Private Equity

The Disciplined Pursuit of Less

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Good Morning,
 

Stocks fell from all-time highs on Friday after the release of stronger jobs data dampened hope for easier Federal Reserve monetary policy. 

Despite Friday’s losses, the major indexes posted solid weekly gains. The Dow and S&P 500 rose more than 1% each this week while the Nasdaq gained nearly 2%. Stocks also posted all-time highs on Wednesday.

The U.S. economy added 224,000 jobs in June. Economists had forecast the U.S. added 165,000 jobs in June, after a stunningly low 75,000 jobs were created in May, according to Dow Jones.

Our Take

 

Summer is upon us and the market has so far continued to reward the bulls after what has been a great first half of the year. In fact, we just witnessed the best June for the S&P since 1955. Pretty impressive given the noise we heard from the “Sell in May Crowd”. The latest market high was the 210th for the S&P 500 since 2013. Funnily enough, for those paying attention, every one of them was called THE top…
 

Having said that, we are finding it more difficult than ever to find fairly/under priced assets of ANY kind. Looking across public, private, alternative and real estate markets we see little opportunity for outsized returns moving forward. 

The balance of probabilities is beginning to tilt to the downside rather than to the upside as most of the silver bullets have been fired: tax cuts, rate cuts, accommodative monetary policy, share buybacks and animal spirits. What drives earnings higher and further multiple expansion we are beginning to become unsure...at the end of the day as Michael Batnick has recently reminded us the last 10 years have been the best ten ever for U.S. stocks: "Can this bull market continue? Yes, of course. It’s already gone on longer than many people thought it would, myself included. But is it likely to be as strong as it was over the last ten years? No, almost certainly not."

In other news, our CIO Peter was featured on MOI Global to discuss Zscaler


Musings


Last month I took a much needed week off and early into my European vacation, something startling occurred: my cellphone vanished. As someone typically attached to their phone, as a “necessary work evil”, my initial reaction was panic. 

How was I to know what was going on without my notifications? How would I be aware of the “newsworthy” developments as they transpired? How were my clients to reach me on a whim? How would I be able to react with immediacy and urgency upon notification? How would I be privy to my professional network’s latest career “humble brags” on LinkedIn? And of course (I’ll admit it), how would I be able to observe what my “friends” on Instagram were up to? 

I saw my options as two-fold: 1) get a new phone 2) spend my week of vacation without a phone and use my laptop to periodically check emails 

After a bit of deliberation, looking out over the Mediteranean, I decided to choose option 2. I found the first day without my phone hard. I became acutely aware of the habit I had built up which many of us seem to share: the urge to reach for one’s cell. I felt it on numerous occasions. At times precipitated by seeing my friends reaching for/looking at their phones and at other times simply a habit in which I would feel myself reaching only to find nothing to grasp. 

As the days rolled by, the habit began to fade. Instead of yearning for my phone seeing others on theirs, I began feeling more intimately connected with the present moment. Riding in a taxi became about observing the beauty of the scenery as it flashed by and laying on the beach became about reflecting on my life, rather than scrolling through emails, reading the news or worse scrolling through curated images and videos of other people’s lives. 

What I learnt in my week without a phone was the following equation: 

No phone = less noise = more presence in the moment = more clarity. 

This isn’t to say I didn’t get a phone when I returned from my vacation, but it is to say that my experience brought to my attention what Greg McKeown has dubbed “the clarity paradox”. 

The clarity paradox can be summed up in four phases: 

Phase 1: When we really have clarity of purpose, it leads to success.

Phase 2: When we have success, it leads to more options and opportunities.

Phase 3: When we have increased options and opportunities, it leads to diffused efforts.

Phase 4: Diffused efforts undermine the very clarity that led to our success in the first place.

Curiously, success can be a catalyst for failure. When we reach a certain level of success, we often then pursue more of it in an undisciplined way. We become attached and get side tracked. We get off course attracted by the allure of the “next opportunity” or “next thing”. 

What my cell phone experience opened my eyes to, were phases 3 and 4 of the clarity paradox. Unenlightened about our phone’s ability to clutter our minds with increased options and opportunities, we often allow our attention to be diffused at best, or completely monopolized at worst. 

