve opportunities with a humble conviction that success can come through iteration: invent, launch, reinvent, relaunch, start over, rinse, repeat, again and again. They know the path to success is anything but straight. 

It’s critical to ask customers what they want, listen carefully to their answers, and figure out a plan to provide it thoughtfully and quickly (speed matters in business!). No business could thrive without that kind of customer obsession. But it’s also not enough. The biggest needle movers will be things that customers don’t know to ask for. We must invent on their behalf. We have to tap into our own inner imagination about what’s possible.

As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn’t growing, you’re not going to be inventing at a size that can actually move the needle. Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures. Of course, we won’t undertake such experiments cavalierly. We will work hard to make them good bets, but not all good bets will ultimately pay out. This kind of large-scale risk taking is part of the service we as a large company can provide to our customers and to society. The good news for shareowners is that a single big winning bet can more than cover the cost of many losers.