Sailing into a Crisis
What you can do to Prepare
Customers For Life
Years ago, I owned a sailboat built in 1929 . . . and you know what else happened that year. Designed by John Alden and built in Marblehead by the James E. Graves yard, the boat, which I named Ivy, was 28 feet long, thin and beautiful, and propelled by a big mainsail on a 40-foot wooden mast. When I bought it, it leaked like a sieve. I fixed it up, enjoyed it for a few seasons, and when I sold it to Matt Murphy, who became editor of Wooden Boat magazine, it still leaked like a sieve.
The year after my boat was built, 1930, the America's Cup--the most prestigious race in sailing--was won by the 120-foot-long Enterprise, a boat owned by Winthrop W. Aldrich, Harold Stirling Vanderbilt, Vincent Astor, George F. Baker Jr., Floyd L. Carlisle, E. Walter Clark and George Whitney . . . rich guys. Enterprise beat Shamrock V, the fifth entry of English tea magnate Thomas Lipton, in four straight races.
America's Cup boats have never been as big or as beautiful as they were in those races in 1930.
In short, the Great Depression got in the way. Rich men became poor. Conspicuous consumption went out of style. Everything got smaller . . . for a while.
The most recent America's Cup, in 2007, was won by Alinghi, a yacht sponsored by Swiss pharmaceutical billionaire Ernesto Bertarelli. And while the boats weren't as big as those of 1930--their length was limited to 85 feet--the budgets were record-breaking. Bertarelli poured $90 million of his own money into the contest.
Since then, however, Alinghi's main sponsor, UBS, has been bailed out by the Swiss government to the tune of $59 billion. And thanks to the global recession, budgets for the next race, in 2010, will be dramatically reduced.
The parallels with 1930 are clear. In boom times, the boats grow bigger and the campaigns more expensive. When times get tight, the budgets shrink dramatically . . . though the race goes on.
And what are we to learn from this? That you should short sailboat makers when the trend peaks? Perhaps, but the bigger picture reveals far more possibilities.
I just finished a book that was recommended to me by a long-time Cabot Market Letter subscriber, P.H. of Arizona. The book's editors, sociologists William Strauss and Neil Howe, originally became famous for "Generations," published in 1991. They followed that with "13th Gen" in 1993, "The Fourth Turning" (the book I just read) in 1997, and finally "Millenials Rising" in 2000. Strauss died in late 2007.
The books all deal with the authors' conception that progress in America is not linear but comes in predictable cycles, all because succeeding generations grow up influenced by--and reacting to--the behaviors and values of their parents' and grandparents' generations.
And according to the authors, the characteristics that define generations are repeated every four generations, so a full cycle takes about 80 years. We are now entering the fourth phase (Fourth Turning) of one of those cycles, and it's not expected to be a good phase.
In brief, a First Turning is characterized by a national High that puts a crisis behind and brings a renaissance to community life. The post-World War II High is our most recent High. Before that was the Gilded Age (1870-1890).
A Second Turning brings an Awakening; young adults revolt against the stability and order as new spiritual ideas and social agendas burst forth. Recall the flower children of the 1960s, preceded by the bohemians of 1900 and the utopian communes around 1840.
A Third Turning brings an Unraveling, as the liberating forces go too far and rampant selfishness is countered by emerging strict moral forces. (Sound familiar?) Previous Unravelings came around World War I and the 1850s. According to the authors (back in 1997), our Unraveling should have ended about 2007 . . .
. . . to be followed by the Fourth Turning, the Crisis. (Interestingly, Strauss and Howe had no idea that the catalysts for our Crisis phase would come from sub-prime mortgages and high gasoline prices.) A Crisis period is characterized by a growing uniformity of purpose, a desire to cast off the complexities of the previous years, to unite as a community, and to address the urgent challenges threatening our civilization. The good news is that the Crisis has always been surmounted. The bad news is that the phase takes 15 to 25 years.
The book says:
"A Crisis era begins with a catalyst--a startling event (or sequence of events) that produces a sudden shift in mood.
Once catalyzed, a society achieves a regeneracy--a new counter-entropy that reunifies and reenergizes civic life.
The regenerated society propels towards a climax--a crucial moment that confirms the death of the old order and birth of the new.
The climax culminates in a resolution--a triumphant or tragic conclusion that separates the winners from the losers, resolves the big public questions, and establishes the new order."
And the result is a new High, which is good. Unfortunately, virtually all of the Crisis stages noted by the authors ended in major wars, in which opposing powers resorted to their most destructive weapons. Previous crises were resolved by the American Revolution, the American Civil War and World War II.
The current Crisis, assuming it is uninterrupted by extraordinary measures, is likely to end in a big war as well. Where it will be fought and what our goals will be is yet unknown. Many people today would bet that it will be over oil because we won't achieve energy independence in time. Others might argue that the Christian/Muslim divide will be the focal point. Global warming, anybody? Time will tell.
But when it's over, the country will be in the hands of a generation driven by strong family values, reinforced institutions and a unified social structure. To see the members of this generation, who will take us to the next High, look at the Millennial Generation, born in the roughly 20 years after 1982.
Admittedly, the authors paint with a broad brush. They focus on people, not technology, so they overlook the role of the Internet and the role of energy, both of which have been critical economic factors in recent decades.
The authors don't claim that the future is carved in stone; they recognize the potential for the concerted efforts of humans to overcome the tendencies of their generational situations. But they do provide a framework for long-term cultural analysis that makes some sense, and the events of the more than 11 years since the book was published suggest that their work deserves a closer look.
Will it get it? Probably not. With one author dead and the book tour long over, the franchise of the two men seems to be spent. Furthermore, I think the public appetite for such ideas is slim. It seems to me that many people would rather believe in the American principle of self-determination--the triumph of free will--over the cycles of generational time.
I think also that most Americans have a hard time seeing the big picture. They're focused on the daily news, on what President Obama said earlier this week and what the members of Congress are doing in response. They're also extremely well-informed about an unemployed single woman whose brood mushroomed from six to 14 in the space of a single day. But they're increasingly ill-informed about their place in the historical tide.
So what can you do?
The authors suggest these steps:
Return to classic virtues, like self-restraint, family commitments, cultural decency and mutual trust.
Heed emerging community norms, as the nation's core will once again be more important than its diversity.
Build personal relationships of all kinds, especially with people who can help you.
Prepare yourself (and your children) for teamwork, as the rewards will grow for people with a reputation for accepting authority and working well in teams.
Look to your family members for support, as they will be your ultimate safety net.
Gird for the weakening or collapse of public support mechanisms. Unless your income and wealth are low enough to pass a means test, don't count on Social Security, Medicare and Medicaid. Save.
Diversify everything you do, as generalists will have an advantage over specialists whose skills are useful only in an undamaged environment.
Your feedback is welcome, by email or on our blog, http://www.iconoclast-investor.com
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I read a large part of "Fourth Turning" in the St. John, U.S. Virgin Islands airport on Monday afternoon, while waiting for a flight home. All around me were TV sets showing President Obama speaking to a crowd in Elkhart, Indiana, intruding on my consciousness. I tuned them out with an iPod and the book. That same evening Obama spoke again, and I read his words the next morning, reflecting all the while on how exactly his talk of crisis and catastrophe fit into the book's projections.
And now, three days later, as the immediate impact of the book has cooled and my core beliefs and values have accommodated a little part of it, what do I think?
I think you should read the book and decide for yourself.
And putting on my investment hat, I think you should remember that even though the Chinese ideogram for Crisis does not mean Opportunity, times like the present do offer unusual opportunities to men and women who can seize them.
For Americans with average or below-average job skills and family support, times are already hard and they're likely to be harder still. Government safety nets will be strained. You don't need an 11-year-old book to see that. But for the above-average American--which likely includes you if you have read this far--opportunities arise.
Long term, I'm very keen on solar power. But the sector was a big winner in 2007, and now needs more time out of the limelight before it shines again.
In recent issues I've talked about for-profit education, and that's still an attractive sector, thanks to the strong desire of motivated people to improve their prospects for employment.
I've also mentioned medicine, where the future is bright for several reasons. First, baby boomers are aging, and will need a lot of care. Second, the transition from our current broken health care system--where the insurance companies hold all the cards--to its successor will bring new opportunities. I sincerely hope it focuses more on keeping people healthy than treating the sick. And fourth, the growing discoveries in genetic medicine promise a greater understanding of our bodies and thus new advances in treatment.
But today I've got a new idea for you, a stock that popped up in Cabot Top Ten Report just last week.
It's Brinks Home Security (CFL) and here's what Michael Cintolo wrote about it.
"Brinks Home Security installs and monitors home alarm systems, including burglar, carbon monoxide, heat and smoke. The company was spun off from its famous parent on October 31 and there are several reasons to like it. First, like most companies that have recently come public, it's not well known as a stock yet, so there are far more potential buyers than sellers, and as the story gets out, these buyers are likely to bid the stock up. Second, it has no long-term debt, which is a marvelous thing. In fact, the parent company retained all pension liabilities! And third, it's in a business that provides excellent recurring revenue, a trait we've always been keen on at Cabot. In the third quarter earnings release, for example, the company noted that Monthly Recurring Revenue (MRR) rose 9.6% from the year before to $39.8 million."
I look at it and I see a company with perfect five-year trends (viewing the company as an independent entity) of growth in both revenues and earnings every year. The valuation seems fair. Finally, there's the fact that if we're heading for a difficult period where people are increasingly conscientious about protecting their homes, Brinks will benefit. By the way, the stock's symbol (CFL) stands for "Customers For Life."
The stock bottomed with the market back in November and has been in a good uptrend since. The past week has seen it pull back a couple points from its high of 25 and I think buying between here and 22 could work out well.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory
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