Studying history can feel like intellectual candy that offers no practical use to investors who are paid to foresee the future. But once you accept how fragile our assumptions of the future are, you realize that forecasts are the real fluff and history is where the meat is.
Accepting that forecasts have little use doesn’t mean you become a blind fatalist. When you pay more attention to history than forecasts you pick up on the patterns that guide how people respond to unforeseen events, which – given how stable behavior is over time – is the next best thing to knowing what will happen next.
Forecasts rely on knowing when something will occur. Expectations are an acknowledgment of what’s likely to occur without professing insight into when it will happen.
Expectations are healthier than forecasts because they provide a vision of the future stripped of all false precision. If you know a recession will occur at some point, you won’t be that surprised whenever it arrives – which is a huge benefit. But if you assume you know exactly when it will occur you’ll be tempted into all kinds of dangerous behavior, leveraged with overconfidence. And you’ll be shocked when time passes and what you thought would occur hasn’t happened (yet).
“There are times in all of our lives when a reliance on gut or intuition just seems more appropriate–when a particular course of action just feels right.”
Tim Cook, in his Auburn University class of 2010 commencement speech:
In making the decision to come to Apple, I had to think beyond my training as an engineer. Engineers are taught to make decisions analytically and largely without emotion. When it comes to a decision between alternatives we enumerate the cost and benefits and decide which one is better. But there are times in our lives when the careful consideration of cost and benefits just doesn’t seem like the right way to make a decision. There are times in all of our lives when a reliance on gut or intuition just seems more appropriate–when a particular course of action just feels right. And interestingly I’ve discovered it’s in facing life’s most important decisions that intuition seems the most indispensable to getting it right.
In turning important decisions over to intuition one has to give up on the idea of developing a life plan that will bear any resemblance to what ultimately unfolds. Intuition is something that occurs in the moment, and if you are open to it. If you listen to it it has the potential to direct or redirect you in a way that is best for you. On that day in early 1998 I listened to my intuition, not the left side of my brain or for that matter even the people who knew me best. It’s hard to know why I listened, I’m not even sure I know today, but no more than five minutes into my initial interview with Steve, I wanted to throw caution and logic to the wind and join Apple. My intuition already knew that joining Apple was a once in a lifetime opportunity to work for the creative genius, and to be on the executive team that could resurrect a great American company. If my intuition had lost the struggle with my left brain, I’m not sure where I would be today, but I’m certain I would not be standing in front of you.
“Mr. Market is there to serve you, not to guide you.”
Warren Buffett, writing in his 1987 letter to Berkshire Hathaway shareholders:
Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.
Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.
But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”
Ben’s Mr. Market allegory may seem out-of-date in today’s investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising “Take two aspirins?”
The value of market esoterica to the consumer of investment advice is a different story. In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace. In my own efforts to stay insulated, I have found it highly useful to keep Ben’s Mr. Market concept firmly in mind.
Notes: Titan: The Life of John D. Rockefeller, Sr.
Notes from Titan: The Life of John D. Rockefeller, Sr. (1998) by Ron Chernow:
* Rockefeller equated silence with strength: Weak men had loose tongues and blabbed to reporters, while prudent businessmen kept their own counsel. Two of his most cherished maxims were “Success comes from keeping the ears open and the mouth closed” and “A man of words and not of deeds is like a garden full of weeds.”
* Far more than a technocrat, Rockefeller was an inspirational leader who exerted a magnetic power over workers and especially prized executives with social skills. “The ability to deal with people is as purchasable a commodity as sugar or coffee,” he once said, “and I pay more for that ability than for any other under the sun.” Employees were invited to send complaints or suggestions directly to him, and he always took an interest in their affairs.
* At meetings, Rockefeller had a negative capability: The quieter he was, the more forceful his presence seemed, and he played on his mystique as the resident genius immune to petty concerns. As one director recalled, “I have seen board meetings, when excited men shouted profanity and made menacing gestures, but Mr. Rockefeller, maintaining the utmost courtesy, continued to dominate the room.”
* Standard Oil had taught the American public an important but paradoxical lesson: Free markets, if left completely to their own devices, can wind up terribly unfree. Competitive capitalism did not exist in a state of nature but had to be defined or restrained by law. Unfettered markets tended frequently toward monopoly or, at least, toward unhealthy levels of concentration, and government sometimes needed to intervene to ensure the full benefits of competition.
* “Great wealth is a great burden, a great responsibility. It invariably proves to be one of two things—either a great blessing or a great curse.”
* To Rockefeller, the least imaginative use of money was to give it to people outright instead of delving into the causes of human misery. “That has been our guiding principle, to benefit as many people as possible. Instead of giving alms to beggars, if anything can be done to remove the causes which lead to the existence of beggars, then something deeper and broader and more worthwhile will have been accomplished.”
* Rockefeller reviewed every bill that arrived at home and often patrolled the hallways, turning off gaslights. Such habits were not simply reflexive stinginess but were rooted in bedrock beliefs about the value of money.
* “A man’s wealth must be determined by the relation of his desires and expenditures to his income. If he feels rich on ten dollars, and has everything else he desires, he really is rich.”
Notes: Oil: A Beginner’s Guide
Notes from Oil: A Beginner’s Guide (2017) by Vaclav Smil:
* In 2016 motor and aviation gasoline accounted for a third of global refinery throughput. The US share of global gasoline consumption was about 41% of the total, or more than 1,200kg/capita: the country now consumes more gasoline than the combined total for the EU, Japan, China and India.
* Nearly two-thirds of the world’s refined products are now used in transportation (roughly 2.5Gt in 2005) and in the US that share is now more than 75%. Transportation’s dependence on liquid fuels is even higher: in 2015 about 93% of all energy used by road vehicles, trains, ships and planes came from crude oil.
* In 1900 American farmers needed an average of about three minutes’ labor to produce 1kg of wheat, but by the year 2000 the time was down to just two seconds and the best producers now do it in one second.
* The second most voluminous non-fuel use of a refined petroleum product is asphalt.
* Only about 20% of diamonds are sold to the jewellery trade; most of the rest go into drilling for hydrocarbons and metallic ores.
* Record US well depths reached with rotary rigs increased from 300m in 1895 to more than 1.5km by 1916; the 3km mark was reached in 1930, the deepest pre-WWII well was 4.5km (in 1938) and the 6km mark was surpassed in 1950.
* The average depth of new US exploratory oil wells increased from about 1,460m during the 1950s to nearly 2,300m during the first decade of the twenty-first century.
* Fracking fluid is about 90% water. Most of the rest is sand, and additives (hundreds of substances have been tried) usually make up less than 0.5% of the volume but they contain a mix of chemicals (acids, corrosion inhibitors, gelling agents, surfactants, biocides) that should never be allowed to contaminate drinking water. Usually this is not a problem as fracking takes place far below the aquifers, and steel and cement in properly finished wells should prevent any contamination closer to the surface.
* Moving Alaskan oil 3,800km by tanker from Valdez to Long Beach in California requires energy equivalent to only about 0.5% of the transported fuel. And a 300,000dwt supertanker needs an equivalent of only about 1% of the fuel it carries in order to travel more than 15,000km from Ra’s Tanūra, the world’s largest loading oil terminal on the Saudi coast of the Persian Gulf, to the US East Coast.
* By far the largest oil storage is the US Strategic Petroleum Reserve that began to fill in 1977 with imported Saudi oil. Crude oil is stored deep underground in four massive salt caverns along the Texas and Louisiana Gulf Coast. The maximum capacity is 713.5Mb and the reserves stood at 685Mb in June 2017, representing about 10% of US annual oil consumption.
* The chances of ending the fossil fuel era in a matter of two or three decades appear quite unrealistic: in 2017 the world derived about 85% of its primary commercial energy from the combustion of fossil carbon.
“There’s nothing quite like a convivial evening wrapped around a pint to give you health, happiness and a sense of well-being.”
Like all monkeys and apes, humans are intensely social. We have an urgent desire to schmooze and an awareness that alcohol helps our cause. Friendships protect us against outside threats and internal stresses, and this has been key to our evolutionary success. Primate social groups, unlike most other animals, rely on bondedness to maintain social coherence. And for humans, this is where a shared bottle of red wine plays a powerful role.
So, if you want to know the secret of a long and happy life, money is not the right answer. Get rid of the takeaway in front of the telly, and bin the hasty sandwich at your desk — the important thing is to take time out with people you know and talk to them over a beer or two, even that bottle of Prosecco if you really must. There’s nothing quite like a convivial evening wrapped around a pint to give you health, happiness and a sense of well-being.
“Who knows what you might learn from taking a chance on conversation with a stranger?”
Timothy Leary (often attributed but unsourced):
Admit it. You aren’t like them. You’re not even close. You may occasionally dress yourself up as one of them, watch the same mindless television shows as they do, maybe even eat the same fast food sometimes. But it seems that the more you try to fit in, the more you feel like an outsider, watching the “normal people” as they go about their automatic existences. For every time you say club passwords like “have a nice day” and “weather’s awful today, eh?”, you yearn inside to say forbidden things like “tell me something that makes you cry” or “what do you think deja vu is for?”. Face it, you even want to talk to that girl in the elevator. But what if that girl in the elevator (and the balding man who walks past your cubicle at work) are thinking the same thing? Who knows what you might learn from taking a chance on conversation with a stranger? Everyone carries a piece of the puzzle. Nobody comes into your life by mere coincidence. Trust your instincts. Do the unexpected. Find the others.
“Stacked up, the Stasi’s complete files reached 125 miles.”
