INTERVIEW WITH HARRIS KUPPERMAN ON DISTRESSED DEBT INVESTING BLOG

Interview Part 1

Interview Part 2

Adventures in Capitalism

Over the last two of three months, I have toyed with the idea of doing something like Value Investor Insight for emerging hedge fund managers. Over the years I have met some truly incredible investors running smaller funds that most have never heard of. These investors are not trying to build an empire but are instead content to manage smaller pools of capital without the head ache or managing a $1b fund. Some of these investors have absolutely incredible track records and are full of investing wisdom. Because of a number of major projects I have going on across the sites (one will be announced Monday), I thought it better to start the series right here on the blog for all to see. I will be working with Shaun Noll, founder and managing partner of Stirling Capital Management -who did today's interview- to bring you a series of interviews over the next few months.

With that said, if you are a hedge fund manager with less than $100M of assets and would like exposure, please reach out to me (hunter [at] distressed-debt-investing.com). Or if you have a recommendation for a manager you would like to see interviewed, I can do the hard work and try to convince them to come on the site. Value, event driven, distressed - we welcome all!

I have been following Harris Kupperman for a while now and I am always impressed with his ability to foresee long term macro shifts and put those themes to work with deep fundamental company research. In addition to this, Harris is 100% self taught and built an incredible track record with a fund he started straight out of college. He is one of the best investors I have met when it comes to finding “small companies that will become big companies” and so it gives me great pleasure to introduce Harris Kupperman of Praetorian Capital. This is part 1 of the interview. Part 2 will go up tomorrow.

Please tell us how you got started investing Harris:

I had always been interested in economics and the markets but I first began investing in college. I started managing some family money and by the end of college was up more than tenfold on my money when the world was in free fall. After that, family and friends asked me to run their own money and the easiest way to do that was to start a hedge fund. So senior year of college I started my hedge fund.

So you started your fund very young. That is impressive and unusual.

The hedge fund kind of started itself in some ways. People would come to me and ask me to run $25k or $50k for them and so that is how I started the fund. We’ve done very well since the fund began and so here I am today.

So did you have any investment experience prior?

No previous investment experience, I just read a lot of books. I still read constantly, I typically read at least 10 books a month. In college, I was going to school but wasn’t putting much effort into my classes because I was so focused on investing.

I am completely self-taught though. When I was learning, one thing I would do is look at big investments made by great investors in the past that were successful. Then I would see how that idea performed over time and I learned what worked and why. I learned a tremendous amount by reverse engineering their trades and I think that helped me a lot.

How much money did you start the fund with If you don’t mind disclosing?

I started the fund with $90k but at the end of the first 6 months we were at $1m and then by the end of the first year we were at a few million. The fund’s size just ramped from there. I really never went out and tried to raise capital until 2008. I wanted to put together a 5 year track record first since I thought that would speak for itself. After a few years we had a very good track record though, in the top 1% of all funds out there. So we were making money for people and then people would come to me and say, “My friends want to invest in the fund also, what can you do?” and that is how the fund grew. I didn’t go to New York and do a lot of interviews and actively try to raise money, I probably should have in retrospect but I didn’t. I wasn’t trying to start a business for the sake of starting a business, I was doing it for the intellectual pursuit of what makes money in the market.

Of course spending time on investing money is better than spending time on marketing.

Yeah, I always thought that if the track record was good the money would come to you. And that is not quite the case. If you’re a contrarian it means you’re buying when other people hate it. So then when you go pitch the fund to potential investors they ask what you are buying and you tell them “X is what I’m buying and I know you don’t like it but here is why it makes sense”. It’s tough to raise money that way because you know they are going to think you are crazy.

I guess that is one of the natural side effects of being contrarian.

Of course and I’m also not investing in big companies people have heard of. I am investing in tiny esoteric situations nobody knows about that have a lot of upside potential. While there is great potential in these areas it just makes for a difficult sales pitch to your average New York investor or institution.

What kind of investing were you focused on when you started? Sounds like long/short equity?

Basically our specialty, and I say “our” since I have a couple people working for me, but our specialty is finding little companies that will become big companies. We look for a secular or macro trend where we have the wind at our back, then we try to find the best couple companies in that industry. We get to know management well and then we get to REALLY know the industry, and when we feel comfortable we take a big position. We are not a highly diversified fund, at any given point we hold somewhere between 10 and 20 stocks and the top 5 positions are more than half our capital. There just aren’t that many good situations out there. When you get to know a company and really like it, you want to have a big position. It takes a tremendous amount of work for each idea and so you want to be there in size when we find something we like.

We have always focused on small companies though. I simply feel that is the best way to compound returns over the long term. If you look at the 500 largest publicly traded companies in the US, over the last 100 years you would have compounded at roughly 7%. If you look at the next 1500 companies you would have seen compounded returns of nearly 12% and if you look at even smaller companies it gets better. The compounded average returns of the next 1000 companies are nearly 20%. The crazy thing is that everybody knows this as it has been demonstrated in academic studies over and over and over again. The problem is that in small caps you are going to have a year every 3 to 5 years where the entire sector gets wiped out and is down 20% or more. If you are trying to run a money management business you may not survive that year as investors redeem from your fund and you have to sell into declining and less liquid stocks. What if your fund’s first year is that year where small caps decline dramatically? Your fund will likely never get a second chance and that will be the end right there. So everyone knows that small companies generate higher returns over time but it is a difficult strategy to implement for these reasons and so we choose to focus in this area. There just isn’t as much competition.

Do you use leverage?

We have but it is not really what we like to do. A small amount of leverage won’t kill you but if you take on too much it gets very dangerous and makes the fund more difficult to manage.

So you are long only? You don’t talk very much about shorting stock.

No, in the past we have been very short. A few years ago, we saw a lot of the problems coming that hit in 2008, so from early 2006 we were actually net short. This was quite frustrating though as our long book would be up over 100% a year and then we’d give back a good chunk of that on the short side. This was a very frustrating experience because you see crazy frauds keep going up when it is so clear they are a disaster. We ended up being broadly right but after that experience I decided I never really want to be on the short side again. It is very easy to look at a cheap stock and say this thing is going to go higher because the company is growing earnings very fast. It is much more difficult however to time when an over leveraged or fraudulent business is going to finally fall apart. There are so many great little businesses out there also that we have decided to primarily focus on buying these companies as opposed to shorting.

