The 2-Minute Thought: The Last Edition . . . And A Few More Thoughts

This is the last edition of The 2-Minute Thought. It’s time – and taking a break from the same format week in and week out often is a good idea. But first, a few random thoughts before going:

Anders Hall, the head of Vanderbilt University’s investment office, said in a recent interview with SumZero that the best advice he had for someone thinking of starting a hedge fund is to remember that “the world does not need another asset management firm.” Many people may understand this, he said, but they still go ahead because “many believe themselves to be unique or different.” That’s fine, of course. But, “They should not assume investors will soon join them in the effort.”

That strikes me as sound advice – and not just for hedge funds, because there are plenty of things the world does not need more of. There are far more restaurants than there are customers to keep them all afloat. There are far more books written than can be widely read. And daily, weekly, or monthly commentary? The world simply does not need more content, as anyone who pushes out content should know.

That’s one way to look at things. Another is to watch the people that still go on to open funds, start restaurants, and write books, and then learn from how they find their own way.

This makes me think of food blogger J. Kenji Lopez-Alt, who when asked for his best advice on opening a restaurant, said, Just don’t, just don’t do it. But then he went ahead and opened his own restaurant, and he actually seems to still be enjoying it, kind of.

As a content pusher myself, I’ll say that I’ve genuinely enjoyed writing this little column. It started in February 2016, so it’s been almost three years of writing on investing ideas – and random things like Japanese laundromats, the multilingual brain, Denmark, North Korea, and In-n-Out Burger.

The beginning of 2016 was a pessimistic time for markets, if you can remember that before things soared and then fell again. Market earnings multiples now are very close to where we were in early 2016. We started at 16, reached a peak of 21, and now are pretty much back to 16 or 17.

Value investing still struggles, and active investment management still faces existential crisis. But actually, passive investing doesn’t look quite like the be-all, end-all it once was. People are souring on the big platform tech giants. And the economy may well be in a different phase.

While I wrote very little about it here, what stands out to me most from recent years is populism and how divisive the world has become. The haves versus the have-nots. The you against me. A different kind of politics took root from 2016. The vote for Brexit happened in 2017 – though they’re still working out exactly how to shoot themselves in the foot over there. And in this week’s Barron’s, Schwab strategist Liz Ann Sonders said we have “an every man or every country for himself mentality” that is affecting the way the world works in many different ways.

That’s a depressing thought. And yet, there is kindness out there if you look for it.

I just read Gallup’s 2018 World’s Most Generous Countries Report, which looks at how 146 countries give time and money to help others. It’s worth remembering that in 2017, Americans donated more money than the GDPs of all but 40 countries around the world. That is something. But Americans scored less well when asked if they had helped a stranger or someone they didn’t know in the past month.

The top country in terms of helping out a stranger was Libya, where 83% of responders said they had done so recently. And the most striking thing for me: All top 10 countries in this respect were in North Africa, sub-Saharan Africa, or the Middle East. That is something worth thinking about.

Thank you for reading -- and Happy Holidays.

Our Chocolate Recipe Pivots to the East…

Hooray - our annual Chocolate Dessert for this Holiday Season. And just to impress you with our effort, listen to this vetting process. Jordan Lafayette here at the office supervised a rigorous Test Kitchen to get to our final result. From early November two employees a week prepared a chocolate recipe. In early December we voted on the winner, and not just one vote but two. First we got down from ten entrants to three, and then the bake off to determine the final selection.

Our 2018 winner is our newest employee, Liz Ford but as they say on late night TV – wait there is more. The actual winner this year was not Liz Ford but Sven Eklof with an outrageous explosion of goo-ey chocolate wrapped in moist cake, the ‘German Chocolate Bombe.’ As with many things in life however there were issues. The big one is the recipe is somewhat involved (“It is really simple!” claims Sven) and does not fit on a Newsletter page. So alas on to Plan B but rest assured this is no step down. Liz’s pudding, “warm, spicy and exotic,”as she describes it, was a very close second in the voting and she fully deserves the baking bragging rights for the next twelve months. The “raz el hanout” spice (a curry blend) does not require a trip to the bazaars of Marrakesh (although this would win big points at your dinner party) but can be had at Trader Joe’s or other specialty stores. Arrowroot powder is available from local co-ops.

So from all of us here, a Happy Holiday and a Successful and Healthy New Year. P.S. For those wanting to throw all caution to the wind, we are happy to send along (FREE SHIPPING!) Sven’s recipe for a DOUBLE Holiday Treat.

