Delusions about Democracy

 Democracy, like freedom, is a word which we in the west like to believe is generally synonymous with goodness, justice and success. Our leaders love to feed us this narrative since it tends to breed complacency and satisfaction and to stop us from thinking. Churchill’s quote about democracy being the worst system apart from all the others is often trotted out. Perhaps this is generally correct, but I find myself increasingly troubled but some nagging doubts. As ever, it probably depends on the context and on what exactly we mean by democracy.

 

This week I heard another great quote, this time one that was new to me. Mike Tomlin, venerable head coach of an NFL American Football team who are in the midst of a difficult transition, claimed that if he would start listening to the fans, then soon he could expect to be sitting among them. I like that concept and it feels true, though a coach who consistently makes decisions that fans dislike is also playing a very risky game. Based on the fan ideas I read online or hear during a game, following the fans would be a sure recipe for disaster. I will add journalists the list of groups whose ideas should be treated with a pinch of salt, despite it being their professional job to offer opinions to improve the performance of a team. In my experience these ideas are quickly proved wrong. A few years ago, a former player and respected pundit, Gary Neville, was given a coaching job, and he crashed and burned within weeks.  I believe that most of the journalists I read would be even less effective than him.

 

There are similar insights available in business. In this case investors and customers have immediate agency. But can you imagine a successful business where the employees, or any other stakeholder group, ran the day to day operation, or took frequent votes to determine direction? It is telling that business leaders, often some of the most vocal proponents of democracy, have the most dictatorial attitude within their own empires. In the business their call is for clarity of responsibility, and in most cases they argue for a single leader to be accountable for most decisions.

 

That is just as well. I have been involved in various employee engagement initiatives. They have their place, and can provide excellent feedback on matters such as culture, communication, motivation and respect. But don’t ask wide groups of employees to give decisive input on strategy or even for innovative ideas, unless you want to be disappointed and to fail.

 

Indeed, I believe that my primary business community, strategists, woefully undervalue themselves. Nobody denies that strategy matters; most would agree that it is a great a differentiator as exists in business. But most big businesses do not cultivate a career specialism in strategy. The academic literature is sparse to the point of embarrassment. Senior leadership teams seem to think they can do strategy as well as anybody else, despite usually having few relevant skills. When they need help they quickly call for outside consultants, who charge a fortune yet rarely stay long enough to make a difference and have very different incentives to the leaders they are advising. Can you imagine a leadership team trying their own hand at engineering, or outsourcing the activity to a consultant?

 

Most organisations demand an organisation chart that offers clarity of role and huge decision-making power to leaders. Churches do not meaningfully consult their congregations about doctrine or practice, and indeed the largest church has a singular leader deemed to be both infallible and chosen by God. Britain has spent the last two weeks mourning somebody with theoretically absolute authority. A military unit is defined first and foremost by a hierarchy of leadership, with subservience and obedience considered key attributes. Even in an artistic pursuit such as a choir or an orchestra, there is little room for dissent: one of my favourite conductors frequently states that choirs should not be democracies.

 

So there is almost no aspect of life where democracy is considered a smart mode of operation, and for good reason, yet we are supposed to believe that this is the best way to run a country. Every few years the management of the most influential parts of the enterprise is subject to a poll. The entire direction and strategy is subject to very frequent change. Furthermore, in many democracies there are parallel leadership teams, each with limited authority, required to reach agreement among each other for most important decisions.

 

This method of allocating power is surely superior to a monarchy or a system lacking any accountability, but it has very obvious flaws, ones which would doom any business in a competitive market.

 

To succeed, an enterprise in any field needs a few tenets in place. These include an agreed purpose, sets of goals covering multiple time horizons, and some priorities. The enterprise also requires talent to be available and effectively deployed, especially in leadership positions, and a sound governance structure for its operation.

 

How likely is it that a democracy can produce an operation that satisfies these requirements? In many cases, it feels very unlikely. To have a better chance would need very strong institutions acting in parallel with the elected parts of government, guided by a mature and sufficiently independent civil service. The election process practice matters too, enabling high quality, unbiased information to be available to citizens.

 

These factors help to understand how some democracies can endure while others founder, and how volatile an immature democracy is likely to be. Rating these factors can also show how vulnerable a democracy is at any moment, what needs protecting, and which claims by protagonists should be most closely scrutinised. Where there is gerrymandering, where there are too few or too many parties, where money has an undue influence, and where information can be warped by interested parties, democracy is vulnerable.

