Over the course of the 20th century, an Englishman named P.G. Woodhouse (who eventually became an American citizen) authored a series of stories featuring a rich Englishman, Bertram “Bertie” Wooster, and his manservant, Jeeves. Bertie is always getting himself into sticky situations, and it’s up to Jeeves to get him out of them. Jeeves is more than up to the task. A walking encyclopedia, far more knowledgeable on almost any subject than Wooster himself, Jeeves is the ultimate personal assistant – coming up with brilliant schemes, navigating the complexities of the social order, solving Bertie’s every problem with discretion and flair. And the reader is left with no doubt as to who is really in control.
The name Jeeves has come to be a generic term for a personal assistant, or anyone who can answer a wide variety of questions and/or give good advice. Originally, the internet search engine ask.com was called Ask Jeeves. It hardly needs to be said that a Jeeves is always handy to have around.
Turn on a television or radio news show and you will often see and/or hear an “expert.” Often this is a person who is merely knowledgeable about a specific topic – a walking, talking database if you will. Just as often it is someone who has a grasp of both the factual information and the logical relationships within a field, and can apply that understanding to give advice on a specific topic. And sometimes, it’s a person who has a very good track record in making predictions.
None of these things are the exclusive province of human beings. Machines can store and process information, conduct analyses, and generate predictions. And they are doing all of these things, ever more effectively, year by year.
30 years ago, there was a lot of talk about “expert systems.” An expert system is a computer program that takes a large collection of facts, along with a system of logic applied to those facts, and then answers questions or makes decisions on that topic. The term has largely fallen out of use, because such systems have become so common and so integrated into our lives that we just think of them as part of our background. Personal assistants like Siri and Alexa are examples. More sophisticated systems include medical diagnosis programs, or the programs that go hand-in-hand with business process automation.
Many people do not realize that large amounts of stock are now controlled by people and organizations called quants. Quant is short for quantitative analyst. It is estimated that about 30% of all stock trading is now done by quants, and this percentage is growing. And among the highest-paid quants are those who use what is called algorithmic trading. In plain English, they use automation – computer programs that can analyze large amounts of financial data quickly, and generate good predictions.
The current value of the equities on the New York Stock Exchange is about 21 trillion dollars – about $66,000 for every man, woman, and child in America. Of course, every man, woman, and child in America doesn’t own equities. And contrary to popular belief, most of the 21 trillion dollars worth of equities on the NYSE isn’t owned by individuals.
Apple computer, for example, is the largest company in America. Its largest individual stockholder is its current chairman, Arthur Levinson. He owns about 1.1 million shares, currently worth about 200 million dollars. But this is a drop in the bucket. Apple’s current market capitalization is approaching a TRILLION dollars. Its largest INSTITUTIONAL shareholder, The Vanguard Group, holds almost 350 MILLION shares, worth more than 60 billion dollars. About 64% of Apple’s stock is held by institutions.
If you examine the holdings of most any large company, you will see a similar pattern. The stock of Exxon-Mobil, the second largest American company, is 54% held by institutions. The stock of Google, the third largest American company, is 71% held by institutions. Companies like Blackrock, Vanguard, Fidelity, and T. Rowe Price are the largest stockholders in the country.
Much of this is held in funds. Going back to the Apple example, The Vanguard Total Stock Market Index Fund holds about 108 million shares of Apple stock, worth about 20 billion dollars. And here’s a news flash. The Vanguard Group, which controls these funds, is OWNED BY THE FUNDS IT CONTROLS. This is what is called a mutual company. Vanguard owns the funds, and the funds own Vanguard.
If this sounds nuts, you probably suffer from something called real life. In real life, people own assets. In the world of high finance, it is often the case that nobody owns assets. “Nobody? What do you mean nobody, Dave?” I mean no HUMAN. Instead, abstract objects called INSTITUTIONS often own assets. Those institutions own enormous assets – assets controlled by the fund managers. These “experts” are of course paid very handsomely.
Since most stock is owned by institutions, most stock trading is performed by institutions. And these institutions tend to behave in similar ways. For example, U.S. News has a list of its top-ranked large-company growth ETF’s (exchange-traded funds). Let’s look at the top 3:
Vanguard Mega Cap Growth ETF
SPDR Portfolio S & P 500 Growth ETF
Schwab US Large-cap Growth ETF
The top 10 stocks in the Vanguard Mega Cap Growth ETF are, in order of importance:
Alphabet A (Google)
Alphabet C (another Google)
The top 10 stocks in the SPDR Portfolio S & P Growth ETF are, in order of importance:
Gee, looks pretty similar. How about the Schwab US Large-cap Growth ETF?
