2015 Speaker Series: General Wesley Clark & Robert Bryce
February 8, 2016
August 20, 2015
Front row from right: Tony Shink, Harrison Grodnick, Robert Bryce, Gen. Wesley Clark, Phil Grodnick. Back row from right: Jim Rhodes, Kathryn Hubert, Herb Schechter, Rob Britton, Luke Johnson, Sarah Rude
Senior Portfolio Manager Harrison Grodnick began the MPMG Speaker Series event on August 20, 2015 stating that the firm’s investment style may not “please all of the people all of the time.” MPMG’s unique, value-based philosophy is focused on managing risk effectively rather than chasing the latest popular investment fad, strategy, or asset class. MPMG maintains that a slow and steady approach to investing is vital to growing wealth over time.
Consider that a $1 million investment in the S&P 500 Index at the end of 1968 grew to an impressive $79 million by the end of 2014. Yet over that same time period, $1 million invested in the 20% of stocks with the lowest price-to-earnings ratio within the S&P 500 (one definition of value stocks) grew to $578 million in value. These are stocks that would be considered “out of favor” by the broader market, yet their underlying value created superior wealth over time. This occurred even though value stocks, the focus of MPMG’s investment style, underperformed the broader market in 18 of those 45 years, a perfect example of the adage “you can’t please all the people all of the time.”
One of the tenants of MPMG’s value-based philosophy is that successful investing is more about avoiding large losses than it is about chasing gains. The key to avoiding large losses is to pay the right price for an investment. We are now in the seventh year of a bull market, and many investors are now reaching for returns without consideration for risk. To those investors that may have forgotten the risk of chasing performance as they wish for market like returns, MPMG warns them to be careful for what they wish for. Consider that:
• investors who bought into a Dow Jones Industrial Average index in 1965 needed nearly 17 years to make their money back
• the S&P 500 and NASDAQ Composite Index reached record levels in March 2000, but it took about 13 years for the S&P 500 to finally top that record for good while it was about 15 years before the NASDAQ Index managed to sustainably top its record level from 2000.
Meanwhile, the longest period of time that MPMG investors have ever needed to break even from a year over year loss was approximately 18 to 24 months – and this was following the once-in-a-generation financial crisis of 2008.
Despite some late-summer turbulence in the markets, the economic “tea leaves” suggest that the economy may be stronger than many doomsayers believe. For example, existing home sales reached a six-year high in June and permits for new construction are at an eight-year high. U.S. auto sales reached an annualized rate of 17.8 million units in August after the strongest month of sales in more than a decade. The economy has added an average of 250,000 jobs per month over the past year and the unemployment rate has dipped to 5.3%, its lowest rate since before the recession of 2008. Wages are also beginning to grow. Consumer prices registered their largest gains in more than two years in May, and a 12-month high in June – a sign that a stronger economy is pushing demand higher. This environment presents a prime opportunity to find attractively priced stocks of great businesses that are well positioned to capitalize on emerging opportunities.
While there will never be a shortage of negative headlines to fuel the fears of “perma-pessimists,” it can be expensive to take let investments be driven by emotion rather than logic. A long-term investment strategy built upon a selective, value-based approach continues to be MPMG’s philosophy, one that continues to serve clients well.
General Wesley Clark and Robert Bryce –
The Next Strategic Shift: Challenges and Opportunities for American Investors
For the first time in the ten-year history of MPMG’s Speaker Series event, two guest speakers shared the stage. Because of the complexity of the issues facing investors, MPMG felt that attacking these issues from two distinct viewpoints with the insights of two of the world’s leading authorities would yield the greatest insights.
General Wesley Clark capped a 38-year military career by rising to the rank of four-star general and serving as NATO’s Supreme Allied Commander, Europe. Since retiring from the military in 2000, he has taken on the roles of investment banker, alternative energy leader, author, network television military analyst and businessman. He sought the 2004 Democratic nomination for President and was victorious in the state of Oklahoma before he returned to the private sector. Mr. Clark has chaired several public and private companies and is a progressive leader in pursuing energy solutions. He graduated first in his class at West Point and was a Rhodes Scholar, completing degrees in philosophy, politics and economics at Oxford.
Robert Bryce, a senior fellow at the Manhattan Institute, has nearly three decades of experience as a professional journalist. His articles have appeared in dozens of publications, including the Wall Street Journal, The New York Times, National Review and the Washington Post. His first book, Pipe Dreams: Greed, Ego and the Death of Enron, received rave reviews and was named one of the best non-fiction books of 2002 by Publisher’s Weekly. His newest book, Smaller Faster Lighter Denser Cheaper: How Innovation Keeps Proving the Catastrophists Wrong, focuses on how continuing innovation fosters unprecedented prosperity, greater liberty and better environmental protection.
MPMG moderated a discussion between Mr. Clark and Mr. Bryce that focused on what it believes are key pillars for our future: the economy, cybersecurity and terrorism, energy, and global warming.
Prior to the end of the Cold War, the United States was united toward a common purpose (deterring the Soviet Union), and we succeeded. In the 1990s, we enjoyed significant economic expansion but with no real national strategy, particularly as it related to our military strength. The aftermath of the 9/11 attacks demonstrated this. We invaded Afghanistan and later, Iraq, with no real follow-on plan on what to do after the initial combat mission was completed. As a result, chaos ensued. The nuclear deal with Iran is a prime example of how we lack a global strategy. Although aspects of the deal are disappointing, Iran is not a major threat, and yet it is consuming significant focus that should be placed on other potential threats like Russia and China. We now face a number of major challenges – terrorism and cyber security, stability of the financial system, the growing influence of China and climate change. We need a cohesive national strategy to address these and other concerns.
