Friday, January 28, 2022

This week's interesting finds

This week in charts

Being an Amazon Seller in 2021; Year in Review 

I’m the founder and CEO of Viahart (est. 2010), an e-commerce focused educational toy company. We did $8.8 million in sales in 2021. This article is going to tell you what it was like to run this business in 2021 vs. 2020, amidst threats like the Amazon aggregators, supply chain difficulties, inflation, and even getting “dragged” on social media. 

Sometimes I ask people what they would do if they ran my company. The most common answer is “build your business off Amazon”. Amazon was 98.1% of our sales in 2018. We’ve now got it down to 90.8% in 2021. At the current trend, it’ll take us 17 years for Amazon to account for less than 50% of our business. 

That’s a problem. You don’t want too many sales concentrated with a single customer because if they change their mind about you, your business can evaporate overnight. With Amazon at 90.8% of our sales, were we to lose them, we could not afford to pay our rent nor the wages of our employees. Further, without Amazon’s sales volume, we wouldn’t be able to demand quality from our suppliers, nor cheap container shipping. We would go bust, fast. 

Robinhood and Democracy Promotion 

In March 2021, Robinhood announced they would be building a platform to give everyday investors access to IPOs. It really was the perfect ‘democratizing finance’ story. Until they pushed this, the IPO allocation process was the poster-child of clubby, insider-y, and banker-y. The stereotype was of investment bankers pulling out their Rolodexes and calling up their golf buddy money managers to decide who got the juicy access to buy into an IPO that always pop on the open. It was so easy to conjure up images of backrooms with oak furniture and cigars. 

And it worked and it was non-stop. Sweetgreen opened at nearly double it’s IPO price. Allbirds surged 90% after the open. Nubank ‘only’ traded up 15% after it’s ‘blockbuster IPO’. I will note, Robinhood, itself, was a bit different. The shares traded slightly down on IPO day, and then shot up 100% on the 4th day of trading. 

Overall, things appeared to be going according to plan. Finance, democratized. 

But, of course, that’s not how things have ended up. 

A lot of people have now lost a lot of money. I have no way of knowing what percentage of them were retail investors, but back in July 2020, when I wrote about Robinhood users being ‘the gravy’, this is the kind of stuff I worried about. Even more, this feels exactly like the woo-woo Silicon Valley doublespeak of democratizing finance that has always grated on me. In that original Robinhood post, I had written: 

I hadn't processed just how perfectly Robinhood has silicon valley-ified financial markets until I started writing this post. Robinhood is Facebook is Google is everything else. Just look at the story: 

Stanford (or insert other top-level school here) grads head out to disrupt a market that genuinely needs to be disrupted. 
The great disruption is things will become free. Everything is couched in the language of democratization. The Robinhood founders even push the origin story that the idea was born amidst the Occupy Wall Street protests. 
As with most "free" products, the real business model is based on engagement. The more time you transact and interact on the platform, the more money the platform makes. 
The product is built to trigger every possible dopamine receptor in a user's brain. In the early years, terms like gamified UX are considered a positive. 
• The company grows to an incredible size and the founders and investors and lots of people working there get incredibly rich. 
We slowly start to see a litany of unintended consequences, but for the most part, it's too late and the cultural impact has already taken place. 

China’s COSCO Pays Huge Bonuses 30 Times Worker’s Salary Amid Container Shipping Boom 

Asian shipping companies are offering mega bonuses to employees amid a boom in freight rates, with China’s state-owned giant Cosco Shipping Holdings Co. doling out as much as 30 times a worker’s monthly salary, according to Caixin Global. 

Cosco is doling out the huge year-end bonuses to employees including its sales and marketing staff, Caixin said, citing employees at the company. Other shippers are also giving out generous rewards. A worker at Taiwan’s Evergreen Marine Corp. received a year-end bonus that was nearly 40 times their monthly salary, according to the daily. 

US warns of fragile chip supply as inventory falls to just five days 

According to a survey by the department of roughly 150 companies worldwide, manufacturers’ median chip inventory plunged from 40 days supply in 2019 to about five days late last year.

Friday, January 21, 2022

This week's interesting finds

We’re hiring in Toronto and Montreal! We’re looking for individuals who have a passion for relationship management.  

EdgePoint Equity Commentary: Trust the process – 4th quarter, 2021  

This quarter, portfolio manager Andrew Pastor discusses why our investment approach is repeatable despite the unpredictable sources for our business ideas. 

