Thursday, August 4, 2016

An essay about Investing, but first a few words about social change

We live in uncertain times.  That seems to be the theme of the day, but when have we not lived in uncertain times?  I suspect that what most people mean is that established institutions that have given us a sense of stability during uncertain times are themselves being disestablished, with no mutually agreed upon replacements in sight.  The trusty balloon of American generic Protestantism has deflated.  Public schools are demeaned.  Police are feared and distrusted. Government was declared the enemy by Reagan, and the chorus of amens has escalated ever since.  Every major corporation is now multi-national with little loyalty to any interest other than its own.  Local fraternal organizations, once the birthplaces of local leadership, are dead or dying.  Unions were busted a long time ago.  The institutions we relied on to give predictable structure to society have failed us, and now to whom can we turn?  As a Christian, I have some thoughts about that, but not right now.  

It began in the Viet Nam era when anti-war and civil rights protests turned violent, and no one over thirty was to be trusted.  They coincided with passage of civil rights legislation dismantling legally sanctioned segregation that had, if nothing else, fixed the lines of social structure in a knowable way.  They also coincided with Great Society legislation that strengthened an expanded social safety net financed in large part by the federal government.  The past fifty years has been a political tug-of-war between forces trying to stop or reverse those trends, and forces trying to improve and extend them.  With the frightening advent of a black president, and the dawning recognition that whites would very soon no longer be in the majority nor hold dominant political power, a substantial number have been engaged in a toddler’s tantrum, refusing to do anything, or let anyone else do anything, unless they get their way.  Indeed, they now have their own candidate for president.  

Yes, the times are uncertain.  It isn’t simply that uncertain change is upon us, it’s that the velocity of change is increasing.  It is said that we are in a new age, the information age, which is driven by technology changing so fast that no one can keep up, or so it seems.  Is there anything out there that can be relied on to stand still long enough for us to get our bearings?  It remains to be seen what kinds of institutions will rise to give stability to the nation in the sea of uncertainty that we are now and have always been in.

I don’t believe it’s that dire.  The tantrum throwing toddlers, you know who you are, need to be given a long, long time out.  The rest of us need to bend to the task of reenergizing institutions that can serve an ethnically diverse population.  We also need to get on with the business of recrafting the social safety net to do its job well while, at the same time, encouraging self reliance as a treasured American virtue.  It can be done.  With that in mind, I want to drift into a related field: investing.  After all, if we are to be self reliant, we, each of us, must take some responsibility for investing in our own future, and that means investing money.

One of the silliest things I’ve read and heard said in conversations about finance and world markets is that the problem is uncertainty.  If it wasn’t for such unpredictable uncertainty, the markets would be more rational.  And, say the analysts and financial managers, our advice to clients about how to increase the return on their investments would be much more reliable.   If the markets were predictably certain, the analysts and managers would be out of business.  By definition markets are always uncertain, and hardly ever predictable.   Investing is a calculated bet, and just as often a dumbass bet, that the uncertainty will fall favorably in one’s direction.  Rather than uncertainty, I think what is meant is that the number of variables affecting market performance has increased beyond our ability to apprehend them, much less comprehend them. 

A local example might help explain.  We grow a lot of wheat around here.  The market for wheat has become much less predictable than it once was.  What was once?  Once was when there were  a few markets where wheat was traded by agents tasked with buying it for domestic milling companies.   Now wheat is an international commodity bought and sold in many markets.  Most of our local wheat is headed straight for export, which means it’s in competition with wheat grown anywhere in the world.  Global news that might affect the price of wheat is instantaneous, and sometimes not well verified.  Speculators, who have no intention of actually owning any wheat, buy and sell it in a game of commodity blackjack.  Algorithmic trading throws computer driven market manipulation into the mix in unsettling ways.  It’s all so uncertain.  Well, yes it is, it always has been, but now we have to contend with more variables than we can count, and many of them have nothing to do with the business of growing wheat to be sold to a miller, who will make it into flour to be sold to a baker, who will sell bread and pasta to hungry customers.

Wheat, oil, gold, corporate stocks, municipal bonds, mutual funds, hedge funds, treasury notes and bills,  they are all part of several games of commodity blackjack, which differ from casino blackjack in major ways.  The deck, for instance, is never the same size two games in a row. One cannot be sure from game to game that it contains complete sets of suits, or whether new unknown suits have been added.  Casino games favor the house, with the dealer bound to be the evening’s winner.  Commodity blackjack dealers are analysts and fund managers who have very little real knowledge about the game, but a lot of pretend knowledge backed up by reams of data collated to look like research.   Nevertheless, each year ends with someone producing yet another report showing that they underperform the market at every level, except when one or two don’t, and that’s just gamblers’ luck. 


So let’s hear no more talk about market uncertainty as the subject of blame for why markets are not more rational, especially when that talk is made with the implied expectation that more rationality will return as soon as things settle down a bit.  There will be no settling down.  Market rationality, if it ever did exist, is a thing of the past.  So what to do?  My preference, as one whose retirement depends on market performance, is to push investments toward funds that pick industries, and companies within those industries, that show long term performance in ethically responsible ways, and to stick with those investments regardless of market fluctuations.  Not very exciting.  I’ll never be a billionaire.  So what.  Never wanted to be one in the first place. 

No comments: