Friday, July 30, 2021

This week's interesting finds

Immigration and Canadian housing market

Americans taking personal loans to invest in the stock market

Thinking about macro 

Macro forecasting is another area where – as with investing in general – it is easy to be as right as the consensus, but very hard to be more right. Consensus forecasts provide no advantage; it is only from being more right than others – from having a knowledge advantage – that investors can expect to earn above average returns. 

Nonetheless, since macro developments are so influential, many people think it is downright irresponsible to ignore them when investing. Yet: 

•Most macro forecasts are likely to turn out to be either unhelpful consensus expectations or non-consensus forecasts that are rarely right

•There are few investors who successfully base their decisions on macro forecasts. The rest invest from the bottom up, one investment at a time. They buy when they think they have found bargains and sell things they consider overpriced – mostly without reference to the macro-outlook.

•It may be hard to admit that you do not know what the macro future holds, but in areas entailing great uncertainty, agnosticism is probably wiser than self-delusion.

How Trader Joe’s $2 wine became a best-seller

In the spring of 2002, the label made its retail debut at the shockingly low price of $1.99 per bottle. Early on, in an internet chat room, a Trader Joe’s employee dubbed it “Two Buck Chuck” — a moniker that caught the eyes of budget-conscious shoppers. 

In the wake of the dot-com bubble, there was a demand for cheap wine. But nobody could’ve anticipated the brand’s success. 

For a $2 bottle, it performed astonishingly well in competitions: The Chardonnay won a double-gold at the 2007 California State Fair, and Wines & Vines magazine rated it higher than a $67 bottle in a blind tasting.

Two Buck Chuck, declared one New York Times critic, had “revolutionized wine drinking” forever. \

How to make money on a $2 bottle on wine 

Industry experts estimate a bottle costs ~$1.50 to produce, accounting for processing, packaging, labor, and shipping. The wine itself only makes up ~30-40% of this cost. Though the Charles Shaw label claims to be “Cellared and Bottled in Napa,” most of the grapes in the wine are grown in the Central Valley — an area with dramatically cheaper land and operation costs. 

Costs in the supply chain have also been minimized:

•oak chips are used to ferment wine rather than barrels 

•real corks substituted for composites

•lighter glass bottles are used, allowing them to ship more cases per truck and save on shipping

His role in changing the wine industry has earned him near-universal disdain among “true wine people” — mainly vintners who claim he’s “cheapened” the good Napa name. 

But this doesn’t seem to bother him much. 

“You tell me why someone’s bottle is worth $80 and mine’s worth $2,” he told a reporter in 2009. “Do you get 40 times the pleasure from it?”

Wisdom from decades of investing 

A podcast with Carl Kawaja, who has served as a portfolio manager at Capital Group for decades.

[00:16:37] - Discussing his investment style through the lens of simplicity

[00:24:35] - A time where he worked to try and create a simplified equation but couldn’t

[00:36:03] - Thoughts on whether buying well or holding well is more difficult 

[00:40:40] - Capital Group’s history and his river-rafting analogy in regard to the company 

[01:13:08] - Advice for new investors who want to step into the field and set themselves up for success

History does not repeat itself, but it rhymes

Friday, July 23, 2021

This week's interesting finds

This week’s charts 

In the market for a car? 

Market corrections by decade 

Social media 

Canada’s fiscal reality

It’s imperative that Canadians distinguish between convenient political rhetoric and reality when it comes to the country’s finances. The Trudeau government continues to promulgate three assertions that must be clarified. 

• First, that the government lowered personal income taxes for the middle-class. It simultaneously eliminated a number of tax credits such as children’s fitness, public transit and income-splitting for couples with young children. A 2017 analysis of these tax changes, which included both the tax rate reduction and the elimination of the tax credits, found that 81 per cent of middle-income families paid on average $840 more in income taxes. And a follow-up study found that 61 per cent of low-income families faced higher personal income taxes due to these tax changes. 

• Second, the Trudeau government continues to use Canada’s comparative government debt position as a rationale for more debt-financed spending. Using net debt, however, turns out to favour Canada in a way that fundamentally misrepresents our indebtedness because it includes the assets of the Canada and Quebec Pension Plans to adjust total debt when calculating net debt. Those assets are required to finance the promised benefits to current and future retirees. Therefore, it’s misleading to offset government debt with these pension assets. This is one of the main reasons why Canada’s total debt ranking is so different from its ranking on net debt. When we compare total government indebtedness as a share of the economy among 29 industrialized countries, Canada falls to 25th with only Japan, Italy, Portugal and the United States having higher levels of indebtedness. 

