I recently spent a week on vacation in the Dominican Republic. The weather was beautiful, as expected, and I returned well-rested and recharged.
But while I was there, I couldn’t help wondering, “Why is this country so poor?”
(For the record, the GDP of the Dominican Republic is just over $9,000 per person, while the U.S. GDP is $46,000 per person.)
After a little research, I found my answer.
It’s not because the country is so small. Though it’s approximately the size of New Hampshire and Vermont combined, I can name smaller countries that are far richer. It’s not because there are few resources; the country has abundant water, sunshine and minerals. And it’s not because the people are lazy; in fact, I found them quite industrious.
The reason the country is poor is that it’s been only 12 years since voters in the country booted out Socialist strongman Joaquin Balaguer and adopted a true representative democracy modeled on that of the U.S. … and change takes time.
Now you would think that countries around the world, having noted that the most successful economies are those with representative democracies, would be rushing to follow their lead. But politics is a complicated business, dirtied in no small way by the tendency of men (and women) to enjoy power.
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How Not to Act
Which brings us to the United States presidential election.
In a little more than six months, we will determine the successor to a man who (to put it kindly) failed to live up to the expectations of his party, a man whose approval rating, at 31%, is nearing that of Congress, which hovers in the low 20s. Yes, the process is overly long, but that may be appropriate considering its global importance.
What most of us want, though we may not have articulated the thought, is a great president, who can lead us out of our troubles and forward to a renewed role of world leadership.
What we don’t want is another leader who fails to live up to our expectations, and lord knows there are plenty of examples of those, in both politics and business.
There’s Eliot Spitzer, who failed to live up to his own code of behavior.
There’s William Lerach, bane of corporate managements, who was recently sentenced to two years in federal prison for (in part) paying plaintiffs in order to induce them to sue.
There’s Melvyn Weiss, who agreed last week to plead guilty to similar charges, and faces the possibility of 18 to 33 months in prison and a fine of $10 million.
There’s Fidel Castro, who for 49 years led his country nowhere.
There’s Hugo Chavez, who has embarked on the same course with Venezuela.
Closer to home, there are the geniuses at Bear Stearns, Countrywide Credit and Carlyle Group, who forgot about the importance of ensuring that assets exceed liabilities.
The value of these failures to us today is that they provide lessons on how not to act … if we pay attention to them.
Choosing the Right Person
They remind us that the person we choose for the most difficult job in the world needs to be intelligent yet be humble; needs to be resolute yet open to change; needs to have principles yet be ready to compromise. But above all, that person needs to lead.
I’m not asking for a Washington or a Lincoln or a Jefferson. I’d settle for a Reagan, or a Truman, or a Roosevelt (either one).
If we do our jobs right, we’ll select a person who can help keep the U.S. at the forefront of the world for many decades to come, not just because power is so very nice to have but also because our values are worth defending … and promoting.
But the job is harder now that it ever was, in large part because the two parties in Congress are so divided.
(On that note, I felt a ray of hope last week, when I read that Stanford University professor Lawrence Lessig had launched a Wikipedia-style project named Change Congress that aimed to use transparency and the power of the people to overhaul Congress. I wish him success.)
Meanwhile, over in China, which has over four times our population, economic growth is running at 10% fairly consistently. That growth has been a great tonic for investors in China, and helped make Cabot China & Emerging Markets Report the #1 investment letter of the past 12 months. But it means that eventually (though not soon), China could eclipse the U.S. in power, and we better hope that by then their values have evolved to be far closer to ours than vice versa.
Back in 1905, George Santayana wrote, “Those who cannot remember the past are condemned to repeat it,” a statement that has been paraphrased in numerous ways since. My high school history teacher, of course, appreciated the sentiment and tried to teach it to us. Yet of the entire year I spent in the man’s class, what remains in my mind today is the fact that three times during the year, he pulled on the cord that unrolled the projector screen, only to have the entire assembly crash onto his head.
Some of us, I gathered, learn better from the past than others.
Microsoft and Yahoo!
Which brings me to Microsoft (MSFT), which bid $45 billion to buy Yahoo! (YHOO) back on February 1.
My investment perspective on these companies is two-fold.
First, every investor in America knows these two companies. Microsoft is owned by 1279 mutual funds, while Yahoo! is owned by 480. Those are big numbers, and they tell me that there are more potential sellers than buyers for these stocks. They also tell me that there are thousands of analysts monitoring those companies. There is almost nothing that is unknown about those companies in the investment community and almost nothing that has not been imagined. And that means it’s going to be very hard to beat the market by investing in those companies.
Second-and this was actually put into words by my father-those companies are going down the same road traveled by IBM decades ago.
(This is where knowing the past comes in handy. It means you’re not condemned!)
Admittedly, IBM is a great company; it’s been a great company most of my life. But the time to sell the stock was 1969, nearly 40 years ago. That’s when IBM’s stock stopped beating the market. Sure, the stock is higher now than it was then, but as an investor, you would have done better in an index fund.
And so it is with Microsoft and Yahoo! Their stocks have been lagging the market since the 2000 market top and there’s very little chance either one will significantly outperform the market in the future.
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Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory