This Is the Amazing Power of Human Ingenuity in Investing
You can't stop human creativity
As you can see in the image above, both the S&P 500 and the US bond market delivered impressive Q3 results.
Bond market returns were aided by a 0.5% rate cut in September while companies continued to deliver strong earnings, revenue growth, and cheered the idea of lower rates.
This confirms my long-held belief that human ingenuity relentlessly develops. The best performing stocks year-to-date are benefitting from all the excitement around artificial intelligence. That is, software that can continually learn and do tasks just like a human brain.
Fifty years ago (1974), the top performing stocks in the S&P 500 were Matson, followed by Boeing. Matson is an ocean shipping company and Boeing, the airplane-marker, today can’t seem to do anything right.
It’s amazing to think the most exciting companies of yesterday were involved in transporting people and things from one place to another, while the most exciting companies of today are trying to figure out how cars, ships and planes can move goods and people autonomously. That’s quite the leap.
I should add, the S&P 500 closed at 68.56 at the end of 1974 (after being down nearly 30 percent that year). As of writing, the S&P 500 is near 5,853 (~85x higher fifty years later, not including dividends). That, my friends, demonstrates the power of human ingenuity.
Do not confuse the moral of the story. Artificial intelligence (AI) today is not more valuable, or better, than the yesteryears of transportation. In 1974, Matson and Boeing were the companies that were changing the world. They were the innovators. They allowed the world to function and connect in a way it hadn’t been able to do so before.
AI will follow a similar path. It will allow our civilization to experience and do things that are fresh and stimulating. And, it will have its successes and perils along the way, just like any other new technology.
AI couldn’t exist fifty years ago because the technological infrastructure was not available. We can’t know what companies will lead fifty years from now because they have not even been conceived. If we could teleport fifty years into the future, we’d all be shocked at what new innovations have occurred.
The innovators of the past aren’t the innovators of today, but innovators are innovators
As an investor, you don’t need to pick the individual winners and losers to win. Today’s top performer, Nvidia, didn’t exist in 1974 (and wouldn’t until 1993). Fifty years ago, you had 0% exposure to today’s top performing company.
Yet, if you simply owned the largest 500 companies in America in any year, you would have benefitted from Matson, Boeing, and Nvidia’s strong years.
Today, Matson is no longer in the S&P 500 index and Boeing is about the 110th weighting. Just as the world consistently changes, leadership changes. Yet, as a passive investor, all you had to do was invest, sit back, let the world change, and you’d be 85 times wealthier for it.
The takeaway here is it doesn’t matter who the most exciting companies of today are. Fifty years from now, the top companies will look, behave, and act completely differently.
Although I realize it is not a perfect system, capitalism allows for human ingenuity to flourish. For my clients, the stock market is not an arbitrary gambling hall. Instead, it’s a place where we can put our dollars, and faith, in the imagination of humankind.
The creativity of humans is a force that does not stop. And that is worth investing in.
Nobody knows anything
To be a prudent investor, you must let go of the idea you can foretell the future. Don’t feel bad about it, no one else can either. Not even Warren Buffett.
Although many clients have worked with me for a long time and know my investment philosophies, I am occasionally asked to make predictions about the future. While I do attempt to make well-informed investment decisions given the data in front of me today, I don’t know the future.
One of my favorite refrains from advisor consultant Nick Murray is, “There are no guarantees in investing, just like there are no guarantees in life. There is no guarantee that the sun will rise tomorrow. Similarly, there is no guarantee you will wake to see it.”
Long-time economic pundit, Barry Ritholtz, shares the same view. For years he has written a series of articles highlighting the unknowable future and our enduring attempts to know it. Whilst, ironically, capturing the humorous essence of how much we can be wrong.
His latest article highlights The Beetles. The Fab Four is considered by many to be the most influential and popular rock band of all time. Yet, when they first came to the states, all the “expert” music critics of the time could write about was how awful they were.
The Los Angeles Times opined, “Not even their mothers would claim that they sing well.”
And maybe they didn’t sing particularly well. That, of course, is subjective. After all, you don't need to have a stellar voice for people to enjoy your music.
What those experts at the time failed to grasp was the passion, the beauty, and the energy the Fab Four brought to their music. Those qualities connected with a generation of people in the UK, later in the US, and eventually all around the world.
The most popular and influential rock band of all time. Yet, the expert music critics were convinced The Beetles were a flop. Those expert takes did not age well.
In a world full of opinions, even the so-called experts can lack perspective and become narrow-minded. Even they can’t know the future (regardless of their enthusiasm and confidence!).
Therefore, the next time an “expert” tells you they know the economy is going to collapse because of ABC and XYZ, remember these three insightful words, nobody knows anything.
The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. Indexes are unmanaged and cannot be invested in directly.