Wall & Main


My perspectives as an investor and consumer

So you’re saying, “There’s a chance.”

zebraOne of the many funny scenes in the movie, “Dumb and Dumber” involves an exchange between Lloyd (Jim Carrey) and Mary (Lauren Holly).  Lloyd is wondering about the probability of a future with Mary:

Lloyd: What are my chances?

Mary: Not good.

Lloyd: You mean, “Not good” like one out of a hundred?

Mary: I’d say, more like one out of a million.

Lloyd: So you’re telling me there’s a chance.  Yeah!

The reaction of investors on March 18th seemed similar to that of Lloyd’s as they digested the statement by Ken Lewis, the CEO of Bank of America.  He stated that his company could pay back the $45 billion it received from the Troubled Assets Relief Program (TARP) by the end of 2009 or early 2010.  The price of the stock shot up 22% that day.

This got me thinking about “rhetoric” and the perception it creates in the minds of the audience.  Notice the use of the phrase, “could pay back.”  The intended effect here was that of using the phrase, “will pay back” without the negative legal and psychological ramifications of actually making such a definitive statement.

The reaction that such a statement generated in the stock price of Bank of America is what elicited this post.  Executives of corporations and politicians see it as their job to put as positive a spin on an issue as possible while staying within the legal bounds.  Corporate and political public relations (PR) departments are in the business of using the imagination of the audience and causing them to project what is possible as something that is probable or even highly probable.

What does this mean?  There is a distinction between possibility and probability.  Simply put, that which is possible may not be probable, while that which is probable has to be possible.  In other words, the likelihood of an outcome increases when you move it from the realm of the possible to that of the probable.

What does this have to do with rhetoric?  The intent of rhetoric in the world of business and politics is two fold:

  1. To get people to perceive that which is merely possible as actually being probable
  2. To minimize or eliminate liability from the statements that are made

Let’s take a look at a couple of examples, one from the corporate world and the other from politics:

Corporate.  Ken Lewis, the CEO of Bank of America says that the company could pay back $45 billion by the end of 2009.  This is actually within the realm of possibility.  But things that are merely within this realm do not provide enough actionable information for an investor.  I cannot make an investment decision based solely on this information because the company could just as well not pay back the money.  However, if the executive can make me think that this is highly probable, then I have something to build an investment thesis on.  It would go something like this…

The company pays back the TARP money.  They are excluded from discussions about banks that are going to be nationalized.  Management is, therefore, free to run the company in a manner that’s in the best interest of the shareholder as opposed to the government.  Bonuses for highly talented people are dictated by the company’s compensation committee, not the government.  This becomes a tool for poaching talent from other nationalized or semi-nationalized banks.  The company, as a result, is able to run a business that is more efficient than their nationalized counterparts.  As an investor, this would make the company a candidate for my investment dollars.  Therefore the spring-loaded effect on Bank of America’s stock price on March 18th.

If this does not pan out and the company is unable to pay back the money, they minimize their liability by saying that they never made a definitive statement to that effect.  It was only a possibility.  The company has succeeded in capturing current upside and minimizing future downside.

Politics.  Here is a case with similar intentions but contrasting results to the corporate example.  I remember even when the recession was underway, President George W. Bush and Senator John McCain were sounding like a broken record emphasizing that the fundamentals of the economy were strong.  Their intention was to keep the country, as a whole ,from going into panic mode.  It is possible that the country would not go into a deep recession, but probability showed otherwise.  They were trying to get the American people to project what was possible as that being highly probable.  If called to account, they would try to minimize liability by saying that the “fundamentals of the economy” actually referred to something like the integrity, optimism, entrepreneurial spirit, and work ethic of the American people.  However, as the popular saying goes, “The road to hell is paved with good intentions.”  The administration and Senator’s intentions were instead seen as ignorance, arrogance, and subterfuge and contributed significantly to the results of the subsequent elections.

Here are the lessons for consumers/citizens/investors:

  • Realize that it is the job of corporate executives and politicians to present any situation in a positive light.
  • It is not your job to receive it at face value.
  • The explicit statements may not contain much actionable material.
  • The interesting material is implicit as is the case with the work of art shown above by Victor Vasarely, considered by many to be the father of Optical Art (Op-Art).
  • Learn to read between the lines and be diligent about it.
  • Ask yourself questions like, “What is the real information here?” and “What is intended merely as a projection?”

