| Saturday, August 2, 2014 | Issue #88 | Agora CEO: "This made me and 50+ employees millionaires" Agora Inc. started more than 35 years ago in a Baltimore row house, and has become one of the largest publishing firms in the world. And now, for the first time ever in a brand-new book, Founder Bill Bonner explains his radical approach to business, wealth, money, family, management, relationships, and more. If you want to be a better investor, manager, parent, spouse, or businessman, this book is a must read, full of great ideas you'll find nowhere else. See a full review and get your copy now...
Joel Bowman, sipping ristretto in Rome, Italy... Not a great week for investors. Stocks, down... WAY down. Gold, down. Even your editor's beloved Bitcoin... down... down... down... A single unit of the crypto-currency, at time of writing, trades for barely $580. Recent investors are counting their losses, licking their wounds. "Ol' timers" in the Bitcoin world (those with three or more years of experience) pay no heed. They've seen this kind of "volatility" before. Call them when the price falls to $200, or less. They'll be there... "backing the truck up," as resource legend Rick Rule likes to quip. Of course, the prices for stocks, gold, bitcoin etc., will have changed by the time these words reach you. Meaningfully, perhaps. No need to fret. Remember, markets move in both directions... at least that's what we've been told. We've also been told that identifying winning stocks is not the only game in town. Avoiding losing ones is just as important. Maybe even more so... "Don't worry about finding the best stocks or the best investments," writes Bill Bonner, Agora's founder and author of the new book, Hormegeddon. "Just be sure you don't have the worst ones. And don't worry about missing the market's best days... just watch out for the worst ones." Bill's thoughts build upon a recent study in which a group of academics "wrote off" the 10 best days, and separately the 10 worst days, from a hypothetical portfolio going back... well, a long time. They then compared the two. "If you missed the 10 best days of market action during the last 25 years, your rate of return would have been cut nearly in half. Instead of getting over 6% per year, your return would have been only 3.67%. On the other hand, if you missed the 10 worst days over the last 25 years, your rate of return would have risen to nearly 11%." The lesson rhymes with the advice of legendary money manager Jean-Marie Eveillard, who, after being "accused of prudence" for eschewing the risky tech mania of the late '90s, famously, defiantly remarked, "I'd rather lose half our shareholders than half our shareholders' money." It is true that Eveillard lost half his shareholders... but perhaps more importantly, when the tech bust finally (inevitably) rolled around, he did not lose half his shareholders' money. Needless to say, it wasn't easy going for Eveillard at the time... "For three long years," Eric Fry recalled in these pages, "it looked like Eveillard's illustrious career might end in disgrace. His fund nearly closed down. But as it turned out, Eveillard's prudence was, in fact, prudent. In the 10 years from March 31, 2000, to March 31, 2010, the S&P 500 Index and the MSCI EAFE Index both produced a negative total return. Over the identical time frame, the First Eagle Global Fund more than tripled!" Next to winning, not losing often appears underrated. But as history shows, avoiding the worst is at least as important as chasing the best... "This is true of a lot of things," continues Bill. "Think how much happier your marriage would be if you could blot out the 10 worst days of it. Or what a nice life General Custer might have had if he'd managed to avoid that awful day at Little Bighorn! "But when do the market's worst days arrive? We haven't studied the matter, but you don't need much study to know that they follow big run-ups in prices. 1929. 1987. 2000. 2008. Typically, you get big drops after a long period of gains." We have no idea whether we're nearer the beginning or the end of this current "long period of gains." We only know it won't last forever. Nothing does. In the meantime, we turn again to the Roman stoic Marcus Aurelius for insight: "The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." Joel's Note: Having known and worked with Bill Bonner for many years now, I can honestly say he is a man who does not take refuge in the false consensus of the majority. As for avoiding the "ranks of the insane"... well, that depends on who's defining the terms... Bill is insanely successful, yes... and insanely wealthy. But he is also "insanely" humble in his daily life... and "insanely" insightful when it comes to appreciating big ideas and little details alike. Bill's latest book, Hormegeddon, is a testament to the man's uncanny ability to see the world as it is, not how we're told it "ought to be." It's full of "aha" moments and the unique brand of wit Bill's readers have come to know and love over the years. Hormegeddon is not yet available in bookstores, but you can grab an advanced copy at the link below. I heartily suggest you do so. Hormegeddon: How Too Much of a Good Thing Leads to Disaster But you don't have to take my word for it; today's featured essay is an excerpt from Bill's book. Take a look...
Are You a Zombie? By Bill Bonner
 | | "It was unbelievable," said a colleague, encountering the complexity of modern life. "My son got arrested for having a marijuana cigarette on him. I had to go to court with him.
"First, the judge seemed to know the whole thing was a farce. She looked down at my son and the other kids who were at the same party and were all arrested along with him. She said 'you all have to realize that marijuana is against the law in the state of Maryland. Also, it is a door to more serious problems. Every addict I've had in my courtroom has started out with pot.' Then, she gave them each a $50 fine plus court costs of $57. But they each also paid about $1,500 to a lawyer, who sat with them in the courtroom but really had nothing to say.
