Blind Spots, Power and Decision Making

Good Morning,

U.S. stocks steadied Friday after a three-day slide, while Treasury yields and the dollar edged lower. The week was largely dominated by crude’s tumble into bear market territory yet all three major American assets didn’t seem to care.

The S&P 500 Index finished the week virtually where it began, as rallies in health-care and tech shares offset a rout in energy producers. Small caps rallied Friday to end higher on the week.

Also of interest this week was Warren Buffet’s Berkshire Hathaway Inc., buying a 38 percent stake in Home Capital for about C$400 million ($300 million) and providing a C$2 billion credit line to backstop the Toronto-based lender.

With the deal, the billionaire investor is wading into a housing market that’s been labeled overvalued and over-leveraged, with home prices in Toronto and Vancouver soaring as household debt hits record levels.

Warren Buffett’s deal to back Home Capital Group Inc. was quickly interpreted by Toronto real estate pundits as a vote of confidence for a housing market that everyone from investors to global ratings companies say is a bubble ready to burst. Nevertheless, before getting too jubilant about Canadian real estate one should consider the terms of the deal. 

Buffett is no stranger to taking advantage of dark times to opportunistically turn need into an attractive investment (famously investing $5 billion in Goldman Sachs right after the 2008 collapse of Lehman Brothers). Securing Buffett’s participation came at a high price for the Canadian company, including giving Berkshire Hathaway a large stake at a steep discount to a recent trading average. Based on Friday’s closing price Buffett appears to have already have nearly doubled his initial $153 million investment in Home Capital’s equity, on paper...

A classic example of: “be greedy when others are fearful.”

Our Take


Weakness in energy prices were the theme of the week, yet few signs of contagion emerged leaving everything from gold to the dollar to U.S. equities to stay range bound as the traditionally slow summer season began.

As Bloomberg remarked, the bear market in crude in many ways resembles its more severe predecessors from 2014 and 2016: oil prices plummeting, non-U.S. producers floundering to keep supply at bay and concerns swirling around the impact of energy companies on high-yield bonds.

The correlation between daily swings in the S&P 500 Index and crude has been roughly zero in the past month, the lowest since January and far below the five-year highs reached in 2016 as the oil prices bottomed near $26 before staging a rebound.

Why? Perhaps the industry’s impact on the overall market is simply low. Today, energy stocks account for less than 6 percent of the S&P 500, compared with 11 percent three years ago. Or perhaps investors see little possibility of systemic risk.

One thing is evident: that falling energy prices will likely further subdue inflation.

Treasury yields have fallen from their 2017 highs recently, with the benchmark 10-year yield trading around 2.15 percent. In March, it traded around 2.6 percent. The bond market doesn't appear to see inflation coming in the near term, and so far it's been right.

The consumer price index fell 0.1 percent in May, raising questions about whether the Fed will be able to raise rates once more this year. The next rate hike isn't fully priced in until March 2018, according to the CME Group's FedWatch tool.

In addition, Amazon’s CEO Jeff Bezos may be single handedly killing inflation. As recently pointed out on CNBC, at a time when central banks are starting to prepare for an expected rise in inflation ahead, Bezos' move to acquire Whole Foods looks to be a significant counterweight.

The entire food retailing industry is an $800 billion market and it is likely that the the supermarket wars are only just beginning. Food makes up about 14.6 percent of the consumer price index, a widely used inflation index…

In addition, this move will likely put greater pressure on other chains such as Target and Wal-Mart to lower prices. Neil Irwin for the NY Times goes so far as to say that the Amazon-Walmart showdown has come to explain the modern economy as in the short term consumers will benefit from lower prices but in the long term will have worrying implications for jobs, wages and inequality.

Interestingly, few are following the Federal Reserve’s lead to raise interest rates. In fact, inflation appears to slowing worldwide and a broad measure of rich-world monetary conditions implied by Morgan Stanley, which incorporates short-term interest rates, bond yields, share prices and other variables suggests monetary policy is becoming looser, if anything…

In this environment further tightening presents asymmetric risk to the downside. Much better to let the economy run a bit hot and raise rates than exacerbate a deflationary environment...low inflation and thus low interest rates will likely remain the “only game in town”...



This week I read an interesting piece in the Atlantic which suggested that power causes brain damage. Many leaders actually lose mental capacities - most notably for reading other people - that were essential to their rise.

Is it perhaps useful to think of power as a prescription drug which comes with side effects? After 2 decades of lab research, Dacher Keltner, a psychology professor at UC Berkeley, found that subjects under the influence of power acted as if they had suffered a traumatic brain injury—becoming more impulsive, less risk-aware, and, crucially, less adept at seeing things from other people’s point of view.

Sukhvinder Obhi, a neuroscientist at McMaster University, in Ontario, recently described something similar.

When he put the heads of the powerful and the not-so-powerful under a transcranial-magnetic-stimulation machine, he found that power, in fact, impairs a specific neural process, “mirroring,” that may be a cornerstone of empathy.

