Friday, November 26, 2021

This week's interesting finds

Holiday gifting made easy – and fun!

Once again, it’s our pleasure to unveil the EdgePoint holiday gift list. In this 2021 edition, you’ll find great ideas for anyone on your shopping list. Our recommendations range from practical and classic to “Why didn’t I think of that?”. Some of them even fall into the “Wow, I never heard of that!” category. Whatever gifts you choose for your loved ones, we wish you much joy this holiday season.

This week in Charts

Many former high growth/tech/IPO/SPAC favorites from last year are now showing significant drawdowns.

Amazon’s secret war on Americans’ privacy  

In recent years, Inc has killed or undermined privacy protections in more than three dozen bills across 25 states, as the e-commerce giant amassed a lucrative trove of personal data on millions of American consumers. 

Amazon executives and staffers detail these lobbying victories in confidential documents reviewed by Reuters. 

Some of this information is highly sensitive. Under a 2018 California law that passed despite Amazon’s opposition, consumers can access the personal data that technology companies keep on them. After losing that state battle, Amazon last year started allowing all U.S. consumers to access their data. (Customers can request their data at this link.) Seven Reuters reporters obtained and examined their own Amazon dossiers. 

One found that Amazon had more than 90,000 recordings Alexa devices made of the reporter’s family members since 2017. 

Another reporter found that Amazon had detailed accounts of her Kindle e-reader sessions and a customer profile which included her family’s “Implicit Dietary Preferences.” 

Alexa devices also pulled in data from iPhones and other non-Amazon gear – including one reporter’s iPhone calendar entries, with names of people he was scheduled to contact.   

The Winds of Change

The last 20 months have been a most unusual period, thanks primarily to the pandemic, yet many things feel like they haven’t changed over that time span. Each day seems like all the others.

Yet there are changes taking place, and they’ll be the subject of this memo. My focus isn’t the “little macro” changes, like what will happen to GDP, inflation and interest rates next year, but rather the “big macro” changes that will have an impact on our lives for many years. Many aren’t actionable today, but that doesn’t mean we shouldn’t bear them in mind.

• The Changing Environment for Investing 

• The Changing Nature of Business 

• Inflation/Deflation 

• The Outlook for Work 

• The Outlook for Democracy 

• Generational Inequity 

• The Role of the Fed 

• Developments in China 

• The T-Word   

Nearly two-thirds of Gen Z think they’ll become crypto millionaires  

Lifted by a flood of stimulus money, plus a sense that Congress would do anything to stave off an economic collapse, financial markets have spiked over the course of the COVID-19 pandemic—giving investors soaring confidence that they'll become the next Warren Buffett. 

Unlike the Oracle of Omaha, though, young investors think cryptocurrencies are their ticket to riches. 

A recent survey by research and analytics company Engine Insights found that 31% of the U.S. adults it polled “believe they can become millionaires from crypto investments." Of the Gen Z surveyed—that is, anyone born between 1997 and 2012—59% think crypto riches are their future. 

Viral stories of investing successes are frequent—helping fuel even more of a “Fear of Missing Out” investment philosophy. 

And the young—especially young men—are particularly prone to the crypto sirens. More than 40% of 18-to-29-year-old men have either invested in, traded, or used a cryptocurrency, according to a recent Pew Research Center survey.

Friday, November 19, 2021

This week's interesting finds

Why charging phones is such a complex business, with Anker CEO Steven Yang

Steven Yang founded Anker in 2011, and since then, it’s turned into a 3,000-person company that operates all over the world by selling phone chargers and battery packs on Amazon and have since expanded to other categories like webcams, Bluetooth speakers, and smart home products. 

Along the way, they’ve pioneered a major advancement in charging technology — you know that little white brick that takes forever to charge an iPhone? It’s made using silicon and puts out about 5 watts of power. Anker made a big bet on a material called gallium nitride, or GaN, and it is now a charger the size of that iPhone brick that can put out 30 watts of power — enough to charge a MacBook Air. It was a big bet, and it paid off. 

