Thiel laments the influence of either type of “indefinite” mindset.
Luke agrees:
This also comes down to the key question of agency. The “indefinite” doomers and optimists lack a sense that they are personally responsible for anything, and so are less likely to contribute to bringing about the future they believe will happen.
This means there is an aspect of reflexivity involved, of course. Perception creates reality. If enough people are indefinite optimists, then nothing will happen (because not enough people will take concrete action) and the future will actually become worse than the present.
“Indefinite optimism” leads to option hoarding. I’ve written about this in The Option Cage (12 min read). The popularity of that post affirms the sense that we are intrinsically repelled by optionality mindsets propagating beyond the realm of tactics and into a way of life. The seduction of such nihilism is liberating yourself from specific commitments. It’s a way of lowering the stakes for your ego. It’s a pre-excuse. You can always hide behind “I never went all-in”.
But there’s no reward without risk.
Sure, there are lucky exceptions. Probably more than ever these days if we’re being honest. You can become a rich cog in a wildly profitable business. You ride a great wave, get overpaid considering how little risk you take, and now complain that you make $500k a year and feel broke. That’s the universe reminding you that maybe your fat paycheck is downstream of the same forces that make everything feel so expensive. It’s tied together. You can’t with a straight face think that your pay is justified while the inflation in your consumption basket is not.
(Yes, you work hard. Yes, your skills might be more scarce than what it takes for a typical job. And you are very much rewarded for that. But risk is required for a truly asymmetric outcome.)
Risk requires uncomfortable levels of commitment. Risk, or even better, “accountability” (from the most popular twitter thread I’ve ever seen), is incompatible with an appetite whose primary macronutrient is optionality. That friend that always bails on their plans sees all their commitments as options not futures. The plan was just an insurance policy against “something not better coming along”.
This brings me to today’s read:
Committed: How to give a damn about your work (7 min read)
by Rick Foerster
I’ve spoken to Rick. He walks the walk. This article starts strong and gets better:
In an apathetic world, full of short-termism and an addiction to the slow drip of incentives, the treasured virtue is commitment.
We are surrounded by conditional people, who need to “be engaged” or receive the whip of stimulation to get moving. They wait, until the move is obvious and success certain.
But we unlock the best in life when we become committed, even in the face of uncertainty.
Further reading:
I’ve excerpted one of my favorite antidotes to nihilistic option mindests from
In my market-making life, I often had positions that were net short extrinsic option premium but long convexity. (A common junior option trader question would be to ask the candidate to create a structure that had that profile. A good answer is — a vega-neutral iron fly which can be roughly by shorting 1 ATM strangle and buying roughly 1.4 25d strangles. Vega-neutral butterflies were often quoted in the gold options market. They wouldn’t ask for it by name but the structure would usually be a iron fly with a strange ratio that amounted to zero vega.)
With that niche bit of trivia, I present this week’s sponsor: Helium
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My recent post, Nah…you just ain’t seein’ the balladdresses the lazy confession you hear when professional investors moan “the market doesn’t care about fundamentals”.
At the end of that post, I pointed to research that shows that in the long-run fundamentals remain the largest driver of returns.
Good businesses pay off. While the wrong price can ruin any investment that math becomes less relevant the longer the holding period (this is Buffet’s “pay a fair price for a great business” compounder philosophy).
Here’s 3 more bits that show the stock market is still governed by the force of financial gravity (profits):
1) What’s Driving Stock Market Returns (3 min read)
Ben Carlson
It’s ridiculous to assume this means the gains in the stock market are somehow rigged, fake or manipulated.
There is no man behind the curtain pulling levers to ensure stocks go up.
In fact, over the long run, fundamentals still play an important role in the stock market’s success.
There have been times when prices have gotten ahead of themselves but for the most part stock prices have been going up because earnings have been going up.
The late-John Bogle had a simple formula for expected returns in the stock market that looks like this:
Expected Stock Market Returns = Dividend Yield + Earnings Growth +/- the Change in P/E Ratio
In his book Don’t Count on It, Bogle applied his formula to each decade in the stock market going back to the turn of the 20th century to see how well fundamental expectations matched up with the actual returns.
The difference between the two is essentially human emotions.
