Megan Fraser
Reuben Beelders
May 2024
“’There is more joy in heaven over one sinner who repents than over 99 people who have nothing of which to repent, according to Luke’s Gospel.’ Similarly, in a rather more mundane way, there appears to be more joy on Wall Street over one bear who capitulates than over 99 bulls who were positive all along.
That might explain the fascination with the news that Mike Wilson, chief equity strategist at Morgan Stanley, has increased his year-end target for the S&P 500 from 4,600 to 5,400. That’s a big leap that came accompanied by a lengthy explanation.”
This is the opening statement of John Authers’ Points of Return on Tuesday, 21st May 2024 based on Bloomberg’s headline:
ONE OF THE LAST BIG BEARS ON WALL STREET TURNS BULLISH ON US STOCKS
Mainstream thinkers and institutions commonly show an aversion for outliers; outliers challenge established norms and, above all, consensus, which can be unsettling and disruptive. This Wall Street headline illustrates the significant fascination and attention given to a bear market pessimist who turns bullish, joining the herd. Mike Wilson’s shift from a bearish to a bullish stance, accompanied by the detailed explanation, garnered more attention than the steady optimism of other analysts, highlighting how deviations from the norm, especially by influential figures, capture the collective imagination and attention of the financial community.
Furthermore, it reveals that when an alternative thinker – representing heterodoxy – capitulates and aligns with the prevailing consensus – representing orthodoxy – they are welcomed into the fold with notable enthusiasm. The shift validates the mainstream’s view and reinforces the authority/superiority of the orthodox perspective.
Orthodoxy and heterodoxy represent contrasting perspectives within a given context. Orthodoxy refers to adherence to established or accepted beliefs or practices, while heterodoxy implies deviation from these established norms, pursuing and presenting alternative or non-conformist views that challenge the mainstream. These perspectives play a crucial role in shaping conversations, belief systems, and practices, influencing how ideas are perceived and accepted or rejected within a given group.
John Authers goes on to say, “That raises the issue of whether it should matter if people change their mind in response to altered facts. Most of us do, and in investing the greatest winners tend to be those who accept and correct mistakes quickly. As behavioral research shows, this is very hard to do, and those who can manage have a big advantage over everyone else. Meanwhile, never making any mistakes is not a viable strategy.”
In order to be in a position to change our minds, we must first have the capacity and the willingness to embrace the possibility of another view. This open-mindedness does not always come naturally or easily to us as humans, as commented by John Authers.
“When the facts change, I change my mind – what do you do, sir?”
― John Maynard Keynes
In Charlie Munger’s address, The Psychology of Human Misjudgment, he identifies biases that, while sometimes useful, tend to mislead. These include the Liking/Loving Tendency and the Overoptimism Tendency.
The Liking/Loving Tendency describes how humans and animals are naturally inclined to form bonds of affection based on initial positive interactions. This tendency, seen in creatures like newly hatched geese and human infants, drives individuals to seek acceptance and approval throughout life. It can lead to a biased perception of faults, favouritism, and even distortion of facts to maintain the status quo.
The strength of these bonds and the implications of their attachment are vividly illustrated in the movie, Fly Away Home. The movie is based on a true story and revolves around a young girl named Amy. After her mother’s death, Amy moves to Canada to live with her estranged father, Thomas. They discover a nest of abandoned goose eggs which Amy decides to care for. When the goslings hatch, they imprint Amy as their mother. To teach the geese to migrate south for the winter, Amy and her father use an ultralight aircraft to lead them on their journey.
The Overoptimism Tendency is the inclination to believe overly positive outcomes and to expect favourable results, even when there is no assurance of such beliefs. The Greek orator Demosthenes said, “What a man wishes, that also will he believe.” This tendency leads people to overestimate their chances of success and underestimate risks, often driven by wishful thinking. It is what leads to hope-based decisions, such as buying lottery tickets or believing in unrealistic business ventures or trusting that your portfolio manager is not vulnerable to sentiment or emotion in managing their fund. To neutralise this tendency, it would be wise to make considered, realistic assessments, rather than relying on instinctive optimism and following the crowd. A fixed set of guidelines – rules – would be effective in providing a disciplined framework for decision-making, helping to mitigate risks and enhance the potential for consistent returns.
