Archive for September, 2010

Fisher Investments Analyst’s Book Review: The Shallows and Cogintive Surplus

September 29, 2010 Leave a comment

When society gets anxious, it tends to infest all corners of culture. Today’s age of perceived plight has turned its gaze toward technology. So, wonder of wonders, a recent batch of books reveals our nervousness, anxiousness—tensile jitteriness—about technology. This should be all the more striking compared to our decade-ago view of tech as economic savior.

Nicholas Carr’s book, The Shallows: What the Internet Is Doing to Our Brains, is getting a lot of attention. The book is about how the mind works in the internet age and asks the question: Is our technology making us smarter or dumber? He believes we’re getting dumber. Clay Shirky disagrees. His latest book, Cognitive Surplus: Creativity and Generosity in a Connected Age, argues technology and the information age are a source of goodness almost beyond our ability to comprehend.

Paradoxically, Carr’s book is often wrong but worth reading; Shirky’s is often right but should be skipped. We’ll tackle this review from two perspectives—the books themselves, and what they mean for investors.

I. Technology and Our Brains

This year, I had a mild career change. I went from being an analyst to managing some of them. A few months into it, my boss asked me how it was going. I said, “It’s changing my brain.” He looked at me sideways. But I meant it—I’ve had to think differently. Instead of contemplating just me and my work, I had a bunch of folks to consider, constantly. I’d get requests and interruptions all day such that I’ve had to learn to change focus on a dime, continually. At first, I worried this would affect my ability to think deeply and write for long stretches. Turns out, those things didn’t go away at all (these book reviews seem to be getting longer and longer!). Plus, I now have a new set of skills and new perspective.

Carr’s book, The Shallows, deals with this topic in earnest. He believes information bombardment from the net, email, smartphones, Twitter, text messages, and so on makes us less capable of deep, linear, focused thought and more prone to attention diffusion and interruption. Carr spends many pages making one point: Human brains are malleable, and so what we “feed” them dictates a lot of their wiring and thus how we think.

This ends up both right and wrong. True, the internet age will change our brains, but our neural abilities are so powerful this doesn’t have to be a bad thing and certainly doesn’t have to make us “shallower.” Through history, intellectuals have lamented mass paperback publishing, comic books, radio, television—saying they’d all ruin society and our ability to think deeply. They didn’t. Why? Carr goes to great lengths to prove that the brain is the finest computer of all time, but oddly doesn’t recognize our brains might have the ability to switch gears. Perhaps sometimes our attention is diffused on conversation, emails, and the like. And maybe other times, we can still sit quietly and read.

Carr cites a study that ostensibly proves a person’s brain changes materially with “just one hour of internet use a day.” From this, he concludes that if one hour does all that, think of what a whole day in front of the screen will do! One would expect interaction with any new medium to require a lot of energy and new neural activity before it becomes habitual. But that doesn’t mean the magnitude of new neural activity would necessarily continue unabated in each subsequent hour—or crowd out older, learned modes of thinking. Rather, and in keeping with Carr’s insistence on the primacy of neural plasticity, the marginal brain change would diminish over time. You only have to learn to ride a bike once and then riding is easy, making room for additional new learning and allowing the peaceful coexistence of all previous modes of thought.

More, Carr argues that solitary, silent reading and writing were the substrate for some kind of individuality that was imperative for the development of society. This is sheer nonsense and can be dismissed simply by examining the life of Socrates, who never wrote or read, but spoke and listened. This reflects Carr’s confusion on the important difference between the ability to think and how that thought is transferred. Transfer mechanisms, like books and language, influence thought, but are not thoughts themselves. (Steven Pinker has proven this over and again in his studies of language.) Further, our fabulous brains make room for many different transfer mechanisms (as discussed above)—the evolution of which have only furthered and deepened thought.

On one level, The Shallows is a sterling introduction to contemporary neural science—from studies on instinct and plasticity to the chemistry of memory. Carr is extremely well researched and authoritative here. (He even cites—and seems to have actually read!—David Bueller’s hugely turgid Adapting Minds, a seminal critique of evolutionary psychology.) But The Shallows is ultimately less than the sum of its parts—a grouping of well-written, thought-provoking pieces that never really prove the case. By contrast, Clay Shirky’s Cognitive Surplus is often generally right to argue that increasing information and technology is a good thing for society, but does so in tedious and tautological fashion. Shirky has a few important points:

  • There will always be folks lamenting the new opening of information and that always ends up wrong.
  • Though we feel busier and more anxious about it than ever, we actually have more time than ever and are more productive than ever. This is the “cognitive surplus.”

