In Which a Mere Blogger Questions Warren Buffet's Investing Philosophy

Value-investing was developed during the Great Depression. Since then, the percentage of households holding stocks has at least tripled, radically increasing demand for stocks. Because of that, it is too hard to find under-priced stocks to ever systemically apply value-investing. It might be akin to a high school kid holding out for a Sports Illustrated swimsuit model for a prom date. If he can do it, great. But if he wants to go to prom, he might want to lower his standards. So it is for folks who want to retire.

There. That's the gist of my argument. You can click on to another of the web's nearly 15 billion pages or you can read further.

First the caveat. I'm no Warren Buffet. Thursday of last week, Buffet's net worth rose $557 million. Yeah. Half a billion. My total net worth is a rounding error in the amount his wealth fluctuates during a trip to the bathroom. Buffet recommends value-investing, so you would probably be wise to ignore my concerns and listen to him instead.

But you're still here. Good. That means you've got an open mind. So for you I'll elaborate.

Ben Graham and David Dodd developed their ideas about value investing in 1928 and then released a textbook defining it (Security Analysis) in 1934. In its simplest form, the idea is to find stocks that are under-priced and then buy those when investing. Buffet has since defined this as buying outstanding stocks at sensible prices. I'm not foolish enough to argue with this. While it's a great ideal, it's just not a practical idea. Not anymore.

Both the percentage of households owning stock and the percentage of wealth represented by this stock ownership have gone up dramatically since Graham and Dodd wrote their book. As demand has risen for stocks, it is harder to find under-priced stocks that meet their criteria. While you wait for cheap stocks, you could miss out on decades of decent gains.

In 1929, when the stock market crashed and triggered the Great Depression, only twenty-some percent of Americans owned stock.

Gallup reveals that about 54% to 67% of households now hold stock. This percentage probably under-reports the actual percentage since so many Americans are invested in the stock market through pension funds they're unaware hold stocks.

Further, the portion of household wealth has gone up. In 1984, only 9% of household wealth was in the form of stocks (either directly or through mutual funds or IRA accounts). By 2011, that had risen to 46%. (401(k) accounts did not take off until about 1984.) As a percentage of household wealth, stocks rose about 5X in a quarter century.

This demand for stocks has driven up their price. And it is only getting worse. It's a cliche (and possibly even accurate) to say that about 20 years ago 80% of retirees depended on fixed pensions whereas today it is 80% of retirees who depend on their own investments. Demand is high for stocks and that alone drives up prices.

So, if you can find a stock that sells for cheap, a stock that's a great investment, do it. But that's like saying buy a good house for less than market price. It's tough to do. If you want to retire, you'd probably do well to get your money out of your savings account and into the market. If you can find cheap stocks, great, but don't wait because that may never happen. Buffet may represent the last generation able to systemically find under-priced stocks. You and me? We may have to pay retail.

The Beginning of the Zombie Apocalypse

The zombie apocalypse began so subtly, so seductively even. Of course now, in retrospect, it seems so obvious.

Portman's Reversal on Gay Marriage - or, the failure of imagination in policy formulation

Ohio Republican Senator Rob Portman changed his mind about gay marriage once his son came to him to announce that he was gay and had been as long as he could remember. It seems to me illustrative of the GOP's general lack of imagination when it comes to policy. Aid for the poor and homeless? Can't imagine this ever happening to me, says the GOP, so let's not worry about it. Aid for AIDS victims? Can't imagine this ever happening to me, says the GOP, so let's no worry about it. Same-sex marriage? Can't imagine ever wanting to marry someone of the same sex, so let's not worry about that.

In my opinion, good policy is a product of a good imagination. Ultimately, being able to imagine that the situation in which others find themselves is one that you could find yourself.

Finding our Future in the Past - There is Brain Research to Support my Conviction (he says, a little defensively)

From the WSJ article "The New Power of Memory" by Shirley S. Wang,

"Memory allows for a kind of mental time travel, a way for us to picture not just the past but also a version of the future, according to a growing body of research.""The studies suggest that the purpose of memory is far more extensive than simply helping us store and recall information about what has already happened.""Brain-imaging studies have demonstrated that when people are asked to imagine the future as they recall past experiences, many of the same regions of the brain—the hippocampus and the medial prefrontal cortex—show increased activity. "

The person who only knows the now has no clue about what else could be. Knowing what else has been in the past immediately triggers the imagination for what else could be in the future. 

