Circle of Competence Issue #67

QUOTE OF THE WEEK

"We have two lives, and the second begins when we realize we only have one." - Confucius

FOOD FOR THOUGHT

Attorney General Delrahim's speech on antitrust enforcement and digital gatekeepers (Justice Department)

To take down tech, regulators need to reinvent anti-trust law around 'consumer welfare' (New York Times)

How 'stealth' consolidation undermines competition - small mergers increase industry consolidation (WSJ)

Lately, the buzz has been around how antitrust regulation should apply to the monopolies du jour - big tech. But I wrote about how smaller companies escape scrutiny from regulators last week and this has the potential to be a hairy process, sorting out where to draw lines in terms of regulations around size, acquisitions, market dominance, and consumer welfare. You can look at this issue from two perspectives: the economist's perspective (in which perfect competition is best for the consumer - or is it?) or the investor's perspective (dominate the market, generate outsize returns). The question on whether or not this increasing concentration in smaller industries is good for consumers hinges on the outcomes for consumers when they use the product or service. Obviously, companies are acquiring competitors for strategic reasons - could be revenue/cost synergies, increased buying power, increased pricing power, etc. They are rational economic actors that are seeking to dominate in the economic jungle and generate excess returns. But what happens if these returns are generated because they can provide superior products or services relative to competitors? Should they be automatically broken up and treated as 'bad actors' due to their 'monopoly status'? Of course, I'm not defending all mergers on the ground that they improve products and services for consumers because the primary reason they occur is financial in nature, but it is worth asking the question.

Ultimately, taking a hard look at antitrust law requires regulators to review the original basis of antitrust enforcement that was based primarily around 'consumer welfare'. Changing antitrust law would require 1) redefining what the ultimate objective of antitrust regulation would be (is it just protecting consumer welfare or something more?) and 2) deciding whether expanded regulatory authority would be good or bad for innovation, consumers, and the economy at large. For what it is worth, I tend to think that more competition is always better for 1) the consumer (keeps companies competing on price and quality of service/product) 2) innovation (forces companies to continuously evolve or die) and 3) the economy (new products and services are born daily to satisfy new consumer needs and desires. However, this is on a macroeconomic level. Notably, Buffett figured out a long time ago that monopolies don't necessarily have to be harmful to consumer welfare (e.g. Coke - OK, it's not healthy, but it isn't forcing consumers to drink their products either!). From a microeconomic, investor mindset, finding companies that distance themselves from competitors due to some competitive advantage and whose customers LOVE the brand is a win-win: consumer desire is more than satiated and the investor base is happy to compound capital ad infinitum. Nowadays, it seems that regardless of whether consumers are satisfied with the offering (Google, Amazon, Apple), if you are large enough, you will attract unwanted attention.

Unpopular opinions in crypto - is Bitcoin just another digital commodity? (Collaborative Fund, Matt Lucas)

On Crypto and its implications for American innovation - a16z's Scott Kupor addresses the House Agriculture Committee on crypto (a16z)

I wrote some thoughts on crypto back in September 2018, and I think they still generally hold true. Cryptos, to me, are simply an alternative method of storing value that requires no intermediary, guarantees fidelity in past transactions, and has a limited supply as a digital commodity. Indeed, I think this quote from Scott Kupor's testimony proves this point:

"Once the network is functional and, in particular in cases where the network is decentralized, we believe that the nature of the tokens looks more like commodities than securities. This is because there is no centralized sponsor on whose efforts the value of the token is largely dependent. Rather, the tokens will have value that represents the utility of the service to its participants; the value will not be derived from the coordinated activities of a centralized sponsor."

The world gets more interesting every day. I will repeat what I said in 2018 - I think the true innovation is the blockchain/cryptographic networks that underlie the cryptocurrencies, but more time is required before we can definitively say that these novel innovations have true utility.

Chuck Akre on the three legged stool approach to investing w/ Patrick O'Shaughnessy (Invest like the best)

Fantastic lessons on what matters most in investing. It doesn't need to get any more complex than Chuck Akre's three legged stool of investing:

- quality of the business

- quality of the people involved

- quality of the reinvestment opportunities ahead

With only 2 legs, a stool cannot stand. But with 3, it is as sturdy as can be. This would be what I would call the Munger-style investment: a quality business with quality management and a lot of runway for reinvestment... all at a fair price. If you find a business like this, please send it my way!

WRITTEN WORD

TOP READ: Attorney General Delrahim's speech on antitrust enforcement and digital gatekeepers (Justice Department)

How 'stealth' consolidation undermines competition - small mergers increase industry consolidation (WSJ)

To take down tech, regulators need to reinvent anti-trust law that centers around 'consumer welfare' (New York Times)

Unpopular opinions in crypto - is Bitcoin is just another digital commodity? (Collaborative Fund, Matt Lucas)

On Crypto and its implications for American innovation - a16z's Scott Kupor addresses the House Agriculture Committee on crypto (a16z)

The future isn't what it used to be - a cautionary tale on trusting grand predictions (WSJ)

The difference between open and closed minded people - hint: listening more vs. speaking more is key (Farnam Street)

Industry towns - where you start a company matters (Elad Gil)

Amazon is shutting down it's food delivery business (Quartz)

Walmart is integrating Jet.com into its online business after it failed to live up to expectations (Reuters)

Every lie we tell incurs a debt to the truth - thoughts on HBO's "Chernobyl" (Brad Feld)

Moat erosion starts from behind the wall - how a company's competitive advantage erodes from within itself over time (Ensemble Capital, Todd Wenning, CFA)

SPOKEN WORD

TOP LISTEN: Chuck Akre on the three legged stool approach to investing w/ Patrick O'Shaughnessy (Invest like the best)

Henrique Dubugras, CEO of Brex, discusses disrupting the financial services industry (Pattern Recognition)

Applying a fundamental value investing approach with David Abrams of Abrams Capital (Value Investing with Legends)

Andrea Schaffer on investing in opportunity zones w/ Dr. Daniel Crosby (Standard Deviation Podcast)

Where we are in the cycle and what to do about it (Real Guys Estate Radio)