Everything Has Been Done Before


Good Morning,

U.S. stocks rocketed higher on Friday, seeing the Nasdaq composite hit a new record, after February jobs growth far exceeded expectations.


The Dow Jones industrial average rose 440.53 points to close at 25,335.74, with Goldman Sachs among the biggest contributors of gains to the index. The 30-stock index also closed above its 50-day moving average, a key technical level.


The S&P 500 gained 1.7 percent to end at 2,786.57, with financials as the best-performing sector. It also closed above its 50-day moving average.


The jobs report which came out Friday was nothing short of extraordinary. The U.S. economy added 313,000 jobs in February, according to the Bureau of Labor Statistics. Economists polled by Reuters expected a gain of 200,000.


Wages, meanwhile, grew less than expected, rising 2.6 percent on an annualized basis. Stronger-than-expected wage growth helped spark a market correction in the previous month.


Our Take

The jobs report was impressive. For all that can be said about Trump’s unconventional decision making (his big deficits may actually make sense by spurring productivity and his “tariffs” may in fact be good for free trade) this report confirmed the underlying strength of the economy, and also diminished some of those inflationary concerns and the potential that there could be more than three rate hikes this year.


Many question how you can create this many jobs and not have wages go up more but we maintain that this phenomenon is due to a unique interplay of several factors: demographics, labour force participation and technology.


The basic formula is as follows: as labor becomes more scarce based on demographics, it constrains supply, triggering inflation. But labor scarcity, in turn, should speed the adoption of automation and trigger an investment boom. Automation investments are likely to generate supply growth just as demographics and investment both spur demand growth, creating a reasonable balance (despite rising inequality). Once the investment boom ends, however, the negative effects of automation will become more visible—namely, high levels of unemployment, wage suppression and slowing demand.

We may have progressed further along this matrix than some may think. Regardless, we are a long ways from the sort of wage inflation of the 1990s . . .

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I shared an interesting chart in the Economist with some friends this week which sparked a spirited discussion:

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The debate focused on whether or not such historical data offers the investor anything of value. Certain friends suggested that the world in 1900 was vastly different than the world today and thus such data was of limited use.


What struck me most about the discussion wasn’t the comparison between what the world looks like today vs. what it looked like over 100 years ago, it was the ease with which we are able to overlook history in an effort to justify the perceived novelty and uniqueness of whatever appears to be relevant in the moment.


Think cannabis, blockchain, bitcoin, AI, cryptocurrency and whatever else is hot right now. This isn’t to say that these “new” things aren’t relevant.


But it is to say that broadly speaking everything has been done before as human nature hasn’t changed all that much. As Morgan Housel reminds us: The scenes change but the behaviours and outcomes don’t.


"Historian Niall Ferguson’s plug for his profession is that “The dead outnumber the living 14 to 1, and we ignore the accumulated experience of such a huge majority of mankind at our peril.”


The biggest lesson from the 100 billion people who are no longer alive is that they tried everything we’re trying today. The details were different, but they tried to outwit entrenched competition. They swung from optimism to pessimism at the worst times. They battled unsuccessfully against reversion to the mean.


They learned that popular things seem safe because so many people are involved, but they’re most dangerous because they’re most competitive.


Same stuff that guides today, and will guide tomorrow. History is abused when specific events are used as a guide to the future. It’s way more useful as a benchmark for how people react to risk and incentives, which is pretty stable over time.”


Logos LP February 2018 Performance

February 2018 Return: -3.75%

2018 YTD (February) Return: -2.24%

Trailing Twelve Month Return: +21.02%

CAGR since inception March 26, 2014: +19.72%


Thought of the Month


"The way to outperform over the long haul typically isn’t done by being the top performer in your category every single year. That’s an unrealistic goal. A better approach is to simply avoid making any huge errors and trying to be more consistent. The top performers garner the headlines in the short-term but those headlines work both ways. The top performers over the long-term understand that’s not how you stay in the game over the long haul.” -Ben Carlson

Articles and Ideas of Interest

  • When value goes global. Interesting piece in Research Affiliates magazine suggesting that the value premium that is traditionally associated with stock selection and market timing works just as well when applied globally across major asset classes. The alternative value portfolios studied are typically uncorrelated with their underlying asset classes, traditional value approaches, and each other, thereby offering meaningful diversification benefits alongside attractive excess return potential. The success of global value portfolios hinges on their design, which allows investors to gain better exposure to desired risk premia not easily available when investing in a single market.


