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How to Dive Deep Into Investment Knowledge

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On May 22, 1968, the nuclear submarine USS Scorpion disappeared somewhere in the North Atlantic. John Craven, a naval scientist who specialized in finding objects lost at sea, put together a team to find out what happened.

As related in James Surowiecki’s “The Wisdom of Crowds,” his team was small but diverse, including mathematicians, submariners and salvage experts. Working with only fragments of information, Craven tasked each team member to develop independent scenarios about what might have happened, including an estimate of the likelihood of each scenario. To lighten things up, he set up the project as a competition, with bottles of Scotch as prizes.

Surowiecki writes that there was not enough information for anyone to know definitively where or why the submarine went down. “But Craven believed that if he put all the estimates together, building a composite picture of how the Scorpion died, he’d end up with a pretty good idea of where it was.” That turned out to be an incredible understatement.

Despite the fact that they were operating with “tiny scraps of data,” their collective estimate of where the submarine sank was just 220 yards from where it was found. Craven’s gathering of individuals with disparate backgrounds, adding a seemingly superficial incentive, and running everything through Bayes’ Theorem (to help eliminate pre-existing biases) helped the Navy find a sunken submarine in the middle of the ocean.

The story demonstrates that when information is perceived in a new and/or creative way, connections not previously understood (or valued) appear — and those now meaningful relationships increase our knowledge, with sometimes spectacular results.

The activity we call investing occurs within a framework of connections: relationships between people, institutions, ideas, emotions, behaviors, information and incentives — the list is almost endless.

Thinking only of my own experience: I have relationships with each of my clients, their ideas, their expectations and their trust. I have a connection with my professional drive for excellence, for performance and for the growth of my business. And (of course) I have important relationships with my family, my community and my friends.

I have a connection with my investment philosophy and my efforts to reflect it sensibly in my portfolio decisions. I have an ongoing connection to the financial markets, as they represent a window into the collective thinking of investors. I have a relationship with the news and all other sources of information, in my ongoing struggle to separate what’s truly important from that which may be more dramatic but temporary. It’s a lot to juggle, but we’re born with the capacity to handle it all, and then some.

Brain Relations

In his book “A Universe of Consciousness,” Nobel laureate Gerald Edelman wrote of the brain’s amazing connective capacity: “If we considered the number of possible neural circuits, we would be dealing with hyper astronomical numbers: 10 followed by at least a million zeros. (There are 10 followed by 79 zeros, give or take, of particles in the known universe.)”

Making connections is easy; making sure they are good connections is another story. The brain exploits its connectivity with plasticity. That means it can create new pathways to replace old ones lost or damaged, or because you learned something new. But plasticity also means that if you have a bad habit (say, a drug habit) — the brain will gladly make pathways reinforcing that unhealthy behavior.

I suffer periodically from swimmer’s shoulder, a form of tendonitis caused by bad technique reinforced by nearly a million repetitions. I know how to correct it, and I have thousands of correct strokes under my belt. But it will be tens of thousands of more strokes before the old neural pathways will be replaced by new ones.

Thanks to the insights of Thomas Kuhn (“The Structure of Scientific Revolutions”), we know that scientists are as vulnerable as anyone to perceptual ruts that inhibit the growth of healthy new connections and new knowledge. Science spends most of its time operating within a paradigm — i.e. the currently accepted way (scientifically speaking) of understanding how things relate to each other.

At some point, however, someone observes an anomaly — something that can’t be explained by the existing paradigm. This is the proverbial sand in the oyster. Most experienced scientists perceive the anomaly only as an irritant; they cannot envision the pearl, and thus confirm Max Planck’s famous observation: “Science advances one funeral at a time.”

Achieving clarity and maintaining perspective in an investment world full of noise and distraction is an ongoing challenge. The acting paradigm when I started working was that successful people were informed people — and so began my daily ritual reading The New York Times and The Wall Street Journal. After a few decades of this practice I was successful and well-informed. But I realized I was no wiser for the experience. Rolf Dobelli, author of “The Art of Thinking Clearly” explains: “The important stories are non-stories: slow, powerful movements that develop below journalists’ radar but have a transforming effect. The more “news factoids” you digest, the less of the big picture you will understand.”

My brain had been making and sustaining the pathways needed to support decades of my daily reading behavior. “The more news we consume, the more we exercise the neural circuits devoted to skimming and multi-tasking while ignoring those used for reading deeply and thinking with profound focus.” Dobelli then poses an important question: “Information is no longer a scarce commodity. But attention is. You are not that irresponsible with your money, reputation or health. Why give away your mind?”

Reading Habits

The decisions we make as investors today have to be relevant within the context of the rest of our lives, which for many of us can mean decades. Over the years I worked very hard to keep clients focused on that critical relationship. But at some point I realized that if my attention, my neural circuitry and my thinking were being reinforced by copious amounts of day-to-day news, I was compromising my own ability to provide sound and appropriate long-term advice.

I decided to change my connection to the news — to make it healthier. Knowledge, perspective, experience and wisdom are attributes built on a broad and diverse foundation, so I didn’t have to stop reading the news; I just needed to start reading other things. There was no plan; my curiosity drove my choices. I started to ask friends and acquaintances what they were reading and when something piqued my interest I read it. I didn’t put a boundary around this, absorbing news articles, essays, poetry, novels, investing, history, psychology. If I was moved to turn the page, I did. If not, I didn’t.

All experience changes our perspective in some way. What I discovered from my unstructured experiment with reading was that seemingly disparate and unrelated things can be connected in profound and unexpected ways. As a result, I might find myself reading something in the daily news, and it would remind me of an idea from a book about investing I had read a few years ago — and that related to something else I had read in a book about evolutionary biology more recently, which was slightly reframed in a book about diet that I had not yet finished.

Like Craven and his motley team, investors are all operating with tiny scraps of data. The lesson from his process is that by spreading a wide perceptual net we can make new, even unique, connections. While we are living in an age of information, what makes that information valuable to us are the relationships we discover within it. Knowing that there are atoms is information; knowing how atoms interact is knowledge.