This edition of Market Factors starts by explaining why good intentions and strong investment returns are rarely seen together. Later, I defend capitalism a bit and the diversion covers a distressing prediction about the death of social media.
The character Debbie Downer, played by Rachel Dratch, in Saturday Night Live
Reality check
Accentuate the negative
Venture capitalist Sophie Bakalar from New York-based Collaborative Fund discussed where the firm is “most excited to invest right now’ on the company’s website earlier this year. One of the ideas is to harness the power of social media software to enable healthy human connection. I really hope it works, but I’m skeptical. Where investing is concerned, I am always skeptical. Cynical even. It’s my money.
Television was a technology with the power to improve the minds of viewers and in the beginning the evening news probably was an educational boon. Eventually, however, the vast majority of television programming turned into trash.
There is a Steve Jobs quote about television I think about all the time. He said, “When you’re young, you look at television and think, ‘There’s a conspiracy. The networks have conspired to dumb us down.’ But when you get a little older, you realize that’s not true. The networks are in business to give people exactly what they want.”
The educational potential of television went largely unfulfilled because most people wanted easily digestible, simple shows during which they could power their brains down like C-3PO. Good intentions and investing success are not always antagonistic, but they are rarely in the same room. If anything, the reverse is true – strong returns and human frailty often go hand in hand.
Tobacco stocks were the top performers of the 20th century (about 4.5 percentage points higher than the benchmark annually), not exactly a socially responsible investing success. More recently, the S&P 500 aerospace and defense index is up 37 per cent year to date. Both sectors can involve killing people.
Investing in the better angels of our nature can work out – for a brief period. Peloton was a great idea that kept thousands of people in shape during COVID. But the stock ultimately fell 95 per cent from the pandemic peak, as consumers’ interest in home-based exercise equipment waned.
My most successful investment of the past five years is a position in Stryker Corp. (SYK-N), an orthopedics company. The combination of developed world aging combined with an obesity epidemic created strong demand for new hips and knees. Now, with the human frailty part of the thesis – obesity – in doubt because of Ozempic, I’m considering selling.
The late Charlie Munger – Berkshire Hathaway’s Yoda to Warren Buffett’s Luke Skywalker – was fond of reminding investors to “always invert”. I understood this to mean looking for all of the reasons an investment will fail along with the bullish story before committing funds.
I’m not thrilled about any of this. Optimism makes for a much happier life and it would be great if this correlation applied to investing. Happily, sometimes it does.
The frequent need for brutal pessimism is uncomfortable, except maybe for particularly disagreeable people. It is often necessary, however, for even the happiest people, to temporarily adopt a pessimistic stance when investing.
Corporate strategy
Capitalism’s blind spot
A discussion with a communist-leaning colleague uncovered that I am unprepared to make a succinct argument as to how capitalism creates wealth beyond extracting it from the physical or social resources of a developing country. While working on that – it will take a bit because I want it to be rebuttal-proof – I discovered the interesting concept of Positional Goods.
The status imbued by Positional Goods is dependent on scarcity. If everyone owned them, the value would be negligible. DeBeers Group is desperately fighting to keep diamonds in the Positional Goods category despite the fact diamonds can be grown and could be widely available. Beachfront property is another example – if everyone could buy a house on the beach then there would be no premium.
The wealth generated by capitalism leads to competition for Positional Goods but capitalism does not deal with them well. The rising price of beachfront properties, for instance, cannot lead to more supply unlike elsewhere in the economy where capitalism works.
In “Her”, Theodore (Joaquin Phoenix) is an introvert attempting to get over a relationship. In doing so, he finds himself falling in love with Samantha, the “world’s first artificially intelligent operating system.”Courtesy of Warner Bros. Picture
Diversions
Social media is over and what’s coming is much worse
The Atlantic senior editor Damon Beres argued that the age of social media is ending and a distinctly anti-social era, that of individual AI companions, is beginning.
Unfortunately, Mr. Beres’ argument is compelling. He believes that the promise of social media – bringing people together – has not only failed but accomplished the reverse. At the same time, social media has verified the brain’s susceptibility to algorithms and similar forms of technological manipulation.
More than three billion people use Facebook and Instagram per day and most find the experience pleasant despite (or maybe because of) the manipulation. Mr. Beres writes, “many of us may simply slip into relationships with bots that we first used as helpers or entertainment, just as we were lulled into submission by algorithmic feeds and the glow of the smartphone screen.”
I urge readers interested in the topic to watch the movie Her, a 2013 movie starring Joaquin Phoenix and Scarlett Johansson. Mr. Phoenix’s character falls hard for a virtual partner voiced by Ms. Johansson in a way that seems entirely plausible and ominous.
The essentials
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Globe Investor highlights
Tim Shufelt says things are not nearly as scary as they might seem in a stock market full of bubble talk. Still worried? Then check out Tom Bradley’s tips for preparing for the next big market fall
Tylenol may not cause autism, but David Berman thinks it may be creating a buying opportunity
It’s that time again: market outlook predictions for the year ahead. Here is what a rather bullish UBS has to say. And while we’re on the topic of forecasts, here’s the latest poll of analysts on where the Canadian dollar may be heading
Quick thoughts
Like a lot of Canadians, I have a weird relationship with U.S.-based research on Canadian stocks and the domestic economy. Sometimes it’s an interesting, novel perspective and sometimes it’s just a more distant, watered down version of local research.
Diageo PLC, owners of the Smirnoff, Johnny Walker, Captain Morgan and Tanqueray gin brands, saw its stock hit a 10-year low last week. This is the latest sign that alcohol is going the way of chewing tobacco and this surprises me (even though yes, I am aware cannabis is legal). People have been consuming alcohol for millennia. And it’s no wonder Gen Z is in a “sex recession”.
In my experience people’s attitude about AI was fixed from the beginning. Some will never believe it might be useful and for others any hurdle can be overcome and a new technological golden age is at hand. Either way the attitude is set in cement.
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