Blips and Discount Rates
Our CEO Brent sent me a thought-provoking post – nee tweet – the other day from one BuccoCapital Bloke. He wrote:
For 50 y[ea]rs we treated the supremacy of asset-light businesses as a permanent economic law.
But if AI commoditizes asset-light businesses, we’d just be reverting to the historical mean where value accrued to atoms, infrastructure, energy.
It would be a 50-year blip. An anomaly.
I wrote back to say that while I also love the real world, I’m not convinced AI will commoditize all asset-light businesses (shoutout Selective Search). I also noted that the foremost paper I know of on historical returns is The Rate of Return on Everything, 1870-2015 and it, as its title suggests, only maths back to 1870. So if you think that the outperformance of asset-light technology businesses has been a blip, I’m not sure how one substantiates that claim.
That said, one of the more interesting takeaways from The Rate of Return on Everything, 1870-2015 is that real estate has delivered equity-like returns with lower volatility. That makes sense. Not only is the supply of land finite, but land is also useful and beautiful (unlike bitcoin and more so than gold), which makes it hard to disintermediate.
This is why when Columbia, Missouri-native and NASCAR Hall of Famer Carl Edwards (it’s incredible the backflipping people you meet along the way) told me that after he’d made a bunch of money he’d bought a bunch of land, I told him that was smart.
There’s another paper that helps explain why: Paul Schmelzing’s Global Housing Returns, Discount Rates, and the Emergence of the Safe Asset, 1465–2024, which, as the title implies, goes all the way back to 1465. One of its key observations is that real estate returns have been good because of a centuries-long, secular decline in discount rates.
Discount rates going down means that investors are willing to accept lower returns to commit capital. And that only happens when trust, stability, and institutional reliability go up. And that’s because returns require trust.
I hope our current crop of politicians realizes and/or remembers that.
– Tim
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