Futility and stock-picking

Active managers have had another bad year, says CNBC. Traditional stock-picking and bottom-up analysis doesn't work any more.

 

Just as in 2011, only about 1 in 5 active managers are beating their benchmarks in a year marked by the same type of headline volatility caused by events in Europe and fiscal concerns closer to home.

While the advantage of passive over active is nothing new, the near-record level of futility is, and the cracks are beginning to show.

[...]

"The market is being driven by macro factors," Flam said. "So most professional advisors have a background in evaluating companies, industries, economies. It's not in politics, and politics is what dominating the markets over the last couple of years."

Political factors are about decisions and perception, not ratios.

Aristotle: Virtue and Happiness

I'm going to conclude a series of posts about Aristotle's The Politics , which start here.


He warns again against simply doling out surplus, as in a welfare state - which apparently happened at the time, and notoriously so later in antiquity in the form of Roman bread and circuses.

On the other hand if revenues are available, one should not do what popular leaders today do - make a free distribution of the surplus. (When people get it, they want the same again: this sort of assistance to the poor is like the proverbial jug with a hole in it.) .. Every effort therefore must be made to perpetuate prosperity. And since that is to the advantage of the rich as well as the poor, all that accrues from the revenues should be collected into a single fund and distributed in block grants to those in need, if possible in lump sums large enough for the acquisition of a small piece of land, but if not, enough to start a business, or work in agriculture. p375

Independence is preferable to simply handing out revenues, he thinks. It is a timeless thought. Often we think we are the first generation to confront a problem, or we are wonderfully modern and sophisticated. But it is just as often because we don't know how often it has been confronted in the past. We forget lessons which were already manifest in 350 B.C.

 

A constitution needs a view of the most desirable life

However, he comes back to his main point. We have to know what the good life is to design political institutions to achieve it.

If we wish to investigate the best constitution appropriately, we must first decide what is the most desirable life; for if we do not know that, then the best constitution is also bound to elude us. p391

He believes that virtue is the precursor to prosperity and happiness.

Thus people suppose that it is sufficient to have a certain amount of virtue; but they set no limit to the pursuit of wealth, power , prosperty, reputation and the like. {But} it is not by means of external goods that men acquire and keep the virtues, but the other way around; and to live happily, whether men suppose it to consist in enjoyment or in virtue or in both, does in fact accrue more to those who are outstandingly well-equipped in character and intellect, and only moderately so in the possesion of externally-acquired goods. p392

Of course, one of the more difficult issues in life is that sometimes character and virtue are not rewarded, of course. Time and chance happen to everyone. But it is still probable that as a rule people who are prudent and temperate and courageous and honest will do better. Parents generally teach their children to be honest rather than lie, after all. And living happily has only a tenuous connection with wealth and material goods beyond a certain threshold, as we know from the Easterlin paradox.

So Aristotle may overstate the point when he says

Let this then be agreed upon at the start: to each man there comes just so much happiness as he has of virtue and of practical wisdom, and performs actions dependent thereon. p392

But we would like it to be true. And in the long run, on average, it probably is true - and, like Pascal's bet, it is probably better to act as if we believe it is true.

 

Defining the Good Life

So what's the good life, or the best life? Not asceticism or denial or honor/shame or material success.

For the present, let this be our fundamental basis: the life which is best for men, both separately, as individuals, and in the mass, as states, is the life which has virtue sufficiently supported by material resources to facilitate participation in the actions that virtue calls for. p393

Although this is open to all, some avenues attract the most ambitious.

Both in earlier and in modern times men most ambitious for virtue seem generally to have preferred these two kinds of life, the statesman's or the philosopher's. p395

We have to have some purpose, or target.

The well-being of all men depends on two things; one is the right choice of target, of the end to which actions should tend, the other lies in finding the actions that lead to that end. p427

Aristotle is very teleological, of course. I often complain about liberal neutrality. But there is a liberal teleological tradition as well, and a leftist one stemming from Marx and Hegel. The problem is the good life they aim at is a vague abstract equality without much substance.

I would add another element. We need a choice of target, if nothing else because the economy and society naturally evolve regardless of whether we choose to perceive it. We can and ought to at least choose the fitness and selection criteria for the kind of change we experience.

