Capitalogix

Here Are Some Links For Your Weekly Reading - February 18th, 2024

Here are some of the posts that caught my eye recently. Hope you find something interesting.

Lighter Links:

• OpenAI's Product Page for Sora – Their AI Model That Creates Video From Text (with Examples). (OpenAI)
• You Are Not Late to Artificial Intelligence. (TheAlgorithmicBridge)
• ‘Mental Time Travel' Can Help You Make Better Decisions. (LifeHacker)
• ‘The Alternative' is Just the Book Economists Should Read — And Won't. (Washington Post)
• Musk Says Putin Can't Lose in Ukraine, Opposes Further Funding – “Prolonging the War Does Not Help Ukraine.” (Bloomberg)

 

Trading Links:

• OpenAI Staff Granted Permission to Liquidate Shares at Astounding $86 Billion Valuation - Insider Report. (Cryptopolitan)
• What Sam Altman's Chimerical Trillions Say About AI Hype. (Axios)
• The US-China Chip War is Escalating. (Apricitas)
• In Memory of Byron Wien, Here Is a 2024 "Ten Surprises" Tribute. (BlueFoxAdvisors)
• How Big Is the Commercial Real Estate Mess in the U.S.? Expect Losses in the Trillions of Dollars Over Time. (TheInstitutionalRiskAnalyst)

 

An Early Look At The Upcoming Election

You know it's election season when Jon Stewart steps back in to host The Daily Show. 

Unsurprisingly, the antagonism and hatred from both sides of the fence are still in full force - now with extra boosts from fake news and AI's influence. 

Surprisingly (to me), the frontrunners are still Biden and Trump, despite them being 81 and 77, respectively ... or despite Trump's several cases against him and Biden's horrible approval ratings ... or ... (it seems like we could keep finding reasons to be surprised).

Truthfully, I am surprised neither party is running someone "better" in this election. 

It feels like almost everyone I talk with is voting for the "lesser of two evils," even though they know it may not serve the greater good.

Here is a chart showing third-year approval ratings of first-term Presidents since WWII.

 

I thought the last Presidential election was pretty interesting, but this one's shaping up to be even more so. If it were fiction, no one would believe it.

The most popular issue on people's minds is the economy, but we also have controversial issues around trust in the government, immigration, abortion, foreign policy, and even the fate of Democracy in America itself. 

For all the economic woes and complaints, the unemployment rate remains low, GDP growth is strong, and the S&P 500 recently hit record highs. Yet, Americans are still feeling it in their pockets as the price of goods has gone up. 

It is a good reminder that the "facts" are often less important than how it feels. 

It is still early, but what do you think will happen?

How To Make Real-Time Decisions

I recently came across an interesting technique that fighter pilots use to make fast and accurate decisions in high-stakes situations. 

The Air Force calls it an OODA Loop.

It is an iterative feedback model that Colonel John Boyd designed as a foundation for rational thinking in chaotic situations like dogfights.

It stands for Observe, Orient, Decide, Act. 

via Wikipedia

Why do people use decision models?  Obviously, to make better decisions.  But really, they use models to create a process that avoids many of the mistakes or constraints that prevent good decisions.

You make countless decisions every day - and at a certain point, you reach decision fatigue.  It can be harder to make decisions when you are tired, after you've made too many, or when the intensity of the environment distracts or drains you. 

It's one of the reasons I rely on artificial intelligence.  Here are some others. 

• Best practice becomes standard practice. 
• It accounts for signal and noise.
• It attempts to quantify or otherwise make objective assessments, comparisons, and choices. 
• And, it often gives you a better perspective by letting you apply and compare different models or decision techniques to achieve the desired outcome.

Nonetheless, many algorithms are dynamic and adaptive automation of processes or strategies that humans have used successfully before.

So, let's take a closer look at the OODA Loop, which stemmed from analyzing many interactions between and among fighter pilots during battle and training. 

Observe

The first step is to observe the situation to build the most accurate and comprehensive picture possible.  The goal is to take in the whole of the circumstances and environment.  It's not enough to observe and collect information ... you must process the data and create useful meaning. 

