Don´t forget the system

Dear Reader and Fellow Investors,

I recently had the pleasure of over hearing a discussion on the merits of free man, free market.

Long term investment management believe in a free market, free person.

Not one for political chattering, however, I would like to portray some points that I believe are important and which we use actively when investing, and indeed, in living.

The system we live in cannot be ignored. We must always try and study it and attempt to understand where it has been, where it is, and where it is going relative to itself and other systems.

Though people make the system, the system eventually makes the people.

When told, free man, free market; I feel obliged to say free market, free man.

Free men have created controlled societies, which made other men controlled, not free.

One cannot separate themselves from their system, they must see it and use it for what it is.

It is the difference in institutions that often make different countries have different systems, and this story is often clearly embedded in history.

People are no different from one place to another. Like in evolution, freak accidents create freak genes that occasionally create a superior species. But we must distinguish the aggregate from the individual. Society is rarely a freak accident in the long run. I have often worried that history takes one path when looking from behind, it may look more rigid than it really is. However, i believe more and more that only the time component is random, the events often have to happen. Much like over valued markets must fall, we simply do not know when, what the random trigger will be.

Let us refer to a previous blog where we hint on our belief that incentives create conditions that make certain events more probable. But what creates the incentives? Often this is painted in history. Whether there was huge immigration, a war, a natural disaster. A system today was made from its history, it only exists because of its history.

Individual events on individual days seem random, but there role in a longer history are predictable when placed into a longer time frame.

As a result, luck favours the prepared mind…

The discussion I overheard also touched on the concept of the law of the land.

Law, in my mind, is the collection of the thoughts of many individuals through history. Law is created to reduce the sound of a single individual. It is fundamental to the working of a society. When a government starts tinkering with the law in unusually large amounts, they are making the sound of one person, of one government, louder than the sound of the majority of a country, or its history. This is a most worrying sign…and the public must decide if they agree or disagree.

As always, yours sincerely,

Alessandro Sajwani


PS.

Management of the system should be focused on stability of the currency (i.e. price stability), clear and fair law and an encouragement of open and free markets where cheaters are punished and good people are rewarded. A sophisticated police force (regulation) to ensure quick money is not being made at the sacrifice of long term gains should exist to stop, for example, poor lending practices or the unjustified usage of securities with assymetric properties. However, good laws would ensure this and good police would ensure it is being practiced. Other variables such as employment should be sorted out by the market. If you give them decent rules to play with, they will give you a good solution.

A good police would also make continuous investigations into the impact of different products coming into the market. There should be less of a gap between academics, investors, government in this area: all there opinions should be valued and participate in final conclusions to law making. Thi ensures less of a conflict of interest towards a particular member of society. Each party, of course, have their own incentives and agenda be it re election, making money quickly or building a reputation.

The reality seems to be that any system is unstable, different systems can simply seem to be sustainable for longer. Humans seem to have tendency for self destruction, often driven by personal greed and feed on by herd behaviour. All things human are flawed, they are therefore ephemeral. They will be changed, and often, those who want change to those who do not, will have a conflict. We fight for different flawed ideas. this is life. we all need to identify ourselves to something to feel we exist..

Categorisation of being a monetarist or Keynesian is best left to bureaucrats.