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Circle Of Competence Issue #7

Department of General Finance

On The Relationship between Crude Oil & Energy Stocks

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

Coming Signs of a Yield Inversion

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

Hedge Funds - Higher Activity Does Not Lead to Higher Returns

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.

Berkshire Hathaway, Amazon, J.P. Morgan Venture Targets Health Issues

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

Department of Blogs

The Most Important Plot in Finance

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)

CorePoint Lodging - Form 10 Notes

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.

Lecture notes on LEAPS

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

China Bans Online Bible Sales

Tough sanctions on missionary brothers and sisters in China.

Nixon in '68: the Year America Came Apart

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

Department of Technology

MIT's new AlterEgo Headset can Read Words from Your Mind

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

Luxury Space Hotel - 200 Miles Up and $792k/night Need I say much more?

Can Tech Stocks Grow Without Limits?

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.

A New Concept to Stock Markets - AI Dark Pool

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

Walmart's Future Workforce - The Robots are Coming

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

The Bitcoin Debate

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

BiggerPockets Episode 274

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

Everest Reinsurance Holdings 2017 10-K

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.

Fairfax Holdings 1992 Letter to Shareholders

Fairfax Holdings 1993 Letter to Shareholders

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).

Warren Buffett's 1989 Letter to Shareholders

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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