Author: shyam

Book Review: The Myth of Capitalism

In the book The Myth of Capitalism: Monopolies and the Death of Competition (Amazon,) authors Jonathan Tepper and Denise Hearn lay out the case that capitalism is dead in America and that over regulation and under-enforcement of anti-trust is to blame.

Key points:

  • Regulation suppresses startups and cements the lead of incumbents who can afford the added compliance costs.
  • Current anti-trust only focuses on “consumer welfare.” And the welfare of the consumer is really only measured by low prices. But what about keeping markets open to all new entrants, dispersing economic and political power, preventing collusion, and protecting small suppliers from predatory pricing?
  • What is good for the CEO to do for his company is not necessarily good for the whole economy. In the economy, it is logical for big companies to try to seek efficiencies, acquire competitors, pay lower wages, and increase their own income, but when all companies try to do this at the same time, everyone is worse off.
  • Investing in a portfolio of companies that spend the most on lobbying and influencing regulators would consistently beat the market. Over the past 10 years, the Strategas Lobbying Portfolio beat the Standard & Poor’s 500 by five percentage points every year.
  • Government is not a passive bystander in the increase in inequality. It is an active participant, granting favors to the wealthy and powerful, looking after the interests of the well connected.

I thought I had a personal philosophy about competition but according to the book, I am an “Ordoliberal.” Ordoliberalism argues that capitalism requires a strong government to create a framework of rules that provide the order (ordo in Latin) that free markets need to function properly. And I completely agree with the label.

A lot of supporting evidence is provided in the book to further the point. And the policy prescription is fairly straightforward. But here are some exceptions that do not really fit the narrative:

  1. Amazon routinely steals ideas from successful marketplace products. Does this mean we need marketplace regulation? Probably not because without Amazon, those businesses probably wouldn’t exist in the first place. And there are other market place competitors, like Etsy, Instagram, Pinterest, etc who act as a counterweight.
  2. Facebook is effectively a payola scam where you have to pay up if you want your own fans to see your content. Does this mean it should be regulated as a media company? The last company that had a walled garden of content was AOL. The world wide web is just a click away.
  3. Kraft Heinz took a huge markdown on its brands because consumer tastes changed and they hadn’t invested enough in R&D to be on top of it. Moats are only apparent when they are under attack.

Do I agree with the authors that capitalism needs fixing? Yes. But do I think the situation is as alarming as it is made out to be in the book? No.

Recommendation: Must read!

Chart: Number of stocks going up

We often hear market commentators croaking about the number of stocks going up vs. those going down. There is even an advance/decline line filed under technical “analysis.” However, have a look at the statistical distribution of stocks going up in any given month and see for yourself if it makes any sense paying attention to it:

It is, at best, a historical artifact… something that is nice to lookup when someone says that they had a great/crappy month. When a lot of stocks have gone up, it presents a target rich environment for long-only traders. So a random selection of stocks would out-perform the index in that scenario. But good luck using it for market timing.

Code and chart are on github.

Long-term averages are still being made

Value investing in the US has been under pressure recently, having underperformed growth and momentum over the last decade. The most popular explanations given for this are:

  1. Price-to-book, the most popular metric of value investors, stopped being a good measure of value.
  2. Value, as a strategy, got crowded after putting in a strong performance the prior decade.
  3. The value effect is the strongest in small- and micro-caps but scale prevents investment managers from being able to access it. Making large-cap value an over-fished pond.
  4. All anomalies, including value and momentum, have their ups and downs. Investors chase performance, thus preserving the anomaly.
  5. This time is different.

From a quantitative point of view, “value” is a way of ranking the universe of stocks and applying a cut-off on them. The cut-off is based on historical averages. But the problem with historical averages is that history is still being made. This point is driven home in newer markets, like India’s, where we cannot lean on 100-year back-tests but have to depend on data-sets that are, at best, 10- or 15-years old. And here’s how that last 10-year price-to-book of different indices looks like:
PB ratio

The averages are being made as we speak. This presents a moving target for value investors because value is all about mean-reversion. And something similar could be happening in the US – maybe a few decades from now, a test looking back at today will reveal that the high PB stocks were unusually cheap.

Related: Index Valuations

Momentum vs. Low Volatility

Is the low-volatility anomaly overrated?

momentum vs. min-volatility

momentum vs. min-volatility

Investors may be giving up on the significantly higher returns of a momentum strategy in favor of slightly lower drawdowns of a low-volatility strategy. They maybe better off managing overall portfolio risk through a bond allocation rather than tilting away from momentum.

Book Review: Atomic Habits

In the book Atomic Habits: An Easy and Proven Way to Build Good Habits and Break Bad Ones (Amazon,) author James Clear lays out a step-by-step guide on how to adopt better habits.

An excerpt from the book that hit the spot for me:

Your current habits are not necessarily the best way to solve the problems you face; they are just the methods you learned to use. Once you associate a solution with the problem you need to solve, you keep coming back to it.
Habits are all about associations.
You see a cue, categorize it based on past experience, and determine the appropriate response.
Every action is preceded by a prediction. Life feels reactive, but it is actually predictive.
Our behavior is heavily dependent on these predictions. Put another way, our behavior is heavily dependent on how we interpret the events that happen to us, not necessarily the objective reality of the events themselves.

Most investors are well aware of biases that they should overcome. However, when the hypothetical becomes real, they feel powerless to control their behavior. How do you go about making the right choices by default? By making them a habit. And this book will put you on a path where you can make better choices.

Recommendation: Must read!