2023 Markets have posted above average results driven by a robust fourth quarter for the S&P 500 up over 10%. Inflation data has greatly improved, the Fed is indicating the possibility for rate cuts in 2024 and a positive narrative is in full effect. Including the downswing of 2022, the results of the last 5 years have been robust. The highest returns have been delivered by technology stocks as the NASDAQ posted a 44% gain for 2023.
At the end of 2022 the market sentiment was extremely negative numerous projections for a down year were proven incorrect as the S&P rose 26% for the year. The challenge of 2024 is that valuations have risen dramatically. Investor demand for shares of quality companies ultimately declines as the price to earnings ratio rises to levels that are difficult to justify. Positive indications are abundant:
“Risk of runaway emissions growth from shift to coal amid global energy crisis fails to materialize as renewables, EVs, heat pumps, efficiency and other factors reined in CO2 rise.” IEA 2-3-23
“What’s pushing inflation down? More goods, workers and housing.” Associated Press 11-14-23
“Solid US job growth, drop in unemployment rate underscore labor market resilience.” Reuters 12-8-23
“Most people think the U.S. crime rate is rising. They’re wrong.” NBC News 12-16-23
Successful investing is based on principles, not prediction. It is impossible to anticipate what may happen this afternoon, let alone any timeframe, but we can attempt to shape our approach and behavior in the most rational way.
The principles are simple, yet deep and challenging to execute.
- Investing is challenging, many achieve sub-optimal results
- Returns are only revealed over significant periods of time
- Investors will be put to difficult tests by scary events and market volatility
- The human mind is not designed for optimal economic decision making
Rational Investor Declaration: We hold these truths to be self-evident, that all economic participants are created equal, that businesses are endowed by the capitalist system with certain unalienable opportunities, that among these are human resources, legal rights of ownership, and the pursuit of success and profit. American rule of law, property rights, and robust accounting principles creates an environment for innovation, growth and rising standards of living.
2023 began with dire predictions of persistent inflation and fear of central bank policies to raise interest rates aggressively. Negativity was widespread and laced with headlines of “20-year highs” on interest rates. The context of rates that had been low for 20 years was left out almost every time. The financial pundits were largely negative with dire forecasts for 2023. Bloomberg cataloged just how wrong many financial strategists and pundits were so incorrectly negative at the end of 2022. You can also get economic predictions from non-financial forecasters. On 12-20-2022, an Artist known as “Cardi B” transmitted a message on social media, “We are going through a recession…Merry Christmas.” It is a great service that artists and celebrities can now broadcast their economic views on social media, so all the “followers” can be in the know.
The resilience of the American economy consistently runs through pessimism and forecasts of decline. Relentless commentary regarding political dysfunction and social breakdown is a running theme throughout American history. The US economy is extremely resilient. No matter the progressive overreach of the recent “Inflation Reduction Act” or the “tariff man” of the previous presidency, we are beneficiaries of an incredible economy.
Pessimism is a form of prediction. Forecasting negative events is a natural pillar of human existence. The human brain was engineered in the crucible of evolution and natural selection. We cannot simply rewire in the face of 2024 realities. The past experiences of hundreds of generations are galvanized in the brain function with harsh events that we instinctively seek to avoid and prevent.
Optimism is not a prediction, but a philosophical platform. We can think of all the innovation and development that has historically emerged and live with a positivity about the future. It is natural to adapt and take for granted rather than appreciate all that has been accomplished. The persistence of past human endeavor is not obvious as time recedes, and we lose the awe of what humans have accomplished. Combine this posture with a phone that is radiating an endless stream of clickbait and fear inducing headlines, it is miraculous that so many of us are out in the world accomplishing much of anything.
The human experience is built on resilience and innovation. Amid all the protective risk averse behavior is the human ability to seek improvement in our existence. All the inventions in engineering, healthcare and energy among numerous other fields have created an incredible world that has rapidly advanced. Difficult eras, wars and societal disruption have not prevented human adaptation and capitalistic innovation from solving challenges. The “Pursuit of Happiness” is something that is rarely discussed but always incentivizing invention, risk taking, and business formation.
The inclination towards negativity clouds our mind to the future potential of investing. Hindsight bias provides deceptive clarity. Looking backwards, we can see that the negative possibilities of a given timeframe were addressed or less threatening than could be perceived in real time. In the aftermath of 9/11, the collective psyche of the western world raced to dire future scenarios. The future of terrorism was overestimated for years based on the events of one horrific day. Anthrax and “sleeper cells” were lurking within every community. Low rent grainy videos of “terrorist training” sessions on playground equipment were somehow indicators of a grim future.
It was hard to speculate in real time that nihilism is a tough sell. Chants of “death to America” had much less recruiting power than had been estimated. The criminal destructive plots of al Qaeda are weak because funding is uneconomic. The horrendous acts of terrorist groups have amounted to a blip within the arc of human progress. You cannot invest in “destroy the west.” Without persistent funding, terrorist destruction cults wither and die.
There is not much in life or liberty, let alone a pursuit of happiness in extremist groups that use violence as a political tool. Most people would much rather try to emigrate to the USA than pursue a terrorist mission.
“Patriotism is when love of your own people comes first; nationalism, when hate for people other than your own comes first.”
Nationalism needs an other as a target. This murky, hard to define group, is often comprised of immigrants or targeted ethnic groups. The bulk of the population is easily led towards anger at these “outsiders”. The irony of attribution of societal problems to the very groups that represent almost all current citizens ancestry is striking. We are after all, a nation of immigrants. Apparently, the grandeur of the Statue of Liberty is not applicable to the vision of this current crop of those with a reverence for reality TV politics.
Nationalism generally isn’t pride, but resentment. The nationalist’s foil can be foreign or domestic. For instance, the tragic mischaracterization of “the border crisis” as something other than an incredible thirst for the American opportunityby demonization of desperate people from Latin America is akin to how red baiting opportunists saw “communists” around every corner for decades.
The “Border Crisis” is driven by numerous factors including economic collapse in Venezuela, and decades of societal instability throughout Latin America. Political opportunists in the United States will draw like moths to a flame with nonsense solutions like a “wall” and other empty slogans. Political demonization of immigrants simply exacerbates the trouble.
It was JFK who said, “Let us not seek the Republican answer or the Democratic answer, but the right answer. Let us not seek to fix the blame for the past. Let us accept our own responsibility for the future.”
It seems naive to anticipate any politician providing articulate commentaries and insight given today’s environment. Let our philosophy of hope put forward new characters on the domestic stage to speak positively and pull the center towards a more politically stable and sophisticated future.
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Energy and infrastructure may be the two most important fundamental characteristics of our domestic economy and the growth that may lie ahead. In the interest of protecting profitable fossil fuel businesses, numerous PR efforts have been foisted upon the American psyche. The relentless pushback against mileage standards and emission controls have slowed the progress towards cleaner air for generations. When posing the simple question, “do you like clean air?” it is probable that the answer would be nearly universal.
In 2024 there is more confusion than ever regarding “global warming” or “climate change” and environmental policy in general. According to the International Energy Agency, 2015 was the last year in which fossil fuels received more investment than clean energy. In 2023 renewable sources received 40% more investment globally than oil, gas and coal.
The impetus for these flows of capital originates from the economic opportunity that occurs during paradigm shifts. Investors globally cannot invest money by trying solely to create environmentally positive or sustainable energy sources. Trends of investment towards renewables are driven by economic opportunity and government policy. The right-wing caricature of a “tree hugger” throwing away money by installing ineffective solar panels is a relic of the past. Solar and wind energy are increasingly competitive and likely to have massive impacts on our future.
The American whaling fleet hit its high in 1846 with 735 ships out of 900 in the world. This energy industry relic grew to the fifth-largest enterprise in the United States. In 1853 alone, 8,000 whales were slaughtered for fuel. Whaling at its peak was a global energy juggernaut, its product superior to its rivals, like lard oil or camphene. The beautiful mammals were harvested to near extinction until people envisioned the crazy idea of drilling into the ground for oil in Titusville Pennsylvania in 1859. The idea of drilling into the earth was deemed to be a pipedream, just as renewables are disrespected today!
In 2006, George W. Bush suggested that The United States was addicted to oil during his state of the union address. This was a confusing statement from a leader known for a consistent lack of articulation. Quotes such as, “Our nation must come together to unite.” Or the unforgettable, “I’m the decider, and I decide what is best.” These are iconic utterances of the former president. The reality that our energy infrastructure is extremely refined and developed and any transition away from it will be challenging and filled with false starts.
American geoscientist Marion King Hubbert, who worked as a researcher for the Shell Oil Company and taught geophysics at Stanford University is regarded as the founder of “Peak Oil Theory”. In 1956, Hubbert presented a paper in which he forecast U.S. petroleum production on a bell curve, starting from zero in the late 19th century, peaking between by 1975 at 2.5 billion to 3 billion barrels per year. The estimated production in the United States for 2023 is 4.7 billion barrels. Once again, pessimistic forecasting got it wrong!
The early 2000s saw a lot of talk regarding corn-based ethanol along with questionable alternative energy theories that involved other plant materials. This was a period before the breakthroughs in fracking that produced massive domestic oil production and surplus natural gas. Solar was in the conversation during this time but seen as a distant future solution due to efficiency challenges that have been solved much more rapidly than predicted.
The developing narrative is that somehow alternative energy has been overhyped, electric vehicles have failed, or we are better off with our current energy system. These ideas are likely driven by the vast economic interests of the status quo in a similar way the tobacco merchants argued and promoted counter-narratives about the safety of their product for years. The global oil industry has numerous components that seek to sway public opinion. Maybe Sarah Palin can reemerge and lead ridiculous chants of drill-baby-drill!
Recency bias places our thinking into a mode that can only see current trends and infrastructure running forward through time. Alternative energy has become politicized for harvesting votes or shilling for existing companies that depend on the continuation of fossil fuel consumption. The New York Times has an illustrative clip of the type of political hack nonsense that we have recently been subjected to regarding coal.
The numerous shills for fossil fuels have persistent talking points that renewable energy is uneconomic and dependent on government subsidy. Rarely do we hear much about the incredible tax code benefits commonly referred to as the oil depletion allowance.
Under U.S. tax law, citizens with an economic interest in a mineral, oil or gas deposit can benefit from the depletion allowance. This allowance is a significant subsidy for fossil fuel enterprises and investors. With the depletion allowance, investing in oil and gas wells has become one of the most tax-favored mechanisms in the tax code. As a result, independent oil and gas producers and small investors can enjoy a tax-free income of approximately 15% of their gross income from oil and gas operations.
The subsidies for oil, natural gas, and mineral extraction in the United States were seen as integral to the economic development of vital resources. There were rational reasons for the tax code to support these endeavors. Now that many of these industries are extremely mature it can be argued that continued tax code support is less important. There had been many efforts by advocacy groups to reduce these subsidies.
The probable scenario is that innovation will grind forward and most passenger vehicles will plug in. The grid will grow more robust, sources will become more efficient, and the gasoline industrial complex will recede into energy history. It is certain that no one is out there harvesting whales for fuel anymore.
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How can we really know anything as a fact? The answer may be “Information aggregation.” This is where research and knowledge may be assembled from various sources, and the more, the better. Social media is of little use. Television has minimal value. Books, subscription material and earnest study is where we start. Most citizens have little time or inclination for this process. This is where knowledge begins, like most other accomplishments in life, via effort and persistence.
Conversation with an individual who has distinct and passionate opinions based on little more than the cable channel of their choice spiced with social media is an increasingly common and startling experience. Passionate opinions and a projection of certainty are not a marker of knowledge or intellect. A sad dynamic of our digital age is the concept of an “information silo.”
Knowledge silos are a business management concept where different departments of an organization do not communicate or make expertise available beyond their immediate area. The advent of algorithmic feeds has created a different type of silo as people are fed information that is sympathetic to existing interests and opinions.
