27 February 2018


by Nick Dennis

Author’s note: Over time I’ve realised that ‘Bits & Pieces’ is an unsuitable title for these musings, which are (hopefully) neither bitty nor piecey. I recently read a nonfiction book called The Great Game, by Peter Hopkirk. Set in the 1800s, it tells the story of the British and Russian empires vying for influence across the vast territory of Central Asia. Their ultimate goal was the jewel of the East: India. Britain possessed her, Russia desired her.

The chief protagonists were British and Russian military officers – spies – typically in their early twenties. Their survival in the region’s inhospitable mountains and deserts, populated by hostile and barbaric tribes, depended in no small measure on their ability to think quickly on their feet. Success meant a warm reception from the Queen or Tsar, military titles and prestige. Failure resulted in decapitation.

It struck me that today’s empires – countries and corporates – play their own version of The Great Game. They are in constant battle across the physical and digital realms for the hearts, minds and wallets of a global audience. Investors are caught in the crossfire and have to think strategically and tactically to avoid decapitation. These letters are my attempt to make sense of the intersection of economics, politics, geopolitics, business, culture and psychology as they find expression in the financial markets. I find The Great Game fascinating; I hope these missives convey that passion.

The Unlearning Journey

Global equity markets had a good run in 2017. The upward trajectory continued in January, until a sudden plunge knocked investors out of their complacent state. The culprits are thought to be rising inflation and interest rates, as well as excessive positioning in trades that benefit from falling volatility. The truth is we can only speculate as to the causes of the sell-off.

Following any event that causes pain or loss, I find it useful to see if there’s anything to be learned from the experience. It also occurred to me that there’s a ‘paradox of pain’:

  • Painful losses are the catalyst needed for us to make important changes, which ultimately produce benefits that massively outweigh those losses. In the long run, we are better off for having suffered the loss, than had we not experienced pain at all.

Drawing lessons and implementing changes after painful events does not come automatically. There are several steps which are vital for this process to be effective (the context is investing, but the principles are broadly applicable):

Accept responsibility.

Winners take responsibility for their actions. Losers always find something or someone else to blame: they would be ultra successful if it weren’t for Central Banks, the Illuminati, Government, or Janice in Accounting.

After suffering a loss, the first question to ask is “Did I make a genuine mistake?” This is not always obvious in equity markets, as studies have shown that investors are right only half the time. Being wrong and losing money is not a mistake in and of itself – you can do dumb things and make money and smart things and lose money. Real ‘Mistakes’ are process related: either straying from your process, or a flaw in the process itself.

Don’t beat yourself up.

Making mistakes is part of being human. An emotional response is normal, but wallowing in regret is counterproductive. I like to take small active steps to shift from a negative to a positive mind-set. For example, making a few tweaks to improve the quality of the portfolio. I can’t overstate how helpful this is.

Reflect. Write.

After the emotion has subsided, it’s useful to reflect on the lessons we can draw from the experience. For some reason, physically writing them on paper not only drills them deeper into our consciousness, but has a cathartic effect. Writing also creates a point of reference for later, when we can remind ourselves of old lessons learned and take encouragement from our progress.

Plan. Implement

Having absorbed the relevant lessons, we can identify all the necessary steps we need to take to improve. Be specific. Then, all that remains is to implement the plan.

I’ve talked about lessons from painful experiences, which tell us which actions to stop. Just as important (if not more so) is to learn from our successes, which tell us which actions to continue.

Related to the above, and perhaps most important of all, is unlearning. The essence of the idea is captured by Mark Twain’s quote: “It ain’t what you know that gets you into trouble. It’s what you know for sure that just ain’t so.”

Ironically, Twain may not have said this at all. Quote Investigator first attributes it (loosely speaking) to “Josh Billing’s Encyclopaedia and Proverbial Philosophy of Wit and Humor (1874)”:

  1. I honestly beleave it iz better tew know nothing than two know what ain’t so [sic].
  2. Wisdum don’t konsist in knowing more that iz new, but in knowing less that iz false [sic].

To give a practical example, consider the traditional food pyramid. For decades this concept has been accepted wisdom. Anyone wanting to lose weight was told to eat less meat and more pasta and bread. In recent years, new research has called into question the validity of the pyramid altogether. In other words, everyone would’ve been a lot wiser, not by “knowing more that iz new, but in knowing less that iz false.”

Unlearning is much, much harder than learning, as we have to throw out deeply ingrained beliefs as part of the process. It’s far easier to twist our perception of reality to fit our existing beliefs, than it is to change our beliefs in the first place. Investing is steeped in its own dogma, traditions and belief systems. Unfortunately, many investing truisms just aren’t true. It is only by gradually unlearning what is untrue that we are able to move closer to the real truth.

I don’t know what the markets hold in store for the rest of 2018. That said, following a period of learning and unlearning, I am more bullish than ever. Let The Great Game continue!



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