Solitude Is A Competitive Advantage

Good Morning,
 

The tech-heavy Nasdaq composite rose to a record high last Friday as Wall Street cheered the blowout quarterly reports from three of the world's biggest tech companies.            

The index rose 2.2 percent to 6,701.26 and notched its biggest one-day gain since November 2016.                        

The PowerShares QQQ Trust exchange-traded fund, which tracks the Nasdaq 100, rose 2.9 percent.         

Leading the ETF higher were shares of Amazon, Microsoft and Google-parentAlphabet; their stocks rose 13.2 percent, 6.4 percent and 4.3 percent, respectively.

The S&P 500 Index also hit a new high, after the U.S. saw its strongest consecutive quarters of growth in gross domestic product in three years.

The first reading on third-quarter GDP showed the U.S. economy grew by 3 percent, above an estimate of 2.5 percent indicating resilient demand from consumers and businesses even with the hit from hurricanes Harvey and Irma, Commerce Department data showed Friday. In addition, U.S. consumer sentiment rose to its highest level since 2004.

Our Take
 

These tech giants reported excellent numbers.  Amazon's third-quarter earnings stole the show with accelerating revenues, a growing customer base, 42 percent sales growth in Amazon Web Services and a busy Prime Day.

Alphabet's earnings report impressed thanks to its 70 percent growth in YouTube, which now delivers 100 million hours of content per day to its users.

Microsoft blew away Wall Street's earnings estimates by delivering 42 percent growth in subscription revenue from its Office 365 offering and 90 percent revenue growth from Azure, its cloud platform.

This tech strength is closely tied to the growing importance of data. More specifically, the explosion of data via the cloud. Amazon, Alphabet and Microsoft are the big three of web services, the backbone of the cloud. Expect the strength to continue as these giants continue to shore up their dominant positions in the space.

For Q3 2017, with 55% of the companies in the S&P 500 reporting actual results for the quarter, 76% of S&P 500 companies have reported positive EPS surprises and 67% have reported positive sales surprises.

For Q3 2017, the blended earnings growth rate for the S&P 500 is 4.7%. Six sectors are reporting earnings growth for the quarter, led by the Energy sector. On Sept. 30, the estimated earnings growth rate for Q3 2017 was 3%. 

These are excellent numbers supporting the suggestion that this is a rally based on earnings growth.

A very strong bull market indeed, also supported by a global economy that continues to surprise to the upside. 

Even Caterpillar earnings which showed increased profits and and improved outlook which tends to evidence that global growth is picking up in a synchronized fashion.

Valuations continue to look frothy but fundamentals are keeping pace.

As we have previously stated, caution is warranted in this environment yet caution should also be exercised when faced with arguments that both the economic cycle and the stock market has run its course and it is time to lighten up, raise cash and wait for an imminent crash.

The veracity of these types of arguments now seems obvious. The danger is believing that what seems obvious, must take place. This is simply untrue. Instead, such beliefs evidence the primacy of emotion over reason. A lazy reliance on heuristic shortcuts rather than thoughtful analysis.

The skeptics have and continue to beat their drums yet the place to be remains equities. The brightest opportunity for returns over the long-term remains the ownership of high quality businesses.

Musings
 

Thought-provoking piece in HBR I came across this week which suggests that in a distracted world, solitude is now a competitive advantage. “Always remember: Your focus determines your reality.” Jedi Master Qui-Gon Jinn shares this advice with Anakin Skywalker in Star Wars, but in our hyper-distracted work world, it’s advice that we all need to hear. 

Research by the University of London reveals that our IQ drops by five to 15 points when we are multitasking. In his book, Your Brain at Work, David Rock explains that performance can decrease by up to 50% when a person focuses on two mental tasks at once.

Our world is becoming increasingly complex which is having a major impact on our lives especially when it comes to problem solving. Pushed and pulled by X,Y and Z stimulus at any given time it is unclear how we can solve the challenges of our age. The answer may lie in cultivating solitude.

Having the discipline to step back from the noise of the world is essential to staying focused and thus to staying effective.

How can we cultivate solitude? How can we build this skill?

Build periods of solitude into your schedule

Analyze where your time is best spent

Starve your distractions

Don’t be too busy to learn how to be less busy

Create a “stop doing” list

 

Logos LP September Performance

 

September 2017 Return: 2.03%

2017 YTD (September) Return: +15.57%

Trailing Twelve Month Return: +18.71%

CAGR since inception March 26, 2014: +18.06%
 

Thought of the Week

"I’m a “dumb shit” who doesn’t know much relative to what I need to know. Whatever success I’ve had in life has had more to do with my knowing how to deal with my not knowing than anything I know.” - Ray Dalio

Articles and Ideas of Interest
 

• These are the businesses still immune to Amazon. In order of least likely:1) Dollar Stores 2) Auto parts 3) Home improvement 4) Home Furnishing

• Our biggest economic, social and political issue The Two Economies: The Top 40% and the Bottom 60%. Very interesting piece from Ray Dalio suggesting that Average statistics camouflage what is happening in the US economy, which could lead to dangerous miscalculations, most importantly by policy makers. For example, looking at average statistics could lead the Federal Reserve to judge the economy for the average man to be healthier than it really is and to misgauge the most important things that are going on with the economy, labor markets, inflation, capital formation, and productivity, rather than if the Fed were to use more granular statistics.

