Quote for the Week

Hard experience has taught me that chasing noise leads me to miss the main trend too often. At the same time, having lived through the bond yield/stock yield shift of the late 1950s and the breakthrough of bond yields into the stratosphere beyond 6 percent in the late 1960s — just to mention two such shattering events out of many — I look with suspicion at all main trends and all those means to which variables are supposed to regress. To me, the primary task in investing is to test and then retest some more the parameters and paradigms that appear to govern daily events. Betting against them is dangerous when they look solid, but accepting them without question is the most dangerous step of all. — Peter Bernstein (source)

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Quote for the Week

Never before did so many people make so much money, or spend it so lavishly, as during the late bull market. Prolonged prosperity makes the new-rich seek new ways of spending; and spending for new luxuries gives to money a pleasure-giving power that it did not have in the less affluent days. But as expenses rise, there develops the need of increasing the income to keep pace with the new living standard.

From hardship to comfort, the gap is a million miles wide. From comfort to luxury, the step is only four inches long. Ask any man who has made easy money.

Stock speculation always seems the cleanest way of making easy money. It is legalized gambling masquerading as a legitimate business. It possesses insidious attractions. It tickles the vanity of the speculator to feel that it is his superior judgment, clear vision and financial courage that win the money for him. That is why stock speculators refuse to regard their operations as attempts to get something for nothing. They know that nobody gets that. Speculating, to them, is getting something for something. — Edwin Lefevre (source)

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Quote for the Week

All of these things are about balance. If you assume you know nothing, you can’t function. If you think you know everything, you’re going to get in trouble. You have to strike a balance. And hopefully, it’s an appropriate balance.

Think about confidence. If you’re an investor, if you don’t have confidence, then every time you buy something, if it goes down, you’re going to sell it because you’re afraid it’s going to go down more. And you’re going to be an abject failure. You have to have confidence.

If you buy something and it goes down, you have to reassess your thesis. And if it’s intact, you have to buy more or you can’t be great. But on the other hand, if you have hubris and you feel you can’t possibly be wrong and every time something goes down you blindly double down, then you’re probably going to get into trouble and maybe be asked to leave the industry. So, you have to have this balance, confidence but not overconfidence. Humility, but not over-humility. — Howard Marks (source)

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Innovation drives creation, disruption, and destruction. It drives change. The impact can be unpredictable. It breeds excitement and new investment but also concern and fear over what it displaces.

We see it in discussions around AI today. We saw it with the rise of the internet, the personal computer, TV, radio, airplanes, and more.

The early days of the auto industry is one of many examples from the turn of the 20th century of the creative destruction that underlies innovation.

Business and Wealth

New innovation breeds excitement. Investment flows into new businesses. Success leads to further investment and competition. Excess competition leads to poor investment returns. Poor returns lead to business failure, consolidation, and less competition. Less competition drives returns higher. That’s the gist of the capital cycle in new industries. Under the right conditions, market booms and busts follow along.

Hundreds of auto companies emerged in the U.S. in the first decade of the 1900s. Thirty years in, only three sat on top. Ford, GM, and Chrysler controlled 90% of sales in 1934.

The byproduct of the capital cycle in the auto industry, in a winner take all arena, is that most auto companies failed or were bought out as size and scale created a massive advantage for the remaining few. Capitalism and competition lead to unequal outcomes.

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