Capitalogix

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!

Why You Need Patents ...

I shared an article titled “Who’s The Most Innovative?” a few weeks ago.  That post alluded to the power of patents.  Here, we'll discuss the importance and value of intellectual property in more detail.

Historically, profitable companies often built or sold some tangible product. Consequently, the Titans of industry were automobile manufacturers, oil producers, landowners, etc.

However, over the past 20 years, the Titans have changed dramatically. Now, the leaders are in tech, intellectual property, and other intangible assets.

As business becomes more digital, you will see an increasing shift towards creating and protecting intellectual property.

When most people hear that, they probably think about patents.  So, let's start there.

A patent is property ... meaning it is an asset.  Technically, it is a legal right granted by the government to an inventor, giving them the exclusive right to make, use, sell, and import an invention for a limited period (typically 20 years from the filing date) in exchange for public disclosure of the invention. To obtain a patent, an inventor must apply and prove that their invention is new, non-obvious, and useful. In addition, the application process involves disclosing the details of the invention so that others can learn from it.

Patents and trademarks are a great way to build a moat between you and your competitors ... but they’re more than that. They help you create partnerships and an ecosystem. Ecosystems & communities have proven to be the difference between legacy businesses and flash-in-the-pans. It’s the difference between having a product and having a platform.

Patents add dimensionality and revenue streams.

Take Tesla. They’re not just in the business of making cars or pushing the proliferation of electronic vehicles. They’re creating a suite of capabilities that are patentable and licensable. In the future, they can license the self-driving capability (because why would someone build it when they can license it?). They can license the ability to update a car’s operating system over the Internet (or by their Starlink Satellite offering). They can also grow into a clean energy business. I’m sure there are other strategic byproducts I’m missing – but you get the idea.

As they develop these tools and create intellectual property, these same inventions can also become a weighing and measuring tool to find out where people are interested, and identify where people are spending time, money, and energy.  Here is a 60-second video that explains the concept.

 

Patents make the intangible, tangible.

They provide a concrete form to innovative concepts, enabling businesses to protect and capitalize on their intellectual property.

This mindset also creates the infrastructure for change and anticipating future needs, and ensures companies remain adaptable and positioned for long-term sustained growth.

Getting Started

When I help people understand how to move forward with AI, the first thing I ask them is “What’s your why?”. I ask that because as soon as you lose sight of why you built your business in the first place, you’re lost.  

After you understand yourself and your business, you have to understand the industry-wide ecosystems, and where the low-hanging fruit are.

If you know the low-hanging fruit, your problem statement, your value proposition, and your “why” you’re in a great place to move forward.

You can use that understanding to stack some easy wins and create bandwidth for larger endeavors.

The effort-to-impact ratio is a great way to think of how you get started. As you begin thinking about staking ground, you don’t want to do the flashy and cost-intensive stuff first. You want to keep a low profile and start to create walls that will help you in the future.  

You can use trade secrets, instead of patents, when you don't want to disclose what you do and how you do it.  A trade secret is any non-public information that provides a business with a competitive edge and is subject to reasonable steps taken by the business to keep it secret. The protection of trade secrets does not require registration or disclosure to the public. The information remains protected as long as it is kept secret and continues to provide a competitive advantage.

Other common forms of intellectual property are copyrights and trademarks.

You can also use your intellectual property as part of an attraction strategy to find potential partners or collaborators – creating what Dan Sullivan calls the “Freezone Frontier”.

Final Thoughts

In essence, patents are not just legal safeguards—they are strategic instruments that can shape the future trajectory of businesses. By embracing a holistic approach that combines legal protection, market intelligence, and strategic foresight, companies can harness the full potential of patents, unlocking new dimensions of success in an ever-evolving business landscape.

How Long Do You Have Left?

We only have a limited time on this earth - and a lot of it is taken by frivolous activities. 

How much time do you think the average millennial spends on their phones ... or a baby-boomer sits in front of the TV?

The answer is a lot.

via dailyinfographic

Nine years in front of entertainment devices - another 10.5 years spent working.  You get the idea.

If you have goals you want to accomplish, aspirational travel, and lifestyle plans - this really puts the idea of finding and living your passion in perspective. 

