We came in to work this morning and the first thing we looked at was a daily market commentary from a major Wall Street firm whose first words were "Market Update - another boring and quiet day in US equities...." Mind you, we are in no way trashing this Wall Street firm, although they will remain unnamed (they, and anyone who reads their work know who they are). We would add that this is one of the few Wall Street firms we respect for doing some very good research on publicly trading companies. But the comment just underscores an underlying problem in the way the world views the role of the market.
We are fully prepared to accept that we just may be ornery as we enter our sixth decade of managing money professionally for ourselves and our clients, but it occurs to us that the mentality that views the market as "boring and quiet" has grown to put too much emphasis on the "market" than is healthy.
Clearly, we are picking on this one commentary, and we admit that it's not fair to that firm, for they are by no means alone. We would posit that most of the "investment firms" (we use that term skeptically) on the street, are anything but and have become gigantic trading houses, or as some may better describe them, giant gambling casinos!
Our patriarch and mentor, Richard C. Taylor used to reference the concept that one could put capital at risk in three possible ways: by gambling (relying on pure chance), speculating (relying on an educated guess), and investing (relying on thorough research and business-related knowledge over long periods of time). He was certainly not the first one to put these three terms together in an effort to differentiate them, but it was definitely at the heart of his investment process and we carry on that idea today as we deploy capital.
The problem, in our assessment, is that far too much of the focus with respect to capital deployment is dedicated to the first two types of risk. In fact, we would argue that much of what is considered "investment" nowadays is, at best, speculation and more likely simply gambling. We believe this is having negative ramifications for true investment, as we define it above.
Why is this important? Because the economy depends on capital investment. Without it, the system we adhere to, entrepreneurial capitalism, simply is not allowed to operate at full potential. As the investment world moves towards schemes that are more aligned with speculation, and even gambling, it loses perspective on investment and thus distorts the allocation of capital, creating dislocation that affects the economy, and ultimately all of us.
Perhaps an example will best illustrate the predicament. Our good friend and venture capital partner, George Gilder, in his recent book, The Scandal of Money: Why Wall Street Recovers But The Economy Never Does, points out that each day over $5.3 trillion dollars (with a T) trade in the world foreign currency markets. This is astounding! This is capital that is essentially trading on a guess (at best) and can most appropriately be categorized as gambling. We have long said we have no problem with traders. They are very necessary to provide liquidity to the market. But this is an example of the tail wagging the dog! We can assure you that not even close to $5.3 trillion dollars is being invested in innovative, entrepreneurial companies in a year.
In February 2009, our Chief Investment Officer, Gerry Frigon, gave a speech before a business symposium on the Central Coast of California. This was in the midst of the mayhem caused by the mortgage and credit crisis. In it, he described the need to get back to investment for investment's sake. In other words, stop trying to game the system, and look at businesses as the investment, not the "market".
Some people may think that investing in innovation that may take a few years to really make a difference is "boring," but we don't think so at all -- and we believe it is much more beneficial and necessary for economies, and ultimately much more beneficial for investors (as opposed to "gambling," which may be exciting but is often quite bad for investors).
It would appear that we still need to be giving that speech.