What Game Are You Playing?

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Over the last three years, the performance of the Cambridge Canadian Equity Fund has not met clients’ expectations, and rightfully so. After an excellent five years from inception, the last three have been subpar (third quartile to be exact).

First, let me confirm that my approach to investing has not changed. I continue to focus on downside risk, followed by assessing opportunities for capital returns and growth, which are and continue to be the cornerstone I build my portfolio on. And the last three years have been very different. How different? In a recent report titled “Value Investing and Manias”, our friends at Kailash Concepts have provided the information to help understand this. The following is an excerpt:

Had Kailash known a global health pandemic and economic crisis putting 40 million Americans out of work was coming we might have made numerous predictions. Not one of them would have included: “Record levels of retail brokerage accounts will be opened by inexperienced investors piling into some of the market’s most expensive firms sending markets soaring.” But that is precisely what has happened.

- Value Investing & Manias: A Brief Defense of History and Arithmetic. Kailash Concepts, June 2020

The first take away: over the long-run, value has outperformed growth dramatically. My risk discipline keeps me focused on value.

Compound returns to value, growth and the Kailash All-Cap Universe

From the chart above, $1 invested in the top decile of price-to-sales in 1964 has returned $27 as of today while $1 invested in the bottom decile has returned $894. That said, I understand a 56-year horizon isn’t a create reference time frame for most investors, and in the last 41 months, growth has outperformed value by almost 100%. Placing this level of outperformance in the 99% percentile over all 41 month rolling periods:

Historical rolling 41 month returns: Value minus growth

Source: Kaliash Capital

What’s even more interesting to me (and why, I believe, I have struggled during this time) is what has driven this outperformance. Since December 2016, the valuation of the Russell 1000 Growth Index has expanded by 60%. This means 75% of the performance has come from multiple expansion. At the same time, value has seen its multiple decline by 30%:

Price to sales rations of the Russell 3000, R3000G and R3000V

Remember a key tenet to my investment process: focus on downside, buy good companies that can deliver growth and capital returns, reduce when it is priced in. I have never been one to build significant multiple expansion into my upside targets.

While I don’t know when this divergence will end, I do think some historic analogues may be helpful and from my reading, the following seem to rhyme: 

The nifty fifties

one decision stocks

In the 60s and 70s, there was a significant concentration of investment dollars flowing into a small number of growth stocks, later labeled the ‘Nifty Fifty” (although no index for this existed and no consistent list was kept). These companies were called “one decision stocks” because everyone knew they were the leaders of the future and everyone knew they were easy buy and holds. With that determination, valuation was no longer a consideration and multiples expanded dramatically (see chart to the right).

Source: Michael Batnick, The Irrelevant Investor, November 26, 2018. https://theirrelevantinvestor.com/2018/11/26/the-nifty-fifty/

The reason these stocks were crowed into was (a) they were working, (b) they were future bound, (c) nothing else was working. In fact, through a mild recession in 1969 and after a bad recession started in 1973, they continued to go up and multiples continued to expand. However, as inflation spiraled upwards (lagged effect of ending Bretton Woods, system of monetary management, it seems), the economy and asset prices were hit, driving these stocks down. Over the next 10, 20, 30 and 40 years, the most expensive underperformed the SPX, while the least expensive performed more or less inline. Of course, there were great successes (McDonalds, Walmart) and failures (Polaroid) on the list.

One investment manager at the time decided the game had changed, and he could no longer compete with the growth funds being launched by large investment managers. On announcing the closing of his firm, he shared:

“The investing environment I discussed at that time (and on which I have commented in various other letters) has generally become more negative and frustrating as time has passed. Maybe I am merely suffering from a lack of mental flexibility. (One observer commenting on security analysts over 40 stated: “They know too many things that are no longer true.”) I hate to end with a poor year, but we are going to have one in 1969. My best guess is that at year-end, allowing for a substantial increase in value of controlled companies (against which all partners except me will have the option of taking cash), we will show a breakeven result for 1969 before any monthly payments to partners.

- Warren Buffett letter to investors, Mary 29th 1969

Warren Buffett stepped away from the business, re-established his philosophy and returned to be one of the best compounders of wealth in history.

My view is that there are many similarities compared to this historic period of the markets. There are several “one decision” stocks that we know by various acronyms, that have concentrated in indexes and portfolios. There is a tremendous amount of monetary stimulus and a tremendous amount of uncertainty about the future, which combined makes crowding into the structural winners make sense.

