Next Election vs. Future Generations - Weekly Blog # 766

 

Mike Lipper’s Monday Morning Musings

Next Election vs. Future Generations

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

  

  

Time Horizons

Behavioral, political, and investment strategies should be selected based on a measurement period, acceptance of errors, and compound returns. While rarely identified, these three factors often control the success of a chosen strategy.

 

Many people are currently very short term oriented, distinct from the expressed time frame driving the Founding Fathers of the US expressed in the Declaration of Independence and Constitution.

 

Four examples of this shortened time focus are:

1.  Selection of Leaders in political, military, health, and corporate sectors. We unfortunately pick leaders with political skills rather than courage to lead in a different direction, with the focus is on the next election or selection. Both Henry Kissinger and Jaime Dimon have written about the lack of foresight in the world’s political and business leadership. (I would slightly disagree. Autocratic leaders seem to be playing chess rather than checkers, which is what our elected or selected leaders are doing.)

 

2.  As revealed in the recent “Varsity Blues” scandal, where some rich parents made illegal payments to get their children into well-known Universities. Their apparent motives were intended to ensure their young got admitted to these schools for bragging rights, while others utilized “legacy rights” at their own alma mater to achieve the same result. (That one’s children do not possess the appropriate credentials to be accepted into these designated schools should have been addressed years ago.)

 

3.  Almost all investment performance data in the press focuses on annual or shorter time periods. This often mirrors the investment focus of many in selecting a fund or manager. (While I can’t predict winners in future markets, I am aware that the poorest performing advisors can occasionally produce the best results in  future periods by recapturing some of the prior lost performance.)

 

4.  On Friday the Dow Jones Industrial Average (DJIA) gained some 700 points. Supposedly this was because of the questionable Department of Labor establishment survey which showed a higher number of workers than expected. (There was almost no coverage showing that only 6 out of 10 employable workers were on the job. For many years, countries with 7 out of 10 workers employed were considered the better locations for investing.)

 

Contrarian Views

The history of market prices around the world suggests that the biggest gains come from a radical change of opinion on the future performance of various securities.

 

After 15 years of the US stock market being home to many of the big winners, there is some sentiment that more global oriented companies will be winners.

 

Markets don’t have to follow nice, neat calendar periods. In the US, stock prices generally rose in October and November then declined a bit in December. It is quite possible that November represented the end of the recovery period that started in June. Suggesting Friday’s gain won’t be sustained for the month.

 

Only 10 out of 104 mutual fund equity-oriented sector averages rose in December. Utilizing securities data on a national basis, only China, Hong Kong, Japan, and Thailand gained over 1% (listed in performance order).

 

Winning the Long Game

One of the long-term reasons mutual fund investing performs better than many managed accounts with individual securities is that the fund industry developed an easy process of reinvesting distributions of income and capital gains. A number of large companies had similar reinvestment procedures in the past, although they were dropped due to lack of interest.

 

One of the lessons learned from the thrift industry is that through the magic of compounding a series of small contributions can produce meaningful returns over 12 to 30 years, particularly in a market of generally rising prices where fund holders stay in the product.   

It is often the small and simple things that lead to investment success: having patience, a long-term time horizon, taking as much emotion as possible out of the investment process, not following the herd and looking for opportunities elsewhere. While these items are simple attitudes, they are often difficult to implement in practice. Investing is an artform; therefore, one should allow for mistakes without deviating from good strategies.

 

 

 

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Mike Lipper's Blog: Bear Market, Recessions, Reinvestment - Weekly Blog # 765

 

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Four Investment Quandaries for 2013+

·       Debt, a four letter word

·       Killing off the Individual Equities Investor

·       Asset Allocation: Correlations?

·       Learn from today’s investors

Investment analysis is like a narcotic or a very difficulty habit to kick.  At the beginning of the week, I may not have an idea about what I will post the following Sunday night.  Though I am exposed to a myriad of communications, in many ways the most valuable inputs are the conversations I have with investors and investment professionals.  This week I will focus on four suggestive thoughts, or quandaries for 2013.

