Every ninety days or so, I begin to think about what I can write that will fortify the process of building portfolios and create the best balance between risk and reward. All of the material that I produce is intended to give perspective on what is currently happening in our world and yet the message seems to always lead back to the same place.
This endeavor of seeking our greatest potential as investors will never be easy. These commentaries are one of the toughest things that I now do with my time. I love the challenge but also recoil with fear of producing pointless mutterings. Often it seems that I should just pay for a professional newsletter service – but I passionately believe that my most mediocre material is far ahead of the sanitized “market update” rubbish that many firms circulate to clients.
The struggle for investors is that we must stay engaged and courageously pursue that path back to that same mental campground of patience, courage and perseverance. Investors have a very tough job to do. They have to stay cool, diligent and never flinch in the face of whatever grows and roils our world. There will be big hiccups and scares, likely soon. The market has made a big, fast positive move. Lots of buyers have come in bidding up prices of equites. When too many buyers push the values up, something negative, scary or flat out horrible will come along to create sellers on the other side. That is simply the way the market works. So fortify your tents my troopers. Make sure your rations of courage and staying power are ready to go. We will likely be tested soon.
Bad News / Good News / Weird News
The news has gotten tough to watch, listen to, or even stick one’s cranium out of the foxhole with open eyes. I have been meditating more, and ducking the firehose of daily info spray. Political dysfunction is nothing new. American Democracy can get quite messy.
Fear mongering seems to be a big focus of US leadership. Nothing new. Our political discourse has always been erratic and often upsetting. The American Government and two party system often drifts from what we might wish for; International Trade, “Big Government” and Immigrants have been perennial subjects of scorn as politicians look for figures to place blame. When I grow anxious I look to history to reassure myself that little of what happens is different or un-precedented.
In reviewing a wonderful book by Daniel Gardner, The Science of Fear: How the Culture of Fear Manipulates Your Brain, from 2008, I stumbled on a passage about the Red Scare of 1919.
The Red Scare of 1919-1920 is an interesting analogy to what we are experiencing today. According to mass.gov:
Causes of the Red Scare
During the Red Scare of 1919 – 1920, many in the United States feared recent immigrants and dissidents, particularly those who embraced communist, socialist, or anarchist ideology. The causes of the Red Scare included:
World War I, which led many to embrace strong nationalistic and anti-immigrant sympathies;
The Bolshevik Revolution in Russia, which led many to fear that immigrants, particularly from Russia, southern Europe, and eastern Europe, intended to overthrow the United States government;
The end of World War I, which caused production needs to decline and unemployment to rise. Many workers joined labor unions. Labor strikes, including the Boston Police Strike in September 1919, contributed to fears that radicals intended to spark a revolution;
Self-proclaimed anarchists’ mailing bombs to prominent Americans, including United States Attorney General A. Mitchell Palmer and United States Supreme Court Associate Justice (and former Massachusetts Supreme Judicial Court Chief Justice) Oliver Wendell Holmes, Jr.
The Government Responds
Enraged by the bombings, the United States government responded by raiding the headquarters of radical organizations and arresting thousands of suspected radicals. Several thousand who were aliens were deported. The largest raids occurred on January 2, 1920 when over 4000 suspected radicals were seized nationwide. Over 800 were arrested in New England from locations that included Boston, Brockton, Chelsea, Fitchburg, Lawrence, and Lynn.
On April 29, 1920, several days before the arrests of Sacco and Vanzetti, Attorney General Palmer warned the nation that the Department of Justice had uncovered plots against the lives of over twenty federal and state officials as part of planned May Day (May 1st) celebrations. May Day, also known as International Workers’ Day, was celebrated by many socialists, communists, anarchists, and unionists.
The failure of these plots to materialize, coupled with increased criticism of the Palmer Raids, brought these raids to an end.