Do you have the time to waste it?

VisualCapitalist put together a chart projecting longevity based on 2020 mortality rates.

 

via visualcapitalist
 

I turned 60 this July, so I only have 20 years left, according to this calculator.   I expect more!

There are some interesting statistical facts in this; for example, an average American baby boy can expect to live until 74 ... but if that boy turns 21, his life expectancy jumps to over 75. 

While these numbers seem pretty high, there are two things to consider. First, COVID heavily reduced these numbers because mortality rates went up. That likely won't continue (though it will likely continue to affect your insurance premiums and pension benefits). 

Also, remember that these numbers are based on 2020 averages, which likely differ from you (specifically considering your race, income, location, etc.). These numbers also don't take into account expected medical and technology advances, etc. 

Finally, I think Purpose is one of the most important catalysts of longevity. People often die when they retire ... not because they're done working, but because they're done striving. 

If you're not growing, you're dying!

Dinner With Robert F Kennedy Jr.

I just got back from the Genius Network Annual Event. It was a great event.  Members and guests included Verne Harnish, Dan Sullivan, and Daymond John.

This year, Joe Polish interviewed Robert F. Kennedy Jr. at the conference.  To make it didn't seem like a political event, they didn't tell people he was coming until after the event was sold out. 

Kennedy stayed to have dinner with a few members later that night. At the dinner, he answered questions from the attendees. 

 

 

RFK is an interesting guy ... he's a newly declared Independent who was a lifelong Democrat. Democrats think he's a conservative. Conservatives think he's a liberal.

It is a little confusing.  And most people probably don't know what to think. 

I'll be frank. He did much better than I expected.  He's undoubtedly a politician. Answers were prudent; he gave nuanced opinions to avoid stepping on too many toes. He was clearly knowledgeable about foreign policy and history. He was sharp. And it is easy to argue that he is more coherent than some of our other options. 

I'm still making my own decisions about who I'll vote for in the coming election. But I hope there's a space in modern politics for comment sense and bipartisanship - something I think RFK offers. 

At this point in history, can decent ideas and a centrist approach from an Independent gain any real traction?

I voted for Ross Perot, but if you remember, he got 0 electoral college votes, despite getting approximately 20% of America to vote for him. Could this be another situation like that?

Politics has always been divisive, and the internet and technology have made it more so. On the one hand, it's very hard for a moderate opinion to gain traction. On the other hand, both parties are largely sick of their options. 

Do you think he has a chance?

On a lighter note, the dinner was hosted at Tom Mello's house, who has bought replicas of K.I.T.T., Herbie, and the Delorean from Back To The Future. 

I couldn't help myself. I had to make this video. 

 

Buckle-Up ... Instead of heading Back to the Future, we are headed for an election year.

The Cost Of Thinking Linearly In Today's Age

Humans can’t do a lot of things.

Honestly, the fact that we’re at the top of the food chain is pretty miraculous. 

We’re slow, we’re weak, and we’re famously bad at understanding large numbers and exponential growth. 

Our brains are hardwired to think locally and linearly.

It’s a monumental task for us to fathom exponential growth … let alone its implications. 

Think how many companies have failed due to that inability … RadioShack didn’t foresee a future where shopping was done online.  Kodak didn’t think digital cameras would replace good ol’ film.  Blockbuster dismissed a future where people would want movies in their mailboxes because they were anchored to the belief that “part of the joy is seeing all your options!” They didn’t even make it long enough to see “Netflix and Chill” become a thing. 

 

via Diamandis

Human perception is linear.  Technological growth is exponential.

There are many examples.  Here is one Diamandis calls “The Kodak Moment.”

In 1996, Kodak was at the top of its game, with a market cap of over $28 billion and 140,000 employees.

Few people know that 20 years earlier, in 1976, Kodak had invented the digital camera.  It had the patents and the first-mover advantage.

But that first digital camera was a baby that only its inventor could love and appreciate.

That first camera took .01 megapixel photos, took 23 seconds to record the image to a tape drive, and only shot in black and white.

Not surprisingly, Kodak ignored the technology and its implications.

