To mark the launch of the Quality-Growth Investor Conference we have launched Quality-Growth Quarterly. We also publish Value Investor Digest which started in 2011 and is now in its 55th issue.
In the fourth issue of QGQ we feature a Goldman Sachs study which looks at how inflation and government bond yields have behaved in the aftermath of the world’s 12 largest wars and pandemics. Also included is an Outstanding Investors Online interview with Shuhei Abe from SPARX, a JP Morgan 2021 market outlook report, a Money Maze podcast with Sir Chris Hohn, a Ted Seides article on the secrets of interviewing asset managers, plus another interesting GS report on what happened to pent-up savings in the US after World War II; as well as 16 more interesting articles, reports, interviews and videos from Q1 2021.
“We find that, while inflation has typically risen sharply during and (especially) in the aftermath of major wars, it has generally remained weak during and after major pandemics…in wars, government spending is used to fund increased war-related expenditure (before and during wars) and reconstruction efforts (in the aftermath), placing significant strain on available resources. In pandemics, by contrast, any increase in government spending is used to fill the gap left by absent private sector demand, with very different implications for the overall balance between aggregate demand and supply.”
“Mr Buffett made that speech in 1998, [over] 20 years ago and he said that as long as the cost of capital will stay at 1% he will keep watching. He should keep watching…He found these very interesting companies that were trading companies. I thought about it a lot why he became interested in it and he bought a package – not the one trading company but the 5 of them. What I concluded is that…he was looking for the opportunity to participate in the operating platform for this end of the world. He built that in the US through building Berkshire Hathaway over the past 50 years and now he became interested in Japan.”
“The Hazmat Recovery. In response to the worst pandemic in 50 years and a country at war with itself over lockdowns, individual freedoms and election results, the Fed and Congress airdropped an unprecedented amount of stimulus with vaccine airdrops to follow. That should be enough for markets to rise again in 2021 as pent-up activity is unleashed, and since the bill for stimulus is shifted to future generations. Whether this solves any of the other issues is a different story. Our 2021 Outlook reviews these topics along with deep dives on China, Europe, Emerging Markets, tech antitrust issues, gold and the rapidly shrinking portfolio choices for yield-oriented investors.”
“In particular we want to address the banks because the banks are financing the dirty economy and a special resolution needs to be put to their shareholders which is the disclosure of the carbon intensity of loan books, their lending on fossil fuels: oil, gas coal. So the investors can track: are they cleaning up their loan books? And of course it will require them to get the information from the borrowers.”
“Sitting in-between managers and clients as the co-CIO of a fund of funds, I was stunned how frequently interviews took place with no prior preparation. Time in front of managers is limited. Wasting that time drawing out easily accessible information that could have been learned in advance is highly inefficient. Great interactions come from preparing to blend structure and flow in the conversation.”
“Artisan Partners’ portfolio managers were painted as short-term activists, but their push to replace Danone’s CEO was a win for traditional long-only funds…Artisan wasn’t the only traditional investor calling for change. Causeway Capital Management, a long term value-oriented investment manager, had been in private discussions with management since the middle of last year, according to sources familiar with Causeway.”
“Amazon is a big and very aggressive company, that’s radically changing how retailing works, and that attracts a lot of scrutiny and a lot of criticism. Some of this is entirely justified. However, there’s one strand of criticism that fascinates me because it attacks Amazon for something that’s been part of retail for 150 years – the private label business.”
“Our general view is that the interplay of global digitalization, interconnection, and demographics is a powerful deflationary force, so we are not overly concerned by the risk of high inflation…At the extreme end, some market strategists foresee a period of stagflation in the 2020s, similar to what we saw from about 1969 to 1982. That wasn’t a great time for equities in general, but our research suggests that the winners from that period included businesses with pricing power and market leadership, and businesses with those characteristics tend to outperform, regardless of market environment.”
“There are only two ways of losing money in equities: either the earnings go away or the valuation goes away. Our quality-obsessed investment philosophy looks to minimise the former, and we have also looked to reduce the risk of the latter..we don’t suggest that high quality global equity is cheap in absolute terms but relative earnings multiples look far more defensible. Now more than ever, it is time to focus on keeping the lights on, rather than attempting to shoot them out, and reasonably priced compounders seem a reasonable way of avoiding a plunge into darkness.”
