Friday, April 29, 2022

This week's interesting finds

 This week in charts

Year-to-date Fixed-Income returns

Commodity trading ranges 

U.S. household net worth

Average 30-year fixed rate mortgage in the U.S.

A New Texas Oil Boom Is Coming, Finally

In the two months since Russia invaded Ukraine and oil prices shot up to more than $100 a barrel, the perplexing question for the Texas energy industry has been: Why isn’t anyone drilling? The answer initially was that the oil business has become beholden to a new group of investors who have no interest in strapping in for a roller-coaster ride. They ponied up their money for a nice calm turn on the kiddie train. This dynamic still holds, but evidence is emerging that the recent fossil fuel boom may stick around for a while. That could melt the frosty resistance to deploying more rigs—if only the exploration companies can find enough workers and parts to make that happen.

The most recent sign of the new interest in upping spending on production has come from Olivier Le Peuch. Le Peuch is the CEO of Schlumberger, the world’s largest oil-field service company. When anyone from Chevron to a one-rig family company wants to work on a well, they call Schlumberger, giving the Houston company a wide-angle view of energy trends.

Last week, Le Peuch, while announcing a surge in business and profits, said the Russian invasion had spurred interest by companies and countries in having a more secure and diverse supply of oil and gas. That means a lot of energy investment can be expected to open new producing areas and boost the output of existing areas. Overall, he said the industry is entering an “exceptional” period marked by “a cycle of higher magnitude and duration than previously anticipated.” In other words, there will be a boom—and it will be stronger and longer than expected. This message will likely be reinforced later this week when Exxon reports its first-quarter earnings, which it has hinted could feature record-breaking profits.

The Permian Basin Oil Field Is Running Out of Workers, Materials—and Cash

MIDLAND, Texas—America’s most prolific oil field is running out of the workers, cash and equipment needed to produce more oil.

In the Permian Basin, the sprawling oil-rich region in West Texas and southeastern New Mexico, drillers are facing long delays and steep competition for everything from roughnecks to steel to fracking pumps.

The region is the only place where U.S. crude production is expected to grow significantly this year, and the Biden administration is hoping production there can help alleviate high prices at the pump. But mounting supply-chain crunches are putting a ceiling on how much more frackers can produce there, said energy executives and analysts, despite the highest oil prices in roughly seven years.

Unlike the last time oil fetched about $100 a barrel, the vast service industry of steel suppliers, drilling-rig operators and fracking companies that develop shale producers’ wells is coming into the current price cycle malnourished. Service companies mothballed large fleets of equipment during the pandemic and investors remain wary of the industry, leaving companies short of capital and reluctant to invest in new fracking fleets and drilling rigs.

U.S. drillers are expected to raise domestic oil output by about 8% from last year to about 12.6 million barrels a day by December, according to the Energy Information Administration, and analysts say most of that growth will come from the Permian. By contrast, in 2014, the last time oil prices topped $100 a barrel, U.S. production grew by 1.6 million barrels a day, nearly 20% over the year, according to the EIA.

This week’s fun finds

4 ways to hack your memory (video ~ 4 min) 

  • Self-testing is one good way to better remember information. Think of memory as a two-way street. If we only put information in, it is like traveling in only one direction. Recalling information requires us to go the other way.
  • Spacing out studying is better than cramming. If you need seven hours to prepare for an exam that is one week from today, study one hour per day rather than all seven hours the night before.
  • Context matters for memory recall. If you study while eating Sour Patch candy, do the same thing while taking the test.

Romanian Philosopher Emil Cioran on the Courage to Disillusion Yourself

“People who shut their eyes to reality simply invite their own destruction, and anyone who insists on remaining in a state of innocence long after that innocence is dead turns himself into a monster,” James Baldwin wrote in a staggeringly prescient piece from 1953. And yet shutting our eyes is how we humans have coped, again and again, with our own discomfort and helplessness in the face of inconvenient realities — indeed, it could be said that our existential eyelids evolved precisely for this survivalist function, maladaptive and supremely adaptive at the same time. Virginia Woolf articulated the intoxicating chill of this truth: “Illusions are to the soul what atmosphere is to the earth. Roll up that tender air and the plant dies, the colour fades.”

Our illusions are self-cast enchantments that sever our contact with truth by paralyzing what Bertrand Russell called “the will to doubt” — the vital moral faculty that protects us from manipulation and from the credulity Russell considered our “intellectual original sin.” It is a vicious cycle of delusion — one which W.H. Auden described in his incisive meditation on enchantment: “We must believe before we can doubt, and doubt before we can deny… The state of enchantment is one of certainty. When enchanted, we neither believe nor doubt nor deny: we know, even if, as in the case of a false enchantment, our knowledge is self-deception.”

To break the spell of self-deception, then, is one of the greatest moral triumphs a human being — or a society, or a civilization — can claim.

Friday, April 22, 2022

This week's interesting finds

An EdgePoint ESG update

In honour of Earth Day, we are excited to announce EdgePoint has fully offset the emissions of our operations through the purchase of two carbon offsetting projects, after quantifying our carbon footprint. With the assistance of external emission consultants, we identified all direct and indirect emission sources within our firm (Scope 1, 2 and select Scope 3). 

Our main motivation was to improve our understanding of our emissions and strategize ways to reduce our footprint.

As we look ahead, we will continue to offset EdgePoint’s emissions on an annual basis through a mix of energy efficiency and carbon offsets.

Stay tuned for more information on our upcoming Sustainability Report. 


