Claims / C-G32B5P2QS6
EmpiricalRequires evidence
Helmer argues that using the Seven Powers to earn investment alpha requires a material informational advantage rather than merely identifying a business whose Power is already evident to investors.
Evidence 5 passages
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the differential acuity of the seven powers framework, incorrectly characterizing the prospects for power in high-flux situations. But assessing power prospects ex ante in high-flux situations, is also what drives the business person's need for a strategy compass. Let me give you some details. First, to summarize the strategy compass thesis, I have made the foundational assumption that strategy and strategies are about only one thing, potential fundamental business value. I refer to this as the value axiom, and it is the bedrock of power dynamics and the seven powers. This assertion represents an intentional narrowing on my part. The last several decades have proven to me that much acuity and usefulness results from adopting the value axiom. By far the most important value moment for a business occurs when the bars of uncertainty are radically diminished with regards to the fundamental equation of strategy, market size, and power. At that moment, the cash flow future makes a step change in transparency. It is the period of invention, with all its high flux, that gives rise
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to this value moment, offering the potential for traction in both market size and power. High uncertainty persists during this interval because these transitions are typically not difficult to forecast accurately. Strategy, the discipline, can only contribute in this period if it serves as a strategy compass to guide on-the-ground inventors, increasing their likelihood of finding a path to satisfy the mantra. To serve as such a cognitive guide, a strategy framework must be simple but not simplistic. That is the objective of the seven powers. So what relevance does this bear to active equity investing? To the best of my knowledge, the seven powers applies to all businesses everywhere. Furthermore, it is founded on fundamental business value, which also concerns a large class of investors. Does this mean that utilizing the seven powers can result in alpha for investment in any company? Of course not. In nearly all cases, both the potential for power and the size of the market are sufficiently evident to astute investment professionals. In particular, they can often be found in the
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markets of historical financials. Alpha depends on exceptions to the semi-strong form of the efficient market hypothesis. You need material informational advantage. In these cases, the seven powers offers no such advantage. The only places one might expect alpha from applying the seven powers are those situations in which such transparency is not the case, opacity in other words, and that such opacity is penetrable by the seven powers. A primary driver of opacity is high flux. If a business is in a fast-changing environment, then the information-facing investment pros tends to have much higher uncertainty bars regarding future free cash flow. But high flux also attends the sort of conditions which orbit the value moment. So if the seven powers can lead to alpha by identifying power in these situations, ex ante, it also promises to be useful in doing the same for those inventors on the ground, trying to find a path to satisfy the mantra. So how have I done following this approach? Have I been able to deliver alpha? My active investing records go back 22 years, But I will be brief in answering those questions. I have daily portfolio returns data for all the 4,664 trading days I was in the market. Dating from the beginning of 1994 through 2015, my year-by-year annual gross returns are shown in figure 8.10 in the supplementary PDF. So, for these 22 years, I was fully in the market for 17 years, partially for 3 years,
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and fully out of the market for 2 years. For the 20 invested years, 17 full years and 3 partial years, my gross returns exceeded those of the market for 14 years, and underperformed the market for 6. Over these trading days in which I actively invested, I achieved an average annual rate return of 41.5% per year versus 14.9% per year for the S&P 500 TR. So on average I outperformed the S&P 500 TR by 26.6% each year. However, my highly concentrated approach results in a different risk profile than that of the market overall. So we should also look at a risk-adjusted return. One way to do so is to take out the effects of the market overall, beta. This yields an average annual alpha of 24.3%, 9.1 basis points of alpha per trading day on average. Because of the high concentration, my approach has higher volatility, 31.6%, versus 15.8% for S&P 500 TR when annualized. An informative way to assess the risk-reward associated with this is to calculate an investor's prospects of beating the market. To do this for all 4,664 trading days, I calculated the risk-return profile. 1. Risk What was the probability of underperforming the market if an investor had stayed with my approach for 1, 2, 3, and 4 years. 2. Return. What would have been the average annual rate of return over those 1, 2, 3, and 4-year periods?
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Figure 8.11 in the supplemental PDF displays those calculations. indicate that, historically, if you had invested based on this approach and continued with that investment for four years, you would have had about a 3% probability of not outperforming the market. This was your risk, and the average return for a four-year hold outperformed the market by about 30% per year. This was your return. So based on both these measures, utilizing the seven powers has historically delivered unusually attractive returns over an extended period. I know of no other strategy framework with this outcome. Thus, the seven powers seems to have been differentially acute as a tool for identifying the potential for power X and P in high-flux situations. This provides additional assurance in its utility as a cognitive framework for business leaders and ## Chapter 9: The Power Progression their crucial value moments, which are also inevitably high-flux. Chapter 9 The Power Progression Turn, turn, turn. Intel starts from scratch. In my introduction I use the case study of Intel to demonstrate the primacy of power
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