Despite positive growth this year, China is deeply troubled

Amidst this recession, economies all over are suffering, albeit to different degrees.  China is almost uniformly recognized as the one economy that has some redeeming features that may still inch out a respectable growth figure this year.

The reasons given are numerous, some backed up with good data, some not.  When contrasted with India, China does not depend as much on external financing, as it does on external demand.  When sitting on vast foreign reserves, one is not as affected by the global liquidity freeze.  Back in the mid-2000s, China had in fact tried to cool down its economy through lending restrictions and bank restructuring – remember the time when Chinese banks first IPO’ed, the talk of town was concerns over the depth of Chinese banks’ bad loans? Good times, those days.

So China’s tight fiscal and monetary policy back then aimed to limit domestic lending, and consequently domestic consumption, while hitting those target growth rates and five-year plans. It walks on a tight rope. On the one hand, growth must continue to quell potential social uprisings from rising unemployment.  On the other hand, China desperately needs a back-up plan, should its best customers for the past few decades – the Western consumers emerge from this recession with a permanently lowered propensity to consume.

To make up for the lack of external markets, and to prevent China from turning into some version of Japan or Germany, both with relatively low internal consumption compared to exports – albeit for completely unique and different historical and economic reasons, China is set to stimulate internal consumption.  Businesses salivate at the rate of growth not only of high net worth individuals in China, but those entering the legion of the mass affluent.  Although middle class members of China are spending at unprecedented rates, economic observers are continuously frustrated at the discrepancy when compared to their western counterparts. How to get them to spend more?

In response, many government agencies are now paying employee bonuses in the form of product vouchers. Instead of handing them over a few thousand yuans, some companies are simply handing out gift certificates with an expiry date, thus forcing people back into shopping malls.  This way, you are forced to spend, instead of saving.  Products manufactured for export and previously inaccessible for many in the rural regions, are suddenly available, and they are on sale.

But it’s still not enough. Many would argue that this is a good time for China to use its stimulus to invest in its social welfare system, instead of throwing more money at existing infrastructure projects.  Burdensome costs such as education, health care, and retirement savings are driving people to save like crazy.  At this point, the narrative of a developing China takes a slight turn.  Demographically, it is graying just as rapidly as its more affluent customers and trading partners.  But the problem is compounded, if not exacerbated by the one-child policy instituted in late 70s, as a response to a very third-world country problem of population explosion.

In the long run, China will have to work out some kind of fiscally sustainable system that will allow for a public, and universally accessible health care system, and some kind of a pay-as-you-go retirement account.  Even at the surface, these are difficult, and no doubt, time-consuming projects to construct and implement.

  1. With much growth of the country taking place on the backs of migrant workers, their residency status, along with health care and education costs (of their children) in the city where they work, must be addressed first.  Much like Mexicans in the US, much of the underground economy, and much of the above-ground economy, is highly dependent on the availability of this marginalized population.  While they work, more must to be done to care for their needs. Should they return to their cities and towns when urbanization abates at some point in the future, the government need to steer the economy in a way that makes place for them.
  2. Taxes are low for the average working professional.  After all, the government cannot take away what it does not provide.  Thus, financial prudence is expected, and often practiced, by the young – saving for a house or a car, children’s education, and the old – for their children’s marriages, and their own retirement and healthcare costs.  This is self-directed education retirement savings plans to the extreme.  The age of the rice bowl, or even lament and nostalgic for such a time, is long over.
  3. When it comes to medical care, it has really only been theoretically free.  Any family with a child on the way, or an ailing elder in the hospital, would have given the doctors and nurses “red pockets” for extra care, even back in the old days.  Nowadays, the level of reimbursements when it comes to medical care is linked to one’s job and title.  Most retired professionals and government servants have adequate health care.  But few has full coverage, and many worry.  Thus the tendency to over-save for a rainy day. Those days usually always come.  Reforms are on their way, with medical insurance and a bare-bone universal care system instituted. But before those can provide the kind of security that does not leave people in the hole after a few hospital visits, people will expect the worst, and save.
  4. The realm of higher education in China is ultra-competitive, and it’s not something people take for granted.  The system is rote, its mechanical, and most absolutely hate it.  But the centuries-long mentality and tradition of glorifying academic success is deeply ingrained.  The scoring system is transparent, simplistic to the point of being robotic, and for all its flaws – both intentional or not, the system is one of the few uncorrupted ones in the country. That is to say, the standards are national, and more or less rids itself of blatant discrimination based on backgrounds and geography, and the best in the game come out on top.  They are then rewarded with scholarships, and sent off to the best schools.  The rest, well, in addition to measuring up against the bar, will have to pay up.  That’s when a lot choke.

Such is but a snapshot of the myriad of problems facing China, and some may be quite common among rapidly developing regions. One the one hand, it grapples with development issues that range from poverty, over-population and urbanization; on the other hand, like many developed nations, it must confront challenges in social reforms while balancing fairness with equality.

Battling it Out During Tough Times: MBAs vs. Entrepreneurs

I am beginning to wonder if mainstream education and conventional wisdom is treating entrepreneurship all wrong.  Last week, I had a conversation with my boss-in-start-up, who introduced the term the “iterative process” into my business vocabulary.  Today, I came across this eye-opener.

The article, and the paper discussed, questions if there is any fundamental difference between the way MBAs and your average boot-strapping entrepreneur bring product ideas to market.  And the answer is a resounding yes.

1. Change the question.

During the research, it was found from the get-go, the two groups appear to attack two potentially different sets of problems.  Entrepreneurs prefer to be in an unpredictable market, since the market can “be shaped through their decisions” as well as their select group of stakeholders and customer-partners.  Reasoning that someone smarter and with deeper pockets can always come in and do it better than they do, many entrepreneurs stay off the beaten track and experiment with new markets themselves.

The researcher attribute this behaviour to to the logic: To the extent that we can control the future, we do not need to predict it. Whereas most MBAs are taught to act based on the assumption and logic that: To the extent that we can predict the future, we can control it.

2. Conqueror vs. explorers.

Alas, the paper is full of analogies like these.  Actions of MBAs are compared to Genghis Khan, whom given a pre-determined goals and set of means, seek to identify the optimal route and result.  An entrepreneur, on the other hand, is compared to Columbus, whom does not begin with a specific goal, but a given set of means.  They allow “goals to emerge contingently over time from the varied imagination and diverse aspirations of the founders and the people they interact with.”

3. Dealing with setbacks.

During business school, we used to write a lot of business, or marketing, or strategic plans, from every stage of the product life cycle to those dreaded case studies.  Usually towards the end of such plans, we stick in a section that deals with contingencies – what happens if one of the key variables or assumptions don’t work out?  In reality, of course, the whole piece on hand was based on nothing but assumptions.  But we still had to scratch our heads and attempt to answer to our self-selected obstacles.