It's no surprise to me that in a recent article on CNBC, the biggest complaint millennials had about their lives is: “I have too many choices and I can’t decide what to do. What if I make the wrong choice?”.

When faced with too many choices: 

  1. Quality of decision making goes down

  2. Satisfaction with choices goes down 

  3. Decision paralysis sets in and no choice is made at all 

Now home with a new phone, armed with a more enlightened understanding of its impact on my psyche, I’ve resolved to do things a bit differently in my personal and professional life, to engage in the “disciplined pursuit of less”: 

  1. Remove clutter by narrowing focus:  If you don’t absolutely love something then eliminate it. Don’t settle for good opportunities, focus on great ones which sit at the intersection between: your talents, what the world needs more of and what you are passionate about. 
     

  2. Ask what is essential and eliminate the rest: We naturally gravitate towards clutter and attachment, we hoard, we suffer from loss aversion, the sunk cost fallacy and the endowment effect ie. we value an item more once we own it and we make the things we are attached to a part of our identities. We prefer to hold onto people, places, things and investments rather than let them go. If we can instead ask “is this necessary?” we will quickly realize most things aren’t. Remove them. Want to try something new? Get rid of something old first. 
     

  3. Practice self-awareness and equanimity: This is the most important factor in attaining and maintaining clarity. Make a habit of looking in the proverbial “mirror” and asking “who am I?” What is important to me right now? How do I feel about my current situation? We as humans suffer from attachment which refers to the unrelenting drive to succeed, to acquire, to compete, to control, and to the inability to let go. Without the things we attach to, our views of ourselves become unacceptable, as if the house, the car, the job title, the watch or the fancy friends make us worthy and enhances our self esteem and position in the world. On the other hand equanimity refers to the ability to accept what is without resistance. When you resist, not only do you suffer but you also perpetuate suffering. The reality is that when you resist, suffering persists. Resisting what arises internally causes concentration, clarity and equanimity to decrease and as they decrease, suffering increases. Lost the promotion? Couldn’t afford the new watch? Startup has collapsed? Practicing equanimity and non-attachment allows us to avoid suffering and maintain clarity. This isn’t to suggest a passive or indifferent attitude. It is instead to embrace “a gentle matter of factness” with your sensory experience. “Equanimity” means balance; and in practical terms means “don’t fight with yourself” accept people and situations for what they are not as you wish they were. 

Whether as an organization or as an individual the ability to establish and maintain clarity will have an enormous impact on whether outcomes will be positive or negative. Purposefully having the courage to address “the undisciplined pursuit of more” by practicing “the disciplined pursuit of less” will differentiate your outcomes from the crowd, whether you throw your cellphone to the wind or not. 

Charts of the Month


The current expansion has just tied the 1990s' expansion for the longest in history, and then anything after that will be a record. Good news, but the recovery has also been the weakest.

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Monthly data from the Conference Board showed that the leading versus coincident indicator ratio was down slightly on the month.

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Household debt in the USA may be at record levels yet household debt as a percentage of personal income is at a 40 year low.

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Logos LP June 2019 Performance


June 2019 Return: 5.57%
 

2019 YTD (June) Return: 25.35%
 

Trailing Twelve Month Return: 3.25%
 

Compound Annual Growth Rate (CAGR) since inception March 26, 2014:+15.31%


 

Thought of the Month


"An intense love of solitude, distaste for involvement in worldly affairs, persistence in knowing the Self and awareness of the goal of knowing-all this is called true knowledge.” -The Bhagavad Gita


Articles and Ideas of Interest

  • What you lose when you gain a spouse. What if marriage is not the social good that so many believe and want it to be? The Atlantic explores the notion that marriage is the best answer to the deep human desire for connection and belonging finding it to be incredibly seductive.

  • The advantage of being underemployed. The five-day, 40 hour workweek is incredibly outdated. The irony is that people can get some of their most important work done outside of work, when they’re free to think and ponder. The struggle is that we take time off maybe once a year, without realizing that time to think is a key element of many jobs, and one that a traditional work schedule doesn’t accommodate very well.

