8th March 2019
The highlight of my week was lunch with one of our investors who happens to be a medical doctor, a general practitioner to be precise. He’s one of those people in life that’s always willing to question conventional thinking and so our wide-ranging discussion on politics, economics and medicine threw up some fascinating analogies.
As I tucked into my lamb chop, he calmly asked why I was carefully dissecting the fat and shifting it to the edge of the plate. In all honesty, I wasn’t sure why but joked that I was staving off middle aged spread.
It set him off on a tirade about some of, what he thought, were the crazy ideas that had infused the medical world over the last thirty years - especially when it comes to diet. He recounted a story of another lunch he had at the start of what we now call the obesity epidemic. He noticed a colleague carefully separating the yolk away from his egg and, like me, leaving it to the side of his plate – it was the time when cholesterol as a cause of heart disease was going mainstream and so his colleague, clearly keen to avoid the cholesterol in the yolk, was determined to diligently follow the crowd.
The growing obsession with cholesterol and “fat avoidance”, our client argued, has left us feeling hungry and so much more prone to binging on starch in the form of wheat flour (he didn’t think there had really been a meaningful increase in sugar consumption over the last few years). He then went on to challenge, to put in mildly, accepted wisdom on the role cholesterol plays in heart disease.
The cholesterol obsession, he told me, really took off in the 1950s when an American scientist, John Gofman, claimed to establish a “clear link” between cholesterol and atherosclerosis. He in turn inspired a prominent nutritional scientist at the time, Ancel Keys, to conduct the highly influential Seven Countries Study which examined lifestyle, diet and cardiovascular disease amongst different populations.
One consequence of their conclusions is a $20billion industry in statins, a prophylactic drug now administered as standard here and elsewhere for anyone in their fifties with elevated levels of Low-Density Lipoprotein – so-called bad cholesterol.
The evidence from the 1950’s study is now being seriously challenged and is widely considered as flawed by today’s standards. In 2016 an international team of scientists reviewed 19 studies involving 68,000 people and found no link between high levels of LDL and heart disease in the over 60’s. In fact they found that 92 percent of over 60’s with high cholesterol lived as long as or longer than those with low cholesterol. The study went even further and argued that there was some evidence that high cholesterol levels may in fact protect against some diseases, even cancer, by binding to toxic microorganisms.
Our doctor client had his own theory. He pointed out that, historically, extended families in Mediterranean countries, where diet is often cited as low cholesterol, tended to stay together more than in the UK and the US, and so older generations had more young people around them. Numerous studies have cited loneliness as a key factor in heart disease in the aged.
The link between cholesterol, heart disease and the effectiveness of statins remains controversial (and it’s certainly not for me to offer a conclusion) but our client’s story makes an important point.
John Maynard Keynes is often quoted as saying “When the facts change, I change my mind, what do you do Sir?”. As is often the case, however, it’s not totally clear that Keynes actually used those precise words. A related but more reliable and useful quote comes from the American economist Paul Samuelson, “When my information changes, I alter my conclusion”. “Information” includes more than “facts”, it also includes the analysis and interpretation of the facts, so even when the facts don’t change it’s perfectly reasonable, on further analysis, to change one’s mind.
The lesson? Keep analysing, keep questioning your interpretation and, most importantly, be willing to accept when you’re wrong.
Next time I have a lamb chop, I’ll make sure to eat the fat as well.
7th February 2019
Welcome to Rational Exuberance.
The team here at Equitile constantly analyse the world around us and so we decided to launch a new blog as an informal way (you can expect the odd typo!) to share some of our observations, insights and ideas with our clients.
We have called the blog Rational Exuberance to remind ourselves to pay due attention to the positive processes of innovation which drive economic growth and, ultimately, investment returns. Naturally, we remain alert to risks, and we will share our thoughts in this respect, but we endeavour not to fall too far into the very human trap of focussing unduly on hypothetical negative scenarios – especially those which dominate the media. To gain a deeper understanding of why we think this way, we recommend the late Hans Rosling’s Factfullness or our own synopsis of his work The Anxiety Machine.
Our title, ‘Rational Exuberance’, is of course a nod to the famous ‘Irrational Exuberance’ phrase coined by Alan Greenspan, Chairman of the Federal Reserve, in a speech to The American Enterprise Institute in December 1996. He asked: “how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”
When he made that speech the US stock market had rallied 200% over the previous decade. His thinly veiled warning of irrational exuberance looked eminently sensible and doubtless encouraged some prudent investors to divest their holdings.
A little more than two decades on from the Irrational Exuberance speech the US stock market has rallied another 280%.
In the years since December 1996 there have certainly been some wrenching financial crises. Nevertheless, innovation has continued driving economic expansion, people around the world have become healthier and richer and the investors that remained rationally exuberant over the time have enjoyed the benefit of that progress.
In coming decades there will doubtless be more financial crises and market setbacks, but there will also be innovation, economic growth and, we are sure, good investment returns to be enjoyed.