Jan

8

 A few quick thoughts on George Gilder's talk on Thursday …

Gilder's comments on the randomness/unpredictability of the creative process (and its resistance to central planning) reminded me of The Fountainhead because of the obvious intrinsic motivation of Howard Roark.

From a conversational exchange between Ellsworth Toohey and Peter Keating:

Does he like money? No. Does he like to be admired? No.

Gilder discussed the impossibility of modeling creativity. But there are some guesses at the distributional arrangement of total output:

Lotka, Price, Pareto and, most recently, in his wonderful book, Human Accomplishment, Charles Murray have studied the extremes of human accomplishment in literature, science, and the arts. Murray also developed some of the statistics of sports accomplishment. The models of these authors are power law statistical distributions of the form … [Read more here]

 There's also some indication of predictabilities in the individual timing and cross-sectional clustering of creative acts [Read article here]

Claude Shannon was a protagonist of Gilder's talk. Here's an excerpt about him that I just read in Fortune's Formula:

Shannon was the not the first great scientific mind to suppose that his talents extended to the stock market. Carl Friedrich Gauss, often rated the greatest mathematician of all time, played the market. On a salary of 1,000 thalers a year, Euler left an estate of 170,587 thalers in cash and securities. Nothing is known of Gauss's investment methods.

Gilder's remarks about how supposed "deflation" harmed the telecom sector were parallel to an economic theme Bill Gross considers in his Investment Outlook this month:

Since almost all yields reflect a real plus an inflationary component, it stands to reason that the ability to pay debts expressed in nominal terms should be viewed in a similar fashion when analyzing growth. By so doing one can understand, for instance, why a deflationary environment can be so deadly to a modern-day, debt-ladened economy … the U.S. economy has gravitated to an average nominal growth rate of 5% or so as disinflation has taken hold. Because 5% has become so 'standardized,' government, mortgage, and corporate bond yields have centered around that level as well - the Lehman Aggregate index now yielding approximately 5.30%. 5% is how fast we grow and 5% is what we owe; the two rates are thus symbiotic, one feeding off the other when the economy is in balance. Problems arise however when nominal growth rises …too far below 5% - usually indicative of declining real growth … [Read more here]

Professor Charles Pennington comments:

My comments on George Gilder and his talk at the Junto on Jan 4:

He was very forthright and abject about the many subscribers who started buying his stocks in early 2000. He had lost 94% from peak to trough. He also showed (using data from a third party provider, Mr. Dick Sears) that his stocks had actually outperformed the S&P and Nasdaq from 1996 to present, even including the gigantic decline.

His big idea is kind of paradoxical. He believes that in order to earn big returns, returns much higher than you'd make from bonds, you've got to be in companies that have intrinsically unpredictable future profit streams. The paradox is that he must think that he can at least partially predict them. His aim is to have a few of the companies he owns go up by 100-fold or even 1000 fold, and by doing so, they will make up for the ones that failed. He may be correct, but let there be no confusion–this is not in sync with conventional "efficient market theory," which states that you don't get paid for the "idiosyncratic" component of your risk, the component that can be diversified away.

He does not believe in "reductionism" or "materialism," which is the prevalent idea in science that states that everything is all ultimately explained by the deterministic laws governing microscopic physics. He believes in "emergence" in which new laws emerge as one goes to a larger scale; that quantum electrodynamics is not the relevant thing to think of when approaching something like child psychology. His belief could be either very obvious or very controversial, depending on how it's interpreted. He mentioned an essay that he wrote for the National Review on intelligent design, which unfortunately requires a subscription.

In my opinion, his understanding of science and engineering does not deserve the criticism that he sometimes gets. No one can understand all of science and technology. His thoughts and studies are very wide ranging. He takes in a lot, and he thinks about it clearly and often originally.

Will his strategy be successful over the long term? I don't know. As discussed above, it's been fairly successful since 1996, though few could stomach the volatility. It may be more successful going forward. It might be more orthogonal from the growth/value axis than you might think at first glance. For example, he might do well going forward even if "growth," defined in other ways, does not.

I agree with the Chair that adding a new guy just to monitor PE's or something like that is not promising. That looks like a very rear-view-mirror kind of move. The guy does seem like a bright guy, but individuals can also appear to be misleading themselves about how easy it is to predict things in advance.

Personally, Mr. Gilder is quite a nice guy, very humble and optimistic. He was very gracious and patient with all the questions from the Junto members.


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