Below is an excerpt from Mark Yuskos quartlery outlook. Read the full piece on the Morgan Creek website.
The first time I heard the name Babson was in 1980 when I was a senior in high school in Weston, Connecticut (serendipitous given some of the themes of this letter and coinciding with Reagan’s election). I was on a bus with my soccer team headed to Massachusetts to play weekend scrimmages against Babson College and Brandeis University. Our coach had convinced our parents that this was a college tour and showcase event where the college coaches would be evaluating us as potential recruits. We learned (the hard way) the real reason for the trip was to help break the complacent attitude the team developed after going undefeated the previous season. Coach felt we were overconfident as we entered the new season, and he intended to show us that we didn't even know what we didn't know about the game of soccer. The bus trip was awesome, the first night in the dorm at Babson was amazing and we were pretty ebullient as we sauntered onto the field on Saturday morning. Most of us had never even heard of Babson College. How good could they be? We were the WCC Champions. This was going to be a great day for the Trojans. It turns out that overconfidence kills (in sports, investing, and pretty much everything else). Since we will be talking about 1929 a lot in this letter, it is appropriate to compare that scrimmage to the Saint Valentine’s Day Massacre (a gangland ambush perpetrated by Al Capone’s gang in Chicago on February 14, 1929). It wasn't pretty. We never had a chance. Any swagger we had when we walked on the turf, got beaten out of us over the next 90 minutes in Wellesley, yet despite the short-term pain (both physical and emotional) we all learned some very valuable life lessons that day. We learned that humility and resilience are two of the most important character traits (in life, sports, and especially investing). They say that all growth requires pain and by that metric, we all grew a lot over that weekend. Despite getting our butts kicked twice (we lost at Brandeis too) we walked away better for the experience, and with a more humble and committed attitude, we went on to have a very successful season.
Unbeknownst to us at the time, Babson College was a lot more than just a soccer powerhouse. Roger Babson founded the Babson Institute on September 3, 1919 (ironically, ten years to the day before the stock market peak that would bring him fame as a market forecaster and make him the subject of this letter) as he saw a need for a private college specializing in business education to provide practical and ethical training for the sons of businessmen who wished to become business executives. The Institute enrolled its first class of twenty-seven students in a one year program focused on the fundamentals of business. Babson believed, “it is not knowledge which young people need for success, so much as those basic qualities of integrity, industry, imagination, common sense, self-control and a willingness to struggle and sacrifice. Most individuals already have far more knowledge than they use. They need inheritance and development of a character, which will cause them properly to apply this knowledge. Real business success comes through the qualities above mentioned, not through money, degrees, or social standing.” Classwork was paired with opportunities to gain practical experience, and group work, and first exposure to business were emphasized. Over time, the Institute expanded beyond the original instruction model to a three-year program and eventually awarded undergraduate degrees (1947) and master’s degrees (1953). In 1969, the Institute converted to a four-year college and began admitting women. Over the next four decades, Babson has become the predominant school for entrepreneurship in America and has been consistently ranked #1 for nearly three decades. In addition to the main campus in Wellesley, Babson has opened campuses in Boston and San Francisco to extend its reach into the entrepreneurial centers of the U.S. and created a blended learning program for the Babson F. W. Olin Graduate School of Business MBA program. From humble beginnings, Babson has grown into an internationally recognized leader in business education and has maintained the entrepreneurial spirit of its founder and namesake.
Roger Ward Babson was born on July 6, 1875 in Gloucester, Massachusetts.1 Babson’s father Nathaniel owned a dry goods store and instilled a keen sense of business and commerce into his son that would become the guiding principles for his career, philanthropy and extensive writings later in life. Babson also had a deep interest in his family heritage and rigorously studied his ancestors’ personalities, professions, and lifestyles, as he believed personality traits were hereditary and that individuals should focus on their inherent core strengths. This process led to his belief in and deep understanding of human psychology and personal interactions and served him very well during his career. One of the most interesting things about Roger Babson was his independent thinking and his willingness to break from conventional wisdom. As an example, he did not believe in the traditional university experience as he felt the instruction, “was given to what had already been accomplished, rather than to anticipating future possibilities.” But as a dutiful son, he attended the Massachusetts Institute of Technology to gain the rigorous, technical education that his father felt was necessary for success in the business world. Babson had a disappointing experience at M.I.T., as he believed his professors failed to foresee the great industries of the 20th century including automobiles, air travel, motion pictures and radio. The area of study he did value was learning about the eminent scientist, mathematician, and philosopher, Sir Isaac Newton. Babson was enamored by Newton’s original discoveries, in particular his Third Law of Motion: For every action there is an equal and opposite reaction. This construct loomed large in his life (and in this letter) as he integrated Newton’s theory into his personal and business activities.
