Changing my strategy – investment to speculation. Teaching my son.

20240217

When my divorce was final in 2007, I came away with the smaller half of the estate I had accumulated through my real estate and stock market investments. That's how divorce works in the United States. It was, nonetheless, enough to begin a new life.

I moved to Ukraine in that year to start a new family. I met my wife two years later and married a year after that. We had a son the next year and since have two daughters.

On the pessimistic assumption that Social Security would be broke by now, my investment strategy focused on conserving capital. I wanted to be sure we had enough to support the family as the children grew up. To my amazement, the collapse has yet to take place. Governments throughout the world have gotten away with printing vastly more money than I would have imagined possible. Living modestly, we have gotten by on monthly income from my IBM pension and Social Security.  This having carried me halfway through raising the family without eating up the nest egg, it is time to reassess my money management strategy.

This is the first of a series of articles of observations I will share with my son Eddie on things we will investigate.  After three marriages I am confident in the sexist observation that wives are mostly not interested in the hard work of investing.  They happily leave it to their husbands, hedge fund managers, index fund managers and even pure charlatans.  This is probably a good thing. The temperament required to be a good investor is quite different than that required of a mother, and our society needs mothers far more than investors. In any case, Eddie needs to be ready to manage the family money when I step back.

The overarching observation is that whereas I made my money decades ago in a time of national expansion and stability, we have entered an era of chaos and volatility.  Stupidity and wishful thinking are rampant.  It is an era for speculation more than long-term investment.  It is a time of credulity and major fraud, such as FTX and Theranos. Bubbles expand and pop.  Witness the stock prices of Moderna and Pfizer.  Look at the exuberant explosion in the stock price of solar panel and windmill manufacturers, and their present crash.  Look at the huge inflation in single-family house prices in an era in which there were no other safe investments and interest rates were at rock bottom and ask, who are the greater fools who can afford them?  Who wants to live in the crime-ridden, overtaxed cities?  It is The Big Short all over again.  There is money to be made on the long side as fools rush in, and the short side as fools rush out.

What will change?

Astute financial prognosticators have been increasingly predicting collapse.  They are now a chorus. Other collapses are happening simultaneously. Big cities in the United States are becoming unlivable as the courts refuse to enforce laws on vagrancy, homelessness, shoplifting and in many cases assault and murder. Authorities are unwilling to evict squatters who occupy and destroy rental properties.  More and more people are becoming concerned about the degree to which the big pharmaceutical companies control the government and exploit the citizenry.  Traffic is terrible and honest citizens are scared to ride the crime-ridden public transport systems.

I write this knowing that many readers do not agree. You must at least agree that public opinion has shifted. Going again to public opinion, whether or not you agree, you have to recognize that there is a groundswell of resistance to the transsexual movement, and pushback even with regard to gay issues. The green agenda is being subjected to criticism as never before.  A reasonable person would have to concede that the times are much more tumultuous than the decades in which we grew up.

During my working years I invested for long-term returns. It was not difficult to purchase rental properties that, taking into consideration the tax advantages,  would pay for themselves. Publicly owned companies produced products that satisfied real needs.  These included IBM, my first employer; Nokia; Intel; Walmart; Target Stores; Cisco Systems; Oracle; and Microsoft. Though these companies did business with the federal government, they were not totally beholden to it. To a much greater degree than today, they offered honest goods and services for reasonable prices in a free market.  An investor did not have to be concerned with what was going on day to day in Washington DC to make a decent return.

Three eras of American industry.

In my mind American industry has progressed through three major phases in the three recent centuries:

19^th century – satisfying basic needs.

The robber barons of the late 19th century satisfied basic needs. They developed the steel industry. They developed electricity generation and distribution. They developed artificial light. They developed speech and music recording. They developed the radio. They develop the train and the automobile. They developed energy in the form of oil and natural gas.  The industrialists behind these developments accumulated fantastic fortunes by radically improving the lives of the common people.

20^th century – satisfying basic wants.

The entrepreneurs of the 20th century satisfied basic wants. We wanted recorded entertainment – music and films. We wanted a variety of foods – imported foods, sweet foods and so on. We wanted comfort – heat in the winter, air conditioning in the summer. We wanted adventure, travel, vacations. We wanted sports for our own amusement – sailing, skiing, and skateboarding. We wanted sports spectacles such as professional baseball and football. We wanted to be educated – universities proliferated. We wanted to be informed. Book, magazine and newspaper publishing flourished. We want convenience – recorded entertainment and world events came to our living room via television, and fast-food outlets and TV dinners came to keep us fed. We cannot begrudge these people their money – we knew what we were getting, and willingly paid for what we got.

Twentieth century inventions continued to solve a number of basic needs.  The most significant ones include the semiconductor-powered computer, air travel, atomic power, and antibiotics.

21^st century – creating and satisfying artificial wants and needs.

The entrepreneurs of the 21st century create and satisfy perverse wants. It is unhealthy to be chained all day to our social media, but we are.  We poison our minds with short zaps of hyperbole delivered by X, Telegram and Viber.  It is unhealthy to depend on drugs to overcome the problems brought on by too much alcohol or overeating, but we do. We know that student loans are a trap, a lifetime of debt in exchange for an education that is not nearly as good as our parents enjoyed. But we take it on, in exchange for four carefree student years and the vaporous promise of a career that might be. Tinder, Grindr and sexbots offer  cheap simulacra of the satisfaction that comes with marriage.  So-called ethical drugs such as antidepressants and oxycodone, and now recently illegal drugs such as marijuana, LSD and magic mushrooms buffer us against the psychic insults that are part of everyday life. These "benefits" turn out to be detrimental. Their purveyors use psychological tricks and play on our weak human nature to get us to use products that are injurious to our mental and physical health.

Twenty-first century entrepreneurs squeeze small business and the middle class.  Uber displaces taxi drivers.  Airbnb squeezes small hotels.  Amazon and eBay have nuked the small retailers in downtown shopping centers.

An observation, not a judgment.

I share these sweeping generalizations with my son as explanations, not moral judgments.  I am describing how to make money. It is up to an individual to what extent he is comfortable making money by exploiting his fellow man.

All investment involves some exploitation. By the "greater fool" hypothesis, you buy any investment with the hope that some greater fool will take it off your hands for more money. I missed Google and Tesla big time because I could not imagine there would be greater fools.   I didn't anticipate the power of the Internet or the  role the government would play in such companies.

The situation today has changed. Many of the most profitable companies – Oracle, Google, X, Facebook produce nothing tangible. Intellectual property is the biggest cost element even in tangible products such as those produced by the pharmaceutical companies, Tesla, Apple and Samsung.  Amazon and eBay have provided more powerful systems for distributing goods.  All of them are deeply in bed with the federal government. The Covid years made the connection dramatically evident, as the federal government flexed its muscles and found many, many ways to violate our freedom of movement, our bodily autonomy and our free speech.

In my next post I will address the motivations and mentalities of the players that shape the market.  My thesis is that government has displaced private individuals as the primary driver of investment decisions.  There is money to be made from government stupidity.

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Those are the musings from Lake WeBeGone, where Eddie is carrying on the family cold as everybody else is healthy. The birds are twittering that spring is on the way, an the last thin skin of ice is melting off the ponds.

Graham