value of investment cycles

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From: Dave Long (
Date: Fri Apr 21 2000 - 21:24:04 PDT

> > The market and economy
> > will be far healthier when bad companies never have a chance to get
> > started.
> In the abstract long run, this is probably true. Unfortunately ... there
> will probably be an extended irrational swing in the opposite direction.

Perhaps markets and economies are far healthier when they don't have
uniform investment criteria; if spatial diversity* is lacking, then
temporal diversity may supply the variation.

When investment flows freely, we generate an ensemble of potential
additions to the economy. The risk is that many may not be viable,
and the investments would have been more productive if placed in
proven businesses.

When investment dries up, we test the performance of going concerns
and cull the economy. The risk is that by restricting the economy
to immediately viable concerns, our capital would have been more
productive if placed with an eye to riskier ventures.

Just as window size in a windowed transfer protocol may fluctuate as
it attempts to track changes in the bandwidth-delay product of a
network connection, availability of investment resources should
fluctuate as their holders attempt to track changes in the returns
available to differing economic activities.


* for an example, take the development of bluewater navigation.
Sailing out of sight of shore took many developments in nautical
and navigational techniques and technologies. If one happened to be
situation on the main axis of eurasian trade, why bother investing
in such speculative activities, when good money was to be made in
outfitting caravans and galleys? Hence, it fell to the atlantic
states to develop oceangoing trade, and fortunately for them, it
paid off handsomely (at least for whoever had the superior navy at
any given point during that time).

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