“No darkness lasts forever. And even there, there are stars.”
Ursula K. Le Guin
Diversification is About Decades - A Wealth of Common Sense
In the article Diversification is About Decades by Ben Carlson, the author discusses the importance of maintaining international diversification in investment portfolios. Despite the impressive performance of the U.S. stock market since the Great Financial Crisis, Carlson argues that historical patterns suggest a need for diversification to manage long-term risks. He highlights that different markets outperform in different decades and warns against assuming the U.S. market will continue its recent dominance indefinitely. Carlson's argument is supported by historical data showing the variability of market leadership across decades.
Key Points
Recent Trends in U.S. vs. International Markets:
Since the Great Financial Crisis, the U.S. stock market has significantly outperformed international markets.
A total U.S. stock market index fund has increased by over 660% since 2009, compared to 180% for a total international index fund.
Reasons for U.S. Outperformance:
The U.S. has a larger tech sector, a strong dollar, and a better-performing economy.
U.S. corporations also benefit from a favorable regulatory environment for innovation.
Investor Sentiment:
Many investors are questioning the need for international diversification, given the strong performance of U.S. stocks.
Some argue that U.S. companies' global operations provide sufficient international exposure.
Historical Perspective on Market Leadership:
Market leadership changes over decades; past performance does not guarantee future results.
Historical data shows that every decade has different market leaders and laggards.
Risk Management through Diversification:
Diversification helps manage risk by avoiding overexposure to any single market.
It prevents being fully invested in the worst performers and opens opportunities for unexpected winners.
Quotes and References:
“Every decade has big winners and big losers. Look at the spread between the best and worst performers in each period. There are some massive gaps.”
Peter Bernstein: “I view diversification not only as a survival strategy but as an aggressive strategy because the next windfall might come from a surprising place.”
Historical Examples:
The U.S. experienced a "lost decade" from 2000-2009, highlighting the potential for underperformance.
In the 1970s and 1980s, U.S. stocks were often at the bottom of performance rankings.
Key Quotes
“There is no guarantee the U.S. stock market is going to replicate the success it has had over the past 15 years over the next 15 years.”
“I like diversification as a form of risk management because it helps you avoid the extremes.”
“Diversification also opens you up to surprising winners too.”
Why It Matters
This article matters because it emphasizes the importance of long-term investment strategies and the inherent risks of concentrating investments in a single market, even one as dominant as the U.S. market has been recently. Carlson’s insights are crucial for investors who might be tempted to abandon international diversification due to recent performance trends. By highlighting historical patterns and the unpredictable nature of markets, he makes a compelling case for maintaining a diversified portfolio to manage risk and seize unexpected opportunities. This approach can help investors avoid significant losses when their primary market underperforms and benefit from the growth of other markets that might unexpectedly outperform.
Quality or Value – Why Not Both? (mailchi.mp)
The article "Quality or Value – Why Not Both?" from Verdad Capital Research, written by Chris Satterthwaite and Lionel Smoler-Schatz, investigates the trade-off between quality and value in investments, especially in the context of US large-cap and small-cap equities. It argues that while large-cap stocks often force investors to choose between value and quality, small-cap stocks offer opportunities to acquire high-quality companies at low prices. The authors provide empirical evidence to support this claim, demonstrating that small caps show a positive correlation between value and quality, unlike large caps.
Key Points
Large-Cap Trade-Off:
Investors in US large-cap equities often choose between cheap, low-quality companies and expensive, high-quality ones.
Higher-quality companies in large caps command premium valuations, while cheaper ones tend to be more capital-intensive or cyclically sensitive.
Small-Cap Opportunity:
In small-cap equities, finding high-quality companies at cheap prices is possible.
The correlation between value and quality is positive for small caps, suggesting these stocks are less efficiently priced.
Empirical Analysis:
The authors scored the equity universe on value (using metrics like EV/sales, EV/EBITDA, P/E, P/B) and quality (using GP/assets).
