Investing in Cannabis : CO2 GRO Inc.

Preface

Some of the most interesting and profitable members that have been admitted to The Financial Log Book have been fledgling companies built around innovative ideas: Silver Wheaton for its new-at-the-time streaming model for mining; Abitibi Royalties Inc. for its novel approach to grub staking mining claims; and, Clean Seed Capital for its farmer-led innovation for a next generation seeder.

The first two investments were very successful and there is the  possibility of a major upside for Abitibi.  Moreover, the potential increase in revenues for Abitibi will be achieved without Abitibi having to shoulder the costs for development work at Canadian Malartic.

The full potential of Clean Seed has yet to be realized, but the signals are there.  See the company's most recent news releases and financial reports. Unfortunately, the depressed state of the farming sector has hindered sales of the CX-6 Smart Seeder but that will pass.  Since establishing an initial position in April 2015, I added to our holdings as the company has passed various milestones.  I plan to increase my stake in 2019.  The share price has declined notably in 2018 in concert with other agriculture-related listings.  However, I regard it as a buying opportunity.  The original investment was made with a 5 - 10 year time horizon and the view that the path of bringing the technology to market would be arduous.  So far, I have seen no reason to change this outlook.

The Risks of Investing in New Enterprises

The risks are significant:

• technological risk - nothing ever works the first time: tinkering is always required ... and it takes time
• financial risk - it's always difficult to get financing with reasonable terms and to find patient investors who are prepared to weather the up's and down's of new enterprises
• market risk - competitors may develop better products or established suppliers may lower prices to the point where the product has no competitive advantage
• awareness - building a robust customer base is always a difficult challenge
• intellectual theft - always a possibility, especially from individuals in countries such as China where the rule of law does not prevail
• management risk- key personnel may leave or founders may not have the wisdom to involve others with the skills to take an idea to the next level
• operational risk - things will always go wrong in the delivery of products and services, especially during the early going before the kinks are worked out

Coping with Risk

It's all about people.  A  significant part of my time is spent assessing the people associated with an enterprise: their character (integrity, perseverance, commitment); experience in launching new businesses; academic and other professional qualifications; ability to work with others and get things done.  I especially like people with "muddy boots" - individuals who have a direct working experience in the worlds of their target markets.  In this respect, the value of professional and social networks cannot be underestimated.  I have an aversion to the involvement of inexperienced MBA's and other financial types in start-ups, especially those who migrate from business schools directly to the financial world and consultancy: people with clean fingernails.  One exception: the very few MBA's who have spent time "down on the farm".

I always allow time for a company to "find its sea legs" before investing in it.  I look for the achievement of milestones such as:

• a working prototype tested under the conditions it will be used in the real world
• a realistic assessment of the cost/benefit to potential clients 
• the costs of producing and delivering the product/service to customers
• a realistic assessment of the market.  A story in this regard.  It is common for companies to cite figures such as a "trillion dollar market" or "the industry of the future".  I NEVER heed this bullshit.  Why?  In a previous incarnation, I was involved in an effort to expand the Ontario Provincial Parks by 204,000 km2 (1.9 percent of the province).   As part of the workup to the approval by Cabinet, we made a presentation to some Treasury Board staff and included some optimistic takes on the economic multiplier effect these  parks would have on the economy.  Staff rolled their eyes and then took us to the intellectual woodshed.  "Using the same logic, the engineers at the Ministry of Transportation would have it that by paving over all of Ontario, the province would be the richest place on earth."  We meekly tucked out tails between our legs and never suggested it again.  And yes, we were successful in bringing 155 new parks into the system.  

I always spend time in looking at a company's intellectual property.  If patents are involved (and they are not always needed) I look to see what they involve, where they apply and when they expire  - also any potential complications such as infringement.  

I look at a company's financial situation: its ability to secure additional financing (and at what terms), income, burn rate, potential for profitability in the short term.  Its share structure is also important.  

I look at the agility of management - the ability of a company to adapt quickly to changing circumstances.  This includes things such as a change in strategic and operational focus, recruiting people with the skill sets to bring the business to the next level, responding to customer feedback and regulatory demands.  

NOTE:  

Very few of these assessments involve an exhaustive review of financial spreadsheets.  Spreadsheets can be manipulated.  I ignore forward-looking statements of income as these are notoriously inaccurate - better to ask a high priestess to look at animal guts spread out on an altar or listen to The Business Network.

CO2 GRO Inc - A New Crew Member

Introduction: My Approach to Investing in Cannabis

It is often said that the only people who get rich during gold rushes are those who provide the shovels.  With this in mind, I started to investigate companies which supply products and services to the growers of cannabis as opposed to making bets on cannabis growers.  My investigation (still continuing) explored several avenues: automated growing systems, providers of essentials such as light, nutrients and nutrient delivery systems, inventory control systems, etc.  After a few months a few things became apparent:

• The "ecosystem" is fragmented with many players ranging from mom and pop operators to multinationals (who would offer little in the way of returns as meeting the needs of the cannabis industry would represent a tiny part of their revenues  e.g. LED light manufacturers). 
• Barriers to entry for most technologies are fairly low and the number of competitors is high. 
• Most enterprising growers can cobble together their systems on a custom basis without incurring unacceptably high costs in terms of potential returns.  
• It is difficult to find listed "pure play" companies within this niche. 

I was about to give up my search until I came across CO2 GRO.  I can't say precisely how it came to my attention, except that it was the result of weeks of background reading, none of it involving articles in the financial press.

Company Snapshot  

The company is based around a patented technology whereby CO2 can be infused into water.  When sprayed on foliage, the CO2 enhanced water results in faster growth and higher yields.

As of late 2017, CO2 GRO’s sole focus is commercializing its patent-protected CO2 gas infusion technology license and its patent-pending US PTO CO2 foliar spray, both of which form the Company’s Dissolved CO2 plant-production platform. Prior to the 4th quarter of 2017, the Company was a producer and marketer of
natural specialty shrimp and algal oil products that formed CO2 GRO’s 3 other business platforms pursuant to a license agreement signed in October 2014
https://www.sedar.com/GetFile.do?lang=EN&docClass=5&issuerNo=00032690&issuerType=03&projectNo=02843331&docId=4419823

The previous business was essentially moribund.  However, some bright people realized that the technology was well suited to accelerating the growth of high value plants such as cannabis, lettuce, peppers etc.  This was no surprise given the close connections that management and the board have with the University of Guelph, a vibrant centre for agricultural research and the commercialization of research discoveries.  And so, in a remarkably short period of time, the company changed focus and commenced efforts to exploit a potentially profitable opportunity.

Why I Decided to Invest 

1.  Leadership

Management is experienced in the way of bringing new products to the marketplace: financing, operations, trials etc.  It has a very extensive network of contacts.  I know one of the members of the board through my work in a previous incarnation (some 15 years ago and beyond) and can attest to his energy, ethics, and ability to work productively with others.  (I haven't been in contact with him for almost 20 years.)  I believe firmly that you are known by the company you keep and visa versa.  I was also impressed by the financial commitment shown by management.  Having skin in the game is meaningful.

2.  Business Acumen

The strategic shift of direction is very significant in that it demonstrates the ability of management to adjust to new opportunities.  However, there are other aspects of the company's business approach that attracted me as well:

• the business model does not burden customers unduly with upfront costs and reduces risk, especially for early adopters
• the model also ensures a continual flow of income as opposed to a series of one-off events
• I appreciate management's approach to managing its financial resources (spans everything from minimizing the cost of trials to remuneration for field representatives)
• I like management's focus to limit its initial efforts to North America - this as opposed to trying to do everything at once and all that entails

3.  The Technology

A few aspects impressed me:

• the technology actually delivers on its promise as demonstrated by real world tests in a variety of situations (see extract below)
• the simplicity of the application of the technology and the ability for treated water to be delivered via a variety of irrigation systems at what I assume at a fairly low cost and without a lot of rejigging of existing systems
• a technology which can be applied in a variety of situations ranging from greenhouses to open fields, from cannabis to flowers and high value leaf crops
• the technology is scalable
• the company does not have to maintain an large inventory and my bet is that off-the-shelf products are cheap and readily available in order to install misting systems

4.   Strategic Positioning

The company is in a sweet spot.  The business risk to potential customers is very low.  There is the prospect of increasing profits using a technology that does not clash with existing set-ups and operating methods.  

