(CRM) How to Invest in a Bipolar World, Part II

On Friday, I argued that the biggest challenge facing investors today is our “bipolar world.”

In the public sector, for instance, we have stifling regulations that cost Americans $1.8 trillion a year. That’s $14,768 per household. And we have a federal budget deficit and unfunded liabilities for entitlements amounting to $1.25 million per taxpayer.

How can anyone apprised of these facts be optimistic about the future or long-term bullish on stocks?

The short answer is because commerce trumps politics.

Two hundred years ago, 85% of the world’s population lived on the equivalent of less than a dollar a day. Today fewer than 15% do.

What is responsible for this enormous spike in material prosperity? Part of the credit goes to science and technology. But it took something more pedestrian to transform the world’s standard of living: the profit motive.

Government doesn’t provide us with food, clothing, shelter, healthcare or Teksta Robotic Puppies.

Businesses do.

It’s All About Freedom

Detractors argue that capitalism is all about selfishness, greed and exploitation. Not so. Unlike government, business is about freedom and individual choice, not coercion. If you don’t like a particular company or its policies, you don’t have to work for them, sell to them or buy from them.

Every business exists to serve people. Capitalism promises that you can have anything you want if you just provide enough other people with what they want.

Most wealthy Americans achieved their affluence not by inheritance or real estate speculation but by starting and managing a profitable business.

Most of us don’t have the time, the investment capital or the experience necessary to found and run a successful company, but we can still own a piece of one through the quintessential expression of capitalism: the stock market.

Invest for Success

With even a modest amount of money, you can accumulate a stake in many of the world’s great firms. And owning a piece of a company is a whole lot simpler than running one. You don’t have to sign personal guarantees, hire or fire employees, grapple with an avalanche of federal mandates and regulations, pay lawyers and accountants, or even show up for work.

How great is that?

In short, over the past few hundred years, our free-enterprise system has vastly improved our quality of life and raised our standard of living. That isn’t likely to change.

Today there are dozens of companies that are changing the way we work and live. Here are just a few quick examples:

  • Salesforce.com (NYSE: CRM), the enterprise cloud computing leader, is helping companies connect with customers, suppliers and employees in entirely new ways.
  • Alexion Pharmaceuticals (Nasdaq: ALXN) is developing life-transforming therapies for patients with severe and life-threatening diseases that are also ultra-rare.
  • Intuitive Surgical (Nasdaq: ISRG) provides surgical robots to help surgeons operate more precisely, make fewer mistakes, reduce recovery times and cut costs.

I’m not recommending these stocks, just mentioning a few of the many firms that are transforming our world. It’s not just Amazon (Nasdaq: AMZN), Google (Nasdaq: GOOG), Facebook (Nasdaq: FB) and Twitter (NYSE: TWTR).

The whole private sector is knocking itself out every day to bring you goods and services that are better, cheaper and longer lasting. And the whole glorious system is underpinned by the most durable of foundations: rational self-interest. Entrepreneurs, business owners and investors recognize that outsized success leads to outsized rewards.

Here Come the Politicians

Unfortunately, politicians are motivated by rational self-interest too. Although they call themselves “public servants,” what they really enjoy is exercising power, spending other people’s money and being called “Congressman” or “Senator.” Most value incumbency only slightly less than oxygen.

Since they want to maintain their office and its many perks, they don’t tackle problems that are political dynamite. They kick the can down the road past the next election.

In the private sector, rational self-interest is a good thing. In the public sector, not so much.

In short, Congress – with its 6% approval rating and 91% re-election rate – is doing exactly what you’d expect with our nation’s toughest problems: almost nothing. That will change only when voters hold them accountable and exact a price.

Then – and only then – will we get real reform at the national level. Nobody knows when that will be. And it’s not your job as an investor to guess.

What to Do About It

However, you want to recognize what is going on – and the potential for nasty fallout down the road – and take the appropriate actions.

What are those actions? Divide your portfolio among non-correlated assets (stocks, bonds, metals, etc.). Diversify broadly within those asset classes. Stick to quality. And run trailing stops behind each position.

In other words, you should be doing exactly what we’ve been recommending. And now you know why.

We invest because we have a superb free-enterprise system that offers handsome rewards. We hedge because, aside from the vagaries of the business cycle, we have self-serving pols who are bent on gaining and holding power.

That’s just the world we live in.

We wish it were different. But The Oxford Club sizes up the world we have – not the one we’d like to have – and deals with it as it is, using a battle-tested system that gives us unlimited upside potential with strictly limited downside risk.

And in an uncertain world, that’s all any investor can ask.

Good investing,


View original at: Investment U


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