Month: December 2024

Learning Out Loud #1: Synthesis of Ideas on Decision Making, Life and Investing

As part of my learning journey, I regularly consume content from various sources including podcasts, books, and articles. This post synthesizes key insights I’ve gathered around three main themes: thinking probabilistically, living authentically, and investing wisely. These notes reflect both direct insights from experts and my own reflections on applying their wisdom. I will continue to post these reflections as “Learning Out Loud”.

Thinking in Probabilities

Making good decisions requires understanding probability better than our intuition suggests. Consider a common scenario: an accomplished home cook deciding to open a restaurant. While their cooking skills might suggest an 80% chance of success, industry statistics show that most restaurants fail in their first year. This base rate should adjust our confidence downward to perhaps 60% – still optimistic, but tempered by reality.

Destination analysis helps refine these probabilities further. For any future expectation, we should ask: What specific events need to occur? What must not happen? For example, in our restaurant scenario, success might require:

  • Maintaining consistent food quality at 5x the volume
  • Finding and retaining reliable staff
  • Managing costs while maintaining margins
  • Building a loyal customer base within 6 months

These become trigger points for feedback loops – clear signals that can validate or challenge our thesis along the way. Rather than waiting years to judge success, we can monitor these specific indicators monthly or quarterly. This can apply to investments that are usually considered to need a long time horizon to determine success, e.g. VC investing. Instead of assuming one has to wait the [7-10] years to realize whether the investment was a success, one should use as trigger points the elements they were going to assess the investment in the meantime. It isn’t as though the VC invests and goes to bed for a decade, they will monitor sales, cash burn, management decisions, etc. Those should be used then !

This probabilistic thinking extends beyond business decisions. Whether investing, career planning, or making life choices, we can improve outcomes by:

  1. Starting with base rates from similar situations
  2. Identifying our specific edge or advantage
  3. Setting up clear feedback loops
  4. Maintaining a margin of safety to account for uncertainty

The key is making these components explicit and trackable, preventing after-the-fact rationalization of outcomes.

Living a Full Life: Principles for Authentic Living

On Personal Authenticity

The fundamental challenge of living well starts with being true to oneself. This means not just understanding who you are, but actively embracing it. We must sometimes give up what we want our destiny to be to find out what it is. This requires both courage and humility – courage to be authentic, and humility to let go of preconceptions about our path.

On Professional Conduct

There’s wisdom in considering how institutions like the royal family approach their roles. They demonstrate the power of ceremony, routine, and decorum. Yet this formality needn’t conflict with authenticity – indeed, many successful professionals find ways to be the same person both personally and professionally. This consistency builds trust and reduces the emotional burden of maintaining different personas.

On Relationships and Boundaries

Meaningful relationships require both generosity and boundaries. The pattern is clear: help someone once, and they should reciprocate. If they continue asking without giving back, it’s time to reassess the relationship. This applies equally to our own behavior – we must be mindful of not becoming the person who constantly takes without giving, as illustrated by the anecdote of investors being careful not to always ask Warren Buffett for coffee while in Omaha.

On Purpose and Presence

Your most important job isn’t your career – it’s living a meaningful life. This requires being present in each moment rather than always seeking the next opportunity. At a conference, this means engaging with the content rather than chasing celebrity sightings. It means putting on your own “life jacket” first – ensuring your own well-being so you can better serve others. It is also important to know where you are going: “If a man knows not to which port he sails no wind is faovourable” – Seneca.

The Art and Science of Investing

Understanding Growth Drivers

At its core, investment returns come from three fundamental drivers: earnings growth, multiple expansion/contraction, and shareholder returns (dividends or buybacks). This framework helps cut through market noise to focus on what truly creates value over time.

This thought experiment illustrates the point. These two investments will net the same returns (all else being equal):

  • A company growing earnings 20% annually, and
  • A company with no growth and a 5x P/E multiple using 100% of cash flow to buy back its stock

The latter isn’t exciting, and likely easily overlooked, but is no less a compounder generating returns for one’s capital.

A Process-Driven Approach

Rather than trying to predict short-term market movements, successful investing requires a systematic approach focused on longer time horizons. The “invest, then investigate” method offers an interesting balance: take a small initial position when you spot a promising trend, then do deeper research to either build the position or exit. This approach recognizes both the speed of modern markets and the importance of thorough analysis.

Consider the case of investing in cyclical industries: conventional wisdom often warns against them, yet companies that can survive industry downturns while capacity decreases may emerge stronger during the inevitable upswing. This illustrates how thinking probabilistically about future scenarios, rather than just current conditions, can reveal opportunities.