I think that is understandable and we have heard similar thinking from other very successful investors. Not to mention that psychologically it is much harder to manage that side of the book.

Exactly, and if you are good you don’t necessarily need to look for bad companies. Since we are in small caps which are relatively binary, when you get one of these right you’re going to make 5-10x your money. This is not the way shorting works though as you’re not going to make 5x returns on the short side. Maybe you’ll make 50% instead. As a result of this and everything else we don’t focus on the short side anymore. Of course we always have some stuff we are looking at on the short side and if we came across something amazingly bad we might put on a smaller position but we are pretty much long only at this point.

Do you ever put on any macro hedges? There have been a lot of the more famous investors talking about this lately. This would be the Seth Klarman or David Einhorn approach with a generally long only strategy but with a few cheap insurance policies for protection.

The thing about insurance is that you have to pay a premium for it. If you think about it you are going to compound better if you don’t go out there and pay up for protection because protection is generally priced for the guy who is selling it. The fund is friend and family money and my own money is a big piece of the fund so we can take a lot of volatility and don’t have to focus on smoothing out our returns. I just don’t see a reason to be hedging and over paying for insurance since we are looking out and trying to figure out what is going to happen over the next 5-10 years and not trying to generate low vol returns so I can market to someone else. I’ve seen way too many funds try to do that try and squeeze out 200bps a month, every single month, just so they can go try and raise $2b. That may be a great business strategy but it is not very intellectually satisfying so we don’t focus on that.

Sounds like you’re style has changed quite a bit over last 10 years then?

I wouldn’t say it’s changed a whole lot. We don’t short much anymore because we just decided we didn’t want to be on the short side anymore. Honestly, I don’t think there is much money to be made on the short side anyway these days. If I felt like there was a very pregnant opportunity I’d probably put more energy into it but I just don’t feel like there is much downside from here generally.

Why do you say that? I would say that is pretty contrarian in itself. Do you think the global situation is pretty stable?

I don’t know. It was so obvious before, just so blatantly obvious. You had to be a fool not to see it. I just don’t feel like the problems are as obvious anymore. Companies have decent balance sheets more or less. There are lots of problems lurking out there but there is not the systemic risk in the same way.

I think the primary risks now are government issues and governments misbehaving. They are over leveraged, over regulating and just acting idiotic. I think the real risks for the next decade are governmental and macro and not really companies that are frauds. Basically any company that was over leveraged or a fraud got taken out in 2008 and 2009 and so we haven’t had a chance for new over-leveraged industries to be built. So I just don’t think there is that much downside. Maybe the market could drop a third from here, and it wouldn’t really be shocking. Overall though, I just don’t feel like there is a chance for a whole-sale slaughter as there was before. Especially with governments printing so much money and holding up asset prices forever.

So then naturally you must be bullish on precious metals?

I find macro or secular themes with a strong tailwind to them and go find the best companies in the industry and so I think precious metals are an interesting place to be right now. I got involved originally in precious metals back when gold was at $330 back in 2003, we got really active in 2004 and you know we are still involved. It changes from time to time but it is a macro theme that will go on for a long time. The problem is you won’t find the bargains in this space you found 5 years ago.

That makes sense though with so many people digging in that space now.

Right. The thing about these trends is that you need to discover them early when nobody cares about them and then take your position early and we’ve done that really well in precious metals and in the whole commodity sector really. I think the better trend now is not necessarily buying gold. It could go higher, I don’t know much. It could double or triple from here but it won’t go up 10 fold like it could when you’re buying it at $330. I think the more interesting trend to get into is buying into the mining services sector. This is our biggest sector bet right now. It’s a bet that companies have used up their resources at a much higher rate than they have discovered new deposits industry wide across the globe. You have seen a lot of industries where they are depleting their resources faster than they are being replaced, whether it is nickel or oil or any of these things. The numbers aren’t always the same but in some industries like copper you have just seen that nobody is putting money back into it. You drill holes and it costs money and you have to put that against your income statement and executives don’t want to do that. So instead companies have been spending a lot more on making acquisitions to replace reserves. The problem is that there just aren’t that many valuable little resource companies any more since nobody has really found anything big. If you look at global expenditures on the hard rock exploration spending it probably needs to run at $15b to replace what has been mined. This year should come in at $8-9b and last year was half of that and the peak in 2008 was at $12 or 13b. So the industry as a whole is clearly not replacing what is mined. Then taking into account that global GDP is growing a few percent a year and global population is growing at a few percent a year, it is clear that you need to do more than replace reserves you actually have to grow worldwide reserves. Before the play was to buy the commodities and commodities companies themselves but I think it now is more exciting to invest in the arms merchants, the guys selling the picks and shovels.

For the first time in a long time the mining companies are making good money, they’ve paid down a lot of the debt they acquired in the last decade in their acquisition binges. I think now that they have cash flow they are going to start spending on exploration, partially just because there is nothing truly valuable left to acquire. You look at some of the prices paid by some of these guys in the last few months on acquisitions and it is amazing. Kinross over paid on Rubicon, Goldcorp overpaid last week on Andean. You look at some of these and you realize that they either have to vastly overpay or they take their chances drilling holes and at some point drilling some holes just looks more attractive. I think that is the trend I’d rather bet on than betting on the price of gold going much higher, although I think it will.

Are there any other 5 year trends outside of precious metals ? What do you think is the next gold going forward?

I have some theories of my own going forward and I’m buying some stuff but I’d really rather not jump in there. The problem is that the world wide economy is looking weak. Some countries are good and some are mediocre but a lot of countries are in really bad shape and it is really hard to get too optimistic on global GDP overall. I don’t think we’ll see global GDP decline much but it could muddle along for a decade. So it’s really hard to find real growth industries because the world is just not growing.