But we didn’t need a whole book to get to these points. Most of the text is a quagmire of tautology like, “the needs of the group and the needs of the individual should be balanced” for an online community. (Who needed to be told this, and what does it really have to do with the book’s topic?)

II. Technology and the Investor

I increasingly hear questions from clients about how to choose information sources, which ones to trust, and how to generally deal with the bombardment of information that hits us every day. One thing is certain: Just the mass influx of information causes heightened anxiety—it can be like drinking from a fire hose. Serious investors need to consider how technology and the availability of information affects their decisions.

Fifty years ago, with paper, pencil, and newspaper stock quotes, you could make a stock price chart and calculate a few things like P/E ratios. If you had the time and a big enough research budget—you could cleverly use all this to act on things others weren’t seeing or hadn’t thought of. (Have you ever actually graphed a stock price by hand? It takes forever.) Today, you can get every stock price or metric (any piece of data you can think up, really) free on the internet and crunch it any which way you like—in milliseconds. Where once all of this was only possible for an elite few, today all you need is a computer, the internet, basic knowledge of statistics, and spreadsheet software like Excel.

A good bit of investing used to be about how fast and comprehensively we gathered information, but today it’s more about the quality of our thought and analysis and how well we sort out the noise. The human brain still ultimately pulls the decision-making trigger and our brains haven’t much altered—we can only digest, think through, and understand so much, and rational thought is still influenced by subjective emotions. Said differently, more information hasn’t led to better investor returns. We live in a world where successful market forecasting is more than ever about interpretation…and less about finding that one “magic bullet” no one else has yet found.

Look no further than right now. We at MarketMinder have been truly breathtaken at how quickly folks have decided recent slower economic data automatically means double-dip recession. Fifty years ago, an average US investor couldn’t get a hold of, say, a breakdown of Japanese GDP without spending huge time and resources (and probably hiring a translator). And even if they could, it would likely lag weeks or months after it was reported. Today, a full breakdown of global GDP is available online, basically instantly, to everyone and for almost every country. So, the issue is how to interpret the GDP reports. Our analysis says this is a very typical deceleration of growth after what’s been a swift first stage of recovery. Recoveries—and expansions, generally—aren’t straight, smooth lines up. Others disagree. Whoever’s right, there’s no secret or hidden piece of data that tells the tale.

Thus, effectively sorting and interpreting, not just data gathering and computing, is more important than ever before. Or, as James Hillman has said, the “hungering for eternal experience makes one a consumer of profane events.” Determining what is truly holy to markets (what moves them) and what is profane (noise) is the crux of forecasting today.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Correlations Work Fine…Until They Don’t

September 27, 2010 Leave a comment

Lately there’s been much hubbub about how highly assets have been correlated (i.e. different types of assets all moving more or less in lock-step). Which is a (mostly) true observation lately. But, as an investor, be very wary of acting on such observations. Ignoring “correlation without causation” is one of the first and best lessons I’ve learned. Lots of stuff can be correlated, but if you don’t understand the reasons for it—and therefore aren’t able to make a sound judgment on whether it will continue—just ignore it. Because, as any technical trader or quant hedge fund investor will tell you, correlations work…until they don’t. And there’s no rhyme or reason for understanding when and how all that shakes out. For instance: After Nine Months, Crude Oil Parts Ways With the Stock Market.

The other side is, even if you believe two things—in this case oil and stocks—should be tightly positively correlated, you still have to figure out where one is going to know where the other one is going.

Global Trade—Nearly Back to Pre-Recession Highs

September 17, 2010 Leave a comment

I was thinking back to about this time last year, and recalling how many believed galloping inflation would be overtaking us by now. It hasn’t. Also, about a year ago, many believed—and this is a part of the New Great Depression narrative that today’s on its last legs—that we’d have all sorts of renewed trade wars, leading to the end of this most recent wave of globalization, and thus another reason for persistent economic stagnation. Surely, we didn’t read many who believed global trade would be a major reason for better than expected growth in 2010, as has been the case. From page A1 of the 9/13 Wall Street Journal:

World trade has come roaring back. The total volume of global imports and exports fell 21% between April 2008 and May 2009, the largest decline since the 1930s. By this June, trade was back to within 2% of its old peak. The collapse and rebound in trade played an important role in the global recession and recovery; now it may be the key to how strongly the global economy can grow.

