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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.


Great investors are investment philosophers (Link)
Think back to your education. Remember your university or secondary school days. What did you learn then that you still use today? Does any of it help you in your professional life? Many could claim that nothing they learned at university helps them at their job today. If you’re in finance how could your chemistry skills of calculating the polarization of sodium D1 help with investing?

If we think about this further many of us could claim the best skill we developed in university was how to solve problems. Famous mathematician, Carl Jacobi once said: “Invert, always invert.” He said that many complex problems can be solved if you invert them and think about the solution you want to find and then work backward to your current situation. When you do that, you often find the quickest and most effective solution to seemingly intractable problems. In mathematics and physics, this inversion technique is applied all the time, but seldom is it used when assessing business problems or new investment opportunities.

Research analysts and fund managers typically have been trained in finance and learned everything about financial statement analysis and know every little detail about the companies they cover. Many of these fund managers are interviewed on television and usually share their “wisdom” on why they love growth or income stocks or why they think rates will be hiked or not. Put another way, they talk their book. Are they good problem-solvers or are they just book smart?

How do people like Warren Buffett, Howard Marks or Benjamin Graham stand out? They don’t focus on any of these technical details. They think about the fundamental long-term drivers, and they have developed investment techniques that can adapt to a broad range of problems to understand the underlying market dynamics. These are investment philosophers.

A lesson on compounding (Link)
Many young people find it very hard to stick with a long-term savings plan. For many, it’s likely your savings will trump your investment gains for the first couple of decades. And then, all of a sudden, your investment returns take over once you’ve built up a decent-sized nest egg.

Let’s pretend someone starts out saving 10% of their salary from age 25 to age 65. They start out making $40,000 and that salary grows at 3% a year (with inflation). Let also assume they earn a 6% annual return. Here is the math:

By 40, they have saved over $80,000 with the overall balance growing to $125,000 from investment growth. This means that 65% of the balance comes from saving alone. As years go by that ratio begins to flip. 

By age 65, the contributions from saving equal 31% of your portfolio and 69% come from your investment growth on 6% annual growth. Small gains can add up over time even though it may not feel like it at the moment.

Less is more: Chick-fil-A (Link)
Founded in 1967 by entrepreneur Truett Cathy, Chick-fil-A’s signature item has been its breaded chicken-breast sandwich and its relatively simple menu is what makes it stand out. Five decades later, the closely held company this year is poised to become the third-biggest U.S. restaurant chain by sales. Sales from Chick-fil-A’s restaurants have tripled over the past decade, reaching $10.2 billion in 2018.
What’s their secret? It's their slow and steady, quality over quantity approach. This combined with their focus on ensuring all customers, employees, and restaurant operators are treated with care and respect. Among U.S. restaurants that serve chicken, Chick-fil-A’s market share rose to 33% last year from 18% in 2009, while the market share of Yum Brands Inc.’s KFC chain fell to 15% from 29% in that time.
Since, 2015, Chick-fil-A has been the top-rated fast-food restaurant on the American Customer Satisfaction Index. This is in large part due to their restaurant operators who help assure consistent food quality and service. The average McDonald’s franchisee owns half a dozen stores while most of Chick-fil-A franchisees own one.

America's favorite supermarket: Wegmans (Link)
Wegmans Food Markets is a Rochester-based regional grocery chain with just over 90 stores and reported $8.3 billion in sales. Founded in 1916, this family-owned company is under the leadership of the 3rd and 4th generations of the Wegman family. The spirit of family extends to its customers, employees and into the community. It's not surprising that it's the most beloved supermarket in the US. According to the Harris Reputation Ranking survey, Wegman’s has the best corporate reputation among visible US businesses. In 2019 Wegmans beat out # 2 ranked Amazon.

There are many things that Wegmans does well but most of all they believe in putting employees first. They believe that in order to be a great place to shop, they must first be a great place to work. 


Cymbria’s 11th annual investors day!




