Market Cycles


Good Morning,

Bit behind on this July update but better late than never!

Stocks fell on Friday for the fourth straight day, capping off a volatile week for investors as rising trade fears and a tech sell-off led to broad weekly losses. The Nasdaq Composite fell 0.3 percent to 7,902.54, led by declines in Apple, Amazon and Alphabet. The tech-heavy index posted its fourth straight loss — its first since April — and is worst start to September since 2008.


The S&P 500 pulled back 0.2 percent to close at 2,871.68 as utilities and real estate both dropped more than 1 percent.


President Donald Trump, speaking from Air Force One, said Friday the U.S. is ready to slap tariffs on an additional $267 billion worth in Chinese goods. His remarks come after a deadline for comments regarding tariffs on another $200 billion in Chinese goods had passed last night.

"The $200 billion we're talking about could take place very soon, depending on what happens with them," Trump said. "I hate to say this, but behind that, there's another $267 billion ready to go on short notice if I want." (targeting a sum of goods equal to virtually all imports from China)

The selloff pummeling emerging market currencies shifted to stocks as contagion concerns weighed on risk assets. MSCI Inc.’s EM equities gauge entered a bear market on Sept. 6 and had its worst week since mid-August.


The fear also comes after the Wall Street Journal reported, citing U.S. officials, that the possibility of the U.S. and China reaching a trade deal are fading as the Trump administration tries to revamp the North America Free Trade Agreement (NAFTA). Meanwhile, Bloomberg News reports that the U.S. and Canada will likely end the week with no trade deal in place.


Wall Street was also under pressure after strong wage data stoked fears of tighter monetary policy in the U.S. Average hourly earnings rose 2.9 percent for the month on an annualized basis, marking the largest jump since 2009. The U.S. economy added 201,000 jobs in August, more than the expected increase of 191,000.


Treasury yields jumped to their highs of the session following the jobs report release, while the dollar also rose. The Fed has already raised rates twice this year and is largely expected to hike two more times before year-end.

Our Take

There is little doubt that the U.S. economy is in a boom. The Conference Board is reporting the highest levels of job satisfaction in more than a decade given a tight labor market — the ratio between the unemployment level and the number of job vacancies is at its lowest level in a half-century. A broader measure, the prime-age employment-to-population ratio, is back to 2006 levels. Meanwhile, real gross domestic product growth for the second quarter was just revised up to 4.2 percent. Corporate profits are rising strongly. And investment as a percentage of the economy is at about the level of the mid-2000s boom.


Wages are still lagging. But all other indicators show the U.S. economy performing as strongly as at any time since the mid-2000s — and possibly even since the late 1990s.


Why? A few reasons present themselves as outlined recently by Noah Smith:

  1. Demand Side Explanations:

    1. Low interest rates: lowered borrowing rates for corporations and mortgage borrowers, which tends to juice investment. Fiscal deficits provide an added boost to demand, and deficits have been rising as a result of President Donald Trump’s tax cuts. Typically pumping demand will eventually lead to rising inflation but this hasn’t happened yet.

    2. “Animal spirits” or “sentiment” as small business confidence is at record highs, and consumer/investor confidence also is very strong.

    3. Tail end of the long recovery from the Great Recession — consumers and businesses might finally be purchasing the houses and cars that they waited to buy when the recovery was still in doubt. Housing, traditionally the most important piece of business-cycle investment and consumption, is still looking weak, with housing starts below their 50-year average. But business investment might be experiencing the positive effects of stored-up demand.

  2. Supply Side Explanations:

    1. The Trump tax cuts removed distortions that held back business investment, and that fast growth — and the attendant low unemployment — is the result of the economy’s rapid shift to a higher level of efficiency.

    2. Technology: Information technology advances such as machine learning and cloud computing might be driving the investment boom — perhaps also spurring companies to invest in intangible assets such as brands and workers’ skills.


Which one is responsible? It is difficult to say but determining which are responsible matters as it can give insight into how the boom will end and how it can be prolonged. In our view all these factors have played a role, albeit certain ones have played a more crucial role during different stages in the bull market.  


At the current stage of the bull market we see evidence that the demand-side “animal spirits” or “sentiment” factor is doing a lot of the heavy lifting.


It should be remembered that although of late there has been a minor repricing of high multiple/risk assets, the trend is still firmly in place: investors are not put off by unprofitable companies. In fact, the proportion of companies reporting losses before going public in the United States is at its highest since the dotcom boom in 2000.


Last year, 76 percent of the companies that listed were unprofitable in the year before their initial public offerings, according to data compiled by Jay Ritter, a professor at the University of Florida's Warrington College of Business.


That's lower than the 81 percent recorded in 2000, but still far higher than the four-decade average of 38 percent.


