Friday, August 19, 2005

Buying China

Institutional Investor (no free link) published a story in its August 2005 issue that described Bank of America's purchase of almost nine percent of China Construction Bank for $3 billion. There was an interesting quote about the transaction from an unnamed head of research at a leading Asian investment bank:

“Too many executives are reading Time Magazine and thinking China is the great dragon that is going to eat the world…The mentality is, (i)f I’m not there and China takes off, I’m toast. If I’m there with every other guy on the planet, I probably won’t lose my shirt entirely.”

I hate to beat a dead horse, but it sounds an awfully lot like this:

"Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally." --JM Keynes

Not to be outdone, Royal Bank of Scotland Group announced yesterday that it would buy a five percent stake in Bank of China for $1.6 billion. They'll be joined by Merrill and Li Ka Shing's combined $1.5 billion.

Pretty soon you're talking about real money. I had thought that Bank of America's 4% dividend yield was attractive until now.

Thursday, August 18, 2005

More Market-Beating Wisdom

Readers of this blog will learn that I am not fond of John Maynard Keynes, the economist. First, because I think his unbalanced view of macroeconomic theory was wrong and self serving. Keynes’s emphasis on the demand side and denigration of the importance of the supply side was compelling to Keynes and other economists in part because it made them important. With Keynes’s ideas, they would become the Wizards of Oz pulling the levers of the economy from behind a curtain. Indeed, this power was so mesmerizing, “Keynesianism” became a quasi-religion among economists in the twentieth century, and economists trained in classical analysis became passé. As with many liberal ideas, power and feelings ruled over correct thinking (von Mises hated to concede the moniker "liberal" to the leftists, as do I, but I'm afraid that is a battle that has already been lost and cannot be re-fought).

But, the main reason I dislike Keynes is that he did more to effect socialism in the western world than anyone. He conquered the west with his misguided ideas more effectively than Lenin and Stalin could with a military. Ideas do have consequences. Keynesianism provided the intellectual hammer for FDR's bashing of the US Constitution to bring about New Deal socialism, which, by the way, never did cure the problem that it set out to cure (I’ll have more to say on that subject in another post). We still live with the consequences of Keynesianism today.

What does any of this have to do with alternative investing? I admit this is somewhat of a tangent, but I so dislike what Keynesianism did to the West that I am forced to preface anything positive that I write about its progenitor. Keynes was not only famous for his economic theories and his homosexuality, but also for his investing prowess. We anecdotally know that he became wealthy from investing in stock markets in the 1920s and 1930s. So, in this post I would like to include a quote from Keynes, the investor, that continues the theme of my inaugural post. In 1934, Keynes wrote a letter to an associate that included the following passage:

“As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.”
Mr. Swensen and Mr. Buffet must have read Keynes’s investment philosophy. It is from the wisdom of these giants of investing that alternative investors can find the discipline to stay the course. As Swensen said, "Investment success requires sticking with positions made uncomfortable by their variance with popular opinion. Casual commitments invite casual reversal exposing portfolio managers to the damaging whipsaw of buying high and selling low." Or, as Keynes said:
" is the long-term investor...who will in practice come under the most is in the essence of his behavior that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful that will only confirm belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."
Nothing is more at "variance with popular opinion" than a portfolio that is concentrated in "enterprises which one thinks one knows something about." And nothing is more vital to the success of alternative investing as the comfort that traditional investors find in the approval of their peers.