• Tim O’Reilly: ‘Generosity is the thing that is at the beginning of prosperity’. Tech pioneer and CEO Tim O’Reilly suggests that his industry will fail unless the web giants start putting consumers ahead of shareholders. When questioned about the notion that technology is going to eliminate jobs, Tim counters by suggesting that this will happen only if that’s what we tell it to do. And it is what we’re telling it to do. But on the other hand Marc Bain suggests that now corporations kneel down to us. We’re in the midst of a profound shift in consumer culture, he writes. Corporations were once king, but “influencers” and viral videos—like the one of the United Airlines passenger-dragging incident that shaved $1 billion off the company’s valuation—have shifted the balance of power. A new report examines how US buying behavior will change as a result. Nobel Prize winner Joseph E. Stiglitz writes that America has a huge monopoly problem.

• Robots are eating money managers’ lunch. Rishi Ganti on why obscure assets may be the human investor’s last refuge. Like what? Like scooping up receivables and other claims owed to those in need of immediate cash—a refugee facility waiting for payment on a contract from a charity, for example. Luckily robots still have a lot to learn about being a human trader. 
  
   

• How social media endangers knowledge. The very idea of knowledge itself is in danger. The idea behind Wikipedia—like all encyclopedias before it—has been to collect the entirety of human knowledge. It’s a goal that extends back to the Islamic Golden Age, when numerous scholars—inspired by Muhammad's famous verdict of ‘Seek knowledge, even from China’—set themselves to collecting and documenting all existing information on a wide variety of topics, including translations from Greek, Persian, Syrian, and Indian into Arabic. Social networks, though, have since colonized the web for television’s values. From Facebook to Instagram, the medium refocuses our attention on videos and images, rewarding emotional appeals—‘like’ buttons—over rational ones. Instead of a quest for knowledge, it engages us in an endless zest for instant approval from an audience, for which we are constantly but unconsciously performing.

• Why is everyone so busy? Time poverty is a problem of perception and partly of distribution. The Economist looks into the fact that everybody, everywhere seems to be busy. In the corporate world, a “perennial time-scarcity problem” afflicts executives all over the globe, and the matter has only grown more acute in recent years, say analysts at McKinsey, a consultancy firm. These feelings are especially profound among working parents. As for all those time-saving gizmos, many people grumble that these bits of wizardry chew up far too much of their days, whether they are mouldering in traffic, navigating robotic voice-messaging systems or scything away at e-mail—sometimes all at once.

• Will Canadians survive higher rates? A new poll from Canada’s largest insolvency firm, MNP LTD, shows that 1 in 3 Canadians say that they already feeling the effects of increasing interest rates. Don’t think this is surprising considering well known debt issues. But that 63% of Canadians are either worried about bankruptcy or already feeling the effects of 50bps (to 1%)…feels like something that should be concerning.

Our best wishes for a fulfilling week,  

Logos LP

• Asset Management
• Ideas
• Macro
• Newsletter
• Psychology
• Strategy

Temperament Determines Outcomes

Good Morning,
 

This week U.S. stocks climbed to record highs and Treasuries rallied after a core inflation reading slowed, adding to evidence that economic growth continues apace without stoking price increases. The dollar pared losses.

The three major indexes posted slight weekly gains. The S&P 500 and the Dow recorded their fifth consecutive weekly gains, while the Nasdaq has completed three.

Bonds in Europe gained after a report that the European Central Bank may continue asset purchases for at least nine months after it starts tapering in January. The Stoxx Europe 600 Index climbed, led by steelmakers and miners as most industrial metals gained and crude oil rose back above $51 a barrel.

Excluding food and energy, so-called core prices rose 0.5 percent in September, below an estimate of 0.6 percent. At the same time, a Commerce Department report also released Friday showed U.S. retail sales rose in September by the most in more than two years, as Americans replaced storm-damaged cars and paid higher prices at the gasoline pump. Excluding autos and gas, sales still increased at the second-fastest pace since January.

The inflation data bolstered the view that U.S. inflation below the Federal Reserve’s target may be structural rather than transitory, prompting traders to slightly reduce the odds of another rate increase in December. Could the Fed be ignoring actual inflation data?

Our Take
 

As we’ve suggested in the past, inflation is simply not cooperating but the fundamentals continue to look good. The never-ending crazy going on in Washington simply hasn’t stopped the economic expansion.

The International Monetary Fund, echoing increasingly gloomy sentiment in Washington, has concluded that the Donald Trump administration and Congress probably won't succeed in enacting tax reform or even significant tax cuts. The Republican chairman of the Senate Foreign Relations Committee calls the White House "an adult day care center" and says he fears that the president's reckless bluster may lead us into World War III. The president, meanwhile, says he wants to compare IQ test scores with his secretary of state.