These are 3 of the biggest brokerage firms in the country – The Vanguard Group, State Street Global Advisors, and Charles Schwab. They control enormous amounts of stock. The fact that their exchange-traded funds are so similar tells us that stock trading is not rocket science. Once the goal is established – in this case, trading in large companies with strong growth potential – the “experts” pretty much all reach the same conclusions. This is why big company stocks tend to go up and down together. Because most of them are controlled by institutions with “experts” that all make largely the same predictions, and therefore have essentially the same holdings. These large funds contain stocks from numerous companies, ensuring that the failure of a particular company will not affect the price much.
My point is that the so-called “expertise” of the finance industry, which our society pays handsomely for, is nowhere near the rocket science the average person thinks it is. The economy tends to grow over time. So a fund that is invested broadly and tracks a particular stock index will grow over time. If you want a faster rate of growth, you have to accept a higher level of risk. It’s not that complicated. And increasingly, the trading is being guided by computer programs, not human “experts.”
Allow me to quote Wikipedia on the subject of algorithmic trading: “Computers running software based on complex algorithms have replaced humans in many functions in the financial industry. Finance is essentially becoming an industry where machines and humans share the dominant roles – transforming modern finance into what one scholar has called, ‘cyborg finance.’”
It doesn’t take a lot of “expertise” to understand that investing $10,000 with a 10% annual return will make about $57,000 in 20 years, while investing 1 million dollars with a 2% annual return will make more than that in only 4 years. If you already have lots of money to play with, making lots of money is a no-brainer. Similarly, the notion that banks or insurance carriers should make enormous profits because they are incredibly good at something is absurd. They simply have large amounts of money to play with. There are lots of advertisements for schemes purporting to show you how to “beat the market.” But index funds controlled by big brokerage firms don’t try to beat the market. The merely track the relevant index, and in the process they make tons of money – simply because they already have tons of money invested.
Over the last 30 years, the Dow Jones Industrial Average has multiplied by about 12 times. In other words, if you had invested $100,000 30 years ago in a fund that merely tracked this index, your stock would now be worth about 1.2 million dollars. Not rocket science. Yet our society pays financiers – stock brokers, fund managers, investment bankers, and so on – very handsomely for what they do. So much so that a huge, and growing, portion of our economy now consists of finance. This has everything to do with wealth inequality and the stagnation of worker wages. If working people don’t have disposable income, who is going to buy all of the goods and services that keep the economic engine running?
Clearly these trends cannot continue. What happens when “cyborg finance” really gets going? What happens when the vast majority of equities trading is done by computer programs? What happens to our whole concept of the value of work, when machines are really doing these jobs, and human beings are sitting back watching the numbers crunch? At some point the whole thing becomes utterly absurd – and the real issue rears its head, which is ownership.
Once upon a time there were 2 men, Marvel and Joe. They lived on a planet where there was no food, no water. But Marvel was able to create these things, and much more, seemingly by magic. Marvel lived in opulence – a beautiful, ornate house, the finest clothing, wonderful technologies. Joe lived in a very modest house. It was hot in the summer and cold in the winter. He didn’t always have enough food, and when he got sick he didn’t always have enough medicine. He had to go to Marvel for these things. But he had to pay for them. Marvel gave him money too, but it was never enough to break out of his situation. He was always struggling. Even so, he was always in awe of Marvel. After all, Marvel deserved to have all of these nice things, because he had this amazing ability to create all of them, apparently out of thin air. “It’s amazing that you can do these things,” he told Marvel. “You are like a god to me.” But one day, Joe came to Marvel’s house when he wasn’t expecting it. That’s when he saw Marvel say, “Replicator on.” A machine suddenly appeared. Then he said, “$10,000.” On a platform of the machine, a large amount of money appeared, and he picked it up. “Replicator off,” Marvel then said. The machine disappeared. “THAT’S IT?” Joe exclaimed. “That’s your incredible ability? You just tell this thing what you want? You didn’t even give this thing any money! It gave YOU money! Lots of it! Why do you deserve all this and I don’t?” “I OWN this machine,” replied Marvel. “You don’t.”
Ownership. It’s a total abstraction, but it’s the key to all things economic in our world. Who is going to own the machines? Who is Jeeves going to work for? A privileged few? I’ve said it before, and I’ll say it again. The end of this century will look very, very different from its beginning.