Sunday, October 25, 2009
McDonald's Alpha Deception
I would estimate 90% of all alpha is misrepresented. Anyone in charge of a business line making money, is usually too embarrassed by the straightforward nature of their advantage to admit it, so they have to point out some nuance that makes absolutely no difference. Thus, every market maker, making money off order flow, will swear they are adding value 'reading the tape' or trading like a turtle, or some other such nonsense. Finance is probably the worst, because there's so little alpha and so much branding and 'sticky money', that truth-telling is a strictly dominated strategy. If you ask your average financial executive to explain what he does, chances are he won't tell you even if he knows. Further, many are actually clueless. They don't know their job is to provide the appearance of a method to the whims of the main decision-maker, that they fit the right diversity box, or their husband is a senator. Admitting the truth would be too depressing, and the mind is very good at protecting its self image.
Thus, it's fun to see market leader McDonald's brought down to the level of a Jim Cramer. I like McDonald's: it's clean, I like the burgers and fries, my kids enjoy their play areas and have a fairly nutritious lunch (hamburger with apple slices and milk). But their burgers tend to lose adult taste tests against Burger King. Why? McDonald's burgers are primarily loaded with ketchup, which appeals to kids, where BK has more mayo, which appeals to adults. The solution might seem easy, add an option to replace ketchup with mayo. But that would make the burger choice seem much less alpha-like. A burger chain has a reputation, and they carefully project one of having super quality and care, or something outside the box like a square shape, or flame broiling. Heaven forbid they state, these are hamburgers, not steak. They are cooked by people who have trouble remembering to wash their hands after using the bathroom (thus the prominent signs), let alone the ordinal ranking of rare, medium, and well-done. A multinational corporation can't produce a medium rare burger without generating a class action E. coli lawsuit, and a well-done piece of ground beef is about as nuanced (yet still enjoyable), as an ice-cold light beer.
But that's like a finance professor saying all investment analysts can't predict the market. A thriving industry goes on, acting as if they have alpha in every 'buy' recommendation, every burger. Thus, the newest McDonald's creation are their new Angus burgers. They have...lots of mayonnaise. Too much in fact. So, even though they know this is the true 'secret sauce' in the adult burger battle, they emphasize the Angus dimension, and then overload the key ingredient. I prefer the more predictable double quarter pounder with no pickle.
Subscribe to: Post Comments (Atom)
Eric, you are actually very correct. most of money management is done poorly and underperforms, it is confidence/marketing game more than a skill. In regards to your assessment of many practitioners being self deluded, I would have to agree as well. Most don't have or don't want to look at the real source or lack of their "edge".
Angus burger. Hah! This is a CLASSIC commercial by the burger joing "Jack in the Box"
"fairly nutritious" and "clean"? Are you sure you are talking about McDonalds?
I actually eat my burgers without pickles as well. Some people demand a burger without pickles to make sure it's freshly done. Some people say that eating a pickle makes you even more hungry, so the pickle is only added to get people to order more burgers. (In case I go to McDonalds, I order a Big Mac and take out the pickles by myself because I'm afraid they would spit into my burger if I tell them to make one without pickles).
Concerning the cleanliness: Your probably know that marketing books tell you that cleanliness was what made McDonalds so famous. It was their USP (Unique Selling Proposition). Speaking of alpha, how come that there are still so many places around that offer a somehow standardized food as well but look so unclean? It's getting better but is the alpha decay really that slow?
I read somewhere that Julian Robertson actually had lost more absolute dollars in the market than what he has made for investors, given that his last 2 years (00 and 01 I think) was down 50% and that was when he was running >$20bn. I would suspect the same is true for many other of the mega funds. Does anyone have any data on this?
Clean? This must be written by a man who does not live in a major city.
yeah i like the pickle too, but whatever...
can one of you finance knowledgeable people help me with something: when they talk about implied volatility of say 20% that means it could go either way, right? not 10% up and 10% down, but 20% up or 20% down. sorry but have no one to ask.
McDonald's company-owned stores are usually high-quality and clean. Some of the locations, often franchises, particularly in tight labor markets with built-in indiscriminate customer bases (e.g. the McDonald's at a terrible but busy airport) are a sloppy mess. It's a very different store depending on whether they have their pick of teenagers and the uneducated vs. having to hire whoever walks through the door. Growing up in a small town, I had reasonably intelligent and capable friends who had to work in fast food. In a big city/poor-quality restaurant, some of the employees are simply not capable of helping you, because if they were they would have a better job.
"a fairly nutritious lunch (hamburger with apple slices and milk)"
you are Clueless...
That is the meal my kids get, too, I would agree it is pretty healthy. Also McDonalds Happy Meal toys are better than the other fast food places, while the Happy Meal itself is cheaper.
W/o kids I choose Wendy's - 99 cents for a Double Stack, amazing! How the hell can a crappy Chipotle burrito that is 80% rice and beans cost $6.35 when a Double Stack is 99 cents? Also the caesar side salad is $1.49 and comes with tasty dressing, and bacon!
Isn't it a law that the "employees must wash hands" sign must be posted. Regardless, degrading the McDonalds employees is a little snooty.
Post a Comment