As this time especially, I am looking for companies which have the potential to prosper in the event that the general economy slides into recession.  The legalization of cannabis for recreational use will, over time, result in a change in the general level of social acceptance of cannabis.  I believe that cannabis holds a cost advantage over alcohol for individuals who wish to "relax".  Further, there is a growing use of cannabis products for medical uses to treat conditions which are concentrated in baby boomers, a cohort which is significant.  Further, with climate change, entrepreneurs are searching for technologies to enhance plant growth under controlled growing environments which as less susceptible to seasonal fluctuations in weather during the growing season.  

A Snapshot of Progress to Date

Some people spend an inordinate amount of time scouring financials and rooting around in what I call "financial trivia".  This is understandable as this behaviour is expected by the clients of financial analysts and investors who do it simply because "it's the thing to do".  However, the level of detail in analysts' reports is mostly not necessary.  I will be writing about this in a later post.  In brief, my contention is that the application of a few "rules of thumb" (heuristics) is far more beneficial to one's portfolio than an exhaustive analysis which typically focuses on the wrong things and things that simply cannot be known such as forward earnings.  I will continue with this rant in a few weeks' time.

As a result, I narrowed my focus to a few key things.

After reviewing the company's filings, I came across this pithy statement.

INTERIM MANAGEMENT’S DISCUSSION AND ANALYSIS QUARTERLY HIGHLIGHTS Three months ended September 30, 2018 

Corporate Operational update During the third quarter of 2018, the following activities took place: 
Three cannabis dissolved CO2 foliar spray grow trials were press released. Buds from the dissolved CO2 plants and buds from the no CO2 gassing control group plants were analyzed by SGS Canada Labs, an accredited Health Canada Company. Speed to plant maturity of 28%-33% and bud yield increases of 20- 22% were very consistent for the three different strains grown. However, the THC content in the indica buds shot up 75% over the control group bud THC levels versus 20-22% greater for the sativa and hybrid strains. 
The Company received a favorable response from the Canadian Food Inspection Agency (“CFIA”) that the Company's CO2 gas and water mixing technology “does not create a supplement” and “does not fall under the Purview of the Canada Fertilizer Act and Regulations”. This allows all Canadian food and non-food plant food growers to use dissolve CO2 Foliar Spray other than Licensed Producers (“LPs”) of Canadian Cannabis. LPs are bound under Bill C45 to not use any foliar spray with supplements or additives. The Company has filed an exemption request from CMC Compliance Issues and Response Section of the Cannabis Legalization and Regulation Branch for its dissolving CO2 foliar spray technology. The Company believes that its dissolved CO2 rich natural water is still natural water as also concluded by the CFIA. 

NaturalwaterisallowedbythisHealthCanadaCMCBranchforLPstofoliarsprayontheircannabis cuttings at minimum. 
As of September 30, 2018, there were two pepper grow trials underway in Michigan and various micro green grow, manually at a commercial aeroponics grower and at St Cloud State U (SCSU), which is fully automated and various micro green grow trials with one limited tomato grow trial. The Company replicated its 2013 University of Guelph's best successful lettuce-grow trial results of 100% over CO2 gassing in Q3, 2018. Two Q3, 2018 scientific studies at St Cloud State using CO2 foliar spray were press released that concluded 400% additional chlorophyll and 800% additional CO2 conductance (transfer) can be created using dissolved CO2 foliar spray coating leaf surface area over CO2 gassing. Also press released was that the top of a romaine leaf surface area is essentially as effective absorbing dissolved CO2 as the bottom of a romaine leaf where most leaf stoma (pores) reside that intake CO2 gas. 
As of September 30, 2018, the Company had 20 CO2-grow trial reps reporting to the Company’s VP of Operations. All sales reps remain on zero retainers with 100% commissions paid only upon commercial installations of dissolving CO2 equipment. A project engineer (half time) and a full-time bio-scientist will be joined by Dr. Matt Julius who will be acting Chief Science Officer effective January 1, 2019 as was announced. The Company’s confirmed, likely and conditional client list grew to 70 companies expressing interest to trial dissolved CO2 foliar spray, indoors or outdoors. 

... also ... view this:

video link
https://www.youtube.com/watch?v=27bqMiofLUU&feature=youtu.be

I established an initial position in mid-December 2018 and tripled it shortly thereafter upon further reflection.

What I Will Be Monitoring

1. Most important thing:  I will look to see if the company receives regulatory approval for the application of its technology to cannabis plants in Canada.  This will be a major catalyst. 
2. I will look for the further results of trials to see how the technology works in a variety of situations.  In this regard, I would like harder information about the value proposition for growers (this information would probably be subject to a non-disclosure agreement if even management would agree to it)
3. I would like to learn more about how the company intends to establish a baseline for its clients' production before and after the application of its technology as a basis for determining its share of income streams.  
4. I worry about the company's ability to recruit people and the technological capacity of field representatives in installing, maintaining and monitoring installations.  Having a PhD is no guarantee of competence.  In many instances I have found that an undergraduate degree is better as the people are generally more flexible and amenable to new situations. I hope that the company has internal processes to ensure that the standard of delivery is uniformly high and that they have robust feedback mechanisms with their customers. 

A story here about education and competency:  During a retreat of scientific staff in a remote location many years ago, we engaged in a pattern recognition game to pass the time during one long, dark evening.  It involved the group being presented with a grid of 32 cells on a flip chart.  One person was asked to leave the room while the rest of the group chose a square.  On his/her return, the person was asked to identify that square.  The mechanism involved a "presenter" with a pointer.  The presenter would point to a square and ask "Is it this one?"  If, after four presentations, the person did not identify the chosen square, the grid was replaced with one consisting of 16 cells.  If no success, then to 8, then to 4.  

After that, another person was chosen to leave the room for another round.  The idea was to observe the process to detect subtle clues that were inherent in the way the presenter pointed to the squares.  Through close observation, it was possible to detect a pattern.  Those who were able to identify the chosen square were asked to not reveal their finding to the rest of the group.   

The first people to "get" the right answer were the secretaries, one of them on the second round.  After a few iterations, most people got the right answer by the 4X4 grid..  It involved being alert to subtle clues which became more obvious at the game progressed. We were beside ourselves when the number of choices was reduced to 2.  And who were the last people to finally "get" the answer?  Two PhD's!  And believe it or not, their job was to find mines!  My dear long-departed dog could have done better. This said, some of my best friends are .... and lawyers.

Concluding Remarks

While it is always risky investing in emerging companies before they achieve significant revenue streams, I have the sense that this company has the potential to become very profitable.  My major concern is with regulatory risk.  There is considerable uncertainty in the regulatory area, especially as government is proceeding very carefully for political reasons and the newness of the cannabis industry.  Investors must understand that civil servants in all levels of government these days are becoming exceedingly risk averse and loathe to take direct "ownership".  Deflection and prevarication are the order of the day. This is reflected in appallingly slow decision making and the ambiguity of compromise when clear direction is required.  Sadly this condition prevails regardless of the political party at the helm.  It's a product of "top down" government  and a 24/7 news cycle where political operatives in short pants at the ministerial and cabinet levels lack knowledge and experience and are prone to fear biting and self-protection as a result.  The consequences to emerging companies can be significant.

In light of this, I sized my position in the company to represent less than 4 percent of one portfolio.  It's a balance of regulatory risk on one hand and my faith in the company.  Also - there is no sense in minimizing an initial position as it negates the possibility of meaningful gains.  With investments of this nature, I am prepared to accept volatility and to be patient ... always with the thought that I'm willing to experience the loss of most, if not all, of my initial stake.  I reason that if I can bat .300 with beasts of this nature, my portfolios will do exceedingly well over the long term. This said, I don't make bets of this nature very often.

Noteworthy Reads - December 2018

This will be the first of this genre of posts - a citation of articles that opened new avenues of understanding.  I'll catalogue them for my future reference.

Some notes on investing appeared recently on the WertArt Capital blog site.  (It led me to subscribe to the blog which addresses investment opportunities globally.)

