Success Is Self-Limiting

"Complacency can be a self-denying prophecy," says Larry Summers.

We had to struggle with the phrase for a few seconds. We think it would make more sense if he had said, "Extremely bullish expectations can be a self-denying prophecy." But what can you expect from a Harvard man? Like the president, Summers can't seem to express himself in a clear sentence.

What he means is that when people are extremely complacent, and expect things to work out well despite the actual fundamentals of the situation, they do such reckless things that they doom themselves to failure, thus denying the prophecy.

Another way to put it is this: Success is self-limiting. When a man enjoys a little success... he reaches further. If he buys a stock and it doubles, he considers himself an investment genius and buys more. If he seduces the heavy hairdresser, he next aims for the slim girl at the cinema. If he holds up a liquor store and gets away with it, he begins studying the bank.

Eventually, his reach exceeds his grasp.

So too, in markets do trends tend to run to the point where they can go no further. Then, since history must continue...since markets must go somewhere...and since there must be a yin for every yang...they begin to go in the opposite direction. Tides come in and then they go out.

There are limits to how much people can pay for a stock or for a gallon of gasoline. There are limits, too, to the cycles of optimism and pessimism...and there's a limit to the amount of liquidity that be put into a financial system.

We saw yesterday how long some of these cycles can be. If Dan Forshee is right, the broad market in real estate in America, takes as long as 120 years to go from peak to peak. The last peak, he says, was just before World War I. Since then, real estate investments, adjusted for inflation, have gone down most of the time.

This is not good news for us. We do not like stocks. So we have put most of our free money in property. We own office buildings in Baltimore where our business is located. We own a family farm not far away. In addition, we have property investments in Canada, Nicaragua, Panama, Ireland, Argentina and France. If this stuff goes down for 100 years, this will prove to be the worst investment strategy ever devised. Our stock of humility will soar...right up until the moment we drop dead and are tossed into a pauper's grave.

Most of our property was bought at what we thought were near-distress prices. In fact, so successful were we at real estate investment - until recently - that we began to think we were pretty good at it. We grew careless. Complacent. As reckless and as dumb as any poor lump ever mentioned in these Daily Reckonings.

In France, we have just suffered a huge loss (huge for us). We bought a building to be used as a seminar center. We found an architect to renovate it. We signed the papers and prepared to write a check. But when the time came, we found that the final check was far...far...larger than what we expected. In fact, rotten wood, rotten politics, and rotten heads in the building trades caused such staggering cost over-runs that the building can never really be profitable. What's more, we still have not been able to work our way through the bureaucratic maze so that we can put the place into use. It stands empty...with the heating system sizzling away, in order to keep the new paint from cracking.

The loss is painful. It's bad enough that we are losing money. What is worse is that we have called into question our own judgment, if not sanity. We wrote five years ago that 'chateau' was the French word for 'money pit.' Now, we've proved it, digging our own hole deeper and wider than any we've ever seen.

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