It was a mid-December afternoon when the phone rang as we were wrapping up the year, signing Christmas cards, and planning the firm’s Christmas party. On the other side of the line was a voice telling me that he was with the Securities and Exchange Commission (SEC), and he and his staff would be paying us a visit that next week. 

It is part of the job. We are regulated by the SEC, and they will periodically come to inspect our operation. I was not worried, but I was a little miffed, since an SEC exam does not exactly get one into the holiday spirit. From the SEC staff’s perspective, this was great – they were from the Atlanta office literally one block away from us. They could get in one more exam and still be home in time for Santa. 

The exam went smoothly and was done in time for our firm party. During the standard wrap-up briefing they went over all their findings, and I will never forget the interaction about our website. They found no issues with it but reminded us that we are not allowed to make exaggerated claims. I jokingly said, “So I can’t claim to be the greatest investor who ever lived?” The agent laughed and said that’s right, “besides, I have already met him.” I thought he was joking, but he wasn’t – they had actually found an adviser who claimed on his website to be the best investor ever. 

Years earlier, the head of sales for Invesco’s retirement division liked to say that he was often wrong but never in doubt. I would always respond that the investment team was seldom wrong but always in doubt. Overconfidence is a death knell to investors. It is one of the first life lessons anyone in this business learns. I didn’t need to meet “Mr. Greatest Investor Ever” to know that eventually his clients would regret they ever did. 

Of course, overconfidence was not this gentleman’s only sin. Hyperbole: “Exaggerated statements or claims not meant to be taken literally,” according to the Oxford dictionary. Today we swim in an online ocean of hyperbole: People begging for attention, posting about their lives, and then anxiously waiting to see how many likes they get. Experience in the real world will teach you that humility is the better path, but humility doesn’t excite the algorithm. Hyperbole, on the other hand – that gets people’s attention. 

As an investor, one needs to learn to sniff out hyperbole. Management is always putting the best foot forward, and a good analyst needs to be able to read through that when listening to earnings calls. However, hyperbole has become so prevalent today that many forget about not taking it literally; some people are not capable of discerning the difference between hyperbole and fact. 

The only thing more common online than hyperbole is the ever-present “straw man.” When I was a young analyst, many investment teams would assign two analysts to work up a specific company. One analyst would build the case for investing while the other would build the case for selling. They would debate each other in the investment committee meeting, and the arguments had to be sound and strong. Sadly, this is not what happens in our divided world today. Today, the algorithm will find someone – anyone – making the claim it thinks you want to hear. That person will then tell you what the other side’s argument is, except what he really tells you is what is known as a straw man. 

The best example I remember of the straw man was during the 2010 great debate over the Affordable Care Act (ACA). There were lots of good arguments against the ACA – cost, complexity, unintended consequences. However, ACA’s proponents did an amazing job of creating a straw man to beat them all: if one were against the ACA, it meant she didn’t want people to have health care. In my memory, this was the first time that people really started to believe that the “straw man” they had created was actually the real argument of the other side. This was the beginning of the other guys not just being wrong, but being evil; who could possibly want people to be denied health care? Any rational person would know that no such person exists, but not everyone who reads posts online is rational. 

This brings us to the tragedy of Charlie Kirk. Last Sunday he was the subject of our adult Sunday School class. He wasn’t meant to be, but how could he not? We noticed something frightening about our world: the more liberal members of our group found nothing in their social media feeds but references to Kirk being evil and hateful, while the more conservative members of our group found nothing but references to him being the greatest citizen this country has ever seen. The algorithm constantly feeds what we want to hear.

What are good people to do about this? The biggest obstacles to investing success are the psychological traps: We overestimate risk; we believe that whatever is happening at the moment will keep happening; we are too quick to sell winners to lock in gains, and too slow to sell losers because we want to get back to even and not take a loss. I could go on and on. The most important thing for the professional investor to remember is that he is just as human as his clients and has all the same flaws. We can’t magically make them go away, but we can be aware of them and guard against them. 