EdgePoint Fixed Income Commentary: Loaded Dice – 4th quarter, 2021  

This quarter, portfolio manager Derek Skomorowski talks about why fixed-income investors often forget that good times don’t last forever and why it’s important to manage inevitable risks that come along the way.   

This Week in Charts 

Critical materials for a low-carbon economy


China’s No Baby Boom   

Excess Savings   

Cathie Wood’s Famous Outperformance Versus the S&P 500 Is Fading 

With another 4.2% drop on Tuesday, the tech-heavy ARK Innovation ETF is closer to wiping out its famous outperformance versus the S&P 500 Index that helped propel Cathie Wood to Wall Street superstardom. 

As rising yields hammer expensive-looking growth companies with shaky profit outlooks, the exchange-traded fund beloved by day traders, ticker ARKK, has already plunged 18.7% this year -- down 51% from February’s peak. 

It has now returned just 11 percentage points more than the benchmark U.S. stock gauge since the start of 2020 -- when Wood’s fortunes soared in the pandemic-fueled speculation that helped ARKK trounce just about every fund in America’s now-$7 trillion ETF market. 

Weighted by when inflows occurred, the average investor in five ARK ETFs is sitting on a 27% loss, Bespoke Investment Group wrote in a Tuesday note. The firm monitors a slew of the firm’s funds as a proxy for market risk appetite.   

Why Canada may yet be an energy superpower 

Shifting too quickly from carbon-intense industries, which currently employ millions of workers, will trigger economic volatility, deepen unemployment and increase societal and geopolitical tensions, warned the World Economic Forum in its latest report. 

It’s not just developing countries — Western resolve is weakening, too. Europe, which is at the forefront of the global energy crisis, serves as an early warning that well-intentioned, long-term energy policies that look astute on paper can easily be taken hostage in the interim and threaten those very polices. Outsourcing the EU’s energy needs to Russia has jeopardized the growth prospects of one of the most advanced and progressive economic blocs in the world. 

Given its riches, Canada has a role to play in the world’s energy security. Not as a shallow, “ethical-oil producer” (the whole ethical-oil thesis falls apart as many Canadian barrels will end up in human-rights challenged China), but as an energy exporter that has more stringent emissions policies than its peers, and technological expertise in the areas of hydrogen, carbon capture and storage, wind, solar, hydro, and nuclear among others.   

Fink finally wakes up to reality

Wall Street’s biggest investors are welcoming back oil and gas stocks, and not just because of their knock-out performance over the past 18 months. 

Forward-looking fossil fuel producers will play a “critical” role in decarbonizing the world economy, BlackRock Inc. Chief Executive Officer Larry Fink said in his annual letter to CEOs on Monday. Meanwhile Ray Dalio, founder of hedge fund Bridgewater Associates, praised their role in tamping down inflation. 

“Foresighted companies across a wide range of carbon intensive sectors are transforming their businesses, and their actions are a critical part of decarbonization,” Fink said. “Driving capital towards these phoenixes will be essential to achieving a net-zero world.” 

Seven of the top 10 performers in the S&P 500 are oil stocks, which added to outsized gains last year. Most U.S. oil companies have transformed their business model since the pandemic to focus on generating free cash flow rather than expensively growing production at a cost to shareholders and the environment. Fink emphasized that divesting from fossil fuels, as many endowment funds such as Harvard University have done, won’t drive the world toward low carbon.

Friday, January 14, 2022

This week's interesting finds

This week in charts   

Is Nuclear Power Part of the Climate Solution?

Despite longstanding concerns over its safety, nuclear power can play an important role in a low-carbon world. 

Nuclear plants don’t depend on a steady supply of coal or gas, where disruptions in commodity markets can lead to spikes in electricity prices, as has happened this winter in Europe. Nor do nuclear plants depend on the weather. Solar and wind have a great deal of potential, but to be reliable energy sources on their own, they require advanced batteries and high-tech grid management to balance varying levels of power generation with anticipated spikes in demand. That balancing act is easier and cheaper with the kind of firm power that nuclear can provide. 

The level of carbon emissions generated by nuclear power is on par with solar and wind, especially when considering the complete life cycle of a plant. Both solar and wind produce entirely carbon-free electricity once they are up and running, but they require a significant carbon investment up front. Solar panels rely on metals that need to be mined, and the average wind turbine is now large enough to contain around 200 tons of steel or more.   

Does Not Compute 

Historian Will Durant once said, “logic is an invention of man and may be ignored by the universe.” And it often is, which can drive you mad if you expect the world to work in rational ways. A common cause of everything from divisive arguments to bad forecasting is that it can be hard to distinguish what’s happening from what you think should be happening. 

One way to think about this is that there are always two sides to every investment: The number and the story. Every investment price, every market valuation, is just a number from today multiplied by a story about tomorrow. 

The numbers are easy to measure, easy to track, easy to formulate. They’re getting easier as almost everyone has cheap access to information. 

But the stories are often bizarre reflections of people’s hopes, dreams, fears, insecurities, and tribal affiliations. And they’re getting more bizarre as social media amplifies the most emotionally appealing views. 

The pandemic delivered a surprise to Nordic countries: a baby boom 

Since the COVID-19 pandemic began, births in many wealthy countries across the world have plummeted. In 2020 the United States’ fertility rate cratered at its lowest ever, Chinese births plunged 15 percent, and France saw the fewest babies born since World War II. Meanwhile, the Nordic countries—Denmark, Norway, Sweden, Finland, and Iceland—all have maintained their birthrates, and some are puzzled to find themselves in the midst of a pandemic baby boom.   

New Howard Marks Memo: Selling Out 

“When I meet people for the first time and they find out I’m in the investment business, they often ask (especially in Europe) “what do you trade?” That question makes me bristle. To me, “trading” means jumping in and out of individual assets and whole markets on the basis of guesswork as to what prices will do in the next hour, day, month or quarter. We don’t engage in such activity at Oaktree, and few people have demonstrated the ability to do it well. 

Rather than traders, we consider ourselves investors. In my view, investing means committing capital to assets based on well-reasoned estimates of their potential and benefitting from the results over the long term. Oaktree does employ people called traders, but their job consists of implementing long-term investment decisions made by portfolio managers based on assets’ fundamentals. No one at Oaktree believes they can make money or advance their career by selling now and buying back after an intervening decline, as opposed to holding for years and letting value lift prices if fundamental expectations prove out.”

Friday, January 7, 2022

This week in charts 

Workforce woes 

The most unusual job market in modern American history, explained

It can be difficult now to remember what the U.S. economy looked like a year ago. The unemployment rate was 6.7 percent, with 10 million fewer people employed than before the pandemic. Expectations were that it could take years for the labor market to heal. 

Then, the economy experienced two historic surprises. First, demand for workers came soaring back at a velocity almost never before seen. And second, despite companies going all out to hire, millions of workers either retired early or stayed on the sidelines. 

These two forces collided to create the most unusual job market in living memory — and an economy afflicted not by too few jobs, but too few workers. 

The shortages are beginning to raise difficult questions about how much some of America’s most vital sectors can continue to rely on a relatively low-paid workforce. 

In 2022, something’s got to give. Otherwise, worker shortages could become an enduring feature — or defect — of the U.S. economy. 

Meet the Kidd Who Goes Toe to Toe With Warren Buffett 

The typical stock fund manager is a sheep in wolf’s clothing: passively mimicking the market, with only a few small and timid active bets. By taking the opposite approach, Wilmot H. Kidd III has racked up one of the greatest long-term track records in the history of investing. 

Over the past 20 years, Mr. Kidd’s Central Securities Corp., a closed-end fund, has outperformed Warren Buffett’s Berkshire Hathaway Inc. Over the past 25, 30, 40 and even nearly 50 years under Mr. Kidd, Central Securities has resoundingly beaten the S&P 500. 

That’s not to say Mr. Kidd has never underperformed. Over the past 10 years, according to Morningstar, Central has lagged the S&P 500 by an average of three percentage points annually as giant tech companies have raced ahead. (So far in 2021, Central is outperforming again.) 

Number of Nasdaq Stocks Down 50% or More Is Almost at a Record

Roughly four in every 10 companies on the Nasdaq Composite Index have seen their market values cut in half from their 52-week highs, while the majority of gauge members are mired in bear markets, according to Jason Goepfert, chief research officer at Sundial Capital Research. 

 “Whatever the fundamental and macro considerations, there is no doubt that investors have been selling first and trying to figure out the rest later,” Goepfert said in a note. 

Another way of thinking about the tech wreck: At no other point since the bursting of the dot-com bubble have so many companies fallen like this while the index itself was so close to a peak.