Category: Finance

Horizon Kinetics’ 1st quarter commentary has an excellent primer on “On Concentrated Positions, “Locking in Profits” and “Trimming”” which contains sage wisdom, well worth reading (pages 2-6).

When trying to summarize my own investment strategies in a sentence, it always amounts to maximizing the reward/risk ratio (or minimizing the risk/reward ratio). Most laymen when hearing this think it means trying to operate a conservative-as-possible portfolio, but it doesn’t preclude really swinging the bat for a home run now and then at the risk of a strikeout. However, when going into detail as to what exactly entails ‘reward’ and ‘risk’, I end up sounding like a total flake simply because my investment style is to be as amorphous as possible dealing with the cross-section of the highest probability of what I believe I know (e.g. I can’t know everything, I don’t know most of everything, I know a lot of what I do not know, and I don’t necessarily know what I think I know!) and where I think things are going in the grand scheme, and having political experience helps with this. Markets inevitably are human-driven, with all of our psychological traits deeply embedded despite most of the actual trading being driven by human-written yet computer-executed algorithms.

It is always disturbing to me that the performance I have generated over the past 15 years or so has just could have (Sacha’s note: In the original posting, I forgot to include these two words which materially alters this sentence!) been the result of dumb luck. I’d like to think otherwise, but I can’t rule it out. One great and bad thing about an “amorphous” investing strategy is you can’t backtest it to measure how much alpha you truly generate. But I do like the “if I went into a coma for the past X years, would my portfolio be better off today or had I not slipped into the coma” test, whereby you can measure your performance against yourself rather than some arbitrary index. For instance, all of us have underperformed the bitcoin index over the past decade.

If I were to characterize the markets currently, it is pretty clear that things have stabilized after Covid-19 and this is going to end up muting overall returns going forward. Q2-Q4 in 2020 was a bountiful time where farmlands were fertile, and today the crops are growing, but the harvest time is coming very soon. I’m guessing that as the more youthful participants in the markets slowly get their accounts liquidated (through SPACs, junk crypto and the like), that the remaining competitors in the market will be much more sharper with their pricings. The continuing gap of passive vs. active (another topic that Horizon has written about extensively in the past) will also be exploitable going forward.

Lumber has gone nuts, especially in relation to its ambient trend over history.

Since 1978 we have the following (nominal) pricing data:

And in the past year:

Similar to crypto, nothing shows proof of work more than a sawed 2″x4″x8′ stick of wood available at Home Depot!

Not surprisingly, given the completely out-of-history price rise in lumber pricing (right up there with government bond pricing), we have seen lumber producers skyrocket in price from their Covid lows. The previous rise up in 2018 also caused a spike in lumber producers, but this time the prices are even much higher.

However, lumber is like most other commodity markets that are highly cyclical – I suspect pricing is at the point where there will be an element of demand destruction and when this occurs, watch out below. It’ll probably happen in 2021 when the current backlog of “must-construct” projects abates and supply continues to stream in.

The times are good right now – lumber companies will be posting insanely high profit numbers in Q1 and Q2, but the question remains how sustained this massive commodity boom will be. The phrase “leaving the party while people are still drinking the hard liquor” seems apt – it seems so contradictory, but you want to unload your commodity shares at a point where the historical price to earnings is the lowest (typically a mid-single digit). The market has a very good sense of being able to detect when the commodity company has reached its peak profit.

Just doing a brief equity scan of the winners and losers of 2021 to give me an idea where the trends are going.

Losers

The TSX is littered with the carnage of gold mining companies. They’ve performed well for the year, but in the past two months, they are all trading down. Notables include Gran Colombia (TSX: GCM) and New Gold (TSX: NGD), both down roughly 30% for the year. New Gold is still well up (about 80%) year-to-date, while Gran Colombia is roughly flat.

The first non-gold corporation of any significance that hits the scanners is Docebo (TSX: DCBO), down about 28% for the year. They went public in the summer of 2019 at CAD$16/share, so they’re still massively up from their IPO. Their primary business is educational software, which needless to say, was a very timely sector to be in during COVID-19. With a market cap of nearly $2 billion and “annual recurring revenues of $73 to $74 million”, it trades like a typical SaaS COVID company. Their stock performance is likely a reversion to the mean scenario.

Next down the non-gold list is Ritchie Brothers (TSX: RBA), down 22%. They’ve done reasonably well post-Covid, but had a mild miss on year-end earnings. While the company itself is solid, they are still at valuations that I’m not tremendously interested in the stock.

Moving further down the list, we have Trillium Therapeutics (TSX: TRIL), down 21%. I don’t see any obvious reason why they are trending down.

Then in the 20% or greater category, we have BBTV holdings (TSX: BBTV) which is down 21% for the year as well. They went public last autumn for CAD$16/share and let’s just say they’re an interesting company.

Winners

There are many, many more winners on the TSX scan than losers. There’s about 80 companies that are up more than 50% year to date. I won’t talk up my own book, but I’ve generally been surprised to see some names that I own in this list!

The highest performers have been, interestingly enough, in marijuana. Aphria (TSX: APH), Canopy Rivers (TSX: RIV), Supreme Cannabis (TSX: FIRE) and Village Farms (TSX: VFF). Another tier has been what I consider to be ‘marginal’ mineral miners. I won’t name them. There are also a lot of other marginal companies as well on the list (associated with crypto, but also oil and gas). The next tier down is a mix, but mostly non-gold commodity companies. Notables include: CRH Medical (TSX: CRH) which got bought out by Well Health (TSX: WELL), Denison Mines (TSX: DML). Other standouts include Canada Goose (TSX: GOOS) and Cineplex (TSX: CGX).

Interesting times. Will gold continue to show weakness? Will there be a huge mean reversion with the rest of the market?

Another miscellaneous ramblings post.

Let’s play a mental game. Imagine if you lived in a world where the public markets consisted of only the following choices: AMC, Bitcoin, Canopy Growth, Gamespot, Microstrategy, Nio and Tesla.

There would be little purpose in investing in the public markets beyond gambling. It would more or less be a zero-sum casino for the most part (until, at least in the short term, Gamespot and AMC went bankrupt). Perhaps the public would feel more “secure” investing in a “index ETF” that would be a “well diversified basket” of these companies, but of course since they are usually capitalization-weighted, it would be like splitting your money between Tesla and Bitcoin. Who reads the fine print on these ETFs beyond their titles anyway?

Today that leads me to the next point of Tesla getting in on the Bitcoin zero-sum game bandwagon – Michael Saylor (Microstrategy) is the big winner here. However, note that $1.5 billion for Elon is approximately 0.2% of Tesla’s market capitalization, while it is more than what Microstrategy invested (at cost) into Bitcoin. I’d be really curious to know what would happen if Tesla decided to float a $5 billion convertible debenture (which would receive a very low coupon rate because of the huge implied volatility in the stock’s options) and dumped the proceeds into Bitcoin – who else would be compelled to jump in, fearing the miss-out on the bandwagon?

The good news is that because a bunch of capital is being thrown at a zero-sum asset doesn’t mean that I have to. Fortunately there are more than two options to invest in the public markets beyond Telsa and Bitcoin.

Let’s play this mental game again, and throw in some boring, relatively unremarkable positive income/cash generating company that has a very high probability of being around for the next 50 years: Fortis (TSX: FTS). What happens? Almost by default, the “natural valuation” of Fortis will rise because of the contrast provided in comparison to the other companies. Believe it or not, there are some people out there investing in publicly traded securities not for gambling purposes.

The point is that we have multiple currents flowing in the public equity ecosystem – those that get most of the attention (the Teslas and the like) versus the ones that creep a thousand feet under the surface. Right now there are enough of them, but even they, to a large extent, have been recipients of financial attention due in part to the monetary environment (low rates) and the availability of automated data screening to find them out (just imagine in Warren Buffet’s growing up days where you had to write into companies to obtain their financial statements and this was the only way to discover they are trading at 3 times earnings).

Investing in part is a choice of alternatives and priorities. If you want immediate safety and liquidity, there is cash. There used to be the GIC/government bond option for those that wanted to make a small return on their cash, but this choice is now more or less gone. You can speculate on commodities (gold, silver, oil and gas, etc.) but the underlying commodity does not give a return, although it should retain some form of value because there will be future demand. Finally, there are stocks and they provide a huge range of risks and potential rewards. I am just thankful the stock market still has companies that are trading well under the radar of the Reddit and Robinhood retail traders!