Ignore Brexit; The Future Is Better Than You Think, So Position Yourself Accordingly

| About: SPDR S&P (SPY)


Is Brexit really that bad?

We are programmed to think linearly, not exponentially, and therefore underestimate things that grow exponentially, like compound interest or human progress.

Don't underestimate the future.

Sometimes I find it useful to take a step back and try to look at the bigger picture. Is Brexit really that bad? Will China have a soft or hard landing? Global growth? There is a lot of noise.

It seems like we are in a real trading rut, where markets can't seem to break 2,135 on the S&P (NYSEARCA:SPY). And even if we do break that level, is there really much upside at current valuations? You can probably find the following chart in some article on Seeking Alpha at least once a day:

^SPX Chart

^SPX data by YCharts

It sure "seems" like we have a third bubble and are about to burst.

But is that really where we are? Let's zoom out a bit.

^SPX Chart

^SPX data by YCharts

We may have had a bubble in 2000 and stocks got hammered way too low in 2009, but you can see that the clear long-term trend here is up and to the right. Note that this chart is on a log scale, which flattens exponential returns to a straight line.

But you may say that developed world populations are shrinking now, sovereign debt is dangerously high and getting higher, monetary policy is spent, etc., and therefore the future won't be nearly as prosperous as the past.

Before I counter let me direct you to an article I recently read on artificial intelligence. You can find it here. I would highly recommend reading the entire article (which is interesting, funny and most of all scary) but for these purposes I would just point to the first page. The author makes the argument that human progress has accelerated over time because advanced societies can progress at a faster rate because they are advanced. Intuitively this is obvious; we know that a lot more has happened in the last 100 years than happened in the 100 years prior. In fact, more development may have occurred in the last 100 years than occurred in the millions of years before that. This is exponential growth. The strange thing about exponential growth is that we don't think in exponential terms; we think in straight lines. That's why it's so difficult to comprehend compound interest/dividends beyond a few years, and why you'll be amazed at the results if you run a compound interest/dividend model out 30+ years.

The author refers to arguments made by Ray Kurzweil. Kurzweil argues that a 20th century's worth of progress was made between 2000 and 2014 and another 20th century's worth of progress will be made by 2021. Towards the middle of the century we will achieve a 20th century's worth of progress multiple times in the same year.

No matter what you think of Kurzweil, it can't be denied that (1) human progress is increasing exponentially and (2) human brains think linearly, not exponentially.

In other words, we are here:

But to us, we can't see the future. So it feels like this:

Graphics from Tim Urban sourced from article.

So what does this mean to investors? To me, it means that the future is likely to be much better than we currently expect, and there will be a lot of progress in the next few decades. While most people assume that stock market returns will be lower going forward, just consider the possibility that they might actually be higher given the explosion of progress that should come over the next few decades. Consider also that the equity risk premium right now is at a very high level, and is even more attractive today after the Brexit plunge and rally in Treasuries.

Here's what I think: use dips like the Brexit to buy, stay fully invested, and don't panic sell. Short rarely, and only short bad companies. Never short good companies on valuation. And buy companies that are well positioned for the future. Have a place for the most dynamic companies in the world (Amazon (AMZN), Alphabet (GOOG) (NASDAQ:GOOGL)] and keep in mind that it's always better to buy a great company at a fair price than a mediocre company at a great price.

Disclosure: I am/we are long GOOG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.