One problem with Indian capital risk return matrix

One problem with Indian corporate and their regulation can be summed up in the chart below.

Ideally a simplistic capital risk return matrix looks like this (click picture for larger version). In the best of places it comes close to this. Note that this is a simplistic depiction.

Ideal Capital Risk-return matrix

In India, it looks like this:

Indian Capital Risk return matrix

This is law enforcement issue as well as information issue. There is lack of regulation on conflict of interest between promoters and investors (small and big), there are many issues related to corporate governance. There is paucity of information to ratings agencies and these days the rating rigour is under a cloud with intense competition.

The chart also tells us why India does not have a deep bond market. Since my days in CRISIL, we have been harping on the improving the depth of bond markets. But so long as the risk-return profile continues there are no incentives for it.

The dispute resolution mechanism is abysmal. It is particularly unwieldy, long winding, costly and infructuous in the end. This has hurt investment in the country. Once this is fixed India will have unprecedented growth in equity and bond investments.

---

Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

Questionable Promoters' action

Deepak Shenoy from CapitalMind has an excellent blog and website. His post today titled Jubilant Backtracks From Paying Promoters For Brand They Don’t Really Use deals with some questionable actions by the Bhartias. Below are edited quotes from that article.

Jubilant Foodworks and Jubilant Life Sciences in a board meeting, they proposed a 0.25% royalty on consolidated sales for using the “Jubilant” name , to each of the companies.

To give you a perspective Jubilant Foodworks is franchisee operator for Dominos and Dunkin Donuts both well known US brands. Jubilant Life Sciences is a pharma company in generics and contract manufacturing.

The article further details various business groups doing this activity in some form or other. The two prominent ones that are missed in that discussion are the Aditya Birla Group and Kingfisher. Here are some from the article:

• Royalty from listed companies - 
• Colgate from Colgate India (4.8% of turnover) 
• Unilever from HUL (3.15%), 
• Dominoes from Jubilant Foodworks (~3%), 
• JSW Steel to Wife of Promoter (INR 1.25 billion)
• Tata from Tata companies using Tata name (0.25%) 
• Tata from Tata companies not using Tata names (0.15%)
• Muthoot group
• Shriram group
• Wadias (intending) from Britannia Industries
• Loans to promoters later written off
• Network 18
• DHFL (Alleged)
• Merging promoter companies with listed ones at unclear valuations
• Satyam
• JPAssociates
• LEEL
• Eon electric (attempted)
• Vedanta
•  
• Financing Promoter lifestyle
• Raymond - maintaining Raymond House

I do not like these kinds of "promoter earnings". You are either a promoter or an employee - don't be both. These should come within the purview of related party transactions irrespective of their materiality.

---

 Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

Tax as a destabilising force - Border Adjustment Tax

John Mauldin, a prolific commentator, is well connected to the Republican establishment. He has recently concluded a three-part series titled Tax Reform: The Good, the Bad, and the Ugly on the coming tax reform in the US. The parts can be found here - first, second and third. It is a must read. 

The US is trying to simplify tax structures. This, by itself, is nothing new. All the countries have been trying since time immemorial to simplify tax codes. Surprisingly, they keep getting more complicated. I do not think "simplify" means what you think it means. But this time, it does seem simpler. Let us not jump the gun, it is still early days. Let the bureaucrats have a go at it and it will come out as complicated as it has ever been. Nevertheless, the intent seems to be right.

The disturbing part is the way BAT or Border Adjustment Tax is supposed to work. John paints a pretty grim picture and rightly so of the adverse consequences of ill-thought out Border adjustment tax. Mauldin and his friend Charles Gave, both seem to suggest that this move will disturb the present equilibrium. Other republicans do not think so. But there is merit in Mauldin-Gave arguments.

And then I read the US intelligence’s ‘Global Trends, Paradox of Progress’ report. That is another bleak report. What is disturbing is that the world seems to be in a precarious balance at present and 5 years out. Some situations in next 5 years as highlighted by the report:

Now the timing of BAT by Trump has become exceptionally crucial. At times in history you get amplified impact because historically small acts happened at unstable times. Here we are faced with a big act at unstable point. In effect, we are beholden to Trump's good sense, pragmatism and sense of leadership.

