The Blue Sheets

While the stock market is behaving fearfully, we want to devote this issue to the thesis that the human capacity for innovation is an inexhaustible source of power that routinely topples seemingly intractable challenges. Our genius for betterment has flourished in the social arrangement known as democratic, free-market capitalism. Its promise of rewards for our efforts tends to subdue our baser instincts of fear and envy, and to stimulate the powerful creativity with which we are endowed.

What is it about gold?

In the past 10 years, the price of one ounce of pure gold has risen from less than $300 to $1,500, far outpacing the return on stocks and bonds. And yet, to paraphrase the comedian Rodney Dangerfield, “It don’t get no respect” in most gatherings of professional investors. Why is that? Why is the yellow metal treasured in some quarters and disdained in others?

Our young neighbor, Sam, was feeling a bit weary of his obligation to take his shelter puppy for a walk and feed him every day. One morning he announced that he was putting the little darling up for sale. “What do you suppose Barkie is worth”, his Dad asked. The 8-year old offered his sober judgment, “About $1,000.”

In this much‐loved passage from the Book of Ecclesiastes, King Solomon encourages patience in the conduct of our earthly affairs. He specifically recommends an unhurried attitude toward the accumulation of wealth.

The King’s 2400 year‐old reflections offer timeless wisdom and practical insights for our work of managing investments for families in this hurried and hectic 21st century. I am thinking especially of Solomon’s idea that there are rhythms in the affairs of men that cannot be hurried and ought not be ignored… that seasons come and go in turn, and that each is appropriate for different purposes. In this issue of the Blue Sheets we’ll reflect on the natural rhythms of the credit cycle. We’ll try to understand how this cycle influences our economic behavior and its implications for investment decisions. I can almost hear a whisper from across the centuries, “There is a time for borrowing… and a time to refrain from borrowing”.

Our mission at Financial Advantage is to promote the prosperity and, thereby, the economic freedom of our clients and their families by thoughtfully investing their savings; to pursue opportunity wherever we find it, while diversifying the risks that attend even the most promising enterprises. As the door swings open to a fresh new decade of opportunity, and as we survey the exciting array of businesses in which private capital might be invested, we are conscious of three large-scale risks that have the potential to overwhelm ordinary investment considerations.

Our process for preserving your capital in a volatile world- In the last issue of The Blue Sheets® we examined some of the profound ways in which the world is changing, and the new opportunities and new kinds of risk that may proceed from those changes. In this issue we take a look inside the Financial Advantage process for investing our clients’ irreplaceable life savings during what is likely to be a volatile period of transition to an unfamiliar future.

Thomas Rowe Price, founder of the eponymous mutual fund giant, opined famously that “Change is the investor’s only certainty.” As our thoughts ramble back across the eons, a startling range of famous change agents parade before our mind’s eye: The taming of fire; the first tradesman to hitch a wheeled wagon to a camel; the Code of Hammurabi (rule of law); the Exodus from Egypt and the carpenter from Nazareth; the Battle of Hastings; Adam Smith’s Wealth of Nations; the American Revolution; the Crash of ’29; D Day; the integrated circuit (microchip); and we are tempted to add, subject to revision, the collapse of Lehman Brothers.

The answer matters profoundly-The most valuable advantage in the battle for investment survival is to understand the context* in which we are making investment decisions; that is, to correctly appraise the economic and political forces that are shaping tomorrow’s risks and opportunities.

To observant investors, the collapse of global securities markets and the near hysterical efforts by governments to stop it signal a global contextual transformation that will be broader, deeper and more pervasive than any disruption since WWII. As everyone now knows, this upheaval was triggered by the implosion of the postwar credit expansion which had soared beyond the limits of prudence during the last five years.