Horse Feathers

While wisdom and experience are certainly very important to long-term investment success, I do believe it is also necessary to begin each day with an open mind. Flushing the senses, so to speak, allows new information to be processed through an unbiased filter. In short, markets change, and investment thinking must be adaptable.

The timeless challenge is to sort through the constant flow of information and determine what is relevant and what should be discarded. The latter, I think, is easier to do given our penchant for making the innocuous seem significant.

An example… The February 20, 2013 edition of the Wall Street Journal had an article titled, “Horse Meat Found in Nestle Products.” I’ve never tried horse meat before, but is it so bad? Lewis and Clark may not have survived their historic journey in 1805 had it not been for horse meat. Yes, I know, if one buys Beef Ravioli, one expects beef not horse meat, but if I owned stock in Nestle, I would not sell it because of this story.

For the record, I did not watch the President’s state of the union speech. Nor did I listen to any of the rebuttals offered by the other side of the aisle. What happens in Washington matters, what is said in Washington less so. In the Marx Brothers movie, Horse Feathers, Groucho Marx, cast as Professor Quincy Adams Wagstaff, the newest president of Huxley College, offers this line in his introductory speech before the assembled student body – “As I look out among your smiling, eager faces, I can readily understand why this college is flat on its back.” That sums up rather well, how I feel about our polarized political process.

But some news stories really do matter… Cyber attacks to our computer systems are a big deal. Our economy relies upon the accuracy and confidentiality of information at many levels. It seems that many of these attacks may be tied to the Chinese military. How this plays out will impact global trade, military spending, as well as peace in the Asia-Pacific region. From an investment perspective, companies that can offer leading-edge security products and services may be interesting investment ideas to research.

Meanwhile, merger and acquisition activity is heating up. This positive development is being driven by two factors. First, corporations are becoming increasingly pressured to invest their record levels of cash. Higher dividends and share buy-backs have relieved some of this pressure, but corporations seem focused on making more significant investments. All these trends are positive for the stock market.

Second, the exponential growth in government regulation, executive orders, and higher taxes, continue to pressure the private sector. Smaller companies, in particular, are increasingly burdened by government’s heavy hand, and may be forced to combine with larger partners to survive. While this is good for stock prices in the near term, it is not good for future job creation.

The Federal Reserve’s zero interest rate policy is another tonic that may be good in the short run, but harmful in the long run. And that is my real concern, that too much of what government is trying to do is short-term focused, with potentially negative effects over time.

On this note, how will the world adapt as the only global military superpower shrinks from the world stage? Does it make the world safer, or does it embolden despots in places like Iran and North Korea?

And how will the drive to redistribute wealth end up? Will we reach a tipping point when the weight of entitlements and higher taxes sink the economy?

Or perhaps the story will change… Over the next few years the core values of our country will be tested, perhaps redefined. The next few years will also test our resiliency. I don’t believe there is much chance any of this can be avoided.

More Horse Feathers… In that same movie, just before Chico Marx launches into his obligatory piano solo, Groucho saunters up to the camera and growls – “I’ve got to stay here, but that’s no reason why you folks can’t go into the lobby until this thing blows over.” If only we could…