The Well-Read Investor

Episode 7: Larry Siegel

Prolific author and investment professional, Laurence B. Siegel and host, Mike Hanson make the case for why in the end, optimists win.

Today we have Laurence B. Siegel on the program to discuss his book, Fewer, Richer, Greener: Prospects for Humanity in an age of abundance.

Mr. Siegel, Larry, is a graduate of the University of Chicago Booth School of Business, author of more than 200 articles and monographs on investing and related topics, and has won many awards including the Graham and Dodd Award for excellence in research and financial writing. He was the director of research for the investment division of the Ford Foundation, and an establishing member of Ibbotson Associates, which finance wonks will know for their data services. He’s currently the Gary P. Brinson director of research at the CFA Institute Research Foundation.

Larry’s seen a lot over his career and it’s one of the reasons we wanted to speak with him. You can learn more about him at Larrysiegel.org, and buy Fewer, Richer, Greener on Amazon here.

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Michael Hanson (00:00):

Hello everyone and welcome to another episode of the Well-Read Investor, the podcast that profits your mind and your money.

Today we are delighted to have Laurence B. Siegel on the program to discuss his book, Fewer, Richer, Greener: Prospects for Humanity in an age of abundance.

Mr. Siegel, Larry, is a graduate of the University of Chicago Booth School of Business, author of more than 200 articles and monographs on investing and related topics, and has won many awards including the Graham and Dodd Award for excellence in research and financial writing. He was the director of research for the investment division of the Ford Foundation, and an establishing member of Ibbotson Associates, which finance wonks will know for their data services. He’s currently the Gary P. Brinson director of research at the CFA Institute Research Foundation.

Larry’s seen a lot over his career and it’s one of the reasons we wanted to speak with him. You can learn more about him at Larrysiegel.org, and buy Fewer, Richer, Greener on Amazon.

I hope this episode provides a little bit of optimism for you. With the terrible strangeness of this year, Larry offers a view of the future that is far more optimistic than many are willing to believe, and that’s why you should listen. There’s an old investing saw that goes, “In the end, the optimists win”. That’s what I think Larry’s book is really about. We take the ills of now, the urgency of today’s headlines, and extrapolate those far into the future as if humanity can’t or won’t adapt, as if we as a people haven’t surmounted many, many challenges just to get to this point. In truth, and along with today’s ills, there are also many positive things happening in the world—big trends—well worth contemplating that help give needed perspective.

So here he is. Our conversation with Larry Siegel.

Michael Hanson (2:05):

Larry, thanks again for coming on the show. We not only enjoyed the book, but one of the things that I look for in a good book to recommend to investors is something that you can digest. And that in fact is information rich. And I think your book was very much like that. It's a book that you actually read all the way to the end, versus just reading the introduction. How did you come to write this book and why do you think every well-read investor ought to want to read Fewer, Richer, Greener?

Larry Siegel (2:28):

Because it provides context for the decisions that investors make. A lot of people understand their own specialty very well, which is how they came to be investors in the first place, but don't necessarily have a strong general education on issues like the world economy, the environment, and demographics. And these are the big picture issues that make investments tick. So, I provide that, at least I hope I do. I wanted to say that the world isn't coming to an end because I hear it all day and all night from every direction. And it isn't so.  

Michael Hanson (3:07):

In many ways, it's this very it's this very great summation of a lot of different contemporary thinkers. Deirdre McCloskey and Matt Ridley and Peter Diamandis and Steven Pinker and Bjorn Laurinburg, among others. What are your influences and what did you draw from and how did you come to think about writing a book like this?

Larry Siegel (3:22):

Well, you certainly named five of the major ones. Matt Ridley was the real inspiration. Although I had Deidre is a professor at the University of Chicago, many decades ago when she was Donna Mclosky. And so, I have been thinking about these issues, all my adult life, but I've also been a professional investment manager and consultant. And in 2012 I had just read Matt Ridley's book, The Rational Optimist. I wrote a review of it for Advisor Perspectives, which is a publication that I'm a regular contributor to.  And it occurred to me that I had my own views, which were not exactly the same as Ridley's, more finance and investment oriented and that the Financial Analyst Journal, which at that time was edited by Rodney Sullivan. Asked me if I wanted to contribute an article.

