Behavioral Tendencies & Life Expectancy

If you’re regularly having arguments with well-informed people of goodwill, you will probably ‘lose’ half of them–changing your mind based on what you’ve learned. If you’re not changing your mind, it’s likely you’re not actually having an argument (or you’re hanging out with the wrong people.) While it can be fun to change someone else’s position, it’s also a gift to learn enough to change ours.

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Stocks, on average through every bear market since the inception of the S&P 500 in 1957, bottom in price a full 9 months before the earnings do. This is why stocks are referred to as an anticipatory vehicle. By the time earnings are reaching their cycle low, stocks have already been rallying for three quarters of a year in advance of that low.

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In an era when a select group of U.S. tech behemoths have dominated market returns, investors are growing increasingly wary of the concentration risk they pose. With asset owners now exploring various avenues to diversify their equity allocations, U.S. small-cap stocks have emerged as more than just a diversification tool—they represent a compelling investment opportunity. In fact, the “Magnificent 7’s” dominance have driven small-cap stocks to trade at a historically wide valuation discount to large-caps. The potential for mean reversion to narrow this valuation gap creates an opportunity for small caps to outperform the narrowly focused large-cap indices over the next decade.

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About 70% of Nevada gaming revenue is from slot machines and the majority of players are locals. In 2024, Nevada casino games won $15.6 billion from players with $10.5 billion coming from slot machines. It’s a jarring figure when put into perspective with other forms of entertainment (here’s a comparison: the entire US box office in 2024 was $8.5 billion).

Slot machines are the new crack cocaine of high-tech gambling. The most addicted players don’t even play to win. Rather, they play to be in a trancelike state called the “machine zone” where daily worries, social demands, and even bodily awareness fade away.

Meanwhile, the North Star metric for casinos is maximizing the players “time on device” by designing technology with a deep understanding of human psychology. If this all sound somewhat familiar, it’s because the exact same playbook has been used to make our smartphone apps as addictive as possible.

Let’s walk through the details……

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A review, with examples, of the more popular behavioral tendencies investors exhibit, especially in volatile times:

Recency bias – When you give more weight or importance to recent events.
Loss aversion – The most important concept in finance. Losses hurt twice as bad as gains feel good.
Confirmation bias – Seeking opinions or data that agree with one’s pre-existing beliefs.
Anchoring – When a default starting point influences your conclusions.
Hindsight Bias – The assumption that the past was easier to foresee than it actually was.
Endowment Bias – When you place a higher value on something you possess.
Gambler’s Fallacy – When you see patterns where none exist in sequences of random events.
Illusion Of Control – The belief that you have control over uncontrollable outcomes.
Sunk Cost Fallacy – When your decisions are determined by investments that have already been made.

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Studies show that decision makers exhibit a “memory premium:” they tend to things they can remember vs. ones they can’t, even when the latter are objectively better. The memory premium is associative, subject to interference and repetition effects, and decays over time. Even as decision makers gain familiarity with the environment, the memory premium remains economically large. The ease with which past experiences come to mind plays an important role in shaping choice behavior.

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How American’s life expectancy compares to 11 other major developed countries:

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When you go to the doctor, you’re probably the one answering most of the questions. Yet it’s essential to make sure you’re asking plenty of your own. We need to get someone to fund a bazillion-dollar PSA to tell people to be bolder when they talk to their doctors. I see this over and over again: People aren’t asking any questions, never mind the right ones. We asked experts to share the questions you should ask your doctor to help you get well or stay that way:

“What are my treatment options, and how do they compare?”
“If this were your family member, what would you do?”
“What should I do if my symptoms get worse or don’t improve?”
“How many people with my condition have you treated?”
“Are there any new treatments, clinical trials, or emerging research that apply to my condition?”
“What screenings should I get?”
“What vitamins and supplements might be helpful?”
“When can I expect my test results, and how will I receive them?”
“Can you explain that in a way that’s easier to understand?”

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How a Secretive Gambler Called ‘The Joker’ Took Down the Texas Lottery: A global team of gambling whizzes hatched a scheme to snag the jackpot; millions of tickets in 72 hours.

