Cultural Differences in the Handling of the Coronavirus

person holding test tubes

Photo by Polina Tankilevitch on Pexels.com

In the evening of January 20, 2020, China’s respiratory expert Zhong Nanshan confirmed and announced to the public that the virus had passed from person-to-person. I was in Beijing that Monday evening.

By 9pm that day, when I looked out onto the street, many citizens already had surgical masks on. By the next day, as I was travelling through China on a high-speed train, somewhere between 20% to 50% of people I saw started wearing masks.

Within three days, on January 23, Wuhan was locked down. In the following few days, Chinese cities started requiring citizens to wear surgical masks and implementing other types of social distancing measures. For example, on January 26, 2020, Suzhou announced that all passengers using the city’s subway system must wear surgical masks.

In the U.S., the first coronavirus was confirmed on January 20, 2020 — coincidentally on the same day as China’s outbreak news. Since then, the total case count in the U.S. has risen from 1 to now over 800 (as of March 10, 2020) and about three quarters of U.S. states now have confirmed cases.

However, life is hardly changed in the U.S. If you stroll through New York City, almost no one is wearing a mask — despite the fact the state of New York has more than 170 confirmed cases now and most cases concentrate in or near New York City. In Florida, reportedly, PortMiami is as busy as usual with thousands of travelers still getting on cruise ships for their vacations, even though cruise ships could be extremely dangerous during a pandemic.

Compared to China’s top-down precise-management, clearly, in the U.S., it is much more “laissez-faire.”

These observations led me to wonder what had caused this huge difference in people’s behaviors between U.S. and China, when the two peoples are facing the same deadly threat?

I think the answers probably lie in both history and culture. On the history side, China was struck hard by SARS in 2003 and most people, including me, still have a vivid memory of SARS and its horror. Ever since, in China and across many East Asian countries, wearing surgical masks in the public became an accepted social norm. People in East Asia also understand that draconian measures during a virus outbreak works and they also believe it is warranted. In the U.S., in most people’s minds, there is no SARS or SARS-like events in recent memory. During SARS, the U.S. had fewer than 30 confirmed cases and zero deaths. Having no recent memory of a painful virus outbreak — that is probably why America is not that concerned about the virus today.

The 1918 Pandemic (aka the Spanish flu) was truly horrific. However, the deadly 1918 Pandemic is only vaguely remembered by the general American public today. First, it happened 100 years ago. Few people who experienced its horror is still alive today to tell others the story. Second, the 1918 Pandemic was severely under-reported. The “mother of all pandemics” killed about 675,000 Americans. Globally, it killed far more people than World War I killed. Of the U.S. soldiers who died in Europe, half collapsed because of the flu rather than the enemy they were fighting. Unfortunately, in 1918, the U.S. and many Western countries imposed strict wartime censorship. European and American press were unable to report the virus outbreaks. (history’s quip: Spain was a neutral country and its press freely spoke about what was happening; it was because of Spanish media coverage that the outbreak got its nickname — Spanish Flu.) For these reasons, the super-horrific 1918 Pandemic is largely missing in America’s memory today.

On the culture side, the question is much more abstract. To still answer it, I will focus on a few observations that I have made in recent weeks. First, there appears to be a broad cultural consensus among Americans that wearing a surgical mask is weird. If you wear a surgical mask and walk down a street in the U.S., most pedestrians will stare at you, thinking “what is the problem with you” or “are you really that ill?” So, people in America seem to have chosen not to wear facial masks, because it is not socially acceptable.

Second, in the U.S., there appears to be a cultural norm that any sign of being physically ill is a sign of weakness. But this is not the case in Asia. In Asia, it is common to see an office employee wearing a facial mask because he or she might be coughing. In the U.S., however, if a person is coughing or sneezing, he or she will likely still report to work but wearing no facial mask — because he or she does not want to feel socially awkward. Try to recall the last time you saw an American worker wearing a surgical mask at work. Could you recall any examples? So, people in the U.S. seem to have chosen to go to work even if they are coughing, because they have always done so, and this kind of behavior is accepted by society.

Weeks ago, I was concerned for people living in China. At this point in time during the virus outbreak, I am more concerned for people living in the U.S. — about 8% Americans do not have healthcare insurance; over 60% Americans do not have savings to pay for a $500 emergency; ICU rooms can potentially cost a patient $4,000 to $20,000 per 24 hours.

I hope everyone on this planet to be healthy. I also understand that “you can not see your own eyes.” While I am forming my opinions, I am inevitably subject to my own biases — primarily my experience in Asia.

To conclude this piece, I certainly would choose to join the “hope camp” in hoping the virus can quickly go away. But, what a cultural difference!

(End)

Source:
https://www.forbes.com/sites/maggiemcgrath/2016/01/06/63-of-americans-dont-have-enough-savings-to-cover-a-500-emergency/#7a12e3a14e0d
https://www.livescience.com/39510-icu-treatment-overused.html

Coronavirus: Fear of Asians rooted in long American history of prejudicial policies


https://www.reuters.com/article/us-health-coronavirus-usa/trump-says-coronavirus-will-go-away-as-pressure-grows-for-economic-relief-idUSKBN20X1ZB
https://virus.stanford.edu/uda/

The Social Mobility of Stock Markets

The Social Mobility of Stock Markets

— A Historical Perspective into the U.S. and Chinese Stock Markets

My previous piece A Decade of Inequality focused on the concept of “market cap gains.”  It reviewed the end results but paid little attention to how we got there — how did it happen that almost all the market cap gains were concentrated with the largest companies?  Was it because larger companies started bigger so their gains over a decade’s time naturally became bigger?  Or was it because smaller companies collectively never had a chance to grow big at all?

To put it differently, the question that my previous piece raised and that I am trying to answer in this piece is this: over the past few decades, have stock markets in the U.S. and China offered “social mobility” so that smaller companies can still achieve above-average returns relative to their larger peers?

My belief is that, over the past few decades, the U.S. stock market has transformed from a socially mobile market to a socially immobile market.  Bigger companies keep getting bigger.  Middle companies get stuck in the middle.  Smaller companies cannot escape the fate of being small.  Because of the lack of social mobility, active investing in the U.S. is becoming harder and harder.  Also, I believe the reverse is happening in China where there is still social mobility among stocks: small companies can still grow big and the dispersion of stock returns is still wide.  Therefore, China is still a market that rewards active investing much more than the U.S.

The methodology and scope of data for this study can be found in the end note section.

So, let’s see what data says.

How To Read The Charts?

The bar charts on the left show the concentration patterns of market cap gains during the decade.  Stocks are sorted into 10 deciles by the dollar size of their market cap gains over the decade.  Each decile has about the same number of stocks.  Each decile is represented by a bar and the height of the bar represents the total dollar market cap gains (or losses) of companies within that decile.  The 10% of companies that gained the most market cap form the far-right bar in the bar chart; they are the 1st decile.  The 10% of companies that gained the least or lost the most market cap form the far-left bar in the bar chart; they are the 10th decile.  The Y-axis unit is in trillion U.S. dollars.