• The third and final clarification relates to rates of economic growth. The government continues to reiterate its commitment to improving the economy, the inference being that their policies—namely higher taxes, higher debt-financed spending and more regulation of the economy—have led to stronger economic growth. But if we compare the four years prior to the 2020 COVID recession (2016-2019) to similar periods in the past, the Trudeau government experiences the lowest annual average rates of economic growth (2.1 per cent) dating back to Brian Mulroney.

The private equity backlash against ESG

Call it Newton’s law of corporate ownership. As listed companies come under increasing investor pressure to act on everything from executive pay to carbon emissions, a reaction against those constraints seems to be fueling a spate of buyouts by private equity firms. 

The first half of 2021 was a boom period for the sector with $500bn-plus of deals, the highest level since records began four decades ago. 

Done well, private equity has a crucial role to play in modernizing economies, helping companies to restructure efficiently away from the short-termist glare of public markets. Buyout firms rightly pounce on listed companies that they deem undervalued or bloated. In so doing, they keep capitalism efficient and act as a positive reactionary force.

But is private equity also reactionary in the conservative backlash sense of the word — facilitating a rebellion against some of the progressive constraints of public company existence, particularly the growing demands of complying with standards on environmental, social and governance issues? The evidence is mounting. 

More freedom on governance has long been seen as a plus for private companies. As listed company governance has become stricter, so the advantage of private company status has increased. Heads at private equity owned companies relish diminished bureaucracy and the ability to earn more money without critical scrutiny from public company shareholders. Fortress’s agreed £9.5bn buyout of Morrisons this month came with a strong hint that management “incentives structures” would be boosted, only weeks after the listed UK supermarket suffered a shareholder revolt over pay.

The fact remains, though, that ESG is a fringe topic in the private equity industry. That in turn risks undermining the whole drive to embed ESG in global business. First, the steady switch towards private ownership and away from public markets neutralises progress made in public company ESG standards. Second, private equity is under little pressure to change. Buyout firms claim that their “limited partner” end investors, such as right-thinking pension funds and endowments, are demanding more focus on ESG. However, those LPs have little genuine influence, given the wall of return-hungry money clamouring for access to the best private equity funds.

Can the nuclear industry power Canada’s future?  

Governments encourage electrification of cars, buildings and nearly everything else. Those efforts could double, even triple, electricity demand in the coming decades. But renewable forms of generation – hydro, wind, solar and biomass – have become preferred tools for decarbonizing electricity grids. And utilities can buy inexpensive wind turbines and solar panels today.

Seeking to catch up, dozens of nuclear vendors sprung up just in the past few years, promoting a dizzying assortment of next-generation models that have collectively been dubbed “small modular reactors” (SMRs)

Though the characteristics of individual designs vary widely, in brief, these compact new reactors promise to retain the main selling points of nuclear power generation – namely, low carbon emissions and predictable electricity output, rather than the intermittent power generated by wind and solar. The makers also hope to ditch the nuclear industry’s considerable baggage, which includes a long history of cost overruns and construction delays.

Senior government officials regard SMRs as indispensable tools for meeting Canada’s greenhouse gas emissions targets, by replacing coal-fired plants and by electrifying mining and oil and gas facilities. U.S. President Joe Biden and U.K. Prime Minister Boris Johnson have also indicated they will also support SMR development, as have some prominent investors, notably Bill Gates.

Friday, July 16, 2021

This week's interesting finds

Q2 EdgePoint commentaries

This quarter, Sydney Van Vierzen looks at why we believe that the key to ESG investing is making the world a better place, not just how a company is rated.


Derek Skomorowski discusses how we're positioning our Portfolios to deliver pleasing long-term returns regardless of the potential negative effects that central bank measures may have on fixed income markets. 

This week in charts 

Income earned in a savings account is at the lowest level, while income needed to beat inflation is at the highest level since 1994. 

