Though the Market Is a Winner, Most Stocks Are Losers

The U.S. “stock market” is represented by various collections of stocks, such as the Dow Jones Industrial Average (30 stocks), the NASDAQ Composite (securities listed on the NASDAQ; weighted towards information technology), and the Standard and Poor’s 500 Index. The S&P 500 is an index of the largest 500 companies listed on the New York Stock Exchange and the NASDAQ, weighted by capitalization. The version of the S&P usually cited just takes into account stock prices. History shows that, over a reasonably long-time frame, the U.S. stock market rises. Here is a chart, using a logarithmic axis, of the S&P from January, 1950 to February, 2016. It shows a rise in value by a factor of about 65 between 1950 and 2016.

S&P 500 daily closing values from January 3, 1950 to February 19, 2016

Below is a chart of S&P values from 1980 to 2021 on a linear scale, which compresses the earlier data and magnifies more recent variations. This shows the Covid-related dip in early 2020, which was followed by a meteoric rise as Fed and federal money flooded the financial system:

Source: Yahoo Finance

A lab technician I knew in my company in the 1990s took every bit of savings he had (about $50,000) and plowed it all into the stock of America Online (AOL). This was when the internet was just taking off, and AOL was a leading company in that field. My friend held on while his investment doubled, then had the conviction to hang on until it doubled again. He then cashed out with around $200,000, quit his job, got an MBA in finance, and ended up managing money on Wall Street.

With these sorts of success stories, and the (so far) reliable performance of the stock market, how hard can it be for the average small investor to pick a winning basket of stocks? Surprisingly hard, it turns out.

A study of the returns of U.S. stocks from 1926 to 2015 was published by Hendrik Bessembinder, a business professor at Arizona State University. A draft copy is here . He worked with total returns (stock price plus dividends). He found that the rise of the S&P is entirely due to huge gains by a tiny subset of stocks. The average stock actually loses money over both short and long time periods. In statistical terms, this is an extremely skewed data set; the mean return is greater than the median. There is a sort of Darwinian selection that occurs in a market index like the S&P 500. The companies that are doing well tend to get more represented in the index as their stock prices rises relative to other companies, while the relative weighting of losers automatically diminishes.

This asymmetry between winners and losers is partly a result of the following math: If you invest $1000 in a company that then tanks, the most you can lose is $1000. But if that company is one of the rare firms that really takes off, you could make many times your initial investment. If you had put $1000 into Microsoft (MSFT) in 1986, your shares would now be worth nearly  five million dollars.

According to Bessembinder’s study, half of the U.S. stock market wealth creation had come from a mere 0.33% of the listed companies. The top five companies (ExxonMobil, Apple, GE, Microsoft, and IBM, at that point) accounted for a full 10% of the market gain. Each of these companies had created half a trillion dollars or more for their shareholders. ( A similar list of the top five or ten value-creating companies drawn up in 2021 would have a different set of names, obviously, but a similar principal has held in recent years – a huge portion of the rise in “stocks” in the past five years has been due to a handful of internet superstars, the FAANGM stocks).

Out of some 26,000 listed companies, 86 of them (0.33%) provided 50% of the aggregate wealth creation, and the top 983 companies (4%) accounted for the full 100%. That means the other 25,000 companies netted out to zero return. Some gave positive returns, while most were net losers.

The average stock which you might pick by throwing darts at the Wall Street Journal listings lost money 52% of the time in any given month, and 51% of the time over the life of the company. The lifetime of the average company was only seven years, with only 10% of companies lasting more than 27 years.

This helps explain why actively managed stock funds, where diligent experts analyze and select some subset of stocks in an attempt to beat the market, typically underperform the broad market indices. (The fees charged by these funds also drags down their performance relative to the market indices). This also explains why about half the small-cap stocks I have bought over the years in my little recreational brokerage account have lost money. I had thought I was particularly inept at stock-picking. Turns out I was just about average.

Welfare programs and black markets

There are lots of big questions about welfare programs and how to design them. I am not going to answer any of those questions here, but I am going to ask a few, specifically these two:

  1. Should receipt of welfare be means-tested for need (e.g. TANF) or universal (i.e. a minimum income for everyone)?
  2. Should receipt of welfare be conditional on employment?

The good arguments for means-testing usually boil down to maximizing impact. If we have a fixed amount of resources we can redistribute, then we can maximize the impact of those resources by directing them towards the people with the greatest need (rather than spreading it thinner across everyone). The good arguments against means-testing revolve around changing incentives at the margin. Even when designed with gradual phasing out as a person’s income rises, there remains the unavoidable reality that means-tested welfare reduces the value of every marginal dollar earned within the phase-out window.

The good arguments for requiring employment to receive a form of welfare are, again, incentives to work, this time at the extensive margin (i.e. how many people in the population choose to work at all). The good arguments against requiring employment are the obstacles that poverty places between people and finding work. It becomes a classic Catch-22 – you’re poor because you can’t find work, but you can’t find work because you are poor. Welfare unconditional of employment can help people get over the hump and into their next job.

None of these observations are new, and these very much remain hard questions. Yes, we should be concerned with incentives to work at the margin, but the fact remains resources are finite, and many people will, at some point in their lives, need a lot of help. The more we can give them the better. This pushes me towards means-testing. But then I remember that those marginal incentives to work at the intensive margin (how much to work) depend on phasing out of benefits with increasing visible income. For people living in poverty, there exist a number of viable earning options that are not visible to the institutions testing their means. A dollar earned in legal wages might reduce TANF benefits by $0.15, but a dollar earned in the black/gray market leaves those benefits untouched. Yes, illegal earnings come with risks, including future access to benefits, but the possibility remains that means-testing benefits could have the perverse effect of increasing the relative value of any and all “off-the-books” income, be it cash labor in the gray market or explicit criminal earnings.

Considering whether a source of welfare should be conditional on employment raises the question of wage subsidies versus cash welfare, but it’s really just the same question we were pondering previously, but with greater emphasis on incentives to work or not. These questions at the extensive margin, much like those at the intensive margin, become far more interesting when placed in the context of not just whether to work or not, but which market to work in. In a world of prohibitions scattered across a variety of extremely high demand (and high profit) markets, where licensing, educational norms, and discrimination all work to create a collage of cash opportunities outside of the well-lit protections of legal labor markets, there is no shortage of work that goes unseen. Welfare transfers conditional on legal labor can serve as incentive to pull people out of these market, and begin building a record of accomplishment that serve them going forward. This speaks in favor of conditioning welfare on employment, so long as everyone has access to employment.

This this thought experiment leaves me mostly where I started (no surprise, an hour’s reflection rarely changes my priors), namely that wage subsidies have a place in our welfare system, as does means-testing, but as welfare benefits rise, they should become more universal in their access across the income distribution, a lesson I expect we will learn in retrospect as we come out of “The Great Resignation”. A “universal basic income” need not be fully universal, but there are good reasons for it to reach well passed the median income. Or median voter, for that matter.

But maybe I repeat myself?

People of the past were not irrational morons

That sentence is one that I repeat every time I teach economic history. It is repeated because a common misconception in history is that there are “different mentalities”: a pre-capitalist mentality versus a capitalist mentality; a western mentality versus a non-western one etc. The variations are endless but the common denominator is quite simple: there are discontinuities in economic rationality and these discontinuities explain economic change.

That, as I explain to my students, amounts to labelling people of the past as “irrational morons” who would leave $100 bills on the sidewalk. There are no variations in rationality, merely variations in constraints and incentives. That is what I tell my students. And the thing is, that statement is actually testable! Indeed, arguing that something in people’s brain changed is an argument that can never be tested because they are dead and cannot testify. In fact, even if they were alive, their statements would be meaningless because nothing speaks louder than actions (i.e. preferences are revealed by action). Making statements about the rationality of X or Y action is easily testable as we can observe what people did (or do now). And its really easy to refute differences in “mentalities”

Let me give you an example from my native Canada. In Canada, there is a large French minority (the majority of which lives in Quebec) which has long been argued to hold different economic mentalities than the neighboring English majority. Peddled (yes, that is a strong term but I think it applies) by both French and English historians (and economists), this view is used to explain the relative poverty of the French minority (which has historically been 60%-75% as rich as the English majority). As far back as the early 19th century, French-Canadians are argued to have clung on to archaic farming techniques even though they observed better techniques from their English-speaking neighbors. Their “traditional conservative” outlook (in the words of an eminent Canadian historian) pushed into economic stagnation (and even retrogression by some accounts). This view continues today. I vividly remember a debate on French-Canadian TV with former Quebec premier (like a governor for Americans) Bernard Landry telling me that there was a difference between my “anglo-saxon economic worldview” (i.e. neoclassical economics) and that which most French-Canadians held.