Larry Siegel (4:11):

So, I wrote up a short version of this book. But then in 2018 a literary agent named Lucinda Carter asked me if I intended to write a book at some point, because she was trying to find authors. And I said, well, I could write Fewer, Richer, Greener as a book. If you can find somebody who'll pay me. And we made a deal with Wiley and I wrote the book and they published it. So, I had always wanted to do something more general interest and more like a popular science book than the investment stuff that I had been writing for my various employers and on my own. And it seemed like this was the most important issue. The future of the human race, you know, I'm a modest guy, so it's seems like the right topic.

Michael Hanson (4:59):

So, tell me a little more, I mean, what is the pushback, because this is an optimistic book, these are optimistic views of the future. What are the counter arguments and how did you deal with those?

Larry Siegel (5:09):

Well, the first counter-argument is environmental, which is that the future can't possibly be any good because we've destroyed our planet, which is the only habitat that we're ever likely to have. And that the world is becoming uninhabitable. The evidence for that is nonexistent. We are continuing to Terraform the earth in ways that are favorable to human life. That that's why we're doing it. And climate change of course, is the big unknown. The error bars around the estimates of how much the climate is going to change are so wide that at one end, it's something like the end of the world.

Larry Siegel (5:44):

And at the other end that the climate change could be neutral or even slightly beneficial. So, we don't know what is going to happen, but we do know that the climate changes all the time and we've had to adjust to it in the past. And for example, that's why I live in America. My ancestors were from Europe, but as Europe became overcrowded, the United States had a lot of land and could support many more people. That migration or conquest, however you view it, really didn't start in earnest until the little ice age in Europe, which made half of Northern Europe unsuitable for farming. And if you go back even further, you see climate change has caused migrations in the past. The Roman empire broke up because of a different little ice age. So, it will do it again. But this time we have jet planes, we have weather satellites, we have all kinds of technology that'll make it less dangerous, less costly. So this is something we can manage.

Michael Hanson (6:41):

The three concepts of your book, Fewer, Richer, Greener, one of the things I read daily in the investing media, is that as the population ultimately starts to decline this century, that that means terrible things, not only for the world economy but also for the investment landscape, is that how could there possibly be demand for things like equities and so forth in a world where demographics are older and fewer people? What’s your response to something like that?

Larry Siegel (7:06):

Well, there are some legitimate concerns, a society that’s on average very old, is going to be, to use a technical term, and pain in the ass, because if all the young people are occupied taking care of the old people and paying huge taxes in order to support old people who haven't saved enough for retirement and that sort of thing, then productivity could go down. But that transition isn't forever. Eventually the population stabilizes at a lower level where the births will either rise to meet the deaths, or the deaths will fall to meet the births and you get population stabilization. An aging society that isn't extreme, Isn't all bad. Young people have more energy and more entrepreneurial verb, but old people have more wisdom. They certainly have more money. But, if you're an advanced technological society, where knowledge is the main currency, old people know more, and I am one, maybe I'm just bragging, but you want to have some wisdom, some accumulated human capital, and as long as the age distribution doesn't become really extreme there are some upsides to an older, more mature society.

Michael Hanson (8:21):

Now, one of the concepts that I think is very provocative in your book is that it is about greener. And one of the things that you really say in the book is, in fact, we can have increased prosperity while getting greener in a lot of ways, and with less energy intensity, what does that look like to you?

Larry Siegel (8:37):

Well, we we’re already using much less energy per unit of output than we were 40 or 50 years ago. The energy efficiency of the world economy has grown dramatically, but the economy has grown faster. So, we're using more energy, but we're using less energy per unit of output. As the population stabilizes, and as more countries become middle income and then upper income, they can afford to look more like Switzerland or Norway or most of the United States, which has to have a very well protected environment with clean air, clean water, and other environmental virtues. The United States invented the idea of the national park. Now there are national parks in almost every country. When you're at subsistence level, it's an environmentally terrible way to live because your discount rate, the rate at which you will sacrifice the future in order to consume in the present, basically in order to eat that day is very high, but you also have a low population.

Larry Siegel (9:37):

So, the environment may look good. If people living in an open field or in a forest hunting and gathering and so forth, it looks like a well-preserved environment, but as they industrialize and become more wealthy, it gets dirty very fast. But then, different incomes depending on which environmental variable that you're examining, then it gets cleaner. And this is called the Kuznets nets curve named after the Russian American economist, Simon Kuznets. And the reason is that environmental quality is a good that people want to consume. You want clean air, you want clean water, but it costs something. And as a country becomes richer people's demand it through the political system, they are also willing to pay more for goods and services that are environmentally sound. So, you get this clean, dirty, clean cycle. So as the world moves toward the middle class and half of the people in the world are already middle-class, that situation is going to improve. It isn't automatic. It doesn't happen by itself. It takes the political will. It takes money and it takes leadership.

