Wednesday, July 20, 2011

Murdock Schmurdock!

The News of the World scandal is not about billionaire Rupert Murdock. It’s about ordinary people like you and me. We have yet another excuse to sit in judgement, brazenly criticising everyone associated with this British illegal cell phone ease dropping affair. We condemn the gossip mongers who read that filthy newspaper, we condemn the regulators for not catching the offence sooner, and we condemn the newspaper’s management for allowing (encouraging?) cell phone wireless-tapping. We human beings, it seems, have a strange attraction to the seedy side of life.
In my investing book, Beyond the Bull, I maintain that if we want to become better investors, we have to change the way we think. The News of the World scandal clearly illustrates a faulty way of thinking. This negative thought pattern is known as the V-A-R Triangle. The thinking pattern involves people who are cast in the role of Victims, Abusers and Rescuers. In this scandal, the Victims are all those people who were spied on illegally: this includes everyone from the Royal Family, and a series of celebrities, to victims of kidnapping. The Abuser role is being filled by the reporters of The News of the World. The Rescuer role is being assumed by British politicians. There’s even a US Senator who wants to be the Rescuer of those who perished in the World Trade Centre tragedy (the would-be Victims) from having beenspied on by these over-zealous English reporters (the would-be Abusers).
The V-A-R Triangle is a thought pattern. Whenever we consider a situation from the point of view of either Victim, Abuser or Rescuer, we are in this unhealthy pattern. This pattern of thought is particularly harmful when we consider ourselves to be a Victim, Abuser or Rescuer. For example, the US Senator who is calling for an investigation into wireless tapping around the 9/11 incident is putting himself in the role of Rescuer. Once we start to think in this pattern, our objectivity goes out the window. We lose contact with reality. The results can be disastrous.
Here are a few historical examples where this V-A-R thought pattern has led to disaster:
Nazi Germany: Hitler portrayed the German people as Victims of a conspiracy of Jewish bankers, whom he presented as the Abusers. He and his Nazi Party were to be the Rescuers. This thought pattern turned the ordinary German into the greatest abusers of the twentieth century. The massacre that followed was the result of V-A-R thinking.
Canadian Court Rooms: in the late 1900s there were many court cases where “the accused” was put in the role of Abuser, an innocent child was placed in the Victim role and the police, assisted by a certain child pathologist named Dr. Charles Smith, cast themselves in the role of Rescuers. Many people were falsely sent to jail because of Dr. Smith’s testimony. It turned out that Dr. Smith was a fraud – and his testimony was false. Many cases where Dr. Smith had been the expert witness were re-tried and many of those sentenced to long jail terms were released. The Abusers had become Victims: the Rescuers had become Abusers.
These examples show how harmful a thought pattern can be. This particular one, the V-A-R pattern, is the most harmful and the most wide spread destructive thought pattern I know. As The News of the World scandal heats up, notice how damaging it becomes. Notice how it draws you in: the V-A-R thought pattern invites every one of us to join the rescuers.
How does it work in the investment world? How does this pattern destroy your ability to earn a respectable rate of return on your money? It happens when the market goes down and we lose money. Our loss causes us to cast ourselves in the role of Victim. Our Abuser can sometimes be our financial advisor; sometimes it’s some politician. And our rescuer? That’s who we look for.
Consider the 2008-9 stock market crash. The Canadian stock market dropped almost in half in eight months. Investors felt victimised. The abusers most commonly blamed for that fiasco were George Bush, the big-bonus deal makers at the big brokerage houses, the greedy banks, and former FED chairman Allan Greenspan. The Rescuer? What White Knight would restore our RRSPs to their former levels? Some selected a new financial advisor; some voted for a Democratic president; some hoped “the market” would recover as their financial planner predicted: the market itself would rescue us.
But if we want to become better investors, we have to get out of this thought pattern all together. Finding another rescuer is not the answer. We need a new thought pattern.
This is what the V-A-R teaching recommends. If you find yourself in the role of Victim, ask yourself the question: “What did I learn from this negative experience?” If you find yourself cast as the Abuser, ask yourself: “How can I challenge this person’s (the Victim’s) beliefs? If you fancy yourself as the Rescuer, ask yourself: “How can I help this person help themselves?” Once your thought pattern shifts in this way, you will find yourself taking responsibility for your own actions.
Instead of a victim of a market crash, you will become a defensive investor who won’t be caught in a market down draft again. Instead of blaming someone else for your loss, you will accept responsibility and learn a new way of investing based on not losing money in a crash. Instead of a high powered securities salesman offering to rescue innocent investors from a corrupt system, you will become an educator, teaching people what to look for in the investment jungle. Instead of pretending you have the Holy Grail of Investing and having all your clients investments exposed to the ups and downs of the market, you will use compassion as you advise your clients about being cautious in their portfolios.
And what about Mr. Murdock and this nasty little thorn in his side? What can we learn from him? Try this: put yourself in his shoes. He thinks he’s the Victim. His over-aggressive reporters are the Abusers. And now, the press and the public are also his abusers... and members of the British Parliament. Let’s step into Mr. Murdock’s shoes and ask ourselves: “what did I learn from this experience?” The answer might be a variation of, “When you live by the sword, you die by the sword.” For Mr. Murdock in particular, “When I live in a world of sensationalism, gossip, accusations, muck-raking and meddling in other people’s business, I could die in that world.”