Tina Rosenberg, writing in The Haunted Land: Facing Europe’s Ghosts After Communism:
The Stasi complex on Normannenstrasse in the Lichtenberg district consisted of 41 brown concrete buildings. In addition, the Stasi possessed 1,181 safe houses, 305 vacation homes, 98 sports facilities, and 18,000 apartments for meetings with spies. The Stasi had a budget of 4 billion East German marks. It had 97,000 full-time employees—after the army, it was East Germany’s largest employer. There were 2,171 mail readers, 1,486 phone tappers, and another 8,426 people who monitored phone conversations and radio broadcasts. In addition, there were about 110,000 active unofficial collaborators and perhaps ten times that many occasional informants. The Stasi kept files on 6 million people. There were 39 separate departments—even a department to spy on other Stasi members. A master file with a single card for each Stasi employee, collaborator, and object of surveillance stretches for more than a mile—the cards for people named Müller alone reach a hundred yards. Stacked up, the Stasi’s complete files reached 125 miles. They weighed fifty tons per mile; in total, 62,500 tons.
Notes: The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War
Notes from The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War (2016) by Robert J. Gordon:
* Advertising developed in part as a result of mass production; likewise, it was said that advertising made mass production possible. Firms decided that there was a limit to attracting customers through lower prices, and they tried the alternative strategy of increasing volume by brand-centric advertising. Although advertising began in the late nineteenth century with the development of the first branded products, its true explosion came in the 1920s, when it became increasingly tied to the newly invented radio.
* Electric lights are an example of a technology that had a great burst of innovation early, in this case 1880–1920, and then stood still afterwards. Although the fluorescent bulb had come to dominate lighting in commercial and industrial settings by 1950, virtually nothing changed in home illumination from 1920 until the development of the compact fluorescent bulb after 1990.
* The current system of airport security all over the world represents an overreaction to the September 11, 2001, hijackings. There was only one weakness in the U.S. airline security system on September 11, and this was that the cockpit doors were flimsy. Within days, they were replaced by completely secure doors that nobody could break through. Although the security issue was completely solved within a week, fourteen years later billions of dollars per year of passenger time continues to be wasted in unnecessary additional security precautions. The pre-2001 security system, based on a quick walk through an X-ray machine to check for guns and metal weapons, would be enough.
* If any year can be anointed as the beginning of the Internet revolution, it is 1995. The introduction of Windows 95 was a sensation, creating long lines of eager buyers waiting for hours in front of stores that would sell it before the doors opened on August 24, 1995. This version of Windows represented the transitional moment in the history of the Internet in that Microsoft’s Internet Explorer, a web browser derived from Mosaic, was available as an add-on to Windows 95.
* Virtually every firm making consumer goods (except for basic food and clothing products) had been forced to make something else during World War II, and every one of these producers learned to be more efficient from the process.
* The unrivaled autonomy of the medical profession began to erode after the 1950s. As hospitals became larger and more complex, administrative control fell increasingly into the hands of professional administrators. Patients also began to challenge the authority of the medical profession. While “for the most part, the authority of the doctor was unquestioned” in 1960, with the surgical profession even earning such high praise as being called a “religion of competence,” by the early 1970s patients were demanding greater say in how they were treated. What had always been a tradition of “doctors know best” changed in 1972 when a federal appeals court in Washington, D.C., for the first time established a legal requirement for informed consent. “According to the new standard, the physician had to tell the patient whatever ‘a reasonable person’ would want to know in order to decide whether to accept the treatment.” In 1973, responding to increasing pressure from healthcare consumers, the American Hospital Association came out with a Patients’ Bill of Rights.
* One of the most important improvements in American industrial efficiency was the establishment by Herbert Hoover of the National Bureau of Standards. Its aim was to create a system of uniformly sized parts, down to screws and bolts, aimed at “simplification of practice, elimination of waste, conservation of materials, minimum training of workers, reduction and savings in supply purchasing and unwieldy inventories, defeat of confusion, and speed in production.”
“The lottery’s only objective is to maximize the funds you pay for educational activities.”
One should remember that the only objective for the Lottery, anywhere in the world, is not to make you rich. Contrary to their advertisements, the objective is not to show you a good time. Wasting your money is never a good time. The lottery’s only objective is to maximize the funds you pay for educational activities. The lottery does this by taking all of the proceeds, then first diverting nearly 45% of it towards educational benefits, and also towards store commissions and advertisements designed to trick you into spending more into the system. Say you played 292 million times with hypothetically a $1 ticket, and then won exactly one time. In this case your reward would not be anywhere close to $292m. The funnel would start at a gross level of just 55% of $292m (or a loss of $131m on your ticket purchases since 45% was skimmed straight away to the government). And then your net amount would still be less than this 55% gross payout, since this reward is again taxed as income. There is nothing sexy about this arrangement; it extorts a non-tax deductible dollar from you and many others, who could least afford it. And each time putting offering 55 cents into a community savings jar, until one day that amassed jar is given to basically just one person at random (but not before the government comes back to tax that jar as “income”). The whole scheme is an educational tax for those who instead could use a free education in probability theory.
Lottery is basically a form of additional tax you (legally) get to choose not to pay.