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The Nightmare Scenario

by Mark Peres

May 4,2005

Consider the nightmare scenario. With thousands of executives walking the streets of Manhattan and driven by its ambition to become the world’s preeminent financial player, Bank of America indeed goes to where the money is and relocates its flag in New York. With its Southern consumer banking too attractive to ignore, in a new round of consolidation Wachovia is acquired by Citigroup or JPMorgan/Chase. Energy prices plummet as the Middle East stabilizes and Asian demand shocks ease, leading to significant downsizing at Duke. USAirways shuts down, interest rates rise, personal debt surpasses record levels and Center City condominiums sit empty. Real estate equity drops and bankruptcies in Charlotte soar.

After Atlanta significantly bids up the price, NASCAR selects Charlotte and relocates the all-star race to Kansas City. Half the number of projected race fans visit the Hall of Fame, unhappy at over-priced Uptown restaurants that soon pull stakes with most of the bankers gone. A new fortress-size Convention Center ballroom that hardly compliments the architecture of the Hall remains vacant for most of the year.

After significant cost-overruns, Light Rail brings few workers to the Center City. The trains run near empty, the multi-modal station is scaled down and development of the remaining transit corridors are permanently delayed. Property taxes are increased to stem the financial tide at City Hall, the migration of small businesses and middle-class families to surrounding counties further increase sprawl and environmental degradation, pressure between racially-segregated neighborhoods increase, and Lowes brings cars and smog into Dilworth. After a bruising battle, CMS deconsolidates. The travails of our public school system brand Charlotte throughout the nation.

There you have it. Our dystopia. Not usually the vision one reads in our pages.

Recently, I spent a week out of town with financial advisors from around the nation. We talked about how our job is essentially one of risk management, helping our clients win by not losing. In the financial markets, losses can decimate a portfolio, requiring twice the gains to return to even. Asset allocation models, that transfer risk between assets based on risk/return differentials and time horizons, make clear that downside protection is ultimately far more valuable than upside returns. With a corpus secure, affordable big bets can be made on the edges to significantly enhance performance.

Our civic leaders are the family advisors for our city. They are helping manage our civic portfolio. They uncover and give shape to our goals and objectives, they assess where we are and what we will need to achieve our vision, they outline a plan, set priorities against the plan, and manage a team of professionals that execute against the plan. They adjust as circumstances change and opportunities arise. They understand that, at any given time, our city is either spiraling up or spiraling down, and it is their job to make the often short-term difficult choices to insure long-term success.

What separates good financial advisors from great ones is not economic analysis or security selection, but managing client emotions and expectations. Earnings may move the market in the long term, but fear and greed move the market in the short term. Great investors know to act with fear when the crowd is greedy, and to act with greed when the crowd is fearful. The same can be said of great civic leaders. They know that their job is to act with caution when the citizenry is on the march with their torches, and to lead vigorously when the citizenry is comfortably at home in their huts.

Charlotte’s blessings have come from the good work of many who have managed the city portfolio well over many years. In the rush to gain on the hot trend, we’ve made a few short-term bets over the years that have not panned out. The city is not unlike any investor that sometimes gets caught up in market mania. But more often than not, Charlotte has created wealth by doing it right: living within its means, diversifying assets, insuring against loss, investing for the long-term, with a few affordable strategic bets on the side.

We elect our civic leaders to make choices – choices that will insure that our good dreams come true.

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