  • Why startups are more successful than ever at unbundling incumbents. These companies are essentially product design teams that are focused on iterating fast to find product-market fit. They are able to offer fundamentally better products and services than the incumbents because of the product-centric DNA of the management teams. Second, these companies rent all aspects of operational scale from partners and eliminate any capital expenditures or operational inertia from their execution plans.

 

  • Liquidity and a ‘Lie’: Funds confront $30 trillion wall of worry. Now, with warnings growing louder about the risks money managers have taken with hard-to-trade investments, Wall Street is starting to wonder: Just where will this end? That question is reverberating across the financial world after the head of the Bank of England warned that funds pushing into a host of risky investments -- in some cases, without investors fully understanding the dangers -- have been “built on a lie.’’ Some $30 trillion is tied up in difficult-to-trade investments, he noted earlier this year. The big worry is that the now-troubled European funds that embraced such investments, only to stumble when investors asked for their money back, are just the tip of the iceberg. Exposure to illiquid assets and poor-quality bonds has crept into funds as managers hunt for whatever returns they can find in today’s low-interest-rate world. The troubles in Europe are reminders of the Icarus-style demise that active managers can meet when they wander into tough-to-trade products, while promising investors the ability to cash out easily. Lets also note that private equity dealmaking has reached new heights. It has swelled to its highest level(paywall) since before the 2008 global recession, and there’s no sign of slowing: buyout firms have nearly $2.5 trillion in unspent funds primed for investment.

  • Random darts beat hedge fund stars - again. A stock-picker’s market? Not so muchCan you successfully pick stocks with a dart board? The writers at The Wall Street Journal thought so. To test their idea, the writers threw darts at a stock list in the newspaper. From those random hits they built a portfolio to stack up against highflying financial elites. Those elites meet at the Sohn Investment Conference, held each May in New York. The attendees are full-time active investors, people who spend 365 days and nights a year thinking hard about what investments to own and why. So how did the dart-throwing journalists do this year? “The results were brutal,” recounts Spencer Jakab of the Journal. The random writer picks beat the pros by 27 percentage points in the year through April 22. “Only 3 of 12 of the Sohn picks even outperformed the S&P 500. Choose your managers wisely.. 

 

  • Could the U.S. be heading to a future of zero interest rates forever? It’s the obvious way to avert national bankruptcy as the country keeps piling on debt. If it decides to let the debt grow, it will have to borrow more and more in order to cover its increasing interest, and both borrowing and interest costs will snowball. That could provoke what the CBO calls a fiscal crisis -- a private investor panic about the government’s ability to repay its debt, causing a drop in bond prices that render financial institutions insolvent and causing an economic crisis. The government thus has a good reason not to let debt spiral out of control. And the easiest way to keep that from happening is for the Federal Reserve to cut interest rates to zero and keep them there. Welcome to Japan!

  • To succeed in America it’s better to be born rich than smart. Children in the U.S. are told from an early age that hard work pays off, starting with their time at school. But according to a recent report from the Georgetown Center on Education and the Workforce (CEW), “Born to Win, Schooled to Lose, ” being born wealthy is a better indicator of adult success in the U.S. than academic performance. “To succeed in America, it’s better to be born rich than smart,” Anthony P. Carnevale, director of the CEW and lead author of the report, tells CNBC Make It. “People with talent often don’t succeed. What we found in this study is that people with talent that come from disadvantaged households don’t do as well as people with very little talent from advantaged households.” How much longer will the majority allow this sorry state of affairs to persist?

  • Your professional decline is coming (much) sooner than you think. There is a message in this for those of us suffering from the Principle of Psychoprofessional Gravitation. Say you are a hard-charging, type-A lawyer, executive, entrepreneur, or—hypothetically, of course—president of a think tank. From early adulthood to middle age, your foot is on the gas, professionally. Living by your wits—by your fluid intelligence—you seek the material rewards of success, you attain a lot of them, and you are deeply attached to them. But the wisdom of Hindu philosophy—and indeed the wisdom of many philosophical traditions—suggests that you should be prepared to walk away from these rewards before you feel ready. Even if you’re at the height of your professional prestige, you probably need to scale back your career ambitions in order to scale up your metaphysical ones.


