Power & Market

Voltaire once famously urged people to “Judge a man by his questions rather than by his answers.” Someone’s questions tell us what they already presume to be true and whether they are seeking wisdom or something very different. For example, a politician asking “who should I blame for something I am actually at fault for?” or “how can I best make a proposal that will violate people’s rights and liberties come across as reasonable?” is not seeking wisdom.

But asking appropriate questions is often a useful means toward wisdom. Unfortunately for most of us, knowing what wisdom is to be developed and how best to get others to see that wisdom for themselves is a high bar to clear.

That is why Leonard Read turned to Socrates for inspiration toward wisdom and how to more effectively transmit such wisdom as we have to others, which he pursued for a major part of his adult life, in his “How to be like Socrates,” Chapter 20 in his 1973 book, Who’s Listening. 

Each of us is unique. But the method employed by Socrates to advance understanding is one that all of us might well try to emulate.

The Socratic method of teaching or discussion is to ask a series of easily answered questions that inevitably lead the answerer to a logical conclusion foreseen by the questioner. This is to teach a student the way of philosophizing, as distinguished from urging him to memorize the conclusions of philosophers.

This is quite the opposite of the popular “compulsory mis-education” which tends to turn students into carbon copies of so-called teachers. Instead of putting masks on students--blanketing their minds with someone else’s “wisdom”--real teaching is an unmasking process, helping [individuals] to find their own hidden aptitudes, potentialities, uniqueness…Enlightenment is the mutual goal.

If enlightenment is sought, and the Socratic method can help us get there, one would think it would be used more than it is. Read asked why.

Why, we must ask, is this superior method so little used?...because we do not know the right questions to ask.

How can we reach the level of wisdom to utilize that method to lead others to “own” such wisdom for themselves?

If one would be like Socrates, where does he start?...training for enlightenment above and beyond where he now stands…To ascend, one [first] reaches for the bottom rung…practiced and mastered, to that extent may one rise step by step toward the top.

Consciously developed, it assures individual growth in awareness, perception, consciousness; and this leads in turn toward the good society…we seek for truth and share it with those who also seek…We enrich or enlighten each other.

As one succeeds in probing for truth, he becomes more and more conscious of an ever-expanding unknown…If one can reach the level of humility, of wanting to know, then the next higher rung of the ladder is within reach: an intelligent interpretation of self-interest. In reality, this amounts to an understanding of the Golden Rule: one’s interest is never served by doing injury to another.

Leonard Read then turned to exemplars of the kind of wisdom he sought.

Immanuel Kant was at this level: no one has a moral right to do anything that cannot be rationally conceded as a right to everyone else-the principle of universality. The interest of self and of society are in harmony, not at odds.

William Graham Sumner…stated the principle in brilliant terms: “Every man and woman in society has one big duty. That is to take care of his or her own self… the duty of making the best of one’s self individually is not a separate thing from the duty of filling one’s place in society, but the two are one, and the latter is accomplished when the former is done.”

With such exemplars in mind, Read also acts as an exemplar of someone seeking wisdom, by first turning serious questions inward.

I…am aware of knowing nothing, and understand the Golden Rule. However, I do not know enough answers to ask many of the right questions. Why am I not more like Socrates? Simply because I am not wise enough. Nonetheless, each of us can strive for more wisdom.

Finally, Read provided an example of a step along the Socratic path toward liberty:

Q-Joe Doakes was lynched. Who did it?

A-A mob.

Q- Mob is but a label. Of what is it composed?

A - Individuals.

Q- Then did not each individual in the mob lynch Joe Doakes?

A- That would seem to be the case.

Q-Very well. Can any individual gain absolution by committing murder in the name of a label, the mob, a collective?

A- I guess not.

Q- Now that we have established that point, let me pose another question. Do you believe in thievery?

A- Of course not.

Q- Logically, then, you do not believe that you should use force to take my income to feather your own nest. True or false?

A-True.

Q-Is the principle changed if two of you gang up on me?

A-Not at all.

Q- One million? Even a majority?

A-Well, perhaps O.K. if a majority does it.

Q-Do you mean that might makes right?

A-Oh, no.

Q- That is what you have just said. Would you care to retract that?

A- To be logical, I must.

Q-You have now agreed that not even 200 million people or any agency thereof-government, labor unions, educational institutions, business firms, or whatever—have a moral right to feather their nests at the expense of others, that is, to advance their own special interests at taxpayers' expense. You have also admitted that no one gains absolution by acting in the name of a collective. Therefore, is not every member who supports or even condones a wrong collective action just as guilty as if he personally committed the act?

