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Circle Of Competence Issue #7

Neat work on the correlation between oil prices and energy companies.

As the saying goes, the bond markets lead the equity markets, I am sure fixed income investors are watching this like hawks.

See the study linked in the article for a deeper dive into hedge fund alpha and it’s relationship to a fund’s trading activity.

We’ve heard about this new entity, but still not much substance. I’ll be watching this closely.

Department of Blogs

First article I’ve read by this blog, but a solid short read on why backtested strategies in quantitative investing can be tortured to give you good returns (classic over-fitting for you machine learning folks)

Another good post from Clark Street Value on the spin-off of CorePoint and various ways of thinking about its valuation. Also included, their investment strategy on the spinoff.

Excellent lecture from on long term equity appreciation securities (LEAPS - essentially long-dated calls) and the ideal strategies around using these types of securities. Long but wonderful notes here including thoughts around bullish call spreads, straight LEAPS strategies, handicapping risk/reward ratios and when NOT to use LEAPS.

Department of Culture

Tough sanctions on missionary brothers and sisters in China.

Great Saturday Essay from WSJ on the cultural shifts occurring during Nixon’s presidential run.

Department of Technology

Very interesting new tech that could lead to breakthroughs and deeper integration of technology into our every day lives.

Great piece by Jason Zweig on the limits of growth in the tech industry and whether they will continue their exponential growth or be anchored by the iron chains of ever expanding capital bases and capitalistic competition.

Interesting way of applying AI to fill orders in different markets (currencies, equities, etc.) simultaneously using machine learning.

A trend I’ve been following for a while now (the robots are coming) is starting to manifest itself in various ways in various industries. This is neat read on how Walmart is joining the fray.

Department of Podcasts

Great debate on the Value Investors Podcast on future of bitcoin and blockchain technology. Another good earlier episode on what bitcoin is here: Bitcoin, Ethereum, Segwit 2X, Lightning Network with Value Investors Podcast

One of my favorite podcasts on real estate, BiggerPockets is a great resource for both experienced real estate investors and beginners alike. This episode is fantastic and has the ring of a seasoned value investor (listen closely to Paul Morris’s three rules, especially his call to stick to what you KNOW) in real estate.

Department of 10-K's and Letters

Solid insurance company, but not overwhelming returns on shareholder capital and invests more in a conservative portfolio (fixed income mostly) than a portfolio geared towards absolute return.

Prem Watsa was never shy about his objective to average 20% return on shareholders capital over the long term. Reading his shareholder letters chronologically has allowed me to gain insights into what I’ll call his “business playbook” and how he has allocated capital over the years to achieve his ultimate goal of 20% ROE. Particular to these two issues, I enjoyed how he structured the takeover of Hamblin Watsa investments, his transparency of what Fairfax's foray into investment banking cost shareholders, and the deal structure of the purchase of Ranger insurance company (he’s not afraid to issue shares at a fair price and then buy them back).

While reading Fairfax Holdings’ annual letters, I also want to juxtapose the master’s work against Prem Watsa, who was initially inspired in 1985 to follow the same model as Buffett - I.e. buy insurance companies that consistently underwrite at or below 100% combined ratios and invest their float for absolute return.

In this particular letter, the 25th anniversary of Buffett being in control, he lays out several “mistakes” he’s made over the years that are timeless. Moreover, after reading his letters chronologically, I am becoming more familiar with his business playbook as well - 1) conservative financing 2) good returns on equity 3) good management 4) fair priced acquisitions 5) lavish praise for good management 6) transparency to shareholders on both successes and failures 7) decentralized approach to management to an extreme... and the list goes on.

What are you reading this week? Drop me a line!

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