Sunday, September 2, 2012

Our Arrogance Hurts Our Investments

Today’s blog may be uncomfortable or argumentative for some.

This is the season of arrogance. With one US political convention over, the next one about to start, and a major hoped-for policy speech from the chair of the US Federal Reserve, each event characterized by speakers proclaiming that they are correct on all issues. At no point during these polemics did any of the speakers ever admit that they have been wrong in the past and that their espoused policies could produce any negative impacts along with their expected good results. Beyond the US, various other politicians are singing the same song and will do so until this election cycle ends in 2013. Think about it, with the exception of our spouses and significant others, do we know of anyone including ourselves who has not made mistakes and is likely to make at least some mistakes in the future? To deny the possibility of human error on our own part is the height of arrogance to me.

We should not assume too much guilt for our individual heights of arrogance; politicians of all types are much more professional in their arrogance. As distinct from the rare statesman or stateswoman, the self-interests of a politician require observing the audience closely. When there is a movement or a high profile issue, they quickly get to the head of the parade and become the loudest advocates as to where the crowd wants to go. People want to ignore deficits, the critical threat to our capital and possibly our well-being and safety.

The imminent threat

The growing deficits with spending in excess of government revenues leads almost inexhaustibly into transferring wealth from private domestic owners to the government and foreign lenders. The transfer of wealth is unlikely to create new wealth through productive investment, but instead goes into immediate consumption. This is precisely where the second stage of our arrogance comes into play. We are all consumers of government provided services, including protection from foreign and domestic enemies, transportation subsidies, healthcare, and useful regulation. Much of what we consume is involuntary such as military and police power. But as individuals we feel entitled to these services. (We thought we paid for them which often not the case entirely.) This is what we think we are “due.” However, many feel that the money the government spends on others because of their unsafe life styles and similar protections and benefits are wasteful and create the shortfall in government revenues. We arrogantly defend our own expenditures and deprecate money spent on others (perhaps less deserving).

Where does our arrogance come from?

From the moment of our birth to the very present, we live in a competitive world. We compete for the attention of our loving parents. In sports we compete for position and rank. In business we compete in this “dog eat dog world.” This week Newsweek published a list of the 25 most stressful colleges. (I am not endorsing the magazine’s methodology or the conclusions that the graduates from these top 25 highly selective colleges will perform the best in life.) What I found of personal interest is that in the case of nine of the colleges, our family or close friends attended or are senior officers. This result gives me an insight as to why so many that are close to me are so intense. They have been trained through the process of generating stress to be strong in their opinions. I suspect that this kind of training in civilian colleges mirrors the stressful training in the military which also produces intense and we hope aggressive military leaders.


When arrogance meets arrogance nothing gets decided as long as there are two or more left standing. What is desperately needed is to attack the low-level of efficiency in large areas of spending. This is difficult and requires important levels of good will on all sides. If we can put a vehicle on Mars we should be able to solve our traffic problems on Earth. Think of the economic benefit to society if commuting and shopping times were greatly reduced! I suspect the use of iPads at an early age could well free teachers’ time to instruct and to bring learning into the home so that parents can participate alongside their children. We also need to have sufficiently stable tax and administrative rules that permit businesses to confidently plan expansion. There are many other ways that we can use our talents to make and spend money more efficiently.

Arrogance and my portfolio

The most dangerous portfolio is one managed out of arrogance. There are far too many individual and institutional investors who have predicted the investment future and will only act when the present conditions meet their perceived future. They could eventually be right, but I doubt it. Over the years I have been blessed with many private conversations with some of the best equity managers in the world. What has struck me about these conversations is that most of the time these “fishermen” wanted to discuss the ones that got away. Often there was a discussion on what mistakes they made and how they have modified their investment behavior. If the great can learn, then I think we can all learn if we are not too arrogant.

Where to find the less arrogant

One of the worst things that Fortune magazine and other media did was to be the first to rank companies on aggregate sales.  Sales rank alone is not a particularly good measure for investment or even job opportunity. Nevertheless, large companies often quote with pride their sales rank and mindful of the list, possibly consider acquisitions more favorably. Bigger is not always better. (A study of the Newsweek 25 stressful colleges also demonstrates this principle.) Bigger does mean more people and higher compensation for senior executives. Often the leadership of large companies become isolated. As demonstrated by politicians around the world, the more isolated the leader becomes, the easier it is to become arrogant. Large companies also attract more media attention which gives their leadership more opportunities to pontificate and lock themselves into arrogant positions. Further, with so many ETF type products in the marketplace the chance for breakaway performance for a mammoth company is somewhat less. For these and other reasons we would want most portfolios of funds to have a few reasonably concentrated Small Cap funds managed by experienced portfolio managers who are not arrogant. For the more venturesome, investing in small companies internationally may be rewarding but stressful.

What do you think?
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