Classical Education and Modern Politics

I know I referenced some of this ancient history several months ago, but I was intrigued by Nicholas Kristof's editorial in the January 23rd 2007 issue of the New York Times in which he mentions the debate in Athens about whether or not to send troops to Sicily some 2,500 years ago. Mr. Kristof's reference made me dust off my wife's old copy of the "Greek Reader", a collection of different writers' translations as edited by W.H. auden (and you thought he was just a poet!). In Mr. Kristof's editorial the author discribes the efforts of Nicias to disuade the Athenians from invading the island of Sicily while his opponent, the vociferous Alcibiades, argued the case in the afirmative. Alcibiades promised that the Athenians would be greeted as liberators and, besides, the argument went, if the Athenians did not come to the aid of their allies in the region (primarily the Egestaeans) all would be lost.

Much of the above was covered in Mr. Kristof's editorial. However, in rereading the translations of Thucydides from W. H. Auden's collection, I discovered that Nicias was not just a politician but a General who was well schooled in the art and science of war, and who was knowledgeable in the cultures of the region. Alcibiades, in contrast, was a young General without the measure of experience and little curiosity about anything other than what riches he might find in Sicily. After the debate, when Acibiades won his argument, Nicias went on to suggest that besides "...a large heavy armed force both of Athenians and our allies...." , Athens should make sure that "our naval superiority be overwhelming...". Shades of the Powell Doctrine, perhaps?

The war went badly and the Athenians were left with two choices - to withdraw or increase their forces. Alcibiades argued for the "surge" as one might expect and doubled the committment of men, ships and treasure. In the end, the Athenians were defeated with many killed or enslaved far from home and their navy destroyed. The rest, they say, is history...within a few years the old allies of Athens sided with Sparta and the great democratic state of Athens was destroyed.

It seems to me that if our modern politicians would spend time reading history they might find that the choices we have made and will make in the Middle East are not without prior contemplation. I would even go far enough to suggest that students ought to devote some time in the study of war during their college years. To my nowledge there is only one course in the study of war offered outside of the military schools here or in Europe (the U.K. included). Much has been written about the business sills of our leaders...but if we are to elect someone who is to make decisions on when, where and or how to go to war, wouldn't it be approriate to have some nowledge of the subject? Perhaps there IS a place for classical education in modern politics.

Philanthropy and Fiduciary Responsibilities

The recent announcement by Mr. Buffett that he has agreed to transfer most of his assets to the Gates Foundation where it will be administered reflects another well-informed decision by Mr. Buffett. Whether one is managing the growth of a business or donating money to others, the simple principle of good stewardship is one of the common threads. What are some of the other principles? They include having a clear vision of where one wants to go, whether it be entering a new market or seeking a new avenue to give back to a community. The principles also include having a well thought out plan of how to get there from here and a way to assess .progress during the implementation phase. Mr. Gates is well known for requiring those who have received money to report back on their progress on a regular basis. This approach to monitoring the efforts of the recipients may seem obvious but, in many cases, money is given out that makes both the donor and the recipient comfortable without a clear sense of how to assess the impact of the gift. In some situations, such as poverty and nutrition, it would be difficult to find the appropriate short-term measures. Yet Fiduciaries need to find some metric to judge the success or failure of a donation; otherwise, how can the donor make the distinction between one worthy cause and another? If the common denominator is money, how can we measure the out put” in such a way to assess the return on investment? We are pleased to see that the Swiss Family-owned banking firm, Lombard Odier Darier Hentch & Cie, has come up with a way to recognize Family Businesses that are active in philanthropy and who exhibit a commitment to social responsibility. The criteria used in the selection process includes the firm's approach to financial accountability, governance, adherence to the company mission across generations and sharing experience with others.