Our best wishes for a fulfilling July,

Logos LP

These Halcyon Days

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Good Morning,
 

Stocks closed lower on Friday after it was reported that trade talks between China and the U.S. had stalled and tit-for-tat tariffs soured the process. The late-day sell-off underscored the fragile mood in financial markets destabilized by concerns that the escalating trade war will undermine global growth.

President Donald Trump took steps toward calming nerves by postponing any tariffs on Japanese and European cars, while agreeing to end levies on Canadian steel and aluminum imports. But the status of talks with China remained unclear as investors headed into the weekend.

It was also the fourth straight weekly drop for the Dow.

Earlier this week, under the banner of a threat to the “national security” of the U.S., the administration made it harder for U.S. companies to do business with Huawei, a giant telecommunications company in China. U.S. firms that want to do business with Huawei must now have a license.

On the positive side, U.S. consumer confidence sentiment gauge reached a 15-year high with stocks near records and A Wells Fargo/Gallup survey found small business confidence rebounded strongly in the second quarter, matching a record, as current conditions posted a new high and recession concerns diminished. Top worries were attracting customers and new business, followed by hiring and retaining staff.


Our Take


Take a deep breath, these are halcyon days. Enjoy. The data coming out of the U.S. is for the most part still supportive of the view that things are pretty good (For a nice overview see here). Let's remember that the S&P 500 is still up about 14% YTD.

With stocks struggling to find direction amid heightened volatility over increased tariffs and threats of new ones as the White House and China battle over trade, many investors are overreacting and trading headline noise. *(Interestingly Trump’s China fight/tariffs has enjoyed broad support from American business, the Democrats and the Republicans)

They would be better served if they recalibrated their expectations on the outcome and timing of any future agreement on the China/U.S. tariff issue.
 

We’ve heard murmings that this is a Trump powerplay: a mastery of the art of timing. A sniffing out of the right moment to strike a deal with China to save the day just as Americans head to the polls. Vanquishing a saviour who has adroitly played on what voters hold dear and what they fear would certainly be a difficult task for the Democrats...

The above narrative may or may not be accurate but regardless, to expect a quick deal is to completely misunderstand the deep differences in the two countries economic models (state capitalism vs. free-market capitalism). These differences ensure that their trading relations will likely be unstable for years to come.

It should be remembered that the Chinese government allocates capital through a state-run banking system with $38trn of assets. Attempts to bind China by requiring it to enact market-friendly legislation are unlikely to work given that the Communist Party is above the law.

These are issues that have been around for decades. Stable trade relations between countries require them to have much in common such as how commerce should work, what role the state should have and a commitment to the enforcement of rules. Look no further than the (for the most part successful) renegotiation of NAFTA (Mexico, USA, Canada).

Compounding the friction between these competing economic visions is that fact that many in the U.S. are suffering from a lack of self-confidence (“bullying behaviour”) as they witness China’s rise.

The problem with this administration's heavy handed approach is that it has made it difficult for China’s leadership to frame the trade spat domestically as anything other than an effort to undermine China’s rise. The shift toward a nationalist tone coincides with Beijing’s hardened trade negotiating position.

The problem is that an intensified conflict over trade and nationalism that results in harm to U.S. interests will make China less appealing to foreign investors, something Beijing can ill afford at a time when its economy is already slowing. Moreover, previous protests have shown that promoting nationalism can boomerang on the Chinese state and lead to unwanted social disruptions.

As such, the probability of some kind of a resolution is high.

For the investor, it is important to come to terms with any pervasive “fear” of “losing money” and  corresponding unwillingness to take a long-term view. Making rash decisions each time there is a change in the short-term trend due to a headline is a recipe for the investor to realize low returns on capital or worse: no return on capital.


Musings


This month we were featured/interviewed by two wonderful organizations.

ValueWalk: https://valuewalkpremium.com/2019/05/eter-mantas-and-matthew-castel-general-partners-of-logos-lp-talk-small-cap-investing/

MOI Global: https://moiglobal.com/peter-mantas-2019/

Only a short note this week on portfolio concentration. This month we fielded several questions regarding the concentration of our portfolio and thought it may be useful to explain our view that concentration as a strategy is more attractive than diversification.

