Richard Handler: Trying to Retain Focus and Make Some Sense of the Madness
Globally, we are experiencing an exceptional period. Our U.K. sisters and brothers have surprised the world and voted to leave the European Union, erasing in two days a record $3 trillion of market wealth and perhaps forcing ultra-low and negative interest rates to continue for an even longer foreseeable time horizon. We’ve snapped back a good chunk of this lost valuation, but uncertainty and volatility still permeate. In an ironic twist that illustrates that circumstances are rarely black and white or win-lose, the leadership on both sides of the referendum have either resigned or been given a vote of “no-confidence” and a demand to resign. The rest of the EU, which could hardly be called a “well-oiled” machine, may have finally found the first cause it can truly unite against: punishing the U.K. for her disloyalty! Unfortunately, the EU was much stronger with the U.K. in the fold and London as a regional financial capital, so, if all goes as voted, there may be no victors on any side and the likely outcome is a higher likelihood of an intermediate-term British and possibly pan-European recession, neither of which would help any of us, including the U.S.
On top of this (and perhaps intertwined), we have the painful intersection of mass populism, and the common enemies being every bank and any other “elite” in the neighborhood. We are sadly experiencing large numbers of people wanting to undo or at least limit or slow globalization (i.e., bring on the trade warriors and immigration barriers). If this wasn’t enough, one can throw into this distasteful cocktail a painful mixture of the sad mass migrations from troubled lands, unparalleled government debt, stagnant growth and despicable terrorism, sectarianism and prejudice. It is easy to become quickly overloaded with negativity or even paralyzed from depression and sadness at the current state of the world. This environment has massive ramifications for how we manage money for others, run our companies and live our lives. Sadly, it will also dictate the reality of the future and the legacy we leave to our children. With all of these cross-currents, we thought we would try to cut through some of this “painful noise” and highlight some basic observations that might help us all navigate our evolving world and steer ourselves to a better future.
[drizzle]Ten Thoughts on Navigating A Painful and Confusing Period:
- Compassionate Capitalism. History is littered with examples of what happens when the gap between the haves and the have nots expands too far. We firmly believe that capitalism, while not perfect, is the best economic model that exists and results in the highest quality of life, as well as the greatest personal satisfaction and sense of freedom. That said, it may not be accepted by many who are privileged, but it is clear that the fortunate ones who have figured out how to create and accumulate wealth must allow for a fair sharing and a safety net for those who need and deserve one. At the same time, few will ever feel good about redistribution unless it is done in an efficient and intelligent manner by an effective and balanced government. Additionally, it goes without saying that philanthropy and kindness not only make the world a better and safer place, but it makes the giver a happier and more complete person.
- Politics. We are not going to advocate a political choice or statement, but will speak philosophically. What every society truly needs and deserves are political leaders who do just one thing right: PUT THE CITIZENS’ INTERESTS AHEAD OF THEIR OWN PERSONAL AMBITIONS. We don’t care why the other candidate is horrible. We don’t care about form over substance. We care about constructive logical ideas that are actionable and will maintain and hopefully improve the quality of life for as many people as possible. Efficiency, common sense, fairness, balance and long term vision. If only it were so simple.
- It Is All About People. Whether you are managing money, building a company or watching your son or daughter pick his or her life partner, it comes down to surrounding yourself with people of high character, integrity, compassion, intelligence, empathy, perseverance and loyalty. When the environment is such that the wind is at your back, this priority might not be as obvious as it should be. In times of pain, stress or uncertainty, this is all that matters and will dictate success or failure.
- Low interest rates. There can always be a surprise shock to the system, but the likely outcome of all the current strife is that historically low interest rates are highly likely to be with us for quite some time. Growth is just too slow, the economy is fraught with too much uncertainty and fragility, and inflation is in check. This means that unless you have a stomach for huge risk, you should expect and be prepared for moderate to low rates of return. Unfortunately, this reality will not discriminate whether you are investing money or trying to drive ROE for your shareholders. There will obviously be exceptions to this rule, but for most companies and investors, this will be a fact of life that needs to be incorporated in your future planning.
- Technology Persists As A Game Changer. Just when you think there is no growth or potential rates of return, one has no choice but to marvel at the technological innovation and resulting improvements to quality of life that have occurred (and will continue to proliferate) in everything from shopping, investing, communicating, entertaining, learning, driving, and living healthier and longer (and better) lives. One of us even has his own Instagram account (although his kids won’t let him be on Snapchat — not cool enough!). The point is that while there are always some downsides with technological progress, this is one of the best weapons the world has to combat the painful cross currents that exist today, as well as the challenges we have to sustain growth and promote freedom.
- Volatility Is Here To Stay. Of this point, we are certain. The winds are too strong and change on a moment’s notice. The only way to stay secure for the long term is to have ample liquidity. This too will dampen ROE for companies who cannot employ too much leverage, no matter how cheap it may appear. Even the most astute of money managers will need to keep a meaningful cash cushion to prepare for untimely redemptions (is there ever a timely one?) and the ability to average down when attractive value gets even more attractive. Capital structure matters, and those who are built on a strong foundation will take advantage of those who are not, and it will happen suddenly, ruthlessly and without warning. By the way, it is also possible to get badly hurt when the markets instantaneously bounce back the moment after you de-risked, downsized, or — god forbid — hedged and went short. Perhaps we have our rose colored glasses on when we hope Europe will find a common path, but the unlikely announcement of a “re-vote” by the British may cost