It's the same with data collection for an AI system.  Ingesting or collecting data isn't enough.  You have to be able to apply the data for it to become useful. 

Orient

The second step is less intuitive but very important.  When you orient yourself, it becomes easier to recognize strengths, weaknesses, opportunities, and threats to identify how changing the dimensionality or perspective alters the outcome. 

This step reconnects you with reality in the context of your cognitive biases, recent decisions, and more.  For example, have you received new information since starting?

I think of this as carrying a map and pulling out a compass while exploring new lands.  Sometimes, you need to remember where you started, and sometimes, you need to make sure you're going where you think you are. 

Decide

The last two steps provide the foundation for taking action. 

When there are multiple decisions in front of you, observing and orienting help you choose wisely. 

In business and with AI, you can go through these loops multiple times. 

Act 

Finally, remember that the best-made plans mean nothing if you don't act on them. 

Once you've taken action, you can reobserve, reorient, and keep moving forward. 

Conclusion

Like most good mental models, The OODA loop works in many situations and industries.

Speed is often a crucial competitive advantage.  For example, knowing (and taking decisive action) while others are still guessing (and taking tentative action) is something I call time arbitrage. 

Said another way, you make progress faster by walking in the right direction than by running in the wrong direction. 

These processes (and technology) also help us grow more comfortable with uncertainty and uncomfortableness.  Markets are only getting more volatile.  Uncertainty is increasing.  But, when you have the ability to adapt and respond, you can survive and thrive in any climate. 

Ranking The Most Popular AI Tools

Last week, I shared some of the tools I've been using recently to help run my business and life. 

As we all know, several AI tools are taking the world by storm - notably ChatGPT, but others as well. 

It only took ChatGPT 5 days to reach a million users. But the whole AI tools market is growing at a surprising rate.

VisualCapitalist put together a nice infographic on the most popular AI tools of 2023. 

via VisualCapitalist.

I am familiar with some of the apps mentioned (such as Quillbot, Character.ai, or Hugging Face), but I don't use them. On the other hand, I had no prior knowledge of others (such as NovelAI, Janitor AI, and Civitai).  

It's remarkable how much of the market ChatGPT currently controls on its own. In 2023, it is estimated that ChatGPT attracted 14.6 billion visitors, or more than 60% of all AI tool visits.

With that said, it's a marathon, not a sprint. The "feel" of this AI market reminds me of the dot-com bubble times of the late 90s and early 2000s. Many products took the world by storm only to be overthrown by a more robust competitor. For example, consider how few early web browsers or search engines still exist. I suspect that will be true of many early leaders here, too.

It isn't sexy, but it is a safe bet that Google's Bard and Microsoft's Copilot will continue to grow because of investment, acquisition, and distribution.

Remember, new technologies lead to new products and new platforms ... and the current crop of these AI tools are still only at the beginning of their cycles. I anticipate that many innovative frontstage products like ChatGPT will gain greater importance and profitability (albeit with less prominence) as they move backstage to become the backbone or plumbing infrastructure of various other products and services.

The development of new technologies brings about the emergence of new products and platforms. 

AI capabilities and adoption are growing exponentially. It will be interesting to see what else stays on the list three years from now. 

Posts like these are helpful reminders to consider technology adoption and hype cycles.

It's only the beginning ... Onwards!

Predictions for 2024

At the beginning of 2022, I shared VisualCapitalist's predictions for the year, and then at the end of the year, we checked to see how well they did. 

Since they posted a 2024 version, I figured, why not do it again? 

via VisualCapitalist.

You can find forecasts anywhere ... but since they're basically guesswork and I don't know what data they are using or excluding, I don't spend much time on them.

That said, I found this infographic easy to look at and think about. So, it's as good a place to start as any. Also, VC draws from a database of 700 expert forecasts to make this chart. 

