Science was the first academic subject I stopped pursuing, and I regret it. In high school, the only science options senior year were A.P. and required an extra hour for the lab work. I had other priorities, including a semi-professional dance career that took up a lot of my time. In college, I took the bare minimum of two science courses and chose biology and astronomy. Physics and chemistry were never my strong suit.
So it was a surprise to me when my son was gifted a book about the solar system titled – 8 Little Planets. Eight? When I learned about the solar system, there were surely nine. What happened to Pluto? It turns out, in 2006, the International Astronomical Union (IAU), downgraded Pluto to the status of a dwarf planet. They deemed Pluto had not met the three tests required for full planetary status, hence the change.
I find myself rebelling against this change like a cranky old man. Back in my day, Pluto was a planet! I refuse to call it a silly dwarf planet. Bah humbug! I’ll probably get angry again when my kids start learning the solar system in school.
I notice this tendency among professional investors. The sands of time shift the way the world of money works, if only ever so slightly. What worked in investing 40 years ago, may not work today. We cling to the groundbreaking academic papers of yonder days – mean-variance optimization, the small-cap premium, the value premium, and book value. We read the masters – Ben Graham, Modigliani, Miller, Fama, French, and Merton – and we deem their work Gospel.
This is where economics and finance differ from physics and chemistry. Money is a story created by and agreed upon by humans. Money is a social contract. With it, we have propelled an amazing amount of progress in the last century and a half. We’ve made improvements and experienced failures along the way. But to stick our heads in the sand and pretend it doesn’t change is a grave mistake.
Today is a tricky time to be an investor. Is there anything certain anymore? Since the 08-09 financial crisis, I have witnessed the following:
- After the 2008-2009 financial crisis, the Federal Reserve began buying bonds and expanded its balance sheet from $800 Billion to over $4 Trillion. When COVID-19 threatened to shut the global economy, the Fed’s balance ballooned from $4 Trillion to $7 Trillion almost overnight. The Fed even bought bond ETFs and junk bonds to calm the markets. Its balance sheet sits above $9 Trillion today and still climbing. Financial markets have loved every minute.
- Interest rates, both real and nominal, have gone negative in many countries. Yet demand for bonds never declined. Pension schemes, sovereign wealth funds, central banks, and private investors can’t get enough paper they pay to own.
- A digital currency was created out of thin air, or by your nerdy hacker friend “mining” it, on his laptop. Bitcoin now has a market capitalization of over $900 Billion, and the entire cryptocurrency market is valued at over $2 Trillion. There are real companies using blockchain technology to push forward incredible innovation, and the country of El Salvador accepts Bitcoin is legal tender.
- Apple became the first company with a $1 Trillion market cap in August 2018. It is worth $2.5 Trillion only two years later.
- Oil futures settled at negative $37.63 per barrel in April 2020.
- In August 2011, the United States Congress came within two days of the Treasury running out of money to pay its bills before finally raising the debt ceiling. S&P later downgraded the credit rating of the United States. They are currently flirting with this disaster again in Congress as I write.
- A band of merry internet traders caused the stock of struggling brick and mortar retailer Gamestop, to soar over 3000% in January 2021. They’ve repeated this successfully with movie theater chain AMC and others. An at-home trader name Roaring Kitty, was called to testify before Congress on the matter.
- Clip art of a fake rock sold for $1.3 Million on the internet.
Toto, we are not in Kansas anymore. I could go on. These events have forced me out of my comfort zone and stretched my intellectual capacity. I am willing to leave all my preconceived notions at the door. Innovation is rumbling the ground on which the current economy and financial system rest. Change is upon us. The impossible may become possible. The key is to open your mind.
Pluto is, in fact, no longer a planet.