How many ideas are you exposed to each year – dozens certainly. Hundreds? Maybe even thousands. But how many do you really remember once you’ve left the room or closed the phone? let alone a week or month later.
But some ideas do stick. They burrow into your brain somehow and manage to take up residence “rent free”. It’s either because they are brilliant, subversive, different or maybe just something you needed to hear at that moment.
Here’s 10 ideas that stuck for me in 2023 and I’ll be taking into 2024. For last year’s list click here.
1. Drop that Recency Bias – inspired by Karen Ward writing in the FT (link)
As we all worked to pick up the pieces in 2023 after the hurricane of inflation and rate-rises ripped up most of the 2010s markets playbook in 2022 the call to drop recency bias is sound advice for all allocators and resonated a lot with discussions in Edinburgh at the PLSA investment conference where the same topic came up again and again.
The easy bit is talking about it though, the hard bit is actually doing it because it’s so hard to actually see where the recency bias is manifesting itself. Stable features of an enviornment like the last decade can get built quite deeply into frameworks, models and systems of thinking without even realising it. The last decade captures a lot of folks’ entire investment careers, after all.
It’s structural features of markets implied by low and stable vs high and volatile inflation and interest rates that have real consequences for long-term allocation like stock/bond correlations and the existence or otherwise of various important premia attached to asset classes (eg term premium, inflation premium).
But what’s a reliable constant and what’s really different this time? Tough question, important answers.
2. Keep it simple in investing when everyone knows everything (says Jan Loeys of JP Morgan [link to FT article] )
The bottom line according to Jan
- How many assets do you really need in your long-term portfolio? Two (a global stock fund and local bond fund)
- Are there any superior assets left that you should systematically overweight in a strategic portfolio? Not any more, everyone knows everything
I think complexity gets put on a pedestal far too often and this creates real problems because it becomes the expectation. But you can see why, complexity superficially signals effort and expertise and cleverness. It feels like real work, while simplicity can look naive or, well, simplistic.
And there are tangible advantages to simplicity: you can far more easily stay on top of performance and what’s driving it, and you’re less likely to constantly tinker and add/subtract strategies and managers.
There’s more thinking to be done here on the “investing when everyone knows everything” line. Does everyone know everything? I don’t quite think so, but they do all know much much more than they used to. Sophisticated stock screening tools are available extremely cheaply and huge amounts of historical data are written about and discussed openly in real time. It’s a world away from the 90’s let alone the 1950’s or earlier. What that means in practice for investors is a great question.
3. The Roman Empire Fallacy by Frederik Gieschen (link)
What if our minds start melting at the intersection of history, markets and (geo)politics
There’s a bias to always thinking our generation is on the cusp of history …
This is a neat putback to all the end-of-Empires theorising from the likes of Ray Dalio and others.
4. Applying Economics, not gut feel to ESG. Alex Edmans – (link)
The bottom line: yes, ESG asks questions that requires new techniques and models, exposing limitations in existing ones. BUT, that doesn’t mean that traditional macro-econ models are all useless. Don’t throw the baby out with the bathwater. Traditional thinking models can help get at key issues and lead to important conclusions.
Sustainability Risks don’t increase the Cost of Capital (Sustainability risks lower expected cash flows).
A Company’s ESG Metrics don’t capture Its Impact on Society (Partial equilibrium differs from general equilibrium).
Shareholder Primacy doesn’t lead to an exclusive focus on shareholder value (shareholders have objectives other than shareholder value)
5. Confidence [link]
Michael Mauboussin, Morgan Stanley Counterpoint Global Insights –
The bottom line – I think confidence is an understudied area, relative to, say, the energy that gets put into estimating things to the decimal place (hello, expected returns). What’s your actual confidence in any of your numbers?
Some folks do do this well, but it’s not universal and often times the problem in asset management is over confidence (as overconfidence sells, is more likely to get you an allocation, or to get a decision to fall your way).
Explained – what the authors are doing here is separating the concept of probability from confidence. For example you might say an election outcome is 50/50 either because you have a lot of data that shows the race is neck and neck or because you have no information at all, and those things are not the same.
