Tumultuous Weeks
Written by Paul Siluch
December 13th, 2024
"There are decades where nothing happens; and there are weeks where decades happen."
-Vladimir Lenin
It has been a very full couple of weeks in the world:
- After 53 years in power, the Assad dynasty in Syria fell, toppled by rebel forces with support from Turkey. The geopolitical impacts are not known yet, but oil prices rose, as they always do when something explodes in the Middle East. Oil is not a large export for Syria so any ripples in the energy markets are likely to be short-lived. Syria’s main exports are olive oil and nuts, so a regime change won’t affect global trade much at all. However, Russia and Iran stand to lose influence in the region while Turkey gains.
- The president of South Korea attempted martial law but was stopped by the Korean legislature – a victory for this sometimes-shaky democracy.
- U.S. employment worsened.
- Canada cut interest rates by 0.5%, which is well below U.S. rates right now. As a result, the Canadian dollar hit its lowest point against the US dollar since the 2020 pandemic.
Markets continued their uphill march, despite the news.
Preparing to Fail
Most famous for inventing the light bulb, Thomas Edison received another 1,092 patents for the many other things he created, like motion pictures and the phonograph.
Yet, he also failed numerous times. He didn’t see these as failures, though:
"I have not failed 10,000 times—I've successfully found 10,000 ways that will not work".
-Thomas Edison
Failure was part of his process, just as it is for every inventor. Today’s equivalent to Edison, Elon Musk, blew up dozens of rockets before SpaceX had its first successful launch. It is now the world leader in the space industry.
Failure applies to the investment world, as well. Often harshly. Companies fail for a variety of reasons, from bad decisions to declining profitability. Sometimes it is nothing more than a stumble and a skinned knee (metaphorically speaking), and sometimes it is a death blow.
When CIBC bought a billion-dollar package of U.S. subprime loans from Goldman Sachs from 2007 (source: CMI Group), it did so to keep up with the big boys of Wall Street. These banks were profiting heavily off predatory mortgages and CIBC wanted to join the party. When the Canadian bank subsequently wrote them down to close to zero, it felt like a mortal blow at the time.
Within two years, it wasn’t. CIBC had cash flows from tens of thousands of mortgages and depositors back in Canada to earn the losses back, and they did. Anyone who recognized this and bought the bad news did very well as the shares gradually recovered.
Value Investing
Value investing is the art of buying failure. And knowing the difference between mortal “company killer” risks and “skinned knee” temporary risks.
It is not always easy to tell the difference.
For example, can Intel – once the most dominant semiconductor company in the world - remake itself to compete with Nvidia? Can Boeing reclaim the quality it once had in the airplane business before the Chinese apply their manufacturing prowess to take over yet another industry?
Billions are being invested for and against these companies right now. Both Intel and Boeing will take years to fix, if they can be. We are not invested in either. They are difficult to analyze.
Meanwhile, some think TD Bank is in a similar situation as CIBC was in 2008. Slapped with a $4 billion fine for money laundering at several of its U.S. branches, TD has now suspended its 2025 growth targets while it cleans up its mess. It is the weakest of the Bix Six Canadian banks this year.
TD Bank has too many profitable divisions (Canada, insurance, wealth management) not to recover, just as CIBC did after 2008. Every Canadian bank that has stumbled has always risen in the years following due to their monopoly position in Canadia’s financial universe.
It may take time, but we expect TD will too.
Permanent Loss
Companies can vanish when there is dramatic industry change. The story of Weight Watchers is a prime example.
Started in 1964 to help overweight people slim down, Weight Watchers began as a franchise model where franchisees set up group meetings and sold diet books. It grew quickly through specialized exercise regimens, a magazine, counselling, and rigorous point-based diets. It eventually sold itself to Heinz for a handsome profit.
Competition arrived in the 1990s through Slim-Fast and Jenny Craig, forcing Weight Watchers to reorganize and adapt. These were not mortal risks. The company separated from Heinz, moved onto the internet, and resumed its growth.
The next challenge came through the internet: free diet apps and fitness watches. Weight Watchers, once again, bent but didn’t break. Oprah Winfrey took a large stake in the company and became its spokesperson. The company started selling thousands of monthly web-based subscriptions (the Holy Grail for all software companies) and the shares skyrocketed from $10 to $100 per share.
And why not? Obesity affects one in three Americans. The future looked guaranteed.
Dieting is hard work. New research shows that fat cells develop ‘memory’ once they are exposed to repeated saturation of fats and sugars. Once they expand to store more fat, they ‘remember’ this state even after dieting shrinks them. Fat cells seek to return to their larger form.
It means heavy people must continue with a diet regimen for life. Few people have this amount of willpower.
And then a meteor called Ozempic struck.
Ozempic and its GLP inhibitor cousins have taken the world by storm. With an injection once a week – and soon a pill – people can lose up to 20% of their body weight in a year without dieting (source: Cedars-Sinai). The two main companies – Novo Nordisk and Eli Lilly - cannot make enough of their weight loss drugs.
