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Investing Lessons from My Secret Life as a CIA Agent

by Mark Skousen, Advisory Panelist, Investment U
Friday, December 7, 2007: Issue # 739

Investors are always warned to avoid the twin relics of Wall Street folly, fear and greed.

But during my two years working for the highly secretive Central Intelligence Agency, I learned that there are two worse dangers equally applicable in the financial world: ignorance and arrogance.

Let me explain…

I don’t usually tell my subscribers or friends very much about my stint as a junior economic officer at the CIA in the early 1970s, but after reading Tim Weiner’s expose, “Legacy of Ashes: The History of the CIA,” I thought it appropriate to reveal some insights I learned there, and how to apply it to one’s finances.

Tim Weiner, a New York Times reporter, tells a depressing story of how the CIA failed repeatedly in its mission to predict international conflicts and attacks on the U.S. For example, to cite two recent examples of bad intelligence, the CIA failed to warn America of the 9/11 terrorist attacks from Islamic extremists; and it gave faulty information on weapons of mass destruction, and thus condemned the U.S. to a misconceived war in Iraq.

My Run-In with Former CIA Director George Tenet

I confronted George Tenet, director of the CIA from 1997 to 2005, on these two blunders at a session I moderated at last year’s New Orleans conference. He could only answer, “Our failures are always publicly trumpeted; but our successes – which were many – are always a secret.”

He’s right. When I was at the CIA in the early 1970s, the agency’s mistakes were all too prominent. As a member of the Office of Economic Research (OER), we were in charge of warning the President and Congress of imminent economic crises. But we failed to anticipate the power of OPEC, the 1973-74 energy crisis, and the subsequent gasoline shortages.

A few years later, when Mexico devalued the peso, the CIA economists were silent. They were just as surprised as everyone else. Tim Weiner recounts numerous tales of failed missions by the clandestine service, such as the Bay of Pigs invasion of Cuba.

Even when the CIA was right, its successes were suppressed. I co-authored a secret report on the meat shortage in the U.S. as a result of Nixon’s wage-price-controls. (Yes, Virginia, the CIA is into everything.) We predicted that when the price controls were lifted, beef prices would not increase, but would actually fall. But the White House refused to believe our prediction, and buried the report.

The CIA failed repeatedly because of two persistent problems: ignorance and arrogance. More often than not, they just didn’t have the intelligence to know what was really going on in the Middle East, Vietnam or Latin America. And they refused to admit they didn’t know, so they often lied to presidents and Congress.

In sum, billions of taxpayer dollars were wasted on the CIA, and thousands of American citizens, as well as freedom fighters in foreign lands, were killed.

Ignorance is Costly

Is there a lesson here for investors?

Indeed, humility and lack of understanding reality are all too often missing in the lives of investors. How often are we shocked by the unexpected, such as this past summer’s collapse in the mortgage and credit markets, and its ramifications? Could we not see the real estate boom was too good to be true and had to come to a bad ending? If we had studied Austrian economics, we would know that inflationary booms are unsustainable and require a bust.

What about China? If we study the history of emerging markets, we know that booms inevitably turn into busts. Should we not be surprised that after the Shanghai stock index rose 400%, it would fall by 40%-50%? The smart investor uses trailing stops to protect his profits.

How many of us take the time to study the history of Wall Street and the inevitable cycles of greed and fear? How many of us learn by sad experience that stories that are too good to be true usually are just that. We eventually get burned by investing in “sure fire” penny stocks and tax shelters.

Pride Proceedeth the Fall

There is also the problem of pride. Investors and money managers who have doubled or tripled their portfolio that become “know-it-alls,” thinking that beating the market is easy.

A few years ago, a hedge fund manager I know had several years of superior profits, and become highly conceited. He wrote a book about his exploits, full of colored photographs of his expensive lifestyle. But as the old saying goes, pride proceedeth the fall. A few years later, he made a series of blunders in the marketplace, and his accounts blew up. He was forced to declare bankruptcy.

Don’t let it happen to you. “The used key is always bright,” says Ben Franklin. Keep informed and know the signs of the times. Stay educated. Attend conferences and keep up on the financial news. And always remain humble, knowing that you never know what’s around the corner.

Good trading,

Mark

Today’s Investment U Crib Sheet

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The 7 Most Common Investor Mistakes

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