Over the weekend we learned that President Trump has COVID-19, and fortunately it looks like is recovering. On Saturday a friend asked my opinion on what Trump’s illness would mean for our economy, especially if he did not get better. My answer surprised her. I said, “Not a thing.”

We are a nation of laws and our elected officials are public servants, not rulers. At least that is the way it is supposed to work. Politicians have often forgotten this over the years, but shockingly, the general public seems to have forgotten as well, or has never been taught. If Trump died of COVID-19, or any other cause, then Pence becomes President and we, as a nation, move on. If Trump and Pence die, then Pelosi becomes President. Our Founding Fathers thought of this.

They also thought about what would happen if we had a contested election. Congress would decide, those are the rules. There is no constitutional crisis; the Constitution is clear. There is, unfortunately, is a significant element in our society today that believes that if the outcome of our system is not to their liking, then they will just change the rules. This is not to be taken lightly, or quickly dismissed. Our system has given us the longest lasting democracy in history. We should not fall victim to hysterics, but neither should we dismiss the threat.

My 10-year-old daughter, who is in fourth grade, asked me the other night whether what happened to Rome was going to happen to us. I won’t lie, I was proud of her for asking the question. It shows that she knows more about the history of Western Civilization then the so-called college-educated rioters who wish to burn it all down. The answer is, of course, that it is possible; for most of our history, a common societal knowledge of what happen to Rome and that it could happen here has kept our system in check.

It seems that common knowledge was not passed along to this generation. This weekend, not long after being asked about the potential economic consequences should a President die in office, I saw a commercial supporting the abolishment of the Electoral College, the filibuster, and making the District of Columbia a state. This is truly frightening, and we need to wake up to it.

Why does the Electoral College exist? The answer is in understanding who the United States of America is. We were formed as a federation of 13 independent states, and we remain a federation of 50 states today. We are not a pure democracy; we are a republic. Each state holds an election for who they wish to be president, and the state’s electors vote on behalf of their state. Each state has the same number of electors as their representation in Congress. This was the Great Compromise of 1787 that made the making of a nation possible. Pure democracy would subjugate small states to large ones, while equal representation of each state would unfairly under-represent the large states and give small states undue power. The brilliant compromise was that each state would be equal in the Senate and represented by a number of congressmen based on population. Their vote towards who gets to be President would be based on the same calculation.

So why aren’t we a pure democracy? Because our founders knew the history of ancient Greece. Our founders, who had just freed themselves from the tyranny of a monarch, also realized the threat of the mob. So we became a republic, like Rome. We elect representatives to go to Congress to argue and vote on our behalf. The filibuster, which was first used in the U.S. Senate in 1837, is as old as representative government. As long as there have been politicians, there have been people skilled in the art of stalling. This tool, although annoying, is very useful as it requires the majority to account for the views of the minority. It benefits persuasion and compromise over the brute force of the mob. Like any tool, it can be used for causes later judged good or evil, but it is a sword that cuts both ways. Those in the majority who wish to dismiss it would be wise to think of a day when they become the minority, because it will happen.

The District of Columbia is the home of our federal government. It is a city with a population of 705,749 people as of 2019. The idea that it should be a state with the same voting power in the Senate as New York or California is quite frankly absurd. It already has the full attention of our federal government. If one were truly concerned about the 705,749 people not having representation, then a far more logical step would be to have Maryland and Virginia annex the District, although I suspect neither state wants it.

At the end of the advertisement, the young lady speaking said these things had to be done to protect our democracy. One does not protect our democracy by breaking its rules and traditions. The thing that has kept it working for almost two and a half centuries is that no one is above its rules. We live under the rule of law, not the rule of politicians. The real threat to our democracy is not Donald Trump, Joe Biden, COVID-19, or this upcoming election. People and events are not nearly as dangerous as ideas. Ideas like the ones in that advertisement are the real threat, and we had better wake up to that threat. At least that is my perspective.

Warm regards,

Chuck Osborne, CFA
Managing Director

~Civics 101

A few years ago when we began to write these Perspectives, we did so because we frequently get the question, “What is the election going to do to my portfolio?” We had never wished to discuss politics but we get the question all the time, so we decided that we would do it as a separate forum, so clients who were not interested could tune it out, and we would stick to discussing policy. What impact would a said policy have on the economy and therefore the stock market and your portfolio?

