A Refresher Review of John Mauldin's Timely Work
Just a scant two months away from the date-rollover and this reviewer has just read John Mauldin’s impressively researched analysis of the event. Mauldin explains simply and clearly what the Y2K problem is all about, then draws extensively on material by Capers Jones, The GartnerGroup, Ed Yourdon, Dr. Ed Yardeni, Michael Curtiss, and many others, to underscore the potential for significant disruptions to the economy should the programming problem not get fixed on time in certain critical industries, and in the public sector. What will happen outside of North America is a different situation entirely and will also have some impact on our economy. Nonetheless, Mauldin comes across as a qualified optimist at heart for, as he states right at the outset: “….the consequences of the Y2K problem will have a serious impact on our economy and on our investments. I am in the middle camp: I don’t expect a breakdown of society, but neither do I think that this is a trivial exercise,” and: “There are more positive things happening in the world than negative ones.”
This book makes for enjoyable reading, particularly for those inclined toward interesting – and often hair-raising- information about the MIS business that the author has researched. For example:
“There is no reason at all to assume that year 2000 defect removal efficiency levels will be any higher than the ranges for other kinds of software errors. Software quality has been a major embarrassment to the software industry for 50 years. It is naïve to think that thousands of companies that were never very good in software quality control before the year 2000 problem will suddenly achieve higher than average defect removal rates for one of the toughest software problems in history.” (Capers Jones, in a submission to U.S. Congress)
“Even in the best-managed (IS) shops, the probability of being late is still 22 percent, with total cancellation down to 1 percent.” (Capers Jones)
“Fifty-five percent of government enterprises will not be ready when the calendar hits 2000” – (GartnerGroup)
Never mind that his manuscript went to press almost a year ago; his book is relevant and worth reading for the opportunities he foresees, as well as for the cautions it raises. The opportunities will be there given that you heed the cautions. However, he is quite clear that a Y2K-induced recession is likely for North America and that it will mean depression in less prepared parts of the world.
The first half of the book is devoted essentially to the available research on the Y2K problem, the implications for society at large, business, and the individual citizen. Mauldin builds on this material with his own interpretations, drawing on his extensive experience as an investment analyst. Therefore, he comes into his own when he gets into the subject of investing your money, planning for a Y2K-induced recession, and the opportunities presented by just such a scenario. For most of the remainder of the book, Mauldin describes how stocks, bonds, gold, real estate, mutual funds and collectibles should fare in the Y2K recession. He sets out defensive strategies, given several individual net worth scenarios, even spelling out what he plans to do with his own finances, to help the reader cope with the recession and prosper with the arrival of the Millenium Wave. In deference to the author, we’ll not get into the ‘how’ – it’s in the book!
With all the media hype about the Y2K problem, the elements of a self-fulfilling prophesy are at hand, so what is the individual supposed to do. Mauldin writes that his book is “a mission to warn you, to stimulate action, and to help prevent the very events that I am predicting.” He describes actions that individual citizens and companies must take to soften, prevent, or even reverse the impact of the predicted events; however, in the final analysis it is up to the individual to prudently look after his/her own self-interest.
The author is scrupulously honest in his recommendations and tells the reader about his own personal businesses and investments that are pertinent to this book. Where he does of necessity refer to one or other of these, that could mean personal gain or place him in a conflict of interest, then he makes this clear and also makes sure that other choices and resources are identified so that readers can make up their own minds. For many years he has been a consultant to various investment funds, he is a partner in ProFutures Fund Management, which manages privately offered hedge funds, and a partner in the investment advisory firm ProFutures Capital Management. Also, he publishes an investment newsletter called Year 2000 Alert. (Sometime in 2000, when he thinks we are at the bottom of the market, Mauldin will change the name of the newsletter to The Millenium Wave.) Since the book was finished in late January 1999, Mauldin encourages readers to check his web site (www.2000wave.com) for any change of advice in the book or for any change in the approach to Y2K preparedness offered in the book.
Mauldin is serious yet entertaining when he tells his readers about his own approach to investing, some of which sound like the Sage of Omaha talking, although their investment methods are very different. A sampling:
“Successful investing is primarily about quantifying and controlling risk. Before I invest my hard-earned money, I want to know everything I can about the inherent risk in an investment…..”
“If I cannot quantify the risk, it is very doubtful I will make the investment.”
“The greater the risk, the smaller the percentage of my portfolio I will allocate to any one investment.”
“The riskier the investment, the more counsel and help I think you should have to analyze the investment. …Most of our poor investments are based upon emotions like greed or excitement….”
“The best way to save money is to not lose it.”
“I prefer to let professionals manage the bulk of my money……Professionals beat amateurs not only in sports but in investments and in almost every area of life.”
“I believe we are entering a period of great uncertainty and think it is time we take the profits we have made during the last bull market off the table.”
“Never get into a gunfight with Wyatt Earp, never bet on three-card monte on the streets of Manhattan, and never buy stocks from a broker or salesman who calls you on the phone with a hot tip. All three are guaranteed losers.”
The author includes four appendices at the end of the book that detail (A) information resources, sources, and suggested reading; (B) contingency planning document for municipal governments; (C) fixing your personal computer; and, (D) the cultural and religious implications of the Y2K crisis.
So what are we to make of the Y2K crisis? What to do with 50 lbs of dried beans and pasta stashed away for the possibility of Armageddon! A visit to John Mauldin’s web site (October 1999) reveals that the red alert meter is still at the 37.5% level; government agencies are a problem, public utilities could be a problem, and some Fortune 500 companies expect significant disruptions. From personal observations, most businesses are saying that everything is cool; even financial reporters are claiming that Y2K will be a non-event. And the original Y2K doomsayer, Peter de Jager, recently told a CBC Radio reporter on air that he now plans to be airborne on January 1, 2000. For the still-skeptical, Hebrew University in Jerusalem claims its Department of Computerized Information has developed a nifty little program that fixes Y2K and is applicable to all computer applications (The Bottom Line Oct.22, 1999). Jonathan Chevreau (Financial Post, Oct.19, 1999) in my opinion sums it up appropriately for personal financial planning, when he concludes that after reviewing numerous Y2K web sites (but not Mauldin’s) “It’s a wonderful thing if indeed the hard work of programmers around the world has “solved” Y2K, if only at the 11th hour. But I’m still not buying stocks until several months of the new year have passed.” Co-incidentally, that’s a component of one of the many strategies you’ll find in John Mauldin’s book.
Reviewed by Ian Bullock in October 1999.
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