America Wasn't Ready

This Sunday, the U.S. health care bill was passed after a furious battle.

The center and left were virtually silent this week, giving the limelight to those who believe that Barack Hussein Obama is not working in their best interests, to say the least. In fact, the opposition united in what both looked and sounded like a religious crusade to save America.

“We have to deny the power of the devil and his disciples in our midst,” wrote one blogger. “Pray to the father God to wake up Congress,” pleaded another. References to “rebuke,” “wickedness,” and “righteousness” were everywhere.

Then there was the coming revolution. There were calls for “bloodshed” if the bill was passed, for “revolution in the streets,” and to “impeach the foreign born dictator.” Conservative talk-show host Rush Limbaugh said that Obama’s secret goal is to divide America before destroying it, while house Minority Leader John Boehner likened the bill to "Armageddon." An ad on the Washington Post's website offered free handguns and knives to those who enrol in a self-defense training course, to prepare you "for what's coming."

The conservative right says that their hatred of Obama is politically – not racially – motivated. Casual observation suggests otherwise. One commenter on a national news website called President Obama a “lying sack of Kenyan dog crap.” Another said that he “lies through purple lips.” Yet another said that the “monkey man will get beaten.”

Of course, the health care bill passed and will now become part of American life. Citizens will have health coverage, whether they like it or not.

For investors, the big question is “what to do now?” When propaganda is rampant & emotions high, what can investors expect? At the opening bell this Monday morning, the 22nd of May 2010, two possible scenarios could occur: A) The right will demonstrate its genuine belief that Obama has destroyed their economic future by selling off U.S. stocks like mad, creating one of the largest stock market crashes in history. Or B) nothing dramatic will happen, showing that it was all just crazy talk.

Personally, I’m hoping for “A.” If so, you will find me at my computer, happily buying underpriced stocks of great American companies, while everyone else loses their minds.
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“Reactance – the urge to do the opposite of what someone wants you to do out of a need to resist a perceived attempt to constrain your freedom of choice.” Wikipedia, “List of Cognitive Biases”

Thomas Malthus couldn't foresee this

In 1798, Thomas Malthus, in an essay on the principle of population, put forth the idea that "the power of population is indefinitely greater than the power of the earth to produce subsistence for man.” Ever since, people have been worried about the capacity of human beings to produce enough food to sustain their growing population. Yet, the data seem to indicate that the inevitable conclusion of Malthus’ theory – food shortages & starvation -- are a long way off.

Malthus could not have foreseen how modern farming methods have transformed the productivity of the farm. Machines have taken the place of farmhands, and computers have revolutionized the business. Farms are getting larger and productivity higher. In the last 30 years, for example, sow productivity (for pork production) has increased by 70%. With high protein diets, it now takes only 6.5 months for a piglet to become a 260-pound hog. Corn yields in the U.S. have increased from about 40 bushels per acre in 1950 to 150 bushels per acre today (U.S. Dept of Agriculture). Other farm industries are experiencing the same level of productivity growth.

Last year I had the opportunity to visit a state-of-the-art dairy farm in Canada. The whole concept of the farm is too maximize milk productivity by keeping the cows fat, happy, and pregnant.

The barn is divided into gated areas: one for milking, one for eating, and one for resting. Each cow has a radio controlled collar that limits the amount of time they spend in each area. When a cow has been in the feeding area, if it wanders near the gate of the rest area, the gate will open and allow the cow to pass. Once in the rest area, the collar will only open the gate to the milking area, and not back into the feeding area. Thus, the cows go from milking to eating to resting on a rotating basis.

The rest area consists mostly of “water beds” (that look like large yoga mats) for the cows to lounge on. If they get bothered by flies, overhead fans whisk them away. If their backs get itchy, the cows stroll over to the automatic back scratcher. Comfortable, low-stress cows produce more milk, so no expense is spared.

Once they become uncomfortably full of milk, the cows walk themselves to the milking area and their radio collars open the gate. In the milking area a laser scans the udder, and a robotic arm attaches the milkers. A computer interface keeps track of each cow’s production, analyzes the milk (and therefore the health of the animal), and sends the information to a central computer. Any minor problems, such as a non-milking teat, also gets relayed to the computer. The milk itself flows into a stainless steel storage tank. Once done milking, the suction cups detach and the cow is free to stroll back to the feeding area.

The farmer pointed out to me that in addition to keeping stats on the cows and opening gates, the radio collars also keep track of the cow’s movements. When cows go into heat, they get frisky and tend to pace. Thus, a spike in activity indicates a cow that can be taken out for artificial insemination. I asked if I could borrow one of these collars for my girlfriend, but the farmer basically ignored me.

All told, the farm is virtually self-sufficient. Once the cows know the process they do most of the work themselves. In general, farms are becoming larger and more businesslike.

In recent years, the trend has been to accept Malthus’ theory, and to believe that with the rise of India and China food shortages will soon become a reality. Long-only commodity index funds, which assume rising food prices, are popular. Yet, while theorists talk about shortages, the reality is that every year foodstuffs such as apples, peaches, hogs etc. are left to rot or culled to reduce gluts caused by overproduction and/or lack of demand. Other industries, such as sugar, milk, and Japanese rice production are heavily subsidized.

Thomas Malthus’ theory of population growth may become true some day, but not for a long, long time. Investments that assume a steady rise in food-related commodity prices are not, in my opinion, a good way to make money.
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“…cattle are ruminants, a term that refers not to their capacity for deep thought but rather to their distinctive ability to digest plant fibers.” Dunsby, Eckstein, Gaspar and Mulholland: Commodity Investing

That's a Fact, Jack

INVESTOR PSYCHOLOGY

Over time I have received many good pieces of advice about investing, but one of the simplest and best was, “learn to separate opinions from facts.” Whenever there is financial turmoil, emotionality reigns - and emotion is the mortal enemy of logic. Truths becomes distorted. Facts become obscured in the fog of opinion. To be a great investor, you must first filter these facts, and then form your own opinions.

To illustrate how easily opinions and facts can become obscured, I have included a few recent examples from the media…

- “Greek borrowing rates increased by as much as 10-15% as a result of speculation that Greece would default on its debt.” OPINION
- “A market frenzy in recent weeks saw traders make bets worth billions of dollars against the euro and on the chances of Greece not repaying its massive debts. FACT

- “Due to changes in fuel efficiency and the move to hybrid and electric vehicles, demand for oil will drop by as much as 25% in the next 5-10 years. OPINION
- “Most Americans, and an increasing number of Chinese and Indians, drive gasoline-powered vehicles to work every day.” FACT

- “World demand for oil will increase by 900,000 barrels per day this year.” OPINION
- “OPEC believes that world demand for oil will increase by 900,000 barrels per day this year.” FACT

Note that opinions often provide more specifics than truths, thus obscuring the fact that they are merely opinions (read that sentence two times fast)! Don’t be mislead. Read every news story with a skeptical eye. Think, “How could this article be wrong? Do the facts (if any) support the conclusion? If it seems logical, what could derail it?” Recognize that correlation does not imply causation. Recognize that taking an opinion contrary to the crowd does not necessarily make it right. Then, after reviewing the data, form your own opinion with a blatant disregard for everything you just read – except, of course, the facts.
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"You can't do well in investing unless you think independently. And the truth is, you are neither right nor wrong because people agree with you. You're right because your facts and reasoning are right." Warren Buffett