Charles Darwin and his theory of evolution revolutionized the scientific understanding of nature and biology. But because evolution is among the most counter-intuitive ideas in science, its public acceptance has been limited. There are many intelligent and educated people who still do not fully understand or believe it. And more who may accept it as a scientific truth but have not adopted evolution into their mental toolkit, and do not apply it to their perception of reality each and every day.
Here are four ways Darwinian thinking can help you understand money, finance and markets, and help you build and protect your wealth:
Many value investors have given up on their strategy over the last 15 years amid concerns that value investing no longer worked. However, some made small adjustments to their strategy but remained value investors to the core. Now all of the value investors who held fast to their investment philosophy are being rewarded as value Read More
- Consider the stock market a biosphere of public corporations that live, evolve and die like plants and animals.
The national financial folk wisdom of 1955 was, “As General Motors goes, so goes the nation.” Bankruptcy for GM was not only unimaginable, it would assuredly bring the nation down with it. Yet as we all know GM did indeed go bankrupt in 2009, wiping out common shareholders. And the nation not only survived, our GDP has since nearly septupled, soaring from $2.8 trillion in 1955 to $18 trillion last year. The DJIA is up from 488 to 26,000 this year.
Folk wisdom and common sense can be myopic, and perceive only the present-day reality projected upon the future. Why else should we be shocked by aging celebrities? Or when venerable corporations cease to outperform, and upstarts such as the FANG gang (Facebook, Amazon, Netflix, Google) take center stage. “If current trends continue” always sounds prescient. But current trends never continue indefinitely in organic systems where birth, growth, death and evolution rule. The “widows’ and orphans’ stocks” of the 1950s, the stocks that would always be there, cannot always be there. Corporations, like people, routinely grow, age and die. So how do you deal with it? Like evolution, you adapt. To a Darwinian thinker the true widows’ and orphans’ “stock” is a diversified index fund that will endure and grow, even as its components ripen, wither, fade, merge, are replaced and even die.
- View every living thing, every financial entity, as primarily interested in its own survival, prosperity, expansion or reproduction.
Long before Darwin, Adam Smith wisely wrote, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Here’s the short version, courtesy of Warren Buffett: “Never ask the barber if you need a haircut.”
When buying stocks, insurance, or any other service, financial or otherwise, always remember the self-interest of the broker and the seller. A surgeon performs surgery. A lawyer bills every hour. A stockbroker lives on commissions. A commissioned stockbroker who is reluctant to execute your order to buy shares of Berkshire Hathaway (full disclosure, I buy them, own them and have never sold them) knows you are statistically less likely to sell Berkshire than most other holdings; the money that purchases shares of Berkshire may likely never yield commissions or fees for any broker ever again.
- Understand that deception and fraud are key survival tactics in biology and finance.
A cat deceptively raises its hackles to inflate its size and intimidate enemies and predators. Other animals use mimicry, camouflage, surprise, and even feign injury or death to survive or devour prey. Consider the Bible, which introduces the power of deception in human life: the serpent deceives Eve, Cain kills able and seems to deceive God. Believe it as literal truth or accept it as parable, Bible stories bespeak an essential truth about the centrality of deception in the biosphere.
So why should we expect to escape deception in the high stakes world of finance? While financial professionals provide customers with needed services, self-interest — conscious or not — may lead them to recommend managed mutual funds, closed-end funds, annuities, or complex insurance policies which provide large fees and commissions but may not serve the best interests of the client. A broker recommending purchases to a client is not held to the fiduciary standard — to act solely in the interests of the client -- but only a “suitability” standard, which leaves plenty of room to aggressively sell financial products that are lucrative for the seller, but not the buyer.
- Realize that our instinct to trust our fellow creatures represents an eternal vulnerability in financial transactions.
Humans are social animals, and humanity is a team sport. We are congenial and credulous by nature, which was necessary for the tribal life we evolved from, and is necessary still for sustaining the communal and national life in which we now live, work and prosper. The counter-trend, so evident in wartime but also present in our workaday world — in media, markets, finance, government and even, courtship and family life — is manipulation and betrayed trust. Think of “fake news.” Think of the indicted politician, the con artist, the criminal, the sociopath. But the Machiavellian betrayal of trust can be adaptive even in successful professionals, entrepreneurs, sales, courtship, marriage and family. A small child caught misbehaving by his father has a stock answer: “Mommy said I could.”
So how can we protect ourselves from our own congenital credulousness when approaching financial markets? Read, study and listen to credible sources that have a long track record of honesty and integrity. If there were a Mt. Rushmore of investing I would nominate these three wise men: John C. (Jack) Bogle, Warren E. Buffett and Charles T. (Charlie) Munger. They have each long honored their investors as partners and friends and have grown their wealth alongside them. My current book, Anyone Can Be Rich!: A Psychiatrist Provides the Mental Tools to Build Your Wealth, is dedicated to all of them — and was commended by Mr. Buffett himself.