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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.

Asia catching a retail bid? Hong Kong share trading volumes are up 4x since 2019

Stock trading volumes in Hong Kong have soared to four times those on the London Stock Exchange (LSE), as large technology stocks attracted a soaring appetite from foreign investors.

% of IPO that are unprofitable 

Green hydrogen plant in Saudi desert aims to amp up clean power

Developers behind the world's largest planned green hydrogen project hope a growing global thirst for emission-free fuels will pay dividends

The initiative-a joint venture of Neom, U.S. chemical company Air Products & Chemicals Inc., and Saudi Arabia's ACWA Power-will invest $5 billion to build what will be the world's largest green hydrogen production facility. Another $2 billion will be invested in distribution infrastructure in consumer markets around the world, primarily to fuel industrial vehicles and public buses. 

Plans call for the sprawling facility, which isn't yet under construction, to produce 650 tons of green hydrogen a day starting in 2025. The facility's output will dwarf that of a green hydrogen plant in Québec that produces about nine tons a day, making it the largest such facility in the world. The Neom project exemplifies the Kingdom's ambitious plan to diversify away from oil and natural gas and showcase Neom as a global hub for technology and green energy. 

How People Learn to Become Resilient  

Frame adversity as a challenge, and you become more flexible and able to deal with it, move on, learn from it, and grow. Focus on it, frame it as a threat, and a potentially traumatic event becomes an enduring problem; you become more inflexible, and more likely to be negatively affected.

Promising data in Israel's race to defeat pandemic 

Israeli experts are confident the vaccines rather than lockdown measures brought the numbers down, based on studying different cities, age groups and pre-vaccine lockdowns.

Flocking to tech IPOs

Over the last 12 months investors have flocked to buy shares of newly listed tech companies, believing in the potential of upstarts to transform their sectors. That excitement has given newer firms valuations several times higher than established companies in the same industries-even when those older companies have far more revenue and profits.

Airbnb for example was the largest tech IPO in 2020, with a valuation of about $47 billion at the time it went public in December.

Having since grown to $117.7 billion, Airbnb's market capitalization makes it more valuable (on paper) than many top hotel chains combined. Marriott, Hyatt and Hilton's combined market capitalization is roughly $40 billion shy of Airbnb's, despite their higher revenue.

Examining the recent market and risks

The recent boom and bust in a number of stocks illustrates how capital markets over the short-term can be driven by flows and investor positioning, rather than by the underlying fundamentals of businesses. Some argue that the primary causes of this market dysfunction are the prevalence of passive investing and leverage.

The effort to squeeze short-sellers took GameStop's share price well beyond any rational fundamental valuation. It soared by 23 times within 11 trading days as those who had bet the price would fall were forced to buy shares to cover their obligations.

One factor that made the GameStop squeeze so profound was passive ownership. About one quarter of the available shares were owned by passive investors. These funds run on autopilot. As new money comes in, it is allocated to keep a constant balance among a specific combination of individual stocks or other assets. As GameStop's price rose to ridiculous heights, those passive funds were almost certainly buying to maintain their balance.

Passive funds have a much greater impact on prices because active investors can be patient in deploying their capital and are sensitive to the prices they pay. Passive funds have little discretion whether and at what price to buy - they must buy if they have inflows. Perversely, passive funds' demand for a stock generally grows as the price increases because the weighting of the stock in the indices they track increases. So long as such funds have inflows, they do not sell.

Leverage linked to low interest rates turbocharges these unhealthy dynamics.

Here's a Silly Game That Should Make Stocks Go Up

People have long been conditioned to see whether companies have "beaten" their expectations. And as Savita Subramanian of BofA Securities Inc. demonstrates here, the percentage of S&P 500 companies beating estimates for both sales and profits is very nearly at the record set in the third quarter of last year.

Specifically on sales, the number most directly tied to the performance of the economy, more companies than ever before are outstripping forecasts.

We should know by now that the earnings forecast game is a little silly. Particularly in the U.S., CFOs have grown adept at talking down expectations ahead of results, and then reaping the positive performance bump when they "beat" a lower bar.

Feedback Loops & GameStop, GM and Sears

Morgan Housel examines why GameStop went up 100-fold in the last year and why Sears never recovered. They have to do with the same force in opposite directions. It's a force that can explain a lot of baffling trends lately, and it's so easy to underestimate and overlook.

Stuck at home with just some cash and free trades

Source: BofA Global Research, @WallStJesus

Goldman's non-profitable tech index is approaching 250% year-over-year performance

Tom Brady wins another one

Retail investor frenzy in Korea

The October 1999 Fortune magazine issue.

Sound familiar? 

Google searches for 'stock market bubble' reached an all-time high in January

Tech flows


Source: Company financials

Who are you rooting for?


Exploding retail activity

The number of retail investors has been growing since commissions were broadly cut to zero in late 2019.

Demand is coming through in multiple ways but it's arguably in the options market where retail traders are having the most impact.

Option volumes have exploded, and at the same time retail is growing as a share of the overall market. Retail was already a big player in the options market, accounting for 40% to 45% of contract volume pre-COVID, but that figure rose during 2020 to over 55% of the market by the third quarter. 

This week call option activity went parabolic. 

The herd has arrived

Much of this volume has been driven by investors congregating on sites like Reddit's WallStreetBets forums. On January 26th, GameStop was the most traded stock in the U.S in terms of trading value. More GameStop shares traded by value than even Apple. Frenzied investors pushed GameStop's market cap to an eye-popping $25 billion from a little over $1 billion at the start of the month. 

Having the ticker symbol "GME" was helpful even if you are in Australia. A relatively small Australian mining company called GME Resources, which has the same ticker symbol as GameStop (but in Australia), was mistakenly rewarded by the retail crowd with a 20% up day.

Trading volume in the most expensive stocks has skyrocketed 

With more stimulus coming, personal savings are expected to exceed the levels we saw after the CARES package payouts


EdgePoint Podcast: Tye's takes on 2020 

Tye recently did a 30 minute investor-friendly interview which is now available in an easily downloadable podcast. Tye discusses: 

1. Why short-term underperformance is required for longer-term outperformance 

2. 2020 performance: a tale of two markets 

3. Why we won't invest with the herd 

4. Our ongoing commitment to getting your clients to their Point B 

5. Tesla, TE Connectivity and more…. 

Download it now 

or listen on Apple or Spotify

Comparing investors to frogs in boiling water 

Seth Klarman, the founder of hedge fund Baupost Group, has told clients central bank policies and government stimulus have convinced investors that risk "has simply vanished", leaving the market unable to fulfil its role as a price discovery mechanism. 

Mr. Klarman also said the Fed's policies had exacerbated economic inequality, referring to a "K" shaped recovery that has seen "the fortunes of those already at the top bounding swiftly upward, while those at the bottom remain on a downslope without end".

"With so much stimulus being deployed, trying to figure out if the economy is in recession is like trying to assess if you had a fever after you just took a large dose of aspirin," 

"But as with frogs in water that is slowly being heated to a boil, investors are being conditioned not to recognise the danger." 

Using Tesla as an example, Mr Klarman said shares in the "barely profitable" electric carmaker had soared "seemingly beyond all reason", briefly making the company's founder Elon Musk the richest person in the world. Low interest rates have made projected cash flows more valuable, he said, a point many investors have unwisely used to justify valuations on companies that sit far above historic norm.

Investors used to love "story stocks." Now they love story ETFs. 

Often called thematic ETFs, these funds cut across industries, trying to capitalize on ideas like alternative energy, cloud computing or 3-D printing. Others buy stocks that could benefit as more people work from home, demand gender or racial diversity, or lavish money on their pets. Assets in these funds have grown at an average of 45% annually over the past three years. 

In the fourth quarter of 2020 alone, thematic ETF assets shot up 78% to $104 billion. Quirky rules of portfolio construction can also crop up. At the U.S. Vegan Climate ETF, the size of any single stock position is limited to 4.5%. Yet Tesla Inc., the fund's largest holding, has mushroomed to 7.9% of total assets. 

Investors pursuing themes that seem obvious should remember that if a theme appeals intuitively to you, chances are it appeals to millions of other investors too, making a fund's underlying holdings more expensive. 

These funds tend to launch months after a theme has gotten hot-amid a crescendo of media hype and stocks earning eye-popping returns. In other words, investors have a natural tendency to buy at exactly the wrong time, and these funds can make that even worse. 

"Well, I've got a tip for you. If you think you've spotted a theme that other investors haven't fully appreciated yet, ask yourself how come there's already a thematic fund for it." 

When Investors Forget Fundamentals 

This year, stocks priced below $1 have performed the best, followed by those between $1 and $2, and so on. It looks remarkably like investors are treating a low-price share as an indicator that the stock is a bargain, and a higher price as a sign that it is worse value for money. 

The share price on its own carries virtually no useful information: It depends entirely on how many shares the company has issued. 