Which gives a neurological basis to what Keltner has termed the “power paradox”: Once we have power, we lose some of the capacities we needed to gain it in the first place.

These findings are concerning as we look to those in our societies who have power including perhaps ourselves.

What blind spots has our power generated in ourselves and our leaders? Do these findings help to explain current political events and leadership styles? How much do they contribute to trends in income distribution, social stratification and investment returns?

What I found most interesting and perhaps most alarming about these findings is to set them in the context of another ill which society is currently suffering from: an inability to acknowledge error.

In a wonderful piece in The Economist a few weeks ago it was posited that humanity is getting worse at owning up to its gaffes.

Few enjoy the feeling of being outed for an error but real damage can be caused when the desire to avoid reckoning leads to a refusal to grapple with contrary evidence.

People often disregard information that conflicts with their view of the world. Why? Roland Bénabou, of Princeton, and Jean Tirole, of the Toulouse School of Economics posit that: “In many ways, beliefs are like other economic goods. People spend time and resources building them, and derive value from them. Some beliefs are like consumption goods: a passion for conservation can make its owner feel good, and is a public part of his identity, like fashion. Other beliefs provide value by shaping behaviour.

Because beliefs, however, are not simply tools for making good decisions, but are treasured in their own right, new information that challenges them is unwelcome. People often engage in “motivated reasoning” to manage such challenges. Mr Bénabou classifies this into three categories. “Strategic ignorance” is when a believer avoids information offering conflicting evidence. In “reality denial” troubling evidence is rationalised away: house-price bulls might conjure up fanciful theories for why prices should behave unusually, and supporters of a disgraced politician might invent conspiracies or blame fake news. And lastly, in “self-signalling”, the believer creates his own tools to interpret the facts in the way he wants: an unhealthy person, for example, might decide that going for a daily run proves he is well.”

These tendencies/biases linked to the desire to avoid acknowledging error are relatively harmless on a small scale but can cause major damage when they are widely shared or exhibited by those in power.

It is no wonder that motivated reasoning is a cognitive bias which better-educated people are especially prone. This takes us back to the research on how power can cause the brain to become more impulsive, less risk-aware, and, crucially, less adept at seeing things from other people’s point of views.

As investors, but more broadly as humans we would do well to recognize how these tendencies cross-pollinate and threaten to wreak havoc on our decision making and its outcomes.

Particularly as we accumulate success and thus power we become more vulnerable. Blinded by our own righteousness, increasingly unable to consider differing narratives, facts, perspectives, ideas and at times even reality.

What can be done to avoid these blind spots? Research finds that humility can go a long way to counter such tendencies. Yet to build humility, experiences of powerlessness may be key.

By experiencing or at minimum recounting moments of powerlessness, you maintain a connection or “groundedness” in reality.

When was the last time you felt powerless? The last time you made an error? Hold onto those moments. They may more important than you think.

Ideas from Logos LP

Huntington Ingalls Industries (NYSE: HII) 


Logos LP in the Media

Our 2016 Annual Letter to Shareholders Published by ValueWalk

Thought of the Week 


"It is impossible for a man to learn what he thinks he already knows." -Epictetus

Articles and Ideas of Interest

  • My algorithm is better than yours.  Just 10% of trading is regular stock picking estimates JPMorgan. The majority of equity investors today don't buy or sell stocks based on stock specific fundamentals. No wonder the world’s fastest growing hedge funds are quant funds and robots are eating money managers lunches.


  • Finland tests a new form of welfare. An experiment on the effect of offering the unemployed an unconditional income. Interesting piece in The Economist chronicling Mr Jarvinen who was picked at random from Finland’s unemployed (10% of the workforce) to take part in a two-year pilot study to see how getting a basic income, rather than jobless benefits, might affect incentives in the labour market. He gets €560 ($624) a month unconditionally, so he can add to his earnings without losing any of it. Finland’s national welfare body will not contact him directly before 2019 to record results. I see this happening more often in the developed world. Something to keep an eye on.


  • Stop fooling yourself about 8% returns. Nice piece in Gadfly suggesting that There's an amazing amount of denial going on right now. Investors are simply ignoring current market dynamics and are still expecting average annual returns of 8.6 percent, according to a Legg Mason Inc. survey of income investors released this week. Those who were employed expected more than 9 percent gains, with retirees expecting less. Actual returns have come in markedly lower of late, but hopes remain high. It is important that investors become realistic. If they're not, fund managers will try to serve their hopes and dreams, making the financial system all the more fragile for it.


  • The web makes it harder to read market sentiment. The internet swept away the old-school financial pundits, turning the public forum into the Wild West. Inflammatory click bait filled with extreme opinions has found its way into ordinary discourse. Not too long ago, anyone who held radical opinions about markets, individual stocks (or even politics) could freely opine about them, just as today. But it was local and contained; those with idiosyncratic opinions could only scare their friends and neighbors, one at a time, at backyard BBQs and school plays. That is no longer the case as “crash”, “hyperinflation”, “monetary debasement” are becoming more common than “value investing”, “long-term” and “prudence” ;).


  • The cheapest generation. Why millennials aren’t buying cars or houses and what that means for the economy. Younger generations simply haven’t started spending yet….But what if this assumption is simply wrong? What if Millennials’ aversion to car-buying isn’t a temporary side effect of the recession, but part of a permanent generational shift in tastes and spending habits? It’s a question that applies not only to cars, but to several other traditional categories of big spending—most notably, housing. And its answer has large implications for the future shape of the economy—and for the speed of recovery. After all the old are eating the young. Around the world, a generational divide is worsening.


  • The older we get, the person we spend the most time with is the one we see in the mirror. QZ reports that time with friends, colleagues, siblings, and children diminishes over the course of a lifetime. One doesn’t have to be alone to be lonely. More than half of the lonely respondents in the UCSF study lived with a partner. To feel connected to others, it seems, the number of hours spent on relationships is less important than the quality of the relationship itself.


Our best wishes for a fulfilling week,  

Logos LP

Political Risk and "Expert" Bearishness

Good Morning,

Significant movement for U.S. stocks last Friday closing mixed due to pressure from this year's best-performing sector: technology.


The Nasdaq composite hit a record high at the open before closing 1.8 percent lower. Shares of Apple, Facebook, Amazon, Netflix and Google-parent Alphabet all fell more than 3 percent.

The tech-heavy index also posted its worst weekly performance of the year. The S&P 500 closed 0.1 percent lower, erasing earlier gains, with information technology dropping more than 2.5 percent. Big tech was slammed as investors took profits from the group, which some fear has become a massive market bubble.


These concerns were bolstered by a report released by Goldman Sachs on the top five outperforming mega-cap names in tech with some warnings on valuations and concerns that their volatility has become extraordinarily low. In fact, the stocks had become closely correlated to safe haven plays, like bonds and utilities.


Meanwhile, the Dow Jones industrial average rose about 90 points, notching a record close as out of favor financials and industrials led.


Also this week we saw another unfortunate chapter of Donald Trump’s Presidency unfold. Hiding in plain sight in former FBI Director James Comey’s testimony Thursday before the Senate Intelligence Committee was a potentially major new avenue for special counsel Robert Mueller’s investigation of Russia-related crimes: the possibility that President Donald Trump committed a federal crime by lying to Comey about his connections to Russia and activities on his 2013 visit there.

Our Take

“Big tech” could be vulnerable in the near term as investors rotate into other groups that have lagged such as financials and energy yet the long-term earnings growth story remains intact. If anything this rotation is evidence of a healthy market alive to the issue of valuations supported by sound fundamentals (almost 40 percent of fund managers think that global equity markets are overvalued, the highest level since January of 2000. And 80 percent see U.S. markets as the most overvalued in the world).

Interestingly, looking back at the year 2000, all five companies have eight times more cash than the big tech stocks had in the bubble.


As for the Trump show, this week what became more clear is that the self-inflicted wounds of what appears to be an undisciplined presidency are increasingly likely to blow its chances of passing any of the anticipated economic stimulus measures. The trifecta of tax reform, repatriation and infrastructure investment could put the U.S. on very strong footing for the next several decades but this opportunity seems to be slipping away.


Barry Ritholtz in an interesting piece for Bloomberg, suggests that the president is becoming radioactive. He is having problems hiring outside counsel: four top law firms have reportedly turned him down. Resignations are mounting. Diplomats are revolting. Hundreds of key positions have gone unfilled as people increasingly perceive working for Trump as a career killer.


What now appears increasingly likely is not a dismantling of the Trump administration from the outside. But an implosion from within. Furthermore, although there may be no serious collusion with the Russians, there is now certain to be a wide-ranging independent investigation into all things Trump. This investigation will likely make governing even more difficult than it already is...


But, some may say, stocks are up, so how bad can it be? It’s true that while Wall Street has lost some of its initial excitement about Trumponomics the market is still sitting close to all time record highs as investors and businesses don’t seem to be pricing in the risk of disastrous policy.


Or aren’t they? Interestingly, in a recent research note put out by FactSet the initial excitement does not appear to be translating into stronger performance for most measures of the real economy so far in the first half of 2017. Even the initial surveys suggesting optimism have retreated somewhat as the equity markets have flattened out as progress on reforms has stalled in Washington D.C.


Business and consumer surveys initially reflected optimism, but we have seen small retreats in sentiment measures for both in the second quarter. *Note that the sentiment indicators may have pulled back recently, but they still remain elevated and near longer-term highs.


Perhaps the big money, which classically tends to equate wealth with virtue, is beginning to consider (even Ray Dalio is starting to break a sweat as Trump consistently chooses conflict over cooperation) the potential risks posed by this increasingly self-destructive Presidency….



