Tilting the Odds in Our Favor

Good Morning,
 

Stocks gyrated between gains and losses Friday to end a volatile week on Wall Street, as investors appeared content to consolidate positions after worries over Evergrande and a slowing global economy prompted traders to pull $28.6 billion from U.S. equity funds over the first three days of the week, the most since February 2018. But stocks then staged a two-day rally after the Federal Reserve signaled no removal of its easy money policy, at least for now. 

Tech stocks trailed Friday after a crackdown on bitcoin by China overnight hurt sentiment in the sector, but financial stocks rose as the 10-year U.S. Treasury yield reached its highest since July. "What is clear is that inflation is likely to be the determining factor for liftoff and the pace of rate hikes," Deutsche Bank Chief U.S. Economist Matthew Luzzetti wrote in a note. "If inflation is at or below the Fed's current forecast next year of 2.3% core PCE, liftoff is likely to come in 2023, consistent with our view. However, if inflation proves to be higher with inflation expectations continuing to rise, the first rate increase could well migrate into 2022."

Meanwhile Nike confirmed investor concerns about the pandemic wreaking havoc with supply chains and raising costs for companies, especially multinationals. Nike shares fell 6.2% after the sneaker giant lowered its fiscal 2022 outlook because of a prolonged production shutdown in Vietnam, labor shortages and lengthy transit times.

Our Take 

Skepticism on Wall Street is widespread with most of the major investment firms calling for a 10-20% market correction. Furthermore, the popular narrative for the rest of the year appears to be falling Covid cases globally and economic acceleration favouring cyclical stocks in the energy, financial, industrial and travel sectors. For us the data is noisy. Economic acceleration could very well occur but we also believe as we have stated in the past, that there are equally compelling reasons to infer significant economic deceleration. 

At present we believe policy error in the form of excessive government intervention in the economy to be the largest risk to growth estimates. Several countries closely regulate industries, labor, and markets, set monetary policy, and provide subsidies to help boost their economies yet many countries are veering towards giving the government a level of control that would allow it to steer the economy and industry along a path of its exact choosing channeling additional private resources into strengthening state power.

The big risk for these countries is that the push winds up suppressing much of the entrepreneurial energy and incentives that have powered their boom, years of innovation and improving standards of living.

From a market standpoint, we continue to believe that as pandemic-era programs to bolster the economy are lifted there will be an easing of market conditions which favor the indexes and tech megacaps. The era of narrow stock leadership -- powered by the explosive growth in passive funds -- may be beginning to unwind. Less aggressive monetary easing ahead should expand the number of market winners favoring active management. PanAgora Asset Management’s research suggests that a cap-weighted strategy thrives as concentration rises, but delivers “significantly” lower returns when the macro climate shifts in favor of higher rates. 

The removal of policy supports could mean the fundamentals of individual companies come to the fore replacing what has been a wall of stimulus money hitting the indexes. We see much opportunity for outperformance ahead...


 Musings
 

Over the past month, as I’ve watched politicians worldwide flounder around on everything from public health, housing, the economy, taxation to capitalism itself I’ve found myself thinking more about my framework for viewing life and investing. The future is becoming more and more uncertain as the world is changing rapidly while those in power appear less and less capable of leading with grace and conviction. It is possible we are at the dawn of the period of greatest change for the past few centuries and the range of potential outcomes when pondering the coming decade or two spans from “dystopia to Renaissance”. 

In Canada and across the border in the USA, our democracies appear to be in the hands of statists who believe that government justifiably holds near-absolute power. During the recent Canadian election and the ongoing Democrat proposed 3.5T spending discussions there is little sense that there are or should be limits on the power of democratically elected governments. Such limits still exist in constitutional form, but they are being overwhelmed in spirit if not in law. A tax on wealth and capital? Previously unimaginable spending and deficits? Restrictions on the right to buy and sell property? Restrictions on speech, employment, movement and association based on “woke” ideological purity? Break up corporations? State led discriminatory attacks on certain corporations and individuals based on their ability to make profits? No worries. Big brother knows best and more government intervention and control is warranted. 

The overall ideological thread today has been that governments have the power and the right to do whatever they want — a trend that COVID-19 appears to have entrenched globally. 

Authoritarianism is on the rise around the world with governments becoming less transparent and losing the people's trust. The latest report 'Freedom in the World 2021' by Freedom House is sobering. The report, which is an annual country-by-country assessment of political rights and civil liberties, downgraded the freedom scores of 73 countries, representing 75 per cent of the global population. Democracy has eroded in the United States as well, the report noted.
 

While still considered 'free', the United States has experienced further democratic decline. The US score in 'Freedom in the World' has dropped by 11 points over the past decade, and fell by three points in 2020 alone. 

How much of the above is in our control? The rules of the game keep shifting as the state increasingly imposes its will on markets, society and culture. Watching this distressing reality unfold, largely out of my control, has prompted me to think more deeply about my framework for viewing life and investing. 

As a starting point, William Green in his fantastic new book suggests that it’s helpful to view investing and life as games in which we must consciously and consistently seek to maximize our odds of success. The rules are slippery and the outcomes unpredictable yet there are intelligent ways to play as well as stupid ones. 

How can we avoid swimming upstream and instead be carried with the current? How do we tilt the odds in our favor regardless of the environment or “playing field”? 

When it comes to investing, much ink has been spilt on this. Without diving too deeply we could distill the common “get an edge” formula into the following principles:

Be patient and selective exploiting neglected and misunderstood market niches. 

Say no to almost everything. 

Exploit the market’s bipolar mood swings. 

Buy companies at a discount to their intrinsic value. 

Stay within your circle of competence. 

Filter out the noise, keep things simple and avoid anything too complex. 

Make a small number of bets with minimal downside and high upside. 

Control your emotions and be patient. 

Simple but not always easy to follow. But my goal here isn’t to review the core principles that most investors likely already know, or should know. 

Instead, faced with the increasingly frustrating and downright depressing global macro political environment I tried to think about the times in my investing career I was best able to follow the above principles. 

What I found was that essentially all of the moments I had achieved some sort of “high performance” or “success” occurred in periods of time in my life in which I was joyous. Periods of time when I was particularly happy.  

Interestingly, perhaps the most consistent way we can maximize our odds of success is adopting an optimistic and positive attitude. Shawn Achor in his fascinating book “The Happiness Advantage” explains that “waiting to be happy limits our brain’s potential for success, whereas cultivating positive brains makes us more motivated, efficient, resilient, creative, and productive, which drives performance upward.”

New research in psychology and neuroscience demonstrates that we become more successful when we are happier and more positive. In his book, Achor outlines that: “doctors put in a positive mood before making a diagnosis show almost three times more intelligence and creativity than doctors in a neutral state, and they make accurate diagnoses 19 percent faster. Optimistic salespeople outsell their pessimistic counterparts by 56 percent. Students primed to feel happy before taking math achievement tests far outperform their neutral peers.” 

Unfortunately, for most of us, we are conditioned from birth to believe that once we become successful then we will be happy. Success is conceptualized as a necessary condition for happiness. If we get the promotion/raise/car/return [insert success/external validation], we will be happy. But with each victory the goals shift and the happiness gets pushed further out. 

Instead, in the face of an increasingly precarious future including its associated “FUD: Fear, Uncertainty and Doubt” I think that focusing on happiness as a precursor to success rather than simply its result is game changing. This kind of relationship with happiness is the ultimate way we can tilt the odds in our favor in investing and perhaps more importantly in life. 

