Investment Leadership

Are investors leaders?

They should be. The same qualities that we see in the best leaders also serve investors well. Leaders need to have clear goals; they need to establish a culture of integrity; they need to understand what they can—and more importantly, cannot—do. And they need to communicate these values to those around them.

Virgil’s poem, The Aeneid, lays out these classic leadership elements: fatum, pietas, and virtus. Today we would call them vision, culture, and values. In this work, Virgil paints a picture of his ideal ruler: decisive, humble, just, honest, courageous, and so on. Investors who learn these lessons will know where they’re going and how to get there.

During his wanderings, Aeneas undergoes many hardships. In every instance, he reminds himself of his goal and the great empire he is destined to found. But he can’t compromise: his dalliance with Dido along the way caused heartache for him and was disastrous for her. In the same way, investors need to establish goals, avoid getting sidetracked, and pursue their plans with diligence.

The Aeneid is an epic poem about leadership. It tells the story of the establishment of Rome—its confusing, challenging, tumultuous founding. As we put our own resources to work, we do well if we look past present circumstances and focus on the future. Like Aeneas.

Douglas R. Tengdin, CFA

Chief Investment Officer

Odysseus: The Resourceful Investor

Investors need to be resourceful.

Whether it’s reading a set of financial statements or watching the Federal Reserve Chair talk about the economy, investors need to use all their wits to understand what’s going on. There are myriad difficulties and distractions that would keep us from accomplishing our goals. We have to think clearly and creatively.

The Greek hero Odysseus faced the same problem. After the Trojan war, each of the leaders headed back home. Odysseus faced one of the longer journeys, as his home island of Ithaca was on the other side of the Greek peninsula, over 500 miles away.

On the way back he faces storms, monsters, enchanted islands, hostile and menacing hosts, and other challenges. While the war demanded physical prowess, the voyage home required mental and creative energy. There were times when Odysseus just wanted to quit. But each test called for a new response, and he eventually got back.

In the same way, investors face all kinds of issues—both external and internal. There are monsters and enchantments that would separate us from our money; there are distractions and temptations to give up; economic and financial storms can blow us off course. It’s during such times that we need to remember where we’re going and how we plan to get there.

Investing is an odyssey that can take us to uncharted waters. As with Odysseus, it’s our planning and perseverance that will get us home.

Douglas R. Tengdin, CFA

Chief Investment Officer

Classical Investing: The Self-Aware Investor

How well do you understand yourself?

That’s one of the underlying questions Homer raises in The Illiad. Most of us know about Achilles, the brawny Greek hero. His role in the war is so important to the Greeks that when he argues with his commander and withdraws from the fight their army is almost annihilated.

But by far the most sympathetic hero in the story is the Trojan leader, Hector. He is no less powerful a presence in battle, but he is also depicted with his wife and young son within the walls of Troy. There is a touching scene in the sixth chapter where he prays that one day people will say his son is a “far better man than his father.” Hector ably leads his troops in spite of doubts that Troy can win this war. He knows his role: father, husband, warrior.

By contrast the only thing Achilles understand is his own personal desires—first, for honor from his men, later, for revenge when a close friend is killed in battle. Homer contrasts these two, perhaps to demonstrate that rash actions lead to bad ends. We know Achilles will die in the war as well.

Just so, investors need to understand themselves when they enter the arena of the investing world. What motivates them, what they fear, what are their hopes for the future—these internal dynamics will come out when people put their money to work. Safety, growth, liquidity, regulations, taxes—all must be balanced. Self-aware investors understand how these trade-offs will impact what kind of return they receive and how well they sleep at night.

Both Hector and Achilles figure prominently in Homer’s poem. Their characters shine bright over 2700 years. But Hector’s honesty, integrity, and self-awareness are what we should admire.

Douglas R. Tengdin, CFA

Chief Investment Officer

The Heroic Investor

Can investors be heroes?

The early epics are sometimes called heroic literature. They start and finish with a singular character. The Illiad, Odyssey, and Aeneid are epic poems that focus on Achilles, Odysseus, and Aeneas respectively, with their particular character qualities. Generations of readers have heard or read of Achilles’ strength, Odysseus’ cunning, or Aeneas’ leadership through these works. Each one of them uses his particular ability to accomplish his mission. But they must also overcome distractions or obstacles would keep them from reaching their goals.