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I have been devoting more research to "robotics".  Why?

• the increased difficulty many businesses have in recruiting and retaining staff
• a potential solution for first nation companies to compete with low wage workers elsewhere in the world
• the potential to perform many operations faster and more accurately the people
• a viable alternative to people in dangerous work environments

Here is a very interesting article on human exoskeletons and the potential for this facet of robotic innovation.

Industrial Exoskeletons

I subscribe to The Robotic Report for updates on the sector.  It's interesting and provides many leads for further investigation. 

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One method to deal with thieves.  New technologies and business models always present new opportunities for crime.  Package thefts from services such as Amazon have soared.  This engineer decided to do something about it.
https://www.youtube.com/watch?v=xoxhDk-hwuo&feature=youtu.be

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Canary in the coal mine?
US debt market troubles threaten Australian buyout activity

Investing in India - Fairfax Financial Holdings Corporation

The following article restates some of the arguments advanced in earlier posts about investing in India.  Some highlights:

• the high rate of economic growth
• a more business friendly climate under the Modi regime
• an attractive demographic
• the contention that India should be less affected by international trade disputes than other countries (debatable)
• the difficulties encountered by foreigners trying to invest in India (corruption, a myriad of bureaucratic barriers etc.)

'An elephant starting to run': With China's economy slowing, all eyes turn to India in search of growth

In reviewing possibilities for investing in India a few years ago, I settled on investing in Fairfax India Holdings Corporation (FIH-U-T).

In brief:

• The company takes equity positions in India-based companies and manages them in a manner comparable to the model used by Berkshire Hathaway.  The Corporation evolved out of Fairfax Financial Holdings Limited, an enterprise which has a very solid foundation and which is helmed by some very able individuals.  
• The Corporation is managed by individuals who are very familiar with the ways of doing business in India and who have successful records of investing.  
• I figure that its selective approach to investing in specific companies will yield a performance that is superior to the performance of stock market indices for Indian exchanges.  

The performance of FIH since the original purchase:

2016     7.9%

2017    25.7%

YTD   (18.1%)

The shareholder letters are informative and explain how Fairfax is adjusting its operations over time.  I like the adaptive approach and management's flexibility in navigating what can be a challenging and complex market place.  Read this sample:

Share Owner Letter March 2018

A few thoughts going forward:

• I anticipate and accept that there will be volatility in the price of FIH for a variety of reasons: investor skittishness about short-term (measured in 3 to 5 year increments) things such as the political climate in India, concerns over international trade etc.  My time frame for this investment is in the order of decades - not months and I figure that the long-term trends bode well for this investment. 
• I consider that India will be a better long term investment than China: a democracy governed by the rule of law; a far more attractive demographic, substantial unmet needs for infrastructure, a geopolitical entity that somehow is able to accommodate tremendous internal differences in culture, language and religion; a country where the direction of the economy is set by a myriad of actors and not dominated by a political kleptocracy; an awakening sense of the possibilities of home-grown enterprise. 
• I have faith in the ability of management to deliver superior performance.

Fairfax India is a core holding and I plan to add to the position on dips in the market.  

Investing in Agriculture : LIsten to the Farming Community - not Wall Street

Ignore the Financial Press and Wall Street

I have learned to ignore the financial press and reports produced by most financial analysts.  Why?

• Many of the writers pen their articles out of sheer self interest: to promote their "brand" in a search for a larger client base for their services; to promote the interests of their clients (e.g. listed companies who generate advertising revenue); to bask in the glow of public notoriety.  
• The articles are seldom balanced - most always slanted in favour of one-sided perspectives ... and which almost always, fail to acknowledge uncertainty.
• Most financial analysts are unoriginal and think along the conventional lines of thought drilled into them in business school.  Further, most of them simply do not have the time to think deeply.  For this reason, I generally ignore their reports save to dip into the vault on occasion to see the mode of thinking which prevails at the moment ... and yes, there are distinct shifts in style over time.  
• Most articles in the press are shallow, short, and deal with the "minutiae of the moment" - mostly inconsequential events - instead of meaningful long-term trends.  This is understandable as writers are always searching for new material to populate their articles.  And unless they produce something "different" they are likely to have issues with their editors.  In contrast, some thoughtful writers such as Howard Marks would never survive with a daily column as they are very repetitive and sing much the same song line over time. 
• With the exception of self-promoting fund managers, the authors are not rich.  (And even then, most of the so-called financial geniuses, who administer funds have sub-par performance over the long term when compared to market indices.) Why, then, sign them on as your financial navigator? 
• Most important, the articles seldom contain profitable ideas.  Either they are "yesterday's news" where major profits have already been made or the ideas are not investment worthy (poorly researched, biased to favour "clients").  

Listen to People on The Front Line

Most of my most profitable ideas have been generated by taking the pulse of people with dirty boots - individuals and organizations involved directly in providing products and services to customers.  

A much better approach is to listen to the people who make their living producing products and delivering the services in the "real world".  

I discovered that it is far more profitable and beneficial to my portfolios ... and far more interesting than the formulaic bleatings of market analysts and the like.

Surveys 

One of the most useful surveys is the Ag Economy Barometer which is managed by boffins at Purdue University.

The Ag Economy Barometer is the result of a collaboration between Purdue University’s Center for Commercial Agriculture and the CME Group to provide monthly nationwide measures of the health of the US agricultural economy. Together we believe this economic indicator underscores the importance of the agricultural economy and its participants – food producers and agribusinesses – to the overall U.S. and global economies. Purdue will analyze and report the result of each months’ Ag Economy Barometer value, which will be published the first Tuesday of every month....

The Barometer is unique because the index will be calculated based on producers’ sentiment about both current conditions and future expectations. Unlike other indices, the Ag Economy Barometer will also focus directly on key economic drivers US farm economy, including farm profitability, farmland values and key commodity prices and other seasonal drivers such as seed, fertilizer and feed ingredient prices. Each quarter, 100 agribusiness leaders will be surveyed to provide additional insight into the health of the ag economy. The barometer website features monthly releases and quarterly webinars.

Here is an extract from the most recent Oct 2018 monthly report:

https://ag.purdue.edu/commercialag/ageconomybarometer/ag-barometer-rebounds-in-october/

This does not bode well for equipment sales, a combination of:

• low commodity prices 
• higher input costs
• uncertainty about trade policy and the impact of competition from places such as Brazil and Argentina 

You can subscribe to get free monthly reports via e-mail. 

Regional Farm News Sources

I much prefer reading local/regional newspapers as they provide a more direct pipeline to local news than the major rags.  They are very useful for assessing sentiment in the agricultural community.  In this regard, I read periodicals that are sampled from a geographical cross-section of the US and Canada.  I use Wikipedia as a starting point:

List of Newspaper in the United States 

Farm Focused Publications

I visit a selection of these publications about once a month. 

The Top Ten Agriculture Publications

Government Reports

The Federal Reserve Bank provides some invaluable information about the state of agriculture in the US.  You can subscribe to receive monthly reports on a variety of topics.  

The Twelve Federal Reserve Bank Districts

The US Department of Agriculture is a great source of information on a wide variety of topics.  I often use the search function to to access detailed reports on topics ranging from research and science to crop production.  

Concluding Remarks

1. It takes time and effort to monitor these sources but after a while, you can get a sense of the community and develop a perspective which allows you to instinctively winnow out promising leads for investing.  
2. You will develop a new respect for farmers and the challenges that face them - also a sense of the products and services that will make a difference for them ... and why. 
3. It's always fun to learn new things.  This knowledge broadens your perspectives - even to the point of making road trips more interesting as you start to gain an understanding of what is going on in the land traversed by the roads you are travelling.  

Trump: A Fail for Agriculture

Without doubt, Trump's policies have been a disaster for agriculture.  His diplomacy through tweets and his thoughtless implementation of tariffs have resulted in a flood of unintended consequences - all to the detriment of the American economy, especially to long suffering farmers.