Anytime you get a truth that much of humanity doesn’t understand, that’s a large competitive advantage. Intelligent people are easily seduced by complexity while underestimating the importance of simple ideas that carry enormous weight. When you consistently apply a powerful idea such as the happiness advantage with thoughtful diligence, the effects may astonish you...

Charts of the Month

According to the Fed's Z.1 report, U.S. Household net worth rose at a solid 18.4% rate in Q2 to $142 Trillion, after gains of 16.7% in Q1 and 28.5% in Q4 '20. The "Wealth Effect" is one of the most important statistics we can use to measure how American households are faring. This measurement leads to the "feel good" effect that adds to the confidence to go out and spend. It is comical that this report never makes a headline. Then again the popular rhetoric is still concentrating on how BAD things are out there. The data on consumers doesn’t seem to support that outlook...

Men are falling behind remarkably fast, abandoning higher education in such numbers that they now trail female college students by record numbers. No one is talking about it.

Logos LP August 2021 Performance

August 2021 Return: 10.23%

2021 YTD (August) Return: 18.26%

Trailing Twelve Month Return: 57.07%

Compound Annual Growth Rate (CAGR) since inception March 26, 2014: 25.71%

 
Thought of the Month

“The very purpose of religion is to control yourself, not to criticize others. Rather, we must criticize ourselves. How much am I doing about my anger? About my attachment, about my hatred, about my pride, my jealousy? These are the things that we must check in daily life.” -Dalai Lama.

Articles and Ideas of Interest

• ESG is inflationary. As the global economy rebounds, the likelihood of inflation has become the dominant economic story. You can’t watch the financial news for long without hearing about inflation. At the same time, environmental, social, and governance (ESG) initiatives continue on an inexorable march to greater public perception. However, despite both issues occupying ever more column inches, one consideration has been underexplored; ESG will add to inflationary pressures. TwentyFour Asset Management suggests that yes, ESG is a new source of inflation that was not so present in the previous cycle and cannot be overlooked when forming a view on this cycle’s inflation outlook. How willing will consumers be to shoulder such rapidly increasing costs? There's arguably a point at which a preponderance of inflationary pressures may backfire, with people suddenly demanding governments do something (anything!) to ensure access to cheaper energy (never mind whether it's dirty or not)...Britain looks set to bump up against this reality as some customers are facing a 50% increase in their energy bills…
   

• Replicating private equity with liquid public securities. According to a Harvard Business School study, it is possible to replicate private equity returns with liquid public securities. “A passive portfolio of small, low EBITDA (earnings before interest, taxes, depreciation, and amortization – a commonly used measure of cash flow) multiple stocks with modest amounts of leverage and hold-to-maturity accounting of net asset value produces an unconditional return distribution that is highly consistent with that of the pre-fee aggregate private equity index.” Accelerate in a fascinating report believes that Harvard has it right, despite claims from private equity executives insisting otherwise.

• Lie Flat’ if you want, but be ready to pay the price. ​​The new “lie flat” social protest movement seems to be catching on. It started among overworked Chinese factory workers burned out from grueling 12-hour, six-day work weeks, and the unrelenting pressure from the government and society to climb the economic ladder. So some Chinese millennials formed an underground movement to opt out of work and the pressures of society. Never ones to miss a chance to cry “hardship,” upper-middle-class, well-educated young Americans are also getting in on the action, claiming they, too, are burned out and quitting their jobs to do nothing. What this trend will mean for China is unclear, but Allison Schrager suggests that Americans who choose to lay down in lieu of work may end up worse off than they think.
  
   

• The ‘melancholic joy’ of living in our brutal, beautiful world. Brian Treanor writes that it’s a challenging time to be an optimist. Climate change is widespread, rapid and intensifying. The threat of nuclear war is more complex and unpredictable than ever. Authoritarianism is resurgent. And these dangers were present even before we were beset by a historic pandemic. The data clearly show that based on certain objective measures of wellbeing we are living in the best of times – yet many people feel dissatisfied. In some places, including the US, self-reported happiness has actually been on the decline. So how should we view the state of the world: with optimism or pessimism? In answering, Treanor suggests that we must contemplate the broad sweep of both the world’s goodness and its evils.
  
   

• The everything bubble and TINA 2.0. FTX research does an fantastic job of exploring that common statement that “We are in an everything bubble” reviewing the data and going asset by asset. Worth the read. Spoiler: There’s most certainly pockets of excess in nearly every corner of the financial markets, but there’s also ample opportunity.
   

• Why is gold not rising? Interesting take on the shiny metal (albeit from a gold bug) via GoldSwitzerland.
  
   

• Silicon Valley is searching for the fountain of youth in a bill. Human aging is the latest and greatest field being disrupted by technology. The big picture: Work on therapeutics that could slow or even prevent the aging process is moving out of the fringes and into the mainstream, fueled by funding from tech billionaires who have one thing left to conquer: death.

• What if people don’t want a career? Charlie Warzel, a reporter on the future of work has found an interesting and potentially profound trend: the growing skepticism around ‘careers.’ ‘Careerist’ has long been a dirty word in the working world — usually it’s meant to signify a cynical, ladder climbing mentality. A careerist isn’t a team player. They care more about the job title and advancement than the work. The current brand of career skepticism he is talking about is different, more absolute. It’s not a rejection of how somebody navigates the game, it’s a rejection of the game itself. The idea isn’t limited to a specific age group, but the best articulation of it comes from younger Millennials and working age Gen Zers. Many of them are fed up with their jobs and they’re quitting in droves. Even those with jobs are reevaluating their options. What comes next?
   

• You are living in the Golden Age of stupidity. The convergence of many seemingly unrelated elements has produced an explosion of brainlessness. Interesting take by Lance Morrow suggesting that stupidity dominates in our time because of a convergence of seemingly unrelated elements (the death of manners and privacy) that - mixed together at one moment, in our cultural beaker - have produced a fatal explosion.

• Why you need to protect your sense of wonder - especially now. As the pandemic era goes on, more than ever we need ways to refresh our energies, calm our anxieties, and nurse our well-being. The cultivation of experiences of awe can bring these benefits and has been attracting increased attention due to more rigorous research. At its core, awe has an element of vastness that makes us feel small; this tends to decrease our mental chatter and worries and helps us think about ideas, issues, and people outside of ourselves, improving creativity and collaboration as well as energy. David Fessell and Karen Reivich, a physician and a psychologist, have facilitated hundreds of resilience and well-being workshops; they suggest for HBR a number of awe interventions for individual professionals as well as groups. 

Our best wishes for a month filled with joy and contentment,

Logos LP

The Beauty of Discomfort

Good Morning,
 

Stocks rallied on Friday after an unexpected surge in U.S. jobs raised hope that the economy is starting to recover from the government imposed lockdown. 

The Nasdaq Composite became the first of the three major averages to climb back to an all-time high, advancing 2.0%. After tumbling as much as 25% earlier this year, the tech-heavy index is now 9.3% higher for 2020.

Friday’s rally put the S&P 500 down just 1.1% for 2020. At one point this year, the broader market index was down 30.3%. The Dow was only down 5.0% year to date after dropping as much as 34.6% in 2020.

Friday’s gains put the S&P 500 up more than 45% from a March 23 intraday low and less than 6% from its February 19 record.

