Sunday, July 8, 2018

Waking up the global citizen in us!

It takes years to build a business and that business will experience good and bad years. There are numerous aspects of the business that go bad, OK, or good. The work atmosphere may be great, but there are no or little sales. Are products mispriced or is it just a louse market or a bad business model?  Over the longer term a business is likely to become more valuable. It may built an inventory of products in hopes to sell when demand is higher. Small business tend to do OK or fail right away. If there is sufficient working capital, a company may prepare for the good times while burning cash on possible future products.  

Some businesses, like restaurants fail or succeed quickly. A company may have an excellent product or service but not enough working capital. Other business take longer to reach commerciality. Think Tesla: a vision of mass producing attractive electric cars. It probably depends heavily on investor goodwill and patience for it to become a reality. It may prove to become a great business but a lousy investment. Finally, it produced 5000 cars per week after a pretty bumby start-up with Elon Musk shouting and firing staff without restraint. Did it help produce those cars faster or was he his own worst enemy? 

But overall, a business, especially one that reinvest its profits and possibly it’s employees’ earnings back into the business may work out and build up a steady revenue and earnings stream over many years. We can accelerate growth by using debt and different forms of other people’s money such as shares. After start-up which can take from a few weeks to many years, the company generally grows larger until it reaches peak potential and it will have to upgrade its products to remain relevant or make more products, develop new products, acquire competitors etc. In case of a corporate take-over, past management may have wanted to move on to a new venture or its performance wasn't great and new management may do better. When your company is taken over, especially during a down-turn, don’t throw in the towel; the new company may do better and so just come along for the ride (i.e. don't blindly sell out). On the other hand, it may be an opportunity to take the cash and run.  Every situation is unique.

See a business as an asset that is being developed with as primary purpose for you, the investor, to throw of an income stream. The business may have been around for many years and it will have many future good and bad years. As such, you cannot just look at a business’ latest quarterly report but rather you have to look at its longer-term ability to throw of cash flow through dividends and/or capital gains. Bell Canada has been around for over a century. That is quite different than Shopify, whatever that company may be doing.
As an employee or business owner you do not every day check what your company is worth. A business is often a dream in progress.  Yes, a good manager may streamline a company’s performance but remaking the essence of a company in one or two quarters is not a realistic expectation. There is a saying that states that a good management reputation is easily destroyed when getting involved in a bad company. 

As investors we often forget these matters when buying shares in publicly traded companies. We chart the psychology of the market price patterns and after a few months we better made 10% or more. If not let’s sell! That is no true business ownership and to be honest it is more gambling than investing in a truly good business. Some think that stock prices follow a random pattern as outlined in the classic book by Burton Malkiel.  Others do technical analysis based on the premise that short term stock price pattern are a reflection of human psychology. But over the long term it are earnings that seems to determine the final value of a company.

To be honest, an earlier post showed that the longest surviving component making up the Dow Jones industrial was General Electric. None of the earlier companies survived the Dow as it is annually adjusted by the editors of the Wall Street Journal. And guess what? Now GE is gone as well. So the expectation that shares of a company can be thrown in a shoebox and voila 50 years later you are rich is not true either. But, it is known that over a five to ten year time horizon shares of successful companies tend to go up. The question is how long will it be before the company peaks and starts an abrupt or long decline? As you can see there are many ways one can invest – short term with price momentum or based on technical analysis. Long term investing in a company but one should  keep a close eye on that company. 
Also, you may become an index-investor. This is investing on more of a macro-level. Many countries have stock markets of publicly traded companies: banks or resources or whatever other industry groups that make up its economy. People interested in the performance of their local economy can create a portfolio of companies representative of their local economy. These portfolios are often called indexes, The Dow Jones Industrial is an example. So is our TSX or the TSX60.  

When you track these index portfolios over the years they map out the progress a country’s economy makes. Countries do not tend to disappear overnight and people like Jeremy Siegel claim that U.S. stock markets and the stock markets of many other countries return typically 6% plus inflation. This is not a bad long-term return. But there maybe decades of good economic years interspersed with economic calamities needed to achieve this returns. There may be years with good business friendly business climate and years where there is a neutral or anti-business climate. 

An economy like Canada is resource driven as well as driven by its financial institutions. The U.S. is a much larger and much more diversified economy.  Since I started to invest in the stock market (that was in 1980 or so), I have seen many up and down markets. In the short term, it seems many markets are in lock-step but that is a misleading notion.  Canada's stock markets outperformed those of the U.S. from the late 1970s to early eighties because of its resource industry. While Western Canada outperformed  Eastern Canada in those years. 

