3 Awesome Things About Investing-Thinking

 

 

Every once in a while I relapse into loving trading. Recently it’s been pulling harder than normal. The following screenshots are from a presentation to the investor of Guy Spier’s Aquamarine fund.

Some History Repeats

Elliott stated that “because man is subject to rhythmical procedure, calculations having to do with his activities can be projected far into the future with a justification and certainty heretofore unattainable.” (via Wikipedia)

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Some use these patterns successfully. There’s a lot of argument about whether or not they work empirically. What isn’t up for debate is that humans tend to get most excited before the subject of their excitement fails.

The following graph is in Doing Capitalism in the Innovation Economy and it shows three different bubble cycles over a century:

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People who can remember these graphs when the rest of the world is screaming don’t get screwed at the highs and can take advantage of the valleys.

Mental Biases

Charlie Munger is most famous for his use of checklists like that below to help keep investment decisions in perspective. Going through this will immediately clean up your thinking on whatever it is you’re considering:

 

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Checklists

Spier was featured in The Checklist Manifesto for his use of checklists in investment decisions. Below is a sample of questions he asks himself when a market hits new highs.

09_Spier.pdf

“You must stay drunk on writing…”

Ray Bradbury in Zen in the Art of Writing:

And what, you ask, does writing teach us?

First and foremost, it reminds us that we are alive and that it is a gift and a privilege, not a right. We must earn life once it has been awarded us. Life asks for rewards back because it has favored us with animation.

So while our art cannot, as we wish it could, save us from wars, privation, envy, greed, old age, or death, it can revitalize us amidst it all.

Secondly, writing is survival. Any art, any good work, of course, is that.

Not to write, for many of us, is to die.

We must take arms each and every day, perhaps knowing that the battle cannot be entirely won, but fight we must, if only a gentle bout. The smallest effort to win means, at the end of each day, a sort of victory. Remember that pianist who said that if he did not practice every day he would know, if he did not practice for two days, the critics would know, after three days, his audience would know.

A variation of this is true for writers. Not that your style, whatever that is, would melt out of shape in those few days.

But what would happen is that the world would catch up with and try to sicken you. If you did not write every day, the poisons would accumulate and you would begin to die, or act crazy, or both.

You must stay drunk on writing so reality cannot destroy you.

For writing allows just the proper recipes of truth, life, reality as you are able to eat, drink, and digest without hyperventilating and flopping like a dead fish in your bed.

I have learned, on my journeys, that if I let a day go by without writing, I grow uneasy. Two days and I am in tremor. Three and I suspect lunacy. Four and I might as well be a hog, suffering the flux in a wallow. An hour’s writing is tonic. I’m on my feet, running in circles, and yelling for a clean pair of spats.

For those who will practice morning pages:

Every morning I jump out of bed and step on a landmine. The landmine is me.

After the explosion, I spend the rest of the day putting the pieces together.

A Brief History of Uncertainty

We begin with the simultaneous birth of truth and uncertainty. It may seem fluffy at first, like it doesn’t apply to your uncertain future. I assure you it will. Soon.

From Passion of the Western Mind:

[T]he more the Greek developed a sense of individual critical judgment and emerged from the collective primordial vision of earlier generations, the more conjectural became his understanding, the more narrow the compass of infallible knowledge. “As for certain truth,” Xenophanes asserted, “no man has known it, nor will he know it.” Philosophical contributions such as the irresolvable logical paradoxes of Zeno of Elea, or Heraclitus’s doctrine of the world as constant flux, often seemed only to exacerbate the new uncertainties. With the advent of reason, everything seemed open to doubt, and each succeeding philosopher offered solutions differing from his predecessor’s. If the world was governed exclusively by mechanical natural forces, then there remained no evident basis upon which firm moral judgments could be founded. And if the true reality was entirely divorced from common experience, then the very foundations of human knowledge were called into question. It seemed that the more man became freely and consciously self-determining, the less sure was his footing.

As we began to uncover the concrete world under our subjective level of understanding we uncovered a vast separation between others and ourselves. If logic and natural law applied to one area, shouldn’t it apply everywhere?

Yet, how can each of these philosophers present logically sound arguments while contradicting each other?

