AIM13 Commentary - 2024 Q3
“For fast-acting relief, try slowing down.”
We needed a little more time for our letter this quarter to give ourselves some distance after the election to let a lot of the hysteria that followed – both favorable and unfavorable – to subside. While many investors are exuberant, our views regarding the outcome do not change how we manage investments and think about risk. Too often, however, we see investors get over excited, as if who controls Congress or the White House should fundamentally change how they invest. We think the better course is to stay calm and do not overreact and, in a world with so much uncertainty, avoid being over confident.ng.
“It’s not what happens to you, but how you react to it that matters.”
Don’t overreact – nothing is ever as good as it seems.
Following the election, a lot of people have become bullish about the markets with the prospect of a pro-business administration, less regulation, interest rates possibly going down, and protectionist policies. In November, the stock market rallied, at one point gaining over 6% since the election. According to the Financial Times, trading volumes in U.S. equities jumped 38% in November from the same month in 2023.
The bullish sentiment seems widespread. In mid-December, Charlie Bilello posted this chart showing that over 56% of Americans expect stock prices to rise over the next year, the most positive outlook for the stock market in decades:
Share of consumers expecting
stock prices to rise over the next twelve months
Source: Charlie Bilello, Conference Board via LSEG; monthly data
We get nervous, however, when it feels like a lot of investors are on the same side of the boat. Things are never as good as they seem and when the “herd” thinks one way, it is often the wrong way. Indeed, the market has shown signs recently of stress, and cracks in the post-election euphoria are beginning to appear. According to CNBC, the Dow recently posted the first 10-day losing streak since 1974, giving back all of its post election gains. Morningstar reported that over a ten trading day period in December, decliners far outpaced advancers on the S&P 500, the worst stretch of negative market breadth since 2001.
We are also frightened with what is going on in the world with Israel fighting for survival on multiple fronts, Syria collapsing, and turmoil even in South Korea.
“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.”
While there may be reasons to be optimistic or pessimistic, when it comes to investing, the greatest mistake is over reacting either way and immediately thinking that we are in unprecedented times. For us here at AIM13, our historical perspective tells us that what has worked for more than 25 years will work in the next 25 years. Investing is a marathon, and you need to take one step at a time. Do your work, stick to your process, stay true to what you’ve always done, and carry on. Swinging wildly from unbridled enthusiasm to wanting to crawl under a rock is not the way to invest over the long term.
Avoid Over Confidence – For most of us, things are not as certain as we think they are.
“It ain’t what you don’t know that gets you into trouble.
It’s what you know for sure that just ain’t so.”
Hand in hand with the risk of over reacting is the risk of over confidence. We have written before about the cognitive bias known as the Dunning-Kruger effect, which can be summed up as believing you are smarter than you are. Unfortunately, there are a lot of unknowns today, yet many investors express certainty about where markets are going, what 2025 will look like, how various conflicts around the world will resolve themselves, etc. Over confidence, after all, is not an uncommon phenomenon:
Sources: **Heck, Simons, and Chabris 2018 study (https://pmc.ncbi.nlm.nih.gov/articles/PMC6029792/);
***American Automobile Association (2018); data published by Schwab in Omar Agular’s “Overconfidence Bias”
General George Custer reportedly said before his disastrous defeat at the Battle of Little Bighorn in 1876, “There are not enough Indians in the world to defeat the Seventh Cavalry…” and look what happened to him. We try to mitigate the risk of overconfidence and have always believed that partnering with people smarter than ourselves is the best way to invest over the long term. As we like to say, if you think you are the smartest person in the room, you are in the wrong room. Finding those smart people is the real challenge, but the first hurdle is recognizing what you do and, more importantly, do not know.
dRONES
We first wrote about drones in our letters in the beginning of 2019 after Yemen’s Houthi rebels used drones to strike Saudi oil facilities. At that time, we had already spent several years exploring the drone space and had realized both the enormous benefits and likewise new threats the devices would bring. We were not wrong, and since then we have made a number of investments in the space, including in Fortem Technologies, Epirus, Hoverfly, and WhiteFox.
With the news of suspicious drones in New Jersey, last week we offered a call with our investors and the CEO of Fortem Technologies to discuss what was happening. The primary takeaway from the call was that this is not a new phenomenon, and whether it is corporate espionage, nefarious non-state actors, pre-planned government exercises, or otherwise, people are waking up to the risks we have been talking about for years.
What has also been exposed are the gaps in law enforcement, antiquated laws and regulations that limit drone mitigation, and conflicting responses from local, state, and federal authorities. On December 5, 2024, the Department of Defense unveiled a comprehensive strategy to address the escalating threats posed by unmanned aerial systems, the growing sophistication of which has heightened the risk they pose to both American service members abroad and civilians at home. We believe that more of that thinking is urgently needed
In Memoriam: Sandy Robertson (1931-2024)
Sanford (“Sandy”) Robertson, a close friend of AIM13, an innovator in banking and technology, and the founder of Robertson, Stephens & Company in 1978, died in August with his wife Nancy and other loved ones by his side. He was 93 years old. Sandy was one of the icons of Silicon Valley and the technology industry.
Sandy was once asked in an interview whether people or ideas matter most in making investments and whether it is a question of betting on the jockey or the horse. “It’s the jockey,” Sandy answered without missing a beat. “No question about it, pick the right person.” We could not agree more, and that belief has guided us all of our investing lives.
We had the pleasure of knowing Sandy personally for decades. Above all and beyond his accomplishments in business, he was an enormously kind and generous person. He will be missed.
The Dangers of Personal Info Online
Following the recent targeted killing of a health insurance company CEO by someone who allegedly stalked his victim using publicly available data on his whereabouts reinforced, we recently reminded our investors about the urgent need to be vigilant about our personal online presence. Personal information is ubiquitous online, and criminals use it to steal from, harm, or even, in this most recent case, kill their victims. Removing this data is one way to make individuals and families harder to locate and harm in the real world.
While no solution can completely guarantee security from cyber-related attacks, we think one of our portfolio companies, mePrism, can be an important part of a comprehensive privacy and security framework for any company or individual concerned about their safety and financial security. mePrism provides tools to prohibit the unconsented use of personal information by companies and individuals who sell our data to unknown and often nefarious organizations for profit.
What mePrism can do for you:
mePrism has generously agreed to extend a 25% annual discount per user for companies and individuals in the AIM13 network. To set up an account, please follow the instructions below.
For individuals: Visit meprism.com to create an account and use the discount code FRIENDOFAIM13. Once you have set up your account, download the App from the App Store and enter your login details.
For companies: Click here or email the sales team at sales@meprism.com. Once the business account has been set up, email tom@mePrism.com to claim the discounted rate using the code “Friend of AIM13”.
We wish you all the best in the New Year.
Sincerely,
Alternative Investment Management, LLC (AIM13)