Well-known former Morgan Stanley strategist Barton Biggs, who tragically passed away in 2012, asks an interesting question at the beginning of his book, Wealth, War and Knowledge: “How do you keep money safe when the Four Horsemen are out in the open?” (By the Four Horsemen, Biggs refers to “pandemic, war, famine, and death.” See also Revelation 6:8.)
Back in 2008 (when Russia invaded Georgia – some things never change), Biggs gave money management (Still registered representative) A special look at his work, which is as relevant today as it was then, given Russia’s recent invasion of Ukraine and the ensuing financial chaos. here is an excerpt from Wealth, War and Knowledge,
Beware of Investing in “Keeper” Stocks: Nothing Lasts Forever!
[One] The message from history is that even in lucky countries (countries on the winning side that are not prone to catastrophic attacks), assets invested in equities should be diversified. There are no great long-term, “keeper” stocks to put away forever, and there has never been one because no company has ever had a lasting, forever competitive advantage. Excellence lasting more than several decades is virtually non-existent.
Some advantages last longer than others, but all are temporary. Furthermore, there is overwhelming evidence that corporate competitive advantages have shortened periods, which is not surprising in a world where the rate of change is accelerating. This is the nature of business development. Also note that wars, as Joseph Schumpeter would have said, are “storms of creative destruction” and result in accelerated technological progress.
It seems that corporate growth involves a company developing a competitive advantage, taking advantage of its edge and becoming successful. Then its share price rises, and it is soon discovered and thereafter it becomes a keeper growth stock. As the company grows and gets bigger, it attracts competition and inevitably becomes less nimble and creative. Then as it ages, its growth slows down and eventually it becomes either stagnant or obsolete. Studies of organizational ecology show that in the world economy when new companies create new businesses, there is little innovation in large, mature companies. To express the same concept differently, companies do not innovate; contractors do. IBM and Intel were once great innovation companies, but now they are corporate research laboratories. Bill Gates was the innovator, not Microsoft.
For example, when the pace of change was very slow, there were stocks that maintained a competitive advantage over a long period of time. Eric Beinhocker generation of wealth writes how in the seventeenth and eighteenth centuries the British East India Company had a total monopoly in the four countries, dominated the world in everything from coffee and woolen to opium, had its own army and navy, and indeed war by the Crown. He had the right to tease. if necessary. Although the world changed, it did not, and its “giant wall of core competencies” collapsed in the face of technological innovation. It went out of business in 1873.
In 1917, Forbes Published a list of the 100 largest US companies. The next 71 years were marked by the Great Depression, World War II, the inflation of the 1970s, and the spectacular post-war boom. When Forbes In a 1987 review of the original list, 61 companies no longer existed for one reason or another. Of the rest, 21 were still in business but were no longer in the top 100. There were only 18, and with the exception of General Electric and Kodak, all of them underperformed the market indices. Since then, Kodak has had serious difficulties so GE is the only, truly successful survivor. In 1997, Foster and Kaplan checked the endurance record of the Standard & Poor’s 500 stock index as it was created 40 years earlier. Only 74 of the parent companies were still in the Select 500, and that group made the overall index less than 20 percent.
Warren Buffett is a certified immortal, but even investment connoisseurs can tell individual companies wrong. Eleven years ago, I heard them tout Coca-Cola as an impenetrable franchise growth stock that you could safely close and own forever. The shares were then sold at a substantial premium valuation. He misquoted various social, industry and company-specific items that plagued the company and crushed its share price. The same applies to his other favourites: Washington Post,
In another study cited by Beinhocker, two academics, Robert Wiggins and Tim Ruffley, created a database of the operating performance of 6,772 companies in 40 industries in the post-war era. They were consistently ranked for better business, not stock market, performance lasting 10 years or more relative to the industry the company was in. He found that there was no safe industry. The pace of change in the high-tech groups was faster than in the more mundane ones, but was gaining momentum in all industry groups over time. They also found that only five percent of companies achieved periods of superior performance that lasted 10 years or more, and only half of one percent maintained a competitive advantage for 20 years. Only three companies, American Home Products, Eli Lilly and 3M reached the 50-year mark.
Diversifying funds into equities over decades or generations means either buying an index fund or finding an unusual investment management firm with the knowledge and vision to build a diversified portfolio that will at least beat the average — After taxes and fees. Two important advantages of an index fund are that it reduces taxes and transaction costs due to low turnover and charges a small investment management fee. You can now buy index funds to replicate almost any equity sector. Several recent studies show that over time the average American investor, whether he buys individual stocks or active mutual funds, generates significantly lower returns than the S&P 500. It pains me to write this, but professional investors don’t do much better on a statistically significant, risk-adjusted basis.
The record indicates that over the long run public equities (to use the infamous phrase) are highly likely to earn returns in excess of the inflation rate. If you live in a stable country and you know with a high degree of certainty that you can get real long-term returns of 400 to 700 basis points in an index fund, why mess with anything else? Maybe you can do better if you still believe in fairies and are a skilled professional investor but don’t count on it. Above all, don’t put your eggs in a few big baskets. There is an old saying: “Put all your eggs in one basket and then look at the basket” is the broker Baloni. The risks in holding a diversified portfolio are astronomical.
Common sense and a message from the past is that in all aspects of the investing world, but especially in equities, the reversal toward the mean is an over-powering, gravitational force. There are no super-return asset classes! It is written in stone that exceptional returns attract excessive capital, and size is the enemy of performance. No one should be under the illusion that private equity or hedge funds will be different.
Gold, art and bonds are problematic
Third, the history of Europe during World War II indicates that gold and jewelry worked well enough to protect a small amount of wealth. Think of them as your “crazy money”. However, as mentioned earlier, the history of World War II warns against keeping them in a safe deposit box in the country. Winners demand the key, and your bank will give it to them. Keep your safe deposit box at home or stash your valuables in a safe. Above all don’t tell anyone. When your neighbor’s kids are starving (as in the chaotic winters of 1945 and 1946), they’ll do anything. You’ll want to keep your crazy money on hand in case the barbarians come next in the form of a terrorist attack or plague.
Fourth, the art is also not particularly good. It is vulnerable to destruction by fire, can be easily damaged, can be robbed quickly, and is difficult to hide. At the end of the war, Warsaw alone reported 13,512 missing works of art of one kind or another. That said, some Europeans successfully removed valuable paintings from their frames and smuggled the canvases from their home countries to safer places. The caveat was that when they tried to sell them, they could only get a fraction of their original value.
Fifth, at least based on the last century, fixed income investing is nowhere near as good as equities. Even in Lucky Countries, they delivered returns well below stocks, although they offered very little volatility. In various countries, the standard deviation of bonds was about half that of equities, and bills had about a quarter of the volatility compared to equities. In terms of liquidity, they were fine. Fixed income markets in London and New York remained relatively liquid throughout the war years.
among the losers [Germany, Japan, Italy, et al.], fixed income had severely negative returns, and although government paper is generally considered to be relatively risk-free, German bill investors lost everything in 1923, and German bond investors lost real money after World War I to 92%. Loss of more than a percent. Admittedly, inflation was very high in a war-torn world, and fixed income is not the place to live in such an environment. In the chaotic, chaotic environment of the war years in the losing nations, you can no longer sell in bonds or cash bills allowing you to trade stocks. However, there was a time in the 1930s when bonds were the best performing asset everywhere due to deflation.
part with permission. Copyright © 2008 by Barton M. Biggs. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey