Cigarbutt

I know, I should look for mispriced ideas and, in the end, we will all be fine but, a few weeks ago, I read a book about John Law, an 17th-18th century fascinating character that may be relevant in today’s investment world. Who knows? So, I have prepared a commented book review of this recently updated publication of John Law’s biography. Law lived and performed in 18th century Absolutist France. I understand that this may be of some interest for some. If you want to see a photo of the man. http://www.eumed.net/cursecon/economistas/Law.htm The book is called: The Mississippi bubble: a memoir of John Law. I read the 2016 French edition but the text is essentially based on the initial book written by Adolphe Thiers (1797-1877). Thiers was a French politician and historian. The book is historical and critical. John Law was born in Scotland (1671). It became clear that he was a gifted individual attracted to higher social circles. After a duel (that was one of the ways to resolve problems then), Law eventually had to flee England. He travelled in Europe to live and learn, spent some time in Amsterdam and studied the functioning of the Bank and amassed money gambling. He came up with and wrote about the potential of paper money as a way to increase trade and wealth. The biography describes well how the money supply was scarce in those days. Also, there were few banks and, as a rule, these institutions did not extend loans on reserves. Basically, Law devised a set of theoretical ideas that he wanted to apply to the real world. He tried to sell his ideas to different rulers and monarchs and ended up in France right after the death of Louis XIV. (After all, Princeton was only founded in 1746) Louis XIV (le Roi-Soleil) ruled the country that was considered a leading European power at the time. However, the king was not a fiscal conservative and incurred a huge debt spent on the lavish lifestyle of the Court and expensive wars, including the War of the Spanish Succession which finished in 1714. When Louis XIV died in 1715, France was basically bankrupt. In those days, Thiers explains, national debt was not based on the issuance of what we now know as government bonds but was financed by the issuance of “billets” and “rentes”. In 1715, these instruments were trading at about 30% of nominal value. Before Louis XV (child) was ready to rule, a Regent, le Duc d’Orléans, took control. Fiscal revenues were incredibly low in relation to general and interest expenses on top of high short term refinancing needs. Taxes were felt to be oppressive and a large part of tax revenues was extracted by intermediate collecting agents. There seemed to be no way out. That is when John Law comes along. He has a plan, a “Système”, that has the potential to create wealth and to cause the debt dead end to disappear. The “Système” application would be painless, so it seemed! The plan included “debt management” with more debt, reform and reorganization of the extractive tax collecting system and some kind of infrastructure spending. (More or less a “drain the swamp” type of approach) From an independent perspective, as the author explains, the entire plan did not make any sense but the Regent decided to go ahead anyways. Personal note: A parallel to the modern era would be that a candidate having the intention to lead a major economic power would promise, in the context of an excessively leveraged economy, to significantly decrease taxes, to massively invest in infrastructure using government funds, to balance the budget AND expect to be elected. When you thought that you could see this only in a Hollywood movie. Time to be “all in”. Isn’t it? Who needs basic math when you can have financial engineering/alchemy? John Law had a plan and was impatient but, to “succeed”, had to go step by step. He first setup a private bank with his own money (1716). He was able to get implicit royal backing and to issue his own paper money. The author rightfully suggests that the creation of paper money satisfied an unmet demand then. Initially, the bank contributed to an increase of money velocity and trade. Interest rates did decrease and the value of government debt moved closer to par. After all, fractional banking became eventually a cornerstone of modern capitalism and Law, in that respect, was an ingenious precursor. Perhaps, at that point, the French would have been better off if Law had fallen from a horse. But that wasn’t to be. He was put on a pedestal. L’excès en tout est un défaut, and Law went too far (way too far). After the successful exploration by Lasalle (1673) along the Mississipi River, France took possession of a very large piece of land which corresponds today to a territory made up of more or