Moore’s Law Investing Strategy

Ben Stein once noted (me paraphrasing from memory), “unless your name is Warren Buffet, you can’t pick stocks.” This essentially restates the theory of Princeton professor Burton Malkiel, which is you can’t beat the market. The evidence seems to demonstrate he’s right. What that means is that, if you want to best guarantee returns on your investment, put your money in a passively managed index fund which tracks the major market indexes.

Think of beating the market like beating the house in a casino. If you put your money in the index fund, then you are the house.

Or if you do want to pick stocks, realize you are doing it for fun or some other reason; you might win big, but you probably won’t beat the market. There is one major difference, as I see it, between “picking stocks” and casinos. I think picking stocks, as long as you aren’t putting all your eggs in one basket, is still safer than going to casinos where you are almost guaranteed to lose over the long run. Picking stocks rather means you are likely, over the long run, not to beat the market. You still may come out ahead.

So you may wish to pick stocks for the similar kind of thrill or fun as the gambler gets from going to the casino. But as noted above there may be “other” reasons why you want to pick stocks. Enter Peter Thiel, a figure for whom I have a tremendous amount of respect (despite his endorsement of Donald Trump). He doesn’t endorse Malkiel’s approach, but he knows he can’t refute it.

Rather, Thiel has a different vision — call it a moral vision — for investment. For Thiel, you put your money in companies whose ideas you believe in, and attempt to change the direction of the future by doing so. It’s impossible to do that by just dumping your money in a passively managed index fund and waiting for returns on investment that nearly perfectly track the market.

And of course, the vast majority of us aren’t, like Thiel, venture capitalists who have large sums of money to invest in changing the direction of the future.

Thiel is fond of noting how as it relates to technological breakthroughs, we are experiencing a “great stagnation.” There was tremendous economic progress — what Deidre McCloskey terms “the great enrichment“–  coupled with dramatic scientific breakthroughs starting around the year 1800. Economic growth and scientific breakthroughs aren’t necessarily the same thing. Thiel argues that as it relates to the latter, we reached the peak in 1969 when we landed a man on the moon.

Of course information technology is excepted. In those non-IT areas (the world of “atoms” as opposed to the world of “bits” — transportation, construction, engineering, medicine, etc.) year by year we do get very slight gradual improvements (think air bags in cars). But no major breakthroughs. No Mr. Fusion Flying Cars as Back to the Future II promised us.

But IT is currently riding a wave that constitutes a continuous breakthrough. The name of that wave is Moore’s Law.

The main reason why we can’t “pick stocks” is that we can’t predict the future. If psychic future readings were a real phenomenon, why aren’t they all billionaires? They would be able to pick stocks. Likewise, think of how embarrassingly wrong the record of future predictions has been, from Hal Lindsey (who is going to die of old age before the rapture occurs) to Paul Ehrlich.

Except it seems on Moore’s Law grounds, we actually can predict future changes. AT & T did it in 1993.

I have no idea whether the “event horizon” Ray Kurzweil terms “The Singularity” will occur as Kurzweil describes it (where we achieve immortality by uploading ourselves into something like The Matrix). I do believe however, that everything Kurzweil predicts that will occur before that event, will occur on a similar timeline as he predicts.

So as it relates to investing, we can try to pick stocks that anticipate those changes which are predictable. There’s just one problem. That AT & T commercial got most things right; but it got one big thing wrong. It said that AT & T would be the company that would bring these things to us. But, by and large, they didn’t. Other entities did. In 1993, Apple or Microsoft would have been the stocks to pick and hold onto. (Though I think from 1993-2016, AT & T did “beat the market.”)

Think VCRs. Who could have predicted that VHS would put Beta out of business (I think Beta was the better product). Or as between MySpace and Facebook, who could have predicted? So even if one adopts the Moore’s Law investing strategy, you should still hedge your bets. Put 1/2 into Beta, half into VHS, 1/2 into MySpace, 1/2 into Facebook.