I never dreamed that I would be discussing defunding the police. This went from a ridiculous idea to actual policy in some cities in a matter of days. It brings to mind one of my favorite quotes:

“The truth is that, to many people calling themselves Socialists, revolution does not mean a movement of the masses with which they hope to associate themselves; it means a set of reforms which ‘we,’ the clever ones, are going to impose upon ‘them,’ the Lower Orders. On the other hand, it would be a mistake to regard the book-trained Socialist as a bloodless creature entirely incapable of emotion. Though seldom giving much evidence of affection for the exploited, he is perfectly capable of displaying hatred – a sort of queer, theoretical, in vacuo hatred – against the exploiters.” ~ George Orwell, “The Road to Wigan Pier”

Orwell packs a lot into that one paragraph. The first thing I love about this quote is that Orwell was a Socialist. He believed in the revolution, as he put it. Some find that odd with his obvious concern about totalitarianism, but he never disavowed his socialist views. He was criticizing his “side.” Wouldn’t that be refreshing today?  A little self-reflection and honesty – that is what is needed.

Today everything has become about politics and the next election, and people are too afraid to speak up for what they believe to be right. It is much easier to have loyalty to a party than it is to have principles. While this is normal for politicians (which is one reason we hold them in such low regard), it also seems true for even our friends on social media. I don’t want to sound overly dramatic, but if our republic is going to survive, this has to change.

When I was just a child, Richard Nixon resigned instead of facing an impeachment trial because his own party was set to vote for impeachment. He may have been a Republican, but what he did was wrong. Two presidents have been impeached since, and both impeachments failed on pure party lines. Something is wrong.

The first riots this summer in Atlanta occurred approximately a quarter of a mile from my house. I assure you there were no peaceful protests. That is not to say the protests don’t have peaceful moments, or that some individual protesters are not peaceful, but the fact is that every major protest that has occurred this summer has ended in violence. This did not happen in the real Civil Rights Movement because the leaders of that movement wouldn’t stand for it.

Martin Luther King, John Lewis, Andrew Young, and rest of the leaders in that original movement were trying to persuade, not punish. They were motivated by love for the exploited, not hatred for the exploiters. They fought for the right to vote, the right to ride in the front of the bus, and to eat lunch where they wanted. They did not fight to tear down anything except for injustice, no modifier necessary. They subjected themselves to violence, but they remained peaceful, and in doing so changed the world for the better.

Is defunding the police designed to help the exploited or to punish the exploiters? It seems self-evident. However, before we just completely dismiss the notion as absurd, we need to make sure that we are not guilty of declaring triumph over a strawman. Is there anything to this idea?

Self-reflection is called for on all sides. Police violence is a real issue and one that must be addressed. There is no doubt that across the country we have too many Barney Fifes and far too few Andy Taylors (for our younger readers, use your Google). My understanding is that the police officer who murdered George Floyd was in the top-ten percent of citizen complaints. Why did he still have a job, let alone why was he training the officer with him?

Republicans are supposed to be the party that is leery of public employee unions, yet when this black lives versus blue lives started four years ago, they lined up for the police vote. Party loyalty is easier than principles. To simply defund the police is, well, stupid. This does not mean there are not problems which need to be corrected. Franklin Delano Roosevelt, the great champion of organized labor, did not believe government employees should be unionized; perhaps that would be a good place to start?

Some may think I’m going too far with the idea that much of what we have witnessed since May is just hatred for the supposed exploiter. This past Saturday, a protester ambushed two Los Angeles County sheriff’s deputies as they sat in their patrol car. The deputies were taken to a hospital where protesters gathered and chanted, “we hope they die.” That isn’t affection for the exploited, that is hatred, and it is wrong. At least that is my perspective.

Warm regards,

Chuck Osborne, CFA

~Do What to the Police?

One of my favorite parts of my job is that we are constantly learning. All endeavors, whether it is sports or business, can teach life lessons. One of the great life lessons in investing is to take your opponent seriously. Every time we buy a stock, someone is selling it. Why?

