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Just a quick short episode today, as I hope you get ready to spend some time with your family and away from work for the rest of the year, as I am.
I just want to make a quick observation or maybe two as we wrap up the year 2024.
I'm not a big fan of saying, here are the lessons I learned from this year because you're just trying to force that insight into an arbitrary 12 month period.
I don't see a lot of value in that.
So this is an insight from 2024, but I think actually it applies to most of the last 20 years and will continue to apply for the coming decades, I think.
Which is, and look, this is a very broad statement.
It's meant to be broad.
It might not apply to you, but I think for a lot of people, 2024 was either an exceptionally good year or an exceptionally bad year.
And I think you see that dynamic play out in several areas of life.
One, because this is kind of my domain is in the stock market, where the S &P 500 or the NASDAQ had an absolutely bonanza year.
You're up heavy double digits, 25%, 30%, the NASDAQ's up 30 % year to date.
Absolutely incredible, way ahead of the long -term averages.
But if you dig down into actually what happened in those indexes, those big components of stocks, it's a much different story.
So among the S and P 500, 500 of the largest companies in America, of course.
On average, in aggregate, this was an incredible year, but I checked this morning, roughly half of the stocks in the index are down this year.
In a year where the average went up 25%, half the components are down.
And if you look at the bottom fifth, pretty big chunk of American capitalism, you're talking about companies that are down 20 % or more.
And then at the top of the list, You have these absolute home run, knock it out of the park into the stratosphere companies.
Palantir, Nvidia of course, companies like Microsoft, whatnot, that have just had absolutely sensational runs and are now worth trillions of dollars.
Broadcom just reached the trillion dollar club last week and that's a company that I think the majority of Americans have never heard of.
And this has always been the case.
The idea that tails drive everything that a small percentage of companies or a small percentage of attempts at anything you do account for the majority of the returns, but it feels like it's much more accentuated these days.
The magnificent seven as they are called tech companies, the big mammoth tech companies, Nvidia, Apple, Microsoft, Amazon, Google, Facebook, those companies, are now more than a third of the S &P 500.
So it's 500 companies, a representative sample across diverse industries, But one third of it is seven tech companies and that of course is a higher concentration than we've ever seen.
There's always been a concentration at the top, but it's more than ever.
You can keep on going down the list of that dynamic in finance, where a small number of things drive the majority of outcomes.
On one hand, that's kind of an interesting academic observation of statistics and fat tales and whatnot.
But I think this does something very important and potentially dangerous to people's psyches where it creates a situation where your investing portfolio, your career, your industry, your job security is either doing exceptionally well or very poorly.
I thought about this the other day when I was thinking about YouTube creators.
It occurred to me as a broad, sweeping statement that you cannot make a living as a YouTube creator.
It's impossible to make a living as a YouTube creator.
You can make a fortune.
You can make an absolutely incredible fortune, but you cannot make a living.
It either works or it doesn't.
You either make zero dollars or you just have money flowing into your lap.
And I think this is true for a lot of those kind of professions.
Podcasts even, books, music creators, YouTube creators, those things either work or they don't.
You cannot make a middling income.
You can make a fortune, or it just doesn't work, and more and more careers are like that.
One other area that I think you saw this in 2024 was in politics, which of course I'm stating something that everybody knows is more divisive, more partisan, more on the tails than it's ever been.
I think at least one of the reasons for that is the country in general, the direction of economy and culture and society and economics is either working exceptionally well for you or it's not working at all.
It's tougher to have people who are just right in the middle and say, oh, I earned a decent income and I'm happy with it, and it's that year after year.
Less so than it used to be, where either your career is working very well or it's not working whatsoever.
Now, I'll say it for the millionth time.
That's a broad, general, sweeping statement.
Of course, there are people who are earning a nice income in half for years and will for years to come.
But more so than ever, it's a tale driven economy.
And maybe this is a more important point.
Because of social media, you are more likely to see those tales and be aware of those tales and have a microphone to share your side of the story than it's ever been before.
So more so than we've ever had, the people who are doing exceptionally well, the companies that are doing exceptionally the well.
The creators, the athletes, the musicians, you know about their success, you know how much money they make, you know how many views Mr. Beast gets on YouTube.
You can see all of it and it creates a stronger sense of FOMO and a sense that you have not made it.
Even if you're actually doing pretty well it's easier than ever to feel like you're falling behind.
So much of why that's just accentuated now than it used to be is because modern business models, more that we've ever seen, and growing very quickly, allow for leverage.
Where if the thing you're doing works, it works incredibly well, but if it doesn't work, there's no room for it whatsoever.
I think it was Warren Buffett who once used the example of if you go back a hundred years ago, every town in America had an opera singer and you didn't even have to be that good.
You just had to be the best in your town.
so if you were a very mediocre opera singer in Kalamazoo, it didn't matter.
You had plenty of work.
You can make a living doing that because you were just the best in your town, even if you weren't that good and buffet made this point that once the radio came along, forget about it.
Now the only person who got the attention was the best opera singer in the country.
No one was going to spend their time listening to a mediocre one when you could listen to the best on the radio and that just exploded over the last, really over the last, I think five years, kind of post COVID when more things at least went digital to where now if what you were doing works, the sky is the limit.
And if it's not working, it's going to go straight to zero.
It's just a much more stratified set of winners and losers than a lot of people had become accustomed to.
I really started thinking about this in a bigger way in 2020 during the COVID lockdowns.
That was probably the most stratified year we've ever had economically ever in the history of this country in 2020.
Because if you were a tech worker, 2020 was literally the best year you could possibly imagine.
You got to work from home, the company you were working for probably saw it's stock price double or triple, you had incredible job security.
That was a bonanza year, but if you owned a laundromat or a restaurant, it was literally worse than the great depression.
Your business went to zero.
A lot of them, of course went bankrupt.
You could not imagine a worse year than 2020.
And so you have these two groups of people who won, which is probably a big chunk of the country.
I don't know. 30, 40 % of the country in 2020 said what an incredible year, made more money had more fun had got to relax more than I ever have ever at least economically and then another half of the country saying what in the world are you talking about this is apocalyptic you could not create a James Cameron movie more scarier or worse than this and then so you have half the country that does not understand cannot possibly fathom the views of the other half of the country in that world we're so stratified like that and when tales drive everything, and you see that in politics too, where I think
the two kinds of politicians that get the most attention at least are people who are either trying to maintain the status quo or people who are trying to completely shake things up and turn things upside down, blow things up and start over.
That makes sense too because you have a lot of people that would say why would you defend the status quo?
Well, I think the truth is the status quo has worked very well for a lot of people, and if that sounds crazy to you, it's because probably the other 50 % of the country, the status quo has been a disaster for them.
And look, this topic has always been true.
It's just more accentuated now than it's ever been.
And it's hard to see how that will revert anytime soon.
You can easily see how that could get worse and worse and worse.
In a world where the business models have so much leverage to where when they work, they really work, and if they don't, they have absolutely no mercy for you.
And in a world where social media means that you aren't going to know about it, you are going to see those people's success and hear about it and create a world where it is easier than ever to feel like you are falling behind relative to other people.
Hard to see how that turns around.
But that brings me to maybe the second point that I want to bring up which is, in general, it is never as good or as bad as it seems.
Back to the stock market.
We have a year like 2024 where the market goes up 30%, incredible, way above average.
but with that comes the completely unavoidable, nearly guaranteed idea that there are gonna be years that are as bad in the other direction.
And if you're a long -term investor, those average out, and you're gonna have probably a very decent 8 or 10 % average annual return, but the market almost never goes up 8 or 10 % in any given year.
It's either up a lot or down a lot.
That's way more common.
And so when you have a year like this, and let's say your year was very good or very bad, not just investing but overall, in your life, in your career.
Incredibly easy to extrapolate that and grab a hold of that and just assume it's going to keep going in that direction indefinitely, whether it is in a good direction or a bad direction.
It's easier to say, well that's the momentum, that's where we're going.
Very rarely does it occur like that in either direction.
There's so much evidence in economics that good times plant the seeds of their demise.
Because people get overconfident, overoptimistic, complacent.
And the opposite is true.
That bad times cause people to get motivated, solve problems, do something new, try something different.
And of course, that's not to minimize a lot of the pain that people go through during bad economic times.
But in general, the idea that nothing is as good or as bad as it seems, because the seeds to push them in another direction are so incredibly powerful is something to pay attention to and remember in a year like 2024.
One other thing I tend to think about as related to that is the idea that what we've been through in the last 12 months or even the last three months seems like the most important thing in the world and it's front of mind and it's emotional and it's what that you just experienced, very good chance, that no matter how well you did this year, that in 10 or 20 years, if someone says, what happened to you in the year 2024, that you will say, I don't remember.
That in the grand scheme of things, in the fullness of time, these things all kind of blend out because nothing is as good or as bad as it seems.
It tends to revert back to some sort of comfortable medium for most people most of the time.
And that can be actually kind of comforting that as crazy as this year may have been for you and for a lot of people it was that in due time over the course of your life, you will look back at it as just being one chapter over the course of a very long book.
That's it for this week, and that's it for this year.
Thanks again for listening, and we'll see you next time.