Less is more: Chick-fil-A (Link)
Founded in 1967 by entrepreneur Truett Cathy, Chick-fil-A’s signature item has been its breaded chicken-breast sandwich and its relatively simple menu is what makes it stand out. Five decades later, the closely held company this year is poised to become the third-biggest U.S. restaurant chain by sales. Sales from Chick-fil-A’s restaurants have tripled over the past decade, reaching $10.2 billion in 2018.
What’s their secret? It's their slow and steady, quality over quantity approach. This combined with their focus on ensuring all customers, employees, and restaurant operators are treated with care and respect. Among U.S. restaurants that serve chicken, Chick-fil-A’s market share rose to 33% last year from 18% in 2009, while the market share of Yum Brands Inc.’s KFC chain fell to 15% from 29% in that time.
Since, 2015, Chick-fil-A has been the top-rated fast-food restaurant on the American Customer Satisfaction Index. This is in large part due to their restaurant operators who help assure consistent food quality and service. The average McDonald’s franchisee owns half a dozen stores while most of Chick-fil-A franchisees own one.

America's favorite supermarket: Wegmans (Link)
Wegmans Food Markets is a Rochester-based regional grocery chain with just over 90 stores and reported $8.3 billion in sales. Founded in 1916, this family-owned company is under the leadership of the 3rd and 4th generations of the Wegman family. The spirit of family extends to its customers, employees and into the community. It's not surprising that it's the most beloved supermarket in the US. According to the Harris Reputation Ranking survey, Wegman’s has the best corporate reputation among visible US businesses. In 2019 Wegmans beat out # 2 ranked Amazon.

There are many things that Wegmans does well but most of all they believe in putting employees first. They believe that in order to be a great place to shop, they must first be a great place to work. 


Great investors are investment philosophers (Link)
Think back to your education. Remember your university or secondary school days. What did you learn then that you still use today? Does any of it help you in your professional life? Many could claim that nothing they learned at university helps them at their job today. If you’re in finance how could your chemistry skills of calculating the polarization of sodium D1 help with investing?

If we think about this further many of us could claim the best skill we developed in university was how to solve problems. Famous mathematician, Carl Jacobi once said: “Invert, always invert.” He said that many complex problems can be solved if you invert them and think about the solution you want to find and then work backward to your current situation. When you do that, you often find the quickest and most effective solution to seemingly intractable problems. In mathematics and physics, this inversion technique is applied all the time, but seldom is it used when assessing business problems or new investment opportunities.

Research analysts and fund managers typically have been trained in finance and learned everything about financial statement analysis and know every little detail about the companies they cover. Many of these fund managers are interviewed on television and usually share their “wisdom” on why they love growth or income stocks or why they think rates will be hiked or not. Put another way, they talk their book. Are they good problem-solvers or are they just book smart?

How do people like Warren Buffett, Howard Marks or Benjamin Graham stand out? They don’t focus on any of these technical details. They think about the fundamental long-term drivers, and they have developed investment techniques that can adapt to a broad range of problems to understand the underlying market dynamics. These are investment philosophers.

A lesson on compounding (Link)
Many young people find it very hard to stick with a long-term savings plan. For many, it’s likely your savings will trump your investment gains for the first couple of decades. And then, all of a sudden, your investment returns take over once you’ve built up a decent-sized nest egg.

Let’s pretend someone starts out saving 10% of their salary from age 25 to age 65. They start out making $40,000 and that salary grows at 3% a year (with inflation). Let also assume they earn a 6% annual return. Here is the math:

By 40, they have saved over $80,000 with the overall balance growing to $125,000 from investment growth. This means that 65% of the balance comes from saving alone. As years go by that ratio begins to flip. 

By age 65, the contributions from saving equal 31% of your portfolio and 69% come from your investment growth on 6% annual growth. Small gains can add up over time even though it may not feel like it at the moment. 

Last week we celebrated Ted's 8th anniversary!


US real median family income is finally above its last peak. 
2018 millennials and money survey (Link)
53% of millennials expect to become millionaires at some stage in their lives. Breaking it down further shows that 73% of male millennials and 38% of females expect to become millionaires at some stage in their lives. Maybe in a world of hyperinflation.
Only 50% of millennials invest in the stock market. This also includes employer-sponsored retirement and brokerage accounts. Male millennials are much more likely than female millennials to invest in the stock market at 66% vs. females at 39%.
When asked what they are saving for, vacations ranked the highest with 43% of millennials saving for their next vacation. The second highest was adding to their emergency funds or retirement accounts. 21% of millennials are saving for a down payment on a house.

Full video and highlights - Berkshire's annual meeting (Link)
Buffet on the advantage of volatility. “The nature of markets is that things get overpriced and things get underpriced. And when things get underpriced, we’ll take advantage of it.”

Munger on the best philosophy in life. "If you want one mantra, it’s from a gentleman who just died, Lee Kuan Yew who said - Figure out what works and do it.”  Under decades of Lee Kuan Yew’s leadership, Singapore transformed itself from a British outpost into a global trade and finance giant.