Why are they willing to sell something we believe should be bought? I have known of firms that force their analysts to take opposite sides of this argument and debate one another in front of the investment committee. They do this in an effort to make sure they are truly considering why they may be wrong. We have never gone to that extreme at Iron Capital, although I often play the part of devil’s advocate in our investment committee meetings.

We don’t do it because in my experience when one is asked to argue a point of view that she does not actually believe in, she will tend to create a straw man. As a reminder, a straw man is an intentionally misrepresented proposition that is set up because it is easier to defeat than an opponent’s real argument. We may be debating if we should invest in Apple, for an example. (As always, this is an educational example not a recommendation to buy the stock; I do own Apple, and we own it in client accounts where we have deemed it appropriate.)

The argument for Apple is that their business has never been better. The new phone really is an improvement and services are finally taking off. The argument against Apple is that its stock has risen too far too fast and is now hugely expensive, and its service business is under scrutiny from legislators. Both of these arguments are real and should be taken seriously, but human nature being what it is, we tend to land on one side or the other and then we downplay the other side. We create a straw man.

If one is on the side of buying he might say, “If we pay attention to valuation, then we will never own this stock and we will continue to miss out on its return.” On the surface that sounds like a decent argument, but it isn’t actually factual. It is a complete straw man. For most of the last decade Apple’s stock was cheap; it is only after this huge run that it has become expensive.

On the other side one might say, “This company has not innovated since Steve Jobs passed away. The growth is not sustainable and it is foolish to pay these valuations for a company that no longer innovates.” Once again, a straw man. Yes, the iPhone was created while Steve Jobs was still in charge, but the seamless Apple universe has been improved and its business has really changed from a hardware company to a service company.

It is easy to put words in others mouths and then defeat those words. Ultimately, what we are saying is the people who buy that other argument are stupid and we are smart. Well, not so fast.

In my world we get to find out. Ultimately, we have to choose what side we are on and then the market lets us know if we were correct or if it was those idiots with the feeble arguments who were correct. One does not last in the investing world if he doesn’t learn to take the other side seriously.

I wish this lesson could be learned in our politics. Nowhere do straw men exist in more prevalence than in politics. I believe it is the straw men that give us the perception of polarization. We continually exaggerate the positions of our opponents to make them ridiculous, and through the magic of our social media feedback loops, we begin to believe these straw men are actually real arguments.

Trigger warning: If any of our readers send these messages to their children who grew up with “safe spaces,” they might not want to read on. For those who wish to continue, I am not going to tell you what “side” you should be on, nor, contrary to your belief, am I going to reveal what “side” I am on. That is not our place. I am going to attempt to show how we might all start getting along a little better.

When the NBA re-started their season, the entire league wore Black Lives Matter shirts and took a knee for the national anthem. One player, Jonathan Isaac, did not. He did not wear the shirt and he stood during the anthem. After the game reporters asked him, “Do you not believe black lives matter?” For those who are not aware, Jonathan Isaac is black.

It is not my place to suggest what any of our readers should think about the Black Lives Matter movement, or Jonathan Isaac; it is to point out how ingrained the straw man has become in our society. The reporter who asked this sounded sincere. She made it sound as if she believes that if one does not support the organization named Black Lives Matter, then the only reason that could be is that he doesn’t believe black lives matter. This is a classic straw man. Mr. Isaac absolutely believes that black lives, including his own, matter. He has other reasons for his actions, and if you are interested you can look it up on Google.

Black Lives Matter is an organization and they have a platform. That platform, as laid out on their website, includes among other things, defunding the police and redefining the “western construct” of the nuclear family. Regardless of one’s view, these are certainly controversial positions. They may be correct, but certainly one could understand why someone would disagree. Many neighborhoods throughout the country, including mine, pay for extra police presence. Many Americans of all backgrounds still value the importance of family.

On the other hand, those athletes who take a knee are often booed. Those who boo say the act is disrespectful to the flag and the nation for which it stands. We all grew up pledging our allegiance to that flag every morning at school. The response from multiple kneelers has been, “They don’t understand.” This brings up our inability to effectively communicate, but that is another topic in and of itself. The point for today is that the people kneeling believe they are making a statement in favor of a real issue.