The concept of funneling information tuned to a person’s interests by social media structures has the unintended consequence of creating isolation filled with confirmation bias as people see mostly what they agree with. Ubiquitous and personalized echo chambers allow us to witness the increasing levels of ignorance amid the bounty of information available via the internet and the digitization of knowledge. There is data that indicates that electronic information and internet search material creates unwarranted confidence.
A study by Rozenblit and Keil titled, “The misunderstood limits of folk science: an illusion of explanatory depth” notes that “People feel they understand complex phenomena with far greater precision, coherence, and depth than they really do; they are subject to an illusion—an illusion of explanatory depth.” The study notes that “Individuals will, for example, discount high correlations that do not conform to an intuitive causal model but overemphasize weak correlations that do”.
A 2015 study at Yale university titled Searching for Explanations: How the Internet Inflates Estimates of Internal Knowledge provides fascinating insight into this unintended consequence of the treasure trove of information that has been created through digitized material. The internet fosters a false confidence as information discovery is confused with knowledge. We are all vulnerable to this dynamic and must seek to remain humble and curious rather than overly confident and opinionated.
As access to information has been transformed by digital publishing and social media, it seems that the value of information has been diminished significantly. People have strong opinions about numerous topics that traditionally would not even arise. Economic opinions of complex questions are common. Political opinions are so strong that people can become estranged from family who see things differently. The views of the student are somehow considered right alongside the professor.
What is the saying, opinions are like…everybody’s got one? That expression reflects a time when the “news” was 30min local and 30min national. Then most people went back to daily living. Now your conspiracy minded uncle is checking his social media way too often.
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On election night in 11-4-1952 the Univac was referred to as an “electronic brain” and the computer age was introduced to the masses by Walter Cronkite. The machine was manufactured by a typewriter and office machine company named Remington Rand. Business technology in 1952 was quite limited and based on punch card “tabulation” machines and lots of manual calculations. The Univac is thought of as the first “commercial” computer.
These devices are symbolic of an ancient era where design was based on vacuum tubes and subject to endless physical failures. The CBS news producers decided to structure their election coverage around the excitement of a little-known technology that would become modern day computers.
Ironically the story includes a prediction made by the computer after 3% of the vote was available suggesting that Dwight D Eisenhower was a 100 to 1 lock to be elected president. The news team was mystified that the prediction could be made so quickly and held back that information only later to confess that the computer had performed beyond expectation. The final electoral count was 442 for the World War Two hero and 89 for the intellectual Adlai Stevenson. It would seem obvious in hindsight that Eisenhower would never have been vulnerable as he went on to be reelected in a 1956 rematch versus Stevenson by the score of 457 to 73.
The birth of the modern computer was on the kitchen table of mathematician and inventor George Stibitz in 1936. The device resembled a rough science fair exhibit made from spare lightbulbs and scraps of tin. The device was one of the first electronic attempts to process information. The singular ability of simple addition completed by a machine was the first step on the path that we all walk upon today while using cell phones, laptops and all our digital devices.
The timeline of computer development is a road paved with numerous commercial failures. The dustbin of business history is overflowing with companies like Data General, Digital Equipment and Gateway Computer. The Challenge of engineering hardware in combination with software that makes it useful in commercial or consumer markets is incredibly difficult.
Investors are currently subjected to the 2023 narrative of an electronic brain referred to as artificial intelligence or AI. The technology industrial complex is always looking for the next transcendent breakthrough to package and sell to industry and individuals. It is easy to forget how transformative cellular technology and cloud computing services have been over the most recent period.
The ongoing era of digital innovation has the potential to push the economy in ways that are impossible to anticipate. In the 1990s travelling with a phone mounted in an automobile was a revelatory luxury for businesspeople and early adopters. The supercomputer known as an iPhone or Android now available to anyone with an affordable cellular subscription is light years away from the long-forgotten America online internet account.
Mindful consideration of the historic progress of technology allows us to be hopeful about our investment future. After 31 years of working with wonderful people, I feel more energized than ever to continue the mission. I am so grateful to be on this journey with all of you and I look forward to watching our principles and process unfold in prosperous ways for all of us.