(Irrationally) Investing in Technological Revolutions, Household CFO Job Analysis, and Learning to Sell Mutual Funds (EP.123)

Episode Summary

Executive Summary: The episode blends personal updates, market commentary, and a deep dive into Carlotta Perez’s framework for technological revolutions. The hosts argue that new paradigms often attract excessive capital and produce poor stock returns, while declining or “boring” industries can outperform. They also discuss household financial management research and critique misleading investing advice about dividends and mutual fund selection.

Main Topics: 3D printing and community updates (Priority: 2/5): Ben describes his growing 3D-printing hobby, especially designing custom parts in Fusion 360, and the hosts thank listeners for strong engagement, reviews, swag interest, and book recommendations. Robinhood, platform incentives, and who the customer is (Priority: 4/5): The hosts revisit Scott Galloway’s criticism that free platforms treat users as products rather than customers, while also noting that Robinhood’s order-routing model can still be economically beneficial for small-odd-lot investors. The Ant Group IPO and the scale of capital markets (Priority: 3/5): They highlight Ant Group’s enormous planned IPO and use it to illustrate the scale of modern capital formation and investor demand in China. Technological revolutions and financial capital (Priority: 5/5): A long segment applies Carlotta Perez’s model to historical technological revolutions, arguing that innovation comes in bursts, bubbles often accompany new paradigms, and financial capital is crucial in funding the infrastructure of the new age. Why growth industries often underperform (Priority: 5/5): Using historical and empirical examples, the hosts argue that investing in the newest, most exciting industries has often led to poor realized returns because investors overpay for expected growth. Household CFO research (Priority: 4/5): Cameron summarizes a Financial Planning Review paper that defines the tasks, skills, and traits needed to manage a household’s finances effectively, showing a gap between successful and less successful households. Bad advice of the week: dividends and mutual fund selection (Priority: 5/5): They criticize advice to replace bonds with dividend stocks and also call out a licensing-course framework that teaches flawed mutual fund selection based on past performance and manager attribution.

Key Arguments: Technological revolutions follow a recurring pattern: a new paradigm emerges, capital floods in, bubbles/frenzies form, regulation catches up, and then a golden age begins. The companies that dominate the new paradigm are often bad stock investments because investors pay too much for their expected growth. Old or declining industries can outperform because expectations are lower and valuations are more reasonable, even if the industry shrinks as a share of the market. Market dominance is not the same as stock-market outperformance; the biggest companies are not reliably the best investments. Financial capital is essential during the frenzy phase because it funds infrastructure, even if many investors lose money. Household financial success depends on a mix of planning, conscientiousness, record keeping, financial literacy, and interpersonal skills—not just knowledge. Dividend stocks are not a substitute for bonds because dividends are just one form of return and do not eliminate equity risk. Fund-selection guidance based on trailing returns and manager attribution is misleading because it ignores mean reversion, luck, and fees.

Data Points: ETF assets launched before 2015: 94% - Stat cited by Nate Jarassi showing ETF asset concentration in older products despite many new launches since 2015. ETF products launched since 2015: 1,500+ - Shows product proliferation in ETFs over the last decade. U.S. equity mutual fund assets redeemed since 2010: Over $2 trillion - Net redemptions from actively managed U.S. equity mutual funds over the last decade. U.S. mutual fund assets: About $3 trillion to $6 trillion - Despite outflows, total assets doubled due to bull-market appreciation. Ant Group expected IPO raise: $34 billion - Projected cash raise in what would be the largest IPO cash raise in history. Ant Group valuation: Over $300 billion - Expected market value at IPO. Ant Group active users: More than 1 billion - Scale of the company’s payments platform and related ecosystem. Chinese retail IPO demand for Ant: 870x allocation - Demand from individual Chinese investors relative to shares allocated to them. Chinese retail orders for Ant: Over $2.8 trillion - Aggregate retail demand for the IPO shares. Rail industry share of U.S. market cap: 63% in 1900 to <1% in 2019 - Historical example of a declining industry that still outperformed the market. Software industry share of U.S. market cap: ~0% in 1971 to 15% in 2019 - Example of an industry that grew enormously during the information era. Oil industry share of U.S. market cap: ~15% in 1971 to 3% in 2019 - Illustrates a former dominant industry declining in capitalization share. Software index dollar growth: $76 per $1 invested - From 1971 to 2019, as cited from Ken French data. Oil industry dollar growth: $134 per $1 invested - From 1971 to 2019, oil outperformed software despite software’s rise in market share. Value’s underperformance vs growth: 24% per year over 36 months - U.S. market value stocks trailing growth stocks in the recent three-year period ending September. Worst historical 3-year value spread: -7% per year - Current three-year value spread described as the worst on record in the ranking exercise. Next-worst three-year value spread: -17% per year - Three-year period ending March 1940. S&P 500 original-constituent strategy outperformance: More than 1% per year - Jeremy Siegel example: holding original S&P 500 names (instead of reconstituting) beat the actual index over 50 years. Railroads as share of U.S. market cap in 1900: 63% - Starting point for the rail industry example. New issues and returns: No reliable relationship in 49 industries; only about 7 showed statistical reliability - Braden’s check using Ken French data on industry growth vs stock returns.

Pivotal Quotes: "If you're not paying, you're not the client, you are the product." — Scott Galloway (referenced by Ben): Used to explain Robinhood/social-media-style business models and weak customer-service incentives. "The favorable conditions for the next technological revolution are created when the wealth creating potential of the previous one is exhausted." — Ben Felix: Summarizing Carlotta Perez’s core thesis about why technological change arrives in waves. "Investing in technological innovation and also investing in the winner-take-all companies of a given technological paradigm are time-tested failures." — Ben Felix: The episode’s conclusion on tech investing and valuation.

Implications: Listeners should be wary of chasing the newest industry or headline-grabbing winner. History suggests valuation matters more than narrative, and disciplined diversification/value exposure may outperform excitement. Also, household finance success requires process and habits, not just knowledge.