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15 Points to Look for in a Common Stock

April 2, 2012 Leave a comment

Sometimes (actually fairly often) it’s good to revisit the investment classics that stand the test of time. From Philip Fisher’s Common Stocks and Uncommon Profits, great questions to ask about a company before considering a stock investment:

Point 1: Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?

Point 2: Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?

Point 3: How effective are the company’s research and development efforts in relation to its size?

Point 4: Does the company have an above-average sales organization?

 Point 5: Does the company have a worthwhile profit margin?

Point 6: What is the company doing to maintain or improve profit margins?

Point 7: Does the company have outstanding labor and personnel relations?

Point 8: Does the company have outstanding executive relations?

Point 9: Does the company have depth to its management?

Point 10: How good are the company’s cost analysis and accounting controls?

Point 11: Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in its relation to its competition?

Point 12: Does the company have a short-range or long-range outlook in regard to profits?

Point 13: In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares than outstanding will largely cancel the existing stockholders’ benefit from this anticipated growth?

Point 14: Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur?

Point 15: Does the company have a management of unquestionable integrity?

 

Bernanke: Ready for His Close Up

April 27, 2011 Leave a comment

Today’s first ever FOMC Chair press conference is certainly the start of something new—but having nothing to do with economic or monetary policy. That I could see watching from Fisher Investments HQ, virtually nothing interesting or heretofore unknown was said. It was all very…political. Bernanke was well spoken, he was empathetic, he was balanced, he was sensible. He was all the things you look for in a politician’s speech.

So what we have here is not so much a new era of improved communication between the Fed and the public, but more like a politicization of the Fed—Big Ben is now an inch closer to being the head of the US economy in the public’s eyes—in some ways almost more than the president. Think of what an evolution that is: just 30 years ago the Fed was barely thought of at all for macro economics, now Bernanke is speaking to everything from inflation to manufacturing to the Japanese earthquake. Said another way, people believe he is in charge, and—gulp—has some mighty control over what the US economy does and is. In reality he mostly sets monetary policy and governs the banks—a vital part, but just a part, of the economy. Ben now seems less interested in saying what is true or what he really thinks than he is in saying things that he believes will be good for the market, good for the economy, will instill confidence in the system, confidence in him, etc. Oh, and also he will talk and behave in ways that preserve his job and ego (recall that this is an appointed post by the president).

The Fed Chairmanship is now—as of today—more of a public figure-headed institution than ever before. Time will tell what that means—the Fed is one of the most evolutionary public financial entities in all market history, and they’ve never been static in their policy or function.