So was it worth looking in such detail at a classic work, from a world in which a trireme or a horsecart was high technology? Yes. While looking up the Easterlin reference above, I came across this previous quote from Deirdre McCloskey in this blog post:

The great economist Simon Kuznets, notes his student Richard Easterlin, believed that "the `givens' of economics- technology, tastes, and institutions- are the key actors in historical change, and hence most economic theory has, at best, only limited relevance to understanding long-term change.

The technology has changed since Aristotle's day, of course. But tastes and institutions are still the key actors which we need to understand in a much less superficial way than our own parochial view allows.

And that is why stepping far outside our own parochial view , right back to first principles at the origin of many of our conceptions about ethics and politics, can give us a fresh perspective on our current challenges.

Investing in local neighborhoods

This is a fascinating piece in Atlantic Cities:

The Millers have invested the last two years and nearly a million dollars in trying to answer this question: Why can’t small-time investors put their money in their own communities? Then, finally, in August, they successfully took a single property on H Street public

 

Tom Wolfe’s California

This is a great article in City Journal about Tom Wolfe's writing about California. Wolfe spent much time on the West Coast delving into what made it tick.

The Second World War brought a massive wave of people to California.

These people, now revered as the “greatest generation,” built modern California. Wolfe’s essay “Two Young Men Who Went West,” the finest short history of the early Silicon Valley ever written, details the cultural baggage that Intel cofounder Robert Noyce brought with him to California from Grinnell, Iowa, after the war:

Noyce was like a great many bright young men and women from Dissenting Protestant families in the Middle West after the Second World War. They had been raised as Baptists, Methodists, Congregationalists, Presbyterians, United Brethren, whatever. They had been led through the Church door and prodded toward religion, but it had never come alive for them. Sundays made their skulls feel like dried-out husks. So they slowly walked away from the church and silently, without so much as a growl of rebellion, congratulated themselves on their independence of mind and headed into another way of life. Only decades later, in most cases, would they discover how, absentmindedly, inexplicably, they had brought the old ways along for the journey nonetheless. It was as if . . . through some extraordinary mistake . . . they had been sewn into the linings of their coats!

No single paragraph—written by Wolfe or anyone else—better explains the paradox of modern California. It was built from scratch, overnight, at the farthest reaches of the world, land’s end for Western civilization, on a foundation of virtues cultivated and nourished in Old Europe and the American heartland. But something in the character of the place and of the people who chose it drives them restlessly to seek (or invent) new virtues, new modes of living, to sweep aside all that has come before and start over, unencumbered. .. . In hindsight, it’s clear that the virtues sewn into the linings of those coats were at least as instrumental as any quality inherent in the land.

California had the cultural capital of the older dissenting Protestants, as well as the zany inventiveness of the new. I wonder if the postwar boom there was a classic example of the right degree of fluidity: rules or virtues being relaxed, but still present, as has happened before in many creative cities and places. But it is also a transitional state of mind that cannot last, any more than Venetian power or Athenian cultural supremacy.

California's history is fascinating. I read and hugely enjoyed Kevin Starr's Coast of Dreams (postwar history) and California: A History (Modern Library Chronicles) a few years ago while travelling all around the beautiful state.

 

Aristotle: Justice and Law

I've been taking an extended look at Aristotle's The Politics , starting here. It helps to see political issues and dilemmas in very long view.

We have been looking recently at how impartiality and fairness are not the whole of our moral sense. It a running theme on this blog. Empty neutrality is not necessarily the end point of humanity.

 

Justice

There is a frequent tendency to identify justice with fairness or equality. But, says Aristotle, justice is not the same as equality.

So it thought that justice is equality, and so it is; but not for all persons, only those who are equal. Inequality also is thought to be just, and so it is, but not for all, only for the unequal. We make bad mistakes of we forget this "for whom" when we are deciding what is just. P195

Nor does he believe the state can just be a neutral referee between different views of the good life, as contemporary liberal theory mostly believes.