In the spring of 2023, a London banker-turned-bookmaker reached out to a few contacts with an audacious request: Can you help me take down the Texas lottery? Bernard Marantelli had a plan in mind. He and his partners would buy nearly every possible number in a coming drawing. There were 25.8 million potential number combinations. The tickets were $1 apiece. The jackpot was heading to $95 million. If nobody else also picked the winning numbers, the profit would be nearly $60 million.

Marantelli flew to the U.S. with a few trusted lieutenants. They set up shop in a defunct dentist’s office, a warehouse and two other spots in Texas. The crew worked out a way to get official ticket-printing terminals. Trucks hauled in dozens of them and reams of paper. Over three days, the machines—manned by a disparate bunch of associates and some of their children—screeched away nearly around the clock, spitting out 100 or more tickets every second. Texas politicians later likened the operation to a sweatshop.

Trying to pull off the gambit required deep pockets and a knack for staying under the radar—both hallmarks of the secretive Tasmanian gambler who bankrolled the operation. Born Zeljko Ranogajec, he was nicknamed “the Joker” for his ability to pull off capers at far-flung casinos and racetracks. Adding to his mystique, he changed his name to John Wilson several decades ago. Among some associates, though, he still goes by Zeljko, or Z.

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Stress, Attractiveness & Stocks

Minimum Levels Of Stress, a phenomenal new article by one of my favorite authors; Morgan Housel.

A day after the September 11th terrorist attacks, every member of Congress stood on the steps of the U.S. Capitol and sang God Bless America. Could you imagine that happening today? It’s easy to say no, given how nasty politics has become. But if America faced an existential crisis like 9/11 again, I think you’d see the same kind of unity return. There’s a long history of enemies putting their differences aside when facing a big, devastating threat. People get serious when shit gets real. If that sounds like wishful thinking to you, let me propose a reason why: Part of the reason today’s world is so petty and angry is because life is currently pretty good for a lot of people.

There are no domestic wars. Unemployment is low. Household wealth is at an all-time high. Innovation is astounding.

As the world improves, our threshold for complaining drops. In the absence of big problems, people shift their worries to smaller ones. In the absence of small problems, they focus on petty or even imaginary ones. Most people – and definitely society as a whole – seem to have a minimum level of stress. They will never be fully at ease because after solving every problem the gaze of their anxiety shifts to the next problem, no matter how trivial it is relative to previous ones. Free from stressing about where their next meal will come from, worry shifts to, say, a politician being rude. Relieved of the trauma of war, stress shifts to whether someone’s language is offensive, or whether the stock market is overvalued.

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The graphics below show that in general, men rate women more highly than women rate men.

A summary and thoughts on the data from the author:

The typical woman is disgusted by the typical man
The typical woman is moderately disgusted by the median man
The typical woman is strongly disgusted by the bottom quarter of men
Men should stop taking rejection so personally. When the typical women rejects you, the problem isn’t so much that she finds you unappealing. The problem is that the typical woman finds almost all men unappealing.
Men should try harder to be less disgusting.
Women should try harder to be less disgusted. Most women eventually accept a guy who isn’t visibly attractive. Much of the reason is that superficially unappealing guys win them over with charm, humor, and devotion.
It’s not hard to use evolutionary psychology to explain why the typical man disgusts the typical woman: Since women’s maximum reproductive capacity is strictly limited, they’re evolved to be hypergamous, with a strong preference for mating with the best of the best.

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Numerous studies show a strong relationship between stock market valuation and long-term subsequent returns. Since 1979, global stock market indices have been valued on average at a Shiller-CAPE of 20 and a price-to-book ratio (PB) of 1.9. Investors who invested at attractive valuations in recent decades were able to achieve above-average returns over the following 10-15 years. Those who bought at high valuations, on the other hand, were generally disappointed in the long term.

Here’s a look at where countries stand today. The lower left are the least expensive countries/stock markets and the upper right are the most expensive. You can see that India is off the charts expensive while the United States is in another solar system based on how overvalued it is.

