Wealth, War and Wisdom

Publisher: Wiley, 2008

Wealth, War & Wisdom by Barton Biggs, Conclusion (pp 331-333)
(Annotated commentary by The Anecdotal Economist, with particular emphasis on Mr. Biggs's suggestion regarding acquisition of an easily accessible "safe place" ranch or farm.)

Equity markets are wise. The invesor crowd has great intuitive wisdom. Stock markets, in their long run judgments, are the perfect, dispassionate, separately-but-directly motivated crowd.
(Only for 25-50-75 year time frames, as any less is only “noise.”)

Disregard the ranting and raving of the self-proclaimed elite thinkers and alleged experts on wars, economies, politics, and, above all, the stock market. They are empty suits with vacant heads, and their opinions cluster around the probable. They lack the imagination and the courage to predict the unexpected, the 10 standard deviation events that transform the environment. (An extremely unlikely event, as the universe is not yet old enough for even one 10-sigma event to have occurred, yet we are hearing frequently of 25-sigma events – Subprime).

History doesn’t evolve in a slow and orderly way; often it leaps forward in disorderly, chaotic jumps.

People with wealth should assume that somewhere in the near or far future there will be another time of cholera when the Four Horsemen will ride again and the barbarians unexpectedly will be at their gate. (Sooner, most likely, should a confluence of events spin out of control in a short period of time.)

By definition, the next Black Swan will be some form of a total breakdown of civilized society and the social and financial infrastructure as we know it. (A low-probability, unknown, unforeseen event, unexpected because the event never has occurred before in human history.)

The issue is what form it will take, what costume it will wear? (The essence of a Black Swan event is that it is completely unknown, and, therefore cannot be predicted.)

It is likely to have the general effect of the anarchy of an occupying army in World War II. The trigger event could be a massive terrorist or nuclear attack that disrupts the economy for months and maybe for years. A power failure that lasted not a day but a month would paralyze a modern economy. Or it could be a plague, a massive SARS epidemic, in which hundreds of millions die, or an electronic explosion that cascades into a complete breakdown of the world’s financial accounting systems. Whatever happens, it most likely will be an event that is both unexpected and we will not be prepared for. (These are all “known” unknown events. As above, a Black Swan event cannot be described, as it is an “unknown unknown.”)

The world is very good about locking the barn door after the horses have been stolen.

What can you do? In simplest terms, the conclusions are to diversify your fortune both as to asset class and location, anticipate the anticipation of trouble, and pay attention to the message of the markets. (Valid advice in regard to diversification of assets and location. It’s why many West German companies were eager to set up U.S. locations in the late 1970s-early 1980s at the height of the U.S.-U.S.S.R. cold war.)

Equities are the place to be in the long run because of their proven and virtually unique ability to increase the purchasing power of capital. (So far. A Black Swan event could negate this observation exactly because it renders past performance or observations irrelevant.)

In my considered but not necessarily correct opinion, a family or individual should have 75% of its wealth in equity investments. (Only if the remaining 25%, however diversified, can produce sufficient income to cover all conceivable living expense over long periods of time.)

A century of history validates equities as the principal, but not the only, place to be. (As above, so far. A Black Swan event could negate this observation exactly because it renders past performance or observations irrelevant.)

As David Swenson likes to say, you as an investor in an inflation-prone world want to be an owner – not a lender. (Again, over very long periods of time, and so far. Consideration also must be given to what securities/money would be most liquid in the immediate aftermath of an event – Gold, food, short-term government obligations.)

Most of that commitment should be in publicly traded global equities. Don’t try to time short-term market swings. What you want to capture is that wealth purchasing power compounding from the real return of stock. Tilted, refreshed index funds, or even just plain vanilla index funds, are fine. Don’t fuss with high fee investment alternatives, and in general, don’t get fancy and try to pick the best global managers or hedge funds. Last year’s superstar may be next year’s bum.

