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

Friday, June 25, 2021

This week's interesting finds

When Americans Took to the Streets Over Inflation

 Today, after decades of nearly invisible inflation in the U.S., many Americans have little idea what it looks like. Nearly half of the U.S. population was born after 1981, the last year of double-digit consumer price increases. But America’s long inflation holiday shows signs of ending. Consumer prices are now rising again: The Labor Department’s consumer price index rose 5% in May from a year earlier, the biggest increase in more than a decade. History provides some useful lessons.

The nagging inflation of the late 1960s and 1970s didn’t happen overnight. It took root over years, building through a cascade of policy missteps and misfortunes until it became embedded in the psychology of nearly every American. It would take two deep recessions and new ways of thinking about economics to tame the inflation of that period.


Real cost of lighting in United Kingdom over 700 years 

Growing Capital Discipline in the E&P space

If we want to fight the climate crisis, we must embrace nuclear power  

On 30 April, the Indian Point nuclear power plant 30 miles north of New York City was shut down. For decades the facility provided the overwhelming majority of the city’s carbon-free electricity as well as good union jobs for almost a thousand people. Federal regulators had deemed the plant perfectly safe.

New York’s governor, Andrew Cuomo, a key figure behind the move, said that the shuttering of Indian Point brought us “a big step closer to achieving our aggressive clean energy goals”. It’s hard to reconcile that optimism with the data that’s recently come out. The first full month without the plant has seen a 46% increase in the average carbon intensity of statewide electric generation compared to when Indian Point was fully operational. New York replaced clean energy from Indian Point with fossil fuel sources like natural gas 

It’s a nightmare we should have seen coming. In Germany, nuclear power formed around a third of the country’s power generation in 2000, when a Green party-spearheaded campaign managed to secure the gradual closure of plants, citing health and safety concerns. Last year, that share fell to 11%, with all remaining stations scheduled to close by next year. A recent paper found that the last two decades of phased nuclear closures led to an increase in CO2 emissions of 36.3 megatons a year - with the increased air pollution potentially killing 1,100 people annually.

Pembina and TC Energy Partner to Create World-Scale Carbon Transportation and Sequestration Solution: The Alberta Carbon Grid 

Key Benefits of the Alberta Carbon Grid 

World-Scale Carbon Capacity: The open-access system is being designed with the ability to scale up to more than 60,000 tonnes per day of capacity, or 20,000,000 tonnes per annum, representing approximately 10 percent of Alberta's industrial emissions. 

Environment, Cost and Time Benefits: Utilizing existing assets dramatically accelerates timing, greatly reduces cumulative environmental and community impacts, and is significantly less capital intensive than building a new pipeline. Pembina and TC Energy are targeting the first phase to be operational as early as 2025, with the fully scaled solution complete as early as 2027, subject to regulatory and environmental approvals. 

Economic Development: The construction and operation of the ACG, along with other investments in CCUS technology and infrastructure, will create an entirely new business platform for each company and create new high-value jobs and support economic growth across Alberta.

Safe & Reliable Operations: World-leading experts have been engaged to evaluate technical and operating conditions of using existing pipeline systems to transport CO2. The companies have the skills and experience to safely operate these kinds of systems as the characteristics of CO2 are very similar to other products which are safely transported today, such as specification ethane. The completed feasibility study demonstrates that ACG is achievable while maintaining high standards of safety and reliability. The companies have been working with regulators to advance the Project. 

Customer-Focused Solution: With multiple inlets and outlets, customers will have flexibility to decide delivered CO2 end-uses including industrial processes and sequestration. 

Friday, June 18, 2021

This week's interesting finds

U.S. P&C commercial rates continue to accelerate

Ironies of Luck

If risk is what happens when you make good decisions but end up with a bad outcome, luck is what happens when you make bad or mediocre decisions but end up with a great outcome. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes. They are mirrored cousins, driven by the same thing: You are one person in a 7 billion player game, and the accidental impact of other people’s actions can be more consequential than your own. Experiencing risk makes you recognize that some stuff is out of your control, which is accurate feedback that helps you adjust your strategy. 

Experiencing luck doesn’t. It generates the opposite feedback: A false feeling that you are in control, because you did something and then got the outcome you wanted. Which is terrible feedback if you’re trying to make good, repeatable long-term decisions. 


Why are they celebrating the Keystone XL cancellation?

Activists across the country are claiming victory over TC Energy cancelling the Keystone XL pipeline. But what are they really celebrating?

Increased transportation by rail
Keystone XL, which was first proposed in 2008, would have been a net-zero emissions pipeline that transported oil from Canada – a country with some of the highest environmental standards among all major oil producers – to refineries on the Gulf Coast that process heavy crude into gasoline and other necessary products. We all know it, but it’s worth stating again: Pipelines are by far the safest, most efficient means of transporting oil. Yet U.S.-Canadian pipelines continue to face attacks from activists that either don’t fully comprehend supply and demand or don’t care that this oil will now need to be delivered via truck, rail or – even worse – tankers from countries across the ocean

Increased reliance on OPEC and Russian oil
Preventing pipelines from being built doesn’t mean the demand just goes away. The United States recently accepted its second tanker of oil from Iran in the past six months. Oil imports from Russia are also currently at a 10-year high.

