In a scene from Monty Python's
“The Meaning of Life,” an executive from a large
corporation is
presenting a report on the meaning of life to colleagues.
The executive explains that he has been working on the project
for some time and the answer can be reduced to two fundamental
concepts: “One, people are not wearing enough hats.
Two, matter is energy. In the universe, there are many energy
fields which we cannot normally perceive. Some energies have
a spiritual source which act upon a person’s soul. However,
this soul does not exist ab initio, as orthodox Christianity
teaches. It has to be brought into existence by a process
of guided self observation.
However, this is rarely achieved, owing to man’s unique
ability to be distracted from spiritual matters by every day
trivia.” Whereupon, one of the executives asks, “What
was that about hats, again?"
Which brings us to paradigm-- really. A paradigm can be
described as a set of implicit assumptions
that are not meant to be tested. Paradigms are never questioned.
They become part of our belief system. That is until we run
into a wall, and those beliefs are shattered. For example,
the earth is flat or the earth is the center of the universe;
both were paradigms not that long ago.
Paradigms exist everywhere because for most people it's easier
to live in the paradigm than to have to think about it. Down
through the years, the investment business has always had
its own paradigms.
Prior to the 1950s it was generally accepted that a high
short-interest position in a common stock was negative. Along
came Jack Dreyfus who shattered that paradigm by pointing
out that stock sold short must eventually be bought back thus
pushing the price up. In the 1970s the paradigm was the "nifty
fifty," stocks whose earnings were predictable and would
grow 20-30% every year, a paradigm that made for easy nonthinking
investing. The 1990s witnessed the dot-com boom. Just buy
any stock with a technology sounding name and you would be
rewarded with untold riches.
What then, are today's paradigms? One is that 1.3 billion
Chinese represents a market for anything that can be produced.
Many American corporations are spending vast sums of money
in anticipation of tapping into that huge pool of consumers
without apparently giving much thought to the fact that most
of these people subsist on less than $100 a year. To be fair,
other countries are doing the same. However, some foreign
companies are thinking outside the box and are actually building
plants here in the USA to take advantage of what is by far
the largest, most stable economy in the world.
Another related paradigm is that with 1.3 billon people,
China has an unlimited supply of labor that
will keep labor costs low for years to come. China is itself
somewhat caught up in this paradigm.
However, there are reports out of China that all is not well
in labor land. The Chinese labor force is well aware of labor
conditions in other countries, especially the US, and is demanding
higher wages and benefits as help-wanted signs are popping
up all over the industrial landscape. None of this is meant
to denigrate China as they are and will be an economic force
in the continuing globalization of this planet.
So, where is all this leading? Only that in our business,
like yours, there are paradigms that can turn into pitfalls
(note GM). It requires constant vigilance to avoid these traps.
We have an equity strategy that has produced superior results
in both bull and bear markets. To maintain this performance
we place a heavy emphasis in examining trends in the market
place and continually questioning ourselves and our strategy
to avoid the complacency that could disrupt this record. The
same, of course, applies to our fixed income strategy. We
have seen interest rates as measured by the prime rate drop
from 22.5% to 4% and short rates drop below 1% with huge volatility
in between in our 25+ years in business. This has required
us to continually adjust our strategies to provide the best
returns with the least amount of volatility.
Every year someone says, these are trying times and every
year it is probably true. We try to view
every year as a challenge and do our very best to not get
caught up in the latest paradigm.
In the marketplace this last month, the new head of the Federal
Reserve, Ben Bernanke, had his first meeting and stayed the
course with another quarter point increase in the fed funds
rate. Another quarter point increase to 5% seems likely at
the next meeting. Interest rates on the long end of the curve
are now rising, and it does not make much sense to invest
in long-term, fixed-rate bonds. The 30-year Treasury bond
issued in February at 4.5% is now down 8% for the year.
Random thought for April 2006:
"There is nothing either good or bad but thinking makes
it so."
- William Shakespeare
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