Maz: Han, it is time to get back in the fight. 
Rey: What fight?
Maz: The only fight. Against the dark side. Through the ages I’ve seen evil take many forms…. We must face them, fight them. All of us. 
~ “Star Wars: The Force Awakens” 

Last week Russia invaded Ukraine. In an instant, the world realized that we have not actually cancelled human nature, and that our generation may very well be called upon to stop true evil once again. To do so, we will first need to get rid of our childish ways. That begins with doing away with hyperbole, beginning to actually listen to one another, and maybe even admitting that we don’t know everything. 

How does a man like Putin believe he can get away with invading another country in 2022? Part of the answer lies in my experience last Thursday: As Russia was invading Ukraine, and I was going through my normal daily reading of the news. Just about every article was about the invasion, and most of them had a common theme: arguing for us to act like adults, especially in regard to climate policy. 

Is it any wonder Putin would believe the West would be too weak to stand up to him? For years Europe has turned a blind eye and empowered him by relying on Russia for their fossil fuels. Why? Because of a childlike view of climate change. The climate is like most of our subjects today – you are either on one side of the sandbox or the other. 

Holeman Jenkins of The Wall Street Journal put it perfectly in his column on January 28, “Millions of us have grown too comfortable pronouncing ourselves passionate about a problem we don’t bother to understand.” That pretty much covers every issue we have today.

When it comes to climate change, there is a scientific consensus that the climate is changing. There is also a consensus that man’s activity is contributing to the change, especially the increase in carbon in the atmosphere. There ends the actual consensus; everything else is childlike taunting. “It is settled science!” – “Is not!” – “Is too!” We might as well be in the back seat of our parents’ car saying, “He’s touching me!” 

Several years ago at a climate presentation I heard a point I had never heard before: The presenting expert noted that, going back to the beginning of the industrial age, deforestation is five times more responsible for the increase in carbon than all the emissions put together. He was not talking about the deforestation currently happening in the rain forest, although it was his goal to stop that; he was speaking of the forest that is now New York City, London, Paris, and your neighborhood. 

I have no idea if he was correct. I can say that I have asked about this every time I have had the opportunity to speak to a climate scientist and thus far no one has refuted it. I’m no climate expert, but I am pretty good at math. If cutting down the forest to build large metropolitan areas is five times more responsible for the increase in carbon, then we could go to zero emissions and somehow capture every ounce of carbon ever emitted from the dawn of the industrial age and only solve 20 percent of the problem. That is some perspective.  

In the fall of 2020, we took our then-10-year-old daughter to Disney World for her birthday. As we drove from the Florida Turnpike to Disney World, we passed acres upon acres of solar panels. That space used to be covered in orange trees. If the expert I heard from several years ago is even close to being correct, then it makes me wonder: is cutting down all of those trees and replacing them with metal and glass really a net positive for the environment? Is that really “clean?” I honestly do not know the answer, but I know that we are not allowed to ask the question. If we do, we will be labeled a denier and told that science is real. No questions allowed. 

When I was a child, the grocery stores replaced paper bags with plastic ones. Why? To save the trees of course. Today our oceans are drowning with plastic. What environmental disasters will the electric car bring us 20 or 30 years from now? Are we asking those questions? That is what adults do. Children come up with solutions that are impractical and/or cause more problems than they solve. Then, when an adult points this out, they throw a temper tantrum. Sound familiar? 

Putin is a lot of things, but he is no child. He has become powerful as Europe pretends to move on from fossil fuels to prove they are climate warriors while in reality becoming dependent on Russia to heat their homes in the winter. Is it any wonder he views the West as children who can be bullied? 

Climate change is real, but so is the need for energy security. Adults are able to understand conflicting problems. They are able to weigh pros and cons, risk and return. We need to start talking to about the problems we face as adults, not as children who simply hurl insults when they don’t get their way. Only adults can truly work together to find compromise and a path forward. We eventually have to do this, because if history teaches us anything, it is that the fight never ends. 

Evil takes many forms, among them Hitler, Stalin, Mao, Pol Pot, Castro, Bin Laden, and now Putin. To stop evil, we have to face it as adults. We must put aside our childlike ways and start to understand that adult problems are complicated. They are nuanced, and asking questions, or having different perspectives, is not the same as denying the problems exist. The truth is there is no way known to humankind to produce energy without impacting the environment. Lithium batteries are not clean. Destroying nature to make room for solar farms and windmills is no way to save nature. Pretending otherwise is childish, and acting like a child encourages evil men to take advantage of the situation. It makes them believe we are weak.

