Temperament Determines Outcomes


Good Morning,

This week U.S. stocks climbed to record highs and Treasuries rallied after a core inflation reading slowed, adding to evidence that economic growth continues apace without stoking price increases. The dollar pared losses.


The three major indexes posted slight weekly gains. The S&P 500 and the Dow recorded their fifth consecutive weekly gains, while the Nasdaq has completed three.


Bonds in Europe gained after a report that the European Central Bank may continue asset purchases for at least nine months after it starts tapering in January. The Stoxx Europe 600 Index climbed, led by steelmakers and miners as most industrial metals gained and crude oil rose back above $51 a barrel.


Excluding food and energy, so-called core prices rose 0.5 percent in September, below an estimate of 0.6 percent. At the same time, a Commerce Department report also released Friday showed U.S. retail sales rose in September by the most in more than two years, as Americans replaced storm-damaged cars and paid higher prices at the gasoline pump. Excluding autos and gas, sales still increased at the second-fastest pace since January.

The inflation data bolstered the view that U.S. inflation below the Federal Reserve’s target may be structural rather than transitory, prompting traders to slightly reduce the odds of another rate increase in December. Could the Fed be ignoring actual inflation data?

Our Take

As we’ve suggested in the past, inflation is simply not cooperating but the fundamentals continue to look good. The never-ending crazy going on in Washington simply hasn’t stopped the economic expansion.


The International Monetary Fund, echoing increasingly gloomy sentiment in Washington, has concluded that the Donald Trump administration and Congress probably won't succeed in enacting tax reform or even significant tax cuts. The Republican chairman of the Senate Foreign Relations Committee calls the White House "an adult day care center" and says he fears that the president's reckless bluster may lead us into World War III. The president, meanwhile, says he wants to compare IQ test scores with his secretary of state.


No worries. Investors do not appear to be concerned about any of these things. Earnings season has also gotten off to a good start, with 87 percent of the companies that have reported topping bottom-line expectations. The number of companies currently beating estimates, and the margin by which they are doing so, is running at a clip well above what these same 31 companies have recorded, on average, over the past three years.


Even Buffett thinks that stock valuations make sense with interest rates where they are. You measure laying out money for an asset in relation for what you are going to get back. You get 2.30% on the ten year. Seems fair to say that stocks will do better over the long term. In case you missed it Warren Buffett’s full interview on CNBC.


But what of the concept of Ben Graham's “margin of safety” in this "bull market in everything" environment? The idea that the price paid for an asset (stock, bond, real estate etc.) should allow for human error, bad luck or, indeed, many things going wrong at once.


In a problematic world of trade tariffs, nuclear braggadocio, nationalism and inequality such a concept is more prescient than ever. Rarely have so many asset classes -from stocks, to bonds, to gold, to real estate to bitcoins, to wine, to classic cars- exhibited such a sense of invulnerability. And all at the same time to boot! Listen to the temperature of this market. Listen for the all too familiar refrains of “this time it’s different” as they roll in. Timing markets is a fool’s game, but remaining alert to the concept of “margin of safety” is not. It may ensure survival.  



Many great investors suggest that generating above average investment results necessitates above average temperament.


As warren Buffett has stated: “Success in investing doesn’t correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”


Over the last few weeks in particular I’ve observed this on numerous occasions. Individuals with seemingly above average intelligence making poor decision after poor decision, blinded by ego and jealousy. Weakened by insecurity and contempt. Burdened by an inability to move forward after failure. Influenced by “opinions” when they reach “decisions”. Led astray by their own faulty temperaments.


This week I came across an interesting piece in the Economist that made me think deeply about temperament. Management gurus have poured over a related topic endlessly: is a knack for entrepreneurship something that you are born with, or something that can be taught? In a break with those gurus’ traditions, a group of economists and researchers from the World Bank, the National University of Singapore and Leuphana University in Germany decided that rather than simply concoct a theory, they would conduct a controlled experiment.


Moreover, instead of choosing subjects from the boardrooms of powerful corporations or among the latest crop of young entrepreneurs in Silicon Valley, Francisco Campos and his fellow researchers chose to monitor 1,500 people running small businesses in Togo in West Africa.


As they reported in Science, the researchers split the businesses into three groups of 500. One group served as the control. Another received a conventional business training in subjects such as accounting and financial management, marketing and human resources. They were also given tips on how to formalise a business. The syllabus came from a course called Business Edge, developed by the International Finance Corporation.


The final group was given a course inspired by psychological research, designed to teach personal initiative—things like setting goals, dealing with feedback and persistence in the face of setbacks, all of which are thought to be useful traits in a business owner. The researchers then followed their subjects’ fortunes for the next two-and-a-half years (the experiment began in 2014).


An earlier, smaller trial in Uganda had suggested that the psychological training was likely to work well. It did: monthly sales rose by 17% compared with the control group, while profits were up by 30%. It also boosted innovation: recipients came up with more new products than the control group. That suggests that entrepreneurship, or at least some mental habits useful for it, can indeed be taught. More surprising was how poorly the conventional training performed: as far as the researchers could tell, it had no effect at all. Temperament was the determinate factor. Superior mental habits lead to outperformance.


Focusing on the theme of temperament for our own decision making at Logos LP we’ve made a conscious effort to record instances in which poor temperament has lead to poor outcomes. A record of instances when either we or those around us have let poor temperament wreak havoc upon output. The journal gets re-visited on a monthly basis in order to develop an awareness of trends or patterns. Action items are them developed to alter behaviour.


