Edgepoint Edgepoint2

Inside Edge is dedicated to providing a collection of investment-related charts, articles and musings that have hit our desks or inboxes. Once in a while we will post materials we’ve created and glimpses of EdgePointers’ lives.

August 17, 2019

U.S. mortgage debt hits a new record
U.S. mortgage debt reached a new record in the second quarter, exceeding its 2008 peak. The steep drop in mortgage rates boosted borrowers' incentive to take out a mortgage or refinance. Alongside higher home prices, a factor behind rising mortgage debt balances is homeowners tapping into home equity for cash when they refinance. Still, the household debt picture is different in 2019. Despite the higher debt levels, Americans appear to be keeping up with their payments.

EdgePoint bond desk: Four more rate cuts might be excessive
Core prices rose 2.2% versus a year earlier in July, the largest increase since December. Even this increase counts as tame and suggests that the Fed's preferred measure of core prices may remain below the 2% inflation target. Still, after the two largest back-to-back monthly increases in core prices since 2006, when the Fed was on the inflation-fighting warpath, it is harder to get worked up about "too low" inflation. Especially with the unemployment rate at 3.7%. 

It's never been cheaper to borrow in Denmark
Banks in Denmark are now effectively paying qualified homebuyers who take out a 10-year fixed-rate mortgage. Jyske Bank, the third-largest bank in Denmark, will now lend to prospective homebuyers at an interest rate of -0.5%.

Risk in investing
Risk is the four-letter word of investing, but it is poorly understood. Consider, for example, the two different investments in the accompanying table: Investment A and Investment B.

Which investment would you prefer? A or B?

Everyone would prefer investment A. After all, you end up with more money after three years. But, which investment is riskier? According to investment orthodoxy, Investment A is riskier! Why? Because it has a higher standard deviation (or volatility of returns) at 23.6% than Investment B at 0%. Doesn't that strike you as odd? In investing, if you don't want volatility, then you have to accept that you won't have much upside potential.

We asked Sandro, the most passionate movie buff at EdgePoint, for his top 10 movie picks of all time. After agonizing for days over this list, this was his response:

Films have had a profound influence on shaping the man I am. In fact, great films have the power not only to entertain but more importantly to transform the way we see the world. Truly great films, like a great vintage wine, get better with age. Each subsequent viewing reveals new pleasures and they become more socially and culturally relevant.

Ok. That's enough with my ramblings. Keep in mind that if you asked me next week, it might be a completely different list. I didn't even include a foreign film. I love foreign films!

Sandro's Top 10 of All Time… more specifically on August 13, 2019

Citizen Kane (1941) - Welles
Casablanca (1942)  - Curtiz
Vertigo (1958) - Hitchcock
The Good, the Bad & the Ugly (1966) - Leone 
The Godfather (1972) - Coppola
Annie Hall (1977) - Allen
Goodfellas (1990) - Scorsese
Pulp Fiction (1994) - Tarantino
Boogie Nights (1997) - Anderson
The Social Network (2010) - Fincher

August 10, 2019

Half the world's bonds have yields that can't match inflation
About $30.2 trillion of bonds offer yields below zero after accounting for inflation. The amount has surged from $25 trillion less than a month ago. The figures are based on the bonds in the Bloomberg Barclays Global Aggregate Bond Index, which has a market value of $55.6 trillion.

10-year yields
There are now 12 countries whose government debt sports negative 10-year yields. Switzerland leads with a 10-year yield of -0.92% followed by Germany, with a 10-year yield of -0.53%, down to Slovenia in 12th position with a 10-year yield barely in the negative of -0.04%.

The US, with its 10-year yields of 1.73% is in 30th position of the 51 countries. This puts the US two places behind Italy, in 28th place, with a 10-year yield of 1.51%. The list has only 51 places, and the US already has a low 10-year yield of 1.73% is all the way down in 30th position! Greece, which defaulted on its debts in 2012 and imposed big haircuts on holders of Greek government bonds, is in 33rd place with a 10-year yield of 2.02%. 

