Why do value and momentum strategies work?

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I’ve just read a really interesting pre-publication paper from Dimitri Vayanos and Paul Woolley called “New Light on Choice of Investment Strategy”. It’s available online. It aims to explain the ability for momentum and value investment strategies to generate returns, while retaining the assumption of rationality. It does this largely by discussing intermediation. It seems a smart addition to the debate in this area, and a useful input to the work I’m doing in support of the Kay Review.

Why hire consultants?

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Knowing that I used to be a strategy consultant, a colleague forwarded me a link to a post on the industry from Overcoming Bias. Robin Hanson’s blog is in my newsfeed, but I’d missed this post, which is a suggestion that firms hire consultants purely to break internal coalitions blocking change. My colleague comments that he wouldn’t be so dismissive of the ‘best practice’ explanation, with which I agree. Both explanations seem right to me. There may be other explanations too: for example, the need for instant-on brains without the hassle of a recruitment round and short-term employment contracts. (It’s at this point that I should mention that anyone with a background in consulting will probably enjoy this site – although it’s not one to read in public.)

Banking talent

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From Chris Dillow’s blog:

Bank bosses have played a trick which countless ordinary workers do. The IT support guy who introduces lots of “security features” to his firm’s IT systems, or the secretary who has an incomprehensible filing system, make themselves indispensable by inconveniencing others.

I think people who make arguments like this are basically trying to claim that they are smart enough to do any job, and that if by chance there is any job too complex for them to understand, it’s not due to a lack of their abilities (oh no!) but rather because there is some conspiracy to make the job more complex than it needs to be. It’s basically vanity. I mean, maybe this chap is quite clever. But until he knows when to use ‘fewer’ and when to use ‘less’ I wouldn’t be employing him even in his current journalistic capacity.

A portfolio of initiatives

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From the McKinsey Quarterly 2002, via a friend:

Uncertainty and rising levels of risk make it impossible for companies to determine the future. But a portfolio-of-initiatives approach to strategy can help ensure that companies take full advantage of their best opportunities without taking unnecessary risks.

I get the sense that this approach is not what most people mean when they say the word ‘strategy’. I think most people imagine ‘strategy’ means ‘plan’, means ‘manageable’, means ‘predictable’. I prefer the portfolio-of-initiatives approach. I think it’s something Google has right – just take a look at the speed at which it rolls out (and kills) initiatives, and how it builds the applications first, with the business models following later. Obviously, this approach is harder when you make widgets than when you make nifty web apps. But it’s still possible, and it’s nice to see a view of strategy less fatalistic and more fallible.

Barnier spins Vickers reforms

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Dow Jones is reporting that EU Commissioner Barnier has made a speech in London saying that the Vickers bank reforms are compatible with the EU.

EU internal market commissioner Michel Barnier told an audience in London the U.K.’s proposed Vickers reforms won’t fall foul of single market rules that seek to impose uniform standards for banks’ capital and liquidity across the region.

This is nothing new. We all knew that the ring-fence was compatible with the EU. That’s how we designed it. What is important is what he’s not saying: that the higher minimum capital requirements, a critical part of the Vickers package, are completely incompatible with the current EU direction. It’s the higher capital requirements that caused the (so-called) veto, not the ringfence. It’s disingenuous in the extreme for Barnier to spin things like this.

This market economy is no longer capitalist

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The following paragraph from John Kay’s column in the Financial Times today rings true:

So the business leaders of today are not capitalists in the sense in which Arkwright and Rockefeller were capitalists. Modern titans derive their authority and influence from their position in a hierarchy, not their ownership of capital. They have obtained these positions through their skills in organisational politics, in the traditional ways bishops and generals acquired positions in an ecclesiastical or military hierarchy.

His broader point is that our market economy is no longer capitalism, in two senses. First, what is valued has developed beyond capital, to capabilities, information, relationships and processes. Second, capital is fragmented and distributed, and its ownership has much less relevance to outcomes than it did in the nineteenth century. It’s worth reading the whole thing – and yes, I do work for him, so I would say that wouldn’t I, etc.

Does listing decrease investment within companies?

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This blog post by Robin Hanson highlights a NBER research paper that shows investment differences between listed and private companies in the US. The abstract of the paper (my emphasis):

We evaluate differences in investment behavior between stock market listed and privately held firms in the U.S. using a rich new data source on private firms. Listed firms invest less and are less responsive to changes in investment opportunities compared to observably similar, matched private firms, especially in industries in which stock prices are particularly sensitive to current earnings. These differences do not appear to be due to unobserved differences between public and private firms, how we measure investment opportunities, lifecycle differences, or our matching criteria. We suggest that the patterns we document are most consistent with theoretical models emphasizing the role of managerial myopia.

There is a digest of the paper here.

Tea, a continuing safari

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Since being introduced to Bohea Lapsang by my stepmother-in-law and subsequently taking a tea safari in Beijing in 2010, I’ve become a real tea convert. Obviously, I drank tea before — I am, after all, English — but I was previously limited to PG Tips, with the occasional foray into Twinings’ Earl Grey, both with milk.

Now I’ve ditched the milk and have experiment with various teas as an alternative to my coffee habit. It’s hard to make a great cup of coffee when you work from different offices, and coffee paraphernalia is tricky to clean. Great tea is a snap to make anywhere you have boiling water. You don’t need milk (nor refrigeration), tea takes longer to lose its freshness, and cleaning up is much more straightforward. If that weren’t enough, tea is also cheaper, more varied, and lower in both calories and caffeine than coffee.

Oolongs, white teas and greens (from tea and Jing) haven’t really done it for me, although Japanese sencha is nice. Generally, I like to drink something a little more robust as a coffee replacement during the day, so stick to black/red teas or pu-erh, plain or with flavouring. This still gives a huge range, from delicate darjeelings to everyday keemuns and malty vintage pu-erh. It’s also a well-served niche, with a number of firms providing some great blends. Any of these are preferable to the spin-off varieties from the big companies: there really is no comparison between a darjeeling bag from Twinings and a pinch of loose darjeeling from the specialists.

If you don’t get on with caffeine, or like my wife can’t drink it in pregancy, I can also recommend the range of herbal ‘teas’ by pukka. Some of their range, such as their After Dinner and Detox blends are delicious, and the former is surprisingly punchy for a caffeine-free blend. Rooibos is also an option, and this appears harder to mess up through mass manufacture, although I’d recommend getting at least Tick Tock if you’re not going to go loose-leaf.

My latest discovery has been some fantastic black tea blends from The Mighty Leaf. I discovered the company when in Los Angeles last October — their Celebration was provided in bags in our hotel’s lounge. I liked it so much that I kept the sachet. Discovering it in a jacket pocket last week, I found they have a UK distributor, and put in my first order, for Celebration and a couple of other blends. It arrived today. The sample sachet of Orange Dulce that came with it has now totally blown my mind. It’s hard to describe how good this tea is. Imagine drinking a liquidized chocolate orange with zero calories and you’ll be getting close. It’s very rich for a daytime tea, but to accompany a dessert, or chocolates, it would be superb. I think my next might have to be their sampler of all the bags in The Mighty Leaf collection.