Economic Recessions, Mass Extinctions, & Buying American

Contrary to some opinions, an economic recession is not like a Christmas sale at Macy’s. Yes, they both lower prices and provoke all sorts of mad rushes. But recessions are grave. They’re long hard winters in the wilderness. Companies die. They resemble mass extinctions over evolutionary history, and in that sense have a fascinating, maybe even positive long-term effect. Yet recommendations to buy buy buy, even from Warren Buffett, need to be taken with a grain of salt.

Survivorship bias gives us an overly rosy depiction of history. The term draws attention to an inherent bias in types of retrospective analysis; it's due to how many historical studies only focus on entities that still exist today. For example, most studies of stock market activity during the great depression will only look at companies that survived the whole great depression. This is because companies that go out of business don't have an effect that is easily quantifiable. Empirically speaking, this bias causes analyses to overestimate historical achievements by overlooking public companies that went under.

Survivorship bias is often explicitly recognized as a factor, but it's usually minimized as a statistical artifact, or a minor inconvenience that pops out of data - something to keep in the back of your mind while you’re looking at market trends. But it fully permeates how we judge the stock market, and you can see this on an intuitive level as well:

Think to yourself, quickly, of a few companies that you should have invested in 40 years ago.

Simple enough. Now quickly name a few companies that you shouldn’t have invested in. It’s a bit harder - especially if you don't follow the market closely. But there are tens of thousands of lousy investments over stock market history, and many of them quietly went out of business.



Economic recessions further inflate survivorship bias as the frequency of bankruptcy increases. That is, more businesses go bankrupt, so more businesses are taken out of a study's view. Following an economic recession - and they can last anywhere from years to decades - the market often recovers, and you hear about how great it would have been to buy in while stocks prices were so low. This is often true, and in retrospect you can cherrypick some stocks that would have made you a ton a money. What you don't see are stocks of companies that simply went out of business, which would've lost you money. And this is particularly relevant for buy-and-hold value investors, with time increasing the chances of going belly-up.

With time recessions yield rich fruits. No doubt they’ll provide a few great value investments, but in the grander sense, things always get better. Just as personal challenges offer the best opportunity for growth, recessions stimulate growth. They provide space for new entities to operate.

Biological evolution provides an eerily similar scenario: Scarcity, tough times – long hard winters – stimulate living creatures to evolve. Mass extinctions have a much stronger effect on evolution than times of plenty. Species that survive extinctions are more likely to live through future disasters. While species that die off leave niches for better ones to take their place.

It’s no mistake that humans originated in Africa, which contains some of the harshest climates in the world (along with the most diverse climates in the world packed into one continent). Our relatively modest physical stature may have allowed us to develop alternative resources – like intelligence – in order to survive. Unlike gorillas, we couldn’t rely on physical strength alone (while smaller animals like monkeys often rely more on social living).

Natural resources, like a gorilla’s brute strength, often actually negate the short-term need for intelligent solutions. Economically, a plethora of resources often curse a country’s economy (as with Russia and the Middle East). While in contrast wealthy countries contain relatively few natural resources.

Survivorship bias heavily skews our perception of evolutionary history, even moreso than it skews our perception of the stock market. For every species alive today, there were hundreds of thousands – perhaps millions – of extinct species. A common myth of evolutionary history is that we currently live during at its peak. This belief may partially in true in some regards – we maybe the most advanced intelligent species that ever roamed the earth. But such judgments are heavily egocentric in their assumption that intelligence is the end-all and be-all of evolution, which is very improbable, and they also ignore other forms of intelligence exhibited by species as wide-ranging as ants and beavers. It's a clear cut case of survivorship bias, just like in the stock market, because we're not seeing all the creatures that have died in the past.

Still, harsh times are generally followed by better ones – not just because things can only get better, but because we become equipped with better tools to help us overcome future hardship. In the wake of our current recession, some well-established companies will be able to lick their wounds and thrive again, and new and improved companies are going to crop up where poorer ones failed. Certainly this provides a window for some great value-investments. But I would encourage the shrewd investor, in picking his buys, to still see these times for what they are, and to recall that entities as promising and diversified as the mammoth, trilobite, and triceratops have all had their day.