For the next six months try and keep track of all of your major decisions and thoughts in a journal. This will help to build an awareness of the way your decisions are made and their associated outcomes. What you may find is that you develop more control over yourself and your decision making. Education comes from within; you get it by personal struggle, effort and thought. Live in the process…


Thought of the Week


"If you do not conquer self, you will be conquered by self.” - Napoleon Hill

Articles and Ideas of Interest

  • There’s nothing old about this bull market. Claims that it’s the second-longest ever don’t hold up. Barry Ritholtz makes a convincing case that the current bull market is only four and a half years years old. The best starting date of a new bull market is when the prior bull-market highs are eclipsed. That is how we get a date like 1982 as the start of the last secular long-term bull market. And it is also how we get to March 2013 as the start date of this bull market, when the S&P 500 topped the earlier high of 1,565 set in October 2007. Could we just be approaching the middle of the run?


  • Debt keeps rising and nothing bad happens. Economists are stumped. As the Republicans prepare for their big tax reform push, the issue of deficits and debt is once more coming to the fore. Many economists realize that tax cuts, especially income tax cuts, tend to increase deficits, which over time lead to increases in the national debt. The GOP plan, if adopted, probably would pump up both deficits and debt. So the question is: Is more debt good, bad or does it even matter? But if it’s bad, how serious a problem is it?


  • Ideas aren’t running out, but they are getting more expensive to find. The rate of productivity growth in advanced economies has been falling. Optimists hope for a fourth industrial revolution, while pessimists lament that most potential productivity growth has already occurred. This must read piece argues that data on the research effort across all industries shows the costs of extracting ideas have increased sharply over time. This suggests that unless research inputs are continuously raised, economic growth will continue to slow in advanced nations.


  • Bitcoin resumed its climb. After tearing past $5,000 on Thursday, the cryptocurrency soared above $5,800 on Friday. JPMorgan CEO Jamie Dimon, who told investors last month that bitcoin was a bubble “worse than tulip bulbs,” said Thursday he doesn’t want to talk about it anymore.  But on Friday, Dimon responded to a question about bitcoin by saying if people are "stupid enough to buy it," they will pay the price for it in the future. The craze rolls on with hedge funds flipping ICOs and receiving preferential discounts and terms. Here’s the deal with an ICO: You can buy entry in a computer ledger issued by a start-up company on the basis on an unregulated prospectus. It is called an ICO (“Initial Coin Offering”) but though the ledger entry is called a coin, you cannot spend it at any shop. And whereas the use of the term ICO makes it sound like an IPO (initial public offering), the process whereby a firm lists on the stockmarket, coin ownership does not necessarily get you equity in the company concerned. The Economist points out that this is the kind of bargain that would only appeal to people who reply to emails from Nigerian princes offering to transfer millions to their accounts. There is a serious side to the craze as there was with the dotcom boom. The technology that underpins digital currencies- the blockchain- is an important development. The problem is that it is not easy to draw a line between financial innovation and reckless speculation.

  • Dating apps are reshaping society. There’s been a big uptick in interracial and same-sex partners who find each other online. Interesting research presented in the MIT Tech Review which tends to support that there is some evidence that married couples who meet online have lower rates of marital breakup than those who meet traditionally. That has the potential to significantly benefit society. And it’s exactly what new data models predicts. Perhaps online dating isn’t all bad. Important to think about as Berkshire Hathaway CEO Warren Buffett recently stated that making money means nothing without having another person, such as a spouse, to share the wealth with. Who you marry, which is the ultimate partnership, is enormously important in determining the happiness in your life and your success. A study published by Carnegie Mellon University found that people with supportive spouses are "more likely to give themselves the chance to succeed."


  • The loneliness epidemic. This may not surprise you. Chances are, you or someone you know has been struggling with loneliness. And that can be a serious problem. Loneliness and weak social connections are associated with a reduction in lifespan similar to that caused by smoking 15 cigarettes a day and even greater than that associated with obesity. But we haven’t focused nearly as much effort on strengthening connections between people as we have on curbing tobacco use or obesity. Loneliness is also associated with a greater risk of cardiovascular disease, dementia, depression, and anxiety. At work, loneliness reduces task performance, limits creativity, and impairs other aspects of executive function such as reasoning and decision making. For our health and our work, it is imperative that we address the loneliness epidemic quickly.

Our best wishes for a fulfilling week, 

Logos LP

Where Is "The Crowd"?

Good Morning,

U.S. equities rose on Friday on better-than-expected employment data. The Dow Jones industrial average hit a record high and closed 66.71 points at 22,092.81. Goldman Sachs contributed the most gains. The index also posted its eighth straight record close.


Banks, including Goldman Sachs, outperformed the market, with the SPDR S&P Bank exchange-traded fund (KBE) advancing 0.81 percent. The space received a boost from a jump in interest rates, which followed strong U.S. employment data. The U.S. economy added 209,000 jobs last month, according to the Labor Department, well above the expected gain of 183,000.


On the Canadian side, Canada’s labor market continued its stellar performance in July, with the jobless rate falling to the lowest since before the financial crisis. The unemployment rate fell to 6.3 percent, the lowest since October 2008, as the labor market added another 10,900 jobs during the month, Statistics Canada reported from Ottawa. The total increase over the past year of 387,600 is the biggest 12-month gain since 2007. These jobs figures will likely bolster confidence that the country is quickly running out of economic slack and higher Bank of Canada interest rates may be needed to cool off growth...


Our Take

The US report was very strong. Timing couldn’t be better as we are moving into the tail end of Q2 earnings as well as into August and September which are typically weak months for the market. This was a beat and raise guidance jobs number and the second month in a row the U.S. has come in above 200,000 and above expectations.