No worries. Investors do not appear to be concerned about any of these things. Earnings season has also gotten off to a good start, with 87 percent of the companies that have reported topping bottom-line expectations. The number of companies currently beating estimates, and the margin by which they are doing so, is running at a clip well above what these same 31 companies have recorded, on average, over the past three years.

Even Buffett thinks that stock valuations make sense with interest rates where they are. You measure laying out money for an asset in relation for what you are going to get back. You get 2.30% on the ten year. Seems fair to say that stocks will do better over the long term. In case you missed it Warren Buffett’s full interview on CNBC.

But what of the concept of Ben Graham's “margin of safety” in this "bull market in everything" environment? The idea that the price paid for an asset (stock, bond, real estate etc.) should allow for human error, bad luck or, indeed, many things going wrong at once.

In a problematic world of trade tariffs, nuclear braggadocio, nationalism and inequality such a concept is more prescient than ever. Rarely have so many asset classes -from stocks, to bonds, to gold, to real estate to bitcoins, to wine, to classic cars- exhibited such a sense of invulnerability. And all at the same time to boot! Listen to the temperature of this market. Listen for the all too familiar refrains of “this time it’s different” as they roll in. Timing markets is a fool’s game, but remaining alert to the concept of “margin of safety” is not. It may ensure survival.  

Musings
 

Many great investors suggest that generating above average investment results necessitates above average temperament.

As warren Buffett has stated: “Success in investing doesn’t correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

Over the last few weeks in particular I’ve observed this on numerous occasions. Individuals with seemingly above average intelligence making poor decision after poor decision, blinded by ego and jealousy. Weakened by insecurity and contempt. Burdened by an inability to move forward after failure. Influenced by “opinions” when they reach “decisions”. Led astray by their own faulty temperaments.

This week I came across an interesting piece in the Economist that made me think deeply about temperament. Management gurus have poured over a related topic endlessly: is a knack for entrepreneurship something that you are born with, or something that can be taught? In a break with those gurus’ traditions, a group of economists and researchers from the World Bank, the National University of Singapore and Leuphana University in Germany decided that rather than simply concoct a theory, they would conduct a controlled experiment.

Moreover, instead of choosing subjects from the boardrooms of powerful corporations or among the latest crop of young entrepreneurs in Silicon Valley, Francisco Campos and his fellow researchers chose to monitor 1,500 people running small businesses in Togo in West Africa.

As they reported in Science, the researchers split the businesses into three groups of 500. One group served as the control. Another received a conventional business training in subjects such as accounting and financial management, marketing and human resources. They were also given tips on how to formalise a business. The syllabus came from a course called Business Edge, developed by the International Finance Corporation.

The final group was given a course inspired by psychological research, designed to teach personal initiative—things like setting goals, dealing with feedback and persistence in the face of setbacks, all of which are thought to be useful traits in a business owner. The researchers then followed their subjects’ fortunes for the next two-and-a-half years (the experiment began in 2014).

An earlier, smaller trial in Uganda had suggested that the psychological training was likely to work well. It did: monthly sales rose by 17% compared with the control group, while profits were up by 30%. It also boosted innovation: recipients came up with more new products than the control group. That suggests that entrepreneurship, or at least some mental habits useful for it, can indeed be taught. More surprising was how poorly the conventional training performed: as far as the researchers could tell, it had no effect at all. Temperament was the determinate factor. Superior mental habits lead to outperformance.

Focusing on the theme of temperament for our own decision making at Logos LP we’ve made a conscious effort to record instances in which poor temperament has lead to poor outcomes. A record of instances when either we or those around us have let poor temperament wreak havoc upon output. The journal gets re-visited on a monthly basis in order to develop an awareness of trends or patterns. Action items are them developed to alter behaviour.

For the next six months try and keep track of all of your major decisions and thoughts in a journal. This will help to build an awareness of the way your decisions are made and their associated outcomes. What you may find is that you develop more control over yourself and your decision making. Education comes from within; you get it by personal struggle, effort and thought. Live in the process…

Thought of the Week

"If you do not conquer self, you will be conquered by self.” - Napoleon Hill

Articles and Ideas of Interest

• There’s nothing old about this bull market. Claims that it’s the second-longest ever don’t hold up. Barry Ritholtz makes a convincing case that the current bull market is only four and a half years years old. The best starting date of a new bull market is when the prior bull-market highs are eclipsed. That is how we get a date like 1982 as the start of the last secular long-term bull market. And it is also how we get to March 2013 as the start date of this bull market, when the S&P 500 topped the earlier high of 1,565 set in October 2007. Could we just be approaching the middle of the run?

• Debt keeps rising and nothing bad happens. Economists are stumped. As the Republicans prepare for their big tax reform push, the issue of deficits and debt is once more coming to the fore. Many economists realize that tax cuts, especially income tax cuts, tend to increase deficits, which over time lead to increases in the national debt. The GOP plan, if adopted, probably would pump up both deficits and debt. So the question is: Is more debt good, bad or does it even matter? But if it’s bad, how serious a problem is it?

