However, one of the things I learned first-hand through my injury, and a topic Warren Buffett touched upon during the meeting (I watched the streaming version online), was the impressive pace of technological change and what it means for our future. When I fell and couldn’t get up, I called for help on my smart phone. To get to work I called an Uber. To get around without crutches—more torture devices than walking aids—on Friday I ordered an iWalk hands-free crutch from Amazon. Because I signed up for Amazon Prime service, it arrived by Saturday afternoon.
Technology is no longer for the geek class. It has become an indispensable part of our everyday lives. However, for all the good that new technology offers, there can be a dark side—specifically, job losses. At the annual meeting, Buffett came under fire from a shareholder for his partnership with 3G capital. A multibillion dollar investment firm based in Brazil, 3G Capital is known for its unsentimental practices of cutting companies to the bone in an effort to boost productivity, which is the best measure of success. There is no question that tactics such as these can be devastating for those affected, but it is more often better for the greater whole. Buffett used the railway as an example of this trend. In 1946, US railways employed 1.6 million Americans. Today, they carry far more loads, and travel far greater distances employing 200,000 people. Part of that is because people don’t travel by rail in the same way. More importantly, railways are far more productive than they used to be.
Throughout history, people have fretted over the next wave of innovation. It is how the Luddites came into being. A group of English textile workers and weavers of the 19th century, Luddites feared progress and protested against the new machinery in an attempt to stop these technological advances. We all know the Luddites lost. And we will too if we try to stop technology’s ever-increasing pace of advancement. Will jobs be lost? Yes. But others will be created and we will adapt, as we always have.
Technology makes scandals less about wrongdoing and more about crisis management
Advances in technology, particularly the power of the Internet and social media, are at the heart of the Home Capital meltdown. An alternative mortgage lender in business since 2003, has been a solid investment within many portfolios for years. Two and a half years ago, a small group of rogue mortgage brokers, not employed by Home Capital, sent the company falsified client records. The mortgages that Home Capital issued based on these records had a lower default rate than the industry average, and it seemed to have no material impact on Home Capital’s balance sheet. The issue that now has them under investigation by the Ontario Securities Commission, and has cratered their stock price was that they didn’t promptly disclose the issue when given the opportunity. As a result, Home Capital is now fighting for its life as it looks to borrow billions of dollars at a higher rate of interest just to stay afloat.
The lesson for Home Capital isn’t about accounting, but more about crisis management. It’s not the numbers that have investors racing for the exits, but the company’s lack of transparency, and the media’s portrayal of it. It’s not that different than the Enron accounting scandal that forced Big Five accounting firm Arthur Andersen to dissolve its global partnership. Or Lehman Brothers to declare bankruptcy as part of the fallout of the sub-prime mortgage crisis and the recession that followed.
Wells Fargo faced a similar crisis of confidence after it was revealed that some of their employees had created millions of false accounts to meet aggressive sales targets. In explaining why Berkshire Hathaway reduced its stake in Wells Fargo, Buffett emphasized that it was not about the scandal or investment valuation. In fact, he was quick to praise the bank for the swift action it took once the issue around the false accounts came to light. Buffett said of Berkshire Hathaway’s portfolio of companies that as he spoke there was probably someone doing something wrong. The important thing is that when you understand there’s an issue, you admit to it immediately, and you fix it. Unfortunately, that’s where Home Capital went wrong. Home Capital is a solid, well-run company. But it failed to disclose the falsified documents issue in a timely manner, and it is now paying the price.
Analysts see Home Capital as the canary in the coal mine
The Home Capital scandal may have nothing to do with the stability of the mortgages it issues, but that is not stopping analysts, particularly south of the border, from seeing the company as the “canary in the coal mine.” Since the Home Capital scandal, Canadian bank stocks are down an average of 10 percent. And now Moody’s Investor Services has moved to downgrade the credit ratings of the Big Six banks based on weakening credit conditions in Canada, mostly because of the exponential rise in household debt.
The real estate market continues to surge despite every effort by governments and other market players to cool it. Strong fundamentals behind the surge suggest it will continue regardless of what the analysts say. Canada remains one of the most attractive countries in the world. Does Home Capital serve as a harbinger of a market correction to come? I certainly don’t think so.
Ben had fun listening to two old guys talk in Omaha
My Achilles heel may have stopped me from heading to Omaha, but it certainly didn’t stop my son, Ben. So, while I watched the meeting from my streaming feed in the comfort of my home, he made the pilgrimage, got up early for a seat and spent eight hours on the edge of his seat listening to two old guys talk. Like me, he admitted they weren’t telling him anything he didn’t know. Yet, everyone in the room hung on every word as if they were spinning gold.
Focus on good companies that will perform over the long term. Don’t make decisions based on election results. And always bet on the US economy.
We both can’t wait until next year.
Information is General Only. This newsletter is for general information purposes only. It is not intended as specific investment, financial, legal or tax advice and you should not rely on it as such. This newsletter does not constitute the official version of Howard, Barclay & Associates Ltd.'s disclosure documents and may not always be the most current. This newsletter and information contained therein is provided “as is”. Howard, Barclay & Associates Ltd. does not warrant the accuracy, adequacy, timeliness, or completeness of this newsletter and information contained therein, and disclaims liability for any errors or omissions.