Weekend Brief

December 6, 2010 Leave a comment
  • So far a recovery in employment hasn’t had anything to do with the bull market or the economic recovery. See this week’s (or this year’s) returns relative to the new higher unemployment number.
  • Few will see it this way, but history could very well show that the US —more or less—did things right once the crisis hit. At the outset, huge liquidity provisions to keep the system afloat, and once the recovery took hold a few years later it looks like we’ll get extended tax cuts and probably even some spending cuts. QE2 notwithstanding (granted, that’s a BIG notwithstanding), that’s actually a pretty good way to navigate a financial crisis on in to a recovery.
  • One of my favorite things is to read Fed commentary literature—it’s some of the best speculative writing since Ray Bradbury. Everyone thinks they “know” what Ben is “really” trying to say in his speeches. Ignore that stuff and act according to what is done, not said.
  • A worthwhile readWho Pays for Big Government?
  • Russia hosting the World Cup will be less a grand display of the country and its prospects and more like a last gasp on the global stage.
  • A thought-provoking and worthwhile opinion piece from Gerald O’Driscoll Jr. in today’s WSJ on whether we even need a central bank, and how the world might look without one.
  • EU business confidence recently hit an all-time high. The EU economy will grow nicely this year and projected next year too. It’s a bizarre dichotomy right now between European sovereign troubles and their recovering/thriving private economies.
  • The ECB extending unlimited lifelines to banks one quarter at a time doesn’t really help much at this point—knowing you’ve got a backstop for another 3 months doesn’t address the real issues. Although, it’s probably good that they didn’t sunset the program. That the ECB is buying Portuguese and Irish bonds right now is fine enough, but the scale of the purchases as of right now is way smaller than previous programs—it’s not a big initiative at this moment. Maybe it’ll grow…
  • …you can think about the debt crisis in poker terms: Ben Bernanke’s got a terrible bluff—usually telegraphing his moves well in advance. Trichet’s got a great poker face, sometimes even misdirecting the public before making a move. He says he doesn’t expect another big stimulus initiative by the ECB—I wouldn’t hold my breath on that, particularly with EU finance ministers meeting in a few days.
  • One of the main reasons for Europe ’s current fiscal problems is political. Have a look at Prime Minister Zapatero in Spain —he’s getting more unpopular by the day. Meanwhile, he’s got to figure out a way to make his budget work and support the smaller Spanish banks with dwindling political capital. Tough to get things done in that environment.
  • An interesting thing about Obama and his administration is that they’re nothing if not persistent. Initiatives like the Healthcare laws and parts of FinReg looked DOA and yet eventually got done. And now the South Korean trade pact—which looked all but dead a week ago after the tepid G20 summit—now looks like it could actually get done again. That’s a good thing…the US has woefully under-participated in new free trade pacts this year where the rest of the globe’s done tons.
  • Surprisingly profound quote of the Day: “It’s always here and now my friend, it ain’t once upon a time!” – David Lee Roth

 

Tuesday’s Quick Takes

December 1, 2010 Leave a comment
  • Here’s one of the most important articles of the year: Economists’ Grail: Post-Crash Model. Simply, any economist worth their salt knows that the nature of complexity and accelerating change means math as it exists today in no way is able to predict the direction of markets or economies. The world is too big and deep and complex and has been for a very long time. So it becomes a profession of probabilities. These Sisyphus-ian attempts at math blended with psychology are noble, but a losing endeavor for those who must make practical predictions…like investors.
  • The euro sovereign debt thing ain’t over. Just don’t expect it to spark a new bear market. One of the oddities about the European situation right now is the disconnect from government finances and their actual economies. Ireland is set to grow +4% in 2011, and much of Europe is firmly in recovery. Germany ’s economy and stock market are up, as is European economic sentiment. Most of the rest of the world looks poised to post modest stock market gains for the year. That’s important because just a few months ago experts were declaring that asset markets were all unprecedentedly highly correlated. Yet, at least on a country basis for equities, there’s going to be some significant dispersion this year. Italy is down almost as much as Spain and Portugal , but Germany , Sweden , and others are doing just fine.
  • Germany does a lot of its exporting to other European countries that use the euro. So, expect them to keep talking tough publically about other euro countries in fiscal trouble, but ultimately lending their support. Maybe the only way it breaks down is if Germany itself becomes fiscally endangered, in which case you can bet they probably won’t be willing to go down with the ship. But we’re nowhere near that right now.
  • Obama’s proposed two year freeze on federal pay seems fine, but speaks to the overall lack of incentive to produce that comes with working for the government—pay isn’t based on any sort of output that I can see. This is also a clear signal to my view of Obama’s upcoming move to the middle to get reelected in 2012. Watch for a compromise on tax cut extensions to come next.
  • The revelation that Russia has moved missiles near NATO territory isn’t going to rankle markets now, but it’s worth noting. With the SMART treaty in jeopardy, this is a sterling example of how frisky Russia could get given their desperate population aging and economic problems—which will only get worse over time. Desperate countries do desperate things and look for last gasps at power on the international stage. Eastern Europe is prime territory for that drama over the next decade.
  • The brewing row in Florida over a phosphate mine and environmentalism is a global non-issue. If the US doesn’t do it, countries like Morocco , Tunisia , and China will provide all phosphate the world needs and more—and reap the benefits. Phosphate is used in everything from batteries to fertilizer, and the world will have a big need for it in the decades to come.
  • Note that the Wikileaks scandal is a non-issue to markets, and really not that big a deal generally. Why? Most of the stuff in those leaks are all things most well-informed citizens of the world more or less expected to be going on anyway. Rumors have surfaced that next on the Wikileaks hit list are confidential docs from a big commercial bank. Same principle probably applies there too—will be damaging to whoever gets hit, but the global markets will likely mostly shrug it off, if it happens at all.