The worst four letter word

Growing up I was told that it wasn’t nice to use certain four letter words like F*@k or S*#t. What my Mother never told me was the worst four letter word of all; a word that has bedeviled mankind for centuries. That great economist William Shakespeare put the following words into Polonius’s mouth, giving guidance to his son Laertes, “Neither a borrower nor a lender be.” The four letter word is debt.

There are three essential problems with debt. The first is that it must be paid back, often at inconvenient times. The second is the additional payment of interest, which can be either fixed at the time of the loan or flexible, but each is based on the assumption that the rate is high enough to pay the lender to forgo spending and has a sufficient risk premium that is an accurate gauge of the odds on getting repaid in full and on time. The issue here is what appears to be the appropriate lending rate at the beginning of the period may not be the right rate at the end of the period when conditions have changed. The third problem is collateral that in theory guarantees to the lender that he will get his money back in full and on time. Securities can often provide the margin for a loan. Of course, if the securities go down in price the value of the collateral may become less than the size of the loan. Some upstanding people, companies, and nations have been able to borrow based on their good names. J.P. Morgan is reported to have said that he loaned money on the basis of a man’s character. There is a problem with this as fittingly portrayed by Shakespeare again, in “The Merchant of Venice,” in the legally sanctioned, but inhumane attempt to collect on the collateral on a defaulted loan.

The main purpose of debt is time-shifting. The borrowers want an asset that at present they cannot pay for, and the lenders are willing to delay their own spending if they get paid for this indulgence. Unfortunately what has become the custom is that new debt is raised to pay off expiring debt. The question facing both the borrowers and the lenders is what is the optimum level of debt that can be added on top of a given level of assets? This is called debt capacity. It is usually calculated on the basis of assets and/or income that are not encumbered by other debt. What is usually done for nations is to compare their outstanding debt, most often without concern for future debts, to the their Gross Domestic Product or GDP. This number is the estimated annual generation of goods and services within the country. (Two weeks ago, I blogged on the approach of looking to a more complete analysis of both the assets and liabilities for the US.) Nevertheless I will stay with the convention of looking at a nation’s debts as a ratio of its GDP. Europe’s deficit as a unit is now 131% of its GDP. China has a 120% ratio, all of Asia excluding Japan is 104%. (Hong Kong 275%, Singapore 137%, Malaysia 117%, Indonesia 33%) These reported ratios include personal and corporate debt as well as sovereign debt. Thus globally there is too much debt. 
 

In the US, as is often the case, the private segments of the economy are moving differently than the government sector. The private sector is deleveraging its debt structure whereas the federal government is adding to its debt by issuing bonds that are largely being purchased by the Federal Reserve System to neutralize their impact on the level of interest rates. The combination of the private sector deleveraging and the Fed’s increased borrowings leaves the US debt level, according to one source, at 62% of the GDP which is down slightly from prior readings. 

Translating the economic figures into the bond market, the following three facts are of interest:

1.    Some Investment Grade (corporate) debt is yielding less than some sovereign debt. This would indicate that the market believes that corporates are safer than some nations. One possible reason for this is that Europe, with 7% of the global population,  spends 50% of global social spending.

2.    The yield on the S&P 500 is higher than an index of BAA bonds. Again, the market is suggesting that lower investment grade credits are safer than dividends on the S&P 500 stocks. At the same time this represents an unusual opportunity to view large cap stocks as a more productive source of current income than investment grade bonds.

3.    We may not be out of the sub-prime mortgage mess. The Federal Housing Administration (FHA), is by far the largest guarantor of conventional mortgages. Not only does it already in effect own a number of defaulted mortgages, but there is pressure from Congress and the Administration for the FHA to loosen its underwriting standards. Only a significant recovery in house price and possible individual incomes will bail out the taxpayer liability.

