Friday, July 31, 2020

This week's interesting finds

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.

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.

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.

Friday, July 24, 2020

This week's interesting finds

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.

“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

Friday, July 17, 2020

This week's interesting finds

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.

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

Friday, July 10, 2020

This week's interesting finds

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.

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

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.

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.

Friday, July 3, 2020

This week's interesting finds

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:
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.
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.