The Markor Fund Returned Its Last Dollar to Investors a Little More Than Two Years Ago
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The Markor Fund returned its last dollar to investors a little more than two years ago. We decided to return capital after a period of good performance and dwindling new investment opportunities. Markor’s bread and butter was supporting companies in crisis. On average, investing in crisis-ridden companies is a money-losing proposition. We made a 650% return for our investors over 14 years by looking for companies with something special: goodwill, or guanxi.1 When the going gets rough, it turns out it is really helpful if your employees and customers want you to survive. It’s nice to see the Golden Rule at play in the stock market. But the pickings got slim. Not for lack of crises, but because stocks stopped going down as much in response to crisis. It wasn’t only that individual stocks stopped responding to crisis; the market as a whole seemed disconnected from stresses in the real world. The pat answer is that as long as profits go up stocks do too. But we wondered if profits weren’t sitting atop an eroded base of societal goodwill. Guanxi is hard to account for, and it often isn’t missed until it’s gone. Could the framework of goodwill as a stabilizer be useful at a national level, and might markets be missing an important risk? We spent the twilight of our time at Markor looking into this question, with particular focus on the U.S., by way of Ancient Greece. 2 Case Study: Athens in the 5th Century B.C. Roughly 2,500 years ago, the city-state of Athens launched a brave political experiment: direct democracy. Demo-kratia means “people power,” and Athens was radically representative. The process began in 598 when the law-giver Solon created assemblies of common citizens to curtail the influence of aristocratic families, who he said “pushed through to glut yourselves with many good things.” Solon’s political reform spawned Athens’ efflorescence, an explosion in economic and cultural development. So far so good. Athenian democracy continued to develop along with its naval power and regional influence. Democratic ideals projected soft 1 The Chinese term guanxi refers to social capital built on trust and moral obligation. Goodwill is as close as we get in English. 2 At this point it may be dawning on the reader that we actually applied our fund’s investment framework to the United States of America with the aim of drawing a meaningful conclusion and are expecting you to read about it. power. Persian nobleman Otanes put it this way: “The holders of offices are selected by lot and are held accountable for their actions. All deliberations are in public. I predict that we will give up monarchy and replace it with democracy. For in democracy all things are possible.” Athens was the hub of international trade. Its drachma became the coin of the realm. Athenian historian Xenophon wrote: “the city of Athens lies at the navel not of Hellas merely but of the habitable world.” The statue of Athena at the Parthenon, made of gold and hippopotamus ivory, towered 39 feet high. Her gold clothes and accessories weighed 120 lbs. Athens was also a magnet for great thinkers and a hotbed of innovation. The atom was conceived of by the philosopher Democritus, a Thracian immigrant, in 5th century Athens. Athenians invented the kleroterion, a random selection machine used to Kleroterion select citizens for civic duties.3 Nearly every important civic function, from bureaucratic to judicial, was filled by ordinary citizens selected by lot. For nearly 200 years Athens stood as a beacon of freedom, equality4, and transparency in government… Ok, you say, so then Athens fell. And because the U.S. is also democratic, wields the global reserve currency, has naval preeminence, and is a “hotbed of innovation,” it too will fall? And how does the hippopotamus ivory fit in? The hippopotamus ivory adorned Athena, the goddess of wisdom. As Athens fell into decline, so did wisdom’s stature relative to persuasion. Cults that worshipped the goddess of persuasion, Peitho, and her bastard child Pheme/Fame, gained in popularity. Politics got increasingly volatile as demagogues jockeyed for power and popular sentiment thrashed this way and that. Athenian decision-making became unmoored as State actions depended on whoever could make the most convincing argument on any given day. Dysfunctional decision-making was Athens’ undoing. After 25 years at war, Sparta finally gained a decisive advantage over Athens. Despite its stronger position, Sparta offered a truce. Athens refused, largely at the urging of Cleophon, a skilled orator who cared more about his own power and influence than making good decisions. The consequences were swift and tragic. In 406 B.C., the 3 Each male citizen had a bronze disc with his name inscribed on it. When it came time to select those who would hold public office, all citizens who wished to participate would place their discs in rows in a stone tablet. Different color marbles were sent down a randomizing chute and stacked up alongside rows of discs. Citizens whose discs were in the rows next to the designated color marble were chosen for service. 