The box plot charts on the right show the distribution patterns of stocks’ cumulative 10-year returns.  Stocks are sorted into 10 deciles according to their market caps at the beginning of the decade (or at IPO, if they went public during the decade).  Again, each decile has about the same number of stocks.  The largest 10% of the companies, based on their market cap at the beginning of the decade, form the far-right “box,” indicating they were the 1st decile largest companies at the start of the decade.  Likewise, the smallest 10% of the companies at the beginning of the decade become the “10th” decile “box” that sits at the far-left side of the box plot chart.

The dark grey area of a “box” represents the 2nd quartile stocks and the range of their returns; the light grey area of a “box” represents the 3rd quartile stocks and their range of returns.  Similarly, the top edge of a “box” marks the decile’s 1st quartile return; the bottom edge of a “box” marks the decile’s 3rd quartile return.  The amber-colored diamonds represent the average (i.e. mean) returns of each of the deciles.

For ease of comparison, across all charts in this article, the scales of their Y-axes are fixed.

Decade: 1989 to 1999

Universe captured: ~8,900 listed American companies and ~1,100 listed Chinese companies

1999 us1999 china

For the period from 1989 to 1999, the U.S. saw its equity markets increase fourfold in size, from $4.0 trillion to $16.5 trillion.  By market cap gains, the top two decile companies (i.e., the far-right two black bars in the left-hand bar chart) contributed almost all the decade’s $12.5 trillion gains.  The top five gainers were Microsoft, General Electric, Cisco Systems, Walmart and Intel.  The bottom decile companies (i.e., the far-left black bar in the bar chart) lost $291 billion.

Regarding the return distribution of U.S. stocks, for all 10 deciles, at least half of the members in each decile yielded positive returns (i.e., the 2nd quartile “dark grey boxes” are all above the zero-line). Meanwhile, except for the 1st decile, all deciles saw their 3rd quartile returns (i.e., the bottom edge of a “box”) in the negative zone.  This pattern suggests the market was bullish overall, yet there was sufficient divergence in stock performance, which led to many companies with negative returns.  Moreover, both the 5th and the 10th decile companies saw their average returns reaching 500%, meaning a large number of “extremely small-sized” and “exactly middle-sized” companies did extraordinarily well in the 1990s.

China’s financial markets really only started in the early 1990s: the Shenzhen and Shanghai stock exchanges both launched in 1990; the first H-share, Tsingtao Brewery, listed in Hong Kong in 1993.  Companies’ market cap gains were so small that in the left-hand bar chart, the black bars are almost invisible.  By the end of the decade, the total market size of all listed Chinese equities only reached $440 billion.  Among them, the largest five companies were China Mobile (market cap at $86 billion by 1999), CITIC, Shanghai Pudong Development Bank, Lenovo and Sichuan Changhong Electric.

In terms of Chinese equities’ return distribution, it was a picture of extremes.  For the 1st decile companies, their 1st quartile return was negative (measured at -0.29%), meaning at least 75% of the largest Chinese companies lost money during that decade.  From the 1st decile to the 4th decile (i.e. the four “boxes” on the right), half of their members lost money.  From the 6th decile to the 9th decile, however, at least 75% of their members posted positive returns for the decade (i.e., the entirety of their “boxes” was floating above the zero-line).  Regarding the smallest companies, the 10th decile, their mean return approached nearly 350%.

Thoughts for this decade:

  • The U.S. stock market displayed sufficient social mobility in the sense that high-performing companies made huge gains and low-performing ones got punished with negative returns. Put differently, during the 1990s, the U.S. stock market was an environment where good companies went up and bad companies went down.  What was even more encouraging was the fact that many of the “extremely small-sized” and “exactly middle-sized” companies experienced a decade of strong growth.
  • For China, there was so much social mobility in the country’s stock markets that the overall picture looked like a “social revolution” — most large companies went down and most small companies went up. Almost all returns went to small companies.  What a violently dynamic market back then!
  • Given the dynamisms in both the American and Chinese equity markets, it’s no wonder the 1990s gave birth to many active investing luminaries in both countries.

Decade: 1999 to 2009

Universe captured: ~7,100 listed American companies and ~2,300 listed Chinese companies

2009 us2009 china

From 1999 to 2009, the U.S. total market cap changed little, starting at $16.5 trillion and ending at $17.8 trillion, an increase of only $1.3 trillion (about 8%).  Top decile companies gained $5.8 trillion while bottom decile companies shrank by $5.5 trillion.  Winners and losers were reasonably distributed, free of obvious outliers.

Stock return-wise, smaller U.S. companies fared materially better than larger ones.  On the one hand, among the smallest companies (i.e. the far-left “box”), their 1st quartile return reached almost 300% and their mean return exceed 800%!  On the other hand, among the larger companies, from the 1st decile to the 8th decile, about half of them made money and half did not (i.e. the light grey areas of the “boxes” are mostly under the zero-line).

For China, its equity markets grew from $3.5 trillion to $5.2 trillion, a growth of $1.8 trillion (about 51%), outpacing the U.S.’ growth in both percentage terms and absolute dollar terms.  The 1st decile contributed $2.0 trillion and the 10th decile lost $918 billion.  Interestingly enough, over 70% of that $918 billion loss came from the $650 billion shrinkage on PetroChina!

China’s return distribution chart inherits some attributes from the previous decade: smaller companies yielded higher returns than larger companies.  Here, however, most of the larger companies still posted good results, compared to the large-cap bloodshed seen in the 1990s.  What is also noteworthy is that the dispersion of returns (i.e., measured by the height of the “boxes”) appears to have grown wider: wider than itself a decade ago and wider than the U.S. in this same decade.

Thoughts for this decade:

  • Company “social mobility” was prevalent in the U.S. stock market in the 2000s: many small companies grew fast; some large companies declined.  If you are an active investor, you would love to be in the U.S. and live through the 2000s one more time.  Small-cap significantly outperformed large-cap — stock picking worked!  Among the larger companies, about half made money and about half lost money — stock picking worked, and short selling worked too!
  • China was also a fertile land for active investing. Like in the U.S., small-cap outperformed large-cap.  Better than the U.S., the dispersion of stock returns was even wider in China, further enhancing the potential rewards for stock picking and active investing.

Decade: 2009 to 2019

Universe captured: ~6,200 listed American companies and ~5,000 listed Chinese companies

2019 us2019 china

On the U.S. side, the U.S. stock market expanded from $17.0 trillion to $40.9 trillion, a massive gain of $23.9 trillion, which is about equivalent to twice China’s GDP or nine times the U.K.’s GDP.  The top two deciles of companies accounted for 100% of all gains.  Apple, the biggest winner, saw its market value grow by $1.1 trillion — i.e., one company alone managed to grow by an amount equivalent to 40% of the U.K.’s economy.  On the other end of the spectrum, the worst performing American companies were apparently not punished much by the capital market — the bottom decile companies lost only $1.6 trillion of market value, led by Dupont (lost $110 billion), HP (lost $92 billion) and General Electric (lost $64 billion).

In terms of individual stocks’ returns, the 2010s was almost a reverse image of the previous decades.  Larger U.S. companies handsomely outstripped the rest.  Among the 1st decile largest companies, their 1st quartile return exceeded 300%, far ahead of the 1st quartile returns of the remaining nine deciles.  Also, for the 1st decile companies, their 3rd quartile return was the highest among all deciles as well.  The largest U.S. companies simply dominated!  The only realistic hope to outperform U.S. large-caps appears to be the idea of investing with “100 bagger” penny stocks, as indicated by the smallest stocks’ high-flying average return, which stood at about 430%.  (And that is probably why the book 100 Baggers is so popular these days.)  The most underperforming groups are those in the middle — the mid-cap companies of the 6th and 7th deciles.