Here is the prelude to this post - a quote from a recent Gartman letter:

ON THE POLITICAL FRONT,  we attended a  board  meeting  at  one  of  the  universities  in  whose endowment/investment  committees  we  are  Board members and we were  really  quite  astonished at the antipathy  of  those  we  spoke  to  regarding  President Trump.  Previously,  those  we  had  spoken  to  were staunch  supporters  of  the  President,  welcoming  his attacks upon the massive numbers of regulations that  the previous Obama Administration had imposed upon the economy and openly supporting the tax cuts and judges  appointed;  but  the  depth  of  anger  over  the President’s  tweeting  and  “un-Presidential”  demeanor was really quite stunning.  However, what truly caught our attention was the anger at the President over his most  recent  verbal  attacks upon  the  Federal  Reserve Bank. To several “That was the  last  straw.”  When  the President  losses  men  and women of this sort who had supported him openly before he is in very real trouble. We are  simply  reporting  what we’d heard.
The Gartman Letter LC, November 29, 2018

Impact on the Farm Economy and Why it is not an Opportune Time to Invest in Farm Equipment Manufacturers and Distributors 

I follow statistics on farm income closely.  Why?

There is a direct relationship between income and expenditures.  When times are tough, farmers rein in their spending by economizing on farm inputs and equipment.  Farm incomes are good indicators of future spending on farm equipment and services.

The Farm Equipment Market

The following article provides a comprehensive overview of the farm equipment market from the perspective of equipment dealers.  It is well worth reading in its entirety. 

2019 Dealer Business Outlook & Trends for Farm Equipment Improved 2018 Sales Sets the Tone for 2019 Outlook

A few things to consider when reading the article:

• optimistic forecasts are seldom proved out in reality ... in recent years outcomes have been worse
• the sustained nature of sales of lawn and garden equipment ... so far (it all depends on the economic well-being of non-farm households)
• trends in sales by major equipment manufacturers  - an indicator of stocks that one might want to buy when things eventually recover? 
• the general gloomy outlook for sales 

At present, farmers are suffering.  Crop prices are low due to global oversupply - the result of increased capacity in South America and China and efforts on the part of importing counties to reduce their consumption by substituting imports for lower cost alternatives derived via technological innovation and/or direct substitution for lower (often not as satisfactory) food stuffs.  The high American dollar has also been a factor. 

This suffering is compounded by Trump-imposed tariffs which have had the following impacts:

• The increase in tariffs on steel and aluminum have increased input costs on the part of manufacturers - costs which will be passed on to the customers of farm equipment manufacturers or which will constrain bottom lines if manufacturers decide to absorb some of them.  US steel manufacturers took the tariffs as an opportunity to increase their prices, thereby negating Trump's protectionist measure - an unforeseen consequence ... or an obvious consequence which was either unanticipated or ignored by Trump (if indeed, it was even within his capacity to imagine).
• The impact of cost on new equipment sales and innovative technologies cannot be underestimated.  In response to a recent survey by AgPulse, and the question,  "What’s your biggest barrier to implementing new AgTech on your operation?", 55 percent of farmers indicated that cost is the greatest barrier; 25 percent were concerned about ROI ... all other reasons were far less important:Ag Pulse Survey
• US tariffs have prompted retaliatory measures on the part of countries such as China which have been very selective e.g. increased duties on soy beans have had a major impact on export markets in the Midwest and driven down prices.  The contagion has spread to Canada: Canadian farmers are finding it more difficult to find export markets due to competition and high shipping costs.  
• The long-term impact of tariffs has yet to be expressed.  There is a palpable dislike of Americans in much of the world - an attitude which has worsened since Trump took office.  How this will influence patterns of trade and consumption has yet to be determined.  
• It has implications for the farming community. The following article provides a good synopsis of the concern over tariffs which prevails in the agricultural community: https://www.farmforum.net/farm_forum/market-analyst-tariffs-trade-and-more-talk/article_6ec6f8cf-f8e6-5bb8-993b-86bb10c78310.html.  It makes for some sobering reading and does not bode well for the short term. 
• See this take on Trump's trade war tactics by the CEO of Deere - wonder if he is now a Trump supporter? Deere CEO Worried About Lasting Impact of Commodity Tariffs.   

As noted above, future projections on the part of the equipment industry are usually optimistic ... and unreliable.  The following article from 2016 shows just how far off the mark forecasts can be:

Are Falling Farm Incomes Impacting Agtech Adoption for the Long Term?

A few highlights:

• This year will likely be the worst year of the commodity price downturn for US row crop farmers as many enter their third year of negative net incomes, according to Kenneth S. Zuckerberg, senior research analyst at Rabobank Food & Agriculture.
• Zuckerberg also believes that along with a stabilization in crop prices, farm incomes will stabilize around long-term break-even levels for five years. This means the situation will not improve as quickly as in other commodity cycles. “This is based on Rabobank’s view that commodity prices will not improve much over the intermediate term,”

Farm Incomes by the Number

This post is already overly long but it is worth looking at the rate of farm failures, the ultimate measure of the state of the farming economy. 

The incidence of farm bankruptcies is increasing:

And that nagging economic strain of low commodity prices on farmers and ranchers—compounded for some by recent tariffs—is starting to show up not just in bottom-line profitability, but in simple viability. Over the 12 months ending in June 2018, 84 farm operations in Ninth District states had filed for chapter 12 bankruptcy protection—more than twice the level seen in June 2014 (Chart 1).

https://www.minneapolisfed.org/publications/fedgazette/chapter-12-bankruptcies-on-the-rise-in-the-ninth-district

Commentary on Farm Incomes

Statistics tell one aspect of the story.  Just as compelling are the narratives of those in the farming business.  The narratives are indicative of community mindsets - one of the main drivers in decision-making on the part of those involved in agriculture and other pursuits. 

Here is a selection of comments made by bankers in the most recent edition of the AgCredit Survey of the Kansas City Fed

Higher interest rates, along with increasing fuel and repair costs are key concerns for producers. – Southwest Kansas

Much of our area was hit with significant drought, which paired with the currently low commodity prices has reduced capital for most producers. – Northeast Kansas

Devaluation of land, cattle and equipment are causing adjusted analysis of borrowing capacity and cash flow. – Central Kansas

Current grain prices make it very hard for borrowers to cash flow. Trade agreements need to be worked out with other countries to hopefully help prices rebound. – Southwest Kansas

We are on the border line between drought and severe drought. Most farm customers will produce 60 to 80% of normal and will have income deficiencies. – Western Missouri

Deteriorating working capital and overall equity erosion of ag customers is starting to have a significant impact on producers and lenders. – Western Nebraska 

A Few Conclusions

1. Forecasts by farmers and those involved in the farming economy are usually too optimistic.  
2. The Trump-initiated trade war has had a double negative impact on the farming economy: increased input costs and reduced commodity prices.
3. Farmers are not in a mood or position to willingly purchase new equipment.  They are doing everything they can do to stay above water.  
4. I figure that it is not an opportune time to invest in the agricultural sector.

However

1. Things change.  
2. Equipment manufacturers and dealers have learned to manage throughout the agricultural cycle. If anything, they have reduced overheads and introduced efficiencies which should benefit them when the economy recovers. 
3. In comparison with recent declines in commodity prices, today's farmers have kept a reasonable handle on managing debt.  When commodity prices improve, they will be able to allocate more funds for new purchases than in years previous when debt loads were much higher. 
4. I have assembled a "buy list" of companies in anticipation of the turnaround.  A few things the companies share in common:

• low debt
• profitability
• great management which has been at the helm during tough times in years previous
• excellent, competitive products and services and a scale that should enable internal efficiencies
• a good reputation in the farming community
• the potential to capture more market share

FRED Adds Silver to its daily series

Any significance to this development?  I wonder why this was done.


FRED Adds Some Precious Metal
Posted on October 16, 2018

FRED has added 17 daily series on the price of silver. These series depict the value of silver for major currencies through London bullion market auctions.

Investing in India - some positive deep trends

In recent years, my interest in investing in India has increased.  My reasons are outlined briefly later on  in this post.

However, I had not appreciated yet another reason for investing in the country - a growing sense of pride and confidence that home-grown businesses can thrive and compete on the international stage.  This is quite different from businesses which operate primarily on the basis of India's low cost wage structure (... and even now some of them are "graduating" to higher value-added products and services).