Why?

  1. Better information increases the probability of superior returns, so a concentrated fund allows the investor to conduct thorough research and understand the intricacies of the business in order to take advantage of mispricings in the market. Instead, lack of concentration leads to making investment decisions based on superficial reasons or worse: emotion.

  2. If the target range of holdings is narrow, the investor is setting a higher hurdle rate for investment quality and return. Investors can be more discriminating, avoiding stocks or sectors that are not high quality and focus on a smaller group of companies that meet their strict metrics.

  3. There is also the issue of cost. With low to no-cost ETFs, there is simply no justification for an active investor/manager to construct a portfolio with a large number of holdings that mimics the benchmark. Better to own the benchmark in a low cost way.



Charts of the Month


According to a new survey by Charles Schwab, almost half of millennials (49%) say their spending habits are driven by their friends bragging about their purchases on social media vs. around one-third of Americans in general. link

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Tech bubble all over again?

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Logos LP April 2019 Performance
 


April 2019 Return: 10.08%
 

2019 YTD (April) Return: 23.87%
 

Trailing Twelve Month Return: 6.60%
 

Compound Annual Growth Rate (CAGR) since inception March 26, 2014:+15.58%


 

Thought of the Month

"Knowledge is learning something new every day. Wisdom is letting go of something every day.”-Zen Proverb


Articles and Ideas of Interest 

 

  • Why we’ll never be happy again. Ben Carlson suggests that there are two things people need to understand about humanity:(1) Things are unquestionably getting better over time. (2) People assume things are unquestionably getting worse over time. Is there a silver lining?

 

  • Inflated credit scores leave investors in the dark on real risks. Consumer credit scores have been artificially inflated over the past decade and are masking the real danger the riskiest borrowers pose to hundreds of billions of dollars of debt. That’s the alarm bell being rung by analysts and economists at both Goldman Sachs Group Inc. and Moody’s Analytics, and supported by Federal Reserve research, who say the steady rise of credit scores as the economy expanded over the past decade has led to “grade inflation.”

 

  • What makes a great business? Great article by Travis Wiedower regarding what makes a great business. In summary, there’s no getting around that businesses have to invest capital at high rates of return to be successful. To do so, they probably need several strong competitive advantages that keep potential competitors away. Finally, organic growth of new products usually outperforms other types of growth, especially large acquisitions. Those are the base rates of what makes a great business.

 

  • Putting your phone down may help you live longer. By raising levels of the stress-related hormone cortisol, our phone time may also be threatening our long-term health.

 

  • If this is a tech bubble in stocks, it’s the expansionary phase. Is this the tech bubble part two? It’s fair to ask, given how big that index is getting versus the rest of the market. At about 36 percent of the S&P 500, it’s creeping up on 1999-style dominance. Arguing against the comparison is the share of overall earnings its companies generate. Going by the quarter they just reported, it’s four times as much as 20 years ago. 

 

  • The Age of the influencer has peaked. It’s time for the slacker to rise again. It’s hard to remember a time when scrolling through Instagram was anything but a thoroughly exhausting experience. Where once the social network was basically lunch and sunsets, it’s now a parade of strategically-crafted life updates, career achievements, and public vows to spend less time online (usually made by people who earn money from social media)—all framed with the carefully selected language of a press release. Everyone is striving, so very hard- #nevernotworking. And great for them....But sometimes one might pine for a less aspirational time, when the cool kids were smoking weed, eating junk food, and… you know, just chillin’. Quartzy suggests that the slackers are back…

 

  • Getting rich vs. Staying rich. Fantastic article by Morgan Housel in which he explores the following pattern: Getting rich can be the biggest impediment to staying rich. It goes like this. The more successful you are at something, the more convinced you become that you’re doing it right. The more convinced you are that you’re doing it right, the less open you are to change. The less open you are to change, the more likely you are to tripping in a world that changes all the time. There are a million ways to get rich. But there’s only one way to stay rich: Humility, often to the point of paranoia. The irony is that few things squash humility like getting rich in the first place.

