The State of Credit

Long Term Does not Beat Short Term

We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be.

Some practise the fourth, fifth and higher degrees.

Someone might think that a skilled investor can earn large profits from the other players in the long run if he:

• is unperturbed by the prevailing pastime
• continues to purchase investments on the best genuine long-term expectations

I answer that there are such serious-minded individuals. It makes a vast difference to an investment market whether or not they predominate in their influence over the game-players.

But there are several factors which jeopardise the predominance of such individuals in modern investment markets.

Investment based on genuine long-term expectation is so difficult today as to be scarcely practicable.

He who attempts it will surely have much more laborious days and run greater risks than he who tries to guess better than the crowd how the crowd will behave. Given equal intelligence, he may make more disastrous mistakes.

There is no clear evidence from experience that the investment policy which is socially advantageous coincides with that which is most profitable.

It needs more intelligence to defeat the forces of time and our ignorance of the future than to beat the gun.

Moreover, life is not long enough. Human nature desires quick results, there is a peculiar zest in making money quickly. Remoter gains are discounted by the average man at a very high rate.

The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct.

He who has it must pay to this propensity the appropriate toll.

An investor who proposes to ignore near-term market fluctuations needs greater resources for safety and must not operate on so large a scale, if at all, with borrowed money. This is a further reason for the higher return from the pastime to a given stock of intelligence and resources.

The long-term investor is the one who most promotes the public interest.

He will be criticised the most wherever investment funds are managed by committees, boards, or banks.[4]

People will require him to be eccentric, unconventional and rash.

If he is successful, it will only confirm the general belief in his rashness.

If he is unsuccessful in the short run, which is very likely, he will not receive much mercy.

Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.

The State of Credit

So far we have had chiefly in mind the state of confidence of the speculator or speculative investor himself and may have seemed to be tacitly assuming that, if he himself is satisfied with the prospects, he has unlimited command over money at the market interest rate.

This is not the case.

Thus, we must also take account of the other facet of the state of confidence – the confidence of the lending institutions towards potential borrowers. This is sometimes described as the state of credit.

A collapse in the price of equities can have disastrous reactions on the marginal efficiency of capital. This may have been due to the weakening either of:

• speculative confidence or
• the state of credit.

The weakening of either is enough to cause a collapse. But recovery requires the revival of both.

The weakening of credit is enough to bring about a collapse. But its strengthening, though a necessary condition of recovery, is not enough.