The Power of Patience and Concentration

The most successful investors often make fewer, more concentrated decisions rather than constant trades. As Warren Buffett’s famous “20-hole punchcard” metaphor suggests, quality matters more than quantity. This patience shows in real-world results: Norway’s pension fund’s seemingly modest 6% CAGR has built nearly 60% of the fund’s $1.5 trillion in wealth, while Aquamarine fund’s 9% CAGR has created significant family wealth. These examples demonstrate how steady compounding through patient, focused investing often outperforms more active approaches.

Making Better Decisions

The Role of Conviction and Flexibility

Good decision-making requires a seemingly paradoxical combination: strong conviction with willingness to change. As one investor notes, “A very good investor is a contrarian with conviction, and being able to not listen to what others think, and yet being able to change one’s mind.” This applies equally to life decisions and investment choices.

Practical Decision-Making Tools

Several practical tools can improve decision quality:

  • Simple, clear documentation (1-2 page write-ups for investment decisions)
  • Regular journaling to track your thinking and establish personal base rates
  • Structured discussion with others, including designated devil’s advocates
  • Recognition that risk often manifests in counterintuitive ways

The Discipline of Inaction

Perhaps the hardest yet most important aspect of decision-making is knowing when not to act. We often feel compelled to take action – making trades, changing strategies, or making decisions – simply to feel productive. Yet some of the best decisions are choices to wait, observe, and let time work in our favor.

Integrating These Principles: A Framework for Better Decisions

Whether in investing, career choices, or personal life, these themes interconnect in powerful ways:

1. Probabilistic Thinking Applied Broadly

  • In Investing: Use base rates for industry success/failure, adjust for company-specific factors
  • In Life Choices: Consider historical patterns in career changes, relationships, and personal growth
  • In Decision-Making: Recognize that certainty is rare; work with probabilities rather than absolutes

2. Feedback Loops and Learning

  • Investment Thesis: Set clear markers for success/failure
  • Personal Growth: Regular reflection through journaling and discussion
  • Career Development: Regular check-ins against defined goals and market realities

3. Patience and Compounding

  • Investment Returns: Let time amplify good decisions
  • Personal Development: Build habits and skills systematically
  • Relationships: Invest in long-term connections rather than transactional interactions

4. Authenticity and Conviction

  • Investment Style: Develop and stick to your approach while remaining flexible
  • Personal Brand: Maintain consistency across professional and personal spheres
  • Decision-Making: Trust your analysis while remaining open to new information

Conclusion

Success in any domain – investing, career, relationships – comes from applying these principles consistently over time. The key is recognizing that while the specific applications might differ, the fundamental approaches to decision-making, risk assessment, and long-term thinking remain remarkably consistent.

By understanding base rates, establishing clear feedback loops, maintaining patience, and balancing conviction with flexibility, we can make better decisions across all aspects of life. The goal isn’t to make perfect decisions, but to create a framework that leads to better outcomes over time.

Sources:

Podcasts

Writing

Videos

CIBC – Can I Buy (more) Cheaply?

Introduction

CIBC’s journey from Wall Street wannabe to steady Canadian banking powerhouse is a tale of redemption—and right now, it’s a story of success trading at a premium price. After climbing out of some of the most spectacular financial mishaps in Canadian banking history, the bank has transformed itself. But does its current stock price reflect potential or overvaluation?

It’s been one hell of a good year for CIBC shareholders. As with all Canadian banks, their fiscal year end is October 31*, and results for Q4 and full year 2024 were reported on December 5. This one is one of my biggest positions, from my time when I was particularly focused on dividends. It’s been a good year, and purchases made during the Pandemic period have also panned out quite nicely – see this 5 year stock chart:

Before diving into this year’s results, a brief recap of their history.

Let me see your bulge…bracket

They are Canada’s 5th largest bank by assets and most domestically weighted of the ‘big 5’ notable for its very large residential mortgage portfolio. This wasn’t always the case.

They’ve come a long way since the heady days of the late 1990s and early 2000s, when then-management tried to make it a US Bulge Bracket Bank, competing with the Wall Street firms (i.e. Goldman Sachs, Morgan Stanley, JP Morgan). CIBC was involved in tech IPOs, private equity and arguably tried to be too many things to too many people. There were offices across Europe; they owned investment bank Oppenheimer; executives made the news for buying expensive real estate; CEO succession was fraught and made front page news.

Then the tech bubble popped; the bank was one of many involved in Enron and had one of the largest fines for its role (which still haunted the bank through 2019, having fought with tax authorities about how much of the expense could be deducted against income); the great financial crisis hit, and out went the share price with over $9B in subprime write downs. Leading into that CEO Gerry McCaughey had been appointed around 2005 to stabilize the good ship CIBC, and by 2008-09 many current senior executives had joined at that time from outside the bank, including Merrill Lynch, National Bank, and elsewhere.

As a result of a decade of knocks through 2010, the bank retreated to the foundation that was its Canadian business. Oppenheimer was sold; foreign offices closed or scaled back; and new business was kept to fairly vanilla banking activity. The stock was arguably overlooked by the investing community, and with good reason, having gained a reputation as the bank most likely to step onto a sharp object. That and CEO McCaughey was tasked with keeping things stable, not grow!

This meant the stock traded with a below market PE ratio. See the blue line in the chart below:

Stock Unlock: Free Form Tool, comparing the Big 5 Canadian banks’ PE in the past 10 years.

How does a company work out of a situation like this? Ideally, change the culture and prove it to investors with steadily improving results.

Show me the money!

With McCaughey retiring in 2014 – and how it came about was somewhat emblematic of old CIBC, having renewed his employment contract for three years and then deciding to depart, resulting in a very large payout – succession was brought back to the fore and there were concerns in some corners that the market would see a succession battle like times of old. Somewhat surprisingly, it didn’t happen. Victor Dodig, then head of wealth was appointed by the Board after a search.

In fairly short order, he completed a big round of musical chairs in senior executive ranks. Why? He wanted to ensure that the bank did not find itself in the situation it did when he was appointed. Specifically, he wanted to make sure that there was a “deep bench” of talent that were experts in more areas than a single business line they may have come through. Over his 10 year tenure, this shuffle in the ranks every few years continues, and it seems like results in the business are paying off.

But that skips over the rumbling that started growing a few years into Dodig’s time as CEO. He wasn’t really doing anything. What would be his legacy? What’s the bank’s story? What is CIBC, other than merely Canadian bank? It had been nearly a decade without much to speak of except the problems were past. The other banks can quickly be described – TD and BMO are very American (in different regions); RBC has global aspirations; Scotia is very big in South America.

So what’s a CEO to do? Buy something!

The Purchase of the (21st) century

 In 2017, CIBC completed its record setting purchase of US bank the PrivateBank, based in Chicago. It was known for its customer focused, relationship centric lending practice in the US midwest. The purchase was initially panned after CIBC chased its prize, increasing the purchase price by 20%, in the face of reforms from then-President Trump that resulted in bank asset prices rising.

It was a bold move, that quickly started to pay off, by diversifying the bank, giving it a footprint in the US again outside of capital markets activities and a source of business deposits. Since the acquisition, the bank increased earnings from the US from about 5% at the time of the purchase to over 20% this past fiscal year.

Back to the future! Oh, and Fiscal 2024.

With that brief trip through time, we come back to results this past fiscal year. Handily, their investor fact sheet does the talking quite nicely, so no fancy Stock Unlock charts for this section.

Growth in most metrics have been on a steady uptrend since the 2020 Pandemic year, with some fluctuations owing to losses, particularly in the commercial office portfolio and a ~$1B provision to settle a lawsuit filed by Cerberus in 2015, which hit 2023 results (article). ROE, the common measure of returns for banks, is on an uptrend again after last year, and capital levels are well above OSFI regulated minimums.

Ironically, the Cerberus settlement plus the US regional banking crisis plus US commercial real estate concerns meant market expectations at the end of Fiscal 2023 – a year ago – were pretty low, with some worried it might signal a return to the bank of old and thus didn’t believe the emerging track record of steady results.

In other words, and perhaps with a little benefit of hindsight, the market had over-punished the stock, so with steady and quite positive results in 2024, the potential returns were quite high and indeed, the share price whiplashed back around again. Total shareholder returns were almost 100% in the past year, which for a Canadian bank is absolutely ridiculous.

With the ship righted, a course charted, and engines on full steam ahead, and my nautical references exhausted, the bank has some exciting times ahead of it:

Valuation

This brings us to the question of whether it’s trading at a fair price right now. As usual, I used Stock Unlock to complete my valuation. I used P/E as the valuation metric (10.5 5yr avg), assumed EPS growth on the low end of guidance (7%), and dividend growth slightly below this (5%) as I feel the next two years may pose a challenge to the bank with a significant amount of mortgages up for renewal so management may want to preserve some earnings to build capital to buffer against any losses. I also assume they don’t use their authorized share buyback and so stick with ~1% p.a. average share issuance.

Taken together, the FV is about $73/sh or almost 5% CAGR.

Increasing growth to the high end of 10% gets us to $82/sh or almost 7% CAGR.

If they can keep that growth, I think it’s more likely they would maintain their premium (to their average) PE. Right now the PE is over 13, but I use 12, resulting in a FV of $91.50 and just over 9% CAGR.

Seems like that’s what the market is pricing in, but for me it’s rich at current prices. I like the story, I like the direction, and I like the dividends (up another ~8% this year – a nice raise!), but I’m not going to add to this position right now.

*Perhaps apocryphal, but apparently the banks agreed to do this to help accountants who were otherwise busy from January-April with those whose fiscal year ends matched the calendar (link: https://archive.is/EI4k7)

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