We are excited to announce we officially became a member of the International Association for Emissions Trading (IETA). The IETA is a non-profit organisation created in 1999 to establish a functional international framework for trading in greenhouse gas emission reductions. IETA’s over 200 members globally seeks to develop an emissions trading system that results in real and verifiable greenhouse gas emission reductions, while balancing economic efficiency with environmental integrity. Claire is EdgePoint’s active member with IETA and will be spearheading our involvement with IETA various members and working groups. 

“IETA has been a leading voice in Canada and globally on carbon pricing and climate finance for nearly two decades. As members, we are excited to have the opportunity to participate in IETA’s various working groups that develop proposals to increase efficiency, transparency, stability, and effectiveness of carbon markets”Claire Thornhill

EdgePoint commentaries

Why we can stay calm in the face of uncertainty – 1st quarter, 2022
This quarter, Investment team member George Droulias discusses why our investment approach helps us stay calm during uncertain times.

Earning our wings - 1st quarter, 2022
This quarter, portfolio manager Frank Mullen talks about the importance of knowing what you own – not just when to sell, but when to add.

This week in charts

US TV Streaming time

Tech Wage Inflation Puts Pressure on Companies

Wage inflation in the technology sector is accelerating, pressuring companies to boost compensation for key roles by 20% or more as they compete for a limited pool of workers skilled in areas such as cloud computing and data science.

There is no single source of data on all tech jobs, but it is clear from a range of market analysts and executives that demand for labor in the tech sector is on the rise. During the first quarter, U.S. employers posted 1.1 million tech jobs, an increase of 43% from a year earlier, according to information technology trade group CompTIA.

Demand for workers to fill those jobs has been surging since the pandemic began, prompting companies to turn to remote work and other digital initiatives. Inflation at a 40-year-high and the war in Ukraine disrupting tech and outsourcing hubs in Europe also are pushing compensation for tech workers higher.

The tech roles in greatest demand include cloud computing architects, data scientists and modelers, and machine learning experts. Staffing firm Mondo, an Addison Group company, said at the high end of the compensation range, cloud architects saw average salary increases of 25% between 2020 and this year, while average salaries for software engineers rose 11% over the same period.

The rising cost of hiring and retaining top tech talent is creating challenges for chief information officers and other tech leaders and has even caught the attention of chief executive officers. “It’s stunning,” said Michael Burns, co-founder and executive chairman of iDEAL Semiconductor Devices and managing director of the Murray Hill Group venture capital and private-equity firm. Mr. Burns said wage increases in the tech sector can top 20%, and in hot markets such as Austin, Texas, they can hit 30%.

Mosaic Forest halts logging on some of its timberlands as it opts to sell carbon credits

One of Canada’s largest timber companies is setting aside 40,000 hectares of British Columbia coastal forests – woodlands three times larger than the city of Vancouver – after concluding it can make more money from letting trees grow and selling carbon credits than from logging.

On Wednesday, Mosaic Forest Management announced it will defer the harvesting of “old forests” on Vancouver Island and Haida Gwaii for at least 25 years, opting instead to sell nature-based carbon credits to companies that want to offset a portion of their greenhouse gas emissions. The Vancouver-based company is halting logging on 7 per cent of its timberlands, calling it the largest project of its kind in Canada.

Mosaic estimates the program, which it calls the BigCoast Forest Climate Initiative, will generate between $100-million and $300-million, based on current prices for carbon credits. In an interview, Mosaic chief forester Domenico Iannidinardo said: “We expect to make at least as much from the BigCoast initiative as we would earn from harvesting these forests.”

Mosaic oversees forest holdings for two B.C. companies – TimberWest Forest Corp. and Island Timberlands L.P. – which are owned by two pension plans: the British Columbia Investment Management Corp. and the Public Sector Pension Investment Board.

“The BigCoast Forest Climate Initiative brings high-quality, large-scale, nature-based carbon credits to a growing international market,” Mosaic chief executive officer Jeff Zweig said in a news release. “The initiative generates economic value, contributes to the global effort to reduce carbon emissions, and benefits our local partners.”

This week’s fun finds

Envy the optimist, not the genius

The modern world is said to over-reward academic intelligence, and so it does. Of the most successful people I know, though, none are the very smartest in their organisations, much less their generational cohorts. Beyond a certain cognitive level, another trait seems to become more decisive. “Optimism” is the crispest word for it, but it gives a banal ring to what is a complex and eerie mental gift: the sifting for good news among the bad, the willingness to magnify and even invent some, the reinterpretation of adverse events as what one had wanted all along. It can border on self-deception. But it also gets people through the night. And the most underrated component of success is continuing to show up.

Whether optimism is genetic or learned, it is, I am sure — in a way I wasn’t when I hadn’t met any high-fliers — worth more than extreme intelligence. Few executives or entrepreneurs I have ever known have said anything brilliant or novel. If an enviable attribute comes across, it is an almost constitutional inability to mope. This, as the Gordon Gekko picture of business misses, is the commercial psyche: not the seeking of advantage in everything, but the seeing of it.

Optimism is, in part, what Oliver Wendell Holmes had in mind when he called Franklin Roosevelt a “second class intellect” with a “first class temperament”. It should be obvious that he meant it as praise. But it is almost as clear that, forced to choose, most 21st-century tiger parents would wish the inverse traits on their children. It is hard to fault their logic. Intellect is more measurable and certainly more coachable than temperamental buoyancy. The worldwide struggle for places at top universities is Darwinian, if not Hobbesian. Still, as I see friends enter the hot-housing phase of white-collar parenthood, I sense they overrate the marginal returns to brain power beyond a certain (admittedly high) point.