Buffet on finding a balance between saving and enjoyment. “I don’t necessarily think that for all families in all circumstances, saving money is necessarily the best thing to do. I think there’s a lot to be said for doing things that bring your family enjoyment rather than trying to save every dime. If you can’t be happy with 50 thousand or 100 thousand, you won’t be happy with 50 million.”  

Buffets thoughts on socialism.“I’m a card-carrying capitalist. I also think capitalism does involve regulation. It involves taking care of people who are left behind.” 

Munger on finding your specialty. “Not everybody can learn everything. No matter how hard you try, there is always some guy or girl who achieves more. My attitude is, so what? Do any of us need to be at the very top of the whole world? It’s ridiculous."

Buffet on the competitive investment field. “It is much more competitive now than when I started. I would do a whole lot of reading about many businesses and figure out on which ones I had some important knowledge and understanding that was different from most of my competitors. And I would try to figure out which companies I didn’t understand. It’s still an interesting game but it’s harder than it used to be.” 

Buffet on finding the right partners in life. “Having the right partners in life, particularly the right spouse, is enormously important. It’s more fun and you get more accomplished too. You just have a better time. I recommend finding the best person who will have you.”

Charlie Munger designs college dorms (Link)
Charlie Munger donates hundreds of millions of dollars toward buildings at major universities and institutions but these generous donations come with one caveat. The universities that want his money have to accept his ideas on building designs and Mr. Munger is not your traditional designer. 

He’s interested in the nuts and bolts and not aesthetic design. He dislikes curves, wasted space, shared bedrooms and bad acoustics. He likes using precast concrete and putting hallways and staircases on the outside of buildings.

He also likes anticipating how a building could be used differently in decades to come. Some are shocked at Mr. Munger’s ability to see into the future. For example, Mr. Munger designed Harvard-Westlake’s middle-school library, which opened in 2008, with several computer rooms. Munger insisted the computer rooms be made with removable walls. When students later switched to laptops, the computer rooms were easily converted for other uses. There are many other cases just like this.

Young people are less interested in driving (Link)
About 25% of 16-year-olds had a driver’s license in 2017, a sharp decline from 50% of 16-year-olds in 1983.

Teenagers are reaching their driving age at a time when ride-sharing services like Uber and Lyft are now able to shuttle them around town. Another contributing factor could be social media and video chats that let these teens hang out with friends without actually leaving the house.

When they reach their 20s, more are moving to big cities with mass transit, where owning a car is neither necessary nor practical.

Cost is increasingly a challenge. The average price paid for a new vehicle was $32,544 in 2018, up from $25,490 a decade ago, according to J.D. Power. The average monthly payment on a new-car loan reached $535 a month last year or more than 10% of the median household income.

China's property vacancy ratio is on the rise.



Companies are staying private longer so IPOs are getting bigger. 




Young people are less interested in driving (Link)
About 25% of 16-year-olds had a driver’s license in 2017, a sharp decline from 50% of 16-year-olds in 1983.

Teenagers are reaching their driving age at a time when ride-sharing services like Uber and Lyft are now able to shuttle them around town. Another contributing factor could be social media and video chats that let these teens hang out with friends without actually leaving the house.

When they reach their 20s, more are moving to big cities with mass transit, where owning a car is neither necessary nor practical.

Cost is increasingly a challenge. The average price paid for a new vehicle was $32,544 in 2018, up from $25,490 a decade ago, according to J.D. Power. The average monthly payment on a new-car loan reached $535 a month last year or more than 10% of the median household income.

China's property vacancy ratio is on the rise.


Companies are staying private longer so IPOs are getting bigger. 



Full video and highlights - Berkshire's annual meeting (Link)
Buffet on the advantage of volatility. “The nature of markets is that things get overpriced and things get underpriced. And when things get underpriced, we’ll take advantage of it.”

Munger on the best philosophy in life. "If you want one mantra, it’s from a gentleman who just died, Lee Kuan Yew who said - Figure out what works and do it.”  Under decades of Lee Kuan Yew’s leadership, Singapore transformed itself from a British outpost into a global trade and finance giant.

Buffet on finding a balance between saving and enjoyment. “I don’t necessarily think that for all families in all circumstances, saving money is necessarily the best thing to do. I think there’s a lot to be said for doing things that bring your family enjoyment rather than trying to save every dime. If you can’t be happy with 50 thousand or 100 thousand, you won’t be happy with 50 million.”  

