Munger

Our Inner Scorecard

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Good Morning,
 

The S&P 500 closed at a record Friday, helped by gains in technology stocks on the last trading day of the quarter. The tech-heavy Nasdaq composite rose more than half a percent to post its 50th record close for this year. The Dow transports and small-cap Russell 2000 also hit record highs.

 

The Dow posted quarterly gains of 4.9 percent its eighth straight quarter of gains for the first time since 1997. The S&P 500 rose nearly 4 percent in the quarter, also its eighth straight quarter of gains. The Nasdaq composite gained almost 5.8 percent for the quarter, its fifth straight positive quarter since 2015.

Our Take
 

Strength begets strength. Virtually every asset class is moving up. New record highs are being made in virtually every corner of the market. We suggest remaining cautious as positive sentiment is building.

Of note this week this week was the announcement surrounding Trump’s tax reform. As expected it was thin on details and appeared to favor the rich. On a first read it is likely to
increase the U.S. budget deficit but beyond that, its impact is still unclear. Excellent piece in the Washington Post from Bruce Bartlett who was a domestic policy advisor to President Ronald Reagan (Mr. Tax cut) questioning whether tax cuts stimulate growth. Tax cuts are still the GOP’s go-to solution for nearly every economic problem and extravagant claims are made for any proposed tax cut. Bruce looks into whether they hold water.


Musings
 

Over the last few weeks I’ve been busy setting up a new venture yet I finally found some time to get to a staple in the value investor’s library: The Education of A Value Investor by Guy Spier. What a breath of fresh air in my increasingly busy world.

 

What was so refreshing about the book was that it wasn’t what I’d been expecting. As the esteemed manager of Aquamarine Fund I figured Guy would spend a considerable amount of time on his stock selection approach yet the book offers something much more valuable.

 

This is a book about life. About Guy’s life. Guy’s education. Guy’s path and Guy’s alone. This point teases out its key piece of wisdom. We spend so much time trying to compete with others. Looking for their acceptance and adoration failing to realize that true success in life, true fulfillment can only occur through the acceptance of self.

 

Once we shift from orienting ourselves towards an outer scorecard towards an inner scorecard we can become aligned with ourselves. Authenticity is a powerful force. Guy’s story is the story of this shift. It is the story of the magical success one can have when one becomes aware of one’s own values and perspectives.

 

This message really spoke to me at this particular point in time as I’m starting to realize that the outer journey we start at birth; going to school, learning how to build friendships, learning how to navigate relationships, deciding what to take in school, getting our first jobs, navigating heart aches and let downs is only the starting point. The real growth occurs when we are able to drive ourselves toward the inner journey of spiritual development and self-awareness.

 

In our early years we are often driven by the outer scorecard - that need for public approval and recognition, which can easily lead us in the wrong direction. Come to think of it, many of the mistakes (perhaps all of them) I’ve made in my life have occurred because of my pursuit of this outer scorecard.

 

What I’ve realized and what Guy so eloquently posits is that the inner journey is not only more fulfilling but is also a key to becoming a better investor. If we don’t understand our inner landscapes - including our fears, insecurities, desires, biases, and attitude to money- we’re likely to get run over by reality. As such it is important to look within:

 

Are we the same people on the outside as we are on the inside? Are we pretending to be something we aren’t? Are we building a rock-solid understanding of who we are and how we want to live? Are we building environments in which we can operate rationally and calmly? Do our friends support and stimulate the authentic version of ourselves? Why are we building wealth?

 

The outer journey may bring us to money, professional advancement or social cachet yet the inner journey, the one we also start at birth is the one that puts us on a path toward something less tangible yet more valuable. The inner journey is the path to becoming the best version of ourselves that we can be, and this appears to me to be the only true path in life. It leads us closer to finding the answers to the real questions that matter: What is my wealth for? What gives my life meaning? And how can I use my gifts to help others?

 

Logos LP in the Media

 

Forbes has done a special feature on Canadian Investment Opportunities and we offer one of our ideas.


Thought of the Week

 

"This became my own goal: not to be Warren Buffett, but to become a more authentic version of myself. As he had taught me, the path to true success is through authenticity.”-Guy Spier



Articles and Ideas of Interest

 

  • Successful investing isn’t easy. They say a picture is worth a thousand words, but in investing it is worth so much more. Check out this great collection of extreme charts as a helpful reminder that there is no such thing as "can't", "won't," or "has to" in markets. The market doesn't have to do anything, and certainly not what you think it "should" do. The market doesn't abide by any hard and fast rules; it does what it wants to do and when it wants to do it. That's what makes it so hard and at the same time so interesting.