Benefits of Starting Your Day with a Cold Shower

Hydrotherapy is simply the use of water as a natural medicine or treatment. Leveraging water in its various forms, such as ice or steam, and at various temperatures, from ice cold to practically scalding, has been used to treat various maladies since the beginning of time. 

Research published in the North American Journal of Sciences (NAJS) revealed some interesting findings regarding the consistent use of cold showers as a form of therapy. For one, cold showers result in a significant increase in dopamine concentrations. (Dopamine is a neurotransmitter that regulates learning, attention, emotional responses, and physical movement.)

In addition, recent research has found a link between low dopamine levels and the brain’s ability to form new memories, prompting additional research into dopamine’s impact on Alzheimer’s disease. The correlation between cold showers and increased dopamine has the potential to positively impact natural approaches taken toward preventing cognitive decline.

Another benefit of cold showers reported by NAJS is the reduction of cortisol production, also known as the dreaded stress hormone. When our cortisol levels are at their best, this hormone plays a role in regulating our metabolism, reducing inflammation in the body, balancing the salt and water equation within our bodies, maintaining healthy blood pressure, and helping with memory formation.

 But when cortisol levels are excessive, it often leads to belly fat, high blood pressure, and mood swings which show as anxiety, depression and/or irritability. Additional clinical research studies affirmed that cold showers not only decreased inflammation in study participants but also showcased two additional benefits. Study participants reported significant analgesic effects as well as substantial benefits associated with improved sleep patterns.

But the scientifically-reported benefits of cold showers don't end there. The skin, which is the body's largest organ, is laden with cold receptors. When the skin is shocked by the sensation of cold water, it sends an astounding number of electrical impulses from the peripheral nerve endings to the brain, a process that has been shown to decrease depressive symptoms. 

 Most notably is a study conducted in the Netherlands with more than 3,000 participants which revealed that consistently ending a shower with 30+ seconds of cold water resulted in a 29% reduction of self-reported sick leave from work.

Thursday, April 14, 2022

This week's interesting finds

This week in charts

Cost of raising a child

Home prices (indexed at 100) 

Chinese government bonds 

Measure Twice: Sizing Europe’s Natural Gas Crisis

In this analysis, we’ll align the natural gas flows presented to a consistent measurement of billion cubic feet per day (bcf/d). Apologies to our non-US Doomers, but US supply will likely play a key role in weaning Europe off Russian supply, so we’re aligning to the unit you’ll likely see referenced regularly in the coming months.

Thanks to the shale revolution, the US now produces approximately 96 bcf/d of natural gas. Of that amount, nearly 12 bcf/d is exported via newly constructed LNG terminals. Said another way, Europe’s Russian natural gas imports represent the equivalent of 125% of the entire current US LNG export capacity. This is a significant number.

Until recently, the US had six major LNG export facilities running at or above nameplate capacity. On March 1, 2022, Venture Global LNG's Calcasieu Pass facility in Louisiana shipped its first product, establishing a seventh hub. That project will continue to build out more trains, while Golden Pass, a 70:30 joint venture between QatarEnergy and ExxonMobil, is slated to come online in 2024. In all, these projects should add approximately 3.2 bcf/d of additional export capacity by 2025. There are several other projects at various stages of development, and assuming price differentials between the US and the rest of the world remain elevated, it is safe to assume these will eventually get built. Critically (and finally!), the industry is experiencing a newly warmed reception from the Biden administration.

According to data from S&P Global, total LNG exports amounted to approximately 377 million metric tonnes in 2021. To convert this into our bcf/d framework, there are 48.7 billion cubic feet in a million metric tonnes and still 365 days in a year, making the global LNG export market approximately 50 bcf/d across all sources [(377 x 48.7)/365 = 50 bcf/d].

At a rate of 15 bcf/d, Europe relies on Russia for the equivalent of 30% of the entire global LNG export market. Given the price elasticity of demand for natural gas, and the fact that countries like Japan, South Korea, China, and India depend heavily on LNG imports to meet their energy needs, the nature of the challenge facing Europe becomes clearer.

Investors Own Nearly a Third of Homes in Major Canadian Markets

People who own more than one home account for about a third of the housing stock in some of Canada’s biggest markets, new government data show, highlighting how the nation’s real estate boom may also be heightening inequality.

Multiple-property owners accounted for 31% of all homes in Ontario as of early 2020 and almost the same share in British Columbia, a report from Statistics Canada said Tuesday. In the smaller east coast provinces of Nova Scotia and New Brunswick, the share was about 40%, the data show. 

A 50% rise in home prices over the last two years has made the cost of housing a political issue in Canada, prompting Prime Minister Justin Trudeau to make home affordability a centerpiece of his government’s 2022 budget. 

But with the supply of houses for sale still near record lows, prices at record highs, and interest rates set to rise, the barriers for new buyers appear to be getting more entrenched. In British Columbia, the top 10% of owners control 29% of the total value of residential properties in the province. 

While Trudeau’s budget focused on curbing the role of professional investors and foreign owners in the housing market, the new government data suggest the majority of multiple-property owners are just individuals or families already living in Canada. Most own just two properties -- usually single-family detached houses -- and are usually located in the same area, suggesting most are buying the second property for rental income not recreation.

Because the figures are from the period prior to the Covid-19 pandemic, they may underestimate multiple homeowners’ current role in the market. More recent data from the Bank of Canada showed multiple-property owners have increased their share of home purchases in that time, while first-time buyers represented a smaller share of the market. 