"And this was the result of a raid on a house right off campus. The police knocked down the door and arrested almost everyone. And what did they find? Just a few marijuana cigarettes. Imagine the cost of all this... the police... the lawyers... the court... the parents. And for what?"
Joseph Tainter, in Collapse of Complex Societies, believes the decline in civilizations can be traced to problem-solving. Each problem, he says, leads to a solution, which involves greater complexity. Bureaucracies, hierarchies, rules, and regulations are imposed. These things cost time, energy and resources. Eventually, the cost is too great. Complexity increases costs without increasing output. Eventually, the civilization operates at a net loss, negative returns, and then... you guessed it... "Hormegeddon."
Not everyone loses. There is a great transfer of wealth involved: from productive citizens to lobbyists, lawyers, accountants, bureaucrats, policemen, judges, counselors and psychologists, jailers, pundits, lobbyists, lawmakers, parole officers, social workers and thousands of others.
But a little refinement of Tainter's hypothesis is needed. There are different kinds of complexity. There is the natural complexity of the upside - with an infinite web of human and commercial relationships. And there is another form of complexity - one that is imposed by force, rather than spontaneously generated.
The first form of complexity helps reduce costs; the second increases them. The first makes the system more robust - like a web of small streets in a big town. The second - like a single large highway with a tollbooth - makes the system more vulnerable. The first allows for experimentation, innovation and correction. The second cuts off innovations and forbids corrections.
Entrepreneurs flourish in the natural complexity of a dynamic economy. But planners favor complexity in its heavy-handed, directed form. Why? It is easier to understand. And easier to manipulate. It is also a rich cover in which to hide special favors and privileges.
Sure, you could replace the government's revenue with a much simpler tax system, but you'd inconvenience thousands of insiders. Better to inconvenience millions of outsiders - those who don't benefit from the complexity.
Artificial, imposed complexity forces the distribution of power, status and wealth along prescriptivist lines. A dynamic economy is descriptivist. It offers no prescription for success and only a few simple rules: Thou Shalt Not Steal, for example. Prescriptivist complexity, on the other hand, brings countless new rules, forcing you to hire good lawyers and accountants to avoid running afoul of them.
Artificial complexity is what you get in a non-market system. Without a functioning market, there is no way to know what things are worth or who's valuable and who's not. Government output is not priced by an active bid-ask market. Nor are government workers hired or paid on a piecework basis. Instead, everything depends on theories, guesswork, prejudices, credentials, paperwork, and connections. As a result, resources are invested in ways that do not necessarily pay off.
Here is a simplified illustration of Tainter's idea: In the Roman Empire, agricultural output per person dropped as population increased. The problem was addressed by a policy of conquest. The Romans took resources - grain, slaves, gold - from their neighbors. But this required a large army, which was an expensive, energy-consuming enterprise. And it undermined the normal agricultural economy of Italy; free farmers couldn't compete with stolen imports and large slave-run farms. The return on investment declined and eventually went negative.
The Empire collapsed.
That was not necessarily a bad thing. When the decline on investments is negative, you are better off stopping the program. And archeological evidence from bones and teeth suggest that many people were actually better fed after the collapse of the empire.
As the size and complexity of society grows, the governments that are most competitive are those that draw on the most support of their subject peoples. That is why the Roman policy of conquest was so successful. They were able to turn the conquered peoples into supporters of the regime, with most of the army eventually comprising non-Roman soldiers.
The British Empire was good at this too. The empire began by subduing the Scots, who became the backbone of the British Army. Today's American army, too, depends heavily on soldiers from the southern states, who were conquered by Abraham Lincoln's armies in the 1860s.
In an early stage, a society tends to be robust and efficient - or "simple," in Tainter's terms. Later, additional complexity degrades returns on investment. While this complexity may be described as a form of problem-solving, it is better understood as an attempt by elite groups to hold onto their wealth and power. "Complexity" is created by people who find ways to game the system. They earn their livings without contributing to useful output (even though they may or may not be working hard). Growth rates slow, as much of the society's energy is diverted to unproductive uses. In short, more and more money goes to zombies.
What are "zombies"? Neither dead nor alive, from an economic perspective, they are people who live at the expense of others. Are you a zombie? Here's how to tell: Ask yourself, in the absence of the government, would people voluntarily pay you to do what you do? If not, you're probably a zombie.
Cheers,
Bill Bonner
For Free Market Café
P.S. If you enjoyed today's message from Bill Bonner, you'll probably love his brand-new book: Hormegeddon: How Too Much of a Good Thing Leads to Disaster.
If you want to be a better investor, manager, parent, spouse or businessman, this book is a must-read, a veritable font of "aha" insights and ideas.
This book is not yet on sale through Amazon or any of the other mass-retail channels. But it is available through Bonner & Partners at this link:
Hormegeddon: How Too Much of a Good Thing Leads to Disaster | | | |
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