CINCINNATI I BUSINESS COURIER
January 28 – February 3, 1991
Investments
By Charles D. Vaughan
ROOT, HOG OR DIE!
The lowly pig will selfishly gorge himself with wild abandon on any edible put before him. No concern for others, no worry about the next meal. But regardless of how domesticated he may be, when no food is provided, he gets back to basics. He puts his snout to the ground and does what his ancestors did to survive.
After a decade of greedily feeding at the economic trough, we now find the bitter aftertaste of truth. The food is all gone and we cannot pay the bill.
Despite tax increases, spending cuts and general hoopla about debt reduction, the federal deficit will balloon to a record $300 billion to $325 billion. Operation Desert Storm could add $30 billion easily. State, local and school district finances are in no better shape with municipal bond defaults jumping 37 percent last year. Junk bond defaults approached $25 billion. Failure of the Bank of New England increases the already staggering cost of bailing out of the banking system.
The primary strategy of many managers and legislators is likely to move increasingly toward cutting expenditures. In virtually every field that which is deemed expendable will be cut. The secondary strategy will be to try to increase revenue. Industries such as auto and investment brokerage respond to declining volume by increasing prices. Banks and service firms raise user fees. Credit standards are likely to become increasingly stringent. Marginal operators are likely to be driven out. Increasing unemployment seems inevitable.
The news is not good and each day brings more of the same. It can bring a lump to the throat of even the toughest. Supply side economics proved to come with a demand note. Yesterday’s prophets of greed are either filing for bankruptcy or sitting in jail. Who can we turn to for help?
Perhaps instead of looking to the now fallen proud, we should take a lesson from more humble creatures. When survival is at stake, and it surely is, we need to get back to basics. In the past several years so many computers have crunched so many numbers and so many new economic theories have developed that it is hard to know what basic means anymore. Here are three truly basic concepts that have stood the test of time:
1. Prepare for the worst. Forecasts, both positive and negative, tend to be exaggerated. Defensive planning helps reduce costly mistakes made by panicking. A conservative approach may produce less than optimum results in the short run, but avoids disaster when times get tough.
Now is the time to review your financial situation. Look at each facet and each investment in light of how it might be affected under the worst possible circumstances. Spending less, saving more, reducing debt and eliminating speculative investments is boring, but it could save your hide.
2. Learn from history. We have a data base of information for every conceivable kind of past situation and what coping strategies have worked. Of course past results cannot assure future success, but neither can untested theories and computer generated hypothetical plans.
There are many universal lessons for the investor from history. These stand out:
Keeping adequate liquidity assures that you will not have to sell good assets at a bad time.
The greatest rewards come from overcoming adversity. Trading in and out does not pay.
3. Diversity. There is no such thing as a perfect investment. Examine your financial holdings by separating them into categories such as cash, equities (stocks), fixed income (bonds, certificates of deposit, annuities, etc.), inflation hedges (real estate) and foreign investments. Then look at the ratio of each group to the total. If a large portion of your wealth is concentrated in one place, you are taking unwarranted risk.
Only by spreading commitments over a broad range of different types of assets is it possible to achieve the best return at the least risk.
Being prepared for the worst means that you are free to enjoy anything better. Just by taking an active approach in making such preparations you can reduce the feeling of helplessness that many people experience.
One approach is to sit tight and wait for the government to “do something” to get the economy going again. A better one is to dig in right now to assure your own fate. Even a pig knows that!