Succeeding unconventionally

John Keynes once said, “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”  

What he meant is that people would do better if they were focused less on their reputation and more on what works, but they don’t.  

In investing, you cannot do better than average by doing what everyone else is doing.  This seems plain and simple, until investors become uncomfortable doing or being asked to do something the crowd isn’t.

Howard Marks, the chairman of Oaktree Capital, illustrates these points brilliantly in his latest letter to investors, Dare to Be Great II.

For those of you who don’t want to read the 9 page letter, I’ll summarize with quotes:

  • The real question is whether you dare to do the things that are necessary in order to be great.  Are you willing to be different, and are you willing to be wrong?  In order to have a chance at great results, you have to be open to being both.
  • …you can’t take the same actions as everyone else and expect to outperform.
  • By definition, non-consensus ideas that are popular, widely held or intuitively obvious are an oxymoron.
  • Most great investments begin in discomfort.
  • To succeed at any activity involving the pursuit of gain, we have to be able to withstand the possibility of loss.
  • But it’s crippling to have to avoid all failures, and insisting on doing so can’t be a winning strategy.  It may guarantee you against losses, but it’s likely to guarantee you against gains as well.
  • I’m convinced that everything that’s important in investing is counterintuitive, and everything that is obvious is wrong.
  • Unconventional behavior is the only road to superior investment results, but it isn’t for everyone.  In addition to superior skill, successful investing requires the ability to look wrong for a while and to survive some mistakes.

Great results will not come without discomfort, and not without risking looking wrong.  If you can’t stand discomfort or looking wrong–even temporarily–then you must be willing to save a lot more money (which means spend a lot less of what you make) to reach a successful retirement.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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Succeeding unconventionally

Economics rap

(If you’d like to skip my set-up to two amusing and excellent economics rap video’s, please zip to the bottom for the links)

After graduating from the Air Force Academy in 1992, I went on a knowledge-gathering binge.  I read philosophy, pop science, great quotes and great literature.  I was eager to put my 17 years of learning to work, but I realized I still had much more still to learn.

After graduating from pilot training, I got back to work in my knowledge-gathering project, this time filling huge gaps in my knowledge of history, politics and economics.  In that journey, I found out about the Austrian economists.

In college, I took Economics 101 and 201, which focused on micro-economics–the economics of supply and demand in individual markets–and macro-economics–economics at the aggregate level (national, regional, world). 

Little did I know that an intellectual battle had been fought long ago, and that the Austrian economists had been essentially stricken from the record of academia.  In almost any college in the nation, the focus of macro-economics courses was on Keynes and the Monetarists (Milton Friedman being the most prominent of the latter).

My problem, before reading the Austrians, was that Keynes and the Monetarists didn’t seem to very well describe reality as I saw it.  Keynes, a British economist, saw the government having an active roll in the economy, smoothing out the bumps of free markets.  But, my reading of history clearly showed this always ended in tears.  The Monetarists, based especially out of Chicago and MIT, constructed complex mathematical models based on assumptions that were clearly false, so they too seemed off the mark.

When I read the Austrian economists, especially Carl Menger, everything seemed to fall into place.  I felt like a physicist reading Newton for the first time–this was clearly a better description of reality.  So, I was stunned that my college classes never mentioned the Austrians and that they were basically relegated to the back-woods of academia (much like Aristotle during the Dark Ages).

As time went by (I first read the Austrians 16 years ago), I realized the Austrians weren’t and wouldn’t get a hearing any time soon.  The Austrians, including Hayek and Mises, were considered to be cranks and irrelevant (like those who believe in the gold standard–oh wait, that’s becoming fashionable again, too!).

The Austrians showed that economics was best left to individuals freely choosing their own economic destiny.  Interest rates, prices, quantities produced, etc. set by the free market would fluctuate, but this would be infinitely better than bureaucrats setting them more disastrously. 

In particular, they showed that bureaucrats setting interest rates would lead to gross mis-allocation of capital over time, leading to worse booms and busts than occur in free markets.

This discussion may seem academic, but it became clear to me that the Great Depression could be clearly understood in this framework.  The Federal Reserve was created in 1913 to prevent financial panics.  In the mid 1920’s, the Fed held interest rates artificially low so France and Britain could pay back their debts from World War I.  This led first to a real estate and then a stock market bubble that crashed (sound familiar?).

The mis-allocation of capital for years before 1929 had caused the Great Depression, not animal spirits (Keynes) or inadequate money supply (the Monetarists).  This seemed a more accurate description of reality than anything else I had read.

Not surprisingly, this meant the Austrians clearly saw the dot-com and housing bubbles building and bursting more recently–because they were focused on the mis-allocation of capital due to the Fed fiddling with interest rates!  Keynes and the monetarists were oblivious and even responsible for the busts! 

Despite all this supporting evidence, I still expected the Austrian economists to remain in the backwoods during my lifetime.  I didn’t think they’d get their hearing. 

I must admit, I was short-sighted and wrong.  The Austrian economists are coming back.  As proof, here are two links (Keynes and Hayek round 1, Keynes and Hayek round 2) to rap video’s featuring none other than Keynes and Hayek (not the real people–they are both dead–but actors playing economist rappers).

Perhaps the Austrians will get their hearing.  Perhaps people will start demanding economic policies that conform to the facts of reality and human nature.  I must admit, I would be all too happy to be wrong on this.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Economics rap

Higher saving rates are a GOOD thing!

The U.S. saving rate recently hit 5.7%, and all types of commentators have been saying this is bad for the economy. I think this is a load of hooey!

One of the most famous economists of the last century, John Maynard Keynes, made this fallacy main stream with his “Paradox of Thrift.”

I’ll spare you the details, but the gist is that savings aren’t spent in the economy, and therefore prevent growth, employment, all good things.

This fallacy has all kinds of people, including economists and commentators with IQs that are much higher than mine, saying that more savings will crush the economy.

But, I think they are full of baloney. Saving stuffed under a mattress, as they were during Keynes time, aren’t spent in the economy. But who puts their savings under a mattress nowadays?

No, most people put their saving into the bank, bonds or stocks.

If savings go to the bank, they are lent out again and used for consumption or investment in productive capacity. I call that spending.

If the money goes into bonds, then whoever sold the bond will either spend the money, which is consumption, or invest the money elsewhere, which will turn into an investment in productive capacity.

If the money goes into stocks, you get the same thing as with bonds.

If people save their money (and don’t stick it under the mattress), it gets invested. Investment is where higher productivity, new jobs, and growth come from.

We shouldn’t be encouraging people to spend, we should be encouraging them to save and invest. Consumption, especially consumption paid for with debt, is what got us into this economic mess to begin with!

What we need is more, not less savings. That will create new jobs, higher productivity and higher growth. This will not prevent growth, but is the necessary precursor to growth.

Okay, I’ll get off my soap-box now…

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.