It turned out that most successful entrepreneurs don’t work that way.  Although in fairness, I’m not sure product development within a corporate environment can be compared to one that takes place in the anarchic environment that entrepreneurs inhabit.

Based on the research, most of those self-starters initiate the process with little elaborate planning, and instead, executes plans that are constantly revised and recast through “action ad interaction with others on a daily basis.”  The end goal also changes at the beginning stage, because surprises that come along sway it so.  And instead of treating at those contingencies as unwanted elements in an otherwise deterministic path, the most successful entrepreneurs actually see it as the norm, “the flora and fauna of the landscape, from which one learns to forge a path through the jungle.”

I’m reminded of the article here that discussed the role side projects (many results of accidental discoveries) played in the entrepreneurial success of America.  We can probably add Twitter to that list in 2009.

4. The role people play.

Entrepreneurs are also highly dependent on a good team of people.  The network of enduring relationships outlive failures and create successes over time.  Essentially, MBAs will work with the idea that “a particular effect has already been chosen such as a target segment within an existing market, the people we hire an partner with will depend on the effect we want to create or the market we want to penetrate.”

On the other hand, the converse idea will dictate the actions of a self-starter. Markets do not pre-exist, they are only built with the people that are brought together to create it.  Thus, the ultimate creation is not a static entity, but one that is dynamic and ever-changing.

So given the current economic environment, the consensus it that entrepreneurs may fare better. Your thoughts?

The Social Construction of Gen Y

A couple of days ago, a fellow blogger commented on this rather unfortunate Fortune article on his blog.  It is interesting for several reasons.

First, the ideas are cookie-cutter and stale.  Us Gen Yers had been told (to a certain extent) that we were on the cusp of a great demographic shift, where baby boomers’ impending departure would wreak havoc on corporate health.  True, some of us were led to believe that our contribution would be valued at a premium, which would in turn translate into lots of choices and result in us hopping through the corporate environment at break-neck speed.  In reality? Highly unlikely.  The smart ones among us always knew that good jobs are competitive, and supply almost always outstrip demand, especially at the bottom rung. But the media kept up the propaganda – to what end, I don’t know.  Every once in a while, articles like this appear.

Second, the timing is totally off.  Because of economic realities, many boomers simply can’t afford to retire.  More and more Gen Yers find themselves in a much more competitive environment than they were led to believe.  Now everybody is learning to make do with less and to compromise.  Exactly who is out pandering to those misunderstood geniuses, I’m not sure.

The somewhat hilarious prescriptions thrown around by the Fortune writer, and the kick my blogger friend got out of it, reminds me of a book I heard about recently.  In this book, the authors address the various social and consumerist constructions of the Gen Y generation.  I took some notes, here’s a broad overview of the ideas.

School: the obsession with feeling good at all cost

According to the book, the ME culture evolved over several decades, but found its decisive start within the school system.  The baby boomer generation struck out, rejected authority and tried to find its own path.  In their children, they instituted and obsessed over instilling self-esteem.  Subsequently, various forms of formal, or informal self-esteem programs were introduced in school.  They generally aim to make children feel good about themselves at all times and at all cost, with messages like: you are special, you are unique, you are fine just the way you are.

This relentless focus on the self led to some friction as children of those baby-boomers moved through the school system.  In one instance, red pen were deemed too harsh a colour to mark mistakes, so lavender was used instead.  Participation trophies in sports were introduced.

Over time, various institutions have had to deal with this cohort and adjust to its various demands.  In universities, some professors are now faced with complaints when handing out marks: some children and their parents simply would not accept bad ones. In this case, education is viewed as a business transaction, and entitlement rears its ugly head: students are customers of a product, and universities are there to provide it.  Therefore, they feel entitled to walk away with a degree, and a degree with hounours at that.

The road to hell is often paved with good intentions.  Child psychologists now recognize that instead of instilling self-confidence and self-esteem in children, this generational focus on feeling good has created quite the problematic outcome.  The languages and tools used throughout the school system has created an environment where competition is eliminated or downplayed, criticisms are removed when deemed too harsh, children are protected from failures, and as a rule, any kind of output – meaningful or not, is lavished with praise.  In hindsight, this created us: a generation hooked on constant validation and affirmation, perhaps with an unrealistic sense of our own strengths and shortcomings.

The extent to whether the above analysis is in fact accurate, is questionable.  The teachers and lecturers I encountered during my school years were for the most part, fair, constructive, and honest.  But I have noticed the emergence in a brand of bland, neutral and non-critical teachers into the classroom. With various changes taking place in the education system, and more teachers seeing themselves not as teachers but facilitators, what can we expect from the next generation?

The market feeds the beast: unique, customized, and controlled by you

Marketing shifted its focus when it comes to psychological selling.  In the past, the advertising world used to sell based on aspirations.   The marketing message then was: you are not good enough unless you buy our products.  Since nobody will ever be “good enough”, one is left to buy in perpetuity.

That message lost its lustre a while ago.  The message that sells now is something quite different.  Marketers tap into our sense of entailment , our vanity, our need to feel good, and our need for “self-expression” and self-validation through the idea of: you are important, you are unique, you are great the way you are. Now all you need is a product that we have to express your uniqueness.

If we think of some of the most successful products and services to emerge in the past decade, what comes to mind? Facebook, Youtube, IPod, Starbucks.  What do they have in common?  They all capture our need to exert and broadcast our presence, our importance, and our uniqueness to the world.

The trend that pander to the idea of self-expression and self-importance developed when the current Gen Yers were still in their tweens – the term has only been in existence for under two decades.  It was back then marketers first tasted the success of marketing to kids that had their own brand of shampoo.  Since then, that market had been segmented and targeted as one that has the power to make or break products.  I know a little about that.  I still remember the Tomagochi craze and the hand I had played in that hype with my baby alien.

Since then, our generation had not been without this constant bombardment of “uniqueness” marketing.  Marketers are also astute to introduce a sense of “control” back to the consumers: you know better than us, so tell us how and what you want.  Starbucks sells to that – customized coffee experience; burger and sandwich places want to sell you “your” burger or sandwich; cultish spiritual books sell on that – The Secret is to conform the world to your divine force; new condos targeting young urban yuppies – customize your living space by checking a few boxes.

Of course, the true irony of the situation is: the more we buy into the message of customization, the more we are essentially the same.  No matter what colour of IPod we choose, how obscure our coffee order is, or what kind of boxes we tick off when it comes to picking our condo tile or flooring colours, we are buying into the same message of uniqueness.

Arguably one of the most consistently powerful and seductive marketing pitch of our time is one that centres around the idea of: you deserve it.  The L’Oreal commercial and Oprah alike appeal to their audiences this way.  There’s nothing wrong with leading the best life that we can have.  But after years of the same self-congratulatory refrain, we have internalized the idea that luxury is for the masses and not only the rich.  In doing so, we have become accustomed to living the life we want, or “deserve”, rather than the life we can afford.  That sense of entitlement has us hooked on swiping those credit cards.  In one way or another, those self-affirmation and feel-good principles seeded during our school years, carefully nurtured by teachers, parents and marketers alike, came to fruition.