Memory of the past seems to be the first step towards mental time travel. Those who learn history have an easier time imagining the future. 

Or maybe, as a guy who wrote about patterns of change that played out over 700 years of history in order to predict the next 50 years, I am reading too much into a little brain research to support my notion that we can find the future in our past. 

The Popularization of Entrepreneurship is Already Underway

Shark Tank is reality TV / drama / comedy / technology / business advice show mash up. Each week various entrepreneurs make a proposal to investors. It is the highest ranked Friday night show and its viewers have grown from 4.2 million in the first season to 6.4 million in this, its fourth season. Tim Sae Koo, founder of Tint, writes about how what he learned from watching Shark Tank helped him to get his startup funded.

I don't doubt that there are a number of stories like Tim's. As entrepreneurship becomes more visible, more people will consider it as a choice. McDonald's spends nearly a billion each year in advertising because they know that we only choose from the menu we're aware of: if you don't know about something as an option, you simply don't pursue it. Shark Tank is just one of the more obvious ways that entrepreneurship is entering the mainstream as a choice for the average person.

Meanwhile, outside of TV land, the Internet is abuzz with entrepreneurial stories, resources, and organizations. Shark Tank lets viewers vicariously experience what it means to pitch ideas or be a venture capitalists. By contrast, Kickstarter lets actually lets people actually be venture capitalists, funding projects they believe in.  Susan Jones from Melbourne has the blog Ready Set Startup! that shares stories and strategies of successful startups. Startup Social has created a platform that allows entrepreneurs in LA to connect. Paul Barron, at rethink  is offering videos on business innovation. And these are just a few of the folks who have begun to follow my twitter account in the last week. (And of course there are folks who continue to hone their skills in this new economy, folks like Cody McKibben and Dan Andrews who are simultaneously creating and being created by a new generation of location-independent entrepreneurs, in the process creating a new economy that transcends both old practices and national borders alike.)

The internets are alive with stories, strategies, collaborations, plans, small businesses about to become huge, ideas about to become real, and people who are teaching each other things that no one even articulated decades ago. The obscure is becoming common and the unknown is getting mapped. We are at a stage of entrepreneurship akin to the stage of exploration when Columbus was taking inspiration from Marco Polo's book of adventures.

What people don't realize is that the success rate of these efforts only has to be in the single digits to transform the world as we know it. Imagine this scenario: 100 entrepreneurs try startups. One goes on to create a company with 10,000 employees. The result? We end up with 100 employees for each entrepreneur - even with a success rate of only 1%. And as social entrepreneurs can tell you, business entrepreneurship is just part of the story: there is not a segment of society that will emerge unscathed from the  popularization of entrepreneurship: education, religion, and government will all be changed - indeed, transform is not hyperbole in the context of what will happen in the next couple of decades.

Most people are still wandering the mall unaware of the tsunami of change that will follow from the popularization of entrepreneurship. (A recent article of mine about this here and my book, The Fourth Economy, here.)

The Industrial Revolution was transformative. Starting in 1700, for the first time in 6,000 years, incomes began to rise. One reason for this is the math of capitalism. As Benjamin Franklin put it, "Money makes money and the money money makes also makes money." Compound interest is powerful. Wealth that increases by 1% a year will double in 70 years; wealth that increases at 7% a year takes only a decade to double. This math represents the phenomenal rise in wealth since the birth of Franklin in 1706.

The math of the entrepreneurial economy is even more impactful. It is the 1 in a 100 that leads to a 1,000. That is, the one successful entrepreneur out of 100 aspiring entrepreneurs who goes on to employee 10,000. We've never seen anything akin to the popularization of entrepreneurship, a force that could make this sort of math more common.

If you are a young parent, it is likely that your child will grow up to consider entrepreneurship as seriously as you considered college. Wrap your head around the impact of that. But that is the essence of progress: what was once rare becomes common.

