Writing in the Globe and Mail, my good friend and Prosperity Institute “builder” Geoff Beattie nails the key difference between two kinds of development strategies. One creates fictitious wealth, the other is key to real, sustainable development.
The two approaches – building versus trading – are profoundly different. What we have seen in recent months are the consequences for the markets of both domination for too long by a trading mindset and ever decreasing levels of regulation. In other words, as the game was getting faster and tougher, the rule book was getting thinner and easier.
The pattern of constant trading had ever more deleterious effects. As return expectations grow, traders become exposed to ever-escalating levels of risk. Because the pipeline of new, high-quality investment opportunities is not infinite, traders are forced to tolerate higher levels of risk. When returns start to suffer, they have to leverage their capital by investing borrowed money to help juice the investment return …
In contrast to traders, builders invest with the intent of seeing a business opportunity develop over time … Builders invest over the long term and integrate risk management into their strategies as they must inevitably ride the highs and lows of the economy. Builders expect, and navigate through, the downturns based on a confidence in the underlying fundamentals of the business, its market and its management. Builders understand and engage in the businesses in which they invest and thus contribute both to the businesses’ success as well as that of investors …
The influence of the trader mentality has crept beyond Wall Street and the business world and infiltrated government policy, with devastating results. Decades of deregulation by the American and other governments has allowed a free-for-all in the financial markets – not to mention airlines, telecoms, energy and even prescription drugs. It has been supported by a political philosophy that disregarded the long term, expected markets to resolve their own problems, threw money at problems when they did arise, and let diplomacy and relationship-building wither away in business and foreign affairs.
How do we recover the builder orientation? I hope the discipline of the markets will start us off. It is extremely valuable to have a new generation of investors live through a major market downturn …We also need to revisit how we judge and compensate our business leaders and, for that matter, government leaders…The average lifespan of a CEO of a Fortune 500 company is now less than four years. How can we expect them to be interested in the long-term health of their business when their tenure lasts only a few years?
There is also an important role for government and public policy …Good government isn’t big government or no government; it is smart government that embraces its responsibility to look decades ahead and build the appropriate policy infrastructures for growth and prosperity. Our tax, corporate and securities laws need to foster and reward the builder mentality with incentives and stability.
In short, we need to restore a builder mentality in government, on Main Street, in our boardrooms, among institutional investors, and around the kitchen table. The pain we all feel now will be wasted if we don’t learn from it.