Retail inflows into four direct brokerages account for approximately 20% of all US equity market volume since the start of the pandemic. Inflows were mainly driven from younger age groups, associated with a lower income category. 

The valuation spread between S&P 500 Index companies is wider than its historical average   


There are four main trends underlying the June inflation report. 

First are the items where prices fell sharply at the start of the pandemic and that are now returning to their pre-pandemic levels. 

Second are items where prices have temporarily risen above their pre-pandemic levels due to supply constraints and could come down. 

Third are items where prices are likely settling at a permanently higher level. 

And fourth are items where price increases have slowed rather than accelerated as a result of the pandemic, at least for now.

The loser’s game

To win at amateur tennis, you only need to avoid mistakes. And the way to avoid mistakes is to be prudent, keep the ball in play, and let the other guy defeat himself in doing so. The other guy will try to beat you but an activist strategy will not work. His effort to win more points only increases his error rate. And it works ever brilliantly when he doesn’t realize that he himself is playing a Loser’s Game.

It’s not just tennis. Any game can be assessed through the mental model of the Winner’s and Loser’s Game. What’s important is whether you can assess which one you are dealing with and adjust your winning strategy accordingly. 

Winner’s Games are ones in which the outcome of the game is entirely dependent on the player’s ability. Great examples of Winner’s Games are chess, sprinting, and weightlifting. 

Loser’s Games are entirely different from Winner’s Games. Loser’s Games are ones in which the players struggle to compete against the game itself. In such games you make more progress getting ahead by avoiding mistakes rather than making brilliant decisions. 

The loser’s game of investing

It’s gradually becoming a well-known fact that the majority of professional money managers—the ones who have devoted their entire career and day to picking stocks—are not beating the market. 

The investing game continues to suck in bright and articulate individuals laden with overconfidence who erroneously try to play the Winner’s Game rather than the Loser’s Game. They manage money for outsized gains, expose their clients to too much risk, and rake up too many transaction fees in the process. 

Why? Because these people all compete against themselves and they all try to do it faster than the other.

The very essence of how a Winner’s Game turns into a Loser’s Game is when the players all flock to the same place based on the wild successes of the early players. So, the investing game wasn’t always a Loser’s Game. It was transformed from a Winner’s Game into a Loser’s Game.

Luckily, there are a few principles that allow one to play the Loser’s Game of investing successfully for those who dare to do so.

Principle #1: Make sure you are playing your own game. In other words, know your circle of competence and know it really well.

Principle #2: Keep it simple. Simplicity, concentration, and economy of time and effort have been the distinguishing features of the great players’ methods, while others lost their way to glory by wandering in a maze of details. 

Principle #3: Concentrate on your defenses. Almost all of the really big trouble that you’re going to experience in the next year is in your portfolio right now; if you could reduce some of those really big problems, you might come out the winner in the Loser’s Game. 

Principle #4: Don’t take it personally. In the investing business, working harder isn’t at all correlated to getting a better outcome. And we are all, as a group, captives of the normal distribution of the bell curve. The way to give yourself the biggest chance of being on the right side of the curve is by fishing in the less-crowded pond.

Friday, July 9, 2021

This week's interesting finds


Bond yields peaked at the same time as demographic ratio (number of 20 to 34-year olds divided by number of 55+ year olds). Both measures have been in secular decline since early 80s.


The capital inflows into equity in first half of 2021 are larger than all the inflows in first halves of the years for the last 20 years combined

The gain for global stocks in first half of 2021 is 7th largest gain in the past 100 years.

The annualized return for commodities in first half of 2021 is the largest in almost last 50 years and the 5th largest in the past 100 years.


Large retail sales despite jobs still not being fully recovered could be explained by fiscal stimulus

As a result, US inflation was up 8.4% annualized in past 3 month, which is 9th fastest since WW2.

Patient investing is hard 

Patient investing is the ability to endure long periods of underperformance — adhering to your well-thought-out plan in the form of an investment policy statement — in hopes of achieving your investment objective. 

When it comes to judging the performance of investment strategies involving risk assets, far too many investors believe that three years is a long time, five years a very long time and 10 years an eternity. This is true even of most institutional investors — a State Street survey of senior executives with asset allocation responsibilities at 400 large institutional investors found that just 20% of respondents said they would tolerate underperformance of two years, and just 1% for three years.