This kind of uncertainty is uncomfortable for us (the two words are practically synonyms). Philosophers tried time and again to create a way of living that followed the newfound rules of reason. The Roman Stoics had a strong contingency, yet even they couldn’t provide the certainty craved by those who needed a philosophy to live by.

It’s worth noting here that the Stoics were working hard to deal rationally with an ethically ambiguous world. Yet the issue was not only internal. The world itself seemed to be going out of control. People seemed to have lost control over their lives. External discomfort causes internal confusion. When our old stories turn out to be false we are left in an existential void—and we will fill it with anything.

Enter Christianity:

“This Christian ethical ideal of goodness and charity was strongly promulgated and at times widely observed, an ideal certainly not lacking in the moral imperatives of Greek philosophy – particularly in Stoicism, which in several ways anticipated the Christian ethics – but now having a more pervasive influence on the mass culture in the Christian era than had Greek philosophical ethics in the classical world.

In contrast to the previous centuries of metaphysical perplexity, Christianity offered a fully worked out solution to the human dilemma. The potentially distressing ambiguities and confusions of a private philosophical search without religious guideposts were now replaced by an absolutely certain cosmology and an institutionally ritualized system of salvation accessible to all.”

Individual truth no longer mattered. Spiritual (and philosophical) certainty became easily available for anyone who craved it.

This sense of certainty didn’t come for free. Human activity was now seen as valid only if it served God. Sacrifice was applauded and pride was punished.

“Only by such [divine] intervention were [Paul and Augustine] saved from continuing a life the self-defined direction of which could now be seen as futile and destructive. In light of these experiences, all merely human activity, whether independent willfulness or intellectual curiosity, now appeared secondary – superfluous, misleading, even sinful – except as it might lead to fully God-directed activity. God was the exclusive source of all good and of man’s salvation. All heroism, so central to the Greek character, was now concentrated in the figure of Christ. The human surrender to the divine was the only existential priority. All else was vanity. Martyrdom, the ultimate surrender of the self to God, represented the highest Christian ideal. As Christ was self-giving in the highest degree, so should all Christians strive to be like their Redeemer. Humility, not pride, was the distinguishing Christian virtue, requisite for salvation.”

It seems that reason and science would make our world more certain. Not so. Winston Churchill describes uncertainty (both physical and moral) nearly two thousand years after the beginnings of Christianity:

“It is not given to human beings – happily for them, otherwise life would be intolerable – to foresee or predict to any large extent the unfolding of events. In one phase men seem to have been right, in another they seem to have been wrong. Then again, a few years later, when the perspective of time has lengthened, all stands in a different setting. There is a new proportion. There is another scale of values. History with its flickering lamp stumbles along the trail of the past, trying to reconstruct its scenes, to revive its echoes.”

Churchill saw first hand how well the First World War was planned for—and how exactly zero of those plans mattered. From the first fight the best generals looked like amateurs. New technology and tactics disrupted everything. It had been theorized about for a decade but never battle tested. These generals were forced to appreciate the power of improvisation—a lesson Churchill took with him into WWII.

Even science textbooks have to be thrown out every few years because of new information. It seems all that is stable are death, taxes, and 2+2=4 (although I’ve been told this last one is disputed by some mathematicians…).

This swaying back and forth between uncertainty and certainty has never stopped.

We move through periods where the world seems to behave according so some eternal laws. If we learn to use these laws we can do anything we want. We can see this in the Christian era described. More recently we can look to the period when the American Dream seemed to be in full swing: go to college, get a job; buy a house, sell it for more; invest in stocks, make money.

Then the pendulum swings the other way. The world seems to be thrown into chaos. There is no reliable pattern we can follow. The events around us—and thus our fates—seem to be completely beyond our control. As we saw above, the birth of reason created this kind of uncertainty. You know from experience that we are again in a time of intense certainty.

Notice that Stoicism was popular before Christian certainty swept the Western world. With this understanding it isn’t surprising to see its resurgence in our culture, is it? Especially among tech entrepreneurs who operate under massive uncertainty. (See: Tim Ferriss, Nassim Taleb, Ryan Holiday, William Irvine, and Art of Manliness.) We will explore this in more detail later on as a tool for leveraging the uncertainty of the world. For now it’s enough to understand that humans develop (or, in this case, adapt) the philosophy they need for their current situation.

