How much you can make depends on how much you are willing to risk.
It sometimes seems that the old-fashioned art of “investing”—putting money into a specific business with the goal of sharing in its profits—has been superseded by sheer financial speculation, often of a rampant and irresponsible sort. Most accounts of profit-seeking activity today dwell on activities on its margins in the form of complex and often incomprehensible financial instruments known as derivatives. In the 15 years preceding the 2008 financial meltdown, the minute-by-minute discussion of stock prices seemed aimed at stimulating day traders, who buy a stock in the morning only to sell it in the afternoon. At the same time, computer programs were set up to take advantage of tiny changes in a company’s position during any given day, thus turning the act of buying and selling stock into something very nearly beyond human agency.
Whatever happened to the commonsense wisdom displayed by, say, Benjamin Graham (1894-1976), the Columbia Business School professor whose name became synonymous with a simple, straightforward, look-for-undervalued-companies-and-hold-them approach?
Well, nothing, actually. Graham’s classic book The Intelligent Investor is, as of this writing, number 289 on the Amazon sales list—not bad for a book first published in 1936. Warren Buffett, the most successful investor in history, is a thoroughgoing Grahamite, and that alone is good advertising for investing instead of speculating.
The truth is that speculators have always received the lion’s share of the press, in good times and bad. Speculation is much more exciting as a subject of discussion, since the results are often known much more quickly. Speculators surf on the waves of risk.
One of the fundamental laws of the marketplace—although one not often enough emphasized—is that risk always equals potential reward. If you buy a lottery ticket, you are at an astronomically high risk of losing your entire investment. But if you guess the right numbers, your reward is equally astronomical. In a country as large as the United States, someone is likely to buy the right ticket and gain, say, $200 million while risking only a dollar. That’s news. The millions who each bet a dollar and lost it are not.
What tide is to water, risk is to the world of finance. It’s omnipresent and always in operation. It can kill you—at least financially—if you aren’t careful, but it can also make life a lot easier if you use it to your advantage. You have to decide how much risk to take on.
Risk is omnipresent because there are no totally safe places to put money, even if you keep it close to you. After all, houses do burn down, taking the money under the mattresses with them. Businesses can go bankrupt and default on their bonds. Just ask the bondholders at GM and Chrysler. Banks go belly up. Governments can always print money to pay off their bondholders, but printing money causes inflation, which wipes out the value of investments denominated in the currency being printed. Middle-class Germans found that out in 1923. And governments can be overthrown and their debts repudiated. Holders of czarist bonds had to begin counting their losses in 1917.
At the other end of the risk spectrum, there are no currently foreseeable circumstances that would cause the U.S. government to default on its bonds. As a result, short-term Treasury bonds right now are paying virtually nothing in interest, and 10-year bonds (much more subject to the unknowns of the future) are paying only a little over 3 percent. Investing $1,000 in hopes of gaining $30 in a year’s time isn’t thrilling enough to generate attention (though given what has happened to real-estate values over the past few years, it doesn’t seem like a bad deal). Still, it would take an investor 24 years to double his net worth at a 3 percent rate of return. Not much to write home about there.
The difference between gambling, speculation, and investing has to do with where each falls on the continuum of risk. Gambling is the riskiest; investing the least; speculation in the middle.
Strictly speaking, gambling always involves a randomizer—whether cards, dice, horses, or a machine that pops up ping-pong balls with numbers on them. In pure gambling, such as lottery tickets, it’s pure luck that determines the outcome. With games like poker, skill, over time, will determine the winners. But gambling never creates wealth. It only redistributes from the unlucky and unskillful to the lucky and skillful.
The biggest difference between gambling and speculating is gambling’s all-or-nothing aspect. Investing in a lottery ticket is gambling; you win big or you lose everything. But putting your money in gold, for instance, is speculating. You may win or you may lose, but you won’t necessarily lose everything.
Gold, which has almost no industrial or other uses, has no intrinsic value. But many regard it as a good hedge against inflation. If more and more people invest in what is a largely fixed supply—it is unlikely someone will find a colossal new gold mine and flood the market with new material—the price has to go up, which it does whenever inflation seems imminent. In the past 10 years, the price of gold has tripled (in dollar terms). But in the past 30 years, gold has lost a third of its value from its 1980 inflation-induced high. Thus in speculation, timing is everything. If you played a short-term gold game recently, you made a killing. Not so with the long game.
What is the difference between speculating and investing? Successful speculations depend on guessing right on market forces and are usually short term. Investing means putting your money in productive assets, such as a corporation or land, and hoping they will grow in value over time because of the production of wealth.