“Let your yes be yes and your no, no. For whatever is more than these comes from the evil one.” Matthew 5:37. We need to recognize that most of what we hear and read online is hyperbole, and while we can’t stop it, we can be aware of it and refuse to participate. We can also learn to recognize straw men, and again, stop participating. You and I might recognize that these are exaggerations not meant to be taken literally, but not everyone is as mentally well. 

I have been writing about economic issues for a long time. I always kid that I must be doing a good job, because I get yelled at by both sides. The truth is that I mostly get positive feedback, and I get it from both sides. When we actually talk about policy and the real-world impacts, we discover that the online myth of a divided country is hyperbole. If we can just stop the hyperbole and burn down all the straw men, then we will find a much better world – a world in which we can once again debate solutions to our problems with substance. At the end of the day this is what Charlie Kirk tried to do, and the world would be a better place if we followed his example. At least that is my perspective. 

Warm regards,

Chuck Osborne, CFA 

~Lessons From a Career Investing Other People’s Money

The more things change, the more they stay the same. I was recently approached by a marketing firm who promised to increase activity on our website. I usually ignore such calls, but for some reason I agreed to hear them out. 

They suggested that if we wanted to increase traffic to our website, then we needed to produce more articles than we are currently publishing. They had an AI tool that would write articles for us so we could spend our time “wining and dining” with prospective clients. Obviously the gentleman I was speaking with believed in stereotypes and spent no time actually getting to know us, but that didn’t really matter. 

At that point I knew the conversation didn’t need to go any further. If he actually spent five minutes on our website, he would have known have no intention of ever using AI to create content for our clients. We often hear that our clients appreciate our Insights and Perspectives. They like that we are willing to tell them exactly what we think on a subject, even if they disagree. They especially like that we communicate like humans, with stories and anecdotes that teach lessons. According to Google research, the two most popular searches that lead some to our website are, “Did Henry Ford invent the automobile?” and, “How many Tootsie Rolls are too many?” Any functioning AI could have answered those questions, but could it have understood that Henry Ford’s story demonstrates the function of capitalism that leads to innovation and not invention? I don’t even need to ask if AI would teach the economic law of diminishing marginal utility by revealing a traumatic childhood memory that has led to me not being able to even think about Tootsie Rolls without gagging since I was 10 years old. 

However, I was curious. What would the AI bring back? We chose a subject from a list – Trump’s tax cuts – and the marketing firm gentleman clicked a button. A few minutes later he emailed me a complete article ready to send out to you, our clients and friends. It was complete garbage. To the extent it proved any insight at all, it ranged from translating plain English to plain English (“A tax cut is when the government cuts taxes.”) to politicized nonsense (which doesn’t even deserve repeating). Evidently this particular AI was “trained” on social media posts of the extreme left. It could have been just as bad if it had been the opposite, but in this specific case the AI in question was under the influence of communist propaganda.  I want to be clear: these were not the arguments of left-leaning economists; that might have created a one-sided piece, but at least it would have had substance. No, this was the stuff one sees in the comments section, if he is dumb enough to look. 

At first I thought this was just incompetence, but then I realized it was indeed what the AI was trying to do. The marketing firm promised more clicks on our site. Substance doesn’t lead to clicks; radical statements lead to clicks. This AI wasn’t trying to actually educate someone on tax policy, it was trying to write an article that would generate clicks. If that is the goal, then the crazier the better. 

Heidi Mitchell of The Wall Street Journal wrote an interesting article on June 25, “That Chatbot May Just Be Telling You What You Want to Hear.”  It turns out that AI is like all technology that came before in the sense of garbage in, garbage out. To the extent that it is more human than technology of the past, it might be so in the not-so-good way of it being human nature to not tell the boss anything the boss doesn’t want to hear. 

Will AI take all of our jobs? I think not. It will be a great tool, like the technology that came before, but the need for human judgement is still there. Meanwhile, rest assured that no content from us will be AI-generated, and we won’t be publishing for clicks. We need more substance in our world, and that still comes from the human experience. At least that is my perspective. 

