Some Thoughts On Capitalism And Investing: In 2004 ~ by Juergen Klemann

Some Thoughts On Capitalism And Investing

In 2004

By Juergen Klemann

During my time in Miami one of my friends there was an American, who is originally from San Diego. He had studied at the University of California in San Diego: (UCSD). While studying at UCSD, he worked on a part time basis as assistant for Merrill Lynch at the investment bank’s office in San Diego. After graduating from UCSD, he moved to Miami and continued to work for Merrill Lynch in Miami. When I arrived in Miami, I was not even aware that large US – investment banks are also represented in big German cities. Since then, my horizon has broadened a little. Anyway, because of our chats every now and then about the world of international investment banks, I started toying with the idea of working for an international investment bank in Germany after getting admitted to the bar there.

When doing the exams to get admitted to the bar, I was seriously toying with that idea. So I applied to various US – investment banks in Germany for as a position as broker or Financial Consultant or whatever title you are fond of using for this sort of thing.

As the application process was unfolding, it looked as if Prudential Bache in Frankfurt and Merrill Lynch in Dusseldorf were interested. However, after doing some serious and more or less realistic soul searching, I arrived at the conclusion that I was not yet tough enough for this sort of work. Once more, things have changed a little since then.

The German Banking Scene

Who knows how the future would have unfolded if I had ended up working as a broker for Prudential Bache in Frankfurt or Merrill Lynch in Dusseldorf? Does this sound like a regret? No, not really. Instead, I gained experience in international business in South Africa and New Zealand, which is presumably a lot more valuable. Moreover, in the course of time I have found something like my calling – at least for the time being – which is college teaching.

However, when you have not been to your country of origin for more than a decade, your perspective and opinions change quite a bit. For example, your perspective on the business and banking environment of your country of origin. German and international business magazines have recently reported that Merrill Lynch is selling its private banking arm in Germany to UBS. Prudential Bache appears to be withdrawing from the German market altogether. I cannot claim to be surprised. When reading German and international business magazines – ranging from “Manager Magazin” to “The Economist” – the impression you get is quite clear. The banking scenery in Germany is changing. Who buys whom and who merges with whom remains to be seen. That development has started and will continue.

A little and more interesting and telling is the mindset of certain politicians and other public figures in Germany.

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They all seem to be shell shocked by the possibility that international banks may purchase one or another private German bank. When Deutsche Bank bought Bankers Trust, it was just fine or “good as gold” to use a New Zealand colloquialism. If an international bank is going to acquire a private German bank, of course it is not just fine. And it is definitely not “good as gold”. We might be tempted to use a phrase like economic provincialism here to describe that sort of mindset.

The City of London - with its merchant banks - used to be rather cosy and clubby until the “Big Bang”, the deregulation of the financial services industry there in 1986. International competition has contributed to creating a few changes there. The German equivalent to the City of London – primarily based in Frankfurt - deserves to be called cosy and clubby as well. Again, perhaps the right sort of remedy is more international competition, not less. Let international banks acquire one or two private banks in Germany- The market there will benefit from those acquisitions. Those acquisitions will create a breath of fresh air there. This is as close as Germany will ever get to a Big Bang.

Stocks in 2004

A few weeks ago, the German business journal “Manager Magazin” published the results of a survey it did among fund – and money managers. In that survey “Manager Magazin” asked the fund – and money managers for investment recommendations in 2004.They almost unanimously – you never guess – recommended various stocks and shares. They proclaimed that 2004 is going to be a year for stocks and shares.

I am almost tempted to quip “I will keep it in mind. But I am not necessarily going to act on it”. It is often a good idea to look at history and historical patterns. That is exactly what Richard Russell does in “The Dow Theory Letters”, in which he notes: “We experienced a bull market that lasted a record twenty six years. Most bear markets tend to last a third to half as long as the preceding bull market. That suggests to me that the bear market that began in 1999 should last eight to thirteen years, or as a guess maybe about a decade.

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That could take the current primary bear market to around the year 2010, give or take a few years”.

2004 is going to be a year for stocks and shares? Let us wait and see. We shall soon discover.

It sometimes helps to resort to illustrations to get a message across, especially when the illustration is rather colourful. Marc Faber uses such an illustration in “The Daily Reckoning”. He notes that “….the entire financial services industry is like a huge brothel. The brokers push stocks they know nothing about, but which move and, therefore, can be turned over quickly, thus generating commissions. The analysts recommend stocks not necessarily based on sound fundamentals, but because they are showing signs of rising momentum as other analysts are also recommending them. And the fund managers are forced by the brothel’s owners to perform by buying sectors that they do not really like but which will, as they soar, give full satisfaction to the brothel’s clients”.