We at ASC are constantly querying our clients and listening to others who are in the business of providing such distributions to get a better sense of what they are thinking. Starting with this post we will share with you or thoughts on the subject as we continue delving into the matter. After all, while we cannot all be a Warren Buffett or a Bill Gates, we can still learn a great deal from their approach and apply it in our own philanthropic ventures. In the end we all will be better off for having made the effort.

Combining Knowledge & Experience offers Benefits for Our Clients

Several months ago I shared the results on work that a group of us did on the concept of Knowledge Navigation, an area of inquiry that included the idea of tacit and explicit knowledge. The latter is what is available in books, the internet or other forms of publically accessible depositories. The former, tacit knowledge, is what we have in our minds, the information that is gathered, processed and shaped by us on an ongoing basis. Lawyers, doctors, salesmen, nurses and, yes, financial advisors, are good examples of those professions that require the ability to synthesize information, see the patterns in the abstract, and form conclusions for the next course of action. Up until now the link between such "knowledge workers" and the growth of a company has been difficult to quantify.

A new study by McKinsey & Company of 8,000 companies has formed the basis for a better understanding of how the tacit knowledge worker may contribute more to the profitability of a company than has been known. James Manyika, a McKinsey Partner, discusses the results of the research on his article "The Coming Imperative for the World's Knowledge Economy" on page 13 of today's copy of the Financial Times (US edition). As Mr. Manyika writes: "Management must shift its focus from efficiency to effectiveness, which requires changing from measurement of output to measures of output, fostering organizational change, learning, collaboration and innovation". We at ASC take this advice to heart In fact, we have been pushing the envelope on finding ways to share ideas through innovative ways with our clients for the last 15 years. In the end, most financial advisors can access the same information. It is how our firm's collective experience and approach to selecting and sharing information that may be most appropriate for our clients that sets us apart.

Read History - Learn Leadership

I came across a column by Josiah Bunting (President of the Guggenheim Foundation, author, Rhodes Scholar, former Superintendent of the Virginia Military Institute) written for the Richmond Times Dispatch in 2002 titled "Leadership Qualities: Studies of War, History Should be Lifelong Pursuits" in which the author pulls from Thucydides' work on war and politics in the Attic colony some 2,500 years ago. Thucydides, Bunting writes, "saw life steadily and saw it whole". By this I believe he meant that we can gain great wisdom from the counsel of history if we are willing to avoid impugning the integrity of others with whom we might disagree. Today, we are faced with the rancor of politicians who are full of certitude, jockeying for the latest photo op and castigating the opposition for their lack of patriotism. Again reaching back to Athens Bunting suggests:

"One qualification seems to be common of all leaders of democracies that prepare for war and fight wars successfully: a willingness, born both of necessity and compulsion, to engage their citizens in conversation about their policies, and to do so (think of Pericles, of the Younger Pitt, of George Washington, Abraham Lincoln, Winston Churchill and FDR) with a magnanimous spirit, a consciousness of the terrible costs that will have to be borne, and the uncounterfeitable eloquence that rises from honest, educated conviction"

We in the business of finance can take our cue from Bunting and seek out opportunities to study our history, extrapolate its truths and share them with others. We can also learn from the Athenians to live life in its sense of wholeness, of purpose and of clarity. Too often we seek only what is most self gratifying rather than what is best for all concerned. Lets hope that we all read more history.

The Truth from "Real" Accounting

Congressman John Cooper in his article in today's Financial Times (Comment, page 11 of the US issue) provides us a thoughtfull reflection of the difference between what the US Government wants us to believe and what we need to know about the financial health of our Nation.

Most of us tend to manage our personal finances on an accounting basis known as "cash" whereby money is paid when required and income is recognized when received. This is a simple method of seeing cash flow without regard to our ongoing obligations.. and this is the way the politicians want us to think about the financial status of the US. Companies, however, are required to use the "accrual" method of accounting wherein income is recorded when earned and expenses recorded when incurred. If we as individuals used this accrual method, we would have to recognize expenses when we became obligated to them (car payments, mortgages, for example) for the period. For example, if we earned $10,000 for the month of January (wth no certianty of further income) and we incurred an obligation of $60,000 of expense of which $5,000 would be required to paid in January and $55,000 would be required to be paid in February, the cash accounting method would show us in surplus of $5,000 ($10,000-$5,000). However, if the accrual method was used, we would be in deficit of -$50,000 ($10,000-$60,000).