On a not so unrelated topic, I came across two notable bearish "expert" perspectives on the American economy this week. Good old gurus Bill Gross, manager of the Janus Henderson Global Unconstrained Bond Fund, and Paul Singer, founder of hedge fund Elliott Management Corp. Speaking last week at the Bloomberg Invest New York summit on Wednesday.


They’re message: a crash is coming. Their argument: The Federal Reserve flooded the U.S. economy with cheap money after the 2008 financial crisis by holding interest rates near zero and beefing up its balance sheet. Corporations and individuals responded by bingeing on debt and risk assets -- as the Fed encouraged them to do so.


Now we’ve heard this argument many times before. In fact we’ve basically heard it every year since 2013. Should we be worried as these two investors are considered by many to be two of the greats having both superbly navigated the 2008 financial crisis?


There is no doubt that debt levels should be watched closely yet what is the data telling us?

As shown in the chart above, after over eight years, the nominal outstanding amount of U.S. consumer debt which includes mortgages eclipsed its $12.6 trillion peak from Q4 2008. While the $12.7 trillion current outstanding amount of consumer debt has made a new high, consumer debt has seen zero growth in the last nine years compared to a near doubling of debt in the five or so years that preceded the prior peak.


The consumer loan delinquency rate is at a 30 year low.

And this chart paints a positive picture of where the consumer stands regarding paying off their loans:

Nir Kaissar for Bloomberg reminds us that Gross's and Singer’s investment realms -- high-grade bonds and multistrategy hedge funds, respectively -- have been two the biggest laggards since the financial crisis. The S&P 500 has returned 18 percent annually from March 2009 through May, including dividends. By contrast, the HFRI Fund Weighted Composite Index -- a collection of various hedge fund strategies -- has returned 6.2 percent annually, and the Bloomberg Barclays U.S. Aggregate Bond Index has returned 4.2 percent annually.


Thus, a market meltdown would perhaps be the best thing that could happen to Gross and Singer. Should we therefore brush off such warnings?  


The answer is no. Although the consumer’s balance sheet appears to be healthy, vigilance is necessary as signs are now emerging in the credit markets that leverage is on the rise with a surge in corporate debt issuance that has steadily pushed investment-grade corporate leverage to a new peak for this cycle, as measured by debt-to-equity ratios. The ratio for companies in investment-grade indexes is around 2.8 times and 4.2 times for those on high-yield indexes.

Even though the ratios are near historic highs, market volatility as measured by the VIX is near a record low. Yes, the VIX is often criticized as a good measure of stock market volatility, but the divergence between leverage and VIX isn’t sustainable. We may be looking at a reversion to the mean as volatility is bound to pick up as investors and markets come to realize that low volatility and rising leverage may no longer be a suitable marriage.


Nevertheless, none of this suggests a 2008 style meltdown. What is likely is simply for the market to hang around its current level for years, waiting for earnings to catch up with stock prices as there are compelling reasons that companies will remain incredibly profitable for the foreseeable future. Thus, what vigilance in the face of such warnings should mean is what it has always meant to the prudent long term investor: buy right and hold on. You’re never going to get a perfect all-clear or get-out-now signal from the markets and this time is no different.

Logos LP Updates

May 2017 Return: 3.68%

2017 YTD (May) Return: 23.36%

Trailing Twelve Month Return: 31.01%

Annualized Returns Since Inception March 26, 2014: 28.471%

Cumulative Return Since Inception March 26, 2014: 92.53%

*All returns are reported unlevered

Thought of the Week


"Simplicity is not the goal. It is the by-product of a good idea and modest expectations.” -Paul Rand

Articles and Ideas of Interest

  • 6 Long-Term Economic and Investment Themes. Good list from Gary Shilling. 1) Huge fiscal stimulus, primarily infrastructure and military related 2) Globalization that shifted manufacturing from West to Asia is largely completed 3) Worldwide aging of populations 4) The long-promised Asian Century of global leadership is unlikely to come to pass due to the completion of globalization, the slow shift from export led domestic spending driven economies, government and cultural restraints, aging and falling populations 5) Disinflation with chronic deflation likely, especially as services follow goods in price retreats 6) The bond rally of a lifetime continues


  • Stop being positive and just cultivate neutrality for existential cool. Do we believe in the superiority of optimism? Culturally, we’re obsessed with positivity—our corporations measure worker glee, nations create happiness indices, and the media daily touts the health and social benefits of optimism. Thus, the good answer is to see the glass half full. Otherwise, you risk revealing a bad attitude. But are things so mutually exclusive? Is the glass not in a state of perpetual change? Can neutrality set us free? Can it help us see something more like the truth, what’s happening, instead of experiencing circumstances in relation to expectations and desires? The pressure to succeed—or to define success conventionally—can be subverted with neutrality. Things can go just so or totally awry once you understand that all things are fine, their upsides and downsides to be determined.