Now, the workplace

The problem gets a little more interesting when my generation enters the workforce.  The old guards are not used to tell us how valuable we are, or hold our hands for constant validation or feedback, or have the patience to listen to our unidirectional broadcast.

All the arguments given above is predicated on the idea that we are indeed a cohort, and this kind of attitude is prevalent in our generation.  In many cases, family influences can trump socialization.  Even so, I have to say that whether I like it or not, my generation probably embodies more Me-ness than generations past.  Whether these are attributable to our age and brashness, or some wider social forces, I cannot be certain.

But the ego-massaging activities the marketing community readily offers is beginning to seem more cynical than clever to me.  If they are indeed fostering a generation that is both insecure and vain, unable to cope with failure and assess ourselves critically and realistically, then perhaps we are better off without them.

Four Reasons I’m Bullish on Canada

A while ago, I looked at some of the worst-hit countries from the global financial storm, and concluded that on a scale of bad to deplorable, the US hardly the worst off. No crystal ball can readily foretell which regions will emerge from the crisis unscathed, but I am bullish on Canada in the medium to long term. Here’s why.

Sounds banks, no bailouts

Some say it was the far-sightedness, wisdom and conservatism that prevented the Canadian banks from participating in the madness that was the sub-prime securitization in the US. Many European banks were not so lucky. Financial institutions from Ireland, England, Iceland, to Belgium and Germany bit off more than they could chew from the “financial innovation” engineered by geeky American capitalists.

In actual fact, it was more likely that the one should credit the particularly Canadian combination of inertia, combined with a dose of cynicism and natural repulsion reserved for those overwhelmingly dominant American business machines, for saving taxpayers from burdens now haunting citizens the world over.

In 2009, the World Economic Forum announced that Canada has the soundest banking system in the world. No small feat, given both the US and many of Europe’s finest had put out their hands to respective governments for help. More embarrassingly, IMF bail-outs and their subsequent belt-tightening policies – previously a last-resort set up to help the undisciplined and “underdeveloped” countries of the world, are forced-fed to some that basked in prosperity only a year ago.

Still sustainable health care, and education system

Rosy picture aside, Canada is hardly immune from the global downturn. In 2008, even perennial winners and long-time economic powerhouses – such as Ontario and Alberta, reported deficits. In a bittersweet historical moment, Ontario got its first ever federal equalization payment this month. Bitter, because the check is usually reserved for Canada’s poorest (have-not) provinces. Sweet, because, well, Ontario cannot complain from never getting anything out of the federal government again.

But that one dark blotch aside, the fabrics that make up the social welfare system of Canada faces no immediate threat. The health care system is still universal and free, save for small and income-tested fees in a few provinces, topping out at a few hundred dollars a year. This is very small compared to what most of the world pays, even the European ones.

As an aside, in the Netherlands, where I am residing now, health insurance is universal and government mandated, but NOT picked up by one’s employer. Nor do employers provide generous dental and other health-related benefits enjoyed by even the most entry-level positions in Canada. An average person pays over 1000 euros a year (yes, still laughable compared to what Americans shell out) for a basic package. More often than not, visits to specialists incur fees that require co-payments. Perversely, I think this kind of system encourages entrepreneurship, since the upside of work is much less attractive without the peripheral benefits.

But back to Canada. Last time I checked, good education is still available at relatively affordable rates compared to most private institutions across the border. Subsidized by taxpayers, Canada’s higher education has yet to grow into the madness that is American tuition fees. Unless one is wealthy or smart, then short of robbing a bank, you are sure to graduate with a mountain of debts. In Canada, by exacting a moderate financial commitment from the students (the average hovers around $5,000 CND a year, excluding books, equipment and living expenses), the government and the public demand reasonable academic and financial discipline. This is a justified and balanced approach. Otherwise, you end up with the western European scenario, where graduating from a bachelor’s degree within its mandated four years is more often an exception rather than the rule, where students (I use that term loosely) still wander around campus in their late 20s, oblivious to the ridiculousness of dragging their studies on for 6 to 10 years.

Got what you need – commodities, agriculture

Like many export-oriented economies, prosperity in Canada depends on the goodwill and continued demand of its products from abroad. For the last couple of decades, the economy has grown increasingly two-pronged.

A common Canadian complaint is the mixed blessing of living next to the world’s most powerful nation, where its mood and appetite need to be carefully monitored and catered to. The Canadian manufacturing industries (particularly those in Ontario and Quebec), its film industry (much of Hollywood production is made in Canada, creating thousands of jobs and millions of dollars for the BC and Ontario economies), and the tourism industry, all depend a good chunk of their yearly revenue on the backs of Americans. In some instances, Canadian businesses closely parallel their American counterpart, none more obvious than the auto industry. America has been, and perhaps will stay the number one destination for Canada’s exports for the near future.

On the other hand, what Canada has stored underground, and what Canada is able to grow, has piqued interest the world over. The three prairie provinces that stretch through much of Canada: Manitoba, Saskatchewan, and Alberta, are fertile farmlands. When the prices of agriculture recover, and they inevitably will, those traditionally sleepy provinces may emerge as the real winners in the coming decades. In other parts of the country, forestry products and base metals abound. As China and India continue their industrialization process, aluminum, copper, gold, iron ore, nickel, uranium will fetch a pretty price yet.

Last but not least, there are the “black gold” of Albertan oil sands. Granted, large-scale operations have all but halted due to the precipitous drop in crude price. But most economists concur that the current price level is 1) temporary, and 2) harmful for long-term oil affordability. In fact, the retrenchment of large-scale drilling and exploration projects lead to an untimely delay to secure future resources. When demand roars back, we’ll get smacked around at the gas pump even worse than the last time.

All this reminds me of two quick stories from my time in Calgary. The first one is the widespread belief that “this time around is different”. Not really, it’s never that different. Calgary went through an oil boom in the 70s, followed by two decades of sluggish growth. When oil price resumed its rise in mid-2000s, people cited the insatiable demands of China’s factories and American consumers as proof that oil had nowhere to go but up and up. This was also the rough line of reasoning that supported the astronomical rise of property prices and the subsequent building boom. At one point in 2007, I could see over half a dozen building cranes from my fifth floor balcony in downtown Calgary. The three corners adjacent to my building were prepared for the erection of luxury condos or office building. The city was untouchable. Things have changed since then. Now all’s quiet on the construction and oil rig front: out of province workers left en-mass beginning of the year. Some never came back after Christmas.