U.S. employers added a shocking 2.5 million jobs last month — the largest gain on record — while the unemployment rate slid to 13.3%, the Labor Department said Friday. Economists polled by Dow Jones expected a drop of more than 8 million jobs and the unemployment rate to nearly reach 20%, which would have been the highest since the 1930s.

Our Take

All of a sudden, the V-shaped recovery thesis is looking pretty convincing. Friday’s report appears to support the beginning of the labor market recovery and the unemployment rate is likely to fall further in June. 

Quite frankly, it is astonishing just how wrong the “experts” got it (despite reports that a “misclassification error” made the unemployment rate look better than it is). Average expectations of more than 8 million jobs lost and instead, the largest amount of jobs created in any month EVER at 2.5 million. Friday’s nonfarm payrolls report is quite likely the biggest surprise relative to expectations that the market has EVER seen.

This is game changing and represents a completely different picture than the job market ravaged by the government mandated shutdown. 

Jeff Cox puts forth a convincing description of the turnaround as a “three-headed” bull:

"First, government funding helped mitigate a wave of layoffs that otherwise would have come with stay-at-home orders related to the coronavirus. Then, states and cities reopened more quickly than anticipated. Finally, the U.S. economy, which seemed to wobble even before the shutdown, showed an uncanny sense of resilience that gave still another boost to an uncanny Wall Street rally that seemed to defy fundamentals.”

Was this data surprise a completely unexpected outcome? Not really. The stock market has been telling us that the U.S. was rebounding more quickly from the pandemic than anyone expected. But instead of being optimistic and listening to the market, many decried “the gap between Wall Street and Main Street,” and focused instead on the gloomy forecasts about how much of this job loss researchers think will be permanent and how we’re already in another Great Depression.  

Time will tell as there is still a lot of work to be done. Job gains represent just a fraction of those lost, yet American balance sheets are also looking healthy. The personal savings rate hit a historic 33% in April. This rate - which indicates how much people save as a percentage of their disposable income - is by far the highest since the department started tracking in the 1960s. 

The swiftness and severity of a U.S. economic recovery hinges on whether consumers continue to stockpile cash or start to spend again. Our thought is that a 2 month recession shouldn't be enough to scare consumers into keeping their wallets shut. We see pent up “revenge” spending to be likely, and already see signs of this given the incredible velocity of retail investor buying in the financial markets. 

Kelly Evans reminds us that “after all, guess who has been buying this market since the darkest days of the pandemic? Retail investors. The general public. Here’s Axios, on March 30: “As traders around the globe have frantically unloaded positions in recent weeks, so-called mom and pop retail investors have kept level heads and not sold out of stocks.” “Wall Street” was panicking and selling the rally. Everyday Americans were buying.” 

We aren’t out of the woods yet and thus, taking victory laps around the bears is certainly premature. Nevertheless, this incredible rally, which is gradually being confirmed by the economic data, should remind us to listen to “experts” with a healthy degree of scepticism. 

As Nick Maggiulli has recently stated: “No one has a monopoly on knowledge. No one is infallible. Not the analysts at the top tier banks. Not the Nobel Laureates. Not even the great Warren Buffett. Yet, we create this mythology around them that says otherwise...the divide between you and them is smaller than you think.”

With each passing day, the March lows appear to have in fact been a “historic” buying opportunity. What the market appears to be reminding us dovetails Ramp’s statement above quite nicely which is to remain flexible in our convictions and to do our own homework. To remember that our desire to be right should never trump our goal of generating investment returns. We won’t be right 100% of the time, but with a flexible data driven approach and a clear investment strategy, ANYONE has a shot at generating market beating returns over time.


Stock Ideas

Kingsoft Cloud Holdings Limited (KC): China's largest independent cloud provider and 3rd largest cloud service. The Company saw 64% Q1 growth YoY and guided 60-65% growth for FY 20. Expected growth for next year is 60%. Currently, they are building and running data centres for phase 1 "land and grab" in China's enterprise cloud market, which grew from 2% IT penetration in 2015 to 15% for 2020. Billings have been growing at 115% CAGR and will continue at a high clip given the early stage of China's cloud market (~30% market growth, 3-4x the size of the US market). Competition from AliBaba and Tencent will remain and new players will eventually enter the market. However, the main drivers for Kingsoft include: 1. Neutrality for video and gaming; 2. Data risk management for the enterprise in key verticals like healthcare and financial services; and 3. Product innovation and development of scalable solutions for enterprise IT needs. At 3.8x next year's revenues, we think that the valuation is very reasonable given the company's future cash flows and we expect gross margins to ramp up over the next decade.

 

Membership to Exclusive Daily Newsletter


We have launched an exclusive daily newsletter including actionable daily insights from Logos LP

• Each Digest Contains the Following:

  • Key Market Technicals

  • Logos LP Watchlist Technicals

  • Macro News

  • Logos LP Update

  • Alerts

  • Access to the Logos LP team

Membership will initially be limited to 1000 members. Please subscribe here.



Musings

 

To say that 2020 has been a challenge would be an understatement. COVID-19’s tragic loss of life, government imposed lockdowns, natural disasters, economic pain, market turmoil, trade wars, divisive rhetoric, the failure of expertise, unparalleled uncertainty and now, civil unrest. For even the most disciplined stoic, 2020 has been a year of discomfort. 

Nevertheless, 2020 can be viewed differently. It can be viewed as an opportunity to observe and be reminded how beautiful discomfort can be.

How so? Well as a starting point, humans are wired to seek comfort. As babies, we cry when we are hungry, lonely, bored and uncomfortable, signalling our distress. Our parents then cater to us to alleviate our discomfort. As we grow into children, the pattern continues. Our parents protect us from turmoil at school or on the playground and in organized sports the objective becomes to make children feel as comfortable as possible. Participation is rewarded and competition and outperformance is frowned upon. Standout talent is chastised and even penalized for superiority for fear of its effects on those less gifted. 

Moving on to high school and university, our teachers and parents continue to be wary of exposing us to any discomfort. Materials are censored as it may upset certain students, provocative statements and debates are avoided, grades are manipulated to avoid disappointment and all matters of tardiness are excused. 

As Amanda Lang in her book The Beauty of Discomfort has observed: “schools are now working so hard to avoid giving offence that they cannot teach one of the most important lessons of young adulthood: how not to take offence. Learning to cope with discomfort, disagreement, aggression and criticism (even wholly unprovoked aggression and criticism) can be one of the greatest accomplishments of a child’s early school years.”

Why should we be concerned about the proliferation of this “discomfort avoidance” trend in our societies? 

People who get comfortable occupying the discomfort zone learn that the habit of making an effort as well as the willingness to make mistakes is the price for positive change, growth and ultimately, success (however you define it). 

In contrast, watching the events of 2020 unfold appears to suggest that our culture of “discomfort avoidance” may be failing us. 

Observing the 2020 fallout puts into perspective the reasons why some people drive change while others are blindsided by it. Why are some able to adapt and thrive when change is forced upon them while others stay stuck in the mud or are run over by it?

The variance in outcomes can be better understood when discomfort is reframed as beautiful. Change isn't comfortable, yet those who can change and thereby innovate, have the best chance of succeeding. Studies show time and time again, that successful people are those that don’t merely tolerate discomfort, they embrace it. It is their comfort with discomfort that makes them so good at change. 

