'Buy the Umbrella' - Issue #36
Hi there!
Here is your latest dose of ‘Buy the Umbrella’, a short list of interesting things I’ve been reading and thinking about during the week.
Quotes
“Thinking is the hardest work there is, which is the probable reason why so few people engage in it.”
— Henry Ford
"If you have knowledge, let others light their candles in it."
— Margaret Fuller
Chart
Real assets relative to financial assets hit a new low
This fascinating chart, put together by Bank of America's global investment strategy team, illustrates the degree of outperformance of bonds and stocks relative to commodities and real estate. This is particularly evident since the end of the last war on inflation in the 1970s and early 1980s.
If inflation ends up being sticky, could that result in real assets making up (at least some) lost ground over the next decade?
Investor Memo
Howard Marks published another brilliant and must-read memo for investors titled "I Beg to Differ".
The topic of the memo is one of BTU's favourite: how do investors achieve superior returns and how should they position themselves if they want to continue to do so?
Marks covers a few key areas: conventional versus unconventional behaviour, superior second-level thinking, contrarianism and willingness to be wrong alone.
Below are a few great passages that should hopefully encourage you to read the entire memo or at the very least aid your own investment processes.
"If your behavior and that of your managers is conventional, you’re likely to get conventional results – either good or bad. Only if the behavior is unconventional is your performance likely to be unconventional ...and only if the judgments are superior is your performance likely to be above average."
Investors who are happy with average returns can simply invest in a broad index fund or exchange traded fund (ETF) whose exposure represents that asset class, geography or sector.
On the other hand, if investors want to generate above average returns, they have to do something different to consensus, which opens the door to below average performance.
Marks points out that in order to outperform, an investor's thinking has to be different and better:
"First-level thinkers look for simple formulas and easy answers. Second-level thinkers know that success in investing is the antithesis of simple."
Their outperformance has to come from their superior ability to do one or more of the following:
- Better understand the significance of the published numbers
- Better assess the qualitative aspects of a company
- Better predict the future
"Readily available quantitative information with regard to the present cannot be the source of superior performance.”
On contrarianism:
During periods of extremes (i.e. excessive optimism or pessimism), then it’s valuable to leave the crowd and be a contrarian, i.e. diverging from the crowd:
"At the extremes, which are created by what “most people” believe, most people are wrong."
"Most great investments begin in discomfort. The things most people feel good about – investments where the underlying premise is widely accepted, the recent performance has been positive, and the outlook is rosy – are unlikely to be available at bargain prices. Rather, bargains are usually found among things that are controversial, that people are pessimistic about, and that have been performing badly of late."
Earnings Commentary Insights
LVMH reports strong performance, despite the difficult macroeconomic backdrop
Jean-Jacques Guiony, LVMH's CFO, stated very clearly the strength of the business: "I will mention the double-digit revenue growth in all business groups and in all geographies, except obviously Asia".
Mastercard continues to see persistent inflationary pressures but highlights several positives: strong labour market, rising wages and high consumer savings
The CEO, Michael Miebach, states that "with this backdrop, consumer spending and particularly travel-related spending remains strong."
US retail spending in particular remains healthy. According to their 'MasterCard SpendingPulse' which is based on all payment types including cash and check, "US retail sales ex-auto, ex-gas, were up 6% in the second quarter versus a year ago. In Europe, spending trends are positive although the risks related to both the supply of natural gas and higher interest rates remain headwinds".
Schindler seeing economic growth cool
The elevator and escalator manufacturer's CFO stated that "our industry market is severely dropping by more than 15%", with credit tightening becoming evident and "many developers are in real difficulties".
On China, the CEO highlighted the credit crunch in the property market is not getting better at all.
S&P Global experiences issuance declines in every category
The CEO stated that "This is the first time that I can recall seeing [issuance] declines in every category in every region since I’ve been doing earnings calls", highlighting the challenging market conditions so far in 2022.
Articles
Crypto collapse has flooded the market with Rolex and Patek watches
Online-watch trading platform Chrono24 believes the pullback in crypto prices "has directly impacted pricing of luxury watches from brands like Rolex and Patek Philippe". The German company has more than half a million watches listed for sale on its website.
Copper worth around half a billion dollars has gone missing in China
The onshore depot in Hebei (northern China) has 200,000 tons less than it was supposed to be holding resulting in an investigation by its financiers, most of whom are state-backed Chinese companies. The storage site was found to be holding just one third of the inventory it claimed it had.
UK braces for black-outs this winter
Under the UK government’s latest “reasonable worst case scenario” warns that the UK could experience blackouts for several days in January, if cold weather combines with gas shortages to leave the country short of power.
Concerns over a power supplies shortfall have grown despite government sources insisting are highly unlikely to materialize. The shortfall could total about a sixth of peak demand even if emergency plans to fire up retiring coal power plants are enacted.
Until next time...
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Do you have any questions or thoughts? Please feel free to reach out.
Have a wonderful week and enjoy your summer.