A wonderful play on words with the Dow Jones Industrial Average (DJIA). This book is more psychology and philosophy focused than purely about investments, which is a familiar trend with my favourite investment books. Goodspeed takes us back to an old Chinese philosophy, Taoism, which contrasts against the more dominant Chinese philosophy of the past few hundred years, Confucianism. Confucianism focuses on the worship of ancestors, a strict conception of morality, etiquette, the importance of rules and names and highly values knowledge through tireless study of ancient texts. As an example, Confucian civil service exams were renowned for being grueling multi-day events under incredibly tough conditions with little access to food, water and sometimes even basic sanitation was prohibited. These exams were so extreme that they drove some pupils insane.
By contrast, Taoism focuses on removing things to attain wisdom, looking less favourably on knowledge just for the sake of knowledge. Rather than focusing on opposing dualities like heaven and evil, Taoism focuses on the interrelationship of all things. Through this lens, good and evil can be seen as complementary poles that cannot exist without each other. An encouragingly realistic approach! I dislike the notion that people are inherently good or evil and often wonder whether both concepts and their interdependence should be embraced to attain a better understanding of the nature of people. Taoism recommends being humble, flexible and adaptable, avoiding forced action and creating success through attitude - summed in the concept of “whole-brainedness”.
Goodspeed relates these concepts to investments by arguing we need a holistic “whole-brained” approach to create investment success.
We could argue that Western thought at has become caught up in scientific methodology. Emphasis on the analytical left-brain is in some senses understandable as many traditional conceptions of economic prosperity are backed by scientific and analytical discoveries. But as with anything is over-emphasised in the macro realm, there are large unintended consequences. At the extreme, if something cannot be measured or counted it cannot be believed. Society has developed an “awe for experts” consistently diverting responsibility to someone else in the hope that they will be better able to take care of our lives than ourselves. This concept reminds me of modern socialist thought which is frequently paternalistic and nannying. The author also argues that the information overload of the modern information age contributes towards this bias because we are unable to trust our right-brained senses with so many stimuli.
Many analysts use lengthy data analytics to create the illusion of knowledge where none truly exists and as a result are continuously surprised by changing conditions. As an analyst who spent years studying technical academic style research at university but also spent years understanding the praxeological approach of Mises and more recently Nassim Taleb, these concepts really resonate with me. Many institutions place far too much focus on detailed mathematical models that have limited relevance in the real world where the assumptions often prove unrealistic. Not only are these models difficult to implement but they become dangerous in the hands of policymakers who adopt them to fit a political narrative. I think Taleb would argue that the modern day mathematical and over-engineered approach to risk management can create risk rather than prevent it.
Of course, analysis remains crucial in investments but often the skill of asking the right question is underestimated. We can quickly learn a huge amount from other analysts by asking the right questions. Feelings tend to precede logic so the intuitive right side of the brain often asks the questions while left side answers them. There are many examples of great investment ideas originating from ordinary personal observations where the individuals merely asked the right questions and displayed courage to trust in their own wisdom. The point is rammed home by the experience of “visionaries” who are not people who see things that are not there; but people who see things that others do not see. In hindsight most ingenious discoveries display embarrassing simplicity not complexity.
In an effort to harness the right brain people often leave note pads and pens next to the bed because sleep usually shuts off the left brain, while the left brain continues in our dreams. Deferring judgement on important matters is also advisable, particularly for left-brained people, who are more likely to make a decision based a good piece of evidence but in so doing, might negate right-brain participation from decision-making.
While a whole-brained approach to decision-making is desirable, there is often good reason for dominance of one side of the brain over the other. If not, we could end up like “Buridan’s Ass”, the symbol of indecisiveness, who starved to death equidistant between two bales of hay. That being said, we must be aware of our biases and try to contend with them. In fact, knowing your bias can turn a weakness into a strength. In investments one can often offset bias by interacting with others who have a complementary dominance. Given my slight bias towards my left-brain I’ve reflected on the various complementary people in my investment team. I already have greater appreciation of their influence and am thinking of ways to harness the collaboration. I need to trust my right-brained instincts and enhance them. I’ve identified reading fiction, attending theatre, thinking while walking and abstract conversations with friends as avenues to try attain greater whole-brained decision making skills.
