Jul

17

Muir Woods is 500 acres of coastal redwood forest, twelve miles north of San Francisco, and is a setting that is relatively unchanged over the last 50 million years. The trees in Muir Woods are the oldest living things on earth, and having visited the woods recently I have been thinking of what lessons they might hold for markets and for life. My thoughts on the subject have been helped by reading the following books: Muir Woods by James Morley, Life in an Old Growth Forest by Valerie Rapp, Trees by Roland Ennos.

Lesson One: While from a distance, all the trees look very similar, up close they are each different, showing the effects of fires, exposure to light, roots damaged or spared by floods, wind, storms, landslides, disease, and predation from insects. Many of the current trees have lived since the times of the Vikings. If only the trees could tell their story of what they have seen and witnessed, and what adaptations they have had to make to prosper, we could learn so much about the past present and future.

Looking at an individual stock or a market at a point in time, without regard to the major events that have shaped it leaves much information out of the mix that could be used to project the future.

Lesson Two: The forest thrives and benefits after many seemingly disastrous events. Fires clear the underbrush. Dead trees still standing provide cover for much flora and fauna. Trees contain so much water that there is still much biomass left when they die, and they contain the nutrients and moisture that other plants or fungi need for survival. This situation is called a biological legacy by the scientists, but is just known as a gift by the laymen.

The number of, the amount of time in between, and the extent of watershed declines that the market has witnessed in the last year, as well as the resilience of the market to these declines, is a good measure of the health of a system. It is often good for future growth, to see decimated parts of the market landscape, such as the US real estate sector which has currently taken it on the chin, or the Saudi Arabian market that is down 75%.

Lesson Three: A strong root structure is key. The roots of the redwood trees often stretch horizontally 30 yards from the center of the tree, and they can be as much as one foot in diameter. They mix with the roots of neighboring trees which provides greater strength to all. Seedlings also sprout from the roots, so the same sources are used for multiple outputs. If the tree is unfortunate enough to die, the roots can produce more trees of the same genetic material. The roots of the redwood tree are remarkable in that they are not deep, but they stretch so far horizontally, allowing the tree to grow in different conditions.

The importance of roots to the coastal redwoods leads me to consider the functions of the roots of a company — the sources of capital necessary to build its infrastructure. The money reaches the various divisions of the company and is turned into profits which are then circulated back to the trunk.

Lesson Four: Being tall keeps out competition and gets more light. The choice that a tree makes to invest its energy in upwards growth, and raise its canopy above that of its competitors, is apparently a very successful one in nature, because the different genera of trees, cones,cycloids, hardwoods, have all come to it independently. The redwood trees are able to reach the sun above any competition, and they are able to shade out and prevent any other trees that need sun for growth.

The big companies, those that say have a share price above $100, or a market value above 25 billion, have an advantage over the smaller ones. They are not as subject to dying, yet they have the ability to shed many older divisions to help their earnings statements along. They also do not have to worry as much about random shocks from the environment that might level smaller companies.

I hypothesize that the returns of companies that have a price above $100 is higher than the returns from average companies, and that their volatility is less. Also, that markets at higher levels are less volatile than those at lower levels.

Lesson Five: Trees depend on other flora and fauna.The diversity of the flora that help the basic functions of the tree provides resilience in case of disaster. The ground of Muir Woods is covered by sorrel which retains the moisture and nutrients necessary for the redwoods to grow during the dry summers. The roots of the tree are dependent on lichens that help them get water and nitrogen. Mites helps to recycle a fallen tree by eating the rotting wood, and chewing the litter that falls on the forest floor, and voles living in the canopy spread the fungi that the trees need for survival.

The health of a individual market or stock component, like GE, is dependent on the health of its environment. The healthiest market environments are those that have witnessed many varieties of stress and strain, and exposures to good and bad news.

Conclusion: There are many other lessons that I have learned from Muir Woods, like building a strong bark resistant to insects rather than growing leaves immediately, shading out your competitors, thinking long term, sending your leaves out on strong branches, and changing with the seasons. I can think of no better place in the world than Muir Woods to visit with a view to improving the quality of one's trading or living.

