Sit back and let the bots, MBAs and consultants slug it out

The writer is a former head of responsible investment at HSBC Asset Management and previous editor of Lex

What a time to be a business columnist — and thank goodness I’m not one. Having to ponder what chatbots mean for companies the world over is some ask. Bill Gates calls “generative AI” as important as personal computers or the internet. A thousand words by Monday?

Then something on the latest MBA rankings, please. Also this week the management consulting industry took a pummelling in the new book The Big Con. What do both mean for employers and their staff? Argh!

Writing about investing means I don’t worry about such things. Will Alphabet be dethroned by Microsoft? Let’s see. Which business schools produce the most chief executives? Yawn. Are McKinsey, Boston Consulting Group and Bain worth the fees? Dunno.

These are key stories, obviously. But the understanding of companies isn’t so important when it comes to investing. Likewise, how firms are run doesn’t move aggregate returns much. There are plenty of good reasons to do an MBA or hire a management consultant. Ironically, however, performance ain’t one of them.

While it is obvious the rise of ChatGPT has different implications for different businesses, knowing what these are ex ante is impossible. Hence why 63 per cent of active equity fund managers underperformed their benchmarks last year in Europe, according to Lipper.

And the winners are always few. In a 2018 paper in the Journal of Financial Economics, for example, Professor Hendrik Bessembinder analysed the returns of all companies listed on the NYSE, Amex and Nasdaq exchanges from 1926 to 2016. Total net wealth created was due to just 4 per cent of the 26,000 stocks.

That is why I recommend only investing in passive funds. Then it doesn’t matter if everyone switches from Google to Bing to Baidu — or if they don’t. Yes, my portfolio will own loads of dud companies along the way. But the handful that smash it out of the park should more than compensate for the swing-and-missers.

Which brings us to those MBAs and management gurus. Why are there so many poor-performing shares when 250,000 students are enrolled as masters of business administration each year? And what’s been gained from the almost trillion dollars per annum spent on consultancies worldwide?

From an investment perspective, nada. The average real return for US equities over the previous 30 years is 6.7 per cent. As it was when calculated in 2000, 1950, 1909 and 1876 — to choose just a few dates from data compiled by Jeremy Siegel.

So many expensive lectures on leadership and cash flow. All those PowerPoint decks. For what? That equity returns are more or less stable is intuitive. When they are high, investors pile in and there is less to go round. Too low and capital exits, leaving more on the table.

That is not to say humanity isn’t better off. The quality of products and services, from phones to eye surgery, improves each year. Companies have scaled-up volumes and shortened delivery times beyond imagination. But again, that’s a business story, not an investment one.

Profit margins have risen in most developed markets since the early 1990s. But as with equity returns, profitability seems to fluctuate around a mean over the long run — albeit glacially. Excluding depreciation, US profits as a percentage of gross domestic product were in gentle decline for 50 years before 1992.

That earnings don’t go up forever also makes sense — no matter what Deloitte or KPMG promise their clients. The Kalecki-Levy profit equation, first described in 1908, reminds us that income is produced by companies, households or governments. Simply put, firms can only grab more of the pie by taking it from the other two. Assuming constant government spending, household savings must contract. Given they’re customers too, profitability is capped.

Great innovations do boost productivity though — especially on the mass market. Like steam engines or biotechnology, the hope is that chatbots become one of these so-called “general purpose technologies”. Productivity helps boost economic growth and ultimately stock markets.

So fingers crossed for an AI revolution with MBAs and management consultants leading the charge. It will be noisy and bloody, with victims galore. Companies and perhaps entire sectors will lose their heads.

But it was ever thus. In the same 90-year study above, the average life of a stock was 7.5 years. Thankfully, however, we investors can view the action from afar, reading the odd dispatch from overworked business columnists, knowing we’re richer whatever the outcome.