Notes, Views, and the Occasional Provocation May / June 2012 

As European debt concerns unsettle the markets for the third summer in a row, many investors question whether the European Union can continue in its current form – quite a turnabout from investor sentiment about the EU only a few years ago.

Before jumping to conclusions, though, it's helpful to consider how misleading appearances have been in the past. The parallel development of the EU and the Internet offer a helpful lesson in this regard.

Here's to smoother sailing in the coming months.

All the best,

Milo Benningfield




Resisting the Obvious
The parallel histories of the European Union and the Internet over the past six decades offer an important lesson in the perils of investing based on what today seems so likely to happen. more

BFA Media Quotes
Recent media quotes. more




Resisting the Obvious
Six decades ago, the seeds of two social experiments were planted, with the aim of collapsing the span of distance, culture and commerce into a single, unified world. With the European Union, it was a world of nation states. For the Internet, it was the digital world. The success of these two experiments has ebbed and flowed over time, continually thwarting investors' attempts to make an easy killing based on what seemed obvious at the time. Today, with the EU seemingly poised for extinction and the Internet offering tantalizing possibilities for future innovations, the situation is likely no different.

The earliest form of the EU began in 1951 when six countries – Belgium, France, West Germany, Italy, Luxembourg and The Netherlands – signed the Paris Treaty, creating the European Coal and Steel Community. A few years later, these same countries signed the Treaties of Rome, creating the European Economic Community.

At the same time, computer programmers began experimenting with how to create peer-to-peer networks among mainframe computers, the behemoths that filled entire rooms and required elaborate cooling systems. The U.S. Department of Defense took over the effort in the 1960's, developing the Advanced Research Project Agency (ARPA) to facilitate communication in case of war.

During the next two decades, the architecture for both the EU and the Internet were further developed. The European Monetary System, with its "ecu" currency unit, was created in 1979, and three years later "internet protocols" were standardized along with the concept of a global system of interconnected local computer networks.

The 1990's saw the final preparations for the EU and Internet as we know them today. In 1992, under the Maastricht Treaty, most of Western Europe committed to using a common currency, the Euro, by the end of the millennium. In 1995, the last restrictions on commercial use of the Internet were removed, paving the way for a digital gold rush.

By the end of 2000, however, the Internet had proved a disappointment, even embarrassment to investors who got caught up in the speculative frenzy surrounding companies like Webvan and Pets.com – companies that ran extravagant ads during major sporting events, but which never earned a profit before dying.

By contrast, the Euro launched successfully and picked up steam as investors became convinced that a new era was at hand where the Euro would eventually replace the U.S. dollar as the world's reserve currency. In fact, by 2006, the consensus was that the U.S. dollar was poised for a crash and analysts advised investors to sell dollar-denominated assets and buy foreign currencies in order to protect themselves.

Investors who acted on the consensus view regarding the dollar watched in consternation as it not only failed to crash during the recent global credit crisis, but, in fact, appreciated against most major currencies, including the Euro. In a pinch, the U.S. dollar still represented the safe haven for global investors. Similarly, chastened by the late 1990's dot-com bust, many investors failed to seize golden opportunities with second-generation Internet companies like Google and a reinvented Apple.

Today, with the rise of mobile computing and other technological innovations, it seems likely that the Internet will continue to help power the global economy, and investors influenced by the recent success of social-media companies are avidly searching for the next big thing in areas like behavioral-modification apps and mobile health.

On the other hand, it seems apparent to many people that the EU in its current form is a failed experiment about to unravel, perhaps as early as this coming weekend, when Greek national elections may start the process of Greece's exit from the EU. As a result, investors have been dumping stocks of companies in Europe and elsewhere, anticipating a global recession.

If the stories of the EU and Internet teach us anything, however, it's that investors acting on what seems obvious do so at their peril. Too often, reacting to what seems likely to happen next leads investors to buy what everybody else wants (when asset prices are high) as they did with emerging-market stocks before 2008, and sell alongside other panicked investors (when prices are low) as they did with municipal bonds at the end of 2010.

Tomorrow may well find us in a world where the EU has been drastically altered or no longer exists and where markets fluctuate sharply as they try to sort out the implications. But if history is any guide, there will be as many opportunities in that world as there are risks and taking a tempered, diversified approach with one's investments will be the surest path to success.

back to top



BFA Media Quotes
Bloomberg News, June 11, 2012
Milo was quoted in an article by Ben Steverman, "Wealthy Cling to Art and Other Treasures in a Low-Return World," which discussed how some investors are reacting to recent low stock returns by purchasing art, cars, and other collectibles. Milo cautioned that there are risks with purchasing assets for both investment and personal enjoyment, stating, "When you start mixing business and pleasure, usually one or the other suffers." Read the article.

Thank you for reading. Please look for our next newsletter in August.

Best regards,

Milo Benningfield

back to top




Copyright 2012 - Benningfield Financial Advisors