Creating Tribes

Seth Godin reintroduced the term “tribe” into our world with his 2008 book Tribes. It’s awesome, I don’t know why it took me so long to read it.

tribes cover

My favorite pieces:

It’s only in the last couple years that businesses have started leveraging the power of showing their processes. It’s a powerful tool for gathering an audience.

While Joel runs a small software company in New York City, his real passion is talking about how to run a small software company. Through blogs and books and conferences, Joel has changed the way many smart people thing about finding, hiring, and managing programmers. Along the way, Joel has assembled a large and influential tribe of people who look to him for leaderhship.

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Tribes are simple.

A group needs only two things to be a tribe: a shared interest and a way to communicate.

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Provide “Belonging”

Human beings can’t help it: we need to belong.

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Believe

Do you believe in what you do? Every day? It turns out that belief happens to be a brilliant strategy.

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More from Joy

“How was your day?” is a question that matters a lot more than it seems. It turns out that the people who like their jobs the most are also the ones who are doing the best work, making the greatest impact, and changing the most.

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 Partisans

It’s a criticism when you throw that word at a politician, but all tribes are made up of partisans, the more partisan the better. If you’re a middle-of-the-roader, you don’t bother joining a tribe.

 Partisans want to make a difference. Partisans want something to happen (and something else not to happen). Leaders lead when they take positions, when they connect with their tribes, and when they help the tribe connect to itself.

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 Interest -> Action

 So a leader can help increase the effectiveness of the tribe and its members by

  • transforming the shared interest into a passionate goal and a desire for change;
  • providing tools to allow members to tighten their communications; and
  • leveraging the tribe to allow it to grow and gain new members.

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Anatomy of a Movement

Senator Bill Bradley defines a movement as having three elements:

  1. A narrative that tells a story about who we are and the future we’re trying to build
  2. A connection between and among the leader and the tribe
  3. Something to do – the fewer limit, the better

Too often organizations fail to do anything but the third.

That’s it – three steps: motivate, connect, and leverage.

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“Everybody” Sucks

Most organizations spend their time marketing to the crowd. Smart organizations assemble the tribe.

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 1000 True Fans

 An individual artist needs only a thousand true fans in her tribe. It’s enough.

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 Change

Whatever the status quo is, changing it gives you the opportunity to be remarkable.

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You Are Leveraged

What I’m saying is that one person – okay, what I really mean is you – has everything. Everything you need to build something far bigger than yourself. The people around you realize this, and they are ready to follow if you’re ready to lead.

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“I’m doing what you told me”

The second reason we have factories has nothing to do with efficiency and a lot to do with human nature. Part of us wants stability. We want the absence of responsibility that a factory job can give us. The idea of “I’m doing what you told me to” is very compelling, especially if the alternative is foraging for food or begging on the streets.

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Organizations Good, Factories Bad

Organizations are more important than ever before. It’s the factories we don’t need.

Organizations give us the ability to create complex products. They provide the muscle and consistency necessary to get things to market and to back them up. Most important, organizations have the scale to care for large tribes.

But organizations don’t have to be factories, not anymore. Factories are easy to outsource. Factories can slow you down.

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Fearlessness Wins

In a battle between two ideas, the best one doesn’t necessarily win. No, the idea that wins is the one with the most fearless heretic behind it.

Another look at winning in the world of words from Nassim Taleb: “As in anything with words, it is not the victory of the most correct, but that of the most charming – or the one who can produce the most academic-sounding material.”

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Use Attention, Don’t Hunger for It

It’s easy to hesitate when confronted with the feeling that maybe you’re getting too much attention. Great leaders are able to reflect the light onto their teams, their tribes. Great leaders don’t want the attention, but they use it. They use it to unite the tribe and to reinforce its sense of purpose.

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Faithful Heretics

Faith is critical to all innovation. Without faith, it’s suicidal to be a leader, to act like a heretic.