I love the way Goodspeed shifts gears and includes pertinent quotes from different fields of interest. In the teachings of Don Juan, the world’s most famous lover, there were 4 enemies to overcome in order to be a “man of knowledge” – in my case “a wise investor.” Fear, Clarity, Power and Old-Age. If a man runs away and avoids investing, nothing will happen except that he will never learn. You can read many books about investment theory but you can never really learn unless you become a player. Fear is overcome by clarity, which becomes the second enemy. Knowledge can be an illusion. It is dangerous to feel too secure in such an uncertain world, particularly when it comes to investments. One who overcomes clarity possesses power but this too can be an enemy. Being defeated by power is like the feeling that one was never able to handle it, which is a pretty self-defeating emotion. To conquer overzealous power you have to defy it deliberately. You have to realise that the power you seemingly conquer when investments succeed was never really yours but merely a fleeting moment in time. Old age is a serious enemy to becoming a wise investor. We must resist the unyielding desire to rest, remain slightly uncomfortable and constantly learning. This form of old age is unrelated to physical age but tiring in concentration where you stop questioning the changing world.
Goodspeed makes an interesting observation about the world’s guru worship syndrome. Taoism noticed that “nature alternated dynamically” and similarly the financial market alternates in a cycle of fortune and misfortune. Chinese does not actually have a word for crisis but rather a two word idiom; crisis equals danger and opportunity. Through each cycle there are those who sense the changes, benefit from the opportunity, make a bountiful harvest and these occurrences can lead to guru syndrome where Wall St. attaches guru status to individuals. But these gurus can easily become complacent and lead their followers off a cliff in the next cycle – upon which the public moves on to the next guru. Following gurus in each cycle is as unsustainable as following the herd. Sustainable investment strategies require independent thinking.
Another great take-home for me was the recommendation to view everything in portfolio terms. Research must be directly towards the investment outcome rather than some independent think-tankesque goal. Coming from a pure research background a rigorous portfolio focus is difficult but my experience already tells me that this is a key element and one I need to work on. Important to note that Goodspeed’s recommendations are targeted at an audience who want to make their own investment decisions. It is also possible to employ a professional to implement on your behalf. Here’s his advice under those conditions (particularly useful for manager research):
- Insist on meeting the person managing your money
- Ask what role personal judgement plays. Avoid mechanical decision makers
- Avoid investment scholars that are too articulate and create a barrier of complex words between you and your investment. Conversely you don’t want someone who only feels and senses – analysis is still critical
- Your account must be meaningful for the manager
- Find out about the past mistakes the manager has made. Mistakes always exist and if they haven’t happened yet, you should be wary. The Chinese have an ancient saying, “ one disease, long life; no disease, short life”
- Don’t be impressed by investment records alone. Markets are cyclical and recent positive returns can easily turn into negative future returns.
- If the managers golf handicap is below 6, either they are lying or spending too much time on the golf course
- Try to determine the degree of “whole-brainedness”
- Once chosen, give the manager enough time. Chopping an changing managers isn’t in your best interests.
All in all, a great short book with some different but practical thinking that strongly resonated with ideas I’ve been toying with for a few years. Goodspeed finished off with his investment alphabet of recommendations, which I’ll return to frequently:
A. Be a light sleeper
Believe in the wisdom of insecurity. Investors must be sensitive to changing conditions
B. Be your own judge of value
Bargains are rarely advertised. You need to make the value judgement, develop conviction and display courage
C. Do not be too sure
When you are most certain you are right, it is time to become the most nervous.
D. Stay diversified
E. Avoid recommendations of experts
Experts’ advice is disseminated widely, giving no real advantage. Bear in mind that many experts are “half-brained”
F. Value the art of selling
Selling is the highest art form of investing
G. Be comfortable with risk-taking
H. Stick to what you know
I. Use value guidelines
Yardstick/guidelines are useful tools. E.G. level relative to P/E.
J. Take your losses
K. Don’t procrastinate decision-making
L. Don’t churn your account
Lao Tsu, “In making furniture, the more you carve the wood, the weaker it gets”
M. Don’t fight the tape/fad/trend
Trends might be false, unsustainable or wrong but it is wiser to wait for them to pass than fight them.
N. Don’t just hope
Hope is a false god and can be an investors greatest enemy.
O. Avoid insider information
Follow a tip from a company’s president and you will lose half our money. Follow a tip from the chairman and you will lose all of it.
P. When you feel out of synch, don’t play
Q. Avoid formula investing
R. Trust your vision
Without vision investors perish.
S. Mistakes are ok
T. Be comfortable holding cash
U. Use both brains
V. Bounce your ideas off others
W. View yourself as a typical consumer
In reality humans, regardless of nationalities/backgrounds are more similar than different. Often the activities of you and your family are reflective of the universal consumer and might present investment opportunities.
X. Coincidence is more than chance
Y. Avoid the pied piper
Z. Be patient but act decisively
Sound Money 