“Who killed Cock Robin”

The somewhat shotgun wedding of the New York Stock Exchange and IntercontinentalExchange (ICE) publicly demonstrates the fact that while derivative trading particularly not based on stocks is very profitable for an exchange (and therefore broker/dealers), trading in individual stocks is not. As an analyst and owner of brokerage firm stocks, for some time I have taken the position that listed equity agency business for brokerage firms is not profitable. Try to get a brokerage account opened to buy 100 shares a quarter of General Motors. What you will quickly find in a broker (if one will talk to you at all), he or she will attempt to sell to you some complex structured product or a high fee fund or possibly introduce you to using a margin account (interest bearing and securities loan revenues). This reaction by the peddlers of our business has been successful in discouraging individual investors from buying and holding individual stocks. Thus, the title to this section, “Who killed Cock Robin” is an English nursery rhyme, but the real killer of interest on the part of individual stocks is the regulatory agencies, particularly the US Securities and Exchange Commission (SEC). In 1968 the Commission forced the beginning of the end of fixed-rate brokerage commissions, which were totally replaced in 1975. Prior to those dates there was a vibrant and useful retail research and individual sales business by brokerage firms. Institutions received tons of reasonably high-quality research and other services from “Wall Street.” Continuing this trend of not understanding the impacts of its actions, the SEC permitted multiple locations where a trade could take place which denuded the central marketplace’s liquidity. Carrying this approach further, the substitutions of penny decimals for fractional prices made professional traders withdraw their capital from the marketplace. The way all markets work is that there has to be a perceived profit potential for the professional participants to play. Without the professionals in the game the market will shrink in size and its use as an important economic indicator will be vastly reduced.

I do not mean to be negative on the announced deal, because the holders of my private financial services fund and I benefited. Our holding in NASDAQ OMX rose 3% on the day of the announcement. My guess, the thinking is that NASDAQ itself may be in a merger situation or that the change in control of the NYSE means that it will be a less fierce competitor for new listings and daily trading. While this may benefit my fellow investors and me, it won’t do anything positive for the individual investor and could hurt.

Is asset allocation really about correlation?

At this time of year, institutional investment committees have meetings to decide on the appropriate mix of assets for their portfolio responsibilities. Historically this was a decision made for them in that the initial funds in both the US and UK were balanced funds with a reasonably fixed percentage in bonds and stocks. Balanced Funds and their modernized versions are still an important part of the mutual fund business. The whole excitement about asset allocation was generated by a flawed study of corporate pension funds that showed that funds with a higher percentage in equities did better. For the most part there were only two asset class accounts, bonds and stocks. Later on other classes were added in terms of venture capital, private equity, international securities, commodities, gold, timber and various forms of real estate. Then 2008 came along, with the exception of US Treasury Bonds all the other asset classes declined and often in roughly the same percentage declines.

My approach to this question is first to have an opinion as to how closely the correlations of the asset classes will be over time. Using US mutual fund investment objective averages over ten or more years, most fall within 100-200 basis points in terms of annual returns which suggests to me that on a long term basis it is difficult to pick winning asset classes.

Jason Zwieg’s latest piece in the Wall Street Journal on a young 107 year-young investor and manager, Irving Kahn, takes a different point of view. At his age he is invested approximately 50% in well-researched global small caps and the rest in cash. I have worked with Irving for many years on analyst society activities. He and his late wife Ruth were on an analyst trip with my wife Ruth and me in Italy more than 25 years ago. They both set a blistering pace which was a challenge for us younger types to keep up. Out of all of these experiences, I have developed a real respect for his acumen; besides he is one of the very few people alive that remembers my grandfather’s Wall Street firm. If the committees have Irving’s research skills, I would approve of their allocation if not some other forward looking approach was warranted. We should be watching and listening.

Learn from today’s investors

Most individuals do not have CFA certificates or have logged more than 50 years as an investor, but we can learn from what they are doing as shown in the following examples:

1.    As already indicated, on a personal level they are paying off their debts. If one disregards student loans, consumer debts are declining. Savings as calculated by the government is rising a bit. Individuals are slowly, but I believe surely are going through their own austerity program particularly in terms of being more astute shoppers.

2.    While retirement flows are continuing to benefit from 401(k) and similar salary savings plans, the purchase of mutual funds for individual retirement accounts through directly marketed mutual funds is well off  peak gross sales. This may be in response to investors' own actual or feared employment picture. Possibly they are using what would have gone into their IRAs to reduce their debts or to improve their homes for a future sale.

