Thoughts from the Frontline

The Nature of Change

October 3, 2003

"My interest is in the future, because I am going to spend the rest of my life there."
-- Charles F. Kettering

How well we deal with change is at the heart of the investment enterprise. I make a departure from our normal writing fare to think about the longer term future and some of the changes we will encounter. I speculate about the future of the investment business and what you will be faced with in a few years.

I have been thinking about change a great deal the past few months. I have been researching the academic literature on the psychology of investing for my book and the overwhelming conclusion that one is left with is how consistently the broad class of investors (which does not include you or me, of course) assume that the current trend will continue long into the future.

They may give lip service to believing things will change, they may constantly worry about changing trends, but they do not invest that way. They rationalize their actions with the mantra of "this time it's different" or assume they will be able to nimbly react to or avoid the affects of the change when it happens. It never is and they hardly ever do.

This study is super-imposed on a personal period of change which has me in a reflective mood. Tomorrow I have my 54th birthday. As I have been working for 30 years and anticipate working for at least another 30, this is the halfway point of my work career. (Richard Russell of the Dow Theory Letters, writing brilliantly and daily at 79, is my hero.)

I should warn readers that most of this letter is a somewhat reflective biographical sketch of the nature of change in my personal business journey. If that is of little interest, rest assured that next week I return to our regular format analyzing future investment trends and changes. But today I am going to indulge myself in a little free thinking.

I am often asked how to become an investment writer. The answer is I do not know. My rather torturous trek is not a model for young writers. It seems that I subscribe to the Yogi Berra School of Career Paths: "I came to the fork in the road and I took it." Sometimes the path was obvious and sometimes it was forced upon me. Change was not always welcome, but it has always been interesting.

I grew up working in a small print shop, setting type by hand and running small presses. I graduated from Rice University in 1972 and the Southwestern Baptist Theological Seminary in 1974. God not be willing to foist me on some poor unsuspecting church (what a disaster that would have been!), I ended up running a small family printing business. I grew it substantially and then we sold it in 1976. I eventually became somewhat of a direct mail guru back when direct mail was just beginning to computerize. I started a company which sold checks through the mail, which allowed me to volunteer with a missionary outfit called Youth With a Mission for three years. During that period I did some consulting with an investment newsletter publisher. In 1981, I returned to the check printing company where we developed a new technology for printing checks. When we introduced the prototype in 1982 at COMDEX (a large computer show) it was the fastest bit-mapping printer in the world - 120 fully programmable pages a minute, which was something in those days. It sold for $240,000 in 1982 dollars, if I remember correctly. I was fortunate (and forced) to sell out my interest at a very nice profit, as the largest investor wanted an older and more seasoned hi-tech CEO. His mistake, my good fortune. That was my first (and last!) foray into the high tech world. I then turned my attention to the investment publishing client (Dr. Gary North and the American Bureau of Economic Research), eventually buying a stake in the firm.

This was when Howard Ruff was the big dog on the block with 200,000 subscribers, Bill Bonner had a small office in a very rough neighborhood in Baltimore (it made me nervous to go there during the day!) and Tom Phillips was only a few years from his kitchen table. The investment newsletter publishing community, while competitive, worked closely together, sharing tips and secrets, as it was to everyone's benefit to grow the total market.

Even though I had an emphasis upon economics at Rice, this was really my introduction to the investment world. It was at that time I was introduced to von Mises, Murray Rothbard and gained an appreciation for the Austrian school of economics. (I actually met Nobel Laureate Friedrich Hayek [he was in his late 80's at the time] in Austria, who wrote the seminal Road to Serfdom .) I helped a lot of subscribers get in the cellular telephone lotteries and our personal partnerships ended up winning a few. I banged around in Africa attempting to get some cellular licenses there (l-o-o-o-n-g story), trying to make lightening strike twice.

I also looked at hundreds of investment ideas and managers. I read voraciously and began to get some glimmer of the field. I soon realized there was more money to be made in managing money than writing about it. I formed a partnership with Gary Halbert of ProFutures in the late 80's and we began to offer a variety of funds and managers to clients, helping build that firm into a quite respectable venture. Rather than directly manage money, we managed managers, so to speak. We emphasized alternative managers, market timers, commodity funds, and hedge funds. I had begun to write in the late 90's and was meeting with some small success, but enjoyed it enormously.

I sold out to Gary in 1999 (a very friendly transaction) as I wanted to pursue some different directions. I wanted to begin to manage money on my own. In my previous business, I looked over the shoulders of some of the better market timers watching them at their trade.

I had been introduced to a money management and market timing system developed in the late 70's using money flow indicators that had a very good track record. The gentleman who had done the work was retired and looking for someone to use his work. I spent a great deal of money having the system independently verified and then bought the system.

