Practicing Random Acts of Insanity Bill Bonner The Daily Reckoning 8 November, 2003 The Daily Reckoning PRESENTS: "Distilled information" culled from the wisdom of old, the lessons of history, and - when in doubt - the "systematic rejection of new ideas". . . This little meditation began as a speech. It was delivered on Saturday to the New Orleans investment conference. Then, it took a detour, as your editor read a book sent by a friend - "Fooled by Randomness," by Nassim Nicholas Taleb. The book is a gem. Its author, a mathematician, coaxes out of numbers the same insights that we discover by intuition and accident. Those of you who read the Daily Reckoning regularly will recognize our theme. A casual view of some of our articles might suggest a morbid fascination with the dead. We read the obituaries, dear reader, in the way others read the editorial pages - for information and enlightenment, for the distilled wisdom of saint and sinner alike. The editorial pages, by contrast, we read only for entertainment. The editorial pages - like the news pages - are the distracting background noise of everyday life. It is like loud music at a bar, where you can hardly hear... and barely think. The headlines offer one urgent problem after another. An election contest... a financial calamity... a traffic accident - each headline crashes into your mind like a madman through the front door yelling, "FIRE!" How could you not pay attention? But that is the trouble with the news. It is hard to know what is really going on... and impossible to know what is important... when you only have the judgment of people who happen to be breathing to rely upon. The living can imagine no problems more urgent than the ones they confront right here and now... and no opportunities greater than the ones right in front of them. We prefer the obituaries. Take investments, as another example. When you buy a stock today, the presumption you're making is that you won't be able to get a better deal on it tomorrow. You can ask investors what they think, and they'll tell you that stocks could go down. And if we were to dig up some dead men and take a poll, you'd find that whenever stocks sell for more than 20 times earnings, the odds are pretty good that they're going to be a lot cheaper in the future. If you asked the ghosts of investors who bought in the 1920s, they'd say they wished they had waited until the 1930s to buy stocks. Or if you asked the old folks who bought stocks in the late 60s... they'd say they wished they had waited until the late '70s. But if you ask people today - when stocks are once again over 20 times earnings - how many wait? Not many. Fund managers have the lowest proportion of their funds in cash in many years. And individual investors and consumers can't seem to wait, either. How many save their money to buy a car next year... or a stock 10 years from now? How many set real savings aside - or bury gold in their backyards - so their children and grandchildren can spend or invest it on better deals? Not many. Last week, we read an interview with Sir John Templeton. The great old man said he thought stocks were too expensive and that the U.S. was cruising for a bruising with its trade deficit and U.S. federal deficit. He said he anticipated a long bear market in stocks and a serious slump in the economy. Implicitly, he advised investors to hold cash. The person who wrote the article then asked local analysts and stockbrokers what they thought of Templeton's opinion. One challenged Templeton's competence, saying that because of his advanced age, (Templeton is 92) he might be 'out of touch' with current thinking. Templeton is not even dead yet, and already his views are being dismissed. At the Daily Reckoning, we take the opposite view. We like old things. Old buildings. Old ideas. Old trees. Old rules. Old investors. The older the investor, the more confidence we have in him. He's seen good times and bad times. He's seen bulls and bears. Maybe the old fellow's even heard enough absurdities to be able to recognize the voice. Mr. Taleb explains it in a different way. "For an idea to have survived so long across so many cycles is indicative of its relative fitness. Noise, at least some noise, was filtered out. Mathematically, progress means that some new information is better than past information, not that the average of new information will supplant past information, which means that it is optimal for someone, when in doubt, to systematically reject the new idea, information, or method... "The Saturday newspaper lists dozens of new patents of such items that can revolutionize our lives. People tend to infer that because some inventions have revolutionized our lives that inventions are good to endorse and we should favor the new over the old. I take the opposite view. The opportunity cost of missing a 'new new thing' like the airplane and the automobile is minuscule compared to the toxicity of all the garbage one has to go through to get to these jewels (assuming these have brought some improvement to our lives, which I frequently doubt.)" Mr. Taleb considers the wisdom of the old... and the lessons of history... as a sort of 'distilled information.' He notes that the information revolution has put more raw, undistilled, information in front of people... making them more susceptible to error. "A preference for distilled thinking," he continues, "implies favoring old investors and traders, that is, investors who have been exposed to markets the longest, a matter that is counter to the Wall Street practice of preferring those that have been the most profitable and preferring the younger whenever possible... " Testing the proposition using a mathematical model, Taleb "found a significant advantage in selecting aged traders, using, as a selection criterion, their cumulative years of experience rather than their absolute success (conditional on their having survived without blowing up)." In investing, as in other things, it is "survival of the fittest," he explains. "Who will survive are not necessarily those who appear to be the fittest. Curiously, it will be the oldest, simply because older people have been exposed longer