  • Mary Meeker’s 2017 internet trends report. In the most anticipated slide deck of the year Kleiner Perkins Caufield & Byers partner Mary Meeker looks at trends in digital and beyond. Of great interest is her coverage of interactive games as the motherlode of tech product innovation + modern learning (slides 113-150). Interesting concepts as we debate whether machines will replace most roles performed by humans. Such research supports that rising engagement in digital games is preparing us for the merger of man with machine.


  • Leverage: Gaining disproportionate strength. Wonderful explanation of the concept of leverage. Anyone who has ever haggled at a market or with a salesperson will understand the principle of using leverage in a negotiation. The trick is to declare their product or service to be so flawed and worthless that you are doing them a favor by buying it. Subsequently, the next step is usually to offer a low price which they counter with a slightly higher one that is still much lower than the asking price.


  • Passive investing is worse than...the misuse of antibiotics. The FT argues that the passive investment industry has become an oligopoly, with three large managers “drawing on seemingly limitless economies of scale” and amassing assets “simply by slashing costs” — both things, surely, that a blue-blooded capitalist would think is a sign of progress. Passive investing erodes competitive forces, because companies in the same sector end up with the same investor base and thus could pricing mechanisms break down?


  • Is the Canadian economy finally smooth sailing? Canada’s labor market continued surprising in May, with a greater-than-expected 54,500 jobs gain that also finally came with signs of a pick-up in wages. The employment gain -- the third biggest one-month increase in the past five years -- was driven by the addition of 77,000 new full-time jobs, which offset falling part-time employment. Economists had forecast a 15,000 increase in employment. The employment gains bode well for the continuation of the country’s expansion, which is the fastest among the Group of Seven, as Canada emerges from the oil price collapse and benefits from a soaring real estate market. It also could raise pressure on the Bank of Canada, which has been citing worries about slack in the economy for being cautious, to increase rates sooner. Certain funds are even becoming bullish on Canadian stocks seeing oil prices recovering. Nevertheless, it is doubtful that the bank of Canada will raise interest rates any time soon. Vulnerabilities remain. What should be watched closely is the impressive growth of Home Equity Lines Of Credit (HELOCs). A recent report from the Financial Consumer Agency of Canada explored this growth and found that “HELOCs offer relatively low interest rates and convenient access to large amounts of revolving credit, which may encourage some consumers to use their home equity to fund a lifestyle they cannot afford.” Keep an eye on the temperature of the market...


Our best wishes for a fulfilling week, 

Logos LP

Free Lunches and The Catch 22 of the Canadian Economy

Good Morning,

U.S. stocks finished near all-time highs Friday, Treasuries gained and oil closed in on $50 a barrel even after the world’s biggest economy reported its slowest pace of expansion in three years.

A large portion of those stock gains came this week. Stocks posted sharp rallies on Monday and Tuesday as corporate earnings season continued to reveal strong performances from some of the top companies in the world.

The Nasdaq 100 Stock Index added to its record level as Alphabet Inc. and Amazon.com Inc. rose after reporting strong earnings late Thursday.

Also of note was the Bureau of Labor Statistics employment cost index, which climbed 8 percent in the first quarter, its largest gain since 2007 and a sign that wage growth is accelerating. This builds on data from Europe showing higher than expected price growth in April.


Our Take

Overall, a soft report on U.S. Q1 GDP, but this number fits in with the seasonal pattern that has been common over the past few years, where Q1 has tended to be weak.

Markets continue to digest other concerns as President Donald Trump fights an uncertain legislative battle to make his promises a reality while tackling the North Korea issue. The administration’s tax-cut plan (which some believe the U.S. can afford) and mixed signals on its view of Nafta stirred markets this week leaving investors unsure of his position on either.

 As for the growth slowdown, investors will now question the Federal Reserve’s resolve to raise interest rates two more times this year.

What we are seeing is a market that is taking sides when it comes to the direction of the U.S. economy. In the green corner are stocks. The Standard & Poor’s 500 index is just 0.2 percent away from a record high reached in March on bets that Donald Trump’s administration will push through tax-code changes to spark growth. In the red corner sit U.S. government bonds, where benchmark 10-year Treasury yields have unwound almost half of their post-election increase, suggesting a far more pessimistic view the economy.

We still maintain that this earnings cycle is doing a good job of justifying these valuations despite the fact that economists such as Robert Shiller and other pundits view current valuations as dangerously high.

 Of note is economist Jeremy Siegal’s criticism that Shiller's "valuation statement takes no account of returns elsewhere in the asset markets, it takes no account of where interest rates are, where real estate are, where anything else is; it says there's one right price for equities, and the average from 1871 through, let's say, 2000 should be that average."



“He was going to live forever, or die in the attempt.” -Joseph Heller, Catch 22

The above quote goes a long way to describe the current state of the Canadian economy.

Canada’s economy unexpectedly stalled in February as manufacturing and production in other goods producing sectors shrank during the month. The real estate sector, which expanded 0.5 percent, had its best one-month gain since 2015 as housing in Toronto soared.