 

  • Private equity’s allure poses big risks for the stock market and its investors in the next recession. Private equity is becoming the go-to for active investors — a trend which AllianceBernstein expects to continue for the next decade. The shift, which is well underway, could have implications for the stock market and its investors, especially in a recession. “It throws a spotlight on the resilience of the liquidity of public markets and even questions the point of a public stock market,” Bernstein senior analyst Inigo Fraser-Jenkins says. No wonder Buffett has also sounded the alarm suggesting that private equity returns have been inflated and bondholder covenants have “really deteriorated”.

 

  • Is CBD the cure-all it’s touted to be? The cannabis derivative is being tested as a treatment for everything from brain cancer to opioid addiction to autism-spectrum disorders. Whether it can live up to the hype is still an open question, writes Moises Velasquez-Manoff in the New York Times Magazine. Meanwhile Americans can expect to bombarded by ever more CBD-infused products as Green Growth Brands Inc. is partnering with Abercrombie & Fitch Co. to sell its CBD-infused bath bonds and other body care products in a limited number of stores.


Our best wishes for a fulfilling May,

Logos LP

Less Is More

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Good Morning,


As a special note, this month marks our 4 year anniversary at Logos LP. We appreciate your support and will continue to bring you thought provoking ideas from around the web. 


As for equities, after posting the worst start to April since the Great Depression, U.S. stocks dropped on Friday as several banks weighed down the major indexes on the final day of an otherwise strong week for equities. 


Citigroup, Wells Fargo and J.P. Morgan Chase all reported quarterly earnings and revenue that surpassed analyst expectations. Bank shares initially traded higher before falling, as the strong results were already priced in and guidance was lacklustre. 


This will likely be the case for many other sectors as expectations for this earnings season are sky high with earnings data registering higher growth than ever this late in the cycle. According to FactSet, S&P 500 earnings are forecast to have grown by 17.1 percent last quarter. Financials, meanwhile, are expected to see earnings increase by 24 percent..


2018 has so far been a roller coaster not for the faint of heart with even veterans such as Jack Bogle stating that: "I have never seen a market this volatile to this extent in my career."

 


 

Our Take


What should be made of this volatility? 

Although many are quick to point the finger at Trump’s itchy “Twitter Finger” which has lobbed challenges at Russia, China, Syria, Amazon, Robert Mueller etc. there are at least several other matters contributing to the volatility. David Rosenberg has suggested some plausible factors:
 

  1. "A new, untested and less dovish Fed" led by Chairman Jerome Powell, who may have a less intense focus on stock market values than some of his predecessors.

  2. Budget problems caused by big tax cuts that the Congressional Budget Office projects will lead to a $2 trillion deficit.

  3. A possible trade war that will push up interest rates until the next recession hits.

  4. An isolationist administration when it comes to trade, which will lead to "disrupted supply chains."

  5. The boost markets got last year from tax cuts and a general air of fiscal stimulus has been priced in. Meanwhile, President Donald Trump's attacks on "Big Tech," and Amazon in particular, are leading to policy uncertainty.

  6. "Cracks" in the synchronized global growth narrative. Belief that the world was growing together helped fuel the 2017 rally, but Rosenberg sees multiple big economies slowing down.

  7. A possible peak in corporate profits that is raising the bar for expectations, meaning it will be tougher for earnings season to impress. Earnings perfection or bust? Both business and consumer optimism has certainly hit rarefied air and thus nothing short of perfection will move the needle or at minimum keep it where it is...

  8. Related earnings woes, particularly from a U.S. dollar that may have found a bottom after plunging during the first year of Trump's presidency. Trump has advocated for a weaker greenback as it helps make U.S. multinationals more competitive on the global stage.

  9. The wild intraday stock moves. The S&P 500 is on track for 100 days of plus-or-minus 1 percent moves, a trend that Rosenberg says typically happens during bear markets (1974, 2001, 2002, 2008 and 2009 are other years when this occurred).

