Morningstar Magazine - April/May 2018 - 15

shareholder value, did the United States achieve
higher stock returns?
Against the largest markets, yes it did ( EX HIBIT 1 ).
When compared against Germany, the United
Kingdom, France, and Japan (poor Japan),
the United States was easily the best. Of course,
that does not necessarily reflect victory for
the American approach to corporate governance.
The margin was largely driven by technology
stocks, which quite reasonably could be credited
to the excellence of U.S. research universities
and the availability of venture capital, but
nevertheless, a win is a win. One point to Kessler.
However, when compared with the midmajor countries, the United States doesn't appear
so exceptional ( E X H I B I T 2 ). The Nordic markets
of Denmark and Sweden comfortably outgained
the United States during the three-decade
time period, and Hong Kong was ahead as well.
The Netherlands was close behind. In short:
Some countries that have corporate-governance
policies similar to what Fink proposes have
profited handsomely.
Again, objections can be raised. These markets are
much smaller than that of the United States,
and their demographics are more homogenous.
That makes the comparisons not even that
of apples and oranges; rather, they are cherries
and grapefruit. Fair enough. At the same
time, the numbers permit Fink to even the score.
Kessler can't end the debate by invoking
Adam Smith; not only are there theoretical
arguments against regarding the invisible hand
as an inviolable rule, but there is also some
actual counterevidence.
In short, Fink has advanced an argument that
might be correct. It cannot be dismissed
out of hand as being theoretically wrong, nor can
it be squashed with the preliminary evidence.
What's more, BlackRock is so huge that even if it
gathers no followers, it will have some ability
to change corporate governance. But if it wishes to
convince the majority, particularly among active
managers, it has much work ahead of it. K
John Rekenthaler is vice president of research
with Morningstar Research Services.

Anatomy of a Debacle
Before the collapse,
there is a "bacle."

or a crash, but today, we are going to use the more
sonorous term, Debacle!
Regardless of the terminology, a Debacle
is unexpected, fast, destructive, and
once you are in it, almost impossible to get
out of. If you are a skier or snowmobiler,
you might agree this is a fair description of the
dreaded avalanche.

THE OLD SQUIRREL

Ralph Wanger

Rule 1: The only practical way to survive
an avalanche is to be somewhere else when the
mountain decides to have one.

The views expressed here are those of the
author and do not necessarily reflect the views
of Morningstar.

Before the Debacle, there is a longer period
of general success and prosperity. The last part
of this period can be called a bubble, the
bit before the bubble is considered a boom, and
so on. But there has not been a comprehensive
word for the whole half-cycle until now. The
well-known investing guru Jeremy Grantham has
used the nonce expression "melt-up." That
flippancy does not deserve to survive. We need
words that express the power of market moves and
the logical symmetry of the market cycle: Bacle
followed by Debacle.

Here is a useful chart.

It is useful because it can be used for lots of
different reports, such as:
3 My favorite ski mountain
3 Earnings per share for our company
3 Price of my favorite stock
3 Bitcoin price

BA C LE

D E BA C L E

Bubble

Boom

There are two main parts of the chart. We will
start with the last half, because we are all too
familiar with it.
Peak

What can you do in a Debacle? Not much.
If you own stocks, you can sell some, but rarely
enough. If you are running a business, there
is not much you can do, because events move so
rapidly you can't fix anything. The best you
can do is try to elbow your way into the lifeboat
ahead of me.

D E BA C L E

This part of the chart depicts a sudden, steep fall
from a peak, which some would call a collapse,

Can you avoid the Debacle by not entering
the Bacle? Possibly so, but if we are talking about
a stock market cycle, and you want to make
a living as an analyst or portfolio manager, you
have to play, and you should, for there is
a lot of money to be made in a Bacle. To make
money, and then keep it, we must dissect
the structure of the Bacle.

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Table of Contents for the Digital Edition of Morningstar Magazine - April/May 2018