This week’s fun finds

A Psychology Experiment: Drowning Rats

In a series of experiments that are fairly cruel and unpalatable, yet interesting in their findings, Curt Richter demonstrated that hope is a powerful factor in perseverance. Curt’s experiments focused on how long it takes rats to die from drowning. He conducted his experiments by placing rats into buckets filled with water and seeing how long they survived.

12 domesticated rats were used in Curt’s first set of experiments. The three of these rats initially swam around the surface, then dove to the bottom of the bucket and explored what was there for a while. It lasted a total of two minutes before it drowned. The other nine domesticated rats though did something completely different. After an initial exploration, the predominantly spent their time and the surface. And the just kept swimming. They survived for literally days before eventually succumbing to exhaustion and drowning.

The second set of experiments Curt undertook involved 34 wild rats. Wild rats are excellent swimmers, and these savage and aggressive ones had only recently been caught. Obviously, Curt expected them to fight hard for their survival. Surprisingly though, this wasn’t the case at all. Despite their ferocity, fitness and swimming ability, not one of the 34 wild rats survived more than a few minutes.

Curt reflected on what caused some of the rats to give up and decided that hope a key factor in the willingness to struggle on. The last set of experiments that we’ll focus on were concerned with the impact that introducing hope would have on the perseverance of the rats in buckets. To test his hypothesis Curt selected a new cohort of rats who were all similar to each other. Again, he introduced them into buckets and observed them as they progressed towards drowning. This time though, he noted the moment at which they gave up then, just before they died, he rescued them. He saved them, held them for a while and helped them recover. He then placed them back into the buckets and started the experiments all over again. And he discovered that his hypothesis was right. When the rats were placed back into the water they swam and swam, for much longer than they had the first time they were placed in the buckets. The only thing that had changed was that they had been saved before, so had hope this time.

What This Means in the World of Work

From a work perspective, these findings can be taken to mean that people will remain resilient and will continue to persevere in the face of difficult situations, provided they have hope. What this means for leaders is that people in your team will be strong and resilient, provided that you give them hope of a better future. If that hope is extinguished, your people will stop fighting for you.

The Productivity Secrets of the Air Force’s Disaster Gurus

Hurricane Florence was a day away from drowning the East Coast, but the airmen were at ease. The members of the Air Force’s 621st Contingency Response Wing—a unit designed to respond to natural disasters—could only guess at what was coming. A year earlier, when the United States had been battered by the one-two-three punch of hurricanes Harvey, Irma, and Maria, nearly four hundred men and women from the 621st had deployed to help with the relief effort. If the storm now churning in the Atlantic made landfall with the ferocity of any of those disasters, a lot of the people I saw walking through McGuire Air Force Base would be launching into action within hours. And yet, no one looked rushed or harried. The gloomy weather made everything on the base seem like it was happening in slow motion—the giant arms of the storm had pressed clouds down on all of southern New Jersey, and the air was eerily still.

There was a reason that everyone was so calm: they were prepared. They were so prepared that they could spend hours that autumn day in 2018 showing me around the base without affecting in the slightest their hurricane relief efforts that might soon begin. I had spent a year embedding in different organizations facing high-pressure deadlines, and these airmen were the coolest customers I had encountered yet. What did they know that the rest of us didn’t?

As the unit’s name suggests, the Contingency Response Wing responds to “contingencies,” which can range from earthquakes and hurricanes to the last-second crises that can crop up in a war zone. The 621st can open an airfield capable of landing giant aircraft just about anywhere in the world. And in a disaster, a working airfield can mean the difference between life and death for people needing shelter, food, and water.

On the eve of a storm that would keep the Carolinas underwater for weeks, the unit’s leaders, Chief master Sergeant David Abell and Colonel Ryan Marshall, walked me through their operation. I told them it didn’t look like anyone was about to go hop on a cargo plane and coordinate a wide-reaching relief effort, but they assured me they were poised to do just that. “We’re ready,” Marshall said. “We are designed to go in quick, light, lethal, agile.”

Each mission was essentially unknowable until it arrived, but the commanders were certain they could handle it. There was a lesson here for anyone facing more mundane deadlines, but it took me a while to learn it.

Friday, April 8, 2022

This week's interesting finds

This week in charts

Inflation in food prices  


US Oil Rig count 


Jamie Damon: “The virtual world also presents some serious weaknesses

• Performing jobs remotely is more successful when people know one another and already have a large body of existing work to do. It does not work as well when people don’t know each other.
• Most professionals learn their job through an apprenticeship model, which is almost impossible to replicate in the Zoom world. Since the onset of COVID-19, JPMorgan Chase has hired over 80,000 new people into the company — and we are making sure they are properly trained on all aspects of our business, from their special role to the significance of conduct and culture. But this is harder to do over Zoom. Over time, this drawback could dramatically undermine the character and culture you want to promote in your company.
• A heavy reliance on Zoom meetings actually slows down decision making because there is less immediate follow-up.
• Remote work eliminates much spontaneous learning and creativity because you don’t run into people at the coffee machine, talk with clients in unplanned scenarios or travel to meet with customers and employees for feedback on your products and services.
• Finally, the negative effects of the weaknesses outlined above are cumulative — they weren’t as obvious earlier in the pandemic — and they get worse over time.

And finally, our leaders must lead. They have to walk the floors, they must see clients, they need to be visible, they need to teach and educate, and they need to be able to conduct impromptu meetings. They cannot lead from behind a desk or in front of a screen.

Now you get it
Historian Stephen Ambrose writes about World War II soldiers who left basic training full of bravado and confidence, eager to fight when they join the frontline. Then they get shot at, and everything changes.

