Is it Live or is it Memorex?The commercials ended with the question; “Is it live or is it...
Transcript of Is it Live or is it Memorex?The commercials ended with the question; “Is it live or is it...
A Quarterly Publication June 30, 2020
Capital Investment Services of America, Inc.
111 E. Wisconsin Avenue, Suite 1310 Milwaukee, Wisconsin 53202
(414) 278-7744 (800) 345-6462
[email protected] www.capinv.com
In This Issue . . .
✓ Memorex: couldn’t tell if it was
real or a recording.
✓ Given all the bad news, how can
the recovery in stock prices be for
real?
✓ Stock market looks ahead.
✓ It assesses whether conditions are
likely to get better or worse; not if
things are good or bad.
✓ Market anticipates light ahead at
the end of the economic tunnel. Is
the “light” for real?
✓ Example of adaptation, innovation
and prospects for economic
renewal.
✓ “Progress generally happens too
gradually for people to notice.
Setbacks happen too quickly to
ignore”.
✓ “…a story of massive ignorance
(not stupidity, or anything
intentional), but a lack of correct
knowledge”.
✓ Studies of FUD and Velcro brain.
✓ The room where (innovation)
happens.
Is it Live or is it Memorex?
Back in what may seem like ancient times to some—the early 1980s—
the Memorex Company ran an advertising campaign for its recording
tape. (Memorex? Recording tape? Maybe we are talking about ancient
times!)
The campaign included a series of TV commercials featuring famous
vocalists. As a singer belted out some incredibly high notes, the
commercial would show a wine glass shattering.
The implication was that the high notes shattered the glass. But
viewers couldn’t tell if it was a real (live) voice or artificial (a
recording captured on Memorex tape). The commercials ended with
the question; “Is it live or is it Memorex”?
It strikes us that the stock market is in a Memorex-like situation.
Investment Stewards since 1981
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The “market” just registered one of the largest quarterly advances in U.S. history. This has mystified many
pundits as it occurred in the face of an economy some contend is in “shambles”. And, COVID-19 remains on the
loose.
Is the recent market recovery real…or not?
The stock market is doing its thing Our view is that the stock market is doing what it typically does:
• It looks ahead.
• As it does so, it’s assessing whether things are likely to get better or worse; not whether things are good
or bad.
In last quarter’s Perspective, The Alphabet Debate and Midway (archived at capinv.com), we discussed the stock
market’s often uncanny ability to look ahead through serious gloom by examining World War II events through
the lens of stock markets around the world.
By way of review, the U.S. stock market started to shake free from the Great Depression doldrums and began a
multi-year advance in the spring of 1942. The market’s breakout advance was coincident with the battle of
Midway Islands—a key strategic objective of the Japanese in the South Pacific.
The events at Midway marked the first time the U.S. military demonstrated the ability to checkmate Japanese
naval and air power. In battles leading up to that point, Japan had proved to be the superior military force.
The Japanese stock market peaked around the same time U.S. stocks bottomed. Japanese investors began to sense
the country had awakened the “sleeping giant” and missed their chance to deliver a knockout punch to the U.S.
military.
Chart 1: The stock market usually turns up (and often makes new “highs”) well before economic
recoveries begin.
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Even as three more years of World War II horror lay ahead, investors began to anticipate that the Allied forces
would prevail over the Axis powers of Japan, Mussolini’s Italy and Hitler’s Nazi Germany.
The stock market’s ability to see the light of better times ahead during challenging periods didn’t end with World
War II.
Chart 1 (previous page) focuses on the twelve U.S. recessions and economic recoveries that have occurred in the
post-war period. Notice how the stock market (dark blue line in chart) began to advance well before economic
activity turned up in those prior periods.
That “the market” looks ahead isn’t a big surprise. After all, a stock price reflects the assessment of the future
prospects of an underlying business. And those prospects, in most cases, spans many years into the future.
This doesn’t mean that the next few quarters of business results don’t matter to investors. As we’re presently
witnessing with J.C. Penney, Pier One, Chuck E. Cheese, Chesapeake Energy, and Brooks Brothers to name just
a few of the more familiar, some weak businesses with precarious finances will not survive beyond the next few
quarters.
But for the many, many companies that will survive (and thrive), it’s important to remember that the vast majority
(95%+) of most stocks’ current value rests with their business prospects beyond the next year or so.