  10. Circling back to the Fed, Rosenberg does not believe the central bank will come to the rescue if the markets correct. Moreover, the Fed is reducing the size of its bond portfolio just as the U.S. will be flooding the market with bonds to fund the burgeoning fiscal deficits.

 

Another issue we’ve been monitoring lately is a widening of Libor-OIS which is typically associated with heightened credit concerns. This is a metric that measures the difference between Libor (the London interbank borrowing rate where banks lend to each other unsecured) and the overnight interest rate swap (the rate tracking the interest rate set by the central bank) which has shot up to more than 50 basis points. Known as the Libor-OIS, it's now at the widest it has been since the euro zone sovereign debt crisis of 2012. It widened more than 15 basis points in the February alone.


A widening of Libor-OIS is generally associated with heightened credit concerns, however this time analysts are pointing to several structural shifts in money markets (markets that trade in securities with short-dated maturities) rather than banking concerns — as banks are now flooded with liquidity and are generally performing better.


Taken together these factors suggest a concerning picture. A significant wall of worry.


As always we suggest that for the long-term investor it is a fool’s game to try to time markets, yet whether we are in the 6th inning or the 9th, there are an increasing number of signs and signals that the economy may be entering the late stages of economic recovery.


This doesn’t mean a recession is imminent, but some early warning signs are emerging that should encourage us to make preparations for a rainy day. The expansion will likely extend through its ninth year, but is unlikely to accelerate and looks set to slow from here. Are our minds prepared for less? Are we ready and willing to do more with less? To make the most of less?



Musings


Like so many other important principles regarding successful long-term investing, the merits of training oneself to do more with less can be found when considering other disciplines. 



This past month I found some interesting research which suggests that when people severely cut calories, they can slow their metabolism and possibly the aging process.


Clinical physiologist Leanne Redman, who headed the study at Pennington Biomedical Research Center in Baton Rouge used participants that were not overweight and cut their typical plate for breakfast, lunch and dinner by up to 25 percent.

 

53 healthy volunteers were recruited and one-third ate their regular meals. The rest were on the severe calorie reduction plan for two years.


Redman noticed that for those on the restricted diet, their metabolism slowed and became more efficient.

 

"Basically it just means that cells are needing less oxygen in order to generate the energy the body needs to survive; and so the body and the cells are becoming more energy efficient," Redman explains. And if less oxygen is needed to burn energy, then dangerous byproducts of that burning — free radicals — can be reduced.

 

"Oxygen can actually be damaging to tissues and cells, and so if the cells have become more efficient, then they've got less oxygen left over that can cause this damage," she says. And that damage can accelerate aging.


Now, these findings don't directly prove that drastic calorie-cutting will actually help people live longer. People would have to be followed for their lifetimes to prove that. But the study did find that blood pressure, cholesterol and triglycerides were lower in the group on severe calorie restriction. When those numbers are high, they can lead to life-shortening diseases.

 

What can this research teach us when it comes to investing? 


For the last 5 years or so, returns have been for the most part high, low hanging investment fruit plentiful, central banks accommodative and volatility low.


Calorie intake (as represented by stock returns) has been high. Breakfasts, lunches and dinners have been large and our “investor metabolisms” have slowed, their efficiency impaired. We’ve been lulled into ease by excess. Our expectations inflated. 


Instead, as storm clouds gather on the horizon, we should proactively prepare for less by re-setting expectations. This "mental" cutting of calories can lead to improvements in the efficiency of our investor metabolisms. Ultimately our ability to prepare for less will enable us to do more with less. As our physiology suggests, doing more with less may not only determine our long-term success as investors, but also our longevity as humans. 

 

Logos LP March 2018 Performance



March 2018 Return: 2.34%


2018 YTD (March) Return: 0.05%


Trailing Twelve Month Return: +17.80%


CAGR since inception March 26, 2014: +19.95%


 

Thought of the Month


 

"Without frugality none can be rich, and with it very few would be poor. -Samuel Johnson




Articles and Ideas of Interest

 

  • Most people have a really tough time understanding compound interest. It isn’t intuitive so its systematically overlooked and underappreciated. More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful. But few pay enough attention to the simplest factBuffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child. $80.7 billion of Warren Buffett’s $81 billion net worth was accumulated after his 50th birthday. Seventy-eight billion of the $81 billion came after he qualified for Social Security, in his mid-60s. Start early. Be invested. Repeat.