Reform is Tough

September 9, 2010 Leave a comment

As pointed out on 6/30, austerity is hard to do. Folks just don’t like losing benefits (we feel losses more than we feel gains). So, even in the age of ailing/shrinking unions, workers will mount big, passionate opposition to that which the government might taketh away. (Recent polls suggest 70% of the French actually support pension reforms, but those against it are simply shouting louder.) As economic results continue coming in better than previously believed, even public officials themselves are losing their will.

Earlier this week. protests in France against Sarkozy’s pension reform plans grew to between 1-3mn people. President Sarkozy wanted to raise the retirement age in earnest, but had to give back a little ground. Though he did keep intact the two most controversial areas of reform:  raising the retirement age from 60 to 62, and lifting the age at which a person can get a full pension irrespective of social security contributions from 65 to 67.

These small changes are unlikely to fully appease protestors—they’re expected to turn out again on Sept 18th & 19th. Since Sarkozy has no IMF or EU to answer to (like Greece does), I expect he’ll give more ground. He’s getting more unpopular by the day, and he certainly can’t be blind to the anti-incumbent sentiment sweeping the globe right now (his poor partner in crime, Fraulein Merkel!).

In sum, big new fiscal spending globally is mostly being scaled back, but it’s nowhere near strangled. As the global economy continues to move through its recovery phase, that’s a fine enough thing, particularly with bond yields remaining very low.

Dividends Alone Pay as Much as Bonds Right Now

September 7, 2010 Leave a comment

The dividend yield of the Dow Jones Industrial Average is basically the same as the yield on a 10-year Treasury bond. In fact, bond yields have been lower lately. (Both in the 2.5% to 3% territory.)

This is completely nuts and can’t last forever. Now, I’ve never been a believer in seeking after dividends for their own sake—it’s ultimately just one form of investor return. But good golly—when stocks’ dividend yields match long term bonds…not including the expected price return you’d get from, say, earnings (remember those?), it makes the decision between stocks and bonds a hall of fame level no-brainer. (And by the way, earnings are surging way beyond previous expectations so far this year.) Even if bond yields come up from here, the hurdle they have to clear to be competitive with the earnings yield on stocks is way high at the moment.

These numbers are a reflection of pure, non-rational fear, and won’t last forever.

Source: Dow Jones Industrial Averages, Bloomberg

Not Different

September 5, 2010 Leave a comment

From either side of the aisle, from any and everywhere, really, I hear folks say “it’s different this time”. Whether it’s about the economy, the stock market, politics, society at large—“it’s different this time” is sort of the bipartisan, globally unifying cry of the era. One thing I know is it’s not different this time for stocks, and never was. As the graph below shows, one way or another, ultimately, stock prices are determined by corporate earnings. Sometimes prices over and undershoot, but in the end, prices end up about where earnings are. Its so true and basic even the best of experts often talk themselves out of it.

For those who deny it, there’s little refuting the chart below. Even in this current, strange, time stock prices pretty much did what earnings did. True on the way down, true for the recovery. Note the most recent trend: earnings surging with stocks heading the other direction. At Fisher, we call this a fairly typical bull market correction—they don’t last long. The question is: do you believe stocks will decouple from earnings permanently and cause another bear—actually making it different this time—or will prices come back to earnings? In my opinion to be bearish now is clearly, on this basis, the most risky approach.

Fisher Investments S&P500 Analysis

S&P500 Price & Earnings Growth

Chip Sales…Tasty!

September 2, 2010 Leave a comment

Global chip (semiconductor) sales rose 1.2% in July from June—$25.24 billion, and up 37% from a year ago.

This, in the ostensibly “slow” global recovery. Chip sales have been a decent economic indicator in recent years because chips are in so many things now. It’s not just a computer thing—chips are in microwaves and washing machines and cars and, heck, even clothing nowadays.

This is more—and stark—evidence the media and investing public are misinterpreting a slowdown in recovery as a recapitulation of recession. The world economy is vastly better than a year ago, and in most areas things are still growing from one month to the next.

Source: the Semiconductor Industry Association


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