Blocking out the benefits of free enterprise

Economist Scott Grannis recently published an excellent discussion of the problem with healthcare in the United States entitled "The big problem with healthcare? It's not a market."

He provides a graph showing that consumers now pay only 12% of total healthcare costs theselves -- the rest is paid for by insurance companies or the government. As his graph shows, this percentage has declined dramatically and consistently since the 1960s, when consumers paid for over 45% themselves.

Mr. Grannis concludes: "It stands to reason that when people don't pay the bill for the services they receive, they are very unlikely to take price into consideration when making a healthcare decision. Why shop around if everything is paid for by someone else?" We agree with him, and his ultimate point that the problem with healthcare in the United States is the steady removal of the beneficial forces of free enterprise and individual choice.

We have made this point in the past, and pointed out that if this is indeed the problem with healthcare, the solution is more freedom, not less. We would advise interested readers to go back to our 2009 article entitled "The healthcare black hole," where we linked to an article written by the late Milt Friedman published in 2001 entitled "How to cure health care."

In that article, Dr. Friedman goes through the history of how we got to the system we have today (which Scott Grannis also explains in his piece), and provides excellent support for his conclusion that "the high cost and inequitable character of our medical system are the direct result of our steady movement towards reliance on third-party payment."

Americans are the beneficiaries of the tremendous positive power of free enterprise in so many areas of their lives. It is unfortunate that they have been increasingly denied access to those beneficial forces in the critically important field of medical care.

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The benefits of in-house research

We have previously referred to the performance record of the late Bill Ruane (1925 - 2005) of the Sequoia Fund, which he managed along with Rick Cunniff and Bob Goldfarb for many years.

In a letter to shareholders that Mr. Ruane wrote in February, 1997, he makes a point that we believe is very important and a point which is still not widely appreciated in the investment world today. There, Mr. Ruane said:

In a memo written in 1969, we stated that we wanted to do only one thing -- strive for excellence in money management by having the principals concentrate on security analysis and use the results of their own research, as opposed to using outside research, to manage portfolios themselves rather than separate the task between the "research department" and the "portfolio managers." Rick Cunniff and I had been doing research and investing in this fashion for over fifteen years at that time.

This approach is still unusual on Wall Street, some 28 years later. Typically, people start out their careers in an "analyst" function but aspire to get promoted to the more prestigious "portfolio manager" designation which is considered to be a distinct and higher function. To the contrary, we have always believed that if you are truly a long term investor, the analyst function is paramount and portfolio management follows naturally. While we don't go in much for titles at our firm, if we did, my business card would read "Bill Ruane, Research Analyst".

[Sequoia Fund N30D for 12/31/1996, filed on 02/28/1997, SEC filing 811-01976. Italics in the original.]

We believe this emphasis on doing their own research, rather than relying on the research of others, was a key ingredient in their success, and it is a conviction we share as well. The benefits of doing in-house research rather than relying on outsourced research include a greater understanding of the business and the financials of the companies in which one invests, a better understanding of the management team and business strategy, and in general a more personal understanding of the factors which contribute to the crucial decisions of whether to invest, when to invest, and when it is time to sell.

This is not to denigrate the many excellent research firms that provide external research, (many of them completely outside of Wall Street) or to say that others' opinions are never valuable to consult, but rather to say that we believe the primary research should always be personal, and the expert opinions of others can be consulted as supplementary to that.

If you think of the great generals and tactical commanders of history, such as Patton or Rommel or Napoleon, you will find a common conviction among all of them that they needed to see and analyze the terrain themselves. This is not to say that they would not value the insights of their engineers, artillery officers, and other experts who might have conducted additional analysis or reports, but rather that these legendary tacticians would conduct personal analysis themselves, and layer the reports of others onto the understanding which they gained through their own observation and experience.

This is an important point for investors to understand.

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Two worthwhile videos for investors

Here are links to two videos which we believe are worth investors' time to watch and understand. The first is a recent market commentary from economist Brian Wesbury, entitled "No Bubbles, Sugar, or Dead Cat Bounces."