Canada’s housing sector, particularly in Toronto, has become both the main driver of growth and one of the biggest sources of uncertainty amid concern the gains aren’t sustainable.

To assuage angry voters struggling with unaffordability, the Federal and provincial governments have taken action to slow down the overheated housing markets around Toronto and Vancouver, but they may want to be careful not to overdo it.

That’s because the housing boom was pretty much the only thing holding up Canada’s economy in February.

Virtually all of the strength in February’s numbers comes from industries related to the housing boom — construction, finance and insurance, and real estate. Had it not been for strength in those areas, the economy would have shrunk in February.

This isn’t new. Many economists have raised the alarm about Canada’s increasing dependence on housing for its economic growth. Global banking consultancy Macquarie found last fall found that Canada’s reliance on real estate investment hit a record high last year — the same thing that happened in the U.S. shortly before its housing bubble burst.

It should not come as a surprise that Fitch, a leading U.S. Ratings agency just came out saying that the province’s 16-point plan to create affordability in the Greater Golden Horseshoe — an area home to nine million people and that wraps around the GTA in the southern end of the province — may derail the market.

This Catch 22 situation is becoming more and more common at the national level in our increasingly complex worldGovernments are expected to deliver all the benefits people want at no cost. In other words the electorate believes in the “free lunch”. The reality is that there is little a country can do in terms of policy actions to improve its situation that a) doesn’t have negative ramifications and b) will enhance the long-run outlook in the absence of fundamental improvement in economic efficiency.

Perhaps Canada and more specifically those who have disproportionately hung their hat on one asset class/one industry (blowups like Home Capital often occur at market peaks) will learn that there is simply no such thing as a “free lunch”


Logos LP 2017 Best Picks Update

Huntington Ingalls Industries (NYSE:HII): 9.07% YTD (ex dividend of 1.09%)

Huntington has only been public since 2012 but the company holds a virtual monopoly on the maintenance of U.S. naval and coast guard ships, giving it very high returns on capital with high growth. With a focus on military spending and a strong moat, we still find HII best in class among the aerospace and defence sector.

Cemex SAB de CV (ADR) (NYSE:CX): 14.82% YTD

This highly cyclical company is entering into a perfect storm of strong growth and a beaten down valuation. With a price to sales of 0.3, PE ratio at around 12 and free cash flow growth north of 87% over the previous year, the company has been growing revenue from high single digits to low double digits over the past 2 years while experiencing strong returns on capital. These returns are no surprise given the increased demand in construction and infrastructure spending. We expect this trend to continue for the next few quarters at least.

AAON (NASDAQ:AAON): 10.89% YTD (ex dividend of 0.64%)

With a 10 year average ROIC near 20% with no debt, Aaon is set to face a record year in addition to the infrastructure and housing tailwinds that are occurring in 2017. The company trades at a premium due to its impressive qualities and can be volatile due to the nature of infrastructure and maintenance for major complexes. With low inflation and steady demand for housing and construction, we expect the company to continue to perform well this year.

Syntel (NASDAQ:SYNT): -11.02% YTD

With tight control by executive management (only a minority float on the exchange) this turnaround story has incurred drastic losses due to repatriation and slowing revenue growth. However, historical ROIC has been at least 22% going back ten previous years and in light of their restructuring in the highly sticky IT outsourcing market, there is an excellent opportunity for a turnaround in a stock trading at very depressed valuations.

Thought of the Week

"The Texan turned out to be good natured, generous, and likeable. In three days no one could stand him.” -Joseph Heller, Catch 22

Articles and Ideas of Interest

  • I’ve worked in foreign aid for 50 years-Trump is right to end it, even if his reasons are wrong. Interesting perspective in Quartz from someone who has worked in foreign aid for over fifty years, in over 60 developing countries in Africa, Latin America, and Asia. Tom asks what if we are not even that sincere about doing good? What if we are in the aid business to make sure our own piece of the pie keeps growing? Should we end the “aid-industrial complex”?


  • What is meditation and how is it practicedNice overview including graphics for those interested in meditation. What are the styles, postures, objects of concentration, common hindrances and effects of practice?


  • The happiness experiment. Quartz launches a project focussed on exploring the concept of happiness and the human obsession with it. How to find it, how to keep it and how to define it. They examine happiness from the perspective of economics, history and evolutionary psychology to understand how our notion of happiness has changed over time.


  • An anatomy of “Modern Love”. Emma Pierson and Alex Albright analyzed every “Modern Love” column from The New York Times for a decade and found that the messy process of dating leads to the best stories. Here’s what else they learned.


  • The benefits of solitude. Our society rewards social behaviour while ignoring the positive effects of time spent alone. What really happens when we turn too often toward society and away from the salt-smacking air of the seaside or our prickling intuition of unseen movements in a darkening forest? Do we really dismantle parts of our better selves? A growing body of research suggests exactly that.


