Snippet Blog

1. 75% of containers that come to the US from overseas return to their origin empty. [qz]
2. China is disclosing 90% less economic statistics than it did in 2010. [JP Morgan]
3. Blue zones, “regions of the globe that supposedly contain lots and lots of extremely old people“, have nothing to teach us about extending human life. [Cremieux Recueil]
4. In an unprecedented move, the Tokyo Stock Exchange sent letters to any company trading below book value to ask for a concrete plan to reverse this valuation. [Nikkei]
5. Roger Federer said “In the 1526 singles matches I played in my career, I won almost 80% of those matches. Now, I have a question for you. What percentage of points do you think I won in those matches? Only 54%.” [fs]
6. In the UK, more than half of crimes are estimated to be caused by alcohol consumption. [OurWorldinData]
7. At the end of the 19th century, Japan transformed from a poor economy to a manufacturing export powerhouse in just fifteen years. How? A massive effort to translate and codify technical information in the Japanese language. The only non-Western country to do so at such scale. [NBER]
8. The best car salesman in history offers simple advice “People want a fair deal from someone they like.” When questioned about his actions to get people to like him, he simply says, “I tell them that I like them.”. [fs]
9. If you had 100 bottles of wine and one was poisoned you could figure out which one with just seven tests. [Understanding the unseen]
10. Electric vehicles are now selling more slowly than gas-powered cars. [Edmunds]
11. Encouragingly for gas-powered cars, the 2022 model year saw the largest single-year improvement in CO2 emission rates and fuel economy in nine years. All while horsepower keeps going up. [EPA]
12. You can now circle something in a screenshot and search for it on Google. [Google Circle]
13. Stock markets are an amazing place – since 1980 intra-year the market fell 14.2% on average, but recovered to end positive 33 out of those 44 years. [JP Morgan]
14. More countries have produced a nuclear bomb than mass-produced a jet engine. [Construction Physics]
15. In his 2020 annual letter Larry Fink, the CEO of the largest asset manager in the world, mentioned the the words “sustainability” and “climate” nearly 50 times. In 2023 it was less than 10. [Nat Bullard]
16. Transsion Holdings is the world’s fifth-largest mobile phone maker, commanding 40% of Africa’s market. [Nikkei]
17. The cost of desalination has fallen sharply. [LGIM]
18. China controls 40% of the world’s commercial shipbuilding capacity. The US has just 0.5%. [CIMSEC]
19. Almost 60% of the volume of options traded are those with one day left to expiry. [BIS]
20. 1,250 artists in 2023 earned more than $1m from Spotify, triple the level in 2017. [Spotify]
21. Where you live—what city, what country—has more impact on your well-being than any other factor. Where you live is one of the few things in your life you can choose and change. [KK]
22. “Addiction kills more Americans than cancer or heart disease but only 4% of people with substance use disorders currently receive medication.“ [Recursive Adaptation]
23. More people use Marijuana daily or nearly daily than those who drink alcohol. [Axios]
24. “I know that the legal profession does a great job of identifying competence and rewarding it financially. Cheap lawyers are expensive.“ [Sasha]
25. Owning a major US sports team in the NBA, NFL, MLB, and NHL has handily outperformed the S&P 500. [JPAM]
26. We may have just discovered a word processor for DNA, whereas before we had newspaper clippings and scissors. [Arc Institute]
27. 87% of companies with revenues above $100m are private. [CAIA]
28. Shipping goods with a value less than $800 in the US (150 EUR in Europe) is import duty-free – something Chinese firms like Temu and Shein have been taking advantage of, accounting for an estimated 30% of such “de-minimis” shipments last year. [Reuters]
29. PVC pipe markers managed to collude on fixing prices via an industry newsletter. [FTC]
30. Response rates of major economic surveys are falling making economic data hard to trust. [Apollo]
31. The S&P 500 index is meant to represent 500 companies. It has become so concentrated due to the rise of Mag 7 stocks that its effective diversification is less than 60 stocks. [GMO]
32. “The risk of a fatality from commercial air travel was 1 per every 13.7 million passenger boardings globally in the 2018-2022 period — a significant improvement from 1 per 7.9 million boardings in 2008-2017 and a far cry from the 1 per every 350,000 boardings that occurred in 1968-1977, the study finds.“ [MIT]
33. Compliance officer is one of the fastest growing professions in the US, along with manicurist and HR manager. [Net Interest]
34. Organic food is neither healthier nor better for the environment, it also uses pesticides. [Scientific American]
35. 26 million Americans are still uninsured, this is down from 46.5 million in 2010 all thanks to The Affordable Care Act. [EconoFact]
36. In the UK online is now on par with TV in terms of how people consume news. [Ofcom]
37. Newspapers just don’t endorse presidential candidates anymore. [Axios]
38. 29% of all workers in agriculture and 25% in construction are immigrants.
    [Pew]
39. Drug overdose deaths have been falling over for the last 18 months. [Kevin Drum]
40. Just 3% of companies that grew sales 20%+ are doing so 10 years later. [Goldman Sachs]
41. The vast majority of Y Combinator startups today are focused on AI. [JP Morgan]
42. “A 2024 IQVIA report shows that the share of clinical trials launched by Chinese-headquartered biopharmaceutical companies rose from 3 percent in 2013 to 28 percent in 2023, suggesting a growing involvement of Chinese companies in early-phase drug development.“ [IQVIA]
43. The CTA industry appears to be in terminal decline. [CAIA]
44. The equity base of US markets is shrinking – since 1986 just $2.6 trillion worth of new and follow-on equity was issued in the US market against $21 trillion of demand (from buybacks, M&A, and retail flow). [Fidelity]
45. The power efficiency of datacenters has flatlined even before AI. [Nat Bullard]
46. “People whose surnames start with U, V, W, X, Y, or Z tend to get grades 0.6% lower than people with A-to-E surnames. Modern learning management systems sort papers alphabetically before they’re marked, so those at the bottom are always seen last, by tired, grumpy markers. A few teachers flip the default setting and mark Z to A, and their results are reversed.” [Tom Whitwell]
47. Only 7% of people made it through Nobel Prize economist Daniel Khaneman’s “Thinking Fast and Slow”. [Idea Farm]
48. The Chernobyl disaster may have killed 60 people and poisoned 60,000 but the abandonment of nuclear power that followed was likely responsible for 4 million deaths from air pollution as more coal was used for base power [Klementoninvesting]
49. Due to AI and other drivers of demand, The US could face up to a 40 GW electricity supply gap by 2030, equivalent to 40 nuclear power plants. [TemaETFs]
50. “It’s necessary to be slightly underemployed if you are to do something significant.“ [Slate Star Codex]
51. The overturning of the Chevron deference is perhaps one of the most important Supreme Court decisions with far-reaching ramifications for how the US writes, interprets, and implements administrative laws. [Supreme Court]
52. Since 2010, the UK has cut every public sector department expenditure in real per capita terms apart from health. It has moved the country to the bottom of the G7 in terms of spending and taxation. [Mainlymacro]

As is now a tradition here are 52 things I learned from publishing 320 snippets this year.

