The volatility illusion, sand badgers, compounding dividends and gaming finance

The Weekender offers my perspective on market developments and their potential broader implications, written most Friday afternoons. If you'd like this delivered to your inbox on Saturday mornings via Northern Trust, please sign up here.

Three things I’ve learnt this week. The hard way

i) When choosing a vendor, avoid the lowest-cost provider, for one day they will end up avoiding you.

ii) Assuming that AI can provide insights from your data first assumes your data is insightful.

iii) I was wrong about the right. I should have been looking left (in France).

Question

 What is a “sand badger”, “muck roller”, “moleskin shaver” and a “spilch dealer”?

Answers at the end.

An elephant and a mouse walk into a pub and say "volatility smoothing is over"

If an elephant and a mouse agree to meet for a drink 300 miles along the same coast, they will not end up at the same pub. The reason is that they use different measurements. In fact, as Paulina Rowinska points out in her latest book Mapmatics, it’s impossible to know the exact length of any coastline. It depends entirely on the measure - a concept known as fractal geometry – which explains why on some measures, New Zealand has a longer coastline that North America!

It also explains why some private equity firms report returns that seem of very low volume, when in fact it depends. Entirely. On. The. Measurement.

Volatility illusions

So, if regulators and scale operators like Blackrock’s Preqin are to require more frequent pricing data, which they most likely will in order to index the private markets and provide greater access for retail investors to this asset class, then rest assured: if you shorten the measure you will increase the volatility. And the perceived risk.

Source: Michael J Boorman

As Apollo have said (and they should know), “… everything is not going to be OK.” Whether that’s true or not (and only time will tell), regular readers will be aware that I think everything is going to be just fine – with dividend compounders, Japanese stocks and the UK.

In good company

I’m delighted to see Blackrock moves to overweight on UK stocks. "The team now recommends that investors be overweight in U.K. equities. “Valuation is attractive — now we have a catalyst of potentially perceived political stability that could act as a trigger for international sentiment to warm up.” Bravo!

A better alternative asset to alternatives: compounding dividends

As a former colleague, Richard Bernstein, recently said: “People forget that [compounding of dividends] is one of the easiest ways to build wealth through time”. It may not feel exciting, but ‘the goal is building wealth, not looking popular’. Quite. And while ‘getting rich slow’ may not have the same appeal as its faster counterpart, I’m yet to hear that time has passed slow. Ever.

Last year was a record-setting year for global dividends and buybacks. I believe will be higher, demonstrated by how companies are currently returning record amounts of capital to shareholders. These are returns with a better track record of keeping pace with inflation, meaning the importance of dividends should not be overlooked. And remember the hypothetical exercise we mentioned some weeks back? Assume 5% starting yield, +5% growth, +5% buybacks and by year 7 you have doubled your carry. By year 10 it’s over 13%. Not bad, for a mostly unlevered investment which assumes zero uplift in capital value.

P.S. my employer’s own defensive (i.e. low beta) dividend fund is up 12% YTD. Just saying...

An aging bull doesn’t look like this

As I mentioned last week, I remain convinced Japan is a young bull, for there are too many inefficiencies to suggest otherwise. Consider Softbank, which has a holding in ARM of 1.6x its market cap. That’s despite owning a host of other things, including several AI plays, and having recently IPO’d Tempus AI (more on this in a moment). If markets were efficient, these discounts probably wouldn’t exist. 

A similar story occurs in the UK, where I know of one holding company that owns a number of the names exposed to AI, like Nvidia and ASML, has exposure to the lowest-value yet most ascendent media platform (TikTok) and is one of the few ways to get pre-IPO exposure to SpaceX, which could be set to rocket when it IPOs next year, being a play on the potentially hot new thematic of Space.

This and yet, it trades at a 10% discount to NAV. If only you owned a passport.