• Ideas aren’t running out, but they are getting more expensive to find. The rate of productivity growth in advanced economies has been falling. Optimists hope for a fourth industrial revolution, while pessimists lament that most potential productivity growth has already occurred. This must read piece argues that data on the research effort across all industries shows the costs of extracting ideas have increased sharply over time. This suggests that unless research inputs are continuously raised, economic growth will continue to slow in advanced nations.

• Bitcoin resumed its climb. After tearing past $5,000 on Thursday, the cryptocurrency soared above $5,800 on Friday. JPMorgan CEO Jamie Dimon, who told investors last month that bitcoin was a bubble “worse than tulip bulbs,” said Thursday he doesn’t want to talk about it anymore.  But on Friday, Dimon responded to a question about bitcoin by saying if people are "stupid enough to buy it," they will pay the price for it in the future. The craze rolls on with hedge funds flipping ICOs and receiving preferential discounts and terms. Here’s the deal with an ICO: You can buy entry in a computer ledger issued by a start-up company on the basis on an unregulated prospectus. It is called an ICO (“Initial Coin Offering”) but though the ledger entry is called a coin, you cannot spend it at any shop. And whereas the use of the term ICO makes it sound like an IPO (initial public offering), the process whereby a firm lists on the stockmarket, coin ownership does not necessarily get you equity in the company concerned. The Economist points out that this is the kind of bargain that would only appeal to people who reply to emails from Nigerian princes offering to transfer millions to their accounts. There is a serious side to the craze as there was with the dotcom boom. The technology that underpins digital currencies- the blockchain- is an important development. The problem is that it is not easy to draw a line between financial innovation and reckless speculation.

  
   

• Dating apps are reshaping society. There’s been a big uptick in interracial and same-sex partners who find each other online. Interesting research presented in the MIT Tech Review which tends to support that there is some evidence that married couples who meet online have lower rates of marital breakup than those who meet traditionally. That has the potential to significantly benefit society. And it’s exactly what new data models predicts. Perhaps online dating isn’t all bad. Important to think about as Berkshire Hathaway CEO Warren Buffett recently stated that making money means nothing without having another person, such as a spouse, to share the wealth with. Who you marry, which is the ultimate partnership, is enormously important in determining the happiness in your life and your success. A study published by Carnegie Mellon University found that people with supportive spouses are "more likely to give themselves the chance to succeed."

• The loneliness epidemic. This may not surprise you. Chances are, you or someone you know has been struggling with loneliness. And that can be a serious problem. Loneliness and weak social connections are associated with a reduction in lifespan similar to that caused by smoking 15 cigarettes a day and even greater than that associated with obesity. But we haven’t focused nearly as much effort on strengthening connections between people as we have on curbing tobacco use or obesity. Loneliness is also associated with a greater risk of cardiovascular disease, dementia, depression, and anxiety. At work, loneliness reduces task performance, limits creativity, and impairs other aspects of executive function such as reasoning and decision making. For our health and our work, it is imperative that we address the loneliness epidemic quickly.

Our best wishes for a fulfilling week, 
 

Logos LP

• Asset Management 4
• Ideas 19
• Macro 9
• Newsletter 87
• Psychology 4
• Strategy 7

Our Inner Scorecard

Good Morning,
 

The S&P 500 closed at a record Friday, helped by gains in technology stocks on the last trading day of the quarter. The tech-heavy Nasdaq composite rose more than half a percent to post its 50th record close for this year. The Dow transports and small-cap Russell 2000 also hit record highs.

The Dow posted quarterly gains of 4.9 percent its eighth straight quarter of gains for the first time since 1997. The S&P 500 rose nearly 4 percent in the quarter, also its eighth straight quarter of gains. The Nasdaq composite gained almost 5.8 percent for the quarter, its fifth straight positive quarter since 2015.

Our Take
 

Strength begets strength. Virtually every asset class is moving up. New record highs are being made in virtually every corner of the market. We suggest remaining cautious as positive sentiment is building.

Of note this week this week was the announcement surrounding Trump’s tax reform. As expected it was thin on details and appeared to favor the rich. On a first read it is likely to increase the U.S. budget deficit but beyond that, its impact is still unclear. Excellent piece in the Washington Post from Bruce Bartlett who was a domestic policy advisor to President Ronald Reagan (Mr. Tax cut) questioning whether tax cuts stimulate growth. Tax cuts are still the GOP’s go-to solution for nearly every economic problem and extravagant claims are made for any proposed tax cut. Bruce looks into whether they hold water.

Musings
 

Over the last few weeks I’ve been busy setting up a new venture yet I finally found some time to get to a staple in the value investor’s library: The Education of A Value Investor by Guy Spier. What a breath of fresh air in my increasingly busy world.

What was so refreshing about the book was that it wasn’t what I’d been expecting. As the esteemed manager of Aquamarine Fund I figured Guy would spend a considerable amount of time on his stock selection approach yet the book offers something much more valuable.

