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A lot has happened the last two months or so and at least to me the world is a far clearer, more exhilarating picture. I've had some time to do some thinking and I was struck by several themes. Bottom Line Up Front (or BLUF as we call it): An investor, an Army officer, a corporate CEO, a surgeon, a lawyer….you name the profession… if you're a professional then your purpose in life is not to manage – your purpose is to lead (people, change, emotions, whatever..). I've heard it said that a true professional is someone dedicated to their craft and someone who possesses a certain professional ethos. I think that should be taken one step further. Though professions vary greatly in what they represent I think it fair to say that all true professionals have a competitive drive (more with themselves than anything else) to prove themselves in great difficulty. They dedicate their lives to learning as much as they can about their circles of competence. And I also think it fair to say that the true professionals thrive best when chaos surrounds them… when “all others are losing their heads” as Buffett once said. I am convinced that there is a certain type who actually looks forward to chaos – it's where they're most comfortable. It's where they THRIVE. They've spent years and years studying and acquiring knowledge so that they can APPLY what they've learned and practiced upon a chaotic situation and get the exhilaration of a “win” - however “winning” is defined in their circle. They run with gusto to the sound of the guns. In order to do this there are several pre-conditions which must be met in order for our hero to do his or her thing:
1. They have to have a thirst to learn the craft and apply themselves to this quest voraciously – done during the “boring” times of status quo.
2. The above most likely requires an inner competitive drive – most likely with a high internalized set of standards
3. They need to have a “detached ego” which allows them to execute rationally rather than emotionally. (Recommend watching movie classic 12 O'Clock High with Gregory Peck)
4. They're beholden to none and have a personal center of gravity based on principles and values rather than external things
5. But ultimately they thirst for a set of external conditions that allow them to apply the above

In reading about George Marshall (the ultimate rational being) I note that he suffered in long obscure silence for decades (34 years) – plugging away…acting with integrity and honor…avoiding the limelight… doing the right thing. There was a time when he thought of leaving the Army. A Major at the time, his salary was just over the American average of $750. External opportunity arrived in the form of a job offer from a partner at JP Morgan – salary $30,000. Marshall was severely tempted. In the end of course he turned down the job offer that was pushing 40 times his pay. Why? I spent a few weeks mulling over that question. My only conclusion is that Marshall saw what was looming on the geo-political scene. He had already made a name for himself in WWI and had a wealth of knowledge and experience. He knew the craft so to speak. It is my conclusion that he thirsted for the chance to rationally apply it upon a chaotic scene and missing the chance would be the worst form of hell on earth. He had a deep sense of obligation and duty and due to his gifts to manage the chaos he had a duty. Because he had a grounding of values and principles, no amount of money or family riches could pry him from this. So he turned it down and waited patiently for opportunity – not financial – but the chance to apply his learned rationality upon chaos. Material possessions (to include money) as a central focus would have been a hollow outcome. Once given power as Army Chief of Staff he basically ripped the existing Army careerist culture to shreds and built a wartime Army full of mission oriented leaders who embraced extreme difficulty – (not at all unlike what's happening today I might add).

What's this have to do with investing? A lot I think. The above “rules” are the same no matter what the profession. Professionals are built for chaos, ambiguity, uncertainty, and extreme difficulty. Good times and relative “ease” though sometimes a welcome respite ultimately become the definition of a living HELL. Ask yourself if you ever felt any satisfaction getting an A on a test or a paper if the entire class did. No. Maximum satisfaction comes when you're the only one to get an A. There's a standard. There's a great difficulty that has been mastered and overcome. There is stratification. There are winners and losers. There is “justice” – those who took the easy way out and didn't study get “punished” by their poor grade. Grade inflation in a sophomore class or its stock market equivalent where all equities perform well (or fund managers) is the worst form of hell (Socialism might do well to learn this truth). To the master of the craft - There is a desperate NEED (and secret “want”) for external difficulty in order to apply the expertise acquired through internal drive. When Katrina hit New Orleans I noted two very distinct reactive differences. One type (with a need for external calm and status quo) was devastated (career bureaucrats). The second type I think saw the chaos as a challenge and call to perform (LTG Honore). The difference in response between the two was startling…

And what of now? I think that any professional money manager (or dedicated individual investor who gets turned on by the game) who gets a sense of “fear” or trepidation or worry on what is I think shaping up to be a chaotic situation in the not too distant future is in the wrong profession or passionate hobby. I think there should almost be a CRAVING for financial chaos, markets run amok, and a slew of distraught Wall Street hedge fund narcissists searching for answers that never materialize. Finally, at long last…. After two decades where the whole damn class got A's on their term papers (individual stock analysis) there looks to be coming a day where the true craft and sound tested principles of rationality can be applied. Where the rising tide can't lift all the boats anymore. Perhaps it sounds callous to be seen as “cheering” for chaos but that's not it at all. The chaos is going to come with or without anyone's cheering. Equilibrium theory tells us that good times will be followed by bad (the longer and greater the good times then the inverse) – it's going to come. The only difference is in how it's rationally dealt with on a very individualized level.

This is no different to the “competitive destruction” thread – where the thesis that chaos affords an environment of stratification with winners and losers. And much to my satisfaction take a look at what's happening in the reinsurance market where others are running for the hills – leaving Berkshire almost alone to take on the risk and get enormous premiums (what was it? Half the potential insured loss? Amazing)… That's what Berkshire Hathaway was built and designed for. It wasn't built for the whole damn class getting an A…. it was built for a real bitch of a final exam… Higher inflation? Higher interest rates? Rapidly falling dollar? Dollar's precarious position as world's reserve currency? Crashing emerging markets? Exploding ARM debt servicing? Falling housing market? Automatized sell orders on market ETFs which bring everything down? Tons of conflicting “activity” in options and futures markets? Confused messages from new Fed Chairman? Threats by Iran to strangle global oil supply? Exploding oil prices? Mass restated earnings at Fannie Mae? Corporate corruption in executive suite and on the passive boards? Narcissistic CEO at Home Depot? Predictions of huge hurricane seasons for at least next decade? Trade deficits? Rising protectionism? Nationalization of oil infrastructures in South America? Rise of socialist and populist impulses (windfall oil tax anyone?) in America? American manufacturing sector on brink of destruction? Pension calamities across American industrial base? The tapped out and hyper-indebted American consumer who essentially is pulling the rest of the world on his shoulders? Things that are supposed to be non-correlated are all moving down? Alas…Derivatives meltdown potential? Al Qaida and their threat to our way of life, social harmony and stability (who would have thought that peaceful Canada would be major target)? I think that about covers it for the questions posed on this final exam taught in this hypothetical yet very real 401 class of reality that the world is teaching us. To put ourselves in the right frame of mind perhaps the movie Cinderella Man is a good primer….

Either the above and where it might lead turns one on…. or perhaps fills one with 1) serious doubts bordering on panic or 2) apathy bordering on denial (the most prone to actually panic if and when the time comes). Not at all unlike New Orleans - (You bet those levees will hold! Up to a CAT 3 for sure). Not a darn thing any of us can do to change the reality. All we can do is to properly define it and prepare as best we can. Perhaps this brewing storm never materializes – certainly that's possible – but then we probably muddle along an eternity with stagflation which may just be a worse outcome. A booming stock market? Heck we just had that – not very likely to happen again anytime soon. One might ask oneself how might you feel if your portfolio drops 50% and your purchasing power drops another 30%? Not possible? Hmmmmm… I think if one can come to real grips with that possibility now, or something even more dire – with a serious dose of self honesty – then you're built for leading through the worst of the potential chaos and in fact may even be looking forward to the “test.”

HB
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