“There was no way training could prepare a man for combat,” Ambrose writes. It could teach you how to fire a gun and follow orders. But “It could not teach men how to lie helpless under a shower of shrapnel in a field crisscrossed by machine-gun fire.” No one could understand it until they experienced it.

A lot of things work like that.

Most actions have two sides: skill and behavior. What’s true in theory vs. how it feels in the moment. The gap between the two can be a mile wide. No amount of empathy and open-mindedness can recreate emotions. Textbooks and classrooms can’t teach what genuine fear, adrenaline, and uncertainty feel like. So you think you understand how a field works until you experience a new part of it firsthand. Then you see it through a completely different lens.

Losing a third of your money or more

Can you survive your assets declining by 30%? On a spreadsheet, maybe yes – in terms of actually paying your bills and staying solvent. But what about mentally? It’s easy to underestimate what a big decline does to your psyche. You might realize your confidence is more fragile than you assumed. You – or your spouse – may decide it’s time for a new plan. I know several investors who quit after losses because they were exhausted. Physically exhausted. Spreadsheets can model the historic frequency of big declines. But they can’t convey the feeling of coming home, looking at your kids, and wondering if you’ve made a huge mistake that will impact their lives.

I don’t think there’s any way to understand what a bear market feels like until you’ve lived through one.

Part of the reason is that it’s impossible to contextualize what causes losses until they happen. If I say to you, “How would you feel if the market fell 30%?” you imagine a world where everything is the same as it is today, but stock prices are 30% cheaper. And in that world, it feels like an opportunity. But what actually makes the market fall 30% is a pandemic that might kill you, or a recession where you might lose your job, or a terrorist attack that might just be beginning, or inflation with no end in sight. And in that world – a world that can’t be known until it happens – things feel different. Saying “I’ll be greedy when others are fearful” is easier than actually doing it, because people underestimate the odds of themselves becoming one of the “others.”

This week’s fun finds

Hire people who give a

Over time interviewing, I’ve found that I mainly screen for one key thing: giving a $hit. To be more specific, there’s actually two things to screen for:

1. they care about company, and
2. they care about their work in general.

The first is critical and will only become more important as time goes on. One very scary thing to me is Scale becoming a credential rather than a cult. An institution like Harvard or MIT is a credential—people go there because it signals to others that the person is smart, capable, or otherwise prestigious. As an early-stage startup, it’s nearly impossible someone would join Scale for credentials—nobody knew who we were, nor did we have any reputation.

But as we’ve grown and will continue to grow, it will be more common for people to interview for the brand rather than the substance. In fact, most growing companies often miss this effect entirely, and simply observe the fact they’re getting far more top-of-funnel. It makes it much easier to recruit raw numbers, but what often is missed is that the ROI of the hires drops dramatically. Before you know it, the majority of the company begins to resemble a university: there’s a constant churn of smart but uninvolved people who stay for a few years, and never dive deep enough to do meaningful work. Unless you actively fight against it, it will happen.

The second (caring about work in general) is equally important. It’s possible to fake fervor in the course of an interview and say the right things to convince us of enthusiasm for Scale, but the proof is in the pudding. If someone is applying to Scale and has never been deeply obsessed about something before, then it’s a bad bet to think Scale will be the first.

EdgePoint craic! (Irish gaelic word for fun) 

It’s been a long time since we could get together safely, but it was great to celebrate a belated St. Patrick’s Day this week with our fellow partners in person!

Friday, April 1, 2022

This week's interesting finds

Refinancing and cashing out equity

Battery input costs are on the rise

Cost of energy

Net oil exports

“Price of regret” by Tye Bousada and Geoff MacDonald (Pg. 7 to 9)

We (Geoff and Tye) learned about the idea of future regret as children. For example, one of us grew up surrounded by friends who raced motocross for fun. Despite this person’s mother telling him not to get on those motorcycles, he did it anyway. One day after a big fall, he ran home bleeding, scratched, and bruised, and asked his mom to bring him to the hospital. The mom, who happened to be an ER nurse, saw an opportunity to teach her son about the idea of future regret. Instead of taking him, she sewed him up on the kitchen counter. Rubbing alcohol was used to sterilize the wounds and no freezing was applied before the stiches. Lesson learned. 

Daniel Kahneman, a psychologist notable for his work on the psychology of judgment, once said that “The key to investing is having a well-calibrated sense of your future regret”. 

We agree that a good part of pleasing long-term returns is about having a well-calibrated view of future regret. The motorcycle example above highlights that when you boil down life’s experiences, our most learned ones are usually when we didn’t get the outcome we wanted. How do we take our experiences from the past and use them to ensure we get better and better outcomes in the future? A key is that well-calibrated understanding of risk.

The overarching problem with future regrets is that they can interrupt the magic of compounding. Our goal is to compound your wealth at a pleasing rate over the long term. The words “long term” are essential to the way we do things. We aren’t trying to achieve the highest returns in any given year. We have seen many people try to do this and believe it’s a fool’s game that leads most to ruin. Instead, our goal is to earn pleasing returns for the longest period of time possible. Recognizing this distinction is critical to understanding how we do things. 

This week’s fun finds:

Hot off the presses – Cymbria annual report this week. This edition's fun finds features some of our favourite snippets from the partners' section of the latest Cymbria annual. 

(Unbiased opinion – the rest of the annual is a great read, too.)

Good talk

Conversations about money are rarely easy, especially when its between family members. At a time when companies are asking investors whether "it's time to switch", we thought we could use our back page as a friendly reminder about what a good advisor can offer their clients.

EdgePoint in numbers – A year in review

Unlike most fund companies that judge their success based on assets under management, we prefer to focus on the figures that really matter to us. Below are some of the stats that mattered the most to us in 2021.