less 15 USA states. Law saw an opportunity for commerce there and also in other areas of the world. (His motto could have been “Make France Great Again”) With the Regent assent, he transformed the private bank into a public bank, “la Banque Royale” (1718), merged the bank with this global trade commercial endeavor, and issued a massive amount of paper money backed by a fraction of the real money in circulation and backed by grossly overvalued shares of the combined entity. The “Système” also eventually involved taking over the collection and administration of tax revenues. Finally, Law planned to effectively refinance the entire national debt (huge) through the issuance of the “Banque” paper money (1719). In essence the “Système” effectively took over the state treasury and took control of monetary policy (issuing paper money) on a large scale. John Law became, after the king, the most powerful person in France. As Voltaire later affirmed, Law was a single foreigner who gambled against a whole nation. What is known as the Mississipi Bubble became characterized by a speculative fever concerning the shares of the “Compagnie” and by a generalized oblivion concerning the value of the paper money issued by Law (Law became equivalent to law). As described in the book, the value ascribed to the paper money became disconnected from the underlying fundamentals. The amount of money printed had no rational link to the underlying economic substance of the “Compagnie”, the state and the economy in general. (The government then did not produce much in terms of graphs but, perhaps, some recent graphs from the Federal Reserve balance sheet may be revealing in terms of the scope of money printing) The inevitable happened. Law tried to stop the unwinding process by using political moves and coercive measures but reversion to the mean was too strong. Parts of his strategy then were capital controls and schemes to make real money disappear. He met resistance. (Personal note: at some point, pushing on a string will meet resistance.) Then, confidence in his system evaporated (1720). Thiers is quite critical about the downfall when he describes the inevitable pain that comes after a bust of this magnitude. Confidence can be fickle. Law had to basically escape France and eventually died in misery in Venice in 1729. All components of his system disappeared as the financial instruments were retired or refinanced, at a significant loss, using other names (the king went back to the old “rentes”). Apparently Law never admitted that the system he devised was flawed from the start. Instead, he felt that his system had been destroyed by inappropriate outside forces… In France, thereafter, there was basically financial repression and, after the deflation of the bubble, the country remained reluctant to use paper money for a very long time. Paper money was used for a short period after the Revolution (the “assignats” used in the 1790’s) and that was a bad experience as well. For a variety of reasons, France remained behind the leading economic powers for a very long time. (Personal note: some say that they never really caught up but that’s another story) John Law tried a grand monetary experiment. He suggested that there was no limit to money printing and that money creation automatically translated into wealth. Not surprisingly, that did not turn out to be the case. The biography written by Thiers does a good job overall at providing a sufficient amount of financial data to appreciate the size and scope of what Law wanted to achieve. Dissecting the data, the reader is able to confirm that trees don’t grow to the sky. It is interesting to note that Goethe, the German writer and statesman, was likely influenced by Law when, in the Faust play, the main character ally, Méphistophélès (devil), offers a ruler to pay its claims by magically issuing an unlimited amount of paper money backed by a mostly undefined promise. That story does not end well also. Personal note. It is also interesting to appreciate that financial alchemy is again in vogue. If you made it this far, I would only add the following comments that one of our connected elites made in a recent blog in the context of the recent homeopathic rise in centrally managed rates. With the next recession, says he, “managing expectations” may not be enough and negative world upside down interest rate policy remains a viable option even if it may be difficult to swallow for the populace. Of course our modern financial geniuses do not wear wigs. They have Gucci suits on too. That does not completely reassure me. Wall Street or rue Quincampoix? I think I’ll stay home. I know, in the end, we’ll all be fine. Most of us anyways. For the artistically inclined:

