Acting your age, compounding in reverse and getting rich slowly

The Weekender offers my perspective on market developments and their potential broader implications, written most Friday afternoons. If you'd like this delivered to your inbox on Saturday mornings via Northern Trust, please sign up here.

What an idiot

I recently took profits in a semiconductor stock that I thought had got way over its skis with regard to Generative AI (GAI). I was pretty pleased with myself, for it had performed well. I pondered comparisons made of Nvidia to Cisco in March 2000, which after adding 60% in Q1 that year, fell -80% in the 12 months that followed. Howard Marks’ Bubble.com blog had resurfaced, along Edward Chancellor’s “Devil Take the Hindmost: A History of Financial Speculation” being touted by many a ‘must read’ (which it is, as is most things Chancellor writes). Time to use my experience. Except the stock then soared another 70%. Epic fail. What an idiot. The market is a long lesson in humility. Adding insult to injury, the ARM CEO then comments about AI being not hype, but the most profound opportunity of our lifetimes. And just like that: ARM’s stock jumps 50%. In one day. Last week?Meta rallied 20%. In one day. It added more market cap than 470 stocks in the S&P. Nvidia has added the market cap of Tesla in two months. Yes Tesla! Being early is being wrong. So, should I just buy back in

Finding younger friends

I don’t think I have seen single stock moves like that since, well, 2000. Although it does remind me a little of the treasury market (too soon?). A mentor used to say that volatility like this was common at market tops and bottoms. And this doesn’t feel like a bottom (although the economy is showing some signs of re-acceleration). And I’m fearful of the lore of Stan Druckenmiller and Sir Isaac Newton buying at bubble peaks. Newton’s musing of being able to understand the movement of the stars, ‘but not the madness of man’ being a potent reminder of how even seemingly rational people can fall victim to price. Munger’s belief that envy is the worst of all sins ( as it’s the only one that’s no fun) is also the most commonly-committed. FOMO (Fear of Missing Out) is a powerful force – one that quants and CTA machines exploit – knowing humans are hard-wired to follow momentum (think the Wisdom of Crowds). Yet for those of us who have lived through a market crash, we are more anchored to the feeling of loss than the euphoria preceding it –?a condition psychologists call ‘loss aversion’ that I’ve discussed in recent weeks. Pessimists are just optimists with experience! But after spending time with some younger folk this week, what struck me is they have a different perspective. They don’t see or feel these similarities. They’ve been conditioned to think such moves are more normal. Which got me thinking. Should we (or at least people of my generation) include this cohort more in our decision making? We have spent a lot of time, rightly so, improving the cognitive diversity of teams across race, gender and religious lines, but what about age?

The value of naivety

I was once interviewed for a role I was grossly inexperienced for. When the interviewer suggested I lacked experience, I replied (cheekily) “yes, but I hadn’t time to develop bad habits either”. The point I had made, albeit was oblivious to at the time, was that experience can sometimes blind us to what only younger people can see. We become anchored to the past as a consequence. Once you’ve seen a crash, you can’t un-see it. And ageism persists in decision making – just look at your own investment committee or BOD. The lesson then, I guess, is that if we really hope to improve decision outcomes and are serious about cognitive diversity, we need to have perspectives that can challenge, lest make us aware of our biases. And when it comes to anchoring, age may be the only antidote. And so, I’ve adopted this myself. I now email my nephew each time I’m considering buying or selling a tech or crypto asset. It’s going well, except for every reply I get, he just sends this:

And I have no idea what that means.

PS: said nephew believes bitcoin ETFs are now seeing net-inflows, that the ‘instos (institutional investors) are coming’ and that the halving in April (where the incentives for mining will fall, so too bitcoin supply) is a big deal. And what I wasn’t aware of, it seems, is that bitcoin also has something to do with space travel: a growth market, for his messages are all signed off thus:

And in case you’re wondering: I didn’t get the job.

Stop acting your age

Mauro Guillen 's latest book The Perennials is a worthwhile read. He argues that the modern consumer market is shifting its focus from age-specific stereotypes (boomers, millennials etc.) to understanding the behaviors and preferences of a growing category of “ageless consumers” or “perennials”. These individuals defy typical age-based expectations where age isn’t the primary defining factor in consumption patterns. For example, it’s not only young people with purchasing power. Grey Power hold all the wealth and?are?living older and more healthily. Not all old people will move into retirement (hello housing boom!) and not all of them are sedentary. But while consumer brands are adapting, financial services are not. Pension funds still largely operate under the assumption retirees will own their own houses when they retire, despite mounting expectations to the contrary: for example, in the UK more than 1 million will be renting in less than a decade. And I’m yet to see the Grey Power ETF or Index, one full of the things that this generation still loves. Real stuff the world needs: like houses, roads, energy, infrastructure...and sadly, munitions.

AI can build AI, but it still can't spot-weld

“AI will build AI,” says Jensen Huang, the CEO of Nvidia, who believes he will get 10x the improvement out of his own coding resource. Again, fantastic news for the world, for consumers (and for Nvidia). But I’m not sure the democratising of coding is great news for the coders themselves? Whereas coders were scarce in their millions, we now have an abundance in billions. And yet, software still, despite its brilliance, cannot swing a hammer. Or spot-weld. And it’s here, in real material world pursuits, like building homes, infrastructure, mining, and making munitions where labour is scarce, and where those who control it could one day control price. And yes, coders may well retrain, swap their Tesla’s for pick-up trucks, and topknots for tattoos, but I doubt it will happen fast enough to prevent price tension emerge in certain things we can’t avoid. Like where we live, how we heat our homes or commute to work. More on these folk and what they make in a minute. But before that…

Answer the question, Gary!

