One of the qualities lacking in society-at-large today is resilience. Yes, the pandemic has been a real crisis, imposing dramatic health (mental and physical) and economic problems for many. And yet, similar to other recent crises, consensus behavior doesn’t appear to have changed very much – there’s an expectation for many that things will return to “normal.” Zooming out, we see four decades of declining inflation, declining interest rates, and the questionable use of monetary and fiscal policy. In crisis after crisis since the mid-1990s, government rescue packages have grown larger along with the willingness of the general public to ignore the long-term consequences.
One of those long-term consequences is lack of resilience.
Resilience is simply the ability to recover quickly from adverse change or misfortune. Today, many people and institutions are not built that way. Individuals are anxious to get rich fast and very willing to use debt to do so. Corporations are anxious to optimize every process and remove slack and redundancy. And governments are more than willing to use their license over currency to offer support when individuals and corporations fly too close to the sun.
Resilience is critical at Bluestone. The value of resilience stems from our belief that the future is inherently uncertain. Yes, we may know roughly what to expect tomorrow but we can never be sure what changes or problems might arise. We may recognize that unforeseen crises occur from time to time in the broader world but the nature and timing of those crises can be highly unpredictable. Very few had “global pandemic” on the list of predictions at the start of 2020, nor war in Europe on their list of predictions at the start of 2022. Our world is far more random than many of us would like to admit.
In his new book, “Richer, Wiser, Happier,” author William Green discusses this “respect for uncertainty” from the viewpoint of investor Matthew McLennan at First Eagle Investment Management. Speaking of the period 1908-11, McLennan notes that an investor surveying the world would likely have been confident about the future. “The global economy had enjoyed a long period of unprecedented growth. Asset values seemed reasonable. And it was widely believed that inflation had been vanquished. Why worry?”1
Then things changed. The Titanic sunk in 1912; WWI 1914-1918; New York Stock Exchange shut down for four months during the war; flu pandemic 1918-19; hyperinflation in Germany led to Nazi government; stock market crash of 1929; WWII 1939-1945. “Thus, a period of calm prosperity gave way to three decades of disaster. Whipsawed by world events, the stock market was ferociously volatile from 1926 to 1945, leaving a generation of investors with a lingering dread of risk.”2
I’m not suggesting we have three decades of disaster in front of us. I am saying there’s an enormous amount of complacency in the economic and financial world, in spite of the ongoing pandemic and outbreak of war in Europe.
The answer to uncertainty is not to hide under a rock. The answer is to design our lives and businesses in a way that is resilient; in a way that can withstand some shocks from different directions.
In investing, we respect uncertainty by seeking a margin of safety in each investment; by employing real diversification; by using cash and gold when appropriate; and by being clear about objectives and scenarios.
In business, we respect uncertainty by seeking a margin of safety in allocating capital to new projects or acquisitions; by addressing customer and supplier concentration risk; by using cash opportunistically; by using debt sensibly; and by being clear about objectives and scenarios.
This is the path to resilient wealth creation. It’s OK for one’s business to be a high percentage of net worth. It’s also OK for a handful of businesses (public or private) to be a high percentage of net worth. So long as those businesses are designed with resilience. And so long as one’s own balance sheet is designed with resilience.
It’s time to make resilience a cornerstone of your business philosophy, investing philosophy, and life philosophy.