Random Thoughts on the Inverted Yield Curve and Debt

There was much discussion in 2018 on a temporary inversion of the two and ten year treasury yields, and it almost certainly contributed to some panic as investors widely view inversions in the yield curve as leading indicators of recession. Surprisingly for those who take the position that market timing isn’t possible (it probably is to some extent, but it would likely be difficult and unprofitable to act upon), investors have good reason to believe yield inversions are meaningful, as they have preceded all nine U.S. recessions in the past 60 years with recessions on average occurring 18 months later, with a high level of predictive power according to the San Francisco Fed.

Value Destruction at TransCanada

There are far worse offenders than TransCanada, but value destruction by management is rampant in many cyclical and/or commodity industries, and natural gas is one which has a particularly high rate of occurrence. There are many natural gas firms, particularly those that focus on upstream operations, which compensate officers at least partially on the growth of both production and reserves as opposed to value creation.

Stock Prices are Even Less Efficient Than You Think

Within financial academia, there are three main groups of thinking regarding public equity pricing, all of which stem from the efficient-market hypothesis and depend on it to varying degrees. The strong form of market efficiency thinkers believe stock prices reflect all information that can be known about any business, including insider information, and that stock prices are wholly unexploitable for above-average risk-adjusted returns.

An Investing Metaphor

I don’t know how productive this will be to anyone’s understanding of investment, but I personally found the following to be a very simple and helpful thought experiment. Generally speaking, I believe most investors would benefit dramatically from viewing their investments in the belief that their ownership is completely illiquid and that the only source of returns will be dividends.

The Basics of Deep Value Investing

A few years ago I had a blog in which I used to post about the details of deep value investing and some of the methods by which an investor could go about exploiting market inefficiencies. Those posts weren't ever brought over to this site and it dawns on me that despite explaining some theoretical concepts, I've never explained much of anything about how I have been generating our performance over the past few years in basic, practical terms for anyone interested in hearing about it. 

Stock Price Fluctuations Are Your Friend

This is by far the most important thing I will ever write about investing and it is essentially mandatory reading for anyone looking to become a client and partner of this firm. If you're not with me on this you likely won't be a good fit for us (or for proper investing in general). What I will explain is extremely simple and in my opinion the most important thing to understand and follow in order to achieve excess returns but for whatever reason, it is difficult for most investors to implement in their practice. 

The Assumptions Built into Stock Prices- Netflix & Amazon

This should be a short piece, but I wanted to use a few examples to describe the assumptions inherent in stock prices and why investors need to think through stock valuations. Given that price is a major factor in predicting future returns, investors should of course be unwilling to pay anything greater than the present value of all future free cash flows, discounted at an appropriate rate for any investment.

Growth, Returns on Capital, and Business Valuation

Before I start this piece on valuation, I just want to say that nothing in business or finance is as complicated as it looks, and nearly all of it is much simpler than you think. I’m going to get a bit wonky in explaining some terms here but what’s important is that the concepts are understood.

U.S. Stock Market Valuations and Future Returns of the S&P 500

In 2013, Eugene Fama, Lars Hansen, and Robert Shiller won the Nobel Prize in Economics. It was an odd trio, given that Fama is one of the fathers of the efficient markets theory and Shiller wrote a book titled 'Irrational Exuberance' in which he discussed the irrationally high stock prices  shortly before the crash of 1999.

Cigar Butts and the Advantage of Investing Small Sums

In any lecture or interview about investing, Warren Buffett often says that you should buy great businesses at fair prices. The idea being that as long as you purchase a great business at a reasonable price, the firm will generate higher earnings in the future than it does now, increasing potential future dividends while using retained earnings to increase the asset base and further improve earnings.

The Difference Between a Good Business and a Good Investment

In my last post, I discussed the basics of what gives companies competitive advantage and what makes good businesses. In this post, I want to move from the analysis of a business towards the analysis of an investment. The difference between the two? The price one pays to become an owner of the business.