“We tell ourselves stories in order to live…
We look for the sermon in the suicide, for the social or moral lesson in the murder of five. We
interpret what we see, select the most workable of the multiple choices. We live entirely, especially
if we are writers, by the imposition of a narrative line upon disparate images, by the “ideas” with which
we have learned to freeze the shifting phantasmagoria which is our actual experience. “
Joan Didion – The White Album
We couldn’t agree more with Joan Didion about the importance of the narrative. The story brings life to dry details and meaning to complex disparate ideas among many other things. Yet within the narrative there is always room for confusion, misinterpretation, and deception. The line between charlatan and visionary is oftentimes a thin one. The difference between “funding secured” by Elon Musk and “We don’t need to get FDA approval” by Elizabeth Holmes at Theranos seemed small at the time but not so much anymore. By the same token, was the narrative of “Inflation is transitory” on the way to 9% benign conjecture, malevolent design or incompetence? Whose narrative can one trust? We highlight these issues because stories are vital but when we push aside details in deference to the narrative, bad things can happen.
For example, the latest feel-good story is artificial intelligence (AI). AI is at an inflection point and is going to change human history for the better. We, of course, struggle as we remember Blade Runner, Alien, The Matrix and The Terminator to name a few. On the back of this “inflection point” some companies are trading at/or near thirty-seven times revenue. This means that to give you a 37-year payback, the company would have to pay 100% revenues for thirty-seven straight years in dividends without any cost of goods sold, zero expenses and no taxes. While we applaud this company’s growth and its platform changing artificial intelligence, we can’t help but think back to 1999 when Sun Microsystems traded at 10 times sales and its CEO made a similar argument right before it fell 95% during the dot com bubble. Of course, add to this the experience we had with Bitcoin losing nearly 65%+ of its value three separate times in the past ten years on its way to revolutionize the financial world and one tends towards skepticism of the narrative. Of course, the same time cryptocurrencies were catching fire so were cannabis stocks before also falling 70% plus (pun intended). Thus, we don’t feel we should be faulted for questioning details amidst the backdrop of a highly attractive story. For instance, amidst the valuation issues of artificial intelligence related stocks, there are other doubts surrounding artificial intelligence. In a 60 Minutes special with Google CEO Sundar Pichai, he mentioned hallucinations and emergent properties that manifest in AI. In laymen’s terms, AI can create errors with high confidence or as many of us call them, “lies”. It has also exhibited emergent properties which is when AI teaches itself skills it was not supposed to have access to. As the Google CEO stated in the interview, “We don’t fully understand how it works.” However, he is ready to set this technology loose on the world because it has modeled 200 million proteins that would have taken mankind a billion years to create. Of course, the cynical laymen in us wonders how many of those 200 million proteins are “hallucinations”.
Alarmist thoughts aside, what are the truths we can focus on to provide checks and balances to the euphoria of bull markets and story stocks to improve returns. Amara’s Law states people overestimate the impact of new technologies in the short term and underestimate their long-term implications. Some depict this in the Gartner Hype Cycle which follows an innovation trigger with a peak of inflated expectations and a trough of disillusionment before a slope of enlightenment. In our mind, one can minimize the harshness of the Hype cycle by focusing on valuations, growth in earnings, management, and diversification. Small cap stocks, for instance, haven’t ridden the AI growth model to new heights and instead trade at valuations not seen since the dot com bubble right before they went on to trounce the S&P 500 from 2000 to 2005. Semiconductor stocks were off 35%+ in 2022 and as a group are up 45% through June yet still post valuation ratios that as a group aren’t overwhelming, and these are the companies that provide the infrastructure that helps power AI. Other sectors like healthcare have continued to grow earnings, but the sector has languished in 2023 because merger talk has diminished, and reimbursements have been cut by the government. Meanwhile, surgeries are picking up and we haven’t noticed healthcare bills dropping. Indicators such as pricing power and increasing demand are ones we prefer when adding to investment positions. Finally, diversification has always been called the only free lunch in investing per Nobel prize laureate Harry Markowitz and we couldn’t agree more. On that note, last year we emphasized commodities, international stocks, managed futures and short duration fixed income as a means to provide diversification benefits and were pleased with their performance. This year they have not performed as well but their ability to provide non-correlated returns in a market that looks to be far different than the past ten years appears vital to us.
On the subject of the next ten years, we never profess to foresee the future and try to steer away from such proclamations. We instead focus on the math of the stock market. Historically, the market has trended up two-thirds of the time and to beat inflation we need to be invested in the market in a careful and deliberate manner to do this. If we are beholden to storylines such as banking crises, political intrigue, debt negotiations, raging inflation, border issues and geopolitical flare-ups, then we risk missing the opportunities to invest and build wealth. If we do not build wealth, then it is very difficult to go and live our best stories. When we commingle math and narratives while minimizing the importance of the math, returns are often hurt and no matter how much you enjoy our stories, we know we are ultimately judged based on returns.
Storytelling is considered by many to be one of the greatest powers on earth to paraphrase the author Libba Bray. In fact, Steve Jobs said the most powerful person in the world is the storyteller. We certainly celebrate stories and always look forward to hearing tales from you, our clients. However, it sounds like in a moment of self-reflection that we are asking for math to be added to your stories and please know that is not the case. We just like hearing from you. So please keep the narratives coming into us and we will promise to remain focused on the math in our day-to-day jobs while keeping a skeptical eye on artificial intelligence at the same time.
P.S. – As our final “alarmist AI” note, we do realize that a part of AI will even try to write stories and finish narratives (maybe trying to take the power of the storyteller). We promise to always pen our own quarterly missives and not let AI control our narrative.
General Compliance Disclosures
Statements made via this letter are the opinions of Creative Financial Group (“CFG”) and its advisors, and are not to be construed as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. None of the information contained is intended as a solicitation or offer to purchase or sell a specific security, mutual fund, bond, or any other investment. Readers should not assume that the considerations, suggestions, or recommendations will be profitable, suitable to their circumstances or that future investment and/or portfolio performance will be profitable or favorable. Past performance of indices, mutual funds, or actual portfolios does not guarantee future results. Future results may differ significantly from the past due to materially different economic and market conditions. SSI, its affiliates and its officers, directors and employees may from time to time acquire, hold or sell securities mentioned herein.
Investment products and services provided by Synovus are offered through Synovus Securities, Inc. (“SSI”), Synovus Trust Company, N.A. (“STC”) and Creative Financial Group, a division of SSI. Trust services for Synovus are provided by Synovus Trust Company, N.A. The registered broker-dealer offering brokerage products for Synovus is Synovus Securities, Inc., member FINRA/SIPC and an SEC Registered Investment Advisor. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested.
Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank and Synovus Trust. Synovus Trust Company, N.A. is a subsidiary of Synovus Bank.