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. A recent Fed survey found that 40% of adults could not cover an unexpected $400 expense without borrowing money or selling something. The U.S. is the only developed country in which mortality rates for middle-aged men have risen during the last generation. The authors of the most significant morbidity study, one of whom is a Nobel-winning economist, found that the increase in morbidity was a result of an increase in “deaths of despair”: drug overdoses, alcohol-related liver disease, or suicide. The US suicide rate has increased more than 25% since 1999.
Wealth inequality might be less of an issue if the tide were lifting all boats. But many citizens feel as though they are sinking while the elite are sailing away.
Values-driven Conflict Let’s keep this brief and stick to the numbers: 80% of Americans today feel unfavorably towards their perceived partisan foes, and the portion feeling very unfavorable has nearly tripled since 1994.6 A recent study found that, depending on how you ask the question, between 5-15% of partisans support using violence against political opponents.7
Americans tend to overestimate the extremity of their opponents’ views, to the point where they perceive partisan opinion gaps to be twice their true size.8 As Americans increasingly seek out news that confirms their views and move to areas with ideologically similar residents, there are less opportunities to bridge divides.
The news isn’t helping. A 2017 paper in the American Economic Review tracked the use of sectarian language in cable news transcripts and found a sharp divergence in ideology from pre-9/11 centrism to post-9/11 polarization (in the chart, a higher Y-axis value signals more conservative views). Estimated Ideology by Channel Year
The authors quantify the influence on voters of exposure to partisan media: “A voter watching an hour per week of a news channel for a year would be influenced to a new ideological position just over 5 percent of the distance to the channel’s ideology,” which means that as Fox and MSNBC pull further apart, the country does, too.
Faith in democracy itself is faltering. 46% of Source: American Economic Review respondents in an October 2016 survey reported that they either “never had” or had “lost” faith in U.S. democracy. In a recent Pew study, 17% of respondents believe that army rule in the U.S. would be a “good” or “very good” way to run the country, up from 6% in 1994.9
6 Pew Research Center: The Partisan Divide on Political Values Grows Even Wider. October 2017 7 Kalmoe NP, Mason L: Lethal mass partisanship: Prevalence, correlates, and electoral contingencies. NCAPSA American Politis Meeting; Washington, DC: 2019. 8 Van Boven L, Judd CM, Sherman DK: Political polarization projection: social projection of partisan attitude extremity and attitudinal processes. J Pers Soc Psychol 2012, 103:84-100. 9 Pew Research Center. October 2017 Persistent Structural Pressures We are not predicting the imminent collapse of American democracy. We are saying that it is susceptible to shocks. A divided and radicalized electorate will continue to cause unpredictable responses to external and internal pressures. We have lots of both.
The two gold standard measures of internal pressure – values and distribution conflicts – are both flashing trouble. Guillotine earrings are bestsellers on Etsy. If you haven’t, search “Eat the Rich” on TikTok. And values-driven conflict is playing out in increasingly grotesque political theater.
Meantime, there is no shortage of external pressure. The U.S.’s role as unipolar world superpower is coming into question, both at home and abroad. Competition for resources is increasing, as is the cost of maintaining what we already have. The number of annual natural disasters, according to Swiss Re, has quadrupled since 1970. In some ways we are running faster to stand still, and in others the ground is shifting beneath our feet.
Conclusion: Knowing We Don’t Know Since no one ever paid me to apply investment frameworks to socio- political analysis, I feel it is my duty to readers to tie these seven pages back to investing. The truth is I don’t really know how. But I know that I don’t know, and not knowing does not call for paralysis. It calls for flexibility. This is a time to be prepared not only for changes within frameworks but changes of frameworks. And discontinuous events.10
My experience in developing Asia and Latin America taught me that political risk has a price and that inflation accounting is torture. The core Markor framework of investing in companies built to weather a storm suggests that the U.S. ship could use some mending.
An investment framework obviously does not foretell the fate of nations. And the fall of Athens due to disinformation, infighting, and dysfunctional decision-making may not be any more relevant than the fall of Rome due to demagoguery and wealth inequality leading to mob rule and tyranny.
10 And sentence fragments. These extreme outcomes are by definition unlikely, but we should not be complacent. Historian Donald Kagan notes that up until its fall, Athenian democracy “seemed secure and unshakeable.” Athens became a republic at the beginning of the 5th century BCE and fell at the beginning of the 4th—an eye blink. Democracy’s tenure on earth has been brief and frequently interrupted.
As citizens, I believe there is much we can do to mend our ship. First and foremost, those of us capable of talking across lines should do so. Participants in a recent study gave up money to avoid talking to people they disagreed with. That’s our challenge – how to get through the surface content and connect with each other more directly. We have so much in common: birth, death, fear, wanting to be happy, parents, breathing… the list goes on and on.
And those of us who landed on the bounteous side of the street should be thinking about how to create more opportunities for others. Start local, be generous, build guanxi. Consider directly supporting democracy. Harvard professor Michael Porter analyzed the American Politics Industry and declared it a dysfunctional duopoly with perverse incentives. He and Katherine Gehl, an entrepreneur who commissioned Porter’s study, maintain gehlporter.com to organize support for simple solutions such as open primaries.
Of course, it is most important that we start with our own peace of mind. Personally, this began as stress management for myself and my team. Former investors may recall that at one point we wore heart rate monitors to track and improve our response to stress. Turns out the heart rate monitors aren’t strictly necessary. Simply setting aside time for quiet reflection and being mindful not to stay in stressed states for too long leads to clearer decision-making and enhanced productivity. But productivity is small potatoes. Peace of mind is an end in itself -- our tenure on earth is brief.
Thank you for reading,