MF DOOM, Delivery Apps, and The Split

In an effort to get one last twist of the knife in before the buzzer, the final day of 2020 delivered the news that the legendary hip-hop MC known as MF DOOM (and King Geedorah, and Viktor Vaughn, and a variety of portmanteau aliases reflective of his collaborator(s)) had passed away back on Halloween. The “your favorite X’s favorite X” cliche is overused and typically not quite reflective of reality, but MF DOOM might be the exception to the rule*. The supervillian of hip-hop, it is hard to understate the absolute tear DOOM went on from 2003 to 2005, putting out 6 studio albums that ranged from “very good” to “very, very good” to “in the discussion for greatest hip-hop album of all-time”. It’s hard to state just how much of an impact he had on the genre and the subsequent generations that came after him: MF DOOM was hip-hop, and hip-hop was, in part, shaped MF DOOM.

In a time where popular hip-hop dealt with ostentatious displays of wealth and status, MF DOOM lurked in his underground lair, building his army of rhymes and beats from the foundations of the genre. Artists like 50 Cent. Lil’ Jon and the Eastside Boyz, and even stalwarts like OutKast had pivoted to showing off and flaunting what they had earned. The mainstream style had become fully entrenched in money, power, partying, and other status signifiers, again and again and again. Eventually the public burned out to the same offering over and over with minimal tweaking, leading to those whose success was fully entrenched in the style to flame out and fall off the radar**. At a time where someone as talented as MF DOOM could have altered his style to tap into that vein of popularity, he instead chose to stay off the beaten path and do what he wanted to. It might not have led to capital wealth at the time, but his legacy and legend grew and grew over time. In essence, he found an under-utilized corner of the genre that fit in well with his own style and ethos and made his mark. The popular style in the genre has shifted and morphed time and time again since his peak, but DOOM’s music is resilient by refusing ties to the ebb and flow of the mainstream.

This rejection of the popular flow is something that is becoming more and more relevant today, as we’re seeing convenience usher in a limited set of choice. Take for instance delivery apps in general, or grocery delivery apps specifically. The convenience of ordering your groceries from home and keeping random interactions down in the time of a global pandemic has huge upside. However, many of these services offer a limited range of items that can be picked up. Even those that have the full suite of offerings from a store reduce the possibility of randomly chancing upon a new brand of honey or a different type of pasta. It’s not just groceries: alcohol delivery apps are limited in selection and reduce the chance of happening across a new bottle of nice rum because it sounded appealing. In providing convenience, we’re sacrificing flexibility and chances of a new, virtuous pathway. In fact, convenience could be leading to a vicious cycle: popular offerings become more popular because they’re more-represented in these platforms, which leads to quality smaller offerings dying off, increasing the popular offerings’ share, and so on. No knock against the popular offerings, but limited choice in any industry steers very closely toward a lack of innovation or improvement that typically accompanies industries ruled by a monopoly or near-monopolies. The split between those in the loop and those out of it is born and begins to widen.

This trend is becoming more applicable to investing with the rise of ETFs. Before the Bogleheads come to claim my cranium, I’d like to state that I am a big fan of ETFs. I think they are one of the greatest innovations that the industry has made in the past few decades, their democratization of the field is gamechanging, and the portions of my equity investment portfolio not dedicated to testing Novatero funds and fund ideas are pretty much entirely in ETFs. However, as the rise of popularity in ETF investing increases, the weighting of the investment landscape is distorting. A majority of ETFs are “passive” ETFs: they track the performance of a benchmark or an index. For instance S&P 500 ETFs such as VOO and SPY track the S&P 500, offering the ability to invest in the S&P 500 without having to buy into every individual stock in the index, rebalancing them when companies are added and/or removed, and offering the position at a price that is a fraction of what it would take to hold positions in all ~500 offerings.

But the S&P 500 is not the be-all, end-all of the market, and as the percentage of investment into these companies grows and grows, it unbalances the traditional balance of investments in the market. This leads to ETF providers owning an ever-increasing share of the market, the removal of competition and liquidity in the market (if everyone is in the S&P 500, how will other others move into/out of non-S&P 500 stocks?), and a lack of incentive for companies to continue to innovate to keep their positions in the market hierarchy. It also bakes in a reduction of diversification into portfolios, causing risk to increase beyond what would typically be expected and could lead to a decrease in expected returns or, even worse, a bubble in index ETFs.

The bright side is that non-index strategies become more valuable during these times. The bifurcation of the market into passive ETF and non-ETF equities leads to an interesting development: passive ETFs take all the size and see a reduction in their expected returns, while the rest see their behavior start to take on the appearance of a less-developed market. In other words, the relative lack of liquidity makes for prices that are artificially held in place longer, leading to a higher likelihood of mispricing and an outsized probability of getting into a position before a correction vaults the price up (or down). Think of the difference between a ramp and a set of stairs: a more-liquid market is akin to the ramp, where buying into a position at any given point along is a true reflection of its worth at that point. However, with a set of stairs, prices stay at a level before some event (news, quarterly financials, company announcement, etc.) causes the price to jump up to properly reflect its value. It’s very hard to generate alpha in efficient markets, but the less fidelity the market has, the more opportunity to get into a position at a cheap price (or out of an overpriced one). By finding tilting away from indexes and toward novel corners of the market via orthogonal perspectives on financials, industries, capitalization size, etc., one can start to take advantage of the market’s blind spots.

This is the central tenet behind Novatero’s Global Anomalous Index Allocation (GAIA) and Near-term Response to Corporate Heuristics (NRCH) funds: finding a dusty corner of the industry and applying well-established models and methodology to the area to generate a significant amount of alpha. Our focus on a country-by-country assessment or a domestic ESG strategy that incorporates executive stock transactions isn’t some grand revelation, but it provides a new jumping off point that has led to the unlocking of some very powerful alpha generation. As the market schism continues to widen with an unbalanced investment focus, strategies that have novel perspective will continue to perform well, and could even improve as fidelity dries up. It is tempting to just go with index providers, as it is simple, straightforward, familiar, and easy-to-understand. But a little extra work, a little extra education, and a little bit more knowledge will find some very impressive unturned stones.

The coming splits in our world will offer two choices: go along with the majority for the sake of convenience, or do a little bit of work to find nuggets of undiscovered alpha. The masses-and-platform-driven monotonization of shopping, restaurants, and investing will drain the spice and variety out of even the most exotic offering. By taking the time and effort to look beyond the monoliths, one can protect themselves from the inevitable march toward underperformance and risk by keeping their diversification robust. Mass conformity causes extreme growth that inevitably burns out just as fast, while truly great ideas will build up their acolytes in time. Given the choice between a massive one-hit wonder quickly forgotten and an underground success that morphs into legend like MF DOOM, I know which path I’d choose. If you want to come along, just remember ALL CAPS when you spell the man name.

*To get a truer sense of these videos: 1) Yasiin Bey (Mos Def) might be the greatest MC in hip-hop and he’s absolutely geeking out over MF DOOM’s lyrics, 2) Tyler The Creator and Earl Sweatshirt are two current artists who have taken the baton from DOOM and expanded upon his bedrock. The snapshot at 2:37 in the video is a pretty neat “passing of the torch” moment from the original to the current artist who most-exemplifies DOOM’s ability to push the genre’s boundaries into something new yet familiar. 3) Open Mike Eagle is one of hip-hop’s great scholars and has the ability to take apart and discover the inner workings of songs on par with the talent found in a master watchmaker.

**All respect to 50 Cent, who knew that his time as a top artist was temporary. “The 50th Rule” is a fascinating look into 50 Cent’s approach to success and how much his shrewd understanding of the system led to him adopting some remarkably antifragile positioning for his inevitable decline from rap superstardom. It is very reminiscent of Arnold Schwarzenegger’s foray into Venice Beach real estate with his bodybuilding earnings.