Furthermore, although lower wage Americans are still reeling from the great recession, they are finally getting some relief in the jobs market. Underneath a 209,000 gain in July payrolls, significant shares of job growth were in lower-wage industries such as restaurants and home health-care services. As the overall labor-force participation rate ticked up 0.1 percentage point, the level for people age 25 or older without a high school degree surged to the highest since 2011. In leisure and hospitality, which typically carries lower pay, annual wage gains of 3.8 percent outpaced the average. (For a breakdown of who is hiring see here)


Other indicators suggest that even with the tightening job market, some slack still remains. That leaves room for additional gains that would back up President Donald Trump’s drive to bring people back into the workforce as well as support the Federal Reserve’s go-slow approach to tightening credit. This is good news and suggests that perhaps we haven’t yet reached the peak of this economic cycle.


U.S. equity indexes have been on a roll lately with the Dow notching eight straight record closes.


Nevertheless, all is not rosy. Amid the talk of new highs and record levels, one section of the equity market is having trouble keeping up. Small-cap stocks, on track for their second weekly decline with a loss of 1.7 percent, are falling further behind benchmark equity gauges.


In addition, underneath what was another up week for the S&P 500 Index, things were a little more complicated. An equal weight version of the S&P 500 that strips out market value biases just posted its biggest weekly drop since May, and its worst week versus the regular S&P 500 all year. The reason: while enough megacap stocks rose to keep the S&P 500 afloat, single-stock blowups were far more common than single-stock rallies.


Perhaps we haven’t quite reached euphoria just yet…


During these summer months I’ve gotten the opportunity to reconnect with old friends and learn a few new things whilst doing so. Of great interest have been several conversations with those in the corporate sector.


Among many other enlightening insights, I was startled to hear of a new phenomenon in current deal making circles: deal quality has been decreasing. Deals are getting done that just 1-3 years ago would have been laughed at for their overvaluation, shoddiness, and/or high risk. Interesting data tending to support that risk-taking may be on the rise...


If not by coincidence one of our favorite investors Howard Marks put out a cautionary memo last week entitled “There they go again...Again” suggesting that “they” are “engaging in willing risk-taking, funding risky deals and creating risky market conditions.


Marks suggests 4 attributes of today’s investment environment: 1) uncertainties are unusual in number and scale 2) prospective returns for the vast majority of asset classes are about the lowest they have ever been 3) asset prices are high across the board 4) pro-risk behaviour is commonplace


These attributes support his overall suggestion that in this environment one should move forward with caution. As always, the memo is worth a close read.


Marks supports his 4 overarching attributes of the current market environment with several fascinating vignettes each showcasing “willy nilly risk taking” in a variety of asset classes.


  1. U.S. equities: Many metrics such as average p/e, Shiller p/e and the “Buffett yardstick” and record low interest rates suggest stock prices are at lofty levels.

  2. The VIX: The VIX is at record lows and this suggests that investor sentiment is largely positive.

  3. Super-stocks: Bull-markets are marked by a single group of stocks that are “the greatest” and the FAANGs are having their moment. When the mood is positive multiples rise as one “can’t lose” in these names.

  4. Passive investing/ETFs: These approaches are on the rise and in the current up-cycle, over-weighted, liquid, large-cap stocks have benefitted from forced buying on the part of passive vehicles, which don’t have the option to refrain from buying a stock just because its overpriced. Investors are thus turning capital over to a process in which neither individual holdings nor portfolio construction is the subject of thoughtful analysis and decision-making, and in which buying takes place regardless of price…

  5. Credit: Low grade credit instruments are proliferating. Junk bond offerings are over subscribed and offer weak investor protections.

  6. Emerging market debt: For only the third time in history, emerging market debt is selling at yields below those on U.S. high yield bonds.  

  7. Private equity: PE firms will probably add more than a trillion dollars to their buying power this year.  Where will it be invested at a time when few assets can be bought at bargain prices? Too much money is chasing too few good deals. Standards are relaxing.

  8. Venture capital: SoftBank’s recent raising of $93 billion for its Vision Fund for technology investments – presumably on the way to $100 billion. Can one wisely invest $100 billion in technology?

  9. Digital currencies: digital currencies are nothing but an unfounded fad (or perhaps even a pyramid scheme), based on a willingness to ascribe value to something that has little or none beyond what people will pay for it.  The same description can be applied to the Tulip mania that peaked in 1637, the South Sea Bubble (1720) and the Internet Bubble (1999-2000).

This is a fascinating selection of examples yet perhaps the most interesting thing in the memo was his acknowledgement that many market participants are aware of these issues and agree that things can’t go well forever – that the cycle is extended, prices are elevated and uncertainty is high.


These cautious beliefs are what makes calling a top in this market so hard. Just this week CNBC ran a poll which asked readers “Is the stock market about to suffer an epic crash?”


11,736 readers voted and 44% of them said yes, 33% said no and 26% said not sure.


Think about that.


The poll didn't ask, "Is the stock market overvalued?" or "Will the stock market decline for the rest of the year?" (or in the next year, or anything like that). It asked about "an epic crash," and not just any time, but specifically about whether the market is about to crash. "About to" means that it's going to happen very soon.


It is rather incredible that such a large proportion of people say they expect such an extreme and rare event to happen within such a narrow time frame.


Not to mention, as Josh Brown reminded us in response to the Marks memo, that we’ve got an entirely lost generation of investors, the millennials, who prefer to hold cash and even bonds than own stocks.


Could the behaviour of the crowd (as Brown defines it) be telling a different story than the anecdotes in the Marks memo? A story of caution and bearishness?