The stock market’s recovery suggests that the longer-term prospects for many—though certainly not all—
businesses will not be permanently impaired by the COVID-19 recession.
Real or Memorex?...Is there really light at the end of the economic tunnel? As longer-term Perspective readers know, we believe the U.S. economy’s resiliency is significantly
underestimated. The resiliency comes in large part by the unique willingness and agility of most individuals and
businesses to accept and adapt to change.
Even for an economy that is as resilient as we believe the U.S. is, however, adaption takes time. Immediate
adjustments to an abrupt shut down in significant portions of the economy and population-wide “sheltering in
place” is not possible.
Still, even within the sharp economic contraction that ensued in March and April, and now in the “re-opening” of
the economy, large-scale adaptation and economic renewal was, and is, occurring.
Consider:
• Spending at restaurants and on travel has sharply declined as people cannot venture out in pre-virus
fashion. Meanwhile, sales of boats, RVs, home workout equipment, bicycles, paddleboards, and kayaks
and camping equipment have surged.
• Prefer not to touch cash or checks in the COVID-19 world? Payment networks and the digitization of
commerce are available solutions. (See Chart 2 on the following page).
• Rather not go out to shop? E-commerce provides an “answer”. Chart 3 (also on the following page)
provides some indication of the amazing adaptability of the U.S. economy.
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Chart 2: It’s still early innings in the transition to digital payment methods.
Chart 3: Adaptability…almost 10 years’ worth in 8 weeks!
• Need to work from home? Digitization makes it possible for many. (See Chart 4 on following page)
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Chart 4: Adaptable work force!
As the last three adaptability examples also imply, the COVID-19 recession has accelerated the underlying trend
towards the digitization of the economy that we’ve been discussing the past few years.
The challenges created by COVID-19 appear to be forcing a “rethink” of many business practices and structures.
More minds appear to be opening to new possibilities enabled by digitization and other innovations that are
emerging.
In the race to find COVID-19 vaccines, treatments, and testing, the mindset governing the approval process of
new therapies is being reconsidered. Novel approaches are now being encouraged by agencies long characterized
by extreme risk-aversion.
Digital initiatives like “big data” analysis powered by cloud computing, AI (artificial intelligence) and advances
in genetics and life sciences hold considerable promise to transform (for the better) healthcare R&D and perhaps
the entire healthcare sector. Here again, COVID-19 has likely accelerated trends that were already at work.
Innovation requires experimentation. Experiments in new education approaches forced by the COVID-19
shutdowns, while appearing to be disappointing thus far, may well yet yield results in the form of more effective
education.
More generally, increased diffusion of the new tools of digitization across the economy bodes well for economic
renewal in the form of productivity growth. This is also good news for many of our portfolio companies which
are at the forefront of providing many of the new tools and mission critical technology infrastructure.
Since the mandated shutdowns sent what had been a reasonably healthy economy into recession, it’s not surprising
to see the economy staging a recovery as the shutdowns recede.
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Yes, the recovery will be uneven over the next several months as re-openings trace a step-forward, step-back path
in response to rising virus case counts.
But adaption has occurred here, too, and the country is likely much better prepared to those needing treatment
and protecting those most COVID-19 vulnerable. Even as case counts rise, related incidence of deaths appears
to be ebbing. (see Chart 5).
As a result, another full-scale sheltering lockdown is not likely.
Chart 5: While COVID-19 case counts are rising, the trend in associated death
rates is slowing.
After a near
straight line
advance upwards,
we expect stock
prices to become
more volatile as
setbacks on the
road to recovery
are encountered.
However, we
believe progress
towards economic
recovery and
renewal is
underway and
“real”.
Source: Economist Scott Grannis (scottgrannis.blogspot.com)
Was the economy in a “is it real or Memorex?” situation even before COVID? In the past several years there have been two emerging fields of inquiry that we have been exploring.
One we’ll call human economic progress, and the other, the studies of fear, uncertainty and doubt (FUD). We
believe the intersection of these two fields offers important insights and context for investment decision making.
If some of the material that follows sounds familiar, it’s because our thinking has been influenced by these areas
of inquiry over the past few years.
Here are the most relevant insights.
The history of human economic progress
As Chart 6 on the following page suggests, widespread economic progress has been a relatively recent
phenomenon.
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Chart 6: The Great Escape and Einstein’s 8th wonder of the world in action.