The authors suggest 3 dimensions to start assessing confidence:
- Availability of data to inform conclusion (facts and opinion are both important, but facts should carry more weight in assessing confidence)
- Range of other reasonable forecasts (might reasonable people give different answers)
- Robustness to change in input parameters (you should be more confident if new evidence is unlikely to change)
6. The persistent problems with UK capital markets: valuation, growth, liquidity. Structural or temporary?
It feels a little wrong to be dwelling too much on British declinism in the year we all went ga-ga for the coronation, but it’s practically it’s own field of literature right now (and that’s partly the point says SAMUEL MCILHAGGA link). Maybe Britain has been “dining out” on the soft power of yesteryear while doing little of real use while the ruling classes rent-seek for over 100 years. He charts the genesis of this back to the absence of a re-founding moment, grounded in industrial progress like those in the US and France.
Meanwhile and closer to home there are reasons why the UK economy and stock market have lagged other regions most obviously the US.
– Simon French‘s twitter thread is an incisive and well-informed explainer on this (much better than a lot of the misinformed hand-wringing and simplistic finger-pointing to be routinely found in the press) which shows that the valuation discount of UK markets relative to the rest of the world, even after allowing for sector allocations is some 18% (it’s a whopping 36% when allowing for the Jurassic nature of the companies in the UK market), this discount emerged sometime around 2016. And private equity companies have noticed, prompting a raft of M&A, and overseas listings. Key question: is the discount temporary or structural?
It’s not that there are no growth companies in the UK, they exist, but just attract a much lower valuation than in the rest of the world (and not just vs the US, same is true vs Europe).
Liquidity is also a problem which much fewer UK stocks trading in significant volumes each day vs the US or Stoxx600 (but is this a symptom or a cause – like so many things it’s hard to say).
Good writeup on this by John Stepek too here.
(and no, it wasn’t the pension funds wotdunnit – my Linkedin piece on this pushback here)
7. Deep Time (from “Saving Time: Discovering a life beyond the clock” by Jennifer Odell link). The book is an extremely thoughtful and somewhat subversive take on time and how we think about it, and why it matters. And most of all how different concepts of time like deep time are important and special ways of detatching ourselves from clock time and seeing time on a different scale for example by quiet observation of nature’s rythyms or exposure to indicators of ecological timescales (the author notes the crossover here with indigenous cultures’ appreciation of time). I was fortunate enough to be able to appreciate some “deep time” last summer during time off between jobs!
8. Our lives in their portfolios (Brett Christophers book) – A worthwhile read but probably a tough one for anyone working in infrastructure investment. It’s a challenging thesis but I think the author gets a lot right about the pitfalls of “asset manager society” – a world where those real assets, the building blocks for lives and livelihoods are owned and controlled by asset managers’ funds. Is it a good thing? Especially in areas that are absolutely essential for peoples lives, and areas where free market competition is supressed (eg water companies).
9. “It’s ok to have opinions but not ok to behave as if they are correct” – Howard Marks (enough said)
10. Our Relationship to Profit – Dr Jennifer Hinton on “I am” with Jonny Wilkinson (podcast on web apple)
I didn’t think that England rugby legend Jonny Wilkinson would be providing us with one of the most memorable insights into economics of the year, but here we are …
Dr Jennifer Hinton is a fantastic guest here on some big flaws with core capitalist ideas and examples of re-imagining a different system. This neatly articulates a lot of key arguments from the ESG/ sustainable investing community:
– The way the financial system is set up leads to particular economic and societal outcomes (but does that have to be the case?)
– There are “lock-ins” in the system, for example in legal forms and roles which really affect outcomes and are hard to change
– Externalities aren’t really accidents, they are inherent in a capitalist system that focuses on profit
– Capitalism is inherently expansionary (you always have to grow ££ … but why?)
and inherently exploitative: labour and production gets pushed to cheapest, most unregulated places with lowest labour standards (and called market efficiency)
Stories of “miracles” of benefits of economic growth can also mean environmental destruction and community degredation
Can we as individuals change the system? Yes and no, there needs to be a collective organised push because of the extent of the institutional lock-ins
But now there are actually some real alternative models out there: community not-for-profits, worker co-operatives & B-corps