This is a book about life. About Guy’s life. Guy’s education. Guy’s path and Guy’s alone. This point teases out its key piece of wisdom. We spend so much time trying to compete with others. Looking for their acceptance and adoration failing to realize that true success in life, true fulfillment can only occur through the acceptance of self.

Once we shift from orienting ourselves towards an outer scorecard towards an inner scorecard we can become aligned with ourselves. Authenticity is a powerful force. Guy’s story is the story of this shift. It is the story of the magical success one can have when one becomes aware of one’s own values and perspectives.

This message really spoke to me at this particular point in time as I’m starting to realize that the outer journey we start at birth; going to school, learning how to build friendships, learning how to navigate relationships, deciding what to take in school, getting our first jobs, navigating heart aches and let downs is only the starting point. The real growth occurs when we are able to drive ourselves toward the inner journey of spiritual development and self-awareness.

In our early years we are often driven by the outer scorecard - that need for public approval and recognition, which can easily lead us in the wrong direction. Come to think of it, many of the mistakes (perhaps all of them) I’ve made in my life have occurred because of my pursuit of this outer scorecard.

What I’ve realized and what Guy so eloquently posits is that the inner journey is not only more fulfilling but is also a key to becoming a better investor. If we don’t understand our inner landscapes - including our fears, insecurities, desires, biases, and attitude to money- we’re likely to get run over by reality. As such it is important to look within:

Are we the same people on the outside as we are on the inside? Are we pretending to be something we aren’t? Are we building a rock-solid understanding of who we are and how we want to live? Are we building environments in which we can operate rationally and calmly? Do our friends support and stimulate the authentic version of ourselves? Why are we building wealth?

The outer journey may bring us to money, professional advancement or social cachet yet the inner journey, the one we also start at birth is the one that puts us on a path toward something less tangible yet more valuable. The inner journey is the path to becoming the best version of ourselves that we can be, and this appears to me to be the only true path in life. It leads us closer to finding the answers to the real questions that matter: What is my wealth for? What gives my life meaning? And how can I use my gifts to help others?

Logos LP in the Media

Forbes has done a special feature on Canadian Investment Opportunities and we offer one of our ideas.

Thought of the Week

"This became my own goal: not to be Warren Buffett, but to become a more authentic version of myself. As he had taught me, the path to true success is through authenticity.”-Guy Spier

Articles and Ideas of Interest

• Successful investing isn’t easy. They say a picture is worth a thousand words, but in investing it is worth so much more. Check out this great collection of extreme charts as a helpful reminder that there is no such thing as "can't", "won't," or "has to" in markets. The market doesn't have to do anything, and certainly not what you think it "should" do. The market doesn't abide by any hard and fast rules; it does what it wants to do and when it wants to do it. That's what makes it so hard and at the same time so interesting.

• The plastic fantasy that’s propping up the oil markets. Kenya's mountains of plastic bags might not seem central to oil's grand narrative, but they are. Last week, the East African country banned almost everything about them: making them, importing them, selling them, using them, with penalties of up to four years in jail or fines up to $38,000. This type of prohibition carries a warning for an oil business that's depending on petrochemicals -- and the plastics made from them -- to pick up the slack when we all switch from gas guzzlers to electric cars. Petrochemicals are seen as the strongest source of global oil demand growth in 2015-2040. On the current track, by 2050 our oceans could contain more plastics than fish (by weight), according to a 2016 report by the World Economic Forum and the Ellen MacArthur Foundation. But, as Kenya shows, the days of single-use plastic packaging may already be numbered. And with this stuff making up about a quarter of all the plastic used, that will have a profound impact on the petrochemicals industry. Let’s not forget that there is now a Great Pacific Garbage Patch that is estimated to be about the size of Texas while a new report (dug into by National Geographic) has shown that extreme weather, made worse by climate change, along with the health impacts of burning fossil fuels, has cost the U.S. economy at least $240 billion a year over the past ten years...Can the oil industry really avoid disruption?

• Brace yourself: the most disruptive phase of globalization is just beginning. Great piece in Quartz covering Richard Baldwin’s new book The Great Convergence: Information Technology and the New Globalization. Baldwin argues that globalization takes shape in three distinct stages: the ability to move goods, then ideas, and finally people. Since the early 19th century, the cost of the first two has fallen dramatically, spurring the surge in international trade that is now a feature of the modern global economy. A better understanding of globalization is more urgent than ever, Baldwin says, because the third and most disruptive phrase is still to come. Technology will bring globalization to the people-centric service sector, upending far more jobs in rich countries than the decline in manufacturing has in recent decades. Baldwin argues that we shouldn’t try and protect jobs; we should protect workers. It’s really a fool’s errand to struggle with “protecting jobs” because after a year or two those jobs will still go. Governments should instead focus on comprehensive retraining, help with housing, help with relocation.