Interesting times these.

---

Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

Is India still rising?

I came across this superb talk by David Mulford, former US Ambassador to India given in October 2016. Some positive highlights (I paraphrase):

1. India is a genuine democracy unlike China or such other countries. The data is more dependable and governance is more transparent, unlike non-democratic countries.
2. India has leapfrogged the fixed line telecom revolution by going to mobile directly.
3. India is also likely to leapfrog the credit card system.
4. India had the best monsoon 1954 this year.
5. The way to look at India is not to compare it with China, Singapore and others but to think of India as 19th Century America with robber barons. 
6. India has a service-oriented economy but Modi is pushing for manufacturing. Many of these projects particularly in defence and technology will materialise sooner.
7. By the enhanced transfer of funds to State Modi is trying to create competition between States for growth. Young people are joining the state politics and the political climate is likely to see a drastic change. India constitution is explicit as to the division of powers between State and Center and that helps the political leadership in the states to set correct goals.
8. Religious stability is high in India. Despite having about 250 million Muslims, Indian Islam seems to be softer and therefore radicalisation is much lower.
9. Cooperation between US and India increased after the 26/11 attacks (hotel attacks as he calls them). FBI teams from US helped Mumbai police. Some cooperation as to how to coordinate intelligence between local-central agencies is being shared.
10. India's Nuclear disaster liability law is not correctly worded which has prevented capital from coming into the country for nuclear power. The liability currently is on the suppliers and not the operators.

It is a must watch.

---

Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

Hussman's timing may be wrong again!

John Hussman predicts epic stock crash in his recent newsletter. He says:

The financial markets are establishing an extreme that we expect investors will remember for the remainder of history, joining other memorable peers that include 1906, 1929, 1937, 1966, 1972, 2000 and 2007.

He follows up with another gem:

Enlightened members of the FOMC should even question the theoretical basis for their actions. The Phillips Curve is actually a scarcity relationship between unemployment and real wage inflation – basically, labor scarcity raises wages relative to the price of other goods (see Will The Real Phillips Curve Please Stand Up and the instructive chart from former Fed governor Richard Fisher in Eating our Seed Corn). That’s the only variant of the Phillips Curve that actually holds up in the data, and there is no evidence that this or other variants can be reliably manipulated through monetary changes.

Only long-term sustainable, predictable employment creates a turnaround. Till this I agree with him. Now comes the crucial issue of timing. Here he says:

They want to believe that the Federal Reserve has their backs; that as long as the Fed doesn’t explicitly hike interest rates, the market will move higher indefinitely. We saw one question last week that asked “What if the Fed doesn’t raise rates for another 20 years?” Let’s start with an aggressive, optimistic estimate. If we assume that despite conditions warranting two decades of zero interest rates, nominal GDP and corporate revenues will grow at their long-term historical norm of 6% annually over the coming 20 years, we would expect the total return of the S&P 500 to average about 5.5% annually over the next two decades (see Ockham’s Razor and the Market Cycle for the arithmetic behind these estimates). Even in this optimistic scenario, to imagine that this path would be smooth would have no basis in history, requiring the absence of any external shock for the entire period (and I’ve already demonstrated, I hope, that many of the worst market declines in history have been accompanied by Federal Reserve easing).

If Fed hikes, it will interfere with the risk equation causing "a breakdown in market internals" as Hussman calls it causing precipitation. But it is unlikely that Fed will hike. Fed may experiment with a token hike but may quickly reverse. Or, more likely, Fed will signal a prolonged pause (lasting more than a year or two). 

If Fed does not hike, things won't be as simple as 5.5% annual growth. It will be more. The past data behind this calculations comes from low monetary expansion era. When there is a flood of money, prices should inflate commensurately. Thus, if Fed does not hike,  S&P may average annual growth of ~10% or more for few years. 

Hence, S&P may double from here before Hussman's prediction comes true. We, no doubt, are establishing an extreme. We are confounded by its extremity.

---

Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms". 

What we need to estimate effects of multi-country QE?

I was thinking about ways to estimate impact of QE on potential offered by different equity markets in general or asset markets in general.

Currently we do not have money inflow metrics (i.e. indexed price and volume data) for all asset classes. Nor do we have an exhaustive asset class database (types of asset classes e.g. art). Without these metrics it is difficult to construct a true impact of QE on global markets in general and specific markets in particular. Maybe someone can construct some sort of blended index.

I suspect when we do construct some quasi-indicators we will find that M3 has grown disproportionately with GDP and the difference can be explained by blended asset class inflation.

Once the global effect is understood, the specific country level effect can be understood using a parametrized gravity model. Such model will tell us how the excess liquidity will move. 

---

Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

Double whammy of withdrawal of funds from emerging markets

In the past few trading sessions, there has been a considerable withdrawal of funds from the emerging markets. We can attribute this to two basic reasons.

Firstly, we have seen reduction of QE from $85 billion to $65 billion in the last four months. Secondly, we have seen an upward pressure on interest rates in the developed world. These two factors have combined to create A double whammy. At the time when funds are scarce, we have a reverse potential difference that is pulling money towards developed markets. This perverse situation will lead to substantial abatement of money flows from emerging markets to the developed markets.

In addition, there is already in place, an incentive to emerging markets sovereigns to invest in developed market treasuries for mercantilistic reasons.

I believe, these three forces will lead to substantial correction in equity markets in developing countries. Hence, we will see drastic correction in Indian equity markets. I also think, the same logic will hold for other developing countries.

I will be trying to close my open positions as soon as I can. Let us hope that we are able to ride out this turbulent phase. However, I do not think that this turbulence will last more than three months. Therefore, it is essential to get into the market say around end-April.

---

Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

NIFTY in 2013 chart

The Nifty over in 2013 did something expected - it did three peak- two troughs ~ 2.5 cycles in one year as shown in the chart below.

NIFTY over 2013 calendar (Bloomberg.com)

Following are the interesting points to note:

Firstly, the amplitude of the first cycle is smaller than second cycle. I see this increasing over the next year. Thus, in 2014, Nifty will have at least 2.5 cycles each with amplitude at least as much as the second cycle of 2013. It means a lot of volatility which is positive or negative depending on how you look at it.

Secondly, the time between the two cycles is quite small and there was a muted volatility (bearish lull between End Jan to Mid April and bullish lull between end oct to Dec). I see this muted periods getting compressed. In effect we may have crudely speaking one more cycle in 2014.

Thirdly, if you see the underlying macro/micro data it has generally worsened over this period though we are near to all time highs. It is quite parallel to US equity markets.

---

Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

Baltic Dry Index's positive prediction

Have a look at the following chart of the Baltic Dry Index.

I am particularly enthused about BDIY's recent uptick. BDIY was a very strong indicator of Global Trade and economic strength before it lost a bit of credibility in the post-Lehman crisis. The reason I am excited is this:

1. Shipping industry went through one of the most intensive asset building phase between 2006-2010 with almost double the DWT built as was existing.
2. This industry-specific weakness was coupled with economic weakness stemming from the global financial crisis.
3. The Oil-accumulation during post-Lehman phase provided some respite but it tarnished the image of BDIY as predictor of economic performance.

I think the disturbances in BDIY are past us and its present uptick does bore well for us. This means it is time to dip your toes into shipping cos. In India I would go with Shipping Corp [which I have from the previous high :(], Great Eastern Shipping. These companies should benefit from the Iran-Iraq Oil deal.

We need to watch for any global weakness and potential head-and-shoulder formation as happened in 2010.

---

Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

NYT Chart GDP, stock markets for key countries 2008-2012

Super chart from NYT about GDP, stock markets for key countries between 2008-2012. Following points of interest:

1. Remarkable correlation between markets with different GDP movements. To me that points to singularity in source of money pushing the markets.
2. Indonesian markets are substantially bullish. Someone must have made a ton of money there. Conversely, it signals time ripe for reversion.
3. Britain stands out among those countries with declining or negative GDP and stands with US and Germany rather than Japan, Italy or Spain. Again remarkable correlation between Italy and Spain surprised that there is no time difference in the moves since their economic future will not be as coincidently timed as their markets.

---

Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

Problem of Indian Economy

The problem of Indian Economy needs to be explained better.