When evil men try to bully the world, we must take Maz’s advice. “We must face them, fight them, all of us.” That begins with serious grownup conversations about all of our problems. We don’t have to agree on everything, but we do have to stop attacking ourselves as if we are enemies. As Putin has reminded us, there are still real enemies out there. At least that is my perspective. 

Warm regards,

Chuck Osborne, CFA
Managing Director

~Time for Grownup Conversations

In case you have not heard, Facebook changed its name to Meta Platforms, doing business as Meta. They are sending a clear message that they believe the future is the “metaverse,” which is basically a virtual reality social media platform. In other words, Mr. Zuckerberg (and his peers) saw the movie The Matrix and thought it was a how-to manual as opposed to a giant warning against the downsides of technology. 

How is Meta Platforms doing? The stock is down more than 36 percent and they reported fewer users for the first time in the company’s history. So, is Meta a good investment while the stock is down so much? We don’t think so. 

There is a trend in investing over the last few years known as ESG. Longtime readers know how I hate acronyms – their sole purpose, in my opinion, is to make unintelligent people within an industry sound smarter by talking in a language that no one understands. ESG stands for Environment, Social and Governance, the idea being that companies with high ESG scores are more responsible and better citizens than companies with lower scores. This is not the first time this responsible investing idea has come up. It always collapses because in the end, what constitutes responsible behavior is in the eyes of the beholder. 

Meta Platforms gets a high ESG rating according to Sustainalytics…but should they? There was a Super Bowl advertisement for the Metaverse, which followed a stuffed dog, formerly someone’s beloved toy, now discarded, lost, and thrown away. Its life was harsh. Someone found it, took it out of the garbage and put virtual reality goggles on it. The dog’s virtual life was wonderful. I believe it was the most twisted, disturbing commercial I have ever seen. 

Recently I had a chance to hear a presentation form Dr. Leonard Sax. Dr. Sax has authored several books on parenting and has done extensive research on the effects of technology on children. He cited research published by the American Psychological Association, which tracked depressive episodes experienced by individuals by age group over time. From the early 2000’s through 2017 the number of depressive episodes among adults, people 30 and over, remained stable with no significant change. The older the group, the more stable the data. However, such episodes among adolescents increase 52 percent from 2005 to 2017. Incidents of depression increased 63 percent among young adults ages 18-25. Incidents of serious psychological distress rose 71 percent. The numbers are far worse for girls than for boys. The spike began around 2010. 

What happened in 2010 that would cause such a dramatic shift in the mental health of our nation’s youth? Instagram. Coincidence? I think not. 

UCLA published a study on TV viewing habits from 1967 to 2017. From 1967 through 1997 the number-one shows on TV all had one thing in common: they emphasized community values of doing the right thing and being a good friend. Between 1997 and 2007 the top shows moved to reality TV, which was all about individual values of fame, fortune, and winning. Doing the right thing would get someone voted off the island.  

Today kids don’t watch TV at all, it is YouTube, most of which is people doing anything and everything to get you to hit the like button so they can be famous. Is it any wonder that this shift in emphasis from doing the right thing and being a good friend to grabbing attention for yourself has accompanied higher rates of depression? 

Social media started as a way to stay in touch with your real friends, from the real world. According to Dr. Sax’s research, individuals who spend 30 minutes or less a day on social media platforms still use it for that purpose and do not experience the negative mental health results. However, those who spend more time are primarily using it as a performance platform. They share posts that make their lives seem better than they really are, and then compare their lies to those of their friends. Only, while they know their posts are mostly an act, they fail to recognize that this is true for their friends as well. 

Meta Platforms knows all of this and has for some time. Frances Haugen, a former data scientist for the company, blew the whistle on them last year. What is Facebook doing with all of this evidence of the harm they have done? Changing their name to Meta, hoping you will simply forget about having a real life all together and volunteer to plug your self into your Matrix pod. 

We don’t subscribe to the ESG fad for investing. We do, however, believe that all prudent investing is done from the bottom-up and that we should act as owners of companies and not traders of stocks. Meta gets a high ESG rating because, in truth, ESG has more to do with a company’s politics than anything else. I do not believe a company whose product is primarily responsible for a 71 percent increase in serious psychological distress in the lives of young adults is being socially responsible; at least that is my perspective. 

Warm regards,

Chuck Osborne, CFA

Disclaimer: Neither Mr. Osborne nor Iron Capital owns shares in Meta Platforms stock in their personal accounts or in the accounts of clients. This Perspective was for educational purposes only and not a recommendation for investing. 