Without a doubt, as Josh Brown points out, it is as good a time as any to be cautious as caution should be the default orientation for any serious investor.


But I believe this debate highlights something else of great importance that has plagued the pundit, the asset manager and the individual investor throughout this epic bull run: the consensus or “crowd” has been incredibly hard to pin down. Each of these groups seems unable to agree upon what the “consensus view” is.


Timeless investment wisdom suggests that avoiding the crowd is a good bet for beating the stock market but this is difficult for most as there is ample evidence to support one’s own definition of “the crowd”.


The crypto currency trader believes his asset class is misunderstood and unloved. He sees himself as ahead of the curve and thus ahead of the crowd while the value investor looks upon him with disdain. “Just another herd follower chasing returns with the crowd…”


As such, rather than expending excessive energy on the identification of “the crowd” it may be best to humbly return to first principles: What do I understand and what is my sphere of investment competence? What do I reasonably believe is valuable and can be acquired for less than it should be? Am I being skeptical enough? Do I accept that there is no free lunch?

Logos LP in the Media


Commentary from Logos LP on investment opportunities in the defense sector in Forbes Magazine.

Thought of the Week


"Anyone can hold the helm when the sea is calm.” -Publilius Syrus

Articles and Ideas of Interest


  • How bond markets can predict moves in stocks. Interesting research suggesting that high-yield bonds moving with the ebbs and flows of U.S. earnings announcements tend to predict stock returns for a slew of issuers -- particularly firms with a modest level of institutional equity ownership. So perhaps stock investors seeking an informational edge should keep their eyes on junk-bond prices on the heels of earnings reports.


  • Commodities are a losing bet. Over the past 10 years, the Bloomberg Commodities Index is down 6.5 percent per year for a total loss of almost 50 percent. Over that same time frame, the S&P 500 is up a total of close to 100 percent, or a 7 percent annual return. This difference in performance has led to a huge divergence in the ratio of commodities to stocks, which has compelled some investors to ask whether there is a buying opportunity in commodities. There is also no financial reason that dictates that commodities must exhibit mean reversion. They provide no dividends or income. They don’t have earnings. Commodities are more of an input than a financial asset. In many ways, a bet for commodities is a bet against technology and innovation. Commodities have shown lower returns than cash equivalents with higher volatility than stocks. This is a poor risk-return relationship.


  • There is no U.S. wage growth mystery. Economists are puzzled over U.S. wage growth, wondering why it has been so slow despite a labor market that is allegedly back to or close to full employment. Nice piece in Moody’s suggesting that if you look at the right wage growth and the right measure of employment slack there is no mystery: Wage gains are right where they should be. And it indicates the labor market has room to improve.


  • Is productivity growth becoming irrelevant? As we get richer, measured productivity may inevitably slow, and measured GDP per capita may tell us ever less about trends in human welfare. Measured GDP and gains in human welfare eventually may become entirely divorced. Imagine in 2100 a world in which solar-powered robots, manufactured by robots and controlled by artificial intelligence systems, deliver most of the goods and services that support human welfare. All that activity would account for a trivial proportion of measured GDP, simply because it would be so cheap. Conversely, almost all measured GDP would reflect zero-sum and/or impossible-to-automate activities – housing rents, sports prizes, artistic performance fees, brand royalties, and administrative, legal, and political system costs. Measured productivity growth would be close to nil, but also irrelevant to improvement in human welfare.


  • Why aren’t Americans moving anymore? In the 1990s, 3% of Americans moved out of state each year. Now the rate is half that, with US mobility hitting the lowest level since World War II. “The lack of mobility in the American workforce is a huge blocker of our economic growth,” says Ryan Sager, editorial director for Ladders. It's "definitely hurting Main Street,” writes business analyst Thanh Pham, who says there’s a mismatch between cities with abundant jobs and areas with potential workers. There are myriad reasons for the slowdown in mobility, from lack of job stability to the prohibitive expense of actually moving. Aeon suggests we are living in the quitting economy where employees are treated as short-term goods and thus market themselves as goods, always ready to quit.


  • A highly successful attempt at genetic editing of human embryos has opened the door to eradicating inherited diseases. This is huge and ushers in a new era. Shoukhrat Mitalipov has performed the first highly successful use of the gene-editing technique called Crispr to improve human health: his team was able correct a genetic mutation that causes a life-threatening cardiac disease. None of the embryos were allowed to come to term. But if Mitalipov has his way, future projects could eradicate a disease that affects millions—one in 500 people carry the mutation—and even kills unsuspecting, seemingly fit adults.          


  • Best summer reads 2017. Great list out of The Guardian. My favorite I revisit each summer: Herman Hess - Sidhartha.


Our best wishes for a fulfilling week, 

Logos LP

How To Make Better Decisions

Good Morning,

U.S. stocks limped into the weekend on a sluggish final day of trading, while the dollar fluctuated with oil as investors assessed data showing the U.S. economy on solid footing.


The S&P 500 Index moved between gains and losses before closing higher by less than a point -- good enough for a seventh straight gain and fresh record in trading 25 percent below the 30-day average.


The U.S. economy’s first quarter GDP came in this Friday and it wasn’t so miserable after all, as consumption contributed more to growth and business investment was even stronger than thought.

Our Take

The S&P 500 and Nasdaq indexes both hit record highs this week, and the Dow flirted with its own all-time high. Investors seem to be signalling that everything is honky-dory even as the political headlines remain concerning. Tax and healthcare reform appear to be even further out of reach as the investigations into the Trump administration (now Jared Kushner under scrutiny) deepen.