Nassim Taleb advises a “tail risk” strategy wherein something like 85% of your investing should be “ultra-safe.” The other 15% could be highly risky speculation.

So the 85% could be the dollar cost averaged index funds (i.e., your 401ks and Roth IRAs). The other 15% is your play money. The Moore’s Law stock picking investing strategy would fall within the 15%.


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Jon Rowe is a full Professor of Business at Mercer County Community College, where he teaches business, law, and legal issues relating to politics. Of course, his views do not necessarily represent those of his employer. ...more →

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35 thoughts on “Moore’s Law Investing Strategy

  1. One of the problems with the idea of a guy who can consistently beat the market is… why should he do it for you? He should charge a premium for that service equal to most of the “extra” money you’d get. Which in turn leads to lots of people claiming they can do this, charging “appropriately”, and then handing in substandard results after subtracting their pricy fees.

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    • There’s actually a very good reason someone might want to do so: Capital constraints. Let’s say that market return is 8% per year. You have an investment strategy that can return 10% per year. You have $100,000 to invest. Even with a 2% edge on the market, it’s going to take you a long time to get rich that way. Assuming your strategy is scalable, you’re much better off managing $100 million and charging your clients a 1% fee. You could charge a 2% fee, but then why would anyone invest with you?

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      • Assuming your strategy is scalable, you’re much better off managing $100 million and charging your clients a 1% fee.

        A couple of problems there.

        First, if you do that a year, after that year, you now have 1 million, which means that, if you invest just that, you’d be making 100,000 a year. The next year you manage, you make 1 million off the management, and now have two million to invest, and now your profits make *200,000* a year.

        Or, to put it another way, somewhere around year five-ish, you would manage to get a hold of 10 million dollars from managing+reinvesting what you earned, which means you will make *more* from that pile of money than managing the $100 million.

        I.e., it might be useful to *start* with other people’s money, but it doesn’t make a lot of sense to continue it.

        And second…someone who has figured out a way to beat the market by 2% a year should *already have money*. Or, more to the point, someone who can convince anyone to let them invest $100 million of their money *must already be successful* at investing money.

        Idiots who *haven’t* done that, who have come up with some magical computer program that will beat the market, do not get 100 million of other people’s money to play with in the first place.

        You could charge a 2% fee, but then why would anyone invest with you?

        HAHAHAHA.

        Oh, man. That’s funny.

        I love the idea that there’s some sort of ideal market, where people actual give real numbers about fees and also psychically know how much better than the market they will do and give real numbers about that.

        In the real world, they will invest with you, of course, because you *tell* them they will get returns of 5% over the market, you make sure it’s nearly impossible to figure out the actual returns at any time because they’re tied up in illiquid assets like private corporations, and then you structure the fund so the fees make you a profit either way.

        Oh, and you call it private equity.

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        • Using the casino example, let’s look at the best poker players in the world. These are guys who can beat the house. Yet even the best poker players in the world get staked by bigger money and share a percentage of their purse. Part of it is because there is volatility inherent in these strategies. Just because you’re right doesn’t mean you’ll be right every day, so you need a buffer to smooth it out. And also, it lets you make bigger bets and play games you wouldn’t normally be able to get into.

          Of course, the flip side is that it’s easier to make big returns on a small pool of cash than a big pool.

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          • Not even necessarily “big” money. My oldest surviving friend(*) used to be a minor-league poker pro – one year he was one of the last few to finish out of the money at the WSoP. They were constantly networking and building ad-hoc consortiums to back people when they thought there was a good opportunity. Basically you back me with 10% now, and I’ll do the same for you down the line.

            (*) Brian Dennehy in “Silverado”. Criminally underrated, both of them.

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  2. I’ve said it before, but we have lots of non-IT breakthroughs waiting in the wings for materials science to catch up.

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    • Yes.

      You know what I just realized the other day? How much better *umbrellas* had gotten. I have an umbrella that will fit in my pocket. Literally in my pocket. I remember when those were three foot long poles when collapsed.

      And the distinction with ‘IT’ is nonsense, anyway. A lot of computers are used to make specific things work better, and have nothing particularly to do with ‘information’ in the sense people think of it. Fuel-injectors in cars, monitoring tech in batteries, digital TV, mp3 players, security systems, all of those have ‘computers’, but they are computers that could operate without any user interface at all.

      Putting computers in things allow for cybernetics, in the actual use of the word…automated control systems. This is slowly but surely replacing *decades* of jerry-rigged physical control systems we had to build in things to make them work.

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  3. I’m watching Thiel speak on this video. Apparently 22 year old Mark Zuckerberg and company were offered 1 billion dollars from Yahoo for it. Zuckerberg turned it down (wisely enough). Thiel discloses that Google and Ebay also got and turned down the billion dollar offer.

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  4. I know both people in this article were really just random examples and not really intended to prove anything, but a comment about each of them:

    First, Warren Buffet was *heavily* invested in Wells Fargo. He was the largest stockholder. Well Fargo, if you’ve been paying attention to the news recently, has been in, uh, some minor trouble with the law, and the stock is not somewhere you want your money right now.

    As *supposedly* part of Warren Buffet’s shtick was ‘making sure to investigate companies he was investigating it’, a lot of his shine has worn off recently, and the jury is kinda out if he’s *actually* an investor that beats the market, or just a guy that was lucky until now.

    Second, Thiel is sorta is a moron about technology. Yes, if you exclude the *single most important technology that ever existed in human history*, invention has slowed.

    Except, uh, it actually hasn’t. It’s gone into *incremental* upgrades, but, in reality, that’s *always* what it’s gone into…it’s just, between the 20s and 60s, a lot of stuff incrementally got good enough (Or at least small and cheap enough) for households to use.

    And this has, in fact, continued. Solar panels. Electric cars. Contact lens. Refrigerators. Batteries. Home insulation. Fire detection. Food preservation. Pretty much every single surgical procedure that’s ever existed. All stuff that has nothing to do with IT (And why that’s excluded I have no idea.), and that existed 50 years ago, and has gotten *exponentially* better within that time.

    Stuff gets invented *decades* before it becomes usable. Which means, *in every decade*, if you look around your house, all the stuff was invented decades earlier, ‘back when they invented stuff’. Herp derp. And in two decades we’ll all be wearing clothing that doesn’t get wet or stained, but, man, clothing was invented *forever* ago.

    Meanwhile, excluding IT is *insane*. Adding computers to all sort of things has improved them in huge ways that are incredibly cheap. In fact, a lot of that stuff isn’t even ‘IT’, it’s just that using a computer to do stuff is *much* easier than using anything else. Like fuel-injection vs. a carburetor saving gas mileage *and* causing engines to last longer. Digital TV isn’t computers (although it works well with them), it’s just using a computer chip to do TV things.

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    • “Meanwhile, excluding IT is *insane*. Adding computers to all sort of things has improved them in huge ways that are incredibly cheap. In fact, a lot of that stuff isn’t even ‘IT’, it’s just that using a computer to do stuff is *much* easier than using anything else.”

      Thiel draws the distinction between the world of “bits” and “atoms” or sometimes he uses “stuff” instead of “atoms.” “Stuff” might include cells. Following Kurzweil a friend of mine is fond of noting that everything is IT. As Moore’s Law progresses, with things like nanotechnology, IT will soon get into the world of cells and then atoms.

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      • Thiel draws the distinction between the world of “bits” and “atoms” or sometimes he uses “stuff” instead of “atoms.”

        Well, yeah, I know what *Thiel* thinks, I’m just pointing out he’s an idiot.

        Do fuel-injectors somehow not work on atoms? Do Roombas vacuum up bits? Do giant robots assemble cars out of bits?

        Does ordering stuff from Amazon result in them shipping a box of bit?

        Following Kurzweil a friend of mine is fond of noting that everything is IT.

        Kurzweil, OTOH, is…just a bit silly sometimes. He keeps over-estimating the level of interaction between people and computers, and has completely failed to notice he’s always wrong about that. This is a perfect example of someone assuming *their own field of work* is will be the most important thing moving forward.