          

  • The plastic fantasy that’s propping up the oil markets. Kenya's mountains of plastic bags might not seem central to oil's grand narrative, but they are. Last week, the East African country banned almost everything about them: making them, importing them, selling them, using them, with penalties of up to four years in jail or fines up to $38,000. This type of prohibition carries a warning for an oil business that's depending on petrochemicals -- and the plastics made from them -- to pick up the slack when we all switch from gas guzzlers to electric cars. Petrochemicals are seen as the strongest source of global oil demand growth in 2015-2040. On the current track, by 2050 our oceans could contain more plastics than fish (by weight), according to a 2016 report by the World Economic Forum and the Ellen MacArthur Foundation. But, as Kenya shows, the days of single-use plastic packaging may already be numbered. And with this stuff making up about a quarter of all the plastic used, that will have a profound impact on the petrochemicals industry. Let’s not forget that there is now a Great Pacific Garbage Patch that is estimated to be about the size of Texas while a new report (dug into by National Geographic) has shown that extreme weather, made worse by climate change, along with the health impacts of burning fossil fuels, has cost the U.S. economy at least $240 billion a year over the past ten years...Can the oil industry really avoid disruption?

 

  • Brace yourself: the most disruptive phase of globalization is just beginning. Great piece in Quartz covering Richard Baldwin’s new book The Great Convergence: Information Technology and the New Globalization. Baldwin argues that globalization takes shape in three distinct stages: the ability to move goods, then ideas, and finally people. Since the early 19th century, the cost of the first two has fallen dramatically, spurring the surge in international trade that is now a feature of the modern global economy. A better understanding of globalization is more urgent than ever, Baldwin says, because the third and most disruptive phrase is still to come. Technology will bring globalization to the people-centric service sector, upending far more jobs in rich countries than the decline in manufacturing has in recent decades. Baldwin argues that we shouldn’t try and protect jobs; we should protect workers. It’s really a fool’s errand to struggle with “protecting jobs” because after a year or two those jobs will still go. Governments should instead focus on comprehensive retraining, help with housing, help with relocation.

 

  • Some market myths hurt investors. Nice piece by Ben Carlson looking over some of the rules of thumb and aphorisms that investors accept without investigating their merits based on the historical evidence: Low volume rallies spell trouble for stocks, There is tons of cash on the sidelines, Margin debt at all-time highs mean euphoria in the markets, Something’s gotta give between stocks and bonds, Bonds always lose money when interest rates rise.

 

  • Do tax cuts really equal growth? Excellent piece in the Washington Post from Bruce Bartlett who was a domestic policy advisor to President Ronald Reagan (Mr. Tax cut). Tax are still the GOP’s go-to solution for nearly every economic problem. Extravagant claims are made for any proposed tax cut. Do they hold water?

 

  • The shorter your sleep, the shorter your life: the new sleep science. Leading neuroscientist Matthew Walker on why sleep deprivation is increasing our risk of cancer, heart attack and Alzheimer’s and what you can do about it. We are in the midst of a “catastrophic sleep-loss epidemic”, the consequences of which are far graver than any of us could imagine. More than 20 large scale epidemiological studies all report the same clear relationship: the shorter your sleep, the shorter your life. To take just one example, adults aged 45 years or older who sleep less than six hours a night are 200% more likely to have a heart attack or stroke in their lifetime, as compared with those sleeping seven or eight hours a night (part of the reason for this has to do with blood pressure: even just one night of modest sleep reduction will speed the rate of a person’s heart, hour upon hour, and significantly increase their blood pressure).

 

  • Education isn’t the key to a good income. The Atlantic presents a growing body of research which debunks the idea that school quality is the main determinant of economic mobility.

 

  • The secret to Germany’s happiness and success: Its values are the opposite of Silicon Valley’s. To Germans, caution and frugality are signifiers of great moral character. Moreover, for Germans, a good work-life balance does not involve unlimited massages and free meals on the corporate campus to encourage 90-hour weeks. Germans not only work 35 hours a week on average—they’re the kind of people who might decide to commute by swimming, simply because it brings them joy.

 

  • Take some time to enjoy the scenery. Check out The Atlantic’s coverage of the 2017 National Geographic Nature Photographer of the Year Contest.

 

Our best wishes for a fulfilling week, 

Logos LP

Just Ask Warren Buffett or Charlie Munger

Good Morning,
 

U.S. stocks bounced back from the most significant selloff since May, while Treasuries fell after unexpectedly strong hiring data improving confidence in the American economy, bolstering the Federal Reserve’s case for raising interest rates.