  • Rational Irrational Exuberance. We tend to be uncomfortable with the notion that an economy’s fundamentals do not determine its asset prices, so we look for causal links between the two. But needing or wanting those links does not make them valid or true.


  • If you’re so smart, why aren’t you rich? Turns out it’s just chance. The most successful people are not the most talented, just the luckiest, a new computer model of wealth creation confirms. Taking that into account can maximize return on many kinds of investment.


  • Why doesn’t more money make us happy? Dan Gilbert, social psychologist and author of Stumbling on Happiness showed that people who recently became paraplegics are just as happy one year later as people who won the lottery. Relative to where we thought our happiness would be after winning the lottery, we adjust downward, and relative to where we thought our happiness would be after losing our legs, we adjust upward….Interesting piece from Michael Batnick that suggests that this concept makes sense in theory, but not in practice. Like many things in life, it’s an idea that is hard to truly believe until we experience it for ourselves.


  • The town that has found a potent cure for illness- community. What a new study appears to show is that when isolated people who have health problems are supported by community groups and volunteers, the number of emergency admissions to hospital falls spectacularly. While across the whole of Somerset emergency hospital admissions rose by 29% during the three years of the study, in Frome they fell by 17%. Julian Abel, a consultant physician in palliative care and lead author of the draft paper, remarks: “No other interventions on record have reduced emergency admissions across a population.” No wonder what causes depression most of all is a lack of what we need to be happy, including the need to belong in a group, the need to be valued by other people, the need to feel like we’re good at something, and the need to feel like our future is secure.


  • Could capitalism without growth build a more stable economy?New research that suggests – that a post-growth economy could actually be more stable and even bring higher wages. It begins with an acceptance that capitalism is unstable and prone to crisis even during a period of strong and stable growth – as the great financial crash of 2007-08 demonstrated.


  • Is it time to say it? That retirement is dead? What will take its place? The numbers are startling: Thirty-four percent of workers have no savings whatsoever; another 35 percent have less than $1,000; of the remaining 31 percent, less than half have more than $10,000. Among older workers between 50 and 55, the median savings is $8,000. And this is total savings, including retirement accounts. Contrast that with the fact that experts say you should have eight times your preretirement annual salary saved in order to retire by 65 and continue a reasonable quality of life, commensurate with what you have become accustomed to.  


  • Blockchain is meaningless. People keep saying that word but does it really mean?


Our best wishes for a fulfilling month, 

Logos LP

Be Boring Not Bored


Good Morning,

U.S. stocks closed higher on Friday as Wall Street assessed the likelihood of tighter monetary policy following a weaker-than-expected jobs report.

The Dow Jones industrial average rose 39.46 points, to close at 21,987.56. The index also rose above 22,000 earlier in the session for the first time since mid-August.


The S&P 500 gained 0.17 percent to end at 2,475.77, with energy leading seven sectors higher. The Nasdaq composite rose 0.1 percent to 6,435.33, a record close.   


The U.S. economy added 156,000 jobs in August, according to the Bureau of Labor Statistics. Economists polled by Reuters expected 180,000 jobs to have been added last month.

The BLS also said, however, that wages grew at an annualized rate of 2.5 percent, less than expected.


On the Canadian side, the economy unexpectedly accelerated at a 4.5 percent pace in the second quarter -- tops among Group of Seven countries -- led by the biggest binge in household spending since before the 2008-2009 global recession.


Annualized growth was the fastest in six years and topped the 3.7 percent average forecast from economists. This isn't just a win for Canada. This print is further evidence of a strong global recovery.

Our Take

August's nonfarm data in the US was disappointing but should be viewed the context of solid U.S. and global economic growth, strong earnings, low inflation and still-ample global liquidity which will likely allow the US rally to continue.


The disconnect between modest economic growth and low inflation continues to support equities here. Not to hot. Not to cold. Perhaps central banks search for inflation has turned Sisyphean and should be abandoned...