Imagine the economy as a car (favourite of economists). The car has an engine of 4 cylinders (say). Then process of policy development adds cylinders to the engine. Thus, with prudent reform and policies the 4-cylinder engine economy can grow to become 6-cylinder engine economy. This is achieved while the 4-cylinder engine is still working and therefore is a complicated process.

First set of problems

Indian Economy is a car with 4 cylinder engine (as against US economy which could be 16 cylinder or China could be 12-cylinder etc). This engine is capable of growing at ~7% steadily. But to grow at 9-10% we need a bigger engine. Sadly, the Indian politician has no inclination to undertake these reforms.

Second set of problems

To add to our woes, the 4-cylinder engine itself is not running to its capacity. Not all cylinders are firing, brakes are engaged slowing the economy and there isn't enough lubrication to transmit all the engine power to the wheels. As a result we are finding it difficult to hold on to 6% GDP growth. Here again the problems are created by political class.

Solutions

In times of global macro-economic distress, one expects politicians to at the very least avoid second set of problems. In corporate lingo, these can be solved by "de-bottlenecking". In other words just simplify the procedure and keep policy clear and simple and you will have solved second set of problems.

Tackling first set of problems is going to be difficult and will need decisive political leadership that sadly is not even available on the far horizon.

 

---

My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.

Indian Economy: Difference between 2001 and 2012

The difference between Indian Economy of 2001 and 2012 relates to how demand and policy are inter-related.

In 2001, policy certainty (directional certainty) helped drive investments when demand was yet not established. In 2012, demand is well established but it is the lack of policy certainty (again directional) that is preventing investments.

Thus, if India can sort out its politics it can gain quite a bit in a short time. Meaningless ambivalence about policy has condemned India to low growth seen recently. Hopefully the 5.3% quarterly GDP growth may wake the government from its slumber.

---

My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.

Investors are at the gates - When will India open them?

One of the big problems driving Indian inflation is lack of investments. The investors are here; the question is where is the government. 

How to get investments?

First rule of investments is that higher uncertainty should be compensated by higher return potential of investment. If the return available from the Indian market is given then government can increase investment by reducing uncertainty. 

Indian government is doing exactly opposite.

In general government is failing on many levels and the Indian courts are able to stem the erosion in some areas but in critical policy areas the constitutional arm of government, the RBI, is not empowered to do much. And it has done all it can. Sadly RBI cannot undo what 8 years of inaction has borne to bear. 

Policy nuisance 

The current UPA government came after 5 years of NDA rule. The NDA government had good alignment of strategic direction and policy follow-up. In the first term,  the UPA government was befuddled with coalition issues thereby creating policy ambivalence. However the developmental inertia of previous NDA terms proved beneficial in hiding the policy ambivalence. However the second term is characterized by lack of strategic direction in policy. The policy, rather strangely, is moving in the opposite direction in general. The haphazard manner of conducting policy has confused investors, both domestic and foreign. If the government just stops this policy nuisance we can hope to hobble along a reasonably correct path.

Knowing Congress - future is bleak

The most reasonable forecast is bleak. The only possibility is that a looming crisis may kick the government into action. Just like Churchill's America, at the very last, India will do the right thing. So here is waiting for the crisis, hoping for the dark clouds to see some silver lining... 

---

My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.

Follow up to S&P rating negative outlook

After the post some people wanted to know if my forecast has changed. Quite the contrary, I think S&P rating outlook downgrade may signal the upcoming improvement in equity performance.

So I think: 

1. A revival of sorts may happen by July this year, peaking around December.
2. Analysts will start upgrading around October by which time I expect the move would be reasonably underway.
3. I think a good strategy should be to invest in any weakness.

---

My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.

S&P putting India rating outlook to negative - comments

Everyone knew that India's situation is precarious. Lack of reforms, rising fiscal deficit and lack of focus from a dream-team that brought in first wave of reforms. So it is hardly a surprise that India's rating outlook is changed to negative. It is made big news, was shrugged off by the markets. But it deserves a few comments.

