Warren Buffett

The Art of The Deal

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Good Morning,
 

Stocks closed little changed on Friday as solid quarterly results from some of the largest U.S. companies, including Microsoft, Capital One and Honeywell, counterbalanced threats made by President Donald Trump stating that he is willing to up the ante in the trade war with Beijing and could slap tariffs on every Chinese good imported to the U.S. "I'm ready to go to 500," he told CNBC, referencing the $505.5B of American imports from China in 2017, compared to the $129.9B the U.S. exported to the country last year. (an interesting blow by blow look at global trade here)

 

In other news, President Trump sat down with Russian counterpart Vladimir Putin in Helsinki. Crimea, Syria and election meddling were likely on the summit's agenda, but no aide or official from the U.S. delegation were present during the meeting's initial stages. A controversial press conference ensued (in which Trump seemed to prefer Putin’s story suggesting Russia’s non-involvement in the US election rather than the opinion of U.S. intelligence), coming on the tails of a tense NATO summit during which Trump lambasted allies for not meeting their defense spending commitments.

 

The 10-year yield ended the week at 2.90% and the two-year yield finished up at 2.60%. Some analysts saw the increased 2-10 spread as a sign that investors believe President Trump's criticism of the Fed could slow down the pace of rate hikes.

 

Finally, Amazon reached a $900B market value for the first time, nipping at Apple's) heels as Wall Street's most valuable. The news comes after the company announced it sold more than $100M in products during its annual Prime Day sale. Shares are up over 57% so far this year, bringing Amazon's increase to over 123,000% since it listed on the Nasdaq in 1997.


Our Take
 

As perplexing as Trump’s actions can be, instead of spilling more ink on his diversions from “accepted” presidential behavior, it may be best to try and understand his approach by attempting to apply a different mental model. The seeds of Trump’s mental model can be found in his book “The Art of the Deal”. (His approval ratings also hold other clues)

 

Jim Rickards points out that the book is a window on Trump’s approach to every challenge he confronts, including economic and geopolitical challenges as president.

 

What is Trump’s process as described in the book?

 

  1. Identify a big goal (tax cuts, balanced trade, the wall, etc.).

  2. Identify your leverage points versus anyone who stands in your way (elections, tariffs, jobs, etc.).

  3. Announce some extreme threat against your opponent that uses your leverage.

  4. If the opponent backs down, mitigate the threat, declare victory and go home with a win.

  5. If the opponent fires back, double down. If Trump declares tariffs on $50 billion of good from China,and China shoots back with tariffs on $50 billion of goods from the U.S., Trump doubles down with tariffs on $100 billion of goods or perhaps even $505.5 billion etc. Trump may keep escalating until he wins. (or loses)

  6. Eventually, the escalation process can lead to negotiations with at least the perception of a victory for Trump (North Korea) — even if the victory is more visual than real.

 

This approach is abnormal from a historical perspective but to the astute observer this far into his Presidency should be looking more predictable.

 

What should we expect moving forward in light of this mental model? Likely more dramatic policy shifts and extreme threats. The key is not to overreact and hope that all escalations lead to fruitful negotiations in step 6….

 


Chart(s) of the Month
 

The S&P 500 PE ratio is right in line with historical norms.

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J.P. Morgan: “High yields spreads and defaults are low and not rising. Mr. Bond is not yet sniffing a potential economic problem.”
 

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The Big 5 tech companies together are worth more than the bottom 282 companies in the S&P 500 yet this level of concentration is not unprecedented. In 1965 AT&T and GM represented 14.5% of the S&P 500. What is wild is that these 5 companies are all in the same industry.

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Courtesy of Michael Batnick.
 

Musings



This month we released our 2nd quarter letter to our investors. Included is a discussion of portfolio changes as well as a more detailed description of a new position we’ve initiated in Industrial Alliance and Financial Services (TSX: IAG). Please contact us if you would like to see a copy of this letter.