The second one makes me more optimistic on the long-term prospects of the oil sands. Also around 2007, a large Chinese delegation visited the city in an attempt to either buy up a large and well-known oil company or to negotiate some kind of long-term delivery deal. Word on the street: as soon as the Chinese left, the Homeland Security Department landed by helicopter. Escorted by secret service, the top dogs marched straight up the executive suite of the unnamed company, and wagged their fingers. The deal never went through.

Obama can say what he likes about green technology and frowns upon the environmental degradation caused by working with the oil sands. But when push comes to shove, he’ll buy from friends first.  In the least, he won’t let it go to the competition.

Geographic and demographic sustainability

Did you know that in certain parts of Asia (Japan, Hong Kong), the subway employs “pushers”? Those guys make sure as many people as possible get squeezed into subway cars during rush hours. Not the prettiest picture, is it?

Space affects us in more ways than the obvious. Those living in crowded urban spaces have to put up with a level of stress and claustrophobia (or intimacy, take your pick) not known to the suburban dwellers. Unless they commute, that is. In places that embrace a more collectivist culture and can live with some loss of personal space, geographic limitations may in fact facilitate the cultural norm.  Italy, anyone?

But for most parts of the world, individualism is valued at a high cost. For example, property prices and living expenses are consistently the highest in places where land is limited. Japan and parts of Western Europe are in perilous positions. Their limited geography has adverse impacts on everything from their trade dependencies to their immigration policies.

In those parts of the world, demography is not on their side. Their rapidly aging populations run concurrent to declining birth rates, making the sustainability of current taxation and social welfare systems highly questionable. Yet geography (partly) limits immigration. In already crowded places like Japan and the Netherlands, where do you put these new people?

Then I remember that there’s always Canada. With plenty of land, self-sufficient resources, a working immigration policy that ensures the sustainability of social programs and cushions against the damaging effect of an aging population, the future is pretty bright.

Globalization and the Future of Education

Armed with technology, globalization changed the way of life for many of us in a shocking span of time. The way we work, live, communicate, learn, has been completely transformed. Learning has undoubted changed too. But how will this change impact the way we value education and knowledge-based work going forward?

In the past few years, more and more educational materials have moved off of campus firewalls, and onto the web for all to consume. We are talking about entire course curriculum, reading list, lecture notes and videos. When the accessibility of information is no longer constrained, and the cost for knowledge acquisition is inconsequential, what does that mean for the education of knowledge workers?

Horizontal playing field

A horizontal playing field means that students and workers in less privileged countries or regions have a much more equal starting point, where the only determinants of success is motivation and hard work.

Right now, the up-and-coming parts of the world are still performing relatively mundane and technical tasks outsourced from the west. But let’s not forget how much of a leap that had been already. Computer engineers two decades ago were a rare breed and commanded high salaries. Nowadays, programmers with little business experiences are a dime a dozen. And they compete directly with well-educated coders from India, Russia, and China.

But as the next generation of customer service operators and programmers become exposed to the vast sea of free information readily available on the net, what’s preventing them from “pricing options, or calculating weighted average cost of capital, or mechanically ploughing through ‘five forces’ analysis”? It seems to me that any activities that require only technical proficiency will become low value-added tasks going forward, and can be contracted out.

Value deflation in certain areas of knowledge-based work

In the coming decades, information will become more free and more readily available than ever before. As a result, more than one category of jobs will be made obsolete, or attain the endangered status in their current forms. It’s not only the low level tasks that get outsourced anymore.

Cost for low value-added knowledge and execution of tasks keep falling, due to both a falling cost of information, and the increased competition from a more level playing ground. Power no longer rests in the hands of those with knowledge, not when knowledge has become such a public good. But it rests in the hands of those that know how to manipulate and utilize knowledge in the most value-adding manner.

The newspaper industry’s present-time struggles are partly due to inflexible and inadequate responses to the lowered entry barrier (on the supply side) and lowered valuation of its current product offerings (on the demand side). Also afflicted? Future of higher education. This is succinctly illustrated in the lament on the present course of training MBAs.

What will we sell them when the algorithmic skills we are now teaching will be available at zero marginal cost? What will we be selecting for when the preeminent source of value will be the skills involved in defining values rather than those involved in calculating the best means to achieve accepted values?

And just exactly what kind of thinkers will flourish in this new economy? You know, the ones that will lead the transition from the Age of Information to the Age of Interpretation?

These thinkers will be big- and nimble-minded enough to reason coherently about radically different cultural, metaphysical, technical, disciplinary, linguistic, and methodological perspectives; and tough-minded enough to take constructive, positive action in the face of radical inconsistency and incongruity among perspectives; to stare the future in the eyes even after realizing truth is not equivalent to certainty—and to think about the world while thinking about thinking about the world at the same time, having realized that all thoughts are fallible, but thinking itself is priceless.

Critical thinking and morality in education

I had little interest in the field of education, short of writing about the inadequacies of my own education. Then I came across Shafeen Charnia’s blog, where the shortcomings of our education systems are placed in context with much of corporate and social misdeeds.

This financial crisis has exposed, some says over-exposed (because it always has, and always will exist) corporate mis-behaviour. Executives have been called anything from greedy to immoral. Suddenly, morality found itself a central theme in the discussion of education reforms.

As a precursor to aspired characteristics such as integrity and accountability, morality is no doubt a good starting place for the future leaders and participants of civil societies. Yet one psychologist so far sees flaw in the logic, and pointed out that “true moral education encourages critical thinking and cannot be assumed to promote virtuous behavior any more than education about economics can be assumed to promote thrift.”

Many would argue that moral education should be left in the hands of the parents. But when parents fail, should the system pick up the slack? And just exactly how do we promote morality through the education system? And more importantly, should the promotion of such qualities be a part of its mandate? With a system that in some instances, still struggles to impress upon its students the basic skills of life, is the promotion of moral behaviour too much to ask?

Globalization and the right responses in education reform

American children are by no mean masters of rote learning. And nor should they be. But when it comes to talks of education reform, an overwhelming amount of focus is given to better GPAs and higher SAT scores. The end goal? The right college or university.

This is all good and well when the dissemination of knowledge is protected and monopolized by educational institutions. Those were the times when self-learning was a much more laborious and arduous journey, a journey that requires mental fortitudes not possessed by most. Going forward, perhaps outcomes will one day trump processes. Equality of information access ensures everyone gets to play. In the near future, perhaps other measures of learnedness can be created to replace the diploma-driven educational market.

Some would argue that the west cannot compete with children from countries in East Asia, where children possess higher technical skills. So let them be, and accept the challenge. Focus on molding our children into more creative, conscientious, culturally adaptable and well-rounded beings. While those societies are producing the next batch of knowledge workers, perhaps we want to charge forward and nurture the above-mentioned information “interpreters”.