The virtue of this example is French-Canadians are deemed to be of a “lesser” mentality than English-Canadians at the same moment in time. Thus, it is easy to test whether this is the case. In multiple works, notably in this paper at Historical Methods, I have used simple tools from economic theory to assess this lesser mentalities hypothesis. Start from a simple Cobb-Douglas production function:

Where A is technology residual (also known as total factor productivity or TFP), Y is total output, K is the capital stock and L is the labor supply. The exponents are just the elasticities of capital and labor. If the English and French in Canada are separated, there are two production functions (with one for each) and they can be divided by each other. But the neat part about the Cobb-Douglas function here is that you can rearrange the equation and solve in terms of A rather than Y. As A is total factor productivity, it tells us how effectively people combine inputs K and L to produce Y. And then you can express A in the French sector (1) as a ratio of A in the English sector (2) as in the formulation below

Technically, if the French farmers were less efficient than the English farmers the ratio on the left-hand side should be less than 1 (as A1 < A2 ). Using data from the 1831 census of Lower Canada (as Quebec was known then), I compared farms in French areas to farms in English areas. The results? Yes, the French farmers were poorer (income Y1 < Y2 ) but there were very small differences in efficiency of input use (A) between French and English farmers as can be seen in the table below. French areas were 4.3% to 0.5% less efficient than English areas.

But when you controlled for land quality, distance from urban markets, recency of settlement, complementary industries and other controls, there are no statistically significant effect of culture (proxied in the table below by share of Catholics as all French-Canadians in 1831 were Catholic and very few English-Canadians were Catholic). In other words, the small differences have nothing to do with culture or differences in mentalities.

Notice that this was a relatively simple logical test. The farming actions of French-Canadians were observed in the data. We know which inputs they chose to use (in which quantities as well). The results of these actions are easily observable through the output data in the census. Irrationality on their part is thus easy to test as a simple Cobb-Douglas model suggest that irrationality would be manifest by an inferior ability to use and combine inputs. They used inputs equally well as English Canadians and so that claim of inferior mentalities was wrong.

One could reply that I am just picking an easy case to dismantle the “mentalities” claim. But I am actually late to that party by adding the French-Canadians. Similar claims have been made for Russian, French, Italian, Chinese, Vietnamese, Korean, Mexican, Indian, Polish, New Englanders (yes, you read right), Danish, Irish, Kenyans, Algerians, Egyptians etc. Hundreds of economic historians and economists have shown that these cases do not hold.

If you wish to explain economic change (or economic disparities), you have to look elsewhere than “changes in mentalities” (or differences in mentalities). If you dont, you are essentially claiming that people of the past were irrational morons who simply lacked your expert knowledge.

If Tyler is talking about a new variant…

For some Americans, this Thanksgiving was the first holiday that felt normal in a long time. Being re-united, without Covid restrictions, is something to celebrate.

On the other hand, a new coronavirus variant was just discovered in South Africa. It’s scary enough that travel bans might be imposed. We have all (just about) learned to live with the original strain from Wuhan, but scientists want time to figure out how dangerous and infectious this new strain is. Maybe at this point people are tired of being lectured about risks. No matter how much or little a person sacrificed for Covid-19, they might feel like that storyline has become too boring to deserve any more of our attention. We cannot stop looking out for new variants that might force us to put cherished traditions on hold again. Coronaviruses kill. My advice is to keep following news from Tyler Cowen, Alex Tabarrok, and Emily Oster.

Oster has been consistently reasonable about family and health risks. She argued to open schools and essentially said that you can see grandparents if the risk is small enough (even though the risks are never zero). As I said before, another trustworthy source of information throughout the pandemic has been Tyler and Alex, who put up almost all of their material in real time at Marginal Revolution.

I’ll share something a friend wrote to me today:

Although [his wife’s name]’s chemo treatment continues to show good long-term signs, this morning we discovered that [she] tested positive for COVID. That’s bad news, the good news is that [she] is already getting the antibody treatment and some extra fluids at the hospital as I write this.

“The antibody treatment” did not exist when the first Covid-19 waves swept through New York with such devastating consequences.

If the newest strain turns out to be a serious development, then in many ways we are better prepared to deal with it than we were before. We probably will blow through the red tape on at-home rapid tests faster the next time around (I’m such an optimist!). We already have contact tracing apps that protect privacy. Vaccine scheduling software is already in place. Everyone has masks at home.

The biggest difficulty I foresee is not coming up with scientific solutions but agreeing as a society about which tools to use. Some people might (will) not even believe the new strain is real.

EWED was started right at the moment when Marginal Revolution commentary on Covid seemed the most crucial. So, sometimes I will do little more here than keep up the echo. Do tweets, phone calls, letters, blogs, or talk about Covid around the Thanksgiving table. Don’t give up.

It’s now clear, whether or not the news out of South Africa turns out to be serious, that we are living with a new problem that will last a long time. It’s a marathon, not a sprint.

If you ever read much of the New Testament, you’ll see a theme in the letters of Paul to cities he has visited. The brand-new churches were doing well, while he was with them in person. Then time goes by and the community or doctrine starts to fray.

Paul wrote these words to the church in Galatia, more than a year after he had visited them:

Let us not become weary in doing good, for at the proper time we will reap a harvest if we do not give up. 

Galatians 6:9
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Free Money, Courtesy of Credit Cards

In grad school, I learned about the overlapping-generations model. The idea is that we simplify people down to the fundamental parts of their life-cycle. Each person lives for 2 periods. In the first period, they can produce only. In the second period, they can consume only. A popular conclusion of the model pertains to old-age benefit programs such as Social Security.

The first beneficiaries receive a gift that is free to them, then each subsequent generation accepts the debt, pays it off, and then passes on new debt to the proceeding generation. In this manner, the program benefit of the current generation is limited by the income of the following generation. Therefore, every single generation can consume as if they lived a generation later – and a generation richer – in time. That’s exciting.

But this model is not unique to governments. With a little bit of finance, we can model every person as their own self-encapsulated overlapping-generations model – with two similarly exciting conclusions. Let’s consider a person who has monthly consumption expenditures of $1k per month and let’s assume a discount rate of half a percent per month.

Life is pretty good for this person. They earn income each month and they spend $1k of it during the same period. Now let’s give the person a credit card. It doesn’t matter what the interest rate is – they’re going to pay it off each subsequent month. Now let’s see what’s possible.

What’s going on here? The difference in the consumption pattern is that the first month with a credit card can enjoy twice the consumption. How’s that? $1k of that January consumption is just the typical monthly spending. The other $1k is running up a month’s worth of spending on the credit card. So long one pays-off the card in the following month, there are no interest charges. But wait – if one pays-off the credit card in February, then how does one consume in February? By borrowing from March’s income, of course! And so the pattern repeats ad-infinitum. With a credit card one can borrow against next month’s spending. You too can borrow from your future self. And your future self won’t mind because they’ll do the same thing.

Conclusion #1: Having a credit card entitles you to one free month of double consumption.

The above example includes identical income over time. But, what if your income grows? Let’s assume that your income and commensurate consumption grow at a rate of one quarter percent per month. Our consumption without a credit card is tabulated below.

Obviously, having income and consumption that grow is more enjoyable than ones that are constant each period. Now let’s observe below what happens when we again introduce a credit card that one pays-off each month.

What’s going on here? Just as happened previously with a credit card, one can enjoy an extra boost to consumption in the first period. But what does growing income do for us besides greater complication? Just as previously, one can pay their debt each period and consume by borrowing against the next month’s income. But with growing income, having a credit card means that one can enjoy the next month’s level of consumption today. That is, next month’s higher consumption is shifted sooner in time by one month. Notice that, with growing income, consumption for July without a credit card ($1,018) is the same as the consumption in June with a credit card. Even without the first-month-gift, credit cards increase the present value of one’s consumption by making next month’s greater income available today – and the same is true for every single month.

Conclusion #2: Having a credit card today entitles you to next month’s greater income.

