For the first quarter of 2003, our average account was up +1.54%.
We began the first quarter of the year making a very modest amount of money. After three years of trauma a plus sign is a welcome icon; long may it reign. Our investments performed well as businesses and it scarcely made a difference to their prices. At the moment, if it isn’t war news, it isn’t news at all. We know this as well as anyone, but we can’t help slipping in a plug for bottom up research. The managements of two of our investments came to see us in the quarter; Regis’ Paul Finkelstein and Fidelity National’s Bill Foley both paid us a visit. Our practice in these encounters is to corral as many brilliant money manager friends as we can find who have an interest in the business, pour them Diet Cokes, turn the interrogation lights up high, and watch them go at it. Mr. Foley and Mr. Finkelstein left more than the investment management committee of Levy, Harkins impressed. They are sound guys running superior businesses, and it is no surprise their stocks outperform the averages.
As for the war, we celebrate the courage and competence of our military once again. They are required to take only modest casualties themselves, inflict minimal causalities on their enemies, and have the war over in half the time the German Blitzkrieg needed to conquer France. At this writing they are pulling it off, and it is amazing to watch.
As for the investment implications we will hazard only three. First, it never pays to bet against the United States. As a public service someone ought to hang this sentiment over the 43rd Street entrance to the New York Times, if only to spare the nation a lot of agonizing. But as an investment principle, it is amazing how frequently you can make money pressing a bet that has paid off two hundred years in a row.
Next, terrorists do not live in the air or on the far face of the moon. They have homes, families, offices, training grounds and meeting places. When you attack those places, you seem to get much less terror. This is an observation that infuriates much of the world’s chattering classes, but if you own a sizeable portfolio of insurance stocks, you would be a fool not to notice the correlation. Turning a blind eye to terror proved expensive, and a change in policy has led to a welcome period of calm.
Finally, America finds it easier to wage war than to win peace. Iraq is only the latest case in point. We cannot help but observe that we are today where we would have been twelve years ago if only our diplomacy had been as forceful as our military. Will the Iraqi people now join the lists of the free and prosperous? Only if they are not saddled with huge war reparations, and at the moment this hugely important issue is murkily unclear. The Russians claim they are owed $60 billion by Saddam’s regime, mostly from old weapons sales, the French claim to be owed almost $50 billion in oil field development contracts, and the U.N. Commissioner for Compensation has been taking 28% of all oil proceeds for the last three years to service prior claims. Frederick Barton and Bathsheba Crocker of the Center for Strategic and International Studies in Washington point out that the current U.N. take from Iraq is about twice as much as was taken from post-World War I Germany, and that level of compensation led to the collapse of the Weimar Government. They calculate that if all U.N. sanctioned debt is settled on Iraq it comes to $383 billion, or more than $16,000 for every man, woman, and child. Obviously a prostrate Iraq cannot pay this.
Consequently, much of the wrangling to come over United Nations supremacy and legitimacy is only a thinly disguised struggle over money. The major claimants will be desperate to get this issue sorted out long before the Iraqi National Archives are seized and a calm judgment is made on who was trading with whom and on behalf of what. Indeed, it is only after totalitarian states are finished that a proper history of their years in power can be begun. As Anatoly Rybakov put it twenty years ago, “Our problem under communism was that the future was always certain; it was the past that moved around violently and unpredictably.”
For the Iraqi people, and for us, we will be much better off only honoring claims after we finally determine what that past really was.
Sincerely,
Edwin A. Levy
Michael J. Harkins