Pudding pg 1.jpg


Competition and Innovation in the Middle Kingdom…

Twenty years ago China was already an export juggernaut but it was difficult to see it becoming a consumer powerhouse. It did not have credit cards, banks were backward in their technology, there was no credit rating system, and above all there was no delivery system for internet shopping - no UPS or FedEx.

Well fast forward twenty years and wow, things have changed. China is leading the world in many consumer internet applications. Tencent’s WeChat has wrapped Facebook, Twitter, gaming applications and Skype all into one. I wouldn’t be surprised if Facebook copies WeChat in the future. In internet shopping, Alibaba handles more purchases on Singles Day on November 11 (get it – 11/11?) than anyone else does on any day anywhere. Singles Day dwarfs Black Friday. And in logistics, JD and Alibaba have cobbled together an incredibly efficient motorcycle and small van delivery service that rivals UPS and FedEx.

China is not perfect; its economy could stumble big time if housing collapses or its high debt overwhelms the system or the government is not able to continue stimulating as effectively as it has, but right now China is leading the pack in so many areas. Take a look at the chart below. Chinese universities have quietly but rapidly come on strong in STEM research and are rivaling the best in the world in the number and quality of scientific research papers. Critics say that a lot of Chinese research is fake and in some cases this is true. Another criticism is that Chinese research is incremental, advancing in small steps just so the authors can get published (and rewarded). Where are the big thinking, Nobel Prize winning Chinese, the critics argue? Incremental is incremental but I wouldn’t be surprised if small steps translate into big leaps in the not too distant future.

Paper pg 2.jpg

China is also innovating at lightning speed in the consumer sector. Take a look at the graphic below. The Chinese have far less fear of privacy issues than we do in the West and accordingly they are leading the way in things like facial recognition. Another crazy technology leap is a car shopping experiment in Guangzhou where cars are stacked in an elevator automat system. You put in $50 and the elevator lowers a specific model for you to try for three days. No humans on site. So keep an eye on China. It might just be our future.

Smile pg2.jpg





A Beautiful Mind...

Cartoon pg 3.jpg

You’ve all heard of the placebo effect, where a patient is administered a fake medicine without knowing and then shows signs of recovery. That’s interesting on its own, but would you believe that they are now running tests where patients are told that the pill they are taking is fake and the results still show improved health? Think about that for a second; people are being told they are taking sugar pills and their minds still help their bodies heal!

Our minds also play tricks on us when it comes to investing. Biases tend to sit deep within our psyche and may serve us well in certain circumstances. However, in financial matters they may lead us to potentially hurtful outcomes. It should be noted that these biases impact all types of investors, both professional and private.

Overconfidence bias is having an inflated view of one’s own abilities. For instance, when asked to rate your ability as a driver, 70% – 80% will say they are above average drivers, although obviously only 50% of all drivers are above average. We tend to look at the world through a positive lens, which may be good in some situations but often harmful for your investments.

Warren Buffet typically begins his annual letter to shareholders by highlighting the stupid decisions he has made and how he has learned from them. There is a lesson to be learned here since most people will view a negative investment outcome as simply bad luck, but attribute a really successful investment to superior skill and knowledge. We don’t learn from our mistakes and, more importantly, we don’t take ownership of them.

One way to correct for this is to write down your mistakes and dissect them to understand where things went wrong. The goal is to get better with future decisions. We can learn much more from mistakes than from victories - this is true of many things in life.

Another interesting bias is loss aversion. The work suggests that investors weigh losses more than twice as heavily as potential gains. If I flipped a coin and offered to pay you $10 if you were right but you had to pay me $10 if you are wrong, would you take that bet? Studies show that the answer is no; people require $25 if they win versus handing over $10 if they lose. Losing $10 is much more painful and outweighs the euphoria you get from winning $10.

We don’t stay up late at night worrying about the investments that did well; instead we grind our teeth about those that lost. This pain from losing stands in our way of making rational decisions with our long-term investment goals.

Moreover, people do not like being associated with losers, so stocks that have performed poorly will largely be avoided. As the chart below indicates, stocks tend to perform their best when investors are feeling the worst about the future outlook. Much like every other purchase in life, stocks are best to buy when on sale, yet we insist on doing just the opposite when it comes to investing.

Look Good pg 3.jpg

We are interesting creatures indeed and the mind is a powerful thing. The way we handle our investments is especially fascinating. The pitfalls are well documented yet we still find ways to fall into the same traps, time and time again.