 

Correlations Work Fine…Until They Don’t

September 27, 2010 Leave a comment

Lately there’s been much hubbub about how highly assets have been correlated (i.e. different types of assets all moving more or less in lock-step). Which is a (mostly) true observation lately. But, as an investor, be very wary of acting on such observations. Ignoring “correlation without causation” is one of the first and best lessons I’ve learned. Lots of stuff can be correlated, but if you don’t understand the reasons for it—and therefore aren’t able to make a sound judgment on whether it will continue—just ignore it. Because, as any technical trader or quant hedge fund investor will tell you, correlations work…until they don’t. And there’s no rhyme or reason for understanding when and how all that shakes out. For instance: After Nine Months, Crude Oil Parts Ways With the Stock Market.

The other side is, even if you believe two things—in this case oil and stocks—should be tightly positively correlated, you still have to figure out where one is going to know where the other one is going.

Trend Continuation is the Economic Model’s Bread and Butter

August 20, 2010 Leave a comment

The Bundesbank (in Germany ) raised its estimate for German GDP to 3% for 2010 from 1.9%. Recall that about a week ago, German GDP blew past estimates in Q2, growing 2.2% q/q, which sparked this reassessment.

Many seem to believe this is a tame estimate, and anecdotal forecasts have ranged in the ~3.5% area. I should know better, but I’m still often left stunned and breathless at how fickle so-called economic models are. They quite literally take the recent past and extrapolate it into the near future. Which makes these things darn near worthless to investors, except in one important way: understanding market expectations. With economic models swaying in the wind as they do, they end up approximating what the world is anticipating. And that’s good because trying to understand relative expectations versus reality is what matters for stock market forecasting. So, in a bizarre way, these so-called empirical, math-based economic models function more like sentiment indicators.

Also, recall Germany approved an €80bn austerity package in June to balance their 5.5% budget gap (which Goldman Sachs now estimates will only be 3.4% in 2010). With growth moving so briskly and better than the world believed, one has to wonder how ‘necessary’ all that austerity will feel to politicians, who (particularly the likes of Angela Merkel) must be feeling beat up right now after a summer of PIIGS worries. Right now, the German government is standing pat on austerity, but look for that to change if things continue to improve more than expected.

To wit, the country that put the “S” in “PIIGS” is doing just that. Spain has decided to reinstate €500mn worth of Infrastructure Spending. The funds are purported to be spent in 2011 on a number of projects, the biggest being the development of the A8 motorway linking northern Spain with France . We aren’t even out of the summer of 2010 yet and the worst European debt offenders are already scaling back austerity on the back of stronger economic growth.

True, this is minor in size, but speaks directly to the idea that spending is less easy to cut than simply growing one’s economy in order to rectify budget problems. As ever, the easy answer is to grow the tax base. And by the way, none of these developments are consistent with the theme of a global double-dip recession— Europe ought to be the most prime candidate for it.

Wary is Bullish

August 11, 2010 Leave a comment

This is the kind of headline shrewd investors often interpret (rightly) as bullish: Firms Spend More—Carefully. Just below the headline, it reads: Equipment Purchases Make Up for Recession Cutbacks, Not to Raise Production.

How’s that bullish? Because the simple fact is that equipment purchases are rising, regardless of the “wariness” surrounding it. Or, said differently, economic (and stock) recoveries don’t transpire in waves of high sentiment—the “all clear” never gets sounded until long after. This is as true for CEOs as it is for your average investor. Economies still feel sick even as they heal.

