In his latest piece, Francois Sicart, Founder and Chairman of Tocqueville Asset Management, explores the idea that “nothing is more valuable than an awareness of one’s own ignorance.”
In the context of investing, he feels “being prepared means being suspicious of trends that common sense tells us cannot last forever, and yet have been in force for so long that a majority of investors sees them as being “normal.”
He notes that “Economists who have correctly anticipated past financial crises (from Hyman Minsky to Nassim Taleb and a few others) have pointed out that extended periods of stability in major economic or financial variables tend to encourage risk-taking by market participants – whether they realize it or not – and thus worsen the effect of the next trend reversal.”
He concludes:
“From an investor’s point of view, if we accept that the future cannot be forecast, it seems safer to invest in companies whose leaders have experienced chaos and financial crises in the hope that, as Taleb and Treverton explain for the geopolitical arena, they have been vaccinated against future turmoil. Nothing is more dangerous in an aging bull market than hubris and complacency. And nothing is more valuable than an awareness of one’s own ignorance.”
The Discovery of Ignorance
[drizzle]Eleanor Roosevelt reportedly said that small minds discuss people, average minds discuss events, and great minds discuss ideas. If she was right, my own mind took a huge leap toward greatness in the last few weeks.
It all started when I stumbled upon a conversation between Daniel Kahneman and Yuval Noah Harari, published on the website Edge under the title, “Death is Optional” (3/4/2015). The conversation was engrossing: Kahneman is a professor of psychology at Princeton whose Nobel Prize nevertheless was in economic science (2002); Harari lectures in history at the Hebrew University of Jerusalem, and likes to investigate the links between history and other disciplines such as biology, psychology, etc. His ability to put problems into long-term perspective is illustrated by the global success of his Sapiens: A Brief History of Humankind (Harper, 2015).
From metaphysics to technology
One intriguing notion (albeit a digression from our topic) coming out of the conversation between those two original minds was that throughout history, old age and death were always treated as metaphysical problems – something that the gods decreed. The idea of death conjured an image of the Angel of Death appearing, touching you on the shoulder, and saying, “Come. Your time has come.” Today the attitude towards disease, old age, and death has changed: They are viewed as basically technical problems that should have some technical solution. Maybe we still don’t know all the mechanisms and all the remedies, but in principle people always die as a result of technical, not metaphysical, causes. This is a huge revolution in human thinking, carrying the implication that someday, if I’m rich enough, my death may become optional.
Extreme as that thought might seem, it is increasingly shared by our scientific elites. The Financial Times just published (4/10/2015) an interview with Raymond Kurzweil, whose professed ultimate goal is “to live forever.” While some critics find him a “narcissistic crackpot obsessed with longevity,” I believe that Kurzweil should not be written off too hastily. His first award-winning invention (in high school) was a computer program to analyze composers’ melodies and write original music in the same style. He also invented the first print-to-speech reading machine for the blind, the flatbed scanner, and a music synthesizer capable of reproducing the sound of a grand piano, before finally joining Google in 2012 as a director of engineering to develop machine intelligence. Bill Gates has called him “the best person I know at predicting the future of artificial intelligence.” For Kurzweil, to live forever means staying healthy enough to get to what he dubs “Bridge Two, when the biotechnology revolution will reprogramme our inherited biology, and Bridge Three: molecular nanotechnology enabling us to rebuild our bodies.”
More generally, according to the FT, Silicon Valley’s tech elite no longer views death as inevitable, but only as the latest evil to be “disrupted.”
Ignorance and enlightened chaos
But back on point: Another interesting observation derived from the conversation between Kahneman and Harari, and addressed in the latter’s Sapiens, is that the scientific revolution of the 16th and 17th centuries – when developments in mathematics, physics, astronomy, biology, and chemistry transformed views of society and nature – was not a revolution of knowledge but, above all, a revolution of ignorance. Pre-modern traditions of knowledge, such as Islam, Christianity, Buddhism, and Confucianism asserted that everything that is important to know about the world was already known. The great discovery that launched the scientific revolution was the insight that humans do not know the answers to their most important questions. It was the discovery of ignorance.
These musings take me back to Edge (www.edge.org), a website founded by John Brockman, a literary agent specializing in serious nonfiction (mostly scientific). Among other endeavors, Edge every year asks a single question of 150-200 leading scientists and researchers. The 2014 question, which particularly titillated me, is best summarized by the title of its published collection of answers (Harper Perennial, 2015):
This Idea Must Die:
Scientific Theories That Are Blocking Progress
I find it exhilarating to have so much of our scientific elite capable of questioning the generally accepted wisdom that they have helped create or sustain. To me, this is a typically American phenomenon.
Some years ago, two different Chinese journalists interviewed me and asked the same question, which was very popular at the time: “Do you think China can innovate?” I responded, “If you ask whether Chinese people are capable of innovating, the answer is that we have hundreds or maybe thousands of them innovating every day in Silicon Valley. But to innovate you need a degree of chaos, so the real question is, How much chaos is China willing to accept?”
Innovation has burgeoned in China since, but the whirlpool of ideas in America is truly amazing, whether it is in publications from websites such as Edge or inquiries undertaken under the auspices of the National Bureau of Economic Research or other think tanks. And while the authors/researchers come from all over the world, they very often come to America to air and exchange these ideas, and to discover what they don’t know.
Short-term realism, long-term optimism
The reader may wonder how these musings are relevant to investing, which after all is our assigned task. The January/February 2015 Foreign Affairs contains an article by Nassim Nicholas Taleb and Gregory F. Treverton, “The Calm before the Storm – Why Volatility Signals Stability, and Vice Versa.” Taleb is famous for warning of “black swans” before the onset of the 2007 financial crisis, and more recently for studying the fragility or “antifragility” of systems. The authors of the article compare Syria and Lebanon, commenting that Syria is in a shambles, whereas Lebanon has remained relatively stable despite the turmoil on its borders and the influx of Syrian refugees:
Surprising as it may seem, the per capita death rate from violence in Lebanon in 2013 was lower than that in Washington, D.C. That same year, the body count of the Syrian conflict surpassed 100,000…. But Syria’s biggest vulnerability was that it had no recent record of recovering from turmoil. Countries that have survived past bouts of chaos tend to be vaccinated against future ones.
Most great investors – i.e., those with documented long-term records, from Peter Lynch to Warren Buffett – profess that economic forecasting is a futile endeavor. Howard Marks, for his part, reminds us that you cannot predict outcomes, but you can be prepared. To me, being prepared means being suspicious of trends that common sense tells us cannot last forever, and yet have been in force for so long that a majority of investors sees them as being “normal.”
Economists who have correctly anticipated past financial crises (from Hyman Minsky to Nassim Taleb and a few others) have pointed out that extended periods of stability in major economic or financial variables tend to encourage risk-taking by market participants – whether they realize it or not – and thus worsen the effect of the next trend reversal. The following 36-year chart of US interest rates (one-year Treasuries) shows why most of today’s analysts and money managers have never lived through a meaningful period of rising interest rates. They may have read about such periods and even studied them in school, but they have never actually experienced the pain that results from them.
Worse, for the last six years, as a result of central banks’ ZIRP (Zero Interest Rates Policy) and QE (Quantitative Easing), interest rates in the United States and other major economies have not only stayed flat; they have hovered around zero. If you can borrow, it is basically free. And who can borrow these days? Investors in real estate and private equity, hedge funds, takeover artists, companies repurchasing their own shares, and the like.
But you don’t need to be one of them, borrowing and speculating on your own, to wind up being hurt. If other investors or businesses are doing it, you could suffer along with them when they are forced to sell their assets acquired on credit. As a reminder, margin borrowing at NYSE member firms currently stands at a record.
In my experience, when business and money managers fail, it’s usually not because they don’t know business, economics, or finance. They fail because they don’t know themselves: They haven’t discovered their own ignorance. As a result, they tend to credit bull-market performance to their own genius.
From an investor’s point of view, if we accept that the future cannot be forecast, it seems safer to invest in companies whose leaders have experienced chaos and financial crises in the hope that, as Taleb and Treverton explain for the geopolitical arena, they have been vaccinated against future turmoil. Nothing is more dangerous in an aging bull market than hubris and complacency. And nothing is more valuable than an awareness of one’s own ignorance.
François Sicart
May 7, 2015
This article reflects the views of the author as of the date or dates cited and may change at any time. The information should not be construed as investment advice. No representation is made concerning the accuracy of cited data, nor is there any guarantee that any projection, forecast or opinion will be realized.
The full commentary is available from Tocqueville by clicking here.
More background on Tocqueville Asset Management by clicking here.
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