A good way to think about the present equity market is as follows:


  1. Valuation compared to alternatives – positive

  2. Valuation compared to inflation – positive

  3. Risk of recession – extremely low

  4. Financial stress – extremely low

  5. Market skepticism – high



This week, throughout my conversations and observations about the market I couldn’t help but notice a common theme: boredom. The last 2 weeks have been relatively quiet in the markets as investors return from vacation while others gear up for the long weekend.


Nevertheless, the punditry and financial media have soldiered on doing their best to whip up stories suggesting that danger is lurking around every corner: The Fed, North Korea, Trump, China’s CDS market etc.


What these times of “boredom” acutely remind me of is a principle eloquently presented by Christoper Mayer: “Boredom can explain a lot. It can explain all kinds financial behavior. And there is definitely a “boredom arbitrage” to take advantage of in the markets.


People get bored. Most of life for most people is “boring”. Most jobs require just enough concentration to prevent one from drifting off into a dream but not enough to really occupy the mind. As a result, we have boredom on a massive scale. As such, people will do all kinds of strange things to alleviate that boredom.


They will act like fools. Dress like idiots and make all kinds of decisions to sabotage their lives. Anything to kill the boredom.


The financial markets are still primarily composed of the results of people’s decision making and thus are influenced by boredom. People get bored and just want to make something happen.


In the financial markets, people wind up sabotaging their own portfolios out of sheer boredom.


Why else throw money at fly by night unregulated Initial Coin Offerings (ICOs)? Or put money in “pre-revenue” tech startups with unproven founders? Or chase hyped up tech companies that trade at absurd levels with questionable prospects? Or go to cash or gold because Donald Trump is in the White House or “the market” looks overvalued?


They are bored!


It seems exciting to churn your money in this way. People buy and sell stocks so frequently because they are bored. They feel they have to do something.


This is the fundamental lesson to remind oneself of during these “boring” times. When asked in an interview this week why he hasn’t spoken out about Donald Trump, Warren Buffett reminded us that:


"Forty-five presidents of the United States and I lived under a third of them," he said. "I bought stocks under 14 of the 15. The first one was [President Herbert] Hoover. I was only 2 when he left so I hadn't gotten active at that point. But [ Franklin Delano] Roosevelt was next. And I bought stocks under him, even though my dad thought it was the end of the world when he got elected."


My goodness how boring. Yet how profitable. Furthermore, at a time when most investors are bored with anything that isn’t tech, artificial intelligence, blockchain or Alibaba, Warren Buffett's Berkshire Hathaway has invested more money in financial stocks. Berkshire Hathaway reported a 17.5 million share stake in Synchrony Financial, in its June quarter 13F filing as well as converting warrants into 700 million shares of Bank of America (BAC) common stock.


This is a prime example of “boredom arbitrage”. Often what is out of favor is priced as such and thus offers the best prospects for outsized returns over the long-term.


Furthermore, people get bored of holding the same stock for long periods of time. They want action. But consider the classic 100 bagger Monster Beverage.


This company became a 100 bagger in 10 years and yet during that period there were over 10 occasions that the stock fell more than 25%. In three separate months, it lost more than 40% of its value. Yet if you focused on the business and not the stock price, putting $10,000 in, you would have ended up with $1 million at the end of ten years.


Be a reluctant seller. Hold for the long-term. Be boring not bored.


Hundredfold returns are unlikely to induce boredom...


Thought of the Week

"All men’s miseries derive from not being able to sit in a quiet room alone.” -Pascal

Articles and Ideas of Interest


  • The free economy comes at a cost. Facebook, whose users visit for an average of 50 minutes a day, promises members: “It’s free and always will be.” It certainly sounds like a steal. But it is only one of the bargains that apparently litter the internet: YouTube watchers devour 1bn hours of videos every day, for instance. These free lunches do come at a cost; the problem is calculating how much it is. Because consumers do not pay for many digital services in cash, beyond the cost of an internet connection, economists cannot treat these exchanges like normal transactions. The economics of free are different.


  • Too much power lies in tech companies’ hands. A libertarian case for caution after the Daily Stormer is booted off the public internet. Libertarians tend to worry about concentrations of power in the hands of the state. There is no consensus about the danger of concentrations of power in private hands. But when the private hands in question control access to the principal media of communication in the world, one has to hesitate when they decide that not everyone should be granted entree. For the power they are exercising is almost state-like. 


  • Silicon Valley isn’t special. Tech has plenty of reasons to believe that it is an industry of upstarts but the facade is crumbling.


  • Contrarian view of Amazon. Moody’s contrarian view is especially notable because it makes the intriguing argument that Amazon, while it may be an online juggernaut, is actually the weakest of the large U.S. retailers. Although the Seattle-based company does capture about half of all online retail sales, that’s a tiny share of all retail sales; about 90 percent of all sales are made offline.


  • How the next quant fund crisis will unfold and why quant strategies are underperforming. Almost everyone knows that this month marks the 10th anniversary of the start of the biggest financial crisis since the Great Depression. There was another significant event back then that gets overlooked but was still very significant. I’m referring to the quant equity crash of August 2007. Institutional quant hedge funds have addressed the risk issues that caused 2007 losses, but the newer retail products cannot. Another interesting piece looking at the recent underperformance of quant funds. The space is getting crowded.


  • Finding the root cause of recessions. Two things bear most of the blame: external shocks and economic volatility.


  • Robots will not take your job. Wired magazine paints a compelling picture as to why the fear and hype is overblown.


  • Millennial Americans are moving to the ‘burbs, buying big SUVs. Wait I thought it was the gig economy and consumption was dead? Millennials are finally starting their own baby boom and heading for the suburbs in big sport utility vehicles, much like their parents did. Americans aged about 18 to 34 have become the largest group of homebuyers, and almost half live in the suburbs, according to Zillow Group data. As they shop for bigger homes to accommodate growing families, they’re upsizing their vehicles to match. U.S. industry sales of large SUVs have jumped 11 percent in the first half of the year, Ford Motor Co. estimates, compared with increases of 9 percent for midsize and 4 percent for small SUVs. Guess they just want to be like their parents after all.


  • To come up with a good idea. First try and come up with the worst idea possible. There are many creative tools a designer uses to think differently, but none is more counter-intuitive than “wrong thinking,” also called reverse thinking. Wrong thinking is when you intentionally think of the worst idea possible — the exact opposite of the accepted or logical solution, ideas that can get you laughed at or even fired — and work back from those to find new ways of solving old problems. Nice piece in HBR looking at innovation and discovery.


  • The cryptocurrency phenomenon is gaining further traction. The world’s biggest banks aren’t immune from cryptocurrency euphoria, with a range of projects underway to explore how traditional financial firms can benefit from the innovation. Swiss banking giant UBS and 10 other companies say that they plan to use the technical idea behind bitcoin—a distributed ledger called a blockchain—for their own digital currency (paywall). This could show the way for the world’s biggest central banks to do the same.


Our best wishes for a fulfilling week, 

Logos LP

(NYSE: HII): Defense Contractor With Significant Upside

Huntington Ingalls Industries (NYSE: HII) is a defense contractor for the U.S. Navy, and spun-off from Northrop Grumman in 2011. The company is the largest military shipbuilder in the U.S., with over 70% market share in the construction, repair and maintenance of nuclear-powered ships, amphibious assault ships, ballistic missile submarines and other high-grade ships built at the Newport News and Ingalls port, the largest shipbuilding ports in the U.S. It also provides ancillary products and services to the U.S. Navy, including information technology solutions, professional services and business support services for U.S. Navy missions. The U.S. government makes up roughly make roughly 97% of the company’s revenues while 3% is focused on commercial clients in the oil & gas and nuclear markets. 

HII has seen moderate sales growth since being public but has a strong operating profile over the past 7 years: gross margins have grown roughly 53%, free cash flow has nearly quadrupled, book value per share has grown over 50%, and return on invested capital has grown from 8.30% in 2012 to 21.35% in 2017, with the last 4 year average being in the mid-to-high double digits. The company also has tailwinds that we believe are quite significant going into 2030: HII has a backlog of over $20 billion (and growing – they recently won another $3 billion contract from the Navy) of which 50% has already been committed. The Navy is in desperate need of an overhaul, with new ships and vessels required sooner rather than later and government budgets dedicated to fulfill their cause. Moreover, given this pent up demand, a number of legacy ships are under a replacement cycle and current competitors Lockheed Martin and General Dynamics (who they have a partnership with HII for specific services) have cost the U.S. Navy far too much under the troubled Littoral Combat Ship program, creating new shipbuilding demand for HII. Further, with President Trump’s renewed focus and vow to build 350 ships for the U.S. Navy in addition to the Navy’s request for 12 new vessels in fiscal 2018 and depot maintenance funds beyond that, there is little doubt that HII will be the sole beneficiary presenting the company with very predictable revenue streams. 