~Meta Meltdown

For those may did not know, the Jewish holiday of Hanukkah is underway. It began on Sunday, November 28, and ends on Monday, December 6. I want to wish everyone a Happy Hanukkah this year because it is part of the “Holidays” in “Happy Holidays,” or at least it is supposed to be. 

In our last Perspective I mentioned that we have to stop suffering fools, which brings to mind the obvious question: When did we start suffering fools? It all started with Christmas – at least that is my theory. When I was a child, no one ever uttered the phrase “Happy Holidays.” To be fair, before the age of eight I lived in Greensboro, NC, where my family is from, and there were not a lot of non-Christmas folks around. But when I was eight my family moved to Boca Raton, FL, where, as a gentile, I was a minority. 

Still, even in the majority-Jewish town of Boca Raton in the 1970s we would hear and say “Merry Christmas” throughout the month of December. The city would be decorated with signs; every other one said Merry Christmas and the others said Happy Hanukkah, alternating down the street. This is why I now am curious about Hannukah being included in Happy Holidays. 

It has been several years since I spent a Christmas in Boca, but the last time I did, the signs had changed. They still alternated, but now they alternated Happy Hanukkah with Happy Holidays. Somewhere along the line between my 1970s childhood and today, we decided that we could no longer say “Merry Christmas” because it was somehow offensive. Let us break this offensive phrase down to see where the true horror and meanness lies. 

The first word is Merry. Merriam-Webster defines it thusly: Full of gaiety or high spirits; marked by festivity or gaiety; or giving pleasure. Obviously, we can see the insult in that. How dare you suggest that someone should be full of gaiety or high spirits.  Almost sounds like you want them to be joyful… 

The second word is Christmas. Merriam-Webster defines it as: A Christian feast on December 25…that commemorates the birth of Christ and is usually observed as a legal holiday. I would personally add it is an adaptation of the pagan holiday celebrating the winter solstice, and – in America anyway – an enormous advertisement for Coca Cola (Santa’s suit is red in the U.S. because of an old advertisement for Coca-Cola; he wears green most other places). It is a cultural phenomenon that blends the Christian religion, pagan tradition, the legend of St Nicholas (aka Sinterklass), and retailers’ end-of-the-year, get-this-stuff-out-of-here push. If one wants to keep it simple, it could also be defined as the 25^th day of December. 

So, in its simplest form, Merry Christmas means: Please be of high spirits on December 25. Well, report that guy to HR right away. How dare he wish me well on December 25! Doesn’t he understand how offensive that is? Heaven forbid we wish a non-Irish person Happy St. Patrick’s Day. I will admit I see the offense in someone Googling, “What day is Cinco de Mayo?” 

I’m poking fun, but there is a serious point here: If we get offended by someone wishing us well on a day or week that is important to them even if it isn’t to us, how then are we supposed to have the actual difficult conversations needed to bridge the gaps in our society? It is just foolishness. 

The good news is we are not nearly as divided, or soft, as the media would lead one to believe. How do I know? The last time I ever wished anyone a Happy Holiday was when I left my job at a big corporation and started Iron Capital. When this time of year came around in 2003, our first year of existence, I ordered Christmas cards to send to our clients and friends. I was told that I couldn’t do that because I would offend people and we would get complaints, clients would leave. We have been wishing everyone a Merry Christmas ever since and we have not received one complaint. We have received several compliments from those who notice. 

We aren’t preaching or trying to convert. We wish people a Merry Christmas because that is our holiday, and we truly want everyone to be happy that day regardless of belief or background. So, this year I have no hesitation in wishing everyone a Happy Hanukkah, because it is Hanukkah. We should be aware of it so we can wish our Jewish friends well, and we truly want everyone to be happy whether they happen to celebrate it or not. “They” say we are all supposed to silo ourselves and keep our holidays and traditions only among us, but I think we need to celebrate each other. Holidays are what they are, and they have names for a reason. If we really want to show love and respect, we should call them by their proper name. At least that is my perspective. 

Happy Hanukkah! 

Warm regards,

Chuck Osborne, CFA
Managing Director

~Happy Hanukkah!

It could be said of every mentor I have ever had that “he did not suffer fools.” This didn’t mean that one could not disagree with them, but one had better have his facts straight and a logical argument or he was going to be put in his place. 

One of my bosses in particular had a gruesome reputation. One time I was talking with a member of the senior management team at a company party, and when I told him who I reported to, and he said something to the order of, “Good luck. People say I am jerk, but your boss really is a jerk.” (He didn’t use the word jerk, but this is a family blog.) In reality, my boss was extremely fair. He was extremely demanding, but I found if I did my job he rewarded me, and if I made a mistake, all he wanted was for me to own it and fix it without excuses. The people who got into trouble were the ones who tried to hide their mistakes. 