10 years of US stock market prices
Below is a visualization of the US stock market in the past 10 years returns. Every day for the past 10 years is captured in the graph. The worst day of the market in the past decade was August 8, 2011, which was a response to the credit rating downgrade of the US sovereign debt. The S&P 500 Index dropped nearly 7% that day.

One of the best days was on December 26, 2018, where the S&P 500 rose to 4.9%. This was the first trading day after the dramatic Christmas Eve sell-off.

The Psychology of Prediction
Here are some notable flaws, errors, and misadventures that occur in people's heads when predictions are made.

The distinction between "wrong" vs. "early" has less to do with analytics than the social ability to prevent listeners from giving up on you. Say it's 2003 and you predict the economy is going to collapse under the weight of a housing bubble. In hindsight, you got that right. But it's 2003. So those who listened to your predictions have to wait four years for that prediction to come true. 

Credibility is not impartial: Your willingness to believe a prediction is influenced by how much you need that prediction to be true.
History is the study of surprising events. Prediction is using historical data to forecast what events will happen next.

Predictions are easiest to make when patterns are strong and have been around for a long time - which is often when those patterns are about to expire.

Predicting the behavior of other people relies on understanding their motivations, incentives, social norms and how all those things change. That can be difficult if you are not a member of that group and have a different set of life experiences.

If you refuse to make predictions because you know how hard they are you may become suspect of everyone else's predictions even if they have insight and skills you don't.

The effort put into a prediction may increase confidence more than accuracy. There are stories of Tiger Woods hitting 1,000 balls at the range without a break. And of Jason Williams practicing dribbling for hours on end without ever shooting a ball. That's how you become an expert.

This week we all combined for a midsummer potluck! 

August 3, 2019 

Oxymoron Alert: some high yield bonds go negative

In the latest sign of financial markets going into uncharted territory, more than a dozen junk bonds, which usually carry high yields, now trade in Europe with a negative yield.

China accounting scandal threatens corporate fundraising

An accounting scandal rocking corporate China is drawing comparisons with the collapse of the US firm Arthur Andersen, as dozens of Chinese companies are forced to halt public listing work.

China is trying to clean up its stock market and they are finding big problems with the way that auditing is being done. A string of auditing scandals this year has shaken investor confidence in Chinese equities at a time when global investors are increasing their allocation to the Chinese market through the MSCI emerging markets index.

MSCI recently increased the weighting for Chinese stocks in its EM index, a move that is expected to lead to an inflow of more than $100bn as investors are obliged to allocate more to China. But critics have said the increase has also increased investors' exposure to many of the accounting irregularities on the Chinese stock market.

When to Ignore a Fund Manager

The active asset management industry is overpopulated and hugely competitive, and as with any sales activity, delivering the 'appropriate' message to prospective and clients is hugely important.  These messages often feel as if they are intended to cultivate a certain image or manage client concerns, rather than present a realistic assessment of crucial issues. 

The types of statements listed below should be considered with a liberal dose of skepticism:

"ESG factors have always been at the heart of our investment process".
"Markets are not rewarding fundamental analysis"
"I think that interest rates are going to…" 
"I spend 95% of my time at my desk on pure investment work"
"I don't think we suffer from any biases in our recruitment policy, it just so happens that the best candidates all went to the same universities and look the same".
"The merger/acquisition/ restructure has not been a distraction".

If all firms and teams present themselves with a similar sheen, then there is a significant cost to being an outlier that is frank about problems, challenges, and limitations. 

The overplayed world of artificial intelligence

Today's buzzword is AI. It's difficult to find a manager that doesn't claim to be using artificial intelligence to improve its investment process.

The generally poor performance of the active management community and the existential threat from "the machines" have managers grasping for a quick fix. Many seem to think that AI offers that solution. 

But many are more likely than not to find their experiments with AI to be expensive distractions. For this reason, don't discount managers who are avoiding the hype. A manager that honestly admits that it doesn't see an application for AI in its process may be a realist rather than a Luddite. 

