Here are 8 fascinating things I read this week.
Crimes
How profitable is insider trading?
In a new analysis by Kenneth R. Ahern of the University of Southern California School of Business, the median investor bets $200,000 on the basis of an illegal tip, and reaps $72,000 on that trade, a healthy gain of about 35%. Not bad, when you consider the average holding period is just 21 days. And while that might not seem like much considering that the S&P 500 picked up roughly 30% last year, these investments are usually pretty risk free.
New normal
This is a really good description from Chipotle (CMG 2.58%) about a new consumer trend:
"Over the last decade there has been a noticeable shift among consumers away from traditional fast food and casual dining chains, to fast-casual restaurants as customers are looking for better quality food, served in a convenient format ... The companies that have lost the most customers over the last decade are traditional fast-food chains, while the biggest gains go to fast-casual restaurants. Despite offering dollar menus and frequent discounts, many of these chains also scored poorly in terms of value. The bottom-line customer wants delicious food, served quickly and in interactive format, and they are increasingly unwilling to compromise."
Reversion to the mean
Mark Andreesen says the middle class was an accident:
Andreessen thinks the American middle class of the mid-20th century is an accident of history, created because much of the industrialized world was bombed out of existence during World War II. "The one major industrial country that wasn't bombed was the United States. So the United States became the monopoly producer of industrial goods." However, by the late 1960s, Germany and Japan had rebuilt their economies, and it started to fall apart. "It was an accident of history."
Exponents
Robert Shiller writes about market behavior:
Fundamentally, stock markets are driven by popular narratives, which don't need basis in solid fact. True or not, such stories may be described as "thought viruses." When they are pernicious, they are analogous to the Ebola virus: They spread by contagion.
Theories that seem to explain the stock market's direction often work like this: First, they cause investors to take action that propels prices even further in the same direction. These narratives can affect people's spending behavior, too, in turn affecting corporate profit margins, and so on. Sometimes such feedback loops continue for years.
Cool head
Someone sent me this poem. Fitting for investors:
"If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
Inequality
Bill Gates writes about the forces of wealth inequality:
Imagine three types of wealthy people. One guy is putting his capital into building his business. Then there's a woman who's giving most of her wealth to charity. A third person is mostly consuming, spending a lot of money on things like a yacht and plane. While it's true that the wealth of all three people is contributing to inequality, I would argue that the first two are delivering more value to society than the third.
Getting better
The types of governments people live under has changed dramatically, for the better:
Aging gracefully
Nassim Taleb talks about lifespans:
In Antifragile, I discuss the Lindy effect, which tells you pretty much the following: if something has been around for 20 years, odds are, it has 20 more years to go. So if something is around, a technology, an idea, that's not perishable. For a human, you don't have that effect. For a technology, you have that effect because there's no upper bound on the life of a technology. So if I see an old man and his grandson, I can say statistically that, bearing some problem with the grandson, some disease, some whatever, problem, that the grandson will survive the grandfather, whereas with technology, it's exactly the opposite. If you see very young technology and old one, all the young technology is not going to survive and the old one simply it's a concept – it's application – straight application of the measurement of fragility, the techniques to measure fragility that time either breaks what is fragile or gives what has some properties, some hidden properties of survival, gives it some edge. So when we look now at technologies, you realize that technology tend to stick are technologies that are destructive of other technologies, because the book has not really been replaced, but some things have been replaced.
Have a good weekend.
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