But are these headlines so concerning? In the short-term political events can trigger short term buying opportunities but research has shown that political crises rarely have a lasting impact on markets. There is an abundance of liquidity in this market with a lot of cheap money chasing a returns. This is no doubt one factor contributing to the rally, but more importantly investors are focusing on the strengthening economy, signs from the central bank that interest rates will continue to rise, and the best quarter of corporate-earnings growth in five years.


Furthermore, there still exists a record amount of bearishness. The S&P 500 Index has climbed 7.9 percent since January, including its biggest gain since April in the just-completed week. At the same time, short interest as a proportion of total shares outstanding has also expanded, rising by 0.3 percentage point to 3.9 percent. Never before has an equity advance as big as this year’s occurred simultaneously with more short sales, according to exchange data compiled by Bloomberg that goes back to 2008.

There is no euphoria!


Bloomberg this week reported that investors are pulling money out of stocks after the initial rush to buy faded along with the optimism over Trump’s pro-growth policy. They have withdrawn $20 billion from exchange-traded funds and mutual funds this quarter, reversing about one third of the inflows seen between November and March, according to data compiled by Bloomberg and Investment Company Institute.  


Bullish bets are also shrinking in the futures market. Net long positions in S&P 500 contracts held by large speculators fell in seven of the last eight weeks and were closer to turning net short than any time since December, data compiled by Commodity Futures Trading Commission show.


The challenge for short sellers is how long they can stay solvent before being forced to buy back the shares that they have borrowed and sold. And the pressure to cover is building. The potential for a swift melt up is increasing…..



Last weekend I was on vacation and had the opportunity to read a wonderful book “Charlie Munger: The Complete Investor” by Tren Griffin. Munger is one of the world’s most successful investors better known as Warren Buffett’s partner at Berkshire Hathaway.


What is most interesting about Munger is not his success as an investor but the way he thinks and keeps his emotions under control.


The book offers a great overview of Munger’s ideas and methods which can help us make better decisions, be happier and live a more fulfilling life. Why? Because investing, like life is about decision making. Everyday we are faced with a spectrum of possible decisions which will set us along one path or another.


As such, misjudgement can wreak havoc upon the outcomes of our lives.


What is the psychology of human misjudgement?


Humans have developed simple rules of thumb called heuristics, which enable them to efficiently make decisions. Heuristics are essential as without them humans would be unable to process the vast amount of information they face on a daily basis.


The problem is that these shortcuts can sometimes result in tendencies to do certain things that are dysfunctional.


The upside is that we can learn to identify these dysfunctional tendencies and overcome them. This is the key to better decision making. What are some of the most common of these tendencies? There are over 20 explained in the book but these are those that stood out most:


  1. Liking/Loving Tendency

    1. People tend to ignore or deny the faults of people they love and also tend to distort the facts to facilitate love.

  2. Inconsistency-Avoidance Tendency

    1. People are reluctant to change even when they have been given new information that conflicts with what they already believe. The desire to resist any change in a given conclusion or belief is particularly strong if a person has invested a lot of effort in reaching that conclusion or belief.

  3. Kantian Fairness Tendency

    1. Humans will often act irrationally to punish people who are not fair. In other words they may act irrationally when presented with a situation that they feel is unfair. Some would rather lose money in an investment than see another person benefit from “perceived” unfairness.

  4. Envy/Jealousy Tendency

    1. Very primal emotions are triggered when humans see someone with something they don’t have often causing dysfunctional thoughts and actions. In this world of abundance there is nothing but unhappiness to be gained from envy.

  5. Reciprocation Tendency

    1. The urge to reciprocate favors and disfavors is so strong that people will feel uncomfortable until they can extinguish the debt.

  6. Simple, Pain-Avoiding Denial

    1. People hate to hear bad news or anything inconsistent with their existing opinions and conclusions. If something is painful people will work to even deny the reality.

  7. Excessive Self-Regard Tendency

    1. People tend to vastly overestimate their own capabilities. The most effective way to reduce risk in any situation is to genuinely know what you are doing.

  8. Deprival Super-Reaction Tendency

    1. Loss aversion- we irrationally avoid risk when we face the potential for gain, but irrationally seek risk when there is a potential for loss.

  9. Social Proof Tendency

    1. Humans have a natural tendency to follow a herd of other humans. We view a behaviour as more correct to the degree we see others performing it. This is how bubbles form. The herd is rarely correct.

  10. Authority-Misinfluence Tendency

    1. People tend to follow people who they believe are authorities or have the right credentials. Especially when they face risk, uncertainty or ignorance.


Think independently!

Thought of the Week

"The best thing a human being can do is help another human being know more.” - Charlie Munger

Articles and Ideas of Interest


  • The meaning of life in a world without work. As technology renders jobs obsolete, what will keep us busy? Sapiens author Yuval Noah Harari examines ‘the useless class’ and a new quest for purpose. Could playing virtual reality games be the answer? But what about truth? What about reality? Do we really want to live in a world in which billions of people are immersed in fantasies, pursuing make-believe goals and obeying imaginary laws? Well, like it or not, Harari suggests that may be the world we have been living in for thousands of years already...


  • Why you should learn to say no more often. The NYT suggests that humans are social animals who thrive on reciprocity. It’s in our nature to be socially obliging, and the word no feels like a confrontation that threatens a potential bond. But when we dole out an easy yes instead of a difficult no we tend to overcommit our time, energy and finances. Do you have the ability to communicate ‘no’ and reflect that you are actually in the driver’s seat of your own life?