I think it’s more exciting to look at the specific economies that are really growing. You have places in Latin America and Asia that are really growing fast. These are small economies that are not as inter connected with the global economy yet and the asset prices are cheap. As an investor in these countries you can pick up a tailwind of GDP growth of 5 or 10% yoy. They are small economies and people don’t talk about them much but I think it’s exciting and that is really where I focus my energy now.

I’m sure there are a lot of over looked companies there.

Exactly, but I think you need that macro tailwind. Which means you need an economy that is growing 10% a year because then you are going to have growth in the economy and even more growth at the company level. It is just going to be really hard to find industries or companies that can grow in a stagnant economy so if you can focus on the few economies that are growing I think you will do quite well. There will always be a few countries out there doing well but you really want to have that tailwind.

Even harder to find companies that have yet to be discovered.

Right. Which is why some of these smaller economies are so much more interesting. Because $1b+ hedge funds can’t go there. A lot of the companies are $50-100m market cap or even smaller. It’s a place for people like me to figure out, not the big guys. So the pricing is much better.

How do you get around the communication and accounting standards?

You need to just go in there and not think of it like a western investor. You should spend a month or 2-3 weeks there and just approach it with an open mind. You should read my post on Mongolia if you haven’t yet.

I read that and I thought it was great. I thought there was a particularly interesting point regarding the accounting where you said at a certain point you need to just take a leap of faith and invest even if you don’t know what the accounting is yet.

There is accounting. There are numbers. There is research to do. If you go in there and make investments you have to assume that you are going to have a few problems. However, if in aggregate you buy the companies cheap you are likely going to do all right as a whole. Another important point is that if you are in a country, like Mongolia, where they don’ t have investors showing up and they don’t talk to shareholders and things aren’t all cleaned up and pretty in the accounting there is a good chance that there is no incentive for people to over state things like there is here. Besides, their motive is to understate things for taxes, not to overstate so that their stock options go up in value.

That is an interesting commentary you rarely hear about emerging markets. What do you guys think of technical analysis? Do you use anything like this?

It’s really hard when you are a fund trying to buy millions of shares of a small company and it is hard for you to really have a view on the chart pattern of a $50m market cap company. If you go in there and buy a few million dollars of stock your buying alone could dramatically affect the price action and impact the chart.

What do you like and dislike about being a hedge fund manager?

Just don’t like the marketing but I love everything else. I have been able to meet and work with some great people. I have learned a lot and I have gotten to travel all over the world. It is really a great thing in my mind. I just really don’t like dealing with marketing but nearly everything else is great.

I have some of the best investors in the world and some of them I talk to routinely. The marketing thing is just pointless though. You go to NY and do 50 meetings and get 4 or 5 guys who seem interested and at the end of 3-4 weeks of effort you get one guy who writes a check. I’ve gotten to the point where the fund is closed to new investors and I just don’t want to market and deal with nonsense. Marketing and sales used to take a quarter of my time and now I spend none of my time on that and it is the greatest thing ever.

The best way to grow assets is to put up consistent returns?

You know, I don’t even want to grow the fund. The fund is closed. It is funny though, since I’ve closed the fund I’ve had more investors than ever offering to give me money than when it was open. I’ve turned away lots of money. It’s a strange thing.

Is this because you don’t want the fund to get bigger and lower your opportunity set?

I just don’t want to deal with investors really. I had a bad experience in 2008 with a lot of redemptions and I just don’t want to repeat that. You know, if you are a big fund with large caps you can deal with redemptions by just selling and moving on. If you are a small cap guy though and own 5% to 30% of a company it is really hard to get redemptions. You create your own worst monster because as you sell you keep pushing it lower which is bad for everyone.

What advice would you give to someone else starting a small fund?

Just focus on the track record and ignore raising capital. Hire the best people you possibly can also. Don’t try to save money because it always costs more in the long run.

What’s the most profitable investment you’ve ever made?

That is hard to say. I was really early on uranium. I was in it before $16 and it went up to $145. The little producers naturally went up much more in percentage terms, so that was pretty amazing.

What was the worst investment you ever had?

Oh man…. we saw piles of FNM, LEH and BSC puts expire worthless. 2008 was the hardest year for me though, we started out good but then when equities started falling we began buying too soon. Something we liked a lot would be down 40% and then we’d buy some and it would go down another 75%. Those weren’t necessarily bad investments but it was painful. Shorting in general is just very very hard and stressful though. Most of my worst investments have been on the short side.

Any other memorable trades worth mentioning?

Energold was an interesting one. We had a big position that we started building early in 2007. At the end of 2008 it went from $5 to .55 and was trading at less than cash despite no debt and being fcf positive. When it went down to 0.55 we were buying and now it is back to about $3. I couldn’t believe it could be that cheap when it happened. I mean, it was trading at $5 and we thought it was cheap then. It was one of those rare gifts in the investment world. We missed it the first time because we weren’t aggressive enough in chasing after it. We just didn’t realize how good it was. Then we got a second chance. We got to buy shares at a fraction of our cost basis. It was crazy.

How do you generate ideas?

Mostly I am just lucky to have many friends who are smarter than me! I am always talking to people in the industry and that gets me lots of interesting companies to look at. Just asking who is taking market share, who is most respected, this is a great way to generate investment ideas. I never look to Wall Street though, I don’t talk to wall street analysts and I only know like a dozen fund managers. The less I am influenced by Wall Street the better in my mind.

How do you decide when to sell an investment?

That is a tough question as I always sell to soon; if someone bought only the companies I sold they would be a rich rich man! Generally I try to decide what to hold based on the opportunity set in front of me. Sometimes an idea goes up dramatically or something happens that changed your thesis and that makes the decision easier but generally I sell something when I have a better idea I’d rather put the capital into.

What do you do when you’ve had many investments in a row move against you?

Ultimately we are fundamental investors and when a stock gets cut in half that is when you realize if you know the company well or not. If you like a company at x price then at 0.5x you should like it even more. So when things move against us we try to buy more. We also always keep some cash around to help us in these situations. In the past we have used margin as well, although I am a bit scared of it, if deemed necessary I will margin up to be a buyer.

