Sustainability
The most important part of investing is "finishing the race," by which I mean creating an investment portfolio that is at least self-sustaining and hopefully even grows substantially in value over time.
Recently I have been reading Collapse: How Societies Choose to Fail or Succeed (2004), an informative and insightful book by Jared Diamond about past and present societies and the factors that determine their survival or demise. The author's point is that societies both historically and today have a choice that greatly influences their future. For example, the former inhabitants of Easter Island in the South Pacific, originally settled around 900 A.D., perished largely because they cut down too many old-growth trees, many of which they used to transport and erect hundreds of massive stone statues (later apparently toppled in internal conflict between rival clans) around the perimeter of the island (these stone statues appear on lists as one of the new Seven Wonders of the World). With the disappearance of the largest trees, away went the shade vital to proliferation of lower-lying plants and wildlife, gradually turning self-sustaining island paradise into a barren environmental desert. By the mid-1700s, following a lifespan of around 800 years, the original society on Easter Island had collapsed.
At the other extreme, Professor Diamond mentions Japan, which (as I learned to my surprise) today has the highest percentage of forested land (74%, versus some 20% for the U.S.) among all First World countries in the world today. This impressive statistic is partially the result of Japan's moist climate and mountainous terrain, but is also the outcome of a timely shift in governmental policy at a critical juncture. By the 17th century, Japan's old-growth forests had largely been harvested, with trees having been used in general construction, for rebuilding following large-scale fires in Edo (Tokyo), to erect castles as ornamental symbols of the wealth and power of regional lords (analogous to the stone statues on Easter Island), to build ships to wage war (unsuccessfully) against Korea, and for various industrial purposes (e.g., smelting iron, firing tiles and ceramics, and making salt). The disappearance of the forests led to flooding, river siltation and other problems. Fortunately, the Tokugawa government realized that this new environmental crisis had been created by human-driven deforestation, and proceeded to implement an elaborate long-term reforestation and woodland management program. Today, most of the timberland in Japan sits in managed forests stemming from this government-led tree planting endeavor begun some 300 years ago.
An investment portfolio is similar to a society, in that it either flourishes or depletes over time, depending on many factors, both external and internal. The external factors are the economy, government policy, corporate behavior (leadership, honesty, competition and alliances), taxation, etc. The important internal factors are the financial decisions that we as managers of our own porfolios make regarding level of risk, buy-sell timing, diversification, turnover, payment of fees to outside managers, etc. Our own investment management decisions impact results very significantly and are the critical element over which we can exercise direct control.
In long-term investing, building a sustainable portfolio is the way to make sure that one at least finishes the race. A sustainable portfolio is one that produces income to cover any cash flow needs and also appreciates in value to give a total rate of return in excess of inflation. Just as every society has a choice that affects its longevity and ultimate survival, each of us as investors has management choices that influence our portfolio performance and financial future. Despite all of the perils in the modern investment world, the good news is that controlling one individual's behavior during a lifetime (i.e., your own, as manager of your own portfolio during your own lifetime) ought to be so much simpler than changing an entire society's cultural habits and shifting its course over many centuries!
Recently I have been reading Collapse: How Societies Choose to Fail or Succeed (2004), an informative and insightful book by Jared Diamond about past and present societies and the factors that determine their survival or demise. The author's point is that societies both historically and today have a choice that greatly influences their future. For example, the former inhabitants of Easter Island in the South Pacific, originally settled around 900 A.D., perished largely because they cut down too many old-growth trees, many of which they used to transport and erect hundreds of massive stone statues (later apparently toppled in internal conflict between rival clans) around the perimeter of the island (these stone statues appear on lists as one of the new Seven Wonders of the World). With the disappearance of the largest trees, away went the shade vital to proliferation of lower-lying plants and wildlife, gradually turning self-sustaining island paradise into a barren environmental desert. By the mid-1700s, following a lifespan of around 800 years, the original society on Easter Island had collapsed.
At the other extreme, Professor Diamond mentions Japan, which (as I learned to my surprise) today has the highest percentage of forested land (74%, versus some 20% for the U.S.) among all First World countries in the world today. This impressive statistic is partially the result of Japan's moist climate and mountainous terrain, but is also the outcome of a timely shift in governmental policy at a critical juncture. By the 17th century, Japan's old-growth forests had largely been harvested, with trees having been used in general construction, for rebuilding following large-scale fires in Edo (Tokyo), to erect castles as ornamental symbols of the wealth and power of regional lords (analogous to the stone statues on Easter Island), to build ships to wage war (unsuccessfully) against Korea, and for various industrial purposes (e.g., smelting iron, firing tiles and ceramics, and making salt). The disappearance of the forests led to flooding, river siltation and other problems. Fortunately, the Tokugawa government realized that this new environmental crisis had been created by human-driven deforestation, and proceeded to implement an elaborate long-term reforestation and woodland management program. Today, most of the timberland in Japan sits in managed forests stemming from this government-led tree planting endeavor begun some 300 years ago.
An investment portfolio is similar to a society, in that it either flourishes or depletes over time, depending on many factors, both external and internal. The external factors are the economy, government policy, corporate behavior (leadership, honesty, competition and alliances), taxation, etc. The important internal factors are the financial decisions that we as managers of our own porfolios make regarding level of risk, buy-sell timing, diversification, turnover, payment of fees to outside managers, etc. Our own investment management decisions impact results very significantly and are the critical element over which we can exercise direct control.
In long-term investing, building a sustainable portfolio is the way to make sure that one at least finishes the race. A sustainable portfolio is one that produces income to cover any cash flow needs and also appreciates in value to give a total rate of return in excess of inflation. Just as every society has a choice that affects its longevity and ultimate survival, each of us as investors has management choices that influence our portfolio performance and financial future. Despite all of the perils in the modern investment world, the good news is that controlling one individual's behavior during a lifetime (i.e., your own, as manager of your own portfolio during your own lifetime) ought to be so much simpler than changing an entire society's cultural habits and shifting its course over many centuries!
posted by Lloyd Sakazaki at 3:12 PM
1 Comments:
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