Without question HII has proven that it can be a successful operator under the right conditions and upper management is very homegrown (their new strategic sourcing VP spent years building ships for the company). Further, there has been considerable insider buying over the most recent quarter, with a senior VP purchasing over 4100 shares in the company in May. The company has a payout ratio of 19% (considerable room to increase dividends) and has a stated policy to return a substantial amount of cash to shareholders by 2020 via buybacks and dividends from the significant free cash flow it generates. Despite creating a perfect storm for shareholders, HII faces considerable risks and volatility being tied to U.S. government budgets. A gridlocked Congress (likely under the Trump administration), reduction in committed vessels, waning demand from the U.S. Navy, reduction in maintenance funds, and an overall reduction in government spending will all create a significant reduction in the short-term price of the stock (which has already happened). However, we believe that the short-term risks do not outweigh these important tailwinds. The company is always on the lookout for strategic acquisitions to bolster their add-on services (their recent acquisition of Camber Corporation allows HII to enter into mission based software, systems engineering, data analytics and simulations for the Navy and other federal government agencies) which will support strategic growth initiatives and free-cash flow goals for shareholders.

HII has remarkable free-cash flow generating capabilities, which is due to the company’s superior economic and pricing power that it faces as a market leader. As new ships get built and maintained, the company will realize significant depreciation in the early years (before the ships are delivered), with depreciation coming down in future years despite growth in revenue due to maintenance and add-ons. This means that the company has very sticky (and growing revenue) on fleets that are worth less tomorrow than they are today, increasing the rate of change of free cash flow every year. In 2012, the company faced a depreciation expense of $206 million with net income at $261 million. As of last year, depreciation was $163 million with net income at $573 million. Free cash flow grew from $168 million in 2010 to $560 million in 2017, while free cash flow per share grew from $0.98/share in 2011 to $13.29/share as of 2016. Not only does this reflect a favorable economic environment for the company, but in comparison to its peers, it is a better operator of capital with a much cheaper valuation. The company has a free cash flow yield that is 40% greater than General Dynamics, while the company’s price to sales ratio is 1.2x, which is on the low-end of defense contractors: General Dynamics, Lockheed Martin and Northrop Grumman have price to sales ratios of 1.7x, 1.8x and 2.0x, respectively. HII is significantly smaller than the other defense contractors (GD = ~$51bn market cap; LMT = ~$81bn market cap; NOC = ~$44bn market cap) and if it were to reach a similar valuation to its peers (i.e. 1.8x sales, which we deem fair value) this would value the company at $12.652bn in market cap, giving the company 47% upside. We believe that, despite the volatile nature of defense stocks, this company should be worth at least 1x its backlog in the next 10 years, giving us a roughly $20 billion valuation and a price target of $434.70/share.


Why You Shouldn't Sell Everything

Good Morning,

U.S. equities rose in choppy trade Friday following a strong jobs report, while investors were already looking ahead to a Federal Reserve meeting next week.

Signs of strong growth in the economy weren’t enough to propel stocks higher this week as investors weighed the impact of a potential interest-rate increase by the Federal Reserve next Wednesday. Futures traders now see a hike as a sure thing. According to the CME Group's FedWatch tool, market expectations for a March rate hike stood at 93 percent.

With the first-quarter earnings season almost over, stocks lost the boost provided by profits that on average beat Wall Street expectations.

In U.S. economic news, 235,000 jobs were added in February, the Bureau of Labor Statistics said, adding the unemployment rate ticked lower to 4.7 percent.

In Canadian economic news, Canada’s labour market continued its rally into February, bringing the unemployment rate to the lowest in more than two years, but with continued signs of sluggish wage increases.

Canada added 15,300 jobs in February, and employment has increased by 288,100 over the past 12 months, Statistics Canada reported today in Ottawa.

The quality of the job picture was also better than what was thought only a month ago, with an improved mix of full-time and part-time jobs. The full-time gain in February was the biggest since May 2006.