It is easy to just think “they” just hate minorities. It is easy to think “they” just hate America. It is hard to actually listen to the arguments of those with whom we disagree. My career in investing has taught me that if we want lasting success, we had better do away with those straw men and start taking the other side seriously. “They” might be right some of the time. At least that is my perspective.

Warm regards,

Chuck Osborne, CFA
Managing Director

~Straw Man

Why are we here? This has been the central question of humankind since the beginning of time. Every ancient religion and philosophy that survives the test of time has dealt with this question at its center. Historically, this was the central theme of classic liberal arts education. What is the meaning of life?

It isn’t my place to answer that question for our readers, but an interesting op-ed in The Wall Street Journal got me thinking. Clay Routledge and John Bitzan published the July 30 op-ed, “Free Markets and Meaning in Life.” Mr. Routledge is a professor of management at North Dakota State, and Mr. Bitzan is the director of the Sheila and Robert Challey Institute for Global Innovation and Growth.

According to the authors, a growing body of behavioral-science research indicates that believing life has meaning helps individuals thrive. These individuals deal better with stress and with tragedy, live longer, and are physically healthier. This is nothing new, but interestingly, the authors found that a sense of life’s meaningfulness is tightly tied to positive views of capitalism and entrepreneurship.

As most of you know, I have presented many arguments in favor of capitalism in our various newsletters, and I will continue to do so. Capitalism has its issues and, like its political partner democracy, is the worst system there is, except for every other system ever tried by humans. With all of its flaws and sharp edges, capitalism has proven to be the only system that allows an individual the freedom to pursue her dreams and thrive. Milton Friedman said it best when he observed, “Underlying most arguments against the free market is a lack of belief in freedom itself.”

I had never really thought about capitalism in terms of existential meaning. I find this very interesting, and it makes sense. It fits with my personal experience. Every entrepreneur I know is relentlessly positive. By nature, the entrepreneur is optimistic. I know in my personal case, I have often been asked if I was nervous about the risk I took when I left my job at Invesco and co-founded Iron Capital. My honest reply was that the idea that it would fail never really crossed my mind in any serious way. I had to give lip service to such risk in the business plan, but in my mind I always said, “That will never happen.” I don’t remember, to be honest, but I probably said it out loud to some of our backers.

That does not mean it was not hard. The lawyers’ bills were larger than my salary the first few years of our existence. We have navigated through the financial crisis and the Great Recession, and we are navigating our current world of unrest. There is no such thing as a life of meaning that is free of hardship. It is the struggle that provides the meaning. It is easy to forget that in the midst of the struggle.

A few days ago I had a conversation with someone close to me about the world’s current state. She made a comment about what someone might think who was 100 years old, all the pain they would have seen. My grandmother was born in either 1900 or 1902 (depending on whether you believe the family Bible or her birth certificate), and she died in 1996. During her life she witnessed the last great pandemic, World War I, the Great Depression, War World II, the Korean War, Vietnam, social unrest of the 1960s, desegregation, the economic stagnation of the 1970s, and the Cold War. Personally, she overcame an abusive older brother. She divorced a cheating husband before meeting my grandfather. She and my grandfather both worked in a textile mill in the small town of Elkin, NC, to put food on the table for seven children in the midst of the depression. One of those children died tragically young in a car accident. My grandfather died of emphysema when I was four.

I got to spend a lot of time with my grandmother. I lived with her for a full summer when I was in high school, and went to college down the road from her home in Winston Salem, NC. I often asked her about what it was like to live that long. She would smile and say things like, “Well, we didn’t have cars when I was born,” or, “There was no such thing as air conditioning,” and she always ended with, “The wonders I have seen are truly amazing.” Obviously, she would be honest about the tough times, that is how I know about them, but those struggles made her appreciate all the more what life had given her and the wonders she had witnessed.

We are going through tough times today, but it is good to remember that life does have meaning, and it is the struggle that brings meaning. It is also good to think about the connection between liberty and meaning in life. When our founders enumerated our God-given rights, there were just three:  life, liberty, and the pursuit of happiness. Liberty was the defining virtue of their new nation, which made us capitalist, but more importantly, provided us with meaning. Their wisdom is a good guide for today. At least that is my perspective.