Investors are currently keen on “new business models” and are willing to overlook losses. In fact, many are questioning whether “value investing” and classic investing principles even makes sense anymore. The market's euphoria for so-called "growth companies" has even made billionaire hedge fund manager David Einhorn question if classic investing principles that worked for him still make sense today.


As Howard Marks reminds us, in investing as in life, there are very few sure things. Very few things move in a straight line. There’s prograss and then there’s deterioration. We must remain attentive to cycles.


The process/cycle is typically the same: 1) the economy moves into a period of prosperity 2) providers of capital thrive, increasing their capital base 3) because bad news is scarce, the risks entailed in lending and investing seem to have shrunk 4) risk aversion disappears 5) financial institutions and investors move to expand their businesses - that is, to provide more capital 6) they compete for market share by lowering demanded returns (e.g. cutting interest rates), lowering credit standards, lowering prudence, disregarding the linkage between price and value, paying less attention to profits or disregarding them all together and providing more capital for a given transaction.


At the extreme, providers of capital finance borrowers and businesses (investments) that aren’t worthy of being financed. This leads to capital destruction -that is, to investment of capital in projects where the cost of capital exceeds the return on capital, and eventually to cases where there is no return of capital.


Is this time any different?


Chart(s) of the Month


JP Morgan shows us that holding cash for too long can be a dangerous proposition. 

Screen Shot 2018-09-08 at 4.03.25 PM.png

Are overall tech valuations overstretched or only certain segments?  Notice the absence of earnings in the dot com bubble years. Valuations do not appear stretched when put into perspective, prices appear to be in line with the underlying earnings picture. The NASDAQ-100’s price to forward earnings ratio is still a little below its longer run average of about 23x. 

Screen Shot 2018-09-08 at 8.25.56 PM.png


What of valuation? What of the relationship between price and value? For an investor (whether a “value” investor or not) price has to be the starting point regardless of where we are in the cycle and especially in the last innings. No asset is so good that it can’t become a bad investment if bought at too high a price.


As an example of the current “animal spirits” climate we should consider the following:


Cannabis : the thesis or “story” here is that cannabis, like alcohol, tobacco and other hedonistic instruments, has now achieved positive momentum with policymakers across the world. As such the fragmented industry will consolidate and a few early movers will reap the profits of this new multi-billion dollar industry. But just like investing in the nascent stages of many industries that in essence were revolutions from a status quo, speculation will initially replace prudent financial analysis of price relative to value.


As Easterly points out in a recent article Cronos' (CRON) current valuation is an outright manifestation of "extraordinary delusions" stemming from the madness of crowds.


Cronos trades at about 17.25 forward price to sales (TTM price to sales of 332.97 and TTM price to earnings of 874.69) compared to its peers. For some further clarity, highly valued SaaS stocks prized for their recurrent revenue stream and high gross margins seldom trade at 17.25 forward P/S ratio. The average P/S ratio for stocks in the software application industry is around 6.8, compared to 2.16 for the S&P 500.


Hence, why does an agricultural commodity producer trade at a higher valuation than Shopify and other?


In Deloitte's "A society in transition, an industry ready to bloom" 2018 cannabis report, they expect legal cannabis sales during 2019, the first full year post-legalization to be [CAD]$4.34 billion. This figure is likely inflated when compared against the results of other markets. Further, the study only surveyed a sample size of 1,500 adult Canadians, which is not significant enough to estimate the Cannabis purchase habit of millions of Canadians.


For some perspective, California, which is regarded as the most important Cannabis market on Earth realized sales of [USD]$339 million or [CAD]$444 million (at current spot USD/CAD) during the first two months post-legalization. Extrapolating this across a full year would infer total sales of [USD]$2.01 billion or [CAD]$2.7 billion. Sure there are other factors to consider like a larger Californian black market and a different set of regulations and taxes. However, the Californian market has also not been as stringent on marketing as Canada will be.


Assuming the Canadian market is at least on par with California, the author models the potential market using an optimistic CAGR of 23.54% from 2019 - 2023 which is more optimistic than some market reports. The author also models Cronos' revenue for the years from 2018 - 2022.


Cronos' current market valuation of [USD]$1.75 billion or [CAD]$2.29 billion is around 84.81% of the total Canadian legal cannabis market in FY2019. (And this does not take into account the fact that the total estimated legal cannabis sales [CAD] $4.34 billion number mentioned above represents a total retail sales projection and that will likely be shared between grower, distributor, retailer, and the government through taxes. Taxes will be large, perhaps even 30%. Retail will be handled by government in a few big provinces like BC -- yet the government will still take a retail margin cut. What will be left for growers could be as low as sub $4 CAD / gram.. half or less of that total [CAD] $4.34 billion number…


At a current market valuation of [CAD]$2.29 billion ($2.79 billion at time of writing) which is around 84.81% of the total estimated Canadian legal cannabis market in FY2019, has the fairness of Cronos’ price been considered? Or have people without disciplined consideration of valuation simply decided that they want to own something because the story is good, risk aversion is low and the future looks bright?