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Thursday, July 14, 2011

Tradesman Saves World Economy

My father tried in vain to save the global economy. It didn’t bother him when he failed – but the possibility of failure didn’t prevent him from trying.
How could a tradesman who worked in a steel mill in Hamilton save the global economy? In his view, it was relatively simple. Just keep doing what he had always done. The economic activity that created the modern global economy is the same activity that will save it. It’s ordinary working people who will correct the economic errors made by the MBAs who have leveraged the world beyond its limit. This is his reasoning:
In 1952 my father and his young wife bought a house in the east end of Hamilton: 10% down, 90% financing. He had a steady job and paid off their mortgage in 20 years. I remember their mortgage-burning ceremony. It was an important day in their lives: the day they became debt free. In the 1950s it took only one income to buy a house. He went to work and my mother stayed home with the kids. That was the formula. Those Canadians who grew up in the Great Depression of the 1930s and fought in the Great War of the 1940s formed the basis of the economic world that is falling apart today. The “family formation formula” worked in the 1950s and 1960s. Now it’s almost impossible for a young tradesman to buy a house with 90% mortgaging and support a stay-at-home-mom. The numbers just don’t add up. That’s why it’s coming undone.
My father didn’t realize that his solution to today’s global financial riddle is a variation of Austrian Economics. The founders of Austrian Economics believed that the economy is self-correcting. When things go wrong, there is no need for a big government bail-out: just let things take their natural course and eventually everything will work out. For example, the MBAs who masterminded the sub prime mortgage fiasco in the early part of this century eventually blew up the US real estate market. My father’s view was: who cares? His mortgage was paid off in 1972. If some appraiser told him his home was worth $200,000 in 2006 and $150,000 in 2011, he didn’t care. He bought it for $7,000 in 1952. Those real estate speculators and their bankers who bought and financed some house they thought was worth $200,000 – they’re the ones with the problem. Was it his responsibility to bail them out?
In my father’s view, the collapse of US house prices is a good thing. If prices fall enough, young tradesmen will eventually be able to buy a house with 10% down – and their wives will have the option of staying at home with the kids. And if this causes the mortgage bankers and realtors to miss a few payments on their Mercedes, that’s their problem too.
Today’s European PIIGS sovereign debt default problems and American debt-ceiling default problems can be handled in the same way. Let the ones who got into debt in the first place solve the problem. And let the ones who loaned them the money solve the problem. And, of course, that’s exactly what’s going on in the world today. The wisdom in my father’s neo-Austrian approach is the same wisdom that’s found in the Alcoholic’s Serenity Prayer. “God, grant me the serenity to accept the things I cannot change, the courage to change the things I can, and wisdom to know the difference.” In the world of finance, this translates into serenely and objectively observing the economic world and courageously reacting to it by getting our own economic house in order.
With this principle in mind, let’s make some serene observations about the Canadian economy now and the Canada of my father’s era, the 1950s and 1960s.
Observation #1: in the 1950s, municipal governments started adding fluoride to city drinking water. Yes, it was an additional expense for the city, but it was good for dental health. Today, the city of Toronto is considering stopping this program because it costs too much and the city is spending way more than it earns. The city of Calgary recently stopped their fluoridation program for the same reason. It’s up to individuals to buy fluoridated tooth paste if they want stronger teeth.
Observation #2: the city of Toronto is currently releasing a long list of ways to decrease spending. They are seriously over spending and are desperately trying to reduce expenses. In the mid to late 1990s, the government of Canada found itself in a similar situation. Finance Minister Paul Martin stick-handled the federal government through an austerity program in those days. The European PIIGS countries are involved in the same ‘austerity or else’ process. Our American neighbours are currently negotiating a spending reduction program. It seems there are many governments today who are in the same predicament as Canada in 1993.
Observation #3: have you noticed that municipal and provincial governments no longer cut the grass along Canada’s highways? In my father’s day, they created summer jobs for university students by cutting that grass. They believed that putting money in the hands of university students would stimulate the economy because (a) the students would spend the money, and (b) educating Canadians was good for Canada in the long run. Now it is more common for university students of get student loans and to emerge into the work force carrying a huge debt load. Governments owe less, individuals owe more.
My father’s primary approach was to live within his means and pay off his debts. And that’s what a whole series of governments seem to be trying to do today. So, it appears that the world’s big debt problem is being solved. But the second part of his approach seems much less popular: keeping his own economic house in order. Today’s investors seem reluctant to take responsibility for their own financial fate. They keep hoping the stock market will bail them out like the governments bailed out General Motors and the banks. They keep hoping they will get back the money they lost on their mutual funds. They keep hoping...
In my investment book, Beyond the Bull, I encourage people to be active investors, not passive. This is the wrong time in the cycle to buy and hold for the long term. The long term is over. It has been replaced by a series of short term ups and downs... like when my father was growing up. It’s time to replace your passive invest plan with a conservative responsible active plan – a plan that involves serenely observing the economic world and reacting to it in a pre-planned way.