Vanguard’s Chris Tidmore and Andrew Hon examined the amount of patience required of investors by quantifying the wide range of frequencies, durations and magnitudes of underperformance that both equity factor tilts and outperforming traditional active managers experience. Here are some of the findings: 

• About 70% of outperforming funds underperformed their style benchmarks between 40%and 60%of all one-year periods. 

• Almost 100%of outperforming funds had experienced a drawdown relative to their style and median peer benchmarks over one-, three- and five-year periods. 

• 8 out of 10 outperforming funds had at least one five-year period when they were in the bottom quartile relative to their peers.

Friday, July 2, 2021

This week's interesting finds

Private Equity gears up or the siege of Japan Inc.

Unlike in the U.S., private equity doesn’t have a big presence in Japan. According to consulting firm Bain, 8% of Japan’s mergers and acquisitions involve private equity, compared with 15% in the U.S. And M&A activities, relative to the size of the economy, are much lower in Japan than in the U.S. or Europe.

But private-equity funds are gearing up to look for opportunities in the country now. Total assets under management in Japan-focused private equity amounted to $35 billion as of September last year, more than double the sum at the end of 2015.

Signs of real progress on corporate-governance reform are clearly one factor driving the increasing interest. Shareholder activism has been rising, demonstrated most dramatically at Toshiba. That in turn has driven companies to reassess their business portfolios: Cross-shareholdings have long been common in Japan, but are beginning to be sold off more regularly. Goldman Sachs says Japanese companies made a record 472 restructuring announcements in 2020, a 56% rise from the previous year. 

Buffett & Munger: A wealth of wisdom interview

Born and raised in Omaha, Nebraska, both worked at Buffett’s grandfather’s grocery store, but their paths didn’t cross until Buffett was 29 years old and Munger was 35.

They met thanks to a well-known doctor couple in town Eddie and Dorothy Davis, who told Buffett she trusted him to manage money because the investor reminded him of someone named Charlie Munger. 

“Well, I don’t know who Charlie Munger is, but I like him,” Buffett responded.

They made it a goal to eventually connect Buffett and Munger, Buffett said. It happened over dinner two years later, in 1959, when Munger, then a lawyer in Los Angeles, was back in Omaha after his father, Alfred, died. 

“About five minutes into it, Charlie was sort of rolling on the floor laughing at his own jokes, which is exactly the same thing I did,” Buffett, 90, said. “I thought, ‘I’m not going to find another guy like this.’ And we just hit it off.” 

“We made a lot of money. But what we really wanted was independence. And we have had the ability since pretty much a little after we met, financially, we could associate with people who we wanted to associate with. And if we had, if we associated with jerks, that was our problem. But we didn’t have to. We’ve had that luxury now for, you know, 60 years or close to it. And, and that beats 25-room houses and, you know, six cars or that stuff is, what really is great is if you can do what you want to do in life and associate with the people you want to associate with in life. 

Inflation on the menu

Transitory or not, this hurts

The power of deferred consumption 

A ProPublica reporter wrote an article about the largest Roth IRAs in America. Think of a Roth IRA as a TFSA meets RRSP. There was a time-period in the U.S. where you could port your IRA (akin to RRSP) into a Roth IRA (akin to TFSA) by paying the one-time capital gains at the time of transfer. The benefit of course is that all compounding in the Roth IRA thereafter would be tax exempt as well as go forward withdrawals. 

The largest Roth IRA in America is believed to be Peter Theil's at over US$5 billion. This is not that interesting as he basically put his PayPal founder shares in his Roth IRA and this anecdote should be less about the largest Roth IRA and more about starting a multi-billion-dollar company. Theil did not respond to the reporter's request for comment. 

The more interesting story is the reporter also picked up on Ted Weschler's Roth IRA which exceeded US$240 million at end of 2018. His Roth IRA is likely far larger today given overall strength in the U.S. market since then and the ripe opportunities COVID presented for Weschler's investment style (traditional deep value). Interestingly, unlike Theil, Weschler felt the need to provide more context to his Roth IRA performance. His statement can be found here and is well worth the ~2 minute read.  

The takeaway is what everyone should know - that savvy security analysis, luck and patience does wonders! 

Correlation: Large cap stocks & bonds

Source: Empirical Research Partners