Bruce's Blog: Wiener Financial Management

News & Notes

On the Sexual Revolution

and the Decline of the West

 

When did the sexual revolution begin?  A recent book describes Wilhelm Reich, a student of Sigmund Freud, as the father of the sexual revolution in the 1920's. Another new book claims that the sexual revolution commenced in the1860's in England during the stuffy Victorian era.  Of course, both of these arguments fail to give any credence to the antics of the Hell-Fire Club in London during the late 1700's. 

Ariel Levy writes in The New Yorker how each generation views themselves as having stumbled upon something new.  Such an approach often arises from the conceit of youth -- they are unaware of what preceded them; instead, they focus on how they are breaking free from the social constraints of the day.

While the "founders" of the sexual revolution believed they were exploring a new world unfettered by the restrictions of their ancestors, there exists another group of people who look fondly on the past as they predict a ruinous future.  They are "declinists" -- people who foresee the end of the world as we know it.

Adam Gopnik of The New Yorker explains, however, that those who predict the imminent decline of the West face an immediate hurdle.  Such declinists predicate their gloomy view of the future on the same intellectual ground of those who have previously predicted such a decline.  Thus, present day declinists must "grapple with the tricky point of insisting that the previous era was actually a peak rather than the valley that the previous declinists thought they were looking at." 

In the realm of investments, it seems that many people also subscribe to a gloomy view of our future prospects.  It is easy to project that the recent malaise will continue.  But as Adam Gopnik points out:

"Whatever happens next, short term or long, is likely to be more affected by accident and by invention -- and by new ideas -- than by any trend now in sight...Declinism is a bad idea, because no one can have any notion of what will happen next.  Yet the idea of our decline is emotionally magnetic, because life is a long slide down, and the plateau just passed is easier to love than the one coming up."

Beware of predictions. In 1918, the German historian Oswald Spengler declared in the "Decline of the West," that physics was finished as a science since its task of description was complete.  Of course, just around the corner were the great works of Einstein, Bohr, and Planck.  Oh well!


Words of Wisdom

And all this science I don't understand;
It's just my job five days a week.
-- Elton John/Bernie Taupin "Rocket Man"

Governments do no more to create jobs than babies.  In fact, their proper role in both endeavors should be identical -- they maintain conditions under which the generative processes can readily proceed.
-- Michael Aronstein, Marketfield Asset Management

[Editor's Note:  The first quote refers, of course, to the mention of physics.  The second quote seems quite germane to the larger topic, although we do not necessarily fully subscribe to its political/economic posture.]

News & Notes

Questioning Common Knowledge—Part II

 

More and more, we base our investment decisions on our reading of the global political and economic scene.  Due to the varied and ever changing landscape, we can easily depend on common wisdom to help sort through the mess.  Unfortunately, these shortcuts can be incorrect and lead to mistaken responses.

For example, the link between poverty and terrorism appears reasonable—poor, uneducated people, with little hope of economic advancement, seem more likely to commit such acts than their more fortunate brethren.  Yet, as an article in The Economist points out, this is not necessarily the case. 

A number of studies indicate that there is "little evidence that the typical terrorist is unusually poor or badly schooled."  Instead, terrorists prove to be "better educated and less likely to be from poor families than the general population."

Nor are poor people around the world necessarily more sympathetic to terrorism.  One study found that "the poorest countries, those with low literacy, or those whose economies were relatively stagnant, did not produce more terrorists."  Moreover, "citizens of the poorest countries were the least likely to commit a terrorist attack."

The Economist concluded that the "research on terrorists' national origins suggested that countries which give their citizens fewer civil and political rights tend to produce more terrorists.  Politics, not economics, is likely to be a more fruitful weapon in the fight against terror."

The various aspects of investing are equally complex.  Relying on the "apparently obvious" may not get you very far.  In the next installment, we will question the accepted view that manufacturing in the United States is in a sorry state.


Words of Wisdom

I once wanted to save the world.  Now I just want to leave the room with some dignity.
-- Lotus Weinstock [bio]

News & Notes

Questioning Common Knowledge—Part I

 

For those of us whose ancestors came from Europe many years ago, the family often has a story explaining how their surname was changed upon coming to America.  For example: "My great-grandfather was called Rogarshevsky, but when he arrived at Ellis Island, the immigration officer couldn't understand his accent.  So he just wrote down 'Rogers,' and that became my family's name."

In the journal Azure (Summer 2010), Dara Horn makes a strong case that these stories, accepted as fact, just aren't true.  For one thing, the new immigrants encountered immigration staff who spoke their language.  The intake officers at Ellis Island had to know two or more languages.  In addition, numerous interpreters, who were fluent in the immigrants' native tongue, were available as well.  Mistakes were unlikely.

More importantly, though, "Ellis Island officers never wrote down the immigrants' names."  Instead, the inspectors used the ship's manifests, which were compiled by local officials at the point of embarkation—and these officials used passports, visas, and other identification papers to obtain a passenger's name.  A great effort was made to get the names right since a mistaken name could cause the person in question to be forcibly deported back to the point of departure at the shipping company's expense.

This is not to say that immigrants did not change their names.  They did; only later, after they arrived safely in America.  So why did these Ellis Island stories develop and achieve near-sacred status? 

The suggestion is made that the immigrants had conflicting desires.  They wanted to blend into their new country, hence the name change.  But the immigrants also sought to remain true to their heritage as well.  If the name change was considered to have been forced upon them, even if by "accident," then the the immigrants were not seen as actively denying their connection to the old country.

That received truth may not be accurate is an interesting and important concept.  We often make important decisions based on these "facts."  In upcoming newsletters we will look at how common wisdom may not be true in the political realm and the economic realm. 

Words of Wisdom

I never know how much of what I say is true.
-- Bette Midler

News & Notes

Intelligent Risk Taking

One sure way to become a multi-millionaire is to start out with lots of money.  The maverick businessman Ted Turner began his empire when he inherited the South's largest billboard company from his father.

Turner did, however, play a large role in his subsequent business success.  As Malcom Gladwell points out in an article in the New Yorker, Turner's decision to buy a UHF television station in Atlanta in the 1960s was met with deep concern from both his lawyer and his accountant.  They warned that Turner risked losing everything if the TV venture failed.

Gladwell suggests that Turner did not, in fact, risk it all, but instead capitalized on various positive attributes of the deal that were not recognized by others.  For example, "any losses could be used to offset the taxes on the profits of the billboard business."  In addition, Turner could advertise the station for free on his billboards.  Maybe most importantly, "Turner paid with a stock swap engineered in such a way that he didn't have to put a penny down." 

In my post "Embracing Fear" (see http://www.blog.wienerfinancial.com), I argued that in order to achieve success, you cannot fear failure.  That does not mean, however, that you need to take undue, ill-conceived risks.  Gladwell claims that entrepreneurs who have transformed our economy are not the daring risk-takers of popular imagination, but are people who had an incredible ability to find opportunity where others did not see that it even existed.

In the end, Turner ran the risk of failure.  Yet he tried to enter into a business situation that made success the most likely outcome.  Gladwell concludes that "[o]nce you get past the more flamboyant aspects of Turner's personal and sporting life, in fact, there is little evidence that he had any real appetite for risk at all." 

Success seems to be a fine balance between accepting failure as a natural consequence of taking risk, but also seeking to limit your losses by taking the most calculated, reasoned risk possible.  Obviously this balance is just as much an art as it is a science.


Words of Wisdom

Risk comes from not knowing what you're doing.
-- Warren Buffett

News & Notes

Embracing Failure

 

Many motivational speakers, and a large number of self-help books, claim to possess the secret to success.  But insights on achieving success can also be found in less obvious places.  One such example is the book "Start-Up Nation: The Story of Israel's Economic Miracle" by Dan Senor and Saul Singer.

Israel's ability to launch a large number of innovative high tech businesses is staggering given its small size.  The authors point out that recently Israel's share of the global venture capital market was around 31%, more than all of the United Kingdom, Germany, and France together.  Moreover, after the United States, Israel has more companies listed on the NASDAQ stock exchange than any other country, including all of Europe combined.

The book sets out to discover the reasons for Israel's success in generating start-up tech businesses.  The explanations are varied, including compulsory participation in the Israeli army, which provides young people with intensive, competitive training and the responsibility to solve problems in a sometimes hostile environment. 

One factor, however, seems just as applicable on the personal level as it does on the national level.  Senor and Singer claim that Israelis have a cultural tolerance for "constructive" or "intelligent" failures.  In the military, "there is a tendency to treat all performance – both successful and unsuccessful – in training and simulations, and sometimes even in battle, as value-neutral.  So long as the risk was taken intelligently, and not recklessly, there is something to be learned."  This translates into the business world as well, where "most local investors believe that without tolerating a large number of failures, it is impossible to achieve true innovation."

This approach is contrasted with countries which do not embrace the start-up culture.  These countries may be doing quite well economically, such as Singapore and Korea, yet the fear of losing face if a failure occurs stunts the willingness of entrepreneurs to move forward with new ideas.  It's not that that these countries do not have a lot of innovative talent, but the concern of being exposed while failing has inhibited start-up growth.