Warm regards,

Chuck Osborne, CFA
Managing Director

~The Meaning of Life

We live in troubling times, and these times require people to speak out. Many have done so over the last few weeks, and some may even criticize Iron Capital for not being faster to join that movement. Our clients have heard me say this countless times: we are human beings and we will make mistakes, but we don’t do anything that is not well thought out.

In that regard, Iron Capital stands firmly against all forms of hatred, racism and violence. One would think that is a universal, uncontroversial statement, but they would be wrong. This week a CEO on CNBC said basically that we can no longer be silent, we must choose a side. It doesn’t matter who said it, it is a sentiment that has been shared often over the last several weeks: We must choose a side.

Must we? We used to say about America that our politics were played between the 40-yard lines. One might tilt a little left or right, but by and large, America was a middle country. We don’t do radical; in fact, we don’t tolerate radical. In my youth, politics was about persuasion. Which side could best persuade the middle? There was an understanding that we all meant well. We all shared similar goals; the disagreements were about how to best achieve those goals.

Our politics have changed. Today it is about divide and conquer. Who can best rally the troops? I had a colleague who served on a charitable board with me who was a retired Army general. He had been a helicopter pilot before being promoted out of the cockpit, and he found civilian work with the Air Medical Services and MedEvac Foundation International. Before one of our meetings we found ourselves sharing some drinks and a pizza, and he lamented how he had spent his week speaking to politicians about some pending legislation and not one of them cared about fixing any problems. They cared about what their side would think and how it would impact their re-election efforts. He did quickly tell me they weren’t all like that, but too many are, and his most recent week had been full of them.

Choose a side. I’m not a fan of Karl Rove, but I read his column from time to time because he often cites helpful polling data. According to his research, this is what the polls say: Well over 70 percent of Americans – I wish it was higher, but still the vast majority – are alarmed by what happen to George Floyd. The same percentage believe that racism is still a problem we need to fix in this country and are sympathetic to the motivations of peaceful protesters. The same percentage, more or less, was against the rioting, looting, and violence against police.

In other words, the vast majority of America is against all forms of hatred, racism and violence. The vast majority of America is right where it has always been, between the 40-yard lines. We have a large silent middle in this country in which most of us live, and we are constantly made to feel as if we are alone. Our media is all about taking sides. MSNBC, CNN, or FOX News, from which side do you get your news? Our politicians are all about sides. Our friends on social media who choose to make political posts are all about sides. There is a perception that the middle is gone in America, but that perception is a lie. That middle has just grown silent. We have all heard the term “silent majority,” but like many good terms in our language, it too has been hijacked for political purposes. I prefer the “silent middle.” It is time for that middle to stand up and tell both sides to shut it.

There is only one force in the universe that can overcome hate: That force is love. Fighting hate with hate just spurs more hate. That is what the sides want. They want to fight it out, winner take all. They want to bully the other side into submission. In the history of the human race, no group that uses intimidation to silence the voices of others have ever ended up being the good guys. Hate is wrong no matter what is being hated.

In the Christian tradition, Jesus told us to love our neighbor. When pressed on who our neighbor is, he said to love even our enemies. If religion makes you uncomfortable, well how about the greatest saga of good versus evil in the last 40-plus years? That is right, Star Wars. What was the emperor’s plan to turn young Luke Skywalker to the dark side of the force? Hate. To whom was that hate focused? The emperor himself. “I can feel your anger. I am defenseless. Take your weapon! Strike me down with all your hatred, and your journey towards the dark side will be complete!”

It didn’t matter to the emperor who or what Luke hated; hating the dark side itself was enough to turn him to the dark side. Whether it is in the form of racism or self-righteousness, hate is a destructive force which brings nothing but sorrow. We need to remember the words of American jazz musician Thelonious Monk, who said, “They tried to get me to hate white people, but someone would always come along and spoil it.”

When we stop applying labels and stop taking sides we may remember that we are all unique individuals. The vast majority of us are good people. The vast majority are with one another right here where we have always been, in the middle. I had a client who used to say about his small staff that they worked on the “justice” theory… it is just us.

It is not time to choose a side. It’s time to understand there are no sides, there is just us, and love is the only weapon we have that can actually defeat hate. At least that is my perspective.

Warm regards,

Chuck Osborne, CFA
Managing Director

~There Are No Sides