Some
things are not reasonable. For example, equity brokers still want you to put
money into long term investments, or they want you to trade. Now, it is
obvious that trading is to the broker's advantage because brokers get a
commission coming and going. Buy or sell, profit or loss, the broker is
always in the middle collecting a portion of the ticket. So, brokers love
trading, whether or not it makes sense. They encourage trading.
It may not be as clear why financial advisors love long term investments,
but the answer is simple: they control the assets. Mutual funds and indexes
regularly pay a portion of the investment to advisors and managers. Once
again, the broker is in the middle. The financial advisors sitting on top of
long term investments collect fees amounting to a fraction of the account
every quarter, just for "being there." That's better than trading, because
it is a steady income that does not depend on your making wise decisions.
Moreover, the standings of financial institutions are reckoned according to
total assets under control, so advisors have a chance of gaining economic,
political and social power. In other words, the advisors benefit from
standing in reflected glory. They are always consummate insiders.
So, trading, and
buy and hold, benefit brokers, but they may or may not benefit investors.
This is not to say those strategies are without merit; rather it is to
recognize the certain beneficiary. So, one way to win for sure is to be a
broker.
The advantage of
middlemen is evident in the growth of modern industries. It is rare that the
original inventor or developer of a technology benefits much from it. It is
the shrewd business person or management that "commercializes" a product
that gets the reward. This story has been repeated in every major industry.
The great companies do not spend the time, money and (emotional) energy
required to invent something and make it useful (despite all their boasting
to the contrary). They rely on someone else to do that, as in the old story
of the Cat, the Monkey and the Chestnuts. Thus, it pays to scout up and
coming ideas, and to have an early appreciation of potential winners. After
that, it is a matter of waiting to pounce on frustrated inventors,
developers and entrepreneurs. The waiting is essential, because every
inventor undergoes a cycle of elation and depression. Elation is the
"Eureka!" experience that comes with having a new idea, or solving a
difficult puzzle. Depression is the result of the anger and frustration that
comes when others do not see the solution, and even scorn the inventor. Lee
Armstrong (the inventor of FM radio) got so depressed after losing out to
RCA's depredations that he committed suicide. Smart middlemen wait for that
suicidal moment to offer salvation: a buyout. Most inventors and developers
will take the bait.
An important
middleman principle is represented in the portfolio strategy. Not every
investment is a winner, at least not right away. What works is to pounce on
the idealistic fools who in fact change the world, and take charge of their
fruitful ideas. In doing so, it pays to have a grasp on how the idea can be
marketed. It also pays to have a bunch of other fools hanging around who are
willing to risk their money to commercialize the product. (Most of them
eventually lose part or all of their investment.) In order to wrest away
the invention and the money from all those fools, one must have the gift of
blarney. The venture capitalist has to be a smooth talking SOB. Smooth talk
is a winning way.
Despite the
foregoing, there are some hard realities in this world. While investors have
not been friendly to technology since the bursting of the Technology Bubble
in 2000, the fact remains that all of us live in a high technology society,
even peasants in remotest China, India, and Africa. The Green Revolution,
for example, makes possible the lives of almost 7 billion humans; far more
people than pre-1960s agriculture could hope to support. The use of
computers and satellites has not only transformed First World societies, but
affects the lives of the poorest Africans. Without those technologies, there
would have been no speedy discovery of AIDS treatments, the SARS virus or
Bird Flu. Without modern technology, a pandemic like the Black Plague or
Spanish Flu is far more likely. So, one hard reality is that high technology
is not only here to stay, but absolutely necessary. It is not a bad idea to
have a piece of the action, which means one should either work for or with
the great technology companies. More distantly, one should invest in
technology.
Note: "Technology"
is not just computers. It is biotechnology, medicine, cell phones and all
the other things - even espresso - which are critical to our way of life.
Finally, there is
another near certainty. First Worlders, like all people, are not disposed to
throw away their comfortable life styles. They like their cars. Almost
everything that makes life enjoyable for 21st
century humans depends on the extravagant use of energy and other natural
resources. All of those resources are limited, and many of them will
eventually run out. There is only so much oil, natural gas, etc. Platinum,
gold, rare earths and other scarce minerals are in short supply because of
the way our Solar System was created. So long as the human population
increases, and so long as there is a demand for more and more, energy and
natural resources will be in short supply. This means their prices will
continue to rise. Investing in energy and natural resources is a nearly sure
thing, just like being a Drug Dealer. We could even call this the Drug
Dealer strategy.
Of course, there
has to be a hedge about betting on natural resources and energy: the money
one uses as an investment vehicle can lose its value. This problem is not
solved by holding gold. It is solved by investing in many countries. One has
to bet on the entire human race, not some variant of it. Therefore, one
should spread it around and invest in many places, many cultures, many
ideas.
Finally, there is
one unfortunate certainty. In the long run, it won't matter. As Lord Keynes
so astutely pointed out, in the long run we are all dead. Bet on that.
09:14:26 - Wednesday, 04/12/2006