Stay tuned. The world is just going to get more interesting.
ABC's promo here:

The Gap Between Wall Street and Main Street - real, rational, and reason for policy

Pundits like to pundificate about the odd disconnect between Main Street and Wall Street. They're aghast that the stock market could rise while the "real" economy as represented by job growth and unemployment is still doing so poorly. There is nothing irrational about this.

A stock goes up with the value of future earnings. At least three things make that rise: lower interest rates, higher sales, and lower costs.

A bad economy will lead the Federal Reserve to lower interest rates, so on that count a bad economy actually does drive up the stock market. While a bad economy drives down sales, it is worth remembering that many of the big companies sell more of their product abroad than domestically. So, even a bad national economy may have limited impact on overall sales.

Finally, and most importantly, a company's senior management is committed to profits. They are not committed to any particular product line or market or work force. They want to make a profit. If they have to layoff people to sustain profits, they will. If they have to outsource to sustain or raise profits, they will. If they have to shift their marketing to foreign countries, they will.If they have to create new products or discontinue old ones, they will.  Profits can rise in good times or bad and there is nothing irrational about that.  And it is good. It is wonderful that companies focus on creating profits: profits are the measure of the gap between the value of things we use as inputs (from raw materials to labor and capital) and the value of what we produce as outputs (the products and services the community is happy to buy).

It is easy to dismiss this as evil but it's worth remembering that an entrepreneur who starts a business and doubles his profits to $200,000 from the previous year has no obligation to anyone to hire another $50,000 a year employee (who will cost him roughly all his $100,000 gain in profits). It is not the business of businesses to create jobs. That is a side effect of creating value (valuable products and services for customers and equity value for owners).

Which is why it is silly to think that businesses will create jobs and lift an economy out of a recession. This is just one reason that Keynes was right about the need for government intervention. It is not just in bad times that governments need to spend to stimulate the economy. Only governments - as representatives of the community - can be depended on to make the investments necessary to make employees more valuable. Businesses are simply - and rightfully - focused on making their stock and their products more valuable. Communities and the individuals in them have to focus on making their people more valuable and productive.

Breaking the Congressional Commitment to Dysfunction (on budgets anyway)

I could understand a standoff in Congress over, say, war or abortion. You can't sort of be at war or sort of legalize abortion. Those are all or nothing propositions and it would make sense that opposing sides would reach a stalemate, unable to move forward on negotiations. But budgets? Really?

10 year old kids know that if somebody wants to buy something that another person wants to sell, you negotiate. You want $20 but I only want to pay $10? We compromise on $15. Numbers lend themselves to averages, to middle ground.

For two sides to be unable to negotiate a budget requires a serious commitment to obstinance or a genuine belief that the folks on the other side of the negotiating table are either stupid or evil.

I say that each of the 435 members of Congress put numbers into a spreadsheet that they share with their constituents as "their budget." Congress then simply adds together all these budgets and then sends the averages off to the Senate (who has perhaps done the same thing to arrive at their budget). Negotiations ensue and no three or four powerful or stubborn congresspeople have any more power than anyone else in Congress. Then, no matter how committed you may be to what other folks would consider madness, your influence would only be .25% - a quarter of a percent. If the idiots still get to define the budget in that system than we’ll know it’s only because – on average – congress and their constituents are idiots. And for all the ranting about Americans and their Congress, I just don’t think that’s the case.

This Train

Why Language Was Invented

The Secret to Keeping Teenagers Away from Marijuana

About a week and a half ago, I'm driving back to the Denver airport listening to public radio. In November, the folks in Colorado voted to make marijuana legal. Now they have to define just what that means the news was reporting on progress made by a panel authorized to define laws and regulations for this newly legalized product.

They've decided to make it legal for out-of-state folks to buy. This would make it a revenue source for the state. Colorado governor Hinkenlooper reports that at a recent governor's conference a lot of other governors were asking him about marijuana legalization, fully expecting that this will happen within their states soon. All that is interesting but my favorite bit had to do with their concerns about minors using marijuana.

