What Should Really Guide Your Investment Thinking in 2018

Sometimes new information is found that doesn’t quite fit so neatly into a paradigm, and scientists, being human, often shoehorn the data into the existing narrative rather than consider the fact that the paradigm is inadequate to explain the new stuff (and might need to be revised or even scrapped). 

Wolcott came to paleontology holding to this popular narrative: Evolution is a predictable and gradual progression from the simple to the complex. One that can be analogized to a “ladder of progress” with us (human beings) on the top rung.

The extraordinary uniqueness of the fossils notwithstanding, Wolcott did not have the time for a proper evaluation, so he shoehorned the discovery into his existing narrative and went back to his duties at the Smithsonian. The fossils gathered dust in the basement for over 50 years until three other scientists decided that they were worth a second look.

The narratives we carry with us help us make sense of the world. They help filter critical data: what is true and what is false, who can be trusted and who can’t, what is important and what is irrelevant, whether we are doing something productive or just wasting our time.

But narratives don’t have an inherent fail-safe mechanism — there are perfectly normal and functional people who hold fast to narratives built on half-truths or even complete fabrications.

What these unhinged versions teach us is that while narratives can be incredibly useful, if we are not vigilant — instead of making sense of the actual world, narratives can just as easily make sense of a make-believe one.

Harry Whittington, Derek Briggs and Simon Conway Morris did not come to Wolcott’s find with a different evolutionary narrative. Unlike Walcott, they spent nearly twenty years intensively studying the fossils. 

Gradually the narrative of a steady evolution of life, of a progression from the simplest life forms to the most complex could not explain what was emerging from the evidence.

The story told by the Burgess Shale fossils reaffirmed natural selection’s role in evolutionary science. But it added to the equation major, sometimes catastrophic extinctions. 

Life started, flowered and expanded. Species that were best suited to the environment thrived and became dominant. Then some unpredictable externality (global warming, or cooling, massive asteroid strike) changed the equation. 

Species that had thrived in one environment couldn’t survive in the next. This meant that the species dominant in today’s world are the result of a combination of natural selection and pure luck.

The narrative of a straight line of progression from simple to complex doesn’t address the reality of how life has evolved, been decimated, recovered differently in a new environment, evolved again, then decimated — at least a few dozen times.

The lesson of history imbedded within the fossils of the Burgess Shale was this: If you could rewind the tape back to the beginning of life, and rerun evolution a million times, the odds of any one of those outcomes being similar to life as we know it today is close to zero. 

That lesson gets in the way of our instinctive need for certainty and reveals the flimsiness of the simple narratives we create to make sense of the past.

In their recent book, “Cents and Sensibility,” Gary Saul Morson and Morton Schapiro explain: “That simplicity is a (sort of) historical optical illusion.  The problem is that history is full of accidents and other non-systemic factors — without which the ‘end result’ i.e., where we are today, would look very different.”

With a warped vision of the past, it’s no wonder our narratives can’t clarify the future.

Daniel Kahneman and Amos Tversky wrote: “We often decide that an outcome is extremely unlikely or impossible, because we are unable to imagine any chain of events that could cause it to occur.  The defect, often, is in our imagination.”

During my early years in the investment business, I was fortunate enough to meet some outstanding investors. None of them were famous – just regular people. 

But they shared some important characteristics.

They didn’t spend any of their time following the market, or care what my firm’s analysts thought. They invested only in things they understood. They shared a detachment from the investment world that allowed them to ignore news, market fluctuations and other distractions that vied for their attention.

It wasn’t an active choice; they were just too busy living their lives. As a result, they had the patience to wait until something resonated — and when it did, they were ready to act with confidence.

The year-end review can be a valuable and profitable exercise, or it can be a distraction that prevents us from seeing what is right in front of us. Those regular people I met years ago taught me that too much attention to investing clouds judgment — and that perspective requires distance.

If meaningful investment lessons can be distilled from the study of fossils, then a healthy imagination is the key to finding more. 

Enjoy the year-end reviews, but let personal computer pioneer Alan Kay guide you into 2018: “If you want to predict the future, invent it.”