• Some market myths hurt investors. Nice piece by Ben Carlson looking over some of the rules of thumb and aphorisms that investors accept without investigating their merits based on the historical evidence: Low volume rallies spell trouble for stocks, There is tons of cash on the sidelines, Margin debt at all-time highs mean euphoria in the markets, Something’s gotta give between stocks and bonds, Bonds always lose money when interest rates rise.

• Do tax cuts really equal growth? Excellent piece in the Washington Post from Bruce Bartlett who was a domestic policy advisor to President Ronald Reagan (Mr. Tax cut). Tax are still the GOP’s go-to solution for nearly every economic problem. Extravagant claims are made for any proposed tax cut. Do they hold water?

• The shorter your sleep, the shorter your life: the new sleep science. Leading neuroscientist Matthew Walker on why sleep deprivation is increasing our risk of cancer, heart attack and Alzheimer’s and what you can do about it. We are in the midst of a “catastrophic sleep-loss epidemic”, the consequences of which are far graver than any of us could imagine. More than 20 large scale epidemiological studies all report the same clear relationship: the shorter your sleep, the shorter your life. To take just one example, adults aged 45 years or older who sleep less than six hours a night are 200% more likely to have a heart attack or stroke in their lifetime, as compared with those sleeping seven or eight hours a night (part of the reason for this has to do with blood pressure: even just one night of modest sleep reduction will speed the rate of a person’s heart, hour upon hour, and significantly increase their blood pressure).

• Education isn’t the key to a good income. The Atlantic presents a growing body of research which debunks the idea that school quality is the main determinant of economic mobility.

• The secret to Germany’s happiness and success: Its values are the opposite of Silicon Valley’s. To Germans, caution and frugality are signifiers of great moral character. Moreover, for Germans, a good work-life balance does not involve unlimited massages and free meals on the corporate campus to encourage 90-hour weeks. Germans not only work 35 hours a week on average—they’re the kind of people who might decide to commute by swimming, simply because it brings them joy.

• Take some time to enjoy the scenery. Check out The Atlantic’s coverage of the 2017 National Geographic Nature Photographer of the Year Contest.

Our best wishes for a fulfilling week, 

Logos LP

• Asset Management 4
• Ideas 19
• Macro 9
• Newsletter 87
• Psychology 4
• Strategy 7

Our Institutions Are Breaking

Good Morning,
 

Last week the S&P 500 Index pushed past 2,500 for the first time, notching its third round-number milestone of the year as the bull market in U.S. equities rages on. With a gain of 10.4% through the end of August, this year ranks as the fourth best start to a year in the last ten years, behind 2013 (+14.5%), 2009 (+13.0%) and 2012 (+11.8%).

The benchmark gained 0.2 percent to 2,500.23 last Friday, capping its biggest weekly advance since January, as technology shares rebounded and banks climbed with Treasury yields. Up 12 percent since January, the S&P 500 is on course for its best annual gain in four years.

Equities broke out of a month long trading range after the worst-case scenarios from Hurricane Irma and North Korea failed to materialize. As geopolitical fears subsided, investors shifted focus back to fundamentals, where economic growth remains stable and corporate earnings are expected to increase every year through at least 2019.

Another piece of good news last week: America's middle class had its highest earning year ever in 2016, the U.S. Census Bureau reported Tuesday. Median household income in America was $59,039 last year, surpassing the previous high of $58,655 set in 1999, the Census Bureau said.

Our Take
 

Strength is appearing to beget strength. In each of those three years above (2013, 2009, 2012) where the S&P was up significantly in the first eight months of the year, the remainder of the year saw further upside with a median gain of 9.3%.

In addition to those three years, the last four months of each calendar year has been strong throughout the entire bull market. The S&P 500 has been up every time for a median gain of 3.4%.

On a total return basis, the the index was up an impressive 16.2% over last year through the end of August. The historical average is 11.7% going back to 1928. Can things continue?

The trend may be up but either way we subscribe to a more reserved view well described in a note entitled “Yet Again?” released last week by Howard Marks. In this memo, which served as a follow up to his other recent memo entitled “There They Go Again” released on July 26, Marks suggests that investors are no longer being offered value in the market at cheap prices and thus should pull back and be less aggressive. Marks suggested that the market is not currently a “nonsensical bubble” but rather is simply high and therefore risky.

Risk may have increased as prices have risen yet the interesting question then is: “So what should we do?” At our 2017 high this year our fund was up roughly 25%. We have since come off this high and are in the process of re-calibrating our expectations in what we believe to be a more “low-return” environment. What does this mean?

As Marks reminds us in his memo the options are limited:

1. Invest as you always have and expect your historic returns.

2. Invest as you always have and settle for today’s low returns.

3. Reduce risk to prepare for a correction and accept still-lower returns.

4. Go to cash at a near-zero return and wait for a better environment.

5. Increase risk in pursuit of higher returns.

6. Put more into special niches and special investment managers.

#1 would make no sense.

#2 is difficult.

#3 makes sense if you think a correction is coming but could cost you.

#4 is tough as zero-returns are rarely ever acceptable.

