'Don’t be content with things as they are. Do not
seek acceptance.'
-- Winston
Churchill
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The Speculator
No
greatness without great risk
Advice for the young-hearted investor, courtesy
of Winston Churchill: In the pursuit of greatness, you're liable to
take a great loss or two. Never give up. Never give in. And take
smart risks.
By Victor
Niederhoffer and Laurel Kenner
The ability to climb up after a fall down the
stairs is much on the minds of investors these days as they deal
with the losses suffered in the past few years. Thus we were all
ears when we came across the transcript of a commencement address
delivered at the University of Rochester on Sunday on the topic.
The talk didn’t
deal with the usual subject of how your loving family or friends
would help you climb the ladder. Nor with the aphorism that the way
to climb is one rung at a time. Instead, the advice was replete with
references on how to deal with reversals and failure in the markets
and in life. And how and when to take risks in life.
The
speaker was not a famous alumnus, a vote-seeking politician or a
substantial contributor. Indeed, he was a personage who has been
down on his luck, a well-known flop who as recently as a few years
ago was flat on his back. Yet the speech seemed well-received, at
least judging from the lack of fidgeting in the audience, so we
thought it apt to paraphrase it here for our readers.
After
all, in a sense, we are all graduating from one stage of our lives
to another. Even the transition from a buy to a sell in the markets
is in a way a graduation. Sometimes we fear making these transitions
because we have been burned in the past. Transition brings
uncertainty and the occasional loss. But there is also the chance to
achieve greatness.
And that is the message that the
speechifier -- your columnist, Vic -- wished to
explain.
The Speculator
speaks
Like this Speculator, many companies in Rochester
and on the Nasdaq once achieved greatness and now show a facade of
weakness. Indeed, since a fifth of Nasdaq companies are down more
than 50% from their 1999 close as I write, this facade has an
appearance of reality.
What would it take for them all to
rebound with grace? First we must determine how much risk to accept
in seeking return. A good model is found in Winston Churchill,
wartime prime minister of the United Kingdom, who told the young
people of his embattled nation that they should set high goals and
be ready to accept great risk. “Don’t be content with things
as they are. Do not seek acceptance,” he implored them. “Raise high
the glorious flag, advance them upon the new enemies who constantly
gather upon the front of the human army and have only to be
assaulted to be overthrown. Don’t take no for an answer. Never
submit to failure.”
There are two major reasons that taking
risk is better for the young than for people in latter stages of
life. The first is that there is more time when you are young to
come back from failure. You can always adjust the size of your
consumption to the reduced circumstances. If worse comes to worst,
you can work longer. The second is that the younger you are, the
less you have to worry about the repercussions of a total wipeout.
You have fewer people who will be harmed due to the falling of your
flag and more time to recuperate and raise it again -- ever more
brilliantly and valiantly.
The major barrier to pursing great
goals, however, is cynicism. Cynicism can prevent you from achieving
anything great. It can make you content to take the easy path that
leads to the status quo, the loss of faith in society and eventually
in yourself. As my father, a policeman and sociologist, wrote in his
book, “Behind the Shield,” “Cynicism can lead to misanthropy,
pessimism and resentment, a dangerous combination.”
My
father was talking about policemen and the danger of learning from
the bad examples of those with too much power. He could well have
been talking about the cynicism surrounding investments. There is
grave danger in accepting the views of those with much wealth who
believe that things as they are and were are the best that they can
be, that companies can go on in their own set ways forever without
innovation or any change whatsoever.
The wisdom of taking
risk is underlined by the results of Elroy Dimson, Paul Marsh and
Mike Staunton in their recent book “Triumph of the Optimists: 101
Years of Global Investment Return." (For more on the professors and
their book, see “A good
news/bad news book for optimists."
They prepared a
comprehensive framework that will go down in history as playing the
same role for the theory of investments that Mendelev’s periodic
table of the elements provided in chemistry. Their conclusion is
that in every market, the returns from buying stocks were
substantially greater than those from buying less-risky bonds and
that the returns from buying stocks were on the order of 1,000,000%
to 2,000,000% a century for most major markets.
Like most
good things in life, setting appropriately high goals has unintended
benefits. Psychologists have noted that those who set high goals
tend to extend their capacities, eliciting hidden aptitudes and
resources that never would have been tapped had they not sought
greatness. The work of Dean Simonton in such books as “Greatness” is
particularly inspirational on this point.
It is well to
ground your pursuit of greatness on a strong factual base, such as
the comprehensive efforts of the “Triumph” authors. Too often
guidelines for advice are based on a flimsy foundation.
Investing with
Winston
Churchill himself tried to speculate in stocks. He
was a friend of fabled investor Bernard Baruch’s and decided to play
the market. As William Manchester recounts in his book, “The Last
Lion,” Churchill bought into the 1929 crash. As prices dropped, he
doubled up again and again. He lost everything and finally
confronted Baruch in tears. He was ruined, he said, since at nearly
60 he would never be able to come back and pay off his debts.
Baruch “gently corrected him. Churchill, he said, had lost
nothing. Baruch had left instructions to buy every time Churchill
sold and sell whenever Churchill bought. Winston had come out
exactly even because, he later learned, Baruch even paid the
commissions.”
Churchill was subject to much cynicism in his
life, but he was never content to accept things as they were. While
he was helping to win World War II, he noted that the English were
accepting the very same totalitarian inroads against individual
effort and incentive that they were fighting the Germans to ward
off. He spoke out vigorously against such things as universal health
care and federalized housing even though he knew that it might cost
him his job. He was voted out of office in 1945 as a socialist
government replaced him.
When he came to Fulton, Mo., in
1946, as a man who had reaped the full benefit of living in a free
society, he told the audience that “any private ambitions I may have
cherished in my younger days have been satisfied beyond my wildest
dreams.”
He was not afraid to warn us of an iron curtain of
totalitarianism that was threatening to blot out the light of
freedom in the West. He went on to say that “we must never cease to
proclaim in fearless tones the great principles of freedom and the
rights of man which are the joint inheritance of the
English-speaking world and which through the Magna Carta, the Bill
of Rights, the Habeas Corpus, trial by jury, and the English common
law find their most famous expression in the American Declaration of
Independence.”
It is an ironic reflection of timidity of the
kind that doubtless once contributed to President Truman’s
bankruptcy in business that the president was so ashamed of these
strong words that he hastened to inform the populace that he had
never seen the speech and did not approve of it.
During the
height of World War II, Churchill was invited back to Harrow, the
elite secondary school he had attended before being asked to leave.
He gave this advice to students who faced no ordinary transition,
but rather one from childhood to adulthood under the most awful
pressure and threat imaginable: "Never give in, never give in,
never, never, never, never -- in nothing, great or small, large or
petty -- never give in except to convictions of honour and good
sense."
That is a valuable admonition for all, and we hope
that the companies of both Rochester and the Nasdaq, as well as all
students and readers of this column, are the next to take smart
risks in pursuit of great rewards.
Final note
We are fortunate to have a
wide readership of concerned experts who are pleased to amplify our
thoughts and correct us on subjects when we are wrong. Barry
Vinocur, a guru concerning the real estate investment trust
industry, is one such expert who strongly believes that we were
wrong in our bearish article on the REITs (“Sinking real
estate means rising stocks”) on Feb. 14. Now that REITs have
suffered a bit of weakness, having registered an approximate 10%
decline from their recent highs, he has redoubled his bullishness.
He has prepared a report for the exclusive benefit of our readers
that contains an updated list of companies that he believes have
good dividend coverage and that may be particularly attractive for
those with retirement funds. It is available by e-mailing The
Speculator.
Kindly feel free to write in for it and give
us at the same time, if you will, your suggestions, critiques, and
comments so that we can improve. We read all such comments and
respond to them. We have sent out many thousands of augmentations
and data in recent months to readers. If by any chance you have
requested data and not received it, it is probably due to an
incompatibility in our systems. If you let us know, we will give you
a phone number to call for assistance in downloading the file,
and/or an alternate transmission by fax.
Acknowledgements:
We would like to thank Dr. Brett N. Steenbarger and Patrick Boyle
for their many contributions to this article.
At the time
of publication, neither Victor Niederhoffer nor Laurel Kenner owned
any of the equities mentioned in this column.
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