Friday, August 13, 2010

Cottonwood Investments

This essay appeared on my website on February 15, 2009.

How many of you would build a home out of cottonwood? I doubt that anybody would do this. This kind of wood is not strong. Although cottonwood trees grow tall and their trunks are large, they do not live very long. They live along creeks and rivers, where periodic floods turn trees into floating logs.

In contrast, most oak trees have very strong wood. Strong wood is more expensive for a tree to produce than is weak wood. Oaks live for centuries, and strong wood is a necessary investment, but it would be a wasted investment for a cottonwood, which would be probably be killed by a flood before a century has passed. Cottonwood trees follow the James Dean philosophy of life: live fast and die young. Oak trees grow slowly and live a long time. Both patterns of life are adaptations to their circumstances: the first to a temporary habitat, the second to a stable habitat.

Yet another approach to life is found in alder trees. Alders, like cottonwoods, live in streamside habitats where floods frequently destroy them. The 2007 floods in Oklahoma destroyed almost every alder tree that I could see. But alders produce numerous small trunks from a strong underground rootstock. Within a couple of months of the floods, nearly all of the alders had resprouted. An alder clump may persist for centuries, even though each of its trunks may live only for a few decades.

The near-collapse of the financial sector resulted from cheap investments that were not intended to last. For a brief time, these investments yielded immense profits to a few people, but failure was built into the system. Financial markets invested like cottonwoods. The problem is that a nation is supposed to survive for a long time, like a forest of oaks, not like a streamside with cottonwoods. If the United States intends to persist, the correct way to invest is for the long term.

In nature, cottonwoods cannot survive in oak forests. But on Wall Street, all of the biggest corporations followed the cottonwood type of investment and, in effect, forced it on the entire system. By investing in the short term, banks and other financial firms forced their environment to become unstable, and took billions of dollars down with them. Their approach to life turned a country, and a world, into a habitat that lives fast and dies young.