  • The cryptocurrency mania may just be starting. Practically this entire week on CNBC the top 5 most popular articles were bitcoin related with bitcoin more than doubling in price this year alone and its closest rival Ether up over 2,300 percent! Yes 2,300 percent. There are a few theories for why the currencies have been rallying so much the most convincing being that bitcoin has been getting support from certain governments and investors and that the ethereum blockchain has been getting serious backing by major corporations wishing to use the technology for smart contract applications. I have no interest in trading currency or speculating on its price action but what worries me about products like Ether is that they can be cloned. The people buying Ether are buying a specific blockchain while the technology underlying it is what is most valuable. Cryptocurrencies are proliferating with new currencies being launched at record speeds. Canada-based Kik's cryptocurrency, Kin just launched this week which is also based on the ethereum blockchain. If I were to invest in a crypto currency I would look at bitcoin and take 1% or less of what I own, buy bitcoin with it, and then forget about it for at least the next five years; ideally the next decade. The way I see it you will either lose 1% of your net worth or make incredibly large sums. You can find the ways to buy it here.


  • Toronto homeowners are suddenly in a rush to sell. Toronto’s hot housing market has entered a new phase: jittery. After a double whammy of government intervention and the near-collapse of Home Capital Group Inc., sellers are rushing to list their homes to avoid missing out on the recent price gains. The new dynamic has buyers rethinking purchases and sellers asking why they aren’t attracting the bidding wars their neighbors saw just a few weeks ago in Canada’s largest city. Interestingly, a Canadian regulator this week said it disciplined two mortgage brokers who funneled business to Home Capital Group Inc., marking the first disclosure of action taken against dealers who submitted fraudulent loan applications to the embattled mortgage lender. The Financial Services Commission of Ontario conducted its own review into Home Capital in relation to the company severing ties in 2015 with 45 brokers who used falsified client income on applications. This is a big deal….this means that many Canadians may be delinquent or be under real stress in affording their home since who knows what they put down as income. According to Equifax, mortgage fraud jumped 52 percent last year from 2011, showing the issue may only be growing. House of cards? No wonder a recent Manulife study indicated that a mere 10% hike to mortgage payments would sink almost ¾ of Canadian homeowners. Robert Shiller for the NYT reminds us how tales of “flippers” led to the last housing bubble.


  • The phrase “late capitalism” is suddenly everywhere. The Atlantic suggests that “Late capitalism,” in its current usage, is a catchall phrase for the indignities and absurdities of our contemporary economy, with its yawning inequality (new research suggests that your financial fate is sealed by the time you turn 25) and super-powered corporations (new research also suggests that employers often implicitly, and sometimes explicitly, act to prevent the forces of competition from enabling workers to earn what a competitive market would dictate, and from working where they would prefer to work) and shrinking middle class. Interesting read chronicling the perverse ways our “developed” economy is progressing. What do growth and productivity even mean in an economy that has moved from manufacturing (whose products can be counted) to services (which can't be)? Do economies driven by information and software need new metrics for progress? And what, if anything, can an economy at the technological frontier do to make living standards rise faster?


Our best wishes for a fulfilling week, 

Logos LP

Warren Buffett Is Right

Good Morning,

Stocks posted weekly gains Friday, while Federal Reserve Chair Janet Yellen suggested that she may raise rates this month.


While leaving just enough wiggle room in case conditions should change, Yellen said Friday that economic improvements of late will be a big part of the discussion at the March 14-15 Federal Open Market Committee meeting.


Recently, a slew of top Fed officials indicated that tighter monetary policy may be coming soon.  Market expectations for a March rate hike have skyrocketed to 81 percent, according to the CME Group's FedWatch tool, on the back of hawkish rhetoric and solid economic data.


The market has an excellent track record for predicting rate increases and will most likely get this one right.


Furthermore, markets seem to be applauding a raise as stocks have risen to record levels since the U.S. election fueled by expectations of tax reform, deregulation and government spending. The three major indexes posted their best day of 2017 on Wednesday, notching fresh record highs as global stock markets have also been rallying.


Donald Trump delivered his debut address to Congress this week which although quite “Presidential” was light on policy detail and big on rhetoric.


Trump restated his key campaign themes, issuing a rallying call for the "renewal of the America spirit." Wall Street will have to keep waiting on specifics of the plans for tax cuts, infrastructure investment and regulatory reform that have helped drive a global rally since the November election.


SnapChat’s IPO was a resounding success this week. As stated before we would certainly not be buyers but the 44% surge on open is a bullish sign for the overall market. Interestingly, a high school in Mountain View, California, made millions from the IPO less than four years after investing $15,000 in the company. They cashed out 24 million…..


Nevertheless, a declining user base and a lacklustre monetization plan suggest a "greater fool theory" in which the stock's price is determined by irrational expectations.


No wonder S3 Partners LLC, a financial analytics firm, says short interest in the photo-app maker is liable to reach $1 billion within a week, particularly if the rally continues. The contrary bet won’t be cheap, either, with the cost to borrow shares likely to start at 25 percent and rise.


“We expect that 10 percent to 20 percent of the initial offering will be shorted in the first week of trading, which roughly translates into $500 million to $1 billion of short interest right from the start”


Let’s not forget that Twitter surged over 70% at open from IPO price. That investment hasn’t seemed to have worked so well...



Warren Buffett sent his annual letter to shareholders this week and took questions on CNBC for 3 hours.  Along with more prosaic investment suggestions, the head of Berkshire Hathaway offered advice on how to leverage fear.


He also praised the US’s “miraculous” economic achievements and the country’s “tide of talented and ambitious immigrants”. He railed against asset managers and suggested investors should utilize low cost ETFs. He  also suggested that there is simply no other better long-term investment than in the common stock of high quality businesses.