They found that higher quality correlates with higher prices in large caps, while the reverse is true in small caps.
Illustrative Examples:
For large caps, companies like NVIDIA and Recruit Holdings are expensive but high-quality, whereas Southwest Airlines and Nippon Steel are cheaper but lower-quality.
In small caps, there are examples of cheap and high-quality companies based on GP/assets and other metrics like ROE, ROA, ROIC, and EBITDA margin.
Performance Analysis:
Portfolios of small, cheap, and high-quality companies tend to outperform the market.
The highest returns were observed in equal-weighted portfolios of cheap, high-quality small caps.
Investment Implications:
Investors looking for a balance of value and quality should consider small caps. These stocks offer compelling opportunities without compromising on either attribute.
Key Quotes
"Would you rather own a portfolio of cheap, low-quality companies or a portfolio of expensive, high-quality companies?"
"In small caps, discerning investors can have their cake and eat it too, buying high-quality companies at cheap prices."
"Interestingly, US and international large caps seem relatively efficiently priced, in the sense that higher quality companies are less cheap, and cheap companies tend to be of lower quality."
"The highest return portfolios were cheap, high-quality small caps, with the equal-weighted portfolio outperforming the market-cap-weighted portfolio."
Why It Matters
This article offers strategic insight for investors often caught in choosing between value and quality. It highlights an underexplored opportunity in the small-cap market, where investors can find high-quality companies at attractive valuations. This is particularly important for those looking to optimize their investment portfolios without compromising value or quality. The empirical evidence supports a shift in focus towards small-cap stocks, potentially leading to better investment returns. Understanding this dynamic can help investors make more informed decisions and potentially achieve higher returns by exploiting inefficiencies in the small-cap market.
Industrial policy and ecosystems (interfluidity.com)
The article discusses the superiority of Chinese electric vehicles (EVs) over their Western counterparts, emphasizing the role of rich industrial ecosystems in China. These ecosystems foster competition and collaboration, leading to superior product design and manufacturing capabilities. The author contrasts this with the United States' fragmented approach to industrial policy, arguing that the U.S. needs to develop similar ecosystems to rejuvenate its high-value industries. The piece also critiques the U.S.'s risk-averse culture and centralized subsidy mechanisms, suggesting a more diffuse approach to foster innovation and competitiveness.
Key Points
The superiority of Chinese EVs:
Chinese electric vehicles are superior in design and desirability compared to Western offerings.
This success is attributed to China's industrial ecosystems rather than cheap labor.
Role of Ecosystems:
Industrial ecosystems in China facilitate continuous feedback and tacit knowledge, which is crucial for production excellence.
These ecosystems are polycephalic, involving both competition and collaboration without central control.
Critique of U.S. Industrial Policy:
The U.S. has moved towards specialization and trade, which has led to industrial decline.
There is support for initiatives like the CHIPS Act and the Inflation Reduction Act, but concerns remain about their implementation.
Case Study: Solyndra:
The Solyndra scandal discouraged U.S. politicians from supporting uncertain ventures.
China's approach to subsidy is more diffuse, leveraging local governments and state-owned banks.
Chinese Subsidy Model:
China uses indirect subsidies, with local governments and banks playing a crucial role.
This model encourages overcapacity and price competition but ultimately fosters competitive industries.
Recommendations for U.S.:
The U.S. should adopt a more diffuse subsidy approach involving states and municipalities.
Subsidies should be structured to tolerate failures and focus on building competitive ecosystems.
Key Quotes
"Apple just can't do what Chinese firms can. As Dan Wang has emphasized, production excellence inheres mostly in tacit forms of knowledge that develop only via rich and continuous feedback across every aspect of product development."
"The idea of an 'Apple ecosystem' is a contradiction in terms. Apple cannot be an ecosystem. Apple is flailing because it is starved of one."
"We in the United States are counterproductively attached to very simple and immediate forms of state accountability. Every meeting should be open and transparent."
"In this model, there is still eventual accountability. Among the politically well-aligned banks, those who stand out from the pack as bad performers might be made examples of."