What is the largest position you have ever taken as a % of capital?

We’ve had a few big investments go our way. I remember putting 25% into US global and watching it go from $5 to $75. If you really want to generate outsized returns you need to put your high confidence trades on in big size so you are there when the time is right. We don’t typically take a small position. That is a test of your knowledge and conviction of the idea. If an idea we have is not worth putting at least 5% or more of our capital on then we will pass on it. If you are really doing your homework and you are disciplined then you will not find many opportunities worth purchasing. There are just so few truly amazing companies; they are so rare, that when you find them cheap you need to buy a lot of them. We very rarely just jump into a 25% position though. It usually starts out smaller and so we typically buy some because we like the business and our research shows the company is good. Then we go talk to management and are impressed and so we buy some more. Then we see how the next quarter goes and it is even ahead of what we thought they’d do, so we’ll buy even more. So a 25% position grows into that size. We measure the 25% of capital based on cost also, so if something goes up a bunch we don’t necessarily trim it just because it is up a lot. I think that is a mistake because if you trimming your larger positions you are inherently selling the investments that are working out best for you.

So far we have not gotten a 25% investment wrong. We have gotten a few 10% of capital ideas wrong though. We really only find a 25% of capital idea every couple years and so we know when we have something that is valuable when we do. We probably find an idea worthy of 5% of capital a few times a year, an idea worth 10% of capital maybe once a year if we are lucky but a 25% of capital idea comes along very rarely.

Do you think it was easier to make money in the markets now or 30-40 years ago?

I think it is a bit harder now since you need to do better research. Screening software and tools are free and so powerful now that if you want to find amazing situations you need to look for situations that don’t show up in financials because once the situation becomes apparent in the financials and shows the earnings power of the company then there are already 100 people looking at it. There are always opportunities though. One way to deal with competition is you can go to other countries. You can find companies at 1/3 book value, trading at a 2 p/e with 20% dividend yield if you go to the right countries and know where to look.

What is the best investing book ever written?

I read mostly history and biographies now. I used to read finance and accounting in the past but now much less frequently. If I had to pick one though I’d say Marc Faber’s Tomorrow’s Gold is the best book ever for investing. That book really helps you understand big picture themes and it is very well written. You can make good money finding cheap companies and many investors do very well with this strategy. When you find a really cheap company you will generally double your money, which is not bad. However, to make 10x or more on your investment you need to find big picture themes as well. Once you get those big themes right, and then find companies that benefit from that with good management teams, that is how you get 5-10x+ returns on an idea.

What do you like to do in your free time?

I am lucky to do what I love so I have been able to blend my traveling and reading with my business. Most of my free time I spend reading and traveling. I will take a friend for a week or two and go see somewhere new and interesting. We will rent a car and drive around, meet with some companies and see some interesting stuff. I really like to travel, I am on the road at least a third of the time, and I enjoy reading so that is what I try to do as much as I can.

Do you think you’ll be investing professionally until you’re old or do you think you’ll hang up the hat and retire at some point?

I haven’t given it much thought. I am having a great time though and so I have no intent to retire anytime soon. Even if retired, I would probably continue to do this with my own money. Honestly, I am not sure what I would do if I retired but I really am having fun doing this.

Thank you for your time Harris

poor & rich

"the poor will stay poor living like they're rich while the rich get
richer living like they're poor".

http://globaleconomicanalysis.blogspot.com/2010/11/reflections-on-social-paradigm-changes.html