On China side, the total market cap of Chinese equities expanded from $8.6 trillion to $13.0 trillion, a growth of $4.4 trillion.  The top four market cap gainers — Tencent, Alibaba, Moutai and Ping An Insurance — contributed $1.1 trillion of gains, about a quarter of the market’s total expansion.  The bottom decile saw a meaningful retraction of $1.3 trillion; the biggest loser was PetroChina, shrinking by $207 billion.  Again, PetroChina!

From 2009 to 2019, over 50% of the large Chinese companies — those in the 1st to the 5th deciles — posted negative returns (i.e., the light grey areas of the “boxes” are under the zero-line).  Smaller companies, except for those in the 10th decile, were able to generate much better results, marked by their heightened 1st quartile and 3rd quartile returns (i.e., the top edges and bottom edges of the “boxes”).  These observations support the idea that social mobility is still present in Chinese stock markets.  However, compared to previous decades, the dispersion of stock returns (i.e., the height of the “boxes”) has narrowed in this decade, which may indicate a decrease of company “social mobility.”

Thoughts for this decade:

  • Social mobility was absent in the U.S. stock market. Small- and middle-sized companies experienced a decade of stagnation.  Bigger companies grew significantly faster than smaller ones.  Compared to mega-caps, not only did small- and mid-caps post lower returns but also the dispersion of their returns was narrower as well, meaning there were fewer small companies bucking the trends and giving exceptional returns.
  • Many active investors in the U.S. must have had a difficult decade. Mega-cap stocks dominated all — so, how much could stock picking give outperformance?  Very few companies’ share prices went down, especially among the larger firms — so, how to make money through short selling?  Alas!  What a double whammy for active investing!
  • This story was inverted in China. Index investing has so far not worked in China and it probably is due to the chronic underperformance of large Chinese companies.  On the other end of the market cap spectrum, the small- and mid-cap spaces were highly dynamic, providing a strong tailwind for Chinese active investors.

Summary and Thoughts

These charts speak loud and clear.  For most of the past three decades, in both the U.S. and China, the stock market did offer a fair amount of “social mobility” for companies and many smaller companies did grow faster than their larger peers.  But, for the most recent decade from 2009 to 2019, the U.S. stock market demonstrated a reverse pattern.  All the wins were concentrated at the top:  Bigger companies keep getting bigger.  Middle companies get stuck in the middle.  Smaller companies cannot escape the fate of being small.

For Chinese equities, the 1990s was a violent “social revolution” where almost all gains were concentrated at the bottom.  That was probably “too much” social mobility there.  As the country develops, its stock markets also gradually mature.  Today, the Chinese stock market still offers sufficient social mobility — smaller companies continue to outpace larger companies.  The very fact that index investing has not worked so far in China can almost be seen as a piece of evidence supporting the idea that active investing still works in China.

As a final thought, the following are a few questions to contemplate further:

  • Is the lack of social mobility in the U.S. stock market healthy or unhealthy? Is it an advanced economy’s inescapable fate?  Is it a new normal that we must accept?  Should we do something?  What does this mean for U.S. active investors in the future?
  • I am a big believer that there is always a right investment philosophy for a time, not for all times. What will turn out to be the most effective investment philosophy for the upcoming decade, 2019 to 2029?
  • Given how difficult active investing has been in the U.S., should investors pay some real attention to active investing in China?

End Note:  Methodology and Scope of Data

This study covers all U.S. and Chinese companies that were listed at any time during the past three decades, spanning from 1989 to 2019.

On the U.S. side, my data includes all American companies listed on U.S. exchanges from 1979 to 2019.  Companies listed on Pink Sheets and other OTC-like venues are not included.  On the China side, my data includes all public Chinese companies regardless of their listing venues; the venues are most often Shanghai, Shenzhen, Hong Kong and U.S. ADR markets.  Delisted companies are also included in this study, to the degree I was able to recover their data.

Some quick technical notes:

  • All figures are in U.S. dollars.
  • Stock returns include dividends.
  • Multi-class and multi-listing are “deduplicated” to avoid counting the same company twice.
  • If a company delisted during a decade, its market cap changes are still included in the study for that decade.
  • Stock market cap gains are measured since a company’s IPO date, thus excluding the amount of capital raised from the company’s IPO.

In total, this study covers about 15,900 listed American companies and about 5,500 listed Chinese companies.

(END)

 

Differentiation Is Not A Moat

eggs in tray on white surface

Photo by Daniel Reche on Pexels.com

If one were to compile a list of the most abused words in finance and investing, “differentiation” (or “being differentiated”) will certainly occupy a top place in that list. Most money managers tell clients that their investment processes are differentiated; most businesses claim their products or services are differentiated. It has now become unusual if a business does not sprinkle its client-facing talks with the word “differentiation.”

Wait… common sense tells us a business can only be run in a finite number of ways… if most players in a particular business claim themselves to be differentiated… That is an oxymoron!

I believe that in today’s context and for many industries, the word “differentiation” has lost its meaning. The notion of being differentiated seems to have born out of the previous time, not our time. In a time when an economy’s supply was limited and people’s choices were few, differentiation was indeed a big deal. In the late 1970s in China, most people rode bicycles of the same model (Tianjin Flying Pigeon) and wore clothes of the same color (black) — differentiation, like you driving a shiny Mercedes down Beijing’s Chang’an Avenue while everyone was riding dusty Tianjin Flying Pigeon bicycles, was a big deal. Today, however, the economy’s supply has vastly outstripped our ability to make choices, flooding us with hundreds of car models and millions of other consumer products; whether you are driving a Mercedes or an Audi (or other make and model) down Change’an Avenue, you are not going to get the same attention like you did back in the 1970s, if you get any attention at all. When there is too much supply (e.g. too many money managers, too many businesses operating in a particular space), differentiation no longer matters.

The availability of technology and resources, further catalyzed by their low prices, has dramatically reduced the entry barrier to most industries, making differentiation far less important and making a true moat more valuable than ever before. The other day I came across a resume which reads “(the candidate has) invented a crypto-currency under his name.” I was impressed at first, until a few hours later when I figured out that there are tons of websites and blogs devoted to allowing an average fellow to create a personal crypto-currency within 10 minutes — Aha! I can spend the next 10 minutes creating a currency called “Jackson-coin” and put the same line on my resume as well!

Unlike differentiation, however, a moat is going to matter more and more in our time.

So, what is a moat? In my opinion, a moat is the thing that allows a business to continuously win.  A moat is an unfair advantage. It can last and it is hard to copy. It gives an enduring competitive advantage to a person, a business, a product and a process.

I see two types of moats:

  • Type A – “Single asset”: something that you can do but most other people cannot for now and will not be able to for a while. For example, a company owns a patent that is necessary for a manufacturing process and that cannot be displaced by alternatives.
  • Type B – “Synergy assets”: a list of things that others know how to do but only you can do them all at the same time. For example, a person who speaks and writes both Chinese and English like a native and understands the cultures of both the East and the West; an analyst who is fluent in computer programming (i.e., hard skills), prolific in writing and skillful in presentation (i.e., soft skills), all at the same time.