"But when all is said and done, 'inefficient' exuberance is a better problem to have than failing to develop the ecosystems that nurture high-value industries."
Why It Matters
This article highlights the critical role of industrial ecosystems in fostering innovation and competitiveness. It underscores the need for the U.S. to rethink its approach to industrial policy and subsidies, advocating for a model that supports risk-taking and the development of high-value industries. By learning from China's diffuse subsidy model and fostering rich ecosystems, the U.S. can potentially rejuvenate its industrial sector and reduce dependency on foreign powers for critical technologies.
SSC Gives A Graduation Speech | Slate Star Codex
Scott Alexander's "SSC Gives A Graduation Speech" is a provocative address that challenges conventional beliefs about the value of education. The speech begins by questioning the effectiveness of commonly accepted advice, such as Kurt Vonnegut's famous directive to "wear sunscreen," which Alexander argues is more complex than it appears. He extends this skepticism to the education system, proposing that traditional schooling might be less beneficial than widely believed.
Alexander scrutinizes both the philosophical and practical benefits of education. He suggests that the supposed intellectual enrichment offered by schooling is often not realized, as many students fail to retain significant knowledge about important subjects. Through examples like unschooling and Louis Benezet’s experiment with delayed math instruction, he argues that formal education might not be necessary for acquiring knowledge.
On the practical side, Alexander paints a bleak picture of the job market for graduates, highlighting high unemployment rates and underemployment among recent graduates. While acknowledging that higher education can increase earning potential, he warns that technological advancements and globalization threaten even these benefits, potentially leading to widespread unemployment in the future.
Key Themes
1. Questioning Established Wisdom
Alexander starts his speech by examining Kurt Vonnegut's famous "Wear Sunscreen" advice. He reveals that this seemingly straightforward guidance is fraught with complexity and scientific debate. This serves as a metaphor for the broader theme of the speech: just because something is widely accepted doesn't mean it's unequivocally true. This notion sets the stage for his critical evaluation of the education system.
2. The Philosophical Value of Education
Alexander argues that students often do not realize the purported philosophical benefits of education – such as a deep appreciation for mathematics, humanities, and historical traditions. He questions the efficacy of the education system in imparting this knowledge, citing statistics that show a significant portion of students lack basic knowledge about important cultural and scientific figures.
For instance:
Only 3.3% of college students know who Euclid was.
Only 7.6% know who wrote "The Canterbury Tales."
Only 15% know which city the Parthenon is located in.
These statistics suggest that the education system may not effectively foster a deep understanding and appreciation of these subjects.
3. Alternative Education Models
Alexander explores alternative education methods like unschooling and Louis Benezet’s experiment with delayed math instruction. Unschooling, where children learn through life experiences rather than a structured curriculum, shows that children can keep up with traditionally schooled peers with minimal formal instruction. Benezet’s experiment demonstrated that children who begin formal math education later can quickly catch up to their peers.
These examples challenge the assumption that early and continuous formal education is the best learning method. They suggest that traditional schooling might not be necessary for intellectual development and that there might be more efficient ways to impart knowledge.
4. Practical Benefits and Job Market Realities
While higher education is often justified for better job prospects and earning potential, Alexander paints a grim picture of the job market. He highlights high unemployment rates and underemployment among recent graduates, suggesting that the economic benefits of education might not be as substantial as believed.
He also addresses the issue of student debt, which can negate the financial advantages of a college degree. The burden of debt, combined with uncertain job prospects, raises questions about the return on investment for higher education.
5. The Future of Employment
Alexander warns about the impact of technological advancements and globalization on employment. As machines and automation become more capable, many traditional jobs may become obsolete, leading to a scenario where only a few highly skilled jobs remain. This could result in significant economic inequality and unemployment.
He suggests that the education system needs to adapt to these changes, perhaps by focusing on skills that cannot be easily automated, such as creativity, critical thinking, and emotional intelligence.