I found out as much about myself as I did about market timing. What I found out was that I did not have the emotional personality (the stomach?) to directly time the markets with someone else's money. I could to it with mine and not lose sleep. But when it was a client's, I simply worried too much over each tick of the tape. It bordered on obsessive, although some members of my family might say I had a hazy idea about where the border was. Even with a mechanical system, I could not relax. My wife says the best day of our marriage was when I sent the client money back.

I can watch another manager trade and not blink, and thoroughly enjoy the process of finding and monitoring investment managers and funds. Thus, I returned to doing what I knew, which was finding and representing money managers, with an emphasis upon hedge funds and alternative managers. I will say that I believe the experience has helped make me a better judge of investment talent.

As an afterthought, during this time (late 2000) I put my newsletter on this new thing called the internet, starting with a thousand or so subscribers. It began to grow surprisingly fast. Today, my publisher sends the letter out to well over 1,000,000 each week.

What I now do every day is one of the most fun things I could ever imagine doing. I am insatiably curious about the future. I want to know what is around the Curve in the Road. My passion is to try to understand the world of economics and investment, politics and science and how they all come together in the future. I read anything and everything that interests me and then write about it. And amazingly I make a living at it. I get paid to read and think and talk to interesting people (which includes you when we finally get to meet). What a deal!

The letter was first a passion. I simply love the discipline of writing. It forces me to think. Secondly, it was always a way to communicate with clients and I hoped it would generate a few leads for new business. I did not realize just how large it would become, or how many potential clients and new investment funds it would lead to me. By early 2002 it was clear that my small firm could not handle the potential business without serious restructuring. I had built a few businesses with lots of employees before. I knew what it would take. To add more staff, researchers, sales people, etc. would take away the time from the reading, research, manager analysis and writing that I really enjoyed.

I decided to develop a series of strategic relationships with other firms which would allow me to do what I do best and what I enjoy doing. In essence, I direct investors interested in my ideas to them, they do the sales, share in the due diligence and research responsibilities and we share in any income which is generated.

What a wonderful world. And that is why I am in such a contemplative mode of late. My nature is to believe this trend will last for the next 30 years. I want it to last. However, history tells me it won't last. In fact, one of the things I am certain about is that it is going to change. I just don't know exactly how yet.

The Nature of Change

My career path is an echo of a million other entrepreneurs and businessmen and women. We all deal with change. In fact, the amount of change that I have had to deal with is rather unremarkable. There are millions of people who go through far more abrupt changes.

Some of the changes were forced upon me. Some of them I willingly embraced. I have told my friends that I hope this is the last time I have to "re-invent" myself. I succumb to the fantasy that most investors have: that the trend of today will continue. And yet, I know that this is not likely. The field in which I plow and reap is changing rapidly, and it is unlikely that in 10 years it will even look the same. I will write more on the changes that are coming to your investment world in just a few paragraphs.

When I began 30 years ago, there was no fax, no overnight delivery, and phone service was expensive. Computers? Not until 20 years ago, and they were toys compared to today's machines. It cost a lot of money to deliver a newsletter up until just a few years ago. Now the marginal cost is almost nothing. One or one million is pretty much the same to me.

Research was a visit to the library and books and a few magazines and newsletters. Now I get scores of letters and articles every day delivered to my "mailbox," plus an almost infinite amount of data at my fingertips using something called Google. I have almost five gigabytes of research and articles stored from just the past few years on my computer, which I can search with a few strokes. To write a letter like this even ten years ago would take a week, after a month of research. Now I can access huge amounts of data each week and I write the letter on a computer in about 5 hours on a Friday afternoon. (I read where they will soon have pills which will help our memories. I am going to need them.)

International readers? Very few ever graced my musings in the last decade. Now, I have thousands of international readers, often from some amazingly remote locations. Soon, I am told my words may be translated into Mandarin.

In short, the changes have been dramatic. At times, I complain, it has been hard to adjust. A lot of times those changes were just plain not fun. Some of them were very expensive lessons.

But I can hear that peasant from China, as he follows an ox on the way to the city, telling me I can't even begin to imagine the speed of change. Think about the changes in China and Russia or other parts of the developing world in the last ten years. My less-than-sainted Dad last hitched a wagon to drive to town in the 20's. He saw a man put on the moon with a slide rule, a yellow pad and pencils forty years later. That pace of change has only increased.

What Changes Can We Expect?

Let me mention a few changes I expect to see within this decade that will affect you. I think there is one major change coming within a decade which will alter the way we invest. As you may know, the SEC released their findings and recommendations on hedge funds this week. They want to see hedge fund managers register as investment advisors, adopt more transparent practices, etc. By and large they are far less invasive than what many feared. It appears to be a quite reasonable document.