4 For men born in Athens who were not slaves. Spartan general Lysander crushed the Athenian fleet and slaughtered all but one of the roughly 3,500 prisoners.5 In 404 B.C. Athens surrendered, and its city walls were torn down. Democratic Ideals in the United States From that cheerful tale, let’s turn back to the present. We are examining factors that undermine American civil society. We began with Ancient Athens because democracy was central to Athenian identity in much the same way that it is in the U.S. The words demos-kratia (people-power), eleutheria (liberty), and parrhesia (freedom of speech) were carved into monuments throughout Athens just as they figure prominently in foundational American texts and statuary. And both Athens and the U.S. projected these values beyond their own shores. After World War II, the U.S. stepped into an economic, military, and cultural leadership role similar to that of Ancient Athens: first among equals in military alliances, issuer of reserve currency, and exporter of political philosophy. Eisenhower summed up post-war American values in his 1961 farewell address: “We now stand ten years past the midpoint of a century that has witnessed four major wars among great nations. Three of these involved our own country. Despite these holocausts America is today the strongest, the most influential and most productive nation in the world. Understandably proud of this pre-eminence, we yet realize that America's leadership and prestige depend, not merely upon our unmatched material progress, riches and military strength, but on how we use our power in the interests of world peace and human betterment. Throughout America's adventure in free government, our basic purposes have been to keep the peace; to foster progress in human achievement, and to enhance liberty, dignity and integrity among people and among nations.” Today there are a number of questions about the extent to which the ideals articulated above have been realized as well as the sincerity of our shared commitment to them. How devoted are citizens to preserving the basic framework of civil society in the U.S.? 5 Things might have gone better for Athens if they hadn’t put their six best generals to death months before. Whipped up by a clutch of misguided but persuasive orators, Athenian citizens voted to execute the generals when they returned from a successful campaign against Sparta. None other than the philosopher Socrates was randomly selected to head proceedings and refused to go along with the verdict. By law, trials lasted a maximum of one day as did judicial appointments. The next day a new citizen was selected as chief magistrate of a new trial, and the generals were executed. Shortly thereafter, opinion swung the other way, and the three men who pressed charges against the generals were driven from the city. But the generals were still dead. Distribution-driven Conflict Many historians of civil disintegration distinguish between two kinds of disruptive force. They separate “values-driven” from “distribution- driven” conflicts. “Values” doesn’t just mean “family values” but something deeper, such as a preference for secularism over religion, or democracy over autocracy. Distribution, meanwhile, is exactly what it sounds like: a conflict over ownership of resources. During major societal upheavals, we typically see both kinds of conflict in play. In the U.S. today, there is increasing frustration with wealth and income disparity: a distribution-driven conflict. We can argue over the exact numbers, but what matters is that there is wealth disparity and people are upset about it. US Bureau of Labor Statistics data shows that real hourly wages in the United States have not grown in almost 50 years. Meantime, the top decile receives nearly 50% of total income – one out of ten people get five out of ten dollars. 50% AverageTop Hourly Decile Wages Share in of the Income U.S., Seasonally in the U.S., Adjusted 1910-2010 45% 40% 35% 30% Share of top decile in total income (incl. capital gains) Excl. capital gains 25% 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Sources and series: see piketty.pse.ens.fr/capital21c. Historically, parents have taken heart in better prospects for their children. A Brookings Institution study found that the odds of children earning more than their parents have gone from nearly 70% in 1960 to less than 50% today. Economic hardship is a fact of life for many Americans.