Upon graduation from college in 1898, Babson’s father encouraged him to seek employment in a line of work that would ensure repeat business indefinitely. Babson chose finance and began a search for a position as an investment banker. He found a position with a Boston investment firm, where his intelligence and inquisitiveness got the better of him. He was a quick study and soon had learned enough about some of the sketchy ways that investments were being sold that he actually got himself fired. After only a short time in the business, Babson concluded that the financial services industry at the time was broken (think bucket shops) and was quoted as saying “if things are not going well with you, begin your effort at correcting the situation by carefully examining the service you are rendering, and especially the spirit in which you are rendering it.” So young Roger took matters into his own hands, and while trying to keep the best interests of his clients ahead of the firm, learned the hard way that the firm was seeking to maximize their profit and they informed him that his services were no longer required (unfortunately, character is not always welcome). Undeterred, and in keeping with one of his core beliefs, “It is wise to keep in mind that neither success nor failure is ever final,” Babson decided to set up his own bond brokerage firm in NYC. Later, he moved back home and brought Wall St. to Worcester, Massachusetts. In the fall of 1901, Babson contracted tuberculosis and was given the traditional gloomy prognosis for that era. For Babson, a man of deep faith and great resolve, giving up was not an option, and with his characteristic determination, he fought the disease and was intent on living a healthy and productive life. Babson also believed that, “if things go wrong, don't go with them,” so he went his own way. This turn of fate provided another opportunity for Babson to show his resilience and tenacity. Concerned about how he could continue an investment career away from a major city, he decided to become an entrepreneur (the later focus of Babson College) and started an enterprise based on his unique view of the investment business. Babson had an insight that all financial institutions employed statisticians who simply duplicated each other's efforts in their active research. Babson (with the help of his wife) created a central clearinghouse for economic, business and investment information (an early form of Bloomberg; information is power, and generates lots of wealth too) straightforwardly named Babson's Statistical Organization. Babson published analysis of the stock and bond markets in a newsletter format and sold subscriptions to institutions and individual investors. The Babsons were true pioneers and revolutionized the financial services industry, turning an original investment of $1,200 in seed capital into an organization generating millions of dollars of annual revenue. Babson was known to say, “Experience has taught me that there is one chief reason why some people succeed and others fail. The difference is not one of knowing, but of doing. The successful man is not so superior in ability as in action. So far as success can be reduced to a formula, it consists of this: doing what you know you should do. The successful man is the one who had the chance and took it. It takes a person who is wide-awake to make his dream come true,” and he was living proof.
Babson's success as an investor and in running his investment research firm was, to some large degree, based on his unique (some might say unorthodox) beliefs in how markets functioned. Babson was quoted as saying, “Don’t look for society to give you permission to be yourself,” and his willingness to start an investment business based on a theory that many dismissed as something akin to astrology was notable (particularly because it ended up working). As mentioned above, during his time at M.I.T., Babson became interested in Newton’s third law and posited a theory that the business cycle was driven in part by the interplay between human participants and gravity. Over the course of his career Babson researched and developed Newton’s theory and came to the conclusion that economic variables (and even the stock market itself) could be explained by the gravitational forces of the earth. Working with M.I.T. Professor of Engineering George F. Swain, Babson applied the concept of actions and reactions to classical economics, which led to the development of the Babsonchart of Economic Indicators. The Babsonchart was designed to not only assess current economic, business and investment conditions, but to predict future conditions as well. Having amassed a meaningful fortune himself, Babson expanded his business information business into wealth management after the Financial Panic of 1907 and utilized the Babsonchart to counsel on when it was wise to be in the markets or out of the markets (one of the first tactical allocation services). Babson had concluded that there was a better way to manage wealth, saying, “More people should learn to tell their dollars where to go instead of asking them where they went.” Babson thought it was important to just begin his wealth management effort with his own capital because he believed that, “people would rather be shown how valuable you are, not told.” Actions always speak louder than words, and Roger Babson was always a man of action. As a disciple of Newton, Babson drew strength from the construct of “actions and reactions,” so whenever an endeavor in Babson's life ended, a new one immediately began to take its place. Babson had an amazing ability to never be discouraged by setbacks. One of his mantras was, “When we are flat on our backs there is no way to look but up.” Perhaps his greatest strength, however, was his willingness to take chances and to rebound when the risks at the time perceived by others seemed to overwhelm the likelihood of a successful outcome. Babson developed his own list of “Ten Commandments of Investing” that he encouraged his readers and clients to follow:
Keep speculation and investments separate. This is a very important concept that is often lost on market participants. We describe it as the Three Bucket Rule. Everyone should have three buckets in their portfolio, the Liquidity Bucket (10% to 15% to cover lifestyle costs), the Stay Rich Bucket (70% to 80% that is diversified, long-term investments,) and the Get Rich Bucket (10% to 15% for speculation, we joke this is for the stock tips and friends & family deals, unfortunately, you will likely lose it all, so keep it small).
