A. Markets

Last year it was yield curve inversion, then repo rates, and now everyone is talking about the coronavirus.

The trauma and scars from ‘08 remain visible, and so this Bull Market continues to climbs a wall of worry.

I liked this snippet from famous investor Bill Miller’s recent letter:

“As 2019 drew to a close, the mood was quite different with stocks posting record high after record high. Still, the so-called “chattering classes,” those who make their living talking or writing about stocks but not by actually owning or managing them, evinced little enthusiasm… I would characterize the mood as that favorite term of pundits, including those who actually do manage money: “cautiously optimistic.”... The forecaster always sounds more serious and smarter if he or she is cautious and expresses concerns about the risks that are always lurking about, especially when stocks are at an all-time high.”

And….

“The shock and trauma of the 2008 financial crisis were so scarring that people have been and remain risk and volatility-phobic and see every negative event as presaging a serious correction or perhaps a recession and bear market.”

At times like this, I find it useful to step back and see the bigger picture and focus on the bigger trends and ideas. This article by Ruchir Sharma was useful. Ruchir was Chief Global Strategist and Head of the EM Equity team at Morgan Stanley Asset Management.

He wrote How To Invest: Ten Big Trends of the 2020s.

The three that resonate with me are:

1. The Rest Will Rise Again: The 2010s were another American decade. Defying the many pessimists who thought it had fallen into terminal decline after the crisis of 2008, the United States expanded its share of the global economy - from 23 percent to 25 percent - over the course of the 2010s. Europe lost ground, Japan lost ground. Outside China, emerging countries as a group actually lost share too. (India was an exception, and saw its share of global GDP rise about a point to 3.5 percent.)

In the markets, America dominated even more completely. Its stock market gained more than 250 percent, or more than three times returns in Europe and China, and five times those in emerging markets as a group including India. By the end of the decade, the United States accounted for 56 percent of the total value of stock markets worldwide, up from 42 percent in 2010. Meanwhile, emerging stock markets had suffered their worst decade of returns since the 1930s.

Why not expect another American decade? Many signs suggest its run can't last much longer. The state of the US economy is about as good as it can get, with the expansion entering its 11th year and unemployment at 50-year lows. The country is growing complacent, with rising corporate and government debt.

Meanwhile many other countries, particularly emerging ones, spent the last decade putting their financial houses in order. Smaller economies are those poised for a rebound, and the markets are likely to follow.

2. Smaller Companies Will be Beautiful Again: The 2010s were a great decade not only for the largest economy, but also for the largest companies. Today, the world's top 10 companies account for 14 percent of the total value of global stock markets, up nearly half from just nine percent at the start of the decade. In India, the top 10 have long dominated the stock market, but they account for an even larger share of it: 55 percent.

There are many reasons to expect the 2020s to see a comeback of smaller companies. One is that over the 2010s, smaller stocks gained 110 percent in the US - less than half the gains of large companies. In India, smaller stocks were up just six percent, compared to 115 percent for large companies. Historically, small companies tend to outrun or at least keep pace with large ones, so the dominance of the big is not likely to last.

Other forces favoring the small: the political mood is growing less friendly to trade and more nationalistic, both of which encourage "buy local" movements and undermine big multinationals. Surveys show growing distrust of large companies in nations from India and China to France, Germany and the United States. And today's leading companies are internet platforms, such as Amazon and Flipkart, which give small companies instant access to a broad audience - and instant credibility with consumers. All of this could help make smaller beautiful again in the 2020s.

10. The Rise of Moral Capitalism: Though some academics now question whether and how much wealth inequality is rising, the public perception is clear that it is - and by a lot. Politicians are for the first time bashing billionaires as a class, and by name.

Billionaires doubled in number during the 2010s to more than 2,100 worldwide - and to more than 100 in India. They have become symbols of the growing belief that capitalism is broken and benefits mainly the top one percent.

A backlash is already underway, and likely to gain momentum in the 2020s, Populists across the developed world are calling for redistribution - universal income, free college, healthcare and childcare, new wealth taxes. Parts of this agenda seem likely to pass in many countries. A recent survey showed that from the United States to Germany, India and Russia, rapidly growing major economies think corporations can pursue profits and promote social change at the same time.

Flipping companies, often beyond the scrutiny of public markets, private equity firms became a symbol of capitalism by and for the ultra-wealthy in the 2010s. They may be replaced as the trendy investment vehicle of the 2020s by firms that promise to invest in socially and environmentally responsible ways; assets managed by these firms in developed markets doubled between 2012 and 2018 to $30 billion. With support from millennial investors, they are becoming symbols of a new moral capitalism.

So yes the Coronavirus could be important, but so was SARS at the time. SARS claimed about ~800 lives in 2002 / 2003, which sounds like a lot until you remember that about 3,700 people die every day in car accidents.

Humans love stories.

