Some Thoughts on My Investment Philosophy

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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.

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

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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

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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

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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

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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.

Why I Learn a Second Language?

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We live in a time when everything seems to be in English: web addresses, flight numbers and programming languages. It is tempting to not see that there are other languages being used in the world, let alone be motivated to learn a second language. It is no wonder that less than 1% of American adults have learned a non-English language and can speak that language “very well”. [1]

I am an English language enthusiast. When I first started to learn English, I considered it a school requirement. But now, I take true pleasure studying it. Behind this transition was my realization in the deeper purpose of learning a second language.

First, learning a second language helps us listen. We do not learn a language by just speaking it. We listen first. To understand a speech, we have to comprehend the nuances contained in that speech. Only by grasping these nuances we will be able to decode its message. As we pay attention to every syllable that is uttered, we listen to the whole message rather than the parts that we like. So, we listen more skillfully. While teaching a friend Chinese, I found one particular “listening” example intriguing: when learning Chinese, English speakers cannot fully pronounce the last Chinese character in a sentence, making them sound as if they have not finished the sentence. In contrast, when learning English, Chinese speakers almost always raise their pitch at the end of every sentence, making them sound not confident. At first, this issue appeared mysterious. However, over time I realized that when speaking their mother tongue, English speakers tend to lower their tone at the end of a sentence while Chinese speakers do the oppose by raising their tone. Because we have listened, we found the cause. Learning a second language makes us a better listener.

Second, it helps us think. As humans, we are animals of speech. As we talk, we form ideas. Every idea is an opinion. Furthermore, what is said will inform how it is said, which sooner or later shapes our disposition. This is why language forms how we think. George Orwell pointed out that if a certain word is removed from our dictionary, we immediately become incapable of comprehending its meaning. For example, before the 19th century, the word “democracy” and “science” did not exist in Chinese. Because they were not there to begin with, these two concepts were not mentioned in ancient Chinese scripts. Therefore, the average Chinese person did not understand what democracy was and what science was. Moreover, language is the medium of our thoughts and the engine to process their meanings. Mastering a second language will make us aware of how language overrides and shapes our own thinking without our being conscious of it. Gradually, language learners come to know the power the language has over them and others. As their awareness grows, they start to broaden their vision and refine the way they analyze, discuss and set forth ideas. Thus, a second language cultivates our minds and helps us think.

Lastly, learning a second language is fun. Learning English has allowed me to build deeper relationships with people who I care about, enjoy a culture I did not come from more fully, and stay informed when ordering food in any non-Chinese restaurant.

Learning a second language means more than learning the language itself. When learning a language, many people take a functional or utilitarian perspective, but I want to argue that we should not confuse the means with the end. A utilitarian view will tell you that it is all about functional communication with the “outside”. However, my experience has shown that it is all about what is happening “inside”. Reading, speaking and writing are by-products, enhanced listening and thinking abilities are the main-products, which eventually lead to a happier life.

In a time when less than 1% of the population in this country has learned and can speak another language fluently, what is needed is the ability to be bilingual.

 

Two Forgotten Things to Heal a Divided Society

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Fall 2008 is when I first came to study in the United States. Joined with other college students at a small town in Indiana, together we witnessed the election of the first African American President. We believed the wheel of history, that of the United States and that of the world, had moved forward. Watching such a progressive social movement was a euphoric experience for many of us.

This year, it was different. After an unprecedented divisive campaign, 60 million American voters spent the night watching the election unfold in horror. Yet at the same time another 60 million voters were elated and thrilled. When I woke up the second day, I felt an unusual quietness in the classroom, disbelief in the air, as if students and professors were in mourning. What had just happened, in many people’s minds, was a move backward.

Let us take a step back. We are in a complex world with many trends going on, such as globalization, technology advancement, massive immigration, civil and women’s rights movement. In much of the developed world, the downside of those trends manifests itself in a painful way – job losses and diminishing economic prospects – making the unprepared segments of the population feel disoriented, angry and forgotten. To many people, the present is vastly different from the past and the future is no longer as bright as it used to be.

Negative feeling is infectious. The result of this election sent the other segments of the population into an emotional black-hole that is also painful. Moreover, in this volatile situation with complex problems that frequently out-run our abilities, it is now increasingly tempting to seek simple and quick solutions, such as populism, nationalism, xenophobism, political extremism, sexism or racism, hoping to undo the changes in the world.

As the Chinese proverb goes, “good medicine tastes bitter;” right solutions cannot be that simple. Though we feel angry and forgotten, we should not forget the importance of two things: empathy and liberal arts education.

Empathy should be cultivated. Technological advancement has made the world increasingly judgmental: within a millisecond we can produce and spread judgement by simply swiping right or left on the screen or pressing the like or unlike buttons. Technology connects us but also lets us feel disconnected. What really connects us on a heart-to-heart basis is empathy. With empathy, we listen to both ourselves and to others, acknowledge the time and space that we live in, promote pluralism rather than extremism, and make compromises when needed. Here at school, empathy is one of the most frequently mentioned words by professors and business leaders, yet unfortunately in today’s civil society and political arena what we have is the opposite – voters and politicians are increasingly militant, combative and unwilling to compromise.

Liberal arts education should be championed. Unlike vocational training which mechanically molds students into generic and homogeneous workers, through the teachings of history, political science, art and philosophy, liberal arts education imparts civic values and transforms any person to a disciplined citizen. By engaging in critical thinking, speaking and writing, a person can develop an enduring framework to think through things, a noble set of principles to live by, and a proper degree of decency to express him or herself. This is why liberal arts education fosters both humility and humanity which endows a person with appropriate pride – so even in bad times when things get tough, a person can still take the high road.