1. “Utilizing the state-of-art deep learning technique to quantify facial attractiveness, we find that funds with facial unattractive managers outperform funds with attractive managers by over 2% per annum“. [SSRN]
2. Banning sulfur from ship emissions has had the unintended consequence of heating up oceans along shipping lanes. [Leon Simons]
3. The famous business model – razor and razor blade – was never actually employed by Gilette. [SSRN]
4. 43% of Chinese residential homes were built after 2010. “If you put this in relation to total population it implies that in a single generation, China has built enough homes to house a billion people.” [Adam Tooze]
5. “Since 1970, the team reported in Science in 2019, the number of birds in North America has declined by nearly 3 billion: a 29 percent loss of abundance.“ [ARS Technica]
6. One institution owns 1/6 of all the land on the surface of the earth. [Madison Trust]
7. It takes 200m liters of water to move a ship through the Panama Canal, pumped from the Gatun lake where the water level hit the lowest in decades. [Tema ETFs]
8. Despite being produced in a matter of hours, it took days or even weeks for paint to dry on the Model T. [Material World]
9. Dark chocolate is worse in terms of greenhouse gas emissions than lamb. [Nat Bullard]
10. Tesla has the world’s fourth-largest cluster of Nvidia chips for AI. [State of AI Report]
11. “The world is growing more equal than it has been for over 100 years.“ [Foreign Affairs]
12. “37 percent of the world’s population, 2.9 billion people, have never used the Internet.“ [Tom Whitwell]
13. After the 2011 devastating flooding, Copenhagen re-engineered itself as a “Sponge city”. [Spiegel]
14. “For the first time, China has overtaken the United States as the number one ranked country or territory for contributions to research articles published in the Nature Index group of high-quality natural-science journals.” [Nature]
15. You can track the 100 most visited pages on English Wikipedia daily. [Hatnote]
16. The inventor of PowerPoint ensured his team’s office housed a museum-worthy collection of modern art. [MIT]
17. Target think they will lose $500m of profit from theft in 2023, known in retail parlance as “shrinkage”. [MarketWatch]
18. On-demand audio listening time (think podcasts) crossed linear audio listening (think radio) for the first time in 2023. [Snippet Finance]
19. Mitochondria, the power stations of our cells, have their own DNA but, unlike nuclear DNA, it is only inherited from our mothers. Male mitochondrial DNA is a dead end. [In our time]
20. Insurance coverage issues are starting to hurt home sales in Florida and California. [John Burns]
21. If you are old, you are more likely to vote Conservative in the UK. However, if you have a struggling younger relative this flips to Labour. [FT]
22. “Engineers at Tesla Inc. have developed a new process that they claim will reduce EV production costs by 50 percent, while reducing factory space by 40 percent.“ [ASSEMBLY]
23. Canadian population growth is booming. [Noahpinion]
24. Deepmind may have cracked a better sorting algorithm – that’s a huge deal for all kinds of applications. [Alpha Dev]
25. “In 2023, for the first time, investment in solar energy is expected to beat out investment in oil production. It’s a stark difference from what the picture looked like a decade ago, when oil spending outpaced solar spending by nearly six to one.” [MIT Technology Review]
26. Tokyo stock exchange has written to any company trading below book value, asking them for concrete plans to reverse this valuation discount. [Schroders]
27. Biotech research is getting crowded around specific biological targets. In the early 2000s only three drugs were investigated per target, today that number is seven. [Nature Reviews]
28. Nearly one in ten people have some form of autoimmune disease – far more than ever previously thought. These diseases also tend to cluster, a person with one is more likely to have another, more than ever previously thought. [University of Glasgow]
29. It took ChatGPT five days to reach one million users, something Instagram only achieved in 2.5 months and Netflix in three and a half years. [Snippet Finance]
30. Fab 18, one of TSMC’s 13 foundries, carves and etches a quintillion transistors – “more objects in a year than have ever been produced in all the other factories in all the other industries in the history of the world“. [Wired]
31. China is set to overtake Germany and Japan as the world’s biggest exporter of cars, a feat achieved in just the last three years. [Gavekal]
32. By 2050 the number of people of working age living in the US, Europe, China, and Japan will be 1.2 billion, which is down from 1.47 billion living there today – an 18% decline in the four largest economic regions. [EPB Research]
33. A commercial airplane can land using a swoop landing, which is much better than the current standard stair descent. Many US airports are now adopting this approach. [Scientific American]
34. The most successful film of all time by return on investment was “ET”. The other top films on this measure are equally surprising. [Info is Beautiful].
35. China wants to launch 13,000 low-earth orbit satellites. At the start of this year, there were only 4,500 there already (mostly Starlink). [Rest of World]
36. For the first time ever, more fish are farmed today than caught in the wild. [FAO]
37. 10% of US motorists use more gasoline than the bottom 60% put together. [IEEE Spectrum]
38. S&P 500 is 70% less labour-intensive than it was in the 1980s in terms of the number of employees it takes to produce $1m of revenue. [BAML]
39. Challenger banks deploy app updates 4.6 times faster than incumbent banks. [Built for Mars]
40. The output efficiency of electricity rose from 2% in 1900 to 15% in 1960 and has been stuck there ever since, despite power plants getting a lot more efficient. [Energy]
41. Greece is one of the fastest-growing economies in the world. Some even say it is booming. [FT]
42. Approval of labour unions has been on the rise since 2008 but union membership has continued to slide. [Bernstein]
43. 83% of US adults have an unfavourable opinion of China. [Pew]
44. The IRS makes on average 2x return on auditing people’s tax returns, which can be as high as 6x for the very wealthy. [Washington Post]
45. The average size of a house in the US, after a brief blip during the pandemic, continues to decline. [Eyeonhousing]
46. An AI server uses eight times more working memory (DRAM) and three times more storage than a classic server. [Yuri]
47. “A leak from a Chinese social-media site last year revealed that it blocks no fewer than five hundred and sixty-four nicknames for him [Xi Jinping], including Caesar, the Last Emperor, and twenty-one variations of Winnie-the-Pooh.” [New Yorker]
48. Thanks to digital payments, India hit its 80% financial inclusion goal 41 years early. [GPFI]
49. CMS requires that any payment over $10 by a drug or medical device company to any medical professional in the US be disclosed on this website. You can even look up your doctor. [CMS]
50. Trial documents revealed the keywords that make Google the most money on the week of 22nd September 2018. They are predictably boring – “iphone 8”, “iphone 8 plus”, “auto insurance”, “car insurance”, and “cheap flights”. [DOJ Trial Documents]
51. Ultracrepidarian means “expressing opinions on matters outside the scope of one’s knowledge or expertise”. [Dictionary]
52. A startup in Silicon Valley is working on a cure for tooth decay, by infecting one’s mouth with a genetically modified bacterium that outcompetes bacteria that cause cavities. [Astral Codex Ten]