“One in a million” could mean that you have a chance or very little chance.  Which one, as a consumer or investor, are you going to pick as being actionable?


Filed under: Business, Politics, Psychology, , , , ,

As the pendulum swings…

the_pendulumThrough my experience as an investor, I’ve learned to look at the market as a collective expression of fear or greed. Webster’s dictionary defines greed as a selfish and excessive desire for more of something than is needed.  Fear, on the other hand, is an unpleasant often strong emotion caused by anticipation or awareness of danger.

The market tends to swing between these extremes in reaction to various factors.  What’s peculiar to me is the timing of these emotions.  We are most fearful when we should be aggressive and most greedy when we should be cautious.  I use the words “aggressive” and “cautious” purposefully because I don’t think we should ever be making decisions based on fear or greed.

Part of the reason for collective emotion is due to the human tendency for groupthink.  Groupthink is an exhibition of consensus without critical thought or analysis.  It requires minimal effort, is not caustic, and appeals to our desire for a comfortable buffer.  If an idea fails, at least we’re not the only ones failing.  There is a certain level of comfort in failing or being mediocre as a group.  Unfortunately a successful idea under groupthink does not bear a lot of fruit because the participants, by design, are too late to the game.

Independent thought, on the other hand, requires maximal effort.  You find yourself having to do most of the research and analysis, and drawing your own conclusions.  These ideas differ from the “group;” so criticism is inevitable, which over time, can wear emotions down.  Besides, there is always the danger of failing miserably with no one to fall along with you. Once we take these factors into account it’s no surprise that many of us unintentionally pursue the path of least resistance.

The emotional pendulum had swung to the side of greed during the historic housing boom:

  • as home values appreciated, the idea of quick and large profits gained momentum
  • our wrongful association of material wealth with happiness found new life
  • homes inappropriately became ATM’s due to easy access to home equity loans
  • financiers saw an opportunity to take advantage of groupthink participants to juice up their bottom lines
  • as our perceived “ATM’s” got bigger, we allowed ourselves to suspend the simple, yet profound, notion of spending less than we earn

Kyle Bass serves as an example of a person who resisted groupthink during the greed phase.  Mr. Bass runs a hedge fund out of Dallas, Texas.  In 2005 he started doing his own research into the mortgage-related securities that were being packaged by Wall Street and sold worldwide.  He asked the tough questions.  According to him, Wall Street was putting lipstick on a pig and selling it to people who did not understand what they were buying.  The lynchpin to the groupthink assumption was that home values would never come down.  Bass came to the conclusion that the trend was unsustainable and the unraveling would be vicious.  He and his partners predicted early on that the amount of troubled loans would hit $1 trillion.  He even shared his concerns with risk managers on Wall Street.  No one wanted to listen.  He then made the tough decision of putting a substantial portion of his own capital and that of his investors behind his conclusions even as the herd was thundering the other way.  His fund reported a return of 400 percent in 2007.

The pendulum now finds itself swinging to the other extreme — that of fear:

  • people are pulling out of the stock market after seeing half the value of their portfolios vanish into thin air
  • those nearing retirement are worried that they will have to work much longer to make up for the lost value in their retirement accounts
  • the housing-led recession is fully afoot
  • those who have lost jobs are wondering if they’ll find one soon
  • those who still have their jobs are fearful of losing it any day
  • the decline in home values hasn’t abated yet (remember the lynchpin?)
  • the foundations of many banks are crumbling leaving people wondering if their money will be safe
  • ……….

Fear seems to control our decisions these days.  Unfortunately, the economy will not see an improvement until this emotion subsides.  One thing I know for sure…this too shall pass.  As Solomon, the wise man, once said, “To every thing there is a season, and a time to every purpose under the heaven.”   There are enormous opportunities for people who recognize this, resist groupthink, make tough decisions, and take some risks.  As sure as Kyle Bass earned his profits working against the market’s greed, there will be those who reap great rewards working against the market’s fear.  Sadly, most of us will only hear about it after the fact.

Filed under: Business, Economy, Psychology, , , ,