The Outsiders Lessons

Like I said in the past, I can’t recommend William Thorndike’s The Outsiders enough (More on the Outsiders). It’s one of the best book to have come out on investing in the last couple years. It’s about 8 CEOs that that had extraordinary returns over the long run. Except for Buffett, most people probably never heard of the 7 other CEO mentioned in the book. Here’s a potential blueprint for their success:

From the Preface:

They seemed to operate in a parallel universe, one defined by devotion to a shared set of principles, a worldview, which gave them citizenship in a tiny intellectual village. Call it Singletonville, a very select group of men and women who understood, among other things, that: 

  • Capital allocation is a CEO’s most important job.
  • What counts in the long run is the increase in per share value, not overall growth or size.
  • Cash flow, not reported earnings, is what determines longterm value.
  • Decentralized organizations release entrepreneurial energy and keep both costs and “rancor” down.
  • Independent thinking is essential to long-term success, and interactions with outside advisers (Wall Street, the press, etc.) can be distracting and time-consuming.
  • Sometimes the best investment opportunity is your own stock.
  • With acquisitions, patience is a virtue . . . as is occasional boldness. 

Pages: Preface xvi, xvii

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White House’s Masterpiece Paintings

A little end of the day Friday humor.

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The Story of French – A little bit of background on Quebec

I’m reading this random book, The Story of French by Jean-Benoit Nadeau and Julie Barlow.  First, I should mention that you don’t need to have an interest in the French language to enjoy the book.  It’s a book that somebody gave me to give somebody else and I started to flip through it – And none of them are French. It’s actually very interesting and very well researched. It’s more of a history book and the role of French in shaping it. It’s really by accident that I started reading it. Sometimes randomness brings you the best moment.

Here are some screen shots on the Quebec chapter.

The Story of French Quebec 1 Continue reading “The Story of French – A little bit of background on Quebec”

Oil: Help!

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Crude Oil Prices – 70 Year Historical Chart

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Teledyne and Dr. Henry Singleton, Case Study in Capital Allocation

“[Warren Buffett] considers that Henry Singleton of Teledyne has the best operating and capital deployment record in American business.” – John Train’s The Money Masters

Below is a massive case study of Dr. Henry Singleton and Teledyne. The document states it was edited by John Chew from CSInvesting.org, a great blog to follow. All the credits goes to him. Not a lot of people have heard of Henry Singleton, a person that Buffets consider the best one the greatest capitalists and capital allocators of all-time. An investor who put money into Teledyne stock in 1966 achieved an annual return of 17.9 percent over 25 years, or a 53x return on invested capital vs. 6.7x for the S&P 500, 9.0x for GE and 7.1x for other comparable conglomerates. Here’s the document:

PDF: Dr.-Singleton-and-Teledyne-A-Study-of-an-Excellent-Capital-Allocator

To find out more about Dr. Henry Singleton, I did post this article last year: Henry Singleton Forbes 1979 Article

Dr. Singleton was also featured in The Outsiders by William N. Thorndike, among 7 other great investors. It’s one of the best investment book I’ve read and if you haven’t it should be on the top of the list.

Tesla and GM

Interesting comments from Greenlight’s David Einhorn. This is taken from the Q2 2017 letter:

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Einhorn also add this to add about GM:

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I’m posting this because I agree with Einhorn’s view. I have nothing against Tesla or Elon Musk. Like I said in the past, the world needs more Elon Musk. And I would like to buy a Tesla one day. The issue with Tesla is its valuation. It’s absolutely out of whack with any fundamentals. But this is Elon Musk’s gift: the ability to sell. When you think of GM or Ford, you think old dinosaur boring gas guzzling cars. When you think Tesla you think: technology, AI, self-driving, electricity, revolutionized concept, the future…etc.

Anyway Tesla sells dreams:

Tesla dremas

Disclosure: Long GM. Don’t have any positions in Tesla.

“You can’t con people…” – Trump

“You can’t con people, at least not for long. You can create excitement, you can do wonderful promotion and get all kinds of press, and you can throw in a little hyperbole. But if you don’t deliver the goods, people will eventually catch on.”- Trump wrote in his book, The Art of the Deal.

