December 8, 2021

People often forget that the world is complex, and outcomes are hard to predict.

Simple explanations for cause-and-effect can be tools in helping us understand the world. But very often decisions made without a sense of the deeper nuance lead to serious unintended consequences.

I was thinking about this recently when hearing friends discuss politics… and watching them try to debate macroeconomic policy with each other. Frankly it was kind of painful to listen to. Both were trying to translate complicated theories into simple, matters-of-fact rules for the world.

Reflecting on some of my recent emails to you, I thought it would be cool to think about them through the lens of unintended consequences. Here are a few recent examples:

Michigan created environmental regulations that imposed state-specific environmental codes on certain commercial properties. Whatever environmental harms may have been prevented, the unfamiliar regulatory burden has dissuaded many potential out-of-state buyers out of the commercial market. This has hurt prices in the state, and has also created some really compelling market inequalities that Alliance has taken advantage of.

Another example we wrote about recently is Fannie Mae and Freddie Mac, which are backed by the Federal Government, in part to help promote home ownership in America. This might be a great idea, but government guarantees also create incentives for more risk-taking, beyond what the market supports. I’m not sure policy-makers full appreciated the moral hazard introduced by federal guarantees, or that it might contribute to a housing bubble and then a financial crisis.

Our ongoing trade war is supposed to help protect American industry from other countries’ unfair trade practices. But import duties make many materials and components needed by American manufacturers more expensive, so it’s not clear that protection from foreign competitors is a net win for US companies. And other countries get a chance to respond by putting their own duties on American goods too. The real consequences of a trade war are not so clear…

Anticipating unintended consequences is critical to good decision making. There’s a subtle art to imagining the perspectives and likely responses. Customers, competitors, counter-parties, etc all have their own goals, which they don’t always advertise.

Anticipating unexpected consequences and analyzing potential outcomes deeply before investing is one of many ways Alliance has delivered above market performance over so many years.

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