 

The weakest aspect in most democratic platforms is purpose, goals, and priorities. In a well-run company, that is where the leadership team can make most difference. But a typical party platform in many democracies can be reduced to a set of platitudes. The best we can hope for is one or two reasonably well-articulated policies, which can give an indication of competence and values. Often we don’t even get that.

\

Rather than blandly claiming that democracy is always good and other systems always bad, we can assess the other systems to the same analysis. Does the leadership have a defined purpose and multi-period goals that work for the best interest of the citizenry? Does it deploy the talent available to it, and is there some internal accountability? Do those making decisions have sufficient unbiased information?

 

China is far from perfect, as The Economist and other intelligent commentators are obsessed with pointing out. But, if you view the communist party as a sort of civil service or business organisation, it does not do too badly against my criteria. It can certainly argued that it is better placed to deal with the issues facing its citizenry than most mature democracies. The recent concentration of power is a concern, but over the last twenty years the leaders have certainly got most of the biggest calls right. I can articulate the purpose and the goals quite easily and can see how these can benefit (most of) the citizenry. These goals are reviewed appropriately and translate into decisive and sustained actions.

 

I cannot be as complimentary towards most autocrats. Sadly, I also struggle to be as positive about most mature democracies, at least those outside northern Europe. If I focus my comparison between China and the USA, I can understand how one has been doing better than the other, and I certainly know where to place my bets for success in the immediate future.             

A time for business fundamentals

 I have only been an investor for one period of my life. Between 2011 and 2013 I had a spell with more cash on hand than obvious things to do with it, and enough time to work out how to open a stock market account. Since 2013 I have sold occasionally when I needed cash – either a company that I had fallen out of love with or a slice from a company that had done very well. I have only bought one company, Tesla, at the start of this year, far too late.

 

I have learned that one key decision in investment strategy is the desired frequency of trading. Some people trade nearly every week, trying to play the game almost as a job. Others refresh their portfolios many times each year. Nowadays that is a feasible approach because various websites make it so easy to trade, but I still feel that approach is not for me, mainly because I don’t want trading to become an obsession or to take up too much of my time. I have seen many people become wealthy and then spend an unhealthy amount of their time counting their loot, and it does not usually seem to be conducive to a balanced life. Perhaps these people did not heed yesterday’s rather confusing gospel.

 

So, partly out of fear of myself and partly laziness, I tend to stick with what I have most of the time. I even ration myself to once every two months to check how things are going. Maybe this preferred frequency will change in the future but for now it works for me. I only occasionally get angry with myself for missing out on perceived opportunities. I know how lucky I am to have any such opportunities at all.

 

What I realised more recently is that the strategy for frequency should be a key determinant of the strategy for where to invest. Day trading is about riding waves and trying to follow the herd. Investing is not like Vegas gambling because it is not a zero-sum game. If a stock or a whole market rises then everybody can win together. You don’t have to beat the competition; you only need to emulate them while they are winning. It is true that every trade has a counterparty, so somebody somewhere is losing, depending on how you look at things. For a day trader, however, that is over-thinking the issue.

 

A consequence is that it can make sense as a day trader to plough money into what appear terrible investments. The recent meme stocks are merely an extreme example of this point. We can all see that Game Stop is a terribly run company stuck in a market that has no future. But hey, if lots of people want to buy the stock then it will rise. Join the stampede and you will gain too, perhaps outrageously so, so long as you remember to jump off the bandwagon no later than everybody else.

 

The overpaid people on Wall Street would deny it, but their own strategies are almost as cynical. If there is a stampede, they must be a part of it because otherwise their clients will see lower relative returns and run to the competition. This goes some way to explaining the cryptocurrency boom, and even something as apparently dumb as Theranos, the company which claimed a breakthrough in blood testing without any proven technology to support the claim. How could everyone have been so dumb as to pile in and not question such plainly false claims? Well, if you are a junior trader you don’t have time or skills for your personal due diligence, and you don’t want your boss complaining about your returns going down. You suppress your doubts and buy with everybody else, remembering to sell with everybody else (or even a tiny bit ahead of everyone else) later.

 

If you are a portfolio tinkerer, you probably steer clear of such frippery, but you are certainly looker for waves that last longer. At the start of the pandemic, it did not take a genius to invest in Zoom, or Netflix, or even Peloton. The surprise was that this remained true even after their prices had shot up to levels that seemed too high considering fundamentals. Even when markets are supposed to be smart, waves last longer than you might think. The day trade herd mixes with the tinkering crowd to keep things going forwards. It is only in 2022 that such companies have become poor investments.

