Saturday, February 16, 2013

Obama's confusion about "wise" investment

In his latest State of the Union address, President Obama referred to investing, investors, or investment 13 times. Here are a few of those references:
So let's set party interests aside, and work to pass a budget that replaces reckless cuts with smart savings and wise investments in our future.
It's not a bigger government we need, but a smarter government that sets priorities and invests in broad-based growth.
If we want to make the best products, we also have to invest in the best ideas.
Unfortunately, making wise investments isn't as easy as asking Mr. Obama how many licks it takes to get to the cash-flow center of a public equity fund. The track record of government investment is abysmally poor. And we shouldn't expect it not to be. The government lacks the vital characteristics necessary for successful investment decision making. Most importantly the necessary incentives are not only absent; they are in reverse. Government does not have a profit motive properly aligned with success (consider this the front-end of good investment incentives)--that is not to say that individuals and groups within government lack a profit motive. Government also does not have the correct feedback system whereby success is rewarded and failure is punished. Consider this the back-end of good incentives, and this is the reversed incentive part. Government tends to reward failure at the expense of success.

Another vital component largely and effectively absent from government is talented investors. Rather than attracting and nurturing creative, entrepreneurial innovators and risk takers, government tends to attract and nurture assembly-line bureaucrats and rent seekers.

Government is the wrong process for "wise" investment. Obama doesn't seem to understand this. His administration's malinvestments into solar, et al. are clear evidence of this. Aside from the fraud, there is a key problem with these types of investment. For the investment to be wise, it isn't sufficient to know what the actual technology of the future will be. As very difficult as that part of the task is, an equally challenging feature is getting the timing right.

Being too early to invest in even the right technology can still destroy resources; i.e., not be a wise investment. Imagine travelling in time to 1980 to invest in teaching HTML coding, manufacturing Boeing 787s or Airbus 380s, or building contemporary Whole Foods grocery stores in mid-western cities.

A famous investor adage is, "In the end I was right, I my timing was just too early." Another is that, "The market can stay irrational longer than you can remain solvent." We seem to be testing those two adages via government "investment" at an alarming rate.