Warm regards,

Chuck Osborne, CFA

~Artificial Stupidity?

“I promised I’d never let anything happen to him.” ~ Marlin
“That’s a funny thing to promise…Not much fun for little Harpo.” ~ Dory

Beware of politicians offering protection. An interesting statistic came across my desk earlier this week: Empower, a large retirement plan recordkeeper, is attempting to add private equity options to 401(k)-type retirement plans. An executive from the company claimed that 87 percent of U.S. companies with revenues above $100 million annually are now privately owned. That is an astounding statistic.

That was the first time I have ever heard it put that way, but it makes sense. In the year 2000 there were approximately 2,000 companies owned by private equity; today there are more than 11,500. During this same period, the number of companies publicly owned and listed on a major stock exchange has gone from roughly 7,000 to 4,500. This century has seen an explosion in private investing and simultaneously a decline in publicly traded companies. Why?

In the 20^th century, going public was the goal of almost every fast-growing corporation. This is how entrepreneurs finally realized the fruit of their labor: They started the company with their own blood, sweat, and tears. If they were initially successful, they could find private investors who would provide the capital to take the company to the next level. Then, if the success continued they would go public, listing on a stock exchange and selling the stock of the company to anyone and everyone who wished to invest.

The company would then enter the realm of the small company stock. If the success continued, it would grow into a mid-cap stock and finally a large-cap stock. This led to the phenomenon of small-cap stocks outperforming large-cap stocks over long periods of time. Any investor who could participate in a company 401(k) or simply save some money to put into a mutual fund had the opportunity to invest in these companies.

That all changed in July of 2002, when George W. Bush signed the Sarbanes-Oxley Act into law. Enacted in response to the corporate scandals involving Enron and WorldCom, it was the largest single increase in corporate regulation since the Great Depression. Its goal was to protect investors; after all, we can’t let anything happen to them.

For our younger readers, Enron and WorldCom were both guilty of fraud. They basically lied in their financial statements. Investors in the companies lost most if not all of their money. The key executives went to jail and their auditor, Arthur Andersen, went from being one of the largest accounting firms in the world to ceasing to exist.

Sarbanes-Oxley is, in my opinion, the worst piece of legislation in U.S. history. It made the accounting requirements for being publicly traded so onerous that today we have fewer public companies since its inception after 23 years of economic growth. Investors were “protected” from countless opportunities as companies now stay private much longer than they did historically.  Instead of average 401(k) investors getting the opportunity to invest in companies at an early stage in their growth, that honor is reserved for institutional and accredited investors. In other words, the rich get richer. No regulation has contributed to inequality quite as effectively as Sarbanes-Oxley.

Was it necessary? Well, the villains went to jail because what they did was against laws that already existed. Bethany McLean, the reporter who broke the scandal, had little to no financial expertise; she leaned on her BA degree in English to see accounting irregularities that Arthur Andersen chose to ignore. Yet, Congress and the W. Bush administration determined that accounting fraud needed to be more illegal than it already was, and accounting rules needed to be far stricter so the accounting majors who went to work at large accounting firms could analyze financial reports as easily as an English major who wrote for a major magazine.

Milton Friedman noted in his 1962 masterpiece, “Capitalism and Freedom,” that there is a direct link between inequality in a society and the amount of regulation. There is no greater example of this than Sarbanes-Oxley. Thousands of companies that would be available for investment for anyone are kept in the private market in the name of protecting investors. Dory, the reef fish with a memory disorder in Disney’s classic “Finding Nemo,” knew better: “Well, you can’t never let anything happen to him. Then nothing would ever happen to him. Not much fun for little Harpo.”

Hopefully this administration is serious about regulatory reform. We don’t need private equity in 401(k)s, we need those companies to go public so all investors have access. We would be better off if we had a little less Marlin and a little more Dory. At least that is my perspective.

Warm regards,

Chuck Osborne, CFA

~Dory Was Right

Elon Musk is wrong: Peter Navarro is not a moron. Navarro is one of President Trump’s economic advisers and the one most closely associated with tariffs. Navarro, who has a Ph. D. in Economics from Harvard, holds extremely strong beliefs in the positive power of tariffs. So, what are the arguments in favor of tariffs? Let’s break them down.

If tariffs are so bad, why do all these other countries have them?
This is a popular argument, especially from Scott Bessent, the current Treasury secretary. This has certainly stumped more than one interviewer, but the answer is simple: Other countries have tariffs because their politicians are corrupt. Rent-seeking is the economic term. Hyman Roth said it best in “The Godfather 2” when explaining why he wanted all his fellow mobsters to invest in Cuba. “We have now what we have always needed, real partnership with the government.” Let’s not be pollyannish, this type of rent-seeking happens in the U.S. all the time, but it is still frowned upon here where there is greater belief in free markets. In other countries, this is just an accepted part of society. Russia may be extreme, but no one is surprised in Russia when the number-one attribute of business leaders is their close personal relationship with Vladimir Putin.

Tariffs protect special interests, and that is why other countries do it. It is also why you will hear entrepreneurs in the U.S. cheer the tariff strategy; what is bad for the consumer is good for the businessperson seeking “real partnership with government.”

We must protect certain industries for national security reasons.
There may be some truth to this argument, but the devil is always in the details. Do we need to be protected against China or Russia? Arguably that may be true. What about Canada?

Completely ignored in this argument is one of the primary justifications for cooperative trade between countries: Trade produces peace. Put another way, one does not bite the hand that feeds him. Since Adam Smith first discussed the concept of comparative advantage, the promotion of trade has brought both economic growth and peace.

The Smoot-Hawley tariffs, which triggered a global trade war and were a primary factor in the Great Depression, led to a rise in nationalism and ultimately to War World II. It is not a coincidence that after War World II, the United States led the world in a move to freer trade. We had learned our lesson.

It is also no coincidence that the post-Cold War move closer toward free trade led to the longest period of global peace in modern history. Nothing supports national security as much as a world dependent on the American consumer.

We need to bring back the good blue-collar jobs that have been lost by deindustrialization.
No one could possibly argue against this one, if only it were factual. Here are the facts:

Manufacturing output as a percent of real GDP has varied only 2 percent (13% – 11%) since 1947, according to the St. Louis Fed.

According to data from the U.S. Bureau of Labor Statistics (BLS), manufacturing employment peaked in 1979. Since then we have lost 6.7 million manufacturing jobs, yet we have gained 9.4 million jobs in trade, transportation, and utilities. I am not sure why the BLS lumps utility workers with trade and transport, but the point remains that for every good-paying, blue-collar manufacturing job that has been lost since 1979, 1.4 good-paying blue-collar jobs have been created in trade, transportation, and utilities; and no-one talks about it. They don’t talk about it because we have also added 13.9 million jobs in professional and business services, and another 17.3 million jobs in education and health services. So, we have the narrative that we have gone from manufacturing to services, and those jobs may not be a great fit for the same worker. While that overall narrative is roughly accurate, it ignores the actual growth in good blue-collar jobs.

Finally, there are more automotive manufacturing jobs in America today than there were in 1993 when Bill Clinton signed NAFTA. In the BLS data as of June 2024 there were 308,000 automotive jobs in America, up from roughly 270,000 in 1993 and the previous peak of 298,000 in the late 1990s. Does that surprise you?

Tariffs do not cause harm; we had them in the late 19^th century and did great.
I find it difficult to believe that anyone makes this argument with a straight face. In the late 1800s, we were just exiting the age of sail and the steam engine was the cutting edge of technology. Comparing trade in this era to trade today is like comparing the Pony Express to the Internet.

Still, this is one of Navarro’s main arguments, so let’s take it seriously. The economy is more powerful than any government policy. At that time in history in the U.S., we had reconstruction in the South, the great Western expansion, and the industrial revolution in the North and Midwest. The labor needed for all of that was supplied by a surge in immigration from Europe. There is hardly any economic policy that could have been implemented that would have stopped growth in the face of those combined organic forces. Besides, while tariffs were much higher then, they were dropping, not rising.

Additionally, this was the era of the “robber baron,” which brings us back to the first argument. Tariffs are a rent-seeker’s dream. If a businessperson can get the government to limit competition, then he can create great wealth, but that wealth primarily goes to the top.

When you break it down, the arguments for tariffs are a house of cards. So why do I believe that Elon Musk is wrong about Navarro being a moron? It actually takes a very strong intellect to convince oneself of something that is so obviously wrong. To do that with tariffs Navarro must be a genius. At least that is my perspective.

Warm regards,

Chuck Osborne, CFA

~The Case for Tariffs: Solid Arguments or a House of Cards?

Milton Friedman’s contribution to economics is often misunderstood. He is most remembered for his public defense of capitalism, and for good reason. He had a wonderful way of explaining basic economics in a way the average person can understand. However, you didn’t win Nobel Prizes back then for simply explaining economics to the masses. 

Friedman was among the first to bring serious quantitative analysis to the field of economics. Prior to Friedman, the field was largely an exercise in logic. He was one of the pioneers of the type of analysis that the world of sports calls analytics. He didn’t just make a logical argument for economic policy; he proved his theories with data. He also provided one of the greatest lessons for the use of data to prove or disprove theories: He said one must reject theories that cannot be backed up by facts. That part is easy. He also said you should reject facts that cannot be explained by theory. 

In other words, it isn’t enough to just know the data, one must also know the why of the data. If one can’t figure out the why, then the data should be noted as a mere coincidence. So, what does this have to do with Alabama and Duke playing in the Elite 8 of the NCAA Tournament last weekend? 

Analytics has become crucial to modern sports, and Nate Oats, head coach of Alabama’s men’s basketball team, is one of the most notable disciples. In basketball the numbers say that a team should take shots from the three-point range and from point blank range – three-pointers and layups. The shots in the middle, the mid-range shots, should be avoided. The reason is simple math: Layups are desirable because they can be made at a very high percentage.  

Three-pointers are desirable because three is greater than two, the value of normal shots – actually 50 percent greater. The shots in the middle are not desirable because they are worth only two points and harder to make than layups. Many modern coaches have said no to mid-range shots, and Nate Oats is among the most outspoken on this subject. He will tell you it is just math, and facts don’t lie. So why did these mid-range shots used to be so prevalent in the game? Young coaches seem to believe it is because those who went before could not count to three. 

Actually, it has to do with this thing called defense. The other team is allowed to try to stop you from scoring. They also teach math at Duke. Duke came in with a strategy: chase them off the three-point line and let their seven-foot two-inch center block the layups. Duke knew they didn’t have to guard the middle because the analytics department took care of that for them. It is a fact that three-pointers and layups are the best shots, but what is the theory behind eliminating one of the three ways to score from your offense? 

When pressed on tariffs, the Trump administration often points to the late 19^th century when the United States did not have an income tax and tariffs were a primary source of revenue for the federal government. This was a period of great economic expansion. That is a fact: We had high levels of tariffs and great economic success. 

This was a period defined by the industrialization of the U.S., the rebuilding of the South, and great Westward expansion. In other words, this was a time when there would have been economic expansion regardless of domestic tax policy. What is the theory of how tariffs actually contributed to this success? There isn’t one. 

We must reject theories that cannot be backed up by facts, but we must also reject facts that cannot be explained by any theory. The theory of good basketball offense is to take what the defense gives you and be able to score at all three levels. Duke is really good and they might have won anyway, but had Alabama attacked them in the midrange, they would have been closer and very likely opened up either the basket or the three-point line. Theory matters. 

Tariffs were prevalent in the 19^th century and we did okay; They were pushed hard in 1930 and brought on the Great Depression. Both of those are facts, but only one can be explained by any logical theory. Theory matters, at least that is my perspective. 

Warm regards,

Chuck Osborne, CFA

~What the Alabama-Duke basketball game teaches us about tariffs