As much as we all feel angry and forgotten, we should not forget empathy and liberal arts education. Negativity has a function in that it makes us seek what is right. Sometimes, what is right is just not obvious. Let us not choose simple solutions (if these simple solutions were right, they would have been implemented and the problems would have already been solved.) History is less a straight line than a zigzag: whenever there is significant movement forward, there is significant backlash. Not every social movement is a movement – some social movements are in fact counter movements against earlier social movements that are already well under way. Education matters for it is why we are here today. Today’s problems should be solved in a civil and educated approach, driven by empathy and powered by liberal arts education, rather than through incivility and downright hatred. We should draw on lessons learned and not re-live them again.

Searching for the Path to Professional Excellence

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As an MBA student, I admire successful bankers, consultants and asset managers and more importantly I admire the organizations that they lead. I hope that one day I will do something as great as they have. Yet sometimes I struggle to understand what it takes to be there – why are these organizations so successful? What are the traits that they uniquely possess? How have they managed their business and their people? Or simply put, how have these organizations achieved “Professional Excellence”?

My interest in this topic stems from the growing feeling in me about the tension between being good at what we do for our clients – the “Professional Excellence” and being good at making profits for our investors – the business goals. Professional Excellence is usually what an individual wants while business success is what a firm wants. For job prestige and other obvious reasons, sometimes I feel the impulse to direct myself or advise others that getting a job in a global professional services firm and working really hard is the obvious path to mundane success. However, increasingly I realize that what is obvious is not what the truth is.

Enlightened by a professor at my business school, I started to see that the influx of incredible talent into professional services field has fundamentally changed the industry. Changes are happening in a way that is profound but very concerning. For each and every firm that offers professional services – banks, consulting firms or asset management institutions – the chance to win has become slim and success has become temporary and easily replicable. In other words, the talent in this business is so great that there is no reasonable hope that any one of these talented groups could beat the other. Just look around: consulting firms struggle to differentiate themselves and therefore compete on the basis of “loss leader” – they compete for client mandates by out-offering upfront free services to prospect clients. Asset managers, specifically the ones practicing active stock-picking, failed across the board to deliver the performance results that they wished for and many have no choice but to merge with each other or just close their businesses. Investment banks find themselves operating in a market where the fee level is running to zero, both in its sales-and-trading operations and in its corporate finance business, which leads to the upsurge of cost-cutting activities and business consolidation events. In essence, professional services are now largely commoditized. Commoditization makes it extremely difficult for a professional services firm to stay true to Professional Excellence – to do what is good for their clients. And commoditization kills.

During this summer I had the luck and the luxury of working among brilliant people at several professional services firms: two consulting firms in the U.S. and one investment bank in Hong Kong. They are all great firms and I learned a great deal of things. I saw the payoff of painstaking work but I also felt the conflict of deciding what is good for the firm and what is good for individuals. It is really easy to claim that Professional Excellence and business success are inherently in conflict, yet this is not entirely true. I believe they are two distinctively different affairs and I argue that being good at the former will bring you to the latter. So, why Professional Excellence?  And what should an organization do in order to maintain Professional Excellence?

Professional Excellence is making sure the team, eventually the firm, is placed above its individuals. Individual success is easy to achieve and easy to be replicated, but a skillful team is not. Developing a skillful team demands well-targeted recruitment efforts and good leaders. At recruitment, candidates should be evaluated primarily by their commitment to team-success rather than by their drive towards individual-excellence. Successful candidates understand they are part of a team and commit to it. When leading teams, good leaders should delicately empower rather than mechanically control team members. Successful leaders use the right people and put them on the opportunities rather than on the problems. Because everyone can copy almost any product and no individual can outperform a team, a skillful team supplies the gigantic unfair advantage that helps a professional services firm differentiate itself from its competitors.

Professional Excellence is putting people ahead of projects. This is because professional services are all about people and excellence. Good people are nice to work with, are incredibly relational and can manage themselves horizontally and vertically in and out of an organization. They invest in themselves wisely and they protect themselves from their own weaknesses. They know what not to do and they do the rest with integrity. They exert a proper degree of self-control and they exude a profound level of positive energy. They drive for performance while they do not “perform” in their job. (Note this difference.) They are sensitive to office politics thus they frequently conduct checks-and-balances. Having achieved great things in their life, the talented do not come from a place that is exhausting and insecure but they dispense personal joy to others and turn others on. Therefore, the best thing that a professional services organization can have is these wonderful talents, because there is really nothing much that needs to be done after that. So the natural question to ask ourselves is this: are we giving enough time and attention to the first-rate people in our organization?

Professional Excellence is prioritizing long-term relationships over short-term transactions. Too often we see corporate management push for quick completion of transactions and turn a blind eye against developing relationships. People are blind towards their blindness, however, it is exactly these kinds of transaction-driven motives that are jeopardizing businesses. For example, sending out emails at a high-frequency does nothing but transfer emails directly into the clients’ junk inbox. Moreover, prioritizing relationships encompasses the idea of staying customer-focused. In my five years at the professional services firm, it became clear to me that active listeners bring themselves closer to clients thus selling better in the long-run, while aggressive sellers simply irritate clients. Putting emphasis on completing transactions comes at the expense of long-term relationship and will eventually hollow out an organization. So, stay laser-focused on building long-term relationships.

To be as successful as those people and organizations who I admire is not all that easy. For both individuals and organizations, staying true to Professional Excellence is critical so they can continue to be relevant and competitive in this din of commoditization. Across the Pacific Ocean, the Chinese economy is maturing and institutionalizing. Surely it will ask for more – more professional services in particular. For those organizations that do not get Professional Excellence right, they will find themselves getting commoditized, under pressure to consolidate or even close. For those that get it right, however, the reward will be substantial.

(Big thanks to Charley Ellis and Nina Scherago whose teachings brought me to this level of understanding.)