I rarely answer the phone. Callers are instructed by a polite English lady on my voicemail to send her an email. In return, I practise the title lyrics from a Jimmy Buffet song: "If the phone does ring, it's me." Last week, though, I made an exception.
When John Ewing calls, you answer the phone. This focused stock picker is a co-founding partner of the Toronto-based investment firm Ewing Morris Investment Partners Ltd. He immediately launches an inquiry into the economics of the Indian jewelry industry. His question to me is, "Why should any jewelry business still be around 10 or 20 years from now and make boatloads of money?"
Yes, that was the question. But was it the right question? John later emailed me a parable, allegedly attributed to Abraham Lincoln. It's worth sharing:
A newcomer walks into town and sees an elderly man sitting on a bench with a mean-looking German Shepherd. The newcomer looks at the dog and asks the old man, "Does your dog bite strangers?" The old man looks up and replies, "Nope." The newcomer reaches out to pet the dog and is surprised when the German Shepherd growls and jumps to attack. "I thought you said your dog doesn't bite?" The old man replies, "Ain't my dog."
Oops, wrong question.
This story illustrates the importance of asking the right question. For many investors, the question has been, "when will the Fed raise interest rates?" Higher interest rates mean that some companies, individuals and countries will have to pay more to borrow money, while lenders can actually earn some interest in their bank account. If interest rates increase enough, the bond and stock market might fetch a lower valuation, leading to the old maxim: don't fight the Fed.
But maybe this is the wrong question. Why does it have to be the Fed that raises interest rates?
Interest rates, like many things in the world, are relative. With European Central Bank president Mario Draghi hinting at more quantitative easing in Europe and China cutting rates, relative interest rates in the U.S. just went up for part of the yield curve. The Fed didn't do a thing.
And while some investors were fixated on markets heading higher in late October, currency observers will note that the U.S. dollar moved up against other currencies sharply on Oct 22 and 23 - as if the Fed actually did raise rates. Despite a change of language in the Fed statement, it may be now that an interest rate increase in the U.S. is off the table for the rest of the year.
Investors are consumed with this question. In fact, if extraterrestrial intelligence were to fly into our galaxy and study human life on Earth, they would surely stumble upon the topic. The aliens would, of course, review the volumes of articles, blogs, investment letters and videos, which ponder, debate and predict the timing of the Fed increasing interest rates in the U.S. After adding up the resources and brain power consumed by this question, the aliens would likely conclude two things: 1) the Earthlings exercise an unwavering intensity on when the Fed will increase interest rates; and, 2) it would be best for Earthlings to reallocate resources to better causes, say, finding a cure for cancer or ending world hunger.
If you did know the Fed would raise interest rates 25 basis points, what would you do much differently anyway? Does it really matter?
Maybe it really is the wrong question. Perhaps investors should stick to, "Will this company make boatloads of money 10 or 20 years down the road?"
Paul Moroz is the Deputy Chief Investment Officer and a Director at Mawer Investment Management Ltd.