Michael Mauboussin: Where do we find higher returns and what drives them?

Michael Mauboussin and the team from Counterpoint have just released a new report in which they review five areas of micro- and macroeconomics that they believe drive increased returns.

Most forms of increased returns are deeply intertwined with the emergence of intangible assets, which can scale faster than tangible ones, but are also harder to protect.

Over time, the emphasis of economics has been on how returns decrease toward an equilibrium between price and marginal cost. There is a great deal of empirical evidence for decreasing returns. Businesses with high ROICs tend to see their returns revert toward the opportunity cost of capital over time. This is especially relevant for sectors that rely predominantly on tangible assets. […]

This report discusses five forms of increasing returns. They tend to overlap and are useful to understand in the context of industry formation, market structure, international trade, and economic growth. All of them have relevance in the investment process. Increasing returns shows up as rising ROICs and high market share.

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