Signals

Keep an eye on Tempus AI (TEM US), not for its precision medicine technology but because it’s the first I’ve seen to change its name to include ‘AI’ in order to capture more share of mind (as well as of market). For some this might draw parallels to re-brandings in the dot com era. Whether that’s fair or not , it’s worth keeping an eye on for it might tell us where we are in the hype cycle. So far the signal is quite muted. It IPO’d (well done Softbank) at $37/share. Last seen, $35/share, -5% lower. I would also keep an eye out for Cerebras for similar reasons. Another upcoming IPO (date tbc) but one that will attract attention for the fact it claims to be the first real threat to Nvidia. One that might start to ‘chip away’ at its seemingly impenetrable moat (sorry, couldn’t help myself).

Looking for productivity growth within

 GLP1’s perhaps don’t attract the attention of GPTs or AI, but in terms of what they could do for productivity, perhaps they should. As we’ve written previously, weight-loss drugs could remove a lot of fat from obesity related healthcare costs by some $1.7T in the US. In the UK, the Tony Blair Institute believes between 13 – 23% of workers over 50 with a heart disease or stroke will leave their jobs before the age of 64. But by cutting rates of heart disease by just a fifth you would boost the economy by £2.2 billion within five years. And there is more and more evidence suggesting these peptides produce more than weight loss. They are proving effective to combat heart disease, strokes, some cancers and also, addiction.

So why the [sad face]? Too much time on social media perhaps?

Addiction therapies found in Finland

So, if these peptides work on our reward networks to lower dopamine release, as they appear to, might that also help our teens get off social media? With the growing evidence linking screen time with teen depression, it’s worth a crack. To this end I would listen to Dr Tyna Moore, an Ozempic expert, discuss the benefits of micro dosing. Another method is age-gating or removing the stimulus completely, which, as mentioned last week, schools in the US and NZ are starting to do...

…and now in the UK also. I know this for my son’s school has just instituted the plan. And because many mums and dads still want a way to communicate with their kids, the school has bought them all a Nokia. A device owned by a company which once accounted for 70% of the Finnish stock market. A market that stands to gain a lot, should we ever see peace again between Russia and Ukraine.

Financial literacy

I wish my school had taught me the benefits of investing a portion of my savings, of dollar-cost averaging and compound growth. Sadly all I learnt was how to kick off both feet and convince Lauren Hastie my mother’s marmite and lettuce sandwiches were a fair trade for her S&V crisps. But those schools in countries that do teach financial literacy tend to have thriving equity cultures – something I believe the UK needs to promote capital formation and productivity growth. Take Sweden, where charities are set up to do this very thing. Or the US, where financial literacy courses are mandatory in most states, and soon will account for up to 70% of graduating students. So while it’s good to see talk of a National Wealth Fund to crowd in private capital, pension reforms, easier listing rules, tax breaks, British ISAs, focused industrial policy (hopefully less stamp, FRS17/Solvency 2 reforms and more share options) etc., we need more financial literacy taught and encouraged in UK schools.

For change needs champions – the best of which tend to be the young. So how can we improve financial literacy?

Game it

Why don’t we 'game it'? The Oscars, Booker and Nobels are prestigious prizes that celebrate past achievements. Challenge prizes however reward future efforts. They’ve been used historically to solve seemingly intractable problems like the Longitude Prize in the 1700s which inspired the Chronometer and allowed ships to navigate at night or when there was no sun (i.e. most of the British summer). Similar prizes led to London’s sewage system, skyscrapers, trans-Atlantic flight and even tin-cans (thank you Napoleon). More recently, Musk has funded the CarbonX project with $100m and the Challenge Works Charity offers rewards for scientific breakthroughs, the latest being in antimicrobial resistance (AMR). So, why not utilize this incentive and game it further by adding competition, community and a healthy dose of FOMO?

As discussed with some of you, let’s create a stock competition that we take to schools, focused on UK stocks (build home-bias muscle), perhaps leveraging the research platform being built by Rachel Kent. Let’s get kids, from any school or area as interested in stocks as they are their gaming coins or skins. Let’s encourage the FT to publish rankings, companies to offer internships or sponsorship, generate some interest in The City. And let’s excite our most important cohort about the future, through the best vehicle for such – equities.

And finally...

Still wondering what a “sand badger”, “muck roller”, “moleskin shaver” or a “spilch dealer” is? They were job titles in the UK according to the 1881 Consensus.

Far more descriptive than today’s terms – like Head of Enterprise Client Solutions. 

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