The 10-year club

We wouldn’t be where we are today without being able to partner with like-minded advisors helping their clients reach their investment goals. We wanted to recognize the advisors with clients who have remained committed for at least 10 years.

A lot's happened in the last few years since we updated the Foothills chart. We've updated the most recent events as we look at what an investment of $100,000 in Cymbria on November 3, 2008 would have grown into at the end of 2021.

Friday, March 25, 2022

This week's interesting finds

 This week in Charts: 



Buffett snubs Goldman bankers with quirky takeover price

Warren Buffett is telegraphing his disdain for Wall Street bankers with an oddball price on his latest multibillion-dollar takeover.

The US$848.02 for every share that Alleghany Corp. stockholders get from Berkshire Hathaway Inc. is the result of Buffett balking at the banking fee being set aside by the target company -- in this case for Goldman Sachs Group Inc., which is advising the insurer.

Berkshire had offered to pay US$850 a share with Buffett cautioning Alleghany that he didn’t want to foot the bill for the banking fees, according to a person with knowledge of the matter who asked not to be identified discussing private information. So any fee for a financial adviser would come out of the proceeds for Alleghany’s shareholders. The result is spelled out in a regulatory filing: an announced purchase price that subtracts roughly US$27 million for Goldman -- calling attention to Buffett’s stand.

The transaction is Berkshire’s largest since 2016, according to data compiled by Bloomberg. While deal prices typically reflect the back-and-forth between buyers and sellers, it gets smoothed over before the deal is struck. Most announcements are priced to avoid clunky numbers after both sides agree on a plan for how advisers are paid.

The Oracle of Omaha, known for his witty business aphorisms, rarely uses an investment bank with his deals, instead relying on Berkshire Vice Chairman Charlie Munger’s previous law firm, Munger, Tolles & Olson, to advise on acquisitions.

Howard Marks Memo: The Pendulum in International Affairs

At a recent meeting of the Brookfield Asset Management board, a discussion of Ukraine triggered an association with another aspect of international affairs – offshoring – which I first discussed in the memo Economic Reality (May 2016).  Thus, the inspiration for this memo.

The first item on the agenda for Brookfield’s board meeting was, naturally, the tragic situation in Ukraine.  We talked about the many facets of the problem, ranging from human to economic to military to geopolitical.  In my view, energy is one of the aspects worth pondering.  The desire to punish Russia for its unconscionable behavior is complicated enormously by Europe’s heavy dependence on Russia to meet its energy needs; Russia supplies roughly one-third of Europe’s oil, 45% of its imported gas, and nearly half its coal. 

The other subject I focused on, offshoring, is quite different from Europe’s energy dependence.  One of the major trends impacting the U.S. economy over the last year or so – and a factor receiving much of the blame for today’s inflation – relates to our global supply chains, the weaknesses of which have recently been on display.  Thus, many companies are seeking to shorten their supply lines and make them more dependable, primarily by bringing production back on shore. 

Over recent decades, as we all know, many industries moved a significant percentage of their production offshore – primarily to Asia – bringing down costs by utilizing cheaper labor.  This process boosted economic growth in the emerging nations where the work was done, increased savings and competitiveness for manufacturers and importers, and provided low-priced goods to consumers.  But the supply-chain disruption that resulted from the Covid-19 pandemic, combined with the shutdown of much of the world’s productive capacity, has shown the downside of that trend, as supply has been unable to keep pace with elevated demand in our highly stimulated economy.

At first glance, these two items – Europe’s energy dependence and supply-chain disruption – may seem to have little in common other than the fact that they both involve international considerations.  But I think juxtaposing them is informative . . . and worthy of a memo.

Canada's nuclear industry ‘blindsided’ after exclusion from green bond framework

Many in Canada’s nuclear industry have been left questioning the federal government’s commitment to the technology after nuclear power was excluded from the first ever Canadian-dollar-denominated green bond.

The Green Bond Framework, introduced in March, lays the groundwork for a targeted inaugural issuance of C$5 billion for the 2021-22 period and will mobilize capital in support of the government's climate and environmental objectives, the Government of Canada says. 

The global drive to cut green house gas emissions, with over 130 countries pledging to reach net-zero by 2050, has prompted investors to earmark entire portfolios worth hundreds of billions of dollars into companies and projects that claim clean energy practices.

The definition of which practices can be included in such portfolios, granting them access to a rapidly expanding source of financing, has been the focus of intense debate, not least over differing opinions on the green credentials of nuclear power.

In Canada, items that were specifically excluded in the country’s new green taxonomy are the manufacturing of arms, alcohol or tobacco, gambling, fossil fuels and, to the outrage of many in the industry, nuclear power.

“We have been, quite frankly, blindsided by the release of the green bond because there was no consultation with the nuclear, or any, industry,” says President and CEO of the Canadian Nuclear Association (CAN) John Gorman.

This week’s fun finds: 

The Proven Path to Doing Unique and Meaningful Work

It’s not the work, It’s the re-work.

Average college students learn ideas once. The best college students re-learn ideas over and over. Average employees write emails once. Elite novelists re-write chapters again and again. Average fitness enthusiasts mindlessly follow the same workout routine each week. The best athletes actively critique each repetition and constantly improve their technique. It is the revision that matters most.

To continue the bus metaphor, the photographers who get off the bus after a few stops and then hop on a new bus line are still doing work the whole time. They are putting in their 10,000 hours. What they are not doing, however, is re-work. They are so busy jumping from line to line in the hopes of finding a route nobody has ridden before that they don't invest the time to re-work their old ideas. And this, as The Helsinki Bus Station Theory makes clear, is the key to producing something unique and wonderful.