Overall, we see current valuation trends in certain growth stocks (cannabis, select tech.) (not to mention that the ratio of bearish option bets to bullish ones is waning as the S&P 500 keeps churning out records. That implies investors may be loading up on derivatives as way to make up for lost ground should 2018 deliver a year-end rally similar to last year’s, when stocks closed with a 6.1 percent fourth-quarter surge) to be evidence that the demand-side “animal spirits”/“sentiment” factor is doing a large portion of the heavy lifting to prolong the current bull market.

As such, we would advise caution before increasing exposure to these “loved” and therefore richly valued businesses. Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. For our portfolio, given where we are in the present cycle and overall market conditions we are abiding by the following maxim:

“The safest and most potentially profitable thing is to buy something when no one likes it. Given time, its popularity, and thus its price can only go one way: up.” -Howard Marks


Logos LP July 2018 Performance


July 2018 Return: -0.34%


2018 YTD (July) Return: 0.00%


Trailing Twelve Month Return: +12.79%


CAGR since inception March 26, 2014: +18.29%


Thought of the Month


"The polar opposite of conscientious value investing is mindlessly chasing bubbles, in which the relationship between price and value is totally ignored. All bubbles start with some nugget of truth: 1) Tulips are beautiful and rare 2) The internet is going to change the world 3) Real estate can keep up with inflation, and you can always live in a house.” -Howard Marks

Articles and Ideas of Interest


  • After Coltrane, there is nothing left to say. The saxophone virtuoso pushed jazz as far as it could go, and it’s been downhill ever since.            


  • These Fake Islands Could Spell Real Economic Trouble. Glitzy property projects and financial crises tend to go hand-in-hand.


  • U.S. Household wealth is experiencing an unsustainable bubble. Jesse Colombo suggests that Since the dark days of the Great Recession in 2009, America has experienced one of the most powerful household wealth booms in its history. Household wealth has ballooned by approximately $46 trillion or 83% to an all-time high of $100.8 trillion. While most people welcome and applaud a wealth boom like this, research suggests that it is actually another dangerous bubble that is similar to the U.S. housing bubble of the mid-2000s. In this piece, he explains why America's wealth boom is artificial and heading for a devastating bust.


  • Who needs democracy when you have data? Here’s how China rules using data, AI and internet surveillance.


  • How tourists are destroying the places they love. Travel is no longer a luxury good. Airlines like Ryanair and EasyJet have contributed to a form of mass tourism that has made local residents feel like foreigners in cities like Barcelona and Rome. The infrastructure is buckling under the pressure. Great 2 part expose suggesting that travel has almost become a human right yet it has become predatory - devouring all the beautiful places which drive it. Has nature itself come to be viewed as merely one more good to be consumed? ; Have we developed a shallow, modern need to present a life free from the tyranny of a nine-to-five office job in the tight frame of Instagram? No wonder you are not original or creative on instagram. Everyone on Instagram is living the same life.  


  • Peak Valley. The Bay Area’s primacy as a technology hub is on the wane. Don’t celebrate. Although capital is becoming more widely available to bright sparks everywhere yet unfortunately the Valley’s peak looks more like a warning that innovation everywhere is becoming harder.  



Our best wishes for a fulfilling month, 

Logos LP

The Most Precious Resource Of Our Era: Data

Good Morning,

U.S. equities closed mostly lower on Friday as investors digested a tough week for retailers as well as mixed economic data.


Several retailers, including Macy's and Nordstrom, saw their stocks tank this week after reporting weaker-than-expected quarterly results, putting the sector under pressure.

The dollar fell while Treasuries rallied after tepid data on retail sales and inflation in the U.S. economy rekindled concern that growth won’t accelerate to levels economists project.


Consumer prices rebounded last month, though at a slower pace than expected, while retail sales advanced after an unexpected drop in March. That was enough to support the case for Federal Reserve tightening in June, though not enough to push stocks higher or dislocate bonds. Investors cast a wary eye on Washington, where President Donald Trump escalated his war with fired FBI director James Comey at the same time his cabinet attempted to move forward on trade and regulatory reforms.

While that was a slowdown from March's 2.4 percent increase, the year-on-year gain in the CPI was still larger than the 1.7 percent average annual increase over the past 10 years.


Overall markets were pretty quiet this week as the CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed below 10 earlier this week, raising concerns about complacency in the market.


In addition, with valuations at record levels many investors and commentators are still actively seeking to identify the next “boogeyman” that will tank markets.