Fast forward to 2012, when Kodak filed for bankruptcy – disrupted by the very technology that they invented and subsequently ignored.

via Diamandis

Innovation is a reminder that you can’t be medium-obsessed.  Kodak’s goal was to preserve memories.  It wasn’t to sell film.  Blockbuster’s goal wasn’t to get people in their stores; it was to get movies in homes.  

Henry Ford famously said: “If I had asked people what they wanted, they would have said faster horses.” Steve Jobs was famous for spending all his time with customers but never asking them what they wanted.

Two of our greatest innovators realized something that many never do.  Being conscientious of your consumers doesn’t necessarily mean listening to them.  It means thinking about and anticipating their wants and future needs.

Tech and AI are creating tectonic forces throughout industry and the world.  It is time to embrace and leverage what that makes possible.  History has many prior examples of Creative Destruction (and what gets left in the dust).

Opportunity or Chaos …  You get to decide.

Onward!

Investment Themes Since The 1950s

I tend to focus on the themes that are impacting industry and the world ... but when I started this blog back in 2008, I was much more focused on investment themes ... why were markets doing what they were doing, both on the micro and the macro scale? 

Based on data from Morgan Stanley, visualcapitalist just put together a chart that looks at the key investment themes from each decade since 1950. It's a great retrospective. 

via visualcapitalist

In the 1950s, we saw a post-war boom in European stocks, followed by a shift into "blue chip stocks."

When I grew up, my grandparents advocated for blue chip stocks, and they held their investments until the day they died ... 

By the 1990s, when I started paying attention to markets, tech startups were taking over, and stocks weren't primarily held for years and years. Instead, they were getting calculated in weeks and months; people were trying to capitalize on a "quick trend."

Now, a quick trend can last under a day, and the average holding time for a stock (based on trading volume) is calculated in seconds. 

Where will investments go in the '20s? We're currently seeing massive investment in tech, specifically the platforms that enable burgeoning tech, like NVIDIA. We also see a disconnect in U.S. equity markets, with 43% of global investment, but 26% of the world's economic output.

I think that, plus the growth in emerging markets, will result in a massive shift. Time will tell. 

What do you think? 

Riding The Data Wave - Data Is Becoming a New Asset Class

Data is the fastest-growing commodity, and is today’s “wild west” and the battlefield of today’s tech titans.  We talk about AI as this gold rush, but data is the underpinning of it all. 

A staggering 328.77 million terabytes of data are created daily, which means around 120 zettabytes of data will be generated this year. 

Video is still growing rapidly, but so is IoT, with more than 15% annual growth.  There are now almost 20 billion connected devices. 

Alphabet, Amazon, Apple, Facebook, and Microsoft all have unprecedented amounts of data (and power).

Rapid growth means little time to create adequate rules. Everyone’s jumping to own more data than the next and to protect that data from prying eyes.

As a great example of this, I often warn people to keep their intellectual property off of ChatGPT or other hosted language models. 

I also see it trading, but it’s pervasive in every industry and our personal lives as well. 

Collecting basic data and using basic analytics used to be enough ... but not anymore.  The game is changing. 

For example, traders used to focus on price data ... but there has been an influx of firms using alternative data sets and extraordinary hardware and software investments to find an edge.  If you’re using the same data sources as your competitors and competing on the same set of beliefs, it’s hard to find a sustainable edge. 

Understanding the game others are playing (and the rules of that game) is important.  However, that’s only table stakes.

Figuring out where you can find extra insight, or where you can make the invisible visible, creates a moat between you and your competition and lets you play your own game.

Here is a quick high-level video about Data as fuel for your business.  Check it out.

 

 

It is interesting to think about what’s driving the new world (of trading, technology, AI, etc.), which often involves identifying what drove the old world.

History has a way of repeating itself.  Even when it doesn’t repeat itself, it often rhymes.

With that said, the key to unlocking the pathway to the new world often comes from a new or alternative data set that lets you approach the problem, challenge, or opportunity from a different perspective.

Before e-mails, fax machines were amazing.  Before cars, people were happy with horses and buggies.

These comparisons help explain the importance of data in today’s new world economics.

 

gapingvoid

Data as the New Oil

Petroleum has played a pivotal role in human advancement since the Industrial Revolution.  It fueled (and still fuels) our creativity, technology advancements, and a variety of derivative byproducts.  There are direct competitors to fossil fuels that are gaining steam, but I think it’s more interesting to compare petroleum to data due to their parallels in effect on innovation.

Pumping crude oil out of the ground and transforming it into a finished product is not a simple process.  Yet, it is relatively easy for someone to understand the process at a high level.  You have to locate a reservoir, drill, capture the resource, and then refine it to the desired product – heating oil, gasoline, asphalt, plastics, etc. 

The same is true for data.

You've got to figure out what data you might have, how it might be useful, you have to figure out how to refine it, clean it, fix it, curate it, transform it into something useful, and then how to deliver it to the people that need it in their business. And even if you've done this, you then have to make people aware that it's there, that it's changing, or how they might use it. For people who do it well, it's an incredible edge. – Howard Getson

In a sense, data fuels the information economy much like oil fuels the industrial economy.  The amount of power someone has can be correlated to their control of and access to these resources.  Likewise, things that diminish or constrain access or use of these resources can lead to extreme consequences.

Why Data Is Better Than Oil

The analogy works, but it’s just that, an analogy, and the more you analyze it, the more it falls apart.  Unlike the finite resource that is oil, data is all around us and increasing at an exponential rate, so the game is a little different:

• Data is a renewable resource. It’s durable, it’s reusable, and it’s being produced faster than we can process it.
• Because it’s not a scarce resource, there’s no urge to hoard it – you can use it, transform it, and share it knowing that it won’t diminish.
• Data becomes more valuable the more you use it.
• As the world’s oil reserves dwindle, and renewable resources grow in popularity and effectiveness, the relative value of oil drops. It’s unlikely that will happen to data.
• Also, while data transport is important, it’s not expensive the way oil is.  It can be transported and replicated at light speed.

Using alternative data gives traders an advantage, but it doesn’t always have to be confidential or hard-to-find information.  Traders now have access to vast amounts of structured and unstructured data. A significant source that many overlook is the data produced through their own process or the metadata from their own trades or transactions.

In the very near future, I expect these systems to be able to go out and search for different sources of information. It's almost like the algorithm becomes an omnivore. Instead of simply looking at market data or transactional data, or even metadata, it starts to look for connections or feedback loops that are profitable in sources of data that the human would never have thought of. – Howard Getson

In a word of caution, there are two common mistakes people make when making data-driven decisions.  First, people often become slaves to the data, losing focus on the bigger picture. It’s the same mistake people make with AI.  Both are tools, not the end goal.  Second, even the most insightful data can’t predict black swans. It’s important to exercise caution.  Prepare for the unexpected. 

The future of data is bright, but it’s also littered with potential challenges.  Privacy concerns and data misuse are hot-button topics, as are fake news and the ability of systems to generate misleading data.  In addition, as we gain access to more data, our ability to separate signal from noise becomes more important.

I think one of the biggest problems facing our youth - and really all of us - is how much information is thrust at us every waking moment of the day.  No previous generation has had this much access to data.  As a result, many are actually less informed than in the past.  Soundbites become the entire news story, and nuance gets lost in the echo chambers. 

The question becomes, how do you capitalize on data without becoming a victim of it? 

Food for thought!

Here Are Some Links For Your Weekly Reading - October 8th, 2023

Reports of bed bug infestations in Paris are so bad the government is deploying sniffer dogs to inspect trains.

 

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

Lighter Links:

• Why Collaboration With Generative AI is So Tricky—And How to Make It Work. (Fortune)
• AI-Assisted Decision-Making. (Every)
• 10 Questions to See If You Have a Great Idea. (Entrepreneur)
• At What Age Do You Hit the Peak of Your Career? (Economist)
• Rethinking Flow States by Introducing 9 Antecedents. (PsychologyToday)

 

Trading Links:

• Visualizing the Pyramid of Financial Risk. (Advisor)
• The Invisible Hand: AI in Financial Markets and Algorithmic Trading. (Medium)
• India Surpassed China as the World's Most Populous Country this Year. (UnitedNations)
• 10 Fast Food Chains Ranked by Average Sales Per Store in the U.S. (Infographic)
• Even Michael Lewis Can't Make a Hero Out of Sam Bankman-Fried. (NYT)