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Circle of Competence Issue #66


"Of course it's important that investors keep up with current developments and those that will shape the future. But it's also essential that they not completely unlearn the lessons of the past." - Howard Marks


This time it's different (Howard Marks' Memo)

"This time it's different" is always a favorite line of talking heads, and can be applied to many situations including: economic recession indicators, high growth companies, economic growth, quantitative easing, federal deficits. Marks deals with the common thread running through all of these scenarios: human recency bias encompassed in the four word phrase 'this time is different'. Time and time again, in many scenarios throughout history, humans have had a tendency to extrapolate based on the most recent data until the tides turned. The antidote to recency bias is a firm grasp of history in your field for the full view - in this case economic history. Reading Marks will give you an excellent history of US markets over the 20th and 21st centuries.

Ben Thompson's thoughts on big tech and antitrust cases (Stratechery)

Size is the unspoken variable in this piece. What about the small companies that dominate a specific niche and have a monopoly on a much smaller market? It seems politically expedient to turn big tech into piñatas when similar arguments employed by politicians could be turned on many smaller companies. Of course, I am not downplaying the privacy issues at Facebook or the anticompetitive practices at Google with search results and android OS. Rather, I am highlighting two things: 1) as an investor, it pays to invest in companies with moats that keep competitors from doing what they do as well as they do it and 2) these four companies (Facebook, Amazon, Google, and Apple) touch nearly every American's lives in some fashion daily (much like Standard Oil did in the late 1800's and early 1900's before its breakup) so it makes sense that politicians would take a hard look at how they run their operations.

For investors, its important to note that sizable monopolies are ones that eventually get regulated, while dominant smaller companies carry less regulation risk. I'm sure there are exceptions to this observation, although I haven't yet come across them in my studies. The catch here is that if a small company has a monopoly in a market, if the market is growing quickly then it will run the risk of growing large and attracting regulators' attention, and if the market is not growing at all, there aren't any reinvestment opportunities. The ultimate investment is the compounding machine that is able to maintain a superior moat without resorting to anticompetitive behaviors and reinvest its capital into its business for years on