A- I have never thought of it that way before but I now believe you are right.

Thus, by asking the right questions, one may thread his way through the maze of moral, economic, and political philosophy toward truth. This is the method of helping others to find right answers for themselves, the way to truth through their own minds. Your problem and mine is to become wiser that we may increase the number of the right questions to ask. This, in my view, is the way to become more and more like Socrates.

Well they finally got Boris Johnson. But he sure scared the bejesus out of them…or did he? Johnson’s time as Prime Minister has been one plagued by political turmoil, Coronavirus, and scandal, all three of which many thought he could overcome with relative ease and buoyancy. But alas, due to his own party imploding after the latest scandal - involving sexual allegations surrounding his Deputy Chief Whip Chris Pincher - and various cabinet ministers and others important to the running of a functioning government resigning, his position became untenable. And despite some of his loyalists inside and outside the state backing him no matter what, the game was up and Johnson knew he had to resign. The questions now are firstly who will replace him and secondly where does the British right go from here? Unfortunately, both of these questions do not have clear answers.

Johnson has been at the forefront of British conservative politics for the better part of a decade and was beloved by the right-wing and predominately libertarian side of the spectrum for most of it. He was known as a brash, no-nonsense, and straight-talking politician who, unlike many of his friends in Westminster, did not play the game of social respectability and towing careerist party lines. As his own sister, Rachael Johnson, once said in an interview, Boris knew that breaking all the usual rules of politics would get him further and would make people like him more. In retrospect, this appears to have been the case.

On becoming Prime Minister, Johnson sought to re-inject optimism and dynamism into British politics which had become stale thanks to the lingering state of Brexit. Unlike Theresa May before him, Johnson was a true believer in the Brexit project and set his sights on passing his deal through parliament no matter what. If this meant proroguing parliament, so be it. If it meant de-selecting pro-EU backbench Tory MPs from the party, so be it. If it meant calling a General Election, so be it. In the end, this was the path Johnson took and it paid off beyond his wildest dreams, earning an 80-seat majority - the best result the Conservative Party has had since the Thatcher era. This landslide majority enabled Johnson and his cabinet to do essentially whatever they wished but true to character the Conservatives did absolutely nothing with this victory. Johnson becoming Prime Minister simply revealed that his ideological convictions and penchant for getting everyone to like him were both not as strong as many may have hoped.

After two years of Johnson rule what have the British people had? Lockdowns, Coronavirus fearmongering propaganda, debt at 100% of GDP, inflation rising, high fuel prices, scandals and an overall continuation of the managed decline Britain has been subject to for decades. Anti-ID card Boris Johnson became pro-vaccine passport Boris Johnson. Free market Boris Johnson became money printer and high tax Boris Johnson. Anti-nanny state Boris Johnson became puritan Boris Johnson. The libertarian credo that Johnson rode on for so many years proved to be empty bluster and lies. The populist ‘man of the people’ image he fostered turned out to be a mask which hid behind it simply another careerist Globalist hack; easily captured and made a puppet of the Westminster deep state.

After the recent scandals which broke Johnson’s chances at leading a credible government he resigned, albeit without much remorse or sadness. The question now is who will replace him and the many answers to it all are rather depressing.

Risihi Sunak, Johnson’s ex-Chancellor and poster boy for Tory moderns and wets, seems to be the front runner with Penny Mourdant, a war-hawk who has played into the cultural left’s talking point on more than one occasion, following closely behind him. Other leadership hopefuls are the ex-Liberal Democrat and Thatcherite LARPer Liz Truss and one of the last remaining Neocons in the party, Tom Tugenhardt (derided as ‘Total War Tom’ by his detractors). While there may be some lesser supported candidates, such as the seemingly libertarian-esque Kemi Badenoc and Suella Braverman, these types of MPs- while holding some good ideas and being popular amongst young Tories - will not get anywhere near Downing Street.

The current Conservative Party wants stability and sterility rather than any semblance of radicalism or ideological conviction. Their view is that the poll ratings show they can’t afford to elect a renegade like Braverman, who came out the other day declaring that Britain spends too much money on welfare. But maybe a radical renegade who is able to muster the populist energy of Johnson in 2019 and Farage before that is exactly what the current Conservative Party needs and what the country needs if it is to throw off the shackles of pessimism and decline. But alas, that is unlikely to come in the near future.

Nevertheless, the current turmoil might pose some benefits.