Our Take

In light of fears surrounding the low VIX reading in addition to bearish sentiment I want to highlight two things:


  1. Since September 2001, the S&P has secured 311% of its gains when volatility is as low as it is now.

  2. The first step of a corporate earnings rebound is now in the books with a 13%+ increase in year over year profits being reported in Q1.


Moving to the political front, I’m tired of the attention this man continuously garners, but Donald Trump’s dismissal of FBI Director James Comey on Tuesday merits attention for all the wrong reasons. This is the third time he’s fired someone involved in an investigation of him or his associates.


The bureau has been probing Russian involvement in the U.S. election and possible involvement of Trump associates since the summer. Earlier, former acting U.S. Attorney General Sally Yates was dismissed after she refused to defend Trump’s first travel ban. And former Manhattan U.S. Attorney Preet Bharara was initially asked to stay on in his role before being fired in March.


Bloomberg’s helpful graphic shows how, in each of these cases, the justification for dismissal was inconsistent with prior actions, or immediately followed events related to investigations.


How can we interpret this dismissal? As Timothy L. O’Brien for Bloomberg View opines: self-preservation. There is no point trying to analyze Trump's motives and actions as rational and long-term oriented.  He clearly doesn’t care about policy or process. So searching for "strategy" or "deal-making prowess" in the president is usually a “fool's errand”.


What drives Trump today, and what has always driven him, are twin forces: self-aggrandizement and self-preservation. Most of his public actions can be understood as a reflection of one or both of those needs.


Comey’s firing was a manifestation of the second force: self-preservation. He came for the FBI, what’s next? The rule of law? Nevertheless, while unnerving for world leaders, citizens and investors, at the end of the day the firing is unlikely to lead to previously unforeseen problems in enacting health care and tax reform.


On a more positive note, the election of Emmanuel Macron in France is a clear repudiation of populism as represented by Marine Le Pen. This is a remarkable accomplishment at 39 years old. Macron has managed to triumph over the two parties that have dominated the presidency since 1958 “potentially” heralding in a new era of forward thinking politics.


I say “potentially” as now comes the hard part: turning his political movement into a vehicle capable of winning a majority, or at least garnering enough seats in parliament to govern or form a coalition. We predict that he will win a majority.



More and more buzz is being generated about those who control the most precious resource of our era: data. Like the oil majors of days past when oil was the most precious resource on the planet, the wise are turning their gaze to the giants that deal in data, the oil of the digital era.


And so they should.


These behemoths: Alphabet (Google’s parent company), Amazon, Apple, Facebook and Microsoft- look to be unstoppable. They are (unsurprisingly) the most valuable firms in the world the likes of which even Warren Buffett and Mark Cuban Marvel over. Buffett this week went so far as to say that he was “dumb” not have have recognized their brilliance sooner and Marc Cuban stated that these companies are still undervalued. I would agree.


Few would wish to live without the products/services of any of these companies which underpin both our personal and professional lives. On their face these companies do not appear to transgress antitrust rules yet their control of our data gives them tremendous power.


As data proliferates, those who control it are better able to compete by developing better products, services and experiences thereby creating an even stronger protective moat.


Furthermore as the Economist points out, the possibility of these incumbents being blindsided by a startup in a garage in data age is becoming increasingly slim. They explain that “The giants’ surveillance systems span the entire economy: Google can see what people search for, Facebook what they share, Amazon what they buy. They own app stores and operating systems, and rent out computing power to startups. They have a “God’s eye view” of activities in their own markets and beyond. They can see when a new product or service gains traction, allowing them to copy it or simply buy the upstart before it becomes too great a threat.”


A current and obvious example is Snapchat. If the business does not collapse under its own unprofitability, Facebook will continue to bleed it out by successfully mirroring its most attractive features.


Interestingly, The Economist suggests that antitrust authorities should move into the 21st century by not considering size as the deciding factor in a merger but rather take into account the size of a firm’s “data assets” when assessing the impact of deals. They also suggest that regulators could loosen the grip that providers of online services have over data and give more control to those who supply them with the data aka: consumers. They prescribe more transparency and more data sharing.


These are novel ideas but highly unlikely to be implemented absent significant public outrage. Will that public outrage be forthcoming? I think not.


Perhaps the most underappreciated fact of internet-age capitalism is that we are all in the inescapable clutch of these companies and we like it that way.


We are already living in a world in which our own human “feelings” are no longer the best algorithms in the world. We are developing superior algorithms which use unprecedented computing power and giant databases. The algorithms of these 5 giants not only know exactly how you feel, they also know a million other things you hardly suspect. When a non-human algorithms knows us better than we know ourselves we are likely to stop listening to our “feelings” and defer decision making to these external algorithms instead. I would argue that this is already happening and we adore it. We are coddled by our conveniences, entertained and comforted by our personal echo chambers of self-importance. 


