In this episode, we explore what it means to invest in a non-ergodic world—where time, not averages, determines outcomes. We unpack concepts like volatility drag, ensemble vs. time averages, and the implications for portfolio strategy, while also reflecting on how AI and zero-click search are reshaping business and investor behavior.
Topics covered include:
- What is ergodicity and why it matters
- How path dependency and emerging phenomena disrupt the long-term
- How podcasting and blogging has changed
- What is the future of Money for the Rest of Us
Show Notes
The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb—Penguin Random House
The 60% Problem — How AI Search Is Draining Your Traffic by Tor Constantino, MBA—Forbes
How Late Night TV Is Downsizing by Alex Weprin and Rick Porter—The Hollywood Reporter
List of most watched television broadcasts in the United States—Wikipedia
Tao te Ching by Lao Tzu (Author), Marc Mullinax (Translator)—fortress press
Why AI Might Not Take All Our Jobs—If We Act Quickly by Justin Lahart—The Wall Street Journal
Elon Musk and the Dangerous Myth of Omnigenius by Gautam Mukunda—Bloomberg
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 520. It’s titled, “Where are we heading?” Where are we heading? That’s one of the three questions that I answer each month in the investment strategy report that I put together for Asset Camp and Money for the Rest of Us Plus.
Blogging
I’ve been writing investment strategy commentary for over 20 years. I did it as an institutional investment advisor, chief investment strategist, and I still do it today. I find it very helpful to understand what happened, where are we now, and where are we heading when it comes to the economy and financial markets. Also, 20 years ago, I started my first blog. I used Movable Type as the software, later WordPress. It was housed at the URL jdstein.com. I’ll link to an archived version of it. It was called Global Wandering.
Back in 2005, I met another blogger named Simmons Bunton. We had a lot in common. We each had young children, we both drove Subarus, we enjoyed photography and writing. He lived in Tucson, and I lived in Idaho. His writing and photography was influential and motivational for me to visit Tucson, and eventually move here.
But I hadn’t ever met Simmons in person up until a couple months ago. LaPriel and I had dinner with him here in Tucson. Simmons has a book that was recently published by Trinity University Press. It’s his fifth book, called Satellite. Essays on Fatherhood and Home Near and Far. So Simmons is someone that I met, that influenced one of my life decisions, for us to spend much of the year here in Arizona.
LaPriel and I pointed out the other day—one of her sisters sent her a list of all the houses that her father had lived in over the years. There were a lot of them. And in the first 10 years of LaPriel’s life, she moved eight times. I moved twice in 19 years. Her experience versus mine—she’s much more willing to move, finds it easier to move than me, gets more restless to move than me, because of her life experience. I on the other hand, am more reticent to move.
Ergodicity
We are all influenced by the past, the things that happened, the people we met. There is a Greek word, ergotic. It’s a mathematical and statistical term; it’s used in thermodynamics. Ergodic comes from the Greek word ἔργον (ergon), which means to work, and ὁδός (hodos), which is a path or a way.
So ergodic in Greek meant work along a path, or a path through work. Recently, Michael Mauboussin and Dan Callahan released a piece published by Morgan Stanley where they talked about what ergodic means. A process is ergodic if the average over time, what they call the ensemble average, and the time average are the same. Here’s an example of what an ensemble average is. They said, “Imagine 100 people flipping a fair coin simultaneously and recording the outcomes.”
That’s the ensemble. 100 people. Now, imagine just one person flipping a coin 100 times. That one person going through time flipping the coin—that’s the time average. The 100 people flipping the coin at the same time, that’s an ensemble average, if you average the outcome; what percent were tails, what percent were heads? Both 50%.
Something is non-ergodic if the ensemble expected outcome, the average expected outcome, such as the average return for the stock market—if that ensemble average differs from the outcome through time, which it does for the stock market. The geometric average or mean, or the compound return for the stock market, is lower than the average return. If we just do the arithmetic average of the stock market, it’s higher than the compound geometric mean. The time return, sometimes called the time-weighted return, is lower than the arithmetic return or the ensemble return.
Mauboussin and Callahan write that capital accumulation is a multiplicative process, which means that understanding geometric averages, risk management, and portfolio construction are all essential for compounding wealth. The wealth we have over time, financial wealth, time wealth, other types of wealth—it’s a compounding effect as we pass through time. It’s path dependent. What happens today will influence where we are tomorrow. And a technical term for that is non-ergodic.
Here is a numerical example from the book The Missing Billionaires by Victor Haghani and James White. They say suppose you start with one million dollars, and you get 25 coin flips, and can decide how much of that million dollars you want to wager on each coin flip. If you decide to wager 10%, $100,000, if it turns up heads, you get $100,000.
Now, here’s the trick. This isn’t a fair coin. The coin is weighted such that there’s a 60% chance of coming up heads. So over a long enough period of time, heads will show up more, 6 out of 10 times. So the question is, how much to bet? Now, this is not an ensemble average. This is not 100 people flipping the coin once. This is one person flipping the coin 25 times.
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