For most of the time
humans have walked the
earth, life was marked by
mass poverty, famine,
pestilence, and short life
spans. Economic life
was mostly a “zero-sum”
affair. The main way
someone accumulated
wealth was through
conquest—taking wealth
away from someone
else.
Parts of the world (U.S.,
UK, much of Europe)
staged the “great
escape”1 from this state
of being roughly 250
years ago.
The causes of this great escape are a complex cocktail of developments and events. But the most important
appears to be cultural evolution that fostered (or at least, tolerated) individual freedoms, innovation and mutually
beneficial trade as the basis for commerce.
The interaction between freedom, innovation and mutually beneficial trade was, and is, a powerful dynamic that
pushes human economic progress ahead.
Freedom allows someone to come up with an innovation that solves some problem for others in a manner that’s
deemed superior to the then-available alternatives. The innovative new product or service is shared with others
on terms that makes both parties to each exchange better off.
The farmer grows our food so that we don’t have to. Freed from this task one can apply their skills in other ways
that others find of value. Almost always, trade exchanges are “win-win” propositions that break the zero-sum
stranglehold we mentioned earlier.
The process repeats over and over in daily life and “works” from a progress perspective much like compound
interest—which Albert Einstein called the eighth great wonder of the world. (In Einstein’s words; “He who
understands compound interest earns it, he who doesn’t pays it.”)
In the short run, the compounding impact is typically so modest it’s nearly imperceptible. Yet, over time, it’s a
very big deal in terms of economic progress and the mass flourishing it triggers.
1 Angus Deaton, The Great Escape: Health, Wealth, and the Origins of Inequality, Princeton University Press, 2013
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It’s both interesting and frustrating that progress is apparently easy to take for granted and may be overlooked
even as it’s compounded over time.
In recent decades for example, the “great escape” went global. Yet many either don’t realize or appreciate the
extent of what’s transpired.
In his book, Factfulness: Ten Reason We're Wrong About the World2, the late Swedish scientist Hans Rosling
noted:
“Over the past decades I have posed hundreds of fact questions about poverty and wealth, population
growth, births, deaths, education, health, gender, violence, energy, and the environment—basic
global patterns and trends—to thousands of people across the world. The tests are not complicated
and there are no trick questions. I am careful only to use facts that are well documented and not
disputed. Yet most people do extremely badly (on the tests).
I have tested audiences from all around the world and from all walks of life: medical students,
teachers, university lecturers, eminent scientists, investment bankers, executives in multinational
companies, journalists, activists, and even senior political decision makers.
These are highly educated people who take an interest in the world. But most of them—a stunning
majority of them—get most of the answers wrong. Some of these groups even score worse than the
general public; some of the most appalling results came from a group of Nobel laureates and
medical researchers. It is not a question of intelligence. Everyone just seems to get the world
devastatingly wrong.
…it is a story of massive ignorance (by which I do not mean stupidity, or anything intentional, but
simply the lack of correct knowledge).
It turns out that the world, for all its imperfections, is in a much better state than we might think.”
(Bolding added for emphasis).
For those interested, the topics covered by Rosling’s tests are captured within the Chart presented in Appendix 1.
The chart also reflects world progress—across multiple dimensions over time.
Rosling’s daughter and son-in-law continue his work and publish at gapminder.org. Similar resources include
ourworldindata.org, humanprogress.org, and rootsofprogress.org.
Studies of FUD (fear, uncertainty and doubt)3
How do so many people, to paraphrase Rosling, get the world and its progress so wrong?
Financial writer Morgan Housel likely provides a key part of the answer with his observation that “progress
generally happens too gradually for people to notice. Setbacks happen too quickly to ignore”.
As noted earlier, for the vast majority of human existence life was characterized by famine, pestilence, short lives
and grinding poverty. With such a thin margin for error in life back then, hyper-focus on potential setbacks was
likely a necessary survival skill.
2 Hans Rosling, Factfulness: Ten Reasons We're Wrong About the World—and Why Things Are Better Than You Think, Flatiron
Books, copywrite 2018 3 See Daniel Gardner, The Science of Fear, Dutton, 2008
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Progress has (thankfully!) delivered a world for many people very different from that which most of our ancestors
had to endure. The studies of fear, however, suggest that our brains remain hotwired for life under those earlier
conditions.
