During the course of its long descent, a snowflake passes through a multitude of different weather conditions. The variability of temperature, atmospheric pressure and humidity produces an infinite variety of possible designs. The future of each snowflake is a structure that has never existed before and will never occur again—at no point in its development can we know exactly what it will look like when it finally lands. This is pure uncertainty—a completely unknowable future.
Investing is an activity that exists because we believe that the future can be knowable enough to justify making choices whose outcomes are likely but not guaranteed. As normal as this feels to us today, in historical terms it is a relatively recent phenomenon. It isn’t that our ancestors weren’t concerned about the future—of course they were. But all they had to part the curtains were oracles, prophets and soothsayers—whose success was clouded in mystery and superstition. Accordingly, the ancients’ view of the future was simple: It was uncertain—and most definitely outside of their control.
The source of everything investors today take for granted germinated approximately 1,500 years ago when Hindus invented the modern numbering system. Its brilliant centerpiece was the introduction of a groundbreaking new idea: Zero. This released us from a system of numbers useful mostly for counting and replaced it with something capable of revealing the inner workings of the physical universe.
But it took another thousand years before some brilliant and curious 16th-century minds saw the mathematical implications of simple games of chance, and created a working model for what we now know as probability theory. To get an idea of just how big this development was, try to imagine life without probability: no gambling, no insurance, no drug testing, no safe air travel, no traffic control, no banking, no cell phones, no Google, no Internet and—without a doubt—no investing.
The catalyst for all this reflection is the nature of the current bull market in combination with the immense popularity and growth of financial products and investment strategies that encourage investors to focus only on the market and/or its component asset classes: essentially an “all forest and no trees” paradigm where investors know little and care less about the individual components of whatever financial product they own.
This form of investing has become the accepted wisdom throughout the investment world, and its popularity has been built on considerable success. But success often has the nasty habit of sowing the seeds of its own vulnerability, something I have learned both from observation and personal (and painful) experience.
Over the last five years the market has been moving along quite swimmingly and investors have been able to make money by just showing up. During market environments like this it is rare indeed to find a discussion about the importance of getting down to basics. That kind of discussion is in greatest demand only after a severe market decline—especially one where the change in direction has been sudden and dramatic—and investors are left reeling, looking for answers and advice. Of course by then the damage has already been done and whatever prescription is proffered will be merely palliative.
On One Foot
The idea that I can distill all of investing into three sentences is obviously a bit of a gimmick. My goal is to get your attention. Many know the famous story of Rabbi Hillel, who was asked by a cynic to teach him the entire Torah while standing on one foot. Hillel told the scoffer, “What is hateful to you do not do to your fellow: this is the whole Torah, the rest is commentary.”
My point in this little exercise is that the critical lesson from this 2,000-year-old story is eminently applicable to the world of investing: Hillel’s message to the cynic was that the wisdom of even the most brilliant, most learned, most holy person on earth would be ultimately worthless if it didn’t reflect the core principle imbedded in what we all know as the “golden rule.”
Investors who go out into the world without sensible core principles to direct their choices risk finding themselves out to sea without a paddle at the worst possible time. My prescription is to make sure that we are all clear about the “basics” at the start of our journey—so we have plenty of paddles, rudders and sails when we’ll need them most.