By staying on the bus, you give yourself time to re-work and revise until you produce something unique, inspiring, and great. It’s only by staying on board that mastery reveals itself. Show up enough times to get the average ideas out of the way and every now and then genius will reveal itself.

Malcolm Gladwell's book Outliers popularized The 10,000 Hour Rule, which states that it takes 10,000 hours of deliberate practice to become an expert in a particular field. I think what we often miss is that deliberate practice is revision. If you're not paying close enough attention to revise, then you're not being deliberate.

A lot of people put in 10,000 hours. Very few people put in 10,000 hours of revision. The only way to do that is to stay on the bus.

The Munger Operating System: How to Live a Life That Really Works

In 2007, Charlie Munger gave the commencement address at USC Law School, opening his speech by saying, “Well, no doubt many of you are wondering why the speaker is so old. Well, the answer is obvious: He hasn’t died yet.

Fortunately for us, Munger has kept on ticking. The commencement speech is an excellent response to the Big Question: How do we live a life that really works? It has so many of Munger’s core ideas that we think the speech represents the Munger Operating System for life.

• Acquiring wisdom is a moral duty as well as a practical one.

And there’s a corollary to that proposition which is very important. It means that you’re hooked for lifetime learning, and without lifetime learning you people are not going to do very well. You are not going to get very far in life based on what you already know. You’re going to advance in life by what you’re going to learn after you leave here…if civilization can progress only when it invents the method of invention, you can progress only when you learn the method of learning.

• Learn to think through problems backwards as well as forward.

The way complex adaptive systems work and the way mental constructs work, problems frequently get easier and I would even say usually are easier to solve if you turn around in reverse. In other words if you want to help India, the question you should ask is not “how can I help India?”, you think “what’s doing the worst damage in India? What would automatically do the worst damage and how do I avoid it?” You’d think they are logically the same thing, but they’re not. Those of you who have mastered algebra know that inversion frequently will solve problems which nothing else will solve. And in life, unless you’re more gifted than Einstein, inversion will help you solve problems that you can’t solve in other ways.

• Learn to maintain your objectivity, especially when it’s hardest.

We all remember that Darwin paid special attention to disconfirming evidence particularly when it disconfirmed something he believed and loved. Well, objectivity maintenance routines are totally required in life if you’re going to be a correct thinker. And there we’re talking about Darwin’s attitude, his special attention to disconfirming evidence, and also to checklist routines. Checklist routines avoid a lot of errors. You should have all this elementary wisdom and then you should go through and have a checklist in order to use it. There is no other procedure that will work as well.

Friday, March 18, 2022

This week's interesting finds

This week’s in charts

VW is catching up with Tesla

On one hand it's easy to argue that Tesla is miles ahead, shipping more than double the number of all-electric vehicles that VW Group managed in 2021. On the other hand, you could argue that VW Group's 453k deliveries in 2021 is close to Tesla's 500k effort from 2020, suggesting that the German giant is only 12-15 months behind Tesla's pace, despite starting late.

Source: Chartr

Russia and Ukraine : key suppliers of various metals

Goldman Sachs: “A survey of our equity analysts reveals that imports of car parts from Russia and Ukraine have dropped, with some European automakers already cutting production. Our equity analysts estimate that ongoing disruptions could depress monthly auto production in the affected plants by nearly 60k vehicles (around 25% of their monthly production) in March. In addition, car producers with assembly plants in Russia, such as Hyundai and Renault, have already stopped local production reducing the global supply of autos.

According to our commodity analysts, a stop in palladium exports alone may lead to a 10% hit to global auto production for 2 years based on potential production losses in the region and global inventories."

Inflation is shrinking your products

Do consumers notice when their everyday products get smaller? Often, they don’t and companies are taking advantage by reducing the amount of product they sell while keeping prices the same. Shrinking product sizes to pad profits is not a new tactic but it grows in popularity during periods of shortages and inflation. Some consumers are noticing and documenting their shrinking groceries on the shrinkflation subreddit.

Even with today’s release of US inflation figures from the Bureau of Labor Statistics showing prices increased 7.9% in the last 12 months, consumers may not realize they’re paying more for some of their regular purchases because companies are reducing sizes while keeping prices the same

Saudi Arabia Considers Accepting Yuan Instead of Dollars for Chinese Oil Sales

Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan, people familiar with the matter said, a move that would dent the U.S. dollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia.

The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom, the people said.

China buys more than 25% of the oil that Saudi Arabia exports. If priced in yuan, those sales would boost the standing of China’s currency. The Saudis are also considering including yuan-denominated futures contracts, known as the petroyuan, in the pricing model of Saudi Arabian Oil Co., known as Aramco.

It would be a profound shift for Saudi Arabia to price even some of its roughly 6.2 million barrels of day of crude exports in anything other than dollars. The majority of global oil sales—around 80%—are done in dollars, and the Saudis have traded oil exclusively in dollars since 1974, in a deal with the Nixon administration that included security guarantees for the kingdom.

China introduced yuan-priced oil contracts in 2018 as part of its efforts to make its currency tradable across the world, but they haven’t made a dent in the dollar’s dominance of the oil market. For China, using dollars has become a hazard highlighted by U.S. sanctions on Iran over its nuclear program and on Russia in response to the Ukraine invasion.

China has stepped up its courtship of the Saudi kingdom. In recent years, China has helped Saudi Arabia build its own ballistic missiles, consulted on a nuclear program and begun investing in Crown Prince Mohammed bin Salman’s pet projects, such as Neom, a futuristic new city. Saudi Arabia has invited Chinese President Xi Jinping to visit later this year.