Some are pretty easy to predict - like GenAI's shift to text-to-video. Or, an increase in lawsuits and regulations around AI. Others are questionable. In the past few months, we've seen TikTok investing heavily in the growth of its e-commerce business. Insiders have stated they believe they're trying to compete with Amazon. We'll see how that goes?

On a positive note, it seems like most are predicting positive effects on the market & economy, including a decrease in inflation and interest rates, bonds on the way back, and record highs in the S&P 500.

I'd love to hear your predictions. What do you think?

A Look At Jim Simons & Renaissance Technologies

Jim Simons is a mathematician and cryptographer who realized that the complex math he used to break codes could help explain financial patterns – and he made billions with those ideas in his notoriously secretive hedge fund firm, Renaissance Technologies. 

Though he stepped down in 2021, I still think his legacy is fascinating, not just for its impacts on the Hedge Fund industry - but on trading as a whole. 

He is famous not only for the duration of his success and the size of his results … but also for the way he made his money (with much lower volatility and risk than his peers and competitors). 

His background is impressive.  Simons taught at Harvard and MIT and worked with the NSA.  Here is a video where he shares some thoughts in a 2015 TED talk interview.  It's worth a watch. 

TED via YouTube

Despite advanced math still being a mystery to many,  we rely on it more than ever as the foundation of many exponential technologies.

The Heart of AI is Still in Humans

Simons built a team of mathematicians whose motivation was doing exciting mathematics and science (rather than hired guns who could be lured away by money or pure trading quants, biased by the industry).

This hits on something important. 

Humans are still important ... and companies that pursue exponential thinking and exponential technologies still have to champion integrity, culture, and purpose.

Better Math is a Competitive Advantage - So is More and Better Data

We stayed ahead of the pack by finding other approaches and shorter-term approaches to some extent … but the real thing was to gather a tremendous amount of data

– Jim Simons

On top of his intelligent hiring and novel approach to trading, Jim Simons recognized that an impressive data pipeline - and the technological infrastructure to digest and analyze that data was a moat to competitors. 

It is hard to have an edge if you use the same process and the same data as your competitors.

As the flywheels of commerce spin faster, edges will emerge and decay faster.  Finding a solution is only a step in an ongoing process.  

Robust, reliable, and repeatable innovation at scale is a meaningful competitive advantage.  That implies that idea factories will become as important (if not more so) than factories that produce material products.  Likewise, innovation funnels will become more important than sales funnels. 

The world changes at the speed of thought ... and as technology continues to improve ... even faster.

Onwards!

2023 In Review

Last week, we asked how markets did in 2023.  This week, I want to highlight some of the significant events that occurred in 2023.   

Here is a Visual Capitalist infographic to help.

2023 was defined by two major themes, the first being geopolitical strife, and the second being the proliferation of artificial intelligence. 

What geopolitical strife, you ask?  Seemingly everywhere you looked (from China and Taiwan to Russia and Ukraine, the Middle East, or even the happenings in  Britain and the U.S.) ... This was an interesting year. 

Of course, there were other types of significant events, too, like the collapse of several Silicon Valley/Crypto banks. 

Many of the trends we've seen in 2023 will have aftershocks in 2024.  Still, the only thing constant is change ... and it will be interesting to see what changes.  I think we've seen increased caution as a result of the last few years, but I think people are now getting used to the new normal. 

Do you expect 2024 to be better?

Time will tell.

Don't forget the Trump trials and that it is an election year ... or that crypto is making a comeback – and AI will only accelerate.

We live in interesting times!

How'd Markets Do In 2023?

The Market is not the Economy.  I know it, but it feels like it to many people ... especially in an election year.

I still think about the often-quoted quip “It’s the economy, stupid” - coined by James Carville, a strategist in Bill Clinton’s successful 1992 U.S. presidential election against incumbent George H. W. Bush.

2022 was the worst year for the U.S. stock market since the 2008 financial crisis.

2023 was much better, but much of the gains came in concentrated sectors.  

To help you get a sense of 2023 returns, VisualCapitalist put together a few helpful infographics.

First, the S&P had a stellar year, with the S&P 500 up 20.4% and the tech-heavy Nasdaq up almost 40%. 

 

via Visualcapitalist

Overall, markets improved, which is unsurprising after the year we had in 2022.  With Energy seeing such a massive boom last year, it recessed a little, but real estate and technology both saw strong gains. 

Here is a more global look at return by asset class.

via Visualcapitalist

Japan saw significant growth, partly driven by China’s Real Estate issues. 

Oil, commodities, and Chinese equities all lost, but that loss in oil and commodities could be driven by China’s woes. 

In 2022, I said it was unlikely that the trends would continue into 2023, which wasn’t much of a prediction ...

On one level, I try not to think about or predict markets, because I know better.  On the other hand, it is an election year, and my opinion matters as a proxy for what people like me think or feel in an election year.  So, with that in mind, I predict that we see a brief market correction blamed on various geopolitical instabilities and partisan weaknesses, followed by a long and steady push higher as we approach the November elections.

What do you expect for 2024?

Do you think the continued investment into generative AI will impact these trends?

The World's Top 25 Defense Companies

What's happening in the Middle East with the Israel-Hamas war is incredibly complicated and polarizing.  On top of the long history, partisan interpretations, chronic conflict, and acute suffering, you're seeing propaganda being used at a scale beyond what we've seen before. 

Technology is a big driver of misinformation - and what is happening now provides an early warning of what's to come in future wars and political contests. 

While the topic of Israel and Hamas is beyond the purview of this blog/newsletter - the impact of war on markets is not.

My heart is with all impacted, and I'm never rooting for war or the death of innocent civilians. 

With that said, war seems to be a fact of life.

The most powerful countries in the world spend billions of dollars on defense a year. 

In light of this, VisualCapitalist put together a chart identifying the top 25 defense companies in the world.  Many of these have seen massive spikes in price in the past few months.  I was surprised by how many of the companies I didn't recognize.

 via VisualCapitalist

The U.S. unsurprisingly tops the list, with Lockheed and RTX (formerly Raytheon) taking the top two spots. 

While we don't usually think of some of these companies as defense contractors, Airbus produces multiple drones and transports, Rolls Royce is a supplier of aircraft and naval engines, and Honeywell is actually involved not just in aerospace - but actual space. 

Understanding where and how companies generate revenue (as well as comprehending the relevant competitive landscapes and cooperative ecosystems) are crucial activities regardless of investment strategy.

I believe it's easier to predict human nature than it is to predict technology.  There is a reason that new technology often flows into porn, gambling, and military earlier than other areas ... the reason is that it's so easy to monetize there. We know opportunity often rises from pain and conflict - so it's still valuable to understand these concepts and figures. 

Hope that helps. 

Entrepreneurship Over The Last 30 Years

I've been an entrepreneur ever since I can remember.  I sold tadpoles and frogs in elementary school, colored sand terrariums in middle school, stereos and sound systems in high school and college, and I started a database development company in business school. 

But it wasn't until the early 90s that I made being an entrepreneur my career.

I quickly realized I needed peer groups and advisors to help take my businesses to the next level. 

Verne Harnish was one of the first people I found.  I joined the Young Entrepreneur's Organization (but so many of us have lost our "Y" that it's now just called the Entrepreneurs' Organization.) Among many entrepreneurial endeavors, Verne founded EO, Gazelles (a global executive education and coaching company), and Birthing of Giants (now called the Entrepreneurial Masters Program at MIT).  

I was recently at a party with him in Arizona.  While there, I asked him, "What's changed about entrepreneurship over the last 30 years?".  Here is a short video with his response. 

 

I was happy to hear that the answer was "Nothing".  While the hot industries, technologies, and players have changed, many of the winning principles are timeless. 

This is a helpful reminder that, even when innovating, we should focus on what doesn't change - rather than what does. 

Verne has lots of insights.  I recommend you check out his books - Scaling Up,  Mastering The Rockefeller Habits, and The Greatest Business Decisions of All Time.

He also offers some great one-page tools that you can download here.

Good Stuff ... Hope it Helps!