“The true prophet is not he who predicts the future, but he who reads history and reveals the present.”
. . . Eric Hoffer, an American moral and social philosopher. He was the author of ten books and was awarded the Presidential Medal of Freedom in February 1983.
We could almost hear our history professor espousing Hoffer’s works recently when we were asked by a particularly smart media type if trust and character would really command a “premium” price earnings (P/E) ratio in today’s environment? Our response was “of course,” and as an example we offered up a quote from John Pierpont Morgan, who built the his family’s fortunes into a colossal financial empire. The referenced exchange took place when an aging J.P. Morgan testified before a House of Representatives committee investigating the financial interests of the “House of Morgan” as a tough lawyer named Samuel Untermyer queried him. The exchange went like this:
Untermyer: “Is not commercial credit based primarily upon money or property?”
Morgan: “No sir, the first thing is character.”
Untermyer: “Before money or property?”
Morgan: “Before money or property or anything else. Money cannot buy it because a man I do not trust could not get money from me on all the bonds in Christendom.”
While Morgan’s language is from an era gone by, the essential insight is as “crystal” today as it was decades ago. Or, as Chris Farrell notes, “Markets work off a foundation of trust – a sense of character – which largely explains the disturbing machination of the equity markets over the past few years.” This “disturbing machination” insight was pointed out to us by our friend Frederick “Shad” Rowe, captain of Dallas-based Greenbrier Partners, last Friday when he read me an excerpt from Blackstone’s Byron Wein, who noted that 60% of equity trading is now being done by the machines (algos). To that point, it is of interest the recent rotation has seen the defensive sectors outperform. Such sectors seem to have more “character” than some of the other sectors, but we digress.