The Social Mobility of Stock Markets

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The Social Mobility of Stock Markets

— A Historical Perspective into the U.S. and Chinese Stock Markets

My previous piece A Decade of Inequality focused on the concept of “market cap gains.”  It reviewed the end results but paid little attention to how we got there — how did it happen that almost all the market cap gains were concentrated with the largest companies?  Was it because larger companies started bigger so their gains over a decade’s time naturally became bigger?  Or was it because smaller companies collectively never had a chance to grow big at all?

To put it differently, the question that my previous piece raised and that I am trying to answer in this piece is this: over the past few decades, have stock markets in the U.S. and China offered “social mobility” so that smaller companies can still achieve above-average returns relative to their larger peers?

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Differentiation Is Not A Moat

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If one were to compile a list of the most abused words in finance and investing, “differentiation” (or “being differentiated”) will certainly occupy a top place in that list. Most money managers tell clients that their investment processes are differentiated; most businesses claim their products or services are differentiated. It has now become unusual if a business does not sprinkle its client-facing talks with the word “differentiation.”

Wait… common sense tells us a business can only be run in a finite number of ways… if most players in a particular business claim themselves to be differentiated… That is an oxymoron!

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Some Thoughts on My Investment Philosophy

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For people who invest, their investment actions are usually guided by a philosophy of which investors themselves are consciously or unconsciously aware. It is like asking yourself to list out all items that are in your wallet now; unless you take a pause, open your wallet, one is usually not fully aware of what is in there. Similarly, it is a tall task to give a full answer to one’s investment philosophy. So, this blog piece is not meant to be a complete account, nor final or conclusive. As time goes by, as I age and gain more experience, I will likely abandon some beliefs that are stated below and form some that are new.

I first traded stocks when I was under 20 — I bought an A-share company listed in Shenzhen. Since then, I have invested in A-shares, Hong Kong–listed stocks, U.S. stocks, bonds, funds, real estates and other types of assets and financial contracts.

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A Decade of Inequality: Has the Booming Stock Market Benefited All?

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My wife and I decided not to go anywhere on New Year’s Day. Instead, we spent the day at home. Bored, I decided to devote my first day of this new decade to examining something interesting of the past decade. One of the most distinctive features of the 2010s was America’s roaring stock market, which now is the longest bull market in history. Including dividends, $1 invested in the S&P 500 Index — a basket of some 500 companies — has turned into $3.6, a whopping 13.6% annualized rate of return. The stunning performance of America’s stock market invites the arrival of a very logical conclusion: over the past decade, American companies and people have fared well.

However, this rosy image does not square with reality. For the 19 years from 1999 to 2018, real median household income in the U.S. has only grown at 0.14% a year; from 2007 to 2018, the pace was only 0.32% a year.

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Five Takeaways From 2019

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This is a year-end personal reflection piece. The following five takeaways of mine are inherently backward-looking, but hopefully by examining the past I become more informed going forward.

#1 Think Independently

We giggle when watching lemmings do all kinds of funny things in a group together. But we are not that different — we humans are just as social species as lemmings are. As a general observation, we like people who are like us — a tendency which builds an intellectual echo chamber that confines and reinforces our thinking, making it less independent.

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Local Knowledge

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Thomas Friedman made an interesting argument in his book The World Is Flat: in a globalized world, historical and geographic divisions are becoming increasingly irrelevant.

Through my experiences, however, I think the opposite is happening — in a globalized world where people from different cultures interact with each other, historical and geographic divisions are increasingly visible and relevant.  In order to make better decisions in a globalized world, local knowledge becomes more valuable than ever before!

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The Power of Writing & Reading

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[The body of this piece was written by me in December 2018]

When I was still living with my parents, I used to read almost all the newspapers and magazines my parents subscribed.  In college, I served a leadership role with the university’s reading club.  Later at Yale University, forced by the teaching environment and enlightened by some elective courses that I chose to take, I discovered that I have a real passion for not only reading but also writing.

As I write more and more, gradually, I started to realize that writing has some kind of “superpower” with it.  It is intangible and difficult to describe.  But let me make an attempt here.

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Invest in the Young

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The other day, I was listening to the radio and the host mentioned a new phenomenon: smart speakers are challenging the position parents occupy in their children’s minds.  At the dinner table, kids prefer speaking to these boxes to learn things they do not understand — questions like, “Ok Google! How big is the moon?” — which basically downgrade their parents from “old and wise teachers” to “dinner guests.”

It struck a chord with me, because it reflects a broader social development, that is the foundation of the notion that “old is wise” is cracking.  I am convinced that investing in younger people and younger organizations will increasingly become the right choice for all investors.  This article offers my thoughts on why these changes have been happening, their implications for investors (investors in the broadest sense, not just financial: like parents invest in children, bosses invest in apprentices) and what the old generation should do going forward.  Please note that I am strongly in favor of “respecting your elders” but think we need to respect the younger people more than we do.

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