Charles Sorkin writes:

The slopes of White Mountain Peak are home to the ancient bristlecone pine forest, which contains the oldest living things on earth. Such trees are perhaps the reductio ad absurdum of adaptation, making do with diminished oxygen, extremely harsh weather, few nutrients, and highly alkaline rock/soil matrix in which to sink modest roots. The Methuselah of this grove is in excess of 4000 years old, and I'm sure they offer their own lessons. 

Bill Rafter adds: 

Redwoods need an exceptional amount of water to prosper. The rainfall in northern California is not always up to that requirement. However the height of the redwood comes to the rescue. Moisture in the atmosphere collects on the high leaves and the tree creates its own rainfall. 

Steve Ellison notes: 

Cook, Sillett, Jennings, and Davis, writing in Nature in 2004, estimated the maximum feasible height of a tree at about 130 meters (the tallest redwood is about 112 meters). "As trees grow taller, increasing leaf water stress due to gravity and path length resistance may ultimately limit leaf expansion and photosynthesis".

Adam Robinson adds: 

Those interested in the seminal work on Chair's musings might want to pursue Thompson's On Growth and Form, written nearly a century ago, I believe the first attempt to analyze biological phenomena quantitatively.

Also, re: Chair's Lesson 2 on resilience of a system, one of the ironies forest rangers learned was that their attempts to put out any and all forest fires resulted in a huge buildup of flammable undergrowth, so that the inevitable fires, when they finally occurred, were uncontrollable conflagrations. A sobering thought for the Fed and other market interventionists.

Which thought reminds me, apropos of Chair's point on the cataclysmic decline in the Saudi market, the Saudi market, perhaps for religious reasons, lacks mechanisms for short selling (I believe), so that market lacks the ability to "incorporate" divergent opinion, so the inevitable buildup of selling pressures, when finally vented, is massive and uncontrollable. 

Steve Ellison remarks:

Adam makes an excellent point that one should keep in mind the next time the Challenger, Gray, and Christmas layoff report is in the news. The process of decomposition, the breaking apart of complex organisms into simple components that can be used by other organisms, is very important in biology. Similarly, business failures and layoffs move people from performing work that customers or employers do not want to activities that add more value. 

James Sogi writes: 

Today's quiet market at recent highs are like the lofty tree tops of the forest. The tree tops seem to know where the top levels are and it takes some extra energy and exposure to extra risk to break above the tree tops. The boughs and branches are slender and sway up there.

Sept CME SP Futures
07/16/07,1560.25,1566.25,1556.50,1559.75
07/13/07,1555.25,1565.75,1553.50,1560.00

The quiet growth pushed upwards to make new incremental highs and an incremental daily gain. As with trees and plants, the upward growth of markets is always incremental, but steady. The rate of growth varies with the climate, the weather and season. The transactions approaching the top are always a good study of dynamics. There are many buys at the very top, hopeful buyers either hoping for the breakout, or seeing the new high as a sign of further gains.

These buyers have been rewarded in the past few years of benign climate, good weather, and rich soils. As with slender reeds, rapid growth is not sturdy and might suffer damage, breakage, wind, insects. Sometimes the boughs break, but with a strong organism, the branches grow back. The gains seem stronger and more protected when supported by steady and sold growth rather than thin shoots shooting upward.

Study of the rings in old trees can give much information about weather patterns in past years and relate to tree growth. It is a worthwhile study. The strongest moves in the market seem to be the steady marches upward, grinding, growing slowly but steadily upward. Even bamboo can crack through the strongest concrete. It’s hard to believe how tall the redwoods can grow. My friend has tree climbers, and we go up trees on these ropes. It feels pretty high up there, but is actually safe. We usually don't go out on limbs.

In the markets, as in the wild, it is always good to see the forest, not just the trees.

Russell Sears writes: 

The giant trees are made of mostly dead wood in the center. The incredible heavy lifting of water is even more amazing when you consider, it is just the outer layer, just under the bark. The efficiency and simplicity is reminiscent of the invisible hand of the market. The part that is growing or expanding sustains the whole tree while the dead wood just lends support. 


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