Friday funnies: an EdgePoint partner submission

A major divergence has opened up in my proprietary quant model. Historic correlations are breaking down, presenting a unique opportunity for investors brave enough to take advantage of the temporary dislocation. Yes, it is time to sell avocados to buy Bitcoin!

G(LOW)bal bond yields:

July 27, 2019

The balance sheet isn't what it used to be 
Today, the relative importance of tangible assets compared to intangibles has completely flip-flopped from what it was 40 years ago. Intangibles now account for over 80% of the average company's market value. Intangibles like brand names, customer lists, R&D spending, and patents have become increasingly more important to how we value companies.

For companies in the S&P 500 today, the correlation between stock price and tangible book value has become quite small, just 14%. This is a very big change from 25 years ago when that correlation was 71%.

The expensive getting more expensive

Only once before have the most expensive stocks been relatively more expensive and that was during the internet bubble.
Source: Exane BNP Paribas estimates

Small-cap balance sheets looking riskier than large-cap

With four generations of retail investors now involved in financial markets, attitudes and approaches to investing are beginning to diverge. How did different generations of investors react to recent bouts of volatility in the market?

China scrambles to stem manufacturing exodus 
Many companies, alarmed by the prospect of a prolonged trade conflict, are hedging their bets. While looking for alternative production sites for U.S.-bound goods, many will keep factories operating in China for the domestic Chinese market. Thus, many manufacturers will be forced to set up dual supply chains: one for China and one for other markets, raising their costs and denting profits.

The trade dispute is beginning to show up in flows of goods and capital. In the first five months of the year, exports from China to the U.S. fell 12% on the year in value terms, while those from India, Vietnam and Taiwan logged double-digit gains.

Much of the shift is to Southeast Asia, especially Vietnam, which is becoming home to many manufacturers of electrical and electronic equipment.

July 20, 2019

How can you shop and save your clients some money?

Check out our EdgePoint store! Purchase some great EdgePoint/Cymbria swag and help lower investors' fees. All profits from this initiative will go towards lowering Cymbria's operating costs and the Funds' MERs.

How the investment landscape has changed 
From Jeffries Equities White Paper, 2019 "When the Market Moves the Market"

The ever-changing landscape in the investment industry is news to no one. Here are some charts and tables reviewing some of the major shifts.

Over the last decade, the proportion of equity trading conducted by different types of market participants has changed considerably. Bank principal trading (in which a bank acts on its own account, taking risk), has cratered by 80% - from more than 12% of trading to about 2.5%.  Different hedge fund strategies have traded places, with quant activity nearly doubling to more than 25% of activity.

Over the last 20 years, the number of public companies in the United States has dropped by nearly 50%. This has happened at exactly the same time as a new form of equity-linked security has exploded: the ETF. So, while single name stocks have cratered, the number of ways to express broader investment views has increased.

Fidelity notes that ETFs now account for more than 18% of US equity trading volume. 43 ETF trading can exceed 2 billion shares per day. 

The decline in the number of individual publicly traded companies and the explosive growth and use of passive products have resulted in investors' ability to make broader, cheaper, more thematic bets, but have decreased the potential universe of single names in their portfolios. With nearly 400 sector and other narrowly based ETFs, active managers have more tools at their disposal for expressing their views, and for expressing them more cheaply than ever before.

The Price of Admission

Would you miss out on some of the upsides if it means you can avoid the downturn? Here is an experiment. 

Imagine that there is a market "genie" who approaches you every December 31st and only tells you what the maximum intra-year decline will be for the upcoming year. This genie doesn't tell you what next year's return will be or anything else. 

How much would the market have to decline at its worst point in the next year for you to forgo investing in stocks (S&P 500) to invest in bonds (5-Year U.S. Treasuries)?

Would it be a decline of 5%, 10% or maybe 20%? Since 1950, the average maximum intra-year drawdown for the S&P 500 has been 13.5%.

Let's say you tell the Genie that you will avoid stocks in any year when there was a drawdown of 5% or more. Here is how you did since 1950 vs a Buy & Hold investor. 