3.    The most intriguing demographic trend of all is that there is a substantial increase in the number of singles. In many cases these are, according to Gary D. Halbert, white women who have made the decisions at least temporarily to forgo Children and Marriage.

The young appear to be worried about their future and they should be. Our debt burden and less than wise investing will make their lives more difficult. However, after worrying in American fashion, they will find innovative ways to improve their condition. This is one of the major differences between Americans and Europeans.

You can’t agree with everything I have said.  Please discuss your thoughts with me by reply email.

I hope on Tuesday you can relax with family and friends, not worry about these quandaries and that the rest of the week won’t be too eventful.

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Lessons from 2011 for Earning in 2012

The year 2011 was not a good year for many stock markets, investors and advisors, (I count myself among them). However, there are useful lessons to be learned for 2012 and beyond. One rationalization is that we did not pay sufficient attention to “the Risk on/Risk off” dance. These rapid fire flip-flops were focused almost exclusively on macro factors. Macro factors included the overall levels of interest rates and currencies plus political changes. As these changes occurred or were rumored, the markets moved violently. The rapid fire changes were triggered by syllogisms. If you don’t remember your plane geometry, a syllogism is a form of reasoning with two propositions leading to a conclusion, e.g., “If factor ‘A’ is true and factor ‘B’ is true, there is only one possible conclusion.” A contemporary example might be that (a) the US is in a political deadlock, (b) a major credit rating agency lowers the US credit rating, therefore (c) the US dollar, Treasuries, and its stock market will decline. (Those of us trained as analysts of individual securities require a large number of factors to make a decision. We rarely feel absolute certainty about our conclusions, as all the facts never line up on one side.) The “Risk on/Risk off” switches created the volatility that so unnerved individual investors in 2011.

Incomplete/misleading headlines

If one totally believed the flash news, one could complete the syllogism and react quickly. Unfortunately, all too often the headlines do not include enough information to properly evaluate the news. The following are three examples of news articles premised with too-shallow thinking:

1. “A World with Too Much Debt,” * based on data from the Organization for Economic Co-operation and Development (OECD), examines unfunded liabilities and official government debt as a % of GDP. The US ranks sixth, with a figure of 620% (98% of official debt + 522% of unfunded liabilities). This is pretty scary when Spain, Italy, and Ireland have lower numbers, indicating that the US is in deep trouble, enough to hit the “Risk on” button. That is, unless you look at the details, as micro analysts do. First the unfunded liabilities are the difference between the projected cost of continuing current government programs and net expected tax revenues. Note that the figures do not take into consideration any dedicated assets to these programs. Second and much more importantly, is that liabilities are shown without any calculation as to a nation’s assets, even if it were just the government’s assets. One of the reasons for this mismatch is that the US government does not publish a balance sheet, even an unaudited one. (As regular readers of this blog have learned, I believe our credit rating should be lowered to the mid-investment grade level, not because we don’t have the assets/earnings power to pay off our debts. The downgrade is warranted due to the political unwillingness to materially reduce the US deficit production.) Bottom line, in my opinion: the US debt picture is unhealthy, but does not have to be fatal. Thus, I would delay hitting the “risk on” button.
   
   *This chart was brought to my attention by John Maudlin of Millennium Wave Advisors
   
