‘Peak Everything’ and the ‘winner-take-all’ market

Multi-billionaires, who can control the media and the boards of directors, can’t beat the market. Hedge funds, who have the most sophisticated tools and PHDs at their disposal, can’t do it either.

From pragmatic capitalism: Dear Hedge Funds: Index Funds Didn’t Eat Your Returns

Indexing strategies have been the fastest growing segment of the asset management world in the last 15 years due to low fees, tax efficiency, diviersification and the failure of higher fee active managers to justify their higher fees. As this trend plays out we’re hearing more and more stories about how this trend is bad for investors and how we need these old high fee active managers to better manage the asset space.

Indeed, who can blame people for indexing? Active management is awful, specially as of late:

Why Active Management Fell Off a Cliff – Perhaps Permanently

Whack-a-mole fund managers can’t beat index funds

‘Scale and Skill’: Why It’s Hard for Managed Funds to Beat the Indexers

Poor performance catching up with active stock fund managers

Investment: Loser’s game

86% of investment managers stunk in 2014

To say active management is bad is an understatement – it’s downright awful.

The rise of indexing parallels the cutthroat, winner-take-all nature of the post-2008 stock market and economy where winners like Google, Amazon, Visa, and Facebook, for example, are bid higher and higher to no end and companies that show slightest weakness are culled quickly. Even ‘blue chips’ are not immune to this. Walmart stock crashed 30% in 2015 in an otherwise flat market due to some minor weakness in store sales.

In the 80’s and the 90’s, large funds were more willing to put money in sub-par stocks & sectors, investing indiscriminately, but post-2008 capitalism has gotten much smarter and discriminating. That means lots of losing stocks and few winners, leaving investors with one of three choices: be lucky or skilled enough choose the handful of winning stocks (studies show this is nearly impossible), invest in index funds, or choose active management, the latter which tries to beat the second but almost always fails and has really high fees. Hence, the second choice is the most viable.

To wit, although the S&P 500 is only 10% off the all-time highs made in 2015, half of S&P 500 stocks are in bear market territory, which is why successful stock picking is a fool’s errand for most people. The odds, right there, are that you will lag the index.

See a pattern? SEO, small business, etc… all too expensive or saturated, too efficient. With the possible exception of web 2.0, physics, and apps, and some complicated stuff like that, we’re possibly reached ‘peak everything’, where everything converges to its asymptotic limit of efficiency. But capitalism is still thriving, and I’m still bullish about the US economy. This is because while there are many, many losers and the market is more efficient and saturated than ever, the winners (the handful of them) are big enough (winner take all) to compensate for the losers. The result is a positive expected value, as well as new technologies that improve efficiently, lower costs, and raise living standards. It’s like a ‘powerball economy’ where the parlor has a positive expected value but the average participant doesn’t, yet a handful of people do get rich. When the left complains about capital gains taxes being too low, they fail to take into account the inherent risks of entrepreneurship or investing versus a steady paycheck. Shouldn’t people who take more risks be compensated by keeping more of the money they earn?

I call this the Hobbesian-Locke dichotomy. For a lot of the country, things are Hobbesian (bad, gloom) – but for the enlightened and wealthy, things are ‘Lockean’ (good, optimistic, prosperous). My money is on ‘Locke’ prevailing, even if for the average American things are kinda glum.