A Gift to My Children Read online

  CHAPTER 3

  Good Habits for Life and Investing

  BE A SELF-STARTER.

  At fourteen, I spent my Saturday mornings working for my Uncle Chink—who had been called this since the 1920s because Alabama people thought he looked Chinese—preposterous, looking back on it now. He owned a tiny convenience store across the street from a stockyard and a factory. The workers used to amble in to buy sandwiches, cigarettes, chewing tobacco—that kind of store. My job was to help wait on customers and stock the shelves. Sometimes business was slow, but I never sat idle, in part because of some advice from my father, Jim Sr., the manager of the Borden Chemical plant in town.

  “There is always something you can be doing,” he used to say. “When there's nothing else to do, dust the shelves.” And that's exactly what I did. My initiative so impressed my uncle that he gave me a raise without my having to ask for one. That came as a big surprise, since Uncle Chink was not exactly known to be loose with money.

  Three or four years later, I brought the same energy to a job I obtained with Mr. Brooker, a local home builder. At first, I couldn't even hammer a nail straight, and the men on the job weren't shy about pointing this out. But when we were awaiting deliveries of building materials or had nothing to do, I'd gather up the scrap lumber or sweep up the sawdust or whatever else I could find. “Say what you want,” the contractor told them, “but this kid never stops. He has the right attitude, he has the proper approach, and I want him working for me.” Eventually I did learn to drive nails as quickly as anyone, dig foundations, install roofs, and all the other skills necessary to do the job. If it weren't for my work ethic, I might never have gotten the chance.

  ATTENTION TO DETAILS IS WHAT SEPARATES

  SUCCESS FROM FAILURE.

  If you love and care about what you do, you will naturally want to do it the best that you can. In investing, as in life, the small details often spell the difference between success and failure. So you must be attentive! However trivial it may seem, you must research and check each and every piece of information you need to make a decision. Leave no questions or nagging feelings of uncertainty uninvestigated. The most common reason why people do not succeed is that their research is faulty or limited to the confines of what is immediately available. Only through meticulous research will you obtain the knowledge necessary for success. It requires abundant work and diligence, but the effort will give you a distinct advantage over your competitors.

  When I was an undergrad at Yale University, a fellow history major asked me how many hours I'd studied for a recent exam. “I put in five hours,” he said, very satisfied with himself. I couldn't give him an exact number, since I'd never stopped studying. Arriving at Yale from rural Alabama, I was in over my head, to tell you the truth. Most of the other students had attended elite prep schools and were far better prepared than I was. My advantage, though, turned out to be that I worked much harder than they did. For me, there was no such thing as “enough.” No finish line.

  If and when you decide to pursue investing or whatever your fancy, do not underestimate the value of due diligence. Look through each and every financial statement you can get your hands on, including the detailed notes. If you just read the annual reports of companies, you will have done more than 98 percent of investors. If you read the notes of the financial statements, you will be ahead of 99.5 percent. Verify those financial statements, as well as future projections announced by the top executives, by doing your own legwork. Talk to customers, suppliers, competitors, and anyone else who might affect the company. Do not invest unless you can say with absolute certainty that you are more knowledgeable about this particular firm than 98 percent of Wall Street analysts. Believe me, it can be done. But only with the extra effort.

  In the 1960s, General Motors was the world's most successful company, and everyone coveted its stock. One day a GM analyst went to the board of directors with the message “The Japanese are coming.” They ignored him. In fact, they didn't even bother to listen to him. Investors who did broad homework sold their high-value General Motors stock then and there and bought Toyota instead. The Japanese were building smaller, more efficient, and extremely reliable cars, which quickly found a huge market worldwide, including here in the States. U.S. car manufacturers had been dictating to the marketplace rather than listening to their customers. They've been forced to play catch-up to their Japanese counterparts ever since.

  Here's another example: As recently as the 1990s, there was no better value on Wall Street than Sears. Its stock always seemed cheap, but few were even aware of a growing discount company called Wal-Mart; they never bothered to examine what was happening in small towns throughout the United States. Those who did began to buy stock in Wal-Mart instead of in Sears, JCPenney, and all the other good-value stores.

  When investing widely in a particular nation, begin by checking the strength of the country's basic institutions. Does it have respect for the rule of law? Does it crack down on corruption? Does the legal system facilitate ethical corporate behavior? You cannot do this by simply reading articles in magazines and newspapers. You must go to the country yourself and see, for example, if there is a currency black market. If one exists, then you know that the country has problems. Black market exchange rates exist only when the government is imposing artificial controls. The difference in parity between the official currency rate and the black market rate indicates the gravity of the problem in that nation. It is symptomatic. The higher the fever, the worse the sickness; in other words, the greater the gap in parity, the deeper the problem.

  During my first motorcycle circumnavigation in 1990 and 1991, I looked forward to spending time in Algeria, my second stop in Africa. I had every intention of investing there. But once I discovered that the country had a currency black market with a 100 percent premium—well, I lost interest real quickly. Algeria's problems came to the fore in the next few years. I later figured out there were absurd price controls and a government printing huge amounts of money to pay its bills. Workers, merchants, and everyone else were being squeezed. It was no surprise that voters soon elected a protest party that was then overthrown by a military coup. Investing in countries or anything else when easily observable information suggests doing the opposite can be a brilliant strategy, but only if your own deeper analysis shows positive change around the corner. Be careful! At the turn of the millennium, the African nation of Zimbabwe was a major agricultural exporter that also sold coal and other minerals abroad. Its currency was stable, and the stock market attracted investors to some sound companies. Since then, however, the political situation in Zimbabwe has deteriorated badly, pulling down the economy. Now the country, riddled with violence and corruption, is desperately begging for food handouts, exports have plummeted almost to zero, and the annual rate of inflation is over 200,000 percent. The government just prints money to reward its friends, so that money there loses its value literally overnight.

  LIVE YOUR LIFE WITH A DREAM.

  In addition to finding a fulfilling vocation, you must have a dream. In my younger years, I thought that making money was fun, but I didn't really have a plan beyond that. Had I continued down that path, I would have lost interest by now. Investing around the world exposed me to a range of cultures and different people. Eventually I realized that my dream was to seek adventure and learn about the world by seeing as much of it as I could. So, at the age of thirty-seven, I began traveling the globe on a motorcycle.

  You see, when you begin something, you may not always have a concrete picture or vision of the future. But if you continue to be passionate and work hard at what you truly love to do, then you will eventually find that dream. Which may morph into yet another dream. And another. At this point in my life, you, my daughters, are my focus and passion. That is why I spend every moment possible with you. You are my dream today, and all I want is for both of you to do what you love and live smart, interesting lives with a dream.

  CHAPTER 4

  C
ommon Sense? Not So Common

  MOST PERCEIVED WISDOM IS

  A MISCONCEPTION.

  I've written about the need to follow your own intelligence, to think for yourself. As you travel the journey called life, you will come across conventional wisdom—accepted “truths” about how to behave, or what to study, or eat, or how to invest. You must remember never blindly to accept what you hear or read, no matter how many people believe it or how strongly they advocate it. Always consider alternative interpretations. The popular beliefs embraced by the larger society are often mistaken. I want to explain how to make sense of “common sense.”

  Here's a good example of conventional wisdom being wildly inaccurate: In the early 1970s, stock prices in the defense industry plummeted because of cuts in U.S. defense spending. Some contractors verged on bankruptcy (among them, Lockheed). No one dared invest in defense, especially with conventional wisdom decreeing that defense shares would continue to fall.

  But if you analyzed the reasons for the defense industry's recent free fall, you didn't have to be a sage to foresee a brighter future. For one thing, the absurd protracted war in Vietnam, which finally ended in 1973, had decimated U.S. military strength. That it would need a drastic overhaul, and soon, was driven home ominously later the same year with the Arab-Israeli War. That conflict on the other side of the globe opened America's government's eyes to how inadequately prepared we were to protect ourselves and our allies. Our government began pouring money into defense once again, jump-starting those companies' stocks. Some increased in value by as much as a hundredfold in the next decade or so—the exact opposite of what so many analysts had fiercely predicted.

  Another example: In 1970 crude oil sold for under $3 a barrel. Most experts believed that the price would remain low for the foreseeable future. Many were convinced that new technologies, with impressive-sounding names such as diamond drill bits, deep drilling, and offshore platforms, combined with major oil discoveries in Alaska, Mexico, and the North Sea, all but ensured low prices. Careful research, however, showed that our supply of oil could not possibly meet the world's increasing demand. Basic Economics 101 told you that crude oil prices were destined to rise considerably.

  Accordingly, I invested in oil around 1971. Ten years later, oil was up to $35 a barrel. By then, of course, everyone was investing in oil (including the same folks who had underrated its value). Clearly, the market had overheated. We had a boom in exploration, and those new oil fields discovered in the sixties began coming to market. At the same time, demand slowed, as many people started to become more energy conscious, buying fuel-efficient cars and adjusting their thermostats at home. In 1978 oil production actually exceeded consumption for the first time in years. I sold my shares and did not buy oil again until 1998. Anyone who has been to a pump lately knows what has happened since then.

  THE MEDIA OFTEN PROPAGATES

  CONVENTIONAL WISDOM.

  You should read the newspaper every day, but approach it—and all media, for that matter—with a healthy sense of skepticism. When I was young, newspapers were revered as impartial sources of news and, more so than today, many of them were. But like all purveyors of conventional wisdom, they sometimes fall into the trap of reporting information peddled by self-interested people or failing to dig deep enough for the facts. More than once, I'd find myself making investment judgments based on suspect information or weak reporting.

  I have since learned how better to judge the content of stories in the media, occasionally turning their inaccuracies to my advantage. In cases where I'm making an investment decision (or a decision about for whom to vote, et cetera), I cross-check information from the media with other available sources including government reports, international organizations, company reports, competitive views—whatever I can find. I scan the copy closely for language that sounds like it came straight off a company press release. And I carefully analyze any statistical arguments to see whether the claim being made is based on sound statistical logic.

  When I was a guest professor of finance at Columbia University in the 1980s, my students often seemed surprised by how much detail I brought to bear on making decisions, but this is the basic tool of anyone hoping to transcend conventional wisdom. I will read any document I can get my hands on. If I have doubts about things I see on TV or read in the paper, then I go wherever I need to go in the world to investigate. Seeking out multiple perspectives on the same story will always help you figure out the truth.

  Of course, here in the twenty-first century, we are deluged with information, much of it from dubious (and biased) sources. It's surprising to me that so few people seem to bother to confirm the information they're about to use to reach key decisions. It was the French writer Voltaire, in his Dictionnaire Philosophique, who said: “Common sense is not so common.” And as U.S. Army general George Patton once put it, “If everyone is thinking the same thing, someone is not thinking.”

  CHAPTER 5

  Your Education, Part I: Let the World

  Be a Part of Your Perspective

  DO NOT RELY ON BOOKS; GO AND SEE

  THE WORLD!

  Travel and see the world extensively. You will broaden your perspective many times over. If you really want to know yourself and your country, go see the world.

  Your father can say this with conviction because I have been around the world twice. Beginning in 1990, I spent twenty-two months traveling through six continents on a motorcycle. On my second trip, which started in 1999, your mother and I traveled a total of 245,000 kilometers in a special Mercedes through 116 different countries for three years. We saw with our own eyes diverse lands and nationalities. In the course of our travels, we were offered any number of delicacies, including a live snake for dinner. It was slaughtered and prepared before our eyes. And I loved it!

  We drove through war zones in Angola, Western Sahara, India, Sudan, and other parts of the world. In fact, we made it a point to visit the “frightening” parts of cities to see if they were really dangerous. You know what we learned? That people everywhere are basically the same, no matter their ethnic group, language, religion, food, or dress. We learned that there is no reason to fear foreigners or foreign peoples.

  You will discover more about yourself as you encounter and experience the world's diversity. You will develop interests that you never entertained before and recognize your strengths and weaknesses. You will realize that some things that you'd thought were important are of little consequence. What you wear or who you know or where you dine or from where you originate may mean less. I was once a baseball fanatic but now know nothing about the game.

  It's important that you not simply visit other countries as a tourist. Yes, do see the monuments and eat at predicable restaurants, but also see for yourself how different people live. Experience life as they do; see the world from the ground up. By observing ordinary life rather than merely visiting tourist attractions, you will forever be stumbling upon experiences that will raise important questions in your mind.

  The English author and poet Rudyard Kipling wrote in his poem “The English Flag,” “What can he know of England who only England knows?” I urge you to leave your country for a few years. You can always return, but you will have a new understanding. Of everything. The knowledge and experiences you will have gained will benefit you in untold ways, making you a better person, worker, and even parent. Our family is American, and we will continue to spend a good deal of time there, but we have moved to Asia to help give you as much exposure as possible to the bigger world beyond U.S. borders.

  UNDERSTAND THE SIGNIFICANCE OF BRICS.

  While a student at the University of Oxford in the 1960s, I managed my own scholarship money until the deadline for paying tuition rolled around. By that time, I had already developed a basic approach to investing; an important part of that was developing a global perspective.

  Nowadays you can hardly pick up a business publication without seeing a reference to “BRICs,” a popular
acronym in the world of investing. BRICs refers to a thesis currently popular with investors and politicians that Brazil, Russia, India, and China are destined to be the world's leading economies by the year 2050, and therefore are rife with investment opportunities. I'll tell you a bit more about what I think about each of these countries, but the larger point is the importance of focusing investment strategies on growing economies abroad.

  As anyone who has met me knows, my experience and time spent traveling leads me to feel bullish about Brazil and China, bearish about Russia, and skeptical about India.

  The situation in Brazil will improve significantly over the next fifteen years, as the country increases production of commodities such as sugar and iron ore. Sugar, a major export, happens to be the raw material not just of candy but also of ethanol, which right now is considered to be an attractive alternative energy source to crude oil. Although I'm bullish about these commodity markets, I am neutral about Brazil's stock market at the moment and its currency, the real.

  Next up for discussion: Russia. Why my skepticism of that country? Despite its abundant natural resources, the fundamentals, or basic economic conditions, simply aren't there. The capitalism that now exists in Russia is outlaw capitalism. What's more, the USSR has broken up into fifteen countries already and will continue to splinter into as many as fifty or one hundred countries in the not-too-distant future. There were 124 ethnic, linguistic, and religious groups in the land, and few of them are happy being part of a republic dictated to by the old Union of Soviet Socialist Republics.