Entropy and Mean Reversion
As someone with admiration for the fashion house and brand Brunello Cucinelli has built and who has written about the Italian entrepreneur in this space in the past, I was taken aback to read allegations that his namesake company has (1) continued to sell products extensively in Russia in violation of E.U. sanctions relating to the conflict in Ukraine and (2) become so bloated with inventory that it was liquidating items with TJ Maxx. Because neither of these are actions that an enterprise that seeks to “protect quality, reputation, and margins at all costs” should or would take.
The company has, of course, denied the accusations, but the evidence also seems compelling (read both and decide for yourself). I’m sure there will be investigations. Maybe the truth will come out. (Also: apparently now is the time to score Italian luxury goods at TJ Maxx…Jeff City here I come.)
Two things I believe in that make me not so fun to be around at parties are entropy and mean reversion. So the fact that Brunello Cucinelli has so dramatically outperformed the global luxury index over the past 5 years at a time when a market (Russia/oligarchs) that once accounted for almost 10% of its revenue was supposed to go to zero does seem suspicious on its face.
Of course, one reason for such dramatic outperformance could be operational excellence. And the world is a better place when we have that. But another is cheating. And even in cases like this one with an absurdly unfavorable risk/reward profile if one were to get caught, I fear the practice is more common than we think.
– Tim
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