Investing is basically putting your money in wealth-creating enterprises and waiting for that wealth to be created. While not as exciting as speculation, still less gambling, investing can be very, very profitable. A thousand shares of Microsoft on the day it went public, March 13, 1986, would have cost you $28,000. By March 13, 2000, that investment was worth $7,056,000. The tricky bit, as the Microsoft example demonstrates, is spotting a growth opportunity before the market as a whole does and selling before trouble becomes widely apparent; over the course of the past decade, Microsoft has been relatively flat, while Apple, which looked nearly dead in 1986, has soared.
All three approaches to risk-taking in the hope of profit have been around since the dawn of civilization. Egyptians played board games, and dice have been found in a 5,000-year-old tomb in what is now Iran. Rome had severe—and universally ignored—laws against gambling. It also had professional gamblers who sometimes used loaded dice. (That’s one way of reducing risk, of course, as long as you don’t get caught.)
Speculating in commodities was common in the ancient world, and people of wealth invested mostly in land. Crassus, who along with Pompey and Caesar formed the First Triumvirate, was one of the richest men in Rome and had invested heavily in silver mines as well as in land. He also owned a fire company. When someone’s property caught on fire, he would offer to buy the property—cheap. If the deal was done, his company would put out the fire. If it wasn’t, he let it burn. It was a very profitable business.
Land remained the primary investment vehicle until modern times, but the invention of the full-rigged ship allowed another form of investment to develop, in the form of trade with the Americas and the Far East. It could be fabulously profitable. Queen Elizabeth I owned a half-share in Sir Francis Drake’s voyage around the world. It netted her a profit that exceeded all other Crown revenues in 1580, the year Drake returned.
But, as always, risk equaled reward. Many expeditions failed to return at all. The corporation, an invention of the 16th century, and insurance, which developed in the 17th, allowed the risk to be spread more widely, moving trade from a speculative venture to an investment opportunity.
The Industrial Revolution and the development of stock markets in the 18th century opened further opportunities for both speculation and investment. But even in the middle of the 19th century, stock markets remained hazardous places to put your money. The prudent and those with fiduciary responsibilities invested mostly in government bonds, ensuring a steady income and great safety, if little or no growth in capital.
Bumptious, fast-growing, and virtually unregulated, Wall Street was especially hazardous for the unwary and the gullible in the 19th and early 20th centuries. Subject to fearful market crashes roughly every 20 years, it was also subject to wild bouts of speculation and the “madness of crowds.” In 1857, a year that saw a terrible panic, George Francis Train satirized the get-rich-quick atmosphere of early Wall Street:
Monday, I started my land operations;
Tuesday, owed millions by all calculations;
Wednesday, my brownstone palace began;
Thursday, I drove out a spanking new span;
Friday, I gave a magnificent ball;
Saturday, smashed—with just nothing at all.
Speculation and investment in that time, however, were largely the provinces of the rich, and the rich, by definition, are always few in number. Even in the 1920s, probably less than 2 percent of the population owned securities in their own right. But just as good clothes, comfortable housing, and vacations were once exclusively the province of the rich and are now commonplace, speculation and investment are now within the reach of the average man.
Four radical changes since the 1930s have brought that about. First, there has been a vast increase in the wealth of the average family. The GI Bill made it possible for millions of Americans to enter the middle class by acquiring a college education and home ownership. Further, the spread of 401(k)–type retirement accounts put capital in the hands of millions who needed to invest that money. It is a mark of the spread of investable wealth that while stock-market activity was rarely reported on television even 30 years ago, today it is a part of every news broadcast, sometimes when the market is open, with the equivalent of a stock ticker in the corner of the screen. Little wonder that speculation seems rampant.
Second, the amount of research and expert advice available to the ordinary family has greatly increased. In 1940, Charles Merrill reorganized Merrill Lynch and, unlike every other broker in Wall Street, went after the mass market. He trained his men (now called registered reps) thoroughly and opened a research department to look for companies that were undervalued. By 1950, Merrill Lynch was four times the size of the next-largest brokerage house on Wall Street, and its business model was spreading rapidly. The Securities and Exchange Commission began to mandate rigorous training for salesmen. Research departments became commonplace. Mutual funds made it possible for the small account to be professionally managed, aiding those who were not comfortable investing on their own.
