absolute return

Avoiding Mistakes

Good Morning,

U.S. stocks posted their first weekly gain since the end of March as bond yields rose amid gains in industrial and financial companies.

On Friday the Dow briefly turned positive in afternoon trade after President Donald Trump told The Associated Press his administration will unveil a "massive tax cut" in a new reform, though the timing of that package was unclear.

While the “Trump Trade” may not be the force it was in the months after the election, it showed some signs of life as the S&P 500 Index rallied 0.9 percent in its biggest weekly gain in two months. Eight of 11 industry groups climbed, with industrial stocks advancing 2 percent and financials gaining more than 1 percent.


Our Take

Investors are still a bit spooked about the French election. Le Pen will make it to the 2nd round along with centrist Macron. We feel that it is too early to say whether she will win the presidential election. As for the Trump trade, lots of noise. Continue to watch Q1 earnings quality.



Selecting stocks that beat the market for long periods of time is very difficult. To pick up where we left off from the last newsletter, where we considered Vilfredo Pareto’s 80/20 rule, the following should not come as a surprise:

For more on underperformance, see the WSJ article published this week lambasting active management. Consistently beating the market is certainly reserved to only a select few yet where is the bulk of stock market wealth being created?

Interesting piece in The Irrelevant Investor outlining research from a new paper suggesting that  the top thirty firms together accounted for 31.2% of the total stock market’s wealth creation from 1926 to present. The 1,000 top performing stocks, less than four percent of the total, account for all of the wealth creation from 1926 to present. (on the 26,000 stocks that have appeared in the CRSP database since 1926) The other ninety six percent of stocks that have appeared on the Centre for Research in Security Prices (CRSP) database collectively generated lifetime dollar returns that only match the one-month Treasury bill. The median stock underperformed the market with an excess lifetime return of -54%.

What should the average investor glean from this beyond the obvious (the odds of beating the market are not in your favor)? Well it appears that to improve stock picking performance perhaps less focus should be placed on identifying “star firms” than simply avoiding the worst…Keep things simple in both investing and in life. In our daily quests to shine we often forget that there is perhaps greater distinction in simply avoiding mistakes…


Logos LP Updates

Our fund performance for March is in: 5.13%

2017 YTD to March: 13.67%

Annualized return since inception March 26, 2014: 25.10%

Thought of the Week

"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” -Charlie Munger


Articles and Ideas of Interest


  • Paul Tudor Jones says U.S. stocks should terrify Janet Yellen. The legendary macro trader says that years of low interest rates have bloated stock valuations to a level not seen since 2000, right before the Nasdaq tumbled 75 percent over two-plus years. That measure -- the value of the stock market relative to the size of the economy -- should be “terrifying” to a central banker, Jones said earlier this month at a closed-door Goldman Sachs Asset Management conference, according to people who heard him. This isn’t really anything new as other hedge fund managers also point out that margin debt -- the money clients borrow from their brokers to purchase shares -- hit a record $528 billion in February, a signal to some that enthusiasm for stocks may be overheating. Yet what is new and somewhat interesting is what Tudor points to as the spark for the next market crash: risk parity funds.


  • The American economy isn’t actually becoming more concentrated. Donald Trump’s election win, many speculated, must be due to geographic inequality and the increasing concentration of economic activity in a handful of big coastal cities. It was tough to escape the woeful tales of small-town and Rust Belt voters in the final months of 2016. But as Jed Kolko, chief economist at Indeed.com, pointed out last September, the economy isn’t actually becoming more concentrated. Something much more insidious is happening. Economic opportunity is becoming more concentrated, but Americans’ ability to move to take advantage of that opportunity is declining. Consequently, the rising average incomes in big coastal cities are being offset by those cities’ declining share of the population.


  • Housing trends will keep U.S. interest rates suppressed. If we’re all downsizing, who’s upsizing? That question should be critical to aging and retiring baby boomers whose main “asset” is the equity in their homes. If current demographic trends remain in place -- and there is not a shred of evidence that they won’t -- then we are facing a generation of subdued home demand even as retirees will be looking to sell. We’re not even considering the impact of what “normalized” interest rates means for mortgage borrowing. This raises broader economic problems, too. Beyond the obvious, which is that retirees will face difficulty selling their biggest asset, household formation will remain sluggish. When new households are formed, they buy a lot of things, because along with houses go new cars, appliances, furniture, maintenance, and toys for the kids. Empty-nesters don’t have those needs, and so they spend less. Less household formation means less consumption overall, which will prove problematic in an economy where consumption stands at a record 69.4 percent of gross domestic product. In other words, upward pressure on interest rates becomes more subdued.


  • Jeff Bezos explains how he makes business decisions. In his (excellent) letter to shareholders Bezos last week explained his approach to decision making. "Most decisions should probably be made with somewhere around 70% of the information you wish you had," "If you wait for 90%, in most cases, you're probably being slow." Business moves fast. This Day 1 mantra allows one to make high-quality, high-velocity decisions while maintaining a certain comfort in the face of uncertainty.


  • Will robots displace humans as motorised vehicles replaced horses? The Economist suggests that as robots encroach on human work, studying the fate of the horse could provide guidance. Horses might have fared better had savings from mechanisation stayed in rural areas. Instead, soaring agricultural productivity led to falling food prices, lining the pockets of urban workers with more appetite for a new suit (or car) than anything four-legged. Similarly, the financial returns to automation flow to profitable firms and their shareholders, who not only usually live apart from the factories being automated but who save at high rates, contributing to weak demand across the economy as a whole. Indeed, roughly half of job losses from robotisation (as from exposure to Chinese imports) are attributable to the knock-on effect from reduced demand rather than direct displacement.