..a state's purpose is not merely to provide a living but to make a life that is good. .. all those who are anxious to ensure government under good laws make it their business to have an eye to the virtue and vice of the citizens. It is thus evident that that which is genuinely and not just nominally called a state must concern itself with virtue. p197

The purpose of the state is not to be a referee, but to enable its members to live well.

it is clear therefore that the state is not an association of people dwelling in the same place, established to prevent its members from committing injustice against each other, and to promote transactions. Certainly all these features must be present if there is to be a state; but even the presence of every one of them does not make a state ipso facto. The state is an association intended to enable its members, in their households and the kinships, to live well. ; its purpose is a perfect and self-sufficient life. p198

This, again, thoroughly goes against the grain of contemporary liberal thinking in its Rawlsian mainstream, which is interested in minimal coexistence rather than living well.

Virtue does not imply absolute equality,says Aristotle.

Those who contribute most to this kind of association are for that very reason entitled to a larger share in the state than those who, though they may be equal or even superior in free birth and in family, are inferior in the virtue that belongs to the citizen. p198

The strong may need to be restrained, however.

It is always the weaker who go in search of justice and equalty; the strong reck nothing of them., p367

Law and appetite

The advantage of law is it takes emotion and self-interest out of the equation.

Therefore he who asks law to rule is asking God and intelligence and no others to rule; while he who asks for the rule of a human being is importing a wild beast too; for desire is like a wild beast, and anger perverts rulers and the very best of men. Hence law is intelligence without appetition. p226

"Intelligence without appetition" is marvelous, and similar to ideas about "public reasoning." But, law is also a search for the mean, not simply impartial enforcement of universal rules;

Again, doctors when ill call in other doctors to treat them, and trainers other trainers when they themselves go into training - on the principle that it is impossible to give true judgment when their own interests and thir own feelings are involved. So it is clear that the search for what is just is a search for the mean; for the law is the mean. p227

And one must be wary of interests that cloak themselves under the cover of law.

 

Cities and the public good

Republicans do particularly badly in cities, says Atlantic Cities, and it may not be a matter of race and demographics alone. Where people are squashed together, the need for public services is more obvious than on a tract of land in the exurbs.

In a good piece on the GOP’s problem with geography earlier this week, The New Republic’s Lydia DePillis interviewed Princeton Historian Kevin Kruse, who made this point succinctly: "There are certain things in which the physical nature of a city, the fact the people are piled on top of each other, requires some notion of the public good," he said. “Conservative ideology works beautifully in the suburbs, because it makes sense spatially."

The real urban challenge for conservatives going forward will be to pull back from an ideology that leaves little room for the concept of "public good," and that treats all public spending as if it were equally wasteful. Cities do demand, by definition, a greater role for government than a small rural town on the prairie. But the return on investment can also be much higher (in jobs created through transportation spending, in the number of citizens touched by public expenditures, in patents per capita, in the sheer share of economic growth driven by our metropolises

There may be something to this. It is indeed partly a matter of the public good, in the economic sense. But I would like to see more money spent on parks and libraries and infrastructure and other actual public services open to everybody - not transfers, entitlements and padded union pensions that go to particular individuals for their private use. I pay a staggering amount in New York City taxes, only a tiny fraction of which goes to actual public goods rather than entitlements or subsidies.

As often happens, the principle is correct, but the practice can be corrupted in machine politics and clientelism. In a similar way, I'd double spending on NASA and the National Parks at Federal level, things that everyone benefits from, so long as we eliminate soybean or corn subsidies, say, or limit the proportion of the federal budget spent on services and entitlements for the over 65s.

But it is not simpy about public goods, either. It is also a matter of being able to articulate a notion of the common good. Aristotle, as we saw, defined any constitution that does not aim at the common good as "deviant". Both parties have trouble with the common good, the Democrats because they are a coalition of sectional and selfish pressure groups, the Republicans because their libertarian and oligarchic country club wings both deny any notion of the common good at all.

 

Aristotle: The Middle Way

I've talking about Aristotle's The Politics , starting here. We were just talking about his warning about over-reliance on expert judgment, and the need to emphasize the "middle" kind of life.

This leads to a very important point. One major criticism of virtue ethics is that it is only for an aristocratic elite. I looked at an Oxford roundup of articles, here.

One of the contributors, Schneewind, says

The Aristotelian theory may have been suited to a society in which there was a recognized class of superior citizens , whose judgement on moral issues would be accepted without question (p200)

But in fact Aristotle is not arguing for exclusive reliance on a higher class of superior individuals. He says:

If we were right when we stated in our Ethics stated that virtue is a mean, and that a happy life is a life without hindrance in its accordance with virtue, then the best life must be the middle life, consisting in a mean which is open to men of every kind to attain. p266

This is very important, because it refutes one of the principal objections to virtue ethics that we have come across: the argument that the good life is only one philosophers can aspire to.

