Nov. 11, 2020 3:14 PM ETAAPL, AMZN, ARKK.
- Human intelligence is an under-appreciated ingredient in investing strategies and tactics.
- The Federal Reserve has generally said that virus control is the factor that will help move the economy toward its potential, simple common sense.
- Identify an investment theme or two that you can follow, a micro-focus, and monitor the forces impacting the macro-economy.
- Build trust in your competencies by using your own “intelligence.”
Human intelligence is behind everything, including artificial intelligence, machine learning, and the internet of things. We invest in technology as if it’s got a mind of its own but neglect what’s behind it. The intangible is becoming more tangible and also elusive in some ways. There’s an investment thesis building here, I promise.
We find ourselves at an inflection point in the world of human activity and in what to invest our time, attention and money. Human capital is increasingly valued in some sectors and industries more than others, except when management or leadership recognizes that the people it employs are the very essence of its model, like goods and services-oriented firms or those selling essentials like Walmart (WMT). Then you have the firms like Amazon (AMZN) and Alibaba (BABA) that use technology really well to scale for “essential” services and products. In a research paper about the valuations of firms with more intangible capital on their balance sheets, the study showed how the market and economy are evolving to include more of the FAANGs as highly valued firms, and why, which includes:
The pandemic rewarded many of these firms for a period. Monday, Nov. 9 some of the more traditional firms were back in favor – oil and gas, airlines, and others battered by the pandemic. I’ve written about this since early February that COVID-19’s grip would continue to plague the economy until it was better contained and confidence restored. This current new normal is reflected in the Dallas Federal Reserve’s Index. The trend lines run to Oct. 17 and we know that cases have been rising in all states since that time. The Federal Reserve has generally said that virus control is the factor that will help move the economy toward its potential. It’s just common sense. I’ve participated in several Fed webcasts and read the assessments by various leaders.
Currently, epidemiologists and economics are co-mingling more in the mainstream of academia, trying to determine what pandemic economics look like and might reveal in the months and years ahead. The news by Pfizer (PFE) of their vaccine’s efficacy of 90% created the thrust behind the markets move early in the week as well as the election being called. The safety of their vaccine is now under review.
No lack of themes
Another investment theme is obviously climate change and sustainability, encapsulated by ESG (environmental, social and governance) actions by firms. All of the big investment houses are packaging ETFs and funds to appeal to the growing market for investments that help people and planet. That universe of types of firms is growing as are funds flows. Blackrock (BLK), Calvert and others like the American Century funds are increasing their offerings.
Sustainable funds represented about 10% of all flows into U.S. stock and bond funds for the quarter (9/30/20). It wasn’t so long ago when that percentage was routinely below 1%. In September, sustainable funds comprised 24% of the $12.7 billion in net flows of U.S. stock and bond funds. Granted, September was a bad month for overall fund flows, but sustainable funds appear to be on a secular growth path that hasn’t experienced the same ups and downs.
My point is that we are not lacking in firms, funds and assets in which to invest as the ESG world shows. Note also that these funds can overlap each other’s holdings with other funds owned in a portfolio or 401(k). Duplication and thus concentration is an issue. We also witness “the market” being traded increasingly by algorithmic programs and momentum. What’s a human to do in this investment world of AI, the possibilities of technology, and behavioral economics?
The pandemic has been like one of those apocalyptic series or movies where advanced technology and the basics of living are smashed together in an odd contrast to each other. Think Travelers, Interstellar, Revolution, and so forth. Our workforce is reflecting that as are our politics depending on what world of work you occupy to some extent. The big picture, macro, is a challenge to identify and yet, this is the very thing we require as a compass, particularly in the case of investing at this time. I believe human intelligence is the answer. It’s reflected in many a life sciences firm, ESG-leading firms, technology firms and yes, even oil and gas firms as they try to navigate an energy transition that is undoubtedly happening. British Petroleum (BP), Occidental Petroleum (OXY), Shell (NYSE:RDS.A)(NYSE:RDS.B), Enbridge (ENB) and others are finding unique paths within their scope of operations, asset mix and competencies.
No computer program will necessarily be able to identify “the future” though complexity science-types might disagree. The futurist’s impetus usually starts with a person having an idea or vision about the future. I believe we must use our human intelligence for this – sharpening our wits, focus and awareness. Inherent in operating from the theater of human intelligence is intuition, thought, and analysis that a computer or a Google search cannot truly penetrate. This is why analyzing data and finding inferences, data analytics, is a skill that’s in demand, the human side of the equation that finds meaning. Yes, I’ve been researching bitcoin investments of late. I listened to Raoul Pal’s “greatest trade” video endorsing the future of bitcoin. I’m currently intrigued by the Ark funds (ARKK)(ARKW) to name a couple of their funds.
I probably spend more time thinking about investing than investing, until I’m clearheaded about why I’m willing to bank on a stock or fund. Sometimes that does not materialize as success for many reasons – a sector falls out of favor, a black swan event or some other unforeseen circumstance. However, the portfolios I do have had held up from diversification and not acting (holding) as much as thinking (strategizing). Not pulling the trigger has been as equally important as pulling the trigger.
The best advice I can offer is to identify an investment theme or two (and/or their firms) that you can follow, a micro-focus, and monitor the forces impacting the movements of relevant firms and what is happening in the macro-economy. This will offer both risk mitigation and the ability to observe opportunities. The rest of one’s actions are about risk tolerance and investment horizon. Then, whether pandemic or not, there’s some forward movement or strategic plan when one’s timing is right based on your own human intelligence. The trust you build using your intelligence creates confidence for future decision making – your own human capital.