Annual report is out. Interesting comment on short term results vs long term. Interesting take on Rainmaker, typical value investing style. I'm not sure what to think anymore?

I did not realize that feedback would come back so rapidly. Way to go LC. I owe you one.

I'm fairly new here but I submit that, overall, this forum is excellent. There a many outliers that make it uncomfortable but that's the way to go, especially if done in a respectful manner. But there is always a danger of self-reinforcing group think. Need humility and a strong inner score card at the same time. Not easy. I like:"To improve generated information content in online investment communities, we suggest designing to increase diversity of opinion, minimize friction around incorporating new information, and provide performance feedback for self-correction." Please never hesitate to provide help for self-correction. Who knows, maybe useful concept outside of investment circles?

Sunrider, Trying to have a balanced view here. This is not a conspiracy but medical errors are a huge issue. (Mostly still unrecognized) It's hard to admit mistakes. (individually or in organizations) Here's some links/stats: http://www.cbc.ca/news/health/medical-errors-deaths-1.3565736 https://en.wikipedia.org/wiki/Opioid_crisis There are elements now in place that will tend to improve this. We'll have to wait and see. As far as the US system for training and research, my opinion is that it is the best, by far. Some say that the system is, at the same time, the best and the worst. Food for thought. https://www.theatlantic.com/politics/archive/2014/03/us-health-care-is-the-best-and-the-worst/430719/

Innovation is good. Information technology is great. And fun. Really. But where the money? Recently looked at the productivity paradox numbers? Some say that some benefits are not measured. I agree that a self driving car that takes me to Tim Hortons is an adjunct. As far as surgery, I would humbly submit that humans still have a slight edge. All this to say that there may be a slight exaggeration of the potential benefits. And maybe, a slight underestimation of human potential. The income disconnect has shown diversion lately. Value added content is where you want to be.

By the way, my aim was not to drift into military spending or other. slides referred to were 14,15 and 16. These slides show facts that are accepted across the board. These are not fake or alternative facts. What you do with those facts is the question. My point was to think how to improve healthcare delivery per dollar invested. In another life, I was involved in that at the micro and macro level. Yes, as advanced societies, we invest individually and collectively huge amounts. Are the funds spent wisely? My answer is not really. Do we need to have a revolution? My answer is not really. But. Perhaps a down to earth observation (always keeping in mind potential investment opportunities). In the US, I understand that many (perhaps many that don't feel connected to the elites) can run into major financial difficulty when they become sick. The same problem occurs too in Canada but much less so. Isn't fascinating that about 18% of GDP spent on healthcare is not enough for basic coverage? Some diseases go away by themselves. Some, if not treated, can leave scars. Healthcare will tend to become a larger issue going forward. Can we manage? Absolutely. May be some paradigm shifts however. I like prevention, if possible.

rb, I appreciate your encompassing opinion. You're right. Somehow, in the aggregate, we will all be fine. Ronald Reagan said:"America's best days lie ahead". Albus Dumbledore said:"'Dark times lie ahead of us and there will be a time when we must choose between what is easy and what is right". Perhaps hope for the best but prepare for the worst? Isn't what margin of safety is all about?

The contract is very interesting... I presume it is humorous but can't tell for sure... By the way, your junior investor may need better legal representation as your rates meet the usury definitions! When I thought that the World was filled with complacence about debt. I would then respectfully submit: "It is not the healthy who need a doctor, but the sick." Good luck with the kids. Do you ask them for collateral?

Here's the link: http://www.pgpf.org/sites/default/files/PGPF-Chart-Pack.pdf

I know: -This is mostly an investment forum. -The topic has political implications. -Despite being an interest of mine, healthcare has never made it to my investment punch card. (?) But this may be of interest for some, especially for our American friends. This post is non-partisan (I hope anyways). As most must be aware Trumpcare has not been enacted. I would humbly say that this may be a minor issue in the grand scheme of things. A link here from a presentation that talks a lot about debt and all but, for relevance with this specific post, look at slides 14, 15 16. By the way, long term, I would not bet against the US. The slides show though that a lot of $ is spent on healthcare and aggregate results don't show up. Time to think outside the box? Opportunities?

SmallCap, I'll give you my take for what it's worth. For basic financial education ie saving vs spending, how to buy a car, use of credit cards, how to make a budget etc, I think that parents can play a key role (walk the talk). In terms of value investing hindsight, I would be... more realistic. Successful value investing perhaps requires a certain mindset and attitude. The trait may not be so common and maybe the genetic/environmental factors may not be sufficient. Sorry. That's been my experience so far anyways. Unless there is a true vocation, perhaps it is best to go with an index fund type of approach. In my case (I prefer to think long term but who knows?), I am setting up a way to put me off track when the time comes and alternative ressources have been identified. Index funds are also an option. Having said the above, an entrepreneurial activity with the small ones can be useful AND fun. My mother used to say business before pleasure. But that's not in the offing anymore.

For those interested in RESP accounts, maybe one way to look at them is to expect a +/- 70% penalty at the end of the road for the amounts left. Food for thought. Especially if you like snowballs. Also, something that can be done and which is absolutely legal is that once an older child starts post high school education, the capital amount can be retired without losing the government grants. Then, if applicable and if you want, you can contribute the same amount retired to a younger child (in a family type account) and get the grants again. It's rare that the taxman lets you get away with this type of action but that's the way it is right now.

rb, I would like to provide a better answer but...the best I can come up with is: in the long run, we are all dead.

