Buggy, Messy & all that

Reflections on two years of writing, anchored around the two keywords that I carefully chose for the title: Buggy & Messy.

“The chief problem of this work has been one of perspective – to blend the divergent experiences of the recent and the remoter past into a synthesis which will stand the test of the ever enigmatic future.” – Benjamin Graham and David L Dodd, Preface to the First Edition, Security Analysis

Last December, I wrote a ‘Reflecting on 2020’ piece. I thought of doing that again but realized that I’d just repeat the same stuff. So, I’ll take a different approach this December.

I started my ‘Buggy Humans in a Messy World’ essay-series in December 2019. As I reflect on two years of writing, what comes to mind? I started publishing essays with one overarching objective: “Don’t be stupid”. I was keen to clear the aforementioned Graham test in a far more limited way. I didn’t want to look back after a decade thinking “I can’t believe I wrote this shit”. And, as some of you may know, I have prior experience in this matter.

I used to write a blog titled “Seriously Clueless” back in 2005-06. I had just started investing and was a complete idiot at it. Writing ensured that idiocy became a matter of public record, not just private shame. None of it aged well, except for one bit: the title. In the spirit of celebrating small joys, I am proud of having chosen an inadvertently self-aware label, which acted as a summary and warning of that essay-series.

In late-2019, after 12 years at Nalanda, I felt overconfident enough to write again. I wrote 15 essays and privately shared them with a handful of friends who were kind about the whole thing. Armed with a front-log of essays and biased support, I decided to publish them one at a time. But I was still scarred by my prior attempt. So, I spent a lot of time making sure I had one element that was sure to age well: the title. After weeks of tinkering, I came up with “Buggy Humans in a Messy World”.

I deeply believe that both monikers – Buggy & Messy – are timeless descriptors of us and everything around us. Both are central to how I think about investing and to how all of us should think generally about tackling the social world. After two years of my writing and general tumult (no causal relationship), these two words feel even more resonant. So, I thought I’d make that the topic of this year’s reflections.

What buggy is and isn’t

I hate the typical descriptors used in pop psychology or behavioral science: irrational, flawed, biased. They’re way too negative. Surprising as it seems, we are far from stupid. Our brains are shaped by the most powerful force around: evolution. In investing terms, evolution is compounding over a billion years. It’s why we rule this planet and Elon does all that cool shit. Hell, evolution even saved 99.9% of us from the best virus China could make. Our mental wiring is fantastic for survival and propagation of our species, which is the point of it all. Even the parts that get a bad press (e.g. tribalism) are quite useful. Lists of 72 behavioral biases don’t do justice to how awesome we are. An abiding faith in human ingenuity is central to sensible investing.

Buggy means that our brains aren’t optimized for all settings. While we’re capable of figuring out most things, we’re too capacity-constrained to do so all the time. We’d starve to death if we adopted first principles to decide which toothpaste to buy each morning. Some of the attributes that are great for survival in a real jungle (e.g. herding, overconfidence, pattern-seeking, panic) can be disadvantageous in a modern figurative jungle. Buggy implies that we are prone to certain patterns of mistakes in certain settings. We’re smart and self-correcting, but far from omniscient. Unfortunately, markets constitute a setting where external pressures, social interactions and human frailty get exaggerated, bringing our bugginess to the fore. It takes deliberate effort and some ‘unnatural’ behavior to survive and thrive here. Others being buggy is why markets perennially offer good opportunities. My being buggy is why it’s so hard to take advantage of them.

What messy is and isn’t

In technical terms, messy refers to complex, adaptive (social) systems. Markets, investing, business, government, social media and societies are all messy worlds. Messy means absence of natural law and neat causality. Unintended consequences, if not randomness, makes outcomes path dependent (a fancy way of saying that if you replay the movie, it’s a different movie). Unseen feedback loops exaggerate the consequences of any particular action, in a dynamic way. We can’t control or forecast what will happen. Messy world makes all of us seriously clueless.

However, messy doesn’t mean random. Messy doesn’t mean that we’re helpless slaves of destiny. It doesn’t mean world is totally undecipherable. Messy world still offers patterns that can be exploited. However, patterns are fuzzy. They tend to show up only over long timeframes, at a high level of abstraction. They don’t repeat perfectly, even though they help guide future odds. Messy implies a probabilistic world where we can’t actually calculate probabilities. Messy means broad history is useful but precise back-tests aren’t. Most importantly, messy world throws up a few patterns reliable enough to guide action (or inaction), especially at the extremes.

Looking back at the last two years

So, how were the last two years, when viewed through this lens. Buggy as f&*k. Messy as f&*k.