As Murray Rothbard pointed out during Watergate, the scandal “destroyed the public's 'faith in government'” with him further remarking that “it was high time, too.” The public’s faith in the state has been radically diminished over the last few years with Brexit, Coronavirus, and now incessant scandals and internal party bickering over who gets to sit in the big chair at cabinet meetings. Institutions like the Church of England, the courts, and even the police are facing greater scrutiny and dismay from right-wingers and the general public than they ever have before. And to top it all off, the young British right is beyond fed up with the current Conservative Party and is tired of the stale soundbites, ideological vapidity and the ever-ongoing shifts to the left both economically and culturally.

While there is still a plethora of ideological factions and groupings inside of Conservative youth and related circles the predominant strains seem to be that of a more populist, traditionalist and nationalist bent on the one hand, with a fervent anti-state, pro-free market, and libertarian force on the other. Both may disagree on minute policy proposals, but both want to see the end of the current consensus that has dominated politics for decades which was created by New Labour. They want property rights to be restored, taxes and regulations to be cut, our foreign policy to be independent of the American Empire, and for Britain’s state to be cleared out of weak civil servants, ex-Communist special advisors, and fifth columnist NGOs. For those wanting change, a new alliance between the traditionalist and libertarian factions may be necessary in order to overturn the dominance the middle ground modern Tories have had over the party for decades.

But whatever happens over the next few months and whatever leader the Conservative Party gets, it will not save them from the British public’s derision and their membership’s anger. Nor will they forget the state Britain was put in by Boris Johnson or renew their faith in the institutions of this country. Out of every crisis comes opportunity and the grassroots right must not be dismayed or demotivated. On the contrary, they should work hard at building up alliances with like-minded renegades and seek to create as much noise and trouble as possible in the months and years to come. 

Raymond Geuss is an influential political philosopher, and I hope to review his new book, Not Thinking Like a Liberal,(Harvard, 2022) on another occasion.  Geuss is a confirmed enemy of liberalism, both classical and modern, He dislikes both Rawls and Nozick; in fact, his attitude toward Rawls falls little short of hatred. This interferes with his ability to read these thinkers with care.  He says that one feature he dislikes  of the way philosophy has come to be done  "is the one which Robert Nozick described in the preface to one of his books. He says he wanted to give an argument so powerful that it would fuse the brain of those who heard and understood it and force  them to accept it. Even apart from the visibly sadomasochistic element in this,  it does not seem to me that an approach that conceptualizes discussion in this way, as the search for this kind of argument or refutation, is the most likely way to attain any kind of understanding  of the world." (p.9. Amazon Kindle edition)  Guess hasn't noticed that the point of Nozick's discussion is to oppose this way of doing philosophy in favor of a non-coercive form of discussion.  Because Nozick is an enemy, he cannot recognize that he and Nozick are for once on the same side.

In 2008 Warren Buffett issued a public challenge to the industry he most despised: hedge funds. Charging its clients 2% of assets under management plus 20% of any profits, Buffett wagered none of them could beat the annual return of the S&P 500. That bet was accepted, and ten years later the token wager of one million dollars was duly paid to the charity of Buffett’s choice.

Below is a graph depicting the results of the participating funds against the returns of an S&P 500 Index:

solis_picture_1.png

While it is true that the period in question featured an historical bull market, reaching back into the data and the history of major market participants reveals that the same would have been true at almost any point in the last forty years. Only a handful of investors, a literal handful, have been able to beat the market for their clients in the long run after fees and transaction costs are considered. Buffett, himself on that list, is so confident in the superiority of investing in broad-based index funds that he is said to be leaving the majority of his estate in them for his wife.

Other wealthy investors have taken note, with the share of assets under hedge fund management falling over the past five years.

While the commissions and fees hedge funds charge are large, what explains the basic inability of the average fund, staffed by ivy league quants doing cutting edge analysis running state of the art software, to significantly beat the market over the long run?

The answer, at its core, is the Efficient Market Hypothesis.

In the words of its author, Chicago School economist Eugene Fama (1970), the Efficient Market Hypothesis (EMH) is the belief that “prices reflect all available market information.” The implication being that, if they didn’t, arbitrage opportunities would arise, and prices would be corrected by those large investors with the resources to identify and make such corrections. The focus of the theory, therefore, is on information and its impact on prices.

EMH makes four basic assumptions: rationality, risk aversion, responsiveness to new information, and some amount of randomly distributed error (aka Malkiel’s “Random Walk”). Further, it takes three generally accepted forms:

• Weak-Form Efficient: above market returns cannot be gained from past market data (aka: technical analysis), but can be had from some kinds of fundamental analysis.
• Semi-Strong-Form Efficient: prices reflect all publicly available information. Prices will only change with new information, the emergence of which is assumed to be more or less random (thereby negating any prospect of above market returns via fundamental analysis).
• Strong-form Efficient: even with access to insider information an investor cannot beat the market.