I was, however, intrigued by one paragraph in the report. They suggested that hedge funds which only take investors worth more than $5,000,000 be allowed to do general solicitations. That immediately provoked a serious disagreement from the Investment Company Institute, the organization which lobbies for mutual funds.

They sent out a press release which said. "...we are concerned about the suggestion that one of the only existing hedge fund restrictions -the requirement that hedge funds offer their shares privately- could be repealed. No investor should ever be inadvertently drawn to a hedge fund investment."

Do you think mutual funds are concerned that a few multi-millionaires and institutional investors will "inadvertently" invest in a hedge fund by mistake? No, they are worried that you, dear friend, will find out what they and the rules they lobby for are keeping you from. They are worried you will find out what the rich have access to. If these funds are ever allowed to publicly reveal their track records, there will be a huge demand from small investors to Congress to change the laws so they can be allowed to participate. After the next recession, when the stock market and mutual funds have fallen another 40% and certain styles of hedge funds are up 10-15-20% in the same period, there are going to be some mad investors when they find out what they could have had.

By the end of this decade, you will be able to access all types of hedge funds. Rydex has just come out with a fund of hedge funds based on an S&P created investable hedge fund index contained within a mutual fund. You can only get it through an investment advisor, but it is available to the public. It is the camel's nose under the tent. (At the end of the letter I will tell you how to get some information which compares mutual funds and hedge funds.)

This is going to dramatically change the way in which people invest. The hedge fund "space" will be as big as the mutual fund space not long after the introduction of new laws which allowed such funds to be marketed to the general public. Yes, there will be lots of new regulations and laws passed before that happens, as there should be, but it will happen.

Hedge funds have the reputation for being wild eyed and overly aggressive. While there are many which deserve that reputation, others most certainly do not. Ironically, it is some of the most conservative institutions which are investing larger and larger amounts in some of these absolute return strategies.

You know that I believe we are in a decade long (at least) secular bear market. This is going to make investors more cautious and to look for places to invest besides long only large cap stocks and mutual funds. Hedge funds will be one of the places they turn.

Again, with some irony, I think hedge funds will become completely acceptable, even the preferred investment vehicle, just as we hit the bottom in this current secular bear cycle. Having been burned by a market that has disappointed for over a decade, I can only imagine how hard it will be to get investors excited once again about index funds.

Since I plan to write for another 30 years, that means I will probably witness another 2-3 cycles. I will see yet another secular bull cycle, in which long only funds will be precisely where you should put your money. Some "new" technology will drive a fundamental change in the world. Things will change. It will end up in 2030 (or whenever) with a new cast of characters telling us that "this time it is different." Nanotechnology or artificial intelligence or cold fusion or whatever alchemy we invent in the coming decades, like the internet did in the 90's, will somehow repeal the business and investment cycle that has prevailed since the Medes were trading with the Persians. It will be interesting to see if I can recognize when the "times are a'changing."

Change is Like a Train

What do I see that will change in my business world? I do not think I will be typing my letters at the end of this decade. Voice recognition is here already, but is still somewhat clumsy for producing finished copy. With the advent of artificial intelligence, which will recognize and adjust grammar and punctuation, writing time will hopefully drop to a few hours, which will give me more thinking time.

I am looking forward to the development of true electronic "butlers." These will be software programs which will research for topics of interest and analyze them for content before they make it to my screen, not to mention scheduling and other time-consuming chores.

I do not expect to be chained to a desk in Texas unless I want to be. With increasing internet wireless speed, I can be in a lot more interesting places for much of the year, especially July and August. With cheap video, the "face-to-face" that we need will be available to maintain contact, although I doubt it will ever replace true personal contact. I like to travel and see different parts of the world. I have only been to 40 some odd countries, and there are a hundred still left to see. It will be a fun challenge to learn how to work from different parts of the world.

Yet these opportunities are also challenges. You as investors will be able to access the best and brightest. Your "investment butlers" will search out the best managers and funds. What if my clients should find out that is not me?

Right now, information about most of the managers and funds I represent is hard to find. Heck, it is hard just to find the mangers and funds! I provide a "value-added" service. What happens to guys like me in 20 years when everybody and their artificially enhanced intelligent dog can access the information? When good research is cheap and easy to find? Will there be so much information that just sorting through the numbers will be a service? Stay tuned.

Right now, most hedge funds, managers and even mutual funds (for what they do) are expensive. Information will bring the costs down. When good managers can be found without "gatekeepers" will they pay brokers a significant part of their income to represent them? I suspect my business will go the way of the full service, full fee broker. There is always room at the top, but the top will get very crowded.

So, I continue on down my current business path. But I know that change is coming. Change is like a train. It can either run over you, or you can catch it to the future.

The World Hates Change

We insure ourselves against change - in our health, in the weather, against accidents and all kind of events. "The world hates change, yet it is the only thing that has brought progress." (Charles F. Kettering)

Peter Bernstein wrote a remarkable book called Against the Gods: the Amazing Story of Risk . In it he chronicled how the human race developed mathematics, business practices and insurance in order to deal with risk. Without the ability to deal with risk and change, business on a modern scale is not really possible.

If you have read to this point, I suspect that you were nodding your head as I talked about the changes in my business world. Not because you see those changes, but because you see many more coming to your world. China and India are just two of the genies that are out of the bottle. If they went away, there would still be downward pressure on manufacturing jobs from scores of other countries. Within a few decades, China will be complaining about the unfair trade practices of cheap labor in Yemen. It was not that long ago that Japan was the trade and job loss bugaboo. Think how many US auto manufacturing jobs went to Japan. Now they complain about China.

I am not certain about much, but I am certain about this: the future will be different than we think it will be today. We can plan and dream. But more than ever we need to think about Plan B and C and D. The odds are your personal world is going to change dramatically in the next ten years. How you cope with the change, and even use it to make your life better, will be the measure of how well you thrive.

It is the unique ability of Americans to deal with change that makes me an optimist. We are going to have to face some very difficult changes, which given the pace of change will be even larger than what we have already faced. But coping with change is in our DNA. It is what we do.

I hope I can be part of your "let's think about the future" for a long, long time. And I bet you we find the future far more fascinating and fun than we can even begin to imagine.

My Congressional Testimony

I mentioned earlier that I would point you to some information comparing hedge funds and mutual funds. For those who are interested, I recently testified before Congress on why hedge funds should be available to everyone and one way to accomplish that. Anyone can read that testimony at That is also where you can subscribe to my free e-letter on private offerings, hedge funds and alternative investments. You must be an accredited investor and be approved to receive the letter. You can read about the letter and how to get it, as well as the risks in hedge funds, at the site. (In this regard, I am a registered representative of the Williams Financial Group, an NASD member firm.)

Brother Iron, Sister Steel

Thinking about working for another 30 years or longer (or whatever God in His Grace allows) has made me realize that I will need to take better care of my body. I was not allowed to exercise or participate in sports as kid due to some physical problems, and until my mid-40's, never darkened a gym. A few years ago, I actually got into reasonable shape and then when I sold my business, somehow stopped getting into the gym, telling myself I would go back when things got less hectic.

As luck would have it, just as I determined I would make the time, one of my readers sent me a letter making a few polite suggestions. The website at the bottom of her letter rang a long-lost bell with me and I clicked on it. It was

I was 6 feet and 135 pounds when I was a teenager. I defined the concept of skinny. Dave Draper was my idol as a kid. He was on the cover of all the muscle magazines. Mr. America, Mr. World, Mr. Universe before some Austrian kid named Arnold, who trained with him. Blond and tanned and perfect. I was not the only kid who bought the pec stretchers (remember those old springy things?) and weight gain drinks and whatever in an effort to bulk up. Sadly, bulking up is not the problem today.

I wrote Dave a rather effusive 30 years later fan letter (hey, I can still be a groupie) and he was kind enough to send me two of his books. He also added me to his e-letter list. I am so very grateful.

Dave is a true wordsmith. I mean he can REALLY write. It is a pleasure to read him. He also happens to be a weightlifter and body builder. He writes intelligently and passionately about getting healthy and the joys of pumping iron. If you (and I include the ladies) are looking for something to motivate you to get into the gym, you need to get his book Brother Iron, Sister Steel . If you are looking for solid advice on how to get into shape, you will find it there. No secrets. No quick fixes. Just powerhouse motivation and good advice on what really works, plus a lot of nostalgia for some of us boomer kids. The pictures of him with Arnold are fun. At 60, Dave is still in competition shape and clearly loves what he is doing.

You can go to his website and sign up for his free weekly letter. Every time I read it, I want to leave the office and go grab some iron. My goal is that one year from now, at 55, I will weigh 185 and bench 185.

Tomorrow night, all seven kids will be in one room for the first time in what seems like months. That is the best birthday present I could have. Time does have a way of allowing the kids to grow up and find their own lives away from the home. Just another part of change, but one that is good. The best way to cope with change is to make sure that you have some relationships in your life which do not change: God, family and friends come to my mind.

Your excited about the changes in the future analyst,

John Mauldin


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