Fairfax Lollapalooza

I just got back from a two week trip to Toronto. The first week was spent exploring Toronto with my family. The second week of the trip was spent attending various investment events and I want to use this newsletter to share my insights. The events are based around the Fairfax Financial Annual General Meeting (AGM). Over time Fairfax has developed a following of investors and numerous events have spun-off from the AGM. There are conferences, stock picking competitions, dinners and plenty of opportunities for new investment ideas. When you spend most of your time reading company filing and looking at financial statements, these events are a welcome change. But first here are some thoughts on Toronto.

Toronto 2.0

I took some time to visit my brother, Torontonian Hugh Langis, co-founder and co-owner of Half Hunter (design studio) and The Station (best co-working office space in Toronto), which I shamelessly just plug in. By the time of my visit it was already spring time in Toronto and it was just warm enough to walk around. There’s only so much you can do with a two and a half year old but if you get the chance, the Royal Ontario Museum is a good spot to take your family. There are plenty of dinosaur skeletons among other artifacts. I have to say that the city of Toronto got a lot better over the last ten years. When I first stepped in the city in 2002, I wasn’t that impress. Toronto is often described as “la ville reine” (the Queen City). When your nickname is linked to Queen Victoria’s reign, entertaining is not what comes to mind. “Banks and malls” is how I had described Toronto. But that has changed. Millennials and hipsters took over the suits and royalists and transformed the city for a better place. Now Toronto is populated with cool indie coffee shops, trendy restaurants and great pubs for happy hour. The places are jammed packed in the middle of the day. I’m not sure if anybody works in Toronto. While it’s fun to see the city alive, I never fully understood how they manage to pay rent considering the booming prices of real estate (more on that later). Toronto is certainly closing the gap with Montreal. Today Toronto can say they have decent smoked meat, poutine, and bagels, all trademarks of Montreal. I also found Toronto to be cleaner than Montreal. Right now, Montreal is going through a rough time with all the constructions and its orange cones scenery.  Corruption and a lack of leadership have set the city behind but Montreal will be vastly improved in five years once the mess is cleaned up.  When I was in Toronto there was a pulse in the city. The Maple Leafs was in the playoffs (that’s a very rare thing) so were the Raptors. It was also the beginning of the MLB season and the Blue Jays were playing in Toronto. The city felt alive!

Toronto Real Estate

The Toronto real estate situation was the topic du jour while I was in Toronto. Toronto stole the crown from Vancouver for the most ridiculous real estate prices in the nation, and maybe in the world.  Owners and sellers are a very happy camp and while potential buyers are very frustrated. Toronto real estate has been considered expensive for at least the last seven years. Now the prices just shot up 33% year over year. What was considered “bubble price” a year ago now looked like a steal. Why did prices shot up 33% in one year? No reason. The fundamentals didn’t change. The economy didn’t boom. Population is modestly growing. Speculation is responsible for the booming prices. Sometimes higher prices are responsible for higher prices. There’s a pure disconnect between price and value. Housing basically should only rise by the extent of inflation, which is very low, and the extent of the productivity of the country, which in Canada is also very low. Real estate agents in Toronto like to cite the “strong demand” for the rise in price. But this runs against simple economic theory. Demand doesn’t increase the more you increase prices. In other words, the more expensive the real estate gets, the less demand there should be, not more. Need more signs that speculation is behind the rise in prices? A month ago Toronto held its real estate conference. The place was crowded with subprime lenders, third party lenders, and exhibits on how to get a second mortgage on your house.  That’s should be enough red flags.

Continue reading “Fairfax Lollapalooza”

The Wall On The Canadian Side Is Now Complete

The wall on the Canadian side is now complete.

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On Market Valuation

Below are my comments in an email on recent market valuation:

Are stocks expensive, yes. Is it a bubble no. Will there be a correction? Of course. When? Who knows. We are in the 8th year of a bull market rally. In the past there was a correction every 18 months on average. Look where we are today. Nobody predicted that. No one. The stock market reached a new high yesterday, again making a mockery of what savvy economic commentators though they know about the world. It’s absolutely ridiculous. Consider how things looked one year ago. The world economy seemed hopelessly trapped in a cycle of low growth and inflation. Markets recoiled at the mere possibility that the Fed would raise interest rates. Now, interest rates and inflation forecasts have risen substantially from last year; financial markets are shrugging off — or even rallying at the possibility of — imminent Fed rate increases; and it is all taking place during the Trump’s presidency. Now there are signs that the “new normal” will become the “old normal”. Good luck trying to make sense of all that.