Be honest, if some anti-tech dictator forced you to drop all five companies, how would you do so? In what order? What would your life look like? Strip each away and take a moment to look at your life and how it would change. Is it one you yearn to return to? I doubt it. 


Power has shifted. As both the volume and speed of data increase, classic institutions like elections, parties and parliaments might simply become obsolete - not because they are corrupt but simply because they don’t process data fast enough.


By the time the cumbersome government bureaucracy makes up its mind about regulating data or the big 5 for that matter (it can’t even pin down immigration, tax, healthcare, and trade reform) the internet/digital world will have morphed ten times. As Yuval Harari states: “The government tortoise cannot keep up with the technological hare.”


Thus, it should come as no surprise that In March, Trump’s Treasury secretary, Steve Mnuchin, said the problem of job displacement by robots is “not even on our radar screen” since it will only come “in 50 to 100 more years.” This is a government completely out of touch. The big 5 will continue their supreme control of today’s most powerful resource: data.

*(The above is inspired from a conference I am giving this weekend at MENSA about the societal effects of AI and emerging technologies. Contact me if you wish to see the slides)


Logos LP April Performance

April 2017 Return: 4.57%

2017 YTD (April) Return: 18.98%

Trailing Twelve Month Return: 38.16%

Annualized Return Since Inception March 26, 2014: 27.06%

Cumulative Return Since Inception March 26, 2014: 85.70%


Thought of the Week

"What will happen to society, politics and daily life when non-conscious but highly intelligent algorithms know us better than we know ourselves?- Yuval Harari


Articles and Ideas of Interest


  • Populism is great for stock returns. If the last two decades of anti-establishment rule are any guide, the world may be on the brink of some monster stock rallies as it takes a turn toward populism. A look at 10 of the 21st century’s most recognized populist leaders shows that in the three years after their election, local equities soared an average of 155 percent in dollar terms. And the rallies often continued as long as a decade after the vote.


  • Why you should have (at least) two careers. It’s not uncommon to meet a lawyer who’d like to work in renewable energy, or an app developer who’d like to write a novel, or an editor who fantasizes about becoming a landscape designer. Maybe you also dream about switching to a career that’s drastically different from your current job. But in my experience, it’s rare for such people to actually make the leap. The costs of switching seem too high, and the possibility of success seems too remote. Harvard Business Review suggests that the answer isn’t to plug away in your current job, unfulfilled and slowly burning out. I think the answer is to do both. Two careers are better than one. And by committing to two careers, you will produce benefits for both.


  • There’s no Canadian crisis in sight despite downgrade hitting assets. Moody’s downgrade of Canada’s biggest banks beat down assets in a market already rattled by woes of mortgage lender Home Capital Group Inc. Yet analysts say this isn’t evidence of an impending crisis. We would agree. Sentiment will help to cool an overheated housing market but do not expect any kind of 2007 style housing bust.


  • How homeownership became the engine of American inequality. Interesting piece in the NY Times looking at the perverse effects of the mortgage interest deduction (MID). Important in light of the current real estate situation in Toronto. Poverty and homelessness are political creations. Their amelioration is within American grasp and budget. But those Americans most likely to vote and contribute to political campaigns are least likely to support (MID) reform — either because it wouldn’t affect their lives or because it would, by asking them to take less so that millions of Americans could be given the opportunity to climb out of poverty.


  • A roadmap to investing for the next 100 years. The University of California looks at where we have been and how we can invest for the long-term. What will work: Less is more, risk rules, concentrate, creativity pays, build knowledge, team up,


Our best wishes for a fulfilling week, 

Logos LP

You're Leaving Value On The Table

Good Morning,

U.S. equities closed down on Friday — the last day of the first quarter and of the month — as investors digested a slew of economic data.                                  

The Dow Jones industrial average fell about 65 points, with Goldman Sachs and Exxon Mobil contributing the most losses. The S&P 500 slipped 0.23 percent, with financials lagging.                       

The Nasdaq composite closed just below breakeven.                                                                           

The three major U.S. indexes posted quarterly gains of at least 4.6 percent. The Nasdaq also recorded its best quarterly performance since 2013 as tech stocks rose more than 12 percent in the period.

Our Take

Last week there were some jitters about whether or not Trump’s potential pro growth policies would be delayed, but the market has since remained resilient. March marked the 8th anniversary of the bull market and we hold that the show will go on despite Trump’s bumblings.

There are pockets of value despite repeated calls that “stocks are overvalued” and furthermore for the first time in 6 years double digit earnings growth looks real. Focus on the fundamentals. While stocks have been ascending ever since the election, it’s unlikely the rally would’ve gotten this far without the contemporaneous improvement in earnings, which last year ended one of the longest streaks of declines ever in a U.S. bull market.