Buffets thoughts on socialism.“I’m a card-carrying capitalist. I also think capitalism does involve regulation. It involves taking care of people who are left behind.” 

Munger on finding your specialty. “Not everybody can learn everything. No matter how hard you try, there is always some guy or girl who achieves more. My attitude is, so what? Do any of us need to be at the very top of the whole world? It’s ridiculous."

Buffet on the competitive investment field. “It is much more competitive now than when I started. I would do a whole lot of reading about many businesses and figure out on which ones I had some important knowledge and understanding that was different from most of my competitors. And I would try to figure out which companies I didn’t understand. It’s still an interesting game but it’s harder than it used to be.” 

Buffet on finding the right partners in life. “Having the right partners in life, particularly the right spouse, is enormously important. It’s more fun and you get more accomplished too. You just have a better time. I recommend finding the best person who will have you.”

Charlie Munger designs college dorms (Link)
Charlie Munger donates hundreds of millions of dollars toward buildings at major universities and institutions but these generous donations come with one caveat. The universities that want his money have to accept his ideas on building designs and Mr. Munger is not your traditional designer. 

He’s interested in the nuts and bolts and not aesthetic design. He dislikes curves, wasted space, shared bedrooms and bad acoustics. He likes using precast concrete and putting hallways and staircases on the outside of buildings.

He also likes anticipating how a building could be used differently in decades to come. Some are shocked at Mr. Munger’s ability to see into the future. For example, Mr. Munger designed Harvard-Westlake’s middle-school library, which opened in 2008, with several computer rooms. Munger insisted the computer rooms be made with removable walls. When students later switched to laptops, the computer rooms were easily converted for other uses. There are many other cases just like this.


US real median family income is finally above its last peak. 
2018 millennials and money survey (Link)
53% of millennials expect to become millionaires at some stage in their lives. Breaking it down further shows that 73% of male millennials and 38% of females expect to become millionaires at some stage in their lives. Maybe in a world of hyperinflation.
Only 50% of millennials invest in the stock market. This also includes employer-sponsored retirement and brokerage accounts. Male millennials are much more likely than female millennials to invest in the stock market at 66% vs. females at 39%.
When asked what they are saving for, vacations ranked the highest with 43% of millennials saving for their next vacation. The second highest was adding to their emergency funds or retirement accounts. 21% of millennials are saving for a down payment on a house.

Last week we celebrated Anna's and Harry's sixth anniversary! They shared some cheese and crackers and an EdgePoint carved cutting board!


Private label sales dominate national brands (Link)
In 2018, the mass retail channel topped supermarkets for the first time in annual private label dollar sales volume in food and nonfood consumables. Data revealed that private label dollar volume in the mass retail channel surged 41% over the last five years, compared to a gain of only 7.4% for national brands.
Costco’s, Kirkland Signature brand pulled in $39 billion in 2018 which dwarfed those of Kraft-Heinz, which generated $26 billion last year.

Why independent bookstores are thriving in spite of Amazon (Link)
Before Amazon even existed, many mom-and-pop independent bookstores were supposed to disappear by the entrance of Barnes & Noble. But today, it’s Barnes & Noble that is trying to survive the Amazon retail apocalypse, while independent bookstores are doing just fine. The number of independent bookstores in the US is up 31% since 2009 and book sales at independent bookstores grew 7.5% annually over the past five years.

Books still make up about 80% of sales for independent bookstores sales so why are they doing so well? Many of these independents attract a loyal base of customers who seek a social hub outside of the online world. They offer anything from ukulele lessons to speed-dating events. These customers come to hang out but also buy books too.

How boomers are stealing from babies (Link)
Recently, the C.D. Howe Institute used an economic technique called lifetime generational accounting to assess the fairness of Canada's fiscal policies. Every generation pays taxes and gets government provided benefits in return. The cost of broadly shared programs like defense or the bureaucracy is generally split equally across all generations. But the size and scope of individually focused benefits like health care, education, welfare, and public pensions, along with the taxes meant to pay for them can vary greatly over time. These variations will depend on politics and demographics.

In this study, all figures are adjusted to birth-year values.

Baby boomers can expect to pay, on a net basis, around $200,000 per person over their lifetimes for all the health care, education and other social services they receive. That might seem like a lot, but it’s nothing compared to the current generation of newborns who are expected to pay $736,000 more in taxes than they will receive in individual benefits. The luckiest Canadians are those born in the 1970s. On average, these kids of boomer parents face a net tax burden of just $27,000 each for their lifetime of social benefits.