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Steps to Making Your Movement

The key elements in creating a micromovement consist of five things to do and six principles:

  1. Publish a manifesto. Give it away and make it easy for the manifesto to spread far and wide. It doesn’t have to be printed or even written. But it’s a mantra and a motto and a way of looking at the world. It unites your tribe members and gives them a structure.
  2. Make it easy for your followers to connect with you.  […]
  3. Make it easy for your followers to connect with one another. […]
  4. Realize that money is not part of the movement. Money exists merely to enable it. The moment you try to cash out is the moment you stunt the growth of your movement.
  5. Track your progress. Do it publicly and create pathways for your followers to contribute to that progress.

Principles”

  1. Transparency really is your only option.  […]
  2. Your movement needs to be bigger than you. […]
  3. Movements that grow, thrive. […] Don’t mortgage today because you’re in a hurry.
  4. Movements are made most clear when compared to the status quo or to movements that work to push in the other direction. Movements do less well when compared to other movements with similar goals. Instead of beating them, join them.
  5. Exclude outsiders. Exclusion is an extremely powerful force for loyalty and attention. Who isn’t part of your movement matters almost as much as who is.
  6. Tearing others down is never as helpful to a movement as building your followers up.

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Be Boldly Wrong

Isaac Newton was totally, fantastically wrong about alchemy, the branch of science he spent most of his career on. He was as wrong as a scientist could be. And yet, he’s widely regarded as the most successful scientist and mathematician ever.

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The Secret of Leadership

The secret of leadership is simple: Do what you believe in. Paint a picture. Go there.

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Automatic Problem Solving

Exactly a year ago I wrote this as the first line in my morning “stream of consciousness” practice:

Still not sure if I will do Crossfit or gym. Will I regret the amount of time, attention/concern I gave to decisions like this later in life?

Apparently, I answered yes, because I know follow this heuristic:

Take the first real step toward something before researching it. 

(If you want to know more about that, Thought Catalog ran my explanation of it.)

This kind of thing happens all the time. We make decisions and then forget about them. Your beliefs, perspective, and actions are the result of countless tiny decisions that you made at one point and forgot about. They last forever and it’s impossible to keep track of them all.

I don’t know what this means other than: you’ve probably made way more progress than you think… and you’re setting yourself up for your future in ways you can’t appreciate. Right now.

Nothing is that big of a deal but everything matters.

Rational Religion, Irrational Atheists

I’ve had a complicated relationship with religious faith for a while.

The beliefs are generally absurd, but so are the atheists who attack things so obviously metaphorical.

Faith in certain circumstances has allowed people to do terrible thing (Islamic terrorists) and other people to do great things (religious charity is massive). It’s given business men (John D. Rockefellar) and athletes (basically all of them) the supreme confidence and unnatural energy necessary to perform at the highest level.

In the face of the world mocking them for believing in fairy tales people have remained religious.

Religious may be destructive in some spheres. So is science’s illusion that everything can be explained, predicted, or controlled.

Nassim Taleb and Rupert Read have begun some great work on understanding the real-world benefits of religious practices. Here are a few excerpts from their paper:

Provides Time-Tested Heurisitics

We believe that religion supplies potent tricks to mitigate people’s natural epistemic arrogance and overconfidence about the future. “I don’t know” is something hard for humans to accept and say; this is made easier in the Arabic language, as the typical traditional expression is “God knows.” Saying “God knows” is easier on one’s ego than “I don’t know.” 

Wittgenstein (1961/1921, 6.372) remarked: “…the view of the ancients is clearer in so far as they have a clear and acknowledged terminus, while the modern system tries to make it look as if everything were explained.

 Misunderstood “Belief”

Accordingly it is an extremely naive interpretation to think that religious ‘beliefs’ map to the ‘justified true belief’ standards of modern epistemology (see Ichikawa and Steup 2014); it is naive to examine the supernatural aspect of religion as anything but epiphenomenal. One needs to think of religious ‘belief’ as closer to a form of trusting, as a form of action, or a willingness to take action, and, most crucially of all, as a set of interdicts upon action. Further, religion establishes a categorical demarcation between sacred and profane, and one that cannot be violated (see Eliade 1959). The sacred is not open to ‘rationalization’—what we don’t understand is not necessarily irrational, and it might have reasons that can be probed only across generations of experience and experimentation.

“Suckers try to win arguments, nonsuckers try to win.”