Bogle published the data through the 2000s so I’ve been updating his work into the 2010s and 2020s. Here’s the latest data through the end of 2023:
There has been some multiple expansion in the 2010s and 2020s but nothing like the 1980s, 1990s or even the 1930s. Earnings growth has been the main driver of stock market returns since the end of the Great Financial Crisis.
Brett is very much in the gears of fundamental pod shop investing providing extensive training to portfolio managers.
Excerpts:
I’m here to assert: fundamentals are all that matter (with an investment horizon longer than 3 months). Sure, not in a given day, week, month or quarter. Shorter movements in stock prices are certainly influenced by positioning, sentiment & flows.
But extend the horizon even a few months (let alone a few years) and one thing hasn’t changed in markets over the last two decades, and won’t change in the next two decades: fundamentals are deterministic to stock prices. The analysis I will present below is a ~3 month analysis of why stocks move.
There are two very common proxies for “fundamentals” when looking at a stock, 1) revisions, i.e. how consensus estimates are changing and 2) consensus expected growth…To try to make this point, I did an analysis of the top & bottom 25 stocks in the S&P 500 this year. I applied a very typical “why did the stock move” decomposition analysis of revisions, P/E and growth algorithm shift to try to isolate why these stocks move. [see the thread for the details].
By no means am I saying that fundamental equity investing is easy. I’m showing you an ex-post analysis. Monday morning quarterback. The hard part is using process & judgment to identify these dynamics ex-ante. What I’m telling you is fundamentals still matter. Don’t fall into the trap that fundamentals don’t matter. They have this year, and they always will.
Personal bit of color for what it’s worth: a friend of mine is one of the largest and best performing fundamental pod managers on the street. (When I hear what goes into the process I’m convinced the average professional investor looks like a bear on a bicycle compared to what’s happening at the right side of the power law performance curve). I think this friend would very much agree with Brett. Take it as you will.
3) A simple theory of the stock market (7 min read)
Steve Randy Waldman
This post is more of a red pill compared to the others. I’m quite sympathetic to its argument as stock returns maybe have become a load-bearing pillar of the “affluent professionals — call them the top 30%”
Excerpt:
Equity holders who have come to rely upon high equity returns regardless of the timing or valuation of their purchases. Equities fluctuate, sometimes wildly, but the most enfranchised citizens now expect an upward ratchet over a five to ten year horizon. Speculators’ own self-fulfilling behavior joins forces with tacit but determined state support to deliver on that expectation.
While sympathetic, I don’t yet subscribe to Waldman’s deeper suspicion because I haven’t seen the turn card on the flop. Like what happens to the stock market if earnings have a sustained fall without cover for major intervention (like if the last major earnings cliff wasn’t caused by a virus).
Waldman himself includes this chart of corporate profit margins in the post:
A conspiratorial mindset should should be pulled away from the derivative of the function (stock prices) and focused on the function itself — profits margins. Profits varied around 2.5% while the boomers were still hippies, bounced about 5% when I was a kid, found a new home around 10% in the age of smartphones, and then nearly doubled again since covid. The time for profit margins to double roughly halving along the way. There are so many forces that could go into a picture like this plus technicalities of how accounting and tax laws may have changed that I’m not going to embarrass myself with any guesses.
But the output is unmistakable: earnings are growing from both the top* and bottom lines. Again the chart Ben Carlson posted:
When you zoom out, the SPX time series is still tracing what it always has.
Last week I mentioned our household’s new discovery — comedian Nate Bargatze. He has 2 Netflix specials his most recent special is on Amazon Prime. The following bit comes from the new one and just gets me and the 10-year-old dying every time. (Apologies but I could only find a TikTok link and it includes close-captioning which is an absolute affront to the craft of stand-up)
That skit reminded me of being in 5th grade when a set of twins from South Africa transferred into my elementary school. I’ll never forget how in a proper English accent, the first thing I ever heard of one them say after raising his hand on the first day: “Will we be using the Imperial or Metric system?”
If the accent wasn’t enough I didn’t know what the words they dripped from even meant.
Mental note: put gum on their chairs. Welcome to 80’s grade school in NJ nerds. No one gets out of here well-adjusted.
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