By 2018 you would have 90% less money than Buy & Hold investor. This is simply because you would be out of the market to often - this strategy would be invested in Treasuries in all but 6 years since 1950 or 91% of the time.  

The 'Avoid Drawdowns' strategy doesn't start to outperform until you can avoid drawdowns greater than 10%. Avoiding any year with 10% declines or more will mean you are invested only 46% of the years.

Nobody has a magic genie that will tell them when to avoid declines in the stock market. You have to experience some downside to earn your upside. This is the price of admission. As Charlie Munger once said, "If you're not willing to react with equanimity to a market price decline of 50% two or three times a century, you're not fit to be a common shareholder and you deserve the mediocre result you're going to get"

EdgePoint at a TFC game. It was a great night and our team won 3 -1!

July 13, 2019

Stranded Nation - A documentary that every Canadian should watch

A 68-minute documentary explaining just how much oil and gas resources are integrated into Canadian society. The creator of this documentary, Heidi McKillop, went from growing up in New Brunswick, studying social work and opposing hydraulic fracturing, to making her way west and eventually working for an oil firm in Calgary.

McKillop's goal is to inform people across Canada, particularly young people, of the importance of the Canadian oil and gas sector and the benefits it provides to all Canadians.

Banks' cash return yield

Hard to believe the payout yield is 11% for the group a decade after the financial crisis.

A database that details the history of nearly every major North American company

Investment biases

Our investment bias shows up in many different forms but often where we live can influence the way we allocate our assets. For example, investors in the southeastern US on average allocate 14% more of their portfolios to energy-related companies than the national average. This isn't a surprise as states like Texas and Louisiana are 2 of the 3 largest oil and gas producers in the US. It's important for investors to be aware of these biases and employ a disciplined investment plan that can help minimize them.

July 6, 2019

Our Q2 commentaries are available now

This quarter, portfolio manager Tye Bousada explains the most valuable thing about EdgePoint - its investment approach, while Frank Mullen talks about the futility of trying to predict interest rates and suggests what to do instead.

Fast food working to become faster

McDonald's is testing voice-recognition software at a drive-through in suburban Chicago. Inside the restaurant, a robot also tosses chicken, fish, and fries into vats of oil. Both technologies are meant to shorten customer wait times. McDonald's is working to speed up service as it faces tough competition from smaller burger chains and declining fast-food traffic in the U.S. overall.

Competitors are also investing in technology. Last year Domino's Pizza Inc. began testing voice recognition to take orders over the phone. Other chains are testing self-operating ovens and dishwashers, along with robots that flip burgers and perform other rote tasks.

Technology increases comfort for farmers

For some Midwestern farmers, springtime now means two things: Netflix and farm.

Thanks to GPS-enabled guidance systems and high-speed planters, U.S. farmers can plant and harvest fields faster than ever before, often with minimal human involvement. Self-steering tractors and combines free farmers to monitor seeding rates, haggle on the phone over crop sales, watch the weather-and get bored.

Expanding cellular signal coverage and streaming video apps have helped some farmers to convert these mobile offices into after-hours living rooms on wheels, complete with climate control, leather upholstery and built-in refrigerators. In recent years, massage seats have become available.

One farmer said he didn't have a Netflix subscription until he started farming full-time about seven years ago. Since his tractor's already outfitted with wireless-enabled devices and monitors, he said, "it's too tempting not to".

Measuring bubbles throughout history

Most Speculative Bubble: If we had to choose the greatest bubble in history based on how speculative it was, the Tulip mania of 1637 takes the cake. No bubble in history has had an object of such low utility (a flower) sell for such a high price.

Largest Bubble: When it comes to BIG bubbles, the U.S. housing bubble of 2007 is the biggest on our list in terms of size. The U.S. residential housing market declined in value from $29.2 trillion at its peak to $22.7 trillion when it hit bottom in 2012.  That is a decline of $6.5 trillion in the span of half a decade.