Despite oil’s slump to skepticism over Trump’s growth agenda, Wall Street analysts have been standing firm on forecasts that represent almost twice the profit growth seen in 2013, a year when the S&P 500 rose 30 percent.

S&P 500 operating income will rise 12 percent to $130.20 a share this year, estimates compiled by Bloomberg show.

For the health of your investments, earnings are what matters. Long-term fundamentals drive stock prices. Short-term the political noise can impact sentiment but time and time again over the last 8 years buying the dips has worked…



A focus on the long-term matters. It has a determinate impact on our investment outcomes but more importantly on whether our lives will be remarkable or simply average.

More on that later. First I wanted to highlight the incredible outcomes reserved to those who think long-term. This week I read an excellent research report produced by a team from McKinsey Global Institute in cooperation with FCLT Global which found that companies that operate with a true long-term mindset have consistently outperformed their industry peers since 2011 across almost every financial measure that matters.

The differences were dramatic. Among the firms the team identified as focused on the long term, average revenue and earnings growth were 47% and 36% higher, respectively, by 2014, and market capitalization grew faster as well. The returns to society and the overall economy were equally impressive. By their measures, companies that were managed for the long term added nearly 12,000 more jobs on average than their peers from 2001 to 2015.

In addition, they calculated that U.S. GDP over the past decade might well have grown by an additional $1 trillion if the whole economy had performed at the level their long-term stalwarts delivered — and generated more than five million additional jobs over this period.

What indicators were studying? 1) Investment 2) Earnings Quality 3) Margin Growth 4) Earnings Growth 5) Quarterly Targeting

After running the numbers on these indicators, two broad groups emerged among those 615 large and midcap U.S. publicly listed companies: a “long-term” group of 164 companies (about 27% of the sample), which were either long-term relative to their industry peers over the entire sample or clearly became more long-term between the first half of the sample period and the second half, and a baseline group of the 451 remaining companies (about 73% of the sample).

What is clear from the performance gap between these two groups is the massive relative cost of short-termism.

From 2001 to 2014 those managing for the long term cumulatively increased their economic profit by 63% more than the other companies. By 2014 their annual economic profit was 81% larger than their peers, a tribute to superior capital allocation that led to fundamental value creation.

Now this makes me think of the countless examples I encounter on an almost daily basis of short-termism. It is not simply corporations that favor these costly short-termist agendas. It is the average human or at least 73% of the population…..that chooses the easy money vs. the long money. The easy choice or the choice that seemingly brings the most juice today. Nevertheless, real change is possible. This is one of the key messages from the research.

The proof lies in a small but significant subset of the long-term outperformers identified in the study — 14%, to be precise — that didn’t start out in that category. Initially, these companies scored on the short-term end of the index. But over the course of the 15-year period they measured, leaders at the companies in this cohort managed to shift their corporations’ behavior sufficiently to move into the long-term category.

As an investor it is best to develop the ability to identify such long-term value creators, as well as those companies who are shifting their behavior.

As a human it is best to look at ourselves in the mirror and ask what short-termist behaviors we are exhibiting and how we can change such habits. Upon honest reflection, what we will undoubtedly find is that we are leaving a considerable amount of “value” and long-term “fulfillment” on the table….


Thought of the Week

"The most important quality for an investor is temperament, not intellect.” -Warren Buffett

Stories and Ideas of Interest


  • A world without retirement. The population is getting older and the welfare state can no longer keep up. After two months of talking to people in Britain about retirement, it’s clear that old age is an increasingly scary prospect. The Guardian digs in.  

  • Compelling new evidence that robots are taking jobs and cutting wages. In a recent study (pdf), economists Daren Acemoglu of MIT and Pascual Restrepo of Boston University try to quantify how worried we should be about robots. They examine the impact of industrial automation on the US labor market from 1990 to 2007. They conclude that each additional robot reduced employment in a given commuting area by 3-6 workers, and lowered overall wages by 0.25-0.5%. A central question about robots is whether they replace human workers or augment them by boosting productivity. Acemoglu and Restrepo’s research is a powerful piece of evidence on the side of replacement. Furthermore, automation is set to hit workers in developing countries even harder. The fourth industrial revolution looks set to cause global mass unemployment. Could we tax robots as Bill Gates has proposed? The Economist suggests that this idea is misguided.


  • Silicon Valley’s quest to live forever. Can billions of dollars of high-tech research succeed in making death optional? Forget retirement. Some are actively working on finding a cure for death. The New Yorker digs in and considers the incredible amount of money and effort being deployed towards achieving eternal life. I’ve always looked at this through the following prism: does the present moment really have any significance if it isn’t fleeting or precious?