The pattern of lower-priced stocks doing better is perhaps brought on by the rising popularity of trading by individual investors, who are more likely to be new to the stock market and regard a low-price share as cheap, even though it should be irrelevant to a company's prospects. 

This week's charts 

Who needs earnings? 

Global stimulus in response to COVID-19 

The balance sheets of developed market economies are now approaching wartime conditions

Investing…it's just that easy 

Chad and Jenny are the newest financial stars of TikTok. As Chad puts it: "I see a stock going up and I buy it. And I just watch it until it stops going up, and then I sell it. " "Up is good. down is bad. I just ride the upward trends and when they start going down jump off lol." 

In a bull market, lots of stocks go up. You can probably find a few even if you have no clue what you're doing. As the old saying goes, even a blind squirrel can find an acorn once in a while.

In the late 1920s, trading stocks, often with borrowed money and without doing any research, became a national obsession. The same mania struck in 1999 and early 2000. 

Investing can be simple, but it isn't easy. It isn't a mindless joyride. It is a process, not a game; you win by persisting over the course of many years, not by racking up the most points in the least amount of time. 

Being cooped up has led many investors to conclude that they can perceive which themes, or broad trends, are likely to dominate the market for years to come. That can make it harder to remember that other investors may have spotted the same themes even earlier, driving prices dangerously high. 

You should keep your investing simple. But you should never let anybody fool you into thinking that investing is easy.


2020 Q4 EdgePoint commentary 

Equity commentary: The granny shot (or why you shouldn't always listen to the crowd) 

This quarter, portfolio manager Andrew Pastor explores a deceptively simple (but effective) idea that's difficult to do in practice - investing differently from everyone else. 

Fixed-income commentary: Things that make you go "hmm…" 

This quarter, Derek Skomorowski talks about the risks of buying long-term government bonds in the current environment and why we focus on buying mispriced bonds of businesses that can withstand an economic shutdown no matter how long it lasts. 

30+ year peak in duration of the bond market.


U.S. high-grade corporate bond investors have never been paid so little for taking so much risk 

The "Sherman Ratio," named after DoubleLine Capital Deputy Chief Investment Officer Jeffrey Sherman, shows the amount of yield investors earn for each unit of duration. It tumbled to as little as 0.1968 on Dec. 31 for the Bloomberg Barclays U.S. Corporate Bond Index, a record low in data going back more than three decades. 

This is happening because the numerator (yield) has continued to tumble while the denominator (duration) increases. The average investment-grade corporate bond yield was a record-low 1.74% as of Dec. 31, compared with 2.84% a year earlier, while the modified duration on the index increased to 8.84 years at the end of 2020, just about a record high, from 7.96 years at the start. 

The first week of 2021 demonstrated how potentially perilous this dynamic can be for credit investors. Investment-grade corporate bonds suffered their worst loss on a total return basis since August, and second-biggest decline since March, even though spreads narrowed and there's no sign of broad stress in high-grade markets. 

The blame for that weakness lies almost entirely with Treasuries. The benchmark 10-year yield increased by 20 basis points in the first five trading days of the new year, as investors expect a greater debt-funded stimulus with a Democratic sweep. It really doesn't take much of a move higher in interest rates to wipe out the income return on the index or a fund tracking it. 

COVID-19 Tracker Canada 

Canada is vaccinating 0.12% of the population daily. Total vaccination as of yesterday (January 14th 2020) is 1.15% of the population. Israel is vaccinating 0.76% of its population daily and is at 22.4% of total population vaccinated. 

Some global comparison below: 

Interesting observation: Prince Edward Island has already administered 5102 vaccines or 3.2% of its population. They are running 283% better than the national average. 

FOMO is real 

Last week, Elon Musk recommended folks use Signal, an encrypted-messaging platform which isn't a publicly traded company. Investors and fans of Elon misinterpreted this tweet and quickly bought shares of Signal Advance (unrelated company). Signal Advance shares surged over 6000% in 3 trading sessions, pushing its market value to $3.164 billion from a mundane $55 million. This week the stock is down 80% as it was made apparent that Musk was tweeting about a different Signal. 

Daily trading activity by individual investors in South Korea


Waiting for the last dance 

Written by Mr. Grantham, co-founder of GMO:

"The market is much higher today than it was last fall when the economy looked fine and unemployment was at a historic low. Today the P/E ratio of the market is in the top few percent of the historical range and the economy is in the worst few percent."

"As a Model 3 owner, my personal favorite Tesla tidbit is that its market cap, now over $600 billion, amounts to over $1.25 million per car sold each year versus $9,000 per car for GM."