   
2. “There is significant evidence that the economic growth in China is slowing.” The expressed fear is that to head off a slowdown in China, wages will rise. As we buy so much from China, we will be introducing additional inflation into the US that will hit the Wal-Mart shoppers hard. There are three reasons that this is interesting but not significant. First, a substantial portion of Wal-Mart sales are grocery items, of which very few are imported from China. Second, my guess is that the actual dollar value of imports is approximately matched by the combination of transportation costs, including fuel, and Wal-Mart operating costs. (This company along with a number of other US companies has been very good at finding ways to reduce costs while preserving quality.) Third, we have already seen some production has shifted out of China to lower cost sites, including back to the US, due to increased automation. An important part of the fear of a slowdown in China is that they will no longer buy US dollars and debt, and will begin to be sellers that will lower the world value of the dollar and drive US interest rates higher. One should remember that the largest single owner of US Treasury debt is the US government. In various trust funds, the US government holds about 40% of US debt. Also, the combination of Japan and the UK actually own more of the US debt than the Chinese. Perhaps most importantly, one needs to understand that the Chinese government is not trying to do us a favor by owning our debt, they are solving their own problem. Chinese producers sell their goods all over the world, often being paid in US dollars. To keep the local currency stable and reduce the impact of imported inflation, the Chinese government requires all those that internally hold dollars to turn them into the Chinese banking system in exchange for local currency. With the dollars so corralled, they buy US Government paper. As the trade surplus with the US grew over time, the Chinese became involuntary holders of our paper and very much interested in preserving its purchasing power.
   
   Like most investors and analysts I do not know what is likely to happen to the Chinese economy in the near or far term. I hope to learn more from a trip to Hong Kong, Singapore, and Shanghai beginning the last week of this new month. I would appreciate your suggestions as to investment people I should meet.
   
   
3. “The November decline of Exchange Traded Funds’ Net Issuance”
   Some market pundits have raised an alarm about the decline in the net issuance of Exchange Traded Funds (ETFs). In November, the net dollar issuance was only $5 billion, down from $20 billion in October and $99 billion year-to-date. For some, this was another reason to go for the “Risk on” button. Net issuance is the difference between purchases and redemptions. If one disaggregates the data, the biggest decline comes from a drop of $23 billion in issuance of index ETFs. I do not know with certainty the cause of this decline, however I suspect that various hedge funds and others have regular “short book” purchases, less index funds, to offset some of their short positions. My guess is that once we see the 2011 data from the Investment Company Institute, the December numbers will go back to their former trends.

The Trend is Your Friend, Go with the Flow, and 1987

In the ever-present attempt to simplify investment assertions, the two expressions “The Trend is Your Friend” and “Go with the Flow” get great market currency in a “Risk on/Risk off” market. There is a lot of evidence that these attitudes can work well for traders who can and do reverse their opinions rapidly during the trading day. Now that we know that the S&P500 for all of 2011 produced a zero return on a price basis, and the Dow Jones Industrial Average on the same basis gained about 5% , we can determine how many of these hyperactive traders actually added value to their accounts. In some respect the year 2011 is similar to the flat performance earned in 1987. Both were the third year of a US presidential cycle and both had significant foreign inputs, but with a difference. In 2011, fears of European problems held the US market in check but did not prevent many companies from producing solid earnings. In 1987, the US domestic economy had growing problems, but in this case was bailed out by its growing exports. While finishing flat, both years had sharp market breaks as well as recoveries. One can take the point of view that 1987 was the required preparatory period that would usher in the market boom of the 1990s. With the current market finishing over thirteen years of no forward movement in the averages, we are ready for a longer term explosive upside that we can explain at the current time.

My bottom line

While we need to examine macro factors closely, we also must keep focus on the micro factors and be in a position to benefit early from the next rise.

My best wishes

My wish to all the members of this blog community is that 2012 brings a happy, healthy, and prosperous year; and that we are able to increase the level of our personal and professional communications.
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Managing Against the “R” Word

For most of us who live and think in terms of markets, the “R” word is shorthand for risk, and about what we fear most: a permanent loss of capital. As market addicts, we have long ago cut the lock-step connection between the late developing economy, current market prices, and more to the point, our views as to future prices. As with many of our beliefs, we are challenged by inconvenient facts. Right now the “R” word that is most on our mind is recession (or worse).

Cyclicality

Anyone experienced in life or history is very conscious that there are ups and downs in the course of human endeavor, chronicled from as early as the story of Joseph in the Bible. We have come to believe that the cycles are caused by the alternating opposites of excess and scarcity, which drive our behavior beyond reasonable limits. In terms of the stock market, the extremes are characterized by widespread speculation and distaste for accepting any chance of momentary loss.