Immediately, one can see that the strong-form of the EMH cannot possibly be true. Insider trading is illegal for a reason, and deals like Berkshire’s recent purchase of a large stake in videogame company Activision immediately before it was announced the company would be acquired by Microsoft raise eyebrows.

Between the weak and semi-strong forms, however, there is a lot of gray area. And many economists since the 1980s, including the Yale’s Robert Shiller and Chicago’s Richard Thaler, have made arguably the largest contributions of their careers studying the various ways in which markets apparently misbehave according to the various forms of the EMH.

To take a few examples, seasonal effects defy even the weak form of the EMH. The so-called Santa Clause rally is perhaps the best known of these phenomenon. Regardless of the wider macroeconomic conditions, market momentum, or exogenous risks, investing strictly on the basis of calendar dates, from the last five trading days in December through the first of the new year, has yielded a return 75% of the time. From a statistical standpoint, this is improbable, though several rather mundane facts may explain the anomaly: equities are generally at a cyclically lower level to start December due to tax reasons, professional traders being on vacation makes for lighter volume and fewer short sellers, and purchases in anticipation of another observed historical tendency, the January Effect.

In his analysis of P/E ratios, Shiller provides possibly the strongest evidence against the semi-strong-form EMH:

solis_picture_2.png

What he found was that buying and holding companies with relatively lower P/E ratios over the long-term produced the highest returns over those periods – something fundamental analysis and projections of future earnings could contribute to optimizing.

As pioneers in behavioral and narrative economics, both Thaler and Shiller also believe that the stories we tell ourselves about the stock market matter – how much, they can’t quantify. So, too, that systemic biases in thinking, such as the herd effect and hot hand fallacy, can drive market action in ways EMH would not predict – such as the 1990s IPO tech bubble, the rise of the cryptoverse, the implosion of LTCM, or the London Whale.

As far as bubbles go, Shiller correctly forecast both the tech bust in the late 1990s and the ticking time bomb in the housing market in the mid-2000s. But it is worth noting that while in retrospect everyone admits prices of mortgage backed securities were mispriced in accordance with their actual level of risk for several years in the mid-2000s, it was impossible to convince anyone of that at the time. Indeed, Thaler admits that while bubbles exist, we can really only prove they were bubbles after the fact. Afterall, there were plenty of buyers in every case, and who was anyone to say for certain that the future wasn’t going to be radically different from the past? Or that buying equities whose prices were rising wasn’t rational and efficient, value being subjective? Afterall, what is the value of something if not what amount it trades for between informed market participants freely exchanging?

Under such circumstances, an investor who thought they had identified such an inefficiency in the market and sought to profit from it by going short might wind up running out of money before the market ran out of enthusiasm: as with George Soros in the 1990s and tech.

Shorting being both risky and expensive, in such circumstances the great irony is that the rational thing to do for the average participant from a game theoretical standpoint is to ape the market and go along for the ride – hopefully using their self-awareness of actual risk levels to jump ship at some point before the crash.

It seems clear that between a combination of momentum trading, innovative strategies, superior analysis, high frequency trading for momentary and infinitesimal price arbitraging opportunities, and guessing correctly at future trends, can lead some firms to obtain above market returns. However, once fees and expenses are considered, the actual return to investors has been below the market average. Furthermore, virtually no funds or managers are able to sustain above market returns over the long run.

There have, of course, been periods where this was not true. The first decade of the 2000s as well as the ten years between 1965-1975 would have seen buyers of the S&P 500 index suffer a slight loss, while investor at the most successful funds of their time would have shown a positive return.

All things considered, for the average person planning for retirement, assuming they have neither the time or training to do the level of due diligence and analysis required for making superior individual stock selections, they really have been best off buying and holding broad based index funds rather than trusting to expensive, and often wrong, “experts.”

Whether or not this will continue to be true over the next several years, only time will tell.

As George Bragues argued in the QJAE in 2014, the data clearly reveals markets behave irrationally at times with respect to prices, earnings, dividends, acquisitions, et cetera; however, the market is not irrational either in that it is gradually self-correcting, bubbles are difficult to spot, and even more difficult to time.

Building on Shostak’s critique of Markowitz’s Modern Portfolio Theory, what this means for the efficient Austrian portfolio will be the subject of another discussion.