“..But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts and amenities beyond the compass of the richest and most powerful monarchs of other ages.
The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole Earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep.
He could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share — without exertion or even trouble — in their prospective fruits and advantages.
Or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend.
He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality.
He could dispatch his servant to the neighbouring office of a bank for such supply of the precious metals as might seem convenient — and could then proceed abroad to foreign quarters, without knowledge of their religion, language or customs, bearing coined wealth upon his person.
He would consider himself greatly aggrieved and much surprised at the least interference.
But most important of all, he regarded this state of affairs as normal, certain and permanent — except in the direction of further improvement.
Any deviation from it would be seen as aberrant, scandalous and avoidable.
The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper.
They appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice.”
- John Maynard Keynes, Chapter Two, ‘The Economic Consequences of the Peace’, 1920.
Get your Free
financial review
What a glimpse into a vanished world Keynes pictures here – that classic liberal world that would be shattered by the violence and industrialised slaughter of the Great War. The libertarians among us will regret the passing of so many freedoms and the imposition of so many subsequent controls. (Ludwig von Mises offers an excellent companion piece to Keynes in the form of his ‘Nation, State and Economy’, the publication of which preceded ‘The Economic Consequences..’ by a year.) But it is easy to overstate the negatives. The technologies of the Internet and wireless commerce continue to facilitate economic opportunities, notably in information exchange and the execution of trade. Keynes could not necessarily have foreseen the rise of the world wide web, but he would probably have keenly embraced it, digital warts and all.
The biggest problem with the digital world, we would suggest, is learning to deal with its inherent excess. As numerous students of the digital age have observed, we are now drowning in information yet simultaneously starving for knowledge. The informational challenge today is to sort the wheat from the chaff. Our collective mission is to engage with the useful parts of the web without falling prey to the distracting parts. The Internet is a great enabler, but it needs to be handled with extreme care. In the last two decades the successful investor will have managed to transition from a world of informational scarcity to one of informational super-abundance. As a result we no longer need knowledge funnels – there’s no shortage of information out there – but rather we require powerful knowledge filters.
The mainstream media have not necessarily handled this cultural and social transition well. Compare the quality and reliability of the output of the BBC or the broadsheet press to what those sources of “news” and opinion were publishing twenty or thirty years ago. Now, as with so many modern media platforms, they seem to resemble some kind of anarchic shouting contest, resembling what George Orwell said of the advertising business, “the rattling of a stick inside a swill bucket”.
So choose your sources well. Know, too, what to discard as either irrelevant or, worse, actively harmful to your investment process. Most of what masquerades as “news” will be the latter. (See this essay for more on the dangerous nature of news.)
The award-winning US financial writer Morgan Housel, however, is on the side of the angels. In this short piece he offers a deceptively brief assembly of investment advice. Among the highlights:
- Above-average results requires not being afraid of looking wrong.
In this respect, the individual investor has some real advantages over the so-called professional. Not having the obligation to report your portfolio performance on a daily, weekly or monthly basis is a huge benefit, and vastly under-appreciated by individual investors. Not labouring under reporting pressure also has the potential to prevent the individual investor from emulating those investors who hold funds from being spooked into overtrading those funds. A case in point. Peter Lynch was Fidelity’s star manager of the Magellan Fund during the 1980s and 1990s. During his tenure at the fund, Lynch generated an annualised 29% return. Better than Buffett. Over the same period, Lynch himself calculated that the average investor in his fund enjoyed an annualised return of just 7%. (Source: Spencer Jakab, ‘Heads I win, tails I win’, 2016). What accounted for the yawning difference between the two figures ? Investors in the fund had an amazing tendency to buy high, and sell low. When the industry tells you that time and timing can play a huge part in the investment game, for once they’re not lying.
- Most people are afraid of looking wrong.
Again, the individual investor has comparative anonymity on his side. The professional fund manager and his portfolio returns live in the full glare of public view. Innumerable publications and websites will publish his returns, whether good, bad or indifferent. The private investor is precisely that.
Being contrarian is tough
Consider the following quote from John Vaillant’s ‘The Tiger’:
“The most terrifying and important test for a human being is to be in complete isolation.. A human being is a very social creature, and ninety percent of what he does is only done because other people are watching. Alone, with no witnesses, he starts to learn about himself – who is he really ? Sometimes, this brings staggering discoveries.
“Because nobody’s watching, you can easily become an animal: it is not necessary to shave, or to wash, or to keep your winter quarters clean – you can live in shit and no one will see you. You can shoot tigers, or choose not to shoot. You can run in fear and nobody will know. You have to have something – some force, which allows and helps you to survive without witnesses..
“Once you have passed the solitude test you have absolute confidence in yourself, and there is nothing that can break you afterward.”