What long-term stock market returns can investors expect in the 20 most important stock markets based on valuation?

Based on CAPE and PB, Latin America and Asia currently show the lowest valuations, particularly in Brazil, Korea and China. These equity markets are currently trading at a CAPE of 9-12 and a PB of 0.9-1.4.
Historically, comparably attractive valuations have been followed by above-average returns of 9-11% (in real terms) over the next 10-15 years.
In general, the emerging markets (with the exception of India) are currently valued much more attractively than the developed markets. Historically, comparable valuations in the emerging markets have been followed by annual returns of 7.7%, while the developed markets are expected to achieve rather low returns of 2.5%.
The low return expectations of the developed equity markets are caused by the extremely high US valuation: with a CAPE of 35.4 and a P/B ratio of 5.1, the US market is trading at around twice the level of recent decades. In the last 140 years, such high valuations have been followed by long-term returns of only 0.1% p.a.
Among the developed markets, Germany, Italy, Japan, Singapore, Spain, Norway and the UK still appear attractive. Investors here can expect annual returns of 7-8% in the long term here.

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Fiscal Dominance, Premortems & Waking Up Early

Lyn Alden just released an absolute masterpiece of a newsletter on Fiscal Dominance and the impact it will continue to have on the economy and financial markets moving forward. She walks through:

What fiscal dominance is and how we got here
Why government spending is now more important than bank/private sector lending
Why central bank tools become ineffective at combating inflation in this new environment
Why DOGE will fail to reach its goals on cutting government spending
Why the stock market, not labor markets, have become the dominant driver of tax revenues
What to own/invest in to navigate the through the years ahead

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A phenomenal Q&A with Russell Napier, market strategist and historian, discussing how the global economy and financial markets will look in the months and years ahead.

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Forget about making a New Year’s resolution. Have you tried imagining your deathbed? It’s called a Premortem. It’s a habit that began for Ron as a response to the death of his parents in the 1990s. His mother was at peace with herself when she died, he says. But his father was “racked with regret and remorse” about decisions he made and the opportunities he missed. What he took away from their experiences was the last lesson that his parents would teach him—and the most profound of them all. Don’t wait until the end to decide if you are proud of your life. Do it before it’s too late. Do it while you can still do something about it. To him, there is nothing macabre or even remotely depressing about ruminating on death. In fact, he finds it to be oddly inspiring.

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There’s one particular, very achievable commitment in mind that will help you become happier and improve your health and effectiveness: This year, start getting up early.

Our brain exhibits greater functional connectivity in the mornings. This, we might assume, facilitates better performance of complex tasks.
It tends to enable the achievement of other popular goals. The goal-directed brain regions—such as the hippocampus and orbitofrontal cortex—work better at this time than later in the day.
One habit that is easier to adopt first thing in the morning is exercise. Clear data exist to show that when people intend to exercise early in the day, they are significantly less likely to experience “intention failure” than if they plan to exercise later.
People who get up early enjoy a more positive mood throughout the day compared with those who rise late.

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All the major Wall Street brokerage and bank strategists failed to anticipate how well the market would do in 2024. Only part of the problem is that they are bad at predictions; the bigger issue is that they do it all. It’s kinda like Phrenology, the pseudoscience feeling bumps on people’s skull to predict their personality traits. It’s not that there are better or worse phrenologists, but rather, why was anyone doing phrenology? Think about how variable the future is. Random events can and will completely derail the best laid plans we may make. Even the most well-ordered, thoughtful forecasts turn to mush when randomness strikes. And randomness is served up daily.

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It’s a big world out there. The U.S. makes up a little less than half of the global market cap. By avoiding international stock markets, you cut out half of the investment opportunities. Why limit yourself?

The chart below breaks down the annual performance of developed international stock markets. Each country’s performance seems to bounce around at random year after year, but over the long term those returns smooth out. While it’s difficult to pick the best performing country every year, a diversified global portfolio offers the benefits of international stock market performance which in turn lowers risk.

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Zooming out to all asset classes, U.S. stocks crushed everything in 2024, as they have for the last 15 years: