“The Value of Value”

“Once you adopt a Value investing philosophy, any other investment behavior starts to seem like gambling.”

Seth A. Klarman, “Margin of Safety”



It took me a few days to finish a letter written to fellow investors by Mark Yusko, Morgan Creek Capital Management, a money manager with $3B AUM. As part of the 66 pages long “Q2 2016 Market Reveiw and Outlook” of the company, this letter is 30 pages long, with the title of “The Value of Value”.

The reason I love this letter is the timing of it. In the past few months, I was struggling with which path of investment I should choose for the rest of my life. I was indulged in day trading for some times. I read some books about value investing, but the whole concept is still vague for me. Just a few days ago, a friend who is a beliver of value investing, had a chat with me and strongly suggested me to go the value investing way. Then I noticed this letter on Twitter (link).

Mark Yusko is the founder, CEO and CIO of Morgan Creek Capital Management. It was very interesting that the source I know him was from a podcast of NPR Money about crude oil (link). He is the only one who admitted to the public that he is a “speculator of oil”, according to the interviewers. When his name appears on Twitter, it drew my attention immediately.

Mark’s letter has a through review of Seth A. Klarman’s value investing philosophy. Some depicts are from Klarman’s famous book “Margin of Safety” , some are from Klarman’s letters to his fellow investors at Baupost. Mark’s letter systematically reviewed Klarman’s thoughts from 6 aspects: (1) philosophy; (2) mindset; (3) process; (4) team; (5) client; (6) culture. If someone wants to know Klarman’s value investing philosphy, this lettter is absolutely a piece of article worthy to be read back and forth.

There are many good examples and stories in the letter. One of them I love very much is about cash as an investment. The letter wrote (on page 29), a concerned client called Klarman to express his displesure that the Fund was so heavily invested in cash and asked “why I am paying you 2% and 20% for you to hold cash?” In a very calm manner, Klarman replied something along the lines of, “if you think you are paying me those fees to hold cash, you should redeem immediately. You are paying us 2% and 20% to know when to hold cash and when to invest, when to take risk and when to retreat to the sidelines. You are paying us those fees to know when is the best time to press the best possible risk/reward. But since you fee this way, I will waive the usual lock-up restrictions and wire your cash to you in the morning.” What a wise explanation of the value of holding cash and the value of professional expertise!

Klarman’s book is out of circulation since its first print of 5000 copies. Now it is sold on Amazon with a price tag of over $1,000, kind of like a collectible. But the content could be found on internet due to its popularity. It is on my reading list for this week.



Fintech Toronto Event

Today I participated the Fintech Toronto event at downtown Toronto. This is the first time I join this kind of event. It was mind-openning, fun, and inspiring. I guess there are about 150 or more people attended this event.

FintechTo Event

The event featured 3 speakers from 3 Fintech companies: FinanceIt, Honk, and OANDA. All of the 3 speakers’ sharing are facinating.

FinanceIt is a consumer finance comany, focused on home renovating loans. The company originally started from 2007. Along the way, they have tried many market niches, overcame all kinds of unexpected obstacles. Theire story let me know start-up is never easy.

Honk provides solutions for drivers who want to find an ideal parking spot. This is really a big issue each time when I am going to downtown Toronto. The Honk app can even offer discounts. Drivers can pay on cell phone. Definiate I will try it the next time. Michael, the enterpreneur who created this start-up company, has successfully created, operated and sold his first company. What I learned from Michael is, good business model means you can solve a problem for people. First of all, you should find out where the problem is.

OANDA is an online forex trading platform. Although I don’t use OANDA’s platform(I use IB), I have known it for a while. The company’s founder, another Michael, compares starting up a business and work for a bank. The former only suitable for those who have enterpreneurship, vision, and hard working. If your goal is to make big money, you’d better go to work in a bank, this is his advice.

Will I start up a business someday? Maybe! It has never been on my option list, but why not?










Trading US Dollar with ETFs: A Canadian Perspective

The US Dollar Index generally kept an uptrend since May (as shown in the chart below), although it had some zig-zags. Last friday, the US dollar had a sharp drop due to disappointed GDP release. There are sevaral reasons to belive that the US dollar will pick up the momentum, so the drop last week provides opportunities to buy. At the same time, oil price kept going down, it may boost the uptrend of USD/CAD. From a Canadian trader’s perspective, if you want to long the us dollar, there are at least 4 ETFs available to choose.

US Dollar Index 2016-08-01

USD:CAD 2016-08-01

1, Comparisons of 4 ETFs

The four ETFs can be classified into two groups: (1) US dollar against a basket of currencies, two ETFs are UUP and USDU; (2) US dollar against Canadian dollar, two ETFs are FXC and DLR/DLR.U. Here are some comparisons about these 4 ETFs.

  USD against a basket of currencies USD against CAD
Fund Name PowerShares DB US Dollar Index Bullish Fund WisdomTree Bloomberg U.S. Dollar Bullish Fund Guggenheim CurrencyShares® Canadian Dollar Trust HORIZONS


Issuer Invesco WisdomTree Guggenheim Horizons
Exchange NYSE Arca NYSE Arca NYSE Arca TSX
Inception Date 02/20/2007 12/18/2013 6/21/2006 APRIL 06, 2011
Net Assets 829.9M USD 246M USD 207.8M USD 69.9M CAD
Benchmark Deutsche Bank Long US Dollar Index (USDX®) Futures Index – Excess Return™ Bloomberg Dollar Total Return Index CAD.USD USD.CAD
30 Day ADVolume 1,204,479   57,039  
Management Fee 0.75% 0.50% 0.40%CAD 0.45%
Holdings DX futures US Treasury Bills and Short Currency contracts 100% Canadian Dollar US Treasury Bills and Cash

2, Comparisons of the benchmarks of UUP and USDU

2.1 UUP tracks the US Dollar Index (USDX). The introduction of this index see here. It is created in 1973 to reflect US’ trading relationship and only adjusted once when the Euro was introduced.The index is consisted by 6 developed markets currencies. Euro accounts 57.6% weighting, so the index is highly correlated with Euro. The futures based on this index is trading at ICE futures US.

2.2 USDU tracks the Bloomberg Dollar Total Return Index (BBDXY). This index could be regarded as an optimization of the US Dollar Index. It is based on most current global goods trade and currency trade. Compare to USDX, BBDXY deleted Swedish Krona and Swiss Franc, added 5 new currencies: Mexico Peso, Australia Dollar, Brazil Real, South Korea Won, and China Yuan. It is broader, more representative, and less concentrated.

2.3 One major difference of the two indices is: the components and weightings of USDX is static, while those of BBDXY is rebalanced annually according to the global trade and currency trade.

  Currency U.S. Dollar Index (USDX) Bloomberg Dollar Total Return Index (BBDXY)
Euro EUR 57.6% 31.8%
Japanese Yen JPY 13.6% 18.5%
British Pound GBP 11.9% 9.5%
Canadian Dollar CAD 9.1% 11.5%
Swedish Krona SEK 4.2%  
Swiss Franc CHF 3.6%  
Mexico Peso MXN   9.9%
Australia Dollar AUD   6.1%
Brazil Real BRL   2.1%
South Korea Won KRW   3.4%
China Yuan CNH   3.0%

3, Individual fund analysis

3.1 UUP – PowerShares DB US Dollar Index Bullish Fund. This fund’s underlying index is USDX, which is highly correlated with Euro. This fund is very liquid.

3.2 USDU – WisdomTree Bloomberg U.S. Dollar Bullish Fund. The fund holds short term US treasury bills and sell 10 foreign currencies future contracts. USDU’s performance is generally close to UUP but differs from time to time slightly.

3.3. FXC – Guggenheim CurrencyShares® Canadian Dollar Trust. This fund is for investors who take a bearish outlook of USD against CAD. It is just opposite to DLR. If an investor believe USD will appreciate against CAD, he or she should short FXC.

3.4 DLR – Horizons US Dollar Currency ETF. This ETF is for Canadian investors who has a bullish outlook of USD against CAD. It is also a widely used currency conversion tool in Canada. The fund has both CAD and USD version, so it is very convenient for investors.

4, Considerations of trading these ETFs

4.1 Trading against a basket of currencies or an individual currency. Generally speaking, trading against a basket of currencies is less volatile than against individual currency.

4.2 Watch the related central bank policies. UUP is highly correlated to ECB. USDU has higher weighting on JPY.

4.3 Trading directions. UUP is bullish on USD, it also has an inverse version UDN. FXC is bearish on USD, DLR is bullish on USD.