This year I built a game. I also published nearly 420 Snippets. Here are 52 snippets I learned from the past year (a homage as always to Tom Whitwell):

1. On Twitter, the most popular three words in an article headline, based on an analysis of 100 million articles, are “the future of” followed closely by “we need to”. [BuzzSumo]
2. Cobblestone streets in Copenhagen haven’t been resurfaced in 500 years. That’s sustainable infrastructure. [WrathOfGnon’s Newsletter]
3. From only being founded in 1949 to having no AI publication until 1980, the Chinese Academy of Sciences now firmly holds the top spot in quality AI research. [State of AI Report, 2021]
4. In 1840, American George Washington Whistler, father to the famous painter, visited Russia and recommended a wider gauge for their railroads than the rest of Europe. This has enormous ramifications as today “no other European nation uses railroads to the extent that the Russian army does“. [War on The Rocks]
5. From a design concept to a 95% complete prototype in just 2 years, Starship could be a game changer for space cargo – “intended to reach numbers as low as $1m/T and 1000 T/year for cargo soft landed on the Moon. Apollo achieved about $2b/T and 2 T/year for cargo soft landed on the Moon.“ [Casey Handmer’s Blog]
6. UPS, in order not to upstage their customers, decided on using the subtle Pullman brown, the colour used on railroad cars to minimise signs of dust and dirt. [American Business History]
7. In the early days of his fund, Third Point, Daniel Loeb used to post on forums as “Mr. Pink”. [Cloud Valley]
8. As of 2021 “over 80% of global CO2 emissions are “pledged” to be eliminated if we include what is currently in policy documents.” [IEA Report]
9. Despite Nike pulling all products from Amazon, its search rank on Amazon’s webpage search hasn’t been affected. [Market Places Year in Review 2021]
10. Michael Lewis took a ten-year break after his hit book (Liar’s Poker) before he wrote his next one. [Collab Fund]
11. One of John Foley, Peleton founder’s, “sales techniques was to have customers test out the bike; he’d give them headphones and turn up the volume so when they talked to him about how much they liked the product they’d end up shouting an endorsement to passers-by.“ [Snippet Finance]
12. “Tailpipes are now so clean for pollutants that, if you were starting out afresh, you wouldn’t even bother regulating them.” Not so for tyres. [The Guardian]
13. In 1984, The energy sector made 27% of all S&P 500 earnings, today that number is 1%. [Goldman Sachs]
14. “One Kuwaiti diplomat managed to accumulate two unpaid parking fines every working day for a year” when working at the UN in NYC. There is a correlation between parking violations in NYC by diplomats and corruption in their home countries. [Tim Harford]
15. Xi Jinping surpassed Mao Zedong in the number of times his name is mentioned on the front page headlines of the People’s Daily. [Dailyshot]
16. You can now track what suppliers or manufacturers a company or product uses, based on bill of landings data for all US imports. [ImportYeti]
17. 30 years ago, 65% of all funds in the US were managed by a single fund manager rather than a team, today that number is down to just 20%. [bpsandpieces]
18. “Imagine it’s 10:00 AM on a small pond with a single lily pad. If the number of lily pads on the pond doubles every minute, and the entire pond is full of lily pads by 11:00 AM, at what time is the pond half full of lily pads?“ Answer in the link. [Of Dollars and Data]
19. Limb extension surgery (it’s a thing) is one of the few cosmetic surgeries that has a documented financial benefit – every inch of height is equal to $800 more in annual earnings for men. [Glimpse]
20. “People in some Greek regions work up to 12 hours longer than people in some regions of the Netherlands.“ [EU Data Journalism Network]
21. Successful founder VCs have investment success rates that are 6.5% higher than professional VCs. [NBER]
22. “On average people thought that Muslims made up 27% of Americans when the true proportion is 1% or that gays and lesbians made up 30%, when the true number is 3%.” [YouGov]
23. Britons now pay almost as much out of pocket for healthcare as Americans. [FT].
24. In 1967, 82.7% of Americans lived with their spouse. Today it is 37.5%. [StaDaFa].
25. Black women in America die at childbirth at comparable rates to those seen in developing countries. [FT]
26. “About 15% of gasoline customers venture inside to make additional purchases during their car’s few minutes at a Circle K pump, while 40% of EV drivers do so during the 20–30 minutes their vehicle is charging“ [Harding Loevner]
27. Twitter makes sell-side analysts better. [Evidence Investor]
28. Africa’s population is forecast to keep growing, reaching 35-40% of the world’s estimated population by 2100. How can we be so sure – “a large number of the mothers whose children will drive growth to 2050 have already been born.” [Adam Tooze]
29. “85% of energy usage comes from burning things” and “human civilisation is powered by combustion.” [Mises Institute]
30. “Over the last 20 years, across four Presidents (two Republicans and two Democrats) we have had exactly one energy secretary with any real-world energy experience before they were brought into the President’s cabinet“ [Lykeion]
31. In 2023 the number of realtors working in the US has surpassed the 2008 housing bubble peak. [Jeff Weniger]
32. The rate of growth of total football (soccer) transfer fees by season has flattened out. [James Reade]
33. US patent applications cite recent papers less and less. [Whats New Under the Sun]
34. In a stark change from the past – “Today, countries where more women work, more babies are born.” [Vox EU]
35. Of a total of 1228 issues of the New York Review of Books ever published only 1%, or 12 issues, had 50% or more articles written by women. Nine of these appeared in the past three years. 16 issues did not have a single woman contribute an article. [Dan Stone]
36. New tunnels for New York’s East Side Access project cost $4bn per kilometer. A similar project in Paris was done for $230m per kilometer. South Korean tunnels cost $100m per kilometer. [Utah University]
37. In 2016 only 6% of all S&P 1500 CEOs had appeared on a podcast, in 2020 22% had. [SSRN]
38. Leading actors in movies are getting a lot older – in 2020 a record 20% of films had a lead actor over 60 years old. [Patrick Collison]
39. When 1,700 people were asked what the probability implied by the words “real possibility” was – answers ranged from 20% all the way to 80%. [HBR]
40. It is estimated that the average internet user sees 490,000 words per day – equivalent to the length of War and Peace. [The Guardian]
41. In the UK, an 1839 Act of Parliament created the Uniform Penny Post – a single low postage rate and the first adhesive postage stamp, replacing a complex distance-based system. It was the most profound change in communication history. [CEPR]
42. Countries, where men do more housework, have higher total fertility rates. [Vox EU]
43. “At the end of Jane Street internships: interns get a stack of 100 poker chips and spend half a day getting asked brainteasers and then betting on their confidence in the answers … This would actually be a pretty fun way for a math-minded person to spend a few hours, if it weren’t so high-stakes: the winners get a job from which people routinely retire rich in their 30s, and the losers… don’t.“ [The Diff]
44. One team of funders in the 1930s supported all but one of the 18 scientists who went on to receive the Nobel Prize in genetic molecular biology research, funding this revolution. [New Science]
45. “I learned this one from the psychoanalysts. Nobody likes an awkward silence. If a patient tells you something, and you are awkwardly silent, then the patient will rush to fill the awkward silence with whatever they can think of, which will probably be whatever they were holding back the first time they started talking. You won’t believe how well this one works until you try it. Just stay silent long enough, and the other person will tell you everything.“ [Slate Star Codex]
46. “The reason we don’t have fusion already is because we, as a civilization, never decided that it was a priority. Fusion funding is literally peanuts: In 2016, the US spent twice as much on peanut subsidies as on fusion research“ [Astral Codex Ten]
47. Fire departments in the US now perform the role of ambulances – in 1980 they attended 5 million medical calls but in 2020 this was 24 million (Covid notwithstanding, a huge rise). [Terra Nullius]
48. Three firms (Vanguard, BlackRock, and State Street) in 2021 held on average 28.2% of all shares in a small company in the S&P 600 benchmark. [Lazard]
49. “Netflix was not founded after its co-founder Reed Hastings was charged a $40 late fee by Blockbuster. Hastings made the story up to summarize Netflix’s value proposition, and Netflix’s founders were actually inspired by Amazon.” [Wikipedia]
50. “The 2021 baby bump is the first major reversal in declining U.S. fertility rates since 2007 and was most pronounced for first births and women under age 25, which suggests the pandemic led some women to start their families earlier. Above age 25, the baby bump was also pronounced for women ages 30-34 and women with a college education, who were more likely to benefit from working from home“ [NBER]
51. Electrical vehicle prices are growing much faster than combustion vehicle prices – not what you would expect from a new technology. [S&P Global]
52. 6174 is magical. Take any four-digit numbers (at least two different digits), arrange them in descending and then ascending order to get two four-digit numbers, subtract the smaller from the larger. Repeat. You will eventually come back to 6174 – Kaprekar constant. For more numbers trivia play [Bull Bear].

Marshall Wace was founded 25 years ago by Ian Wace and Paul Marshall. The firm runs both systematic and fundamental strategies and manages over $55bn. It is famous for running the TOPS alpha capture system which polls investment ideas from the sell-side. 

Last year Sir Paul Marshall penned 10 1/2 lessons from Experience, Perspectives on Fund Management. This little book brilliantly boils down nearly 35 years of investing and, even more importantly, business experience. Although it is absolutely worth reading in full (and takes no time), I thought a nice summary would help highlight these fantastic insights.

Lesson 1: Real markets are inefficient. There is a great disconnect between how academics (from Walras to Fama) view financial markets, as largely efficient, and their true nature, characterised by fat tails (as described by Mandelbrot) and reflexivity (Soros’ idea that prices influence fundamentals).

Lesson 2: People are deeply fallible. “Their perspective is bound to be either biased or inconsistent or both”. This is to say people are prone to behavioural biases like being too optimistic, viewing abnormal events as reverting to historic patterns, being overconfident, anchoring to initial information, and seeing all new evidence as confirmation of beliefs.

When combined together, these biases lead to a fragile system as described by the Minsky cycle. Periods of stability sow the seeds for future bouts of instability. This is a recognisable and predictable pattern of human behaviour and exploited for example by Marathon’s capital cycle investing philosophy. 

Lesson 3: Investment skill is measurable and persistent. “We have found that the most important ratio for digging below the surface is the success ratio – the percentage of winning trades – the Americans call it the ‘batting average’”. A truly great manager will have a success ratio of 55% i.e. you can be wrong 45% of the time. 

Is there a feature common among these great managers? “Perhaps above all they have to be resilient.” All managers have bad periods and no manager (apart from Druckenmiller) has not had at least one bad year. Interestingly, they find that the reddest flag of underperformance in TOPS are problems at home. 

Lesson 4: In the short term the market is a voting machine, in the long term it is a weighing machine. The voting side is best understood by Keynes who said – “successful investing is anticipating the anticipation of others”. The weighing machine side is the domain of fundamental analysis. This demarcation is the reason Marshall Wace runs both systematic and fundamental strategies. 

Lesson 5: “The greatest opportunities always occur around change”. This is embodied in the idea of “valuation with a catalyst”. Valuation is a story and catalysts make that story complete. Markets love stories. Quality investing is the opposite of this form of investing. 

These approaches are not mutually exclusive – “the best that can be said today is that the market is not good at predicting competitive advantage periods and frequently errs in both underestimating and overestimating the speed of change”. One way to take advantage of this is to scrutinise industry structures and sector level dynamics – because “not enough investors do it”. 

Lesson 6: Concentration and Diversification. Concentration requires a high win/loss ratio, no position can be sleeping. Diversification’s advantages are mathematically proven. It is hard to reconcile these at an individual portfolio level but at the business/client level one can hold a diversified portfolio of concentrated portfolios. 

Lesson 7: Shorts are different to longs. Alpha is easier to generate on the long side. Shorts are hard because they cost money to hold, involve competition in the borrowing market against other hedge funds, depend widely on regime (bull markets last 7 years, bear markets 1.5), and in theory have unlimited losses. 

Shorts also see a rapidly falling Sharpe ratio as they go in your favour (financial leverage increases and they get more crowded) but increasing position size if they go against you. Good shorts are often a combination of weak or deteriorating growth, poor industry structure, regulatory pressure, dodgy accounting, and weak and deteriorating balance sheets.

Lesson 8: Machines are getting better and better especially as the amount of data balloons. Marshall Wace process 7.5 petabytes of data per day, which they expect to rise to 20 in three years. But machines aren’t good in crisis nor paradigm shifts nor at picking sectors. So there will always be room for humans but they need to adapt to use machines along side them.

Lesson 9: Risk management is key – you need to hold a prudential margin to protect against the “unknown unknowns”. How? (1) Use leverage but limit it (Marshall Wace runs a max gross of 400%, vs 700-800% for peers) and (2) Watch liquidity (they never own more than 5% of any stock). “Never be in a position where a stock owns you”.

Lesson 10: Size matters. Though one needs $350m to breakeven in a hedge fund these days, the temptation to get very big is high. Size leads to non-linearly scaling trading costs and huge liquidity footprints. They found that most good managers can deliver strong alpha up to $1bn of capital, very few can do so persistently above $3bn. 

Lesson 10 1/2: Most fund management careers end in failure. This relates mainly to character. On the one hand there is dealing with downside – it is very hard to be wrong even 45% of the time. Decision making freezes up. 