Consider the evolution of ideas: ‘bad ideas’ (in the epistemic sense) can survive if they have some side benefits—an idea that seems to be absent in the literature about “evolutionary epistemology” (Popper 1999). It is misguided to focus on the competition between ideas—and their survival—as an end product. What matters is the survival of the populations that have such ideas. Those with the right risk-management heuristics make it, even if their system of belief does not appear ‘rational.’

Too New to Know

Modernity is in this sense a dangerous uncontrolled experiment. The amount of historical time that any significant number of humans have lived without religion is infinitesimal compared to the sweep of history. Given that, the amount of time that we have sought as societies, as a species, to live without religion is almost nil. It is a symptom of chronic short-termism and over-optimism that people now assume that living in such a way is sustainable.

The Good Ideas They Can’t Have

From Paul Graham’s Black Swan Farming:

… if a good idea were obviously good, someone else would already have done it. So the most successful founders tend to work on ideas that few beside them realize are good. Which is not that far from a description of insanity, till you reach the point where you see results.

The first time Peter Thiel spoke at YC he drew a Venn diagram that illustrates the situation perfectly. He drew two intersecting circles, one labelled “seems like a bad idea” and the other “is a good idea.” The intersection is the sweet spot for startups.

Obsess on the Slow

Slow things don’t change often. They aren’t trendy or even obviously practical – philosophy, emotional stability, persuasion, storytelling, finding value-gaps…

The Fast are the things that change before you can fully learn them. The tools, the tactics, the things that get headlines, the holy grails…

Obsessing on the Fast creates excitement, anxiety, burnout, and obsolescence.

Obsessing on the Slow creates flow, cool-headedness, and mastery.

When you focus on the Slow you use the Fast by default. You pick up the tools and tactics you need when you need them.

Your competency isn’t in being first-to-gizmo, it’s in being able to use gizmos to leverage principles that rarely (if ever) change.

It’s All A Luxury Market Now

From Grinda's post (linked to below)

From Grinda’s post (linked to below)

From Fabrice Grinda’s great piece, The Evolution of Marketplaces:

These end-to-end marketplaces won’t completely take over the market. By virtue of their structure there is a limit to their potential market share. However, by focusing on high end customers who value their time and the quality of the experience above all else, they may end up capturing a large share of the profits in the market. As a result sites like Suitey and Beepi are more of a threat to real estate brokers and car dealers than to Trulia and eBay Motors.

As income inequality increases it’s important (that’s 5 i’s) to remember that a disproportionate chunk of each market will be made up of the high-end users. Marketing becomes even more vital as competition for limited attention increases. From Tyler Cowen’s Average is Over:

The growing importance of marketing integrates two seemingly unrelated features of the modern world: income inequality and increasing pressures on our attention. The more that earnings rise at the upper end of the distribution, the more competition there will be for the attention of the high earners and thus the greater the importance of marketing.

Cowen’s prediction is that we see way more millionaires made… but whoever isn’t wealthy will be supported by taxes/government. They’ll live more comfortably than the poor do now but they won’t have much extra cash. (If you want more reasoning behind this, check out these two posts I wrote at StartupBros: “10 Reasons the Future Doesn’t Include Your Job” and “3 Skills You Need to Succeed in the Machine Economy“.)

Sounds like fun to me.

 

 

 

Taleb Interview Highlight Reel

A few highlights from a great interview with Nassim Taleb:

Current Strength, Not Prediction

…it actually taught us to try not to predict the catalyst, which is the most foolish thing in the world, but to try to identify areas of vulnerability. [It’s] like saying a bridge is fragile. I can’t predict which truck is going to break it, so I have to look at it more in a structural form — what physicists call the percolation approach.

Revolution

I recently read a few books on the French Revolution. I realized that the places that are vulnerable are not places where you have a starving lower class. You simply give them a little bit of bread and they are comfortable. The real danger is a rising middle class with thwarted expectations…

Debt-Growth

You are eventually going to pay back this fake growth — [which is] sort of like Madoff style growth. Is it growth? Well, it looked like growth but it’s not really growth if you discount it by the probability that you have to pay it back.

Safe Over-Confidence

There are some domains in which you can be as over confident as you want without harming you.