Track patterns over time to know more


In a discussion with one of the other advisors here at Personal Due Diligence this week, the question of “how do you know so much” came up.

After pointing out that I don’t know any more than any one else does, I went on to say what makes the difference in figuring out where we might be headed.

Patterns. They’re the key.

To track patterns, you have to discipline yourself to gather data regularly. You don’t need much — I’m voracious about it, but it takes less than twenty minutes a day to collect everything and digest it — but you do have to do it regularly.

Once a day, once a week: for most people, this is good enough. Checking in once a month means you’ll miss too much.

Take Japan as an example. 1990 saw the Japanese bubble burst. The real estate market froze as prices wanted to fall (but mortgages for higher amounts didn’t let people sell easily). The Nikkei average started its long slide from the 40,000 range to the 8,000-9,000 range it lives in today.

This was the start of the “two lost decades” for Japan. Yet, if you went to Japan, you wouldn’t see a depressed economy and impoverished people. Everything looks just fine.

But it’s not. Slowly, over the last twenty years, Japan has built up a debt bubble, as its government has tried every trick in the stimulus book to restore the good old days. The country is awash in new bridges, new roads, new rail lines … and no change, other than the deficits going up.

The slower economy has also caused — over a twenty-year period — a fundamental shift in Japanese savings. Japan used to be a nation of great savers. Nowadays, Canadians save better than the Japanese do (and we don’t save much at all, not even with TFSAs and RRSPs as tax shelters for earnings from savings). Slowly the Japanese have eaten down their savings and added to their personal debt to maintain their lifestyles in an economy that’s drifted sideways.

Oh, and the Japanese government debt has absorbed the country’s savings over the years.

Meanwhile, the Japanese currency has gone up in value. It was ¥120 to the US dollar twenty years ago; today it’s about ¥80. For a Japanese manufacturer exporting goods, that’s a 50% price increase just from currency exchange. (Imagine what would happen to the Canadian economy if our dollar climbed to US$1.50 from its current “just above par”.)

Does that explain why Toyota and Honda keep expanding their plants in Ontario, and how what were once assembly plants using almost all parts imported from Japan are now assembly plants using mostly parts sourced in Canada and the United States?

You’d never have seen most of this if you weren’t tracking little bits of data over the past twenty years. Instead, you’d have visited Japan, seen all the new infrastructure, and said “wow, they must be doing well” (especially when you came back home to gridlock, crumbling expressways, potholes and poor service on transit).

A company, and a country, can appear to be one thing, and actually have a very different situation than appears on the surface. You need to be able to see behind the façade. Fortunately it’s not that hard.

It just takes a little discipline. Otherwise you’ll be at the mercy of the news.

You know, the stuff that comes out after the façade crumbles.

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