Sunday, July 10, 2011

Greco-American Debt

My friend Richard, the engineer, sometimes likes to play dumb and ask me questions about the economy when he already knows the answer. It’s his way of keeping me sharp. This week he asked me: “Why is the Greek debt crisis so important to Europe.” With a population of only 6 million people, Greece represents a very small fraction of the European community. Why not let the Greeks default on their sovereign debt and let them live with the consequences? Why should the rest of Europe bail them out by lending them even more money?
To add further to this irony, he pointed out that the Americans are having a debt crisis now too. Unless they legislate an increase in their own debt ceiling, they too will default. Everyone knows neither the Greeks nor the Americans have the cash to pay off maturing debt. Both nations have to borrow more. But everyone believes the American crisis is not a real crisis: it’s just political bull. Republicans are trying to embarrass a Democratic president, and at the last minute, they will pass the required legislation. But the sorry truth is that neither nation can pay its current debts unless they borrow more.
Richard baited me further by making up a story of two neighbours: an American and a Greek. They each borrowed half a million dollars and opened a restaurant. One served hot dogs, hamburgers and steaks; the other offered souvlaki, mousaka and tzatziki. Both of them were unable to make it work, and both defaulted on their bank loans. Richard challenged me: “Why is this any different from a country defaulting on its loans? We don’t expect the bank to loan them even more money! And don’t tell me it’s because they are so big! On the grand scale of world economics, Greece is simply not that big! There are many cities bigger than the nation of Greece – no-one would bail out New York City, London or Tokyo.”
I reminded him about the 2008, 2009 banking crisis. I reminded him that most European and American banks were over leveraged, just like Greece and the USA. Except in the world of banking, it means the banks loaned too much money to borrowers who couldn’t make the payments. Let’s say that a certain European bank had a loan portfolio that was 22X its capital. And let’s say that part of that capital was invested in Greek Short term notes. And Greek Short term notes were downgraded from A to D. And because of that, the Short term notes dropped in value from 500 million Euros to 400 million Euros. In other words, our bank just lost 100 million Euros. Now it is forced to call in 100 million X 22 Euros in loans, to get back on side. That’s the real problem. That’s what happened in 2008 when the US sub prime mortgage backed paper was downgraded. Once bankers realized they couldn’t find buyers for those US dollar junk mortgages, their value dropped and the crisis unfolded. French banks own a lot of Greek paper. German banks own a lot.
The immediate problem is not with the ones who borrowed the money and can’t pay it back. The problem is with the bankers who loaned them the money. In 2008 their toes were trampled by American investment dealers, and now they are dancing with Zorba the Greek.
Then it was my turn to challenge Richard.
If the situation in Greece (or Italy, Spain, Portugal or Ireland) is really this dangerous, what have you done to protect your investments? In 2008, 2009 the stock market dropped in half. Individual investors need a plan to protect themselves against another banking crisis. What’s your plan? I turned the tables on him: “Why is the Greek debt crisis so important to you?”