To me, differentiation increasingly sounds like an historic relic that has lost its relevance to our time. Today and going forward, both for personal development and when evaluating companies and businesses, moat is what matters.

Differentiation is not a moat.

(END)

Some Thoughts on My Investment Philosophy

analysis blackboard board bubble

Photo by Pixabay on Pexels.com

For people who invest, their investment actions are usually guided by a philosophy of which investors themselves are consciously or unconsciously aware. It is like asking yourself to list out all items that are in your wallet now; unless you take a pause, open your wallet, one is usually not fully aware of what is in there. Similarly, it is a tall task to give a full answer to one’s investment philosophy. So, this blog piece is not meant to be a complete account, nor final or conclusive. As time goes by, as I age and gain more experience, I will likely abandon some beliefs that are stated below and form some that are new.

I first traded stocks when I was under 20 — I bought an A-share company listed in Shenzhen. Since then, I have invested in A-shares, Hong Kong–listed stocks, U.S. stocks, bonds, funds, real estates and other types of assets and financial contracts.

At Yale University was when I first learned investing in a systemic way. I had the great opportunity to learn directly from the Yale Endowment through its capstone course. I also had the fortune to work with Charles D. Ellis as his head teaching assistant and later to be the translator for his book The Index Revolution from English to Chinese and to publish the book in China. (Charles D. Ellis is the former Chairman of the Yale Endowment.)

Reflecting upon the past 10+ years, practicing investing, broadening investment knowledge, and making mistakes along the way, I always have a few thoughts on my mind. Here, let me list them out, and perhaps, call them my investment philosophy.

  • Invest in Highest-Quality People

The most important thing in investing is people. High-quality people take us no time to manage. Good-quality people take us some time to manage. Low-quality people take far too much of our time to manage, leaving us no time to do other things.

The most important aspect of people is character. In challenging and confusing situations, the highest-quality people still stick to the truth and think independently. They are rational people with an enormous amount of knowledge. They are analytical and tend to make good judgement.

So, invest in the highest-quality management team we can find. Even if a business model is being challenged, even if a business moat is still not deep and wide enough, the highest-quality management team will find a way to deliver a high-quality business and let it thrive.

Also, invest with the highest-quality money manager we can find. Give them the freedom to pursue investment strategies as they see fit. The best manager does not need us to tell them when to invest, where to invest, or how to invest. (Those people are hard to come by, so in most cases we have to make some decisions regarding the “when,” “where” and “how.”)

  • “Few Things are Forever”

De Beers’ slogan “A Diamond is Forever” probably does not apply to investing. In investing, “Few Things are Forever.” When I graduated college in 2010, value investing books (usually with pictures of Warren Buffett printed on their covers) could be seen on the front shelves of almost any bookstore — “value investing” was the only righteous road to investor salvation. Other investment ideas that were enshrined around 2010 include “small-cap premium” and “emerging markets opportunity.”

Looking back over the past decade, from 2010 to 2019, Berkshire Hathaway Inc. compounded at an IRR of 13.1%, underperforming the S&P 500 Index by 0.5% a year. The S&P 500 Value Index returned 12.2% a year, lagging the S&P 500 Growth Index by 2.6% a year. Fewer value investing books are now on the front shelves than 10 years ago.

The notion of “small-cap premium” fared no better. From 2010 to 2019, the S&P 600 Index (small-cap index) compounded at 13.4% a year while the S&P 500 Index (large-cap index) did 13.6% a year. The so-called “small-cap premium” became a 10-year “small-cap discount” of 0.2% a year.

The “emerging markets opportunity” idea suffered the most unexpected and tragic fate. For the past decade, including dividends, the MSCI Emerging Markets Index only earned about 3.7% a year, underperforming the S&P 500 Index by almost 10% a year. Investor could have done about as well if they decided to put their money with an online high-yield savings account!

In investing, things always change. Usually, by the time we arrived at a strong belief about something, such a belief was already obsolete and wrong.

  • Only Play the Game I Can Win

Due to huge financial upsides, active investing attracts some of the world’s smartest people and has become probably the world’s most competitive field. Thousands of well-equipped and well-educated investors and traders are consistently looking for other peoples’ mistakes and looking to profit by exploiting them.

To borrow a quote of an unknown origin: “if you’re not at the table, you’re on the menu.” Same for investing. Unless you know you will win, you will lose.

Therefore, I must have crystal-clear visibility into my own scope of competence. I need to know what is within my reach and what is not, where my capability starts and where it ends. Most importantly, I must expand my scope of competence by active learning (for example, I taught myself coding).

On this point, I am a big believer that “differentiation” does not equal “moat.” “Differentiation” is not a good enough reason for one to win a game. Too many companies talk about their differentiated businesses. Too many managers talk about their differentiated investment approaches. To me, “differentiation” increasingly sounds like a lazy excuse to help not answer some of the most important questions in investing: do you really have a moat? Do you have an unfair advantage that other people for a reasonable amount of time will not be able to replicate or develop?

  • Learn from Mistakes

I believe successes can be attributed to countless factors, but failures usually share some commonalities. The existence of luck in the formation of a success made it inherently difficult for a bystander to study the true drivers behind that success. However, behind failures are usually certain regrettable human actions that are worth our attention. Thus, it is hugely beneficial that I analyze my own investment mistakes, find patterns and try to avoid repeating them in the future.

  • Beware of “Diversification”

Nobel Prize laureate Harry Markowitz once said “diversification is the only free lunch” in investing. Mathematically, that is correct. But diversification, if not done right, is the guaranteed path to mediocrity. Putting too many stocks into a portfolio is a sure way to make the portfolio behave like an index (and below the index, because of fees). If investors aim to replicate an index, diversification is fine; but for investors aiming to outperform an index, diversification has its side effects.

(END)

A Decade of Inequality: Has the Booming Stock Market Benefited All?

two pigeon perched on white track light

Photo by Pedro Figueras on Pexels.com

My wife and I decided not to go anywhere on New Year’s Day. Instead, we spent the day at home. Bored, I decided to devote my first day of this new decade to examining something interesting of the past decade. One of the most distinctive features of the 2010s was America’s roaring stock market, which now is the longest bull market in history. Including dividends, $1 invested in the S&P 500 Index — a basket of some 500 companies — has turned into $3.6, a whopping 13.6% annualized rate of return. The stunning performance of America’s stock market invites the arrival of a very logical conclusion: over the past decade, American companies and people have fared well.

However, this rosy image does not square with reality. For the 19 years from 1999 to 2018, real median household income in the U.S. has only grown at 0.14% a year; from 2007 to 2018, the pace was only 0.32% a year.

To reconcile the two pictures, it is sensible to re-examine the 2010s with a goal to truly understand what has happened in the stock market. The study needs to be both broader and deeper than “the S&P 500 Index” — broader in the sense that it should cover more than 500 companies, ideally the entire population of listed American companies, and deeper in the sense that the study should offer a bottom-up view of individual companies with detailed texture.

But, is there an indicator that has economic intuition, that is related to the roaring stock market and that is easily measurable on all listed companies?

Market Capitalization! (i.e. a company’s market value)

Market capitalization is measurable and unambiguous — it measures the size of a company. And by measuring changes in market capitalization, we can tell whether a company is growing or not. We can also tell which companies have been growing the fastest and which companies have been shrinking.