Two other observations:

  1. There is no reason to believe what we are seeing is over: the valuations of the nifty 50 stocks well-exceeded what many one-decision stocks are priced at today.
  2. Over the long-run, valuation matters: Significant losses and opportunity cost ensured for those who never reassessed the ‘one decision’ they made on these stocks.

The tech bubble of 1999

For the second analogy, we are seeing the type of equity market participation we haven’t seen since 1999.

The kindling seems to have been the elimination of trading fees and ability to trade fractions of shares, both reducing the friction in trading, leading to huge account growth for the direct brokers, including the much discussed Robinhood (a pioneer of commission-free investing). It certainly seems intuitive that the taming of the bull would send individual investors rushing for the exits. “I think the conventional wisdom of many market participants and talking heads was at any downturn, retail investors are going to flee,” Andrew Reed (partner at Sequoia Capital Investing) says. But that’s not what happened. Schwab, TD Ameritrade, and E-Trade collectively racked up 1.7 million new funded accounts — and Robinhood claimed over three million. In March, its deposits were 17 times higher than its monthly average. App downloads also surged.

Source: https://marker.medium.com/how-robinhood-convinced-millennials-to-trade-their-way-through-a-pandemic-1a1db97c7e08

The spark seems to have been the stimulus checks and lack of sports betting opportunities. In May 2020, an analysis from software and data aggregation firm Envestnet Yodlee found that among people earning $35,000 a year or more who received a government stimulus check, many used at least some of that money to buy stocks. 

Many used at least some of that government stimulus money to buy stocks.

Source: https://www.cnbc.com/2020/05/21/many-americans-used-part-of-their-coronavirus-stimulus-check-to-trade-stocks.html

Dave Portnoy, who founded Barstool Sports, is emblematic of the new stock market participant. He calls day trading “the easiest game in the world” and claims Warren Buffett is “washed up”, to put it kindly. Portnoy now has 1.5 million twitter followers, and you can find his reports at Davey Day Trader Global (DDTG) if you would like to get a better idea of what he is about.

The oddities don’t end there of course. My current favourite is the story of Hertz, which filed for bankruptcy on May 24, 2020. After trading at $0.52 that day it rose to a high of $5.53, a 10 bagger in a little more than 10 days (the stock is one of the top traders on the Robinhood app). The company has noted the interest in its shares and had filed to sell almost 250 million new shares to the public (the SEC subsequently rejected this request). Even after this announcement the senior debt for the company trades at $0.40 on the dollar, pricing in bankruptcy. But with so many day-traders, who knows, maybe it will work (for a worthwhile commentary on this you should read Matt Lavine’s Money Stuff article “If you want Hertz, have some hertz”, which sadly makes a lot of sense).

Another great investor, Stanley Druckenmiller had a tough time in 1999. Here is his answer when asked his biggest mistake by Ken Langone in 2015:

Well, I made a lot of mistakes, but I made one real doozy…But in 1999 after Yahoo and America Online had already gone up like tenfold, I got the bright idea at Soros to short internet stocks. And I put 200 million in them in about February and by mid-March the 200 million short I had lost $600 million, gotten completely beat up and was down like 15 percent on the year. And I was very proud of the fact that I never had a down year, and I thought well, I’m finished…So I went and hired a couple of gun slingers because we only knew about IBM and Hewlett-Packard. I needed Ventas and Verisign. I wanted the six. So, we hired this guy and we end up on the year — we had been down 15 and we ended up like 35 percent on the year. And the Nasdaq’s gone up 400 percent. So, I’ll never forget it. January of 2000, I go into Soros’s office and I say I’m selling all the tech stocks, selling everything. This is crazy. [unint.] at 104 times earnings. This is nuts. Just kind of as I explained earlier, we’re going to step aside, wait for the next fat pitch. I didn’t fire the two-gun slingers. They didn’t have enough money to really hurt the fund, but they started making three percent a day and I’m out. It is driving me nuts. I mean their little account is like up 50 percent on the year. I think Quantum was up seven. It’s just sitting there. So like around March I could feel it coming. I just – I had to play. I couldn’t help myself. And three times during the same week I pick up a – don’t do it. Don’t do it. Anyway, I pick up the phone finally. I think I missed the top by an hour. I bought $6 billion worth of tech stocks, and in six weeks I had left Soros and I had lost $3 billion in that one play. You asked me what I learned. I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself. So, maybe I learned not to do it again. But I already knew that.

