December 30, 2011

Friction

“Everything in war is very simple, but the simplest thing is difficult.  The difficulties accumulate and end by producing a kind of friction…”
–Karl Von Clausewitz 

Von Clausewitz

Karl Von Clausewitz (1780-1831) was a Prussian professional soldier and military theorist.[1]  He entered the Prussian army as a lance corporal at the age of 12, ultimately attaining the rank of Major General, and fought in numerous campaigns against revolutionary France, and later Napoleon.[2]  His primary work, Vom Kriege (On War), is still considered by many to be the preeminent work on the philosophy of war in the Western Hemisphere.[3]   He’s also credited with originating the terms the “fog of war” and “friction.”[4]

Von Clausewitz was an interesting guy who understood things are rarely ever as simple or easy as they seem; that perseverance, adaptability, a cool head, discerning intellect, a nose for the truth and the conviction to follow it — all serve people well.  Below are several interesting maxims of his, which I believe can also be applied to other aspects of life.  Just substitute the word “war” with “business,” “sports,” “academics,” “relationships,” “preparing a meal,” or just “getting out of the house in the morning,” etc., and see how spot on (in some instances to the point of being funny) Von Clausewitz can be.

I also believe Von Clausewitz’s maxims can apply to investing.  Adhering to them may make the difference between success, and the lack thereof.  Between participating in (and not getting thrown off of) a bull-market, or not.  So read on, enjoy, and we’ll continue below.

Slected Von Clausewitz Maxims

“Everything in war is very simple, but the simplest thing is difficult.  The difficulties accumulate and end by producing a kind of friction. . . .  This tremendous friction . . . is everywhere in contact with chance, and brings about effects that cannot be measured, just because they are largely due to chance. . . .  Moreover, every war is rich in unique episodes.”

“Is there any lubricant that will reduce this abrasion?  Only one . . . combat experience.”

“Many intelligence reports in war are contradictory; even more are false, and most are uncertain.”

“All action takes place, so to speak, in a kind of twilight, which like a fog or moonlight, often tends to make things seem grotesque and larger than they really are.”

“I shall proceed from the simple to the complex. But in war more than in any other subject we must begin by looking at the nature of the whole; for here more than elsewhere the part and the whole must always be thought of together.” 

“We come now to the region dominated by the powers of intellect.  War is the realm of uncertainty…  War is the realm of chance…  Two qualities are indispensable:  first, an intellect that, even in the darkest hour, retains some glimmerings of the inner light which leads to truth; and second, the courage to follow this faint light wherever it may lead.  The first of these qualities is described by the French term, coup d’oeil; the second is determination.”

“When all is said and done, it really is the commander’s coup d’œil, his ability to see things simply, to identify the whole business of war completely with himself, that is the essence of good generalship. Only if the mind works in this comprehensive fashion can it achieve the freedom it needs to dominate events and not be dominated by them.”

“Presence of mind . . . is nothing but an increased capacity of dealing with the unexpected.”

“Staunchness indicates the will’s resistance to a single blow; endurance refers to prolonged resistance.”

“Strength of mind or of character” is “the ability to keep one’s head at times of exceptional stress and violent emotion.”

“Firmness cannot show itself, of course, if a man keeps changing his mind.”  It demands sticking to one’s convictions.

“In war more than anywhere else things do not turn out as we expect. . . .  Perseverance in the chosen course is the essential counterweight.”

Application In The Investment World

Ernharth Group clients know my views on paper money not backed by gold (i.e. all global currencies).  As massively indebted world governments continue to print and debase currencies, it’s my belief Voltaire’s maxim “Paper money eventually returns to its intrinsic value – zero” is in the process of once again being proven correct before our very eyes.

I believe the only incorruptible form of money throughout history has been precious metals (primarily gold and silver) precisely because governments can’t print them.  I believe it will not be long before gold and silver resume their traditional roles as money in some form.  In my opinion, the fundamentals for the precious metals mining sector have not changed.  In fact, “by looking at the nature of the whole” I believe they have actually improved.  World banks look to be ever more insolvent, governments appear to be hopelessly in debt, and money printing accelerates.

That said, nothing goes straight up.  Von Clausewitz’s “friction” applies.  “Intelligence reports” by the media are often “contrary,” “uncertain”, and perhaps even “false,” as news is presented seemingly in a “fog” or “twilight.”  Shorter-term market action can be just as confusing and frustrating.  But with “presence of mind” take a look out the chart below comparing the HUI (NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index), the XAU (Philadelphia Gold and Silver Index – of mining companies), and the S&P 500, over the past 10 years.

 

 

 

 

 

 

 

 

Yes, past performance is not a guarantee of future results.

The Truth As I Seet It

As we watch an insolvent European Banking system seemingly on the verge of imploding, and the United States continue to push and adjust the trajectory of its debt towards the stratosphere, I believe massive amounts of money will be printed, and currencies will continue to be debased in 2012 — at levels which at some point could shock.  And thus, despite the “fog of war” and “friction”  – it’s my opinion nothing has changed regarding the positive fundamentals in the precious metals mining sector.  I believe for well-run, well-capitalized gold and silver miners with proven reserves, they continue to improve.

It may be time once again to use “friction” in our favor.

As always, I maintain my positive outlook.  That outlook is based on my belief a bear market in one thing is often a bull market in another.

As we enter this critical time – now, more than ever – I believe investors need to focus on their investment strategies. Those readers who are clients are fully aware of the strategies we’re implementing in light of unfolding economic circumstances.  Others may feel free to contact us to learn more.

Sincerely,

Stephan R. Ernharth, JD
Vice President
Ernharth Group
www.ernharth.com

Go to www.ernharth.com/economic-commentaries to read past articles from our Economic Commentary series.

[3] Ibid
[4] Ibid