"Out on the Ledge"
by Bill Bonner
YOUGHAL, IRELAND – "Last week, Charles de Vaulx, a famous value investor, was apparently so depressed by the bad performance of his fund that he jumped from the 10th floor of his office building. The New York Post: "Shortly before 1 p.m. Monday, Charles de Vaulx entered the posh Midtown tower at 717 Fifth Ave. that had long housed the offices of International Value Advisers [IVA], an investment firm founded 14 years ago, according to police. Minutes later, de Vaulx - who built IVA into a financial powerhouse with $20 billion in assets at its peak before it abruptly liquidated last month - plummeted from the 10th floor, according to a building employee.
Old fashioned, Graham-and-Dodd value investing is hard work. You need to study balance sheets. And understand a company’s business model. What is the real return on capital employed? How “efficient” is the investment? How risky… and how reliable?
But sometimes – despite your best efforts – things don’t work out. Even Warren Buffett himself – maybe the greatest value investor of all time – couldn’t make much headway in 2019/2020. CNBC: "In 2020, Berkshire Hathaway shares were up, but not by much (2%), against an S&P 500 that gained over 18%, with dividends reinvested, according to S&P Global. Taken together, the two-year stretch of 2019 and 2020 marked one of the biggest gaps between Berkshire and the broader U.S. stock market in recent history, with the [multinational conglomerate led by] Buffett trailing the index return by a combined 37%. Says Buffett, chairman and CEO of Berkshire Hathaway: “I attribute this largely to a lack of exposure to tech stocks.”
Waste of Time: There are times when long-term value mining seems like a waste of time. Why go to all the trouble of working at the coalface of real investing when Dogecoin (a popular cryptocurrency that has zero value from an investment standpoint) is up more than 7,000% so far this year? Why bother with all those company reports when you can just listen to Elon Musk… and get rich on Tesla? And why worry about investing at all? The feds will do it for us.
Daring Investments: Also in the news last week was the U.S. government, announcing the jumping-off point for the most daring “investments” in the history of the world. Yes, that’s what Joe Biden calls the 2020 COVID-19 relief programs and the 2021 follow-on infrastructure, family support, and climate change boondoggles… “investments.”
It’s the biggest, most ambitious, grandest larceny ever attempted. Trillions of dollars will be taxed or inflated away from their rightful owners to be “invested” by the feds. In fact, since March 2020, the total to be “invested” by public officials is rising toward $10 trillion.
The fib from the White House is that the rich will pay the costs. The top 5% of taxpayers already pay 60% of the taxes. The bottom 50% pay almost nothing. And if these credits and other provisions are passed, about 75% of the voters will pay zero. That will leave the full burden on the richest 25% of the population. But these are also the people who are most likely to vote. They’re the people who own businesses. They’re investors, accountants, doctors, and lawyers. And they’re the major backers of both political parties and of every member of Congress. And they’re likely to be Democrats. Over the last 25 years, the two parties have flipped, so that the Democrats now represent the wealthiest citizens. Will these people really be asked to pony up an additional $10 trillion?
Point of Diminishing Returns: Most likely taxes will go up – especially for the richest people of all. These super rich people have reached the point of diminishing returns. They already have their houses and their boats. An extra million dollars, more or less, won’t force them to look at the right side of the menu and choose the tuna sandwich. Like superinvestor Warren Buffett, they actually may prefer to pay their “fair share” – giving up a little low-value money in exchange for relatively higher-value, more socially responsible status.
But let us assume that the feds could identify 1,000 billionaires and squeeze each one for $10 million. That would only be $10 billion. Peanuts. Suppose the IRS really cleaned them out, taking a billion from each one. Now, you’re beginning to talk real money – $1 trillion. Hmmm… still a $9 trillion hole.
Nothing Comes From Nothing: And it’s not as if this money were sitting in a drawer somewhere. It is already employed, one way or another. But that is the problem with all efforts to finance the feds’ bamboozles by raising taxes. Nothing comes from nothing. Nobody gets anything from the feds that doesn’t come from someone else. And people are usually much better off spending and investing their own money than letting the government do it for them.
Private investors usually put their money into value-adding enterprises, in the hope of getting a return on their investment. They are value investments, in other words, even if the investors themselves don’t realize it. In the short run, take a trillion dollars out of the stock market and you could cause a panic – wiping out $20 trillion in paper gains and making the whole upper decks of Americans feel much poorer. Longer term, accumulated capital – savings, businesses, machines, factories – is what makes a society rich. Taking money out of the “capital structure” weakens it, leaving it less productive… and ultimately, making us all poorer.
Addled by Fake Money: At this stage in the Bubble Epoch, investors have been so addled by trillions in new, fake money that value may be hard to find. With people pouring billions into nonfungible tokens (NFTs), money-losing companies, dodgy cryptos, SPACs , and buybacks… a good case could be made that even the government could do a better job of allocating capital.
But Mr. Market quickly punishes private mistakes – if he is allowed to do so. And the capital, what is left of it, is shifted into “stronger” hands… which is to say, people who make money instead of losing it. But when the government “invests,” it’s a whole different thing.
What is the return on investment from giving more money to school administrators… to meals-at-school programs… to Amtrak… to people who are on leave from their work… to subsidize electric vehicles… to cities and states that have mismanaged their pension programs… to diversity training? Nobody knows. But few investors – even those now buying NFTs – would want to find out with their own money. And since you can’t calculate the rate of return, government ‘investments’ develop their own political support and continue misallocating capital resources almost permanently.
Out on the Ledge: What was the bottom line on the War on Terror, for example? And the War on Drugs? Or the War on Poverty? How often do lawmakers say, “Well, that was a bad investment,” and cut off funding? No, a nation’s “investment” mistakes are often much more serious. Japan got the bill for attacking Pearl Harbor at Hiroshima. The Soviet Union’s centrally planned economy lasted for 70 years until it was finally discarded in 1989. And now, Venezuela – #1 in the Misery Index – is undergoing a bitter correction.
The rich alone don’t pay for them – everybody does, the poor especially. And what about the decision makers – the people who choose where to place the money? They are the Charles de Vaulxs of the public sector, playing with trillions of dollars that don’t belong to them. Their decisions affect millions of lives. What happens to them when things don’t work out as planned? Will Nancy Pelosi or Chuck Schumer step out on the ledge? More to come…"