The greatest bubble of all time: At the peak, the Japanese imperial palace was considered to be worth more than all the real estate in California and the Japanese stock market had grown 10x over the prior decade. 30 years after the peak, both Japanese stocks and residential real estate have yet to recover.

Buy and hold: Simple, NOT Easy

The idea of buying and holding high-quality businesses over a long period of time is simple. Everyone knows that, and even those who don't practice it appreciate that this works with most high-quality businesses as history has proven time and again.

It's important to remember that the action of not doing anything over such a long period of time involves hundreds of decisions over months and years that lead to such inaction.

Businesses change, and so do emotions, the behaviours of other investors around us, and conditions in the stock market and our portfolios. And that's why sitting on stocks - the ones that remain of high quality - is not as simple as it sounds, and why patience is one of the most important yet difficult skills one must cultivate while investing in the stock market.

A pianist's advice

Strategy #1: Avoid Flow. Do What Does Not Come Easy.
"The mistake most weak pianists make is playing, not practicing. If you walk into a music hall at a local university, you'll hear people 'playing' by running through their pieces. This is a huge mistake. Strong pianists drill the most difficult parts of their music, rarely, if ever playing through their pieces in entirety."

Strategy #2: To Master a Skill, Master Something Harder.
"Strong pianists find clever ways to 'complicate' the difficult parts of their music. If we have a problem playing something with clarity, we complicate by playing the passage with alternating accent patterns. If we have problems with speed, we confound the rhythms."

Strategy #3: Systematically Eliminate Weakness.
"Strong pianists know our weaknesses and use them to create strength. I have sharp ears, but I am not as in touch with the physical component of piano playing. So, I practice on a mute keyboard."

Strategy #4: Create Beauty, Don't Avoid Ugliness.
"Weak pianists make music a reactive task, not a creative task. They start, and react to their performance, fixing problems as they go along. Strong pianists, on the other hand, have an image of what a perfect performance should be like that includes all of the relevant senses. Before we sit down, we know what the piece needs to feel, sound, and even look like in excruciating detail. In performance, weak pianists try to reactively move away from mistakes, while strong pianists move towards a perfect mental image."

Nick's and Frank's anniversaries! 

June 29, 2019

Next will be net store closures? Real estate implications 

  • The rise of online sales has triggered a re-allocation of capital from retailers
  • Walmart, for instance, is only selectively expanding their network
  • The company, however, is investing more in IT, supply chain and innovation
  • Interestingly, it is also investing more to upgrade and transform its existing stores

Banks' cash return yield

Most predictions turn out to be wrong.

In 1967, the Keuffel & Esser Co. commissioned a study of the future. Keuffel & Esser was a leading manufacturer of slide rules and was thought to be ahead of the curve in innovation. Their "visionary" study ended up being a huge dud, with most of their predictions being completely wrong. One thing they failed to predict was that within five years the company's own slide rule would be obsolete, falling victim to the electronic calculator. Keuffel & Esser would cease production only a few years later.

Steven Schnaars wrote a book "Megamistakes" that goes over the story of Keuffel & Esser and countless other examples of predictions that turned out to be very wrong. His message in the book was simple. Don't be fooled by prevailing opinion, and don't extend trend lines into the future. Instead, challenge your assumption and think for yourself. Work hard to distinguish fad from growth markets.

Today's low interest rates mean the risk is on and caution is old-fashioned. Companies selling at 20 times revenues instead of earnings (Beyond Meat is at 43 times its 2019 sales forecast, and Tableau Software recently sold for 16 times its 2018 revenue.) How long will this last?