Don't be fooled by a name. Make sure you know what you are buying as names can be deceiving. For example, the Blue Chip Growth Fund in my 401(k) that turned out to be “the Blue Chips of the future” and was actually small-cap growth instead of large-cap core.
Be wary of new promotions. If a financial services firm is selling you something new, it is likely that they have figured out how to package up an old idea with higher fees for themselves.
Give due consideration to market ability. Be honest with yourself about how much time you are willing to commit to investing and whether you have the knowledge, temperament and discipline to be an effective investor.
Don't buy without proper facts. Do your homework and never (ever) buy a stock tip. Always remember there is someone on the other side of every transaction who has done at least as much diligence and research as you have.
Safeguard purchases through diversification. Concentrated portfolios make you rich (or poor)and diversified portfolios keep you rich. How do you create a small fortune? Start with a large fortune and stay concentrated.
Don't try to diversify by buying different securities of the same company. Single company risk is a very dangerous game (that said, over the past 80 years there have been some developments in capital structure arbitrage which make this rule a little less absolute).
Small companies should be carefully scrutinized. Back in Babson’s time this was a really big deal as the small companies that went public were dicey at best, and fraudulent at worst. With the increased regulatory burden placed on public companies today, there is somewhat less risk, but small-caps are still very volatile and should be handled with extra care.
Buy adequate security, not super abundance. Investing is about taking intelligent risks. You must take risk in order to make an adequate return, but you only want to take the risks where you are adequately compensated.
- Choose your dealer and buy outright (i.e., don't buy on margin.) Leverage is a tool. It can be used to amplify the returns of any assets, but the danger of margin is you are leveraging leveraged assets, which can lead to problems. The real danger is leverage can’t make a bad investment good, but it can make a good investment bad through forced selling at inopportune times.
Roger Babson was a great thinker, avid reader and prolific writer. He believed it was his obligation to share his insights, experience and wisdom with others, particularly those who were not already subscribers to Babson's Reports. From 1910 to 1923, he wrote a weekly commentary for the Saturday Evening Post and wrote weekly columns for the New York Times and other newspapers. As was usually the case, after being engaged in an industry for some time, Babson thought of ways to improve it and so he formed his own media syndicate, Publishers Financial Bureau, to disseminate his work to newspapers across the country. Babson wrote an astonishing 47 books, including his autobiography, appropriately titled Actions and Reactions, given his admiration of Sir Isaac and his predilection for being a man of action himself. Babson wrote about a myriad of topics from business, investing, education, health, commerce, politics, religion, societal challenges, all with one consistent, primary message - that individuals, and society as whole, could, and should always seek to get better. He believed no achievement or contribution was too small, saying, “Do not let yourselves be discouraged or embittered by the smallness of the success you are likely to achieve in trying to make life better. You certainly would not be able, in a single generation, to create an earthly paradise. Who could expect that? But, if you make life ever so little better, you will have done splendidly, and your lives will have been worthwhile.” Babson was a man of many talents and many interests, so in addition to his accomplishments in education, business and philanthropy, he actively engaged in religion, politics (running for president as the Prohibition Party candidate in 1940), and was always seeking ways to be involved in the scientific advances of the time.
