Case Studies

Most of the headline news has focused on central banks raising short term interest rates to combat inflation. Higher interest rates will restrict businesses and consumers alike and we will experience a recession.

2021 Q4 Market Letter The energy transition from fossil fuels to green alternatives like wind, solar and nuclear was a…

2022 Q3 Case Study – Website The economic and financial era of lower inflation and lower interest rates may be…

The words ‘this time is different’ are often referred to as the four most fatal words in investing. What seems new and fresh may lead many to conclude that different rules should apply.

The historical example of a mania that is often sited is the Dutch tulip bulb frenzy of the 1630s. The tulip craze became popularized as a cautionary tale for investors in the 1841 book by Charles Mackay called Extraordinary Popular Delusions and the Madness of Crowds. Excessively easy monetary policy accompanied by a strong economy led to one of the oddest, speculative, price increases ever.

China’s economy appears to be slowing. This is a big deal in itself but how will we be affected as Canadian investors? Our honest answer is we don’t know, but we should be thinking about it. China is now of a size where it has a major impact on the global economy and financial markets.

The question many investors are asking is, given this increase in money supply, is a period of higher inflation upon us? While we at Avenue believe higher inflation is likely this year, we will soon revert back to an economy with low growth and low consumer price inflation.

After a forty-year bond market rally from a high of 18% in 1982 to the current 0.70% low today, we struggle to get excited about bonds in the short or medium term.

An examination of the valuation of Apple’s shares is an excellent way to demonstrate the extreme divergence that has taken place in the stock market in the last six months. Not much has changed in the underlying profitability of Apple. What has changed is that investors are willing to pay a mania-type multiple not seen since the 2000 dotcom bubble.

The level of US Government debt was an issue before this recent crisis. Now we believe excess debt will come to define financial markets in the coming years.

The case study is where we discuss specific details of our investment process. Today we will tackle stock market multiples and how it relates to risk. I wish I could say we can also make it entertaining, but the subject matter probably precludes this.

Avenue’s stock market investment strategy is to find business that have consistent earnings and trade at a fair price. Technology is difficult to fit into these parameters because technology companies by nature have disruptive business models which don’t always result in consistent earnings. Our topic today is to show just how expensive and erratic many of these technology companies have become. We will examine the influence of Softbank’s Vision Fund and WeWork on tech venture investing.

With Canadian bond yields dropping below 2%, these are dark days to be a bond investor. Gone are the days when one could hope for 5-7 % annual returns from the bond market. With global central bank policy using quantitative measures to lower interest rates close to zero, the global $40 trillion-dollar bond market is searching for a “normal” return.

In Avenue’s equity portfolio, Enbridge is a great example of an investment which demonstrates the current valuation paradox.

In a rising interest rate environment there are times like the last nine months when it seems like nothing is happening. We have had a few questions from clients about why we own bonds at all. We believe it is helpful to lay out Avenue’s bond portfolio, so you can see all the individual bonds and you can better understand the return profile of the entire portfolio.

It seems many Canadians are in denial of what we actually do as a county to create wealth. A majority of the Canadian population have voted for federal politicians to extract us from the carbon economy. This may sound like a good idea except we don’t really have a substitute non-carbon economy ready to replace it, just yet.

Sometime a picture can relay information more clearly than a long-winded description.

A new investment mania is always just around the corner. All you need are the right ingredients of hope, unquantifiable potential and greed. Cannabis stocks and Bitcoin qualify for this distinction as we observe them both dominating the headlines. So, we thought we would take this quarter’s Case Study to discuss why a speculative craze does not fit with Avenue’s strategy of investing in consistent and profitable businesses.

Compounding investment savings using bonds requires a grasp of a few simple concepts. However, it is amazing how complicated the financial industry makes it sound. What tends to get lost in the noise of interest rates going up and bond prices going down is the far more important result that bond interest and maturities can be reinvested at a higher rate.

The stock market of 2017 is starting to feel a lot like 1997. It is now a full 20 years after the first stock market internet bubble. The peak of that market phenomena was in 2000, but it was two and half years earlier when the market started to differentiate between those businesses who used this new phenomenon called the internet which could attract millions of ‘eyeballs’ and those businesses who did not. The world was never going to be the same. Owning your Mum and Dad’s stocks was as sexy as wearing a one-piece wool bathing suit.

Why should one invest with Avenue as opposed to an index and why does Avenue not use index funds to gain exposure to some harder to invest in sectors?

Usually politics grabs the news headlines but does not have much effect on investments. Profit margin cycles and the direction of interest rates evolve gradually over decades and are the real long term drivers of investment returns, unless you experience a dramatic and sustained political interference. So while US politics dominates our news cycle and we would argue that the current US election would have some negative consequences from either candidate, it is important to look beyond this noise and fully grasp how intrusive and stifling domestic politics has become.

The annual proxy season can be a tedious time for money managers as public companies send out their annual reports and proxy materials. Tedious as it is, proxy season is an important time of year, when shareholders are given the opportunity to vote for board members, management compensation, as well as other corporate matters. However, aside from the occasional contentious vote, usually the general consensus towards proxy season amongst investment managers is a collective yawn.

Tax rates are going up in Canada for the wealthy and the moderately wealthy. This has a significant impact on after-tax investment return when Avenue does retirement projections for many of our clients. It is an obvious statement but one we haven’t had to formally address because for the most part the previous federal conservative government had spent the last ten years lowering various tax rates. This is important because we need to make sure we use realistic expectations for planning retirement income.

A very real challenge we face is a lack of liquidity in both the bond and stock market for smaller investments. We see three reasons for this liquidity crisis; two are global issues and one is unique to Canada.

This month’s topic, in light of a market sell-off, is about sticking to our strategy when faced with adversity. Again we feel Mr. Bruce Lee is spot on in his Zen approach to conflict, which can also be applied to the mental challenge of stock market investing.

That we are even talking about this kind of truly esoteric ‘systemic risk’ shows how far markets have progressed since the 2008 financial crisis. We will do our best to explain what this risk is and why it is a hot topic. But first we will start with a few definitions.

Warren Buffett has been one of the most successful investors of our time. He is equally good at distilling complicated investment concepts and explaining them in a way that is accessible to everyone. In this year’s Berkshire Hathaway annual report, he presents a clear and simple argument for long term stock investments being more stable and less risky than long term bond investments.

Avenue believes that with time, the price of oil should recover to the $75 to $80 price level. However, lower prices might be needed in the short term to reduce the excess supply from the global oil market.

We have written about Avenue’s theory regarding equity portfolio volatility, or risk, over the last 10 years in several case studies. Now that we have completed our first decade, we are happy to share with you that the results were much better than what we had hoped for.

Avenue’s Equity Portfolio is designed to accomplish consistent compounding in a diversified mix of assets and not simply to replicate or beat an index. The fundamental reason for creating a portfolio this way is to drive down the overall risk or volatility as it is called in the financial industry. We address this issue occasionally in this part of the letter because there are times that our portfolio does not reflect what is happening in the broad market indexes and we get questions as to why this is the case.

We are at a unique point in time that clearly demonstrates a universal investment fallacy where growth in Gross Domestic Product (GDP) will somehow translate to positive stock market returns. The performance of the Chinese stock market clearly exposes how simplistic this assumption is in reality.

We would like to share a couple of recent developments which confirm our belief that investing Safely in today’s world is best served by owning a hard asset or business in a sound legal jurisdiction.