Source: https://www.valuewalk.com/wp-content/uploads/2015/04/Druckenmiller-_Speech.pdf

A few things to note from this speech:

  1. The NASDAQ was up 400% in 1999, trading at 102x earnings. That type of move we haven’t seen broadly, although we see pockets of it (Nikola, for example).
  2. What got him was the dreaded fear of missing out (FOMO). As JP Morgan said: “Nothing so undermines your financial judgement as the sight of your neighbour getting rich.”
  3. We all know the value destruction from the tech bubble.

We are at the 99th percentile of periods historically for growth beating value, and we have seen huge convexity in this trade. Looking back to our second chart, the 99th percentile for growth vs. value is 100% outperformance over 41 months, but the 100th percentile is 250% outperformance.

Putting these analogues into the current context

There are other 99th percentile aspects to today’s market. Fiscal policy is the most aggressive we have seen. Deficits are the highest outside of war time. The amount of debt outstanding is all time highs vs. gross domestic product. And maybe most importantly, the monetary policy leaders are more committed than ever to avoid market disruptions and bankruptcies. The Fed Put is in full force today and it seems across investors and asset classes behavior has changed to reflect this belief. This market may feel crazy now, but they could become crazier before this is over. At the same time, a lot of this is built on hope in recovery and belief in the Fed, and the downside for other of these narratives is significant because the thesis lacks fundamental substance.

Portfolio positioning: A balanced approach

While I don’t know what the future will hold, I do feel there is tremendous uncertainty across many fundamental drivers of growth (social, economic, political). Could we see the Fed implementing yield curve control, followed by a spike in inflation, driving real yields down? What happens with the election in November? What returns can you get when no one sees any risk anymore? And I haven’t even mentioned the risks surrounding COVID-19. This is all offset with the unprecedented stimulus we are seeing.

Considering the above, Cambridge Canadian Equity Fund has taken a low risk and balanced approach to portfolio construction. I continue to focus on downside risk when investing, which means I continue to have a value style-bias in the fund. I have decided to play the long-game of fundamentals, and I accept it may mean I will miss an opportunity. My rough positioning is as follows:

  • 8% cash
  • 8% gold
  • 10% utilities
  • 15% industrials
  • 8% energy
  • 10% secular growth
  • 13% financials
  • 10% health care
  • 15% consumer (staples retailers mainly)

Some of you may read this and be bullish (free money forever and the party is just beginning) and some may read it as bearish (its all built on sand and will collapse). No matter which side you sit on today, the most important thing is to remember what game you are playing. Its fine to speculate on a melt up in asset prices, if you accept you are speculating. It’s fine to sit out the hand because you don’t like the fundamentals (beware the dreaded FOMO). Either way, the most important thing for success from here is to remember which game you are playing.

As always, comments and questions are appreciated.


Brandon Snow, Principal and Chief Investment Officer



As at May 31, 2020 (%)





Since Inception

Cambridge Canadian Equity Corporate Class (Class F)






Quartile Rank






Canadian Focused Equity Category (average)






# of investments ranked in the category (Canadian Focused Equity)






Source: Morningstar Direct (as at May 31, 2020). Since inception date December 31, 2007.



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Published June 29, 2020


Submitted by Alan Sevigny on

The best quote I ever read about the stock market is that it can remain irrational longer than investors can remain solvent. You put forth a very reasoned analysis at a time when reason has left the building and does not appear to be coming back anytime soon. We're in the results business. We no longer have the luxury of pointing to 5 & 10 year track records when we serve a market where investment timelines are measured in weeks and months versus years. You may very well be proven right but how long that takes is the bigger question.

Submitted by Sherry Cavallin on

All very interesting stuff. Thank you for providing all the historical perspective. 3 years does not a track record make. Having been an advisor for 35 years, I know how big a thing FOMO can be. However I also know our clients (at least mine...) are much more downside worried than FOMO motivated. They count on us (and by us, I really mean the money managers) to take a conservative approach to be responsible stewards of their hard-earned wealth. If something seems too good to be true, it usually is. However it's clear that things can continue to be weird for awhile (just look at the political situation down south and the prospect that Agent Orange could well be re-elected in November...who the heck knows??). Thank you for your diligence and hard work on behalf of us and our clients.

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