Key Quotes
"Sometimes the things everybody knows everybody knows just aren’t true."
"Is education worth it?"
"What if education, as you understand it... is, on net, a waste of your time and money?"
"By one grade level." (On the comparative disadvantage of unschooled children)
"As bad as the job market is, staying in school looks worse."
"Once machines can do everything we can better and cheaper, the inevitable end result is employment for a few geniuses who invent and run the machines, immense profits for the capitalists who own the machines, and what happens to everyone else better left unspoken."
The Broader Impact
Educational Policy and Reform
Alexander's speech encourages policymakers and educators to rethink how education systems are designed and to consider alternative models that might be more effective. It suggests that a one-size-fits-all approach may not be the best way to educate future generations.
Personal Reflection for Graduates
For graduates, the speech serves as a call to evaluate their own educational journeys critically and to think about how they can apply their skills and knowledge in a rapidly changing world. It encourages them to be lifelong learners and to seek knowledge and skills beyond formal education.
Societal Implications
On a societal level, the speech highlights the need to address economic and technological changes reshaping the job market. It suggests that societies must find ways to ensure all individuals can thrive, even in a future where traditional employment may be less available.
Conclusion
Scott Alexander's "SSC Gives A Graduation Speech" is a thought-provoking critique of the education system that challenges conventional wisdom and encourages a reexamination of how we value and approach education. By questioning the effectiveness of traditional schooling and highlighting the potential benefits of alternative education models, Alexander opens a dialogue about how best to prepare for a future marked by rapid technological and economic change.
The Necessary Leap - by Bob Seawright - The Better Letter (substack.com)
In his article "The Necessary Leap," Bob Seawright explores the limitations of evidence-based thinking and the role of risk and faith in making significant, life-altering decisions. He begins with a personal anecdote from his high school chorale days, contrasting the views "God is a groove" and "God is dead" to set the stage for a broader discussion on the nature of evidence and belief. Seawright acknowledges that while evidence-based thinking is crucial, it inherently has limits, especially regarding the most essential aspects of human existence, such as meaning, value, and virtue.
He critiques the over-reliance on evidence and probabilities, citing historical and everyday examples where great achievements and significant life choices required taking leaps of faith rather than following the evidence. He references Morgan Housel's concept of "long tails" – highly unlikely events with outsized impacts – to emphasize that monumental successes often come from taking risks that defy conventional evidence-based approaches.
Seawright also discusses the "index mindset," which favors risk mitigation and average results over ambition and extreme outcomes. He argues that while this mindset can be effective in certain contexts, it often stifles innovation and greatness. He advocates for a balanced approach that considers both evidence and the potential pay-offs of taking risks, using Pascal's Wager as a framework for decision-making that balances stakes, evidence, and probability.
Insights
The Nature of Belief and Evidence
Seawright begins by juxtaposing two contrasting views on belief: the idea that "God is a groove" versus "God is dead." This sets the stage for a broader discussion on the nature of belief and evidence. He argues that while evidence-based thinking is essential, it is inherently limited, particularly regarding deeply human aspects such as meaning, value, and virtue. These areas often require us to take certain ideas as given, even if empirical evidence cannot fully support them.
The Role of Risk in Achievement
Seawright uses historical and everyday examples to illustrate how significant achievements often require taking risks not necessarily supported by evidence. For instance:
The American Revolution: The Founders risked their lives by revolting against a powerful empire, a decision that, based on evidence and probabilities alone, seemed destined for failure.
Start-Up Businesses: Despite the high failure rate, entrepreneurs continue to start new businesses, driven by the potential for success that defies the odds.
Personal Relationships: Many relationships, including marriages, fail, yet people continue to pursue them, driven by the hope and potential for meaningful connections.
The Concept of "Long Tails"
Morgan Housel's "long tails" concept is crucial in Seawright's argument. Long tails refer to highly unlikely events that have outsized impacts on outcomes. These events often drive significant successes in various fields, from business to sports. Seawright suggests that focusing solely on evidence and probabilities would prevent us from pursuing these high-impact opportunities.