#5 is deceptive as high risk does not assure higher returns. It means accepting greater uncertainty with the goal of higher returns and the possibility of substantially lower (or negative) returns.

#6 is good as they can offer higher returns without proportionally more risk. That is if they can be identified.  

Like Marks, we believe that none of these options is perfect but that there are no others. Thus, as we re-set expectations in an environment promising lower returns we will do the things we have always done remaining largely fully invested and accept that returns will be lower than they traditionally have been (#2). While we do what we have always done we will employ more caution than usual especially with regards to price (#3) and we will work diligently to find special opportunities that lie “off the beaten track” (#6).

Musings
 

I attended a conference this week in Toronto called Elevate TO. The purpose of the conference was to showcase the City as a growing hotbed of innovation. The presenters ranged from local politicians, to start-up founders to Canadian technology luminaries. One talk by Salim Ismail the technology entrepreneur and best-selling author of Exponential Organizations really stood out. (for a youtube video see here)

The crux of his talk is that society needs to shift from linear thinking to exponential thinking in order to adapt to a world which is changing faster than our institutions and minds can keep pace with.

But what is linear bias? We’ve seen consumers and companies fall victim to linear bias in numerous real-world scenarios. Although there are many such examples, a nice one relates to intangibles like consumer attitudes.

In a recent HBR article the author suggests looks at consumers and sustainability. We frequently hear executives complain that while people say they care about the environment, they are not willing to pay extra for ecofriendly products. Quantitative analyses bear this out. A survey by the National Geographic Society and GlobeScan finds that, across 18 countries, concerns about environmental problems have increased markedly over time, but consumer behavior has changed much more slowly. While nearly all consumers surveyed agree that food production and consumption should be more sustainable, few of them alter their habits to support that goal.

What’s going on? It turns out that the relationship between what consumers say they care about and their actions is often highly nonlinear. But managers often believe that classic quantitative tools, like surveys using 1-to-5 scales of importance, will predict behavior in a linear fashion. In reality, research shows little or no behavioral difference between consumers who, on a five-point scale, give their environmental concern the lowest rating, 1, and consumers who rate it a 4. But the difference between 4s and 5s is huge. Behavior maps to attitudes on a curve, not a straight line.

Companies typically fail to account for this pattern—in part because they focus on averages. Averages mask nonlinearity and lead to prediction errors. For example, suppose a firm did a sustainability survey among two of its target segments. All consumers in one segment rate their concern about the environment a 4, while 50% of consumers in the other segment rate it a 3 and 50% rate it a 5. The average level of concern is the same for the two segments, but people in the second segment are overall much more likely to buy green products. That’s because a customer scoring 5 is much more likely to make environmental choices than a customer scoring 4, whereas a customer scoring 4 is not more likely to than a customer scoring 3.

This illustration does a great job to outline the problem. The current climate of rapid technological development and change is rooted in exponential thinking. If you look at the biggest problems in the word such as the climate change, economic growth, pandemics and sociopolitical upheaval etc. they are rooted in exponential accelerators and factors. The problem is that many of us (including our leaders) don’t understand this phenomenon and this is the fundamental cognitive gap that we are facing. This gap is causing immense stress as evidenced by the increasing failure of our institutions (Occupy Wallstreet, the Arab Spring, the election of Donald Trump, the surge in nationalism, racism and authoritarianism) which were created in a fundamentally linear world.

When you have an information based environment it goes into an exponential growth path and it starts doubling in price performance every 1 to 2 years. Now we have whole industries and livelihoods like music, newspapers, retail, manufacturing etc. caught up in this vortex of exponential creative destruction as our world is not set up for this.

When you think about all the mechanisms we use to run the world: our social structure, our civics, our politics, our legal systems, our patent systems, our monetary policy systems, our financial systems, our healthcare systems, our education systems they are all geared for the linear world of 100 or 200 years ago when information was scarce. Lets remember that marriage was invented about 15 000 years ago when lifespans were about 25. You grew up, had kids and you died. Was it really designed to last 50-60 years? What happens when lifespans hit 120-150 years?

These mechanisms are all breaking or are already broken. We simply aren’t set up for the exponential world of today and certainly not for the world of tomorrow.

Most of the changes that set this exponential world in motion happened about 25 years ago with the advent of the internet yet now we have moved into the world of 3D printing, AR/VR, synthetic biology, blockchain technologies, advanced robotics and artificial intelligence.

We have a forcing problem with technology. Moore’s law has been doubling computing power for over 60 years and now we have over 12 technologies operating at that same pace: neuroscience, drones, biotech, and even solar cells are doubling in their price performance every 22 months and have been for over 40 years. At this pace we will hit 100% world energy supply that can be delivered by solar in less than 2 decades...Energy that has been scarce for most of human history is about to become abundant...

These exponential and thus highly disruptive technologies will only increase the stress that currently characterizes our world absent the ability of our leaders and I would argue ourselves to learn how to navigate these technologies and update the mechanisms which run our world grounding them in exponential thinking.