Don Coxe on Sunspots, Demographics, and Your Investments

Don Coxe is an investment strategist. But unlike most investment strategists that flaunt degrees in mathematics or quantum physics, Coxe is a curious historian. At 73, his curiosity has yet to wane, and his quarterly newsletter Basic Points has followed him from his old employer BMO to his new investment advisory business.

He makes investment a fun pursuit, not only of numbers, but of knowledge. In his own word, he studies history to “compare popular views about economics, finance, geopolitics with evidence of what has happened in various eras.” And making money is merely a financially rewarding byproduct of that pursuit.

In his March edition of Basic Points, Coxe drew my attention to a few points rarely discussed by investment advisors and analysts in the mainstream. Let’s see what they are.

Lack of sunspot activities and possible crop failures

Most of us are aware that the earth has been warming up in the last couple of centuries. The rise of environmentalism makes sure of that, and Gore’s Inconvenient Truth enforces that belief. As humans, we are no doubt responsible for the unprecedented level of pollution and degradation to our natural habitats. But the feverish pitch of the environmentalists has become dogmatic in recent years, and any dissent over either methodology or the validity of data that supports their belief is deemed treasonous.

As much as environmental awareness is a more than commendable cause, the sensationalism and the selectivity over the type of news and data that make it to the front page has been astounding. Bloopers are swept into the background, and wildly pessimistic and sensationalistic pieces inject more fear and exaggerated claims into mainstream conversations. We are all for a better living environment, but no end justifies the means if facts and truths are misrepresented in the process. The public will turn their backs on the cause, no matter how noble it may be.

But back to the issue on hand for now. With all of that hoopla, you would think that a cooling earth would bring a sigh of relief to the world. But no. According to climatologists, the patterns of the sunspots have been: ten years of sunspot activity, a year of rest, and then a new cycle. The last cycle ended in 2006, and there was little activity in 2007. The troubling thing is that they didn’t appear in 2008, or in 2009 so far. This means that we are experiencing the longest sunspot drought in more than two centuries. Scientists are expecting the sun to resume maximum activity anytime now. But then again, they have been holding their breath with little avail for the past year.

So what does this mean for investors? Coxe thinks if sunspot inactivity continues, we are headed for another year of crop failures and agricultural disaster. He suggests we “watch the websites that update the sunspot story. If the spots don’t return by mid-June, then there might well be great rallies in the grains. Buy the fertilizer, seed and farm equipment stocks.”

And as the unapologetic historian, he leaves us with a requisite tale.

Scotland suffered six straight crop failures during the 1690s because of late Springs and early frosts. Some historians believe this was the major reason why the Scots gave up their dreams of independence and joined England. There were skating parties on the Thames each winter. Polar ice caps expanded dramatically.

Cooling demographics

I have written before on the importance of demographics and the role it played in the ongoing US property bubble. Demographics also played a part in preventing the much anticipated Japanese economic recovery from taking place in the last decade, as well as stopping the Europeans short from writing a large stimulus check.

Don Coxe’s analysis further affirms my belief that many OECD countries face similar challenges to Japan in the coming years. In his opinion, rising standard of living and property prices took place on the back of a population boom. When this came to a sudden halt in the 70s, residential real estate is a reliable long-term asset class no more.

When the overwhelming majority of families in the OECD collectively and simultaneously chose to cease reproducing themselves in the early 1970s, and stuck to that resolution, they repealed the most basic of long-term investment concepts. Demographers and social scientists can debate the reasons behind this momentous behaviour shift – or even whether it is a good thing. We merely note the obvious, that financial prognosticators have no: people changed 35 years ago – apparently permanently – and the world changed – apparently permanently.

What began during the early 1970s was an OECD-wide collapse in the fertility rate from roughly 2.4-2.5 babies per female to 1.4 babies. Since 2.1 is required to maintain population levels, the three decades of fertility below 1.6 have, slowly but inexorably, transformed population profiles – and the housing markets.

He also goes on to spell out the corruption that went on at Fannie and Freddie that could not have existed without full backing and co-operation of the government, particularly the Democrats. Bottom line? Political leadership is as much to blame as the corporate fat cats they have been hanging out to dry the past year.

The government’s relentless pursuit of property ownership expansion ignored the basic supply and demand equation in the market place. None of the reckless lenders in the housing market noticed the reason for debasing lending criteria to expand the supply of qualified homebuyers was the dwindling number of qualified homebuyers.

While the Congress was busy enabling lenders to sign unaffordable mortgages over to poor Latinos and African-Americans, it heavy-handedly restricted the supply of working-visas and green cards to more productive, better-educated, willing and able receivers of properties. The result? The people that could have purchased and sustained a rising housing market were denied access, where those that could not afford to service the mortgages were burdened with incomprehensibly termed debts.

Inequality is Shrinking, Does Anyone Care?

wealth has traditionally waxed and waned along with the economy. The brutal wealth destruction that took place in the last six months means the rich has suffered a larger drop in their wealth compared to the rest of society, both relatively and absolutely.

Since most of the wealthy hold a disproportionately large share of stocks (the wealthiest 1% held more than half of public traded stocks in 2004), it’s no surprise that the current decline in the stock market has lead to a large decline in the wealth of the rich. Even middle-class families owning less than $10,000 in stocks (which is more than 65% of the group) are much less affected by fallen prices. Collapsing assets are also affecting the rich much more, since lower income classes own little, if any.

Perhaps as a way of placating populist anger against a slew of corporate mis-behaviours that’s blamed on the wealthy and powerful during this downturn; numerous news outlets have reported signs of falling wealth gap between the rich and poor. It’s not a bad tranquilizer: the rich are getting poorer at a more rapid rate.

Gimme the numbers

During the last three decades, the dizzying speed of wealth accumulation had led to rising wealth inequality in most societies. Developing countries and previously communist societies in particularly, has seen the largest income disparity. Russia, China, India, and Brazil now top the charts. But even a society as homogenous and egalitarian as Japan has seen a shrinking middle class and an income gap that has risen twice as fast as most other OECD countries.

In the US, the statistics are no less glaring. Numbers show that in 1979, the top 0.1% Americans earned 20 times the income of the bottom 90%. This number climbed to 77 times in 2006. The tide is now turning. During the last three downturns, the share of income held by the richest 1% of Americans obligingly declined. Economists are now predicting that in the next year or two, the share of income by the richest American will fall from an estimated 23% or 24% in 2007, to 18% to 19%.

Different point of contention

Many have argued the rising public anger is over the widening wage gap over the past few years. This is slightly off-base. A study completed with the participation of four think tanks showed that Americans are not so much looking to shrink the wealth gap as they are looking to improve their own economic standing. In other words, this study tells us that the majority of Americans are more concerned over improving their economic mobility compared with improving income inequality.

“We are by definition a country of strivers, people who look ahead, who think that ambition, hard work and individual drive is what defines economic success as opposed to other factors like the state of the economy,” said John Morton, economic policy director for Pew.