Take eating for example. Fortunately, (in the U.S. at least) famines are not a regular occurrence. For most people,
calories are generally abundant and affordable. Yet the brain still seems programed to drive us to consume excess
calories as if another famine is just ahead.4
Researchers in this field elaborate5:
(There is a) universal tendency for negative events and emotions to affect us more strongly than
positive ones. We’re devastated by a word of criticism but unmoved by a shower of praise. We see
the hostile face in the crowd and miss all the friendly smiles. (The result is) the existence of a
negativity effect. It sounds depressing—and it often is—but it doesn’t have to be the end of the story.
Bad is stronger, but good can prevail if we know what we’re up against.
Another researcher, Harvard University psychologist Steven Pinker 6, comes to very similar conclusions. Pinker
states that human “cognition” and the nature of the news media interact in ways that often make us think that the
world is much worse than it really is. From our perspective, other key “nuggets” from the studies of fear include:
Velcro brain—our brains are like Teflon when it comes to favorable things (economic progress for example).
But bad things (setbacks along the way) stick like Velcro in our thoughts.
Various studies estimate that bad news in our Velcro brains outweighs good news by a margin of something on
the order of three-to-one. For investors, this translates into a loss being perceived as three times more painful
than a gain of the same magnitude is deemed rewarding.
We would add that it’s also important to note that emotionally charged decisions are typically the investor’s
archenemy.
Media provides lots of fuel for the Velcro brain and negative emotions—most media is competing for viewers.
Bad news and setbacks, especially shocking news, attract viewers’ attention.
The “if it bleeds it leads” characterization of media remains true. 24/7 “news” and social media only seem to
make the media impact even more pronounced.
Personal optimism/social pessimism—most people are generally sanguine about their own situation, but they
are typically negative about life prospects for “other” people—particularly for folks they don’t personally know.
“Turning point-itis”—as generations age, they’re prone to believe the best days for mankind are in the past.
4 Robb Wolf, Wired to Eat, Harmony Books, 2017 5 John Tierney and Roy Baumeister, The Power of Bad, Penguin Press, 2019
6 Steven Pinker, Enlightenment Now: The Case for Reason, Science, Humanism, and Progress, Penguin Random House, 2018
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What can investors learn from the intersection of human progress and the studies of FUD?
Let’s first clarify a few things. We
are not implying that the world is
under some spell of mass hypnosis
resembling Orson Welles’ War of
the Worlds broadcast or the David
Koresh tragedy several years back.
We’re also not saying all is right
with the world. Lots of troubles
exist, always have, always will.
What we are saying is that we
(humans) seem to have a proclivity
to adopt an excessively gloomy
view of things and often seriously
misjudge progress even as it
unfolds before our eyes.
As investors we have to evaluate a
world full of “is it live (as in real)
or Memorex”? situations.
Awareness of the implications of
studies of fear and recognition of
opportunities created by
underappreciated progress are
important tools in the investment
decision making process.
The room where it happens
Our most powerful tool though is having an ear to the ground near “the room where it happens”—to borrow a
lyric from the Hamilton musical.
Where is this proverbial room? It’s at the company level where economic progress typically gets its mojo.
The best business minds in the world are at work trying to figure out how to prosper in the evolving world. For
investors it’s a matter of evaluating lots of “is it real or Memorex?” situations. Some companies will be the “real”
deal and carve out a path that will enable them to prosper. Some will go the way of the Memorex company and
leave the scene. Many others will flounder.
To increase the probability of investment success, we constantly have “our ear to the ground” assessing company
management plans and strategies. Companies that are intensely focused on solving customer problems via
innovative products and services are, in our estimation, where the future rewarding investments will emerge.
What are we currently hearing from our ear-to-ground analysis? Lots of innovation remains in the pipeline.
COVID-19 or not, whoever occupies the White House, the best and most rewarding investments will be those
that figure out a way to grow.
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Appendix 1: Progress—over time!
The World as 100 People over the last two centuries Source: Our World in Data
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Established in 1981, Capital Investment Services of America, Inc. is a Milwaukee, WI-based independent investment
counsel providing custom-tailored portfolio management to individuals, businesses, and charitable institutions.
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For additional information, visit our website at: www.capinv.com
The information contained in this report is based on sources believed to be reliable, but we do not guarantee its accuracy or completeness. The information is published
for informational purposes. This paper is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to
buy or sell any securities or to adopt any investment strategy. The opinions expressed herein may change as subsequent conditions vary.