As the world de-globalizes and countries become more economically isolated, correlations between international stock markets decrease. This falling correlation makes global diversification more powerful and essential for investors, not less, as was the case in the 1970s.
Despite high market valuations, the current environment is a massive IPO drought, comparable to the 1930s or 1970s. Historically, equity market bubbles are defined by a huge wave of IPOs and secondary offerings. The absence of this issuance is a strong counterargument to bubble claims.
Successful founders often exhibit a paradoxical blend of traits. They need the arrogance to believe they can disrupt incumbents. Simultaneously, they require the humility to do unglamorous, hands-on work—like personally delivering 1,000 packages—to deeply understand the problem they are solving.
Private equity funds report lower volatility because they aren't required to mark assets to market daily. Unlike public funds, they can avoid reporting sharp downturns, a practice critics call "volatility smoothing" or "lying." This creates a misleading picture of risk and return.
By reverse-engineering a manager's portfolio weights to infer their expected returns for each stock, research identifies their "best ideas." These high-conviction positions outperform the other stocks held by the same manager by approximately 4% per year, showing that managers can identify their own winners.
LBO targets exhibit the five Fama-French factors for outperformance (high profit, low multiple, low risk, small size, high payout). Investors can create a liquid private equity-like portfolio by selecting public stocks with these same characteristics and adding modest leverage.
Insiders and CEOs are generally good at timing capital allocation, issuing shares when prices are high and buying back when low. The current lack of equity issuance from high-flying tech companies suggests their leadership doesn't view their stock as overvalued, despite having clear reasons to raise capital.
While managers can identify their best ideas within a larger portfolio, this doesn't mean a fund holding only those few ideas will succeed. Empirically, highly concentrated managers often don't outperform. This approach may attract managers whose success is more attributable to luck than skill.
A common mistake is assuming what's good for the economy is good for the stock market. AI could massively increase productivity, but competition could pass all gains to consumers via lower prices. It could also enable new companies to destroy incumbents, making the net effect on today's stock market uncertain.
Based on asset duration principles, the recent 3% rise in real interest rates should have crushed stock valuations. The market's resilience implies one of two extremes: either stocks are in a massive bubble disconnected from fundamentals, or investors believe AI will multiply future corporate cash flows by 3-4x.
While debates on issues like minimum wage are important, they are unlikely to be the primary determinants of societal well-being in 10 years. Instead, investors and citizens should focus on five critical, high-impact macro trends: the rise of authoritarianism, plummeting birth rates, relations with China, disruptive AI, and environmental changes.