The Three August Weeks

Only a hermit would not be conscious of the market price turmoil of securities and currencies these past three weeks. Declines of more than 20% are not uncommon. Currency moves of 5% have been experienced. These kinds of sharp declines are more normal after extended and widespread bouts of high speculation and extreme publicized behavior. In my opinion, this is not an appropriate description for 2011. Something else is happening.

What is scaring thoughtful people?

The inability of societies on both sides of the Atlantic to politically come to grips with their now recognized, unsustainable budget deficits is an important concern; for we like many of the “entitlements” we receive and don’t want to pay for them today. The fear of losing some of these in various cutbacks concerns the general population. What is more concerning, is the recognition that we will probably be fighting a two-front war with some to materially cut back government spending (which will not be selective in terms of our own proclivities), and which will thus lower demand. The fear is that less spending, combined with some form of higher tax realizations, will crunch ultimate demand for goods and services in our economies. Many are translating lower demand into a general recession. (At the moment, investors and people in general are not focusing on the money previously released by US government spending into the private and personal economy, which is likely to have a multiplier effect.)

Will we have a recession?

I do not know. If we do have one, as consumers we talked ourselves into it by reducing our normal purchases. People do this. They hoard their cash and capital in expectation that their incomes will be hurt in the future. While I have clearly said that I do not know whether we will have a recession, I am managing our clients’ portfolios against suffering a deep recession. Most recessions and bear markets come as a surprise to most people. Discussions of economic problems have been in the news for more than a year, so the possibility of budget and financial problems is not new. (Even if we were to have a recession, most of the time the US stock market bottoms before the recession is officially announced.) The only sector that I see with rampant speculation or unwarranted thinking is on the part of governments around the world.

What are the problems with the governments?

There are two problems governments on both sides of the Atlantic are suffering. The first is that all too often their estimates of the costs for various programs are too low and their expectations on tax realizations are too high. These breed fears on the part of those who have been asked to loan money to the governments. The second and much more basic problem is answering the question, “What is the proper function of government, as distinct from the political need to stay in power?” What is currently being ruminated is the series of issues involved with the second question.

What are the proper functions of governments?

In terms of the valuation of both debt and currency of various countries, the collective views of the marketplace are in the process of being heard. Historically the first function of a government was to arrange the protection of its people. The second was to create a code of behavior that permitted people to interact within their community with relatively little strife. Out of this second function, governments believed they were empowered “to do something” to “help” their people. Increasingly this “help” took the form of intervention into people’s lives to a ridiculous height. In modern days, the level of intervention has reached what some call the “Nanny State.” An extreme example is California’s proposed law that hotel beds must have fitted sheets. There are many other and better examples of government intervention into our lives. The new difference is that increasingly as a society, we are unwilling to fund these interventions.

How does this impact my portfolio of stocks and funds?

There are many ways to filter through the approximate 100,000 funds being offered around the world. (I am using a global figure, as an increasing number of this Blog community resides beyond the US.) One way that may be useful is to look at how much of the earnings power of the companies in stock portfolios are in a relatively high vs. low interventionist country. That approach was one of the reasons that in last week’s blog I stated that we were adding to our Asian exposure. There are four great examples of the many Asian countries who have relatively low debt and deficits compared with their gross national product. China is moving from a command economy where, on the surface, practically every economic act is governed by the party, to an increasingly consumer driven society. China is producing the highest growth rate of any other large country in most economic and financial aggregates. (This is not a recommendation to buy Chinese stocks wherever they are traded. I leave selection of individual securities up to professional analysts and portfolio managers who spend their lives on these matters.) India is another good example of a country haltingly moving from a command economy to a more private sector-driven one. One hears that India is slowly but finally overcoming corrupt practices. India’s growth rate lags China by a bit, but within a relatively few years India will be more heavily populated than China. Both Hong Kong and Singapore are much freer of intervention in economic activities than their two largest competitors, China and India, and their stocks are valued more highly, due in part, to greater disclosure and somewhat less intervention on the part of their market-oriented governments.

What should we do to our portfolios if a recession does hit us?