Critique of the "Index Mindset"
Seawright critiques the "index mindset," prioritizing risk mitigation and average results over ambition and extreme outcomes. This mindset, inspired by the success of index investing, where investors aim for stable, average returns rather than seeking big winners, can be effective in certain contexts but is often limiting in others. He argues that this approach:
Favors safety over innovation: Avoiding risks stifles creativity and significant achievements.
Prioritizes efficiency over uniqueness: It values predictable, incremental progress over groundbreaking innovations.
Pascal's Wager and Decision-Making
Seawright cites Pascal's Wager as an example of balancing stakes, evidence, and probability in decision-making. Pascal's Wager posits that believing in God is a rational bet because the potential rewards (eternal happiness) far outweigh the finite disadvantages if God does not exist. Seawright uses this framework to argue that sometimes, the potential risk payoffs justify the leap, even if the evidence does not fully support it.
Regret Minimization
Seawright also touches on Jeff Bezos's regret minimization framework, which suggests that people should make decisions to minimize future regrets. This approach often leads to taking bold actions, as individuals are more likely to regret not trying something than trying and failing.
Implications
Personal Growth and Decision-Making
Seawright's insights encourage individuals to embrace uncertainty and take risks in their personal and professional lives. By recognizing the limitations of evidence-based thinking, people can make more balanced decisions considering potential risks and rewards.
Innovation and Entrepreneurship
Seawright's article underscores the importance of stepping outside the comfort zone of probabilistic reasoning for entrepreneurs and innovators. Significant breakthroughs often come from taking unconventional paths and embracing the possibility of failure.
Societal Progress
On a broader scale, Seawright's argument highlights the role of risk-taking in societal progress. Many of the greatest achievements in history, from scientific discoveries to social movements, have come from individuals and groups who dared to challenge the status quo and take leaps of faith.
Key Quotes
"God is a groove."
Sets the stage for the discussion on beliefs and evidence.
"Evidence-based thinking is a terrific thing – a crucial thing even. But it is also inherently limited."
Acknowledges the importance and limitations of evidence-based thinking.
"Long tails drive everything. They dominate business, investing, sports, politics, products, careers, everything."
Emphasizes the impact of highly unlikely events on significant successes.
"The index mindset is about risk mitigation rather than ambition."
Critiques the risk-averse approach and its limitations.
"Almost nothing great happens without acting irrespective of the evidence."
Advocates for taking risks to achieve great things.
Conclusion
Bob Seawright's "The Necessary Leap" reminds us that while evidence and probabilities are essential tools for decision-making, they should not be the sole determinants. Great achievements often require us to take risks and make leaps of faith, driven by the potential for transformative outcomes. By balancing evidence with the willingness to embrace uncertainty, individuals and societies can unlock new possibilities and drive meaningful progress.
The Great Flattening – Stratechery by Ben Thompson
In "The Great Flattening," Ben Thompson explores the pervasive impact of technology on society, particularly focusing on how the internet and smartphones have democratized access to information and services. Thompson argues that this democratization, or "flattening," has positive and negative consequences. He highlights how major tech companies like Google, Amazon, Netflix, and TikTok have transformed traditional industries by making everything accessible and commoditized. The article also discusses Apple's role in this transformation, particularly through its devices that serve as platforms for these services. Thompson concludes by contemplating the future of AI and its potential to either empower individuals or centralize control in the hands of a few entities.
Key Quotes
On Aggregation Theory: "The fundamental disruption of the Internet has been to turn this dynamic on its head... the most important factor determining success is the user experience."
On the Flattening Effect: "In short, the analog world was defined by scarcity... the digital world is defined by abundance."
On Apple's Ad: "This is what I mean when I say that Apple’s iPad ad hit the mark: the reason why I think the ad resonated so deeply is that it captured something deep in the gestalt."
On Technology's Duality: "Change is guaranteed, but the type of change is not; never is that more true than today."