Discomfort is conceptualized as a positive catalyst rather than a negative. Thus, if we look at 2020 through this lens, we can look at it as an incredible opportunity to lead us to positive change and growth. Yet to change something as large as a country, or its institutions, we need to start by changing ourselves and the way we each experience discomfort. 

At present, it would appear that the discomforts of 2020 have brought us to a crossroads. It is a potential turning point in the way we as individuals and as a society, experience discomfort. 

We can either continue down the path that we appear to be on - one which views discomfort as something to be avoided at all costs, ultimately leading to self-defeating and self-destructive behaviour (i.e. seeking instant gratification, ascribing blame to others, holding tightly to old convictions, avoiding truth, avoiding personal responsibility, shaming, envy, violence and destruction) - or we can choose to view discomfort as something to be confronted, studied and used to push us towards positive change and growth. 

What approach to the discomfort of 2020 will we choose? The future of our society may depend on the answer. Will we look to its beauty or continue to view it as a beast? As much as we may want to defer that choice to someone else, the decision ultimately lies nowhere else but within each and every one of us…

Charts of the Month

Looking six months out after strong 50-day rallies, the S&P 500 was positive 100% of the time and on average returned 10.2%.

Frothy FOMO?

Zombieland

Logos LP May 2020 Performance
 

May 2020 Return: 23.93%
 

2020 YTD (May) Return: 29.31%
 

Trailing Twelve Month Return: 49.99%
 

Compound Annual Growth Rate (CAGR) since inception March 26, 2014: +19.49%

Thought of the Month


 

"“I will eliminate hatred, envy, jealousy, selfishness, and cynicism, by developing love for all humanity, because I know that a negative attitude toward others can never bring me success. I will cause others to believe in me, because I will believe in them, and in myself.” ― Napoleon Hill

Articles and Ideas of Interest

 

• The “Inconvenient Fact” behind private equity outperformance. After fees, investors in private equity funds earn exactly what they would have in public stocks, according to new research. But the high fees have not only created a new billionaire class, they’re squeezing private equity-backed companies for unrealistic growth.

• Smart money is uneasy. Hedge funds are gearing up for another downturn in the stock market after growing uneasy that surging prices do not reflect the economic problems ahead, but many are apprehensive about going short. Meanwhile two-thirds of US executives surveyed expect the American economy will recover from the recession within one year, according to a survey of 300 decision makers conducted by TMF Group that was shared exclusively with CNN Business. Furthermore sentiment gauges suggest investors have no conviction in the stock market. 

• Do reparations make sense? The idea of reparations for slavery has become morally appealing of late. What should we make of it? David Brooks for the NYT suggests it is the right way to proceed. David Frum for the Atlantic suggests that it is an impossibility.  

• Millennials are facing the worst economic odds in history. It’s worse for women. Their uncertain future is now defined not by dreams but by getting by. Very interesting article outlining the situation using real world examples. As such millennials could cause the next housing slump as housing slips out of their grasp.
  
   

• How fear, groupthink drove unnecessary global lockdowns. Yinon Weiss for Real Clear Politics suggests that in the face of a novel virus threat, China clamped down on its citizens and  academics used faulty information to build faulty models. Leaders relied on these faulty models. Dissenting views were suppressed. The media flamed fears and the world panicked. That is the story of what may eventually be known as one of the biggest medical and economic blunders of all time. The collective failure of every Western nation, except one, to question groupthink will surely be studied by economists, doctors, and psychologists for decades to come. To put things in perspective, the virus is now known to have an infection fatality rate for most people under 65 that is no more dangerous than driving 13 to 101 miles per day. Even by conservative estimates, the odds of COVID-19 death are roughly in line with existing baseline odds of dying in any given year.

• Why are we really in lockdown? Jemima Kelly for the Financial Times suggests that the real reason we are in lockdown is moral: “If we can’t actually care for the people dying in front of us, there’s a sense in which the value of human life, or human relations, is ignored and trampled upon. If you can’t care for the people in front of you, you wonder what the meaning of any of this is.”
  
   

• This decade belonged to China. So will the next one. Martin Jacques for the Guardian suggests that the West is finding it extraordinarily difficult to come to terms with China’s remarkable ascent. The next decade will see a continuing fragmentation of the western-centric international system, together with the growing influence of Chinese-oriented institutions. The process will be uneven, unpredictable and, at times, fraught – but ultimately irresistible. Rise to the challenge or buy stock in the incumbent’s best companies…
  
   

• Warren Buffett held the wrong stocks as the music stopped. Few investors went into this crisis with a portfolio they were entirely happy with (including us).

• Just say no to angel Investing. Great article by Financial Samurai illustrating the pitfalls of angel investing.

• Human evolution is still happening - possibly faster than ever. Natural selection isn’t the only factor deciding human evolution.

All the best for a month filled with joy and gratitude,  


Logos LP

The Disciplined Pursuit of Less

Good Morning,
 

Stocks fell from all-time highs on Friday after the release of stronger jobs data dampened hope for easier Federal Reserve monetary policy. 

Despite Friday’s losses, the major indexes posted solid weekly gains. The Dow and S&P 500 rose more than 1% each this week while the Nasdaq gained nearly 2%. Stocks also posted all-time highs on Wednesday.

The U.S. economy added 224,000 jobs in June. Economists had forecast the U.S. added 165,000 jobs in June, after a stunningly low 75,000 jobs were created in May, according to Dow Jones.

Our Take

Summer is upon us and the market has so far continued to reward the bulls after what has been a great first half of the year. In fact, we just witnessed the best June for the S&P since 1955. Pretty impressive given the noise we heard from the “Sell in May Crowd”. The latest market high was the 210th for the S&P 500 since 2013. Funnily enough, for those paying attention, every one of them was called THE top…
 

Having said that, we are finding it more difficult than ever to find fairly/under priced assets of ANY kind. Looking across public, private, alternative and real estate markets we see little opportunity for outsized returns moving forward. 

The balance of probabilities is beginning to tilt to the downside rather than to the upside as most of the silver bullets have been fired: tax cuts, rate cuts, accommodative monetary policy, share buybacks and animal spirits. What drives earnings higher and further multiple expansion we are beginning to become unsure...at the end of the day as Michael Batnick has recently reminded us the last 10 years have been the best ten ever for U.S. stocks: "Can this bull market continue? Yes, of course. It’s already gone on longer than many people thought it would, myself included. But is it likely to be as strong as it was over the last ten years? No, almost certainly not."

In other news, our CIO Peter was featured on MOI Global to discuss Zscaler. 

Musings

Last month I took a much needed week off and early into my European vacation, something startling occurred: my cellphone vanished. As someone typically attached to their phone, as a “necessary work evil”, my initial reaction was panic. 

How was I to know what was going on without my notifications? How would I be aware of the “newsworthy” developments as they transpired? How were my clients to reach me on a whim? How would I be able to react with immediacy and urgency upon notification? How would I be privy to my professional network’s latest career “humble brags” on LinkedIn? And of course (I’ll admit it), how would I be able to observe what my “friends” on Instagram were up to? 

I saw my options as two-fold: 1) get a new phone 2) spend my week of vacation without a phone and use my laptop to periodically check emails 

After a bit of deliberation, looking out over the Mediteranean, I decided to choose option 2. I found the first day without my phone hard. I became acutely aware of the habit I had built up which many of us seem to share: the urge to reach for one’s cell. I felt it on numerous occasions. At times precipitated by seeing my friends reaching for/looking at their phones and at other times simply a habit in which I would feel myself reaching only to find nothing to grasp. 