I have often said that one can recognize gamblers by whether they get out of bed in the morning. Not only am I a gambler (a balancer of returns and risks), I am an optimist, particularly when others are not. (Perhaps, I am saying the same thing twice.) If the markets continue to decline, I would be selling the fixed income holdings and adding judiciously to our diversified equity holdings.

What are you doing?

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Beyond Near Term Investing: How Much For Brains?

Luckily for me and I hope for you, thoughts once launched continue under development as people react and additional information becomes available. I am very blessed as I am regularly in receipt of many stimulating investment papers and articles of importance.

Last week’s blog post focused on the relative value of my personal accounts' 40%+ investment allocation outside the US and the expenditures to support education for various members of my family.

This week I was privileged to read three articles and a personal email that contributed considerably more depth to these thoughts.

Top Test Scores From Shanghai Surprise Educators

The above was the headline in an attachment to the always interesting, thought provoking and occasionally correct “Ten Surprises” by Byron Wien of Blackstone. (Disclosure: I have known Byron for the more than 50 years and have served on boards with him.) One of the reasons Byron was pessimistic long term as to the future of the US was the poor test scores earned by 15 year-olds in the US relative to others around the world in 2009. The tests were given in Science, Reading and Math. In each case, the United States was far from a leader, above average in Science and Reading but below average in Math. There were thirteen countries that did better than the US students in all three tests. In order of their Math rank they were: China, Singapore, Hong Kong, Korea, Finland, Switzerland, Japan, Canada, Netherlands, New Zealand, Belgium, Australia, and Estonia. (I will be happy to supply my work sheet on these results if you contact me.)

Why Chinese Mothers Are Superior

Amy Chua, a professor at the Yale Law School wrote the above titled article for the Wall Street Journal. The article stressed the very rigorous discipline Ms. Chua applies to her two daughters, not allowing any outside activities and focusing all of their attention on repeated or rote work. For the daughters and their Mother the long focused practice sessions seem to have worked.

Rereading the list of superior test-taking countries, I can not avoid the recognition that the first four locations had strong Asian mothers present. One can add the seventh place Japan to this list of enforcers of scholastic discipline. There were a number of western countries that also did well, at least three of these have long winters which are good for long study hours. I must admit as a “civilian Marine,” (the newly coined term for those who no longer wear the uniform), the use of rigorous discipline and working during dark hours rings true to me.

Over the years I have had successful investment experiences in practically every one of the thirteen high test-scoring countries. Byron Wien was concerned that in the long run, test scores could undermine the intellectual leadership of the US. Three of our family’s college students, attending good universities, report that often the leaders in their various classes come from Asian homes. I hope many of them stay here and produce for this society. As a Trustee of Caltech, I am conscious of the number of brilliant students who come here on student visas and are forced by our immigration policies to return home with the extensive knowledge that they learned here.

I wonder whether we need to put a higher value on those companies that can attract the brightest on a global basis. The ability to get young brains may be of more value than the companies’ current cost of capital and resources.

The Next Decade : Where We’ve Been…And Where We’re Going

George Friedman has recently published his latest book with the above title. I have been privileged to see his author’s note. I can not wait to read the whole book. However, he is focusing on the tensions within the US between our global, if you will, empire roles versus the roles as a republic. In the drive to produce higher test scores and the creation of a “brainy” society, the simplest way to do it is by enforced discipline that eliminates alternative actions. The risk, according to Friedman, is that we unconsciously replicate ancient Rome or other rigid societies at the expense of the sound alternatives which are the basis of our own Republic.

Perhaps our portfolios should be balanced between the most efficient producers and those who practice creative destruction or alternatives to the present order. These are some of the critical issues that long term endowments and family fortunes need to examine and balance.

Maybe education does work

My youngest son sent me an email which stated, “On January 8th 1835, the national debt was $0.00 (the only time this has happened). Makes you think what would have happened if we kept that balance.” This is from a child of the inflationary 1960s. Maybe either education or age is finally kicking into focus the challenges that will face him and his children’s lives.

In conclusion

There is a lot more to think about in setting investment policy than near term interest rates and forthcoming earnings per share.

What do you think?

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