On the other is hubris. Ancient Rome had a good approach to hubris. A winning general would be given a huge parade on his return. At the end of it the general would ride in a chariot to the centre of Rome. In his chariot he would be accompanied by an ‘Auriga’ (a slave with gladiator status) who would whisper in the general’s ear – “memento Mori”, remember you are mortal. 

This year I did a bit more of my own writing. I also published nearly 400 Snippets. Here are 52 things I learned:

1. Cornelius Vanderbilt, at one point, commanded one in every nine dollars in the United States. [Masters Invest]
2. For the first time in 35 years, no oil flowed from Saudi Arabia to the United States, according to EIA data. [Oil Price.com]
3. “Tsundoku (積ん読) is a beautiful Japanese word describing the habit of acquiring books but letting them pile up without reading them.” [Ness Labs]
4. The population of vertebrate species has fallen 60% since 1970, despite (or because of) 97% rise in human population and 285% rise in GDP. [Snippet Finance]
5. “Often, the screams we hear in movies and TV are created by doubles and voice actors. One stock scream is so well-used it’s got a name, the Wilhelm. It’s in hundreds of films.“ [NYT]
6. Norwegian pop sensation A-ha is responsible for the country’s lead in electric vehicles. [Reasontobecheerful]
7. Commercial rocket development (think Space X) has reduced the cost of a typical space launch by a factor of 20x while NASA’s launch cost to ISS has declined by a factor of 4. [Conference on Environmental Systems]
8. The number of Italian lira (then Euros) that could be bought with one US dollar is 280 times more now than in 1900. [Credit Suisse]
9. “The Uber map is a psychological moonshot because it does not reduce the waiting time for a taxi but simply makes waiting 90 per cent less frustrating.“ [Collaborative Fund]
10. 63% of respondents on the property site Redfin said they made an offer on a home without seeing it. [Snippet Finance]
11. Going to the movies is the second most popular out-of-home experience in the US. Seven times more movie tickets are sold than every sports event in the United States in 2019. [The Transcript]
12. The UK lost 11,000 stores from its retail landscape in 2020. [Drapers]
13. The city of Kyoto in Japan has kept records of the peak bloom date of their famous cherry blossom trees since 812 AD. 26th March 2021 peak bloom date was the earliest peak bloom date ever recorded, surpassing the previous record of 27th March 1409 (a century before Columbus sailed for America).[Washington Post]
14. “Since 1980, more than 40% of all companies in the U.S. stock market have experienced a decline of 70% or worse without recovering.“ [JPM Asset Management]
15. Nearly everything you see on an Amazon or Ebay page is an ad. [Market Place Pulse]
16. Singles’ day sales in China dwarfs all US holiday retail events combined. [JP Morgan]
17. Last year Korea’s Asiana Airlines operated 75 flights to nowhere. These flights, that physically go nowhere, allowed 8,000 passengers to shop duty free, spending on average $1,450 per flight. [Moodie Davitt]
18. In 1996 just 0.2% of Starbucks stores were outside of North America. Today it is 48.2%. [Snippet Finance]
19. As the world shifts to renewable energy it becomes very dependent on a handful of countries for crucial minerals. The Democratic Republic of Congo controls nearly 75% of the world’s cobalt. [IEA]
20. Yemen, Serbia and Montenegro come second, third and fourth in the list of top countries by firearms per 1,000 people. [Vox]
21. Hershey have started to put a “add a Hershey” to online checkouts in an effort to reignite impulse buying online. [Wired]
22. If you can return 20% per year for 50 years you will 9,100 times your money. [Snippet Finance]
23. In 1976 George Lucas asked for just $150,000 to direct Star Wars (he could have commanded $1m+) and instead asked for all the merchandise rights. Fox executives, hot off the 1967 write down of Dr Dolittle toys, accepted. Lucas went on to make $45bn from these rights. [Real Vision]
24. A bottomless soup bowl was found to lead to 73% more consumption of soup. This psychological trick is programmed into every social medial feed – infinite scrolling. [Marie Dolle]
25. L’Oréal makes its own TV shows. [The Drum]
26. 80% of users in India only have a mobile phone to access the internet. [Ofcom]
27. Even a low-end car now has 100 electronic control units and over 100 million lines of code. [IEEE Spectrum]
28. A firm that almost went bust now handles 36% of Poland’s e-commerce volume. [Forbes]
29. In 2006 Stripe co-founder Patrick matriculated to MIT with an SAT score he got at the age of 13 after doing the last 2 years of high school in 20 days. [The Generalist]
30. The United States is blessed with the world’s largest (one million square miles) contiguous piece of extremely well-irrigated farmland – the Mississippi basin. [Thomas Pueyo]
31. China’s anti-monopoly laws were first passed in 2007, a century after the US, and almost a decade after all the major tech firms were founded. [Lillian Li]
32. The jury is in – it costs 40% less to maintain an electric vehicle when compared to an internal combustion engine. [Energy.gov]
33. George Lucas was forced to sell Pixar to fund his divorce. 35 Venture capitalists and 8 strategic partners turned them down for funding. Disney, who eventually paid $7bn for the firm, could have had them for free in the 1970s. The reason for Pixar’s eventual success = Steve Jobs. [IEEE Spectrum]
34. 34% of US companies rely on paper checks for the majority of their payments. [SSRN]
35. In 2019, Tiger Global wasn’t even in the Top 15 European venture investors, In 2021 it was number 1. [Lazard]
36. Americans rank themselves (or their partner) as the second best source of financial advice. Financial professionals in the media come dead last. [RIA Intel]
37. “Forty million acres of land in the US consists of lawns. Maintaining them requires 800 million gallons of mower fuel and three million tonnes of (carcinogenic, endocrine-disrupting) fertilisers a year, and they guzzle up to 60 per cent of fresh water in urban areas.“ [LRB]
38. Gitlab publishes its entire employee handbook (13,804 pages) online for everyone to see. [Git Lab]
39. Since Xi Jinping took power, air pollution in Beijing is down 60%. [Snippet Finance]
40. Companies that use simple language on earnings calls substantially outperform those that use complex language, irrespective of length of these calls. [Snippet Finance]
41. If you took 1/3 of all the volume of the entire biopharmaceutical industry today you could only produce 22 million pounds of lab-grown meat – 0.02% of US annual meat production. To get even 10% would require 4,000 bio-reactors and cost $1.8 trillion dollars. [The Counter]
42. 2020 probably saw net migration from the EU into UK go negative for the first time. [Snippet Finance]
43. Famous mathematicians including Paul Erdos all argued that Marilyn vos Savant, who held the moniker world’s smartest woman, was wrong about the Monty Hall Game show problem. She was right. Try solve the problem yourself first. [Behvioral Scientist].
44. The owner of the most onshore oil and gas wells in America is not Exxon Mobil. In fact its a firm you have never heard of. [Bloomberg]
45. Wang Huning, a man you have likely never heard of, is arguably the single most influential “public intellectual” alive today. [Palladium Mag]
46. To earn $1,000 per month one needs to have at least 100,000 followers on Instagram, but only 230 subscribers on Substack. [Creator Manifesto]
47. Geneticist George Church finished his undergraduate degree in 2 years and then worked 100 hour weeks in the lab during grad school, famously getting kicked out due to not attending classes because he was so absorbed in his research. [Stephen Malina]
48. The number of people employed in UK local government is the lowest level since 1963. In contrast central government employment has never been higher. [Snippet Finance]
49. Honus Wagner, although a baseball star during his time, was also a very shrewd operator, restricting images of himself. The result is that his baseball cards are so rare – a few dozen are known to exist – they recently sold at auction for $6.6 million. [ESPN]
50. A fully electric Volvo XC40 in a world where all electricity was renewable would still need to drive 49,000 kms to breakeven in CO2 terms with the petrol version. [Volvo]
51. Peter Thiel, the silicon valley legend, actually tried to convince Mark Zuckerberg to sell Facebook for $1bn to Yahoo. [LRB]
52. Walt Disney World’s land parcel is so enormous that it’s a kind of self-governing municipality with its own fire department and emergency services. It is governed by a five-person board elected by the landowners. As a result, high-level Disney employees essentially run the entire region. [Visual Cap]

Spacecraft design is hard. Akin himself says as much when he puts bluntly, as his 33rd law, “Space is a completely unforgiving environment. If you screw up the engineering somebody dies (and there’s no partial credit because most of the analysis was right ..)“.

We recently came across Akin’s laws for spacecraft design – lessons learnt from decades of space system development followed by decades more of teaching. Reading these laws one can’t help but feel they generalise so easily – replace “design” and “spacecraft” with almost anything and the vast majority of laws apply.

Here is an attempt doing just that for investment analysis, a far safer environment.

1. Investment analysis is done with numbers. Analysis without numbers is only an opinion.
2. To get investment analysis right takes an infinite amount of time. This is why it’s a good idea to operate when some things are wrong. 
3. Investment analysis is an iterative process. The necessary number of iterations is one more than the number you have currently done. This is true at any point in time. 
4. Your best analysis efforts will end up useless in the final analysis. Learn to live with that disappointment. 
5. Miller’s law – three points determine a curve. 
6. In nature, the optimum is almost always in the middle somewhere. Distrust assertions that the optimum is at an extreme point.
7. Not having all the information you need is never a satisfactory excuse for not starting the analysis.
8. When in doubt, estimate. In an emergency, guess. But be sure to go back and clean up the mess when the real numbers come along.
9. Sometimes, the fastest way to get to the end is to throw everything out and start over.
10. There is never a single right solution. There are always multiple wrong ones, though.
11. Analysis is based on process. There is no justification for analysing something one bit “better” than the process requirements dictate. 
12. (Edison’s Law) “Better” is the enemy of “good”.
13. (Shea’s Law) The ability to improve analysis occurs primarily at the interfaces. This is also the prime location for screwing things up. 
14. The previous people who did a similar analysis did not have a direct pipeline to the wisdom of the ages. There is therefore no reason to believe their analysis over yours. There is especially no reason to present their analysis as yours.
15. The fact that an analysis appears in print has no relationship to the likelihood of its being correct.
16. Past experience is excellent for providing a reality check. Too much reality can doom an otherwise worthwhile investment analysis, though.
17. The odds are greatly against you being immensely smarter than everyone else in the field. 
18. A bad piece of investment analysis with a good presentation is doomed eventually. A good piece of analysis with a bad presentation is doomed immediately.
19. (Larrabee’s Law) Half of everything you hear in a classroom is crap. Education is figuring out which half is which.
20. When in doubt, document.
21. (Bowden’s Law) Following a testing failure of your analysis, it’s always possible to refine the analysis to show that you really had negative margins all along.
22. (Montemerlo’s Law) Don’t do nuthin’ dumb.
23. (Ranger’s Law) There ain’t no such thing as a free launch.
24. Mo’s Law of Evolutionary Development) You can’t get to the moon by climbing successively taller trees.
25. (Roosevelt’s Law of Task Planning) Do what you can, where you are, with what you have.
26. (de Saint-Exupery’s Law of Design) An analyst knows that they have achieved perfection not when there is nothing left to add, but when there is nothing left to take away.
27. Any run-of-the-mill analyst can make something which is elegant. A good analyst is efficient. A great analyst is effective.
28. (Henshaw’s Law) One key to success is establishing clear lines of blame.
29. (McBryan’s Law) You can’t make it better until you make it work.
30. You really understand something the third time you see it (or the first time you teach it.)

How does one find valuable signal in the endless sea of pixels on the screen? What follows are a few tips from a year of curating Snippet Finance and more than a decade in financial markets. Relevant not just to investors but to anyone trying to make sense of the world.

(1) Curation

Good curation is important. Find people, not robots or algorithms, that possess the twin attributes of curiosity and experience and let them lead your exploration. FT Alpaville in finance, Benedict Evans and Stratechary in Media and Tech, and Farnam Street and The Browser in the crucial category of “everything else”.

(2) Skimming

Acquire the ability, through practice, to intelligently scan information. Like the investor searching for ideas or the scientist coming up with a hypothesis, it is often best to rely on the subconscious mind to let information wash over you. A good place to start is the section on skimming in this excellent guide on reading.

(3) Only a few things

Only a few things are worth reading carefully. This scene from Short Circuit 2 where Johnny 5 discovers a bookstore sums this up beautifully. Use an app like Pocket to save down those precious long reads. Change your physical environment and sit down to read.

(4) Finishing is for losers

It’s ok not to finish a book. As Naval Ravikant, Angel List founder said “We’re taught from a young age that books are something you finish. Books are sacred. When you go to school and you’re assigned to read a book, you have to finish the book. So…we get this contradiction where everyone I know is stuck on some book. So what do you do? You give up on reading books for a while. That, for me, was a tragedy because I grew up on books, and then I switched to blogs, and then I switched to Twitter and Facebook. And then I realized I wasn’t actually learning anything. I was just taking little dopamine snacks all day long …. [So] I came up with this hack where I started treating books as throwaway blog posts or as bite-sized Tweets or Facebook posts, and I felt no obligation to finish any book … I’m reading somewhere between ten and twenty books. I’m flipping through them.” [1]

(5) Hupomnemata

Write things down in a notebook. Michel Foucault in his writing on Ethics [2] talks about the hupomnemata, a journal concept from the Ancient Greeks. It is written in order “to capture the already said, to collect what one has managed to hear or read, and for a purpose that is nothing less than the shaping of the self”. It is not meant to be “a detached documentary” but rather “the hupomnemata makes the writer just as surely as the writer makes the hupomnemata” [3].

(6) Repetition

Re-read, as Foucault continues, “from time to time so as to reactualise“[2]. Try to use methods like spaced active repetition so that each repetition leads to efficient retention.

