Megan Fraser – BD & Marketing

Reuben Beelders – Chief Investment Officer

October 2023

Abraham Wald was a Romanian-born mathematician and statistician who made significant contributions to the fields of statistics and decision theory during the mid-20th century. He died on December 13, 1950, in a plane crash in India…ironically.

Wald is perhaps best known for his work on statistical quality control and his involvement in the development of operations research during World War II. One of his most famous contributions is related to a problem known as “survivorship bias.”

During World War II, Wald worked as a statistician for the Statistical Research Group at Columbia University, a group tasked with solving various statistical and operational problems for the U.S. military. One of the problems they worked on was improving the survivability of military aircraft.

The conventional wisdom at the time was to reinforce the parts of the aircraft that showed the most damage when they returned from missions. However, Wald argued that this approach suffered from survivorship bias. The planes that returned had survived despite being hit in those areas, whereas the planes that didn’t return had likely been hit in critical areas…areas that needed reinforcement.

Wald’s insight was to focus on the areas of the aircraft that were not hit on the returning planes. These were the areas that needed reinforcement because planes hit there were not making it back. This counterintuitive idea ultimately led to improved aircraft survival rates.

In essence, Wald emphasized that focusing solely on the surviving planes was misguided. The crucial concept here is “living to fight another day.” Wald’s approach highlighted the importance of considering not only what had survived but also what hadn’t, as the missing data could reveal critical vulnerabilities. Simply put, what seems to be an obvious solution may not in fact be so. This principle extends beyond wartime strategies, emphasizing the need to account for both successes and failures when evaluating risks, making decisions, and drawing conclusions in various fields.

Here are two more stories that illustrate the concept of “living to fight another day”:

The story of Fabius Maximus:

During the Second Punic War the Carthaginian general Hannibal inflicted devastating defeats on the Roman armies. The Roman Senate appointed Quintus Fabius Maximus as dictator. He employed the “Fabian tactics” strategy: instead of engaging Hannibal in direct, open battle – a tactic that had led to Roman losses – he focused instead on harassing supply lines and hit-and-run tactics to wear down the Carthaginian army. The goal was to conserve Roman forces and outlast Hannibal. Initially criticized, this strategy eventually worked, as Hannibal’s forces weakened, allowing Rome to regroup and defeat him at the Battle of Zama in 202 BC, ending the Second Punic War.

This story has a twist:

Simone Biles, widely regarded as the greatest gymnast of all time, pioneered the extraordinary Biles II vault. In a bold move, every time she performs this groundbreaking maneuver, she willingly starts with a penalty (points deduction) – her coach, Laurent Landi, stands ready as a precaution to avert potential mishaps during the explosive maneuver. One could easily assume that the coach standing ready at that cost is an indication that the athlete is ill-prepared or incapable. What it indicates rather is a deep and informed understanding of the risk; this calculated approach allows the athlete to attain maximum points by testing practiced limits with appropriate risk control. This is a conscious choice in the pursuit of safety, placing Simone’s well-being above a higher score. This judgement embodies the principle of “living to fight another day.”

We consider the “living to fight another day” approach highly relevant to investing, as reflected in our multi-asset funds which prioritise capital preservation. By maintaining a patient, long-term perspective and adopting a rules-based strategy, Gryphon avoids overreacting to short-term market fluctuations and evaluates the asset class appropriate for optimal risk-adjusted returns, beginning with cash. These principles have enabled Gryphon’s multi-asset funds to safeguard investors’ capital and deliver impressive risk-adjusted returns over nearly a decade.

‘The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd nor against the crowd.’

Warren Buffett