Competition

[roark33]

Munger has discussed multiple times over the years that competition has gotten so much smarter.  For example, he said this recently:

 "but the times when we had idiot competition when we were young—now we’ve got tough competition scrounging every area and little niche with massive—no, it’s way harder."

Part of me thinks, there are still idiots in large caps, that's why Apple was at $142 less than 6 months ago and now is over $210, basically a 50% move in the largest company in the world. 

But, the other part of me wonders, where are the areas where the competition might be less smart, more idiotic, like when Munger and Buffett started out. 

Any thoughts?

 

[rranjan]

Munger has discussed multiple times over the years that competition has gotten so much smarter.  For example, he said this recently:

 "but the times when we had idiot competition when we were young—now we’ve got tough competition scrounging every area and little niche with massive—no, it’s way harder."

Part of me thinks, there are still idiots in large caps, that's why Apple was at $142 less than 6 months ago and now is over $210, basically a 50% move in the largest company in the world. 

But, the other part of me wonders, where are the areas where the competition might be less smart, more idiotic, like when Munger and Buffett started out. 

Any thoughts?

Human psychology has not changed and it won't change. We will have bubble and crash time to time. We will have 50% fluctuations in market price of widely followed businesses as well.

[LC]

Business in the US is extremely competitive. Munger just said recently to go to China...

[Investmentacct]

Munger has discussed multiple times over the years that competition has gotten so much smarter.  For example, he said this recently:

 "but the times when we had idiot competition when we were young—now we’ve got tough competition scrounging every area and little niche with massive—no, it’s way harder."

Part of me thinks, there are still idiots in large caps, that's why Apple was at $142 less than 6 months ago and now is over $210, basically a 50% move in the largest company in the world. 

But, the other part of me wonders, where are the areas where the competition might be less smart, more idiotic, like when Munger and Buffett started out. 

Any thoughts?

>>>But, the other part of me wonders, where are the areas where the competition might be less smart, more idiotic, like when Munger and Buffett started out.  >>

Peter Thiel starts “Zero to One” book with most important question: “What important truth most of the people do disagree with you on?”

Wrote below but Not for finding competition in finding stocks, rather in business competition. Competition  may be less smart if they do not perceive new entrant business as their competition. Since , they invented new turf to play on.

Tesla leads Smart Car, IOT , Self Drive, Electric BEV Auto market in US. Last month sales is at 78% of total US sales. People believe , competition is coming. If you intersect all above listed areas , there is no competition exists. Same situation has been there for past 7 years. So asking more detailed question may help. Why media advertise lot of competition, but in actual sales why there is none. Compelling and consumer stickiness of products play main role in completely new product category where no parallel exists, so it resets consumer expectations on what product must be.

[Haasje]

niche areas; micro caps, frontier markets, weird asset classes, distressed debt, dare I mention cryptos

[johnhuber]

Munger has discussed multiple times over the years that competition has gotten so much smarter.  For example, he said this recently:

 "but the times when we had idiot competition when we were young—now we’ve got tough competition scrounging every area and little niche with massive—no, it’s way harder."

Part of me thinks, there are still idiots in large caps, that's why Apple was at $142 less than 6 months ago and now is over $210, basically a 50% move in the largest company in the world. 

But, the other part of me wonders, where are the areas where the competition might be less smart, more idiotic, like when Munger and Buffett started out. 

Any thoughts?

I really think that the vast majority of investors (including Charlie Munger) are too focused on gaining an informational advantage. This makes sense because if you've spent a formidable portion of your career utilizing and capitalizing on an info edge, and that edge has gone away, then it's understandable to lament the disappearance of this edge. But this misses a glaring edge that can still be exploited by mere mortals (i.e. those of us who are far less talented investors than the All-time First Team NBA types such as Munger and Buffett). And that glaring edge is what Roark mentions... the fact that the largest publicly traded company in the world can go up and down by $200 billion or more in market value in a matter of weeks. Basically, this edge is just capitalizing on the fact that stocks fluctuate more than values do. No, there is nothing I know more than the market does about Apple. Yet the stock traded for $90 a share not that long ago and has compounded at close to 30% annually for three years. How is that possible? Either the business value appreciated that much (which it did not), or the market wrongly discounted recent trends (possible), or simply that the market overreacted to near term noise. I think it's a combination of 2 and 3.

This happens all the time in the stock market, and it happens now more than it did in the 50's and 60's when Buffett and Munger dominated. This is because the reasons for why the info edge is gone (access to information, the speed of news, noise, etc...) is actually the reason why stocks fluctuate probably even more than they once did. Humans overreact.

I think this game is now one of capitalizing on time arbitrage and assuming that you don't have any info edge. Because even with small caps where you think you have an edge, it's very likely that you don't. I think large caps and small caps can get mispriced obviously, and small caps get more mispriced than large caps, but it's far, far more likely to be because of sentiment and emotional swings than because of information that can be obtained.

I think it's useful to keep this in mind when looking at ideas, because if you assume that the market already knows everything you're uncovering as you evaluate an idea, you'll look at it differently, and maybe (hopefully) avoid a few mistakes.

[SHDL]

Another thing to note is that if you’re small, that alone can give you a big advantage (in terms of your ability to get higher % returns) over the big guys because you can be much more nimble. 

For example if I start seeing signs of deteriorating fundamentals at a big company I own I can exit my position immediately whereas a large institutional investor that owns a big chunk of the same stock and sees the same signs may have trouble doing so without causing a nasty price drop.  I strongly suspect (but of course cannot prove) that this has enabled me to “front run” the big guys and get higher returns on more than a few occasions.

[Spekulatius]

Munger has discussed multiple times over the years that competition has gotten so much smarter.  For example, he said this recently:

 "but the times when we had idiot competition when we were young—now we’ve got tough competition scrounging every area and little niche with massive—no, it’s way harder."

Part of me thinks, there are still idiots in large caps, that's why Apple was at $142 less than 6 months ago and now is over $210, basically a 50% move in the largest company in the world. 

But, the other part of me wonders, where are the areas where the competition might be less smart, more idiotic, like when Munger and Buffett started out. 

Any thoughts?

I really think that the vast majority of investors (including Charlie Munger) are too focused on gaining an informational advantage. This makes sense because if you've spent a formidable portion of your career utilizing and capitalizing on an info edge, and that edge has gone away, then it's understandable to lament the disappearance of this edge. But this misses a glaring edge that can still be exploited by mere mortals (i.e. those of us who are far less talented investors than the All-time First Team NBA types such as Munger and Buffett). And that glaring edge is what Roark mentions... the fact that the largest publicly traded company in the world can go up and down by $200 billion or more in market value in a matter of weeks. Basically, this edge is just capitalizing on the fact that stocks fluctuate more than values do. No, there is nothing I know more than the market does about Apple. Yet the stock traded for $90 a share not that long ago and has compounded at close to 30% annually for three years. How is that possible? Either the business value appreciated that much (which it did not), or the market wrongly discounted recent trends (possible), or simply that the market overreacted to near term noise. I think it's a combination of 2 and 3.

This happens all the time in the stock market, and it happens now more than it did in the 50's and 60's when Buffett and Munger dominated. This is because the reasons for why the info edge is gone (access to information, the speed of news, noise, etc...) is actually the reason why stocks fluctuate probably even more than they once did. Humans overreact.

I think this game is now one of capitalizing on time arbitrage and assuming that you don't have any info edge. Because even with small caps where you think you have an edge, it's very likely that you don't. I think large caps and small caps can get mispriced obviously, and small caps get more mispriced than large caps, but it's far, far more likely to be because of sentiment and emotional swings than because of information that can be obtained.

I think it's useful to keep this in mind when looking at ideas, because if you assume that the market already knows everything you're uncovering as you evaluate an idea, you'll look at it differently, and maybe (hopefully) avoid a few mistakes.

This is a pretty good point. I think the mean  difference between  low and the high of even large cap stocks is close to 30%. It is inconceivable that the intrinsic value of the average large cap stock changes by 30% or thereabouts every year . Hence the market can’t be all that efficient. It might be more efficient as a whole, when looking at indexes consistent of hundred of stocks, where these fluctuations even out to some extend, but not for individual securities. i am not sure where this comes from and maybe it has always been the case, even before I indexing became thing, but when you keep they in mind, you can use this to your advantage. It’s not that easy than it sounds, because the market can actually be right, and that should be the default assumption. but even if the market is right directionally, it seems that it vastly tends to over exaggerate the real changes in value that certainly do exists.

[Hielko]

This is a pretty good point. I think the mean  difference between  low and the high of even large cap stocks is close to 30%. It is inconceivable that the intrinsic value of the average large cap stock changes by 30% or thereabouts every year . Hence the market can’t be all that efficient.

I'm pretty sure that you can easily prove that these large swings in price are not a (big) inefficiency. If these swings wouldn't (on average) represent real swings in value you could easily generate alpha with very simple technical trading strategies were you just sell stuff that went up a lot and buy stuff that went down a lot (and it shouldn't matter a whole lot how you construct the strategy). If you agree that making money isn't that easy in the stock market the conclusion is that the observed volatility must mirror the underlying fundamental volatility in business outlook.

[rranjan]

This is a pretty good point. I think the mean  difference between  low and the high of even large cap stocks is close to 30%. It is inconceivable that the intrinsic value of the average large cap stock changes by 30% or thereabouts every year . Hence the market can’t be all that efficient.

I'm pretty sure that you can easily prove that these large swings in price are not a (big) inefficiency. If these swings wouldn't (on average) represent real swings in value you could easily generate alpha with very simple technical trading strategies were you just sell stuff that went up a lot and buy stuff that went down a lot (and it shouldn't matter a whole lot how you construct the strategy). If you agree that making money isn't that easy in the stock market the conclusion is that the observed volatility must mirror the underlying fundamental volatility in business outlook.

Business fundamentals are not changing 40-50% for large diversified businesses in any given year.