The Immortality of Bonds (EP.197)

Episode Summary

Executive Summary: Episode 197 blends personal updates, book reflections on dissent and organizational change, and two major investing debates: whether venture capital is a good retail-accessible product, and whether bonds are "dead." The hosts argue that principled dissent drives innovation, VC returns are highly skewed and selection-driven, and bonds still matter because they hedge uncertainty in future consumption even if short-term returns have fallen.

Main Topics: Book review: dissent, insubordination, and organizational change (Priority: 5/5): Benjamin summarizes Todd B. Kashdan’s thesis that change and creativity often come from principled dissent. He explains how organizations should welcome disagreement, build psychological safety, and help dissenters frame ideas as objective, patient, and group-aligned. He also extends the ideas to parenting. WealthSimple’s venture capital product (Priority: 5/5): The hosts discuss WealthSimple’s launch of a VC product and why it raises concerns. Benjamin reviews VC research showing extreme skewness, selection effects, possible mark-to-market overstatement, and the difficulty of accessing top managers. The broader point is that retail-accessible alternatives may sound attractive but often hide structural disadvantages. Are bonds dead? Risk, consumption, and expected returns (Priority: 5/5): Benjamin pushes back on claims that bonds are obsolete after recent price declines. He argues bonds still serve the core role of reducing uncertainty about future consumption, and that lower prices raise expected returns. The segment contrasts volatility with actual wealth/consumption risk and explains why bonds remain useful in portfolios. Misconception: high-growth sectors/companies are good investments (Priority: 3/5): The hosts revisit the idea that investing in high-growth areas is not the same as investing in good assets. Expected returns are driven by market expectations and valuation, not growth alone; growth stories often already have high expectations embedded in prices. Misconception: you can lose all your money in stocks (Priority: 3/5): Using Bessembinder’s research, Benjamin notes the high failure rate of individual stocks and the importance of diversification. While a diversified stock portfolio is unlikely to go to zero, individual stocks—especially smaller ones—can and often do produce total losses. Podcast/community updates and upcoming guests (Priority: 2/5): The episode also includes listener feedback, community updates, the reading challenge, and previews upcoming guests including Gerard O’Reilly, Eugene Fama, and Antti Ilmanen.

Key Arguments: Principled dissent is a source of innovation; organizations should not suppress disagreement but channel it productively. Dissenters are most effective when they appear objective, patient, and embedded within the group rather than as outsiders. VC returns are highly skewed: top managers can be exceptional, but the median experience can be mediocre or worse, especially for newer vintages. Recent VC returns may be inflated by unrealized mark-to-market valuations, so reported performance may not equal realized outcomes. Retail investors generally cannot access the best VC funds in meaningful size, making the asset class especially selection-biased. Bonds are not "dead"; their role is to reduce uncertainty about future consumption, not to maximize expected return. Bond prices already reflect expected rate hikes, so declaring bonds unattractive because rates will rise is often just a stale prediction already priced in. High-growth sectors are not automatically good investments because high expectations are often already embedded in valuations. Individual stocks can go to zero; diversification is the main defense against catastrophic loss.

Data Points: XBB year-to-date return: -9.2% - Canadian universe bond ETF performance as of April 15 mentioned in the bond discussion. Dimensional global fixed income portfolio year-to-date return: -6.7% - The fixed income portfolio used by the hosts for client allocations, same date as above. Masters practice-round lottery wait: ~15 years - Benjamin says it took about 15 years for his lottery number to come up. Podcast episode: 197 - Current episode number. Upcoming episode 200 guest: Eugene F. Fama - Nobel laureate guest previewed for episode 200. VC fundraising in 2021: $120 billion - Described as a record year for venture capital inflows. VC PME, 1990s vintages mean: 2.05 - From Harris, Jenkinson, and Kaplan; 1990s VC funds outperformed public equities on average. VC PME, 1990s vintages median: 1.26 - Shows strong skewness in venture returns. VC PME, 2000s-2010 vintages mean: 0.96 - Funds raised since 2000 underperformed public equities on average. VC PME, 2000s-2010 vintages median: 0.81 - Median performance for later VC vintages. VC bottom quartile average PME: 0.41 - Full-sample VC funds in bottom quartile performed very poorly. VC top quartile average PME: 2.58 - Full-sample VC funds in top quartile were highly successful. Community members: almost 7,000 - Rational Reminder community size mentioned in the intro. Reading challenge books read: over 1,200 - Angelica’s update on the community reading challenge. Reading challenge badges earned: almost 1,800 - Community reading challenge progress. Reading challenge participants: 465 - Number of participants in the challenge. Long-term real return on government bonds: ~2% - Historical real returns for long-term government bonds in Canada and the US, roughly. Long-term real return on bills: 1.3% (Canada), 0.6% (US) - Historical real returns for short-term government debt. XBB yield to maturity: 3.28% - Current nominal yield on the bond ETF. Break-even inflation: 1.9% - Used to estimate XBB’s real yield. Implied real yield on XBB: ~1.4% - Calculated from yield to maturity minus break-even inflation. 40-year stock outcome range (real): $2 million to $30 million - Illustrative simulated terminal wealth range for a $1 million stock investment over 40 years. 40-year bond outcome range (real): $1.2 million to $3.5 million - Illustrative simulated terminal wealth range for a $1 million bond investment over 40 years. 90th percentile equity risk premium (rolling historical periods): 7.4% - Global stock data from 1900-2020, rolling periods. 10th percentile equity risk premium (rolling historical periods): 2% - Global stock data from 1900-2020, rolling periods. 90th percentile equity risk premium (bootstrap): 8.4% - Bootstrap simulation results. 10th percentile equity risk premium (bootstrap): 1% - Bootstrap simulation results. 90th percentile individual-country return (40-year rolling): 8% - Historical distribution of country stock returns. 10th percentile individual-country return (40-year rolling): 0.5% - Historical distribution of country stock returns. Median stock listing length on CRSP: 7.5 years - Bessembinder research on individual stock lifetimes. Individual common stocks with negative lifetime returns: more than 50% - Bessembinder research result. Single most frequent lifetime stock outcome: -100% - Bessembinder finding on individual stock outcomes. Small-cap stocks with negative decade returns: 58% - Compared with 19% for large stocks. Large-cap stocks with negative decade returns: 19% - Shows smaller companies are more failure-prone.

Pivotal Quotes: "the way to put it is very simple. If you're a new player and you want to put new money into venture, the ones you want to invest in don't need your money. And the ones who need your money, you don't want to invest in." — Bill Janeway: Used to summarize the access problem and selection bias in venture capital. "I define risk as uncertainty about lifetime consumption broadly defined." — Ken French: Introduced to argue that bonds hedge consumption uncertainty, not just volatility. "Creativity is not an innate gift, it's a way of thinking, and dissenters help." — Benjamin Felix: Main takeaway from the dissent/insubordination book review.

Implications: Listeners should be skeptical of marketing around alternatives like VC and of claims that bonds are obsolete. Portfolio decisions should be based on goals, risk capacity, and diversification—not recent returns or popular narratives.