As the days rolled by, the habit began to fade. Instead of yearning for my phone seeing others on theirs, I began feeling more intimately connected with the present moment. Riding in a taxi became about observing the beauty of the scenery as it flashed by and laying on the beach became about reflecting on my life, rather than scrolling through emails, reading the news or worse scrolling through curated images and videos of other people’s lives. 

What I learnt in my week without a phone was the following equation: 

No phone = less noise = more presence in the moment = more clarity. 

This isn’t to say I didn’t get a phone when I returned from my vacation, but it is to say that my experience brought to my attention what Greg McKeown has dubbed “the clarity paradox”. 

The clarity paradox can be summed up in four phases: 

Phase 1: When we really have clarity of purpose, it leads to success.

Phase 2: When we have success, it leads to more options and opportunities.

Phase 3: When we have increased options and opportunities, it leads to diffused efforts.

Phase 4: Diffused efforts undermine the very clarity that led to our success in the first place.

Curiously, success can be a catalyst for failure. When we reach a certain level of success, we often then pursue more of it in an undisciplined way. We become attached and get side tracked. We get off course attracted by the allure of the “next opportunity” or “next thing”. 

What my cell phone experience opened my eyes to, were phases 3 and 4 of the clarity paradox. Unenlightened about our phone’s ability to clutter our minds with increased options and opportunities, we often allow our attention to be diffused at best, or completely monopolized at worst. 

It's no surprise to me that in a recent article on CNBC, the biggest complaint millennials had about their lives is: “I have too many choices and I can’t decide what to do. What if I make the wrong choice?”.

When faced with too many choices: 

1. Quality of decision making goes down

2. Satisfaction with choices goes down 

3. Decision paralysis sets in and no choice is made at all 

Now home with a new phone, armed with a more enlightened understanding of its impact on my psyche, I’ve resolved to do things a bit differently in my personal and professional life, to engage in the “disciplined pursuit of less”: 

1. Remove clutter by narrowing focus:  If you don’t absolutely love something then eliminate it. Don’t settle for good opportunities, focus on great ones which sit at the intersection between: your talents, what the world needs more of and what you are passionate about. 
    

2. Ask what is essential and eliminate the rest: We naturally gravitate towards clutter and attachment, we hoard, we suffer from loss aversion, the sunk cost fallacy and the endowment effect ie. we value an item more once we own it and we make the things we are attached to a part of our identities. We prefer to hold onto people, places, things and investments rather than let them go. If we can instead ask “is this necessary?” we will quickly realize most things aren’t. Remove them. Want to try something new? Get rid of something old first. 
    

3. Practice self-awareness and equanimity: This is the most important factor in attaining and maintaining clarity. Make a habit of looking in the proverbial “mirror” and asking “who am I?” What is important to me right now? How do I feel about my current situation? We as humans suffer from attachment which refers to the unrelenting drive to succeed, to acquire, to compete, to control, and to the inability to let go. Without the things we attach to, our views of ourselves become unacceptable, as if the house, the car, the job title, the watch or the fancy friends make us worthy and enhances our self esteem and position in the world. On the other hand equanimity refers to the ability to accept what is without resistance. When you resist, not only do you suffer but you also perpetuate suffering. The reality is that when you resist, suffering persists. Resisting what arises internally causes concentration, clarity and equanimity to decrease and as they decrease, suffering increases. Lost the promotion? Couldn’t afford the new watch? Startup has collapsed? Practicing equanimity and non-attachment allows us to avoid suffering and maintain clarity. This isn’t to suggest a passive or indifferent attitude. It is instead to embrace “a gentle matter of factness” with your sensory experience. “Equanimity” means balance; and in practical terms means “don’t fight with yourself” accept people and situations for what they are not as you wish they were. 

Whether as an organization or as an individual the ability to establish and maintain clarity will have an enormous impact on whether outcomes will be positive or negative. Purposefully having the courage to address “the undisciplined pursuit of more” by practicing “the disciplined pursuit of less” will differentiate your outcomes from the crowd, whether you throw your cellphone to the wind or not. 

Charts of the Month

The current expansion has just tied the 1990s' expansion for the longest in history, and then anything after that will be a record. Good news, but the recovery has also been the weakest.

Monthly data from the Conference Board showed that the leading versus coincident indicator ratio was down slightly on the month.

Household debt in the USA may be at record levels yet household debt as a percentage of personal income is at a 40 year low.

Logos LP June 2019 Performance

June 2019 Return: 5.57%
 

2019 YTD (June) Return: 25.35%
 

Trailing Twelve Month Return: 3.25%
 

Compound Annual Growth Rate (CAGR) since inception March 26, 2014:+15.31%

Thought of the Month


"An intense love of solitude, distaste for involvement in worldly affairs, persistence in knowing the Self and awareness of the goal of knowing-all this is called true knowledge.” -The Bhagavad Gita

Articles and Ideas of Interest

• What you lose when you gain a spouse. What if marriage is not the social good that so many believe and want it to be? The Atlantic explores the notion that marriage is the best answer to the deep human desire for connection and belonging finding it to be incredibly seductive.

• The advantage of being underemployed. The five-day, 40 hour workweek is incredibly outdated. The irony is that people can get some of their most important work done outside of work, when they’re free to think and ponder. The struggle is that we take time off maybe once a year, without realizing that time to think is a key element of many jobs, and one that a traditional work schedule doesn’t accommodate very well.

• Why startups are more successful than ever at unbundling incumbents. These companies are essentially product design teams that are focused on iterating fast to find product-market fit. They are able to offer fundamentally better products and services than the incumbents because of the product-centric DNA of the management teams. Second, these companies rent all aspects of operational scale from partners and eliminate any capital expenditures or operational inertia from their execution plans.

• Liquidity and a ‘Lie’: Funds confront $30 trillion wall of worry. Now, with warnings growing louder about the risks money managers have taken with hard-to-trade investments, Wall Street is starting to wonder: Just where will this end? That question is reverberating across the financial world after the head of the Bank of England warned that funds pushing into a host of risky investments -- in some cases, without investors fully understanding the dangers -- have been “built on a lie.’’ Some $30 trillion is tied up in difficult-to-trade investments, he noted earlier this year. The big worry is that the now-troubled European funds that embraced such investments, only to stumble when investors asked for their money back, are just the tip of the iceberg. Exposure to illiquid assets and poor-quality bonds has crept into funds as managers hunt for whatever returns they can find in today’s low-interest-rate world. The troubles in Europe are reminders of the Icarus-style demise that active managers can meet when they wander into tough-to-trade products, while promising investors the ability to cash out easily. Lets also note that private equity dealmaking has reached new heights. It has swelled to its highest level(paywall) since before the 2008 global recession, and there’s no sign of slowing: buyout firms have nearly $2.5 trillion in unspent funds primed for investment.

• Random darts beat hedge fund stars - again. A stock-picker’s market? Not so much. Can you successfully pick stocks with a dart board? The writers at The Wall Street Journal thought so. To test their idea, the writers threw darts at a stock list in the newspaper. From those random hits they built a portfolio to stack up against highflying financial elites. Those elites meet at the Sohn Investment Conference, held each May in New York. The attendees are full-time active investors, people who spend 365 days and nights a year thinking hard about what investments to own and why. So how did the dart-throwing journalists do this year? “The results were brutal,” recounts Spencer Jakab of the Journal. The random writer picks beat the pros by 27 percentage points in the year through April 22. “Only 3 of 12 of the Sohn picks even outperformed the S&P 500. Choose your managers wisely.. 