The solution they're using to discourage teenagers from using marijuana is that they'll ban any candy flavoring, like chocolate. Their theory is that as long as they don't offer any chocolate flavored-marijuana, the kids will stay away from it.

I'm sure that will work.

Happy Belated Woman's Day

The Wealth Effect Will Boost 2013 GDP

The wealth effect could make 2013 a boom year.

It's probably the most obvious prediction of economics: as wealth rises or falls, people spend more or less. Your home goes up $100,000? You feel more relaxed about taking that vacation in Hawaii. Your retirement portfolio drops by 20%? You may feel too tense to even dine out that week.

The Great Recession of 2008-09 destroyed $16 to $18 trillion in net worth. Indices tracking the stock market and home prices both showed a drop of about half. A drop of even 20% in house prices can wipe out the net worth of many households. A drop of half is catastrophic. It wasn't just that incomes fell with rising unemployment: the wealth effect pulled down spending by staggering amounts. (And of course this creates a vicious cycle as dropping incomes erodes wealth which drags down incomes which .... )

So what happens when the economy reverses direction and the wealth effect begins to work to our advantage? This year we find out. And my prediction is that it's going to make for a great year.

From the Atlantic, http://www.theatlantic.com/business/archive/2013/03/this-is-america-now-the-dow-hits-a-record-high-with-household-income-at-a-decade-low/273719/

The job numbers are up and look strong. In February, the economy created 236,000 jobs - nearly 2 million in the last 12 months. 

Unemployment dropped to 7.7%, down from 8.3% a year ago and down from 7.9% the month before.

But more importantly, Americans are restoring their wealth.

This week, the Dow hit an all-time high. It has more than recovered the 50% it lost during the Great Recession.

Home prices are up nearly 10% in the last year, and have recovered about half of what they lost during the Great Recession. This means an increase in net worth of about $17,000 for the typical home owner in the last year, an increase of double that since the low. Zillow estimates that about 2 million homeowners were freed from negative equity in 2012 and forecasts that another million will climb above zero in 2013. The combined effect of getting out of the red with an improving job market will likely trigger more buying, particularly of big ticket items like cars, TVs, and, of course, homes. 

Fears of financial catastrophe in Europe are receding. State and local governments are beginning to stabilize and are now as likely to hire workers as lay them off. Combine that with the boost of the wealth effect and it looks as though 2013 could be a great year.

Economists were incredibly aligned on their 2013 forecast, which is ridiculous given the amount of uncertainty in the economy. In a typical year, the gap between economic forecasts is about 2% (predictions ranging from, say, 0% to 2% for growth). For 2013, the gap was only .4%, predictions ranging from 2.1% to 2.5%. I'm going to separate from the herd on this one. My prediction is GDP growth of over 3% for the US economy in 2013. One of the biggest reasons is the wealth effect.

US GDP is $15 trillion. The US lost about $17 trillion in the Great Recession. A recovery of all the stock value and about a half of the home value ends up improving wealth by nearly one year of GDP. And wealth is nearly back to its peak. Additionally, debt services as percentage of income has dropped about 3.5% of income - freeing up nearly $2,000 a year of extra income for each household. That's huge. The difference in debt service alone totals $200 billion, which is more than one percent of GDP. And additional wealth effects could add to that. In my mind, that alone could justify my additional one percent of GDP growth that I'm forecasting in comparison to real economists. Whether for good or bad, a wealth swing equal to one year's GDP can't help but have a huge effect on GDP growth.

Now go buy something and prove me right. It's time to go shopping.

Lots of other charts like the one above and other interesting numbers from Matt Phillips of the Atlantic (who reports with greater objectivity and less optimism than me) here. 

Democracy Collides w/ Complex Systems

Alan Watts reports in The Book, that in 1752 the British government reformed the calendar, changing the day that was to have been 2 September into 14 September. As a result, many people imagined that 11 days had been taken off of their lives and they stormed Westminster, loudly protesting this theft of days.