Third, in 1975 the fixed commissions—essentially a brokerage price-fixing scheme—that had been a key feature of Wall Street since its earliest days were abolished by order of the SEC. Able to compete by means of price for the first time, discount brokers opened for business and greatly lowered the cost of trading securities. These costs have been falling ever since, with stock-exchange volume, as a result, soaring. Only in 1968 did the NYSE have a daily volume figure higher than the 16 million shares traded on the day of the 1929 crash. Today the New York Stock Exchange trades 16 million shares in the first few seconds after the opening bell.
Finally, the change in the means of speculating has been deeply affected by the technological revolution that is sweeping through all aspects of modern civilization, thanks to the microprocessor. Much trading is now done by computer, in obedience to algorithms devised by programmers and brokers. The results are sometimes ugly, such as the “flash crash” last May, when the Dow Jones briefly dropped more than a 1,000 points in a few seconds thanks to faulty computers.
In 2008 the greatest bull market in history, which saw the Dow Jones Industrial Average go from under a thousand in 1982 to over 14,000 in 2007, came to an end with the bankruptcy of Lehman Brothers. Only swift and decisive government intervention prevented Fannie Mae and Freddy Mac, AIG, Bear Sterns, Merrill Lynch, Citibank, and others from following Lehman down the rat hole of insolvency.
Many speculators were wiped out, as they always are in a market crash. Many crooks, such as Bernard Madoff, were exposed and sent to jail. Wall Street was denounced as a den of thieves, fleecing the honest, hardworking citizenry by enticing them into speculation.
That was the news. What was not news was that millions of American households, while they had seen, at least temporarily, their net worth decline sharply, were still much richer than they had been even 10 years earlier due to prudent investing of the Benjamin Graham kind. Already their portfolios have recovered considerably from the market bottom reached in March 2009.
They won’t all be Warren Buffetts. But they won’t be like the news-dominating and often ruined speculators either, thanks to choosing their place on the risk continuum carefully and investing for value over the long term.
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Investing, Then and Now and Always
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A Trump of their own.
There were many arguments for opposing Donald Trump’s bid for the presidency, but the retort usually boiled down to a single glib sentence: “But he fights.”
Donald Trump could accuse John McCain of bringing dishonor upon the country and George W. Bush of being complicit in the September 11th attacks. He could make racist or misogynistic comments and even call Republican primary voters “stupid”; none of it mattered. “We right-thinking people have tried dignity,” read one typical example of this period’s pro-Trump apologia. “And the results were always the same.”
If you can get over the moral bankruptcy and selective memory inherent in this posture, it has its own compelling logic. Driving an eighteen-wheel truck through the standards of decorum that govern political discourse is certainly liberating. If there is no threshold at which the means discredit the ends, then everything is permitted. That kind of freedom has bipartisan appeal.
Democrats who once lamented the death of decency at Trump’s hands were apparently only troubled by their party’s disparity in this new rhetorical arms race. The opposition party seems perfectly happy to see standards torn down so long as their side is doing the demolition.
This week, with passions surrounding Brett Kavanaugh’s nomination to the Supreme Court reaching a crescendo, Hawaii Senator Mazie Hirono demonstrated that Democrats, too, are easily seduced by emotionally gratifying partisan outbursts. “They’ve extended a finger,” Hirono said of how Judiciary Committee Republicans have behaved toward Dr. Christine Blasey Ford since she was revealed as the woman accusing Kavanaugh of sexual misconduct as a minor. “That’s how I look at it.”
That’s an odd way to characterize the committee chairman’s offers to allow Dr. Blasey Ford the opportunity to have her story told before Congress in whatever setting she felt most comfortable. Those offers ranged from a public hearing to a private hearing to a staff interview, either publicly or behind closed doors, to even arranging for staffers to interview her at her home in California. Hirono was not similarly enraged by the fact that it was her fellow Democrats who violated Blasey Ford’s confidentiality and leaked her name to the press, forcing her to go public. But the appeal of pugnacity for its own sake isn’t rooted in consistency.
Hirono went on to demonstrate her churlish bona fides in the manner that most satisfies voters who find that kind of unthinking animus compelling: rank bigotry.
“Guess who’s perpetuating all these kinds of actions? It’s the men in this country,” Hirono continued. “Just shut up and step up. Do the right thing.” The antagonistic generalization of an entire demographic group designed to exacerbate a sense of grievance among members of another demographic group is condemnable when it’s Trump doing the generalizing and exacerbating. In Hirono’s case, it occasioned a glamorous profile piece in the Washington Post.
Hirono was feted for achieving “hero” status on the left and for channeling “the anger of the party’s base.” Her style was described as “blunt” amid an exploration of her political maturation and background as the U.S. Senate’s only immigrant. “I’ve been fighting these fights for a—I was going to say f-ing long time,” Hirono told the Post. The senator added that, despite a lack of evidence or testimony from the accuser, she believes Blasey Ford’s account of the assault over Kavanaugh’s denials and previewed her intention to “make more attention-grabbing comments” soon. Presumably, those remarks will be more “attention-grabbing” than even rank misandry.
This is a perfect encapsulation of the appeal of the fighter. It isn’t what the fight achieves but the reaction it inspires that has the most allure. But those who confuse being provocative with being effective risk falling into a trap. Trump’s defenders did not mourn the standards of decency through which Trump punched a massive hole, but the alt-right and their noxious fellow travelers also came out of that breach. The left, too, has its share of violent, aggressively mendacious, and anti-intellectual elements. They’ve already taken advantage of reduced barriers to entry into legitimate national politics. Lowering them further only benefits charlatans, hucksters, and the maladjusted.
What’s more, the “fire in the belly,” as Hillary Clinton’s former press secretary Brian Fallon euphemistically describes Hirono’s chauvinistic agitation, is frequently counterproductive. Her comments channel the liberal id, but they don’t make Republicans more willing to compromise. What Donald Trump’s supporters call “telling it like it is” is often just being a jerk. No other Republican but Trump would have callously called into question Blasey Ford’s accounting of events, for example. Indeed, even the most reckless of Republicans have avoided questioning Blasey Ford’s recollection, but not Trump. He just says what’s in his gut, but his gut has made the Republican mission of confirming Kavanaugh to the Court before the start of its new term on October 1 that much more difficult. The number of times that Trump’s loose talk prevented Republicans from advancing the ball should give pause to those who believe power is the only factor that matters.
It’s unlikely that these appeals will reach those for whom provocation for provocation’s sake is a virtue. “But he fights” is not an argument. It’s a sentiment. Hirono’s bluster might not advance Democratic prospects, but it makes Brian Fallon feel like Democrats share his anxieties. And, for some, that’s all that matters. That tells you a lot about where the Democratic Party is today, and where the country will be in 2020.
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A lesson from Finland.
High-ranking politicians are entitled to freedom of speech and conscience. That shouldn’t be a controversial statement, but it often is, especially in European countries where the range of acceptable views is narrow–and narrowing. Just ask Finnish Foreign Minister Timo Soini, who spent the summer fighting off an investigation into his participation at an anti-abortion vigil in Canada. On Friday, Soini survived a no-confidence vote in Parliament over the issue.
“In general, I’m worried that Christianity is being squeezed,” he told me in a phone interview Friday, hours after his colleagues voted 100 to 60 to allow him to keep his post. “There is a tendency to squeeze Christianity out of the public square.”
Soini had long been associated with the anti-immigration, Euroskeptic Finns Party, though last year he defected and formed a new conservative group, known as Blue Reform. Before coming to power, Soini could sometimes be heard railing against “market liberals” and “NATO hawks.” But when I interviewed him in Helsinki in 2015, soon after he was appointed foreign minister, he told me his country wouldn’t hesitate to join NATO if Russian aggression continued to escalate. He’s also a vociferous supporter of Israel.
Through all the shifts of ideology and fortune, one point has remained fixed in his worldview: Soini is a devout Catholic, having converted from Lutheranism as a young man in the 1980s, and he firmly believes in the dignity of human life from conception to natural death. “I have been in politics for many years,” he said. “Everyone knows my pro-life stance.” The trouble is that “many people want me to have my views only in private.”
Hence his ordeal of the past few months. It all began in May when Soini was in Ottawa for a meeting of the Arctic Council, of which Finland is a member. At the church he attended for Mass, he spotted a flyer for an anti-abortion vigil, to be held the following evening. He attended the vigil as a private citizen: “I wasn’t performing as a minister but in my personal capacity. This happened in my spare time.”
A colleague posted a photo of the event on his private Twitter page, however, which is how local media in Finland got wind of his presence at the rally. The complaints soon poured into the office of the chancellor of justice, who supervises the legal conduct of government ministers. A four-month investigation followed. Soini didn’t break any laws, the chancellor concluded, but he should have been more circumspect when abroad, even in his spare time.
Soini wasn’t entirely oblivious to the fact that he was treading on sensitive ground. A top diplomat can never quite operate like a private citizen, much as a private citizen can’t act like a diplomat (someone tell John Kerry). Still, does anyone imagine that Soini would land in such hot water if he had attended a vigil for action on climate change? Or one in favor of abortion rights?