Said boss was also open to new ideas, as long as they were truly thought out. The skill of critical thinking is no longer taught, because somewhere along the way on the dumbing down of America we got the notion that to be critical is to be hateful. Nothing is further from the truth: critical thinking means when one has an idea or hears one, she then critiques the idea herself to measure its merit. In science one tests ideas by stating a hypothesis and then testing it rigorously to prove it is true or at least not false. This is the basis for critical thinking: one has to be able to be his own critic, and only then take his idea to other critics. 

A fool does no such thing. A fool has an idea and then just starts running with it. Further, he will simply ignore facts that are counter to his idea. I will admit, that like my mentors, I do not suffer fools well. I want to be clear: I have had many great conversations with people who disagree with me on many topics. I don’t mind that at all, in fact it is essential to critical thinking. Intelligent debate between two people who disagree sharpens both of them. It is mutually beneficial. However, when someone presents an idea to me which is based on lazy fantasy, it is like fingernails on a chalkboard. 

This happened recently. In writing a recent Insight I used a quote form Milton Friedman. I knew the quote but wanted it to be accurate, so I went to “the Google machine” to look it up. First thing I noticed is that what came up were negative articles about Milton Friedman. There is no economist who does not have critics, but this takes some doing, because Friedman’s supporters outnumber his critics tremendously. Curious, I read a couple of the articles. I disagreed with all of them, but most were well-written and thoughtful. All of them, interestingly, were written after Friedman passed away – these critics were not interested in a debate which they would almost certainly lose. 

However, one article stood out. It was published by Forbes and written by Steve Denning. Denning was arguing against the notion that the purpose of a corporation is to make a profit for the shareholders, and he referenced an article that Friedman had published in The New York Times on September 13, 1970. Friedman’s article, like most of his writing, would make a good read today as many of the trends we are seeing now were the same as we saw then. 

Denning’s critique was as follows, “…[T]he article states flatly at the outset as an obvious truth requiring no justification or proof, ‘a corporate executive is an employee of the owners of the business,’ namely the shareholders.” Denning goes on, “Come again? If anyone familiar with even the rudiments of the law were to be asked whether a corporate executive is an employee of the shareholders, the answer would be: clearly not.” 

Fingernails across the chalkboard, I do not suffer fools gladly. I am even sympathetic to Denning’s larger argument, which I’ll address in a second, but the reason Friedman stated “as an obvious truth” that each one of us ultimately works for the person or people who own the business is because it is an obvious fact. Perhaps this is not entirely obvious when looking at large publicly traded companies with thousands of shareholders, but those organizations represent a fraction of the corporations that are out there. 

Iron Capital is a corporation. I am currently the sole shareholder. Do you think an executive here has ever thought to say to me, “I work for Iron Capital, not you.” Sure, that is technically correct. When asked on a form for employer, one would write Iron Capital, but that is a distinction without difference. This is grotesque lazy foolishness and we as a society should not tolerate it. Facts are facts and cannot be dismissed. 

Denning went on to say that while almost everyone recognized that Friedman was correct, he claimed that it was they who “just wanted it to be true.” This can’t be made up. He then goes on to claim that business guru Peter Drucker, in his 1973 book Management, argued against Friedman. Drucker and Friedman were the super stars when I was a student of business and economics, so I have read them both extensively. Never in all of that have I come across a contradiction between those two. However, Denning says that Drucker’s claim that the purpose of the corporation is to serve customers is a rejection of the idea that maximizing shareholder value is the goal. 

I can understand how a third grader might get confused. Is the purpose taking care of the customers or taking care of the shareholders? Adult conversations should not be held at a third-grade level. In what universe does a manager maximize shareholder value by not taking care of the customer? That universe does not exist. These are not only not mutually exclusive ideas, they are also the same idea. To see this more clearly, perhaps one should add the phrase “in the long term” to the end. I would argue that in the early 1970’s, long term was a given. It certainly was for both Drucker and Friedman. 

Once again we will use Iron Capital as our example. Everything that happens here is for the benefit of our clients, and we do it in order to make a living. If we fail our clients then they will leave, and the shareholder value leaves with them. If we serve them well, they will grow their relationship with us and introduce their friends to us, and shareholder value will grow. There is no contradiction there. Friedman was an economist and he spoke like an economist, which is often cold. Drucker was a businessman and he spoke like a businessman, which is warmer than an economist. A visionary entrepreneur would be loftier and warmer yet, but in the end if one actually listens and seeks to understand she would recognize that they are saying the same thing. There is no real disagreement here. 