You can think of this still a third way: A recovery, by definition, is first a replacement of cutbacks, then of resumed growth. We’re in the part of the cycle that still features “replacing cutbacks”, which likely means, barring something big and bad not already widely acknowledged, we’re still in the front portion of a longer bull market run and a stronger (again, global) economic recovery than most are willing to realize.

Don’t let a big negative day like today spook you—that’s what the stock market does best. The puzzle pieces for sustained, global economic growth remain in place, and renewed worries over deflation and/or new recession are based more on this wary sentiment than reality. Even a potentially less robust recovery, as the Fed intoned yesterday, is still a great environment to own stocks that remain very cheap in my opinion.

Fisher Investments Analyst’s Book Review: Squam Lake and Senseless Panic

August 4, 2010 Leave a comment
Let’s get this part out of the way: Don’t read the Squam Lake Report. The book is the muddled product of 15 experts recommending financial reform. It’s mercifully short, but reads like overly collaborative documents do—I shudder to think of the endless word massaging and negotiation writing this thing by committee must have required. The result is an overly formal and tepid work with few novel or particularly lucid insights not already covered elsewhere. And to Fisher Investments MarketMinder’s view, this group fundamentally misunderstands the causes and consequences of the panic. Skip it.

Instead, pick up the equally pithy but vastly wiser Senseless Panic, by William M. Isaac. As former FDIC chairman and close collaborator with Paul Volcker through some truly rough financial times like the Penn Square/Continental Illinois banking crises of the early ‘80s, and the S&L crisis of the late ‘80s, this guy is a regulatory veteran with real world experience to give us important perspective about today.

It’s a great thing to see the 2008 crisis contrasted with these events—something that’s been almost wholly neglected until now. The situations weren’t the same, but the basic lessons about public policy vis-à-vis banking are vital. Basic lessons about getting broad participation from banks for emergency programs, dealing with moral hazard, being decisive and transparent for the markets, showing the “bazooka” of commitment to backstop vital institutions, recognizing the interconnection of banks, and much else, were all experienced here…less than a generation separated from 2008. Back then, at least, they staved off a true panic.

The first part of Isaac’s book is a memoir of his career as FDIC chair, which is surprisingly lively and light—he turns out to be quite a gifted communicator. This is a very readable book. His anecdotes about the Butcher banks of Tennessee, for instance, hold great lessons about how banking stress tests work, and are entertaining without being overly wordy or bogged in detail.

And it’s from this authoritative viewpoint of experience that Isaac launches the second part of the book, which unequivocally states: This panic didn’t have to happen. It’s a breath of fresh air to read Isaac make some basic empirical observations about the subprime mortgage market and its magnitude (it was far too small to create a global recession and market panic), and ask the basic question: So how did a manageable situation like this turn into such a disaster? Answer: The devastating mark-to-market accounting rule and inept response from our government. Simply, this is the best breakdown of FAS 157 published so far.

There’s only a little to be critical of in this book. I couldn’t shake a sense of “apologia” in the same vein of Henry Paulson or Alan Greenspan’s memoirs. Much of the first half of Isaac’s book reads almost like a justification for his decisions 30 years ago. This is understandable because free markets proponents (such as these fellows) would normally feel ambivalence about public policy in the first place. But it’s tedious to continually justify one’s existence.

Isaac is most upset because in 2008 the Feds didn’t get out in front of the problem and instead handled it in a cobbled, hodgepodge fashion. This, truly, is the best advice for a public official—to be consistent and transparent. But at times this lesson becomes overwrought. The hope is for regulators in these positions to realize their powerful, but often limited, ability to truly anticipate and contain all financial ills. Unfortunately, too often such folks are addled with the political disease of believing they are capable of more than is realistic.