History is our guide to see the challenges of the past have tested our country before and we will persevere again. The process is often upsetting and people get hurt. Hopefully the pain will result in progress that creates better outcomes and increased economic opportunities for all people. American Democracy is built upon the incredible ingenuity of checks and balances. The system has weather tremendous stress in the past. There is no reason it will not continue to prosper.
I counsel those of you that are excited to temper your expectations; and those that are worried need to have faith in our American Principals. Most of what happens will happen around the center of Democrat and Republican ideologies.
Our mind can take the events that are happening in real time and weave them together in ways that are not warranted. This is a mental trap that is part hindsight bias, survivorship bias and more broadly a concept that has recently been formalized called the “Narrative Fallacy”.
Narrative Fallacy : The narrative fallacy addresses our limited ability to look at sequences of facts without weaving an explanation into them, or, equivalently, forcing a logical link, an arrow of relationship upon them. Explanations bind facts together. They make them all the more easily remembered; they help them make more sense. Where this propensity can go wrong is when it increases our impression of understanding.
—Nassim Nicholas Taleb, The Black Swan
Much of what happens does not come from a story that can be understood as they happen and certainly there is no predicting what can come next. Randomness and complexity are the reality of living. It is only after the fact, with hindsight bias that there seems to be a “story”.
The human mind craves meaning in our past and for thoughts of what may come next. The events in our experience and the world are the result of the convergence of an incomprehensible set of factors. After the results we have explanations for things that were unknowable as they happened, and yet there is often a notion that what is happening is understandable as it unfolds.
Fear of Communism and the USSR drove much of American foreign and domestic policy for decades. The domino theory, and the concept that Communism was an actual competitor to Capitalism was a belief system that drove massive Cold War military spending and strategies like the fostering of mujahedeen forces in Afghanistan. When communism ultimately collapsed, American Cold War strategies were cited as the heroic gambits that defeated Communism. Rarely are other theories like the unworkable nature of communism, the corruption of command economies or the Free Rider dilemma cited as causes for the demise of the USSR. It seems quite possible that Soviet Communism never was an equal to western capitalist democracy in any way and its destiny was failure. But the notion of an American Triumph is so much more compelling.
Ironically, we now face the blowback of some of our strategies in the Mid-East and Islamic world. The US implemented a massive “War on Terrorism” post 9/11 (Afghanistan , Iraq) in denial of the fact that there will always be sociopathic people and movements that viscously assault the illusory notion that we can ever be “Safe”. There is no real safety in nature. Tribes and ideologies will continue to clash. Criminals will commit atrocities. Expect it. The only “Safety” is to see the world in a probabilistic way. This awareness if the fact that the world is inhabited by over seven billion people is critical. The sheer numbers dictate that terrible things will be happening in numbers that are actually quite small but our innumerate mind cannot place these events in the proper statistical context.
Fanatical movements like we see in Al-Qaida or ISIS produce nothing. They are nihilistic death cults. They have so little means to perpetrate anything more than sociopathic street criminals. The Middle East is sadly and tragically imploding after years of dictatorship fueled by petro dollars. The suffering in that part of the world is truly gut-wrenching to observe. But it is not a real threat to the West or Modern world any more than a Bolshevik revolution was a threat to the USA in 1919.
Terrible things including terrorist acts will continue to happen as they always have. The key is a probabilistic understanding that the dramatic / tragic things that happen are within the context of a massive world. The million to one shot will happen daily. The odds for any one individual to be impacted by most of this bad stuff are much less than a lightning strike. Television, internet and social media make people feel that it is happening down the block. This notion of real local risk is ridiculous. Hopefully core American Values will not be permanently altered to try to protect against lightning strikes.
The propensity to avoid danger stokes our fear receptors and keeps our caveman brain on high alert. Our subconscious mindset seeking safety in a modern digital world is driven by evolutionary instincts. Much of what are mind fears are deep in the brainstem. These characteristics developed over thousands of years of evolution before there was agriculture, indoor plumbing or anything remotely related to our modern lives. Living standards, actual “safety” and declining crime data in the US is better than ever and might be the best in all of time. Do not allow the giant world to frighten you. Most of us will never be chased by a lion or struck by lightning.
