Who Benefits from Innovation?

I often talk about the power of innovation when arguing why the economy continues to move forward over time. This idea was best articulated by Joseph Schumpeter, an Austrian economist who coined the phrase "creative destruction." One of the most interesting considerations regarding innovation is the question of who benefits: the innovators, or the ultimate users of the innovation? The answer is that they both benefit.

This brings me to a great blog post by Steven Horowitz, an economics professor at St. Lawrence University. Professor Horowitz uses the most recent census data to show that, over the past twenty years, those living under the poverty line have seen a dramatic improvement in living standards. Many more poor people have things like dishwashers and air conditioners than did a few decades ago. It is important to note that he is not saying anything about the gap between the rich and the poor, which is another issue.

The entire topic of living standards, economic prosperity, and the rich-poor gap is complex and very politically charged. I only offer the reference to Professor Horowitz's blog, because I find it to be an interesting approach to the topic. What I like best is the quote at the end of the post, with which I couldn't agree with more:

"...as long as the Schumpeterian horse of innovation and the Smithian horse of the gains from trade outrun the Government horse of stupidity, the winners will continue to be you, me and our children and grandchildren, even if the stupid horse is running a bit faster than it used to."

Ultimately, economic prosperity is the result of businesses continuing to evolve, innovate, and trade around the world. As long as this remains true, we will work our way through the current economic difficulties.

Happy Thanksgiving!

In honor of tomorrow's holiday, I though I would show something that we should all be thankful for. The table below shows returns for various equity asset classes through last Friday.

We have shown this table, or ones similar, several times this year, most recently in September. I chose November 20 as the date because it was on that date last year when the market reached its bottom. I remember very clearly how we felt at this time a year ago, and it wasn't very good. If I had said at that point that we would see market returns in the 60% range over the next year, I would have been called crazy.

So I for one am thankful that we can spend the next few days focusing on family, friends, food and football, as opposed to worrying about the economy and financial markets. I hope everyone has a wonderful Thanksgiving!

What is Your Present Outlook?

Yesterday, I received a message from a client with the following questions:

What is your present outlook? Any suggested changes in investments or allocations?

Although these questions seem fairly simple, they really get to the heart of the issues underlying investment management. The first one is the harder of the two to answer. We have clearly been through a historic period in economic history; one that few saw coming, either in scale or scope.

Now that the economy is in recovery, the question on many people's minds is, "Will the recovery last?" There are many "experts" on both sides of this question that are more than happy to share their opinions. Just google "Will the recovery last?" to see what I mean. Unfortunately, many of these opinions are based on the the efficacy of particular government actions: Has the Fed gone too far or not far enough? Will the stimulus work? Will government deficits derail the recovery? etc... Furthermore, it is easy to find two well-respected economists who disagree about each point.

The problem I have with this approach is that it doesn't account for how businesses and individuals are reacting to the current environment. I am a strong believer that innovation and hard work are the foundation of economic growth, not government policies. Examples of innovation and hard work can be seen in this article about how tinkering is making a comeback in the current economic climate.

So to answer the first question, my current outlook is cautious optimism. I am not naive, and I understand that the current recovery is fragile and that there are lots of obstacles that we need to overcome. I also understand that government actions are important, and much of what has taken place over the past year is unprecedented. We really have no idea how the story will play out over the next few months and years, and that is the cautious part. We should all be ready for more bad news and possible short-term market losses. As I say over and over, no money that anyone plans on spending in the next six years should be invested in the stock market.

The optimistic part comes from the fact that good times come when they are least expected. A few weeks ago, I posted about Warren Buffet's purchase of Burlington Railroad. When times are bad, the truly bold, smart, and energetic come forward and lead the way. Why will that be different this time? It may take a while for things to get better, but they will.

The second question, about changes to investments or allocations, is much easier to answer. I am not recommending any changes. We are strongly opposed to market timing. We firmly believe that being globally diversified is the best way to invest. Markets will continue to be volatile, even when the recovery takes hold. Trying to time that volatility is a fool's game.

Everyone's investment assets should be allocated according to their individual risk tolerance, which is what we try to do. These allocations should not be changed based on views of what may happen in the near future, because more often than not we are wrong. Here is an article which explains some the reasons why we are prone to mistakes when we make investment decisions based on our "view of the future."

Thanks!!!!!

Today is Veterans Day, a day when we should all give thanks to the brave men and women who have served our country and protected our freedom. It would be great to live in a world without violence, but unfortunately that is not reality. Maybe someday Veterans Day will seem like a quaint reminder of what the world used to be like, but for now it remains an important day to remember and honor the sacrifice and courage of so many. Thanks!!!

Here is a list of quotes honoring Veterans Day.

An All-In Wager on the Economic Future of the United States

The title of this post comes from a statement by Warren Buffet, which he said this morning when commenting on his purchase of 100% of Burlington National Railroad (BNSF). Here's the whole quote:

"Berkshire's $34 billion investment in BNSF is a huge bet on that company... Most important of all, however, it's an all-in wager on the economic future of the United States... I love those bets."

Not only is Buffett buying the whole railroad, he is paying a 30% premium over yesterday's closing stock price. Mr. Buffett is many things, but one word rarely used to describe him is stupid. That said, he has certainly made mistakes in the past, and this purchase of BNSF might prove to be one of those mistakes. The bigger question is, is he wrong in betting on the economic future of the US? History suggests that betting against the US economy, or betting against Warren Buffett, is usually a suckers bet.

Here is a video of Mr. Buffet that I highly recommend.