(7) Tell others in order to clarify your own thought

Explain your ideas to someone, ideally someone with no prior knowledge. Here the famous Feynman Technique comes to mind. As America’s greatest thinker Charles Sanders Peirce put it “The very first lesson that we have a right to demand that logic shall teach us is, how to make our ideas clear … To know what we think, to be masters of our own meaning, will make a solid foundation for great and weighty thought.“

(8) Be just the right amount of sceptical

“It makes me nervous when someone believes too deeply or too much. I think that being skeptical and questioning all deeply held beliefs is essential. Of course we must know the difference between skepticism and cynicism because cynicism is as much a restriction of one’s openness to the world as passionate belief is. They are sort of twins.” [4]

(9) Read widely

“Don’t just read in business or finance. Expand the scope into new domains or fields. Follow your curiosity. It is hard to know when an idea from an apparently disparate field may come in handy” Mauboussin [5]

A list of 52 things learnt since we started just over a year ago. Enjoy.

1. Cable TV and radio have been speeding up songs and syndicated content (i.e. shows) by nearly 5% for years in order to sneak more ads in. [WSJ]
2. Out of 43.6 billion bags checked-in each year by air travellers 25m get lost and 1.3m are never claimed, and many are purchased by a single company. [The Hustle]
3. The National Cancer Institute’s comprehensive review found that there has been no benefit to public health from changes in cigarette design or manufacturing over the last 50 years. The yellow discolouration on filters is just cosmetic (caused by a change of pH) rather than an accumulation of tar. [The Times]
4. In June 2019 Google passed a major milestone – for the first time the majority of searches on google.com resulted in no click at all. [SparkToro]
5. This has meant over the past 24 months Wikipedia has lost billions of organic monthly visitors to Google. [Hacker Noon]
6. 26% of Americans say they get their news on Youtube. [Pew]
7. According to Google engineers from a 2010 study there are an estimated 129 million books written (of varying quality) and it would take 353,425 years to read them all. Yet if you were to read the sum of all knowledge in antiquity, captured by the entire contents of the library of Alexandria, it would only take 1,370 years. [The Millions]
8. In September 1958 Bank of America mailed a pre-approved credit card to every resident of Fresno, California and gave birth to the credit card industry. [WNYC]
9. In 1949, after 50 years of drilling, analysts estimated that just 47 million barrels remained in the Kern River oil field. Instead the next 40 years saw 945 million barrels removed. In 1989 analysts again estimated Kern reserves at 697 million barrels. By 2009, Kern produced more than 1.3bn additional barrels. [The Atlantic]
10. 300,000 people read full novels on Instagram. [FC]
11. Ultra-wide band, which sits in Apple phones today, can pinpoint objects in space within a 30cm range compared to 1 meter for bluetooth allowing “GPS at the scale of your living room”. [Wired]
12. Academics also engage in clickbait – papers have become shorter while features, that attract busy readers, like titles and abstracts, have gotten longer. [The Gradient]
13. Plants are becoming junk food because of climate change. Studies show that the ratio of carbohydrates to minerals has been steadily going up so the concentration of key minerals like calcium, magnesium, potassium, zinc and iron has dropped by 8% points on average. [Politco]
14. Jeff Bezos is spending $42m to build a clock on his ranch that can tell time accurately for 10,000 years. [The Atlantic]
15. Since 2012, some 18m Americans have health insurance that didn’t before. [Deutsche Bank]
16. A one year of increased longevity has the same effect on happiness, measured by word usage in books and newspapers, as 4.3 percentage points of GDP growth. [Economist]
17. China consumes four cups of coffee per year per person, compared to 300 in the US. [Starbucks]
18. For a period in 2018 “nearly 22% of all ads seen by U.S. Apple device users on Facebook’s ad network came from TikTok and its Chinese counterpart Douyin”. [The Margins]
19. Some birds have penises, but most, around 95%, do not. Rather than having penetrative sex, they mate through a cloacal kiss. Most birds of both sexes have a cloaca — a chamber inside their anus into which their digestive, urinary and reproductive tracts all flow — and reproduce by touching assholes. [Grow]
20. It took 50 years for the telephone to reach 50 million users, a feat that Pokemon Go achieved in 19 days. [Des Jardines]
21. In the US people spend on average the same amount of time listening to audio as watching video, yet the former industry is one-tenth the size of the latter. [Hollywood Reporter]
22. More UK funds are managed by a man named Dave than by women. [Bloomberg]
23. Chess players make more mistakes on polluted days: “We find that an increase of 10 µg/m³ raises the probability of making an error by 1.5 percentage points, and increases the magnitude of the errors by 9.4%.” [Marginal Revolution]
24. A man in his early 20s will tip a female Uber driver 8% more on average than they would a male driver. [NBER]
25. Regulation has meant that while in 1983 a dishwasher cycle lasted 67 minutes and used 15 gallons of water today it takes 135 minutes but uses only 3 gallons. The resulting clean is much worse. [AIER]
26. Jio’s huge investment in a 4G only network in India has led to a 82x increase in mobile internet speeds and 95% collapse in price. [JIO]
27. From 1991 to 2017 the mortality rate of cancer has dropped 29% saving 2.9 million lives. [US Cancer Society]
28. Pokemon is the highest grossing media franchise of all time at $92bn, outpacing Star Wars and Mickey Mouse. [Visual Capitalist]
29. According to VW you have to drive an electric Golf for 120,000 kms before it breaks even in terms of carbon emissions when compared to a diesel Golf. [VW]
30. In 2000, pre-IPO, Google had $19m of revenues, that number is $162bn today. [themarketear].
31. For 2020, the Census Bureau Geography Division was able to employ satellites to verify 65% of addresses which meant that they only needed to hire 40,000 employees to verify the remaining ones. In 2010 this task required 100,000 people. [Calculated Risk]
32. The founders of Pinterest used to go to Apple stores on the way home and change all the computers to say Pinterest, and stand around saying “Wow this Pinterest thing it’s really blowing up”. [Lenny’s]
33. In 1993 Germany ran a trade deficit of $20bn. Today it has a surplus of $200bn (inflation adjusted). This is largely due to the creation and adoption of the Euro. [Conrad Bastable].
34. In 1965 the average CEO made 20x the pay of a worker in their company. Today they make 278x. [Snippet].
35. The FDA approved a bedside MRI which, at $50,000, costs 20 times less than traditional systems, runs 35 times less power and weighs ten times less than the normal 1.5 ton MRI machines. [Health Imaging].
36. It costs just $10,000 to open a Chick-fil-A franchise and requires no net worth at all, the company foots the entire bill to open one. The catch is 15% royalty and 50% of profits. [The Hustle].
37. Bracken Cave, in Texas, is home to 20 million breeding Mexican free-tailed bats, similar to the human population of Mexico City. In some places there are 500 bat pups per square foot on the wall. [Rational Optimist].
38. China consumes more concrete in any two years that the United States did the entire 20th century. [IEEE Spectrum]
39. Netflix spends more on content than all of the UK, Spain, France, Italy and Germany. [Benedict Evans]
40. In social media networks, 90% of users just read content, 9% of users contribute a little content, and 1% of users contribute almost all the content. Gives a false impression of what ideas are popular or “average.” [Collaborative Fund]
41. Airbnb founders turned to selling themed cereals to survive. The cereals were called “Obama O’s, the Cereal of Change,” and “Cap’n McCain’s, a Maverick in Every Box.” – a throwback to their first success housing delegates of the Democratic National Convention in 2008. It was also what got them a spot on Y Combinator. [Pando]
42. In 1900 roughly 800 per 100,000 Americans died each year from infectious disease. By 2014 that was only 45.6 per 100,000 – a 94% decline. [Collaborative Fund].
43. Sewage concentrations of SARS-COVID-2 RNA can predict new cases in an area by seven days and hospital admissions by three days. [Redburn]
44. On average a banking relationship in the UK lasts 17 years, longer than most actual relationships. [Built for Mars]
45. Emissions increase substantially, as much as 60-80%, because of ride-hailing apps when compared to a world without them. [JPM]
46. Nigeria will be the third largest country by population in 2100. Five African countries will be in the top 10. [Statista]
47. Billboard Top 10 music tracks have changed a lot – It now takes more producers, more songwriters, and a whopping 60% have a featured artist when compared to 2000. [MIDiA]
48. Why are Brazilians so good at soccer? In Brazil there is a culture of playing a pickup game, a version of soccer that is played in a much smaller space and with fewer players. The players did all the things you need to be good at soccer, but they did them significantly more often, because there was more ball contact per person. Just because that’s a different game than soccer doesn’t mean people won’t learn soccer skills. They had way more ball contact than someone who went through the British system, by the time they entered the Premier league, for instance. [Alex Danco]
49. 27% of undergraduates received a first in 2018/2019 academic year. In 1994/95 only 7% achieved that grade. [ONS]
50. In 1880 the average American would have lived and died never having encountered a single manufactured candy. Today the average American ingests more than nineteen teaspoons added sugar every day. [New Yorker]
51. In 1970 60% of revenue made on the Las Vegas Strip was related to gambling. Today that is just 34% with Rooms and Food/Beverage being the biggest part of the mix. [Morgan Stanley]
52. We breed and kill at least 100 billion animals per year for food and at least 115 million per year for research. Fishing kills 1-3 trillion animals per year. Building and vehicle collisions kill at least a billion animals per year. This year, more than 300 birds were injured or killed in collisions with a building in North Carolina in a single night. [Aeon]