  • America is regressing into a developing nation for most peopleA new book by economist Peter Temin finds that the U.S. is no longer one country, but dividing into two separate economic and political worlds. In the Lewis model of a dual economy, much of the low-wage sector has little influence over public policy. Check. The high-income sector will keep wages down in the other sector to provide cheap labor for its businesses. Check. Social control is used to keep the low-wage sector from challenging the policies favored by the high-income sector. Mass incarceration - check. The primary goal of the richest members of the high-income sector is to lower taxes. Check. Social and economic mobility is low. Check.


Our best wishes for a fulfilling week,  

Logos LP

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


The 1% Rule

Good Morning,

Stocks closed flat Friday as investors parsed through a mixed employment report, a U.S. airstrike in Syria and comments from a top Federal Reserve official.

The 10-year Treasury yield topped 2.35 percent after falling as low as 2.28 percent amid a weaker than expected jobs report and the first military strike undertaken by President Donald Trump’s administration.

On the data front, the U.S. economy added 98,000 jobs last month, well below the expected gain of 180,000. The unemployment rate fell to 4.5 percent from 4.7 percent. Wage growth was not as strong either, with average hourly earnings up by 2.7 percent on an annualized basis. Nevertheless, the report masked a key problem: The number of open jobs hit a record 5.8 million last April and hasn't dipped below 5.4 million ever since. Sure job creation is important but it appears Americans are not equipped to perform the jobs that exist in a rapidly changing economy.

Also of note was the retreat in the auto sector reported Monday which mirrored lackluster broader consumer spending data released last Friday. Both readings fly in the face of the two most-followed gauges of consumer sentiment, now at 17- and 11-year highs. It also contrasts with an index of optimism among small businesses -- local car dealers among them -- holding near levels unseen since the mid-2000s.

On the Canadian front,
the two-faced nature of Canada’s labor market was on full display this week as employers continued to hire but resisted raising wages.

Canada added 19,400 jobs in March, for an employment gain of 276,400 over the past 12 months, Statistics Canada said Friday from Ottawa. Yet, the pace of annual wage rate increases fell to 1.1 percent, the lowest since the 1990s.

The weakness in wage gains seems to be an Ontario phenomenon. The province, which has led employment increases over the past year, recorded an annual 0.1 percent increase in wages in March, also the lowest on record.

Our Take

Investors may be getting ahead of themselves on their confidence in the economy, with the chance of a short-term sell-off increasing as such hard data measures are contrasting with the more positive soft data but one must remember that short-term sell offs aren’t unusual. The VIX tallied its 103rd session Friday below 15, the longest streak since February 2007, according to Bloomberg data. Thus, a 10-15% correction is looking more and more likely. Nevertheless, we maintain (as outlined in previous letters) that while it may be a struggle to find reasons to get enter this market, the reasons to sell are limited and uncompelling

Do bull markets die of old age?

LPL Research compares the best bull markets in history for us:

At the same stage of the 1990s bull market, the S&P 500 was up 255%, before powering to a 417% gain at its peak about 18 months later.

This bull market is up about 250%. Of course there are no guarantees, but given the fact that after six consecutive monthly gains, the U.S. Leading Economic Index (LEI) is at its highest level in over a decade, the haters need to come forth with some pretty solid evidence of a deteriorating economic picture to convince that the bull market ends here….


Came across a wonderful article this week by James Clear entitled “The 1 Percent Rule: Why a Few People Get Most of the Rewards” which reminds us of Vilfredo Pareto’s 80/20 rule. The majority of output or rewards tend to flow to a minority of producers or people.

Inequality is everywhere. It is perhaps the “natural” state of the world.

Clear states that: “For example, through the 2015-2016 season in the National Basketball Association, 20 percent of franchises have won 75.3 percent of the championships. Furthermore, just two franchises—the Boston Celtics and the Los Angeles Lakers—have won nearly half of all the championships in NBA history. Like Pareto's pea pods, a few teams account for the majority of the rewards.

The numbers are even more extreme in soccer. While 77 different nations have competed in the World Cup, just three countries—Brazil, Germany, and Italy—have won 13 of the first 20 World Cup tournaments.

Examples of the Pareto Principle exist in everything from real estate to income inequality to tech startups. In the 1950s, three percent of Guatemalans owned 70 percent of the land in Guatemala. In 2013, 8.4 percent of the world population controlled 83.3 percent of the world's wealth. In 2015, one search engine, Google, received 64 percent of search queries.”

But why?

Accumulative advantage: What begins as a small advantage gets bigger over time. One plant only needs a slight edge in the beginning to crowd out the competition and take over the entire forest.

This principle applies to our lives. We compete for a variety of things: a job, a resource, a distinction, another human’s affection or love etc.

The difference between these options can be razor thin, but the winners enjoy massively outsized rewards.

Clear reminds us that “Not everything is winner take all but nearly every area of life is at least partially affected by limited resources.” Anytime resources are limited a winner take all situation will emerge.

