(Rationally) Investing in Technological Revolutions, Human Capital, and Asset Allocation (EP.125)

Episode Summary

Executive Summary: Episode 125 spans market/news updates, a deep dive into why technological revolutions can look like bubbles without requiring irrational pricing, a planning discussion on human capital and insurance/asset allocation, and a critique of claims that passive investing has removed market “guardrails.” The hosts connect theory to practical investor decisions around time, risk, and portfolio design.

Main Topics: Book of the week: Time as wealth: They discuss Ashley Whillans’ Time Smart and the idea that valuing time over money can measurably improve happiness, with examples like outsourcing chores, taking more vacation, and savoring experiences. Rational explanations for tech-stock “bubbles”: Using Pastor/Veronesi work, they explain how uncertainty about growth and changing discount rates in technological revolutions can rationally produce bubble-like prices without relying solely on irrational behavior. IPO waves and market conditions: They extend the same framework to explain why IPOs cluster in waves: high expected returns, strong profitability, and high uncertainty can all raise valuations and encourage firms to go public. Human capital and financial planning: They review how human capital, financial capital, and related concepts affect asset allocation, insurance needs, leverage, and retirement planning, especially when labor income is risky or correlated with markets. Bad advice: passive investing as a market destabilizer: They criticize an article claiming passive investing removed market guardrails, arguing that passive funds are mostly price takers while active managers still set prices and market structure is more complex. Market/news roundup: They briefly update listeners on Moderna vaccine efficacy, the stalled Ant Group IPO, MicroStrategy’s Bitcoin purchase, the fading marijuana stock craze, and ETF concentration in the largest index funds.

Key Arguments: Shifting attention from money to time can increase well-being because many life choices create more happiness than their cost would suggest. Uncertainty about future profitability can raise prices through Jensen’s inequality: a wider range of outcomes can justify higher valuations than a single-point growth estimate. As technologies move from experimental to integrated, their risk can shift from idiosyncratic to systematic, changing discount rates and pressuring valuations. The dot-com bubble and railroad mania are consistent with rational pricing stories tied to uncertainty and adoption, not only investor irrationality. IPO waves are endogenous: firms go public when expected returns are low, profitability is high, or uncertainty is elevated, which also helps explain weak post-IPO returns. Human capital must be considered alongside financial capital; optimal asset allocation and insurance decisions depend on the riskiness and correlation of labor income. People with risky or market-correlated human capital should generally hold less risky financial portfolios and may need less life insurance than those with safer labor income. Passive funds are not the main force setting prices; active traders still dominate price discovery, so the “no guardrails” claim overstates passive investing’s impact. The industry’s growth in passive assets does not imply markets are unanchored; it may instead reflect evolving trading and valuation dynamics rather than a structural collapse in price discipline.

Data Points: Moderna vaccine efficacy: over 94% - Initial trial results discussed as a time-stamped pandemic update Pfizer vaccine efficacy: 90% - Referenced as the prior week’s announcement Podcast community users: 618 users - Size of the Rational Reminder community discussion site Annual happiness value of time-focus mindset shift: $2,200 - From Time Smart example of shifting mindset from money to time Annual happiness value of eight extra vacation days: $4,000 - From Time Smart Annual satisfaction from savoring meals: $1,800 - From Time Smart Annual happiness value of outsourcing disliked tasks: over $12,000 - From Time Smart example of buying back time Ant Group IPO valuation impact: about half / roughly $40 billion lower - Delayed IPO due to possible new Chinese regulations Ant Group delay: at least six months - Estimated delay to the IPO MicroStrategy cash invested in Bitcoin: $250 million - Initial Bitcoin purchase announced by the company MicroStrategy excess cash: about $500 million - Cash on balance sheet prior to Bitcoin allocation MicroStrategy stock move: 9% in a day; 23% in two days - Market reaction to Bitcoin-related announcements Bitcoin position value relative to market cap: more than a third - Value of the cryptocurrency held relative to company market cap Canopy Growth peak share price: around $60 - Referenced as a high-water mark for marijuana stocks HMMJ peak share price: around $25 - Horizons marijuana ETF peak in fall 2018 HMMJ current price mentioned: around $7.50 - Illustrative current value at time of discussion Largest ETF AUM (SPY): $316 billion - Largest ETF by assets under management Largest ETF AUM (IVV): $219 billion - Second-largest ETF by assets under management Largest ETF AUM (VTI): $172 billion - Third-largest ETF by assets under management Largest ETF AUM (VOO): $166 billion - Fourth-largest ETF by assets under management Largest ETF AUM (QQQ): $142 billion - Fifth-largest ETF by assets under management Discount rate in Gordon growth example: 11% - Used in the uncertainty/growth-rate illustration Known dividend growth rate implied by $56 price: 9.2% - Single-point Gordon growth model example Expected growth rate with uncertainty example: 6% - Two equally likely growth outcomes used to demonstrate Jensen’s inequality NASDAQ beta: doubled between 1997 and 2002 - Empirical result cited for the dot-com era Small-cap/value valuation discount: 60% below post-WWII average - Referenced from a separate chart shared by the hosts

Pivotal Quotes: "There are no longer, very serious here, Ben, there are no longer guardrails on our winding road of wealth accumulation." — Quoting the bad-advice article: Used to illustrate the article’s claim that passive investing destabilizes markets "What would I be nervous about? If I had $500 million in cash, that would make me nervous because I would think it would go to zero in purchasing power over five years." — Michael Saylor: Quoted in the discussion of MicroStrategy’s Bitcoin purchase "If you can explain a phenomenon using a simple model, a simple rational model with less degrees of freedom, if you can explain a phenomenon with that, you can definitely explain it with a more complex model too." — Benjamin Felix / discussion of Lubos Pastor’s view: Summarizes the argument for rational pricing explanations of technological bubbles

Implications: Listeners should think about market manias, IPO waves, and insurance/asset allocation through the lens of uncertainty, discount rates, and human capital—not just behavior. Time and risk choices materially affect welfare and portfolio design.