“People are saying, ‘We don’t begrudge the wealthy for what they’ve gotten. What we care about is that everyone has an equal chance of making it, and government policy ought to focus on making sure people get to the same starting line, as opposed to tearing down the wealthy.’”

Knowing this, it’s easy to see how much of the discussion over economic disparity and income inequality result in little agreement. During the 08 election, Obama and McCain spat over just exactly how economic progress is achieved. Obama attacked McCain’s trickle-down policy as a continuation of the Bush era, which the poor and lower income families benefitted little from. McCain argued that the widening in wealth gap is the inevitable result of income growth, so ideas on tax increases and more social spending are fruitless in changing the pattern. End of the day, they are debating on two different problems, and it’s hard to declare a winner when the issue at hand differs.

Same playing field, different rules

Some point to the election of Obama as a result in part of mass dissatisfaction of the widening wealth gap. The range of grievances is wide and varied, some are justified and others offspring of populist myths. One vocal objection points to the direction of the corporate fat cats. Already dismayed by their sickening compensation packages and golden parachutes, the public are now confronted with a heads-I-win-tails-you-lose situation.

To the public, greedy financiers have gambled like drunken sailors during the run-up to the credit-crunch. In the process of doing so, they put up money they didn’t have as collateral, and lost it all. The government has since then stepped in with public money to save the day. Through implicit or explicit policies, bailouts have been given out to those supposed champions of capitalism.

The public doesn’t want to hear about systematic risks or the detrimental effects of a frozen credit system (unless they try to get their houses re-mortgage or new car financing). What they see is a government becoming more beholden and more tightly intertwined with the too-big-to-fail banking industry, and the increasing threat this poses to the interests of the public. What they see is hypocrisy at play. While the majority of Americans accept the bargain that a meritocratic, sink-or-swim, and capitalist society means little cushion in economic downturns like this, they see a different set of rules applied to these failed executives. The public is enraged over the selective application of “socialism”.

To be more like you

No matter how pessimistic your outlook might be for the near future, there’s little doubt that sooner or later, the economy will recover. And along with that, so will stock and asset prices – domains of the rich! However indignant it may be over the state of affairs today, when the bullish market returns, the middle class will feel little compunction by throwing their hats in the ring.

Thorstein Veblen coined the term “conspicuous consumption” over a hundred years ago as part of his commentary on the American economy. In his view, human instincts of “emulation, predation, workmanship, parental bent, and idle curiosity” drive the process of ongoing social, as well as economic evolution.

He’s not wrong. One way or another, we are all complicit in this consumerist debacle. And we are spreading it not only to the developing world – Russia, India, China, and Brazil are all developing based on the American model, we are also spreading it the American poor. We should not forget that the subprime crisis originated in the Congress, where the “home ownership for low-income families and minorities” initiative was a social policy push.

The road to hell is paved with good intentions. Not realizing the dangerous implications of their do-goodness, and driven by their own middle-class sensitivities, the Democrats dangled a piece of unattainable and absurdly expensive forbidden fruit named “Emulation” in front of poor families. Clamouring for the appearance of a better life, they dutifully bit. Without the politicians, banks would’ve had little sub-prime mortgages to package and sell as securities.

End of the day, we have to realize that unlike Europe, egalitarianism was never part of the social contract in America. No matter how vocal the populist chant might sound, all will be quiet on the western front again once prosperity returns. American’s biggest fear is any kind of obstruction that blocks their climb up the socio-economic ladder. Their current angst over the issue of equality is more about opportunity, and less about outcome.

End of the day, it’s not socialism Americans want. It’s a better working capitalism.

My Brief Foray into Tbilisi, Georgia

What is risk, and how do we perceive risk? When we see someone hanging off a glacier, doing back flips off of a ski slope, or rope walking between skyscrapers, do we assume these people have a certain born propensity for risk-taking?

Over the years, I have found that one’s tolerance for risky ventures tends to change over time. The range of activities that we spearhead may be different, and the enthusiasm by which we embrace changes and manage perceived risks may also be different. But whether we realize it or not, most of us continue to pursue ever so challenging situations. Our desire for the adrenaline rush or our innate curiosity that risky challenges provide is not unlike our appetite, it is stretchable.  I have changed jobs, moved to new cities and countries, skydived, went to places that in retrospect, I probably shouldn’t have.  None of them are connected, but all of them, in one way or another, have pushed me out of my comfort zone.

Most of them are also less than thrilling, so I won’t bore you.  Instead, I’ll talk about the most off-the-cuff thing I had ever done, which was crossing into Georgia from Turkey on a whim. I’m guessing, and hoping, that most of you reading this hasn’t been there yet,  so here’s my story.  I have to warn you ahead of time.  My total time inside the country was less than 48 hours, thus the title “brief”. What happened?

It was the winter of 2007 and I was backpacking through Turkey. I could have been anywhere but I picked Turkey. Because it seemed a tougher choice than, say, Austria. Then I got to Turkey and realized many parts of touristy Istanbul were even more modern than where I had come from (Calgary).

For the most part, people spoke English, long-distance buses were more comfortable than Greyhounds, and the cost of laundry was nothing but highway robbery in broad daylight. Instead of hitting all the must-sees, I skipped the southern beaches and western Roman ruins, bypassed Ankara and headed for the rocky interior of Cappadocia.

I had no plans, and after an almost week-long stay going through underground caves, taking leisurely hikes through various cute-name canyons (rose, love, dove), squinting at strange chimney rock formations, and watching Turkish military launch angry missiles into the Kurdish areas on TV, I bought an overnight bus ticket, heading east. Trabzon was supposed to be a beautiful town, one built beside the Black Sea, in an area that used to be Christian Armenia. I wish I could say my choice was inspired by some kind of historical curiosity or cultural appreciation. It wasn’t. I just wanted to get away from the tourist crowds.

I got my wish. Other than a hippie Scottish girl and me looking for some je ne sais quoi adventure, everyone on the overnight bus had more legitimate reasons for going to Trabzon. She said she was crossing into Georgia after arrival in Trabzon: because it was cheap and there’s no visa required for crossing the border. My interest was piqued.

What is it about traveling, particularly backpacking, that’s been mystified over the years? People think being on the road will give you some kind of tranquility and peace. That, in turn, will give you the time and space to figure out your life purpose, and you will suddenly be in possession of some sort of guru-like wisdom. That is seriously misleading. It doesn’t happen.

Backpacking is exhausting. Every minute of your waking hours is spent on high alert.  In Homeland Security speak, that would be like, orange or red. Your brains are on constant over-drive, processing the new and constantly changing landscape and people. Because of your unfamiliarity with the environment, nothing is automated. Instead, every person and situation needs to be assessed and scrutinized. And if you are a woman, be prepared to deal with some form of sexual harassment, albeit most of it is harmless.

