Archives for April 2017
A group of tourists was visiting a dinosaur museum. A guide was entertaining them with interesting trivia about various dinosaur species. Just when they were passing by a huge skeleton of an ancient carnivore, an inquisitive member of the tourist group asked the guide, “How old is this skeleton?”
“Oh, that big T-rex skeleton? It’s about 100 million and 5 years old.” quipped the guide.
“That’s quite an odd figure. I understand the 100 million part but how are you so sure about the last 5 years?”
With all earnestness, the guide replied, “Well, that’s the most accurate part of the figure because exactly 5 years ago a world famous expert on dinosaurs told me that the skeleton is 100 million years old.”
The guide was honest in his attempt to provide an accurate information but he confused accuracy with precision. His answer was precise but was it really accurate? In fact, a better question to ask would be – did the guide make expert’s answer anymore useful by making it more precise? I think no.
Sir John Maynard Keynes said, “Better roughly right than precisely wrong.”
Peter Bevelin has written a few amazing books, like Seeking Wisdom: From Darwin to Munger, A Few Lessons for Investors and Managers, and the latest All I Want To Know Is Where I’m Going To Die So I’ll Never Go There.
But one of his lesser-known books that I have on my all time favourites lists is A Few Lessons from Sherlock Holmes. Through this book, Bevelin has distilled Arthur Conan Doyle’s Sherlock Holmes into bite-sized principles and key quotes. In fact, this book is much more than a collection of quotes. It is a way to learn the powers of observation, understand the limits of our mind, and counter the narrative fallacy.
Bevelin writes in the book…
What distinguishes Holmes from most mortals is that he knows where to look and what questions to ask. He pays attention to the important things and he knows where to find them.
Morgan Housel is a partner at The Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal.
He is a two-time winner of the Best in Business award from the Society of American Business Editors and Writers and a two-time finalist for the Gerald Loeb Award for Distinguished Business and Financial Journalism. He was selected by the Columbia Journalism Review for the Best Business Writing 2012 anthology. In 2013, he was a finalist for the Scripps Howard Award.
Safal Niveshak (SN): Tell us a little about your background, how you got interested in writing and investing, and how you have evolved in these fields over the years?
Morgan Housel (MH): I started in college in investment banking. I always loved investing and knew I wanted to do it as a career. But the culture of investment banking totally put me off. I like to have time to think things through, and any culture that emphasizes 24/7 speed and fixed process over deliberation is one where I wouldn’t do well at. So, I moved on pretty quickly from that.
I then got into private equity, which I enjoyed. But this was summer of 2007, and global credit markets started freezing up, which is devastating for private equity firms that own highly leveraged companies. So, I needed to do something else.
There are as many ways to make money in the markets as there are people participating in the markets, but there are relatively few ways to lose money in the markets. For a majority of the people, all the losses come from the same few source. Jim Paul’s cautionary tale is a testimony to the importance of studying the patterns of failure than the ways of success.
The backdrop of this book is the true story of a trader called Jim Paul. His career in stock market started with a string of unusual successes that vaulted him from a dirt-poor country boy to jet-setting-millionaire. However, after 15 years of uninterrupted success, all of Jim’s wealth was wiped out in a matter of few weeks when he lost $1.6 million in a speculative trade. This devastating failure led him to intense self-reflection and discovery of some unusual insights about success and failure.
I met a guy yesterday who spent the past ten years of his life – and he’s just 32 years of age – destroying his body with alcohol, excessive food, and a sedentary lifestyle.
“I have resolved to be fit, lean and healthy in the next six months,” he told me with great confidence.
Well, not surprisingly, he got irritated when I told him that it might take a little longer than six months to achieve what he wanted.
His reaction wasn’t much different from a cousin of mine, who recently told me how she wanted to become a life coach and was ready to do whatever it took to get there in one year.
When I asked her, “What if it takes you ten years to get there, instead of one?” she had no answer.
Clearly, she hadn’t considered the possibility that years of learning, experience and skill development could be one of the necessary success ingredients in becoming a good life guru. But she wanted the results without all this work…or by investing the necessary time.
