Several months ago, during the worst of the Gulf oil spill disaster, I wrote on this blog that I invested in BP stock. BP stock dipped to about 27. Today it is nearing 47. I didn’t time the bottom right, but I averaged down and came out ahead.
Normally it’s a bad idea to invest in individual stocks because everything you know about a company is based on lies from management. And you can’t know if a competitor is about to release a killer product next week. And Lord knows what games any particular company is playing with its accounting. There’s simply no way to have enough information about a typical company to make an informed investment.
BP was different. Everyone understood that the stock’s direction would be entirely determined by the oil spill, and almost everything about that situation was in the news. For once, it was a level playing field, at least as far as raw information.
You might argue that someone close to the ground, such as an engineer or Coast Guard official might have been better informed. But that’s unlikely. I’m pretty certain that no engineer knew for sure what solution would work, or how soon. And clearly no one knew how much oil was going where. It was also fairly obvious that estimates about the size of BP legal settlements were little more than guesses.
In such a case, anyone who has experience in big organizations, and pays attention to world events, had an advantage in analyzing BP stock. You would have known that the wall-to-wall media coverage would generate more fear in investors than the facts would support. You would know that in any complex situation, lawyers will exploit uncertainty, so eventually BP would have the upper hand. And you would be aware of what I call The Adams Law of Slow Moving Disasters, which states that engineers can always solve slow moving disasters if they have society’s support. The spill was slow enough to qualify.
Still, this was more of a gamble than an investment. I’m probably just lucky that things went in the direction I predicted. But it made me wonder – and this is the point I was leading up to – whether the only smart way to invest is in entire countries as opposed to companies.
The economy of an entire country moves because of large events that the media will generally cover. For investors, it can be a more level playing field. For example, I don’t know where Microsoft will be in ten years, but it’s a good bet that India will continue getting richer.
There’s plenty of uncertainty in the economy of countries too, of course. Japan and Ireland are good examples of that. But it seems to me that in general, information about the economy of an entire country will always be superior to information about an individual company. And events will happen slower in entire countries. Terrorist attacks and natural disasters are the exception, but they rarely change the long term prospects of a country. (You could argue that 9/11 killed America’s economy. That’s the only exception I can think of.)
Investing in countries isn’t a clean process at the moment. Often the best you can do is to buy an index fund that is over-weighted with the largest companies in a given country. But I assume that problem will be solved in time.
My prediction for today is that twenty years from now the common form of investment will be in entire countries. And following China’s model, entire countries will start to operate more as for-profit entities. That means the big democracies of the world will evolve into “management” models in the longer run. Some degree of transparency and oversight will be the only safeguards against despotism. Someday voting will be seen as an inefficient relic of the past. In the future, citizens will laugh at the idea that uninformed citizens voted for leaders based on who looked good on television.