  • Your animal life is over. Machine life has begun. The road to immortality. In California, radical scientists and billionaire backers think the technology to extend life - by uploading minds to exist separately from the body is only a few years away. Yes that’s right. Forget the problems with robots replacing humans, when we will be able to achieve “morphological freedom” – the liberty to take any bodily form technology permits. “You can be anything you like,” as an article about uploading in Extropy magazine put it in the mid-90s. “You can be big or small; you can be lighter than air and fly; you can teleport and walk through walls. You can be a lion or an antelope, a frog or a fly, a tree, a pool, the coat of paint on a ceiling.” No wonder Elon Musk is founding another company called Neuralink which will focus on merging man and machine through the “neural lace” about thinking long-term...


  • Given the circumstances our existence, shouldn’t we just kill ourselves? French philosopher Albert Camus did an excellent job describing those moments in our lives when our ideas about the world suddenly don’t work anymore, when every daily routine — going to work and back — and all our efforts seem pointless and misdirected. When one suddenly feels foreign and divorced from this world. In these frightening moments of clarity we feel the absurdity of life. Luckily, his interpretation of the myth of Sisyphus offers us salvation. Sisyphus was sentenced to push a boulder up a hill, just to see it roll down again, and keep doing so forever and ever and ever. Camus offers a bold statement: “One must imagine Sisyphus happy.” He says, Sisyphus is the perfect model for us, since he has no illusions about his pointless situation and yet revolts against the circumstances. With every descent of the rock he makes a conscious decision to give it another go. He keeps pushing that rock and recognises that this is what his existence is all about: to be truly alive, to keep pushing.


  • A dearth of I.P.O.s but it’s not the fault of red tape. Nice piece in the NY Times exploring possible explanations yet finding that while there might be rational reasons to reduce regulation on capital raising — to make it easier and less expensive — we are kidding ourselves if we think that simply deregulating will bring back initial public offerings.


  • Not leadership material? Good. The world needs followers. The NYT suggests that the glorification of leadership skills, especially in college admissions, has emptied leadership of its meaning. I love this. Very contrarian. “Perhaps the biggest disservice done by the outsize glorification of “leadership skills” is to the practice of leadership itself — it hollows it out, it empties it of meaning. It attracts those who are motivated by the spotlight rather than by the ideas and people they serve. It teaches students to be a leader for the sake of being in charge, rather than in the name of a cause or idea they care about deeply. The difference between the two states of mind is profound. The latter belongs to transformative leaders like the Rev. Dr. Martin Luther King Jr. and Gandhi; the former to — well, we’ve all seen examples of this kind of leadership lately.”

All the best for a productive week,

Logos LP

Contrarian Indicators Flashing

Good Morning,

U.S. equities closed mixed on Friday, but squeezed out another record close, while data released Thursday pointed to improving economic conditions in the U.S., with the Philadelphia Federal Reserve manufacturing index hitting its highest level since 1984, while weekly jobless claims remained around their lowest levels in decades.


Our Take

Buy baby buy. Forget any bearish news. Shrug it off and continue to buy stocks. This seems to be the prevailing mood right now with pullbacks lasting hours rather than days.

The issue is that when you look at the underlying fundamentals, they are quite good as companies are posting growth in earnings, rather than gaining because of some vague promise of tax cuts.


Although the rally has left the S&P 500 trading at three times book value for the first time since 2004, market-capitalization weighted earnings likely rose 10 percent in the fourth-quarter from a year earlier, according to data compiled by Bloomberg. Of the 358 members that have reported results so far, 72 percent have shown profit growth.


Furthermore, inflation appears to be finally picking up. Since the global financial crisis, historically low inflation and restrained economic growth has allowed central banks to keep interest rates at record low levels. However, most policy makers are now anxious to return to a more “normal” environment where they will have more latitude to tighten or loosen monetary policy in response to changing circumstances. Even though they have kept policy on hold for now, the Bank of Japan, the Bank of England, the European Central Bank and the Federal Reserve are all anticipating higher inflation ahead, although it isn’t clear how quickly they will start raising rates.


Nevertheless, there are a few key things to take note of so as to take the temperature of the market and maintain one’s good sense as the market moves higher:  


  1. Notorious bears are starting to capitulate. Prem Watsa and George Soros just this week have changed their stance unwinding their shorts and getting long the Trump trade.

  2. The world’s largest sovereign wealth fund increased its allocation to equities: with the amount of noise out there about market being toppish it is interesting to see the Norwegian government looking to increase its allocation to equities. Late on Thursday afternoon, the Norwegian government proposed investing 70% of the country's £723 billion fund in the equity markets.

  3. Hedge funds piled into the consensus trades in Q4 2016: long the USD, long financials, healthcare, consumer discretionary, REITS and short tech, consumer staples, utilities and and bonds. Is the consensus ever right?