The state aims to consist as far as possible of those who are like and equal, a condition found chiefly among the middle people. And so the best-run constitution is certain to be found in this state, whose composition is , we maintain, the natural one for a state to have. p267

it is the middle citizens in a state who are the most secure: they neither covet, like the poor, the possessions of others, nor do others covet theirs as the poor covet those of the rich. So they live without risk, not scheming nor being schemed against. p267

 

Faction

Aristotle is not arguing for a guardian class, like Plato. Even further,

The superiority of the middle constitution is clear also from the fact that it alone is free from factions. Where the middle element is large, there least of all arise factions and divisions among the citizens. And big states are freer from faction, for the same reason, that their middle element is large. p268

Faction seems endemic to just about any human group or organization, unfortunately. He specifically warns against the "greedy grubbiness of the rich."

But at all times a legislator ought to include the middle peope in the constitution. .. The better mixed a constitution is, the longer it will last. It is a mistake made by many, even by those seeking to make an aristocratic constitution, not only to give to great a preponderance to the rich, but to cheat the people. In the long run mistaken good inevitably gives way to unmistakable evil for the greedy grabbing of the rich does more harm to the constitution than that of the people. p272

So there is a sympathetic element to the Occupy 99% there. On the other hand,

In democracies the rich ought to be treated with restraint: there should be no redistribution of property, nor of income, such as goes on unnoticed in some constitutions. p327

Confusions arise from overextending the ideas of equality, or inequality.

Democracy arose from the idea that those who are equal in any respect are equal absolutely. All alike are free, therefore they claim that they are all equal absolutely. Oligarchy arose from the assumption that those who are unequal in some one respect are completely unequal: being unequal in wealth they assume themselves to be unequal absolutely. p296

I think this is a common problem. Gay marriage, for example, is a claim to be 'equal absolutely' even if other citizens have to be coerced or sued into accepting it. Any difference in any respect in equality or any disparate impact is seen as unacceptable.

But, says Aristotle, there are two kinds of equality - numerical, and what amounts more or less to proportionate equality:

Inequality is everywhere at the bottom of faction, for in general faction arises from men's striving for what is equal. .. Now, there are two kinds of equality, the one being numerical, the other of value. I use 'numerically equal' to cover that which is equal and the same in respect of either size or quantity, and 'equal in value' for that which is equal by ratio. ... To lay it down that the equality shall be exclusively of one kind or the other is a bad thing, as is shown by what happens in practice: no constitution that is constructed on such a basis lasts long. p298

Too much emphasis on simplistic equality, taken to an extreme in either direction , can lead to political collapse.

He is also wary of faction arising from different regions or ethnic backgrounds.

Then there is difference of stock, which remains a stimulus to faction until such time as the two groups learn to live together; for just as a state cannot be made out of any and every collection of people, so neither can it be made in any space of time at will. Hence faction has been exceedingly common when the population has included an extraneous element, whether these have joined in the founding or have been taken on later. p304.

The "learning to live together" takes time, and multiculturalism, so to speak, can just as much lead to bitter faction instead of universal harmony. This is a common theme with Aristotle: you most often cannot simply enact things by will. People have to be habituated to them.

Of course, much of this runs counter to current liberal orthodoxy. But it may be there are some timeless issues with human nature that we have to remember to make genuine progress possible. This does not mean we should not look to have people from different backgrounds living together, of course, in the interests of diversity. But it does suggest we need to be on the lookout for faction if so.

He also has a precursor to the "broken windows" theory of law enforcement that became popular in the 1990s, which said minor crimes like turnstile jumping could lead to more widespread major crimes like assault or murder:

Now in constitutions that are well-blended it is essential to take many precautions, and certainly against anything being done contrary to the laws; and it is essential in particular to guard against the insignificant breach. Illegality creeps in unobserved; it is like small items of expenditure which when oft-repeated make away with a man's possesions. The spending goes unnoticed because the money is not spent all at once, and this is just what leads the mind astray. p323.

We will look at Justice and law next.