Paul Rosenberg: Entrepreneurs vs. The Institutions

By Fitzroy McLean on 2010-11-09 23:43:30

Fitz here. Today we are fortunate to have another contribution from friend and global thinker Paul Rosenberg. Paul is a driving force behind Cryptohippie and the author of the must read A Lodging of Wayfaring Men. The freedom movement owes a great deal to Paul, but beyond being a thinker and a writer, Paul is an entrepreneur at heart and as Without Borders readers know, we believe the entreprenuer is the lifeblood of any civil society. The Entrepreneur Versus The Institution I've been an entrepreneur for most of my adult life, but even in my early and desperate days, I could never bring myself to work for a huge company. Not that I think thought there was anything inherently evil about it, mind you; I just felt that it was somehow contrary to my nature. I had no comfort issue working for small companies, though at the time I wouldn't have articulated my reasons very well. The root of it was that in the huge company I felt de-humanized; as if I was not acknowledged as being fully conscious. But, again, I don't think I could have explained it very well. THE TWO STRUCTURES As it turns out, my gut feeling was correct: Large operations (I'll just call them institutions) ARE de-humanizing. To be specific, they enforce a reduced consciousness. Bear in mind that this is not because the people running the institutions want to diminish and devalue their employees – many of them work hard to minimize these effects – but because no other choice is possible for an institution. It is all about structure, not intent. Take a look at these two diagrams: The Institutional Model The Entrepreneurial Model The diagram on the left depicts mental action in a small operation, whether it be a business, a family or whatever. Notice how many connections there are and that they are all reciprocal. Under this scheme, each person is free to consider their goal, their methods of attaining it, and the other individuals involved. The diagram on the right depicts mental action in an institution. Notice that the connections are unidirectional: from the order-givers to the order-takers. The people in this arrangement are not free to independently consider the goal, methods and individuals involved – only the executives are permitted to do that. Put simply: Full mental range is permitted, if not encouraged, by the entrepreneurial model. Full mental action is forbidden to all but a few by the institutional model. To whatever extent we consider humans to be conscious, thinking beings, the institutional model is de-humanizing. PRO-COURAGE, ANTI-COURAGE Being an entrepreneur requires courage, as do most of the important things of life, like liberty and love. So, it is doubly damning to the institution in that it opposes courage. Even those institutions which have no choice but to endorse courage (such as militaries) are very careful to limit expressions of courage to narrow areas. But why should an institution want to reduce courage? Well, once again, it is not so much a want as a need. There is no other choice – the power of the institution flows ultimately from obedience. All large, hierarchical organizations require the people in the lower levels to obey without question. There are far too many people involved; if the boss had to explain every decision to each of them, it would take far too much time. Such an operation would be impossible. Uncritical obedience is necessary; the institution is fully unable to operate without it. This obedience can come in three ways: If a person deeply admires and respects the order-giver, he or she may obey without questioning. However, this sort of near-worship never lasts very long. The order-taker is rewarded so well that they don't want to question anything. This works in the short-term, but it soon fails. As soon as the person's most basic and pressing needs are met, they begin looking for internal sources of satisfaction, which nearly always leads to thinking for one's self. That the order-taker is afraid to disobey. This is the only method that endures. The first and most obvious type of fear is external fear: Being physically injured, starved or otherwise terrorized. This method can work, but not usually for long or very well. It is too obvious and insulting – people rebel, evade or escape far too often, including many of the mid-level bosses. But, there is another fear method that does work: Internal fear, usually described as shame or conditioning. People obey quite reliably when they fear becoming an outcast. If they fear being unable to keep friends, or to find a good mate, or to escape ridicule, they fall into line very reliably. Inside the institution, a fear of insecurity combined with conditioning have always secured obedience. Some may object to my characterization of this, but it is a general fact that can't really be disputed. People can be convinced to join the institution at first, but convincing addresses a person's full mental faculties, and the full use of mental faculties cannot be tolerated inside the institution. So, convincing can be only an occasional method. Once I again I will add: This is not the result of intent – it is the result of structure. The institution is simply unable to exist in any other state. Now, since courage is the enemy of fear, the institution must generally oppose courage. Once we have the courage to think for ourselves, conditioning no longer works. An institution widely supporting courage opposes its own existence. Once people begin thinking in their own voices alone, the institution cannot stand. ORGANIZATIONAL LIMITS It is worth adding that the entrepreneurial model has a size limit, which is often referred to as Dunbar's Number. Dunbar's Number defines the quantity of identities a human can manage, usually thought of as 150 or so. Beyond this number, humans lack the mental power to maintain the entrepreneurial type of cooperation. So, maintaining a cohesive and responsive group larger than this size requires rules and enforcement… which is the institutional model. Rules are simple, binary decision mechanisms, usually of the yes/no model. Because of this, people who are organized according to an institutional model have to operate below their abilities. MARKETS Large cooperative organizations do exist, but with one crucial characteristic: They lack all executive function. That is, they do not decide anything or attempt to enforce anything. There is no inherent size limit to such an organization, since executive functions are provided for each player, by each player. Such organizations are properly called free markets. This term is not to be confused with "free-market economies," which generally refers to large, controlled economies. A market with no executive function is one without an overseer. This is a foreign arrangement to people of the early 21st Century, existing only in the form of local, temporary, informal, or illegal markets. The players in a true free market are left to survive by means of their personal virtues alone. They must function at or near their capacities at nearly all times. A free market is a place of interaction, and nothing more. It has no end goal and no executive function. The mechanisms of a market do not perceive "fairness," they know only exchange. A market that promises anything requires an executive function and an institutional model. ENTREPRENEURIAL CREATIVITY The entrepreneurial model breeds creativity and the institutional model does not. Every informed business-person knows this, including the people who run institutions. In fact, many of them work very hard to mitigate this difficulty. The core of the institution's problem is this: Creativity and obedience are mutually-exclusive operations. Humans do no operate creatively and obediently at the same time and in the same way: One excludes the other. Obedience demands that you override your own thoughts and act according an external command. Creativity requires unobstructed thinking. It is closed in the direction and to the extent that you are being obedient. This was actually Lech Walesa's secret as he and his associates ruined the USSR's domination of Poland. Here's what he said afterward: In the past, you could stand with a gun behind a man who had a pick and a spade and tell him to dig a hole two hundred meters long. But you can't put a man behind someone working creatively, behind a computer, and tell him, "Please devise something original." There is no way to do it, and I took advantage of that. So, my fellow entrepreneurs, go out proud, and create! Fitz again. Every time I read something Paul writes I feel better about the future of humanity. It may be an illusion or merely the feeling he inspires because I can say, ¨That guy says what I think.¨ or ¨Man I wish I said that.¨ Regardless, we appreciate having Paul as a regular contributor to Global Speculations. Please forward this post to your friends and family who will benefit from his thoughts. Thoughts on freedom and entrepreneurship deserve the widest possible distribution.

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The End of the Statist Quo?

By Fitzroy McLean on 2010-11-08 22:51:01

Fitz here.  I first met David Galland, the managing director of Casey Research, in Salta Argentina in 2004. Over a period of three or four days he impressed me as one of the most insightful and independent thinkers I had ever run across. An autodidact of the most impressive sort, David has the innate ability to process mountains of disparate data and come away with the salient points. More impressively, he can then turn his observations and conclusions into prose that speaks to the professional and lay person alike – without coming across like a zealot or rabid ideologue. It is a rare talent I only wish I could master. I always look forward to his missives and when the latest hit my desk it was instantly marked for the widest possible distribution. I hope you enjoy it. Here at Casey Research, we have been rather negative about the economy for many moons. To be otherwise in the face of the decades-long trend toward ever more government – along with its increasingly destructive and expensive meddling in the free markets – would have been foolish. And, so far, we have been right. However, I for one am beginning to see some light at the end of the tunnel. It won't happen overnight, and maybe not in the next five to ten years, but it increasingly appears to me that the government's disastrous "problem solving" that has brought us to this place is approaching a limit. Case in point, governments the world over are now engaged in an insane race to the bottom for their currencies – which will only gain speed if the Fed goes ahead with a new round of quantitative easing. Should the Fed persist with this latest madness, countries all over the globe are likely to step up their own interventions – but that may very well lead to the fiat system breaking down completely, to be replaced by something more tangible. Likewise, given the increasingly dire need to spur economic growth, we could soon see an end to the growth in bureaucracy and the fire hose of taxes and regulations that those bureaucrats have been spraying over the global economy for decades. Put another way, having squandered so much of human progress through counterproductive policies, any leader that wants to retain power – and they all want to retain power – is soon going to be forced to return to policies that have been proven to allow businesses to blossom. This sea change won't happen all at once – and probably not without the global economy first going through a dark and troublesome period. But I have to believe that we'll soon see a widespread recognition that there are problems to be solved, and opportunities to be captured, by breaking from the herd. Thus, while one state tries to raise taxes to "solve" its budget problems, another will see the opportunity for growth to be had by lowering taxes. While one government passes more regulation to pander to a favored group, another will repeal legislation to lighten the dead hand of government in order to favor all. In reasonably quick order, the governments that reduce, rather than increase, their burden on their business communities will see their economies begin to prosper while others stagnate – just as they always have. The United States in its youth provides the paradigm of this principle, but Hong Kong, Singapore, Dubai, and a handful of other, less pure examples prove the point as well. In support of this general theme, subscriber D.W. recently sent along an interesting piece on boom times in a Swiss canton that is picking off the hedge fund managers being chased out of the UK by the 50% tax now being levied on earnings of over £150,000 a year. And I quote… Switzerland's tempting tax regimes attract UK firms Thirty minutes from Zurich and dotted with traditional dairy farms, it might seem an unlikely location for some of Britain's biggest hedge funds. But it is one of a number of Swiss regions competing to offer ever lower tax rates in a bid to tempt British businesses to relocate. The hills are alive with the sound of cowbells – and construction workers. The village, in the area of Höfe in Schwyz is clustered around a shimmering lake which reflects the lush green, rural backdrop. However the scenery is also now increasingly dominated by building sites as it reinvented itself as a hedge fund centre by offering low personal tax rates to attract cash-rich fund managers. Spa hotels and up-market furniture retailers are springing up on the outskirts to cater for the new clientele. Why am I so confident that following another round or two of desperate, last-gasp efforts to maintain the statist quo, we'll see a shift to a global competition based on free-market policies and hard money? Simply because when there is only one path left, the choice of where to go next becomes obvious. Or as one anonymous pundit so well put it… "The world will soon wake up to the reality that everyone is broke and can collect nothing from the bankrupt, who are owed unlimited amounts by the insolvent, who are attempting to make late payments on a bank holiday in the wrong country, with an unacceptable currency, against defaulted collateral, of which nobody is sure who holds title." The very real problems now confronting the world – most of which were created by politically motivated politicos trying to solve real and manufactured problems for favored constituents – have now reached the point where they can only be solved by lowering the burden of government on entrepreneurs and letting the free market do what it does best. The countries that are first to jump on this bandwagon, or that are most vigorous in shedding their layers of obstructionist regulations and taxation, are going to be those that win the day. Conversely, any country that stubbornly tries to hold on to the statist quo is headed for even more serious troubles as its productive elements ship off to more favorable turf. Investment angle? Watch the news for signals indicating that a particular government is turning toward freer markets, smaller governments, and lower taxes – then pile in. Getting in early on such a turnaround could be hugely profitable, just as leaving money tied up in the markets overburdened by stubborn statists is a sure ticket to a big loss. Fitz again. Without Borders subscribers know that we think the current Politiconomy is madness in action.  Politics have never played a bigger role in assessing where your asset value might go. For analysis of the big picture trends effecting the US and other western economies The Casey Report is my favorite source of analysis.  It is one of the few publications I read as soon as it hits my inbox. David and the other editors of The Casey Report analyze the economic, financial, and political big-picture trends and recommend the best opportunities to profit. Knowledge is power when it comes to protecting your personal wealth and I highly recommend you click here to learn more.

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MERRY CHRISTMAS TO ALL!

Well my friends, I arrived in Seattle today, Wednesday, at 1130AM, officially ending the Thai saga. After a brief scare with my airline ticket, I cleared immigration and paid the fine for my overstay, and hopped on a plane at 9am local time. I am so thankful and relieved that this has all come to an end. Thanks again for your thoughts and prayers, surely they were heard as this is no less than a miracle.

I hope you all have Merry Christmas and Happy New Year! Look forward to hearing from you in the days to come!

Blake

CHRISTMAS COMES EARLY

The day in court today was just as we prayed it would be.....I received a 2 year suspended sentence with the decision was returned around 1230pm, my passport was returned, and my immigration block was lifted was so I depart the country. And I was able to change my flight home to 23 Dec at no extra charge. So I thank God for answering all our prayers and them some, and I thank you for your thoughts and prayers the past month or so. I look forward to seeing and talking to you all in the coming days and on into the New Year.

Thanks, and God bless

blake

THE COURT DATE AWAITS

Alrite my friends......The waiting game, for now at least, is nearly over. The documents are in, the translations finished, the plan of attack is determined, and let contingency plans are set.......On Monday, the 20th, I go to court at 9am. This court appearance is not really a trial, but rather it is intended as a time for the judge to ensure both sides are ready to proceed, and to confirm that the defendent (me) still maintains a Not Guilty plea. My plan right now is to change my plea to guilty for a number of reasons: 1) It feels like the morally right thing to do given that I did take the bike; 2) my lawyer feels my chances of a suspended sentence are greater than my chances of a not guilty verdict; 3) if i plea not guilty, I could end up waiting until 2006 for a trial, and be stuck in thailand until then; 4) My strongest defense lies in my background, settlement with victim, and reference letters, not in fighting my guilt. So, assuming I plead guilty, the judge would then take anywhere from 1 hour to 1 week to decide my sentence. My hope is to get my sentence suspended, in which case I could leave Thailand within a few days or weeks (depending on return of passport, clearing immigration, etc). If the sentence is not suspended, I could request bail while awaiting an appeal. If I don't request bail, or it is denied, I'll be going straight to jail. Regardless, if I do get sentenced, I will appeal. The appeal would be decided upon in around 3-12 months (nice, right?) and then whatever decision made there would be final. The downside to being out on bail during the appeal process is that any sentence remaining after the appeal would start upon receiving the appeal decision, while if I am not on bail all the time in jail counts towards it. So obviously there are a lot of unknowns and variables in the equation, but we've talked through everything and weighed the options, and prepared our best case, and now hope and pray for the best result.

My parents came out here last weekend, and are staying through 22 Dec. While I didn't ask them to come, I extremely thankful to them for being here. It could even help my case, as parents have high status here, especially in a matter of this nature. Although just having the company and not being alone is comforting enough.

I certainly appreciate your prayers during the next few days.....for me, my lawyer, and for the judge to be a merciful person. Whatever comes of this all, I'm certain someday I'll be able to look back on it and know that good came of it.

All the best to you, and i certainly hope and pray this isn't the last you hear of me for a year or so! If everything comes out roses, its still possible I make it back to the states for at least part of the holidays. In any event, I'll post to the blog the outcome of this all, and email you again if I am free and clear. Thanks also for the kind words of support during the last two months, they were and are much appreciated.

Have a Merry Christmas, and Happy New Year.....and I still hope to be able to tell you in person!

Blake

THAI TRIAL UPDATE

My first 12 days on the outside after getting bail were quiet enjoyable. I had three days to hang out with Niall before he took off to Laos, and met up with two other jokers from Korea as well, Cozzie and Alex. Got a day in kayaking on the river, which is harder than I thought it would be, and I ended up spending a good bit of time underwater-upsidedown kayaking. Fortunately, didn't scrape bottom or head butt any rocks.

Since then I've been fortunate to meet some great people here who have helped me out in every way. Katherine is a wonderful woman who works with foreigners in the prisons in Chiang Mai and Bangkok as well on occasion. She has helped me out from the start. Paul has been here for 20 years working through various churchs and organizations, and he has introduced me to others and kept me involved in things going on around here. I have been putting my new Thai cooking skills to work, and made up some green curry from scratch and chicken with cashew nut for a group of 5 at Paul's house this past Monday. I've got a few other cheffing appointments set up to round out my skills. Still looking for a football team to join up with, but getting back in shape by running and working out in the meantime. So I've kept productively busy, avoiding the endless hours of mind numbing thought that could come at a time like this. I've spent a good deal of time on the Internet, emailing, messing around, and chatting, and on the phone with my parents.

So, things got rolling again on Tuesday. I went to court expecting a formality type occasion with the prosecution requesting a 12 day delay. Much to our surprise they were ready to go forward with the case. So after getting this news around 415pm, we rushed upstairs for the appearance in front of the judge to enter a plea. Also in the room were some 10 others, some getting sentenced, some entering pleas, and others being told to wait 12 more days. And of course it was all in Thai, so I've no clue whats going on. When my turn came, I stood and said Not Guilty after the prompt from my lawyer. Basically this just buys us time to sort out our plan and defense. The next court date is 20 December. Now, if I maintain a Not Guilty plea, it will probably be a year or more until the case goes before a judge. During which I would have to remain in Thailand, providing my bail is honored by the court. If I go to Guilty, then I would receive a sentence the same day or shortly thereafter. The sentence could range from 2 years in prison to a suspended sentence that allows me to go home to deportation, effectively the same thing.

So there you have it. I have certainly learned a lot through all this, and I am sure this experience will someday be seen as a pivotal time in my life. I hope and pray that it will be a 2 month experience, and not a 2 year & 2 month experience. But thats out of my control, and I'll be trusting God either way. So I ask your continued prayers for me in this situation. And keep in touch on the email, always good to hear from everyone.

b

GOOD TRAVELS GONE WRONG

Cheers all,

This is not a post I had hoped or planned to make at any time during my travels, or my life for that matter, but alas, here it is. Two weeks ago, 22 October, I brought some problems upon myself here in Chiang Mai, Thailand. It started out quiet enough, walking through the night bazaar drinking Thai whiskey and coke, then off to a few bars for a couple beers. By the time the mid morning came around, I was pretty out of my mind, and not so aware of it. So when we came across a motorscooter parked with the key in the ignition, I went for a joyride. I can't really say I though it would be this or that, because I don't really have a sober thought in me at the time. Anyway, I rode around the block and back to my Guest House, a few blocks away, where I was promptly confronted by the owners and the then police, and arrested for stealing the motorbike. I tried to explain I had no interest in stealing in, that I was drunk and just, stupidly enough, went for a ride, but it was to no avail. I was handcuffed, taken to the police station, questioned, and then tossed into the cell.

This was about 5am or so by now. Around 1030am by friend Niall found me at the police station. I still had no idea what the whole affair was going to entail. Later that day, one of the police men there told Niall I should be out within 2-3 days. More questioning that night. The next day, Sunday, I found out I might be in a bit more of a tight spot than I imagined. Monday this was confirmed, as I talked to a Kiwi lady, Katherine, who works in a prison outreach ministry for foreigners in Chiang Mai. She gave me the straight scoop, and I knew I was going to need a lawyer.

Alrite, I'll cut out a good bit of the time here, as I will post it in detail sometime in the next few days. Last Thursday, 13 days later, I was about 10 minutes from being taken to the prison and locked up until the case went to court. Thankfully, and in answer to loads of prayers, my lawyer secured my release on bail at the last moment, so now I am out on bail, awaiting the court case.

As it stands now, the court action should start up sometime late November early or early December. The options in the court case range from me being sent home, i.e. deported, to spending some time in prison here in Chiang Mai. The uncertainty and lack of transparency prevents any reasonable analysis at this point. Its pretty tough to put to words the shame, embarrassment, and disappointment (in myself) that I feel at this point. But 13 days in the hole gives you a bit of time to think, and I've got my head in one piece. At this point, I am praying and trusting in God, that everything will work out for the good. And there are lots of others doing the same. I do appreciate your thoughts and prayers while I work through this. I had quiet of stack of emails awaiting me last night, many of which, ironically enough, wished me safe and happy travels. As I'll be having some spare time now, I will work on getting back to all of you individually. I will put the details of this whole affair on the blog sometime, and will keep you all posted on any developments. All the best to everyone. Blake

TREKKING ON

Back to the blogging after a well earned rest, too much typing and I just might get one of those "sydromes."

The first few days in Thailand were spent in Bangkok, doing laundry, uploading photos, sorting out flights, and all the other less glamourous aspects of this adventure. Also met up with my new travelling companion, Niall, fresh out of Korea. Took off for the island Ko Samet for 4 days while Niall was off in Hong Kong helping the Seoul Gaels successfully defend the All Asian Gaelic Championship. A small island chosen solely for its easy and cheap access from Bangkok, it met the goal of chilling out and doing nothing. Not many other options were available. The weather was a bit moody, tossing in daily storms resulting in the loss of electricity the first two nights and rain the whole of the third day. Regardless, I sat around, read some, watched some movies that don't deserve mention, and hung out in the beachside bar for a few drinks.

Back to Bangkok and met up with Niall. Messed about there for another 2 days awaiting the return of his Vietnam visa. Nothing much to report here, just the usual Bangkok shuffle, dealing with mad tuk tuk drivers, buzzing through the night markets, getting harrassed by every pusher of something on the streets, and trying to sort out watching football matches after closing time. Yes, for all its craziness, most establishments in Bangkok close at 2am. And if you ask a tuk tuk driver to take you to a joint that has the football on the tele, he'll take you to the same one the tuk tuk driver the night before took you when you asked for a place that had cold beer but without working women.

Flew up north to Chaing Mai on, uh, Thursday I think. Yeah. Found a place to stay on the outside of the moat, yes, the city has a full fledged 4km square moat around it. Went out for some pool and darts, talked to some joker Americans and Brits who have been in Thailand way too long, and stayed away from the lady boys. Friday we got in touch with a local trek guide, who came highly recommended from Chris, who had gone trekking with him back in June. Too easy, conducted negotiations at a street side foodcart vendor over a few beers. Set out the next morning.

First stop on the way out to the hills was the local market, where Anan stocked up on food for the next 4 days and we cringed at the sight of bugs, innards, and other such marvels that exist in the local diet. We were dropped off at the designated location, ate lunch, and then set off up the hills into the forest. The first 2 hours were spent hiking up rather steep hills, with Anan cutting half a path with a machete, and us sorting out for ourselves the other half. Luckily, Anan claimed to have spent the last three weeks doing nothing but drinking and smoking, so many rest stops taken. At some points along the way, our fearless leader appeared a bit confused, uncertain, but didnt yield his confidence, so we trekked on. To make a 4 hour story a bit shorter, we ended up in the same place we started at, none the better save for all the energy spent. Anyway, he fell back on a Thai proverb, and came up with an alternative plan, and we took a truck to the elephant and rafting camp on the river, which was to have been our third nights stay. Anan the chef cooked up some eats, and we spent the evening playing cards and chatting in our bamboo hut facing the river.

First up on day 2 was an elephant ride, which was different enough, but would have been better if it was more of a trek than a 30 minutes down the road and 30 minutes back sort of affair. But I have an elephant ride under my belt, another block checked off. The days trekking took us through some amazing forest/jungle vegetation, sticking to a path the first half of the way, and following a river hopping on the rocks for most of the second. It wasnt til I was well confident hopping the rocks with the pack on that I had a false step and went for a splash. Sometime in the afternoon we arrived at our destination, a Shan hilltribe village. The Shan tribe came south into Thailand from China about 45 years ago to escape persecution. The Thai government leaves them alone for the most part, but the don't have any rights as Thai citizens, don't own their land, and don't have any government assitance. How they expect them to prosper under such an arrangement is beyond me. Maybe they just want to protect the trekking market, so they have to keep the villages in order. Anyway. The place was unspectacular other than the location, bamboo huts for living, dirt roads/paths, chickens, roosters, pigs, dogs, cats, kids moving about all over the place. We went for a stroll and ended up getting a tour from two kids, about 6 and 3 in age or so. They showed us how to make whistles out of grass, fed us some leaves, and never stopped impressing us with their English. They talked constantly, limited to their knowledge of the word "hello". Dinner was cooked up by the family we were staying with, and afterwards the village leader joined us, sort of, as we played cards and sat around. He showed us some village tricks and a bit about their way of life.

Day three started magnificiently as I stepped out the hut to find I was now on a mountain island, an oasis above the clouds floating below us. A few other peaks here and there, but for the most part floating on a bed of clouds. After a deliberately slow start, we set off for the next day along a real road until we reached a Budhist Lahu village. Arrived just in time to get into our lunching hut before the rains came, the chef whipped up some fried rice and fruits in our hosts hut. After coffee and more card playing, either rummy or loser, we set off again. We added one man to the trek, "The Doctor", so named for the thoroughness of his kit bag. We could see the destination, a Christian Lahu village, across the valley, but the hike went around instead of down and up. Two hours later and just outside the village we came upon the best shower in the forest, a nice waterfall with a half bamboo shoot to get the whole shower effect. After a good scrub we hiked up in flip flops, a bit of a mistake, but made it nonetheless. Moved into our hut, and half the village seemed to join us. Our man Anan is quite the legend there, for whatever reason, so we had a whole crew waiting on us and cooking green curry for dinner. The hut sat above the village, and offered a stuning view into the valley and the ridgeline in front of the setting sun. After dinner we received an in hut entertainment show, with the young girls from the school/church in full garb doing a singing and dancing performance. Quite an experience, really. After that we chilled out, played cards, attempted conversation via hand signals and gestures with The Doctor, and so it went. The ambience was heightened by the chorus and rythmes of the forest at night, which vividly reminded me of a non-verbal performance, where the performers make sounds out of random objects.

Day four we set off for the road where we came in at, or roughly that area. The trekking again involved making your own path, but was mostly downhill, thankfully. The final leg of the journey was a raft ride down the river, starting at the camp from Day 1. It consisted of about 1 minute of white water rapids, and 59 minutes of gently floating down the stream. No complaints about that. Cruised back into Chaing Mai in a jeep, and that was that. Great times, 4 days with no electricity, eating by candlelight, chilling but not talking with the villagers, beautiful forests and vegatation, and none of the madness from the cities.

Another 4 days here in Chaing Mai, awaiting Laso visas, then up north for a few more in Thailand before jumping to Laos.