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Random Thoughts
Thoughts On
War and Investing
by
Gaurang Bhatt, MD
From early history to the introduction of long range cannons, missiles
and air attacks, fortresses and moats have been the prime mode of
defense. The great wall of China was built to withstand attacks from so
called barbarian hordes. Hadrian�s wall in Britain was meant to keep the
attacking Scots at bay. A moat surrounding a castle was an added
deterrent from attackers being able to scale the walls easily. The
ability of a company to deter competitors from entering its field
because of technological, financial or logistics barriers is
characterized as the original company having a wide moat of safety.
In the present era, it would be
almost impossible for a new car company to succeed unless it had a
tremendously better or cost effective technology. Similarly, a new
company would find it very difficult if not impossible to compete with
UPS or FedEx because of expensive logistics and fixed investment. This
is why technology companies despite having high profit margins, have to
spend much of their profits on R&D. See how leaders of yesterday like
Yahoo, Ebay and even Microsoft have been overtaken by Google, Amazon,
because entry barriers are low and paradigm changing technologies
lurking round the corner in a new inventor�s mind. It is much more
difficult for new drug companies to emerge because of high costs and
time delay for becoming profitable. Successful new ones like Genentech,
Gilead and Amgen have to tie up with majors like Roche, Glaxo or Pfizer
for distribution and marketing.
A country without revisionist, expansive or neo-imperial ambitions has
to erect a wide and difficult to penetrate moat. It has to brazenly
advertise that the cost of attacking it would be ruinous just as some
butterflies and frogs have bright iridescent colors warning predators
that they are poisonous and harmful. This is why Israel, India,
Pakistan, North Korea opted for nuclear weapons and Iran wants them.
Even the US and Russia opted for MAD ( Mutually Assured Destruction)
strategy.
The nuclear bombing of Hiroshima and Nagasaki was not to
defeat Japan or reduce US casualties. It was a veiled threat to the USSR
which had no nuclear weapons at that time, to desist from any further
annexation of territory to shroud in its iron curtain. Contrary to the
hoopla and false propaganda, it was the army of the Soviet Union that
dealt Nazi Germany a deadly defeat at the cost of 20,000,000 million
casualties, ten percent of its population. Eisenhower planned the D-Day
invasion and delayed it to make the USSR bear the predominant brunt of
the German war machine to deliberately weaken both.
A first use of
nuclear weapons is just a terror technique of a powerful nation to
intimidate the weak, just as a similar policy by Pakistan is a desperate
threat of a weak and fearful nation chastised by having previously lost
its east wing.
Well advertised and effective fortifications and crippling retaliatory
strike power are usually effective deterrents. The attacker is often at
a disadvantage as it is fighting in alien territory, often of different
ethnicity, customs and language. Natural scientists give the examples of
predator and prey like the fox and hare, the cheetah and gazelle, the
lion and antelope. Only a small percentage of hunts are successful.
While the hunter is running for its dinner, the hunted is running for
its life. This is also why predators pick out the weakest and youngest
preferentially to prey upon. Aggressive nations do the same. They are
much more restrained with the strong and invariably bully the weak and
small. It is for this reason that companies likely to grow bigger by
acquisitions. It boosts the ego and the pay of the managers and often
gives them monopolistic pricing or markets.
Rockefeller�s Standard Oil
bought up other kerosene makers and sellers by under-pricing and after
eliminating competitors, raised prices to make windfall profits. Walmart
uses similar tactics but within the legal framework. Presently the big
banks by their sheer size and stranglehold on the economy have obtained
massive taxpayer bailouts even though they were the culprits that sank
the economy. Politicians the world over, are mostly shameless selfish
whores. That is why Obama and the Congress are shoveling money by the
truck full to the banks and mouthing platitudes and verbal sympathy to
homeowners under water with their mortgages, but offering no monetary or
interest rate help.
Insurgencies often result when foreign soldiers with no knowledge of the
invaded country�s culture, customs and language occupy it. These and
ethnic or color differences lead the victor to denigrate and maltreat
the vanquished. Lethal force is overused and torture and abuse crop up.
This increases alienation. In a country like Afghanistan, a graveyard of
conquerors for over two thousand years and now infected with a fanatic
form of Islam, we have the willingness to fight and die, an insurgent
sympathetic or supportive population and a geography without
infrastructure, ideal for guerrilla warfare. Opposing them is the
American military, less willing to fight and suffer casualties, in
unfamiliar territory and unable to speak the language or understand the
culture. Its first and main resort is massive and indiscriminate aerial
bombing with large innocent civilian deaths. The result is Hercules�
Anteus problem or Jason�s demonic men�s blood problem.
Hercules during
one of his labors had to defeat the giant Anteus in wrestling. Anteus
was born from the earth and every time Hercules knocked him to the
ground, his mother, he got up ten times stronger. Jason�s problem was
that if he killed the dragon men, from every drop of their blood falling
on the ground there arose more. The US military problem is that the
death of innocent civilians by bombing increases the number of
insurgents, their hatred of the US and their insatiable desire for
revenge. To make matters worse, the US is now repeating its foolish,
self-defeating policy in the tribal areas of Pakistan, ignoring the
advice of its own expert in counterinsurgency, David Kilcullen.
The lesson that idiot nations like India have yet to learn is that those
who give military and non-humanitarian aid to your enemy are not friends
or even well wishers. A tenant who installs a burglar alarm in the
rented house is not doing it for the benefit of the landlord but for his
own benefit. There is nothing wrong, shameful or deserving criticism in
the tenant�s action, but only an idiot landlord would label it virtuous
altruism or a friendly gesture. Such stupid countries are like investors
who rejoice that a company is using its free cash flow to buy back its
stock even as it is hitting a new high much above its tangible book
value and at the upper end of the range of its price-earnings ratio.
Sometimes though not usually it may be alright to do such buy backs but
certainly not when the insiders are selling their stock by the
bucketfuls. Such buying back is to keep the stock price high, while
wasting the company�s finances, to allow the managers to unload at
greater profit. It is better for the investor to buy the stock of a
sound company when it is selling at the lows or below book value and the
company is buying back its shares with free cash flow. Even then the buy
back is to provide the managers with future stock options at the current
low price. The managers hope to make a killing in the future when stock
prices will rise. At such time a buying investor will find that his
future interests are aligned with the managers and the time is right.
Momentum traders are believers in the greater fool theory. They can be
successful because as someone wisely said, �In the short run the market
is a voting machine, but in the long run it is a weighing machine�.
Those who are nimble and prudent enough to take a ride with momentum and
get off before the train wreck that is inevitable with time are enriched
profusely, while most misguided fools ride into oblivion and ruin,
evident now. The same is true of countries. Those intoxicated by power
and wealth begin to believe that there is something inherently superior
and deserving in their pre-eminent status making them exceptional,
virtuous beacons of light, chosen people anointed by god, until the
inexorable mills of time grinds them to dust and irrelevance. Sic
transit gloria mundi.
May 10,
2009
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