6 Ideas to Create Good Growth - Is #1 Our Only Hope?
A return to tangible value over market cap looks like it's starting to happen. If the financial markets burn down, can we rise from the ashes stronger this time?
Imagine the line on the chart below is a mountain range, and the peaks are named Mt Golden 20’s and Mt Dot-Com tapering off the great cliff face known as the US Housing Market. If we were all hiking along this range together, I think now is probably a fair time to stop and ask: “How about we take a vote on going any higher up this mystery mountain?”
Bubbles. They make you wonder. How is it so, that we have knowledge of every financial crisis that has occurred in history; yet whilst the tide is high we struggle to comprehend how one could possibly occur again? Whether it’s tulips or Tesla stock the same rhetoric whispers through the crowd - this time is different.
True, central banking and credit gives liquidity to swell bubbles and guide general flow, but ultimately bubbles are just poorly allocated capital on a grand scale in mostly open markets by mostly free participants. Additionally:
Speculation frenzy is a historically re-occurring phenomenon;
If the same liquidity had been put to productive uses, growth would be real and no recessions required (strict rule though - capital would have to remain in reserves until an intelligent use could be found for it)
When considering this age old dilemma of market speculation orgies, I prefer to step back and as Mr Munger says, “Invert, always invert”. If bubbles are just poorly allocated capital, how is our capital allocating so poor?
System Failure: Bubbles are warning signals that our system is malfunctioning
Our system requires people to be able to calculate value. Tangible value. Productive value. If they can’t, consumption will overrun production and first inflation, then correction will ensue. If the system survives, people remember the pain, re-evaluate the wisdom of their choices and hopefully don’t repeat that behaviour. So far the plan is going…
How are our markets allocating capital today?
Instead of our markets rallying behind investments for their productive contribution in reality, they pile into investments for their potential stock price multiples - sometimes irrelevant of real earnings and tangible asset value! Our markets are lost in a cycle of trying to find easy growth of money for things we want, rather than productive growth of goods and services we need. And additionally, we are failing at our ability to calculate the value of either.
How do we fix our capital allocation woes?
It’s easy to peel the stickers off a rubik’s cube and group colours manually if you just want to look smart. You’ve really just cheated your own brain from beneficial work and undermined your own competence. When faced with real life puzzles, it’s crucial that real problem solving is occurring and boxes aren’t simply just being ticked. ESG, can you guys hear me in the back there? You’re my 6th on a pretty sad list of:
“Our Top 6 Solutions for Good Capital Allocation”
#6. “Box Tickers” - ESG
Environmental, Social, and Governance - How we should be investing to produce enough energy for our population, should not come down to the skin colour or gender of the companies board members. Complex problem solving cannot be replaced with box ticking and checklists. If you’re managing billions of dollars I would assume complex problem solving comes with the job. Just as passive investing is a big risk - passive thinking is far worse.
#5. “Money Catch-All” - Indexes/Big Funds/Passive Investing
Ahh, solution or problem - its a bit grey. The emergence of indexes, big funds and passive investing has meant that individual votes can be multiplied, sometimes many times over, by intelligent investors, not very intelligent investors and even algorithms to boot. And they can all get led astray (AI included) by prepubescent retail pundits or slick talking fund managers and CEO’s. These guys need to be replaced with #1 - I’ll explain later.
#4. “De-fi Movement” - Crypto/Bitcoin/RealVision
I feel like the basic RealVision concept was on the right track. Try teach intelligent market strategy to ordinary peeps? Grant Williams leaving Raoul Pal to launch the movement was like if Obi-Wan left Anakin to start the rebellion. Now we’ve got Darth Crypto-Trader and it’s all got a bit skew-iff. My crypto thoughts can be found here (Bitcoin Memoirs). Forget crypto - the answer is turning Wall Street into Berkshire. This can be done with #1 - I really will explain later.
#3. “Rubik’s Cube Sticker Pickers” - Economists
I have a feeling our economists are mostly sticker pickers (except Larry Summers). They seem too busy debating over the failures in history, to begin thinking from first principles to solve the problems of today. The frontier of economics is looking so grim that physicists are sending in troops to help…who are my number 2...(beating the economists already)
#2. “Nerds To The Rescue” - Physics Troops Deploy
Brilliant. Let’s solve economics by forging a path ahead based on the natural laws it appears to be accustomed to. Now just how to control for matter which can get lead astray by the madness of crowds, I’ll leave to you. I do think a multi-bag scientific approach to macro economics is sorely needed (see “My Ocean of Science” from Female Psychology), though I think a third team mate from anthropology could find some behavioural elements that may be otherwise missed.
#1. “Gold Class, Buffett & Munger Grade” - The Intelligent Investors
Buffett and Munger have built an impressive wealth shepherding system in Berkshire, and even secured its future in the competent hands of Ajit and Greg, the people they trust with intelligence, energy but integrity above all.
These guys vote with their capital and wait for the results to be weighed, having intelligently estimated the required time that money should remain in those companies hands to create:
1: A good service to society
That people need, want and like
2: A return on capital
At a reasonable (not exponential) compounded annual growth rate
Then companies or investors can re-invest the returns, bringing us back to 1. Eat, sleep, invest, repeat until the whole world feels like Switzerland and we can all live like Guy Spier.
But my solution isn’t to buy $BRK on Wall Street, it’s to apply Berkshire to Wall Street
When individual investors prove competent at Buffett class investing by producing good returns and good results for society, over a long enough record, then they should be the ones trusted to:
Invest ‘big funds’ money (guys at #5)
These guys are just a money catch-all of ordinary folk who don’t know how to invest for themselves - this money shouldn’t be attached to AI following prepubescent boys around the internet
Educate the angry crypto crowd lost in the death star (guys at #4)
Darth Vader aint got shit on Yoda
The Return of Value Investing?
For some time, attempting to invest in our modern marketplace like an early Buffett has felt like betting in a rigged casino. Even with a full house at the poker table, you stand a chance of being beaten by a loudmouth holding a pair of twos because he’s romanced the table into thinking a low pair is somehow worth more than your aces.
In time - the market turns from a vote counter to a weighing machine. By then, the loudmouths should have all exited the room.
Spoiler alert, that whole Darth Vader phase didn’t stick for Anakin. Raoul - when you coming back to the light side buddy?