Our Take

The US Jobs report was solid and the labor force participation rate finally ticked up. If the fed was looking for further confirmation from the labor market it got it. Yet interestingly U.S. Treasury yields and the dollar turned lower after the report came out, with some investors disappointed with the hourly wage growth last month. Hourly wages rose at an annualized rate of 2.8 percent, the BLS said.

Also the average hourly earnings were a bit disappointing yet as we have said before expectations are sky high and any choke is immediately reflected in markets. What will come next as a major test for market strength is the break-down in crude oil prices. For most of this year, we’ve managed to ignore rising inventories for crude and refined products while speculators were record long.

Oil posted its worst weekly decline since November as a Bloomberg Commodity Index dropped 3.4 percent for its fourth straight weekly loss. Energy companies slid 2.6 percent as nine of the 11 main industry groups in the S&P 500 retreated.

On the Canadian side, this was also a good jobs report which takes the likelihood of a Bank of Canada interest rate cut off the table yet we believe the central bank is also unlikely to raise rates anytime soon as the economy still has a ways to go given its dependency upon real estate and its weak business investment.

Non-residential business investment has fallen in eight of the past nine quarters, and is down 19 percent over that time.

The two-year decline is the biggest since at least 1981, when the current GDP data set begins. Older data sets aren’t comparable, but can be indicative, and they show the drop may be the biggest since the 1950s.

Investment in machinery and equipment now represents 3.7 percent of GDP. That’s the lowest share of the economy since at least 1981, possibly in the post-World War II era.



I keep hearing from people that they sold their stocks because “the market is getting expensive” or “there just has to be a crash coming” or “things are getting frothy” or “this run has only been because of monetary policies put in place by the Federal Reserve.” They ask me whether we are trimming winners or at least getting more defensive.

I’ve grown tired of explaining the same thing over and over again Read About Businesses, Not Stock Market Predictions! 

Yet I came across something presented by Jim Cramer from CNBC this week that I found quite relevant to this discussion and which goes quite far to illustrate this point.

Cramer also suffers from the same malaise and thus took a look at the top 9 performing stocks since the bottom of the market on March 10, 2009 to signal the end of the market's free-fall and challenged anyone to argue that these companies need the Fed to fuel their stock rallies:

No. 1 Incyte Corporation: This is a biopharma company with a pioneering immunotherapy play that is up a staggering 6,543%

No. 2 United Rentals: Up 4,002% in the last eight years.

No. 3 Regeneron: This biotech company created a drug called Eylea to treat age-related macular degeneration with a once-a-month injection in the eye that was much better than the alternative of once a week. The stock has now rallied 2,975% since the market's bottom.

No. 4 Alaska Air Group: Known as a niche company that knows its market well. A 2,631% gain.

No. 5 Wyndham Worldwide: The stock had 178 million shares at the Haines bottom and now has 108 million. Talk about a buyback!

No. 6 Netflix: Janet Yellen Not a bad at a 2,451% gain.

No. 7 American Airlines: This company managed to come out of bankruptcy and become a top performer. Cramer gave some of the credit to the government for its 2,133% rally because regulators did allow major airlines to merge.

No. 8 Priceline: You won't find anything in the Fed minutes about creating Priceline. The success of its business model was pure innovation, and what travelers were looking for. The stock is up 2,125%.

No. 9 CBS: Cramer attributed the terrific job of CEO Les Moonves for excellent programming and disciplined cash management for the stocks 2,101%.

As comparisons: 

A rough estimate of the appreciation of a Toronto home since March 10, 2009 = 150%

The S&P 500 since March 10, 2009 = 247%


Now to be fair these are indexes and I’m sure you could find homes that have appreciated more or less yet the point is that these kind of colossal returns (20x or more on your money in roughly 8 years) are specific to businesses. They are specific to outstanding capital allocation and management not to the Fed or to “THE MARKET”.

Another interesting note regarding the “stocks are expensive time to sell because a crash is surely around the corner” camp comes from John Huber a fellow value investor who conducted a great study looking at roughly 189 years of stock market returns.

What he found was interesting:

  • The market had 134 positive years and 55 negative years (the market was up 71% of the time)

  • 44% of the time the market finished the year between 0% and +20%

  • 60% of the time the market finished the year between -10% and +20%

  • Only 14% of the time (26 out of 189 years) did the market finish worse than -10%

  • Only a mere 4.8% of the time (fewer than 1 in 20 years) did the market finish worse than -20%

So to put it another way (using the 189 years between 1825 and 2013 as our sample space), there is an 86% chance that the market finishes the year better than -10%. There is a 95% chance the market ends higher than -20%. And as I mentioned above, there is a 71% chance that the market ends any given year in positive territory.

One last observation: the market was 5 times more likely to be up 20% or more in a year (50 out of 189) than down 20% or more in a year (9 out of 189)!

Although certain to happen again, crashes are rare. The 2008 type scenarios, are extremely rare. Only 3 times since 1825 did the market finish a calendar year down 30% or worse. That’s about once every 63 years. I can’t emphasize this enough to the market timers out there. People tend to overestimate the probability of a market crash when one recently occurred.

The storm clouds of 2008 are in the rear view mirror, but they are still visible, and the effects of the storm still evident so before you pay too much attention to the headlines and sell everything or even sell anything, look at the businesses you own and bear in mind the above statistics...


Thought of the Week

"If you do what everyone else does, you will get what everyone else gets." -Stephen Richards

Stories and Ideas of Interest


  • Credit Suisse says the $1.5 trillion of cash on large cap company balance sheets is obscuring profitability and distorting valuations by making companies seem more expensive than they really are. It estimates that, ex-cash, stocks are trading near their historical averages. For example, at a current 18.6 forward P/E multiple, the S&P 500 is trading 13% above its 10-year average because of historic cash levels. Interesting point. Important to remember that a high P/E ratio can point to overpriced stocks, but it can be caused by high cash balances and low debt ratios.


  • A little can go a long way. When thinking about their financial situation, most people spend way more time thinking about investing than they do about spending and saving. Michael Batnick shows that it should be the exact opposite, because saving and spending is something we have complete control over. We can’t know if our portfolio will be up or down next year, but we can decide whether or not to take that $5,000 vacation. Saving to invest in ALMOST ANY VANILLA STOCKS SUCH THOSE IN A LOW COST ETF should be the priority rather than trying to figure out the perfect portfolio or avoid the next crash.


  • Big tobacco has caught startup fever. Something we have been watching for a bit as big tobacco may be entering into a renaissance of sorts. It’s not smoking. It’s platform-agnostic nicotine delivery solutions. Interesting story in Bloomberg highlighting how big tobacco is entering into an innovation war.


  • A world without wifi looks possible as unlimited plans rise. The Wi-Fi icon -- a dot with radio waves radiating outward -- glows on nearly every internet-connected device, from the iPhone to thermostats to TVs. But it’s starting to fade from the limelight. With every major U.S. wireless carrier now offering unlimited data plans, consumers don’t need to log on to a Wi-Fi network to avoid costly overage charges anymore. That’s a critical change that threatens to render Wi-Fi obsolete. And with new competitive technologies crowding in, the future looks even dimmer.


  • Robert Mercer: The big data billionaire waging war on mainstream media. With links to Donald Trump, Steve Bannon and Nigel Farage, the rightwing computer scientist is at the heart of a multi-million dollar propaganda network. This is a must read. Welcome to the future of journalism in the age of platform capitalism. News organisations have to do a better job of creating new financial models. But in the gaps in between, a determined plutocrat and a brilliant media strategist can, and have, found a way to mould journalism to their own ends.


  • Moral outrage is self-serving, say psychologists. When people publicly rage about perceived injustices that don't affect them personally, we tend to assume this expression is rooted in altruism—a "disinterested and selfless concern for the well-being of others." But new research suggests that professing such third-party concern—what social scientists refer to as "moral outrage"—is often a function of self-interest, wielded to assuage feelings of personal culpability for societal harms or reinforce (to the self and others) one's own status as a Very Good Person.


  • What do Uber, Volkswagen and Zenefits have in common? They all used hidden code to break the law. Coding is a superpower. With it, you can bend reality to your will. You can make the world a better place. Or you can destroy it.


  • How to be good at anything according to a world expert on peak performance. There is an important difference between practice and deliberate practice...