2004 is going to be a year for stocks and shares? Let us wait and see. We shall soon discover.

Marc Faber’s comparison of the financial services industry with a brothel demonstrates the dilemma of stock brokers. Stock brokers are captured in a conflict of interest. They cannot really give their clients unbiased advice. They are paid to trade. The transactions they generate lead to commissions that stock brokers earn. However, there are two alternatives worth sussing out. First, instead of working with a stock broker, work with a fee based Financial Advisor. His fee should preferably include a performance related component. Second, the more demanding and challenging alternative is to become well informed, knowledgeable and sophisticated enough to make your own decisions. When you are well informed, knowledgeable and sophisticated enough to make your own decisions, you can use a stock broker to carry out your transactions.

Changing Capitalism

When having a look at capitalism in general, there have been some rather unpleasant changes during the past few years. That development does not appear to be characteristic only for the United States and the United Kingdom. These changes have also occurred in New Zealand and other countries.

Capitalism and business have always been about making profits. There is nothing wrong with making profits. The concept of being an entrepreneur revolves around having an idea or discovering a market for a service or a product. Profits are the by – product of producing/delivering these services and products. Entrepreneurs usually identify with what they do. They tend to be passionate about what they do.

However, a common phenomenon now in capitalism and business throughout the world is greed. There seems to be a trend to make quick profits without producing any services or products. That is not what the concept of being an entrepreneur is about. Let me use two examples to illustrate the point. First, how many professionals have quit their jobs to become day traders? I do not know. Neither do I want to know. Second, a few months ago something close to a real estate mania broke out in New Zealand. Even house wives flew from one end of the country to the other end to buy property, hoping to make a quick buck.

To put it mildly, both examples do not have a bunch to do with the original idea of capitalism or being an entrepreneur. They are just temporary manias. Sooner or later, capitalism will swing back to its original – rather long term oriented - idea. Certain rules that apply to life in general do apply to the business world as well. It is pure common sense. Try to create win win situations. Make everybody involved in a deal a winner. Take a rather long term view and make principled decisions. You cannot gain true fortunes easily. You reap what you sow. What goes around, comes around. Watch carefully with whom people spend their time and what they spend their money on. It will tell you who they are.

John Templeton

An investor who has kept his distance to fads and manias is John Templeton. John Templeton has rather made principled decisions and taken long term views. He went to Yale and afterwards to Oxford on a Rhodes scholarship. John Templeton is famous for his investment acumen on Wall Street and through the Templeton Mutual Funds. He has taken less traveled roads in investing. He founded in 1987 the Templeton Foundation. Assuming that I am still up to date, John Templeton now lives on the Bahamas.

John Templeton has also written or edited about a dozen books. One of them is “The Humble Approach”. In “The Humble Approach” he explains his philosophy and notes: “Rarely does a conservative become a hero of history”. It is rather the maverick and long term oriented thinker who breaks out of the traditional mindset….”one who according to the accepted custom of his time might be branded a heretic”.

John Templeton confirms my impression. Fads and manias are for people who do not think independently. When house wives in New Zealand get involved in real estate deals, intelligent and wise people keep their distance to this sort of thing. When people quit their jobs and do day trading instead, it is wise to stay away from it. In life and in investing, a contrarian approach is frequently more meaningful and productive.

Final Thoughts

At the end of the year, it was overdue for me again to get out of Colima for a while. As I am occasionally inclined to do so, I spent some time in nature surrounded by mountains and not a bunch else. There was a “caja idiota” (Spanish slang for television or box) in my cabaña (Spanish for something like a cabin). But I have more interesting things to do than wasting time in front of the box. By the way, I read somewhere – but cannot recall exactly where – that the main trouble of poor people is not that they do not have loads of money. According to that theory, their main trouble is rather that they spend too much time in front of the box and eat too much fast food. The theory is worth mulling over.

Anyway, an environment as outlined above helps you put certain things into perspective. By putting things into perspective I mean this: The past is history. You cannot change it. You can only draw conclusions from it. You do not know the future. You can only influence the present. The present is the only time, in which you can make meaningful decisions. Considering these facts you make wiser decisions – in your personal life and with investments – if you practice some timeless wisdom. Live one day at a time. Do not worry about anything. Living with this attitude keeps you alive and healthy.

To read Jurgen's two previous articles Click Here and Click Here. Jurgen Klemann can be contacted at the following: jhklemann@gmx.net

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