In the same way, investors should focus on their own particular strengths and avoid getting sidetracked. All of us has something we’re good at–whether it’s on the job, or a hobby, or just some area that fascinates us. These particular skills or interests can give us insight into a business or company. For example, if you like to go fishing, you may know which companies make the best-selling boats, tackle, and beer-coolers. You can use that information when you invest.

At the same time, each of us knows why we want to invest—what our objectives are. In fact, we’re the only ones who do. It’s crucial that we articulate what we want in order to get where we need to go. A written investment policy is a good start.

The Greek and Roman heroes had special skills but also had special trials to overcome. Investors should try to understand and adapt to their own strengths and weaknesses as they try to get where they’re going.

Douglas R. Tengdin, CFA

Chief Investment Officer

A Classic Canon

What classics should we study?

The great works of literature offer lessons that are universal in scope. Questions that everyone grapples with at some time or other. But which classics?

A classic should be something that has stood the test of time and that has appeal to various cultures around the world. J.K. Rowling’s Harry Potter series certainly has been popular, but it’s only been out for a decade or so. Works that retain their appeal over centuries are likely to have insight that is less bound by their time and place and be truly universal in scope.

I like to define a classic as a book that you’ve re-read and from which you learn something new each time you open it. But a superior book will engage people from all walks of life—rich or poor, urban or rural, European or Asian or African. Only a truly noteworthy work can do that.

So, on to my list: the Bible, of course, along with Homer, Virgil, and Dante. These are all from classical antiquity or the renaissance and include prose, poetry, and instruction. Most importantly, they all tell stories. Our brains are hard-wired to think in terms of narratives. The great stories these great works greatly tell inspire us all to greatness.

One final author must be on this list: Shakespeare. It’s been said that Shakespeare invented what it means to be human in the modern sense. That may be going too far. But it is true that the Bard of Avon has been translated into almost as many languages across almost as many cultures as the Bible. And his stories shape how we think today.

This list includes authors from three continents writing over the course of 3000 years. They’re not easy to get through. But the insight they offer is worth the effort.

Douglas R. Tengdin, CFA

Chief Investment Officer

Classic Investment Advice

What makes a classic?

Mark Twain called a classic a book everyone wants to have read, and no one wants to read. We remember them from high-school: big, scary tomes with strange titles that our teachers all said were full of wisdom. We tried, really tried, to get through them. Some of us actually did. But whether it was the 25th Ivan Ivanovich in a Tolstoy story, or a sentence in James Joyce’s Ulysses that went on for three pages—I really wanted my 9th-grade English teacher to try diagramming my 12th-grade literature—most of us got lost at some point and gave up.

And yet those works abide. Not because English teachers have a mean streak, but because these books offer insight and wisdom into the human condition: understanding that goes beyond the crisis of the moment; wisdom that goes deeper than shallow truisms. We share a common humanity. Great literature—books and poems that have endured for centuries—express this in a way that comes alive. That’s why Homer and Dante and Shakespeare remain relevant centuries or millennia after their composition.

It’s no surprise that these wonders of the world of words—these classics—have insight for investors. Literature is a reflection on human nature; investing is an exercise in understanding human nature, where the results are written in dollars and cents, not grammar and syntax. By analyzing some great works—beyond the Cliff’s Notes plot summaries—we can gain insight into ourselves, and greater understanding of how investing works—or doesn’t.

Over the next several months, we will look at some of these works—a canon, if you will—and try to distill their lessons—at least the ones that relate to money and investing. And after we have studied these classics, we may even want to read them.

Douglas R. Tengdin, CFA

Chief Investment Officer

All Economics is Local

Which states are growing the fastest?

The Bureau of Economic Analysis just released their compilation of GDP performance by state. The results are pretty striking: the Great Plains and Rocky Mountains are growing well, while the Northeast is mired in slow grown.

Energy prices have a lot to do with what’s happening. Mining isn’t a significant contributor to national economic growth, but it plays a key role in several states. In North Dakota, the fastest growing state, mining contributed 3.6 points to the state’s 9.7 percent growth rate. It also made up a large portion of the growth of the next four fastest growers: Wyoming, Oklahoma, Colorado, and West Virginia. While the US economy grew 1.8% last year, the Rocky Mountains and Great Plains regions expanded at a 3.1% rate

The Northeast, by contrast, is growing much slower. New England and the Northeast only grew 0.8%. Part of this has to do with high energy costs here, and the fact that we don’t have much exposure to the booming energy and mining industries.

Over the next several years, the growth in domestic energy production will impact economic growth across the US. It just hasn’t had much effect yet.

Douglas R. Tengdin, CFA

Chief Investment Officer

More is Less

Is the Fed’s transparency confusing us?

Yesterday the Federal Reserve concluded its two-day meeting and issued a statement—a long, meandering, abstruse statement. Reading the Fed’s press release has become a thankless chore. Most Fed-watchers just compare the current statement with the one from the prior meeting to look for word-changes that might indicate shades in what the Fed is thinking.

The Fed knows we do this. So they discuss and debate every comma and verb tense. Sometimes committee members even dissent in their policy votes over the wording. As a result, over the years their press release has become both longer and less communicative. Ten years ago, it took less than 150 words to communicate their message. Now the Fed’s statement has grown to an 800-word consensus-driven monstrosity, filled with pabulum and bureaucratese. It’s like the old saw about a camel being a horse designed by a committee.

Fed-watchers now just jump to the supplement—the dot-plots and other materials that communicate their projections. The Chair’s press conference afterwards can also be helpful, but the Q&A takes a long time to sit through.

It would be great if the Fed kept their graphs but went back to the pre-Financial Crisis 150-word directive that stated their perspective clearly and concisely. Fewer words, more meaning.

Douglas R. Tengdin, CFA

Chief Investment Officer

Innovative Waves or Ripples?

Is innovation always necessary?

The 18th century embraced the idea of progress, in the 19th it was evolution, the 20th century gave us growth, and now the catch-phrase is innovation. Innovation is held out as the key to success. Public policy goals require innovative solutions. Smartphone apps provide innovative approaches to finance, health, diet, education, and even relationships.

Firms are told to “innovate or die.” The expectation is that if a firm doesn’t continually upgrade its products and processes, someone else will. If the company can’t compete with the new concept, it will fail. Many long-haul trucking companies have shut their doors because they didn’t embrace intermodal shipping. IBM is another example: it’s Selectric typewriters were dominant in the ‘70s, but they became obsolete when PCs arrived on the scene. IBM had the foresight to embrace the new technology and became a leading PC-maker.

But for every PC there are dozens of New Cokes—changes for changes’ sake, that upset an otherwise sound business. People sometimes lose perspective when something new shows up, and become evangelists for a novel solution to a problem that isn’t really a problem.

Consumers love new things, but they also like what works. The future is uncertain. Sometimes firms do need to innovate or die. But sometimes they die precisely because they innovated.

Douglas R. Tengdin, CFA

Chief Investment Officer

Inverting Value

Tax-inversion is on the rise. What is it?

The latest health-care merger highlights the practice of tax-inversion. If Medtronic—based in Minneapolis—buys Covidian—domiciled in Dublin—Medtronic will shift its home-address from the US to Ireland. That will lower the company’s statutory tax rate from 35 to 12 ½ percent.

The deal isn’t only about taxes: both companies make and market medical implants like pacemakers and stents. Joining forces would allow them to enjoy economies of scale. But the tax benefits sure help. Ireland’s extensive tax-treaties with the United States and European Union would allow the company to distribute more of its combined cash-flow to shareholders without paying a penalty.

This merger wouldn’t be the first tax-inversion deal. Since 1993, dozens of firms have shifted their domicile. On average, these companies have outperformed. The lower rate gives the new company a lot more flexibility. In Medtronic’s case, they estimate they will save some $850 million in taxes annually on a combined $7.3 billion in cashflow—a significant gain to the bottom line.

Some say Congress should prohibit such inversion deals. But that probably won’t work. Corporate officers have a fiduciary duty to maximize shareholder return. The US tax code needs reform. If Congress doesn’t fix it, more companies will just invert their taxes away.

Douglas R. Tengdin, CFA

Chief Investment Officer