SPENCE Asset Management

The Trouble with the Truth May 2009

One of our favorite country music songs was released back in 1996. The Trouble With the Truth by Patty Loveless is a catchy tune that goes something like this….. “The trouble with the truth is it’s always the same old thing.”

We have found that the trouble with the truth of humankind’s battle to govern itself is the government policies most likely to be adopted seem to always lead to the same old thing…inflation. Perhaps the truth about inflation was best summed up by Will and Ariel Durant in their book The Lessons of History. In that philosophical masterpiece they said, “Bankers know that history is inflationary and that money is the last thing a wise man will hoard.”

Before we describe how we try to build the idea that history is “inflationary” into our thinking, maybe we should explain why we think history has been almost relentlessly inflationary. Let’s return for one more quote from our favorite historians to add some color to this discussion. According to the Durants, “Science gives us knowledge, but only philosophy can give us wisdom.” We could not agree more about the connection between philosophy and wisdom. There is plenty more to acquiring wisdom than simply being in possession of a bunch of facts. One finds for example, that when the incentives are in the wrong place and there is no core philosophy intact, wisdom winds up at the bottom of the garbage heap.

Speaking of garbage heaps, these days we are told by experts everywhere that WHAT GOVERNMENTS DO matters more now than ever before. And unfortunately, long ago we concluded that it is the mastery of political science and not wisdom that dominates the actions of men and women in governments all over the world. This is true because the primary objective of the politician (re-election) simply does not require him or her to base daily decisions on wisdom. In fact, we remember a former congressman’s emphatic assertion that “politician” is the only occupation he knew of where being ignorant about sound economic policies was actually helpful to the practitioner. Based on our own observations we would have to agree.

Virtually every politician, regardless of what sort of “philosophy” he or she espouses during a given campaign, will always call on their knowledge of political science rather than maintain any steadfast commitment to a time-tested economic philosophy let alone fundamental wisdom. To a great extent this explains why the only fiscally responsible voices we ever hear from seem to emanate from the party that is OUT of power.

And for those in power, studies in political science have proven over and over again that daring to say “no” to voters, even when it is very clearly in the long run economic interests of a nation to do so, will not achieve the primary objective (re-election). The reason why politicians have been using polling services and focus groups almost daily for many years now is it is much easier to tell the masses what they want to hear, than to pass legislation that rewards personal discipline and individual responsibility.

It is for these reasons alone that there is no other force that pushes politicians from both parties towards inflationary policies more than political science’s findings that re-election requires ambitious politicians to always take the easy way out.

There is not much immediate risk to a politician for committing the economic folly of knowingly causing inflation. Instead it is sort of like using an untraceable weapon. With widespread economic illiteracy, credible witnesses are few and far between and competing partisans from both parties can be expected to use the media to finger-point and debate who did, said, and caused what,…endlessly.

Keeping a wary eye on the relentless manipulation of increasingly cynical political science-driven decision-making processes of government takes effort. We find we must constantly consider the navigation of an on-again-off-again inflation obstacle course. And besides the insidious pressures of inflation, investing has two other mortal enemies, the risks of rapid change and the burden of investment taxes.

Despite the global recession, the rapid changes, and the higher taxes on investments, our philosophical approach to investing, whether we are trying to generate income or growth, has always had to continuously take into account the prospects for inflation.

Assumption-making continues to be a treacherous process.

Companies that can either benefit from inflation or be relatively insulated from change are rare. And unfortunately, identifying shares of common stock that benefit or are unharmed by higher taxes is practically impossible.

What is possible is avoiding companies that suffer more so in an inflationary environment. Recall that many times in these newsletters we have extolled the virtues of companies that do not require heavy capital investments in plant and equipment.

Expensive items that must be maintained, refurbished, and ultimately replaced at ever INFLATED prices forge economic anchors. As time marches on and capital intensive businesses and industries tend to repeatedly prove how difficult they are to manage, we become increasingly convinced that our fundamental investment philosophy is based on wisdom.

As boring as it may seem sometimes, the right philosophy must be based on endurance.

And the trouble with the truth is it’s…always the same old thing.

—Jim Spence, Eric Walton

The information contained herein is for informational purposes only without regard to any particular user’s investment objectives, risk tolerances or financial situation and does not constitute investment advice, nor should it be considered a solicitation or offering to investors. To determine if investment in a Separately Managed Account with Spence Asset Management is an appropriate investment for you please call 1.800.230.1840.

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