Field of play
America’s best days lie ahead
This post is about keeping world and economic events in perspective. When faced with turmoil we need a proper frame of reference. If we focus too much on the here and now, our view of things can get distorted and we make bad decisions. In this post I aim to provide that frame of reference.
New and improved
Before we get into that discussion, let me tell you about an improvement to this blog and website. The ABOUT tab above has been rewritten with an introduction to help readers get the most out of the blog. Please explore.
This time is not different
When we read and watch the news it’s easy to get caught up in the moment. Lots of things are happening on the economic, business and geopolitical front. The stories are often made more dramatic by the writers and presenters.
Let’s take a step back and see if the world is really going to hell in a handbasket.
A wonderful book was published in the midst of the Great Financial Crisis of 2007-09 titled This Time is Different. The subtitle was Eight Centuries of Financial Folly. The authors were Carmen M. Reinhart and Kenneth S. Rogoff, professors of economics at the University of Maryland and Harvard respectively.
The dust jacket explains the thesis of the book:
“Throughout history, rich and poor countries alike have been lending, borrowing, crashing – and recovering– their way through an extraordinary range of financial crises. Each time, the experts have chimed ‘this time is different’ – claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. This book proves that premise wrong. Covering sixty-six countries across five continents, This Time is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes – from medieval currency debasements to today’s subprime catastrophe.” (Emphasis added)
Wars, business and economic turmoil
The world has always experience turmoil. The world is constantly changing. But the world is also constantly recovering and constantly making progress. In this post I will look at the idea of recovery and progress and whether it is only those who suffer from a pathological optimism bias who can contemplate recovery and progress.
June 1914
Let’s look back at roughly the last 100 years.
Ben Graham entered Wall Street in June of 1914. The first edition of The Intelligent Investor, perhaps the most influential book ever written about investing, was written in the late 1940s. Think about some of the world and economic events he experienced in that time period.
World War l took place between 1914 and 1918. The total number of military and civilian casualties in World War I, was around 40 million. There were 20 million deaths and 21 million wounded. The total number of deaths includes 9.7 million military personnel and about 10 million civilians. (Google)
1929 saw the October 24th Wall Street crash, known as Black Thursday. It became the most devastating stock market crash in U.S. history. The crash signaled the beginning of the twelve-year Great Depression that affected all Western industrialized countries. (source for this and items below)
The 1930s
In the early 1930s the Great Depression deepened as nearly 10,000 U.S. banks failed and the nation’s workforce approached 25 percent unemployment.
WWll
World War II occurred between 1939 and 1945. It was the largest and deadliest conflict in human history, involved more than 50 nations and was fought on land, sea and air in nearly every part of the world.
Post WWll
In 1951 the Korean War led to serious government deficits and the issuance of massive new government debt.
In the 1960s inflation took hold. There was a public furor over rising food prices. The Nixon Administration imposes wage and price controls to curb inflation. Although inflation was initially halted, it shot up when controls were removed.
The war in Vietnam intensified in the late 1960s and ground on through the mid 1970s.
Ben Graham was working on the fourth revised edition of The Intelligent Investor in 1972. There had been a massive worldwide post WWll recovery. And yet, 1972 was a perilous time to be an investor. The stock market was collapsing after the Nifty Fifty bubble and panic selling occurred.
In 1972 our first child was born and I decided it was time to think seriously about saving and investing to secure our family’s future. I put those savings into a Canadian Bar Association sponsored retirement plan.
In the 1972 – 1973 period, the Arab oil embargo during the Arab-Israeli war caused petroleum supply shocks that raised the price of fuel. A decline in agriculture, combined with rising oil prices, caused serious unemployment and inflation that reached 10 percent; a phenomenon known as stagflation.
The fourth revised edition of The Intelligent Investor was published in 1973. Stock market turmoil continued through 1972, 1973 and 1974. A major bottom occurred in the stock market in late 1974.
The lesson as articulated by Benjamin Graham
He says, referring to a table of stock performance over a period of one hundred years, and speaking from the year 1973: “Today’s investor cannot tell from this record what percentage gain in earnings, dividends and prices he may expect in the next ten years, but it does supply all the encouragement he needs for a consistent policy on common-stock investment.” (Graham, B. The Intelligent Investor, fourth revised edition.1973) p31 I took this to heart.
1975
After reading several books about investing and after calculating that the return from the lawyers’ pension plan would not secure our family’s future and not allow me to retire, I decided to put all our savings into an all-stock mutual fund. At the same time, I opened a small brokerage account that would allow me to develop practical experience in investing in common stocks.
Late 1970s and into the 1980s
Inflation shot up as new Federal Reserve Board chairman Paul Volcker announced that the Fed would try to break the back of inflation by targeting the money supply itself. Inflation reached 13.5 percent.
In October 1987 the stock market crashed. October 19, 1987 became known as “Black Monday” when the Dow Jones Industrial Average fell 22.6% in one day. The new Federal Reserve Board chairman. Alan Greenspan, tried to calm the panic with a public statement that the Fed would “serve as a source of liquidity” to support the economic and financial system.
In 1989 massive failures of savings and loan associations cost $160 billion, $124 billion of which is paid for with a bailout by the U.S. government.
1990s
The 1990s was a wonderful decade to be a stock investor. It was not smooth sailing on the geopolitical, economic or business front. Here is some of the turmoil that occurred: Special Period in Cuba (1990–1994), Early 1990s Recession, Indian economic crisis (1991), Finnish banking crisis (1991–1993), Sweden financial crisis (1990-1994), Black Wednesday (1992), Mexican peso crisis (1994), Asian financial crisis (1997), Russian financial crisis (1998), Ecuador economic crisis (1998-1999), Argentine great depression (1998-2002), Samba effect (1999) Brazil.
2000s
In 2007 the “housing bubble” burst. This set in motion the subprime mortgage crisis and the Great Recession. In 2008 the Federal Reserve rescued some of the nation’s largest investment firms, including Bear Stearns and AIG, but allowed Lehman Brothers to collapse. Congress passed the Troubled Asset Relief Program (TARP) to purchase assets and equity from ailing institutions. Beneficiaries include General Motors and Chrysler, which averted bankruptcy.
The 2000s also saw the European Debt Crisis (2010-2014): A sovereign debt crisis emerged in several European countries, primarily Greece, Portugal, and Ireland. These countries faced significant levels of public debt, unsustainable fiscal policies, and a lack of competitiveness. The crisis threatened the stability of the Eurozone and required substantial financial assistance from international organizations.
Warren Buffett writes
In his 2010 letter to the shareholders of Berkshire Hathaway Warren Buffett wrote:
“Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of “great uncertainty.” But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain.
Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.
We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.”
From the time Warren Buffett wrote these words in the spring of 2011 to the day I am writing this in 2024, the Annualized S&P 500 Return (Dividends Reinvested) was 13.073%.
Investing in a permacrisis
Eighteen months ago, I wrote a post Investing in a permacrisis sparked by a series of articles in The Economist (a magazine). Here is a picture of the world in late 2022 as summarized in The Economist lead article. The world is continuing to grapple with a commodity shock from skyrocketing energy and food costs largely triggered by the war in Ukraine. At a time of growing concern about climate change we are buffeted by a never-ending series of disastrous floods, fires and storms. We face a profound loss of macroeconomic stability with soaring prices to both businesses and consumers. And all this against the backdrop of geopolitical turmoil involving tensions between Russia and the West and China and the West.
The world as it is
What can we say about the world as it is most of the time? Warren Buffett is clearly an optimist. Do optimists view the normal world as more benign than it really is? I’m not sure they do. With the steady beat of famine, disasters, war, accidents and political strife on the television today one would think most people would see the world as less benign than it really is. It’s hard to avoid being overwhelmed by vivid recent memories of disasters in the news.
I think the answer is that the world is constantly in turmoil and crisis but also constantly in recovery. It is constantly changing and makes progress over the long haul.
All investment decisions are made in a world of uncertainty. This requires sound judgement, insight and good instincts, natural curiosity, adaptability, flexibility and a skeptical mind. Broad reading particularly helps with a changing world.
Benjamin Graham says: “Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgement is sound, act on it – even though others may hesitate or differ.” (Graham, 1973) p. 287.
And Graham adds: “… in the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgement are at hand.” (Graham, 1973) p. 287.
Conclusion
Let me simply repeat the earlier quote from Ben Graham from 1973:
“Today’s investor cannot tell from this record what percentage gain in earnings, dividends and prices he may expect in the next ten years, but it does supply all the encouragement he needs for a consistent policy on common-stock investment.”
Let me sum up this post with a quote used by Ben Graham from Aeneid: “Through chances various, through all vicissitudes, we make our way …” (Graham, 1973) Opposite title page.
+++++++++++++++
You can reach me by email at rodney@investingmotherlode.com
I’m also on Twitter @rodneylksmith
+++++++++++++++
Want to dig deeper into the principles behind successful investing? Click on the ABOUT tab to read an introduction. It will help readers get the most out of the Nuggets of Investing Wisdom blog.
+++++++++++++++
Check out the Tags Index on the right side of the Home page that goes from ‘accounting goodwill’ to ‘wisdom of crowds’. This will give readers access to a host of useful topics.
+++++++++++++++
You can also use the word search feature on the right-hand side of this page to find references in both Nuggets blog posts and also in the Motherlode.
+++++++++++++++
To explore the Motherlode, click on the Motherlode tab
If you like this blog, tell your friends about it
And don’t hesitate to provide comments or share on Twitter and Facebook