Probability and the three bricks
“I’m not young enough to know everything” Oscar Wilde (1854-1900)
“If you eat, invest and think according to what the ‘news’ advocates you’ll end up nutritionally, financially and morally bankrupt” Naval Ravikant (1974- )
“Doubt grows with knowledge” Johann Wolfgang von Goethe (1749-1832)
“As a general rule it’s foolish to do just what other people are doing because there are almost sure to be too many people doing the same thing” William Stanley Jevons (1835-1882)
“Investing should be more like watching paint dry or watching grass grow. If you want excitement take $800 and go to Las Vegas” Paul Samuelson, American Economist, (1915 -2009)
My oldest chums all tell me that when we meet up, invariably I start off by telling them about a fascinating book I’d just read. A few years back, one of them, a bit of an expert on how our brains are programmed, invited me to undertake a computer test which despite the apparently unconnected and off-the-wall questions, highlighted your top five ‘brain skills’ chosen from 32 separate ones out of 4 key colour-coded criteria, one of which was Blue for Communication which I assumed I’d easily pass at PhD level. Alas not. Not even an O level.
Blue might have been the colour of my true love’s eyes but Mellow Yellow was dominant in my brain’s colour scheme. Yellow is for thinking skills - four out of my top five. “A lifelong learner” he explained, “I could’ve put money on it”. So now you know why I read so much. I’m wired that way. Incidentally the fifth ‘skill’ was a Red one – ‘Self-Anchored’. So having spent so much time thinking and reading about an issue once I form a view it seems it takes some shifting. That rogue ‘skill’ is probably down to Nullius in Verba with more than a hint of Grannie McKay’s commonsense added.
So where did my fascination in reading books and acquiring knowledge come from? At home as a ‘lonely child’ there were few books around. There was one on how to use a Brownie camera, another on First Aid, a four volume Encyclopedia for Children and a well- thumbed paperback of Lady Chatterley’s Lover I found hidden below a chest of drawers when I was 16, just in time for back-row manoeuvres on Saturday nights at the Ritz. (our local cinema, not the fancy place in London)
So either I was just born lucky to be wired curious or I was influenced at school. There were two outstanding influencers at my local secondary school: Latin teacher Jimmy Grieve, the brother of Scottish poet Hugh MacDiarmid (real name Christopher Grieve) and the head Maths teacher, Johnny Ferguson. Jimmy encouraged us to think for ourselves and seek knowledge by having an open mind and reading widely. He also introduced us to the humour of PG Wodehouse. I’ve been a fan ever since. Jimmy had a double first in Classics. You could say he was a classic contrarian.
Johnny opened my eyes to the magic of numbers. He believed that Maths was simply another language and that to be fluent in numbers you needed to think laterally. He opened my eyes to the value of Probability Theory when attempting to accurately predict trends. So since their joint influence all these years ago I’ve been fascinated by four Cs : Curiosity, Contrarianism, Cycles and Contagion.
And as I was thinking about what I should write about this month (it gets harder and harder as the years go by) as luck would have it I discovered a few books, some lurking in a forgotten corner, and others fairly new, that combined to fit the bill. One I’ve owned for years… ‘The Art of Contrarian Thinking’, first published in 1954 and written by contrarian investor Humphrey B Neill. It is well worth getting hold of, with its many examples of speculation, bubbles and price crashes over the last 300 years. It’s where I first learned of von Goethe, quoted above, who also said “I find more and more that it is well to be on the side of the minority since it is always the more intelligent”.
I guess that by now clients who have been with us for a good few years will recognise our stance on being different from the crowd, as well as the benefits it has provided. But it does mean having to be stoic and ignore pain when times are tough and the media go overboard on pessimism. Like last March/April.
Curiosity is also highly recommended by Charlie Munger, Warren Buffett’s cerebral sidekick, and it’s not done them much harm over the years. Reading widely introduces you to surprising insights, such as the disadvantages that come from non-diverse thinking (I recommended Matthew Syed’s ‘Rebel Ideas’ before. If you haven’t read it please do). A book I found a few months ago is eye-opening. It’s called ‘The Rules of Contagion’ by Adam Kucharski, subtitled ‘Why Things Spread and Why they Stop’. Funnily enough it has a Yellow cover. This is what it says about the book in the inside cover…
“We live in a world that’s more interconnected than ever. Our lives are shaped by outbreaks- of new ideas, of misinformation, even of violence-that appear, spread and fade away with bewildering speed. To understand them we need to learn the hidden laws that govern them. From super spreaders who might spark a pandemic or bring down a financial system to the social dynamics that make loneliness catch on, The Rules of Contagion offers compelling insights into human behaviour and explains how we can get better at predicting what happens next”
Like Humphrey’s book on Contrary Thinking, Adam covers the various financial bubbles over the last 300 years (as well as pandemics, computer viruses etc) including the Dutch Tulip Bulb fiasco and the South Sea Company Bubble and bust. Isaac Newton said after losing a fortune in that financial collapse “I can calculate the motion of heavenly bodies but not the madness of people”. By the way he lost the equivalent of £20 million in today’s money. OUCH !!