Then the U.S. systematically outperformed Canada from the mid 1980s until the Tech Crash in 2001. In Fact, Eastern Canada did during those years better than the West as well. That was because resources were doing poorly during those years. Then, in one fell swoop, the Canadian resource industry took off between 2002 and 2008, after a short scary drop in 2008-2009 it continued to outperform until 2011 or so. U.S. markets were left behind in the dust. Since then, it was the U.S. that outperformed and we in Western Canada experienced one of the nastiest commodity down-turns in a generation. The S&P500 nearly tripled but Canada’s stock markets languished.
So here is another way to invest than in individual stocks. Invest in a nation’s economy through index investing, in particular using cheap and liquid exchange traded funds or ETFs. It is a lot ‘easier’ than investing in individual companies and you no longer need to pick the long or short term winners. Just pick one or more countries that likely will lead the world in the coming years. Don’t forget your home economy. Consider countries with the best stock market regulations for protection against fraud and against the stock market manipulations of foreign governments.  But also look at demographics of individual countries and their likely future economic development. 

Currently, I am reading a very interesting and somewhat uplifting e-book: ‘Factfulness: Ten Reasons we’re wrong about the world – and why things are better than you think’. This very long titled book is written by a very skilled writer: Hans Rosling. It is recommended on the cover by no-one less than Bill Gates. Does it matter that I also think it is a great read?  I don't know, but I too highly recommend reading it.
One of the many trends discussed is World Population. In a very simplistic way, over the next century, Europe’s population will remain around 1 billion. The Americas will also remain around one billion. Asia will climb to, hold on, five billion and Africa’s population will grow to… FOUR billion. Fortunately, poverty has declined in the world, even compared to a few decades ago; extreme poverty has dramatically declined. Still how by 2100 the African economy can provide a prosperous life for those 4 billion people is, to say it nicely, a challenge.

But think economic growth and energy consumption. Right now,  60% of 1-2 billion people  that live in the Western World have a lifestyle of the world’s top quartile prosperity, i.e.  around 1 billion people. While in the rest of world, 40% of 5 to 6 billion live in top quartile prosperity or 2 to 2.4 billion. So, a total of around 3 billion live what we call a prosperous life style. By 2100 there will be close to 11 billion people with 1 billion or so in the West and 60% of 9 billion, i.e. 5.5 billion in the rest of the world, living in that top quartile lifestyle. So that is an extra 3 billion or so people that lead a middle to upper class lifestyle. 

What will that mean for resource demand and energy demand?  It also means that tremendous economic growth is still ahead but with a lot of questions. For example, even with more energy efficiency, energy demand could easily double. If today 80% of our energy comes from hydrocarbons (oil, gas and coal) then what will generate that much energy at affordable prices 50 to a 100 years from now? 
I am somewhat concerned, because despite all optimists that say there is no limit to our fossil fuel resources and that it is only a matter of economics and new technology: How are we going to convert over 200 million barrels per day of oil, convert double the current coal use AND convert double today’s gas demand with just solar and wind energy?   

Having worked for 40 years in Alberta and somewhat around the world, I know that those years have not left behind a limitless energy supply.  To the contrary, nothing is as depressing as digging through those old depleted oil and gas pools. In fact, there is a crucial event coming up where we may realize that shale oil and even heavy oil is not limitless in supply and also that those 'new' technologies are likely to present huge environmental liabilities.

I would say that having a fossil fuel industry supplying all this energy may pose quite a challenge within a decade but it will also be an boon for fossil fuel investors. So will investing in other forms of energy and in a general growing economy. We may not be able to recognize every technological advance and participate in the Apples and Microsofts of tomorrow, but we can invest in the economy in general through index ETFs and catch a tiny bit of the wealth these future tech and energy giants may create.
Here is another consideration. Many think that innovation and technology are the birth right of the Western World.  That ‘our democracies’ have created the setting for geniuses to convert their insights into prosperity and wealth. Racists, please, humor me, and let’s assume that the occurrence of a genius amongst a population is strictly statistical and that all humans have the same odds of being a genius.  Also, consider the fact that, according to Factfulness, and I don’t doubt it, the number of democratic countries has dramatically increased over the last decades or so.  

With that in mind, what do you think the likely-hood is that the other 9 billion or so people in the rest of world will have more geniuses over the next 100 years than the 2 billion or so in the West and that many of those geniuses will live in sufficient freedom to invent and innovate as well. Probably a lot more innovation and inventiveness than we currently and in the future produce in the West. And... as the saying goes: Necessity is the mother of invention!
It is nearly unavoidable that the importance and influence of western democracies will decline over the next fifty to hundred years. That there will be numerous investment opportunities around the world. Unless you expect to earn all your future wealth from the business you own and create, I suggest that investing in public companies around the world will be an important source of your future finances. You should start thinking about investing in those public companies worldwide right now while you are still ahead of the (population)curve. 

I for one am not smart enough to invest worldwide in individual stocks. I will move more and more into ETF investing both in Energy ETFs, Canadian, American, European and Asian ETFs and maybe African ETFs as well. That should wake up the global citizen in us! That and the realization that there is plenty of opportunity left in this world for all of us to profit. And, never ever forget Jeremy Siegel’s simplistic rule of 6% plus inflation. I suspect it will survive the decades.

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