We human beings like to believe that we are able to choose and have control over our own destiny. But the choices we make aren’t always an outcome of our free will. A new breed of people, called choice architects, are intelligently and subtly making choices for us, without our realization.
In 1908 when Henry Ford introduced Ford’s Model T, it changed the landscape of American lifestyle for ever. Model T was the first affordable automobile that opened travel to the common middle-class American. It’s probably one of the most successful car in the history of automobile industry. Model T, a result of Ford’s innovation in the assembly line manufacturing, remained in production from 1908 until 1927. It literally sold like hot cakes.
Model T was available only in black color, so when people started demanding more options in colour, Henry Ford told his customers, “You can have your car painted any colour that your want so long as it is black.”
For a moment, Ford’s customers thought that they were going to get a lot of colour choices but the very next moment the realisation set in – all choices led to the colour black. A clever play of words, isn’t it? This anecdote is a sarcasm on one of the most successful persuasion strategy employed by the marketing industry. It’s called illusion of free choice.
The Magic of Choice Architecture
In fact, illusion of free choice is at the heart of performing magic tricks. Ask any magician and he’ll tell you that magic, apart from being an art, is a science of how human brain works. A large part of any magic trick is planning, preparation and setting up the stage before your audience walks in.
In October 2016, I had written a post about how I let an opportunity to buy HDFC Bank in the middle of 2006 pass by, and why I have never come to regret that decision (the stock has turned into a 10-bagger since then!).
My reasons to miss that stock was my inability to understand the complexities of the banking and finance business, and more importantly that I have never trusted banks to uphold high levels of honesty and integrity in their business operations.
I received a lot of brickbats for that post for castigating an entire sector (and the bank) that has created so much wealth for shareholders in the past, and that constitutes such a big part of India’s stock market capitalization.
Well, I stand by my thoughts which, by the way, are my personal thoughts and are not binding on you to also avoid stocks from the banking and financial services space.
Investing is a personal affair, and what makes me uncomfortable can be comfortable for you, and vice versa.
Anyways, now the question is – Why am I writing a second post on my unwillingness to invest in banking stocks?
Have you heard about the ‘ultimate game of economics’? Here’s how it goes.
A person – let’s call him proposer – is given a hundred bucks and asked to split the money with a stranger, called responder. The split doesn’t need to be equal. Proposer could split it 50-50 or he could even keep 90 for himself and offer 10 to the stranger. But the condition is that if the responder rejects the offer, none of them get any money.
If you were the responder, at what split ratio would you accept the offer?
50-50? Most people would consider that fair. But is it rational?
What if you didn’t know about the total sum involved in the deal and you’re told only about the amount that proposer offers you? Isn’t it like a free money, something that you found lying on the street. Why would you reject even 5 bucks that way?
But that’s not how humans think. Right?
The knowledge that someone else got a better deal (at our cost) makes us humans feel cheated.
“Not fair,” we cry. “How dare the proposer offer less than 50 to me?” [Read more…] about The Ultimate Game of Economics
A good question makes it clear that the questioner is willing to participate in the process of developing the solution. It exhibits problem-solving intelligence rather than passively waiting for an answer to drop from above. Whereas a bad question is an act of an intellectual dishonesty on the part of the seeker and a huge time sink on those who have to answer it.
Two hunters are out in the woods when one of them collapses. He doesn’t seem to be breathing and his eyes are glazed. The other guy whips out his phone and calls the emergency services. He gasps, “My friend is dead! What can I do?” The operator says “Calm down. I can help. First, let’s make sure if he’s really dead.” There is a silence, then a gunshot is heard. Back on the phone, the guy says “OK, now what ?”
Well, the guy was a hunter. What else can you expect from him? In fact, you would agree that the blame can’t entirely be put on the poor hunter. The operator’s question wasn’t very clever either.
There’s some truth to the saying – the quality of your questions determine the quality of solutions you get. Computer programmers very well know the theory of GIGO i.e., garbage in garbage out. It’s true with questions too. Good question begets good answer. Bad question attracts a bad answer.