"Demographics is destiny"
― Arthur Kemp
Every day there's some new horror in the news. One of the most common questions you hear in bars, office break rooms, bus stops, and kitchen tables is "How did the world get so messed up?"
The answer I usually give is: "It didn't. There's just more news."
sad fact of human psychology that negative headlines grab people's attention. This "If it bleeds, it leads" ethos transcends the mainstream media. 21st Century marketers don't sell products, they sell the fear of living without their products. (A trend that fans of AMC's Mad Men know began in the 1960s.) Gold bugs are laser-focused on inflation, but the VIX (the "fear indicator") is what moves prices in the near term. Negative political ads pay higher dividends than positive feel-good ads, regardless of how loudly the voters deplore them.
Fear sells. It's just the way we're wired. But the reality is that the Big Picture isn't nearly as grim as the media portrays it to be. To illustrate my point, here are 10 Demographic Trends for investors to be thankful for.
The air is cleaner. Total toxic air releases in 2012 were down 8 percent from the 2010 figure, a survey by the U.S. Environmental Protection Agency found.
The U.S. job market will continue to expand. Of the five largest global economies today, only the U.S will see significant growth in working-age population between now and 2050. Keep in mind, however, that labor force participation rates will continue to decline by % until 2020 before slowly picking up again.
Labor force participation rates, 1960-2010 and projected 2020
(Source: Bureau of Labor Statistics)
More Americans are completing high school and going to college.
Record numbers of young Americans are completing high school, going to college and finishing college, from less than one-fifth of young adults in the early 1970s to 33% in 2012.
Potential Play: SPDR S&P 500 Trust ETF (SPY). 87% of upper-income Americans (annual income =$75,000+) own stocks, as do 83% of postgraduates and 73% of college graduates. Despite the incessant drumbeat of doom and gloom in the media since the financial collapse, the public perception of the markets continues to rise and fall with the indexes.
Divorce rates are down. Many Americans are convinced that "half of all marriages end in divorce," though divorce rates have declined by almost a third from their early 80s high of around 50%. Men report themselves increasingly happy with their spouses; Women are less so.
Percentage of married persons age 18 and older who said their marriages were "very happy," by period, U.S.A.
Potential Play: Toll Brothers (TOL) Census results show that married couples with families are significantly more likely to own their own home.
(Source: U.S. Census Bureau)
Poverty is falling. Even though the world's population has doubled over the past 50 years, the percentage living in poverty has declined by 50% over that period.
Potential Play: Monsanto (MON). Developing nations improve the quality of their diet before anything else. This process begins with grains, and therefore seeds. Monsanto now controls up to 90% of the seed market, a fact that will make the agricultural conglomerate pivotal over the next two decades.
Infant mortality is decreasing. Infant mortality and life expectancy have improved by more than 40% in Latin America since the early 1990s. No country in history has improved its average standard of living faster than China has over the past two decades.
Potential Play: UnitedHealth Group (UNH). Health coverage - and therefore healthcare consumption - will continue to rise regardless of the employment rate. UnitedHealth is well-positioned to exploit this trend within the U.S. Market.
Violent crime has plummeted. The violent crime rate (crimes per thousand people) dropped from 51 to 15 between 1995 and 2010. Since 1991, the homicide rate has been reduced by half; violent crime and property crime are also way down.
(source: FBI, Uniform Crime Reports, 1950-2010)
Americans are smoking less. The rate of current cigarette use among U.S. teens decreased from nearly 12 percent in 2004 to about 8 percent in 2010, and dropped from nearly 40 percent to about 34 percent among young adults, according to the analysis from the Substance Abuse and Mental Health Services Administration's National Survey on Drug Use and Health.
Potential Play: British-American Tobacco (BTI) looks to be the first tobacco company to embrace the e-cigarette paradigm. Last September, BTI CFO Nicandro Durante remarked that alternative tobacco products like the e-cig may account for up to 40% of British-American's revenue within the next two decades.
Americans are drinking less. While overall sales are on the rise, Americans as a whole are drinking less. In 1980, per person consumption was 28.5 gallons of alcohol. By 2008, that volume was down to 25.7 gallons. This decrease reflects a decline in beer and liquor consumption. Wine drinking rose during this period.
Fewer Americans are killed in war. Today's wars tend to be sputtering, guerrilla conflicts that, on average, kill only about 10% percent than did violent, large-scale mechanized struggles of the 1950s. Indeed, the first decade of this century witnessed fewer casualties from war than any decade in the last century.
Super-investor Warren Buffett is routinely pilloried for his optimism by young bucks like me who "know better." Sure, the Dow increased from 66 to 11,497 over the course of the 20th century, but that was an "outlier." Things are "different now." The system is not safe! Uncertainty is everywhere. The world is a more frightening place than it used to be.
This is pure fiction. Every civilization criticizes itself in the light of some Golden Age/retro-Utopia that never existed. When the famed Roman orator and elitist martyr Cicero inveighed against the standards of the day in his iconic First Oration Against Catiline with the words "Shame on the age and on its principles!," he was merely repeating the same self-indulgent tripe that every dominant civilization has told itself since the dawn of time. The world has always been "going to hell in a hand-basket."
The internet has done investors excellent service in reducing broker fees while speeding up the flow of the information, but it has also encouraged the viral propagation of extreme, panicky worldviews; particularly in response to crisis. The resulting spike in the noise-to-signal ratio surrounding securities today implies that mispricing is more likely, not less, as financial motives are increasingly multidimensional.
If you bought a stock in the 1928, you did it for one of three reasons:
- To make money when the price went up.
- To receive dividend income.
- To assert beneficial ownership/vote the stock.
Today, between diversification, hedging, mechanical strategies, options, 401k requirements and tax accounting, no one can tell you with certainty why a particular security is being bought or sold at any given time. Such thoughts are disturbing, especially considering the empirical collapse of homo economicus and the Chicago School.
In the decades to come, I believe a healthy dose of skepticism and an appreciation of social inertia will be even more critical to successful investing than it is today.