The Decade from 2010 to 2019 & Expected Even Distribution of Growth

Over the past 10 years, about 4,600 American companies have been floating on the country’s stock exchanges at some point (a combination of active and de-listed companies). Over a decade’s time, these companies have in aggregate grown by $22.1 trillion and this growth in market capitalization has lifted the U.S. stock market to a valuation of $34.8 trillion by the end of 2019.

A common expectation is that this $22.1 trillion of new gains ought to be relatively evenly distributed. If we distribute companies based on their growth in market capitalization so the top 10% are companies that have grown their market capitalization the most, then we would expect that the top 10% of companies grew by a lot; good companies in the middle also grew handsomely; bad companies got disciplined and lost some of their value; some really bad companies in the bottom 10% were severely punished and lost a lot. That is just how a healthy financial market works.

So, this expectation would lead us to a picture that roughly looks like this:

1

The Decade From 2010 to 2019 — The Reality

Reality seldom matches expectations, but it is the gap between the two that matters.

2

As the above chart demonstrates, over the course of the past 10 years and among the 4,600 listed American companies, the top 10% of companies grew by $19.9 trillion, representing over 90% of the $22.1 trillion of total growth. The next 10% of companies (i.e. 80% to 90%) grew by $2.2 trillion, representing slightly under 10% of the total growth; the next 10% of companies grew only by $0.93 trillion.

20

Counting the top 10 companies that grew their market capitalization the most, all top five winners were technology companies. Berkshire Hathaway came at No.6.

3

What is even more shocking is this: the top 1% of companies (just 47 companies) grew by $10.2 trillion, which is 4.6x the bottom 90% of companies combined (about 4,100 companies)!

Given the entire U.S. stock market only grew by $22.1 trillion over the past decade, the growth from the top 1% of the companies accounted for almost half of this growth.

4x

From an 80/20 split point of view, the bottom 80% of the companies have added almost no value at all (they actually lost $0.0075 trillion) while all the $22.1 trillion growth went to the top 20% of companies.

A Decade of Inequality

Perhaps, stock markets are no longer a barometer for the economic health of a country. The top 1% of companies dominate the bottom 90% by a ratio of 4.6-to-1. The bottom 80% of companies remained stale for 10 years. Perhaps, something is wrong.

One way to think about this is through a labor angle. In total, the top 1% of companies employ 8.7 million people, which is less than 5% of America’s total working age population (about 200 million). If a person was employed by the top 1% of companies (or even the top 20%), he or she probably has done well this past decade. If a person was with the bottom 80% of companies, on average, his or her company has not grown at all and it is reasonable to believe that his or her salary has not changed much either. And, that is probably one of the driving forces leading to the stagnation of real median household income for the past decade.

The heightened wealth inequality in the society has already split us into the “haves” and the “have nots” and has created a myriad of difficult social and political problems. I believe this study shows that “companies” are also bifurcating into the “haves” and the “have nots.” And we should get ready to deal with the challenges this heightened level of “corporate inequality” can bring upon us.

Has the Booming Stock Market Benefited All?

Afterthoughts

  • Inequality: if you have not watched it yet, you should — this YouTube video (link) has earned 22 million views.
  • Technology: is technology the “culprit” to blame? Technology usually leads to network effects, which then leads to a business dynamic of winners-take-all. Is there is a downside to what technology is bringing to us, what is it and how do we manage it?
  • Bad companies: the bottom 10% companies only lost $1.5 trillion of market value, which was way less than the common expectation. Is the capital market still functioning properly by not only rewarding the good players but also punishing the bad actors?
  • Investing: since the only obvious winners are the big and growthy companies, is Index Investing (i.e. buying S&P 500 ETF) the only obvious way toward investment success? Or alternatively, because (apparently) fewer smaller listed companies have succeeded in a big way, does it make active investing/stock picking more needed and appealing than ever before?

(END)

 

References:

The S&P United States BMI Index was used as a proxy for the entire U.S. stock market. Foreign-listed American companies are excluded; for multi-share companies, such as Google, only one ticker is represented in the study.

Listed companies’ employee headcounts come from official company filings.

https://fred.stlouisfed.org/series/MEHOINUSA672N

https://fred.stlouisfed.org/series/LFWA64TTUSM647S

Five Takeaways From 2019

bright celebrate celebration dark

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This is a year-end personal reflection piece. The following five takeaways of mine are inherently backward-looking, but hopefully by examining the past I become more informed going forward.

#1 Think Independently

We giggle when watching lemmings do all kinds of funny things in a group together. But we are not that different — we humans are just as social species as lemmings are. As a general observation, we like people who are like us — a tendency which builds an intellectual echo chamber that confines and reinforces our thinking, making it less independent.

For example, if we frequent the same country club often, our views on many things will eventually converge with people who we hang out with at the club. In an echo chamber, we surrender a part of our intellectual agency in exchange for some mental comfort. In an echo chamber, we feel better and more confident because we know that our views are shared and supported by many people around us (and so, we must be right!).

When was the last time you voluntarily turned on a TV channel that broadcasts a view that is different from yours? When was the last time you proactively initiated conversations with people with different views?

To think independently, we should avoid forming strong opinions or making quick decisions because “my friends also like that idea.” Also, we should listen to people who think differently rather than cherry pick what goes into our ears.

#2 Think Scientifically

History makes quips from time to time. In 1793, England made a request to China to establish commercial relations. Emperor Qianlong wrote a letter in response. To quote the letter: “… our Celestial Empire possesses all things in prolific abundance and lacks no product within its own borders. There was therefore no need to import the manufactures of outside barbarians in exchange for our own produce.” We all know what happened in the following century between England and China.

To think scientifically means to develop thoughts on a foundation of objective facts rather than a foundation of subjective feelings and unfounded biases. Let facts lead us to conclusions, not the other way around. Unfortunately, people often fall in love with an idea first then find data to support that idea.

Thinking scientifically also requires us to analyze and learn from our own mistakes. Be courageous in recognizing the past; do not find excuses for our past mistakes; recognize we were wrong on them; learn from these mistakes so we can improve going forward. For the present, appoint a devil’s advocate to challenge our logic. It is better to appoint one early rather than wait until someone must speak out on their disagreements (usually this happens too late, and the damage is done).

To think scientifically is to self-examine our own thinking process — let me call it “to think about thinking.” One way to do it is to identify inconsistencies by recognizing incommensurate elements. For example, do we say A but do B? Did we say A yesterday but say B today? Are there double standards in our doings and sayings? Once inconsistencies are identified, we should grasp them firmly, understand why they are there and use the rationalization process that follows to refine our prior thoughts and beliefs so our thoughts can be reconciled, and our belief system becomes coherent.

#3 Technology/Data, A Secular Trend

Upon high school graduation in 2006, I almost chose computer science as my college major but I did not. These were my beliefs at that time: technology/data and everything it brought with were fads. Because they were fads, like other fashion trends, soon they would begin to wane. Therefore, I did not major in computer science.

Alas, I could not have been more wrong. The year 2006 turned out to be the first inning of cloud technology and first or second inning of Chinese Internet saga: Amazon AWS was launched in 2006; Uber was founded in 2009; WeChat was released in 2011.