The second is a video interview of technologist and author George Gilder by Steve Forbes.

















Both discuss many subjects we have written about in this blog over the years, and we believe both are excellent examples of the kind of "unconventional wisdom" (or "antidotes to conventional wisdom," as Brian Wesbury likes to say) which investors should seek out and examine carefully.

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Backing and Filling

It is our view that investors should not focus too much on the markets but rather on the fundamentals of the underlying companies in which they invest.

In line with that, we don't put much store in technical analysis, which is primarily focused on analysis of market moves and the short-term factors of security market supply and demand that create changes from day to day. We believe investment decisions are better made based on the fundamental analysis of a business and its business prospects.

However, we do think readers should be familiar with the concept of "backing and filling," which is what we call the market's need to pause and consolidate after a long period of broad market gains.

The general market has enjoyed almost uninterrupted gains since late August of last year, and we have been saying for some time that it is probably past due for some consolidation. It's similar to piling up loose earth into a huge mound -- at some point you have to tamp it down in order to build a more solid base.

It seems that the markets are finally using the ongoing turmoil in the Middle East as an excuse to sell off. It would not surprise us if this turns into a period of "backing and filling," and it would probably be healthy for some of that to take place. The important thing for investors to remember is to focus on the fundamentals of their investments and not to allow market-based gyrations to have an undue impact on their thinking.

Another point about the recent events in the Middle East, which can be safely described as a complete surprise in their timing and nature, is the danger of making speculative bets on the short-term movement of things such as commodity prices or the strength of US dollar. While many look at Fed policy and conclude that it will likely lead to inflation and the weakening of the dollar relative to other currencies, unexpected geopolitical turmoil typically creates demand for US Treasuries and a strengthening of the US dollar. Such a scenario caught many foreign exchange speculators who had bet against the dollar off-guard in 2008.

For more on this subject, we recommend investors revisit our 2007 whitepaper entitled "Gambling, Speculation, and Investment" as well as previously published posts such as this one and this one.

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Globalization

Today's news confirming the acquisition of the venerable New York Stock Exchange by the Deutsche Borse brings the issue of globalization home to many investors.

Free to Choose TV, which makes available all ten episodes of Milt Friedman's original 1980 television series Free to Choose, as well as all five episodes of the 1990 version of the same series, also contains a link to the excellent discussion of globalization by renowned economist, economic thinker, and advocate of the benefits of the rule of law and capitalism to reduce poverty worldwide Hernando de Soto.

The series is entitled "Globalization at the Crossroads," and it should be required viewing in the nation's schools (especially in the universities, where poverty is often blamed on everything but its real cause).

In the remarkable video, Mr. De Soto explains that on the major exchanges, symbols of property (such as stock symbols or cattle futures) can be traded, unlike the situation that pertains in many parts of the world, where there are no formal mechanisms for representing ownership of property (such as written titles and deeds). Without such mechanisms, as shown in the video, individuals cannot use property that they own -- such as their home -- for borrowing (to start a business for example).

Mr. De Soto offers a unique and insightful explanation for the root of the word "capital," which of course derives from the Latin word for "head." He maintains that the concept of capital is not simply wealth that can be used for production, but the ability to conceptualize wealth, in exactly the same way that the Chicago Exchange can trade hundreds of thousands of cattle futures without actually having to bring hundreds of thousands of cattle onto the floor of the market (which would be required in societies that have no systems for the symbolic representation of ownership).

Thus, the New York Stock Exchange, that most prominent example of the American ability to allocate capital through the rule of law and the symbols of ownership (in this case, stock in companies), is a perfect symbol for the power of globalization that Mr. De Soto is discussing, the ability to participate in commerce with people from all different cultures and groups. On a symbolic level, the merger of the NYSE with the German exchange should be welcomed by all those who believe, as we do, that globalization is beneficial to all participants.

We have referred to Mr. De Soto's work before, in this previous post. We commend him for his strong work in support of the rule of law and the increased ability for people everywhere to add value to others and to improve their own situation.

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