        But he’s not wrong about almost everything being ‘IT’, (I haven’t actually read him say that, but I’ll take your word for it.) which is why excluding it and then saying ‘We are making no progress’ is nonsense.

        Almost anything that is complicated to need any sort of control system (Which is basically anything mechanical that moves, and a lot of other stuff too) can benefit from IT.

        We all like to think refrigerators with computers built into the front are a built silly…but none of us noticed about a decade ago when the control system for the fridge got replaced with a general-purpose CPU instead of a bunch of dedicated integrated circuits.

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        • If Thiel is an idiot, he’s a billion dollar one who made his wealth from decisions that were either lottery luck or something else. The best thing that happened to him — in fact his first big defeat — was getting rejected for a Supreme Court clerkship. If he got it, his life would have been on a trajectory to be a millionaire Esq. with a net worth in the low 8 figures.

          Most people wouldn’t know what to do with a billion dollars. I live a modest lifestyle and would probably continue it (like Buffet purportedly does). I might trade my Versa in for a Lexus. But there is — to me — something behind the idea of investing, not to hedge your bets to get a big rate of return or to win the stock picking lottery. But rather to invest in your vision of the future without concern what it does to your overall net worth.

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          • If Thiel is an idiot, he’s a billion dollar one who made his wealth from decisions that were either lottery luck or something else.

            Nothing stops billionaires from thinking very stupid things. (I don’t even think I *need* to fake cough a name here.)

            Thiel’s dumbness of not knowing about advances outside of information technology is not, in any way, disproven by the fact he’s made a lot of money by investing *in* information technology. He found a niche he’s good at, it works for him, fine…that doesn’t mean other things don’t *exist*, despite what he thinks.

            And I will point out one of the people he co-owned Paypal with for a bit, Elon Musk, seems to, uh, do pretty well at innovation outside IT.

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          • Considering that pretty much all of his wealth came from putting $500K in Facebook (netting him over 80% of his net worth) and the rest from Palantir, then the lottery luck hypothesis is not out.

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            • Yeah; there’s a bro out there exactly like Thiel, with the same crack-brained ideas, but he put his money into Friendster and so nobody cares what he has to say today.

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      • “Thiel draws the distinction between the world of “bits” and “atoms” or sometimes he uses “stuff” instead of “atoms.””

        so

        it’s true to say that we haven’t made a lot of progress

        so long as you exclude the areas where tremendous progress has been made

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    • With materials, there have been some pretty phenomenal breakthroughs (that I am aware of) that will affect battery technology, electronics, and metallurgy. In almost all cases, the reason these breakthroughs aren’t front & center is because we haven’t figured out how to scale production up yet, or because we haven’t quite figured out how to best utilize/implement/apply the new material.

      In general, the breakthroughs tend to take three forms – either the development of new molecular structures of common elements (think carbon nanotubes, buckyballs, graphene, etc.), nanoscale material structures that give common materials very interesting properties (like hydrophobic coatings), or new crystalline structures[1] for ceramics, metals, & alloys.

      [1] For a lot of these, the problem is getting the desired structure to be homogeneous throughout the material. Being able to control the development of these structures as a material sets/cools is a tricky business. I wonder if such processes would be helped by being in microgravity (going back to my hope to see a space elevator in my lifetime).

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        • Hard to say, because the people who develop the new material are rarely the people who monetize it beyond perhaps licensing it. You can’t even look at your traditional materials suppliers (like steel mills, etc.) because they may lack the expertise or facilities to successfully scale it up*. You almost have to watch for startups or companies that move in very new directions. Alternatively, you can watch machinery suppliers who can market the technology to create the new material in house (so a car maker wouldn’t buy the new steel, they’d just buy the machine that lets them make the new steel).

          *The challenge is control of process. To gain the benefits of the new materials you have to have very tight control of the process.

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    • As *supposedly* part of Warren Buffet’s shtick was ‘making sure to investigate companies he was investigating it’, a lot of his shine has worn off recently, and the jury is kinda out if he’s *actually* an investor that beats the market, or just a guy that was lucky until now.

