February 26, 2016
1. Factor returns, net of changes in valuation levels, are much lower than recent performance suggests.
2. Value-add can be structural, and thus reliably repeatable, or situational—a product of rising valuations—likely neither sustainable nor repeatable.
3. Many investors are performance chasers who in pushing prices higher create valuation levels that inflate past performance, reduce potential future performance, and amplify the risk of mean reversion to historical valuation norms.
4. We foresee the reasonable probability of a smart beta crash as a consequence of the soaring popularity of factor-tilt strategies.
Most CEOs would have had their assistant set up another line minutes after the show aired. Not Shoen. Not only did he not change his number, but eight years later he still claims to respond to every call–although sometimes via e-mail or text–and now insists that all U-Haul general managers post their cellphone numbers in their stores and on the perimeter gates and print them on their business cards. (Don’t believe us? Call him at 602-390-6525.) He credits the direct line with such innovations as a box designed for flat-screen televisions, 24/7 access to U-Haul’s storage units and printed instructions for customers on how to safely connect and disconnect trailers. ... Frankly, a few calls from enraged customers in the middle of the night are nothing compared with what Shoen has already endured for this company. His family and U-Haul–which his father, Leonard Samuel (a.k.a. “L.S.”), and mother, Anna Mary, founded in 1945–have been at the center of one of the messiest family feuds in American history. Having lost faith in his father’s ability to run the business, Joe wrested away control of Amerco in 1986, unleashing a torrent of litigation and reputational warfare ... All of the distractions should have driven U-Haul into the ground. And they nearly did, hindering the company’s ability to borrow money, attract talent and forge partnerships. But Joe held firmly on to control and kept U-Haul alive by concentrating on the mundane, day-to-day details of its core self-moving business. ... As of fiscal year 2015 (calculated from March to March) it had 135,000 trucks and 107,000 trailers on the road, 17,000 more than the year prior. Rival Avis Budget last reported 22,000 truck rentals in 2014, down 5,000 from the previous two years. Penske rents out approximately 15,000 trucks on a local or one-way basis, plus another 25,000 commercial trucks on a local basis.
The internet has spawned subtle forms of influence that can flip elections and manipulate everything we say, think and do ... Most of us have heard of at least one of these methods: subliminal stimulation, or what Packard called ‘subthreshold effects’ – the presentation of short messages that tell us what to do but that are flashed so briefly we aren’t aware we have seen them. In 1958, propelled by public concern about a theatre in New Jersey that had supposedly hidden messages in a movie to increase ice cream sales, the National Association of Broadcasters – the association that set standards for US television – amended its code to prohibit the use of subliminal messages in broadcasting. ... Subliminal stimulation is probably still in wide use in the US – it’s hard to detect, after all, and no one is keeping track of it – but it’s probably not worth worrying about. ... what would happen if new sources of control began to emerge that had little or no competition? And what if new means of control were developed that were far more powerful – and far more invisible – than any that have existed in the past? And what if new types of control allowed a handful of people to exert enormous influence not just over the citizens of the US but over most of the people on Earth? ... It might surprise you to hear this, but these things have already happened. ... The shift we had produced, which we called the Search Engine Manipulation Effect (or SEME, pronounced ‘seem’), appeared to be one of the largest behavioural effects ever discovered.
That now-infamous overhaul, under then-CEO and former Apple retail guru Ron Johnson, sought to reposition Penney as a flashier retailer with fancier merchandise. But it backfired: Customers fled, sales tumbled by almost a third, and Penney was crippled financially. Three years ago the board brought back Mike Ullman, the CEO it had unceremoniously chased out in favor of Johnson, to stop the U.S.S. Penney from sinking. And last summer he handed the reins to Ellison—an executive the opposite of flashy. ... It’s fitting that Ellison, a lifelong musician, plays electric bass, an instrument that rarely gets a flashy solo but without which no band can click. He made his reputation in retail at Home Depot, helping engineer that chain’s turnaround by focusing on unsexy but primordial things like the supply chain and the integration of stores and e-commerce. He’s a data devotee who grounds every decision in information—including that seemingly intuitive shoe move. ... The trees look nice, but the forest is daunting. Penney’s sales, an estimated $12.6 billion for the just-completed year, are still down 37% from their 2006 peak. Its nascent recovery, part of its fourth turnaround effort since 2000, hasn’t swayed Wall Street—its stock trades close to a 35-year low. In the long term, the problem isn’t just that Penney has been dysfunctional; it’s also that Penney is a department store, a practitioner of a business model under siege.
“You’re seeing people escape from prison,” says Rahsaan Thomas, sports editor of the inmate-produced San Quentin News, who is 12 years into a 55-to-life sentence for shooting two armed men. “Here,” says Thomas, who is helping pass out water, “you can only be free in your own mind.” ... If running a marathon is as much a test of mental rigor as of physical endurance, then doing 26.2 miles at California’s oldest prison, home to America’s largest death row, is the ultimate internal contest. On the outside, marathons are movable celebrations that engulf and delight entire cities. The Los Angeles Marathon follows a glittery path from Dodger Stadium, via the Sunset Strip and Rodeo Drive, to Santa Monica Beach; the New York Marathon traverses a five-borough jamboree to the cheers of a million spectators. In the lower yard, a four-acre box on San Quentin’s sloped backside, the only way to re-create that distance is to run the perimeter—round and round, hour after hour—going nowhere fast. ... Sometimes even that exercise in confinement will grind to a halt. No matter the day, alarms punctuate life at San Quentin, signaling fights or medical emergencies, often in corners of the prison unseen from the lower yard. In those moments, every inmate must drop to the ground—runners included—and wait for guards to restore order. During last year’s race, the marathoners had to stop four times. ... when my curiosity sends me digging, I discover why it’s sometimes better not to know. Almost to a man, their crimes are jaw-droppingly atrocious, the stuff of headlines and horror shows.