It ratifies that India's policy direction has reversed signifying the third phase of reform process - reversal. Between 2001-2004 the direction of policy reform was positive. Between 2004-08 there was a policy logjam, primarily attributed to stifling policy of the Left parties. However, post-2008 the policy environment has turned adverse despite no participation by Left in present government.

The current policy environment is typically familiar territory of Congress party - it is a poisoned policy environment. There are arbitrary decisions (Spectrum allocation), abnormal legislations (retrospective tax liabilities), populist measures (NREGA, reversal of first fare hike in 8 years in Railways), arbitrary intervention in infrastructure sectors (under the heading of environmental clearances - POSCO deal), gross corruption aimed at filling the party coffers (commonwealth games scandal), disregard for law and order particularly by government, etc.

To top it all, no change of policy-scene is likely in future despite the promises of finance minister and Prime minister. These people were not waiting for S&P to turn negative before bringing in the main reforms. They do not want reform.

For everyone, investors, general public, firms, foreign investors etc, consistent long-term strategic direction about policy is more important that precise current policy regime. It is immaterial if you have high fiscal deficit, but it matters if you have no plan to come out of such deficit. It is immaterial if there are high taxes so long as there is a progressive clarity in tax laws and consistency in application.

In all, the only change possible is that this government is defeated and subsequent government will bring in a clear long-term strategic view to policy making.

---

My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.

Elite Bonds are equivalent to sub-prime SIVs

Germany and France are mulling elite bonds - essentially government bonds issued by AAA rated countries of EU to finance sub-prime countries of EU.

I read this as equivalent to sub-prime SIVs at the height of Sub-Prime Crisis. At that time, sub-prime loans were bundled with prime loans to create a fiction of higher ratings. The assumption was that these individual component loans are not correlated.

I see the same problem with elite bonds though mechanism is a little different. A curtain is drawn over the component EU states to give illusion of AAA ratings to the Greek Debt. If we have learnt something from the sub-prime crisis this bond issue should fail. 

However, I don't think we have learnt any thing from it. So prepare for a Christmas surge in global equity markets.

---

My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.

India view: Brace for flood of money

I must be sounding ridiculous but that is exactly what I expect to happen in near future. If the developed world investors are keen to retain their wealth, which they are, they will want to move to economies where conventional growth is still possible.

Conventional and unconventional growth

Conventional growth refers to well understood process of growth. In the emerging economies, we know what needs to be done. We need to build infrastructure, power plants etc. That investment will trigger efficiencies which will push EM economies on to a growth path. The history of development of the western world provides the understanding of this process and there is ample evidence as to what works and strategies for growth. This is the opportunities wealth retaining funds will eventually seek as compared to unconventional growth in developed markets.

I have argued previously that growth in developed markets will depend on two forces. The first is renewal and maintenance of infrastructure that already exists and second refers to the new kind of infrastructure and development that is essential. The new kind is uncharted territory and requires patient capital the likes we deploy in R&D. Possible candidates are Water-related infrastructure and forestation related investments. I call them Green and blue options. These investments are more of the Private equity variety than what normal funds would like.

The coming money flood in EM
The money eventually has to move to EMs before EM economies adjust their currency regimes reacting to resultant imported inflation. That implies funds will compete to reach EM shores, in all probability, creating a sharp uptick in EM equity markets.

My strategy
I am going all in as the markets decline. My focus is domestically driven revenues. It means I am avoiding Indian IT companies for strategic reasons. I find Indian consumer goods firms a bit over-valued, though I own telecom stocks as proxy for consumption story for short term. My focus is on infrastructure stocks (GVK, L&T) and banks. I am not very sure about Indian asset valuation story so I am staying away from real estate (except for occasional  short term high risk investments in Unitech which appears to be below its liquidation value). I expect the sector to start turning around when housing deals start happening on ground. I believe that should take 3-5 years at least. However, I do like Indian Hotels which, I believe to be a well managed company with sensible management. I do expect domestic auto firms (Tata Motors, Ashok Leyland and Maruti) to become big players in the coming decades and their current valuation provides a good entry point. In all above cases I am betting on liquid names and large volume stocks only.

It is possible that I am early and will need to hang on to the strategy for a little while. Let us see how things go from here.

---

My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.

The June uptick in Indian markets

BSE Sensex June 21-28, 2011, Google Finance

We have clocked 3 days of super-normal uptick in Indian stock markets. Just as I was not clear about what spooked the Indian markets a few days before on June 20th, I am not sure what has gone right since that time. 

I think, with respect to Indian markets, we are entering a period of volatility in the Indian markets. The reasons are plenty.

First, it is now a consensus view that inflation will move to double digits soon. What is not understood is real life meaning of this stubbornly high inflation extending beyond two years now. The price acceleration that is implied by continued higher inflation will either impact corporate margins, or impact demand i.e. revenues, or both. To complicate matters further, the investment required for supply-side easing are not coming through. Corporate India is reluctant to work on their long term capacity addition plans. This is clearly not a situation where markets should be heading higher.

Second, there is impending specter of Euro-crisis going out of control. Europe is a huge market for Indian exporters. A slowdown in this area will have a shake out. Even excluding Europe, global demand picture looks soft.

Third, the recent fuel price hikes have complicated the fiscal situation. Indian fuel pricing and tax structure is needlessly complicated. The crude imports are taxed, processing is taxed, there is a sales tax and service charges. Ultimately, the whole oil business contributes substantially to the governments kitty.  Any altering of the tax structure is negative for fiscal deficit which is already under stress.

All in all, there is no reason for the markets to behave as they are behaving. While I dipped a week ago at the lower points, I believe there is still down-side risks. We haven't yet completed the correction we were in.

---

My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.

What spooked the Indian markets yesterday?

NSE Nifty-50 India June 20, 2011

Yesterday, Indian markets tanked in the first session. Look at the adjoining chart of Nifty, which is broader 50 stock index and more liquid. Popular media identified the reason as renegotiation of a tax treaty between India and Mauritius. I don't believe it. I think this is an example of retrofitting explanations. 

First, look at the reason. Tax treaty being negotiated has been under negotiation since 2006. The negotiations broke down in 2008 and resumed earlier this year. There has been no meeting, no discussion and no rumor that the treaty was signed. I don't think investors are as idiotic to sell-off on this kind of event. Can we assign it to irrational behavior? I don't think so. If it was a precipitation of Greek crisis I could assign it to irrational behavior but not this. This is pure idiotic if traders have behaved the way did. I simply cannot believe people who pulled the trigger were looking at the treaty. The treaty negotiation news conveniently broke at the wrong time.

Second, some rudimentary analysis of treaty will tell you that Mauritius government is against taxation or sharing crucial information (though they have agreed to collaborate with Indian agencies on investigations). Further, most of Indian bureaucrats and politicians have routed money back through Mauritius. In effect, both sides of the negotiating table do not want capital gains tax or information sharing. So not much is going to be achieved on the treaty front. A rudimentary analysis will tell you this.

Third, look at the sharp fall with volumes. I guess a first trigger is through some algorithm at play rather than a thinking trader. The later drop down is more from margin calls being triggered than any fundamental issue. It is possible the algorithm may have estimated a fall to 5275 levels and adjusted to this very quickly triggering a panic in the process. It looks more like a work of computer than a human being.

In sum, I do not think a flesh and blood trader could have dumped that much volume in that short a time on that news. Alas, in the din of media drums the real explanations may be lost for ever. 

---

My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.

Geoffrey West on corporation and cities onEdge.org

My day was made when I read the edge piece today. Geoffrey West, professor, talks about interesting aspects of Why Cities Keep Growing, Corporations And People Always Die, And Life Gets Faster.

As an investor, company life-cycle represents a lesser-debated frontier. Analysts tend to rely on the accounting view of going-concern. Yet, the permanence we take for granted is a mirage. However, understanding when the decline of the firm comes about is easier said than done. 

Dr. Geoffrey West points to yet unpublished (and still being verified) work that says firms scale sub-linearly. In other words as firms get bigger, they become less profitable and they eventually perish. Compare this with cities (which he discusses before firms) that grow super-linearly. In other words as cities get bigger, they become more beneficial for its inhabitants. So then, should investors stop companies from growing? And how should one view the increase in scale. 

I think as investors it highlights a very important and much neglected area.

---

My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.