“On Thursday, the Massachusetts Institute of Technology Investment Management Company launched a website designed to help new fund managers get started. Joel Cohen, a global investor at MITIMCo, tweeted Thursday that the endowment office had created ‘a website that we just thought ought to exist,’ which is ‘written specifically for emerging manager stock pickers who look to buck convention and focus on generating exceptional results.'”
“During the war, rationing and restrictions on durable goods production drove the personal saving rate to over four times its pre-war level. Rapid personal income growth during the war also boosted saving, and by 1945, households’ cumulative excess savings—the amount by which the actual saving rate exceeded the long-run postwar level from 1941-1945—amounted to about 40% of GDP, roughly four times as large as our estimate of excess savings from the pandemic. After the end of the war, the saving rate fell quickly as spending restrictions were lifted.”
“Years of US equity market outperformance has left portfolios benchmarked to the S&P 500 Index highly concentrated and susceptible to increased risks. While the initial rebound in equity markets following the Covid-19 outbreak was sparked by massive policy intervention, the reflation leg of the new bull market appears to have been driven by expectations that 2021 could feature both a reopening of the economy and ample fiscal support.”
“Congratulations: We have just finished the best 12 months in the history of the S&P 500. It was exactly a year ago that the world’s most followed index hit bottom after the onset of the Covid-19 pandemic, and it has since gained more than 70%. Jim Reid, of Deutsche Bank AG, puts the return in perspective, back-calculating the index — which was launched in 1957 — to 1929, the year of the Great Crash.”
“The great myth is that the stock market crash caused the Great Depression. This is part of every schoolkid’s learning in social studies, but financial historians don’t think the evidence is very strong for that. The crash occurred in late October and early November of 1929. If you go from Black Thursday to Good Friday 1930, which was in the middle of April, the stock market was back up to just about the same level [as before]. People ignore the fact that the stock market had a strong recovery after the crash because it’s inconvenient for the story…Milton Friedman and Anna J. Schwartz’s book A Monetary History of the United States, 1867–1960 pointed out there was no connection between the 1929 Wall Street crash and the Great Depression. The Great Depression really began when the banks started failing in 1930, and then there were more bank failures in 1931 and 1932, leading to a bank holiday when FDR became president in ’33.”
“Here’s a question for you, what’s the largest ever public market listing by a UK company? [Standard Life? Experian? Granada Media?]…Wrong. Just under an hour ago, at US market open, Arrival, a London-based pre-revenue electric van maker, merged with special purpose acquisition vehicle CIIG Merger Corp to list on the Nasdaq. In the process, it raised $660m. But that’s not the nuts bit. The value of the business as the clock struck 9.30am Eastern? $13.6bn. Yes, you read that correctly. Billion with a “B”. Not only that, but it’s the record for a listing of a UK company, according to data from Dealogic. You may not have heard of Arrival, so here’s a quick run down…”
“The Suez Canal blockage is not the first time that there have been serious knock-on effects from a ship blocking a waterway. This excerpt from the excellent book “Bubble in The Sun” details how the Prinz Valdemar blocked Miami’s harbor and helped trigger the collapse of Florida’s epic real estate bubble in the 1920s.”
“We think inflation fears are overblown and that orderly reflation, around a return to sustainable growth, is a healthy development for both macro and credit outcomes…As evidenced by the recent spike in concerns about inflation, the asymmetric fears of too high inflation and the notion of taking away the punch bowl are still very much with us despite the experience since the global financial crisis.”
“It is not a conversation that anyone is keen to have, but what if, in certain companies and industries, the move towards sustainability (and other ESG goals) depresses returns to shareholders at the expense of other stakeholders, society and the environment? Are investors willing to accept this?”
“The pricing-in of inflation in markets is actually the beginning of a major secular change, not an overreaction to what’s going on. Economic conditions and inflation will adjust faster than either markets or the Fed are expecting.”
“One of the reservations we have expressed about Greensill (and supply chain finance in general) is that the practice helps companies disguise their true cash generation capacity and levels of working capital from investors and lenders…US GAAP is slightly better than IFRS in this respect, as certain disclosures are required but it’s beyond comprehension that the accounting authorities are expending massive effort on nonsense like IFRS 16 (blog upcoming) when simple and obvious issues like the disclosure of the use of supply chain finance is not required. Companies can factor or sell forward their receivables or engage in reverse factoring of payables and make no mention of it in their accounts – this seems crazy. In the US, the cash generated from the sale of receivables is generally disclosed separately as a cash flow from financing. Elsewhere, this is (inaccurately) treated as an element of operating cash flow, and as it’s not disclosed, investors have no clue as to its significance.”