Cycles interest me. Progress is cyclical in Nature, not linear. Our planet takes the same time to travel round the Sun each year (although I see that the Flat Earth Society still exists with ‘Branches around the Globe’). Night follows Day and vice versa, tides rise and retreat like clockwork, and there are 4 seasons- Spring, Summer, Autumn and Winter. Unless of course like me you live in Scotland, where there’s only 2 seasons- Winter and Dreich.
Apart from all the books I buy and read, I also spend most of my time downloading information and insights from a dozen sources that I’ve found that over the last twenty odd years are well worth following because they help us identify opportunities and threats that hopefully make us better at looking after your wealth. Stir that in to the experience I’ve amassed through thick and thin since I entered the world of Independent Financial Advice since January 1973 and it ought to help us get even better as advisors in the years ahead.
Every day I learn something new. Yesterday I learned that thanks to Moore’s Law (Computer power doubles every 2 years) in only 12 years computer power will be 60 times more powerful than now. Wow. You can only imagine the opportunities and threats that will bring.
So we try to spot trends that highlight opportunities and threats. I was once asked how hard it is to spot a trend or to know what to do after a crisis. And thanks to an early experience as a five year old (I was hit on the head with a brick at school, tough upbringing) and possibly because my dad was a bricklayer, I thought of an analogy using bricks. Imagine you’re walking along a road that you’re familiar with and out of the blue you’re hit on the back of the head with a brick. Never happened before and nobody to be seen. That’s not a trend, eh?
For ages you are understandably nervous as you pass the same spot, but nothing happens so you relax. Then boom, it happens again. It’s certainly a coincidence, but it’s not yet a trend. But when it happens a third time, you’ve got your trend. And when the fourth time comes along hopefully if you didn’t duck you’ll know how to respond.
In my case after starting off in January 1973 the first ‘brick’ hit in the Autumn that year. A huge stock market crash, with the FT All Share Index down 72% by early 1975. Ouch. Nervousness continued to be the watchword until memories faded. Then Bang- a second brick hit in October 1987. Stockmarkets didn’t recover until early 1989. But investors remained nervous throughout the 1990s until a new paradigm arrived- the Dotcom. Oops …the third brick wreaked havoc.
Then the fourth hit in September 2008 and a fifth hit in March last year. That last one was not easy to predict, because it wasn’t a financial crisis. It came out of left-field but, on the basis of previous cycles, probability suggested that the best thing to do was avoid joining panic-stricken investor crowds being encouraged by pessimists and media-hype to run to cash. I’ve never known one time in all my years since 1973 when it was a sensible move to make any knee jerk emotional decisions with one’s finances.
Isaac Newton fell into the madness of crowds in both directions. I’ve also learned that it’s best to avoid being overweight in what attracts the crowds, but to spread risk in quality taking care to keep a significant defence at all times. Because in this fast changing globally connected world and the vast amount of money printed recently, it’s likely to keep you safe from bricks. My Grannie McKay who didn’t have much, bless her, used to say ‘never put all your eggs in the one basket’. She was a lovely grannie, but a nightmare to go grocery shopping with!
I thought you’d like to know that we have an ‘early brick warning system’ which we’ve put together over the years, utilising various sentiment numbers that swing between threat and opportunity. While, thanks to the nature of the Covid crisis (a genuine Black Swan event), the warning signs didn’t flash, the value of the readings in March pointed to the high probability that sitting tight and not panicking was the correct course of action, as the returns you have achieved since proved. We have seen statistics showing that over 30% of investors panicked to cash. Only 0.1% of our clients did. Result !! Finally, on our website is a shorter piece I wrote about sentiment only the other day in Daily Business. It’s well worth a read.
And now I’m off to watch the grass grow if it’s warm enough. Brrrr