For example, Isaac describes the need to enact reforms and policies that detect and/or fix future ills before they happen. That is, instead of being reactive, they ought to be more proactive. Some of this good: Filling the FDIC insurance coffers in good times rather than imposing higher fees in bad times (as happened in ‘08 and ‘09) is a fine enough thing. But, Isaac simply isn’t skeptical enough of his own powers, or those of who might serve in the future. There’s far too much talk of “there’s a proper way to do this” and “we can make sure a panic never happens again” via sound public policy. This is hubris. So long as we continue to have free markets, there will be more panics. There’s only so much any elite group can anticipate and appropriately act upon. And, every situation will be unique and require context to make the best decisions—no rigid playbook will work. So, it’s disappointing to hear Isaac support notions of a Systemic Risk Counsel (SRC)—a regulatory body designed expressly to monitor risks in the system and recommend circuit breakers for them in the future. (Which is now a reality, by the way, thanks to the new financial reform bill.)

Oh! If only it were that simple. The fact is some of our best, most learned financial minds simply botched this episode. The lesson is not to further strive toward a quixotic utopia of regulation to prevent future breakdowns. Regulation should evolve with the quick-moving capital markets, but sound regulation realizes its limitations—it is by definition reactive and will remain so as long as capitalism remains dynamic. That means recognizing the fantasy of making rules that prevent all future ills. We boom and bust. This lesson is particularly poignant now that we can view the US financial reform, which mostly ended up a jumble of politicized goo that proved wholly unable to produce solutions to the true problems of the era.

In some fashion, though, this is quibbling. Isaac has produced one of the best analyses about the 2008 crisis, and we’d do well to heed the lessons of his well-articulated experience. As the regulators begin to interpret and act upon the new reform bill over the next many years, let’s hope they keep his work in mind.

*The content contained in this article represents only the opinions and viewpoints of theFisher Investments editorial staff.

It’s Never a Straight Line Up

July 8, 2010 Leave a comment

I don’t care if it’s early cycle, mid-cycle, or late cycle in an economic expansion (assuming you believe in the idea of predictable economic cycles at all, personally I’m dubious), economic growth is never a straight shot up.

Maybe you’re an optimist and say U.S. Retailers’ Sales Rise at Fastest Pace in 4 Years is super bullish, and a signal we won’t have a double-dip recession. Or, maybe you see that the ISM Non-Manufacturing (aka “Services”) composite fell more than expected in June, and decide yes, we are going to have that double-dipper, as is vogue these days.

I don’t think either one is telling. So what if retail sales were the strongest in 4 years? And so what if services were more sluggish than hoped? (Note: they didn’t contract, just didn’t grow as fast as expectations.) Both grew, and both are single economic data points that when looked at on a year-over-year or sequential basis can be highly erratic. Heck, check outquarterly GDP growth—during expansions it’s all over the place and one quarter doesn’t tell you much about what the relative strength will be the next.

Particuarly after an initial bounce off the bottom of a recession, a slowing and erratic pace of expansion is normal.  Media and analyst reaction will latch on to these reports as emblematic of whatever serves their purpose. But the point is, they grew.

Fisher Investments Analyst’s Book Review: The Rational Optimist

July 1, 2010 Leave a comment
I was in Austin, Texas recently and met with a client who is a retired French literature professor. After a lively afternoon discussing markets, economics, and geopolitics, the conversation turned to French modernism and Albert Camus. I quipped that Camus was a master author, but his philosophical writing is better than his fiction. Her eyes lit up, she sat up, and spoke through a wide smile, “Yes! Yes. The Myth of Sisyphus. Brilliant! Excellent! Oh!”That’s a lot of enthusiasm for a book about suicide! Well, that’s not fully true. The point of Sisyphus (a longstanding work of the modernist pantheon) is to start with the apparent meaninglessness and absurdity of life, but actually conclude with hope as the only rational response. Indeed, it’s in our nature to hope—to see a way forward, even be overconfident in our ability to achieve a brighter future. And it has been! Humanity’s traversed an accelerating upward trajectory for a long time, albeit with bumps along the way.

But we tend to be hopeful about ourselves, not the world at large. We worry about the world and its future. That’s probably for many reasons but this effect’s been pronounced over the last decade, as it was in the ‘70s. Optimism is the four-letter word of our time. The perfect antidote? Matt Ridley’s new book, The Rational Optimist. This is the best investing book of the last several years—bar none. A sweeping account of human history through evolutionary and economic lenses, this book is a devastating, fact-driven, often empirical, cogent argument against today’s de facto media dourness. Ridley uses economics and evolutionary psychology to chart the upward trajectory of human civilization with astonishing acuity and insight.