The Secretive Company That Might End Privacy as We Know It

Until recently, Hoan Ton-That’s greatest hits included an obscure iPhone game and an app that let people put Donald Trump’s distinctive yellow hair on their own photos.

Then Mr. Ton-That — an Australian techie and onetime model — did something momentous: He invented a tool that could end your ability to walk down the street anonymously, and provided it to hundreds of law enforcement agencies, ranging from local cops in Florida to the F.B.I. and the Department of Homeland Security.

His tiny company, Clearview AI, devised a groundbreaking facial recognition app. You take a picture of a person, upload it and get to see public photos of that person, along with links to where those photos appeared. The system — whose backbone is a database of more than three billion images that Clearview claims to have scraped from Facebook, YouTube, Venmo and millions of other websites — goes far beyond anything ever constructed by the United States government or Silicon Valley giants.

Federal and state law enforcement officers said that while they had only limited knowledge of how Clearview works and who is behind it, they had used its app to help solve shoplifting, identity theft, credit card fraud, murder, and child sexual exploitation cases.

But without public scrutiny, more than 600 law enforcement agencies have started using Clearview in the past year, according to the company, which declined to provide a list. The computer code underlying its app, analyzed by The New York Times, includes programming language to pair it with augmented-reality glasses; users would potentially be able to identify every person they saw. The tool could identify activists at a protest or an attractive stranger on the subway, revealing not just their names but where they lived, what they did and whom they knew.

And it’s not just law enforcement: Clearview has also licensed the app to at least a handful of companies for security purposes.

The Moral Hazard Lessons from Nickel Market Disaster

The tide went out this week in London’s nickel market, and we discovered — in Warren Buffett’s immortal words—who had been swimming naked: a giant Chinese producer that couldn’t meet its margin calls, additional security brokers require when leveraged trades lose money.

Instead of letting the market cleanse itself of this indebted trader, the exchange decided to wade in and save the firm from the consequences of its bets by canceling the trades.

This isn’t just a one-off in an obscure commodity. This is the natural conclusion of a trend that is undermining free markets and creating all the wrong incentives: A growing reluctance by the authorities to let financial groups go bust, even when they aren’t too big to fail.

The problems started on Tuesday morning, when traders on the London Metal Exchange smelled blood and nickel prices almost doubled. China’s Tsingshan Holding faced a $1 billion-or-so margin call that exchange officials feared it couldn’t meet. Rather than let it fail, which would probably have taken down several of the smaller LME brokers that had serviced Tsingshan, LME decided to cancel all that day’s trading, more than 9,000 trades worth about $4 billion

It. Canceled. The. Trades. Not because of a fat-finger error, which exchanges often cancel. Not even because of a rogue algorithm (as regulators claimed in the 2010 flash crash in U.S. stocks). But because someone with too much leverage was going to blow up, with knock-on effects on some members of the exchange.

This week’s fun finds:

Less serious, not investing related, but just as fun. Sometimes we want to share some of our less serious (but still interesting) finds. On any given week, we might show some things unrelated to investing - absorbing articles, notable numbers, or even recommendations from our internal partners.

Your organs may be ageing at different rates

An analysis of hundreds of biological features strengthens the evidence that some organs and body systems can age faster than others. Tracking the biological age of different parts of the body could help doctors predict the onset of disease more accurately.

We already knew that the condition of cells in the body can be interpreted to give someone a biological age that is older or younger than their age measured in years. In other words, cell condition – which varies depending on genetic and lifestyle factors – determines the pace of the ageing process.

Now, work by Brian Kennedy at the National University of Singapore and his colleagues supports the idea that the various organs and systems in the body – such as the cardiovascular or immune system – can age at different rates within the same individual.

“It confirms previous studies that there are diverse ageing rates among organs and systems, and people’s ageing patterns are different,” says Wenyu Zhou at Tempus Labs, a biotechnology company in California. “This further calls

The Joyful, Illiterate Kindergartners of Finland

“The changes to kindergarten make me sick,” a veteran teacher in Arkansas recently admitted to me. “Think about what you did in first grade—that’s what my 5-year-old babies are expected to do.”

A working paper, “Is Kindergarten the New First Grade?,” confirms what many experts have suspected for years: The American kindergarten experience has become much more academic—and at the expense of play. The late psychologist, Bruno Bettelheim, even raised the concern in an article for The Atlantic in 1987.

Researchers at the University of Virginia, led by the education-policy researcher Daphna Bassok, analyzed survey responses from American kindergarten teachers between 1998 and 2010. In the study, the percentage of kindergarten teachers who reported that they agreed (or strongly agreed) that children should learn to read in kindergarten greatly increased from 30 percent in 1998 to 80 percent in 2010.

Bassok and her colleagues found that while time spent on literacy in American kindergarten classrooms went up, time spent on arts, music, and child-selected activities (like station time) significantly dropped.

But Finland—a Nordic nation of 5.5 million people, where I’ve lived and taught fifth and sixth graders over the last two years—appears to be on the other end of the kindergarten spectrum. Finland’s kindergartners spend a sizable chunk of each day playing, not filling out worksheets. Finnish schools have received substantial media attention for years now—largely because of the consistently strong performance of its 15-year-olds on international tests like the PISA.

“[Children] learn so well through play,” Anni-Kaisa Osei Ntiamoah, one of the preschool’s “kindergarten” teachers, who’s in her seventh year in the classroom, told me. “They don’t even realize that they are learning because they’re so interested [in what they’re doing].”