We evolved as a species sitting around fires, hearing other people tell stories. It created trust and had an evolutionary purpose. We still love our stories and storytellers. But the constant reminders of conflict and negativity infect our brains and bias our views. We extrapolate what we recently read or saw on the news to apply everywhere.

Hans Rosling did a number of GREAT TED talks and wrote a great book - Factfulness. He shows the enormous negative bias humans have about the world around them. We consistently assume things are worse than they actually are, while ignoring progress like the huge drop in global poverty.

My favorite one below (which inspired his book):

Child mortality is down significantly, as is the number of people without an improved drinking water source. Life expectancy is up everywhere (except for middle-age white males in the US). Genocide and war deaths are down significantly. So is crime in the US. The number of deaths from natural disasters plummeted well over 90% in the last hundred years. Death rates from air pollution are down significantly in the last 25 years.

Good things are happening and we should celebrate them. It doesn’t mean we should ignore less pleasant realities, nor does it excuse us from helping those who need it right now.

P.S. I really enjoy this website to give my kids some perspective on their reality vs other kids - Dollar Street. We are so lucky.

Thanks John Mauldin.

B. How Will You Measure Your Life

Prof. Clayton Christensen died last week. Most people know him for books like Innovator’s Dilemma, Innovator’s Solution and Seeing What’s Next. He taught at HBS for decades and in 2010 he suffered a stroke and eventually succumbed to cancer on Jan 23, 2020. RIP.

I think his best book wasn’t about Innovation or Management.

It was “How Will You Measure Your Life?”. The book was a great discussion on finding fulfilment using lessons from some of the world’s greatest businesses.

The three best pieces of advice I picked up and carry with me are:

Try new things, serendipity can lead to a deliberate strategy.

Always ask what jobs your clients are hiring you to do ? Then do that. Not what you think is important or what you like. Understand before you seek to be understood.

Children learn when they are ready; your job is as much to provide that learning, as it is to be around when they are ready to learn.

That ties in well with Scott Galloway’s Algebra of Happiness.

C. A 100x Idea:

Look for single decisions that remove hundreds or thousands of other decisions.

Don’t make a hundred decisions when one will do.

What can I categorically and completely remove, even temporarily, to create space for seeing the bigger picture and finding gems ?

Thanks to Gary Keller’s The One Thing.

D. A Few Things Worth Checking Out:

1. The best and worst parenting advice Adam Grant has ever heard:

I think the best parenting advice I've ever received is to show kids that they matter, and that other people rely on them.

If we're not distracted by our devices, we do a pretty good job paying attention to our kids. And of course, we know that it's important to give them unconditional love.

But there's a third piece, which is to say, actually you need to feel that other people rely on you. I think parents often miss that with children. We feel that it's our job to teach them, to protect them, to care for them. And we don't ever give them the chance then to build their own resilience by helping us solve problems.

And so I think that one of the ways we can we can put this advice into action is to ask our kids for guidance every once in a while.

2. Ark Invest released their excellent annual disruptive trends report.

My favorite idea was that deep learning workloads are growing at 5x the rate of Moore’s Law.

3. The team at How To Academy got together with bestselling historian Simon Sebag Montefiore and an all-star cast to bring to life history’s greatest speeches – from conquerors and revolutionaries, activists and athletes, dreamers and killers.

You meet Elizabeth I, Genghis Khan, Muhammad Ali and many more – with insights from Simon revealing how these powerful speeches enlighten our past, enrich our present.

4. Prof. Scott Galloway discussing his Predictions for 2020.

5. Great thread by Gavin Baker on Private Equity (ex-PM at Fidelity’s OTC fund).

Gavin Baker @GavinSBaker

1) Thoughts after reading Bain Capital’s superb 2019 report on private equity. TL;DR: Returns vs. SP500 are compressing, there is a greater skill gap in PE vs. public equity which is wild and I suspect allocators stay focused on PE vs. public equities. Global Private Equity Report 2019Bain’s 10th annual Global Private Equity Report is a fearless look at the industry’s strengths and challenges after a record-breaking five-year run.bain.com

January 19th 2020

91 Retweets629 Likes

​6. Steve Bannon gave his 1st interview (on PBS) since leaving the Trump Administration.

Quotes I’m Thinking About:

Reading is like a software update for your brain. 

Whenever you learn a new concept or idea, the "software" improves. You download new features and fix old bugs.

In this way, reading a good book can give you a new way to view your life experiences. Your past is fixed, but your interpretation of it can change depending on the software you use to analyze it.

- James Clear

“What greater thing is there for two human souls, than to feel that they are joined for life — to strengthen each other in all labor, to rest on each other in all sorrow, to minister to each other in all pain, to be one with each other in silent unspeakable memories at the moment of the last parting?”

- George Eliot

“I met an old lady once, almost a hundred years old, and she told me, ‘There are only two questions that human beings have ever fought over, all through history. How much do you love me? And Who’s in charge?”

- Elizabeth Gilbert