Energy continues to be a key factor in economic progress. The countries that have cheap, abundant and reliable energy are wealthier than those that lack it. The need to produce cheaper energy drives the industry. Coal is a fascinating story. Despite it being condemned as a “dirty” energy source, it is estimated that by 2019 consumption of coal globally will exceed that of oil for the first time since 1949. Demand for coal is driven by the need for development of electricity for a growing consumer class globally. It is a cheap and abundant source of fuel, and 500 coal plants are under construction worldwide, many in China, India, Brazil and Indonesia. Nuclear power is still a major factor as an energy source around the globe. Iran’s pursuit of nuclear capabilities is very much tied to its need to generate electricity from nuclear plants. While an inspection system is needed as a deterrent for nuclear weapons ambitions for countries like Iran, finding agreement to allow Iran to pursue non-military uses of nuclear energy is important. Oil remains a prominent factor in the energy landscape. The boom in shale oil production, particularly in the U.S., signals the end of OPEC’s influence on world oil markets. Access to cheap and reliable energy remains one of the key elements of continued economic development worldwide.
The economic future given the bloated worldwide debt levels
Mr. Bryce believes that the enormous debt loads of both governments and individuals will have a major impact on how fast economies can grow from this point. He fears that this increases the risk of a potential economic slowdown, as leverage must be wound down.
Mr. Clark suggests there is a problem with adequate demand, not so much with supply. People are not in a position to expand their consumption given the financial realities. Businesses invest when there is demand to be met, which must come from consumers or government expenditures. That isn’t happening quickly enough now, and is a big reason why corporations continue to hold cash reserves overseas. Mr. Clark believes that giving corporations tax incentives to repatriate those assets would be beneficial, but political agreement is lacking.
Terrorism and Technology
According to Mr. Clark, most companies prefer not to spend money on security, especially cyber security. He thinks a solution is for government and corporate America work together to meet the challenges. He says America needs a legal framework to deal with it and the government has to step in.
Mr. Bryce notes that terrorism and security threats will always be with us, but that the threat is heightened in today’s connected world. Despite the threats, Mr. Bryce sees a bright future for technology. The smart phones we hold in our pockets today have one million times the storage capacity of the computers that went to the moon in 1969. We’ve seen a 70,000-fold reduction in circuit size. Advancements in medical devices have been tremendous. There is no end in sight to the innovation we’ll continue to see in the technology arena. The benefit, according to Mr. Bryce, is that it is contributing to more cost efficiency.
The future of energy
While the two speakers had much to say on the topic of energy, a significant disagreement focused on the role of biofuels. Mr. Bryce is a severe critic of the ethanol industry, while Mr. Clark is a proponent of it. Mr. Bryce says the corn ethanol industry has been artificially sustained by government subsidies. It costs $10 billion per year in taxpayer money to support what he believes is an inefficient source of fuel. Today, according to Mr. Bryce, we burn a large percentage of our corn crop to meet just 0.6% of world oil demand. Mr. Clark takes a decidedly different stance, suggesting that biofuels have an important role to play in the nation’s energy strategy. Ethanol is proving to be increasingly efficient, cheaper on the wholesale market than gasoline, and with higher octane. He cites statistics showing that since 2005, this country has added more corn production than has ever been required for ethanol production. If it helps support the price of corn, says Mr. Clark, that is a positive development for agriculture worldwide.
On other energy matters, Mr. Bryce claimed that there has never been an oil shortage. Instead, he suggests it is primarily intervention, either by governments or oil cartels, which has led to temporary supply shortages. He credits the current growth in production to a combination of factors related to commodity prices and technology. He notes that it becomes more economical to pursue production if prices go up. Mr. Clark believes the increasing efficiency of America’s shale oil exploration is going to make it difficult for world oil powers like Saudi Arabia to sidetrack domestic oil production. The Saudis have been keeping their own production levels high in an effort to drive the price per barrel lower and potentially cripple U.S. oil production.
Mr. Clark is a major supporter of renewable energy efforts. He notes that wind and solar are becoming cheaper to install on a per-megawatt basis than coal. The key to future growth for these alternative energy sources over the long term is advancement in battery technology to store the sporadic energy they produce. Mr. Bryce says the nation’s energy security is also benefiting from continued advancements in more efficient engines, lighting systems, and other technologies.
Mr. Bryce closed the conversation by addressing the phenomenon labeled by author Gregg Easterbrook as “collapse anxiety.” It is defined the inability to enjoy prosperity because of fear that the Western lifestyle may crash as a result of economic breakdown, environmental damage, resource exhaustion or another cause. Mr. Bryce says that these fears have always existed, and disagrees with the false romantic notion that the world would be better off if we turn the clock back and reject many of the technological advances that are moving society forward. The world’s problems have been, and will continue to be solved, through human ingenuity. He also believes that the U.S. will remain the dominant economic force throughout the 21st century. He cites a myriad of advantages – cheap, abundant energy, exceptional living standards, and more freedoms than most countries. Mr. Bryce says people want to come to America and that will continue to be the case, a testament to our country’s continued prosperity.