A Lot of Good Things Are Happening but Not According to the News

News media is in the amygdala business. The amygdala is our fear center.

Turn on the news. What are they usually talking about? Death, terrorism, financial markets in turmoil. Anything and everything that stimulates your amygdala and fires up your fear response.

Regular news media viewers fall prey to the Mean World Syndrome. They believe the world is worse off than it really is. A #ProTip to a certain President who watches a lot of cable news.

The world and humanity are a lot better off than the average person thinks.

The bad news dominates the headlines. You have to pay close attention to notice when good news sneaks in. Like this piece of great news that Barry Ritholtz noticed.

More than one-third of the adult population in the United States has a bachelor’s degree or higher marking the first time in decades of data.

“The percentage rose to 33.4 percent in 2016, a significant milestone since the Current Population Survey began collecting educational attainment in 1940,” said Kurt Bauman, Chief of the Education and Social Stratification Branch. “In 1940, only 4.6 percent had reached that level of education.”

Click image to enlarge. From the Census via The Big Picture.

Where to Find Good News

Or you have to find it in alternative media.

Peter Diamandis, author of Abundance, and Dan Sullivan got together on the Podcast Exponential Wisdom to highlight all the important positive trends going on in the world today.

For example, robots and automation reducing the need for child labor. It allows kids to have more time to get an education. Educated kids lead to educated adults who have more educated kids. The economy benefits immensely. Especially, when you allow girls to get an education.

Besides economic gains, more educated people in the world produces a cognitive surplus. As Peter Diamandis states, it only takes one person to come up with a cure for cancer for the entire world to benefit.

There is a lot of good happening in the world but you wouldn’t know from the news. Turn off the TV. Stop reading the newspaper. If the news is important enough, it will reach you.

Railroad Stocks Will Benefit From U.S. Corporate Tax Cut

Morningstar making the case for a long-term investment in Railroad stocks.

One of the big reasons is taxes. The railroad stocks are not multinationals. They only operate in the U.S. and they pay the U.S. corporate tax rate.

UNP Effective Tax Rate (Annual) Chart

UNP Effective Tax Rate (Annual) data by YCharts

If President Donald Trump does indeed cut corporate taxes, the savings will help railroads immensely. While other industrials might use the excess cash to buy back shares or raise dividends, the railroads are more likely to reinvest, and that could be a boon to stock prices.

“If you cut corporate taxes in half, the market will take off,” says Nick Kaiser, chairman of Saturna Capital, which manages the Bronze-rated Amana Growth Investor (AMAGX). That’s a big reason rails are up 27% since the election, he says.

An Ideal Investment for Long-Term Investors (Morningstar)

Always Invert

“Invert, always invert”

It is a phrase coined by the mathematician Carl Jacobi and made famous by Charlie Munger. When you want to solve a difficult problem take the inverse.

It is the first thing that came to mind when reading about survivorship bias and where to armor allied bombers during WW2.

In World War 2 the allied nations had a problem, they were losing too many aircraft. At the most dangerous times of the war the odds of coming back were a coin flip.

The Navy decided that the best solution would be to add armor to the planes, but could only add so much, and didn’t know where to put it. They took this question (how much armor to add and where) to Abraham Wald, a mathematician working on the war effort. Wald applied his models to places where the plane hadn’t been shot.

This took everyone aback. Why armor where the planes hadn’t been hit?

Wald reasoned that if some planes were able to return after being shot in certain places, other planes had not been able to return after being shot in the inverse of those places. Wald found the survivorship bias in looking at only the planes that made it back.

Source:

Survivor Bias in WW2 Airplanes, NBA players, & Mutual Funds (The Waiter’s Pad)

Latticework of Mental Models

From A Wealth of Common Sense and the two lessons learned from the founder of Patagonia Yvon Chouinard. If you’re an avid reader and follower of Charlie Munger as we are then the second lesson will look familiar.

2. Have an open mind and utilize a wide number of disciplines to solve problems and make decisions.

Until the 1970s the countries in the world where snow and ice climbing was practiced were divided into those that used only flat-footed (or French) cramponing techniques and those that climbed on the front points of the crampons. Both schools of climbing were equally proficient, but neither side was willing to admit the worth of the other’s technique. It is possible to do all your ice climbing with only one technique – as many persons still do – but it is not the most efficient way nor does it make for a very interesting experience. It is like knowing only one dance. When the music changes, you are still dancing, but rather out of tune. So, as is usually the case in these matters, the truth lies right down the middle. Now all the best ice climbers know and apply both methods in their cramponing.

Source:

Two Business Lessons From Patagonia’s Yvon Chouinard (A Wealth of Common Sense)

It’s Not Easy

It’s a topic we discussed in the last dividend letter, finding high-quality companies is the relatively easy part about investing. It’s mostly math.

Holding onto high-quality companies for the 1,000%+ returns is the extremely hard part. You have to constantly overcome your emotions and biases to stop yourself from selling too early after an initial gain. Or, as pointed out by Michael Batnick of The Irrelevant Investor, preventing yourself from selling during a panic-inducing drawdown.

Chart courtesy of The Irrelevant Investor. Click image to enlarge.
Chart courtesy of The Irrelevant Investor. Click image to enlarge.

A few things really stand out in this table.

  • Nine of the ten biggest winners were all cut in half. Granted, the S&P 500 was as well, but the point is that even the best stocks gave investors plenty of sleepless nights.
  • Even though these winners returned 23x what the S&P 500 did, only Apple and Priceline hit all-time highs more often.
  • The average standard deviation for these stocks was more than twice that of the S&P 500. No pain, no gain.
  • These stocks spent on average 34% of the time in “bear market territory.” That’s pretty wild. One out of every three days these stocks were at least 20% off their all-time high.

It’s our hindsight bias that tells us holding onto multi-baggers over many years and riding out the drawdowns is an easy endeavor. It’s not.

Source:

Looking For a Ten Bagger? (The Irrelevant Investor)