Yet, this book rarely mentions investing at all. I went on Amazon recently and noticed it ranked #2 in the category of Early Civilization and Civilization & Culture books, and #1 in Technology and Futurology, but wasn’t listed in the economics or investing categories that I could see. This is status quo, to my view. The best investing books and ideas are rarely explicitly about those topics. Economics and investing are too narrow—married to their metaphors of equilibrium, market efficiency, supply and demand, bizarre calculations, and so on. Their practitioners cannot usually see these are useful—but limited—metaphors for describing the world. Mistaking these things for real observations about the world, they regard equilibrium, for instance, not as an abstract Platonic ideal, but a real thing. Thus, many spend their time seeking precision and depth in a field founded upon abstraction, as if economics were a physical science. I’ve never been a big Paul Krugman fan (the Nobel laureate and New York Times columnist), but he’s dead right when he says economic theory is best used as a “scaffolding” for positing a point of view that can eventually be stripped away to baser elements of an argument.

Additionally, intellectuals writing economics books—as a group—don’t tend to be optimists. It isn’t becoming of them to be cheery (the rare times they are, look out…a bear market’s likely afoot). If they didn’t have warnings to the populace about stuff, why listen at all? (The recent popularity of Nouriel Roubini’s persona “Dr. Doom” is case in point.) Tiresias never had good news; seers generally have foreboding tidings. Yet, to view history broadly (especially market history) warrants a good dose of optimism.

As a staunch optimist, yes, Mr. Ridley is very biased. He’s a freewheeling, no-apologies capitalist. He believes capitalism is as natural as natural selection. He thinks humans’ natural overconfidence in themselves and capitalism are intertwined and symbiotic because capitalism is all about the pursuit of individual goals and not those of the elite. And while his rhetoric is highly compelling (in the opening chapters he bludgeons us with statistic after statistic of positive things in the world), one could easily argue he’s being myopically optimistic just as pessimists will be myopically pessimistic. It’s not until the end of the book that he balances his argument and acknowledges—almost in an obligatory way—much of the world is still a heinous place with big challenges ahead of it.

But at the very least, I encourage everyone to balance today’s thrum of pessimism and get a dose of optimism with this book. The part I have trouble with is that it doesn’t give pessimism its due. Worry, fear, and the preparation and adaptation they spur in us is a very necessary thing for the progress of mankind. Personally, I want folks overreacting to bird flu, the ozone layer, potential terrorism, etc. It makes us prepare and anticipate—often negating problems before they happen or expand. It’s just not a good baseline perspective for long-term investing.

Economics as Historical Lens

One of the main shortcomings of history is its lack of economic perspective. We have books aplenty about wars and revolutions, and scads of biographies about famous leaders, but little of real quality about the economic forces that truly shaped much of history. That’s mostly because we like narratives about people, not abstract, impersonal forces. (Though, Jarred Diamond’s attempt with Guns, Germs, and Steel is an often flawed but noble attempt to highlight those faceless forces.)

In a way, this book is a recapitulation of Adam Smith—both his Wealth of Nations and the less touted but equally tremendous The Theory of Moral Sentiments—with updated scientific language. Ridley’s crucial point: Economists and pundits who preach doom tend to ignore the most salient feature of life—adaptation. Which is also a baseline ingredient of capitalism. The human race is a collective problem solving machine. As individuals and as a society, we tend to figure stuff out and move forward. Which is a big reason why Malthusian arguments about food supply and energy constraints have never held. Sages and economists through the ages agree that the only thing that’s constant is change and dynamism. It’s therefore insane to extrapolate today’s situations and potential problems into the far future—the world will adapt and change. This is where Ridley is most convincing, and a point that, admittedly, requires some faith in order to be optimistic. There’s no explicit guarantee we’ll adapt through time, but I’d bet on it.

