Trees Grow

“Trees grow” is an adage that has stuck with me over the past several years.

In a post financial crisis interview, a successful investment manager was talking about his decision to load-up on Citigroup and a handful of other banks in early 2009 when the decision to do so was difficult to say the least.

The manager referenced a professor who shared the trees grow saying with him, and he emphasized the impact that the idea had on his decision to build and maintain significant long positions in banks and other financial services stocks when everyone else was certain the world was coming to an end.

The trees grow idea involves considering fundamental qualities of things—whether trees, people or businesses.

Growing is what trees do—it is intrinsic and central to their nature.

Similarly, productivity and growth are fundamental qualities of business. 

For the most part, people don’t show-up at work each day trying to screw things up.  People generally work very hard to do a good job, and this collective productivity is what moves businesses and the economy ahead over time.  Trees grow is an expression that makes the case for long-term optimism about business, the economy and capital markets.

Anyone who has ever shorted a security is aware of this reality.

Shorting is really hard because at a certain level you are betting against this fundamental characteristic of businesses and economies—people work hard and try to solve rather than create problems.

Businesses are fundamentally productive—otherwise they go away.  As an investor, it is much easier to bet on this notion than to bet against it.

Warren Buffett references the trees grow adage indirectly when he talks about the difficulty of betting against the United States over the past century.  The country and capital markets have continued to grow despite a couple of world wars, Vietnam, Watergate, etc.  Buffett, by the way, is also averse to shorting or betting against securities.

There comes a point, though, when people question whether the non-productive elements in the economy may eclipse the productive aspects—particularly when many non-productive elements are so highly leveraged.

Speculative finance combined with a taxpayer safety net and public sector workers retiring at age 55 with $150,000 lifetime pensions are less than productive examples that serve as current headlines.

Italy has the third largest bond market in the world.  On a comparative basis, the 2008 financial crisis might seem like a picnic if Italy’s bond market gets pushed over the edge.

A question on the minds of many people is whether there are big, highly leveraged and growing swaths of the economy operating according to an entirely different set of rules and incentives. 

Do the less than productive elements operate according to the trees grow MO, or are there an entirely different set of operating rules that apply?

At what point might these less than productive actors become such distractions that they actually impede and/or destroy the productivity upon which they depend? 

I guess the bond markets will answer these questions.