Weekly Thoughts


Weekly Thoughts: Just Capital, Jessica Simpson and Rarity of Averages

Here are three things that caught our eye this week:

Just Capital

While we have long admired Paul Tudor Jones for his legendary trading acumen, we think he deserves even more recognition for the ways in which he has sought to apply sound business practices towards his philanthropic work and social progress agenda. As the founder of the Robin Hood Foundation, Jones has been a pioneer in using free market principles as a tool for charitable allocations. Each year the foundation requires potential grant recipients to present business plans and projections detailing the impact and effectiveness of their program. Underperforming programs are even de-funded so the resources can be allocated elsewhere. The result is a wildly successful charitable platform that attracts top talent and has had a meaningful impact on reducing poverty in New York City.

Now Jones is trying to use the same approach to change the way people think about capitalism and company valuations. In a recent Ted Talk, he outlined his belief that corporations are emphasizing short term profits to an unhealthy extreme that will ensure negative outcomes should it be allowed to continue. From a Ted blog post about Jones’ talk:

“It’s a good time for companies: in the US, corporate revenues are at their highest point in 40 years. The problem, Jones points out, is that as profit margins grow, so does income inequality. And income inequality is closely linked to lower life expectancy, literacy and math proficiency, infant mortality, homicides, imprisonment, teenage births, trust among ourselves, obesity, and, finally, social mobility. In these measures, the US is off the charts.

‘This gap between the 1 percent and the rest of America, and between the US and the rest of the world, cannot and will not persist,’ says the investor. ‘Historically, these kinds of gaps get closed in one of three ways: by revolution, higher taxes or wars. None are on my bucket list.'”

Graphically, Jones’ concerns look like the chart below. The United States is off the chart when plotting income inequality against an index of social problems:


Ironically, Jones believes changing the values of capitalism requires using the system itself. To that end, he has spearheaded the creation of a new non-profit called Just Capital which, with public input, will create metrics around corporate justness and publish them annually. Jones hopes that overtime, armed with the relevant data, the free market will allocate resources toward those companies which rank more highly on the justness scale, thereby ensuring their continued success.

Previously, we have used this space to promote our view that in the long run, a well-functioning capitalist system needs to consider all its members. It probably comes as no surprise then that we whole-heartedly agree with Jones’ premise and also applaud his analytical and market based approach to fixing the problem. It may take time, but the effort is worthwhile. As Jones himself said, “When we begin to put justness on par with profits, we get the most valuable thing in the world. We get back our humanity.”

Ted TalkBusiness InsiderJust CapitalRobin Hood

Jessica Simpson

When people think of Jessica Simpson, most might think “faded pop-star,” “fluctuating weight,” “Tony Romo’s ex-girlfriend,” or “Chicken of the Sea.” Few think “successful business woman.” As such, our readers might be surprised to learn that Simpson’s fashion line – The Jessica Simpson Collection – brings in an estimated $1 billion in annual sales. Her label, launched in 2005, has grown to cover more than 30 product categories, and is sold in mainstream department stores across the country. How has Simpson accomplished this? A recent Bloomberg article explained that “Simpson’s label found its groove by targeting regular women, not the high-fashion types celebrities often attempt to court.” Bloomberg expands:

“According to the pop star, Simpson just knows what women want. Her assortment of designs seeks to appeal to all kinds of women — a teen searching the mall for a cool denim jacket, a plus-size girl looking for a going-out dress, a grandmother who wants to dazzle in a chic top.

‘I have been every size on the planet, and I understand—I feel like I understand women,’ Simpson said at Forbes’s annual Power Women’s Summit in 2014. ‘I know there’s all different kinds, you know. There’s life and a whole entire world beyond L.A. and New York. And I do understand the Middle America, and their mindset.'”

We attribute Simpson’s success to a keen ability to empathize with her clients. While many “top-tier” brands may have more cache, in reality many do not deeply understand their customers’ needs, and therefore miss a significant portion of the market. From the 2014 Forbes summit:

“She (Simpson) went on explain how she manages to outsell most runway designers several times over by understanding everyday women, the vast majority of whom are larger than a size 2 and may feel alienated by what they see in Vogue.”

As articulated in the past, we strongly believe that empathy is a critical factor for long-standing business success. Additionally, we believe that there is a lot of value situated somewhere between New York and Los Angeles! We draw inspiration from Simpson’s approach, and hope to match her level of understanding in our own business pursuits.


Rarity of Averages

In introductory statistics, everyone learns about the dangers of relying too much on averages when they discover that its easy to drown in a lake that has a mean depth of four feet. We were reminded of that lesson this week when we came across an article which included a chart of the distribution of S&P 500 returns since 1926. The chart looks like this:


Astute readers will note that while the S&P 500 since 1926 has produced an annualized compound return of 10.12%, there hasn’t been a single year when the actual annual return equaled this figure. We found this fascinating for a couple of reasons. First, from a statistical perspective, it is a great reminder of the importance of standard deviations and the pitfalls of using descriptive statistics on a limited data set. Second, as investors, we look at this data and suspect most practitioners have great difficultly earning that compound annual figure throughout the cycle, as such extreme variation is highly likely to cause portfolio adjustments at inopportune moments.

When modeling long term returns, it is easy to fall back on average estimates without appreciating how jagged the path may be from here to a 10% compound return in the distant future. Our goal, then, is two fold. First, we seek to reduce the standard deviation of our return streams without reducing the return itself (i.e. we pursue higher sharpe ratio investments). Second, we try to understand and anticipate how a return and standard deviation profile is likely to unfold over time, so that we are adequately prepared, both emotionally and intellectually, to handle the volatility that is sure to present itself.

Have a great week,

Your Chenmark Capital Team

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