So this brings us to the central theme of our letter. Roger Babson accomplished many things in his life and we can all benefit from his philosophy of life, by adopting his “can do” attitude, emulating his tremendous work ethic and modeling his lifelong commitment to giving back to his community and society. We can learn some amazing investment lessons from him and hopefully benefit from his brilliance in a time that appears similar to the time when he made one his most noteworthy contributions to society. Babson ran an annual Business Executives Conference at the Institute and began to warn investors that the stock markets were reaching dangerous levels in the fall of 1927. At the time, the DJIA had just breached 200 after having doubled over the previous three years. Money was pouring into the equity markets following a huge real estate bust in Florida in 1925. Prices were beginning to move materially above fair value and the Babsonchart was indicating that the markets were frothy (little did he or anyone else know that the ebullience was just getting started). A year later, the Dow had rallied another 30% to 260 as Herbert Hoover was elected president. Despite endorsing the Republican candidate and saying, “the election of Hoover should result in continued prosperity for 1929,” Babson issued another warning that stock prices were overvalued and that a, “terrific correction could occur.” But as equity bubbles go, the euphoria stage was just about to begin. To get a sense of the mania at the time, economist H.W. Morehouse said on December 28th, “Millionaires have been made many times over with the unprecedented rise of certain individual stocks. Of a list of twenty well-known stocks, which have increased from 600 to 6,000 percent during the last ten years, twelve famous names appear above the 1,000 percent mark, with one outstanding motor stock heading the list with a 6,493 percent increase. No wonder our nation has gone stock market mad.”
But the average investor had also bought into Hoover’s promises of prosperity in a big way and the 1929 stock market started out “hot” with the DJIA rising 5.6% in January (investors were slightly less ebullient in Trump’s first month, but the S&P 500 was still up nicely, rising 1.9%, while NASDAQ was more Hooverish, up 4.3%). The Hoover Bubble took a pause in February and March, flat and down (2.5%), to finish Q1 up a solid 3%. The climb resumed in April with markets rallying 3.2%, but then there was the first tremor of what was to come later as equities dropped (6%) in May to where they began the year, only to have the original “Buy the Dippers” come out in force in June and the markets rocketed up 12.4% to finish Q2 up a robust 8.1%. But the crescendo was still to come as the Dow jumped another 4.2% in July and the final thrust upwards of 9.2% in August to arrive at Labor Day up 27%. Again, to get a sense of the euphoria, we quote Samuel Crowther’s (a journalist best known for his collaborations with Henry Ford) interview in The Ladies Home Journal on August 29, 1929 entitled Everybody Ought to be Rich, where he said, “The common stocks of this country have in the past ten years increased enormously in value because the business of the country has increased. Ten thousand dollars invested ten years ago in the common stock of General Motors would now be worth more than a million and a half dollars. And General Motors is only one of many first-class industrial corporations. It may be said that this is a phenomenal increase and that conditions are going to be different in the next ten years. That prophecy may be true, but it is not founded on experience. In my opinion, the wealth of the country is bound to increase at a very rapid rate.” The DJIA peaked at 381.17 a couple days later on September 3rd and newspaper headlines read, “Public Demand for Stock Appears Insatiable.” The rest, as they say, is history. The index did not regain that level for 25 years. It took two and a half decades to get back to even. Over the next couple of days, stocks began to decline and had fallen (2.9%) by September 5th (not that big a deal given the March and May volatility and the huge run up in the previous few months) and this is where our hero enters the story. Babson delivered his now famous speech to his National Business Conference where he said, “I repeat what I said at this time last year and the year before, that sooner or later a crash is coming which will take down the leading stocks and cause a decline of 60 to 80 points in the Dow Jones Barometer. Fair weather cannot always continue. The Economic Cycle is in progress today as it was in the past. The Federal Reserve System has put the banks in a strong position, but it has not changed human nature. More people are borrowing and speculating today than ever in our history. Sooner or later a crash is coming and it may be terrific. Wise are those investors who now get out of debt and reef their sails. This does not mean selling all you have, but it does mean paying up your loans and avoiding margin speculation. Sooner or later the stock market boom will collapse like the Florida boom. Some day the time is coming when the market will begin to slide off, sellers will exceed buyers, and paper profits will begin to disappear. Then there will immediately be a stampede to save what paper profits then exist.” As news of his prediction reached Wall Street, the markets fell another (3%) and that decline was later labeled the “Babson Break.”