We found ‘The Tiger’ an absolutely gripping read. Located in far eastern Russia, in a wilderness that the Chinese call the “forest sea”, ‘The Tiger’ tells the true-life story of a trapper and poacher, Markov, who is killed by a tiger. It goes on to develop the story of a unit called ‘Inspection Tiger’, brought in to investigate Markov’s death. To an extent it is a murder mystery set in the blistering cold. But it is also a study in human psychology.
Being alone is nothing new or special for contrarian types. Contrarian investing practically demands that the practitioner stands alone from the crowd. The fundamental problem with contrarian investing is that human beings are hardwired to be social, tribal animals. Living and especially thriving alone is not an evolutionarily developed skill. We would not be here if our ancestors had lived in total isolation – they would simply have died out. Eating a poisonous berry, or falling from a rock and incurring a damaging wound, might have been enough for them.
But we are not evolutionarily prepared for the stock market, either, or for financial markets in their broader sense. Stock markets themselves have only been with us for a few hundred years. Our own Royal Exchange, for example, the precursor to the Stock Exchange, was opened by Elizabeth I in 1571. Homo sapiens, on the other hand, has been around for roughly 300,000 years. So our brains are struggling to catch up with this ‘sudden’ innovation in investment.
Nevertheless, contrarian investing requires that we consciously live “alone” for much of the time, at least as far as our portfolios are concerned. Nobody ever got rich following the herd, unless in utterly exceptional circumstances that involved outrageous risks. But being “alone” is also psychologically uncomfortable. Nothing about successful investing is particularly easy – otherwise we would all be rich, and the markets don’t work that way. Contrarian investing requires that we live in an environment well outside our natural comfort zone. It is, fundamentally, difficult – but then so much of what is valuable in life is meant to be difficult. Challenge creates value. As the American writer and mythologist Joseph Campbell puts it,
“The cave you fear to enter holds the treasure you seek.”
This pithy quotation sums up the challenge, and reward, of all value investing. Investors in precious metals miners, for example, will recognise the challenge today.
Economics ? Better to study psychology
- Good investing is 50% psychology, 48% history, 2% finance.
We can debate the precise percentages, but Housel is surely right in the essence. More to the point, good investing is about overcoming certain psychological resistance – such as the natural human unwillingness to “go it alone”.
Our own view is that, since investing is a human activity (we can put to one side the influence of algorithms and high frequency trading, to the extent that those programs were all created and compiled by humans), it makes sense to adopt an investment approach in keeping with one’s own personality. We embrace value investing because we’re “comfortable” being patient. But the style may not be to everyone’s tastes, and we acknowledge that.
(To this end, we don’t aggressively market our discretionary investment business. We certainly don’t pay hard advertising dollars or pounds to promote it. Any promotional activity we did undertake would be drowned out by far better funded marketing organisations. Asset management, like insurance, tends to be sold rather than bought. Instead, we find that clients who engage with us tend to be self-selecting. This essay by Albert Jay Nock touches on some of the philosophy. We would far rather attract like-minded investors as clients. We seek a happy partnership, as opposed to a shotgun wedding followed by an inevitable rupture triggered by a mismatch of expectations.)
But as our friend, the asset manager Tony Deden, has also nicely observed,
A so far unaddressed need
As Tony points out, there are tens of thousands of books offering advice about attaining wealth (many through investment). But there are next to none offering advice about maintaining wealth.
- Being satisfied with your riches is hardest.
One of the larger tragedies of the human condition is that we are never satisfied with our lot. We are all fated to trek along a hedonic treadmill of “more”. More wealth, a higher standard of living.. This accounts for economic growth and the creation of some outstanding businesses, but it does also make for expectations that can never entirely be fulfilled, because there will always be someone out there who has more stuff than we do.
- Wealth is what you don’t see – money that hasn’t been spent, cars that haven’t been bought, jewellery that hasn’t been purchased, stuff that hasn’t been bought.
We particularly like this observation. It partly (and we’re sure, deliberately) recalls Bastiat’s famous essay, ‘That which is seen, and that which is not seen’, and the broken window fallacy. Finally,
- Most people can afford not to be a great investor.
But at the same time,
- Most people can’t afford to be a bad investor.
Morgan Housel saves his best observations until last, namely:
- John D. Rockefeller was worth the equivalent of $340 billion, but he never had penicillin, sunscreen, or Advil. For most of his adult life he didn’t have electric lights, air conditioning, or sunglasses.
- Which is to say: Everything about money is results in the context of expectations.
As we’ve tried to make clear, the perversity of the online world is that while it offers practically an infinity of information choices, it is best exploited with a sense of extreme self-imposed limitation. In other words, though there may be millions of voices all competing for your attention – and your investment capital – the number of voices that you should be listening to can probably be counted on the fingers of just two hands, if that. Morgan Housel, we submit, is one of those voices. Wall Street Journal investment columnist Jason Zweig is another. To round off a triumvirate for this letter, Michael Mauboussin is a third.