      He’s been doing his thing for 60 years and has gone from being a millionaire to Billionaire to many many Billions.

      The scale of his mistakes and successes has certainly gotten larger, and he’s also 86, it’s possible he’s off his prime.

      Except, uh, it actually hasn’t. It’s gone into *incremental* upgrades, but, in reality, that’s *always* what it’s gone into…it’s just, between the 20s and 60s, a lot of stuff incrementally got good enough (Or at least small and cheap enough) for households to use.

      Incremental is great (useful, etc) but a few times a century we get a real game changer. Genetic engineering might be next. :)

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      • Incremental is great (useful, etc) but a few times a century we get a real game changer. Genetic engineering might be next. :)

        It does not work that way. Game changers *are* incremental technology.

        New stuff doesn’t *appear* and change the game. That’s the lie we tell, but it’s not how it works. New stuff is invented, is worked on for *decades*, and then changes the game.

        Genetic engineering is something that sci-fi invented decades before it was even possible, so it’s been ‘around’ long before it was invented…in fact, it’s barely been invented at this point. All we’ve done now is replace some obviously bad genes with *some* good versions of the gene, to make them produce some needed chemical or something…we’ve never tried to rewrite unborn DNA to make a person more whatever. We literally don’t even know what’s possible. Predicting it will show up and change thing is silly…I’m sure at *some* point *some* manipulation of genes will be a game changer, but we have no idea when or what that will be.

        The next game changer is almost certainly self-driving cars. I don’t know if it will be the *next* game changer (Maybe something will slow it down, and another will be *next*.), but it will certainly been a *very soon* game changer.

        An argument can be made that better solar and batteries are sorta *secretly* changing the game for a lot of things right now. We had a solar revolution but the news forget to tell anyone, so they only notice when other people get solar.

        The last game changer was smartphones, which are *still* causing changes, because they need the cost structure and network to catch up with the actual possibilities of the technology. (I have argued an innumerable times here that, within decades, our ‘smartphones’, or, rather, technology that uses the network we’re building for smartphones, will stop almost all crime.)

        None of those are ‘new inventions’. One is just a small networked computer we carry around, which in a slightly different form (wearable computers) has been around in prototype for decades. Solar and batteries have been around forever. A self-driving car is just a car and a guidance system.

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          • Well, not all crime, but it will certainly work against crimes that are not carefully planned and executed, which is the bulk of crime.

            Oh, it works pretty well against most careful ones, too.

            It’s not just the ‘catch the criminal in the act’ thing.

            It’s also the ‘Hey, suddenly almost everyone has an alibi’ part and the ‘a crime happened here at this time, if you were nearby, please send a preemptive alibi of this moment in time, and any footage you have of other people’ part.

            Hey, look, from that, now we know what thirty people were in the area, we have enough coverage to show there weren’t any other people nearby. And twenty five of them gave us an alibi at the same time, and three of the remaining people were recorded as dozens of feet from where the crime was committed at the exact moment it was being committed, so it’s not them unless they can astral project.

            Well, it’s one of those two guys. Let’s get a court order to check both their DNA against DNA found on the victim, and, hey, it’s this guy.

            Note this not only means we solve more crimes, but, and this is important, we stop solving them *incorrectly*.

            We could, right now, be living in a universe where it’s *absurdly complicated* to commit crimes. Like, it requires more than CIA-level sneakiness, where you have to make sure you’re completely unobserved just getting to the crime scene.

            Of course, this has been true for a while, but a) it would have required us to put cameras everywhere, and b) would have required much better cameras than we actually *did* put up.

            (b) solved itself with technology, and letting *people* control them, and only having those people turn over footage *voluntarily* (Which will indeed need some legal protections, along with some technological security.(1)), however, doesn’t present any of the ‘security state’ problems that people opposed to (a) bring up.

            We’ve just magically invented 100% reliable eyewitness accounts, including *self* eyewitness accounts.