These tendencies, along with others highlighted by Mr. Munger, are instrumental in recognising and addressing our own biases. Often, these biases become more apparent in binary situations. Consider which of the following options best reflects your self-perception and how you would choose to be recognised:
48 Laws of Power: This book by Robert Greene is a guide to gaining and maintaining power. It distills three thousand years of the history of power into 48 essential laws, drawing from the philosophies of Machiavelli, Sun Tzu, and Carl Von Clausewitz and from the lives of figures ranging from Henry Kissinger to P.T. Barnum. Its provocative advice and keen analysis make it a popular yet controversial manual on power and strategy; to the degree that it is banned in many U.S. prisons. Prison authorities fear the book could undermine rehabilitation efforts and security by encouraging deceit, cunning, and power struggles, posing a threat to the stability and safety of the correctional environment. Every law, though, has one thing in common: an interest in total domination. People magazine proclaimed it to be beguiling and fascinating!
OR
The Thirteen Necessary Virtues: Benjamin Franklin outlines these virtues in his autobiography, viewing them as essential for individual and societal well-being.
Below is condensed summary of both:
Although many of us aspire to be perceived as being seen to be living out Mr Franklin’s virtues, acknowledging the coexistence of both sets of principles within ourselves—virtues and power dynamics—requires confronting the complexity of human nature. This acknowledgment can be uncomfortable as it challenges our self-image. Furthermore, societal norms often prioritise and reward one set over the other, further complicating our internal reconciliation of these principles.
It’s also societal norms that influence how we approach other sensitive topics, nuclear power for example. Nuclear power is complex and shouldn’t neatly fall into a simple “for” or “against” category, because of its emotionally charged nature. Despite fundamental concerns about the safety of nuclear energy, its potential benefits, including providing clean energy, reducing greenhouse gas emissions, and fostering economic growth, cannot be ignored. But with enduring images of Chernobyl and Fukushima imprinted on people’s minds, convincing them otherwise may prove challenging.
Like nuclear energy, rules-based investing is often overlooked and misunderstood. While conventional investing methods are familiar and widely practiced, rules-based investing offers compelling advantages such as systematic decision-making, risk mitigation, and the potential for consistent returns.
Having shown that the interface between heterodoxy and orthodoxy offers profound insights into various aspects of life, we are able to recognise the coexistence of Benjamin Franklin’s virtues and Robert Greene’s laws of power within us. The debate over nuclear power emphasises the need to move beyond binary viewpoints. In investing, traditional methods are entrenched as the orthodox route, yet rules-based investing offers a heterodox alternative, emphasising systematic decision-making, risk management, and consistent returns.
By integrating the insights from both heterodox and orthodox perspectives, we can develop a more nuanced and effective approach to complex issues. Embracing transformation is key. Yet, the integration process often poses the greatest challenge. It demands vulnerability, a willingness to broaden our horizons, and the openness to change our decision-making process.
In “Think Twice: Harnessing the Power of Counterintuition,” Michael Mauboussin emphasises the importance of adopting a more analytical and less intuitive approach to decision-making. To change your decision-making immediately, Mauboussin suggests:
- Recognise Biases: Identify and understand common cognitive biases that can cloud judgment, such as the liking/loving and optimism tendencies referred to earlier.
- Seek Diverse Perspectives: Incorporate different viewpoints to avoid groupthink and improve decision quality.
- Use Probabilistic Thinking: Assess the likelihood of outcomes rather than relying on gut feelings.
- Implement Checklists: Use structured checklists to ensure all critical factors are considered.
- Learn from Mistakes: Analyse past decisions, especially failures, to improve future choices.
- Adopt a Long-Term View: Focus on long-term consequences rather than short-term gains.
In using these strategies, one can make more informed, rational decisions and reduce the influence of immediate, emotional reactions.
BIG FINISH: Enter Prometheus! A Titan in Greek mythology, Prometheus defied Zeus by stealing fire from the gods and giving it to humanity. This act of rebellion provided humans with the essential gift of fire, symbolising knowledge, enlightenment, and progress. However, as punishment for his defiance, Zeus sentenced Prometheus to eternal torment. He was chained to a rock, and each day an eagle would come to eat his liver, which would then regenerate overnight, only to be eaten again the next day. This cycle of suffering continued until Prometheus was eventually rescued by the hero Hercules.
Prometheus embodies foresight, innovation, and the courage to challenge norms for the greater good. His legend, which highlights his willingness to endure severe punishment to give humanity the gift of fire, symbolises knowledge, progress, and defiance against the status quo.
Similarly, modern investors can benefit from a rules-based approach and counterintuitive thinking. Traditional methods dominate finance, but like Prometheus, forward-thinking investors should consider unorthodox strategies for consistent, disciplined decision-making.
As an investor, embracing our inner Prometheus means means making space for a data-driven approach, rational risk management and long-term thinking, harnessing the power of innovation and critical thinking, daring to defy conventional wisdom, and ultimately making informed, strategic decisions.
“Progress is impossible without change, and those who cannot change their minds cannot change anything.”
George Bernard Shaw