Brand loyalty and online shopping trends: Shopify's State of Commerce Report
  • 73% of North American respondents agree that once they find a product or brand they like they stick with it. 
  • 36% of North American respondents agree that they often buy things to cheer themselves up. 
  • Americans shop most frequently, Germans the fastest, and Japanese shoppers are the biggest spenders. 
  • November is the most popular shopping time worldwide. This is likely due to big retail events like Black Friday, Cyber Monday, Singles Day and pre-holiday shopping.
Investment Placebo Effect
  • The placebo effect is both fascinating and real, with compelling evidence of its impact in both a medical and marketing context. What about in the investment context?
  • An investment placebo is an activity or action taken to make us feel better when there is no evidence that it will have a positive impact. Often investors feel better over the short-term as they satisfy that urge to act and do something when the market makes its volatile swings. In the investment industry, there is a strong preference for action over inaction amidst the incessant news flow, erratic price fluctuations and obsession with the latest headline risk, the urge to do something can be irresistible. What if things go wrong and I have done nothing? How can I just sit here when all of this is happening?
  • While placebos in other areas can actually deliver a positive end outcome, in investing these activities do not assist in meeting our end objectives and in fact, often come at a long term cost. 

Announcing the winner of the EdgePoint Photo Contest, Part III-Even Furrier: Olivia (and Winston)

    June 22, 2019

    Check out our Investment team's latest summertime reading & listening picks (Here) 

    Early stages...but the value in Japan will start to get recognized if this continues
    The Japanese stock market is one of the most inefficient in the world, largely because corporate governance has been bad for a very long time. But if the corporate governance reforms stay on the right track the value in Japan could start to get recognized.

    Management and investors are slowly embracing dialogue as seen by the increase in the number of shareholder proposals at shareholder meetings. Another positive sign is the increase in the number of foreign activist funds in Japan which can push to continue corporate governance reforms.

    Stability is being highly prized
    The market is willing to pay higher prices for large-cap companies with the highest fundamental stability scores. Fundamental stability score is a measure of the volatility of the key financial metrics.

    Advising professional athletes
    Finding real financial advice can be difficult for professional athletes as many "yes men" only associate with these athletes for self-serving reasons.

    One guy who seems to be doing right by his clients is a former Arizona college basketball player Joe Mclean. Joe manages the wealth of professional athletes, including big names like Klay Thompson. McLean's main goal is to help his athletes achieve long-term financial stability and avoid the financial pitfalls many athletes with a lot of money fall into.

    To retain his services, each player must agree to put aside at least 60% of every dollar he earns, with the rate climbing to 80% if he's fortunate enough to land a long-term deal. Or they're gone. Mr. McLean has fired two clients for ignoring the policy. He hates it, because "in my mind, it means I'm giving up on them," he said. "But they didn't buy into it."

    None of us will ever have to worry about how to make our 9-figure contract last a lifetime, but there are a few lessons from Joe McLean's story that apply more broadly to financial management.

    Making your money last
    In the US, the average 65-year-old has enough savings to cover about 9.7 years of retirement income (8.3 years for men and 10.9. years for women). In Japan, this number jumps to 15 years for men and almost 20 years for women.

    Japanese workers are good savers so why do they have the largest gap? First, they tend to live much longer than the rest of the world and second, they avoid return-seeking assets, so the amount they do save ultimately produces few gains over time.

    GE's new CEO, Larry Culp is attempting the largest "turnaround" in American history
    For the first time in its 126-year history, an outsider will lead GE to attempt to clean up a mess that took decades to create. Larry Culp is a proven leader and mostly known for transforming Danaher Corp. from an industrial manufacturer into a science and technology firm. Culp took the helm at Danaher at the age of 37 in 2001 and quintupled the company's revenue over the next 14 years.

    He now faces a monumental task to restore GE to its former greatness. Since taking over in October 2018 he has avoided the company's Boston headquarters and opted for frequent visits to GE units around the world. Gary Wiesner, who runs GE's wind-turbine-blade factory in Florida, was shocked to get an email from the new CEO. Larry Culp wanted to stop in and walk the factory floors, something that hadn't been done by a GE executive in over 18 years.

    Raptors and Noodle champions 

    June 15, 2019

    What share of public companies have interest coverage below parity in China?

    It's estimated that 15% of Chinese bank loans will be non-performing in the next credit cycle. This would be worse than any previous US crisis but on par with the late 1990s Asian debt crisis in Korea.