Curiously, TARP - the troubled asset relief program initiated by Bush and his Treasury Secretary Paulson and continued by Obama and his Treasury Secretary Geithner - is vilified by the right and the left. Tea Party members and Occupy Wall Street Protesters decry it as abuse of government, collusion between cronies in DC and on Wall Street, a massive subsidy to banks, etc., etc., etc. It's hard to think of a government program more roundly criticized by folks on both sides of America's wide ideological divide. 52% of Americans thought it was the wrong thing to do, as reported in a poll from early 2012.

It's also hard to think of a government program that more clearly paid a return of $25 billion to taxpayers. Essentially, the government bought troubled assets when no one else could, propping up their prices. What were these assets? It's simplest to think of them as stock in companies that were threatened with bankruptcy as the financial system began to collapse in 2008 / 2009. (The assets were more varied than that but were - in many cases - essentially shares in insurance companies like AIG and banks.) This did two things. One, it put a floor under falling asset prices, helping to stem a wave that could have rippled throughout the financial system, causing greater damage. Two, when the economy recovered and those troubled assets recovered in price, it allowed the government to make money when it sold them back.

Not only do very few Americans realize that all of the TARP amount has been paid back (the financial system had a line of credit of $700 billion but never came close to using that much), but few realize that the American taxpayer made $25 billion on the amount committed.

The problem is, many Americans still think that support for a financial system and Keynesian policies to create a floor under a bust are bad things. Like the British confused about the calendar, they don't really know what happened but they are quite certain they don't like it. They're protesting.

And this raises the question again of how to make a democracy work when people are suspicious of experts but don't understand the systems their votes influence.

It seems to me one more reason that we need to get really aggressive and really creative about teaching systems thinking and systems dynamics to our polity. Thomas Jefferson believed that education was essential to democracy. As our modern world is more defined by complex systems, that education has to include an understanding of systems.

Problem? What Problem? Why New Technology is no Substitute for GOP's Denial

Conservative friends of mine love to roll their eyes at mention of Bush. It's a nice reaction. It suggests that one is stuck in the past and gives them permission to ignore whatever point you've made. But there is a really important point buried in their avoidance.

Conservatives voted against Clinton's re-election and for Bush's re-election. I've yet to hear one conservative - and I know lots - who has explained the huge difference between conditions in 2000 and 2008. Until they can, it is a powerful indictment of their professed understanding of policy. They certainly have strong opinions about how the world should work; it's not obvious they understand how it actually does.

Republicans are working hard to imitate Democrat's apparent mastery of social media and organizing. They think that this will matter, might reverse their big losses at the national level back in November. It might, but I don't think so. Getting policy wrong can't be fixed by better use of Twitter.

The Fourth, Entrepreneurial Economy - the Essential 2% for Policy Makers

4th Economy book. Sweeping story of new Entrepreneurial Economy condensed to the essential 2% for policy-makers.https://t.co/62XLdFrReY

Fable of Lion & Gazelle vs. Waiting for the Right Pitch

There’s an odd little meme wandering around Facebook, one that Thomas Friedman included in his World is Flat book and that earlier appeared in the Economist.

Every morning in Africa, a gazelle wakes up. It knows it must run faster than the fastest lion or it will be killed. Every morning a lion wakes up. It knows it must outrun the slowest gazelle or it will starve to death. It doesn’t matter whether you are a lion or a gazelle: when the sun comes up, you’d better be running.

It’s ironic, of course, because it’s posted by and read by people who – rather than running – are browsing Facebook. But it’s also untrue.

The lion conserves her strength and does not run until she sees an opportunity. Likewise, the gazelle conserves his strength and does not run until he senses a threat. If they began their day running, they’d be too fatigued to notice, much less respond to, threats or opportunities. This sort of mindless, every day you have to work hard kind of meme, is an artifact of the old 8 to 5 world when every day is expected to be the same. The world in which you have to create your way to success is one more characterized by intermittent periods of immersion, gestation, and creativity. It varies in intensity. For my nickel, this story attributed to Warren Buffet seems to better capture today’s reality.