Ridley makes some excellent economic observations about adaptation and progress through history. For instance, birth rates tend to go down with developed, highly productive nations, helping solve future population problems. He provocatively explains energy development and the Industrial Revolution’s onslaught of efficiency effectively eradicated slavery through much of the globe—making slavery unprofitable and unneeded relative to steam engines, etc. But instead of going the route, as many do, of then worrying about how we’ll fight over fossil fuels in the future, he observes that the most likely outcome is we’ll figure out even better ways to harness and access energy, and as that happens our potential for even more prosperity also increases.

Ideas, Mating

Through all this, Ridley offers an interesting critique of science and the nature of innovation. He sees science as an appendage to the intellectual community where the real innovation and invention come from the mixing of ideas and technologies in the world at large. Ridley believes in trial and error as more powerful than hypothesis and testing. He predicates this on the observation that new discoveries tend to come from the private sector and via immediate needs, not the Academy or government. (Ask any major pharmaceutical company how they create new life-saving drugs, and you’ll quickly realize just how haphazardly new discoveries are often made.)

The basis for this view of progress is technology. Ridley describes technology as a “mash up” of existing things (piggybacking off of Brian Arthur’s excellent book, The Nature of Technology). Technologies are what create productivity, and therefore wealth. This is facilitated by idea exchange and self-interest (here’s where Adam Smith pops in), and by the economic “technology” of exchange for mutual benefit and division of labor (trade)—what human communities and their mechanisms of exchange (like markets) are designed to do. Which, to Ridley’s view, is the reason cities will naturally overtake rural areas—they bring us in to closer proximity and thus facilitate more exchange. In other words, the freer and more capitalistic the society and the more we’re interconnected, the more innovation we can have. Thus prosperity and higher standards of living ensue in a positive feedback loop. This feature can and has accelerated through time.

This is a form of evolution—but out of the biological realm and into human civilization/culture (Marvin Minsky observed this with his idea of “memes” decades ago). Ideas, just as much as machines, are a form of technology and are dependent on reciprocity, exchange, and community to create wealth. Interconnection is the key. Without trade, innovation can’t happen because there’s no incentive for it.

These are not new arguments, but remain provocative because synergy doesn’t come naturally to us—we tend to be very skeptical of it even though we behave in accord with it daily. We tend to be more comfortable with the idea of life as zero sum—dividing up a finite pie instead of making a bigger one. People think of trade and capitalism as selfishness because it’s not natural think in terms of mutual benefit—most of life on earth has been about the struggle for scarce resources. This is especially true since capitalism rewards value creation as a core value versus egalitarianism. But nothing’s been more effective at wealth creation through time.

The Nature of Hope

James Hillman, perhaps the greatest living thinker in the field of depth psychology, is harshly critical of hope. He views it an illusion. He says hope creates expectation, which can only lead to disappointment. We should live without the future and stay in the present.

That isn’t possible. We humans think forward, we expect, we build, we accomplish, and we transfer those ideals to the next generation. And with those innate drives, we hope. Hope isn’t an illusion, it’s the motivator—and it is undying. The will to survive and thrive, to move forward, this is a big part of what it means to be a person. It’s inherent and irreducible and even if it subsides for awhile (as it has communally these last years, at least in economic terms) it won’t go away.

And that reason alone is why—above all the economist-speak about incentive, laissez faire, self-interest, profit; above all the hyperbolic political talk about fairness, independence, and freedom; above all the psychology clap-trap of loss aversion, biases, and behavior—beyond all those things, hope propels the world and its economies onward, especially where capitalism allows it to flourish. Today is no different.

Long-term investors simply must on some level believe in that. To stake your future on investment in any form (that is, on the future prosperity of the world), but particularly equities, you must on some level believe that the world will grow, that wealth will continue to be created, that higher standards of living will prevail. To be otherwise is against our nature. As Camus says, “The struggle itself…is enough to fill a man’s heart.”

*The content contained in this article represents only the opinions and viewpoints of theFisher Investments editorial staff.
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