All the best for a productive week,

Logos LP

2 Opportunities With Potentially Explosive Value

Good Morning,

U.S. stocks closed mostly flat on Friday, with financials falling around 1 percent, as investors braced themselves for a key constitutional referendum in Italy while digesting a stronger-than-expected jobs report. In economic news, the U.S. economy added 178,000 jobs last month, the Labor Department said, with the unemployment rate falling to 4.6 percent. Economists polled by Reuters expected a gain of 175,000 with the unemployment rate holding steady at 4.9 percent. Wages, however, slumped to 2.5 percent.
While Friday's jobs data will not deter the central bank from raising rates, it was not a good report as record numbers of workers are no longer looking for work and part-time job creation is far outpacing full-time.


Our Take

It is always best not to be caught in the crowd. Take the temperature of the market. This violent Trump rally may not be all that it is perceived to be. Commentators such as Bill Gross warned this week that the Trump rally is built on a false promise of growth. Some of his points are worth considering.
Specifically his concerns about US productivity. Gross pointed out that future growth is primarily a function of productivity, which has flat lined for the last several years and shows little promise of accelerating. Gross wrote that “A strong dollar and continuing structural headwinds including aging demographics, de-globalization trade policies, and accelerating debt-to-GDP in almost all countries at now higher interest rates, promise to contain productivity at perhaps 1 percent annual growth rates and therefore real GDP growth at 2 percent.”
In addition, analysts at Bank of America Corp. suggested this week that we may be approaching the market’s last hurrah. The crux of the argument is that the firm’s contrarian sell side indicator, which measures Wall Street’s bullishness on equities, jumped to a six-month high in November, its biggest gain in more than a year. Right now, the index is pointing toward a rally of almost 20 percent for U.S. stocks over the next 12-months, but the analysts believe that a rally of that magnitude could mark the end of the bull run. Remember that market euphoria is typically what we see at the end of bull markets and that has been glaringly absent so far in the cycle.

Recently, we have been looking at companies with explosive book value that have been selling off in this market. After careful analysis, we have noticed that significant book value growth over the last 10 years (over 2.5x), coupled with sustained high returns on capital over the past 5 years, can provide a glimpse into up-and-coming quality enterprises that may propel higher over the medium term.
Some picks of interest:           
CGI (TSE: GIB.A): Book value per share nearly quadrupled since 2007 as revenue tripled. Average ROE is above 14% over the last ten years. Company has strong tailwinds going forward and stock is below 200 MA and is down 4% last 3 months. Look for the stock to dip below its 50 MA.
Luxoft (NYSE:LXFT): Roaring book value per share growth, more than doubling over past 2 years. Return on Invested Capital has averaged over 35% since 2011. Price to sales is at 2.5, which lower than some consumer non-cyclicals growing at less than inflation, and revenue is expected to hit $1 billion by end 2018 (TTM at $716MM). Stock is down 33% YTD despite record growth and no debt.


Thought of the Week

"The herd instinct among forecasters makes sheep look like independent thinkers." - Edgar Fieldler

Stories and Ideas of Interest


  • Silicon Valley has an empathy vacuum. The New Yorker suggests that Silicon Valley’s biggest failing is not poor marketing of its products, or follow-through on promises, but, rather, the distinct lack of empathy for those whose lives are disturbed by its technological wizardry. Living in a bubble can mean different things to different people.


  • Tech was supposed to crash in 2016. It got real instead. Sure money isn’t as easy to get as it used to be but the unicorn reckoning expected in 2016 was nigh. Wired magazine looks into a year in tech which looked more like air leaving a balloon rather than a sudden pop.


  • An incubator for (former) drug dealers. Amid calls for more job training, less automatic background searching, and other changes that would make it easier for ex-felons to become employees, an alternative idea has slowly taken hold: Encourage them to start their own businesses. Bloomberg takes a look at the largest nonprofit pushing entrepreneurism of this kind: Defy Ventures, based in New York. Over the past six years it has trained more than 500 formerly incarcerated people and incubated more than 150 successful startups.


  • Corporate executives have opinions about Donald Trump. Bloomberg has a look at what they’ve been saying. On balance it is safe to say that they are optimistic but most believe that it is too early to speculate about what changes in Washington are going to mean for business. We tend to agree, despite the incredible rotation we have been witnessing in the markets into financials, basic materials and industrials. Be weary of premature herd following. Nevertheless, here’s an interesting look at how the new president might change rules that have made the financial system safer since the 2008 crisis, from most likely to least.



All the best for a productive week,

Logos LP