Friday, May 22, 2020

This week's interesting finds

EdgePoint Video: Bumpy road to long term outperformance
Everyone wants to outperform in the long term, but you can't do that if you invest like everyone else. In our newest video, we explain how looking different might mean short-term underperformance and how that's just part of an investment approach that can pay off over time.

Valuations of S&P 500 companies in the 4th quintile look especially cheap.

An expansion of valuation multiples has driven the rally across global equities, even as earnings expectations contracted across the board, according to BlackRock.

How consumers are spending differently during COVID-19

The onset of changing consumer behavior can be observed from February 25, 2020, when compared to year-over-year (YoY).

As of May 12, 2020, combined spending in all categories dropped by almost 30% YoY. Here’s how that shakes out across the different categories, across two months.

General Merchandise & Grocery


The Song Remains the Same
Rapid technological change can trick us into thinking that the fundamental nature of human beings has changed commensurately, but nothing could be further from the truth. In terms of biological evolution, we are not very different from human beings who lived thousands of years ago in hunter-gatherer cultures that bear no resemblance to our current world. We have inherited the psychology of our ancestors and must work within the constructs of that psychology.

Today’s investors are not that different from those who lived nearly a century ago. The “passion for prophecy”, the desire to “get rich fast”, and buying what is “in trend”  have tempted investors for generations.

The trouble with buying what is in trend is that people are buying not necessarily the “best” securities but merely those that are most popular at a given point in time. And that popularity itself accounts for prices that often are out of proportion to business prospects. 

The crucial distinction between future prospects for a business enterprise and prospects for its securities is one that generation after generation of investors fail to make. A business with compelling future prospects can make for a lousy investment if its securities are so popular that its bright future is more than fully reflected in the price one must pay to participate.

As of May 2020, the top five companies in the Standard & Poor’s 500 comprise over 21 percent of the index:

Microsoft, Apple, Amazon, Facebook, and Alphabet are indisputable leaders of our modern economy. Their stocks are also popular not only with active investors but with index funds that automatically purchase these stocks when they receive new inflows of investor funds. Without commenting on the valuation of these companies, we can note that they are undoubtedly popular stocks in 2020. Their popularity might be justified by the underlying business fundamentals or investors may be repeating the “universal habit” of buying what is popular and suffering poor results over time. At the very least, buying popular stocks should always be done with great caution.

Investment resources
Collection of investment articles, books, speeches, videos including some all-time classics.