  4. There are still a lot of very negative bearish commentary all over the internet regarding the existence of a “bubble” and impending stock crash. This may be a significant contrarian indicator.

  5. There are still several black swan risks. The most significant being Marine Le Pen being elected as President in France. This would surely be a grave threat to the integrity of the European Union. In addition, Eurozone finance ministers and the IMF seem likely to miss next week's deadline to agree on a €7B bailout for Greece.



I was at a financial marketing conference in Orlando this week and had many great opportunities to chat with Americans about their new President Donald Trump. Many showed great disdain, some had no opinion, others expressed concern regarding his unpredictability and some were optimistic. Nevertheless, the prevailing mood amongst the stock market participants that I talked to was that his presidency is just not that relevant with regards to the direction of the stock market.

What lessons can we glean from this? Well first and foremost we should avoid letting our political opinions shape our investing decisions. Whether our savings should be in stocks, bonds or cash depends on our risk profile and our time horizon/investment goals. It should not be a function of our attitudes towards our heads of state.

There is no doubt that uncertainty can cause problems for markets yet allowing our political preferences to influence our investing decisions can cause us to misconstrue risk and/or to see more or less of it when there may in fact be less or more.

What we should remember is that the possibility of a major correction is EVER PRESENT.

This is the case no matter who is at the wheel and is more dependent upon economic cycles than on policy decisions. Thus, given current valuations which appear to be at the high end on a historical basis, the more intelligent question should be whether we are ok with say a 25% correction at this point in our lives?

If the answer is no, then less money should be allocated to stocks. If the answer is yes then perhaps we should keep on keeping on as stocks tend to offer excellent returns over the long term. Consider this illuminating chart from First Trust which highlights the historical performance of the S&P 500 Index throughout the U.S. Bull and Bear markets from 1926 through 2016.


-The average Bull Market period lasted 8.9 years with an average cumulative total return of 490%

-The average Bear Market period lasted 1.3 years with an average cumulative loss of -41%

Thought of the Week

" Roll with it.” -Charlie Munger to Trump Haters

Stories and Ideas of Interest


  • Contrarian indicator or indicator of the end? Wine glimmers like gold as investors see end to stocks rally. The benchmark wine index posted its first gain in six years. Bloomberg finds that: “Prices for fine wines have climbed to their highest levels since October 2011 on speculation that equities near record highs are poised to drop. Wines and the funds that buy them are being viewed much like gold -- as a store of value in uncertain times -- after the U.K. voted to leave the European Union and the U.S. elected Donald Trump as president.”


  • Housing bubble headlines in Canada are back in vogue, driven mostly by strength in the Toronto market. The annual rate of national house price inflation climbed to 13.0% year-over-year in January, up from the prior month's reading of 12.3%, according to the Teranet-National Bank Composite House Price Index. The jump was at least partially due to the ongoing housing boom in Toronto, which saw the annual rate of inflation climb to 20.9% year-over-year, up from 19.7%. Additionally, Reuters reports that Hamilton, an area near Toronto, saw home prices spike by 17.6% year-over-year as buyers were "shut out of the expensive Toronto market." A lot of this bearishness is nothing new yet one thing did jump out at me was new data indicating that the latest census figures show that Toronto’s population is growing at its slowest pace in 40 years. Is this sustainable?   


  • More Canadians are raiding their RRSP to buy a house, make ends meet and pay off debt. A new survey suggests Canadians are dipping into their registered retirement savings plans like never before and the high cost of housing may be driving those decisions.


  • Facebook has mega ambitions for job ads and our brains. Alison Griswold for Quartz suggests that: “Facebook’s users include LinkedIn’s ‘thought leaders’ and white-collar professionals, but they’re also people seeking hourly positions, part-time work, and other opportunities that they’d probably find on sites like Monster, Indeed, or Craigslist long before LinkedIn.” Facebook isn’t chasing Linkedin. It is chasing a far bigger jobs market. In other Facebook news, Bloomberg considers the danger of Facebook’s plan to rewire our lives…


  • Could the chaos of the industrial revolution be about to return? Bloomberg considers the argument that when old jobs are lost to technology, new ones will be created. The author suggests that upon closer study of the industrial revolution, this rosy thesis should be revised as this period of time brought calamity…


  • Fast food can reveal the secrets of an economy. The BBC digs into fast food indicators: “What is an economist’s favourite food? Burgers, chips and pizza might not immediately come to mind – but the consumption of meals like these can signal changes in people’s economic behaviour. Knowing the price of pizza in New York or the cost of a Big Mac in Beirut can tell market-watchers how the world’s cogs are turning.”


  • How can companies become and stay innovative? Fantastic work from BCG complete with excellent data and analysis on the top 50 most innovative companies in 2016.


All the best for a productive week,

Logos LP