Winner-Take-All Effects in individual competitions can lead to Winner-Take-Most Effects in the larger game of life.

From this advantageous position—with the gold medal in hand or with cash in the bank or from the chair of the Oval Office—the winner begins the process of accumulating advantages that make it easier for them to win the next time around. What began as a small margin is starting to trend toward the 80/20 Rule.”

Should we be so surprised that we were so close to having 2 US Presidents with the same Clinton last name? 2 Presidents with the last name Bush? Or 2 Prime Ministers with the last name Trudeau?

Winning one reward increases your chances of winning the next one. Each additional win cements the position of those at the top. Over time they end up with the majority of the rewards. 

What does this mean for us?

The key takeaway here is that small differences in performance (even 1% better: The 1% Rule) that are consistent can lead to VERY unequal distributions when repeated over time. Think compound interest.

Thus, to pull away you need only to focus on being “slightly” better than your competition. But doing so once isn’t enough. You need to develop a process which enables you to maintain this slight edge over and over again. Simple but never easy...

Thought of the Week

"There's a certain consistency to who I am and what I do, and I think people have finally said, "well you know I kinda get her now." I've actually had people say that to me." - Hilary Clinton

Articles and Ideas of Interest


  • Did Trump’s Syria air strikes accomplish anything? Piece in the Guardian
    suggesting that the US bombing of a Syrian airfield is a flip-floppery at its worst. And it signals to America’s foes that Trump can be easily dragged into military quagmires.


  • Europe in crisis? Despite everything, its citizens have never had it so good. Contrarian piece in the Guardian suggesting that despite the media’s constant coverage of populist sentiment, the EU’s achievements are huge. As Brexit begins, don’t forget that hundreds of millions still want to be part of it. “It is easy to take what we have for granted. It has become easy to criticise the European project for its many insufficiencies and its repeated unpreparedness when crises arise. But it is perhaps harder to step back and take stock of what the EU has accomplished and what many, outside the region, continue to admire and yearn for.”


  • The myth of shrinking asset managers. It's easy to assume that the recent upheaval among asset managers would result in a much smaller industry. But that's far from certain. Some big investment firms have certainly shrunk, but many have remained roughly the same size over the past few years. Going forward, the amount of net job reductions will depend in large part how well firms adapt to changing technology and trends. The number of employees in asset management has stayed surprisingly stable in many corners.


  • How moats make a difference. An important element of our investment approach is focusing on companies that that have or more ideally that appear to be building a wide competitive moat. Usually when people talk about different kinds of moats, they are referring to the elements of the business model that give rise to the company’s competitive advantages. Fun piece here from intrinsic investing on identifying different types of moats.


  • Which tech CEO would make the best supervillain? Funny piece in the Ringer considering tech’s greatest minds gone bad. Jeff Bezos’s doomsday device: “On next year’s Prime Day, he will offer all products for 50 percent off. After customers irrationally empty their bank accounts in the pursuit of deals, he will fulfill zero orders as he makes off with the entirety of the United States GDP.”


  • Luxury is an addictive drug. Great piece from a man who was a multi-millionaire at age 27. Few of his lessons: 1) Money doesn’t make you happy 2) You can only help people to help themselves 3) There will always be someone richer than you 4) Luxury is an addictive drug 5) Some people are very shallow 6) Everyone respects wealth 7) Most financial advisors know nothing 8) Banks rip wealthy people off too More zeros are just more zeros 9) The biggest issue people have with money is limiting beliefs 10) F--- you money is overrated 11) Being wealthy is a full time job.


  • America’s unhealthy obsession with productivity is driving its biggest new reading trend. Audiobooks are the latest trend in book publishing. But why? Audiobook listening is growing rapidly specifically with 25- to 34-year-olds, thanks to a pernicious “sleep when you’re dead” mindset reflective of the young, aspirational, educated American: We are fearful of mono-tasking, find downtime distasteful, and feel anxious around idleness. Even when picking socks from a drawer, young workers feel better if information’s somehow flowing into their brains. And this is exactly the restless market that book publishers need. They’re a cure to widespread restless mind syndrome, with its daily self-imposed nagging to make progress: Be more effective, says your productivity tracker. Do and learn more, says your to-do list. Optimize your to-do list, says your faddish new notebook. Yawn…...The Buddha is surely turning in his grave...


  • The nine to five is barbaric. Generation X author on the future of work and how we’ve all turned into millennials. Are there smart and creative young people out there that are better than their bosses, but unable to thrive in the corporate world? “The nine to five is barbaric. I really believe that. I think one day we will look back at nine-to-five employment in a similar way to how we see child labour in the 19th century,” he says. “The future will not have the nine till five. Instead, the whole day will be interspersed with other parts of your life. Scheduling will become freeform.”


  • What are the 50 best restaurants in the world? On Wednesday this week the list was released and Eleven Madison park in NYC became the first U.S. establishment to win the top spot since 2004.

Our best wishes for a fulfilling week, 

Logos LP