It is often said that “a single picture is worth a thousand words”. The phrase is meant to highlight that a complex issue can be illuminated with a simple diagram. Yet, in some cases, the opposite is true, a single picture obfuscates instead of illuminating.

The above chart may just be the best example of this. It was sourced from Ocean Tomo the “Intellectual Capital Merchant Banc®”. The firm is the author of the “Intangible Asset Market Value (IAMV) Study”, and this chart hails specifically from the 2017 update also published on SSRN.

At first glance the chart paints an attractive story. Intangible assets have taken over. As the authors put it “data spanning more than a quarter century for the U.S. make it clear the economy is inverting from one where value was measured by “touch” to one where value is driven by thought. This change has been no less significant than the industrial revolution more than a century ago“.

On first thought one instantly agrees. All around us we see the rise of technology and intellectual capital. In the West factories shutter replaced by the knowledge economy. How can one disagree and here is a piece of undisputed evidence showing how intangible assets make up more and more of the value of firms.

This initial agreement makes other arguments more seductive. The Sustainability Accounting Standards Board (SASB) include this chart in their reports in order to highlight, as one LinkedIn commentator put it, “the strongest argument in support of ESG analysis”. The chart is used to spell the end of value investing and with it traditional accounting and financial analysis. It is also used to explain the changing nature of corporates and how they communicate this with the market.

The chart and the arguments it supports chime so well with the current zeitgeist that it is difficult to think critically. Yet think critically we must. The place to start is the original source. There, in a a footnote, IAMV is defined (emphasis ours, as are abbreviations) – “IAMV is determined by subtracting a company’s net tangible asset value (NTAV) from its market cap (MC) to determine its net intangible asset value. Company data is aggregated for the index, and net intangible asset value is then divided by market cap (MC) to determine the portion of the index’s value that is derived from intangible assets. Companies with insufficient data were excluded from the calculation.“

Reading this text brings to mind Edsger Dijkstra, one of the most influential figures of computing science’s founding generation, who said “A picture may be worth a thousand words, a formula is worth a thousand pictures“. Taking this sage advice, the above can be written as a formula which can then be reduced further:

IAMV = (MC – NTAV)/MC.

IAMV = 1 – NTAV/MC.

The astute reader will recognise the last part of this formula as simply the inverse of the famous valuation metric Price to Net Tangible Asset Value (or Tangible Book Value). In other words, the “Intangible Asset Study” is nothing more than another way of pointing out that valuations in the stock market have risen.

In fact if you chart P/TB of the S&P 500 Index (Source: Bloomberg) you get the same result without assuming it is all related to intangible assets.

Going a step further we can actually include intangible assets in this analysis, as recorded by accounting standards, by plotting price to book value (P/B). These standards are far from perfect (an excellent piece on this here) and the data doesn’t go back as far but the idea is clear – that intangible assets account for some but not all of the variation in valuation.

The culprit here could be the word intangible assets. Accounting standards define it very carefully while the authors of this chart use a very broad definition. However, no matter how broad there is still a distinct difference between asking – what has caused valuations to go up? vs. ascribing a big portion of firm value to intangible assets.

With this revelation all of the arguments which are built on the offending chart crumble. Instead of strongly supporting the need for ESG analysis, presenting the chart above is tantamount to saying ESG matters to company valuation – a statement that requires a lot of proof. Similarly, we might have to hold off writing eulogies for “traditional financial analysis and accounting” just because market cap exceeds tangible book value.

This does leave the unanswered question – what has caused P/TB to rise so strongly? One thing is for sure, by presenting it in this way at least the question is asked correctly instead of assuming the conclusion. Some commentators do pick up on this but still fall short by suggesting it is either intangible assets or a stock bubble that explains current valuations. Ultimately the question of what determines company valuation, framed correctly, still remains.

What are some of the lessons to take away:

• Always look for how measures are defined.
• Be careful with words that are poorly defined and open to ambiguity (like “intangible assets”)
• Watch out if something fits neatly into a narrative especially the prevailing one.
• Always know the author and their personal interests (in this case it is in the interest of an entity focussed on intellectual property to show how important it is).

Feel free to get in touch with any thoughts or comments.