• Could the U.S. be heading to a future of zero interest rates forever? It’s the obvious way to avert national bankruptcy as the country keeps piling on debt. If it decides to let the debt grow, it will have to borrow more and more in order to cover its increasing interest, and both borrowing and interest costs will snowball. That could provoke what the CBO calls a fiscal crisis -- a private investor panic about the government’s ability to repay its debt, causing a drop in bond prices that render financial institutions insolvent and causing an economic crisis. The government thus has a good reason not to let debt spiral out of control. And the easiest way to keep that from happening is for the Federal Reserve to cut interest rates to zero and keep them there. Welcome to Japan!

• To succeed in America it’s better to be born rich than smart. Children in the U.S. are told from an early age that hard work pays off, starting with their time at school. But according to a recent report from the Georgetown Center on Education and the Workforce (CEW), “Born to Win, Schooled to Lose, ” being born wealthy is a better indicator of adult success in the U.S. than academic performance. “To succeed in America, it’s better to be born rich than smart,” Anthony P. Carnevale, director of the CEW and lead author of the report, tells CNBC Make It. “People with talent often don’t succeed. What we found in this study is that people with talent that come from disadvantaged households don’t do as well as people with very little talent from advantaged households.” How much longer will the majority allow this sorry state of affairs to persist?

• Your professional decline is coming (much) sooner than you think. There is a message in this for those of us suffering from the Principle of Psychoprofessional Gravitation. Say you are a hard-charging, type-A lawyer, executive, entrepreneur, or—hypothetically, of course—president of a think tank. From early adulthood to middle age, your foot is on the gas, professionally. Living by your wits—by your fluid intelligence—you seek the material rewards of success, you attain a lot of them, and you are deeply attached to them. But the wisdom of Hindu philosophy—and indeed the wisdom of many philosophical traditions—suggests that you should be prepared to walk away from these rewards before you feel ready. Even if you’re at the height of your professional prestige, you probably need to scale back your career ambitions in order to scale up your metaphysical ones.

Our best wishes for a fulfilling July,

Logos LP

These Halcyon Days

Good Morning,
 

Stocks closed lower on Friday after it was reported that trade talks between China and the U.S. had stalled and tit-for-tat tariffs soured the process. The late-day sell-off underscored the fragile mood in financial markets destabilized by concerns that the escalating trade war will undermine global growth.

President Donald Trump took steps toward calming nerves by postponing any tariffs on Japanese and European cars, while agreeing to end levies on Canadian steel and aluminum imports. But the status of talks with China remained unclear as investors headed into the weekend.

It was also the fourth straight weekly drop for the Dow.

Earlier this week, under the banner of a threat to the “national security” of the U.S., the administration made it harder for U.S. companies to do business with Huawei, a giant telecommunications company in China. U.S. firms that want to do business with Huawei must now have a license.

On the positive side, U.S. consumer confidence sentiment gauge reached a 15-year high with stocks near records and A Wells Fargo/Gallup survey found small business confidence rebounded strongly in the second quarter, matching a record, as current conditions posted a new high and recession concerns diminished. Top worries were attracting customers and new business, followed by hiring and retaining staff.


Our Take

Take a deep breath, these are halcyon days. Enjoy. The data coming out of the U.S. is for the most part still supportive of the view that things are pretty good (For a nice overview see here). Let's remember that the S&P 500 is still up about 14% YTD.

With stocks struggling to find direction amid heightened volatility over increased tariffs and threats of new ones as the White House and China battle over trade, many investors are overreacting and trading headline noise. *(Interestingly Trump’s China fight/tariffs has enjoyed broad support from American business, the Democrats and the Republicans)

They would be better served if they recalibrated their expectations on the outcome and timing of any future agreement on the China/U.S. tariff issue.
 

We’ve heard murmings that this is a Trump powerplay: a mastery of the art of timing. A sniffing out of the right moment to strike a deal with China to save the day just as Americans head to the polls. Vanquishing a saviour who has adroitly played on what voters hold dear and what they fear would certainly be a difficult task for the Democrats...

The above narrative may or may not be accurate but regardless, to expect a quick deal is to completely misunderstand the deep differences in the two countries economic models (state capitalism vs. free-market capitalism). These differences ensure that their trading relations will likely be unstable for years to come.

It should be remembered that the Chinese government allocates capital through a state-run banking system with $38trn of assets. Attempts to bind China by requiring it to enact market-friendly legislation are unlikely to work given that the Communist Party is above the law.

These are issues that have been around for decades. Stable trade relations between countries require them to have much in common such as how commerce should work, what role the state should have and a commitment to the enforcement of rules. Look no further than the (for the most part successful) renegotiation of NAFTA (Mexico, USA, Canada).

Compounding the friction between these competing economic visions is that fact that many in the U.S. are suffering from a lack of self-confidence (“bullying behaviour”) as they witness China’s rise.

The problem with this administration's heavy handed approach is that it has made it difficult for China’s leadership to frame the trade spat domestically as anything other than an effort to undermine China’s rise. The shift toward a nationalist tone coincides with Beijing’s hardened trade negotiating position.

The problem is that an intensified conflict over trade and nationalism that results in harm to U.S. interests will make China less appealing to foreign investors, something Beijing can ill afford at a time when its economy is already slowing. Moreover, previous protests have shown that promoting nationalism can boomerang on the Chinese state and lead to unwanted social disruptions.

As such, the probability of some kind of a resolution is high.

For the investor, it is important to come to terms with any pervasive “fear” of “losing money” and  corresponding unwillingness to take a long-term view. Making rash decisions each time there is a change in the short-term trend due to a headline is a recipe for the investor to realize low returns on capital or worse: no return on capital.

Musings

This month we were featured/interviewed by two wonderful organizations.

ValueWalk: https://valuewalkpremium.com/2019/05/eter-mantas-and-matthew-castel-general-partners-of-logos-lp-talk-small-cap-investing/

MOI Global: https://moiglobal.com/peter-mantas-2019/

Only a short note this week on portfolio concentration. This month we fielded several questions regarding the concentration of our portfolio and thought it may be useful to explain our view that concentration as a strategy is more attractive than diversification.

Why?

1. Better information increases the probability of superior returns, so a concentrated fund allows the investor to conduct thorough research and understand the intricacies of the business in order to take advantage of mispricings in the market. Instead, lack of concentration leads to making investment decisions based on superficial reasons or worse: emotion.

2. If the target range of holdings is narrow, the investor is setting a higher hurdle rate for investment quality and return. Investors can be more discriminating, avoiding stocks or sectors that are not high quality and focus on a smaller group of companies that meet their strict metrics.

3. There is also the issue of cost. With low to no-cost ETFs, there is simply no justification for an active investor/manager to construct a portfolio with a large number of holdings that mimics the benchmark. Better to own the benchmark in a low cost way.

Charts of the Month


According to a new survey by Charles Schwab, almost half of millennials (49%) say their spending habits are driven by their friends bragging about their purchases on social media vs. around one-third of Americans in general. link

Tech bubble all over again?