    The diversity of the Chinese customer base

    Chinese exports to all destinations are up 6% YTD in 2019 with exports to the U.S. down about 5%. The US is only 1/7th of all Chinese exports allowing overall Chinese export growth to hold up.

    Howard Marks Memo: This Time It's Different

    Howard Marks rarely attends a meeting these days where someone doesn't propose a new theory of why this market cycle could be different. Mark's latest memo broaches this very topic where he outlines nine of these hypotheses that have become far too prevalent among investors:
    • There doesn't have to be a recession
    • Continuous quantitative easing can lead to permanent prosperity
    • Federal deficits can grow substantially larger without becoming problematic
    • The national debt isn't worrisome
    • We can have economic strength without inflation
    • Interest rates can remain "lower for longer"
    • The inverted yield curve needn't have negative implications
    • Companies and stocks can thrive even in the absence of profits
    • Growth investing can continue to outperform value investing in perpetuity
    What do all nine of these theories have in common? That's easy: they're optimistic. Each one provides an explanation of why things should go well in the future, in ways that didn't always go well in the past. Mark argues that it should be very worrisome if these are the guiding principles of investors today. It's important to keep up with current developments and those that will shape the future, but it's also important to not unlearn the lessons of the past.

    How elite NBA athletes handle pressure

    From Larry Bird's nausea to Stephen Curry's butterflies, throughout history, the NBA's brightest stars have had to manage and learn from pressure in a variety of ways.  The most elite basketball players are not immune to stress but instead mastered how to channel it, and in some cases thrived from it.

    The truly great ones know there's pressure, so they don't consider consequences. If they did, they'd cave all the time. If you succumb to those consequences, you will never reach your potential. Just like with refining your shooting stroke, the more reps under pressure and stress, the more your body will learn to cope.

    Today, over 50% of the planet's population is online, a mere quarter of a century after the web first took off among tech-savvy types in the West. Most of the recent growth in users has come from the emerging world where 726 million people came online in the last 3 years. Countries like China are still growing fast, but much of the rise is coming from poorer places, notably India and Africa.

    As these countries come online businesses now have access to a vast pool of new customers. The one challenge here is that most of these new users are too poor to spend very much.

    For example, the average Facebook user in Asia generates only $11 of advertising revenue a year, compared with $112 for a North American user. The combined revenue of all the internet firms in emerging markets (excluding China) is perhaps $100 billion a year. That is about the same as Comcast, America's 31st-biggest listed firm by sales.

    Flocking climbers and investors

    Climbers are flocking to Mount Everest, making for increasingly dangerous climbing conditions as inexperienced climbers crowd the peak.  In 2019 at least 11 people have been killed on the mountain, which is the highest death toll since 2015. Why the sudden rush? People didn't suddenly become braver and the mountain didn't become less steep.  What happened was a slow but steady amount of progress in the technology and equipment needed to make the climb, thus opening the way for more and more people to attempt it.

    Climbing Mount Everest still has cache, of course, but compared to ten years ago? Or 30 years ago? Not really. More and more are reaching the peak every year.

    We see this phenomenon play out in the investment markets all the time. The first people to discover something exploitable and profitable are treated better than the subsequent people that come rushing in. This is what crowds do to opportunities. No matter how good you are, if what you're doing is very profitable, others will copy you and will be "good enough" to impinge on your game. Which is why the best investments are those with moats - companies that are so good at something that their abilities and assets literally act as a barrier to those who would follow and imitate.

    EdgePointers celebrate the Toronto Raptors' unbelievable NBA championship!

    Follow by email


    Search Inside Edge


    Book recommendations

    • Fixed income picks from Derek
    • Andrew's favourite biographies

    Food for thought

    The life of an EdgePointer

    • Photo competition
    • Our favourite albums, books and movies
    • Our little Halloween monsters
    • Santa Claus stops by
    • Our holiday wish list


    • 2019
      • April 2019
      • March 2019
      • February 2019
      • January 2019
    • 2018
      • December 2018
      • November 2018
      • October 2018