Dear Thoughtful Investor,
An engineer steps into a building. A while back there was a fire in one of the rooms that spread through and burned a lot of the building. Repairs have been made, the structure has been reinforced and people are back in the building working busily on computers and talking on phones. The building managers have asked the engineer, “Will you inspect the structural integrity of each room and tell us whether we will have a room collapse and pull down the building?”. The engineer dutifully inspects each room. One room is labeled Housing, another Equities, rooms are labeled Bonds, Commercial Real Estate, Banking, and hundreds of other rooms.
After many hours and thorough analysis the engineer reports stoically to the building managers, “The rooms are all structurally sound now. No room is going to collapse.” The chatter of celebration follows. Everyone working inside the building - including the building managers - breathe a collective sigh of relief. Nine years ago one of the rooms caught fire, the room labeled “Sub-prime Mortgages” the fire spread to housing and then the whole real estate wing of the building. It spread to Equities, Bonds, and ultimately most of the building was damaged by the fire, the building almost collapsed but was thankfully saved through maximum interventions by the fire department.
Today the building managers announce the good news that the building is structurally sound, that the rotten and burned beams have been replaced by new stronger beams that have been fire proofed. The building managers announce, “We are unlikely to see another fire threaten to collapse the building in our lifetimes.” Everyone celebrates. In the melee few people notice a little jolt in the building. “Was that just a little earthquake?” a few people ask. It was probably nothing.
Our view pans out to something that looks like Google Earth’s satellite view. The gigantic building is small now and a distinct line takes shape across the landscape, a line running directly under the large building. A fault line. It’s that moment in a movie where right before the credits roll you realize they’re setting up the storyline for a sequel. We suddenly realize the engineer was the wrong guy. We didn’t need an engineer, we needed a geologist. Someone that instead of looking at individual rooms in the building would say, “The building is right on top of the San Andreas fault. It doesn’t matter how sound or fireproof the individual rooms are when then ‘Big One’ hits it’ll take down the whole building.”
The Thoughtful Investor looks to both the engineer and the geologist. The engineer helps us understand which assets we should be in at any given point in time. The geologist helps us take a broader historic view that reminds us that big financial earthquakes have happened before will happen again. I look forward to having conversations with you around these questions, “What should we invest in now?” and “How should we invest just in case?”
A Thoughtful Investor