Weight Watchers has dropped from $100 in 2018 to $1.87 today:
It looks like there is no coming back this time.
Like the buggy whip business a century earlier, Weight Watchers fell victim to a new technology. For buggy whips, the demise came through the internal combustion engine. There was simply no way a company focused on animal power could compete. A few horse carriage makers adapted by switching from carriages to automobile bodies and survived. But as the number of horses in America fell by 99% from 1880 to today, buggy whips became nothing more than museum pieces.
Weight Watchers shows the effect Ozempic has had on the diet industry. In this case, failure may be mortal. Where the company could once copy its competitors or move onto the internet, it is hard to see a new chapter for a diet company when people no longer need to diet.
However, we must remember that investing has few absolutes. Marvel Entertainment emerged from near bankruptcy as comic books were dying in the 1990s by licensing its characters for blockbuster films.
The new drugs are not without their side-effects, which leads to many people stopping the injections. Weight Watchers has 60+ years of data on weight loss and the behaviours around this, which may be very valuable to a company in Big Tech. An integrated approach involving GLP-1 drugs and the traditional weight loss ecosystem may be the key to their survival.
But returning to a $100 stock price, like losing 50 pounds by Christmas, is a very unlikely outcome.
Others at Risk?
Are there other industries at similar levels of risk? It is important to speculate about who might be the next Weight Watchers, or Blockbuster Video. Blockbuster video made a fortune renting videos. When streaming arrived, Blockbuster tried to introduce movies-on-demand over the internet, but they invested too little too late because they didn’t want to upset their existing store-based cash flows.
Netflix had no real estate to worry about. They were able to morph their mail-in service to one of the most successful streaming businesses today.
The Self Driving Extinction
One of the biggest changes to the world as we know it will be self-driving cars. These already exist in locations in both San Francisco and Phoenix through Waymo (part of Alphabet/Google), which has just surpassed 100,000 paid trips per week (waymo.com).
All without human drivers.
As self-driving expands to every city, I think radio is at risk. Approximately 60% of all radio “consumption” occurs in the car because we listen while we drive. Take away the driving aspect and people will be free to surf their phones and tablets, which is now the most ticketed driving offence. There are few pure-play radio stocks any longer but I see it as an industry to avoid.
There are no gasoline-powered self-driving automobiles. That isn’t to say there won’t be any, but all the money is being poured into electric vehicles. As the auto industry rapidly changes to hybrid or all-electric vehicles, every existing car company is catch-up to Tesla and Chinese start-ups like BYD. Few of them will likely make it. It is just the nature of industries facing existential change. Some will adapt. Most won’t.
Autonomous cars will also affect:
- City parking revenues – cars that drive themselves can go home instead of staying downtown.
- Homes with garages – many people will call for a ride instead of owning a car, so no need for a garage.
- Gas taxes for road maintenance will vanish.
- Car insurance – autonomous cars are safer than human drivers already.
- Public transportation - who wants to take a bus when a private car does it cheaper?
- Today’s new drivers may be the last generation who needs to learn to drive.
- Police ticket revenues will dry up.
There are benefits to autonomous cars over and above the safety aspects.
- Seniors will be able to continue to use cars with no need for a license.
- Children can use them as well for a safe experience.
- Most cars are parked for most of their lives. Autonomous cars could be in use far more, meaning fewer will be needed.
Family Support
Failure shows up in families too. Perhaps failure is too harsh a word – call it challenge.
For many reasons, some people have difficulty fitting into the modern world. Inability to find a job, hold a job, make enough, handle money, or live independently means some people need assistance for life.
This is where the concept of a trust can help. Trusts were a legal invention of Britain in the 12th and 13th century for knights who left for the crusades. They could leave their estates in a trusted person’s hands – the trustee - to be managed until their return. Trusts are widely used today, and you don’t need a horse and lance to have one.
Essentially, a trust allows you to set money aside for the benefit of someone else, while restricting their access to it. Rules are put in place – how much they receive, how often they receive it and under what circumstances - to benefit those who cannot handle the money themselves.
Or who might spend everything if given a lump sum. Trusts carry on up to 21 years after your death.
If you find yourself having to provide for someone who cannot look after themselves, call and ask if these may be a solution.
Our trust arm, Solus Trust, provides trust administration. I have enrolled in the Trust and Estate Professional course to become more knowledgeable about trusts and estates. It is a deep and complex field.
Did you know?
I had to add this because it is the most fascinating thing I read this week.
Studies show that people with cancer have a 25% lower risk of developing Alzheimer’s (Imperial College of London).
At first, they thought it was because cancer patients died younger, before dementia could set in. The study has been replicated and verified in many countries with the same result.
Researchers don’t yet know why.
Then, they stumbled upon the reverse, which is even more strange.
People with Alzheimer’s are 37% less likely to develop cancer (MDPI study, South Korea).
Is there some mechanism that could be used to stop both at the same time?
“There may be underlying biological mechanisms that influence the two groups of diseases in opposite directions.”
- Elio Riboli, Imperial College