Michael Hanson (10:48):

One of the things I loved about your book is you actually give some examples of just very interesting and cool pieces of technology that can actually speak to some of these things. One of the things is you show is a manmade tree that can absorb 2000 times more CO2 than real trees. What's exciting to you out there with technology right now?

 Larry Siegel (11:05):

Oh, the most exciting technology right now is biotechnology. We already have the computer, the internet, all kinds of macro technology that we, we send telescopes into space that can see the black hole at the center of other galaxies. But, if biotechnology continues to progress at the rate that it's progressing in this millennium, we're going to simply be typing genetic code into a computer and changing our own genetic makeup, changing the DNA in the human body to eliminate genetically transmitted diseases, to build up immunity to diseases such as the virus that we're currently fighting, the other enemies that we may not even be able to anticipate. And of course, we all have to die anyway, and I don't know what we're going to die of, but we seem to be moving toward a life expectancy that's close to 90 in the next century.

Michael Hanson (11:58):

Yeah, oncology is just making strides seemingly by the day. And I think you're right about that. But, if we think about today though, and have things like COVID-19 social unrest, everything going on politically in the world today, does that change any of your view about this longer term optimistic outlook?

Larry Siegel (12:14):

Well, it makes me think that people are crazy. If your view of the world is that rationality prevails and that people do what's best for themselves and for other people, you might wonder after living through 2020. We are having the worst year in our history since 1968 and possibly since 1945, everything that can possibly go wrong, goes wrong at once. I don't think the long-term prognosis is all that different after observing this behavior. And I'm talking about both social unrest and COVID-19, but you know, it's a virus. It's not going to go away right away. It's going to burn through the population. People are going to die. Although when you look at the deaths curves, they've improved radically relative to the infection curve. So, it seems like this new wave is a strain of the virus that's more contagious, but less dangerous.

Larry Siegel (13:12):

And it may eventually become a low-level endemic, like the flu. But it you lock people up for four months, some percentage of them when they come out are going to be angry, depressed, and want to do weird things, and we're seeing it. The social unrest that we're seeing this year is like nothing I've seen since 1968, and I don’t like it. There's nobody with the calmness that is needed to diffuse these situations, which basically creates even more social unrest. Those are short run, very serious concerns. In the long run, what we've gotten through in the last hundred years, two world wars, a depression, a number of pandemics, that this not being the most serious one that was 1918. And yet our wealth per capita and income per capita is a large multiple of what it was a hundred years ago, with a much larger population. So, I’m very optimistic in the long run, but we have some real challenges to get through right now.

Michael Hanson (14:14):

Yeah on the topic of history, we make great use of it in our work. And one of the criticisms that we hear quite frequently is, well, things are different today. And I very much agree with your point that yeah, things change and they change quickly, but in fact, human nature can really be revealed. And that's the thing that doesn't change very much over time at all. Would you agree?

Larry Siegel (14:34):

Human nature changes very slowly if at all. And yet the technology, the ideas that people have, the political structures change profoundly all the time. So, there's a dance between the soul and the human being, which really can't change that much except in evolutionary time and the context, which is that right now, I'm talking to you over a phone line that was invented in 1876. And yet, in the last 150 years, since phone lines have been put in, we have gone from a disconnected world, to a world that's so intimately connected that I can reach out and contact somebody, who is in the middle of China somewhere.

Larry Siegel (15:22):

I don't even know where he is physically, but all I need is his email address and his phone number. And I can ask him a question. This produces an interplay of ideas and productivity that was unimaginable, even 40 years ago, much less than 1876. And 50 years before that, Andrew Jackson fought the battle of New Orleans in 1815, when the war of 1812 was over a year earlier. Can you imagine fighting a battle now, because nobody could get a message to you for several weeks? So, things really do improve over time, but it's not the human spirit that improves.

Larry Siegel (16:04):

It's the stock of human capital, physical capital, financial, and social capital that we have to work with. That is mostly a one-way path upward. And when it does seem to go backward like this year, I expect it to start going up again pretty soon and in a very powerful way, because there's pent up demand, there's pent-up supply, when they collide you get a big bang. We’ve seen this before, we're going to see it again and possibly not that far off.

