Size Matters
Written by Paul Siluch
August 18th, 2023
“There is no need to worry about mere size. We do not necessarily respect a fat man more than a thin man. Sir Isaac Newton was very much smaller than a hippopotamus, but we do not on that account value him less.”
- Bertrand Russell
My son is just finishing his accounting degree and is required to take an elective course. He chose philosophy, mostly because it fit in the time he had left and because it had fewer exams. I told him he will remember it more than any accounting course in the years to come. It is these little detours we take that often become the most meaningful.
One of the people he studied was Bertrand Russell, a British philosopher and mathematician born in 1872. His landmark book, The Principles of Mathematics, written in 1903, argued that mathematics is simply symbolic logic. The idea that mathematics and logic are identical ushered in a new era of modern philosophy.
Bertrand Russell lived until age 98 and was widely quoted on a variety of topics. It was his quote on size that inspired this week’s topic.
Sir Isaac Newton may have been smaller than a hippopotamus, but there was a time when being compared to a hippo was a good thing.
For most of humanity’s existence, food was relatively scarce, and people could not get enough of it. Skinny girls in Asia and Africa were seen as less desirable and were often overfed to plump them up before their weddings.
Renaissance painters depicted beautiful babies and women with extra fat because heavier people survived famines better. Because famine was ever-present, fat was an attractive quality.
This began to change worldwide around 1900. The use of streetcars became widespread around 1890, and the new “horseless carriages” began appearing en masse after 1900. This meant people walked less, and even those working in the fields were using machines more and more.
Industrialization of farming meant bigger harvests. Modern manufacturing techniques took these harvests and packaged them in abundance. Both led to less exercise and more weight.
By 1910, we were starting to see extra pounds on more people. The idea of dieting began to grow as obesity was seen more as a fault than a virtue.
All manner of cures popped up, from soaps…
…to laxatives and girdles.
And so began the modern diet industry.
Some of you may remember the shaking weight belt, the rotating platform called Twister, or wrapping yourself in Saran Wrap to lose fat. It was a bit of a free-for-all era.
Drug companies largely ignored obesity as a treatable condition under the belief that “if you’re fat, it’s your own fault.” However, in the early 1990s, pills were emerging to treat depression and other neurological conditions, and researchers noticed something interesting:
When you felt better about yourself, you ate less.
Prozac, the first of the drugs developed to boost serotonin levels to treat depression, helped you lose a few pounds. You felt better emotionally, and you craved fewer carbohydrates (a common urge during depression). What was once a failure in willpower became a chemically treatable condition.
If one dose of something is good, then two doses are twice as good, right?
In 1996, a new drug called Redux was officially approved by the FDA for weight loss. It was the combination of a Prozac-like drug with another even more powerful serotonin drug and nicknamed ‘phen-fen’ for the two ingredients. Close to six million people took the drug (source: 12step.com), and the company licensing it raked in billions.
Abnormalities began to appear. The drug caused hypertension, similar to other earlier amphetamine diet pills, and some users developed pulmonary hypertension - heart problems. Redux was pulled from the market in late 1997, and American Home Products (later known as Wyeth) settled a $3.75 billion lawsuit in 2002.
A Growing Problem
Weight gain in the world hasn’t gone away just because we killed a pill. Since Redux was approved in 1996, the percentage of overweight men in Canada has risen from about 58% to 70%. Even China’s and India’s numbers have doubled in that time.
The quest for the Holy Grail of weight loss drugs moved on from serotonin in the brain to hormones in the gut that promote insulin production and slower digestion. This is a completely different mode of attack on obesity: making you less hungry at the stomach level. Sold under the names Ozempic and Wegovy by Novo Nordisk, and Mounjaro by Eli Lilly, these new drugs have been used in similar forms for diabetics for years. We know they are safe because of their longer history, and they deliver additional benefits in lower cardiac risk once you lose weight.
And they do help you slim down – close to 18% of your body weight.
Both Novo Nordisk and Eli Lilly have tripled in price since 2020. Full admission: our dividend portfolios don’t hold them. They looked expensive then, but their phenomenal growth has more than justified the earlier price. Many mutual funds we hold for clients own these two stocks, but it is still sad to miss one of the biggest success stories of the last few years.
"All movements go too far."
- Bertrand Russell
Some drugs go on to be miracles for years, both in terms of how well they work and the profits they generate. AbbVie’s Humira helps stop auto-immune diseases. Merck’s Keytruda is an amazing anti-cancer drug. These are two of the biggest selling drugs in the world, and our portfolios own both companies.
Because I lived through the ‘phen-fen’ disaster in the 1990s, diet drugs have always worried me. The new ones have their own issues, including kidney problems, malnutrition, and a loss of the enjoyment of eating. Most who start the drugs stop using them within a year, and then put all the weight back on.
And they are expensive. Insurance companies are balking at the cost – up to $12,000 per year (Reuters) – which means you may not be able to afford them.
From here, we are not inclined to chase the stocks. You may recall a previous blockbuster called Viagra, Pfizer’s erectile dysfunction drug introduced in 1998. Shares in Pfizer doubled in price over the next few years, but even as Viagra sales continued higher, Pfizer shares didn’t.
Why? The market had already built in much of the future growth.
Eli Lilly shares trade with a p/e of 75x earnings right now, which is very expensive. We missed this one, so we will let it sail on without us.
The Dog Days of Summer
August is one of the worst months for stock markets over the years. Most northern nations see the most holidays taken in August, and it was traditionally the time before harvest when nations went to war.
No wonder stocks do poorly in August.
“It has been said that man is a rational animal. All my life I have been searching for evidence which could support this.”
- Bertrand Russell
Outside of our relatively placid borders, the world does not look as good.
- Russia has seen its currency - the ruble - fall 25% this year. The war in Ukraine is draining the life out of the country.
- Argentina is now close to defaulting on its 22nd loan from the International Monetary Fund, signed just last year. If there was ever a textbook case of chronic corruption and economic mismanagement, Argentina is it.
- China’s growth has long been fueled by debt. Especially housing debt. World economy slowing? Build more homes. Trade problems? Build more homes. China now has total debt of 282% of its economic output, compared to about 120% for the US (source: JPMorgan). Two of its largest property companies are in default or close to it, and the Chinese currency is now at 14-year lows against the US dollar. China matters to the world, and it is creaking.
Still, there is an optimistic side to things.
China has started reducing interest rates, and we may be close to ending our hikes over here. Regions like Europe and Japan are doing better, and we are actually finding stocks with reasonable valuations and generous dividends.
And interest rates on ‘safe money’ deposits are excellent.
We are receiving 4.75% on cash deposits (please check your savings accounts – most pay under 2% today), and Guaranteed Investment Certificates yield 5.4% for one-year terms.
August and September can be rocky. Unlike the new diet drugs, there is no “magic pill” to change this.
But they are also an excellent time to start new investments.
“We want to stand upon our own feet and look fair and square at the world - its good facts, its bad facts, its beauties, and its ugliness; see the world as it is and not be afraid of it.”
- Bertrand Russell