 

I have also learned that entire markets have wave characteristics, not just the individual stocks within them, so a frequency strategy needs to be paired with some insight about a market cycle. This seems obvious, but the problem is that most of us don’t have vast sums of cash lying about. The time when the market is turbo-charged is likely to be the time most of us are already leveraged. And the correction of 2022 was rather easy to foretell, but what are we supposed to do with all the cash we release by being super-smart and selling up? Cash hasn’t exactly been a winner in 2022, and property hasn’t either. Bitcoin, anyone? Most of us just have to ride it out and tinker at the margins.

 

This holds true for tinkerers but even more so for buy-and-holders like me. But I think I have spotted another possible lesson. When I made my investments, I tried to focus on fundamentals. I looked for sectors that seemed to have a medium-term following wind, based on demographics or established consumer trends or regulation or competitive situations. Porter’s five forces is a great mental model for that. Then I looked for companies I thought were well managed within those segments. I was sometimes wrong, but I was also sometimes right, and many of those same advantaged sectors and well-run companies persist even now.

 

In the meantime, at times I have been rather frustrated, not least by the Bitcoin or Game Stop crowds. In my mental model as an investor, people crowding into those areas are almost cheating. In less greedy moments I realise they are not; they merely have a different frequency strategy and are often being smart in that situation, even if they are eating my lunch.

 

But phases of the market may indicate the best moments for different strategies, and perhaps I was very lucky. In 2011-13 the market overall was at a low point, so it turned out to be a good time to enter. But the recovery was a tentative one and interest rates were still significant, so investors were somewhat cautious. Theranos and the others only started appearing once the market became frothy and interest rates tumbled towards zero. At that point the piling in strategy made sense, but not in 2011-13. 2011-13 was a time for fundamentals.

 

Now I am wondering if the wheel may be turning again and if 2022-24 may be a period for fundamentals again. Nearly everything is down, but those with poor fundamentals are the ones that have collapsed.

 

I am in no position to invest and am still cautious about my own behaviour, but maybe I will start looking at companies and sectors more closely again. My go-to publication for this, as for so much else, is the business section of The Economist, especially the Schumpeter column. My only issue is that so far in this unusual downturn, the business editors do not yet seem to have found their feet. I must be patient, a little cynical, and analytical.

 

Last week, the business section had a rather thin article about the strange strength of the labour market, which I twinned with the Bartleby column about somebody who has become a meme with a Tiktok video telling people not to be slaves to work – if anything a further symptom of a moment of worker power.

 

I liked an article noting that technology and other firms have started hiring Economists, because they know how to handle complex data. This is significant: I believe one aspect of next wave of AI will be about smarter slicing of data, beyond merely targeting ads. An example could be more subtle characterisation of outlets within a retail network, with assortments, atmospheres and practices varied according to segment. I twin this with the Schumpeter article about Starbucks, noting that the four closest Starbucks outlets to me serve radically different market segments, and that smarter tailoring could be a differentiator for the brand.

 

The article about European utilities noted a variety of possible paths ahead during the forced transition away from Russian gas. The final article was about beauty products, and this also interested me. During the “piling in” phase, start-ups could secure funding based on as little as an idea and a couple of influencers. Now the incumbents, who know more about supply, branding and sustaining consumer loyalty, are fighting back.

 

So the wheel is turning and the next year or two may see benefits in following fundamentals, both as managers and as investors. The energy transition (especially as regards batteries and other peripherals), the developing cold war with China, and smarter uses of big data can be added to established trends to form a fascinating context. Perhaps I will become a tinkerer, at least for a while.           

The Amazon Factor

 I always enjoy observing irony in current events. One of the great ironies, among so many, of the Trump presidency was that his greatest real achievement (in my opinion), the rapid development and successful deployment of vaccines against Covid, was completely undermined by his own supporters. Putin seems to have achieved very little from his reckless invasion of Ukraine, beyond the irony of uniting his adversaries and accelerating Europe’s transition to sustainable energy, thereby undermining the core basis of Russia’s own economy. Beware of unintended consequences!

 

Now there is a sweet irony that can be attributed to the hip progressive movement, people who love to complain about others getting rich even when that can benefit everyone, especially the people they claim to represent. The irony concerns the bête noir of that movement, Amazon.

 

I love almost everything about Amazon. Perhaps I am a bit biased, since the firm has done more than any other to sustain my own wealth since I had the good fortune to buy a few shares in the firm several years ago. We love to attack people like Bezos, and perhaps even people like me who cling on to his coattails like parasites. But I think Amazon has been of benefit to humanity and has the potential to support our development even further.