           

  • Lessons on Bubbles From Bitcoin. Until there is a way to bet against an asset, its price will be set by the most upbeat buyer. This suggests that there’s a good and easy way for regulators to reduce the incidence of bubbles. Whenever a new asset is created or a bunch of new investors enters the market, allow more futures trading and other exchanges that let pessimists publicly register their pessimistic beliefs. That won’t totally prevent all bubbles -- the late 1990s technology stock bubble, for instance, happened in spite of the existence of stock futures markets. But it would certainly help. Keeping pessimists out of the market is a recipe for repeated bubbles and crashes, as overoptimistic speculators rampage unchecked. Given a level playing field, the bears can restrain the bulls.

 

  • At this rate, it’s going to take us nearly 400 years to transform the energy system. Here are the real reasons we’re not building clean energy anywhere fast enough. Beyond the vexing combination of economic, political, and technical challenges is the basic problem of overwhelming scale. There is a massive amount that needs to be built, which will suck up an immense quantity of manpower, money, and materials. There’s simply little financial incentive for the energy industry to build at that scale and speed while it has tens of trillions of dollars of sunk costs in the existing system. Should we just give up? MIT digs in.

 

  • Why is it so hard to invest with a social conscience? For those so inclined, the good news is this: There are more opportunities than ever to invest with a conscience. One firm, Wealthfront, will even let you strip individual American companies that rub you the wrong way from one of the index-fund-like portfolios it creates for you. But with all these choices comes a fair bit of confusion. To land the biggest blow with whatever investing dollars you have, you’ll first need to confront at least seven challenges.

 

  • There is a lot of hype surrounding blockchain. Could it be crappy technology and also a bad vision for the future? Anti Futurist Kai Stinchcombe goes so far as to say that “Eight hundred years ago in Europe — with weak governments unable to enforce laws and trusted counterparties few, fragile and far between — theft was rampant, safe banking was a fantasy, and personal security was at the point of the sword. This is what Somalia looks like now, and also, what it looks like to transact on the blockchain in the ideal scenario.”

 

  • The Richest 1% are on target to own 2/3rds of all wealth by 2030. Will anger over inequality ever reach a tipping point?

 

  • The end of scale. New technology driven business models are undercutting the traditional advantages of economies of scale. But large companies have strengths to exploit if they move quickly. Is big business really that bad? The Atlantic argues that large corporations are vilified in a way that obscures the innovation they spur and the steady jobs they produce. After all, entrepreneurship isn't for everyone. 

 

  • The grim conclusions of the largest ever study of fake news. Falsehoods always beat out the truth on Twitter, penetrating further, faster and deeper into the social network than accurate information. Extremism pays. That’s why Silicon Valley isn’t shutting it downThe tech giants’ need for ‘engagement’ to keep revenues flowing means they are loath to stop driving viewers to ever-more unsavoury content. The show must go on! Unless Facebook’s Cambridge Analytica problems are nothing compared to what's coming for all of online publishing.

 

  • Private Equity: Overvalued and Overrated? America is in the grips of a speculative frenzy. Investment bankers, private investment firms, and even a few dozen recently graduated MBAs labelling themselves “searchers” are calling, emailing, wining, and dining small business owners. Their goal is to translate prosaic small businesses into the poetry of private equity. This consensus has led institutional investors to flood private markets with capital, about $200 billion per year of new commitments. The result is soaring prices for private companies of all shapes and sizes. Just before the financial crisis, in 2007, the average purchase price for a PE deal was 8.9x ebitda (earnings before interest, taxes, depreciation, and amortization—a commonly used measure of cash profitability). Deal prices reached 8.9x again in 2013 and are now up to nearly 11x ebitda. But asset prices are going up everywhere. What makes private equity dangerous is the use of debt—and the use of phony accounting to conceal the riskiness of these leveraged bets. Great piece suggesting that all the glitter is not gold.

 

Our best wishes for a fulfilling month, 

Logos LP