Many will have heard of the investing duo Warren Buffet and Charlie Munger and the exceptional success of Berkshire Hathaway. However, 50 years ago there was a third member of the group, Rick Guerin. He was a partner of Warren and Charlie in the 1970s and they interviewed business managers together as they built their portfolio of investments. Then Rick kind of disappeared, at least relative to Buffett and Munger’s success.
When interviewed on the topic, Buffet later advised ‘Charlie and I always knew we would become incredibly wealthy. We were not in a hurry to do so; we knew it would happen. Rick was just as smart as us, but he was in a hurry.’ In the 1973-74 downturn, it transpires Guerin was highly levered with margin loans and when the US stock market fell c.70% during those two years, he got margin calls. As a result he faced a financial crisis and was forced to sell his Berkshire stock to Buffet. Charlie, Warren and Rick were equally skilled at getting wealthy, but one of them had not sufficiently planned for the unexpected.
A plan is only useful if it can survive reality; and a future filled with unknowns is everyone’s reality.
Surviving a crisis; lessons from Sputnik
On October 4, 1957, the Soviet Union launched the world’s first satellite – Sputnik – into orbit.
The US Navy had begun a satellite program after World War II but abandoned it in 1948 in a cost-cutting move. Before 1954, the government had spent $88,000 on satellite research, a miniscule sum given the total federal budget.
The launch of Sputnik stunned Americans, who had taken their nation’s technological pre-eminence for granted. Many quickly assumed a rocket that could put a satellite into the Earth’s orbit could also strike the United States mainland with a nuclear warhead, and Sputnik led them to question the adequacy of their nation’s defences and the effectiveness of its educational system during the Cold War with the Soviets. These anxieties proved to be exaggerated, but the panic Sputnik created presented Dwight D. Eisenhower with one of the most frustrating challenges of his presidency.
Prior to this Sputnik moment, the President’s “New Look” plan for outlasting the Soviet Union and maintaining American greatness was to husband the nation’s resources carefully, avoiding expansive government programs and high levels of public debt. In his estimation, Sputnik should not have frightened anybody and certainly was not important enough to merit an expensive crash space program.
More importantly, the American leadership knew the US was about to roll out weapons capabilities superior to those demonstrated by Sputnik, chiefly Polaris and intermediate-range ballistic missiles. These breakthroughs in missile technology had occurred quickly, in part because Eisenhower had prioritised research into next-generation nuclear weapons delivery – not a satellite program.
The launch of Sputnik provoked what Eisenhower later called “a wave of near-hysteria”. Panic began with the news media and spread to the general public. Congressional Democrats accused the administration of negligence and warned that Republican fiscal priorities were endangering the nation. Pressure on Eisenhower mounted further with the Soviet launch of Sputnik II only a month later, weighing more than 1,000 pounds and carrying a live dog. Lyndon Johnson, the Democratic leader in the Senate at the time, seized the opportunity to bludgeon the president and the GOP in congressional hearings, combining the satellite achievements with hyperbolic intelligence reports to yield the frightening – and unfounded – theory of a large missile gap between the US and the Soviets.
At the time, Eisenhower had hoped to avoid rash decisions and unnecessary expenditures but was forced to respond to public anxiety and change his plan. He appointed a special assistant for science and technology, and in 1958 (only 1 year after the Sputnik moment) signed three bills designed to close the so-called missile gap. The National Aeronautics and Space Act created NASA, a civilian agency with close ties to the military, to manage the nation’s space program. The National Defence Education Act provided federal dollars for teaching mathematics, science, and foreign languages, and the Defence Reorganisation Act, among its other provisions, attempted to centralise the management of research in the armed forces. This change in the direction of public policy by the end of the 1950s laid the foundation for the space race of the 1960s. Beyond this, it galvanised a nation to such an extent that the US became the global leader in technology and innovation; a status it has maintained to this day. For some, US economic prosperity and military power can be directly traced back to October 4, 1957.
Q1, 2025 – have we seen 2 Sputnik moments already?
Game-changing events like the launch of Sputnik are few and far between, but they do happen and governments, institutions, regulators and investors – to name just a few – need to develop plans which can be changed, leave room for error or operate with a margin of safety. This doctrine has been particularly relevant through the first three months of this year.
In late January, the first of these occurred when Chinese startup DeepSeek launched its latest AI models. These were essentially on a par with industry-leading models in the US – at a fraction of the cost – potentially turning the accepted technology world order upside down. In that moment, the AI innovation flywheel, centred in the Silicon Valley ecosystem, had a visible challenger. The impact this made is still reverberating through the tech sector and the ensuing share price volatility implies financial markets are unsure as to what comes next; but the AI space has fundamentally changed.
The second Sputnik moment may also have arrived in January, marked by the start of the second term in office of President Donald J Trump. His administration has set an agenda to reshape the global economic order, prioritising the US domestic economy, abandoning decades of globalisation in order to revert to an America-first approach. To date, Trump has issued 103 executive orders and introduced import tariffs against Mexico, Canada and China, as well as on steel, aluminium and autos; the latter particularly impactful to the EU. However, what is not clear are the potential economic and financial market consequences of these various and often conflicting policy agendas. While mercantilism is nothing new, this generational shift from free-trade orthodoxy towards an aggressive approach, prioritising national interests at the expense of global trade and partnerships, has been a shock to the system. Policies that will likely reduce trade volumes, disrupt supply chains and dampen world GDP growth are anathema, especially to US allies.
Trump has also cast serious doubts on the future of the post war international order and the prospect of a wholly disengaged, self-focused United States has troubling implications. The relative peace of the last 80 years has rested on a stable distribution of power among states; norms that influence and legitimise conduct; and shared institutions. History suggests that when the pre-eminent power’s domestic politics change radically –as appears to be the case in these early months of 2025 – all bets are off. Looking through a European lens, the White House administration has sided with Russia, the aggressor that launched a war of conquest against its peaceful neighbour, Ukraine. It is easy to imagine Russia taking advantage of the situation to threaten Europe further, if left unchecked. Europe is having to show greater unity and purpose, rebuilding its own defence capabilities, as it is now unclear a US backstop will remain in place. The political and economic response suggests European leaders are being galvanised in much the same way the US leadership was back in 1957’.
Implication for portfolios
We are only through the first quarter of 2025, and the geopolitical laws of gravity and rules of doing business have been completely upended. The changes underway are seismic, presenting opportunities as well as risks, although we believe seizing the former will require an investment portfolio quite different to those which have succeeded in recent years.
The initially disruptive policy agenda being enacted by the new Trump administration risks upsetting the apple cart of ‘US exceptionalism’. As a result, we are starting to see capital flow to other geographies such as Europe and Asia. The arrival of Deepseek has brought into question the dominant position of the US tech giants, placing more scrutiny on the return on investment some of these may (or may not) achieve. This has prompted a rotation into other sectors and themes, notably defence. Meanwhile, if deglobalisation is among the factors driving higher prevailing levels of inflation and interest rates then, as we have seen year-to-date, this is typically more supportive of allocations to value stocks over quality/growth.
As money managers, we cannot control financial markets, but – as with Sputnik moments – what we can control is how we respond to the challenges they present. We remain focused and flexible, as the world launches into the next quarter.
Russell Waite and Jon Proudfoot
Affinity Private Wealth is a trading name for APW Investors Limited, which is regulated by the Jersey Financial Services Commission. Registered office 27 Esplanade, St Helier, Jersey JE4 9XJ.
References:
The Psychology of Money – by Morgan Housel
Seismic Change//How to Recognise the Opportunities and Risks inthe New Era of Divergence – Fordham Global Foresight