 

 I will certainly be holding onto my precious shares, in the belief that there is a lot more upside than downside, despite the squalls of 2022 caused by the return of sensible interest rates. One test I often apply is to imagine what would happen if a company increased its prices by 50%. Discounters and people like Walmart could not pull off such a trick because of competition and price sensitivity among their consumers, and others are limited by regulation. But I believe that Amazon could double its annual Prime subscription, and also impose fees on excessive returns, without losing many customers at all. They have kept prices low while following the sound retail philosophy of using a cost advantage to grow the business, but one day they will start looking for margin. And the value and quality of their service compared with any competition means they could do it and retain most of their base. For me, that shows a share with further upside.

 

We all have access to a wider range of goods at affordable prices thanks to Amazon and can lay our hands on them ludicrously quickly. Many small and start-up businesses rely on Amazon for marketing and distributing, benefiting them and their consumers. The cloud computing business reduces prices for all, and the streaming supports our abundant entertainment options.

 

But it is something else about Amazon that has tickled my sense of irony. They have revolutionised employment markets around the world, to the benefit of those seeking. Fair wage and fair treatment. Amazon have succeeded in restoring some balance between capital and labour where trade unions and countless left-wing politicians have manifestly failed.

 

It started a few years ago when Amazon decided to go big on fulfilment. I always found this decision rather strange, since it involved considerable capital and human operating costs, things which the tech giants generally avoid. But Amazon decided it could do this well, outcompete the established players such as Fedex, and create a lasting point of difference against other suppliers. It seems to be working.

 

The upshot is that Amazon has quickly become the second largest employer in the US, behind only Walmart. And these jobs are not for highly paid coders, but hourly paid work for people picking goods in warehouses and people driving trucks.

 

Progressives love to hate Amazon for providing these jobs, blinded by the profits Amazon makes and tales of how the jobs are demanding and demeaning. It is true that the jobs are far from glamorous. But progressives seem to assume that the alternatives for these people are as self-employed craft beer brewers and experimental artists. In reality, the alternatives are far worse, even when alternatives exist. Think of all the people sweating in semi-legal car workshops, or in the kitchens of small restaurants, or cleaning buildings. Compared with these employers, Amazon is a dream. They pay on time, are clear of expectations, do not tolerate abuse, and provide hygenic working conditions. A few truck drivers may struggle to find somewhere to pee while still meeting their quota, but generally hardships are few and conditions are fair. Progressives should be thrilled.

 

And Amazon seems to have moved the needle. When I write about the job vacancies I observed on my trip to Europe earlier in the summer, I quoted demographics, fewer immigrants, Covid and a few other factors as partial causes. But I missed one: many of the people who might be working in airports or restaurants are now at Amazon.

 

The same Amazon factor is noticeable in the US in similar markets. It is also affecting the public sector. Last week a report on the PBS Newshour showed how many local authorities were struggling to recruit people as garbage collectors or in other service capacities, and one hard-pressed manager bemoaned the fact that he could only offer $15 while Amazon was giving $18. Before, the excellent benefits and strong unionisation have meant that public sector leaders could usually find recruits to replace retirees. This appears to be no longer the case.    

 

So now central banks are facing an unusual dilemma. Cooling down the economy has in recent decades been rather easy: tweak interest rates upwards, and soon unemployment will trend upwards to cool demand. Most of the cost would be paid by the marginal workers with fewer skills or in the wrong locations, but hey, rather than people holding wealth.

 

Now the central banks are raising rates rather quickly, yet the labour markets remain buoyant, at least in the US and some other developed markets. There have been some announcements of layoffs, but the ones I have noticed have been from over-hyped technology companies and some old economy companies like Ford, and it is notable that Ford are firing their office staff rather than anybody on a factory floor.

 

Sadly, it is all likely to be somewhat temporary. For decades we have heard predictions of how many unskilled jobs would be permanently lost to automation. It feels strange to be observing precisely the opposite. We can thank Amazon. But we should note that those same jobs driving delivery vans and picking goods off shelves are ripe for replacement by robots, especially once driverless vehicles start to gain serious traction. Amazon is no doubt aware of the possibility, and banking on it to maintain their cost advantage in the coming decades.

 

But meanwhile we have an economy that progressives have dreamed of, one where labour has as much leverage as capital, even at its less skilled end. What an irony that two of the causes have been the feverish recruitment of the bête noire of progressives, and blowback from the anti-immigration policy of the racist capitalists. One group lauds the reason by suffers the outcome, while the other loves the outcome but hates the cause.