Some two years after college graduation, the reality slapped my face so hard that I finally woke up. I came to the realization that if I do not know how to code or how to do data analytics, I might not have a job when I turn 30! That jolt brought me to night-school and various MOOCs to learn computer programming. Today, I am extremely fluent in financial data analytics and coding. I have coded multiple financial programs, each with thousands of lines of codes.

Largely due to new technologies, the world is evolving at an accelerated page. In the old days, being 10 or 20 years behind means you were using a slightly older radio than your neighbors — there was no serious repercussion for being an old-timer. Today, being 10 or 20 years behind means you are writing checks and your neighbors were scanning QR Codes on Alipay; you are hailing taxi with open arms and your friends are clicking Uber/Lyft with their fingertips. Many places have stopped accepting cash and many cities do not have conventional taxis anymore. As new technologies continue to emerge and the time spectrum continue to shrink, we can hardly afford to stand still and not evolve.

#4 Interpersonal Skills Should Not Be De-emphasized

Despite new technologies, most businesses remain people businesses. I believe it is still a valuable skill if one can read people’s actions and words — to read between the lines, see between the moments, and extract raw insights that lie beneath a polished surface. Those sorts of insights into people usually contain predictive value that is otherwise hard to come by.

To illustrate, I believe for a person to be successful in what she does, passion is more important than pride, and pride is more important than “just a job.” (“Passion > Pride > ‘Just A Job’”) To be a true out-performer, one must have passion, so she can put in extra hours in what she does, take risks responsibly, think creatively, be a trailblazer, and eventually make breakthroughs. But these people are rare. Many people are only in the second level — they take pride in what they do. They deliver quality work with quality execution. They are proud of their current positions and for this reason, they are less likely to take risks and trail blaze to terra incognita. Their reputation is associated with their present-day achievements, and they cannot afford to risk that. Trying something new is just too risky for them. “Just a job” type people have probably the lowest chance to be hugely successful down the road. They deliver minimum quality work and they do not see a deep connection between themselves and what they do.

#5 Lean Into The Future

Consider these facts:

  • Telephone was invented in 1876 but it took more than 100 years for landlines to reach a saturation in the U.S. *
  • The personal computer was invented in the 1970s. In just 40 years, almost every American has multiple PCs, at home and at their office.
  • Facebook was launched in 2004. Almost all Americans (and many millions internationally) are on Facebook today.
  • WeChat was released in 2011. Almost all Chinese people are on WeChat and few are using text message anymore.
  • About 90% of the world’s data was generated over the last two years! ^

The world is evolving faster and faster. Do not let our old habits confine what we can do today. Do not fall back into our old comfort zone and get defensive when new things emerge (especially when we do not understand them).

Think outside the box — and make sure you are in a big box first! If the box you are in is tiny, thinking out of the box will not do much for you.

To lean into the future, I encourage us to think along a few dimensions.

  • New things versus old things: do not condemn new things simply because we do not understand them. Download new apps. Try new food (well, I have to say that Beyond Meat does not taste that great). Learn new ideas. Try them out and have fun.
  • Younger generation versus older generation: invest in the young can be highly rewarding. See my previous piece.
  • “We” versus “They”: globalization and all the changes it produced creates in many people certain feelings of tribal identities. When we take the facts out, take the moral judgements out, the remaining story of “We” versus “They” feels very true. It gives people feelings of insecurity. However, it is sensible to remind ourselves that not all the “We” people are good and trustworthy people; similarly, not all the “They” people are bad and suspicious people. Learn a new language, travel to a foreign place, and make new friends with people of different backgrounds. Hopefully we will all come to discover that people are different, but not as different as we thought. The best way to eliminate “We vs They” tribal prejudice is contact. Few prejudice and biases can withstand contact.

Lastly, let me borrow a few lines from Bob Dylan’s famous song The Times They Are a-Changin’:

…and don’t criticize what you can’t understand…
… The order is rapidly fadin’, and the first one now will later be last…

 

(END)

References:
https://www.visualcapitalist.com/rising-speed-technological-adoption/
https://www.sciencedaily.com/releases/2013/05/130522085217.htm
http://www.bobdylan.com/songs/times-they-are-changin/

Local Knowledge

book page

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Thomas Friedman made an interesting argument in his book The World Is Flat: in a globalized world, historical and geographic divisions are becoming increasingly irrelevant.

Through my experiences, however, I think the opposite is happening — in a globalized world where people from different cultures interact with each other, historical and geographic divisions are increasingly visible and relevant.  In order to make better decisions in a globalized world, local knowledge becomes more valuable than ever before!

Let me illustrate my point with a recent example.  A couple of weeks ago, I was at a social event in New York.  One participant, apparently working in the finance industry, made an observation and he said, “Everyone I spoke with told me that the Maotai (茅台) tastes terribly bad.  No one in China drinks it.”

(Maotai is one of the most well-known liquor brands in China and it is used in most business networking occasions.)

My jaws almost dropped to the floor.  My head rang loud with the following questions, but I could not ask anyone of them, trying to not spoil the party.

• Have you ever traveled to China before?  When was your last trip?
• Have you tasted Maotai yourself?
• Have you stepped into a Chinese restaurant during dinner time and counted the number of Maotai bottles on the dinner tables?

Today, goods can be manufactured in one country and consumed in another; civil aviation allows individuals to travel very far at a very affordable cost; social media connects people from all corners of the world across culture and language lines.

However, beneath the surface, the world is still spiky!  Many companies have had great successes in foreign markets, but some have failed dramatically.  In my earlier blog post in February 2016, “What does Uber gain by entering China?”, I pointed it out that, for various reasons, few American tech companies have been able to succeed in China in a sustainable way.  Moreover, many investors have made huge returns in international markets, but some have had “sour grapes” experiences.  I know many instances where investors inadvertently offended their counter-parties in local host countries, resulting in themselves being socially blacklisted from investing in the countries.

Why these kinds of things keep happening?  I think it was caused by the lack of local knowledge.

Without exposures, people can only understand events through the lens of their own culture.  A Chinese person who has never exposed himself to American culture can only understand an American person by measuring that American person’s behaviors from a Chinese perspective. For example, if the American person does not show a high degree of obedience to her schoolteachers, upon seeing it, the Chinese person will judge the American person as a bad student (because obeying teachers is a big thing in China).

People can only think in the languages they truly master.  If an American person can only speak English, that American person can only think in English. The boundary of English words and all the meanings they can represent is the de facto boundary of that person’s breadth of thoughts.  People think in the words they know.  Similarly, if a Chinese person does not speak English at all, she will not be able to understand what “honor code” is: even today, “honor code” does not have a standard translation in Chinese — because “honor code” does not have an exact equivalent in Chinese culture.

People can only relate to new things by making comparisons to old things that they are familiar with.  If an American person travels to China often, he will understand that email is not the dominant way of communication — WeChat is.  He will also understand that WeChat is not “China’s Facebook.”  If a person has not seen or used WeChat before, it is almost impossible for that person to understand what WeChat is — because there is no comparable app in the West.

So, “local knowledge” matters.  “Local knowledge” makes people more informed and opens their minds to new information.  It helps people overcome information asymmetry and reduce the various biases they might otherwise carry.  Ultimately, “local knowledge” allows decision makers to make better decisions.