to the rate event and can be, convincingly, more resistant to it." And then, he gives us all hope for the future with the insight: "Women prefer [on balance] to mate with healthy older men over healthy younger ones, everything else being equal, as the former provide some evidence of better genes. Gray hair signals an enhanced ability to survive - conditional on having reached the gray hair stage, he is likely to be more resistant to the vagaries of life." We mentioned last week that on a recent trip back to France, we were seated next to a fellow from Heston, Kansas. We had never heard of Heston, Kansas... so asked what he did there. It turned out he was an engineer with Agco... the company that makes Massey Ferguson tractors. What was he doing on a plane to Paris? Well, it turns out they don't make their tractors in Heston, Kansas... they make them in Beauvais, France. American labor is cheaper. And America is supposed to be so much more hospitable to enterprises. But for some reason, Massey Ferguson makes its tractors in France. Go figure. The subject of the war in Iraq came up. "I was sent to Vietnam right after my 21st birthday," he said. "They told me we were trying to protect the U.S. and make the world a better place. It took me exactly 2 weeks to realize that it was BS. If I got killed, I would be nothing more than a statistic. Nothing more." Of course, in the "here and now" of 1970, the war in Vietnam seemed like the biggest, most urgent foreign policy challenge the U.S. faced. Later, Americans came to their senses, retreated... and Vietnam did fall to the communists. But was the world better, or worse? No one knew or cared. Eventually, a quarter century later, the Donald Rumsfeld of the era - Robert MacNamara - wrote that the war had been a mistake. But it certainly had seemed like a good idea at the time. We mention Vietnam for another reason. Lyndon Johnson's war in Vietnam was conducted at a time when he was also toting up the bill for the Great Society. If the old Eisenhower had been consulted before he died, he would have told Johnson that you have to choose - Guns or Butter, which will it be? Trying to do both at the same time was an invitation to trouble. But Lyndon Johnson, a Texan, was the George Bush of his time. He figured he could get away with it. America was a great power back then, too. And the stock market boom of the late '60s made everyone think that better things were coming not just tomorrow and the next day, but forever. But then the war went bad... and stock market crashed... and the economy went sour, too... Johnson gave up and Richard Nixon took over at the White House. Richard Milhouse Nixon is remembered chiefly for the petty B&E job at the Watergate... but his greatest crime was committed in August of 1971. That was when the bills from Johnson's Guns and Butter policies were coming in. And back then, other sovereign nations could take their dollar bills up to the 'gold window' at the U.S. Treasury and ask to have them redeemed in gold. The French, as usual, were first in line. Years before, General de Gaulle had realized that an international monetary system with dollars as the reserve currency had a bit of a flaw. "The Americans can pay off their debts in money of whatever value they choose," he had noticed. So Nixon had a major problem. He could do the right thing - honoring the commitment of generations of Americans... who had pledged to back their paper dollars at a fixed rate with hard gold. Or, he could renege on those solemn promises... essentially defaulting on U.S. foreign debt. Faced with a such a moral dilemma, Nixon did the time-honored thing - the thing almost all politicians do - the thing calculated to get his derrière off the hot seat in the 'here and now'... and make it someone else's problem... sometime in the future. He closed the gold window at the Treasury department. Henceforth, anyone who wanted to trade his dollars in for something of value would have to take whatever the market gave them. Well, now... the future is here. The system that replaced the Bretton Woods, gold-backed system might properly be called The Dollar Standard system. Where once there were gold bars, now there are paper dollars and paper Treasury bonds. And while once there were people lined up to trade their dollars for gold... now there are people lined up - or practically so - to buy more U.S. dollar assets. Who are these people? Well, you will recall that once we were told not to worry about the federal debt because, as they said, "we owe it to ourselves." That little ditty may need to be updated. According to the Treasury department, a total of $41.2 billion in new money was raised in the month of August. Who were the buyers? A full 81% of them, according to the Treasury department, were foreigners, who now own a net of about $3 trillion in U.S. dollar assets, which is the equivalent of holding the mortgages on 30 million American houses, at an average of $100,000 each. But don't worry. The headlines tell us that the economy is growing faster than any time in the last 19 years... and productivity is reaching to the stars. That is the news that occupies our thoughts... and that most investors rely upon. The economy is so wonderful... it is almost too good to be true. Everyone is getting rich. We'd be a fool not to go along with it, the noise whispers. We prefer the obituaries. Bill Bonner Nov 7, 2003 P.S. Thank God for all the noise. Mr. Taleb explains: "I currently look at it [undistilled information... headline news... noise] with delight," he writes. "I am happy to see such mass-scale idiotic decision-making, prone to overreaction in their post-perusal investment orders - in other words I currently see in the fact that people read such material an insurance for my continuing in the entertaining business of option trading against the fools of randomness." Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the Wall Street Journal best-seller: "Financial Reckoning Day: Surviving The Soft Depression of The 21st Century" (John Wiley & Sons), available at Amazon. A version of this essay was first published in the Daily Reckoning. ________________ 321gold Inc Miami USA