December 1, 2023
“The universe is only as large as our perception of it. When we cultivate our awareness, we are expanding the universe.”
Rick Rubin from his book: The Creative Act: A Way of Being
The Gift of Reading Books
A friend of mine (thanks A.F.) suggested the Ezra Klein podcast interview with UCLA researcher and scholar in the School of Education and Information studies, Maryanne Wolf. It’s entitled: This is your Brain on Deep Reading. It’s Pretty Magnificent. You can listen at this link with a Spotify account.
I listened to this podcast, and I was struck by the parallels between Professor Wolf, a neuroscientist, and the book I was reading by Rick Rubin, a record producer and artist (founder of Def Jam Records, producer of the Beastie Boys Run DMC, Public Enemy, and many other recent artists). I find it fascinating when people with vastly different perspectives and journeys arrive at the same understanding of universal truths.
I also thought highlighting the perspectives of these individuals was a good follow up to my commentary last month in which I offered up my daily routine. This routine is adhered to in order to cultivate my own awareness.
In the podcast, Professor Wolf points out that there is no one part of the brain that is specifically used for reading. This is very unlike all the other brain processes like language, memory, and cognition that do utilize specific parts of the brain. Human beings were not built for reading. What the brain does while reading is make connections across various sections of the brain. Reading is not a natural human process; a circuit is formed to engage in a good book. We are building neuro plasticity as we read books with intention. Intention, and deep focus (on a printed page) is very different than reading news or social media on our phones. Professor Wolf explains why.
Most people would benefit from listening to this podcast, but I highly recommend it for parents with young children. If my children were still young, I would want this information.
A Good Society and A Good Life:
Aristotle wrote about the three lives that make a good society:
Life of gaining knowledge and productivity.
Life of Leisure and Entertainment.
Life of Reflection and Contemplation.
I know I am always emphasizing the importance of contemplation and meditation. It is because I am a lot older and a little wiser now that I am in my 50’s, and I recognize a few characteristics about my own life and the lives of others:
When I was young, like many young people, my focus was almost solely on entertainment and leisure. Point 2 is sorted!
As I matured at university, I focused intently on gaining knowledge. Point 1 is sorted!
As I matured further, I realized that something in my life was missing. There was an emptiness and loneliness to my life. I knew something was missing, but I didn’t know what it was. Point 3 is harder to sort out!
Living in New York City in the 1990’s allowed me to hit rock bottom personally; it was a dark and depressing start to my eight years there. I was thriving on points 1 and 2, but something was missing. To lead a fulfilling life, I needed to cultivate point 3. My life changed dramatically once I started working on point 3. I am happy to share more about my personal story in a more intimate setting, but that is not relevant here. There are many ways to cultivate awareness; the point is to start cultivating if you want happiness.
Whether that is through religion, spirituality, meditation, contemplation, or deep reading, we need to create the space required to cultivate our awareness to fulfill our potential.
It worries me that people seem to be making less and less time to purposefully be still. I suppose that is why we hear reports of a mental health crisis. Technology and information are great in many ways, but it is addictive. It’s important to find ways to separate ourselves from screens and quiet our minds.
Society and individuals over emphasize the importance of gaining knowledge. We can access more information today than ever available in history, but we do not provide enough empty space to develop novel thought and creativity. Rick Rubin mentions in his book that there is great power in not knowing. He suggests approaching the world like a child. With an open mind and no preconceived notions, only then can we make amazing discoveries. The more limitations, rules, and dogma, we place on ourselves, the less we cultivate our awareness. Rick Rubin’s book is not spiritual or religious, but he emphasizes the same truths of the universe as most of the world’s religions. His discussion of this topic reminded me of a 14th Century book written by a Christian mystic called The Cloud of Unknowing that I read when I was learning how to practice contemplation.
Concern for the World:
Most of my success stems from figuring out how to create space in my life through contemplation or meditation. It is the only way to see how awesome the world truly is. It bridges knowledge and entertainment. It allows me to appreciate all aspects of life on a deeper level. It allows me to continue to grow, and it allows me to recognize and see things that others may not be equipped to see.
Many of us wake up and go right for entertainment or go right to email or news. We believe that knowledge of world events, getting into a well-regarded university, obtaining a prestigious job offer, or making more money is “important”. Maybe it is important, but to what end? What are we striving for?
Many interactions with technology provide a dopamine rush in the body. Your body then craves more of this feeling, and we want to be fed news that reinforces pleasant feelings. Algorithms are very good at figuring out what makes you feel good, and they will deliver more of that to you.
Young children used to be able to play and be curious much of the time. Children are generally not equipped to focus for long periods of time on any one activity. But do you ever notice how well they focus for long periods with a screen in their hands? We are altering their behavior, and it might turn out to be a problem. Business will try to keep them addicted to screens; that’s the way our capitalist society is built for better or worse.
I do have concerns that we do not place enough emphasis on balance and discipline around our consumption of information and technology. I do wonder what it will mean for the world going forward. I do not have the answers, but behavior has changed in remarkable ways in a very short period.
The Implications for Investing; Amplification of beliefs:
Someone recently asked me whether AI will eventually be better at investing than humans. It is hard to know for sure.
On the one hand, AI can come at problems within a system with no pre-conceived notions of how to invest; this is a potential advantage compared to humans that think with all sorts of biases. There are certainly helpful ways to use AI for investing, and August Wealth actively uses some of these tools.
On the other hand:
AI will likely create self-reinforcing trends:
Because most time is spent on knowledge and information, the space for novel thought and openness diminishes. And with that, awareness declines.
The science suggests we want to consume information that makes us comfortable and builds on our belief system. It reinforces behavior; think political divisiveness, and the emotions it conjures on both sides of politics.
The same is likely true in markets; beliefs and narratives may be overweighted compared to fundamental facts.
Contemplative people: the people that actively cultivate awareness perhaps are at an advantage because they consume knowledge with an open mind.
They create space for novel thought and creativity.
They will recognize and appreciate events which are hard to explain by science and facts. There is an understanding of how little control we have over events, and our reality.
They are more likely to be able to spot inconsistency between belief, desire, and reality.
We all have the capacity to be artists. It is a matter of observation, contemplation, openness, vulnerability, and expressiveness:
It’s not as simple as looking at the output and saying: “well there is the answer”!
A Financial Planning Exercise: We recently went through a planning exercise as a team for one of our client’s. The output of the computer model we were using gave us what looked like a definitive answer. Based on the assumptions we used, the model suggested strongly that the client should be persuaded to execute on our proposed plan. Some advisors might argue definitively that this was absolutely the best course of action, but the reality is that it may or may not be the case. We know that there are many factors that go into planning: time, expected rate of return, actual rates of return, age, future income, future expenses, asset mix, and lots of other factors. Rarely is something 100% certain for all situations and all families. Financial planning is more art than science.
A potential self-reinforcing trend in the current market: A hot topic in the market these days is the fact that the top 7 companies of the S+P (now known in market circles as “the magnificent 7”: Google, Apple, Amazon, Meta, Microsoft, Nvidia, and Tesla) have been the primary contributor to US Equity returns in 2023. Because the S+P 500 index is capitalization weighted, these seven companies make up approximately 50% of the index. Without going into too much detail, what this means is that when someone buys $10,000 of an S+P 500 fund, they are actually putting $5,000 into the “magnificent 7” companies.
You may ask: If these companies are making the best returns, don’t I want to own as much of them as possible? The answer comes with a caveat: Yes, as long as they continue to go up more than the rest of the market.
To me, I am identifying some potential issues that warrant consideration, and they are the following:
Most fund managers, clients, financial marketers, and even August Wealth use the S+P 500 as a sort of de facto broad representation of the overall U.S. Equity market. And because the U.S. is the leader in financial markets, by default many global fund returns are also compared to the S+P 500 index. The potential issues are:
It is not a representation of the broad market (50% is 7 companies). So, the comparison to a diversified client portfolio makes little sense.
But because the industry continues to use it as a benchmark, more funds flow into these 7 stocks because fund managers may “hug” the index. The easiest way to ensure you do not underperform the S+P 500, is to buy the S+P 500. No fund manager wants to underperform; hence it potentially creates systemic demand for the index.
Most 401k plans, pension funds, and retirement funds receive new funds every pay period as workers contribute to their retirement. These plans will purchase equities, and many of these plans will end up purchasing the S+P 500 index (or some version of it). The result will be to increase the allocation to these top 7 companies. The point is, a greater portion of each new dollar invested into the U.S. Equity market will end up being invested in these 7 stocks.
If these factors are potentially causing the trend to self-reinforce, it may be self-reinforcing because of systemic factors instead of economically justified factors (cash flow, earnings growth, valuation, etc.). If a large portion of the investment world is paying too high a price for the cash flows and growth of these companies, and they fall short of expectations in the future, it could spark an unwinding of these (potentially) over allocations to these companies. That would likely cause some disruption and volatility in the market.
The Good News:
I have no idea if anything I’ve said above means that the magnificent 7 stocks will present a future problem for the market in terms of an unwind or not. There is a case to be made that these companies are the future of global growth, and they will reap a very large share of global profits.
However, even if we did not identify the potential for systemic risks above, we still would not feel it was prudent to invest 50% of the equity portion of your assets into 7 companies!
There are many companies and bonds within the USA and globally that are trading at (in our opinion) very reasonable valuations relative to their cash flows, and we view these as opportunities. Your portfolio will reflect the set of investing opportunities available (in our opinion), and we will diversify your portfolio to reflect the unknown and unknowable. We desire to protect your purchasing power from inflation, erosion in the value of money, and to grow your wealth. Our goal is to make investments across the portfolio in companies and Exchange Traded Funds that are attractively priced, and hopefully avoid those investments that are potentially at risk of disappointing expectations.
The charts below produced by Torsten Slok at Apollo highlight how dramatic the outperformance of these seven companies have been.
If anyone would like to discuss this topic in more detail with me, as always, please feel free to reach out.
My hope for the holidays is that you (and me) might slow down and fully appreciate all the wonderful gifts in our lives.
Best wishes to you and your family,
Joseph Cardello, Principal
August Wealth Advisors, LLC
51 Riverside Avenue, First Floor
Westport, CT 06880
Direct (916) 461-9451 toll free (800) 985-9477
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