Viking, I've had a similar experience with our family RESP. I hear a lot of complaints about the cost of higher education but perhaps filling up a form and a slight modification of lifestyle can go a long way for all income tax brackets.

Would add that you can open a TFSA account only when you turn 18. For RRSPs, your contribution is tied to a fraction of work income, perhaps not significant when still in high school. I would add personal experience for others if you decide to help your kids this way. You can, in a relatively simple way, open an "in trust" account at a discount broker in the name of your child. I did that for all my kids. The nice thing is that capital gains are taxed at the child level (think about that for a minute). Second generation income is also taxed at the child level. You need to really follow the attribution rules. I must say that, for 4 or 5 years in a row, I had to submit documentation showing the allocation process. The last year I did this, my document was about 20 pages long. They stopped bothering me after. You need to, if you go that route, follow the rules and be ready to justify. Otherwise no mercy. I understand that this is no longer permitted in my province but, from what I hear, it is still allowed elsewhere. Of course, you have to remember that the funds actually belong to your offspring when they reach 18. Harvest what you sow maybe. Hope this can be helpful.

investmd, I like your way of asking more questions than providing answers. We should continue perhaps bottom fishing looking for value but the question you ask: "Are there any structural reasons to think that the next 10 years will be drastically different?" really haunts me. Obviously, there is a lot of noise. Always the case. To separate the wheat from the chaff is the challenge. I would appreciate also hearing Mr. Chou on these questions.

Interesting story. Reminds me of similar experiences with the Monster. Perhaps it becomes, at some point, a simple investment decision:ie is it worth the time or aggravation? If it becomes a matter of principle, re-evaluate? When you reach points of resistance, it may not be time to pick up and read Atlas shrugged as you may feel like looking for a guy whose first name is John. Who? I encourage you to continue your venture. Keep us informed. Good luck.

Hi DCP, Hope this helps. From Hagstrom The Essential Buffett p157-8 Buffett on Diversification Buffett's view on risk drives his diversification strategy; here too, his thinking is the polar opposite of modern portfolio theory. According to that theory, remember, the primary benefit of a broadly diversified portfolio is to mitigate the price volatility of the individual stocks. But if you are unconcerned with price volatility, as Buffett is, then you will also see portfolio diversification in a different light. "The strategy we've adopted precludes our following standard diversification dogma," says Buffett. "Many pundits would therefore say the strategy must be riskier than that employed by a more conventional investor. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort level he must feel with its economic characteristics before buying into it." 12 That is, by purposely focusing on just a few select companies, you are better able to study them closely and understand their intrinsic value. The more knowledge you have about your company, the less risk you are likely to be taking. "Diversification serves as protection against ignorance," explains Buffett. "If you want to make sure that nothing bad happens to you relative to the market, you should own everything. There is nothing wrong with that. It's a perfectly sound approach for somebody who doesn't know how to analyze businesses." In many ways, modern portfolio theory protects investors who have limited knowledge and understanding of how to value a business. But that protection comes with a price. According to Buffett, "It [modern portfolio theory] will tell you how to do average. But I think almost anybody can figure out how to do average in the fifth grade." (OID)13

Perhaps people have heard about TFSA stories like this one: (2013) http://business.financialpost.com/personal-finance/tfsa/how-about-a-big-bet-on-the-u-s-housing-market-for-your-tfsa?__lsa=dde9-c7fe Then you say that he is a gambler. But: (2017) http://business.financialpost.com/personal-finance/tfsa/not-for-the-faint-of-heart-the-500000-tfsa-and-whether-its-right-for-you?__lsa=1bb1-7f23 Maybe the investor is on this board as I gather that a lot of people liked/like Fannie Mae stuff. I understand that CRA (CDN IRS) may have an eye for outliers. We're egalitarian, aren't we? Or perhaps they believe in efficient markets! The other point I'd like to make is about the other side of the sunset provision. I recently discussed with my two older children (turning 21 and turning 20 in 2017) about the effect of compounding on the maximum possible contribution (they both got the 10k bump in 2015) over a period of 30-40 years and +. It helps to restrain yourself from keeping up with the Joneses. And from Bloomberg today:"Prime Minister Justin Trudeau will try to convince Canadians he’s just as good at generating growth as he is at handing out checks". I agree with basic distribution but the wording unfortunately reveals the underlying subtle pervasiveness associated with the Robin Hood etiquette. One of my interests is exercise physiology. At some point, if you want to shine, you simply can't improve endurance AND strength. At some point, one has to compromise, ie the "improvement" obtained on one side is made at the expense of the other. I suggest that the automatic stabilizers may offer better protection than some arbitrary choice. Today, no change has been announced for investment taxation but it is in the air.

Uccmal, One of the great things of this forum is to read stuff that resonates with our own thought processes. I find that what you write is useful and hope to eventually contribute too in a material way. I will keep a safe distance though and will not hesitate to challenge you (politely). This is a period of relative hibernation but I'm sharpening my pencil.

Interesting take rukawa. You may be interested in a course given by Andrew Metrick and Timothy Geithner (yes him) called the Global Financial Crisis (Coursera). I enjoyed it. I will tell you that I feel for the main actors when Financial Pearl Harbor hit. The course actually does a good job (balanced) at describing conflicting priorities that have to be dealt with urgently, with incomplete information and an un-written script. I see your point but perhaps one does not need to modify profoundly a system that has worked fairly well over the last centuries (reference to schwab's post). Perhaps, to prevent moral hazard and unintended deleterious consequences, strict and focal application of the Bagehot rule should prevent short term liquidity crisis management from morphing into a nightmare of historical proportions. For completeness sake: Bagehot rule:Walter Bagehot, a 19th century economist and editor of The Economist, designed the solution that remains as relevant today as it was then. The Bagehot rule is that the central bank ought to lend freely to a failing bank, against high-quality collateral and at a punitive rate.

I'm with SharperDingaan on this one but thank you Schwab for the thoughtful and measured response. Yes, the "over-hype" has to be put in perspective. I also think that there is now a pervasive and embedded moral hazard. There are "checks" but I submit that this may not be effective going forward especially during periods of stress. Given this context of equilibrium, how do you explain the Japan experience (not exactly conservative in its money creation predisposition during the last few years) and the evolution of its currency exchange rate curve? Thank you for the historical link. A few months ago, I read a book about John Law who has contributed greatly to the application of fractional reserve banking (good thing and a cornerstone of capitalism). Perhaps then (like today?), this foundational concept was contaminated by money printing gone too far. I plan to start a new thread with a commented review of that book or perhaps will include it later in this thread if it continues to have life.

I really admire people who are successful and humble. Rare combination though. We often underestimate the impact of luck. This is hindsight bias at work. Retrospectively, it may be easy to attribute your results to skill when really there was a confluence of circumstances. Having said that, long term good results are likely related to a superior approach. Hearing about the study done here, a parallel can be made to the book Free Capital. People from various backgrounds using different approaches can obtain good long term results. There seem to be common denominators though.

Good point jeffmori7. For our international friends, The TFSA is an individual tax protected account with rules. This is specific for Canada but many countries have them. My understanding is that for the US, the Roth program is similar. Interesting though how initial intent (announced intent anyways) was to give an opportunity for all adults (from the richest to the poorest) to amass sums for whatever, be it big ticket items, special family trips, down-payment for a house or retirement. If you look at official government statistics and some studies, those who benefit from these accounts are those who don't really need them! ie the high wealth households. Like you say jeffmori7, it is possible to benefit from the deferred tax advantage especially if you save and invest with a plan already. If you look at the statistics, the high wealth household effect is even more marked when you take into account the spousal contribution of those with no or minimal real earnings (ie the contribution is really derived from the spouse having earning power). Over time, it can really add up. Snowball. The disappointing revelation though is that many of those (my take: the majority) who would benefit from saving and compounding end up using the account mostly as a short term savings account. Also, some have shown that the contribution to the TFSA mirrors a smaller contribution to other tax deferred accounts (RESPs). So yes, this is an advantage to the high wealth households that is relatively new and compounding. But isn't it available to all and isn't it a matter of choice to a certain degree? Some suggest that the government should try to convince people that it is a good idea to save... really? Delayed gratification is not fashionable these days. Carpe diem?