Shape clay into a vessel;

It is the space within that makes it useful.

Cut doors and windows for a room;

It is the holes which make it useful.

Therefore benefit comes from what is there;

Usefulness from what is not there.

Lao Tzu (c. 530 BC)

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This is the only quote I’ve used three times in Epsilon Theory notes, previously in The Tao of Portfolio Management and Who’s Being Naïve, Kay?, because it’s such a powerfully wise observation about the vessels we create when we put together a portfolio.

But its wisdom goes way beyond investing. Our days are spent shaping clay into vessels … our homes, our businesses, our friendships, our marriages, our children … our lives themselves.

Not every empty space needs filling.

“It is hard to find good explanations for the low-inflation era being experienced by the U.S.” ? Jim Bullard: St. Louis Fed Governor, waver of hands, charter member of the Epsilon Theory Self-Parody Hall of Fame.

I actually feel bad for Bullard. The cognitive dissonance between what the job requires and what any thinking human being observes must be crippling.

QE and negative real rates are ice-nine. If you don’t know what ice-nine is, read “Cat’s Cradle”, preferably both the Vonnegut book and the Epsilon Theory note.

Spoiler alert: the world ends.


Lianas are woody vines that climb up trees to get to the light. They’re what Tarzan would swing on from tree to tree. They’re also the incarnation of evil in the natural world.

The particular bane of my existence is a liana called Oriental Bittersweet, now endemic in the Eastern U.S. and Canada. Like other creeping plagues such as privet and kudzu, the Oriental Bittersweet was originally introduced as an ornamental plant, but found easy pickings in North America once it escaped captivity.

How do you kill the Oriental Bittersweet? Per the latest intel from the U.S. Forest Service, you need to cut the stem and then immediately douse it with Garlon 4 herbicide mixed with diesel fuel or kerosene. Just be sure that you don’t get any of that Garlon 4 on anything that, you know, you don’t want to kill. Or on your skin. And for god’s sake please don’t use it in wetlands or anywhere it might get into a stream or pond. That would be … umm … not good.

This is what crowding-out looks like in the forest. It’s no prettier in the real economy.

I’m a reluctant gardener. I’ll work in the dirt because I like the outcome, but it’s just that to me — work. I don’t get any intrinsic pleasure from the act of gardening, from the growing of plants from seeds to maturity, because I don’t see the human art in it. I can appreciate the form and function of the plant itself. But that’s nature’s art, not mine.

On the other hand, I’m an enthusiastic arborist. Working with trees isn’t about the growing, it’s about the pruning. It’s about identifying the natural, healthy lines of a tree and shaping the tree to follow those lines over time. It’s about having a vision in your head of what Treeness means in this particular place and this particular plant, and then bending nature to fit that vision. It’s this imposition of human will that makes working with trees an art, whether you’re expressing it in miniaturized form through bonsai or massive form through four acres of maple trees. That’s why I’m an arborist.

At the heart of being a good arborist is recognizing that less is almost always more, that the absence of a branch or limb is as necessary in expressing Treeness as presence. Filling space is easy. That’s the default because that’s nature’s blind imperative, to grow and spread and get more light, regardless of the internal or external consequences. Nature will grow itself into structural ruin, and the arborist must be imaginative enough to see the alternative and brave enough to act. The courage is always in the cut. The imposition of human will and vision is always in the cut. The art is always in the cut.

I rarely use a chainsaw to cut a living tree, or at least a tree that I want to keep on living. For starters, I’m even more scared of my chainsaw than I am of my tractor, which really only goes to show that I’m not scared enough of my tractor. More importantly, if you’ve gotten to the point where a limb is so thick that you need to use a chainsaw on it, then either you’re doing some sort of medically necessary surgery or you’re making a terrible mistake in the imposition of your vision for this particular tree in this particular place. No, my instruments of choice are the handsaw and the lopper. Just because the courage is in the cut doesn’t mean that you need to cut with abandon and leverage.

So as per usual with these Notes From the Field, I’ve got two arborist-as-metaphors to relate, one for investing and one for the economy.

On the investing side, this is the math-free companion piece to Rusty Guinn’s You Still Have Made a Choice, where we’re both saying the same things about portfolio construction and healthy diversification thereof, just in different dialects.

Left to its own devices your portfolio will grow wildly — not to structural ruin, but to structural inefficiency. Of course, by its own devices I really mean by your own devices, and by growth I mean number of positions, not value. The human tendency to keep adding “good ideas” to a portfolio as they come available is at least as powerful and natural an imperative as a tree growing more leaves for more sunlight, and unchecked is just as destructive. A tree pays a price for each branch and limb and leaf it grows. So do you in your portfolio. Each of these investments may be, in and of itself, truly a good idea. But they are merely good ideas. Show me a portfolio chock-full of good ideas and I’ll show you a tree that is not growing to its full potential, and here I do mean value.

A portfolio doesn’t grow to its full potential by having lots of good ideas. It grows to its full potential by having a few great ideas. Okay, that seems obvious. Here’s one that’s not. A portfolio will reach a better outcome by having fewer branches and limbs and leaves that all work together to create a harmonious whole — even if those branches and limbs and leaves are merely good, not great — than by having more branches and limbs and leaves of the same good quality.

The ordinary investor is always looking for a good idea to put into the portfolio. The arborist investor is always looking for a merely good idea to take out of the portfolio.

Now, there IS a science (or at least a methodology) for calculating whether or not the addition or subtraction of a limb in your portfolio adds or subtracts value

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