'Buy the Umbrella' - Issue #41
Hi there!
Here is your latest dose of ‘Buy the Umbrella’, a short list of interesting things we’ve been reading and thinking about during the week.
If you missed our prior issue, you can find it here.
Quote
"Lucky opportunities tend to be stumbled upon, not handed out.
If you're waiting for someone to hand deliver an excellent opportunity to you, it's unlikely to happen. But if you are exploring and moving—if you're in the mix and engaged—then you'll stumble upon many opportunities.
The active mind comes across a lot. Keep tilling the soil and you will occasionally unearth something wonderful."
— James Clear
Charts
China's non-performing real estate loans on the rise
Citi Research put together an incredible chart that demonstrates the depth of the Chinese property crisis focusing on non-performing loans (NPLs).
A NPL is borrowed money whose scheduled payments have not been made by the debtor for a period of time – typically 90 or 180 days.
Citi's estimates show that 47.8% of loans held by privately-owned developers are non-performing. This contrasts with 14.8% of state-owned developers' loan books. Both are up significantly from their respective 2020 levels.
U.S. union membership numbers at historical lows, whilst sentiment towards labour unions on the rise
The U.S. Bureau of Labour Statistics reported that in 2021, the union memberships fell to 10.3%, or 14.0 million workers. To provide some context, this contrasts with 20.1% in 1983, the first year for which comparable union data are available.
Nevertheless, union petitions are up over 58% so far in 2022 relative to 2021 according to the National Labour Relations Board (NLRB).
Interestingly, a Gallup poll shows that positive sentiment towards labour unions has been rising since 2010 and now matches levels last seen during the 1960s.
Articles
Westinghouse to be sold for $7.9bn in sign of nuclear power revival
Westinghouse Electric, a US nuclear power company, is being bought by a private equity-backed consortium in a $7.9 billion deal, four years after it emerged from bankruptcy. Westinghouse Electric makes technology used in about half the world’s 449 nuclear reactors. The company is currentlyo owned by Brookfield Asset Management's private equity division.
The FT reports that Westinghouse Electric will be purchased by Brookfield Renewable Partners and Cameco, a supplier of uranium fuel. Cameco announced a $650 million stock sale to help finance its portion of the deal.
The International Energy Agency believes nuclear generation needs to double by 2050 to hit net zero targets.
Investigation into U.S. congress representatives' stock trading
From 2019 to 2021, 183 current senators or representatives reported a trade of a stock or another financial asset by themselves or an immediate family member. Incredibly, more than half of them sat on congressional committees that potentially gave them insight into the companies whose shares they reported buying or selling, detailed analysis by the New York Times has found.
The thin line between bold and reckless
The Collaborative Fund wrote a fascinating piece on the dangers of judging a process purely by its outcome:
The hardest thing about studying businesses and investors is that many traits that fuelled their success could have just as easily triggered failure. But we rarely think about it that way when learning from specific outcomes.
The key takeaways are:
Focus less on case studies and more on broad patterns
Accept that strategies expire
There is a lot to learn from people who accidentally stepped over the line and lived to tell the tale
The piece links well with what we wrote in BTU issue #17:
What good poker players and good decision-makers have in common is their comfort with the world being an uncertain and unpredictable place. What makes a great decision is not that it has a great outcome, it is “the result of a good process”. That process must include an attempt to accurately represent our own state of knowledge.
Good process is critical to successful investing over the long-term.
Podcast
The big shift with fund manager Jacob de Tusch-Lec
This 20-minute podcast is a worthwhile listen as de Tusch-Lec succinctly highlights some of the key changes to global trends and ways investors can take advantage.
Interesting takeaways:
10+ years of low interest rates and a roaring bull market in long-duration 'growth' assets have resulted in malign investments
The longer you have excess liquidity in the financial system, the longer you allow money to flow to speculative areas (cash flow absorbing versus cash flow generating)
As yields rise, time horizons shorten due to the opportunity cost increasing - we have witnessed this with stocks of unprofitable technology companies' which have been hit the hardest
Just because 'growth' investments have done so well over the last 10-years, does not necessarily imply 'value' will do well for the subsequent 10-years
There has been underinvestment in the real economy relative to the digital economy, resulting in the world becoming structurally short of multiple commodities such as energy, copper and wheat
War in Ukraine accelerated many of the trends like inflation
Higher rates will not drive more supply of whatever is driving higher inflation
Until next time...
Thank you for reading this week’s issue. If you found it interesting, consider sharing it with someone who would enjoy it.
Do you have any questions or thoughts? Please feel free to reach out.
Have a wonderful week.
Why ‘Buy the Umbrella’?
Individuals, many of whom also run businesses and governments, tend to not think of the downside when the present is stable, and the future is looking positive (usually when we feel most in control).
Just because it is currently sunny, does not mean it will never rain. If we are not prepared, once it does begin to rain, we will end up running around looking for an umbrella in the middle of a storm when they are typically in short supply. We therefore need to ‘buy the umbrella’ before it rains.
Simultaneously, we cannot allow our awareness of risk to make us fearful, pessimistic, or paranoid, as this too works against us over the long-term.
Having the right mindset in advance is critical. The challenge is getting the right balance between being optimistic about the future and being able to not only withstand future crises, but in fact grow stronger due to the opportunities they tend to present.
It is not enough just to be conservative. One needs to be willing to put cash to work when others feel least comfortable doing it. To do that with confidence, we need to have a foundational understanding of history, business, markets and human psychology.
Our mission at BTU is to learn as much about the world as possible, and in doing so, to try to find investment opportunities with favourable risk/reward characteristics. These should, over the long term, help build sustainable wealth.