He even went so far as to say that  "Measured against interest rates, stocks actually are on the cheap side compared to historic valuations,"


"But the risk always is interest rates go up, and that brings stocks down.” He also stated that he had invested about $20 billion in stocks since shortly before the election.


"If interest rates were at 7 or 8%, then these prices would look exceptionally high," Buffett said. The Federal Reserve most recently raised its benchmark rate in December, to a range of 0.50% to 0.75%.


Although we tend to avoid making any type of suggestion as to the valuation of the  “overall market” and choose to focus on individual businesses, we would tend to agree with Buffett’s suggestion. We would also agree with this statement he made in his interview:


When asked: "Wait, it's too late for me to get in. I've missed it. We're past Dow 20k, now I have to wait for the pullback." What would you say to someone like that?                       

Buffett: Well, I would say they don't know, and I don't know. And if there's a game it's very good to be in for the rest of your life, the idea to stay out of it because you think you know when to enter it-- is a terrible mistake.


I must say buffett’s comments were a breath of fresh air in what has been the most hated bull market of all time. Investor pessimism is soaring and everyone is unhappy:


"Money managers are unhappy because the majority of them are lagging the S&P 500 and see the end of another quarter approaching."


"Economists are unhappy because they do not know what to believe. This month's forecast of a strong economy or the ramblings of the disenchanted telling them all is not well. They ponder and are vexed when looking at the pros and cons of any proposed changes by the current administration."


"Technicians are unhappy because the market refuses to correct."


"Investors are unhappy because they are nervous over the bombardment of political ramifications to economic policies that are unknown. They fear new highs as if it were a disease as they are constantly reminded by the skeptics that they could give it all back".


"The public is unhappy because they can't figure out what is going on. The political stage says one thing but the stock market is saying another. They sit frozen in place and wring their hands wondering if the stock market can really go higher."


"The skeptics are unhappy because everything tells them to be wary of the market, yet the rising indexes continues to prove them wrong time after time."


As one market participant astutely observed, the ONLY people that are in the pilot's seat are those that have participated in this historic bull market. Which seat are you in?

Thought of the Week

"Our expectation is that investment gains will continue to be substantial – though totally random as to timing – and that these will supply significant funds for business purchases," -Warren Buffett

Stories and Ideas of Interest


  • The Singularity will happen within 30 years. Softbank’s CEO says by then a single computer chip will have an IQ of 10,000  and your shoes will have a higher IQ than you. Hurray for progress!


  • Netflix is thinking about how to entertain AIs. In 50 years, CEO Reed Hastings isn’t sure if his customers will even be human. At a certain point, when algorithms designed to represent our behavior are dictating our consumption, the real-life viewer—you—might start to get lost. That could be what Hastings is driving at here, as Inverse pointed out. Would entertainment be tailored to the person, then, or to the AI?


  • The need for exponential growth kills innovation. Silicon Valley’s obsession with it is damaging a generation of startups. It used to be that successful, upcoming companies would show a prudent mix of present-day profits and future prospects, but such a mix is now considered old-fashioned and best forgotten. Now it’s all potential, all the time.


  • Scraping by on six figures? Tech workers feel poor in Silicon Valley's wealth bubble. Big tech companies pay some of the country’s best salaries. But workers claim the high cost of living in the Bay Area has them feeling financially strained. A tech worker, enrolled in a coding bootcamp, described how he lived with 12 other engineers in a two-bedroom apartment rented via Airbnb. “It was $1,100 for a fucking bunk bed and five people in the same room. One guy was living in a closet, paying $1,400 for a ‘private room’.” “We make over $1m between us, but we can’t afford a house,” said a woman in her 50s who works in digital marketing for a major telecoms corporation, while her partner works as an engineer at a digital media company. “This is part of where the American dream is not working out here.”


  • Every successful relationship is successful for the exact same reasons. One man set out to create the definitive guide to a long and happy relationship by interviewing people that have been married for at least 10 years. The response was overwhelming. Almost 1,500 people replied, many of whom sent in responses measured in pages, not paragraphs. It took almost two weeks to comb through them all, but he did it. And what he found stunned him…They were incredibly repetitive. This is a great guide. Check out all definitive 13 principles and remember:  “What I can tell you is the #1 thing, most important above all else is respect. It’s not sexual attraction, looks, shared goals, religion or lack of, nor is it love. There are times when you won’t feel love for your partner. That is the truth. But you never want to lose respect for your partner. Once you lose respect you will never get it back.”


All the best for a productive week,

Logos LP

Can These Science Concepts Help Us Understand This Market?

Good Morning,


U.S. equities closed flat to higher Friday, taking a bit of a breather from their most recent record run, while investors awaited President Donald Trump's speech to Congress next week.


Nevertheless, stocks rallied in the last half-hour of trading Friday to recover losses from earlier in the session. The Dow Jones Industrial Average, which closed up 0.05 percent, has now hit daily highs for 11 consecutive sessions, its longest streak of records since 1987. The S&P 500 Index and Nasdaq Composite Index also finished higher, while the Russell 2000 Index lost ground.

On the local front, the TSX had a no good very bad day on Friday as earnings and dividend disappointments among gold companies, along with weakening oil prices and trepidation over President Donald Trump’s border tax proposals, erased two-thirds of this year’s rally. Not to mention the fact that growth is disappointing, Trudeau has run out of fiscal runway and inflation is higher than it has been in 2 years...


Our Take


Amidst the growing stock market euphoria it should be noted that gold rose for a fourth week after U.S. Treasury Secretary Steven Mnuchin said Thursday that he expects low borrowing costs to persist, sparking a drop in the dollar.