Broad-based payroll gains that topped estimates boosted sentiment among equity investors a day after stocks suffered the biggest drop in six weeks. The Bloomberg Dollar Spot Index was flat as tepid wage growth stoked concern that inflationary pressure remains weak. The hiring report supported the Federal Reserve’s stance that recent signs of labor market sluggishness are transitory, though the tepid wage gains gave fuel to arguments that weakness remains. 

On the Canadian side, Canada’s job market delivered another stellar performance in June by adding 45,300 positions, Statistics Canada said Friday.

The number, which vastly surpassed economists’ consensus expectation of 10,000 new jobs, increases the probability that the Bank of Canada (BoC) will raise interest rates at its next rate announcement on July 12.

 

Our Take
 

There are plenty of reasons to be bullish as global earnings per share are expected to grow around 11 percent this year, compared to just 2 percent growth last year. In fact, all the major economies around the globe and the companies which compose them are gaining momentum at the same time, the first such simultaneous recovery in years.

What we are looking at is a “global synchronous recovery”. This is a big change compared to recent years, when we had various regions and countries moving in and out of EPS recessions.

Furthermore, Janet Yellen's bet on pulling workers back to the labor force appears to be paying off.
The flow of people moving from outside of the labor force straight into jobs jumped in June to 4.7 million, its highest level in records that go back to 1990. Labor force participation has stabilized after a long-run decline, and the share of the population that works continues to rise moderately. And as long-hidden labor market slack gets absorbed, it could be helping to keep wage gains modest and inflation in check.

Nevertheless, there are reasons to remain cautious as central bank chiefs in the US and UK seem very sure of themselves. Mark Carney, the governor of the Bank of England and chair of the international Financial Stability Board, said this week that issues of the last financial crisis had been “fixed“.

Last week, his American counterpart, Janet Yellen said at a Q&A in London:

“Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.”

Last week, Mario Draghi, governor of the European Central Bank, sent the euro to its highest level in more than a year by proclaiming that the euro-zone economy was improving and that he was “confident” the bank’s policies working. Both the Bank of Canada and Sweden’s Riksbank have also recently suggested that their economies probably don’t need any more monetary stimulus.

The problem is that the wage increases which should go along with increasingly low unemployment are nowhere to be found. Inflation remains below central bank targets. 

In response, central banks are largely sticking to the script: The retreat in inflation is transitory, idiosyncratic even, and the slow-but-steady slog back toward the central bank's 2 percent target will probably resume.

The prevailing wisdom based on the Phillips curve is that the jobless rate is so low that wages and inflation just have to -- at some point -- really start to pick up.

So far this isn’t happening and thus as we have stated before, it may be wise to allow inflation to run above the 2% target rather than raise rates prematurely and risk undermining a still fragile global recovery.

 

Musings
 

A shorter note this week. For insights into how we are navigating this market I urge you to read our Q2 letter to our investors included below.

Nevertheless, to pick up on the themes of patience and discipline included in our letter, I wanted to briefly consider an article I read this week from Nir Kasissar in Bloomberg.

Nir reminds us that despite the reams of financial data and vast computing power to process it, investing remains a stubbornly superstitious and emotional pursuit.

As such, it should come as no surprise that the investment world has always prized “discipline” as the holy grail of personal attributes. 

As an investor, you should find a strategy and have the discipline to stick to it over the long-term. Just ask Warren Buffett or Charlie Munger.

The problem is that every style of investing -- no matter how thoughtfully constructed and ably executed -- goes through a long, agonizing period when it doesn’t work. Again just ask Warren Buffett or Charlie Munger.

Only a few years ago pundits dared to suggest that Buffett’s underperformance was evidence that perhaps he had “lost his touch”.

The longer an investing style falters, the harder it is to know whether that style is temporarily out of favor or destined for retirement. The line between discipline and foolishness becomes increasingly blurry, even to elite investors.  

Further compounding this dilemma are two issues:

1) Current markets are abnormal : Value stocks, for example, are supposed to shine during recoveries. They haven’t. Low interest rates are supposed to translate into meager returns from bonds. Sub 5% unemployment is supposed to translate into greater than 2% inflation. Again nope.

2) “Long-term” doesn’t mean the same thing anymore : In the 1960’s the average hold time for stocks was roughly six years. Today that average hold time is from six weeks to six months.

In this environment, patiently finding the line between discipline and foolishness is itself a fantastic test of discipline...



