Market Mechanism 2

This is in addition to the previous post on the market mechanism. Briefly, it’s the idea that competition erodes the value captured by the producer.

Barry Ritholtz asked Morgan Housel about what he wished he knew when he started. Housel responded, “One thing that sticks out is that good investing is not about being good at something but you have to find something that other people are bad at. The fact that you are good at modeling does not necessarily make a difference because a lot of people are good at that.”

This, said Fredrik DeBoer, is part of the myth of college. One way to avoid the squeeze of the market mechanism is to have a rare skill. In Housel’s words, to be good at something other people are bad at. People are compensated by what they know, proxied by a degree, then a graduate degree. More degrees more (proxied) competition.

Success is found, said Hamilton Helmer, in the durable. “If you do something better, the question is, ‘How can this be durable?’ There has to be something that prevents others from taking all of that away from you.” How can you avoid the market mechanism creating a commodity?

It probably will happen too. Rufus Peabody said about gambling: “I used to bet second halves in college and professional football. That used to drive my yearly earnings, it was an ATM machine basically. But the last three years I’ve basically broke even there and may not continue running the models because the inefficiencies that were there are no longer there.”

Profits attract competition, competition drives profits and prices down. The market mechanism is Santa for the consumer and saboteur to the producer.

There’s one way to avoid the market mechanism; attract less competition.

Movies, wine, investing, and sports all offer financial and psychic income. That’s a double dose of the market mechanism once someone sniffs out the potential rewards. A cooler choice might be digging pools.