The bond market also seems to be at odds with the bullishness of the stock market as the benchmark 10-year note yield fell to 2.33 percent, while the two-year note yield declined to 1.15 percent. We would caution that it appears like bonds could have it right — that growth is coming, but probably not as quickly as the stock market would like to think.


The S&P 500 is up more than 10 percent since Trump's Nov. 8 victory, rising on the election, trading flat through much of December, then jumping again in the new year. The yield on the benchmark 10-year note immediately spiked as well, surging 38 percent to 2.6 percent by mid-December.           


However, the yield, generally seen as a proxy for GDP growth plus the inflation rate, has fallen somewhat since then as fixed income investors have continued to buy government debt. Bonds often lose their lustre during boom times, particularly if inflation sets in.


There are other signs that investors are having some misgivings about growth.


Copper prices, which are seen as a reliable mirror of growth, tumbled about 3 percent Thursday after Mnuchin's comments. The metal, sometimes called "Dr. Copper" for its ability to signal the economy's direction, is up about 11 percent since the election but has fallen 4 percent since its mid-February peak.


These counter trends should be considered as contrarian indicators. THERE IS STILL CONSIDERABLE BEARISHNESS in this market.


Furthermore, perhaps investors, after 10 years of living in constant fear over a succession of financial and political cataclysms, have finally decided to tune out the headlines and focus instead on an economy that, while not great, is not doing so bad, either.


Ed Yardeni, a stock market strategist, calculates that savings deposits and money market funds, the two safest and lowest return options for the risk-wary, doubled to nearly $9 trillion at the end of last month from $4.5 trillion in early 2009. Since 2007 households in the USA have been a net seller of stocks, and have shrunk the amount of their financial assets in stocks by 18.6% since that time!


Perhaps a lot of this pent-up cash earning close to zero in terms of interest rates is finally going to start looking for higher returns in the stock market — with pension funds in particular leading the way. Perhaps, people are slowly starting to realize that you can get bent out of shape living in a sensationalist media environment but this noise has little to do with earnings and the valuation of those earnings in the stock market...


Thought of the Week


"We live in a world exquisitely dependent upon science and technology, in which hardly anyone knows anything about science and technology." -Carl Sagan


Stories and Ideas of Interest


  • These are the science concepts you need to know to understand political life in 2017. It’s early days of 2017 still, but already it’s become apparent that this year science will play a larger role in public discourse than it has in the past, at least in the US. The scientific community has found itself at odds with the new White House administration in countless ways, and is gearing up for a fight that will take place in labs and hacker spaces, in the halls of civic buildings, and in streets nationwide. Quartz has put together a compendium of the scientific concepts and terms that will be at the heart of these conversations—and will characterize the world of scientific discovery through the rest of the year. Concept #1 and perhaps the most important: skepticism: the application of reason to any and all ideas...


  • 7 earth-like planets found orbiting star 39 light-years away. Scientists have discovered what looks like the best place so far where life as we know it may exist outside our own solar system. The new findings raise hope that further systems are waiting to be discovered, the researchers say. And it's something that astronomers and exoplanet hunters are eager to explore.


  • The anatomy of charisma. What makes a person magnetic and why we should be wary. Nautlius puts together an excellent historical account of charisma showing both the positive and the negative. Charisma will never be stamped out nor should it be yet the way to protect people from the dark side of charisma is to teach them how it works. It is best thought of like fire. It can be used to heat your house or burn it all down…



  • Rich people literally see the world differently. Science of us magazine presents some controversial research demonstrating that “people who are higher in socioeconomic status have diminished neural responses to others’ pain,” the authors write. “These findings suggest that empathy, at least some early component of it, is reduced among those who are higher in status.” Generalizations are problematic but there are interesting implications for why  lower-class people are more attuned to the people around them. The authors write that “higher-status people are more focused on their own goals and desires. They also ignore people a little more, maybe because they can afford to. “If you have more power and status, you may not have to care as much about what people are thinking and feeling; and also, if you’re in a resource-scarce environment, where things are a little more unpredictable and maybe a little more dangerous, it would be very adaptive to pay attention to others, how they’re feeling and what they’re going to do.”


  • The next financial crisis may be in your driveway. Lured by low interest rates, low gas prices, and a crop of seductive vehicles that are faster, smarter, and more efficient than ever before, American drivers are increasingly riding in style. Nevertheless, all the glitter ain’t gold —those swanky machines are heavily leveraged. The country’s auto debt hit a record in the fourth quarter of 2016, according to the Federal Reserve Bank of New York, when a rush of year-end car shopping pushed vehicle loans to a dubious peak of $1.16 trillion. The combination of new car smell and new credit woes stretches from Subarus in Maine to Teslas in San Francisco. Is it a surprise that Americans just clocked their biggest spike in stress in more than a decade...


  • As we sit at record highs in the market we should ask: should stocks be worth more now than they used to be? Stocks are not cheap. The CAPE ratio is 28.46, above the long-term average of 16.73 and more expensive than 96% of all readings. But exactly how expensive are they, and what might this mean for future returns? Michael Batnick puts together a very smart piece suggesting that expensive markets leave investors with a smaller margin for error. The more you pay, the less you get. Nevertheless, he makes some intelligent observations to counter the popular argument: “stocks are expensive, sell everything.” Let’s remember that long-term average stock returns smooth over the bull and bear markets that investors experience, and no two market cycles ever unfold the exact same way. Bull and bear markets can vary significantly in both duration and magnitude...


All the best for a productive week,


Logos LP