THE SAGES

Reviewed 6/18/2011

The Sages, by Charles R. Morris

THE SAGES Warren Buffett, George Soros, Paul Volcker, and the Maelstrom of Markets Charles R. Morris New York: PublicAffairs, June 2009				Rating: 5.0 High
ISBN-13 978-1-58648-752-2
ISBN-10 1-58648-752-3	199pp.	HC	$23.95

This book profiles three of the financial gurus of our time: George Soros, Warren Buffett, and Paul Volcker. These men are very different in character, but they share an almost intuitive grasp of markets and investments. They also share three elements of philosophy: a distaste for the Chicago School of economics, with its monetarist, laissez-faire dogma of "efficient markets"; mistrust of esoteric financial instruments like credit default swaps; and opposition to "merger mania", which tends to increase debt loads on companies and penalizes long-term thinking.

Soros, the Budapest-born son of a cultured but middle-class family, spent his boyhood hiding from the Nazis during World War II. Afterward, with the help of relatives, he emigrated to England for a chance at the London School of Economics. While waiting for admission, he read widely in philosophy; Karl Popper's The Open Society impressed him deeply. He discovered a gift for canny investing and became part of the Hungarian diaspora of brilliance that gave the U.S. so much. Later in life, through targeted and monitored philanthropy, he was instrumental in the de-Sovietization of Eastern Europe and sped the collapse of apartheid in South Africa.
Buffett was born in Omaha just after the Depression. Socially awkward but bright, he developed an interest in business and finance at an early age. He earned a degree at the University of Pennsylvania's Wharton School, annoying his professors with his ability to memorize great heaps of material on company performance and finances. Following the "prime directive" of his mentor Benjamin Graham, he focused on value rather than short-term stock price appreciation and built up a respectable portfolio working under Graham in New York before returning to Omaha as a billionaire to become known as the sage of that city.
Volcker is perhaps the most reticent of the three sages. Born in Teaneck, New Jersey, he came from solid German immigrant stock. His mother was valedictorian of her class at Vassar, earning a degree in chemistry. His father was Teaneck city manager, by all accounts organized and dedicated, often working through weekends. Paul absorbed a deep sense of integrity and responsibility from his parents; it served him — and the nation — well in later years. He earned an economics degree at Princeton, did two years at Harvard's Littauer School, and a year at the London School of Economics. He joined the Kennedy administration and participated in the "unwinding" of the Bretton Woods accords as the nations of Europe recovered from the War. Throughout his career, he stood rock-solid for financial conservatism, often going toe-to-toe with Wall Street leaders. As Fed chairman he controlled inflation in America and helped with the LDC loan crisis1 of the 1980s. Three other problems he helped solve were the reluctance of Swiss banks to open their files for holocaust survivors, the Iraq oil-for-food scandal, and corruption at the World Bank during Wolfowitz's term as WB president. Currently he chairs the Group of Thirty, which in January 2009 released a detailed set of recommendations for financial reform. These recommendations are noteworthy because they require little or no legislation to implement, showing Volcker's blend of practicality with integrity.

The profiles are good for a quick overview, but are quite sketchy and sometimes omit important details. That's forgivable, though, for the author's main purpose in writing this book is to illustrate the profound weakness of economics as it is currently practiced. By contrasting the methods and philosophies of these three men with what might be called "herd economics,"2 he demonstrates this very neatly. I give two examples of his evidence in the sidebar and in the table below.

The Predictors

In his Introduction, Morris tells us that 101 of 102 forecasts of unemployment and GDP growth by 51 leading economists published in the Wall Street Journal were wrong. These were forecasts made in late 2007 and early 2008, when the housing bubble was already collapsing.

"For true believers in free-market ideology, it is the worst of all possible worlds—and they brought it on themselves. Greenspan practically wept at the congressional hearing when he conceded that he had never imagined that market professionals could be so reckless and so wrong. And as the Journal's forecasting tabulations suggest, as late as last year, mainstream economists still did not understand what was going on."

– Page xi

However, Soros had warned of the oncoming financial crisis in the 1990s, Buffett a few years later. Volcker too understood the danger, but Morris implies he held his tongue for political or professional reasons.

A key point made by the author is that the widespread faith in market self-correction is a pipe dream. As with the poor macroeconomics predictors he mentions in the Introduction, the Chicago School holds that no single individual can outsmart the market. Warren Buffett blows this out of the water with a comparison reported on page 57. The table shows that seven of his fund managers following Graham-Dodd theory, which calls for rigorous analysis of company fundamentals before investing, hugely outperformed the Standard & Poor's 500.

Fund	Period	S&P 500	GP	GP/S&P	LP	LP/S&P
GP is general partner; LP is limited partner in the firm. The author notes, "* Benchmark is DJIA."
No. 1	28 years	887%	23,105%	26.0	6,679%	7.5
No. 2	16 years	239%	1,661%	6.9	936%	3.9
No. 3	12 years*	153%	2,795%	18.3	1,593%	10.4
No. 4	13 years	270%	N/R	N/R	775%	2.9
No. 5	13 years	97%	1,156%	11.9	500%	5.2
No. 6	19 years	306%	22,200%	72.5	5,530%	18.1
No. 7	18 years*	389%	4,277%	11.0	2,309%	5.9

"The current global economic debacle has discredited almost all the captains of the finance industry, the regulators of most nations, and the gurus in academia. But the Sages stand taller than ever. There is a lesson there, and one hopes the world will learn it."

– Page 180

Morris's book is very readable, and gives a succinct yet detailed comparison of the views and practices of the three Sages, and some of their mentors, with mainstream economics orthodoxy. Its main shortcomings are the sketchiness of its biographies — forgivable, in my view — and some padding in places, as when he includes nine and one-half pages of Buffett quotes without comment. As I note, he succeeds admirably in his main purpose of describing the reasons why mainstream economics performs so poorly, not only failing to solve problems but too often exacerbating the conditions that create them. The book is of course well indexed and thoroughly end-noted. I therefore wish devoutly that it be read widely, though I don't rate it a keeper.

1 This crisis involved LDCs (less developed countries), mainly in Latin America, defaulting on large loans. The international banking community had covered up the growing problem until it became impossible to hide. (See pp 143-149.)

2 Given that there's an economist, or a group of economists, to tout every remedy under the sun for whatever problem arises, "herd" may be too simplistic a description. Yet there is a tendency among professionals in this field to pile onto any bandwagon that rolls by. In that sense, they may fairly be accused of herd behavior; and if they do not take to heart the lesson of this little book (and abundant other books), I may perhaps be forgiven for hoping they become "the herd shot 'round the world."

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