The willingness to accept failure is an essential component of success for two reasons.  One is the well known concept of "nothing ventured, nothing gained."  Equally important is that failure is a priceless learning experience that can lead to future success.

While the acceptance of failure is a key component to establishing innovative enterprises, this does not necessarily mean that undue risk need be taken to be successful in business.  As we will see in my next posting, it is the avoidance of reckless risk-taking that has served many successful business people extremely well.

Words of Wisdom

 

If you really want something in this life, you have to work for it.  Now, quiet!  They're about to announce the lottery numbers...
-- Homer Simpson

News & Notes

Where You Stand 
is Where You Sit

A 15 year old standing atop a challenging ski slope sees nothing but adventure ahead.  A 55 year old in the same position prays he can get to the bottom without any severe injuries.  Same situation; different perspectives.

In the case of investing, however, it is hard not to follow the perspective of the crowd.  Investor sentiment was on a giddy adrenaline rush during the tech and real estate bubbles that arose over the past decade. But as the market crashed at the end of last year and into this year, fear ruled the day.

Brian Pfeifler, Managing Director of Morgan Stanley Wealth Management, summed it up nicely in a recent interview in Barron's.  He stated that during the tech bubble, investors did not care about valuations.  "If you had a discussion about price/earnings multiples, they didn't want to hear about it.  It was just, the market was going up, and they wanted to participate."

Conversely, when the market hit lows in March "it was not about valuation" even though valuations looked attractive, because investors were expecting the economy to remain in ruins for an extended period of time. People did not care if stocks appeared to be a potential bargain, "they just wanted out of the market."

The media makes it easy to be swept up in the mania of the day as a recent article in Morningstar.com highlights.  Unfortunately the media often gets it wrong.  Headlines such as "The Big Bad Bear" and "The Death of Equities" bemoaned the dismal stock market in the 1970s -- just prior to the market making a significant recovery.  On the flip side, headlines declaring "How to Invest in the Hottest Market Ever" inevitably came right before the bubble burst.  

Benjamin Graham, Warren Buffett's mentor, said that in the short term the stock market is a voting machine and in the long run it is a weighing machine.  In other words, emotions rule the day for investment decisions in the short term as investors get caught up in the manic ups and downs.  In the long run, however, Graham believes that the true underlying value of companies eventually wins out as the stock market becomes a reasonable approximation of the realistic worth of its component parts.

A political science professor of mine always said that "where you stand is where you sit."  (A rare recollection from my college days.)  His point was that both our physical location and cultural values (where we sit) deeply affects our position on any particular issue (where we stand).

In the world of investing, we often sit with the crowd, which has shown a propensity for running amok on occasion.  Sometimes we need to readjust our perspective in an effort to obtain a more objective view of -- as Marvin Gaye would say -- what's going on.

Words of Wisdom

Fashions are induced epidemics.
-- George Bernard Shaw

News & Notes

Marshmallows and Financial Planning

Saving money can be a little like passing on a tantalizing piece of cake; you know you should, but...

In a challenging investment environment, it's important to remember that factors beyond stock market gyrations can impact financial success.  The ability to save money plays a vital role.  Unfortunately, saving can be hard.  Really hard.  A recent article in the New Yorker highlights the difficulties that we all struggle with in delaying immediate gratification.

Researchers at Stanford University conducted an experiment in the 1960s whereby they presented four year olds with a frustrating proposition.  A youngster was placed in front of a tray of marshmallows and told that she could either eat one now or receive two if she could wait a few minutes until the adult conducting the test returned after stepping out of the room.  Most of the kids could not wait -- they either ate the treat right away or succumbed to temptation after a couple of minutes.

Such a result is not surprising.  It's the follow-up study, however, that is more fascinating.  The researchers found that the young children who were able to hold out on eating the marshmallows tended to do better academically down the road.  As the professor running the study said:  "If you can deal with hot emotions, then you can study for the S.A.T. instead of watching television... And you can save money for retirement.  It's not just about marshmallows."

All is not lost.  We can develop coping skills to overcome the lure of the here-and-now.  In fact, the nursery school students able to hold off on a treat may offer a clue to success.  The young hold-outs did not become obsessed with the marshmallows -- the "hot stimulus;"  instead, they distracted themselves by covering their eyes, playing hide-and-seek under their desk, or singing songs.  They did not try to defeat their desire -- it was merely forgotten.

We will never defeat our desire to consume, nor should we.  But we can avoid the pressures of spending more than makes sense by establishing fixed methods of saving (the equivalent of taking our eyes off the marshmallows).  Hopefully a judicious pattern of spending and saving will provide for more treats in the future.

Words of Wisdom

Saving is a very fine thing, especially when your parents have done it for you.
-- Winston Churchill