And, of course, we had to talk about Amazon. Anker started its business on Amazon and still sells most of its devices on the platform. Steven told me that Anker has 100 people, or fully 3 percent of the company, dedicated to thinking about managing the Amazon marketplace. And for good reason: this past summer, several of Anker’s competitors were banned from Amazon for breaking guidelines around fake and paid five-star reviews.

What's a Safe Retirement Spending Rate for the Decades Ahead?  

A 4% starting withdrawal rate, with annual inflation adjustments to that initial dollar amount, thereafter, is often cited as a "safe" withdrawal system for new retirees. Financial planner Bill Bengen first demonstrated in 1994 that such a system had succeeded over most 30-year periods in modern market history, and in the nearly 30-year time period since Bengen's research, a 4% starting withdrawal rate would have been too modest. But is such a withdrawal system safe today, given the confluence of low starting bond yields and equity valuations that are high relative to market history?

Retirees who employ variable withdrawal systems that are based on portfolio performance--taking less in down markets and more in good ones--can significantly enlarge their starting and lifetime withdrawals. For instance, our research finds that some flexible withdrawal systems would support a nearly 5% starting withdrawal rate. But these variable strategies involve trade-offs--specifically, the year-to-year cash flow can be more volatile.

Rags to Riches - The Story of the humble uniforms and laundry 400 bagger 

The book Rags to Riches is written by Richard T Farmer who was the president and second-generation family founder, Richard’s grandfather ‘Doc’ Farmer was the original founder of the business which was invented out of the “grinding poverty of the great depression”.

A summary of some elements of overt high-performance culture through the Cintas history include:

• A 10yr stock option plan with none vesting for the first 5 years and then 20% each year after. 

• Cintas managers always wear business attire, no casual Fridays, our business is making people look sharp - lead by example. 

• Operate exceedingly clean plants, Farmer used to inspect the bathroom as a key indicator of manager quality 

• Even while a private company the profit and loss was shared with all employees every year 

• To improve profitability, incentivize the team to satisfy customers, increase competitive advantage and be more productive.

“You’ll hear lots about culture in this book. It is, without doubt, our most important competitive advantage. Competitors can copy our sales material, our products, and even some of our systems but they cannot copy our culture”.

Farmer outlines at the end of the book that to achieve the grand ambitions he needed very talented people however, he was always more comfortable with “partners” than “employees” so whenever he came across exceptional people, he saw to it that they were owners and partners in the business, not just employees. 

Farmer outlines that the best way to communicate the culture of a business is by telling stories about where and how it came about, this is almost exactly the way Bezos describes culture at Amazon –“stories of past successes and failures that become a deep part of company lore”.

Some of the stories about how Cintas grew its culture came from near-death experiences. In 1945 when Cintas was a small family business with 12 employees the factory burned down and although there was insurance it wasn’t enough to truly rebuild the business. Doc Farmer exclaimed that “we are not out of business! you can take our equipment, but as long as we have our people we’ll be okay”. Having to rebuild from nothing with only your staff teaches you the true enduring nature of your people.

Another story about the workplace environment was developed through many experiences including Richard working in the drying room which was stiflingly hot, lifting heavy drums of wet rags that were 200 pounds apiece, eating lunch in the restrooms because there was no lunchroom, scooping out grease from the sump pit by hand in waist-deep oil and grease. All these examples enforced the culture to provide a safe and enjoyable workplace.

This week in Charts



The 10-year yield minus CPI is at levels only seen for a few weeks in 1974 and 1980. In both cases, yields meaningfully rose over the next year, even as CPI decelerated, as sometimes the bond market can react with a delay to inflation. 