Now back to market valuation. The famous Shiller CAPE ratio chart is often brought up to explain the next crash. Bears like to cited this chart when predicting the next big crash. The last two times CAPE ratio was this high was 1929 and 2000. You know how that ended. It’s true and it’s a powerful chart that really sinks in. Well there’s a few things that are not mentioned.
1) The Shiller ratio has been a record high for a few years now. It’s been brought up to predict the next crash but still waiting. There’s a popular saying in the business: “I predicted 9 of the last 5 recessions”.
2)Back in 1929 and 2000 the the risk free ratio was at least 5%. That mean a treasury bond, the safest investment of all, would guarantee you least 5%. Today you are getting nothing, or negative return because of inflation. The reason why the stocks are persistently expensive is that there’s no other option to park your money. Where else are you going to put your saving? Bonds are  on the block to get slaughtered if interest rate ever normalized. Why would I loan money at somebody for less than 1% or even negative rates? Then you have gold. Very speculative and how to you value gold? It looks good on your wife what else are you going to do with? The return on gold since 1800 is 0.5%, on stocks 6.7%, and 3.5% for bonds. These numbers are from Professor Jeremy Siegel are Wharton. Because of persistently low interest rate, people are stuck with stocks.
3) The CAPE is backward looking. It divides the S&P with the last 10 years of earnings. It would be more accurate if you divide it with the expected earnings. I know it’s predicting but you can have a range. It would come down a bit.
4) Professor Robert Shiller said he would still buy stocks because interest rates are super low. He also said that you are not looking at the chart correctly. It wasn’t met to be a marking timing mechanism. You have to look at it like its continual.The lesson there is that if you combine that with a good market diversification, the important thing is that you never get completely in or completely out of stocks.
But to hell with all that, too much explanation, let’s just tell people that it’s doom time again. If you are managing money, I think you need to explain a little bit more. You owe that to your clientele.
Charts has the tendency to over simplifying things. You can’t just wait there until it comes down to PE 6x or something. Stocks just don’t drop because the chart said so. You need a catalyst. A recession would do it but it looks like the U.S. is doing well and that should help Canada. My money is on rising interest rates. Rates will need to go above 2% or more for people to get out of stocks. People are sitting on dividend yield of 3% for now, so why get out. My worried is how are we going to pay all that debt back once interest rate rise? We have taken on a lot of debt but its costing nothing. But that can’t last forever. All that need will need to be renewed one day and it might be a much higher rate. Budgets are already strained and nobody is asking how are we going to pay it back. But again, what do I know.
Right now stocks are on fire because of Trump. Which has me worried. It seems like the market only listened to the good stuff Trump had to say and ignore the bad stuff. The good stuff: tax cuts, regulation cut, and massive infrastructure spending. The bad stuff: possible trade war, protectionism policy, disrupting diplomacy etc…. And Trump’s personality is very volatile. But he has a good business team in board so that’s reassuring.

Stocks could be high for a while.The last couple major dips (5-10% drop), like in August 2016, Jan-Feb 2016, Brexit…was only a blip on the radar. The stocks came roaring back. there are too many specialized funds that take advantage of the dips. While you are trying to make sense of what’s happening stocks are back up. The best move was doing nothing.
The market anticipates very big things from the Trump administration. However market anticipations are often wrong. Trump will not get everything he wants and the market could take it the wrong way. But there is also some real improvement in the economic data underneath the shifts, reflecting economic forces that have been underway for years. And this resetting of expectations is evident in market data beyond the always erratic stock market.
Every decade or so there’s a massive storm like in 2000 and 2008. This is the key to real returns. It’s to buy when nobody wants everybody is selling. When there’s “blood on the street”. That’s easy to say (or write). You need nerve of steel to do that. It wasn’t evident in 2008-2009, after stocks were down 50% that the smart thing to do was to buy stocks. After weren’t we on the brink of a financial collapse? There will be another downturn one day to profit from.