Working Longer for Happier Life?
According to the WSJ:
The research paper found that if someone switches jobs voluntarily in their 50s, it increases the likelihood of them still working at 65 by about 20%. The data suggest that the new job is somehow better, thus encouraging—or at least enabling—people who switch jobs voluntarily to work longer.
https://www.wsj.com/articles/study-shows-one-way-to-extend-working-years-1490582352
Middle age is daunting, and I can attest to this as I work every day to battle the Mid-Life jitters. Contemplation of career change is a discussion that is more frequent as technology offers more ways to stay engaged in the workforce. There is significant evidence of enhanced health and vitality as people stay passionate and involved in professional pursuits.
Look at your life-path and visualize what it is that you see as the ideal future you. This does not necessarily mean you should make changes, but if you are planning to take an off ramp to a different life, see it in the context of how it may significantly engage and enhance your later life. Alternatively, check out and get that beach house…The fifties are the new thirties and the sky is the limit.
Dropped Calls
Most Android and IPhone users do not remember Motorola phones. You can make quite a list of cell phones that at the time were the must have item. Palm, Razor, and Blackberry are important failures of the ubiquitous cell phone and it’s evolution. Cellphone usage has grown from 300 million to 7 billion in 2016. The economic, societal and cultural impacts are immense.
“Eccentric Orbits: The Iridium Story” is an incredible story of business failure. The attempt to create a global satellite phone business was initiated just prior to the growth of cellular technology. This corporate failure is an example of great miscalculation and grandiose thinking by a company with massive resources and smart people joining together in dramatic failure.
https://www.wsj.com/articles/the-fall-and-rise-of-iridium-1464980784
Groupthink often is at the center of these stories of failure. Teams of incredibly intelligent and sophisticated people frequently fail to have perspective in their decision-making process. Groupthink describes a behavior you may have seen or even been a part of—one in which members of a group avoid conflict and expedite consensus by choosing not to test, analyze, and evaluate ideas critically.
The key to avoiding groupthink is diversity in the group and openness to dissent. Do you do this in your own thinking process? As critical decisions are faced, the need for broad perspective and counter argument is what can help avoid the tunnel to error. Think of those that disagree with you. What are the counter arguments? Consider the opposites and alternative before conclusions are drawn. This can be the key to avoiding errors and disappointment.
Global recovery
Now that we have cleared up fear and failure, let’s get to the positive news about the global economy.
From The Economist 3-18-17: False dawns were perhaps to be expected: recoveries from debt crises are painfully slow. Spending suffers as borrowers whittle away their debts. Banks are reluctant to write off old, souring loans and so are unable to make fresh new ones. And the world has had to shake off not one debt crisis, but three: the subprime crisis in America; the sovereign-debt crunch in Europe; then the bust in corporate borrowing in emerging markets.
The global economy is one of the most complex things that can be contemplated. Politics, trade policy, technological innovation, demographics trends are just a few of the forces that drive the world forward. Making predictions of where we are headed is pointless. As always, the vision of a world filled with new innovation, rising living standards and opportunity for all is what we can wish for. What will likely happen is a constant cycle of challenge and opportunity that only looks manageable in hindsight.
Technological innovation is creating advancement and enhancing our lives in many ways. The consequences for the middle class and working people have been dramatic as the requirements for professional job security rise rapidly. The opportunities in manufacturing and other hard-working Jobs have been radically altered by robotics, digitization and globalization.
Global competition for high-paying employment cannot be blocked by walls or political slogans. Fierce and passionate pursuit of education in STEM and other demanding disciplines is ultimately the answer. The hope is that Americans will hunker down and compete at the highest level as we always have. I expect nothing less. We will compete at the highest level. The great American Innovation machine is alive and well. I cannot wait to see what happens next.