Keynes’ world, with its freedoms, its conveniences and its lack of constraints, is long gone. But the digital world that has largely replaced it is not entirely without merit. In any event, regardless of the tools we have at our disposal, human nature remains stubbornly the same. Psychology trumps analysis.
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
Get your Free
financial review
…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and also in systematic trend-following funds.
“..But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts and amenities beyond the compass of the richest and most powerful monarchs of other ages.
The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole Earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep.
He could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share — without exertion or even trouble — in their prospective fruits and advantages.
Or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend.
He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality.
He could dispatch his servant to the neighbouring office of a bank for such supply of the precious metals as might seem convenient — and could then proceed abroad to foreign quarters, without knowledge of their religion, language or customs, bearing coined wealth upon his person.
He would consider himself greatly aggrieved and much surprised at the least interference.
But most important of all, he regarded this state of affairs as normal, certain and permanent — except in the direction of further improvement.
Any deviation from it would be seen as aberrant, scandalous and avoidable.
The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper.
They appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice.”
Get your Free
financial review
What a glimpse into a vanished world Keynes pictures here – that classic liberal world that would be shattered by the violence and industrialised slaughter of the Great War. The libertarians among us will regret the passing of so many freedoms and the imposition of so many subsequent controls. (Ludwig von Mises offers an excellent companion piece to Keynes in the form of his ‘Nation, State and Economy’, the publication of which preceded ‘The Economic Consequences..’ by a year.) But it is easy to overstate the negatives. The technologies of the Internet and wireless commerce continue to facilitate economic opportunities, notably in information exchange and the execution of trade. Keynes could not necessarily have foreseen the rise of the world wide web, but he would probably have keenly embraced it, digital warts and all.
The biggest problem with the digital world, we would suggest, is learning to deal with its inherent excess. As numerous students of the digital age have observed, we are now drowning in information yet simultaneously starving for knowledge. The informational challenge today is to sort the wheat from the chaff. Our collective mission is to engage with the useful parts of the web without falling prey to the distracting parts. The Internet is a great enabler, but it needs to be handled with extreme care. In the last two decades the successful investor will have managed to transition from a world of informational scarcity to one of informational super-abundance. As a result we no longer need knowledge funnels – there’s no shortage of information out there – but rather we require powerful knowledge filters.
The mainstream media have not necessarily handled this cultural and social transition well. Compare the quality and reliability of the output of the BBC or the broadsheet press to what those sources of “news” and opinion were publishing twenty or thirty years ago. Now, as with so many modern media platforms, they seem to resemble some kind of anarchic shouting contest, resembling what George Orwell said of the advertising business, “the rattling of a stick inside a swill bucket”.
So choose your sources well. Know, too, what to discard as either irrelevant or, worse, actively harmful to your investment process. Most of what masquerades as “news” will be the latter. (See this essay for more on the dangerous nature of news.)
The award-winning US financial writer Morgan Housel, however, is on the side of the angels. In this short piece he offers a deceptively brief assembly of investment advice. Among the highlights:
In this respect, the individual investor has some real advantages over the so-called professional. Not having the obligation to report your portfolio performance on a daily, weekly or monthly basis is a huge benefit, and vastly under-appreciated by individual investors. Not labouring under reporting pressure also has the potential to prevent the individual investor from emulating those investors who hold funds from being spooked into overtrading those funds. A case in point. Peter Lynch was Fidelity’s star manager of the Magellan Fund during the 1980s and 1990s. During his tenure at the fund, Lynch generated an annualised 29% return. Better than Buffett. Over the same period, Lynch himself calculated that the average investor in his fund enjoyed an annualised return of just 7%. (Source: Spencer Jakab, ‘Heads I win, tails I win’, 2016). What accounted for the yawning difference between the two figures ? Investors in the fund had an amazing tendency to buy high, and sell low. When the industry tells you that time and timing can play a huge part in the investment game, for once they’re not lying.
Again, the individual investor has comparative anonymity on his side. The professional fund manager and his portfolio returns live in the full glare of public view. Innumerable publications and websites will publish his returns, whether good, bad or indifferent. The private investor is precisely that.
Being contrarian is tough
Consider the following quote from John Vaillant’s ‘The Tiger’:
“The most terrifying and important test for a human being is to be in complete isolation.. A human being is a very social creature, and ninety percent of what he does is only done because other people are watching. Alone, with no witnesses, he starts to learn about himself – who is he really ? Sometimes, this brings staggering discoveries.
“Because nobody’s watching, you can easily become an animal: it is not necessary to shave, or to wash, or to keep your winter quarters clean – you can live in shit and no one will see you. You can shoot tigers, or choose not to shoot. You can run in fear and nobody will know. You have to have something – some force, which allows and helps you to survive without witnesses..