“She got her start in finance when her life-long mentor, Arthur Laffer, helped her get her first job. The Reagan-era economist taught Wood at the University of Southern California, and recommended her to Capital Group, where she worked as an economist before graduating in 1981. She then moved to New York to work at Jennison Associates, an equity portfolio manager. It was there that the penny dropped for her.”
“In my modest view, the split between growth and value is totally arbitrary and quite frankly makes no sense whatsoever. It’s like taking a car, removing the engine and offering the chassis and engine for sale separately. If you have only one, you’re going nowhere.”
“At the top end, if we assume that $20bn of Amazon’s $21.5bn ‘Ads and other’ was actually ads, and it matched Google’s operating margin, that would be $13.6bn of operating income, the same as AWS. It could also be, say, $5bn lower – which would be in line with all of Amazon North America. Either way, it’s big, and growing.”
“In 1957, a researcher at MIT named David Durand published an article called ‘Growth Stocks and the Petersburg Paradox.’ Durand observed that many high growth companies exhibit exceptionally high payoffs, similar to the St. Petersburg Paradox. A small minority of them will be the equivalent of getting 40 heads in a row in our game. Given this paradoxical condition, you’d expect market participants to misprice this optionality at times and pay too much for growth. It was a mystery how to properly value companies with such extreme right-tail outcomes in 1957. Little has been resolved.”
“Thompson says the team are not looking for companies which simply provide good outcomes, resulting in a relative competitive strength – but also those companies that provide goods or services that satisfy the customer in a unique way, in turn giving the company a dominant and sustainable position among its peers.”
“When KitKat arrived in Japan in the 1970s, it was sold as an exotic ‘British’ treat to consumers who were developing a taste for foreign travel. Adverts in Japan showed ‘British people in distinctly British environments enjoying a KitKat break between action-packed activities,’ explained Philip Sugai, a business school professor in Japan, in a case study. ‘The message revolved around how Japanese people could enjoy life within the British context.'”
“We want to be able to have a single point where developers can go to learn about all of the tools and resources that are available for them in the Zoom platform for their work in development, so we’re launching developer.zoom.us as that central hub for all developer resources.”
“Ever since the clock struck midnight on New Years Eve 2019 there have been predictions about whether the United States would once again experience a “Roaring Twenties” like the 1920s…we will dive into the “Roaring Twenties” from a financial history point of view, and consider what elements may be similar to today. However, I also want to pose the idea that there is another period of American history that might better characterize the modern era: The Gilded Age.”
“With the internet economy shifting away from advertising and towards ecommerce and payments, Benedict Evans, a tech industry analyst, described Stripe’s opportunity another way: ‘They are a 3 per cent tax on the future of the internet.’ One of Stripe’s key competitive advantages is doing more with less. It has about 3,000 staff, a third less than Facebook had in 2012 when it went public at a similar valuation. Its online tools are designed to be easy for businesses to adopt without needing a large sales force or support team.”
“The number one megatrend in my head is an un-megatrend. All this discussion about the ‘end of urbanization,’ and working from home, and the world is going to change, and you’re going to live in Noplace, Iowa and you’re going to work for a clothing company. It’s not going to happen. We’re social animals. I’m happy to be very clear that I think people are looking at this current lockdown and extrapolating results that are preposterous.”
“When we first launched we were hoping for maybe 400-500 people. Harvard didn’t have a Facebook so that’s the gap that we were trying to fill. Now we are at 100,000 people so who knows where we are going next. We are hoping to have many more Universities by the Fall – hopefully over 100 or 200 and from there we are going to launch a bunch of side-applications which should keep people coming back to the site and maybe we can make something cool.”
“The term ‘Super Resolution’ refers to the process of improving the quality of a photo by boosting its apparent resolution. Enlarging a photo often produces blurry details, but Super Resolution has an ace up its sleeve — an advanced machine learning model trained on millions of photos. Backed by this vast training set, Super Resolution can intelligently enlarge photos while maintaining clean edges and preserving important details.”
© Quality Growth 2021