  • 11 charts that show marijuana has truly gone mainstream. Many marijuana users hide their stash in their closets. Most people who use marijuana are parents. There are almost as many marijuana users as there are cigarette smokers in the U.S. Those facts and many more are among the conclusions of new survey from Yahoo News and Marist University, which illustrates how pot has become a part of everyday life for millions of Americans. Here are 11 charts that explain how and why. Big tobacco is sure to makes its move…We like (Altria: MO and remain long Reynolds: RAI)


  • Love in the time of numbness. Great essay in the New Yorker suggesting that today, and especially today, as the threat of desensitization—and the accompanying seductions of detachment, outrage, revulsion, indignation, piety, and narcissism—looms over all our lives, we might need to ask ourselves the following question: What will move me beyond this state of anesthesia? How will I counteract the lassitude that creeps over my soul? Each of us will find individual answers to these questions. There is no formula that describes what your solution might be…..but introspection is where the journey begins.


Our best wishes for a fulfilling week, 

Logos LP


Can Stories Destroy An Economy?

Good Morning,

U.S. equities rallied on Friday, with financials rising around 2 percent, following a stronger-than-expected employment report.


The Dow Jones industrial average jumped around 180 points — posting its best trading day of the year — signalling that the Trump rally may still be intact. 


The U.S. economy added 227,000 jobs in January, while the unemployment rate ticked higher to 4.8 percent, the Bureau of Labor Statistics said Friday. Economists polled by Reuters expected payrolls to grow by 175,000 with the unemployment rate holding steady.


Another factor improving investor sentiment was the move on Friday by Trump to sign executive orders aimed at watering down financial regulations in the U.S. This move lifted the Financial Select Sector SPDR Fund (XLF) by 2 percent.


Our Take


Remember when people used to talk about the Federal Reserve? No longer. What we are looking at is a structural shift in the market from a Fed-driven market to a policy driven market. 


Do humans for the most part act rationally, or are they for the most part driven by emotion? To what extent can our decisions and judgements be tainted by emotion? Can stories and rumours throw an entire economy off course? 


I read a fascinating piece this week by Mark Buchanan a physicist and science writer which took up a theme I alluded to in a previous letter that rhetoric can become reality. Sentiment can cause outcomes. 


In his piece, Buchanan fleshes out this concept by demonstrating how narratives can spread economic uncertainty, discouraging consumer spending and business investment. 


In a recent speech Yale University Economist Robert Shiller made arguments about the Great Depression and the 2008 financial crisis. 


In the 2000s people passed around stories about getting rich flipping homes and this contributed to a belief that home prices would always rise. The real estate industry as well as the financial industry played into this but the key is that most appeared to buy into this narrative. Dissenting voices were few and far between. (Sound like the familiar narrative you hear in Toronto with home prices jumping 22%?)


Schiller has written extensively on these topics yet his new work has coined the term “narrative economics” - the idea that stories more more like infectious agents, with some being much more contagious than others, and that an epidemiological approach might help to better understand their movement. This is becoming more of a reality as we are able to perform more complete analyses of news feeds and social media. 


If moods, feelings and emotions drive decision making to what extent to they drive markets and economies? 


As Buchanan states: 


“It is perhaps appropriate that the power of stories is gaining greater recognition during the age of Donald Trump, who rose to the presidency thanks in large part to an utter disregard for objective reality. As Shiller acknowledges, Trump is a “master of narrative." Let's hope this one doesn’t prove to be disastrous.” 


Pay attention to the prevailing mood. Take the temperature of the stories and narratives that dominate the hearts and minds of those that surround you. You may find that causality can be turned on its head…

Thought of the Week


"Words are but symbols for the relations of things to one another and to us; nowhere do they touch upon the absolute truth.” -Friedrich Nietzsche

Stories and Ideas of Interest


  • Since the election, your personal filter bubble has been a big topic of conversation. To solve this bias problem, Wired magazine suggests using tech to re-engineer your media diet. You can try an app called Discors or the Chrome browser extension EscapeYourBubble to help you better understand and accept others. Barry Ritholtz suggests that these are good places to start but that they miss the mark as bias is but one cognitive error we make. He offers a few additional steps here


  • The multinational company is in trouble. Mr Trump is unusual in his aggressively protectionist tone. But in many ways he is behind the times. Multinational companies, the agents behind global integration, were already in retreat well before the populist revolts of 2016. Their financial performance has slipped so that they are no longer outstripping local firms. Many seem to have exhausted their ability to cut costs and taxes and to out-think their local competitors. Mr Trump’s broadsides are aimed at companies that are surprisingly vulnerable and, in many cases, are already heading home. The impact on global commerce will be profound.


  • Inside the mind of a Snapchat streaker. Bloomberg dives into the life of an avid user demonstrating that the photo sharing app is dangerously addicting by design. This is a depressing account but a must for those who are not users. Timing is right given that this week Snapchat filed for an IPO stating in its filing that: "We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.” Will the app’s addictiveness be enough to convince investors to overlook the company’s net loss: $514.64 million in 2016, wider than $372.89 million in 2015? 


  • People wouldn’t care if three quarters of brands disappeared: Survey showed. Havas Group's "Meaningful Brands" report shows that people wouldn't care if 74 percent of brands they use vanished. They also say that 60 percent of the content produced by companies is poor, irrelevant or failing to deliver. This is a clear sign that over communication is diluting brand value and thus making it more difficult for brands to grow. The fight for consumer attention has perhaps never been more difficult. 

    What is a meaningful brand? Delport defined a meaningful brand as one which functionally works, offers value for money and makes someone's life easier, as well as considering the impact it has on a community. 


All the best for a productive week,