Secondly, think of yourself as you go through life as standing at the plate and people throwing you pitches. It is a very special baseball game. There is no one calling the balls and strikes and you can stand there forever. You have got all these people in the bleachers saying, "Hey, swing you bum!" on every second pitch. You just have to learn to ignore them and when a pitch comes along and it is straight but it is a little high inside, you let it pass. Another one comes along and it is a little low outside. Every once in a while a pitch comes along that looks like the sweetest, juiciest, fattest pitch you are ever going to see. And when it does, you swing from your heels on it. You come out of your shoes on it. That is how you go through life. And you are only going to get about ten swings like that, maybe five swings. That is what you wait for. Too many people go through life batting at every other pitch. So just wait for your opportunities and when they come you swing from your heels.

Begin your day scouring the landscape for threats and opportunities. And save your energy to pounce once you see them. Don’t just mindlessly run.  Even the lions and gazelles aren’t silly enough to heed the parable about the lions and gazelles.

Loosely Related Thoughts on Systems, Being and Social Evolution

“Thus, at the quantum level of accuracy, an object does not have any intrinsic property (for instance wave or particle) belonging to itself alone. Instead, it shares all its properties mutually and indivisibly with the systems with which it interacts.”

David Bohm, Quantum Theory, 1958

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Systems evoke properties and this is the story of the actualization of self. We abide in and interact with systems, with environments, and in those systems we become us. The more we know about the systems around us, the better we understand nature or markets or social trends or families or neighborhoods, the more options we have to respond.

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Scientists like Stephen Jay Gould have argued that evolution has no purpose. Evolution just happens. I disagree. Systems are defined by relationships, by a set of mutually interacting responses. The purpose of evolution seems to be to create more elaborate and complex systems that are better able to both evoke response and to respond. Evolution does move towards greater complexity. And in that complexity we have more potential, more ability.

In this the development of the individual’s potential is inevitably bound up in the realization of society’s potential. Bach would not have been Bach had the piano not been invented. Bill Gates would not have been Bill Gates had the computer not been invented.

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We have no intrinsic properties. Who we are is not a given. We have instead properties that are evoked by the world we live in. If you don’t like who you are, enter or create a new system. Stressed in the city? Go to the beach or step into the woods. Hate political parties? Start a new one.

This is the part that is fascinating. Systems evoke from us our different ways of being, different responses. One response is our creating or changing the systems in which we find ourselves. Writ big, it may mean Protestant or Democratic Revolution. On a  smaller scale, it could simply be changing a relationship. Because until we change our systems, there are whole ways of being closed off to us. We still don’t know all the options for human beings being human because the evolution of society isn’t done yet.

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And this process of social change is probably the system through which we have the most potential to realize our potential. Social progress does not just facilitate self actualization. It can be the means for it.

UK's Third Recession in Four Years - Or Why Fiscal Responsibility Comes AFTER Recovery

Among American conservative politicians, there is no one as sharp as the UK's David Cameron. As head of the Conservative Party, he's British Prime Minister. He has cut spending and raised taxes in order to reduce Britain's deficit. Put simply, he's been able to do exactly what so many of my - and your - conservative friends wish we'd do here in the US. However, there has been one little catch.

LONDON (Reuters) - The risk that Britain is entering its third recession in four years grew on Friday with figures showing that manufacturing shrank unexpectedly last month and mortgage approvals for home buyers dropped in January
Gross domestic product fell at the end of last year, bringing Britain within sight of another recession and the latest data suggested the central bank may need to do yet more to revive the economy.
The pound sank to its lowest level against the dollar in more than 2-1/2 years, while prices of British government bonds - which the Bank of England could resume buying - rose after the releases.

David Cameron is sharp but like his Republican counterparts in the US, he's a white man dancing. That is to say, he has all the right moves but has spectacularly wrong timing. The British love Winston Churchill but voted him out of office once WWII was over. They realized that a country needs different leaders for different times and they did not trust Churchill's domestic policy as much as they did his war-time leadership. Sadly, they've shown poorer judgment this time. Cameron would have been a great leader for Britain after it had recovered. His efforts towards fiscal responsibility have, instead, just worsened the economy and - paradoxically - made fiscal responsibility even harder. Nothing helps a government move towards a balanced budget quite like a growing economy.

Want to see David Cameron in action? Here he is debating Labour Leader Ed Milibrand. Hard to imagine John Boehner or Mitt Romney pulling off this kind of performance: