It's 2025 and life is still messy

Welcome to 2025! I hope you all had a lovely end of the year. As has become tradition and since there are again quite a few new readers who have joined in 2024, I would like to introduce you all to the purpose of these posts.

First, the general structure. I post five days a week but only a mad or extremely bored person would read all of them. So here is a quick guide to the weekly structure: On Mondays, I write about all things ESG and sustainability. Tuesday to Thursday, I write about serious economics and finance stuff but on Friday, all bets are off. Friday posts are about the quirky and fun side of economics and I ask you not to take the Friday posts too seriously. They aren’t meant to be taken seriously.

Most importantly though, be aware that in my serious posts Mondays to Thursdays I will not write about the market moves of the day or anything like that. My posts are an opportunity to take a step back and think about markets and economics more fundamentally.

And when I do that – and this is the raison d’être of these missives – I will not do this based on what some theory or model says about the world. I will almost always rely on experimental results because as an investment practitioner, I am interested in the world as it is, not as it should be.

This is important because sometimes readers feel irritated by my posts and in my experience, it is almost always because I have written something that is in contradiction to preconceived notions about how the world should work or what people have learned at university.

Let me be clear, I think most of the things I learned while studying towards my degree in economics are either wrong or worthless for practitioners. You may not think this is true, but what I do in these posts is show you empirical data that form my view of the world. We can then discuss whether the empirical results are wrong or incomplete, and I encourage all my readers to write and challenge me. But I will almost never discuss things that are based on the argument that “(ceteris paribus) if you do X then Y should happen”, or along the lines of “the model/theory developed by Nobel winning economist Z says that…”

Do you know why I don’t bother with such discussions?

Because while I studied economics and finance, I first trained as a physicist and mathematician. And in physics (and the hard sciences in general), you build your models and theories to fit the data. In economics, all too often, empirical data that contradicts a theory is dismissed or ignored.

So, to give you an idea of what you can expect when you read these missives in the future, here are some interesting posts from 2024:

• One of the most important insights for me came when I read about a paper that showed how flows into index funds created a butterfly effect making large stocks in the index larger at the expense of smaller stocks. This is so far the most convincing explanation for the rise of the Mag 7 and other megacap stocks I have seen.

• On the other hand, some ETFs have become so niche that they act like a Ponzi scheme.

• Another important series of posts, in my view, focused on the long run risk and return of stocks and bonds. Here is part 1, which is a reminder that the past performance of the US stock market is a major outlier and that stock markets have seen 20- and even 50-year periods of negative returns. In part 2, I used the analysis of Edward McQuarrie that showed that stocks did not outperform bonds in the US if you cut out the period from 1941 to 1981. Part 3, finally, provided a reminder that negative correlation between stocks and bonds is not the norm, historically speaking.

• On the topic of theory vs. practice, I liked the lab experiments by Peter Andre and his colleagues that indicated that only academics believe in efficient markets. the rest of the world behaves as if markets are not efficient.

• A more gloomy perspective was needed when the conflict in the Middle East escalated. I put out my Armed Conflict Investor Survival Guide, which I think readers should bookmark so they have it handy the next time a conflict escalates or breaks out. And unfortunately, we live in a world where this is likely to happen.

• Finally, after all these discussions of things that can go wrong or simply aren’t as theories and textbooks would make you believe they are, here are two prime examples of my Friday posts. First, the, in my view, very important message that going to university is definitely worth it for both you and the taxpayer. Second, this is the kind of stuff you shouldn’t take too seriously, but I could not resist lampooning the idiotic gadgets that are coming to market that use AI for no reason whatsoever.

As I said in the title of this post: life is messy. Financial markets and the economy do not know what your theory says. They do not react to one variable in always the same way and with the same strength. This is why I love being an investor and why I love studying the economy. They are social systems where billions of people interact with each other, and each individual has different information, incentives, biases, and moods. This means there are second round, third round, and fourth round effects that are hard to guess from a simple model that says “(ceteris paribus) if you do X then Y should happen”.  

If you, like me, are curious about how the world works instead of being comfortable in your knowledge that a theory or model tells you how the world should work, then keep on reading and exploring the world in all its facets and surprises with me. I promise it is going to be a fun journey.