Mike Lipper’s Monday Morning Musings
3 Senior Lessons + Upsetting Parallel
In age order Henry Kissinger, Charlie Munger, and Sandra Day O’Connor
died this week. They were remarkable people who lived good lives, leaving numerous
good lessons for life. In general, these lessons can be utilized in our quest
for investment wisdom.
Henry Kissinger was not only a fountain of
geo-political knowledge, he was also a skilled conflict negotiator. Almost
every important investment contract could use his skills in finding areas of
agreement and more clearly defining the goals of both parties. In many
instances these agreements went beyond the headline numbers. This is the
essence of a happy deal and trade.
Charlie Munger, who I have had the pleasure of
knowing for over ten years, was a believer in staying within his circle of
competence. However, he grew this circle when he could. He was intelligently
patient if progress was occurring. He believed in the value of people over
historic financial results, both as customers and workers. (This became
important as the country transitioned to a service economy, even for the
manufacturing companies. Tesla is much more service
oriented than the Big 3, with their own wholly owned dealers doing some
replacement work, but very little repairs)
Sandra Day O’Connor believed in updating decision alternatives
in reaching conclusions. (One of the traditional investment problems is, what
is cheap and what is expensive? For investors this requires viewing prices in
terms of interest rates, the value of the dollar and other currencies, and evaluating
capacity utilization, among other variables.)
Upsetting Parallel
Current experience is the critical investment difference between the
enthusiasm of youth and inexperience. Young and inexperienced investors treat
every event as something new, requiring a new way of dealing with it.
More experienced investors recognize elements that are similar to past
behavior patterns. This suggests that very little is totally new, most circumstances
are somewhat similar to what occurred in past cycles. Kissinger, Munger, and O’Connor
were young in the period leading to the “Depression”. Those of a similar age
are dying out or no longer have views that seem relevant. We have not gone
through a similar period since WWII, which in part was caused by the
Depression.
Our educational institutions do not study this period and consequently most
people know little about it. Unfortunately, political leaders of today also know
little about it. The current occupant of the White House waxed poetic about the
FDR period upon entering the Presidency, not recognizing that many of FDR’s ideas
led to lengthening the Depression, and probably to WWII as well.
Cycles are never absolutely the same, but close enough to raise the
possibility, if not the probability, of similar results reoccurring. I will
attempt to identify some similar events reoccurring today.
Global Economic Growth Slowing Brings Autocrats to Power
World trade has slowed, and populations don’t like it. They look for someone
to blame and politicians are only too eager to provide answers, gathering more
power for themselves in the process. Prior growth has attracted more immigrants,
initially welcomed as low-cost labor. However, their growth in numbers has now become
a burden to the existing society.
Rising levels of crime will bring more policing power and stronger
governments. We are seeing leadership in just about every continent move from
the center to extremes on either the right or the left. Pay particular
attention to Europe, Africa, the Middle East, South Asia, Latin America, and
some elements within the US and Canada.
China Changes and the World Feels it
The rate of China providing goods at low prices to meet demand in the US
and Europe has slowed. The Chinese have cut back on imports, so China’s net
contribution to world trade has declined. Wealthy Chinese had been previously exporting
as much of their prodigious savings as possible. This has led to a change in the
Chinese government’s attitude. They are now trying to attract foreign
investment and are changing a number their rules.
The Chinese are simultaneously pouring resources into their defense
sector. They have more ships than the US Navy and now have 3 aircraft carriers.
They also appear to have state-of-the-art missiles and spacecraft. Like other
countries with large standing militaries, they have little respect for current
US government forces. However, like both Japan and Germany in the 1930s, they are
very conscious of the potential power the US could deploy if it had time to do
so.
Politicians Using Old Strategies in a Changing World
Good prices vs votes/contributions are the key battles. People want goods
and services without regard to where and how prices are generated, as long as they
appear reasonable relative to perceived competitors. Technology generally
lowers prices through increased production and less human labor. Professional
politicians want contributions from labor unions that have negotiated long and
large contracts. The reduction in world trade will eventually make many nations
poorer, including the US.
Target the Lawyers
Charlie Munger performed the switch from law to investment management brilliantly.
Goldman Sachs also has a number of successful investment bankers and other
executives who started with law firms before seeing green. In their defense,
some lead M&A counsels at law firms earn close to investment banker
packages, with their growing personal accounts residing at money management institutions.
Warning: If some of the trends mentioned continue, the parallel with the
Depression is more than likely.
What are you doing to prevent it?
Did you miss my blog
last week? Click here to read.
Mike
Lipper's Blog: A Cyclical World + Consistent Results - Weekly Blog # 812
Mike Lipper’s Blog: Recognizing a
Professional: Ratings vs Ranking – Weekly Blog # 811
Mike Lipper’s Blog: How to Find the
Answer – Weekly Blog # 810
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