This post from the Managing Direct of JHS Svendgaard says it all:

Until not too long ago, there was a tendency to look down on everything Indian.

Consumers who went out to buy products generally gravitated towards the international at best and anything that even sounded remotely international at worst.

The general conclusion was that if it is international, then it must be superior; if it was Indian, then it must be mediocre.

The biggest transformation of the last half-decade is a new-found pride in a number of things Indian. ...

Besides, there area number of other developments at play: a growing scale achieved by these Indian companies, the manufacture of products that reconcile world-class standards with relevant customisation ,the growing penetration of these products into rural India, the engagement of home-grown role models to endorse these products and increasing competitiveness. The result is that most of these companies are not merely content to play for incremental market share; through the introduction of innovative products, they are keen to create markets that never existed.

The result of this transformation in national identity and pride is captured in the response of friends to our decision to emerge from the outsourcing shadow of a global multinational. When we announced this decision a few years ago, the first response was ‘How will you survive?’ When I explain our business model today, the reaction has largely changed to ‘Wow! It’s so nice of an Indian company to take on international brands.

The bottom line is that it is increasingly inconceivable that the second most populous consumption market in the world would need to depend on global brands for its everyday needs. On the contrary, the time has come for home-grown brands to capture a large slice of then Indian market, leverage the prevailing economies of scale and emerge as successful global brands in their own right.

This represents a transformation in a way of thinking.  In part, it is based on national pride - something which propelled India to its independence in 1947.  Most important, it reflects a real sense of confidence and strength based on ability.  To date, international brands have done well in India.  However, the advent of this trend will open very promising possibilities for astute investors.

In previous posts, I have described my interest in investing in India.

Some of the strategic reasons:

• a growing population
• a rising middle class and improvements in standards of living
• a democratic country government which adheres (more or less) by the rule of law and a respect for property
• the emergence of a more business friendly climate in government
• a country that has the rare ability to accommodate variety (culture/language/religion) and yet function despite a rather chaotic environment ... this resiliency is an under-appreciated strength which should be considered by thoughtful investors 
• a sense among Indians that India presents opportunities for advancement, hence the repatriation of entrepreneurs back to India from places such as the Silicon Valley
• educational institutions which can draw upon the "best of the best" into a high quality academic experience
• the gradual emergence of things required to nurture entrepreneurship: social networks (both national and international), sources of financing, unexploited domestic markets.

I am far more interested in investing in India than China for a variety of reasons:

• It is a democracy.
• The rule of law prevails - this in contrast to China where unaccountable officials can dictate and manipulate policy (Mao's Great Leap Forward was a disaster ... and the outcome of other top down efforts such as the state support of uneconomic ventures by state-owned companies remains to be seen.)
• India's population structure is more evenly distributed - this in contrast to China's skewed structure which will strain the country: fewer workers to support retirees who have little in the way of social safety nets, etc. 
• It would appear that corruption is less of an issue that in years previous: The perception among U.K. businesses that corruption is a major barrier in doing business in India has halved, according to the latest edition of the U.K. India Business Council’s Ease of Doing Business report compared with what it was in 2015. https://www.thehindu.com/business/Economy/corruption-no-longer-among-top-3-hurdles-to-doing-business-in-india/article25541379.ece?homepage=true

This said, there are real barriers for retail investors:

•  It is very difficult for "foreign" investors to understand that intricacies of how business is done in India.  For example, there are assumptions in financial reports that may not be apparent .... ditto for assessments of market potential and the operating challenges faced by Indian companies.  
• There are restrictions on stock ownership by foreign nationals. (Google the topic to learn more.)
• Unless one is prepared to spend a tremendous amount of time reading and travelling throughout the country, it is very difficult to get a "sense" of the place and its investment opportunities.

To overcome these difficulties one can invest in: 

• mutual funds based on India (a non-starter for me due to excessive fees and often substandard performance)
• companies such as Fairfax India which invest, Buffet like, in Indian companies.  This company represents a substantial parts of my holdings and was the topic of previous posts. 
• ETFs (here's a list of 'em https://etfdb.com/etfs/country/india/
• ADRs https://www.https://topforeignstocks.com/foreign-adrs-list/the-full-list-of-indian-adrs/.com/equities/india-adrs
• direct investment in stocks listed on Indian exchanges  https://stepupmoney.com/how-to-invest-in-shares-in-india-beginners-guide-to-stock-market-investment-in-india/

I enjoy reading Indian newspapers on line.  They reflect the country: a wild mix of articles where authors do not hesitate to advance their views.  Here are two of my go-to rags:

The Hindu

The Economic Times

Sometimes, readers express a lovely sense of humour:

Modi's Fitness Video

Howard Marks - Stock Market Cycles

There is a substantial body of investment literature which advocates the dictum that one should ignore market cycles - that in the long run, wisely chosen investments will survive the up's and down's of the market and out perform investments made by "twitchier" individuals.  Further, the authors contend that markets are impossible to "time" ... that attention to changes in the intrinsic value of investments dictate performance over time.

This is fine ... but:

• Some individuals such as retirees don't often have the luxury of waiting for market cycles to correct, especially if they retire when the market heads south.
• Holding on through thick and thin is contrary to the human experience.  By nature, we are adapted to living in cycles: from our daily routines, to the yearly cycle of farming, to the longer-term responsibilities of raising children ... and so on.  
• Investors are a fickle lot.  They are driven by fear and greed and are not rational economic automatons.  

Over time, I have come to believe that it is possible to take market/business cycles into account when managing my portfolios.  Market cycles offer the potential to minimize losses and make significant gains.  For example, I study the agricultural and mining sectors.  These sectors routinely go through rather distinct cycles.  I've learned to approximate where one is in the cycle and to position one's investments appropriately: times where it is advantageous to buy or sell ... or sit tight.  I've also learned that it means going against the crowd and trusting the strength of one's research.

In order to refine my approach I've done a lot of research on cycles.  Of the lot, Howard Marks' writing is THE BEST: based on a wealth of practical experience, a sound academic background, years of thinking and interaction with many successful investment professionals.  Moreover, he writes well.

Howard Marks - Letters

Howard Marks has been in the investment business for more than 40 years.  He is the Co-Chair Oaktree Capital Investments, an organization which manages about $124 billion in assets for pension funds, sovereign wealth funds and corporations.

His Letters from the Chair have been issued since 1990.  The memos provide deep insights into the world of investing and are well worth reading.  You can subscribe by going to this link (which also provides access to other material):

Memos from Howard Marks

His most recent book, Mastering the Market Cycle - Getting the Odds on Your Side (2018) contains a synthesis of observations.  He draws on more than two decades of his memos.

One of the striking things about the book is the consistency of his thinking.  He is not shy about noting the sometimes repetitive refrains which reverberate in his memos over time.  To my mind, this is a real plus.

In their search for variety many writers on things financial venture forth into areas where they are inexperienced or lack the depth to get beneath surficial matters.  This is the lot of most financial writers in the media.  They respond to editors' blandishments for variety and articles to encourage advertisers to continue with their support to publications.  For this reason, I ignore the financial press for the most part.

In contrast, Marks is the real deal.  He is rich.  Why?  Because he and his crew were successful in meeting the expectations of clients.  Good enough for me ... and I figure that I can gain insights from his experience.

The Three Foundations of Sound Investment Management

In the introductory remarks, Marks notes that sound investments are based on two major elements (in addition to heeding market cycles):

• a superior knowledge of "knowables" e.g. the fundamentals of industries, companies and securities
• paying an appropriate price on the basis of the fundamentals.

For the most part, the rest of his book is based on the third foundation -  "understanding the investment environment we're in and deciding how to strategically position our portfolios for it. 

A Few Highlights for Me

I've read Mastering a few times.  Here are a few of my major take-aways:

About Cycles

One of the key words required if one is to understand the reasons for studying cycles is "tendencies."