Source: Bloomberg, Raymond James Research

Friday, November 12, 2021

This week's interesting finds

An investor's journey with EdgePoint, part 2

 A lot’s happened over the last couple of years, so we updated Mimi’s video journey to demonstrate what an EdgePoint investor has experienced. The ride over the short term wasn’t a smooth one, but those who worked with their advisor and stayed invested are closer to their Point B.

This week in Charts

NASDAQ 100’s forward price/sales ratio has reached a new all-time high

The Nasdaq 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks.

The widest gap on record between the U.S. Federal Reserve’s short-term interest rate setting and year-over-year CPI

Large gap in return expectations

Amount of data generated every minute

“Excess” household savings could yet boost spending

 • With household saving rates still elevated in most developed economies, “excess savings” have continued to rise. If people were to run down these savings, this would breathe new life into consumer recoveries. 
 • By the end of Q2 (the latest data available), households in advanced economies were holding currency and deposits that were some $3.7 trillion higher than we might have expected them to be had there been no pandemic. 
 • Household’s savings rates have fallen back from their peaks. The US aside, though, they remain much higher than before the pandemic. This is because while household incomes remain resilient, consumer spending is yet to stage a full recovery. 

DM – developed markets
NPISH – non-profit institutions serving households

The Most Important 2000 Years of Energy History (Video: 33 minutes)
 Few people think of energy at all and even fewer think about its history. We are on the verge of a new chapter in the history of energy and few people realize the implications. Learn more about:
• The one thing that increased real GDP growth 20-fold 
• Why the largest city was 1 mm people for 2000 years 
• Why renewables are a major step backwards 
• Why we might be on the verge of the most important energy revolution in 400 years.

Friday, November 5, 2021

This week's interesting finds

We're hiring!  

We're always looking for talented people who can help us achieve our goals and we understand that extraordinary human ability is a scarce resource in high demand. If you think you've got some and are interested in our company, please send your resume to:

Current opportunities:

Product manager  

Creative writing specialist

This week in Charts 

Wages and salaries for private industry workers (not seasonally adjusted)

Emissions by sector     

Bill Ackman’s presentation to NY Fed on why they should raise interest rates  

Key points: 

- More than 25 million jobs were lost due to the pandemic between February and April 2020, but the economy has since recovered 20 million jobs (~80%). 

 - At the current pace of ~500K monthly job additions, we expect the five million employment gap to pre-pandemic levels to close within the next 10 months. 

- The annualized pace of growth across several key inflation measures, including wage inflation, has remained elevated in the mid to high-single-digit range. 

 - Even excluding the impact of new vehicles and used cars and trucks, which have experienced heightened inflation, CPI has been increasing at an annualized growth rate of approximately 5%. 

- Both the unemployment rate is lower AND inflation measures are substantially higher today than at the beginning of prior rate hike cycles.   

Highest price hike to milk in recent memory  

The Canadian Dairy Commission, a crown corporation that sets the price that dairy farmers get for their milk, had just put out a statement recommending an increase of 8.4 per cent, to make up for big jumps in the cost of feed, fuel and equipment. 

The price hike, if approved by provincial authorities, will take effect in February, amounting to an extra six cents per litre for processors that buy milk from farmers and turn it into retail-ready products.

These Lenders Are Making A Growing Number of LBOs Possible  

Private equity firms are finding that more leveraged buyouts of tech companies are becoming possible, thanks to lenders that have deeper pockets than ever: private credit firms. 

These lenders are providing financing to companies that wouldn’t be able to borrow as much in bond or leveraged loan markets. Private credit firms’ willingness to finance these kinds of deals is helping to fuel the highest volume of LBOs for tech companies since 2016. And they’ve enlarged the universe of publicly traded U.S. corporations that private equity firms can readily buy by somewhere around $550 billion. 

The loans in question are either to companies that are burning through cash and don’t have enough earnings to pay interest, or to corporations that need more debt for a leveraged buyout than bond or syndicated loan markets will provide. Some of these financings can pay interest of 8 percentage points or more, far above yields available in other comparable markets.