“No, no, no. I wouldn’t say so … The Finnish official line is that I should be careful because abortion is legal in Finland and Canada.” So the outrage is issue-specific and, to be precise, worldview-specific. In Nordic countries, especially, the political culture is consensus-based to a fault, and the consensus is that the outcome of the 1960s sexual revolution will never be up for debate. Next door in Sweden, midwives are blacklisted from the profession for espousing anti-abortion views. Ditto for Norwegian doctors who refuse to dispense IUDs and abortifacients on conscience grounds.
The consensus expects ministers to bring their views into line or keep their mouths shut. “This is of course clearly politics,” Soini told me. “I think I have freedom of conscience. I haven’t done anything wrong. This is me practicing my religion.” And the free exercise of religion means having the right to espouse the moral teachings of one’s faith—or it means nothing.
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Banality and evil.
A week ago, I wondered what was going on in Sunspot, New Mexico. The FBI had swept into this mountain-top solar observatory, complete with Black Hawk helicopters, evacuated everyone, and closed the place down with no explanation whatever. Local police were politely told to butt out. It was like the first scene in a 1950’s Hollywood sci-fi movie, probably starring Walter Pidgeon.
Well, now we know, at least according to the New York Post.
If you’re hoping for little green men saying, “Take me to your leader,” you’re in for a disappointment. It seems the observatory head had discovered a laptop with child pornography on it that belonged to the janitor. The janitor then made veiled threats and in came the Black Hawks.
In sum, an all-too-earthly explanation with a little law-enforcement overkill thrown in.
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The demands of the politicized life.
John Cheney-Lippold, an associate professor of American Culture at the University of Michigan, has been the subject of withering criticism of late, but I’m grateful to him. Yes, he shouldn’t have refused to write a recommendation for a student merely because the semester abroad program she was applying to was in Israel. But at least he exposed what the boycott movement is about, aspects of which I suspect some of its blither endorsers are unaware.
We are routinely told, as we were by the American Studies Association, that boycott actions against Israel are “limited to institutions and their official representatives.” But Cheney-Lippold reminds us that the boycott, even if read in this narrow way, obligates professors to refuse to assist their own students when those students seek to participate in study abroad programs in Israel. Dan Avnon, an Israeli academic, learned years ago that the same goes for Israel faculty members seeking to participate in exchange programs sponsored by Israeli universities. They, too, must be turned away regardless of their position on the Israeli-Palestinian conflict.
When the American Studies Association boycott of Israel was announced, over two hundred college presidents or provosts properly and publicly rejected it. But even they might not have imagined that the boycott was more than a symbolic gesture. Thanks to Professor Cheney-Lippold, they now know that it involves actions that disserve their students. Yes, Cheney-Lippold now says he was mistaken when he wrote that “many university departments have pledged an academic boycott against Israel.” But he is hardly a lone wolf in hyper-politicized disciplines like American Studies, Asian-American Studies, and Women’s Studies, whose professional associations have taken stands in favor of boycotting Israel. Administrators looking at bids to expand such programs should take note of their admirably open opposition to the exchange of ideas.
Cheney-Lippold, like other boycott defenders, points to the supposed 2005 “call of Palestinian civil society” to justify his singling out of Israel. “I support,” he says in comments to the student newspaper, “communities who organize themselves and ask for international support to achieve equal rights, freedom and to prevent violations of international law.” Set aside the absurdity of this reasoning (“Why am I not boycotting China on behalf of Tibet? Because China has been much more effective in stifling civil society!”). Focus instead on what Cheney- Lippold could have found out by Googling. The first endorser of the call of “civil society” is the Council of National and Islamic Forces (NIF) in Palestine, which includes Hamas, the Popular Front for the Liberation of Palestine, and other groups that trade not only in violent resistance but in violence that directly targets noncombatants.
That’s remained par for the course for the boycott movement. In October 2015, in the midst of the series of stabbings deemed “the knife intifada,” the U.S. Campaign for the Academic and Cultural Boycott of Israel shared a call for an International Day with the “new generation of Palestinians” then “rising up against Israel’s brutal, decades-old system of occupation.” To be sure, they did not directly endorse attacks on civilians, but they did issue their statement of solidarity with “Palestinian popular resistance” one day after four attacks that left three Israelis–all civilians–dead.
The boycott movement, in other words, can sign on to a solidarity movement that includes the targeting of civilians for death, but cannot sign letters of recommendation for their own undergraduates if those undergraduates seek to learn in Israel. That tells us all we need to know about the boycott movement. It was nice of Cheney-Lippold to tell us.