This huge discrepancy between newborns and older generations is the result of an aging population, which reduces the proportion of working folk who are available to pay taxes while increasing the amount of health care and elderly benefits owing, combined with the accumulation of past government debt.

What if you retire at a stock market peak? (Link)
Sam’s entire family has terrible luck when it comes to the timing of their retirement.

Sam’s great-grandparents retired at the end of 1928. Over the ensuing three years or so the stock market would drop close to 90%. Sam’s grandparents didn’t fare much better, retiring at the tail end of 1972. This was right before a brutal bear market which would see stocks cut in half from 1973 to 1974. Inflation also ran at a rate of 121% over the first 9 years of their retirement. Sam’s parents retired at the end of 1999, feeling pretty good at the top of the tech bubble. In the first decade of their retirement, they would witness the U.S. stock market go down by 50% on two separate occasions.

With balanced portfolios let see how Sam’s family actually ended up with an annual 4% withdrawal rate and a starting value of $1,000,000.
Even retiring right around the peak of the market, their portfolios actually ended up in a good position in each case. In each case, the ending market value for the portfolio is higher than the original amount even after accounting for annual withdrawals.

J.P. Morgan 2019 retirement guide (Link)
Here's one chart from this year's guide showing how a $10,000 initial investment fared over the past 20 years depending on whether the investor stayed invested or instead, missed some of the market's best days. As you can see you don't have to miss many good days to feel the impact. Your return quickly goes from positive to negative by missing only the 20 best days.

Stories play an important part in investing (Link)
Investment decision-making is a domain in which stories assume particular importance in driving, informing and justifying conclusions. Stories aid our comprehension and can lead us to believe that we understand something. They allow investors to both simplify and justify decisions to buy inherently complex investment products. Financial markets can be very unpredictable and uncomfortable. Stories are our surest means of coping with this discomfort to manufacture meaning by forging a relationship between the data and an explanation. They help us explain why the data is what it is and how it got that way. Our focus on narratives during these times of uncertainty is a major driver of some of our most damaging behaviours. We struggle to comprehend that asset prices often move in a random or unpredictable fashion; therefore, we must attach some explanation to it. 

Most of us won’t make an investment decision without it being supported by some form of story, and that’s understandable; stories are effective and can be very valuable.  However, we must also take the time to consider the credibility of the narrative, the data that underpins it and our own role in shaping it.

The Anatomy of a Market Correction (Link)
Market corrections can happen for any reason and sometimes they happen for seemingly no reason at all. Typically, corrections are rooted in psychological factors or fear and are not based on market fundamentals. Here are some quick stats.

The average correction lasts for 71.6 days. On average, there is one market correction that occurs each year. The average correction involves a 15.6% decline.
From 1980 to 2018 there were 36 corrections in the U.S. market, and only 5 (14%) of them resulted in bear markets. Most ended up being just blips on the radar of an otherwise intact bull market.


Stories play an important part in investing (Link)
Investment decision-making is a domain in which stories assume particular importance in driving, informing and justifying conclusions. Stories aid our comprehension and can lead us to believe that we understand something. They allow investors to both simplify and justify decisions to buy inherently complex investment products. Financial markets can be very unpredictable and uncomfortable. Stories are our surest means of coping with this discomfort to manufacture meaning by forging a relationship between the data and an explanation. They help us explain why the data is what it is and how it got that way. Our focus on narratives during these times of uncertainty is a major driver of some of our most damaging behaviours. We struggle to comprehend that asset prices often move in a random or unpredictable fashion; therefore, we must attach some explanation to it. 

Most of us won’t make an investment decision without it being supported by some form of story, and that’s understandable; stories are effective and can be very valuable.  However, we must also take the time to consider the credibility of the narrative, the data that underpins it and our own role in shaping it.

The Anatomy of a Market Correction (Link)
Market corrections can happen for any reason and sometimes they happen for seemingly no reason at all. Typically, corrections are rooted in psychological factors or fear and are not based on market fundamentals. Here are some quick stats.

The average correction lasts for 71.6 days. On average, there is one market correction that occurs each year. The average correction involves a 15.6% decline.
From 1980 to 2018 there were 36 corrections in the U.S. market, and only 5 (14%) of them resulted in bear markets. Most ended up being just blips on the radar of an otherwise intact bull market.

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