 

Logos LP May 2018 Performance

 

June 2018 Return: 4.29%

 

2018 YTD (June) Return: 0.34%

 

Trailing Twelve Month Return: +11.86%

 

CAGR since inception March 26, 2014: +18.77%


 

Thought of the Month


 

"Do you have the patience to wait till your mud settles and the water is clear? Can you remain unmoving till the right action arises by itself?– Lao-Tzu, Tao-te-Ching




Articles and Ideas of Interest

 

  • These 10 stocks account for all the S&P 500’s first half gains.David Kostin, chief U.S. equity strategist at Goldman Sachs, highlighted that more than 100 percent of the S&P 500’s total return of nearly 3 percent in the first half is attributable to just 10 equities. Amazon.com Inc. alone accounts for roughly two-fifths of the benchmark gauge’s advance. Find out which they are here.

           

  • The average age of a successful startup founder is 45. HBR explores why and also why vc investors often bet on young founders.

 

  • YOLO. A Boston College study has found that half of companies raising through ICOs die within four months after finalizing token sales. Is Blockchain even a revolution?

 

  • Longer lives mean a single marriage may not be enough. More couples are wondering if the relationship they had in their first phase of adulthood is worth continuing.

 

 

  • Can the cult of Berkshire Hathaway outlive Warren Buffett? Centuries from now, historians piecing together the narrative of this stretch of America’s existence will have to explain the curious four-decade (and counting) run in which an arena in an otherwise modest midwestern US city filled to capacity once a year for two aging billionaires talking about the stock market, life, and whatever else tickled their fancy. The annual meeting of the Omaha, Nebraska-based holding company Berkshire Hathaway has no analog in US business or culture. Buffett is 87. Munger is 94. And Berkshire Hathaway’s returns over the S&P 500 are slowing, as Buffett has warned for decades they would. Interesting article in Quartz exploring his legacy as well as his adage that America will always remain a safe bet...

 

  • Google is building a city of the future in Toronto. Would anyone want to live there? It could be the coolest new neighborhood on the planet—or a peek into the Orwellian metropolis that knows everything you did last night. Politico magazine explores the tradeoffs and debates involved.

 

  • In praise of being washed. Has a life of ambition and striving gotten the best of you? Do you sometimes wish you could give up a little—stop chasing so many pointless goals you probably won’t hit anyway? It’s time you got washed. A refreshing summer read in GQ.

 

  • Scientists at a company part-owned by Bill Gates have found a cheap way to convert CO2 into gasoline. A team of scientists has discovered a cheap, new way to extract carbon dioxide from the atmosphere — which could arm humanity with a new tool in the fight against climate change.

 

  • The friend effect: why the secret of health and happiness is surprisingly simple. Our face-to-face relationships are, quite literally, a matter of life or death. “One of the biggest predictors of physical and mental health problems is loneliness,” says Dr Nick Lake, joint director for psychology and psychological therapy at Sussex Partnership NHS Foundation Trust. “That makes sense to people when they think of mental health. But the evidence is also clear that if you are someone who is lonely and isolated, your chance of suffering a major long-term condition such as coronary heart disease or cancer is also significantly increased, to the extent that it is almost as big a risk factor as smoking.”

Our best wishes for a fulfilling month, 

Logos LP

 

Just Ask Warren Buffett or Charlie Munger

Good Morning,
 

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

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

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

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

 

Our Take
 

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

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

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

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

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

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

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

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

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

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

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

 

Musings
 

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

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

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

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

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

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

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

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

Further compounding this dilemma are two issues:

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

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

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



Logos LP Updates
 

June 2017 Return: -3.69%

2017 YTD (June) Return: 19.66%

Annualized Returns Since Inception March 26, 2014: 24.89%

Cumulative Return Since Inception March 26, 2014: 82.99%



Logos LP in the Media


Our Q1 2017 letter to our investors picked up by ValueWalk

Our Q2 2017 letter to our investors picked up by ValueWalk




Thought of the Week

 

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


Articles and Ideas of Interest

 

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

 

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

 

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

 

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

 

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

 

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


Our best wishes for a fulfilling week, 
 

Logos LP