The problem is that if you attempt disruptive innovation in any organization or perhaps mind, its immune system will attack you. All of our organizations and mechanisms we use to run the world are built to resist change and withstand risk. Try and change education: teachers unions attack, try to update transportation:  taxi drivers attack, try and marry/date someone outside of your accepted circle: your parents or friends attack, try and actually reform the French economy: the unions attack and your approval ratings tank etc.

We’ve got to solve our immune system problem and the future will belong to those people, those leaders, those businesses and those countries that can do so. Can we scale as fast as technology?

Logos LP August Performance

August 2017 Return: -4.55%

2017 YTD (July) Return: +13.27%

Trailing Twelve Month Return: +13.01%

CAGR since inception: +17.84%

Logos LP in the Media

ValueWalk has done a special feature on us and some of our best ideas that will be released this month. For a teaser please click here.

Thought of the Week

"I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.” -Jimmy Dean

Articles and Ideas of Interest

• Robots and AI may not take our jobs after all. Liz Ann Sonders posted the graphic below showing how e commerce has created more jobs that it has taken away.

• Furthermore, automation commonly creates more, and better-paying, jobs than it destroys. Greg Ip for the WSJ explains. Stop pretending you really know what AI is and read this instead.

• What goes up must come down for cryptocurrencies. The summer of bitcoin looks to be ending badly. The biggest cryptocurrency dropped as much as 40 percent since reaching a record high of $4,921 on Sept. 1, cutting about $20 billion in market value. The collapse extended to as much as 30 percent this week since China began sending stronger signals of a clampdown on Sept. 8, making this the biggest five-day decline since January 2015, when it traded at around $200. JPMorgan Chase CEO Jamie Dimon took a shot at bitcoin, saying the cryptocurrency "is a fraud" but can you really blame him given Bitcoin’s status as “the most crowded investment in the world”? Don’t believe the hype about the tremendous returns on “initial coin offerings”. Great piece on ICOs and the promise and perils of global capital markets for everyone. Canada also poured cold water on ICOs in a notice last week, in which regulators there warned that the "coins" in "Initial Coin Offerings"—a popular new way for companies to raise money using cryptocurrency—are likely to be securities. What’s interesting is that with the changing of the tides it hasn’t just been bitcoin tanking. Virtually all cryptocurrencies have taken a beating. Nevertheless, the coins already appear to be recovering...

• In world of supposed bubbles here’s what investors fear most. From Alan Greenspan and the current Federal Reserve staff to fund managers hoarding cash, people feel queasy about asset prices. Euro high-yield debt is trading in line with U.S. Treasuries for the first time ever. Tajikistan is selling Eurobonds as yields on the junkiest emerging markets drop below 6 percent. An exchange-traded fund for betting on low volatility has more than doubled in size this year. And let’s not get started on the bitcoin rally.

• Making money during the apocalypse. Bryan Menegus reports for Gizmodo from a conference whose attendees envisage a future where capitalism is under siege. “The machinery of freedom” apparently will include floating sea colonies, special economic zones, and stateless cryptocurrencies. And it’s up to these elite techno-libertarian attendees to ensure that future happens—whether it benefits the rest of the world or not.

• How Warren Buffett broke American Capitalism. Provocative piece in the FT time suggesting that the investment style of Warren Buffett may have had disastrous effects on the economy. Are “high moats” not simply “monopolies”? Can an investment philosophy have negative effects on an economy?

• Mind control isn’t sci-fi anymore. 2017 has been a coming-out year for the Brain-Machine Interface (BMI), a technology that attempts to channel the mysterious contents of the two-and-a-half-pound glop inside our skulls to the machines that are increasingly central to our existence. The idea has been popped out of science fiction and into venture capital circles faster than the speed of a signal moving through a neuron. Facebook, Elon Musk, and other richly funded contenders, such as former Braintree founder Bryan Johnson, have talked seriously about silicon implants that would not only merge us with our computers, but also supercharge our intelligence.

• The healing power of nature. The idea that immersing yourself in forests and nature has a healing effect is far more than just folk wisdom. Blood tests revealed a host of protective physiological factors released at a higher level after forest, but not urban, walks. Among those hormones and molecules, a research team at Japan’s Nippon Medical School ticks off dehydroepiandrosterone which helps to protect against heart disease, obesity and diabetes, as well as adiponectin, which helps to guard against atherosclerosis. In other research, the team found elevated levels of the immune system’s natural killer cells, known to have anti-cancer and anti-viral effects. Meanwhile, research from China found that those walking in nature had reduced blood levels of inflammatory cytokines, a risk factor for immune illness, and research from Japan’s Hokkaido University School of Medicine found that shinrin-yoku lowered blood glucose levels associated with obesity and diabetes. GET OUT THERE.

Our best wishes for a fulfilling week, 
 

Logos LP

• Asset Management 4
• Ideas 19
• Macro 9
• Newsletter 87
• Psychology 4
• Strategy 7

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

Musings

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

• Asset Management 4
• Ideas 19
• Macro 9
• Newsletter 87
• Psychology 4
• Strategy 7