Lady Fortune with the Wheel of Fortune. Source: Wikipedia
In sixth century Rome, the philosopher Boethius was awaiting trial—and eventual execution—on a trumped up charge of conspiracy. While in prison, he wrote The Consolation of Philosophy, an immensely influential work that outlines how to be content in a world beset by treachery and evil. The key, he explains, is to look beyond our outward circumstances to the “one true good” we find within. Current conditions are always in flux—moving up and down on a “Wheel of Fortune.” The only thing we can control is our own virtue. True happiness comes from inside.
Yesterday Swiss police arrested six high-level International Soccer Federation officials as part of a global probe. Later, the US Justice Department unsealed a 47-count indictment against 14 defendants, alleging racketeering, wire-fraud, and money-laundering. Justice claims that FIFA executives received bribes in exchange for broadcast rights. The sums involved are huge: over $150 million over 25 years.
Twenty years ago a couple of traders teamed up with some Nobel Prize winners to create an investment company premised on the notion that similar things act similarly—that in the long run, finance obeys rational rules. Small differences in price can be understood and used to create financial returns.
Both require planning. Both encourage diversification. In both cases, time is your friend. Successful investors and gardeners look past their current circumstances to discern the underlying trends. And both have to watch out for pests and poachers who can steal what you’ve cultivated.
Investing is complicated. It’s not enough to understand stocks, bonds, accounting, and discounted cash flow. You also need to have insight that the rest of the world doesn’t—or can’t have. Junk bond investor Howard Marks puts it this way:
“First level thinking says, ‘It’s a good company; let’s buy the stock.’ Second level thinking says, ‘It’s a good company, but everyone thinks it’s a great company, and it’s not. So let’s sell.”
This usually means someone is cheating. In sports, one or more players agree to fail, or at least to let the other side look good. In finance, though, “the fix” often refers to the determination of a certain price on a financial instrument at a certain time. Global markets calculate a “fix” on interest rates, precious metals prices, and foreign exchange at 4 pm London time. This pricing convention may also be referred to in swap contracts worth trillions of dollars.
Dividends have become quite popular in recent years. With interest rates so low, many income-oriented investors have used dividend-paying stocks as substitutes for bonds in their portfolios. And dividends have a lot to recommend them. They usually pay cash quarterly, they can grow with inflation, and taxable investors may owe less to the government if the dividends are qualified.
Those vinyl discs were expensive, bulky, and easily marred. But we all bought them because we wanted to listen to music. People spent a lot of money on their stereos. But when I was in college, if a big truck hit the pothole outside my dorm, my record would jump. I never imagined that lasers and disks and computer files would become the way music would be collected, stored, and played. And the songs wouldn’t skip.
It’s happened to me a couple times. The first was when I was in high-school and had a few words with a Nobel Prize-winning physicist–one who had been a leader on the Manhattan Project. I was awed by his intellect.
Amid the investigation and charges and penalties and appeals associated with last year’s New England Patriots’ football air-pressure controversy, there are some lessons investors can learn. After all, sports are a microcosm of life. When we compete on the field, we strive to do our best physically, mentally, and emotionally. We have to cooperate with others in a highly stylized environment. The rough-and-tumble of football can help us understand some of the rough-and-tumble of the markets.