Logos LP April 2019 Performance
 

April 2019 Return: 10.08%
 

2019 YTD (April) Return: 23.87%
 

Trailing Twelve Month Return: 6.60%
 

Compound Annual Growth Rate (CAGR) since inception March 26, 2014:+15.58%

Thought of the Month

"Knowledge is learning something new every day. Wisdom is letting go of something every day.”-Zen Proverb

Articles and Ideas of Interest 

 

• Why we’ll never be happy again. Ben Carlson suggests that there are two things people need to understand about humanity:(1) Things are unquestionably getting better over time. (2) People assume things are unquestionably getting worse over time. Is there a silver lining?

• Inflated credit scores leave investors in the dark on real risks. Consumer credit scores have been artificially inflated over the past decade and are masking the real danger the riskiest borrowers pose to hundreds of billions of dollars of debt. That’s the alarm bell being rung by analysts and economists at both Goldman Sachs Group Inc. and Moody’s Analytics, and supported by Federal Reserve research, who say the steady rise of credit scores as the economy expanded over the past decade has led to “grade inflation.”

• What makes a great business? Great article by Travis Wiedower regarding what makes a great business. In summary, there’s no getting around that businesses have to invest capital at high rates of return to be successful. To do so, they probably need several strong competitive advantages that keep potential competitors away. Finally, organic growth of new products usually outperforms other types of growth, especially large acquisitions. Those are the base rates of what makes a great business.

• Putting your phone down may help you live longer. By raising levels of the stress-related hormone cortisol, our phone time may also be threatening our long-term health.

• If this is a tech bubble in stocks, it’s the expansionary phase. Is this the tech bubble part two? It’s fair to ask, given how big that index is getting versus the rest of the market. At about 36 percent of the S&P 500, it’s creeping up on 1999-style dominance. Arguing against the comparison is the share of overall earnings its companies generate. Going by the quarter they just reported, it’s four times as much as 20 years ago. 

• The Age of the influencer has peaked. It’s time for the slacker to rise again. It’s hard to remember a time when scrolling through Instagram was anything but a thoroughly exhausting experience. Where once the social network was basically lunch and sunsets, it’s now a parade of strategically-crafted life updates, career achievements, and public vows to spend less time online (usually made by people who earn money from social media)—all framed with the carefully selected language of a press release. Everyone is striving, so very hard- #nevernotworking. And great for them....But sometimes one might pine for a less aspirational time, when the cool kids were smoking weed, eating junk food, and… you know, just chillin’. Quartzy suggests that the slackers are back…

• Getting rich vs. Staying rich. Fantastic article by Morgan Housel in which he explores the following pattern: Getting rich can be the biggest impediment to staying rich. It goes like this. The more successful you are at something, the more convinced you become that you’re doing it right. The more convinced you are that you’re doing it right, the less open you are to change. The less open you are to change, the more likely you are to tripping in a world that changes all the time. There are a million ways to get rich. But there’s only one way to stay rich: Humility, often to the point of paranoia. The irony is that few things squash humility like getting rich in the first place.

• Private equity’s allure poses big risks for the stock market and its investors in the next recession. Private equity is becoming the go-to for active investors — a trend which AllianceBernstein expects to continue for the next decade. The shift, which is well underway, could have implications for the stock market and its investors, especially in a recession. “It throws a spotlight on the resilience of the liquidity of public markets and even questions the point of a public stock market,” Bernstein senior analyst Inigo Fraser-Jenkins says. No wonder Buffett has also sounded the alarm suggesting that private equity returns have been inflated and bondholder covenants have “really deteriorated”.

• Is CBD the cure-all it’s touted to be? The cannabis derivative is being tested as a treatment for everything from brain cancer to opioid addiction to autism-spectrum disorders. Whether it can live up to the hype is still an open question, writes Moises Velasquez-Manoff in the New York Times Magazine. Meanwhile Americans can expect to bombarded by ever more CBD-infused products as Green Growth Brands Inc. is partnering with Abercrombie & Fitch Co. to sell its CBD-infused bath bonds and other body care products in a limited number of stores.

Our best wishes for a fulfilling May,

Logos LP

Less Is More

Good Morning,


As a special note, this month marks our 4 year anniversary at Logos LP. We appreciate your support and will continue to bring you thought provoking ideas from around the web. 


As for equities, after posting the worst start to April since the Great Depression, U.S. stocks dropped on Friday as several banks weighed down the major indexes on the final day of an otherwise strong week for equities. 


Citigroup, Wells Fargo and J.P. Morgan Chase all reported quarterly earnings and revenue that surpassed analyst expectations. Bank shares initially traded higher before falling, as the strong results were already priced in and guidance was lacklustre. 


This will likely be the case for many other sectors as expectations for this earnings season are sky high with earnings data registering higher growth than ever this late in the cycle. According to FactSet, S&P 500 earnings are forecast to have grown by 17.1 percent last quarter. Financials, meanwhile, are expected to see earnings increase by 24 percent..


2018 has so far been a roller coaster not for the faint of heart with even veterans such as Jack Bogle stating that: "I have never seen a market this volatile to this extent in my career."

Our Take


What should be made of this volatility? 

Although many are quick to point the finger at Trump’s itchy “Twitter Finger” which has lobbed challenges at Russia, China, Syria, Amazon, Robert Mueller etc. there are at least several other matters contributing to the volatility. David Rosenberg has suggested some plausible factors:
 

1. "A new, untested and less dovish Fed" led by Chairman Jerome Powell, who may have a less intense focus on stock market values than some of his predecessors.

2. Budget problems caused by big tax cuts that the Congressional Budget Office projects will lead to a $2 trillion deficit.

3. A possible trade war that will push up interest rates until the next recession hits.

4. An isolationist administration when it comes to trade, which will lead to "disrupted supply chains."

5. The boost markets got last year from tax cuts and a general air of fiscal stimulus has been priced in. Meanwhile, President Donald Trump's attacks on "Big Tech," and Amazon in particular, are leading to policy uncertainty.

6. "Cracks" in the synchronized global growth narrative. Belief that the world was growing together helped fuel the 2017 rally, but Rosenberg sees multiple big economies slowing down.

7. A possible peak in corporate profits that is raising the bar for expectations, meaning it will be tougher for earnings season to impress. Earnings perfection or bust? Both business and consumer optimism has certainly hit rarefied air and thus nothing short of perfection will move the needle or at minimum keep it where it is...

8. Related earnings woes, particularly from a U.S. dollar that may have found a bottom after plunging during the first year of Trump's presidency. Trump has advocated for a weaker greenback as it helps make U.S. multinationals more competitive on the global stage.

9. The wild intraday stock moves. The S&P 500 is on track for 100 days of plus-or-minus 1 percent moves, a trend that Rosenberg says typically happens during bear markets (1974, 2001, 2002, 2008 and 2009 are other years when this occurred).

10. Circling back to the Fed, Rosenberg does not believe the central bank will come to the rescue if the markets correct. Moreover, the Fed is reducing the size of its bond portfolio just as the U.S. will be flooding the market with bonds to fund the burgeoning fiscal deficits.

Another issue we’ve been monitoring lately is a widening of Libor-OIS which is typically associated with heightened credit concerns. This is a metric that measures the difference between Libor (the London interbank borrowing rate where banks lend to each other unsecured) and the overnight interest rate swap (the rate tracking the interest rate set by the central bank) which has shot up to more than 50 basis points. Known as the Libor-OIS, it's now at the widest it has been since the euro zone sovereign debt crisis of 2012. It widened more than 15 basis points in the February alone.