The idea that geographical isolation gives you some kind of perspective, insight or comfort of oneness, is baloney. Backpacking means days on end of sleeping in hostels that may or may not be clean or quiet. It means sleeping on over-night busses with seats that are terrible for your back and little air circulation that makes your throat get all dry and congested. It means choosing between your wallet and your tummy every time you decide to go for a meal. It means fending off unscrupulous thieves, hawkers of all colours and stripes, and develop a level of guardedness that may pass for paranoia back home. It means more time spent walking on your feet, no small feat even for gym-rats. It means doing all these things over and over again while you may not have showered for days, are sleep deprived and have your stomach in all kind of knots. This kind of physical toll on your body is in no way conducive to inspiring sharp and witty insights upstairs.

As for the idea that when we travel, our usual flawed selves are somehow transformed into someone wiser, more generous, more open-minded and more content: Haha, and Ha. If anything, extensive traveling reveals the worst in us. All our fears and insecurities become amplified. That sometimes even cripple our good senses. I found this out in the former Soviet-bloc nation, Georgia.

Our little van arrived in Tbilisi, the capital of Georgia in early morning after an overnight ride through eastern Turkey. Twelve hours before that, a dozen of us (us two tourists, others mostly Georgians) crammed into a van that would not pass road safety standards in more developed countries. It’s old and dirty, and designed to transport only half of us. No matter, most of the luggage took their rightful places on top of the van.  A number of men jumped up and down the van to tie them down with a dizzying number of ropes.

Sleep was not an option then. Even for someone who’s barely 5’3, I could not stretch my legs. More plastic bags and cartons filled up spaces below the seats. The best I could do was to fold up my legs against the seat in front of me, and lean against the window for some respite against an onset of claustrophobia. Staring into dark roads with the occasional sights of water, I didn’t think much at all.

We limped our way to the Turkey-Georgia border around midnight. Everyone got off the bus, along with every piece of luggage. We shuffled around in the November chill, stomping our feet and rubbing our hands, waiting for people from buses ahead of us to go through. The custom stations themselves were no bigger than toll-road booths. I can’t remember much from it. Except that I was tired, cold, and wanted to get back into the bus, however cramped and dirty it was. An hour later, my backpack was perfunctorily checked with a hasty ruffle by a caffeinated guard. As we walked in a filed line up to the station booth, a female custom officer dutifully scanned my passport and rewarded my presence with a dud of a stamp. Eventually, everyone cleared customs and we were on our way. I have crossed the American and EU borders on busses, and this was no more or less irksome than the rest of them.

I later learned that unlike its many neighbours, Georgia desperately wanted in with the EU, NATO, and OSCE to protect it from the big bad Russia next door. The ruling party headed by Mikhail Saakashvili was the first democratically elected government in Georgia. After the Rose Revolution, Saakashvili had grappled with typical economic problems after the country’s emergence from decades of communist rule. At the same time, he made a point of distancing Georgia from Russian influence, now ever so threatening. Russia can now switch off Georgia’s gas supply at a whim, and literally freeze the cold Caucasian state into surrender. To that end, Georgia welcomed outside, particularly western visitors, with a no-visa rule. I obliged.

A week before I got on the rickety bus, destination Tbilisi, the capital was in official lock-down. There had been an attempted coup, newscasts were banned for 15 days, and riot police apparently shot anti-government demonstrators with rubber bullets. It was the first time in decades that Georgia made the international headline. The Canadian Ministry of Foreign Affairs issued a no-travel warning for the region. I had to go.

Back on the bus, onward and eastward, the van would slow down to an occasional crawl, and the driver would skillfully maneuver the battered vehicle through stretches of unpaved road. Then inevitably, the landmine of potholes would get the better of us. The vehicle, cement, and dirt would grind together in such a way to emit some inscrutable noise that would force the driver to slam on the brakes, jump off, and peer into the dark night for any evidence of lost luggage.

Why Europe Refuses to Bend and Why Rest of the World Should Listen

American economic intelligentsia has been hammering the European governments for weeks on their “weak” economic stimulus proposals. Time and time again, they are told that the current spending programs are not enough to revive their stagnant and contracting economies. So far, they are barking up a deaf tree. Lead by Germany’s impassive Angela Merkel, Europe has so far given America the hand.

Why has Europe so stubbornly resisted America’s call for more stimuli? Furthermore, why the apparent reversal of roles? The American government has played the part of a heavy interventionist: it stepped in to bailout banks and insurance companies left right and centre, fired Wagoner, signed away billions in monetary stimulus. And the usually vocal and heavy-handed socialist Europe has thus far tightened its purse-strings?

The question of unity

The EU and its peripheral nations are hit by the crisis in different ways. Some are forced to deal with their domestic property bubbles (Spain, UK), some (like Germany) face a collapse in their export economy, most have rushed to guarantee their banking systems (UK, France, Spain, Belgium, and pretty much everyone else), and others (Austria) must face their bad Eastern European/Balkans investments.

Long story short, these countries are too busy assessing its domestic impact from the global fallout, to agree on any unified strategy. It’s not hard to see that, short of a magic pill, no tidy monetary or fiscal policies can cure such a wide array of ailments. We should also remember that the ECB’s (European Central Bank) only central mandate is to maintain price stability (i.e. low inflation), where the Federal Reserve’s mandates are much more varied and powerful.

Automatic stabilizers

Europeans like to talk about their automatic stabilizers. It’s an insurance that cushions the economy against the kind of severe blows to the head that everyone’s taking now. The logic goes that in hard times with higher unemployment, the government will automatically open its coffer to provide the kind of social welfare that the American version of stimulus might do anyway.

There are arguments that this stimulus is 1) not enough, and 2) more expensive than the direct monetary stimulus the American, Japanese and Chinese propose. That sounds pretty weak. Those are also societies where welfares benefits are limited, thus creating a situation where consumers are much more reliant and sensitive to employment situations to sustain their standard of living.

To me, it would seem that any kind of stimulus would have a much better chance of success if it is introduced in a manner consistent with the socio-economic configurations already in place. Without any solid evidence that confirms our current commitment to the “multiplier effect”, or concrete proof that demonstrates severe deficiencies of automatic stabilizers, do we really want to bet everything on one strategy?

Aversion to debt

Membership in the EU comes with certain covenants that limit debts within a certain percentage point compared to the overall GDP. Countries like Italy, Greece and Belgium hold around 100% of debt-to-GDP, certainly higher than the recommended 60% band, whereas countries such as France and Germany have a ratio around the 40-50% range.

In the last six months, the US has run up over $1 trillion in public debt at around 7% of its GDP. Europe looks at this with horror as America’s debt profile start approaching a trajectory that may very well mirror one of its own undisciplined members. To ask leaders in the EU to engage in similar monetary expansion is impractical, because it would set terrible examples for aspiring and current EU members.