On AI's Future: "Will AI be a bicycle that we control, or an unstoppable train to destinations unknown?"
Analysis
The Controversial iPad Ad
Apple's iPad ad, criticized for being tone-deaf, serves as a starting point for Thompson's discussion. The ad, which depicted the destruction of musical instruments and paint bottles, was intended to inspire creativity through the iPad. Despite the backlash, Thompson argues that the ad effectively illustrated a broader point: the iPad, and by extension, modern technology, empowers users to create and experience many activities within a single device.
Aggregation Theory
Thompson's Aggregation Theory is central to understanding his argument. The theory posits that the internet has fundamentally disrupted traditional business models by making the distribution of digital goods free and reducing transaction costs to zero. This shift has empowered aggregators—companies that excel at providing superior user experiences—to dominate the market. The key points of Aggregation Theory include:
Decentralization: The internet was originally seen as a tool for decentralization, but it has led to centralized power among aggregators.
User Experience: Success is now determined by the quality of the user experience rather than exclusive supplier relationships.
Commoditization: Suppliers become commoditized as aggregators prioritize consumer needs, creating a virtuous cycle that attracts more users and suppliers.
The Flattening Effect
Thompson describes how various tech giants have contributed to the "flattening" of content and services:
Google: By breaking down publications into individual pages, Google has changed how we access information, making each piece of content equally accessible.
Facebook: By promoting user-generated content alongside professional content, Facebook has flattened the information hierarchy.
Amazon: As the "Everything Store," Amazon has commoditized shopping by offering nearly every product imaginable.
Netflix: By offering a wide range of content on-demand, Netflix has transformed how we consume media.
Expedia and Booking: These platforms have commoditized travel by offering various options based on user preferences.
The next stage of flattening, as Thompson notes, includes:
LLMs (Large Language Models): These models provide direct answers, bypassing traditional content structures.
TikTok: This app surfaces content based on user interests rather than social connections.
Amazon's Logistics: Amazon is evolving into a logistics powerhouse, extending its capabilities beyond its platform.
Hollywood and YouTube: Professional and user-generated content compete on the same platforms.
Uber and Airbnb: These services have commoditized transportation and lodging by empowering individual providers.
Apple's Role
Although Apple is not a traditional aggregator, its devices, particularly the iPhone and iPad, have facilitated the flattening by providing a platform for these services. The ad controversy underscores Apple's position: its products are tools that enable users to access and create a wide array of content, embodying Steve Jobs' vision of the computer as a "bicycle for the mind."
The Duality of Technology
Thompson emphasizes that technology's impact is structural and amoral. The internet has eliminated friction, leading to both positive and negative outcomes. While it has democratized access to information and created new opportunities, it has diminished the uniqueness of experiences and content. This duality is crucial to understanding the broader implications of technological advancements.
The Future of AI
Thompson raises critical questions about the future of AI. Will AI empower individuals as a tool they control, or will it centralize power among a few entities, potentially leading to negative outcomes? This question underscores the need to consider how AI is developed and implemented carefully.
Implications
"The Great Flattening" has several important implications:
Business Strategy: Companies must prioritize user experience to succeed in the digital age. Aggregators that excel in this area will continue to dominate.
Consumer Behavior: Consumers now have unprecedented access to a wide range of content and services, but this abundance can lead to information overload and choice paralysis.
Regulation and Policy: Policymakers need to consider the implications of centralization and the potential for monopolistic behavior among tech giants.
Future of Work: As technology continues to disrupt traditional industries, workers must adapt to new roles and opportunities created by these changes.
Ethical Considerations: The development and use of AI must be guided by ethical principles to ensure it benefits society.
Conclusion
"The Great Flattening" by Ben Thompson provides a comprehensive overview of how technology has transformed our world. By examining the impact of major tech companies and the role of devices like the iPad, Thompson highlights the profound changes brought about by the internet and smartphones. His discussion of Aggregation Theory, the duality of technology, and the future of AI offers valuable insights into the opportunities and challenges we face in the digital age.