Losing Short-term Confidence? Selling Out is not the Answer

Every action we take is based on our confidence that the action will produce a result, hopefully the desired result. Often we are not overwhelmed with confidence, but believe that we must do something, remembering that doing nothing is in itself an action.

In last week’s blog about my stock selection training vs. using passive ETFs, I indicated that it was rare that macro considerations impacted my investment selection decisions. Macro elements are what is happening to the world as a whole, whereas micro elements are what is happening to a single or a small group of potential investments. One of the reasons to focus on micro elements is that they have proven to be easier to identify. After any review of what various political, economic and investment gurus prognosticate, one has the feeling that there is a high error rate. Often the more clever pundits get some things right, but not enough to be truly helpful for those of us who have to make investment decisions for others.

While I think throughout the previous week what I am going to say in Monday Morning’s blog, I pay particular attention over the weekend. Often I search for confirmations or challenges of my beliefs online, frequently focusing on what is probably the largest data bank of computerized investment company data in the world as put together by my old firm, Lipper, Inc. This weekend I am coming up empty for relevant micro insights, as the range of potential outcomes on the macro side is too great and my confidence in the short run of the market is waning.  (I do not have to be right, I just need to not be really wrong.)

The Macro Factors that can go either way:

The debate as to the final constellation of the euro

My frustration is that I cannot add anything to the debate. Worse, I do not see any progress to a permanent solution to the deficit production of governments and central banks supported by the general populations who in aggregate want more in government services than they are willing to pay. Having no responsibility to solve the currency problem, I can perhaps too easily come up with a grand solution.  At the currency level, Finland, Denmark, Holland, and possibly Austria should lead Germany to a hard euro with responsible governments. France and Italy should lead the peripheral countries into a softer euro with one or more devaluations and probably some form of centrist government eventually. I hope the solution evolves quickly; then all of Europe as well as Russia and China can turn to a much more serious problem in their midst which is the growing population of Islamists that fundamentally hold different cultural norms, particularly in the rule of law.

China: can the government continue to get it right?

For at least the last decade, which is the Chinese Party’s time frame, no government has done a better job of controlling its economy in both a huge expansion and a slowing contraction. Power has devolved from the central control of a headquarters-based party to lower levels of government, including getting down to the village and city levels. Actually it is at the lowest level where the biggest monetary contribution is made to the general population’s benefit. From the study of large organizations be they political, military, corporate, religious, or sporting activities, we recognize how difficult it is for good orders from the top, (and they are not always good orders), to be carried out effectively at the lowest level. Recently China has experienced a significant problem on the political level and another at the industrial (railway) level. I am sure that there have been other malfunctions. At the speed that the society must find reasonably well-paying jobs for the population, the Party may not have sufficient control factors in place. An uncorrected mistake could spark the feared social tensions that could derail the growth plans. I will not have high confidence in this arena until I see what the new political leaders will do.

The US election may not be decisive

I do not know many potential voters that are happy with their particular favorite for President or for Senator, when one is running in their state. They vociferously favor their choice over the opposition, but are still not totally thrilled with their candidate. Perhaps this is a good thing, for many political leaders that came into office with a large wave of enthusiasm have disappointed. My real concerns are that unless things change dramatically, getting effective fiscal legislation through the Senate will be difficult. Along with the rest of the world there does not appear to be any groundswell in the US to drastically cut the costs of the things it enjoys and little delight in paying more taxes. Perhaps out of this morass some true statesmen or women will arise and lead the US onto a prudent growth path.

US exceptionalism comes with a price that it cannot deny

The exceptional results of the US are not solely, and may not be mainly, due to its population. The two ocean borders and the abundance of arable land and other natural resources should not be dismissed or discounted. At the moment the US has a large number of the leading universities of the world;  I speak with a bias as a trustee of Caltech. In many fields such as software and biotechnology (including the Human Genome Project) the US is the leading developer of technology. With the gifts that have been given to the United States, the country has a responsibility to others less fortunate. If it shirks these responsibilities as it is now doing, other nations will surpass and could even suppress it. My meetings with the brightest young Americans I know does give me confidence, but not when I see many existing political and corporate leaders.

Investment Implications

My short term confidence and those of others may recover very suddenly. Markets can move extremely rapidly from the present level. I would rather be a worried investor reasonably fully invested in equities than trying to time a re-entry move. Where possible I would have a significant investment in technology companies that have a practice of being leaders in disrupting the status quo. The world has progressed to such a point that all of my investments must address a global world to prosper. Sleep may be overrated as a priority in this pursuit.

Do you have confidence in your portfolio?  In which securities and why?

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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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