Thursday , October 18 2018
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Three Things I Think I Think – Marx, Value Stocks & Bitcoin

Summary:
Here are some things I think I am thinking about: 1) Time to buy value stocks? Value stocks have done very badly for a long time when compared to growth stocks. So we’re starting to hear more and more contrarians argue that value stocks are much more attractive. I always find this idea interesting. You see, what financial salesman did was create all of these brands within the stock market. Things like “growth” stock or “value” stock or whatever. Then they supported that brand with some evidence. Then they told you it would beat the market, slopped it into a strategy and then slapped a high fee on it and people bought it. Sometimes it works great, but mostly it doesn’t work so great. The problem is, these sorts of strategies don’t always work out and can often fail for very long times

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Here are some things I think I am thinking about:

1) Time to buy value stocks? Value stocks have done very badly for a long time when compared to growth stocks. So we’re starting to hear more and more contrarians argue that value stocks are much more attractive.

I always find this idea interesting. You see, what financial salesman did was create all of these brands within the stock market. Things like “growth” stock or “value” stock or whatever. Then they supported that brand with some evidence. Then they told you it would beat the market, slopped it into a strategy and then slapped a high fee on it and people bought it. Sometimes it works great, but mostly it doesn’t work so great.

The problem is, these sorts of strategies don’t always work out and can often fail for very long times before working out. And the reason for this is that no one really knows what a “value” or “growth” stock is before they buy it. Yeah, we have some vague definition like certain price ratios or whatever, but there isn’t a CEO in the world who would brand their firm the way Wall Street product salesman do. In other words, Mark Zuckerberg doesn’t think Facebook is a bad value or a growth stock. I’m certain that he thinks Facebook is a growth AND value stock. That’s how entrepreneurs think. Their firm is always a great value because they are working their butts off to make it more valuable. Sometimes the market reflects that a high growth stock is going to grow very fast. Sometimes the market reflects that a “value” stock is not going to grow fast. And sometimes the market gets this fantastically wrong. The point is, we never really know what these ratios are telling us about the future performance of the particular companies because predicting the future performance of individual firms is really damn hard.

As I often say, asset picking is the new stock picking. And this is how we’re pretending to be able to “beat the market” now – by pretending to know which stocks will reflect these big broad asset brands that we now call them. So I guess my point is, why do people still play this game where they know stock picking doesn’t work so great, but still pick stocks inside of these “factor” brands that we now call them? Doesn’t it just make more sense to think the same way entrepreneurs do and so if you want to buy “value” stocks then just buy all stocks because most CEOs thinks their stock is a good value. Why even bother taking the risk of trying to pick the best brand and potentially underperform?

2) Happy Birthday Karl Marx, You Were Wrong. Here’s a piece in the NY Times praising Karl Marx. Now, it’s Karl’s birthday so I don’t want to be too mean to him, but I have to be honest here – he was wrong. Way wrong.

I should start by saying that I think Marx was the most important economist and perhaps the most important social scientist who ever lived. He had a lot of good insights and it could be argued that his insights helped make Capitalism a much more robust system. But he ended up being pretty damn wrong about his love of communism over capitalism.

The weird thing is, Marxism is growing in popularity these days which is not actually that weird. Capitalism tends to veer towards inequality and inequality is near all-time highs. It looks like capitalism isn’t working when it’s actually doing exactly what it’s supposed to do. But this isn’t a sign that capitalism is bad. It’s just a sign that we don’t understand capitalism. For instance, a game of poker is designed to be won by the best player. But if the game is to continue then the winning player needs to concede that they can’t have all the chips. Capitalism is not so different. The chips will disproportionately go to the winners, but the winners have to recognize that in order to keep the game going they cannot bankrupt everyone else in the system. In other words, if the poker winner wins the game and then the other players overthrow her and steal her chips then whose fault is that really? I’d argue it’s the winning players fault. After all, they could have continued to be fat and happy with many chips while letting the game go on without bankrupting everyone else and causing a populist uprising.

But the real point here is that Marx was not right about capitalism’s inevitable failure. Yes, he was right that it is not a utopian dream. In other news, welcome to living in a competitive world with scarce resources hurtling through space at 70,000 mph. The point being that human life is inherently competitive. As socialized as we might seem we’re an inherently violent species whose instincts rely on a competitive race to improve the life of ourselves and our children. We’re basically a bunch of ape armies labelled by countries using money as a technology to interact when it’s convenient. Don’t get me wrong, world peace sounds lovely and I try everything I can to help out my fellow man where I can, but the economic utopian equality of Marxism strikes me as inherently at odds with human nature. Yes, Capitalism has probably veered too far in the other direction at this point in history, but that doesn’t mean it has failed or that we should try a system that is inherently at odds with human nature. After all true Communism has never succeeded because it is incompatible with the reality of human nature.

In fairness, Marx wasn’t totally wrong. Yeah, capitalism has been a huge success in that it’s quickly eliminating absolute poverty and has dramatically improved global economic equality (at the expense of domestic inequality in many cases), but the real failure of capitalism is not financial panics and inequality – it’s our inability to understand that these things are inevitable and that we need to implement policies that better protect the system from these inherent risks.

3) Crypto banks accounts for everyone? No Thanks. Here’s the St Louis Fed with an interesting paper on allowing depositors to have crypto styled bank accounts with the Central Bank. Basically, they argue that people like using cash and that crypto is electronic cash. So we should therefore have Central Banks allow people to use a Central Bank issued crypto currency that is deposited at the Central Bank.

This seems like an interesting idea, but I really don’t see the point. The reason people like cash is because it’s convenient (at times) and anonymous. The Fed’s proposal for this crypto currency would remove the anonymity of the deposits and make payments no more convenient than bank deposits that already exist. So what’s the point? More and more I feel like all this crypto talk is trying to solve a problem that doesn’t need to be solved….

Cullen Roche
Former mail delivery boy turned multi-asset investment manager, author, Ironman & chicken farmer. Probably should have stayed with mail delivery....

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