New Technology Doesn’t Guarantee Success

How much meaning do you put on a number? It is probably more than you think. Think about your income, how much you need to retire, or what you spend to maintain your lifestyle— these numbers are critical to you but mean very little to anyone else. When it comes to investing, the market doesn’t care what you paid for 100 shares of XYZ. Mr. Market only cares about itself.

 

 

There are many forms of behavioral bias, one is placing importance on a number simply because it holds significance to you. An annual income of $100,000 is the equivalent of winning the lottery to someone living on social security, but it is bankruptcy to another who has a second home in Aspen and a jet to fly there. This happens to be newsletter number 400, a milestone considering it took 33 years of monthly observations to reach this point. However, you wouldn’t have noticed if it wasn’t mentioned here. You are reading this for an opinion or “observation” on what is happening in the financial world. Whether it is issue 400 or 401 doesn’t matter to you.

 

 

Another bias we have is putting too much weight on what is happening right now and wanting to control our future. We don’t even know how the day will finish, let alone what may happen next year. Throw in politics and our unknowable financial futures, and we all become very opinionated, with a strong bias of why our view is the better one. The world is constantly changing, and we want to believe the stakes are higher now, but they have been high before.

 

 

The country expanded westward in the 1800s and the Sante Fe trail was a popular route before railroads. Seeing opportunity in 1858, the Moore brothers bought a trading post that was directly on the trail about 75 miles north of Wichita, Kansas. The location became known as Cottonwood Crossing. The Journal of Commerce called it an important stop on the trail providing supplies for travelers heading west. In 1859, the Journal of Commerce noted that between April and September more than 2,170 wagons and 8,000 tons of freight passed by Cottonwood Crossing. In 1860, the Moore Ranch established a post office, and in 1861, the town of Marion was formed. By 1865, records show 4,472 wagons, 5,197 men, 1,267 horses, 6,452 mules, 38,281 oxen, 112 carriages, and 13,056 tons of freight passed Cottonwood Crossing. In only eight years it became an extremely successful trading post; the Moore brother’s wealth number was growing rapidly. However, the winds of change were in the air.

 

 

On July 2, 1866, the Kansas Pacific Railway made the trading post irrelevant, and on November 9^th, only a few months later, the post office closed. The railroads changed almost every part of the economy in the latter part of the 1800s, and with it came major speculation in the new transportation technology (it eventually led to the Securities Exchange Act of 1934 protecting investors against fraud). However, the perception of endless prosperity from the railroads ended in the depression that followed the Panic of 1873. Railroads transformed the world, but they didn’t eliminate the risk of economic cycles.

 

 

Does this sound like artificial intelligence today? We know AI is going to have an impact on our lives, but who the ultimate winners will be is far from certain. It is easy to become infatuated with the present and think the future of AI is nothing but bright. Currently, just three companies who are working in AI represent 30% of the value of the entire annual US economy, implying investors have extremely high expectations.

 

 

It is worth remembering that Abraham Moore became wealthy selling supplies to the travelers on the Santa Fe Trail. His investment paid dividends (his bias was earning cash), and his profits probably helped him get elected to the House of Representatives in 1871 even though his business closed. Meanwhile, many railroads didn’t survive— 89 went bankrupt by 1876 due to the depression. Speculation on an emerging technology doesn’t guarantee success, but if your investments provide an income while you hold them, it makes it easier to show a profit.

 

 

Keeping the present and the future in perspective is challenging. In the present, it is easy to attach a value or number to something important to you. A good story can justify any number, but there is an eventual reckoning. Every generation thinks it is ‘different this time’ and their number is more important than yours. Trains made crossing the prairie and the mountains much easier. Airplanes advanced world travel to just hours, and AI can increase the productivity of some tasks dramatically. The stories change, but cash flow is timeless. Make sure you know what number is attached to your story and how much you are paying for it.

Observations on the Market No.400