So, what can we do to acquire “local knowledge?”  Here are some ideas:

• Spend time with people who have very different backgrounds
• Travel to countries where language and culture are different
• Learn to speak a different language
• Download new apps
• Try new things

In 1842, when China and the United Kingdom signed the Treaty of Nanking (which ceased Hong Kong to Britain), many top-level decision makers in China’s imperial court did not even know about the existence of “England.”  Shocked by their countrymen’s lack of exposures, scholar-official Lin Zexu (林则徐) and scholar Wei Yuan (魏源) urged all Chinese people to “open your eyes to see the world” (开眼看世界).

I think the same message is still relevant today.  The world is still not as flat as we thought.  And hopefully, by acquiring local knowledge, people will toast to their expanded knowledge with a small cup of Maotai.

The Power of Writing & Reading

black ball point pen with brown spiral notebook

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[The body of this piece was written by me in December 2018]

When I was still living with my parents, I used to read almost all the newspapers and magazines my parents subscribed.  In college, I served a leadership role with the university’s reading club.  Later at Yale University, forced by the teaching environment and enlightened by some elective courses that I chose to take, I discovered that I have a real passion for not only reading but also writing.

As I write more and more, gradually, I started to realize that writing has some kind of “superpower” with it.  It is intangible and difficult to describe.  But let me make an attempt here.

  • Writing and the Importance of Language

Writing helps me think.  It helps me understand what to focus on and what to let go; what is important and what is trivial; what storytellers wanted me to hear and where the truth might actually lie.  Writing strengthens my memory of the past and improves my ability to predict the future.

People think in words they know.  Period.  The depth of a person’s vocabulary determines the depth of his or her thoughts.  Using myself as an example, I can only construct a thinking process using the words that I fully understand.  Reversely, it would be impossible for me to use an English word that I do not recognize to help me think through a problem.  For this reason, I strive to master as many words as possible in both the English and Chinese languages.  By the same token, knowing a second or a third language is priceless:  someone who speaks only one language and knows only one culture is limited in his or her thoughts.  After all, one language only offers so many words; one culture only contains so many aspects of things.  For example, many “people politics” words in Chinese do not have suitable English counterparts; many “love” words in French do not have foreign language counterparts either.  A language reflects the unique history and culture of the people who developed it.

To use myself again: when I write and think, I can increasingly hear two voices in my mind speaking to me — one in Chinese and the other one in English; they agree on some things and they disagree on others; sometimes, they even talk to each other, leaving me aside watching.  It may sound weird, but if you speak a second language, you probably get what I am saying here.  I like the diversity of my inner voices.  It enriches my thinking processes and helps me be creative and arrive at unexpected conclusions.

  • Reading and the Importance of Being Open-minded

Today’s world urgently calls for more tolerance for thought diversities.  News media, including those which are well-respected, are increasingly biased.  Instead of broadening people’s horizons, they are closing people’s minds.

Equally interestingly, this year [2018] I learned about The McGurk Effect.  It refers to a perceptual phenomenon (or illusion) that occurs when a person hears one sound (the sound that is played) but sees the visual component of another sound (the visual movement of a person’s face pronouncing a second sound), resulting to the perception of a third sound.  It proves that we “hear with our eyes.”  The McGurk Effect, I think, makes the point that we are biologically incapable of acknowledging facts.  Put it differently, we are biologically biased, and we just cannot help it.  The McGurk Effect invites us to think twice of what we see, what we hear.  Next time after I have a good meeting, I will ask myself: “Jackson, are you sure that they are this good?  Are you sure that is what you heard?  Did you arrive to a conclusion too early?  Are you closing your mind to different ideas?”

I believe we live in a “knowledge economy.”  Knowledge gets us jobs; knowledge drives productivity.  Once we stop learning, we become outdated.  So, to prevent ourselves from becoming obsolete and to overcome The McGurk Effect, we should keep our minds open and keep reading from many different sources.

Invest in the Young

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The other day, I was listening to the radio and the host mentioned a new phenomenon: smart speakers are challenging the position parents occupy in their children’s minds.  At the dinner table, kids prefer speaking to these boxes to learn things they do not understand — questions like, “Ok Google! How big is the moon?” — which basically downgrade their parents from “old and wise teachers” to “dinner guests.”

It struck a chord with me, because it reflects a broader social development, that is the foundation of the notion that “old is wise” is cracking.  I am convinced that investing in younger people and younger organizations will increasingly become the right choice for all investors.  This article offers my thoughts on why these changes have been happening, their implications for investors (investors in the broadest sense, not just financial: like parents invest in children, bosses invest in apprentices) and what the old generation should do going forward.  Please note that I am strongly in favor of “respecting your elders” but think we need to respect the younger people more than we do.

First, why is there a long-time notion that “old is wise”?  I argue this notion has three supporting pillars.  One, big data: older people have been around longer, so they have observed more.  Two, people network: older people have had more time to meet people, so they know more people.  Three, skill mastery: older people have been doing their chosen task longer, so they do the task better.  These three reasons explain why in ancient societies, elders had tremendous respect from their tribal members:  by listening from the elders’ wise words — which carry the collective knowledge of several generations — the tribe as a whole learns and benefits.

Today, however, these three pillars hardly stand.  Google, Wikipedia, and collectively the Internet, know much more than any one person can possibly comprehend.  We consult Google and it can give us answers.  Parents and the elders have lost their positions as the “go-to source of knowledge.”  LinkedIn, Facebook, and other social sites have a people network that is so broad that no individual can possible compete — depending on your user status, you can reach out to just about anyone you want.  Again, the older generation has lost its function as the “community connector.”  Industrial automation, and the AI revolution, will surely displace some skilled workers and cause everyone to question what is the value left in hiring “an experienced worker”?  Two years ago, I toured around one of the largest automobile assembly plants in China; for most of the tour, I did not encounter any human beings except my tour guide — tasks are performed by machines and skilled workers are not needed as much as before.

The crisis for “old is wise” is deepening.  But the opposite is happening on the younger generation. In industry after industry, young people are showing they are more productive; younger organizations are showing they are more successful.  Consider these facts:

  • Isaac Newton made most of his discoveries before he turned 30 (and in his later life, he lost millions in the stock market.)
  • Younger hedge fund managers tend to produce better investment returns.
  • Many of the most successful consulting firms have a mandatory retirement age. McKinsey has been implementing the mandatory retirement age of 60 since the 1960s.
  • The age of an average employee at ByteDance, one of the most dynamic organizations in existence today, is below 27! (ByteDance could be a serious threat to Tencent, where employees are much older.)
  • Mark Zuckerberg reportedly said, “Young people are just smarter. Why are most chess masters under 30?”  (Ironically, the quote was later used to support a lawsuit for age discrimination against Facebook.)

Of course, we can also list cases where people achieve great success at senior ages, such as “Colonel” Sanders who founded KFC in his 60s and Ronald Reagan who was an actor until his 40s before becoming a political figure (first in California and later as the President).

Arguably, though, we tend to observe more successes among the young than the old.  Why?

People have different theories here but let me offer a “shortcut” — from the perspective of human evolution.  Ask yourself these questions [the answers are spelled out reversely in the square brackets].

  • How many generations ago did humans first reach Europe? [dnasuoht owt]
  • How many generations ago did humans build pyramids in today’s Egypt? [derdnuh owt]
  • How many generations ago was Europe still in The Dark Ages? [evif ytnewt]
  • How many generations ago was the U.S.A. founded? [evlewt]
  • Do you know that two grandsons of the 10th U.S. President are still alive today?