“Once you have passed the solitude test you have absolute confidence in yourself, and there is nothing that can break you afterward.”
We found ‘The Tiger’ an absolutely gripping read. Located in far eastern Russia, in a wilderness that the Chinese call the “forest sea”, ‘The Tiger’ tells the true-life story of a trapper and poacher, Markov, who is killed by a tiger. It goes on to develop the story of a unit called ‘Inspection Tiger’, brought in to investigate Markov’s death. To an extent it is a murder mystery set in the blistering cold. But it is also a study in human psychology.
Being alone is nothing new or special for contrarian types. Contrarian investing practically demands that the practitioner stands alone from the crowd. The fundamental problem with contrarian investing is that human beings are hardwired to be social, tribal animals. Living and especially thriving alone is not an evolutionarily developed skill. We would not be here if our ancestors had lived in total isolation – they would simply have died out. Eating a poisonous berry, or falling from a rock and incurring a damaging wound, might have been enough for them.
But we are not evolutionarily prepared for the stock market, either, or for financial markets in their broader sense. Stock markets themselves have only been with us for a few hundred years. Our own Royal Exchange, for example, the precursor to the Stock Exchange, was opened by Elizabeth I in 1571. Homo sapiens, on the other hand, has been around for roughly 300,000 years. So our brains are struggling to catch up with this ‘sudden’ innovation in investment.
Nevertheless, contrarian investing requires that we consciously live “alone” for much of the time, at least as far as our portfolios are concerned. Nobody ever got rich following the herd, unless in utterly exceptional circumstances that involved outrageous risks. But being “alone” is also psychologically uncomfortable. Nothing about successful investing is particularly easy – otherwise we would all be rich, and the markets don’t work that way. Contrarian investing requires that we live in an environment well outside our natural comfort zone. It is, fundamentally, difficult – but then so much of what is valuable in life is meant to be difficult. Challenge creates value. As the American writer and mythologist Joseph Campbell puts it,
“The cave you fear to enter holds the treasure you seek.”
This pithy quotation sums up the challenge, and reward, of all value investing. Investors in precious metals miners, for example, will recognise the challenge today.
Economics ? Better to study psychology
We can debate the precise percentages, but Housel is surely right in the essence. More to the point, good investing is about overcoming certain psychological resistance – such as the natural human unwillingness to “go it alone”.
Our own view is that, since investing is a human activity (we can put to one side the influence of algorithms and high frequency trading, to the extent that those programs were all created and compiled by humans), it makes sense to adopt an investment approach in keeping with one’s own personality. We embrace value investing because we’re “comfortable” being patient. But the style may not be to everyone’s tastes, and we acknowledge that.
(To this end, we don’t aggressively market our discretionary investment business. We certainly don’t pay hard advertising dollars or pounds to promote it. Any promotional activity we did undertake would be drowned out by far better funded marketing organisations. Asset management, like insurance, tends to be sold rather than bought. Instead, we find that clients who engage with us tend to be self-selecting. This essay by Albert Jay Nock touches on some of the philosophy. We would far rather attract like-minded investors as clients. We seek a happy partnership, as opposed to a shotgun wedding followed by an inevitable rupture triggered by a mismatch of expectations.)
But as our friend, the asset manager Tony Deden, has also nicely observed,
A so far unaddressed need
As Tony points out, there are tens of thousands of books offering advice about attaining wealth (many through investment). But there are next to none offering advice about maintaining wealth.
One of the larger tragedies of the human condition is that we are never satisfied with our lot. We are all fated to trek along a hedonic treadmill of “more”. More wealth, a higher standard of living.. This accounts for economic growth and the creation of some outstanding businesses, but it does also make for expectations that can never entirely be fulfilled, because there will always be someone out there who has more stuff than we do.
We particularly like this observation. It partly (and we’re sure, deliberately) recalls Bastiat’s famous essay, ‘That which is seen, and that which is not seen’, and the broken window fallacy. Finally,
But at the same time,
Morgan Housel saves his best observations until last, namely:
As we’ve tried to make clear, the perversity of the online world is that while it offers practically an infinity of information choices, it is best exploited with a sense of extreme self-imposed limitation. In other words, though there may be millions of voices all competing for your attention – and your investment capital – the number of voices that you should be listening to can probably be counted on the fingers of just two hands, if that. Morgan Housel, we submit, is one of those voices. Wall Street Journal investment columnist Jason Zweig is another. To round off a triumvirate for this letter, Michael Mauboussin is a third.
Keynes’ world, with its freedoms, its conveniences and its lack of constraints, is long gone. But the digital world that has largely replaced it is not entirely without merit. In any event, regardless of the tools we have at our disposal, human nature remains stubbornly the same. Psychology trumps analysis.
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
Get your Free
financial review
…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and also in systematic trend-following funds.
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