-KJ
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Media (in order of appearance)

Photo: (1) photo of Warren Buffett, "Warren Buffet DRINKS YOUR MILKSHAKE", 04/22/2008, by Jamais Cascio; (2) A Snow Storm in Naeba, 02/26/2008, by FoNgEtZ; (3) fight, 05/07/2006, by scottjlowe; (4) Surfing Rainbow, 01/07/2006, by Mila Zinkova; (4) Photo of a recreation of a Mammoth, 2006.

Video: (1) Aphex Twin - Rhubarb On Classical Guitar, 04/17/2007, from dalycitytwins, rendition based on the song "Rhubarb" by Aphex Twin, 03/08/1994, from Selected Ambient Works Volume II.

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Upcoming ideas:

• More on the evolutionary difference between plenty & scarcity
• How positive psychology is at odds with evolutionary theory
• The upside of things is qualitatively different from the downside

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Mr. Market goes to Washington

Mr. Market is the raging lunatic screaming on CNBC and CSPAN-2 straight from midnight till 3 am about the market. He's the guy who comes into your office and recommends a new stock pick everyday - guaranteed to go up. We’ve all met him, or at least seen his stereotype in Hollywood. He’s speculation incarnate. The problem currently facing the nation is that Mr. Market, it appears, is moving from Wall Street to Washington, DC.

Benjamin Graham, esteemed mentor of Warren Buffet, first created the parable of Mr. Market – yes, parable, like the ones from the bible, as in the prodigal son or lost sheep. Here’s the story:

Imagine you own a small $1000 share in a private business. One of your partners, named Mr. Market, is very obliging, indeed. Every day, he tells you what he thinks your interest is worth and, furthermore, offers either to buy you out or sell you an additional interest on that basis. Sometimes, Mr. Market's idea of the value of the business appears justified. But, sometimes, he lets his enthusiasm or fears get the better of him and the value he proposes seems to you little short of silly. If you are a prudent investor, will let Mr. Market determine your view of the value of a $1000 interest in the enterprise?

The point is to separate Mr. Market’s manic recommendations from common sense. Mr. Market has seen a lot of mood swings since his birth (circa 1950). When prices are high and the market’s up, he's like a kid with ADHD in a candy store, he can't get enough stocks; and when the market’s down he’s downing vodka and antidepressants.



A stock – like anything else in the world – is composed of both value and fluff. The former is the earnings or projected earnings of a company, and the latter is speculation. Together they form its ever fluctuating price. Changing with the price is the P/E ratio, which is almost like a value to fluff ratio, but not quite. The catch, of course, is that you can never really separate speculation from value – and that holds for stocks, or about anything else in the world for that matter.

The government’s drastic reactions to Wall Street reek of Mr. Market’s work. Just like Mr. market, they're acutely attuned to any market activity, and if the market gains for a few days they'll be boasting from Cloud 9, if it drops they'll hit the panic button even harder. Very little true value and long-term solutions will come of it. There has and always will be a strained relation between the government and Wall Street. The government makes money, but Wall Street makes value. Unfortunately we’re now looking a whole lot of the former and very little of the latter.



-KJ

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Media (in order of appearance)

Photo: (1) Cover of Memoirs of the Dean of Wall Street, selected content by Benjamin Graham, 1996; (2) The Return of the Prodigal Son, by Pompeo Batoni, 1773; (3) Emergency Panic Button, 02/21/2008, by carrythebanner (4) Money, by Thomas Hawk, 06/11/2007

Video: (1) MARKET MELTDOWN!!, uploaded by bdoggman, from the CNBC show Mad Money Sphere: Related Content

Chameleon

Freedom is a cornerstone of Church doctrine. When left “in his own counsel,” the argument goes, man “might of his own accord seek his creator and freely attain his full and blessed perfection.” It’s fitting that America welcomed religion with open arms.

Tocqueville ascribed it partly to the power of free choice. Freedom strengthens conviction. People are more dedicated to those things that they choose. Conversely, restricting people tends to yield lackluster results. Consider the fall of communism. Or the uniquely secular populace in modern-day Israel, a country originally formed out of devotion to one religion.

It frames men, but religion is also framed by men. History has revealed a constant give-and-take; at times man bends to suit religion, at times religion bends to suit man. It changes with the scenery, like a chameleon.



It’s no surprise then that Christianity was different in America. Noted Tocqueville, it became more practical. Clergy tended to highlight the importance of rewards in the present life rather than in the afterlife. It changed some.

In some sense, it adopted scare tactics, ranging from fire-and-brimstone speeches of the 18th century to Hell Houses of today (haunted houses depicting the consequences of sins like abortion and suicide on the afterlife).

Hell House - Trailer | Movies & TV | SPIKE.com

In some sense, it became subliminal. %92 of people believe in God, but visions of him vary, ranging from all-powerful to impersonal to not quite sure.

In some sense, it became more tolerable. Theoretically religions are mutually exclusive of each other, but this breaks down when surrounded by neighbors and friends of different faith.

In another way, it became more divisive, a part of personal identity to separate one from others.

Most of all though, it mirrored politics. Wrote Tocqueville, “religion itself holds sway [in America] much less as a doctrine of revelation than as a commonly received opinion.” This underlies the maxim of never discussing politics and religion at the dinner table – it speaks to an interesting similarity between religion and politics in a democracy.

Although separated legally, religion and politics share cores of beliefs, values, and opinions held intimate by many.

Original sin. Faith. Guilt and redemption. Ritual. Community. The apocalypse.

These all extend beyond aspects Christianity, they stir the soul on some level.

Today, they’ve arisen as cornerstones of environmentalism, a movement that relies more heavily on Christian-like dogma than science. Conservatives have Catholicism and liberal’s have environmentalism.

Per environmentalism, areas of Alaska are considered holy and untouchable; while industrial actions previously taken by America are deemed unfit for third world economic development. Its plethora of apocalyptic visions far preceded the current global warming frenzy, covering food availability, population growth, and even water.



Paul Ehrlich and Al Gore stand out as pure modern-day fire
and brimstone visionaries. In 1969, Ehrlich predicted that:
"By 1985 enough millions will have died to reduce the earth's population to some acceptable level, like 1.5 billion people." Two decades later he revealed his true unscientific feelings: "We've already had too much economic growth in the United States. Economic growth in rich countries like ours is the disease, not the cure." Al Gore's current rhetoric needs to be interpreted as part of the same tradition - not so much a scientific prediction as scare tactics, similar to worrying little kids about hell, and a dislike of economic growth.

Environmentalism's more superficial parallels to Catholicism include Earth Day, its day of worship, and a heavy reliance on symbols. Yet at their cores, both are fueled by an essential distrust of human nature and ego.

The chameleon – dragging on belly through its habitat – is a an apt analogy. And religion, or whatever my underlie it, is strongly present in America.

-KJ



"Changing-Color Chameleon"


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Media (in order of appearance)

Photo (1) Toppledominos; (2) Creation of the Sun and Moon, face detail of God, by Michelangelo, completed on the Sistine Chapel cieling, 1512; (3) Portrait of John Edwards, famous for his fire & brimstone speech, Sinners in the Hands of an Angry God, delivered 07/08/1741; (4) Photo of Paul Ehrlich;(5) Photo of Al Gore , 2007; (6) Recycle by Nick Palmer, 7/27/2006; (7) Eath Day symbol of greek letter theta, commonly believed to represent death.

Video (1) Power of color change - Chameleon, by Chuihx, 10/26/2007; (2) Trailer for Hell House, documentary, 2001 ; (3) Trailer for An Inconvenient Truth, documentary about global warming, 2006; (4) Colour-changing Chameleon, 05/23/06, by Daydreamer123

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Upcoming ideas:

• Democracy's reflection of man
• The government, the economy, & Mr. Market
• Opinions are easy
  

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