Michael Hanson (16:36):

I'm truly a believer that to be a long-term investor, you do ultimately need a rational but optimistic mindset. Speaking of which, in your book we picked up on a number of truly literary references, to me it really deepened and broadened the book, everything from Dickens to things like Gerta, and especially The Sorrows of Young Werther, which I agree with you that every young person should at least take a look at that. If you think the problems of today are different than any other time, but what are you reading these days? What's interesting to you? What do you like to read?

Larry Siegel (17:06)

Mostly, I read nonfiction popular science, economics, international relations, history. Right now, I'm reading Matt Ridley's latest book, which is called How Innovation Works. I also read what needs to be in advisor perspectives. So, I have recently read The World by Richard Haas, another modest guy. And for fun I often read mysteries.

Michael Hanson (17:26):

Oh, what mysteries do you like?

Larry Siegel (17:28):

Well kind of the Robert Parker genre of it's a cross between mystery and action adventure, I guess. But the, the latest author who I've been really excited about is Michael Conley. He's responsible for the character of Harry Bosch, who is now on TV.

Michael Hanson (17:44):

Just to wrap things up, just a couple more questions for you. What are, what does the future hold for you? You say your self-employed, what projects are you going to take on next? What seems interesting to you to think about next?

Larry Siegel (17:54):

Well, I tend to get involved in these little business activities that have a low probability of a high payout and maybe one of them will, in fact, have a high payout. But basically, writing more books. I don't know what I'm going to write about next. And I want to continue to do what I've been doing because I love it and I would do it for free, but I also want to build up my retirement account and working field. I'm no longer capable of it. I'm 66. So it could be 10 more years. It could be longer than that. My mentor, Peter Bernstein worked until the day he died at 90, but he didn't work very hard. That's the key to it.

Michael Hanson (18:39):

If your forecasts are right. Yeah, you will be working that long, but what, what do you love about it? I mean, tell me about a lifetime's worth of work in this field is not so dissimilar to what I do with my colleagues. Tell me about the love of it and why you would do it without pay if you had to?

Larry Siegel (18:54):

Because it's fun to think, and turn that into material that other people can read and learn from, and react to and push back, tell me why I'm wrong. And I continue to learn and think differently. The type of work that I do is sort of like a medieval scribe who was keeping alive the tradition of some sort of intellectual work that you, you know, it's important. You're not sure why, but you think that at some level you're saving the world from an ignorance and wrong ways of thinking. And it's easy. It's just something I can do. It's like a puzzle very much every day, they change the parameters of the puzzle and you have to start over, but every time you start over, you make more progress toward the solution.

Michael Hanson (19:44)

That’s a great metaphor for life, too.

Larry Seigel (19:46)

And a pretty full life, so that's it.

Michael Hanson (19:48):

The thing that's so interesting about economics and especially markets, is that it's just a never-ending stream in which you can tap knowledge. And it's, it's not only, never ends, but it's always evolving. And it really is part of the love of it. And I really think that your book brought that very much to the discussion here. So, I want to say thank you again, Larry, for taking the time and speaking with us. And we've been speaking with Lawrence seagull his book, Fewer, Richer, Greener.

Larry Siegel (20:12):

You want to buy the book, please go to Amazon and type in the words, Fewer, Richer, Greener. And it will be right there in a printed book, an ebook and an audio book.

Michael Hanson (20:24):

Larry, thank you so much for being on.

Michael Hanson (20:37):

That was our talk with Larry Siegel. Whether you agree with his optimistic view or not, I admire Larry because inviting differing views are what I believe make markets and societies stronger, and his willingness to think counterintuitively is surely an opinion people can use to create their own more informed views. And anyway, it truly embodies the spirit of well-read investing.

Don’t miss the next episode of the Well-Read Investor in two weeks on September 23rdwhen we speak with Douglas McCormick about his book, Family Inc.: Using business principles to maximize your family’s wealth. I’m excited about this one—the concept of having a family member be a “chief financial officer”, and the idea of thinking about your household as a business is a good one. This is one of those books you wish you read when you were 30 and it would have changed so much of how you set up your household from the very start.

Lastly, you know what to do by now: wherever you may be hearing the Well-Read Investor, please comment, like and subscribe—it really does help us. You can find us on Twitter @wellreadpod

Until then, here’s hoping all your reading profits your mind and your money. Take care.

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