I know. You noticed how I conveniently avoided the question of whether to get back into the GAI stock I sold. Well, I’m still of the view you want to stay invested in those rare few that combine the scarcities of compute network, balance sheet and data. And their enablers: semi-equipment players, for if that’s not AI, it will be something else (like crypto, the metaverse, AR/VR). But other than that, it’s just too early to tell where the other returns will be made. Sure, lower discount rates can help bring the future forward, and create the illusion of prosperity for those selling promises, but then, that’s not stock picking. That’s macro. Even ARM acknowledged the appliance-makers are stocking up on computer power before figuring out what to do with it. And so, for that reason I am staying out. And if I do get FOMO, and jump back in which is possible (see above: idiot) I will let you know. For it will undoubtedly be the top. At least then I will be in good company (i.e. Stan and Isaac).

Zero-sum

Like the story of the computer, the promise of AI is enormous productivity. But if firms can do more with less and can lower prices as a consequence, then might revenues be impacted through the forces of competition (assuming competitors have the same tools)? In other words, could AI be a zero-sum game where the only winners save those few corporates mentioned (who probably make more through advertising), are consumers – who ultimately will win through lower prices? Unless, of course, the price relates to the cost of building a home. For that, along with a lot of other things in the real world, currently looks unlikely to fall...

The opportunities of a housing crisis – continued

Having seen consolidation in US homebuilders recently (where Sekisui House bid for MDC), it was the Brits’ turn this week. On Wednesday, Barratt Development, the largest UK home-builder announced it was buying Redrow, the sixth- largest, to create the UK’s biggest builder. Nothing in the press release suggested this was an opportunistic approach in light of the current market, but more a proactive, strategic one that will enable them to ‘accelerate delivery of the homes this country needs’. They clearly believe in a brighter chrome-plated future. This the same week Halifax suggested house prices have bottomed after rising 2.5% YoY in Jan. The Royal Institute of Chartered Surveyors said buyer demand jumped to levels last seen in Feb 2022 and Foxtons continued its northward ascent. Longer term, few industries have such favorable supply/demand dynamics or a free option on a new government who have promised to “ get Britain building again”. There’s a lack of new supply from older people choosing to stay in their homes longer and given the lack of spot-welders, miners, restaurant workers and engineers, it could be argued that we in the UK need (a lot) more immigration to meet this need. The only folks not sensing this excitement, it seems, were shareholders. The index closed down on the week. That’s odd, given consolidation is typically good for industry returns, especially one that hasn’t added any supply since 1974. What a year that was.

Street cred

The Opposition Labour Party in the UK have form when it comes to presiding over building booms. Indeed, it was the Attlee government (1946 -51) who oversaw the UKs last major housing boom after WW2. Over 1m new homes built with a vastly depleted workforce from before the war. This building boom continued into the ‘50s – you know, the Golden Age known for conspicuous consumption, for space travel. For chrome. Just saying.

Get rich slowly

I’m going to go out on a limb here and say the world’s greatest medicine, in terms of lives saved and productivity gained, is not GLP-1 drugs. But Penicillin. Just think, most casualties of war up till WW2 were from disease and bacterial infections, not combat. And if you go back in history there’s one company that dominated that space, even more than what either Ely Lilly or Novo Nordisk do in weight-loss. That’s GSK in the UK. At one point, during WW2, 80% of all antibiotics were produced in a GSK factory. Now, I’ve always had a soft-spot for GSK, for along with pavlova, the flat-white and Samoan side-steps, it’s one of New Zealand’s finest exports. Yes, GSK or Glaxo as was then known, started life as an infant milk formular company in Palmerston North, aka Vegas. Why mention today? Because Novo Nordisk has just added the market cap of GSK. In. Two. Months. I know the GSK legend because it made a lot of farmers in my local community fabulously rich for when they sold them milk, some asked for returns in script (i.e. in shares). It wasn’t timing but time in the market that rewarded them, driven by the powerful forces of compounding and dollar-cost averaging. The lesson: get rich slowly. It’s easier on the ego.

Compounding but in reverse

If cashflows per share rise, then so must share prices. Eventually. Right? Yet in the case of the many UK companies who have been buying back shares, share prices have not been adjusting. That means, illogically, that companies are able to eat larger chunks of their equity base, leaving investors with even more cash-dividends to share. This, as Artemis'’ Nick Shenton argues, is reverse compounding in action. As these companies buy back shares, dividends per share increase. You get richer by just being patient. Take BP, which reported this week. According to Shenton it has reduced share count by 16% in just over 18 months. They have now committed to removing the equivalent of another 7% this year, which will be more next year should prices stay where they are. This is typical of many shares in the UK, and why for the patient investor – one who perhaps likes the idea of bond-beating returns that compound and are inflation linked – it remains a potential opportunity to look for alpha.

Something that older and more experienced folks may actually have an advantage in. ?

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