Irving Fisher, an accomplished Yale economist for whom there was no love lost with Babson, came out two days later in the New York Times and said in a direct, contradiction of Babson, “There may be a recession in stock prices, but not anything in the nature of a crash.” Stocks fell (9.7%) in September and that little recession in stock prices had begun. On October 13th, Dr. Charles Amos Dice, a professor of business at Ohio State University, came to the support of Fisher saying that the market rally was just getting started, “The stock market will see bigger gains in the immediate future than at any other period of its history, and except for minor fluctuations the present high level of prices will be constant for years to come.” Given the massive increase in equity prices over the past few years, this seemed like an inopportune time to make such a bold prediction, but these are often the types of things you hear near market tops. Who can forget the book Dow 36,000, published months before the 2000 peak with DJIA at 16,000, a level it would not regain for fourteen years? Not to be outdone in the audacious statement category, Fisher came back at Babson a few days later with a statement that will forever live in infamy, saying, “Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon, if ever, a 50 or 60 point break from present levels such as [the bears] have predicted. I expect to see the stock market a good deal higher within a few months.” In what can only be labeled as the worst stock market tip of all time, Fisher could be forgiven (a little) because he was simply responding to someone who he had decided was wrong. Babson had claimed that stocks could crash in 1927 and they had nearly doubled over the past two years, so he was clearly wrong. Babson had claimed that stocks could crash in 1928 and they had rallied nearly 35% in the past year, so he was clearly wrong. Now Babson was claiming that stocks could crash and they were only down (10.5%), which is nothing but a speed bump on the permanently higher plateau, so he was definitely wrong (well, maybe wrong; well, hopefully wrong; well, what if he’s right this time?). Does the fact that when all was said and done the DJIA fell to 41 by July 1932, a total loss of (89%) from the peak, and even (80%) lower than the level at Babson’s first warning, mean that he was right? This is the toughest question in investing. When is early the euphemism for wrong? Is it okay to miss out on the last 150% of gains over the final two years of the Bubble in cash to have a $1.00 at the end of five years rather than $0.11? If you were managing other people’s money, could you keep your clients while you sat on the sidelines in cash while everyone else was getting rich? Likely easier said than done. The real issue here is that the events are not directly related, Babson being wrong in 1927 and 1928 doesn't change the facts at the time in 1929. Just because the markets went to more extreme levels than he thought was possible given fundamentals in the prior two years doesn't change the fact that the call for caution in 1929 was excellent advice and that the risk/ reward was skewed very much to the downside. We will go out on a limb here and say Roger Babson wasn't wrong or even early, but was actually right all along.
Approximately 5,000 unemployed people gather outside City Hall in Cleveland, OH on October 9th, 1930 during the Great Depression.
When “Black Thursday” came on October 24th and the stock market bubble finally burst for good, it was a horror show. Trading volumes surged to 12.9 million shares (about 90 seconds of volume on average today) and the Ticker Tape was delayed four hours. Newspapers would report the market’s paper loss at $5 billion that day and that a “pool of bankers” had acted to stem the drop by putting more money into the market. President Hoover’s advisors urged him to issue a statement of confidence to help calm the markets. The DJIA was down (12.5%) from the Irving Fisher “higher plateau” and fell another (9%) over the next week to finish October at 273. The New York Evening Post ran a story with the Headline “Brokers Believe Worst is Over and Recommend Buying of Real Bargains” that included another endorsement of the Fisher perspective: “How can any cool head fail to agree with Professor Irving Fisher’s declaration that standard American stocks have gone so much too low as to be crying to be bought?” Indeed there was more crying to come, but it would be investors shedding the tears. After another (6%) loss over a few days, President Hoover decided to weigh in on November 5th saying:
“We have had a period of over speculation that has been extremely widespread, one of those waves of speculation that are more or less uncontrollable, as evidenced by the efforts of the Federal Reserve Board, and that ultimately resulted in a Crash due to its own weight. The ultimate result of it is a complete isolation of the stock market phenomenon from the general business phenomenon. In other words, the financial world is functioning entirely normal and rather more easily today than it was two weeks ago, because interest rates are less and there is more Capital available. The effect on production is purely psychological. So far there might be said to be from such a shock some tendency on the part of people through alarm to decrease their activities, but there has been no cancellation of any orders whatsoever. There has been some lessening of buying in some of the luxury contracts, but that is not a phenomenon itself. The sum of it is, therefore, that we have gone through a crisis in the stock market, but for the first time in history the crisis has been isolated to the stock market itself. It has not extended into either the production activities of the country or the financial fabric of the country, and for that I think we may give the major credit to the constitution of the Federal Reserve System.”