A widening of Libor-OIS is generally associated with heightened credit concerns, however this time analysts are pointing to several structural shifts in money markets (markets that trade in securities with short-dated maturities) rather than banking concerns — as banks are now flooded with liquidity and are generally performing better.


Taken together these factors suggest a concerning picture. A significant wall of worry.


As always we suggest that for the long-term investor it is a fool’s game to try to time markets, yet whether we are in the 6th inning or the 9th, there are an increasing number of signs and signals that the economy may be entering the late stages of economic recovery.


This doesn’t mean a recession is imminent, but some early warning signs are emerging that should encourage us to make preparations for a rainy day. The expansion will likely extend through its ninth year, but is unlikely to accelerate and looks set to slow from here. Are our minds prepared for less? Are we ready and willing to do more with less? To make the most of less?

Musings


Like so many other important principles regarding successful long-term investing, the merits of training oneself to do more with less can be found when considering other disciplines. 

This past month I found some interesting research which suggests that when people severely cut calories, they can slow their metabolism and possibly the aging process.


Clinical physiologist Leanne Redman, who headed the study at Pennington Biomedical Research Center in Baton Rouge used participants that were not overweight and cut their typical plate for breakfast, lunch and dinner by up to 25 percent.

53 healthy volunteers were recruited and one-third ate their regular meals. The rest were on the severe calorie reduction plan for two years.


Redman noticed that for those on the restricted diet, their metabolism slowed and became more efficient.

"Basically it just means that cells are needing less oxygen in order to generate the energy the body needs to survive; and so the body and the cells are becoming more energy efficient," Redman explains. And if less oxygen is needed to burn energy, then dangerous byproducts of that burning — free radicals — can be reduced.

"Oxygen can actually be damaging to tissues and cells, and so if the cells have become more efficient, then they've got less oxygen left over that can cause this damage," she says. And that damage can accelerate aging.


Now, these findings don't directly prove that drastic calorie-cutting will actually help people live longer. People would have to be followed for their lifetimes to prove that. But the study did find that blood pressure, cholesterol and triglycerides were lower in the group on severe calorie restriction. When those numbers are high, they can lead to life-shortening diseases.

What can this research teach us when it comes to investing? 


For the last 5 years or so, returns have been for the most part high, low hanging investment fruit plentiful, central banks accommodative and volatility low.


Calorie intake (as represented by stock returns) has been high. Breakfasts, lunches and dinners have been large and our “investor metabolisms” have slowed, their efficiency impaired. We’ve been lulled into ease by excess. Our expectations inflated. 


Instead, as storm clouds gather on the horizon, we should proactively prepare for less by re-setting expectations. This "mental" cutting of calories can lead to improvements in the efficiency of our investor metabolisms. Ultimately our ability to prepare for less will enable us to do more with less. As our physiology suggests, doing more with less may not only determine our long-term success as investors, but also our longevity as humans. 

Logos LP March 2018 Performance



March 2018 Return: 2.34%

2018 YTD (March) Return: 0.05%


Trailing Twelve Month Return: +17.80%


CAGR since inception March 26, 2014: +19.95%

Thought of the Month


 

"Without frugality none can be rich, and with it very few would be poor.” -Samuel Johnson

Articles and Ideas of Interest

 

• Most people have a really tough time understanding compound interest. It isn’t intuitive so its systematically overlooked and underappreciated. More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful. But few pay enough attention to the simplest fact: Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child. $80.7 billion of Warren Buffett’s $81 billion net worth was accumulated after his 50th birthday. Seventy-eight billion of the $81 billion came after he qualified for Social Security, in his mid-60s. Start early. Be invested. Repeat.

• Lessons on Bubbles From Bitcoin. Until there is a way to bet against an asset, its price will be set by the most upbeat buyer. This suggests that there’s a good and easy way for regulators to reduce the incidence of bubbles. Whenever a new asset is created or a bunch of new investors enters the market, allow more futures trading and other exchanges that let pessimists publicly register their pessimistic beliefs. That won’t totally prevent all bubbles -- the late 1990s technology stock bubble, for instance, happened in spite of the existence of stock futures markets. But it would certainly help. Keeping pessimists out of the market is a recipe for repeated bubbles and crashes, as overoptimistic speculators rampage unchecked. Given a level playing field, the bears can restrain the bulls.

• At this rate, it’s going to take us nearly 400 years to transform the energy system. Here are the real reasons we’re not building clean energy anywhere fast enough. Beyond the vexing combination of economic, political, and technical challenges is the basic problem of overwhelming scale. There is a massive amount that needs to be built, which will suck up an immense quantity of manpower, money, and materials. There’s simply little financial incentive for the energy industry to build at that scale and speed while it has tens of trillions of dollars of sunk costs in the existing system. Should we just give up? MIT digs in.

• Why is it so hard to invest with a social conscience? For those so inclined, the good news is this: There are more opportunities than ever to invest with a conscience. One firm, Wealthfront, will even let you strip individual American companies that rub you the wrong way from one of the index-fund-like portfolios it creates for you. But with all these choices comes a fair bit of confusion. To land the biggest blow with whatever investing dollars you have, you’ll first need to confront at least seven challenges.

• There is a lot of hype surrounding blockchain. Could it be crappy technology and also a bad vision for the future? Anti Futurist Kai Stinchcombe goes so far as to say that “Eight hundred years ago in Europe — with weak governments unable to enforce laws and trusted counterparties few, fragile and far between — theft was rampant, safe banking was a fantasy, and personal security was at the point of the sword. This is what Somalia looks like now, and also, what it looks like to transact on the blockchain in the ideal scenario.”

• The Richest 1% are on target to own 2/3rds of all wealth by 2030. Will anger over inequality ever reach a tipping point?

• The end of scale. New technology driven business models are undercutting the traditional advantages of economies of scale. But large companies have strengths to exploit if they move quickly. Is big business really that bad? The Atlantic argues that large corporations are vilified in a way that obscures the innovation they spur and the steady jobs they produce. After all, entrepreneurship isn't for everyone. 

• The grim conclusions of the largest ever study of fake news. Falsehoods always beat out the truth on Twitter, penetrating further, faster and deeper into the social network than accurate information. Extremism pays. That’s why Silicon Valley isn’t shutting it down. The tech giants’ need for ‘engagement’ to keep revenues flowing means they are loath to stop driving viewers to ever-more unsavoury content. The show must go on! Unless Facebook’s Cambridge Analytica problems are nothing compared to what's coming for all of online publishing.

• Private Equity: Overvalued and Overrated? America is in the grips of a speculative frenzy. Investment bankers, private investment firms, and even a few dozen recently graduated MBAs labelling themselves “searchers” are calling, emailing, wining, and dining small business owners. Their goal is to translate prosaic small businesses into the poetry of private equity. This consensus has led institutional investors to flood private markets with capital, about $200 billion per year of new commitments. The result is soaring prices for private companies of all shapes and sizes. Just before the financial crisis, in 2007, the average purchase price for a PE deal was 8.9x ebitda (earnings before interest, taxes, depreciation, and amortization—a commonly used measure of cash profitability). Deal prices reached 8.9x again in 2013 and are now up to nearly 11x ebitda. But asset prices are going up everywhere. What makes private equity dangerous is the use of debt—and the use of phony accounting to conceal the riskiness of these leveraged bets. Great piece suggesting that all the glitter is not gold.

Our best wishes for a fulfilling month, 

Logos LP