Logos LP Updates
 

June 2017 Return: -3.69%

2017 YTD (June) Return: 19.66%

Annualized Returns Since Inception March 26, 2014: 24.89%

Cumulative Return Since Inception March 26, 2014: 82.99%



Logos LP in the Media


Our Q1 2017 letter to our investors picked up by ValueWalk

Our Q2 2017 letter to our investors picked up by ValueWalk




Thought of the Week

 

"Patience is bitter, but its fruit is sweet" -Jean-Jacques Rousseau


Articles and Ideas of Interest

 

  • What history says about low volatility. For all that's being said and written about the lack of volatility in financial markets these days, you might think something unusual is going on. In fact, history suggests it's the opposite. Nice piece in Bloomberg suggesting that volatility is lower than average historical levels, but it’s at levels typical of the bottom of a quiet period between two crises. Instead of fretting about complacency, it appears that history shows us that crises occur when the VIX and realized volatility are above 20 percent, and investors typically get warned months in advance of what the headlines refer to as “shocks”...the market anticipates news events about 18 months in the future. It’s not perfect, of course, but it may be a lot better than experts and commentators. Evidence of smooth sailing over the next while?

 

  • Rising inequality may be the real risk of automation. Technological change has had more impact on earnings distribution than on demand for workers. If your main worry over automation is losing your job, history suggests you’ll probably be just fine. The bigger concern, economists David Autor and Anna Salomons reckon is how technological advances will affect earnings distribution. Interestingly, in the AI age, “being smart” will mean something completely different. HBR suggests that we will need to take our cognitive and emotional skills to a much higher level.

 

  • How to deal with North Korea? The Atlantic proposes that there are no good options. But some are better than others. For his part, Trump has tweeted that North Korea is “looking for trouble” and that he intends to “solve the problem.” For his part, Trump has also tweeted that North Korea is “looking for trouble” and that he intends to “solve the problem.” Nevertheless, the U.S. has 4 broad strategic options: 1) Prevention : crush them using a military strike 2) Turn the screws : limited targeted precision strikes and small scale attacks to debilitate 3) Decapitation : remove Kim and his inner circle and replace the leadership with a moderate regime 4) acceptance : allow nuclear ambitions and train and contain. Acceptance is how the most current crisis should and most likely will play out…

 

  • Baby boomers will live long but might not prosper. The biggest threat to the majority will be outliving their nest egg. As life expectancies continue to climb, managing longevity risk will be a key input in the portfolio management and planning for the 10,000 or so baby boomers retiring every day for the next 19 years or so. Ben Carlson suggests a few tips to stay above water. One I particularly like is try generational financial planning. Bring other trusted family members into the retirement planning process. Just don’t count on millennials buying your home. Student loans are a problem for all of us not just the young. Great piece in Businessweek suggesting that mounting student debt in the U.K., U.S. and elsewhere, might hold young people back from buying houses and saving for retirement. That would endanger economic growth and asset prices, with the effects made worse by shifting demographics. This should worry everybody.

 

  • There is a “wellness” epidemic going on. Why are so many privileged people feeling so sick? Luckily (or unluckily) there’s no shortage of cures. Wellness is a very broad idea, which is no small part of its marketing appeal. On the most basic level, it’s about making a conscious effort to attain health in both body and mind, to strive for unity and balance. This is not a new idea. But perhaps what is new is that there is something grotesque about this multi billion dollar industry’s emerging at the moment when the most basic health care is still being denied to so many in America and is at risk of being pulled away from millions more. In addition, what is perhaps most concerning about wellness’s ascendancy is that it’s happening because, in our increasingly bifurcated world, even those who do have access to pretty good (and sometimes quite excellent, if quite expensive) traditional health care are left feeling, nonetheless, incredibly unwell. Will all the high priced meditation retreats, aromatherapy, yoga, pressed juice, spiralizers and supplements really change anything? Or is history repeating itself with the resurrection of the 18th century peddler with dubious credentials, selling “snake-oil” with boisterous marketing hype often supported by pseudo-scientific evidence? Get your ashwagandha, bacopa, chaga mushrooms, colloidal silver, cordyceps mushrooms, eleuthero root, maca, selenium and zizyphus while supplies last…

 

  • Last Domino’ just fell for Canada rate hike. Canada added more than four times the number of jobs economists had expected in June, capping the best quarter since 2010 and solidifying the view the Bank of Canada will raise interest rates at its meeting next week. A series of government measures and the prospect of higher interest rates boosted listings and sparked the biggest sales decline in more than eight years last month, the Toronto Real Estate Board reported Thursday. The Toronto Real Estate Board also lowered its forecast for sales and prices. Expect prices to decline further as central banks begin to reign in easy money policies.


Our best wishes for a fulfilling week, 
 

Logos LP