"This time, more than in any previous bubble, investors are relying on accommodative monetary conditions and zero real rates extrapolated indefinitely. This has in theory a similar effect to assuming peak economic performance forever: it can be used to justify much lower yields on all assets and therefore correspondingly higher asset prices. But neither perfect economic conditions nor perfect financial conditions can last forever, and there's the rub." 

Video: Charlie Munger at Caltech 

Caltech's President Thomas Rosenbaum interviews 2020 Distinguished Alumnus Charlie Munger on his accomplished career as an investor, businessman and attorney in this 1 hour video.

A few things I'm pretty sure about by Morgan Housel 

Risk is what you can't see, think only happens to other people, aren't paying attention to, are willfully ignoring, and isn't in the news. A little surprise usually does more damage than something big that's been in the news for months.

Daniel Kahneman says a key to investing is having a well-calibrated sense of your future regret, which might actually be the key to understanding all forms of risk. You know exactly how much risk to take if you know exactly when you will cry Uncle when things don't work out.

When interest rates are zero stories about what the future could be are more important than what the present actually is. Interest rates tempt investors away from stories about future potential with promises of returns right now, this year. Once those returns fall to zero, stories about what could potentially happen years from now - even if it's low probability - gain most of the market's attention. And people are good at coming up with awesome stories. That's part of why Tesla is worth two-thirds of a trillion dollars, and the market is at an all-time high with 10 million people unemployed. 

An engineer can have a successful career knowing nothing other than engineering. Same for a chemist, meteorologist, or radiologist. Business and investing don't work like that. They're a little math, a little accounting, a little sociology, a little psychology, a few parts marketing, law, politics, game theory, history, statistics, biology, and public relations. That doesn't make them harder than other fields; just more uncertain, prone to change, and with fewer experts. 

What's wrong with wind and solar? 

Are wind, solar, and batteries the magical solutions to all our energy needs? Or do they come with too high a price? Mark Mills, Senior Fellow at the Manhattan Institute, analyzes the true cost, both economic and environmental, of wind and solar energy. 

Residential mortgages in Canada 

In 2020, equity returns were mostly a result of multiple expansion as company earnings on average declined.

It pays not to try to time the markets 

Some humour to start the year


This special edition of Inside Edge provides an overview of the videos, commentaries and Academy pieces published by EdgePoint in 2020. The next Inside Edge will be published on Friday, January 8th.

Short videos

Embracing the unknown: To achieve pleasing long-term returns, investors sometimes need to feel the discomfort of owning businesses that don't offer the short-term peace of mind that most of the market craves. This video explains why successful investors embrace times of uncertainty. 

Short-term declines: Short-term pullbacks in the market will happen, but they're only temporary. What matters most is how you react during these tough times. 

Bumpy road to long term outperformance: Everyone wants to outperform in the long term, but you can't do that if you invested like everyone else. In this video, we explain how looking different might mean short-term underperformance and how that's just part of an investment approach that can pay off over time. 

Worth your while - knowing the value of what you own: We believe that the best way to avoid falling into an emotional trap is to act like a rational business owner and differentiate between what the business is really worth versus what the market thinks it's worth. 

EdgePoint's investment approach: We believe the most valuable thing about us is the application of our investment approach. Our primary goal is making money for our investors but pleasing returns over the long term are more likely if you understand and believe in the EdgePoint investment approach. 


In 2020, our portfolio managers wrote about: 

• Uncertainty, and things we know to be true even in an uncertain environment (We understand the gravity of our responsibility to you - part 1

• Your path to point B and why you need uncertainty and willingness to look wrong in the short term to get to point B (We understand the gravity of our responsibility to you - part 2

• The high price that investors are willing to pay in search of certainty and why investors should crave uncertainty in investing (The certainty of uncertainty

• The rarely seen high-yield opportunities in the volatile fixed-income environment at the beginning of the year (Glass half full

• The risks in fixed income investing and the importance of fishing where best investment opportunities are (Fish where the fish are

• The changing outlook for fixed income and how you can ensure it plays the right role for you in the future (Play your part - the role of fixed income in your portfolio

• And what helped them sleep at night at the beginning of the year (What helps us sleep at night - Part 6

EdgePoint Academy: Planning for retirement 

A series of articles focusing on retirement, specifically on topics and issues faced by investors preparing to retire or already there: 

1. Are your retirement savings on track? Compound your money, not your problems. 

2. The big day has arrived: the right investments can help meet your income needs. 

3. The retirement income balancing act: the impact of withdrawal rates. 

4. Sequence of returns: a risk worth learning about. 

5. Your retirement preparedness temperature check.


Borrowing more to pay more

Leveraged buyout (LBO) - A leveraged buyout is the acquisition of a company, either privately held or publicly held, as an independent business or from part of a larger company (a subsidiary), using a significant amount of borrowed funds to pay for the purchase price of the company. 