If the factors that influence investing were regular and predictable - for example, if macro forecasting worked - we would be able to talk about what "will Happen."  Yet the fact that that's not the case doesn't mean we're helpless in contemplating the future.  Rather, we can talk about the things that might happen or should happen, and how likely they are to happen.  That is what I call "tendencies." [p.12]

The Superior Investor's Perspective

The superior investor is attentive to market cycles.  ... he gains a sense of where we stand in the various cycles that matter [my emphasis], and knows those things have implications for his actions.  This allow him to make helpful judgments about cycles ... specifically:

• Are we close to the beginning of an upswing, or the later stages?
• If a particular cycle has been rising for a while, has it gone so far that we're now in dangerous territory?
• Does investors' behaviourd suggest they're being driven by greed or by fear?
• Do they seem appropriately risk-averse or foolishly risk-tolerant? 
• Is the market overheated (and overpriced), or is it frigid (and thus cheap) because of what's been going on cyclically?
• Taken together, doe sour current position in the cycle imply that we should emphasize defensiveness or aggressiveness? 

All It Takes

All it takes for the perpetual market machine to grind to a halt is the failure of one or two assumptions and the operation of some general rules:

• Interest rates can go up as well as down.
• Platitudes can fail to hold.
• Improper incentives can lead to destructive behaviour. 
• Attempts to quantify risk in advance - particularly as to novel financial products for which there is no history - will often be unavailing.
• The "worst case" can indeed be exceeded on the downside. 

The error in all these things is always clear in hindsight.  [p. 230]

The Agricultural Sector - A Low Part of the Cycle

Things are bleak.

Dropping commodity prices have caused net farm income to plunge about 40 percent since its 2013 high and credit conditions to tighten.
U.S. farmers also face headwinds of record harvests and trade disputes.
Despite tough market conditions, the farm sector has remained relatively well insulated from potential solvency impacts.
A Tale of Two Economies



There is a positive dimension to this for patient investors.  Drawn from the above-noted article, the graph shows that farmers have learned through hard experience to manage debt. There is the prospect that, when commodity prices increase (and they will), farmers will be positioned to spend significant amounts on equipment, provided interest rates remain "reasonable".  In recent years, most farmers have economized on equipment expenditures but there is a point where the supply of reliable used equipment may not be sufficient to meet demand, hence the need to purchase new.  I continue to monitor this situation closely.  Fortunately, there is a wealth of data to use in this regard.

Potential Post Crash Investments

The mining and agricultural sectors are cyclical.  As mentioned in earlier posts, I have a significant stash of cash as a result of dismissing most crew members in
The Financial Log Book (which will be updated soon).

Why have I done this?

• A view that the markets are in for a major correction.  This has emerged over the past two years.  I realize that I may be "out" by a year or two, but I'm prepared to accept that.  Herr Buffet's admonition about not losing $$$ as the first and second rules for investing rests top of mind.   
• The hope that I can make nice profits by investing when "market spirits" are low.  Market cycles are there to be seen in hindsight.  There is every expectation that they will be repeated.  

While there are complex counter currents in the mining and agricultural sectors, I think that the general trend indicates a downward trajectory in both sectors.  

Why?

• low commodity prices
• growing fears of economic dislocation as a result of geopolitical strife/uncertainty, the prospect of increased trade wars, the threat of increased interest rates, the burden of government indebtedness,  etc. 
• a sense in the markets that a correction is to be expected ... things have been "too good for too long" and the party is about to end

Preparation for Investments in the Future

I am compiling a list of potential companies.  Here are some of the general criteria I am using:

• strong balance sheets with little debt and access to financing 
• great management that has experienced operating during the depths of at least one market cycle
• competitive products and services and a strong reputation with client markets
• companies which are innovative and developing products/services to meet the future demands of clients - not too far ahead of the curve: pioneers take the arrows while settlers take the land
• the ability to quickly ramp up operations when good times return
• majority of company business is located in stable jurisdictions where the rule of law prevails

I am also looking for companies which occupy specific niches in the aforementioned sectors and which should be especially profitable in the early stages of recoveries.  In this respect, I am revising my systems models as part of this analysis.  For example, during the early stages of recovery in the mining sector, I figure that it is more profitable to invest in existing producers whose operations can be ramped up fairly quickly.  Generally speaking, it is only later in the cycle that explorers become more attractive.  

Some Potential Crew Members

I am exploring a few themes:

1. Agricultural equipment distributors
2. Agriculture equipment manufacturers, especially those who are making inroads into traditional markets 
3. Mining equipment manufacturers
4. Mining engineering companies
5. Senior/intermediate mining companies with operations that can be ramped up quickly and where the "operational kinks" have been worked out

Here are a few companies which may be added to the crew at some point:

Outotec 

Rocky Mountain Equipment

Deere

Kubota

While researching Outotec, I came across an interesting site, Corporate Knights - The Magazine for Clean Capitalism .  I'm going to investigate some of the Global 100 companies for two reasons:

• to get a sense of the "opportunity space" occupied by the companies in order to open new avenues for research
• to identify potential crew members for The Financial Log Book

It is a work in progress that will unfold over the next two years.  It brings to mind a dictum which applies (pardon the pun) to painting and varnishing:

A good paint job is 90 percent prep work and 10 percent painting.  

So too, it is with investing.  

Investment Ideas

I often visit sites maintained by outstanding money managers.  Why?

Insights into Decision-Making

The most important reason for doing so is to learn about their decision-making processes and their attitudes.

When I read their quarterly/annual reports, I am particularly interested in learning how the portfolios change through time.  The dynamic view shows how thinking processes work in practice.  In this respect, most portfolio managers are quite candid.  They comment on:

• their reasons for adding to or reducing positions in various holdings
• the weighting of holdings in their portfolios
• their attitude during periods of outstanding or substandard performance
• their perceptions of the macro environment and their reactions thereto

For me, this is pure gold ... better than investment texts.  You get to see how things work in practice.  For example, there are any number of books which have been written by one-off wonders - investors who have gotten lucky and who have capitalized on this by writing books to boast, to sucker people into attending their talks on the investment speakers' circuit or to trust their cash to them.  Sadly, when you peak at their portfolios later on (if indeed, they maintain investment funds) you will often see a record of substandard performance.  

This said, there are some truly outstanding investors with enviable long-term track records.  You can see a representative slate of these people here:

gurufocus

Investment Leads

Fund portfolios are wonderful sources of ideas for investment.  Consider that the managers have the combination of skill, deep experience and access to information that, sometimes, is not readily available to the average investor.  Further, they have the capacity to spend a lot of time in their search.  

All said, it makes sense to take advantage of their work and to incorporate some of their holdings into your investment portfolios.  There is no shame in emulating people who are successful.  This is done all the time in other fields of endeavour: golf, music ...

Here is a wonderful treatise on cloning investments:

Cloning Investments

It is posted in a blog entitled:

Canadian Value Investors

The blog has been added to the "favourite sites" sidebar on this blog.

Inventions

Warning: If you click on the following link, you will be captured for a looong time.

I Googled "inventions" in a random search for investment ideas and came across this fascinating site.  There is no end to human ingenuity.

https://www.youtube.com/channel/UC4Tklxku1yPcRIH0VVCKoeA/videos

The link provides access to YouTube videos depicting inventions related to a variety of subject acres e.g. tools, furniture, camping etc.

Donut Economics - 7 ways to think like a 21st century economist

Introduction 

It's always useful to read widely and to include viewpoints which differ from those in the mainstream - ideas perpetrated by thoughtful individuals with a deep and varied experience with life.

Along these lines, I always make it a point to read George Monbiot, a writer with The Guardian.   For those who wish to learn more, here is his web site: George Monbiot

a few words from about George:

Here are some of the things I try to fight: environmental destruction, undemocratic power, corruption, deception of the public, injustice, inequality and the misallocation of resources, waste, denial, the libertarianism which grants freedom to the powerful at the expense of the powerless, undisclosed interests, complacency.

Here is what I fear: other people’s cowardice.

I still see my life as a slightly unhinged adventure whose perpetuation is something of a mystery. I have no idea where it will take me, and no ambitions other than to keep doing what I do. So far it’s been gripping.

Donut Economics - 7 ways to think like a 21st economist

An Insight about an Historical Ecological Assault - The Advent of Agriculture

I spent many years studying landscape change, especially the evolution of forest cover in the Great Lakes - St. Lawrence Forest.  This, coupled with extensive reading led me to conclude that the greatest human-caused global ecological disaster ever was the advent of agriculture.  

