Tuesday, June 17, 2008

Buzz Cuts

Ain’t it pitiful? The melt down of General Motors seems to have no end. And now, in June 2008, the press is full of stories about plant closings and layoffs. The pitiful part is that the people involved seem totally surprised by the unfolding of GM’s karmic demise.

For years, this observer has been using GM as an example of an obsolete dinosaur. We pointed out that gas guzzling V-eight engines and SUVs have no future in times of high fuel prices [GM Genius, autumn, 06]. We observed that the Japanese manufacturers of small cars are growing as the U.S. manufacturers of large cars are shrinking [The Second Shoe, spring 07]. And now, the seemingly surprised workers at GM’s Oshawa plant are fighting mad because their truck plant is being closed and they are losing their jobs. These Canadian auto workers have become victims of the end of the age of the dinosaurs.

What could the average auto worker have done? Are they really victims? Or have they been careless with their careers?

Hands up, all those who did not notice the following:
The price of gasoline has been going up since 1975. It has been costing us more to fill our tanks for years. This trend favours the manufactures of small cars.
The Canadian dollar has gone up 50% in the past 6 years. CD$ was below 66 cents US in 2002 and it is about $1.00 US now. If a Canadian auto worker was making $24 Canadian per hour in 2002, that was $16 US per hour. Now, if a Canadian auto worker makes $24 CD per hour, that’s $24 US per hour. From the point of view of Americans, Canadian workers received a 50% raise over the last 6 years. Canadian auto workers are the highest paid in the world.
In the last round of labour negotiations, GM’s Mexican and American auto workers gave wage concessions. Canadian workers did not.

GM has been a sick puppy for quite some time. So, why didn’t GM auto workers quietly apply to Honda or Toyota for a job? Why did they stay with the loser for so long? It’s pitiful, isn’t it?

Or is it just human nature to not change? Are we so set in our ways that we won’t change until we are forced to change? Is it our nature to not change until we feel the pain of not changing?

My experience in the investing world, verifies this truth. Most investors will not change their investing ways until they feel financial pain.

Hands up, all those who do not notice the following:
From 2000 to 2002, world stock markets dropped in half. World stock markets bottomed in 2002 [after the 9/11 terrorist attack] and went up for 5 years. A few stock markets are currently at new high levels, but most are a bit below their 2007 levels. Does this seem more like the end of an up trend or the beginning of an up trend? Does this remind you of GM’s failure to notice the ever rising price of gasoline? Is there a time when we should become defensive? Is there a time when we have to change our ways before we feel the pain?
Big banks and stock brokerage firms are the experts at investing, aren’t they? So, how did they manage to get caught in the biggest investment fiasco of this century? [The US junk mortgage situation.] Does this remind you of the problem GM had in continuing to make gas-guzzling 8-cylinder SUVs? Do the big investment firms only know one way of investing? Buy and hold for the long term? And, if they happen to buy the wrong thing, are they stuck with it? Are YOU stuck with it?
Who do you think will make more money in 2008: the car salesman who sells 4-cylinder small cars or the car salesman who sells 8-cylinder SUVs? Who will make more money in 2008: the financial planner who dumps his client’s investments into “buy and hold mutual funds,” or the investment professional whose clients “buy, hold and know when to sell?”

What can the average investor do? Should we follow the example of GM’s Canadian auto workers and wait for the inevitable? Or should we quietly ponder our options and consider changing our ways when we see the hand writing on the wall?

It’s not about cars or investing, is it? It’s about our nature as human beings. It’s hard for us to change our ways. That’s the pitiful part.