It is interesting to note that the much touted "President's Budget", based on cash accounting, shows a US Fiscal Deficit of $319 billion for 2005 and the "Financial Report of the United States" shows a a deficit of $760 billion. Indeed, some politicians suggest that we have seen an "improvement" in our financial deficit of 2005 over 2004. If we used only the cash accounting approach favored by politicians, we would only recognize the current reporting period's obligation of $8.2 trillion but if we use the accrual method we would need to recognise $49 trillion to fund our agreed-to obligations. As Congreeman Cooper points out in his article, it took 204 years for the US to accumulate $1 trillion in debt. Now we borrow about $1 trillion every 18 months. As scary as these numbers sound, what does this mean for each American? It means that a family of five now "owns" $750,000 in debt, almost doubled since 2000.

So the next time you hear how well the economy is doing and listen to politicians opine, as Alfred E. Newman, the great existential philosoher once said, "What me worry?", remember that accounting is not the "cruel science"; rather, the proper accounting can help us see the future as it should be seen, not as others may wish us to see it.

A Crack in the Bell Curve?

Investment practitioners will tell you that risk may be defined as the possibility of the actual market return differing from the expected return. Another definition might include the probability of a loss in capital. In both these cases, the underlying premise is based on the theories developed, not for the measurements of markets as manifested in modern portfolio theory, but rather the work of the 19th century mathematician Carl Friedrich Gauss. Professor Gauss was trying to understand the errors in astronomical measurements in the hope that he might be able to predict and thus minimize the risk of misidentifying events in astronomy. Known formally as the Gaussian model, we know it more as the bell curve with a median, mode and equal standard deviations. We might say that a given investment has a better than even chance (that is a probability greater than 50%) of achieving a 6% return based on its history that fall into the traditional bell curve. So what happens if the bell curve has a crack?

Benoit Mandebrot, the Sterling professor emeritus of mathematical science at Yale University who is perhaps best known for his work with fractals, has been talking about what happens when large unknown events disrupt the known universe, thus putting a crack in the curve. It may seem unusual for Professor Mandebrot to consider such randomness in light of the uniformity in fractals, but I think he is on to something. Do we continue to consider large random events like Katrina to be mere outliers and dismiss their long-term effect on the underlying systems? I am not sure what the answer is but I suggest that the Gaussian Model may be one measure of the evaluation of risk. We need to take seriously the suggestions that risk measurement (and thus risk management) is more complex. Maybe Professor Mandelbrot is the Gauss of the 21st Century?

US on New Plain of Fiscal Existence

OK. We've done it. Today the Senate raised the debt limit to $9 Trillion so we won't default on our obligations. This represents about $30K per person in the US. And this does not account for the "off budget" items that have been sold to us as Emergency Appropriations. The US has never been here before and, between the current account deficit and the national debt, I don't see any change in that trend in the future. We can only hope that some sanity comes forth in this government of so-called "Conservatives". I guess I don't understand the meaning of the word "conservative" ... here I thought it meant being careful with one's assets ...save and don't spend more than you have. And I though "liberals" were the big spenders. Boy, am I confused! The one thing I am sure of, however, is that the holders of our debt are nervous enough to have begun diversifying their IOU's into other currencies and that, at some point, we in the US will have to pay the price. I just hope that our President and his conservative colleagues in Toontown will find some adults to help them with their math. Otherwise, 1929 may come back with a vengeance. In the meantime, I am going to my bank and see if they will lend me a billion or two so I can go out and play with the big guys.