Burdened memories

It’s not so much that Europeans, particularly the Germans, were so traumatized by their experience with the Weimar republic that they refuse to even entertain the idea of monetary expansion. Well, to a certain degree, it is.

It is hard to dispel the image of wheeling money in barrows that has been permanently lodged in collective German consciousness, just as it is hard to shake the picture of long lines of unemployed Americans during the Great Depression. Both scenarios have been invoked, under different contexts, during the past few months. One thing is apparent, the American fear of unemployment perhaps rivals in intensity with the German adversity of inflation. Knowing this, is it any surprise that the road to salvation for the Americans (monetary spending and a respite in employment numbers), is the road to “hell” for some Europeans?

Demographics

Defending her policies, Angela Merkel cited demographics as one of the reasons behind Europe’s reluctance to run up a deficit. It made little sense to borrow and spend today, leaving a shrinking population to shoulder the burden down the road. She says:

“Over the next decade we will undergo a massive demographic change, and, therefore, borrowing is a greater burden for the future than in a country with a much more continuously growing population, as in the United States of America.”

What she says is interesting, because on top of absolving Europe from its various critics on the wisdom of its tight-belt economy decisions, it questions the sustainability and long-term implications of countries committed to monetary expansion and debt-driven stimulus programs.

The most obvious problem here is Japan. Similar to Germany, its export sector has all but collapsed. The country borrowed massively to spend its way out of the last recession, and is now committed to doing more of the same. At least in Europe, migration within the expanding EU may dilute, or at least mitigate some of the challenges of an aging Western Europe. But Japan is confronted with more immediate demographics issues: limited immigration provides no breathing room for a shrinking working population, and increasingly high costs of sustaining a rapidly aging population in a country that boasts the highest life longevity. Can Japan afford this much debt?

It also challenges the validity of the large American stimulus. With ever-more limiting immigration laws and an also-graying population, is America confident that its high(er) birthrates will backup its ability to pay back the growing debts?

Diversification, Long-Term Horizon, Buy and Hold: Still Relevant?

When it comes to investing, the general public has been steadily moving away from the old adages that called for set allocation between the (perceived) safe bonds/cash and the (supposedly) more risky stocks. Nowadays, we have all become heavy investors in the stock market, whether it’s outright ownership or group purchasing through our work-sponsored pension plans.

Last week, I talked about the importance of market timing, particularly when it comes to market entrance or exit points. When we choose to enter or exit have the largest impact on overall portfolio return, much more than the year-on-year growth, diversification, asset allocation and all the detailed balancing and fine-tuning. Today, I want to continue the thought on market timing, and address the issue of long-term riskiness of stock market investment.

We have been conditioned to believe that in the long run, the market goes up consistently. Certainly, there are occasional dips, but many of us have probably heard of the success stories achieved by market-illiterate pensioners that retired comfortably by holding steadfastly to their basket of stocks for decades. Does this much-embraced truism still ring true in face of such market carnage? In addition to my guest post at GenX, here are more thoughts on what we can learn from the market bust.

Imperfections of diversification

One of the major cornerstones of modern portfolio theories is the benefit of diversification. Most of the time it worked. This time it didn’t, at least when applied to the stock market. There are many reasons why it didn’t. But unless you’re an octogenarian and a historian with a succinct understanding of the intertwined global financial and consumer market, and foresaw the implication of mass de-leveraging and forced liquidation, and allocated a substantial portion of your portfolio in non-stock investments, you probably didn’t benefit from diversification this time around.

In fact, long-term, buy-and-hold, value investor guru Warren Buffet, had gradually shaved his 73.5% stock holding in his portfolio in 1995, to just 25% in June, 2008. Because even he didn’t believe that diversification offered him any protection when the overall market was massively over-valued.

That’s not to say that diversification doesn’t work. It does, but only to a certain degree. Slicing and dicing stocks into ever so minute classes, series and geographic reach has not offered most investors the protection they sought.

Long-term riskiness of stock returns

A new study came out just over a month ago that attempted to poke holes in current statistical methods applied in measuring volatility. Traditionally, statistics have shown that market returns over long periods have been consistent. Thus, good returns have been followed by subpar ones, and the reversion to the mean usually paints a picture that points upward in the long run.

Applying the new and unorthodox methodology, the statisticians have found that forces other than mean reversion affect long-term returns. In one instance, the researchers claim that uncertainty about market fluctuations increases with the holding period, because uncertainty is more difficult to quantify in the long-run.

As summarized by Mark Hubert, one of the best examples of uncertainty in the long run is the case of global warming. Its impact over the next year is most likely next to nothing, but should the horizon be expanded to the next few decades, possible effects may range from “negligible to catastrophic.” Applying the Bayesian statistical model, where new information is continually incorporated into the formula to update probabilities, the researchers estimated that stock market returns over a 30-year horizon is almost one and a half times more volatile than returns over a 1-year horizon.

Buy and hold

It’s time to look at whether the buy-and-hold idea applies for most people. I recently stumbled on an article by Henry Bloget that both opened my eyes, and confirmed my suspicions in the following: Market timing and the longevity of one’s investment horizon matter much more than they are given credits for. Since I can hardly put it any more eloquently than Mr Bloget, I am quoting his 2004 article. If you have some time, the entire series of articles are well worth a read.

In the financial markets, the “long term” is long. Over the past 200 years, U.S. stocks have, on average, returned approximately 10 percent a year (about 7 percent, after adjusting for inflation). For many of those 200 years, however, stocks have returned nothing—or worse. The fallow periods, moreover, have not just lasted months or years. They have lasted decades. In a 2001 Fortune article, Buffett observed that the 20th century encompassed three major bull markets in which the Dow jumped more than 11,000 points and three major stagnant markets in which the Dow lost 292 points. The three bull markets, in aggregate, lasted 44 years; the three bear markets 56 years. For more than half of the century, in other words, stock performance stank.

The most recent market cycle spanned 34 years, from 1966-2000. The bull phase, the one we all remember, lasted 18 years (1982-2000), and it took the Dow from just over 800 to just under 12,000. The bear phase—the one almost no one remembers—lasted 16 years (1966-1982—16 years!), and it took the Dow down nearly 20 percent. Lest this tempt you to rush out and buy bonds, average bond returns from 1966-1981 were worse than those on stocks (bonds can be dangerous when inflation is rising, a fact worth remembering now).

Essentially, the message here is that markets cycle swings are much longer, and sometimes, steeper, than we are led to believe. Therefore, if you pluck your money down in the stock market, be prepared for long and sometimes breathtakingly volatile returns. Ultimately, most of us do not have this kind of time horizon when it comes to our money. Many needs arise that range from getting married to having children, from buying property to dealing with unexpected health issues. And given the uncertainty of the market to move consistently upward in the medium-term, its actual liquidity is in fact much lower than commonly perceived. Therefore, the stock market might not be the appropriate default deposit for our hard-earned money.