"The longer you can look back, the farther you can look forward" - Winston Churchill
We made a promise many years ago that we would never allow artificial intelligence to write our quarterly letters. We still intend to keep that promise. However, we never promised not to use artificial intelligence to help organize information and remove a little bit of the drudgery from our day-to-day work.
To that end, we recently tasked an artificial intelligence program with going back through more than fifteen years of quarterly letters and identifying the quotes, themes, and ideas that appeared most often. This exercise had an ulterior motive. Several years ago, we lost access to a website that housed many of our older letters, and we thought it would be worthwhile to revisit some of the ideas that shaped our investment philosophy over time while also sharing them with newer readers who may not have seen them the first time around.
In a way, the exercise reminded us of an idea expressed by one of our favorite bands, R.E.M., in the song “King of Birds” with the lyrics:
“A thumbnail sketch, a jeweler's stone
A mean idea to call my own
Old man don't lay so still you're not yet young
There's time to teach, point to point,
Point observation, children carry reservations
Standing on the shoulders of giants
Leaves me cold, leaves me cold”
Progress often comes from standing on the shoulders of those who came before us. Artificial intelligence, at least in its current form, appears to excel at pattern recognition and information retrieval. It can sift through thousands of pages in seconds and identify recurring themes. What it cannot do, in our opinion, is replace wisdom, judgment, lived experience, or deep introspective thought. We tend to believe artificial intelligence will ultimately become a powerful productivity tool that removes tedium and helps people focus on higher-level thinking rather than replacing that thinking altogether.
Of course, not everyone shares that view. Some researchers envision a future where artificial intelligence fundamentally changes every aspect of society while others warn of existential risks and catastrophic outcomes. We are old enough to remember many previous "end-of-the-world" predictions, whether they involved computers, globalization, derivatives, housing markets, the internet, or even the calendar turning from 1999 to 2000. History suggests that predictions of doom often arrive long before practical solutions or actionable ideas. Thus, we continue to approach artificial intelligence the same way we approach investing: with curiosity, humility, and a healthy dose of skepticism. To that end, we also question whether the ROI (Return on Investment) on these huge investments in artificial intelligence by previously cash flow positive and debt free hyperscalers amidst circular vendor financing will create compelling value at current price levels.
Ironically, after reviewing fifteen years of letters, the AI-generated summary concluded that the same themes in a Southern voice kept showing up over and over again regardless of whether the topic was Greece, COVID, inflation, housing corrections, cryptocurrencies, artificial intelligence, healthcare, commodities, elections, or interest rates. Technology changed and headlines changed but human behavior did not. (We also liked that it recognized our Southern voice since the author of the letter had just returned from a visit to the Pat Conroy Literary center in South Carolina.)
The exercise produced hundreds of observations, but a few quotes rose consistently to the top.
"Be greedy when others are fearful and fearful when others are greedy."
Warren Buffett
"Mimicking the herd invites regression to the mean."
Charlie Munger
"We know from experience that eventually the market catches up with value. It realizes it one way or another."
Benjamin Graham
A few of our quotes that artificial intelligence identified were:
“We want our investing style to bore you to wealth”
“You can’t steer a boat by looking at the wake”
“We want to create a portfolio that's robust to all eventualities but not ideal to any one workout or situation.”
"Freedom is our greatest export."
What struck us was how little these ideas have changed over time. There is always something to cause concern and something to instill hope. We find that investors tend to overestimate what will change and underestimate what remains permanent. Which brings us to one of the more thoughtful market commentaries we read recently that highlighted a concern we have discussed several times in prior letters. While artificial intelligence continues to produce impressive advances, investors appear increasingly focused on how much capital will be required to support the infrastructure behind it. Building data centers, power grids, semiconductors, cooling systems, transmission networks, and energy production requires enormous amounts of capital, and ultimately the return on that investment must justify the spending. Innovation can change the world, but valuation still matters. Also, what are the basic elements used to build compute in this virtual world? Real-world resources like natural gas, copper, oil, rare earths, water, right? And what items are in a tightening of supply due to geopolitical concerns? Those same resources, right? Thus, while we are hopeful for a bright future we are aware of real-world constraints/problems that must be solved and that may prove inflationary for society. These are the reasons we have continued to invest in commodity related funds for our clients as they are a way of bridging the gap between real world constraints and “moon shots” that may or may not materialize.
After fifteen years of letters, different crises, different market cycles, and different headlines, we were surprised that the artificial intelligence program reached essentially the same conclusion we did:
“Buy good assets at reasonable prices”
“Stay diversified”
“Ignore the noise”
“Remain patient”
“Allow compounding to do the heavy lifting”
Perhaps we didn't need artificial intelligence to tell us that. However, we do like to hear our thoughts echoed back to us. It makes us feel like we are “Standing on the shoulders of giants” and hopefully, we are adding an original voice and perspective and not just repeating the same old patterns. Regardless, thanks for reading these quarterlies over the years. We hope they have been insightful. We know they have not been AI slop as we didn’t even know what that phrase was until a few months ago. Please let us know if there are any quotes you remember from previous quarterlies that stuck with you.
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.
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