My wife and I will visit Britain this year.  I used to love the highlands and the Borders between England and Scotland.  They are beautiful but those lands barely hide the ugliness of a declining agricultural economy propped up by artificial subsidies and a system of land management which suppresses ecological diversity and stability.  Read more here: All the Hills are Dead. 

Monbiot makes a compelling argument for the "rewilding" of the British uplands, taking into account a variety of perspectives.  He concludes:

Rewilding could be a lifeline to those who live and work in the uplands. How many people, post-Brexit, will be prepared to keep paying £3bn, roughly same as the NHS deficit, in farm subsidies whose current benefits are hard to discern? Taxpayers may be more inclined to part with this money when it produces such obvious public goods as functioning ecosystems and magnificent wildlife.

Geography - Essential to Understanding Geopolitics and Useful for Investing

Preface

This post is a "think piece".  It reflects some initial thoughts on the applicability of geography to assessing the potential of a prospective investment. I'm offering it with the thought that others might get insights into an alternative approach.

Definition of Geography

Defined simply, geography is the study of the distribution of things over the surface of the earth.  

This definition was drilled into me by my thesis advisor who had a sign over his door which warned: I'm the meanest son-of-a-bitch in the valley.  I am indebted to that magnificent man: he was the proverbial pot of gold at the end of the rainbow - the man who opened intellectual doors and made my university experience worthwhile.  Some of his aphorisms still echo in my mind:  The only excuse for an late assignment is death.  A dirty mind is a perpetual feast.  

A Ridiculously Short Introduction to the Three Main Schools of Geography

1.  Environmental Determinism

The thesis is that the physical environment predisposes human development to certain trajectories i.e. that humans respond directly to the opportunities and limitations imposed by their physical environments.  For example, you cannot grow rice in Antartica. Many industrial sites were situated to exploit hydro power - everything from pioneer mills to huge lumber and pulp and paper complexes along the Ottawa River (which also served to transport logs to the mills from vast upstream catchments).

• this school of thought has a long tradition and flourished in the late 1800's and late 1900's
• it has considerable explanatory power in matters such as patterns of agricultural activity, patterns of overland and maritime trade (e.g. it is possible to model with considerable accuracy, the distribution of things ranging from transportation corridors to retail outlets) 
• the approach has been attacked by academics and others in recent decades as "politically incorrect" i.e. one application of the approach has been to "explain" why some societies are more advanced than others.  For example, northern Europeans developed more robust societies than those who live in more salubrious climes because they had to strive to survive and in so doing, evolved to have a competitive advantage over less developed societies
• it has also been used to try and explain why certain societies are more insular and conservative than others e.g. mountain dwellers (Swiss excepted) are generally poorer and more conservative than their lowland cousins 
• opponents reject it as a relict of colonialism, imperialism, sexism ...  you name it ... 

2.  Cultural Determinism

Followers of this approach believe that human ingenuity is the main determinant of human development e.g. that it trumps physical limitations such as water scarcity.

• this approach predominates in academic institutions 
• practitioners feel that it constitutes a more nuanced approach in that factors other than the physical environment can play a more significant role in determining human outcomes e.g. the role of technological innovation in opening vast areas to agriculture, aviation and electronic communication has overcome limitations posed by distance 

3.  Possibilism

This is a compromise which recognizes that human activity can be explained by elements of environmental and cultural determinism.

• it is not in favour within academic institutions which are constrained by the dictates of political correctness - even to countenance thinking outside the reigning orthodoxy is a non-starter
• when used judiciously, it has tremendous explanatory power as it levers the power of both approaches
• no better is this illustrated than when it comes to developing strategies to solve practical problems e.g. military strategy must account for human and technological factors as well as physical considerations related to characteristics of the theatre of operation; ditto for efforts to determine the best location for retail outlets.  

Application of The Geographical Approach in Assessing Investments

1.   Geopolitical Applications

There is a huge body of literature on geopolitical theory.  Perhaps the best recent addition to the literature is The Revenge of Geography: What the Map Tells Us About Coming Conflicts and the Battle Against Fate by Robert D. Kaplan.  He is a "possibilist".

Here are a few reviews which provide various takes on this impressive work:

http://www.nytimes.com/2012/10/07/books/review/the-revenge-of-geography-by-robert-d-kaplan.html

http://thesummaryreport.com/the-revenge-of-geography-by-robert-kaplan-tsr/

In contrast with the current academic approach to reduce the study of human activity to efforts to know more about less, Kaplan has taken a broader, more synthetic approach which is more reflective of the "real world" - something which the movers and shakers have to address on a daily basis.  It involves taking a considerable risk on his part, especially as it involves personal judgement.

I would also urge readers to take up a copy of The Influence of Sea Power Upon History: 1660–1783 by Alfred Thayer Mahan. Published in the 1890, it is perhaps the most influential book on the geopolitics of naval warfare ever written.  It is every bit as relevant now as then.  I wrote about it in an earlier post:

Sea Lanes and Maritime Security, Globalization, and A Great Source of Information About Think Tanks

The important take-away for these works is that they address high order, low moving processes which "control" or "dictate" the expression of shorter-term events such as battles, or strategies adopted by various nation states as they rise and fall.  Read these books to get beyond theheadlines.  It is no accident that wars tend to be repeated on the same pieces of geography and unfold in generally the same ways.

A Few Potential Applications for Investment Analysis

• An appreciation of the extent, importance and nature of geopolitical trends (e.g. military pressure points/strategies) can point the way to potential investments.  I will be writing about one of them in a future post. 
• Risk analysis is an important part of any investment.  It is important to get beyond the headlines and ascertain if potential threats are short-term in nature or the consequence of long-term high order geopolitical drivers.  
• The consequences of upheaval in one part of the world can, in a sense, be modelled.  For example, have you ever thought of potential consequences associated with the closure of various choke points on maritime routes for the transport of oil ... and how you could prepare for it?  (All of my oil-related investments have been made with this in mind.)  

2.  Hierarchy Theory 

Trade War Hurts Agricultural Equipment Manufacturers

I am not investing in the agricultural sector at the present time.  Why?

The American agriculture sector has taken a real hit as a result of Trump's decision to start a trade war with China and other countries.  This is yet another reason why I will sit on the sidelines and not invest in American farm companies.  The cycle will eventually change.  In the meantime, I am compiling a list of potential investments in the sector in anticipation of an eventual return to sunnier days.

US Farm Equipment Companies Pay More for Steel

Listen to this interview with an executive from Sukup Manufacturing (he is a Republican).  In response to Trump's tariffs on steel, US steel mills raised their prices by 30 percent!  You have to wonder how this has affected the competitive position of American farm companies.  They are already suffering from a depressed farm economy where farmers are struggling with depressed commodity prices and rising costs.

Former Legislator Steven Sukup on Manufacturing

Here is the Sukup Manufacturing web site:

https://www.sukup.com/

Here is another take which portends a more serious state of affairs in the American farm equipment sector:

The US import tariffs on steel and aluminium – of 25% and 10%, respectively – are a serious threat to this recovery. According to the Association of Equipment Manufacturers (AEM), steel makes up about 10% of equipment manufacturers’ direct costs. Now that most countries are exempted from the steel and aluminium import tariffs, the threat of rising steel prices for US manufacturers seems to be lower for the short term. These exemptions, however, are only temporary, and they depend on the outcome of further trade negotiations. Therefore, US agricultural machinery companies still potentially face a 2.5% increase in direct costs. In that case, prices of agricultural machinery will need to go up, putting pressure on sales growth, as US crop farmers face another year of depressed margins....

An even bigger threat for the market recovery of agricultural machinery are the retaliatory measures from the US’s trading partners. The import tariffs on US agricultural products lower prices of US agricultural commodities destined for export, which will negatively impact sales of agricultural machinery.  ...

It gets worse:

After several years of decline in the global market, the US agricultural machinery industry, in particular, runs the risk of receiving another blow. The US becomes a less attractive place for manufacturing agricultural machinery, due to the risk of a further depressed domestic market and the risk of a higher cost of steel. And the competitiveness of American agricultural machinery companies on the domestic and world market is also at risk. As a result, we can expect manufacturing assets in the US to decline in value, creating opportunities for companies that take a long-term approach to building or strengthening their position in the US.

https://research.rabobank.com/far/en/sectors/farm-inputs/Opportunities-Arising-From-Turbulence-in-US-Agricultural-Machinery-Industry.html

My Take-Away

The analyst at Rabobank may underestimate the resilience of American manufacturers, but his observation has led me to extend my research further afield - to include companies based outside the US.  In this regard, I am paying close attention to offshore companies which are setting up distribution and/or manufacturing centres in North America and South America.

Investing - public opinion surveys are useful tools

About once a month, I check opinion surveys on a wide variety of topics.  Why?

• I sometimes get investment leads.
• The background information about public sentiment is sometimes useful in setting a context for the strategic operating theatre of businesses.
• It's fun. 

Here are a few sources that I consult:

YouGov

From the very beginning, we have been driven by a simple idea: The more people are able to participate in the decisions made by the institutions that serve them, the better those decisions will be. ...

At the heart of our company is a global online community, where millions of people and thousands of political, cultural and commercial organizations engage in a continuous conversation about their beliefs, behaviors and brands.

We combine this continuous stream of data with our deep research expertise and broad industry experience, to develop the technologies and methodologies that will enable more collaborative decision making.

And provide a more accurate, more actionable portrait of what the world thinks.

You can search the site for a variety of topics, including snack foods, persons in the news, etc.  Did you know, for example, that M&Ms and Reese's Peanut Butter Cup are the two most popular candies in the US?  

I have always been fascinated by language.  Here is a very interesting take on the nuances of using adjectives such as "very bad" to "perfect".  It compares the perceptions of Americans and Britts.  

How Good is "Good"?

Pew Research Centre

Pew Research Center is a nonpartisan fact tank that informs the public about the issues, attitudes and trends shaping the world. It conducts public opinion polling, demographic research, media content analysis and other empirical social science research. Pew Research Center does not take policy positions.

It takes the pulse on many aspects of American society, including politics, religion, social trends, media and news, science, etc.

Here is an interesting take on Trump's image in the mind of the international community.  Americans may be unaware of the collateral damage which is being wrecked by Trump's attitude, words and actions.

Trump’s International Ratings Remain Low, Especially Among Key Allies

Pew Research is my "go to" site.  

I tend to avoid sites operated by organizations which have an axe to grind, except when I'm interested in learning more about a particular mindset.  Increasingly, tribalism is expressing itself in a way whereby various "groups" are not interested in making contacts with "the others" ... and most discouragingly, disparage their viewpoints as not having any credence.  Hillary Clinton's dismissive remarks about the "deplorables" was a factor which led to her defeat.  If anything, her campaign was deplorable ... or as per the survey noted above in YouGov, was "very bad".

Bear Markets Investment Strategies

The decline in global equities markets was accentuated in October.

An Unrewarded Earnings Season by BlackRock provides a comprehensive view of the current situation.

Key points

1. Uncertainty over the sustainability of earnings growth is fueling equity weakness, reinforcing our call for boosting resilience in equity portfolios.
2. Global equities fell amid elevated market volatility. Government bonds and the U.S. dollar rallied, while oil prices declined.
3. This week’s U.S. employment and inflation data may provide clues about the future path of Federal Reserve rate increases.

Here's another view:

Warning: 14 of 19 bear market signals triggered, Bank of America says

Another interesting take on causes for the declines is presented here.  It's all about yield curves.

Why Another Market Volatility Surge in Likely Ahead

Predicting market performance is difficult at best.  I have found that it is wise to heed the pedigrees of prognosticators and their motives.  Most act in the interest of themselves and their organizations.  For example, inmates from the professional investment industry are loathe to broadcast doubts about the state of the market for understandable reasons: better to advocate the continuation of good times or the doctrine of holding fast for better times during market  corrections.  

It makes better sense to read widely and think in a considered way and to arrive at your own conclusions.  As a result of doing so, I started to lighten up my position in equities in August 2018 for a variety of reasons:

• concern about the possibility of a major correction in the markets (I have written about this in previous posts.)
• the absence of compelling ideas for new investments and the sense that some investments had run their course for the short to intermediate term
• a desire to have a stash of cash to invest once the market correction had run its course
• a conviction that tax considerations are often over emphasized to the exclusion of other matters when it comes to managing one's portfolios over the longer term
• the luxury of having an income stream which allows me to sit on the sidelines if I decide to trim some expenses

Some portfolios are now more than 70 percent in cash.  

My thinking in this matter has been influenced most by the writings of Howard Marks.  

His most recent book, Mastering the Market Cycle, is masterful - a collection of his accumulated wisdom.  I have written about this book in an earlier post.  It is one of top 5 "must reads" on thing financial.

It is difficult to know "where" we are in economic cycles as Howard Marks has taken great pains to note.  However, it is possible to detect general trends and take action.

Here is a great article penned in July 2017 by David Rosenberg:

David Rosenberg: Here are 10 tips for investing late (very late) in the business cycle

I am going to quote his tips directly:

So how to invest?

Answer: Be aware of where we are in the cycle and act appropriately by having an optimal portfolio for this part of the business cycle:

1. Raise some cash — sometimes a 1 per cent yield on a three-month T-bill will have to suffice.

2. Reduce domestic cyclical exposure.

3. Focus on companies with strong balance sheets; low refinancing risks.

4. Cut the overall beta of the equity portfolio.

5. Screen more heavily on earnings quality and predictability.

6. Protect the equity portfolio by writing call options or buying puts.

7. Diversify geographically into markets that are in an earlier part of the cycle (many parts of Europe, Asia).

8. Step up investments in dividend growth/yield and in less economically sensitive parts of the market.

9. Credit hedge funds with attention paid to better quality should help preserve capital and provide a recurring cash flow.

10. Long-term bond yields (even zero coupon) never rise during a recession so no matter how low they are, then can indeed go even lower unless this game goes to extra innings.

I wrote to the man, stating that it was one of the best articles I had read that year on things financial.

Here is another take.

Could the “Barbell Strategy” Whip Your Portfolio Into Shape?

We all know what happened in 2007 and 2008, after debt levels became unsustainable. During the interview, Taleb stopped short of predicting another such crash, but he stressed the importance of paying attention to the risks.

As for his current allocations, he’s invested in real estate, short-term Treasuries and gold, “just in case.” If you own stocks, he said, make sure you have some kind of put protection. Readers of his books might recognize this approach as the “barbell strategy.” Here he is in The Black Swan:

If you know that you are vulnerable to prediction errors, and if you accept that most “risk measures” are flawed… then your strategy is to be as hyperconservative and hyperaggressive as you can be instead of being mildly aggressive or conservative. Instead of putting your money in “medium risk” investments… you need to put a portion, say 85 to 90 percent, in extremely safe instruments, like Treasuries—as safe a class of instruments as you can manage to find on this planet. The remaining 10 to 15 percent you put in extremely speculative bets, as leveraged as possible (like options), preferably venture capital-style portfolios. That way you do not depend on errors of risk management.
https://www.marketslant.com/article/black-swan-author-just-issued-powerful-warning-about-global-debt

My Take

1. You never get poor by taking profits or by failing to remember Herr Buffet's first and second rules of investing - not to lose money and not to forget the first rule.
2. It's always difficult to predict market cycles or even know where you are in a cycle.  It's akin to the "boiling frog" syndrome (Google it if you don't know the term) but with the difference that a point is reached sometimes where a sudden event disrupts the gradual process e.g. the frog is extracted from the pot and eaten. This said, there are clues which can point to where we are in the cycle.  Howard Marks provides guidance. 
3. I have trimmed the portfolios considerably, leaving what I consider are resilient stocks and holdings which might might do well in market uncertainty and potential inflation scenarios. 
4. I will explore the potential to adopt some of the strategies noted above with a view to protecting my stash.  
5. I will busy myself in the search for compelling investments with the thought that the market cycle will eventually present investors with some compelling investment possibilities.  The process may take a few years but I feel that patience will be rewarded.  This is not to say that I won't hesitate to invest at any time if attractive opportunities arise.