This week's interesting finds

EdgePoint Academy - Planning for retirement: Your retirement preparedness temperature check

Our retirement series concludes with a link to a retirement calculator to assess your own retirement preparedness and the key takeaways to remember from the series.

Inflation expectations vs. Treasury yields

Over the past 5 months, real yields have collapsed to all-time lows as inflation expectations rise and nominal yields remain relatively unchanged. Historically, market returns have been more highly correlated with change in nominal interest rates.

Source: Credit Suisse

Mind-boggling stats

1. Apple has added $420 B of market cap over the last month, which is more than the current market cap of 493 companies in the SPX.

2. The market cap added by Apple just since reporting and announcing its stock split at the end of July is equal to the combined total market cap for the bottom 77 stocks in the SPX.

3. Apple alone is worth pretty much as much as the whole of German stocks…

4. It took them 38 years to get to 1 trillion market cap, and 8 months to add another 1 trillion. Normal.

5. 80% of outstanding bonds globally yield less than 1%.

6 Elon Musk founded / co-founded companies are now worth more than 500% of the total combined accumulated revenue of ALL of them. And NONE of them have ever had a profitable year.

7. Elon Musk net worth is greater than the cumulative revenues of ALL of his companies founded or co-founded by him while he was there… of course don’t ask about profits.

8. TSLA is now the 12th largest company in the world with a market cap of $383 B, sales of $24 B.

9. Since announcing its stock split on August 11, TSLA has added almost $200 B in market cap… or 5 FERRARIs or Fiat + Peugeot + Renault + BMW + DAI + VW. In 9 days!!!

10. FB, AMZN, AAL, MSFT, GOOG, now account for 23% of SPX well above the 18% high of the 2000s.

11. While the SPX closed at an all time high, every single sector in the US market had more decliners than advancers last week. All 11 sectors except tech…

12. US corporate bankruptcies (companies with assets > $1B):

2002: 24

2009: 38

2020: 45 and counting!

13. 80% of outstanding bonds globally yield less than 1%.

Investors Have Been Making the Same Mistake for 300 Years

Early in August 1720, Sir Isaac Newton was faced with a choice. In a year when London’s stock market was roaring upward in an utterly unprecedented boom, should he sell the last of his safe investments to buy shares in the South Sea Company? Since January of that year, shares in the firm—one of the largest private companies in history—had gone up eightfold and had made paper fortunes for thousands.

Newton was usually a cautious investor. He did own shares in a few of the larger companies on the exchange, including South Sea, but he had never been a rapid or eager market trader. That had changed in the past few months, though, as he bought and sold into the rising market seemingly in the hopes of turning a comfortable fortune into an enormous one. It was a disastrous choice. Within three weeks, the market turned. By Christmas, it had utterly collapsed. Newton’s losses reached millions of dollars in 21st-century money.

The global financial system still breaks the same way it did 300 years ago. The dot-com bubble that collapsed from 2000 to 2002 and the real-estate bubble of 2007 and 2008 were part of a recurring pattern of boom, bust, and bankrupted people, institutions, and nations. Newton’s errors matter, because we’re still making them. Months into a deadly pandemic that has ravaged the world and thrown millions of Americans out of work, the crisis that sparked the Great Recession seems like a distant memory. Forgetfulness is only one of the reasons bubbles happen again and again.

The Swedish Investor

A collection of videos covering advice from the most successful money managers and investors of our time. You will find many investing/business/trading books summarized into short videos.

This week's interesting finds

EdgePoint Videos : Short-term declines

Since the inception of EdgePoint, there have been six periods of significant volatility in the markets, and each of them provided opportunities to find outstanding investments for those willing to do the work. Short-term pullbacks in the market will happen, but they're only temporary. What matters most is how you react during these tough times.

A mix of charts and clips that caught our attention this week

People over 55 own over 80% of the bonds out there.

The ten-year Treasury bond yield is 140 basis points below the underlying inflation gauge, a record gap.

Real income and sales have gone up despite a huge rise in unemployment.

Apple is worth $2 trillion, and is now bigger than all the S&P oils and banks combined

The S&P 500 made a new all-time high this week. However, of the 500 members in the index, just 6% were concurrently making 52-week highs.

Insider buy/sell ratio for US Energy stocks

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.