(Some Really Good Advice from Mr. Biggs)
Another, much smaller part of your diversification strategy should be to have a farm or ranch somewhere far off the beaten track, but which you can get to reasonably quickly and easily. (The “money shot” and quite possibly the key to survival.)

Think of it as an insurance policy, and for rich people in the developed economies a farm is a fine diversifier and probably an excellent long-term investment. (With considerable tax benefits.)

Perhaps its purchase price should amount to five percent of your net worth. (Assuming one’s net worth is at least $20 million, otherwise expect to pay at least $1 million to acquire, develop, stock and provision a farm or ranch to double as a secured safe-haven, plus another $100,000 or more a year for upkeep.)

The control of food-producing land is a basic instinct of mankind, and landowners seen to find considerable psychic satisfaction just from the knowledge of possession. There are few things as fulfilling as having a drink in the sunset and looking at your fields and cows.

There is no way of knowing how much time we will have to reach our Shangri-La next time. It will not be of much use having a wonderful estate in New Zealand if you can’t get there. (Preferably within an hour’s drive in optimal conditions and a two-day hike otherwise.)

Long-range air travel is likely to be one of the first things to go. On the other hand, you want your sanctuary to be remote enough to be inaccessible to the dispossessed hordes. (Electricity-generating capability with at least a 30-day source of fuel for continuous power and a very good, self-contained security system.)

You should assume the possibility of a breakdown of the civilized infrastructure. Your safe haven must be self-sufficient and capable of growing some kind of food. (Including indoor or underground cultivation.)

It should be well stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc. (Etc., of course, means weapons and ammunition and sufficient training for their use, especially rifles.)

Think Swiss Family Robinson. Even in America and Europe there could be moments of riot and rebellion when law and order temporarily completely breaks down. (We watched live on television, in real time, the breakdown of civilized society in New Orleans in the aftermath of hurricane Katrina, about 48 hours before chaos ruled. In “moments” of riot and rebellion, one should plan on no assistance from any official source, particularly law enforcement.)

A few rounds over the approaching brigands heads would probably be a compelling persuader that there are easier farms to pillage. Brigands tend to be cowards. (On the other hand, a large, motivated group of cowardly brigands, enticed by the possibility of gaining control of a well-provisioned, well-armed safe-haven, may not be deterred by warning shots, and even encouraged. Shots fired should be shots meant to mortally wound and kill, no exceptions, hence the requirement for adequate arms training, and the knowledge that a safe-haven must be adequately manned by competent adults.)

I repeat that history suggests that the rich almost always are too complacent, because they cherish the illusion that when things start to go bad, they will have time to extricate themselves and their wealth. (More likely they are unable, or unwilling, to recognize the scope of the detrimental impact of a Black Swan event as it is occurring, which entails the need to change one’s mindset to survival mode. The possibility, however small, of “losing everything,” when one has much to lose, can cloud the judgment required for safety and survival.)

It never works that way. Events move much faster than anyone expects and the barbarians are on top of you before you can escape. Black Swans by definition have to be unexpected. (Yes, they are “unknown unknowns.”)

The temptation always is to try to salvage wealth, but by the time it is apparent you need to, it is usually too late. It is expensive to move early, but it is far better to be early than to be late. (The essence of this conclusion, but the most difficult concept to grasp. “Things” always can be replaced, health and lives cannot.)

Confucius said: “Study the past if you would divine the future.” (Which is about the most useless scrap of wisdom when dealing with the possibility of a Black Swan event and contradicts everything previously discussed. The past never provides the benefit of experience when confronted with an unknown unknown, and is another reason people are slow to react. As in, there will not be another Hitler/Nazi Germany, as we’ve already seen that horror movie and, in knowing how it ends, will not allow it to happen again. However, there are movies to come, whose ending we do not know. These are the events for which we must remain vigilant, prepared and ready and willing to act, even if only a “drill.” One day it will not.