Alberta’s relative position globally to attract capital for “green energy” related projects

The power of investors to influence responsible behaviour

Bill Ackman was scrolling through Twitter when an article in The New York Times caught his eye. “The Children of Pornhub,” told how unauthorized sex — and rape and torture — videos were being spread across the internet on a website called Pornhub, one of the most popular in the world. An influential shareholder activist, Ackman immediately thought about the growing interest in ethical, or ESG, investing. 

 And that’s where he saw an opening. In this case, he wasn’t an investor in any of the publicly traded companies that he knew were profiting from Pornhub’s content, which is often uploaded from users the same way individuals post videos on YouTube. But Ackman had noticed that Mastercard and Visa were payment processors for Pornhub, and he was friendly with Mastercard’s then-CEO Ajay Banga, whom he had met through a mutual friend. He texted Banga “Amex, VISA and MasterCard should immediately withhold payments or withdraw until this is fixed. PayPal has already done so.” (Ackman was unaware that American Express already did not allow its card to be used on adult sites.) 

Within days, Mastercard announced it had instructed the financial institutions that connect the site to our network to terminate acceptance” of Pornhub charges. Visa also stopped processing Pornhub payments. Within 24 hours of the credit card companies’ actions, Pornhub said it had taken down 10 million videos, or 80 percent of those on its site.

Since then, the Parliament of Canada and the U.S. Congress both have held hearings, legislation has been proposed, lawsuits have been filed, and there have been calls for a criminal investigation. To be sure, Ackman is only one player in the grand scheme of Pornhub’s but the involvement of the high-profile financier drew more attention to a campaign for accountability that activists had been waging for almost a year — with little success.

Friday, June 11, 2021

This week's interesting finds

 Resource equities: Inflation protection at a discount

Whether this year’s price rises are merely transitory or something longer lasting, the opportunity in energy and metals companies looks very appealing from a historical perspective. Energy and metals companies are trading at a discount of over 70% to the S&P 500 Index, the biggest discount seen with the exception of other points in the last year or so. In fact, energy companies are trading at the cheapest levels in absolute terms ever seen prior to Covid.


The core CPI price index is now firmly above the pre-COVID trend.

Three categories that comprise ~5.5% of core CPI drove half of the monthly increase:

i) used cars & trucks

ii) car & truck rentals

iii) public transportation (largely reflecting airline fares)


During the peak of COVID-19, the US box office didn't just slow down — it completely disappeared. So, it's somewhat comforting to see that on May 28th A Quiet Place Part II, the sequel to the successful horror film from 2018, managed to rack up almost $20m on its opening day, and more than $57m over the course of the entire Memorial Day Weekend. 

Benefits of not seeking validation  

There is a fundamental mismatch between the frequency of the feedback an investor gets from market quotations and the time required to determine whether a specific investment or a strategy is working. There will always be critics who are not shy about second guessing your decisions. When it comes to investing, there are massive benefits that accrue to those that can totally ignore short term market movements. 

Visualizing the Snowball of Government Debt 

Friday, June 4, 2021

This week's interesting finds

The Genetics of Investment Biases 

The chart below illustrates one of the key findings of the study and shows that twins in an identical pair display much more similar investment biases compared to twins in a fraternal pair. This finding suggests that investment biases are partly genetic. 

How To Do Long Term

Long term is harder than most people imagine, which is why it’s more lucrative than many people assume. Everything worthwhile has a price, and the prices aren’t always obvious. The real price of long term – the skills required, the mentality needed – is easy to minimize, often summarized with simple phrases like “be more patient,” as if that explains why so many people can’t.

To do long term effectively you have to come to terms with a few points.

MacroVoices #273 Larry McDonald: Dollar Down & Gold, Oil, Uranium Up

 Erik Townsend and Patrick Ceresna welcome Larry McDonald to MacroVoices. Erik and Larry discuss: 

• Relationship between inflation and treasury yields 

• Outlook on US/China relations 

• What to expect in equity and bond market 

• Drivers of upcoming price increase in oil 

• Trading opportunities in energy market 

• “Alpha Male Central Banker” 

• Breakdown of the dollar and its implications 

• Oil demand expectations in the re-opening 

The Fall of the Titans!

The corporate titans in a traditional passive tracker strategy are so engrained in our daily lives it takes a healthy imagination to envision they may not stand the test of time. Nevertheless, in the same way the Greek Titans believed their rule was safe before it collapsed, the tables can also turn for these corporate titans. A half-century of history shows that the market’s titan stocks constantly change.

Warm-weather reads and listens - Spring 2021 list

 Regardless of what stage of opening your province is in, here are the latest books, blogs and podcast recommendations from the Investment team that can keep you socially distanced and mentally active.