How much gas is left in the tank? 

FATMAN-G is Facebook, Amazon, Tesla, Microsoft, Apple, Netflix, and Google. Owners of these shares should consider that they own them at the current share price. A decision to hold the shares, or to not sell them - even if purchased a thousand percent ago - is effectively a decision to buy them today. Let's say we are 30, have a three-year old and want to use our FATMAN-G investments to pay for college in fifteen years. Or maybe we are 50 and want our FATMAN-G investments to pay for our retirement at 65. Let's also say we expect to make 15% a year in these great businesses. Sure, they've done much better than that historically, and these indeed are amongst the best businesses in the world, but let's not be greedy, and just shoot for 15% a year. Let's also assume that these great businesses will always have tremendous growth opportunities and thus instead of paying dividends, these companies will use excess cash to invest in those lucrative projects. 

The table above shows the market caps they would need to sport by 2035 in order to achieve our financial goals. Tesla would need to have a market cap of $6 trillion, Google $10 trillion, and Apple $17 trillion. And for each of them in aggregate to generate 15% annual returns over the next fifteen years, they would need a combined market cap of over $70 trillion. In 2035, that will be greater than the combined GDPs of the US and Europe. 

Interest rate sensitivity of major fixed income indices

Source: SunTrust Private Wealth Management 

Interest rate sensitivity is a measure of how much the price of a fixed-income asset will fluctuate as a result of changes in the interest rate environment. Securities that are more sensitive have greater price fluctuations than those with less sensitivity. 


Robinhood Markets drew millions of users to investing with a colorful app that makes trading seem empowering instead of intimidating. That very appeal thrust it into the regulatory crosshairs yet again on Wednesday. Massachusetts securities regulators filed a complaint against Robinhood. It focuses on the tactics that Robinhood employs to keep consumers engaged, alleging that it encourages them to use the platform through what it calls "gamification." One Robinhood customer with no investment experience made more than 12,700 trades in just over six months, according to the complaint. 

S&P 500 FY2 P/E ratio with and without Tesla


Valuation of momentum


Demand for gasoline
While there is some seasonality in this, this is interesting given that the consensus was that this would recover a lot faster when we were in February/March. 

Trading can be addictive
Is the stock market a form of entertainment? Here is a story of a reporter signing onto Robinhood, the popular stock-trading app, to find out. 

"My editor and I decided that I should see what the fuss is all about. I started trading on Robinhood on Oct. 27, expensing my $100 investment. Any profits I made would go to charity; any losses would go toward public humiliation. I closed all my positions on Nov. 17. I never did any research; the companies would be just ticker symbols to me. Such insanely risky, wildly fluctuating stocks would either make-or lose-a ton of money. That was the plan. In the end, after three hectic weeks, I finished with $95.01. I'd lost 5% of what I'd put in. Counting the free stock I'd gotten, I was down 10.2%. Over the same period, the S&P 500 went up 7%" 

The lesson? 

You can't invest without trading, but you can trade without investing. Even the most patient and meticulous buy-and-hold investor has to buy in the first place. A short-term trader, however, can make money-for a while, by sheer luck-without knowing anything. And thinking you're investing when all you're doing is trading is like trying to run a marathon by doing 26 one-mile sprints right after the other. To invest means, literally, to clothe yourself in an asset. That gives a stock the chance to work for you over the years it may take for a company to prosper. It also minimizes your tax bills-and your stress. 

Why do investor returns differ from mutual fund returns?

Why do Investor Returns vary from the profits of mutual fund houses? Investor Returns depend on: 

• When you made your investment 
• The price you paid 
• Your holding periods 

There are a few reasons why the mutual fund's returns are higher than your returns. 

Most people invest in the fund when the market is soaring, and they see the fund performing well. A well-performing fund has a high NAV. So, the investor buys at a high price. 

When the market reaches a low and the fund's performance drops, investors panic and sell. Optimism and despair control the investor's financial decisions. Situations lead investors to speculate rather than invest. 

Over the years, the retail investor's holding period has reduced. You do not benefit with reduced holding period as you are unable to reap the rewards of compounding. Exponential results are possible only because of compounding which takes time to work.

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Book recommendations

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

Food for thought

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