            1) People wondering how we stop people from faking footage…we don’t have anywhere near the level of CGI to do that in real time, much less seamlessly transition to it and then back. All we have to do is make the storage devices timestamp incoming footage and unable to alter it later, and then, if there’s a question of tampering, move forward and backwards in the footage until it hit some realtime event we know happened. (Like it records someone else, and we can look at *their* video and see the first person walking around in it.) If it actually becomes a problem, we can figure out a way to do ‘sync points’, with random light-level-varying street lights or something, which would be nearly impossible to incorporate into pre-rendered CGI footage.

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        • It does not work that way. Game changers *are* incremental technology.

          Yes and no. Technology tends to increase incrementally, it’s effects on society may not.

          As far as Genetic Engineering goes, right now we’re building tools which make gene manipulation possible, easy, and cheap. We’re already read everything, but we understand very little of how the code works, so we’re building databases to explain that. These tools which build tools or explain how other things work are still growing, but the rate of growth and the rate of our increase in understanding seems high.

          With cloning sheep, making stronger corn, and three parent’ed people as a baseline, I’m not sure what +X% more technology means in terms of our abilities, but we might be staring at multiple game changers, and it’s hard for me to picture this NOT happening in the next 50 years.

          Designer kids may be a boring technology when they finally come out, but the impact on society won’t be.

          The next game changer is almost certainly self-driving cars.

          I think that’s a reasonable guess.

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          • Yes and no. Technology tends to increase incrementally, it’s effects on society may not.

            That’s what I was trying to say.

            Technology is invented somewhere, and some people use it. It then *slowly* gets better and cheaper until it hits a critical mass and suddenly everyone has it and it changes society. It’s sudden, but it’s not sudden at the point of *invention*, it’s sudden much later.

            Even purely software-bases technology follows that pattern, although probably ten times as fast.

            The confusing thing is that everyone forgets those years or decades of reaching critical mass, and only remembers what happened afterward, so assume that any newly invented technology will instantly spread out over the public, also, and then it doesn’t and the assumption is that the technology doesn’t work or some nonsense.

            As far as Genetic Engineering goes, right now we’re building tools which make gene manipulation possible, easy, and cheap. We’re already read everything, but we understand very little of how the code works, so we’re building databases to explain that. These tools which build tools or explain how other things work are still growing, but the rate of growth and the rate of our increase in understanding seems high.

            The problem with genetic engineering is that everyone pays attention to the *tools* and what is possible with them, and almost no one has noticed that we actually have very little knowledge about how to produce the outcomes we want using those tools. We are still at the point where we can patch *broken* genes to what they are ‘supposed’ to be based off other people, but as far as I know, we don’t even know how to make someone slightly more athletic, much less do anything *outside* of normal human variation. Nor are we even close to even trying to research that.

            I think that’s a reasonable guess.

            The actual question is if self-driving cars will be the *next* game changers, or if something is going to slip in before them.

            Self-driving cars are both nearer and farther away that people think. They’re nearer because we will start seeing them in non-experimental stages very soon, and farther because we have a massive amount of normal car inventory that society will have to use up first. The game change isn’t when people start buying new ones,the game change is when some critical mass is reached and the assumption is that you go places by telling a car (maybe not even your car) to take you there, and then traffic disappears and people stop building parking lots next to buildings and instead build drop-offs, and things start actually changing.

            Regardless of how long it takes, there is almost no way they *couldn’t* be a game changer in the future, in many different ways, some that have been completely ignored so far. (Most autonomy for children and younger teens, for example.)

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  5. Thiel is kind of a big hypocrite here. He talks about the need to invest in things that will take the world to where we want it to be and make world changing investments instead of silly social media stuff. And yet, when you look at his big investments, it’s full of social media, PayPal v2 stuff and helping governments spy on their citizens better. So we should probably stop and look at revealed preferences over TED Talk bait.

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  6. If everyone who should invest in index funds did that, what would the index funds index? Would trading in individual stocks be too thin to provide the necessary liquidity to run index funds?

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