How big a deal is this? Obviously, it will differ with the discount rate and the rate of income growth. Using the numbers above, having a credit card permits one to consume with a present value that is 10.5% higher. Let that sink in. People who have access to credit consume as if they are 10.5% percent richer. Access to credit can make the difference between a pleasant Christmas, having quality internet, paying for car repairs, and so on. Being poorer is one thing. Being poorer and lacking access to credit is like taking an instant haircut to one’s quality of life. On the flip side, people can be made better-off without additional improvements to their productivity. Increasing access to credit may be a less costly improvement to the value lifetime consumption than many of the other less politically feasible improvements to labor productivity.

Happy 400th Thanksgiving from EWED

In 1621 the pilgrims were starving after their communal farming system gave them little incentive to work hard, leading them to rely on the generosity of their native neighbors at the first Thanksgiving. But in the long run they were able to produce their own feasts after switching to a private property system. Economist Ben Powell tells the story briefly here, or you can read the primary source, William Bradford’s Diary here.

It is customary in many families to “give thanks to the hands that prepared this feast” during the Thanksgiving dinner blessing. Perhaps we should also be thankful for the millions of other hands that helped get the dinner to the table: the grocer who sold us the turkey, the truck driver who delivered it to the store, and the farmer who raised it all contributed to our Thanksgiving dinner because our economic system rewards them

Powell calls this “the real lesson of Thanksgiving”, and while I think there are other great angles to the story this is certainly a real lesson of Thanksgiving.

This Is Not the Most Expensive Thanksgiving Ever

“Thanksgiving 2021 could be the most expensive meal in the history of the holiday.”

That’s the first sentence of a recent New York Times story. The Times and the New York Post rarely agree on editorial matters, but on this topic the Post ran a very similar story the same week. You can find many such headlines.

But is it true? In short: no. I’ll explain why, but my larger goal is to get you to think more clearly about inflation.

How should we measure the cost of a Thanksgiving meal? A widely used measure comes from the Farm Bureau, which shows that the cost of a traditional turkey-centric meal costs about 14% more than last year. In dollar terms it is $53.31 for a turkey, a pumpkin, cranberries, sweet potatoes, stuffing, etc. That’s more that it has ever been, in dollar terms. Farm Bureau has been tracking the cost of this same meal since 1986.

So in one sense, it seems like the headline claim is true. Most expensive Thanksgiving ever!

But we need to think deeper. A nominal price doesn’t actually tell us much. If a long-lost cousin from the Republic of Horpedahl told you it costs 1 million Jeremys to buy a Thanksgiving dinner, what would your reaction be? The first and best reaction is: how much do people earn in the Republic of Horpedahl?

We should ask the same question in the United States today: how do incomes today compare to incomes in the past? Which measure of income you use is important, but if we use median usual weekly earnings of full-time workers, we can make a simple comparison of how much of your weekly earnings would be needed to buy a traditional Thanksgiving meal. This chart shows exactly that. In 2021 that meal will be the second lowest it has ever been as a percent of median earnings — higher than last year, but tied with 2019 for the second lowest. And much less than in the late 1980s and early 1990s (I use third quarter data for each year, the most recent available).

Adjusting for income is the best way to look at this question. It’s not perfect — part of this depends on what income measure you use — but it’s much better than the alternative. The worst approach is to just look at nominal prices. This tells you virtually nothing.

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50% Endowment Returns Driven by Private Equity Investments: How Rich Universities Get Richer (But You Can, Too)

A recent headline in the Dartmouth student newspaper reads, “Dartmouth’s endowment posts 46.5% year-over-year returns, prompting additional spending on students”.  That seems like really great investing performance. But the sub-headline dismisses it as less-than-stellar, by comparison: “The endowment outpaced the stock market, but fell short when compared to other elite universities that have announced their endowment returns.” After all, fellow Ivy League university Brown notched a 50% return for fiscal 2021, which in turn was surpassed by  Duke University at 55.9% and Washington University in St. Louis at 65%. The Harvard endowment fund managers are a bit on the defensive for  gaining “only” 34% on the year.

The stock market has done well in the past year, but nothing like these results. What is the secret sauce here? Well, it starts with having money already, lots of it. That enables the endowment managers to participate in more esoteric investments. This is the land of “alternative investments”:

Conventional categories include stocks, bonds, and cash. Alternative investments include private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts. Real estate is also often classified as an alternative investment.

It takes really big bucks to buy into some of these ventures, and it also takes a large  professional endowment fund staff to choose and monitor these sophisticated vehicles. Inside Higher Ed’s Emma Whitford notes:

Endowments valued at more than $1 billion, of which there are relatively few, are more likely to invest in alternative asset classes like venture capital and private equity, recent data from the National Association of College and University Business Officers showed.

“Where you’re going to see higher performance are the institutions with endowments over a billion,” Good said. “If you look at the distribution of where they’re invested, they have a lot more in alternative investments — in private equity, venture capital. And those asset classes did really well. Those classes outperformed the equity market.” 

…Most endowments worth $500 million or less invested a large share of their money in domestic stocks and bonds in fiscal 2020, NACUBO data showed. This is partially because alternative investments have a high start-up threshold that most institutions can’t meet, according to Good.

“You have to have a pretty big endowment to be able to invest in that type of asset class,” he said. “If you have a $50 million endowment, you just don’t have enough cash to be able to buy into those investments, which is why you won’t see big gains from alternatives in those smaller institutions.”

Virginia L. Ma and Kevin A. Simauchi report in The Crimson on Harvard’s Endowment, “Harvard Management Company returned 33.6 percent on its investments for the fiscal year ending in June 2021, skyrocketing the value of the University’s endowment to $53.2 billion, the largest sum in its history and an increase of $11.3 billion from the previous fiscal year.” This 33.6% gain, though, represents underperformance compared to Harvard’s peers; this is rationalized in terms of overall risk-positioning:

However, Harvard’s returns have continually lagged behind its peers in the Ivy League, a trend that appeared to continue this past fiscal year. Of the schools that have announced their endowment returns, Dartmouth College reported 47 percent returns while the University of Pennsylvania posted 41 percent returns.

Narvekar acknowledged the “opportunity cost of taking lower risk” in Harvard’s investments compared to the University’s peer schools.

“Over the last decade, HMC has taken lower risk than many of our peers and establishing the right risk tolerance level for the University in the years ahead is an essential stewardship responsibility,” Narvekar wrote.

In 2018, HMC formed a risk tolerance group in order to assess how the endowment could take on more risk while balancing Harvard’s financial positioning and need for budgetary stability. Under Narvekar’s leadership, HMC has dramatically reduced its assets in natural resources, real estate markets, and public equity, while increasing its exposure to hedge funds and private equity.

There it is again, the magical “hedge funds and private equity”.

Harvard’s fund manager went on to warn that the astronomical returns of the past year were something of an anomaly:

At the close of his message, Narvekar cautioned that despite the year’s success, Harvard’s endowment should not be expected to gain such strong returns annually.  “There will inevitably be negative years, hence the importance of understanding risk tolerance.”

The following chart illustrates, at least in Harvard’s case, how extraordinary the past year has been:

Source:  Justin Y. Ye

The fiscal year of these funds typically runs September to September, so it’s worth recalling that back in September of 2020 we were still largely cowering in our homes, waiting for vaccines to arrive. The equity markets were still down in September of 2020, whereas a year later the tsunami of federal and Fed largesse had lifted all equity boats to the sky. So, it is not realistic to expect another year of 50% returns.

Final issue: can the little guy pick up at least a few crumbs under the table of this private equity feast? In most cases, you have to be an “accredited investor” (income over $200,000, or net worth outside of home at least $1 million) to start to play in that game. From Pitchbook:

Private equity (PE) and venture capital (VC) are two major subsets of a much larger, complex part of the financial landscape known as the private markets…The private markets control over a quarter of the US economy by amount of capital and 98% by number of companies….PE and VC firms both raise pools of capital from accredited investors known as limited partners (LPs), and they both do so in order to invest in privately owned companies. Their goals are the same: to increase the value of the businesses they invest in and then sell them—or their equity stake (aka ownership) in them—for a profit.

Venture capital (VC) is perhaps the more attractive, heroic side of this investing complex:

Venture capital investment firms fund and mentor startups. These young, often tech-focused companies are growing rapidly and VC firms will provide funding in exchange for a minority stake of equity—less than 50% ownership—in those businesses.

Some examples of VC-backed enterprises include Elon Musk’s SpaceX, and Google-associated self-driving venture WayMo.

Venture capital takes a big chance on whether some nascent technology will succeed (in the fact of competition) many years down the road, which has the potential to make the world a better place for us all. Private equity, on the other hand, tends to be somewhat more prosaic, predictable, and sometimes brutal. Here is putting it nicely:

Private equity investment firms often take a majority stake—50% ownership or more—in mature companies operating in traditional industries. PE firms usually invest in established businesses that are deteriorating because of inefficiencies. The assumption is that once those inefficiencies are corrected, the businesses could become profitable.

In practice, this often entails taking control of a company via a leveraged buyout which saddles the new firm with heavy debt, firing lots of employees, improving some strategy or operations of the firm, and sometimes breaking it up and selling off the pieces. This was the fate of several medium-sized oil companies that got in the cross-hairs of corporate raider T. Boone Pickens.  “Chainsaw Al” Dunlop also became famous for this sort of “restructuring” or “creative destruction”.

Private equity activities can be very lucrative. But again, is there any way for you, the little guy, to get a piece of this action? Well, kind of. There are publicly traded companies who do this leveraged buyout stuff, and you can buy shares in these companies, and share in the fruits of their pruning of corporate deadwood. Some names are: Kohlberg Kravis Roberts (KKR), The Carlyle Group (CG), and The Blackstone Group (BX). The share prices of all these firms have more than doubled in the past year (100+ % return). If you had had the guts to plow all your savings into any one of these private equity firms a year ago, you would have had the glory of beating out all those university endowment funds with their piddling 50% returns.

Dry turkey and mediocre side dishes are optimal

The Take Economy demands not just that you distinguish yourself with opinions that deviate from the median person, but that the manner in which your opinion deviates is immediately distinguishable from everyone else who is similarly deviating. This leaves us with a tendency to focus on what we don’t like – enjoying something is further evidence of the monoculture, while hate comes in a million shades of beige.

I bring this up because hating Thanksgiving foods, particularly turkey, oven-baked turkey, has been in vogue for years, and I’m sure stuffing is next. Everything is too dry, too bland, yada yada yada. It’s a boring take most often made by boring people. Not that such things usually matter to me, but in this case it does because Thanksgiving as a meal is not an epicurean holiday, it’s an attempt to solve a coordination game across families, friends, and geographies. When solving a coordination problem with so many players, with preferences and cost-constraints that make broadly amenable large-scale get-togethers increasingly difficult. Between navigating travel costs, sleeping arrangements, and the inevitable negative political externalities that some jackass in your family is going to pollute the familial air with, the last thing you have the resources to cope with is culinary coordination. So what do we do? We come up with a pseudo-national, heavily regional menu that we coordinate on, a$1.99 per pound Schelling point that’s a steal at thrice the price.

The turkey’s too dry? Drown it in gravy. The stuffing is too bland? Your aunt has hot sauce in her purse. Your cousin is explaining the vagaries of 18th century 2nd amendment judicial rulings? There’s a bottle of brown liquor quietly being shared on the porch this very minute that you can partake in for the price of nothing more than a pleading glance and keeping your politics to your self.

The food isn’t the point, but if you’re still feeling the pain of a sub-optimal meal, you can order Chinese with us later, and I’ll happily explain to you why you’re not just ordering the wrong dishes, you’re ordering off the wrong menu. Because I got food takes, just not when the meal isn’t about the food.

Word Golf is a new online game

If you like Scrabble or Family Feud, then you might enjoy playing Word Golf. You can get started for free immediately by going to

You play by thinking of word associations to click from one concept to another. The challenge will get you thinking. Every game only takes about one minute, and there are simple instructions on the website to get you going right away. Unlike chess, you can do this for fun even without any time commitment.

Like Mike and Jeremy before me this week, I am writing about something I saw at the Emergent Ventures conference. It was an inspiring type of event. I met the young creator of Word Golf and was inspired by his vision for a new intellectual sport.

The game is built from data on how often words appear together on the internet. That’s why I compare it to the TV guessing game show Family Feud. You are not just thinking of synonyms to jump from one word to another. The challenge is to think of what words other people typically use in the same online article.

Word Golf is probably a better use of time than Candy Crush or Solitaire. (I played a lot of computer FreeCell at one point in my life but not anymore.)