Remember: The old rules don’t apply. . .
February 11, 2009
The current economic and political cycle is very unique because, perhaps for the first time in our country’s short history, the rules are unclear. Investors of all shapes and sizes no longer understand the rules. Banks don’t understand the rules. Homeowners don’t understand the rules. Venture capital firms don’t understand the rules. Employers don’t understand the rules. Politicians don’t understand the rules. My advice? You need to splash cold water on your face and accept the fact that The Rules No Longer Apply.
The British Empire flourished because the rules were clear. Anyone from India to China could walk into a British court and expect their contract to be enforced. England made the rules and stuck to them. Everyone prospered. Our own legal and ethical system was build on English common law and guess what? Everyone prospered (even the poor people in America are rich in relative terms to the rest of the world). Companies were allowed to prosper and fail. People were allowed prosper and fail. America was built on the idea of equality of opportunity, not the equality of outcome. Our goal was to create a society where everyone (person or corporation) could be treated equally. There would be winners and losers. Today those ideals are being put into question by everyone: investors, businesses, citizens and politicians. What will the new new ideal be? How will we measure success? Failure? In the America of today no one under the age of 10 has ever lost a soccer game - will this be our new model?
The biggest risk we face now is that there are no rules. The government might force you to make loans that you know are bad. Then again they might not force you to make loans. The government might punish you for making loans despite the fact that they forced you to in the first place. The government might punish for not making loans despite the fact that they didn’t force you to make them. The government might take over your business. The government might save your competitor and let your company go out of business. The government might dictate how much you are allowed to earn. The government might decide whether or not you deserve cancer treatment or a liver transplant. The government might let you keep your house even though you can’t afford it. The government might pay you NOT to work. Rules mean the game can go on - they don’t even need to be fair for everyone to prosper. Of course, without rules everything stops until we all can agree on a new set of rules. That is the reality of today.
For most of us our home is our biggest asset/liability, but today it isn’t likely you will be able to find a buyer for it. Does this mean it is worthless? Maybe, maybe not. Why can’t you sell it? First and foremost you might be reluctant to sell because you think that Congress will reform the mortgage industry reducing the interest and principle you owe. Second you might be concerned that with the federal government on the brink of spending 9.7 trillion dollars out of a total 13.84 trillion dollar total gross domestic product that inflation might explode making assets more valuable than currency. Third buyers might not be able to secure a loan. Forth buyers might be waiting to see where the bottom is. Fifth buyers might be concerned about their own financial well being. The old rule that they aren’t making an more land may still be true, but the fact that it might not be worth anything means the old rules just don’t apply.
Investors face the same problem. Last year an investor might be able to use his understanding of the rules (i.e. companies buy advertising) to help him decide whether or not to invest $250,000 in your startup. By using his knowledge of the market and the underlying rules of the market he might be able to justify the risk versus the reward enough to make the investment. If suddenly the rules change, as they have today, and new rules haven’t had time to take effect, he won’t be able to justify the investment. You won’t be able to hire those programmers, rent office space and buy those cool Aeron chairs. Herman Miller doesn’t know when or where it will find its next chair customer so they must decide - keep our employees on board in the event something good happens or let everyone go and assume the worst. My Granddad decides to sell his stock because he assumes Herman Miller isn’t going to be selling any chairs anytime soon.
How can we prosper? This is the question my wife asked me last night. Should we slash the price on our second home or buy a third? Should we downsize? Should we get liquid? Should we decrease our liquidty? Should we buy assets? Should we sell assets? The answer? The old rules don’t apply so the answer is there is no answer. We can assume that most people will assume the old rules STILL matter and as a result the old answers will still be true. Use this fact to your advantage. You can also assume that these same people will eventually realize what you are doing. Again, use this fact to your advantage. This current cycle of economic anarchy will eventually (it could take years) create the largest amount of wealth in the history of mankind. Of course this isn’t hard to believe since we have seen the largest destruction of wealth in the history of all mankind over the last 12 months.
