Beyond The Headlines
The Tale of Two Books
As readers of my articles, you probably know well that books are very important to me. This is an account of two that have been a great influence on me, in very different ways. I discovered both of them around 20 years ago. One has defined my career, and the other still defines stock markets and the economies around the world. The first one I bought, and cherish. The other one I browsed through carefully once, but never cared to own … was I wrong?
At the end of my new book – Money, Life, Family, I include a list of books that changed my life. If you have watched my TEDx talk, you’ll know that I was inspired to become an investor by Peter Lynch’s One Up on Wall Street. I picked up that book in a little English-language book store when I was a foreign exchange student in Brussels. As I shared in a Hikecast interview with Jake Taylor earlier this year, I chose between two books that day.
Peter Lynch’s book introduced me to the life-changing idea that stocks are small pieces of businesses. As obvious as that may seem, until that point, I had learned about ratios, alphas, betas, deltas, gammas — I even knew how to price derivatives (!), yet I didn’t see stocks as pieces of familiar businesses, whose products and services we may even use. My prior exposure to stock investing had been a paper “portfolio” that I kept as a 15-year old watching companies getting listed on the then-nascent Warsaw Stock Exchange (originally founded in 1817, closed in 1939, and reopened 52 years later). My paper portfolio was a list of exciting tickers with prices that moved up and down for reasons beyond my comprehension. It wasn’t until after reading Peter Lynch’s book that I bought an actual stock and… quickly lost a fair share of my real portfolio! That was my first experience owning a piece of a business – and as luck would have it, also my first permanent loss of capital. It was a great lesson in patience, too — the stock recovered, and rallied shortly after I sold it!
To this day, whenever I’m invited to speak about investing, I like to start by asking my audience two questions. First, have you ever made money owning a stock? Second, have you ever lost money owning a stock? Most investors have had both experiences, though hopefully more of the former, and less of the latter.
What was the other book that I held in my hands that day, but did not buy? It was ostensibly the tale of a wise man, capable of single-handedly conducting the biggest metaphorical orchestra (i.e. the U.S. economy) the world has ever known. Not only that, he even seemed able to predict the future. His special position gave him the power to make decisions affecting all of us by controlling the price of the money we use.
His story reminded me vividly of the central planners setting prices of everything from butter to tractors in Soviet-era communist Poland of my early childhood. They attempted to predict the demand for each item in the economy down to the smallest nail, in order to ensure that the supply would match it, at the right price. As history tells us, it was a policy that failed spectacularly. The resulting economy’s inefficiency was so extensive that consumers couldn’t even find nails in stores at times! When the Berlin Wall fell, the market was set free. Millions of consumers and businesses made free independent decisions, free market set the prices, shortages disappeared almost overnight.
Ten years after the fall of the Berlin Wall, there I was in Brussels, reading about this central monetary planner who set U.S. interest rates, i.e. the price of money. Whether you are buying diapers for your baby with your credit card or financing the purchase of your house with a mortgage, even planning your retirement, the price of money affects you. The book in my hand was Maestro: Greenspan’s Fed and the American Boom by American journalist Bob Woodward. Published 19 years ago, it was a New York Times best seller. In the book description you can read: “On eight Tuesdays each year, Federal Reserve chairman Alan Greenspan convenes a small committee to set the short-term interest rate that can move through the American and world economies like an electric jolt…”
The book also shares praises of the bull market of the day, today known as the dotcom bubble: “the American economy is pushed into a historic 10-year expansion while the world economy lurches from financial crisis to financial crisis.”
Nasdaq peaked at over 5,000 a few months before the publication of Woodward’s book, and bottomed at 1,114 three years later, a 78% drop, and a $5 trillion lost in the stock market downturn. It took 16 years, zero rate policy, quantitative easing, and an unprecedented monetary intervention to bring the Nasdaq back to 5,000 and beyond. Once again, we are celebrating a historic 10-year expansion and believing that we can achieve fairy-tale prosperity by simply printing money! The history does rhyme, doesn’t it?
Two books, two tales. One of these books inspired me to pick stocks and own real businesses: the other made me aware of powerful monetary policy that can send tidal waves through asset prices, stock prices included. As much as I believe it’s the stock picking that counts in the long run, I don’t think it’s wise to ignore the influence the price of money has on the stocks we buy or hold.
Here I am in New York City, 30 years after the Berlin Wall fell. I know that when the market is set free as it was in Poland in the early 1990s, price discovery works at its best. When the price of money is set free one day, I doubt it will be zero. I also know it will have a massive impact on stock prices. Fortunately, businesses will continue to provide goods and services that consumers want. As stock pickers, we at Sicart are always ready to invest. We don’t know where interest rates will go, or even if the Fed will be around in the future, but we do know what kind of businesses we like to own, and when the prices are right, we never hesitate to buy them.
Almost 20 years have passed since that memorable day in Brussels, and I still wholeheartedly believe I picked the right book to inspire me in my investing career.
Bogumil Baranowski | New York City
Published: November 27th, 2019
This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.