We are reminded here of Shakespeare’s words from Hamlet, “the lady doth protest too much, methinks.” Hoover is trying to talk himself (and everyone else) into believing that all is well and everything is contained. It brings to mind the scene at the end of Animal House where Chip Diller (as played by Kevin Bacon) is trying to convince the rioting crowd by shouting, “All is Well! Remain Calm!” just before being flattened into the sidewalk by a crush of people. We know from history that all was not well and all was not contained (in fact, we wrote last summer how Seth Klarman said in one of his letters the best indicator of when something is not contained is when a government official tells you it is) and that things would get worse (much worse) over the ensuing months and years (which we detail in Surprise # 10 below).
Will Rogers, in his weekly column a month later wrote, “Oh it was a great game while it lasted. All you had to do was to buy and wait till the next morning and just pick up the paper and see how much you made, in print. But all that has changed, and I think it will be good for everything else. For after all everybody just can’t live on gambling. Somebody has to do some work.” Indeed, lots of work is required to create actual earnings so investors want to buy a company’s stock. The real problem was that the Fed, the banks the brokerage houses and the investment trusts (equivalent of mutual funds) had rigged the game to the upside by lending people money with ridiculously low collateral requirements in order to perpetuate the buying mania and generate fees for themselves. So long as the music keeps playing and the fools keep getting more foolish in the belief that the price will always be higher tomorrow, the bubble keeps growing. But when it bursts, things can get really bad quickly. A month later, in the January 1930 issue of The North American Review, author Virgil Jordan wrote a piece entitled “The Era of Mad Illusions” where he succinctly summed up the problem writing, “Probably no nation in modern times has suffered so frequently or so greatly as the United States from recurrent periods of exaggerated optimism and unrealistic interpretation of its economic situation. This tendency to ignore the natural law of steady growth has its deep roots in American history and the American temperament. The country was discovered, settled, and developed by speculators and adventurers, and not so long ago but that the strain is still in the blood of American business and the general public.” Will Rogers made a great comment a year later in January 1931 in reflecting back on the Crash, when he said, “We was just getting the idea that nothing could go down in price, we thought the only way it could go was up. Just buy it and hold it a day or so that’s all we thought there was to finance.” The key points here are that this excessive optimism is in our DNA as Americans and it was in the context of this ignorance of the natural laws of growth where Roger Babson had an advantage. As a student of Newton, he knew that it was only a matter of time before the crash would come and that it had to be “terrific” because the euphoria was so terrific on the other side during the bubble formation.
Babson was right. The crash came and it was beyond terrific, it was horrific. Fortunes were lost, businesses were destroyed, thousands of banks collapsed and disappeared (taking depositors’ savings with them) and, after a series of policy errors by Hoover, the Republican Congress and the Fed, the 1929 Recession morphed into the Great Depression. This letter is already too long to go into much detail on the Depression, but suffice it to say that the stock market and the economy were not independent as Hoover had suggested, but rather they spiraled downwards together for many years, wringing out the excesses that had been built up during the Roaring Twenties. Newton was right. For every action, there is an equal and opposite reaction, and the symmetry of the rise and fall is a chart pattern that every student of financial history knows all too well. So what is the primary message to take away from all of this history and discussion of Roger Babson? It is all in the first two words of the title of this letter. Babson’s brilliance was his ability to consistently stick to his discipline and remain cautious and defensive, even in the face of ridicule from the media and loss of clients who were tiring of the proverbial boy who cried wolf about the dangers of the stock markets (while all their friends were getting rich…temporarily it turned out). Now it is time to step way out onto a limb and remind you that we have been warning that a correction could come since the summer of 2015 (I tweeted on 7/1/15 that going to cash then was a good idea to avoid the coming correction) and to paraphrase Mr. Babson, we repeat what we said last summer, and the summer before, that a correction is coming and it might be terrific. We have written letters over that period entitled Defense Wins Championships and Danger Zone and we have made the case over the past year that the S&P 500 could run toward the Jeremy Grantham 2,300 and that would trigger a #2000.2.0 correction (down (40%) over three years), but we are now modifying that view. We see a run to the 1929-esque peak of 2,800 as a possibility and a bubble of that magnitude would likely be followed by a Newtonian reaction and we could see a crash that would lead to the scenario we outline below in #WelcomeToHooverville. Yogi Berra famously quipped, “forecasting is hard, especially about the future” and, contrary to the cover of our 10 Surprises slide deck, we don’t have a crystal ball, but we are students of history and we do agree with Churchill that, “the farther back you can look, the farther forward you are likely to see,” and by looking back nearly a century, we believe we have a fairly clear picture of what could happen if things do begin to spiral out of hand.
As a tenth generation Gloucesterite, Babson had a keen interest in the history of an old settlement in Gloucester known as Dogtown. During the Depression, as a way to provide assistance to unemployed stonecutters in his hometown, he commissioned carvings of inspirational inscriptions on two dozen large boulders surrounding Dogtown Common. Nicknamed the Babson Boulder Trail, the town has developed the site into a hiking and mountain-biking trail that is very popular to this day. Finding the boulders is a sort of scavenger hunt and the inscriptions represent many of the primary tenets of Babson’s philosophy of life, business and investing (kind of like the lessons we walked away with from the Babson soccer field). The carvings include: INDUSTRY, BE ON TIME, COURAGE, IDEAS, HELP MOTHER, SPIRITUAL POWER, GET A JOB, LOYALTY, STUDY, TRUTH, BE TRUE, INTELLIGENCE, PROSPERITY FOLLOWS SERVICE, INITIATIVE, USE YOUR HEAD, and KINDNESS. A few are particularly relevant to the themes of this letter, including, KEEP OUT OF DEBT, NEVER TRY NEVER WIN and IF WORK STOPS VALUES DECAY. The root causes of the crash (and subsequent Depression) were excess debt and the belief that Will Rogers spoke about that speculating in the stock market could replace good old-fashioned hard work. The problem is that when things get easy and you don't have to work for something, you don't value it properly. Babson said, “Property may be destroyed and money may lose its purchasing power; but, character, health, knowledge and good judgment will always be in demand under all conditions.” Few truer words have ever been spoken, the markets will rise and fall, but character is what defines us, health is the truest wealth, knowledge is power and good judgment will, indeed, always be in demand.
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Forward Looking Statements This presentation contains certain statements that may include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical fact, included herein are "forward-looking statements." Included among "forward-looking statements" are, among other things, statements about our future outlook on opportunities based upon current market conditions. Although the company believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors. One should not place undue reliance on these forward-looking statements, which speak only as of the date of this discussion. Other than as required by law, the company does not assume a duty to update these forward-looking statements.
No Warranty Morgan Creek Capital Management, LLC does not warrant the accuracy, adequacy, completeness, timeliness or availability of any information provided by non- Morgan Creek sources.
Risk Summary Investment objectives are not projections of expected performance or guarantees of anticipated investment results. Actual performance and results may vary substantially from the stated objectives with respect to risks. Investments are speculative and are meant for sophisticated investors only. An investor may lose all or a substantial part of its investment in funds managed by Morgan Creek Capital Management, LLC. There are also substantial restrictions on transfers. Certain of the underlying investment managers in which the funds managed by Morgan Creek Capital Management, LLC invest may employ leverage (certain Morgan Creek funds also employ leverage) or short selling, may purchase or sell options or derivatives and may invest in speculative or illiquid securities. Funds of funds have a number of layers of fees and expenses which may offset profits. This is a brief summary of investment risks. Prospective investors should carefully review the risk disclosures contained in the funds’ Confidential Private Offering Memoranda.
Above is an excerpt from Mark Yuskos quartlery outlook. Read the full piece on the Morgan Creek website.