Unfortunately, this is the world we live in today. People make up their own facts and have bitter arguments over things that are not mutually exclusive. The examples are too numerous to list. It needs to stop, and it starts with having the courage to stop suffering the fools. At least that is my perspective. 

Warm regards,

Chuck Osborne, CFA
Managing Director

~Suffering Fools

Frances Haugen has blown the whistle. Facebook and all its subsidiaries dominate the social media landscape, which has done real harm to our social fabric. Haugen claims they have known it all along – known what it is about their product that is harmful – and have decided to keep doing it anyway. It is a serious allegation and seems to ring true. 

Several years ago, I had the opportunity to work in Poland. I never officially moved as I still had responsibilities at home, but I would spend weeks at a time in Invesco’s Poland office. During one of those trips, I got a chance to tour the Nazi concentration camp, Auschwitz. It is estimated that more than 1.1 million people died there. Most were Jews, but the Nazis also killed Polish intellectuals and anyone they thought might challenge them. This I knew, but what I learned was even more horrifying. 

The Nazis turned death into an industry at Auschwitz. It started when they told their victims to pack one suitcase to take to their new home. The Germans knew that most would pack their most prized possessions, and the suitcases were confiscated immediately. There are storage rooms packed with them on display when one takes the tour. Hair was cut and used to make uniforms, and fillings were extracted from teeth for gold. Being there in person drove home just how evil people are capable of being. 

What does this have to do with Facebook? People who forget their history are doomed to repeat it. The lesson we should learn from the horrors of Auschwitz is that people can be convinced to do unspeakable things. People don’t just wake up one morning and decide to be evil; they have to be moved slowly but steadily in that direction. In 1924, nearly 20 years before Auschwitz, Hitler wrote, “Propaganda is a truly terrible weapon in the hands of an expert.” Joseph Goebbels was just such an expert, and for nearly two decades he and his Reich Ministry of Public Enlightenment and Propaganda slowly and steadily moved what many believed to be Europe’s most sophisticated society into a group that would create a place like Auschwitz. 

As Carl Jung so famously said, “People do not have ideas, ideas have people.” This brings us back to Facebook. When the company went public in 2012 it had one small problem: it was not a business. There was no method for actually making money. A business cannot survive if it can’t make money, so it started allowing advertising. Because Facebook had tons of personal data, it could tailor advertising like never before. Companies could target only those most likely to want their products. Content could be pushed to a user based on Facebook knowing who that user was and what she was most likely to click on. 

Facebook developed algorithms to push information their users were most likely to click on so they could maximize those advertising dollars. As a result, if one started out as a normal, right-of-center Republican, then he would be sent a steady diet of progressively more right-wing content. Conversely, if one started out as a normal, left-of-center Democrat, she would be sent progressively more left-wing content. This process may not be masterminded by any puppet master like Goebbels, but it works the same way nonetheless. 

So, otherwise intelligent people start to believe that a Russian plot put Trump into the White House, and four years later a massive fraud kicked him out. President Biden has claimed that the retreat from Afghanistan was a success and our border with Mexico is closed. Maybe he is crazy, or maybe he is not. Maybe he knows that half of the people will now believe anything he says no matter how crazy, and that the other half will not believe him no matter what he says. This is the damage that social media has done. 

So, what to do about it? Most now agree that social media needs to be regulated; the problem is what economists call rent-seeking. Each side wants their particular propaganda to be seen, and want the other guy silenced. Or, at least they want the other guy’s propaganda labeled as such, while their propaganda is labeled “news.” 

The ultimate problem with Facebook is the same today as it was in 2012. It is the fundamental reason we have never invested in the platform: There is no ethical way to make Facebook an attractive business. It was supposed to be a place where we could communicate with relatives and friends who no longer live down the street; where I can know what one certain friend has for dinner every single night (you know who you are); where people who care can learn that my son, Charlie, made his school’s basketball team – Go Cavs! It should be taken back to what it was. 

The algorithms need to go. Pushed content needs to go. Everyone has a right to free speech, but there is no entitlement for one’s speech to go beyond his friends who happen to know him, love him, and realize that he is an idiot who has no clue what he is talking about. In other words, the online neighborhood should reflect the actual neighborhood. 

If we do that, Facebook’s stock price will plummet. They can still sell advertising, but it won’t be as tailored. It is a solution that is simple and would work, which makes the likelihood of Washington doing it very slim. So, we will simply need to arm ourselves. What we see online is not news, it is propaganda. It is a terrible weapon whether in the hands of an expert, or the inner workings of a computer algorithm. At least that is my perspective. 

Warm regards,

Chuck Osborne, CFA
Managing Director

~Blowing the Whistle