Racine Journal Times, WorkLife Section, April 20, 2008

m = E/c²

Albert Einstein’s famous formula describing the relationship between matter and energy looks strange when arranged in the format you see above, but according to Brian Greene, a professor of physics and mathematics at Columbia, that is how Einstein first introduced it to the world in 1905. Just a bit of algebraic rearranging is required to derive the format to which we are so accustomed: E = mc².

Why would Einstein rearrange the components of this formula? Does it really matter if “m” is to the right of the equal sign rather than the left?

Since both formulas are mathematically equivalent, it doesn’t make a difference except, I suppose, to provide a different perspective. A shift in perspective, though, doesn’t alter the fundamental balance between matter and energy, and the fact is that the existence of one is dependent upon the other.

Distorting the truth

Unlike physics, human beings and the interactions we have with each other are not an exact science. Unfortunately, truth gets distorted at times.

As a practicing attorney, our country’s second president, John Adams, felt so strongly about upholding the truth that he risked his livelihood and reputation by defending a group of British soldiers on trial for the Boston Massacre of 1770. During the trial, Adams said, “Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.”

With so many Americans feeling the pressure of higher prices, job losses and a housing market on a diet, it’s easy to lose sight of the fact that we all contribute to the collective state of our economy. It’s not just a massive structure like a high rise building, void of individual building components. By understanding the role that we each play on an individual level, we can repair the cracks that led to our current, weakened state and foster greater stability in the future.

A change in perspective helps to understand the importance of balance.

Learning to take the bad with the good

Most would agree that pain is bad and pleasure is good. That’s why we seek pleasure and avoid pain, even to the point of excess. This creates a paradox: excess pleasure increases the likelihood of more pain.

Consider food, for example. In our country, food is no longer just an agent of survival. It’s morphed into a source of pleasure and a tool to ease psychological pain. Conversely, exercise – a source of pain for many – is avoided. By balancing more food with more exercise, excessive weight gain and other health problems such as diabetes wouldn’t reach epidemic proportions.

Similarly, those who sought an excess of pleasure by taking on more and more debt to spend and consume at an unsustainable rate – individuals, families, local & national governments and businesses – without balancing it with increased income to service their debt, are feeling the most pain. More pleasure in the short run created more pain in the long run.

What steps can we take?

What can we, as individuals, do to foster greater economic balance?

First, save and invest more. Not only does that help you, but it also helps the overall economy. For example, if corporations and banks don’t have access to enough capital, they can’t lend or invest as much, throwing our economy into reverse. And if foreign investors lose their appetite for our assets, that much less capital will be available for investment.

Second, this is an election year, so be mindful of those whom you entrust to represent you in government. Their decisions and actions will have an affect on all of us – whether positive or negative – for years to come. As John Adams reasoned, we might have to resist our natural inclinations and accept the stubborn facts.

What happened to Bear Stearns was not a freak accident. If we don’t address our excessive spending, is it too hard to imagine that the savers of the world providing balance to our excesses (mainly China & Japan) by funding our massive trade deficits could lose confidence in our ability to repay our debts? I don’t like high tax rates, but I recognize that our ongoing national deficits and imbalanced budgets cannot continue without a reckoning at some point.

We can’t keep spending more, whether for wars or entitlement programs, without balancing the other side of the equation with increased tax revenue and shoring up our national balance sheet. In other words, either government spending has to decrease or tax revenue has to increase in order for us to avoid going deeper and deeper into debt. That’s a mathematical fact.

Risk and return are linked

Another way we can foster greater balance is to recognize that risk and return are inexplicably linked. Investors, especially those hoping for the stock market to head higher would be wise to recognize that most stocks are experiencing a reckoning because a big portion of corporate earnings enjoyed for the past five years had more to do with excessive debt & lax risk control than organic growth. The tug of war between bears and bulls provides tremendous balance to the markets, as the bears provide fresh perspective to those who can’t bring themselves to put down their 20-oz. margarita.

Our country – so much more than the sum of its parts – has tremendous potential. We are its building blocks, so its stability depends on us as much as we depend on it. Seek greater balance, and the balance of the whole is bound to improve.

Michelle Ouzounian, CMFC, is the founder and President of Verity Investment Counsel, Inc. (www.verityinvcounsel.com), a fee-only, independent registered investment advisory firm in Racine. Michelle can be reached at 262-898-8400, or m.ouzounian@verityinvcounsel.com.

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This article contains the opinions of the author, but not necessarily those of Verity Investment Counsel, Inc.  Such opinions are subject to change without notice.  This article is provided for educational purposes only.  The information contained herein does not suggest or imply and should not be construed, in any manner, a guarantee of future performance and/or investment advice.  Information contained in this article was obtained from sources believed to be reliable, but not guaranteed.  No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Verity Investment Counsel, Inc.