All this shows how quickly we humans evolve.  Merely 600 generations ago, we were still hunter gathers.*  Within the past 10 generations, we evolved from a pre-Industrial to a post-Industrial society.  During the previous two generations, we invented the Internet and digitized a large part of our lifestyles.  It is fair to say that not only we are evolving fast, we humans are evolving faster and faster!

That, hopefully, offers us a perspective into the comparison between the young and the old.  For the older generations, on the one hand, they are naturally aging — an average person’s overall task performance peaks in their 50s and significantly deteriorates in their 70s** — on the other hand, they must deal with a technological and social environment that is evolving at an increasingly fast rate.  What a double whammy we face when we age!

For the younger generation, they are free from historical elements (they do not need to unlearn outdated knowledge) and they grow up organically embracing modern elements (kids now grow up using smart phones).  As previously mentioned, humans are evolving so fast that a generation or two make a HUGE difference.

It is like software: newer versions usually have improvements upon the previous versions.  (With the noticeable exception of Windows 8!)

That is why I argue — invest in younger people, in younger organizations!

So, I have already reached my conclusion.  But wait!  Eventually one day, I will look up and realize I am in my 50s or 60s.  What is the advice for “the future me”?  Broadly speaking, what is the advice for the older generation?  These are what I have in my mind:

  • Make room for younger generations to grow.  There are reports** showing the frustration shared by young academics: aged tenured professors just will not retire and by doing so they are preventing younger professors from being promoted.  This is probably a common phenomenon across fields and industries.  As our life expectancy increases, this will surely be a bigger generational problem.  Will I have the heart to step down?
  • Stepping back is not stepping out.  An aged CEO might want to move himself to the chairman position.  An aged tenured professor might want to step back and become an industry expert consultant.  The role may not be the same, but older people can still pursue their passions.  While you should make room for the young, you can still leave room for yourself.
  • It is probably in your best interest to step back.  Bill Gates stepped back from Microsoft to launch one of the greatest philanthropy efforts we have ever known, enhancing the well-being of millions, including his own (his reputation was damaged in his later years at Microsoft).  Jack Ma stepped back when Alibaba was still arguably the No.1 Internet company in China, effectively guaranteeing his legacy as the firm’s greatest leader of all time.
  • Live today fully.  Yesterday is gone.  It will not come back, no matter how much you miss it.  Open your mind please.  If you hear about a new mobile phone app, download it and try it out.  If you have the luxury to travel to a new country, pack and go for it.  Live today fully.  Do not close your mind to new experiences and learnings and live only based on your past successes.
  • Embrace the future.  Your past does not limit your future.  Your past does not define your future.  Think second-act careers.  Think KFC’s “Colonel” Sanders!

 

 

 

References:

*NYT: We Still Have the Bodies of Hunter-Gatherers

https://www.nytimes.com/roomfordebate/2011/05/12/do-we-want-to-be-supersize-humans/we-still-have-the-bodies-of-hunter-gatherers

**PBS: Colleges See Older Workforce Holding On to Coveted Positions

https://www.youtube.com/watch?v=2LGLY0yPjgE&feature=youtu.be

 

Tribal Bias

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I visited India last year. In ten days, I traveled in several cities – New Delhi, Bangalore, Mumbai. I was amazed by the country’s incredible culture: wherever I was, people are happy and welcoming. But I was troubled by the underdevelopment and I started to wonder: where is the “next global powerhouse” that we have been talking about? Especially in the U.S., people have been talking for 30 years about India as the “next global powerhouse.” But even in Mumbai, the nation’s wealthiest city, the deprived living standards were shocking.

I like India so I visited it. I read about the great nation and I enjoy hearing people talking about India. Much of my previous knowledge of India came from Western media, so I thought I know the country well: India is the world’s largest democracy and (so) its society and its economy are both well managed and the country is on its way to becoming the next global superpower. However, watching the local impoverishment was surprisingly shocking – the actual on the ground situation was not communicated to me before. After my Indian trip, I embarked on an intellectual journey. I tried to understand and reconcile what I was told in the U.S. with what I actually saw in India. Gradually, I came to the realization – it is tribal bias.

The bias is difficult to voice. “The world’s largest democracy.” This is how India is introduced in the Western context. Naturally, it becomes quite emotionally satisfying to talk about the great success of “the world’s largest democracy.” Recall the last time you hear the news headline “India is the fastest growing economy” versus “India is slowing down.” And try replacing the word India with a dictatorship country, like “Sudan”, and read the two headlines again. Feel the feelings – you get it. Tribal ideology triumphs and fact matters no more. Whether such success has happened or will happen becomes less important. Especially in the U.S., in spite of realities, American investors generally “want” to believe democratic economies would outperform others.

In investing, because of tribal biases investors are doing themselves and their clients a great disservice. Investment decisions are no longer based on solid facts but flimsy ideological preferences. For example, India has one of the world’s youngest populations with a median age of 28. As such, Western investors are excited about India’s upcoming population dividends, considering the country at an advantageous position for economic growth. But careful investors should do their homework: India sees a net increase of 12 million people joining its labor force every year – that is 1 million a month. However, automation is taking away jobs at call centers, IT outsourcing firms and manufacturing plants. Service sectors alone do not usually generate high-paying job opportunities in large numbers. Anti-globalization movements only make things worse. In the best of all times, India only managed to generate less than half of the needed jobs. What would happen if a ripening generation not having enough jobs? Aside from above mentioned joblessness condition, investors choose to turn a blind eye to many other facts. Just to name a few: court efficiency (27 million pending cases backlog in India, as of 2016), climate change (2017 monsoon flooding unfortunately killed 700 people), lack of skilled workforce (fewer than 5% of India’s 487 million workers received any formal training, as of 2015), growing government deficit and high USD borrowing costs. Facts are filtered to fit our preferences, silently.

Tribal bias hurts investors and it also hurts the target country. During my Indian trip, corporate executives often mentioned about outsiders’ high expectation on India: “they demand first world behavior from us but we are running on third world infrastructure.” High expectation also inflates India’s financial markets. For much of the last 15 years and measured by Price-Earnings (P/E) ratio, SENSEX Index almost always swelled faster and further than the rest of the world. From the beginning of 2016 to now, SENSEX rose more than 30%. During the same period, India’s GDP growth has been slowing down from 9.2% YoY to 5.7% YoY. Today, the Indian equity market is among the most expensive ones in the world, trading at 23x P/E, surpassing the already inflated S&P 500 Index by 10%. In addition, as local retail investors tend to buy at the peak when foreign investors are selling, financial markets movement actually deprives local populations by taking away their hard-earned wealth.

Tribal bias is self-inflicted. It can happen for any investors as long as we are not careful about what is behind our thinking process – is our thinking process driven by economic reality or tribal ideology preference? I’m writing here because I like India and I am very concerned about the tribal bias that permeates the Western investment community that does no good to either India or investors themselves. Tomorrow, when you open newspaper, turn on TV, people will talk about India being the next global powerhouse again. Before they write and speak, have the editors and news anchors ever visited India? And how about you? So many has been so wrong for the last 30 years – I urge you to pause and reflect why.