Nothing that happened in messy world was even remotely expected: disease, lockdown, recovery, re-disease, re-recovery, inflation, rates, commodities, crypto, NFT, vaccine, Cambrian explosion of unicorns, ship traffic jam, 2-1 victory after 36 all out. Yet, we were buggy enough to make confidently wrong predictions all the way. No human prognosticator was left looking good: economists, columnists, epidemiologists, policy-makers, investors, perma-bears, new-normal evangelists, Michael Vaughan. My peer group (FPIs) showed great nerves and timing by selling nearly $ 10 billion of stocks in March 2020.

But it wasn’t all bad either. Many exploited a rare buying opportunity in stocks. We saw the best of humanity, especially in healthcare. We achieved many impossible things, whether making shitty businesses into decacorns or tripling India’s oxygen production in two weeks. We pivoted from not dying to buying too much of everything, including counterfeit money with puppy pics on them.

Buggy, yes. Incompetent, no. Messy, yes. Unmanageable, no. Humanity came out just fine from an end of the world scenario, while looking pretty clueless right through it. Just like it’s always been. Buggy & Messy. I am glad to see my second title holding up as well as the first, at least so far.

What’s the point of all this buggy messy gyan?

“We have stressed theory not for itself alone but for its value in practice” – Benjamin Graham and David L Dodd, Preface to the First Edition, Security Analysis

While I write because I like pontificating, I hope to be useful too. It would be a shame to end up as the op-ed columnist I mock. My Buggy-Messy worldview is intended as both a tool for understanding and a guide to action. If we’re buggy and world around us is messy, it logically follows that our approach, in investing or otherwise, should rest on a few tenets:

·       Majority of messy world is inscrutable, better avoided than analyzed.

·       At best, we can each find our tiny corner of messy world that’s less inscrutable, based on

o   Patterns from long history suggesting that this holds true.

o   Fit with our own strengths, preferences & constraints.

·       Even this corner is best tackled cautiously, with

o   Depth of understanding based on decades of focused effort

o   Patience, as odds play out only over super long timeframes, that too on average.

o   Great humility, we’re still likely to be wrong (even if less wrong than others)

·       Only way to practice humility is through safety.

o   Keep cushion at every level.

o   Especially on knowing your own limitations (e.g. no forecasts).

·       Once sure of your corner & safety-margins, act (big).

·       As messy world messes up scorecards, track only meaningful ones.

o   Process and outcomes aren’t correlated over short run.

o   Easy to look smart while being stupid.

o   Focus on right scorecard (e.g. business progress, not price action).

·       To stay the course, view deliberate inaction as action.

o   Delink activity from progress.

o   Stay paranoid about not missing anything, even when not doing anything.

o   Holding course is conditional on starting assumptions holding true.

·       There is little role for others in any of the above.

o   Your corner, your work, your ass on the line.

o   Others offer opinions, not answers. ‘Experts’ more likely to deter than help.

o   Remember, others are buggy humans in the wrong corner.

·       Nor is there space for a second corner.

o   Investing history suggests that most are good at zero things.

o   If you’ve found one corner you’re good at, you’re way ahead already.

o   It’s near impossible that you’re good in two different corners.

o   If you try to be good at two things, you’ll be good at zero things.

o   Envy and FOMO are ruinous.

·       Assimilating the above into a cogent mental framework makes it easier. And frees up time to write essays!

Back to reflecting on two years of writing

Across two years and innumerable essays, I have tried to discuss how I approach my chosen corner of messy world, while hopefully adhering to the above tenets. I have essentially shared the mental framework that I use in my day-job. I write in depth about my corner, partly since that’s the only thing I know, and partly to be specific, not just philosophical. However, since your corner and approach are likely to differ, the broader philosophy may well be more relevant than the specifics.

That philosophy is about looking at the world as messy and ourselves as buggy. Just internalizing these two descriptors should infuse caution into any process. I believe that the last two years have reinforced this philosophy and the tenets that flow out of it: obsessive focus on one narrow niche, sacrifice of everything else, depth, diligence, patience, humility, safety. Such an approach has held up well over the last two years. Many levels of safety ensured that there were no survival issues even under unprecedented stress. Focus, preparation and blinkers allowed for both action and sitting out, as the situation demanded. This philosophy allowed unusual times to be tolerably handled, despite not knowing what lay ahead at any point along the way.

Like with investing, it takes decades to judge writing. I don’t know how it will hold up. However, at the two-year mark, I am happy about lumping it all under the umbrella of buggy, messy & all that.

PS. I deliberately started this essay on a more personal note than usual, discussing how I got into writing. Nalanda formally completes fifteen years in a few months and it’s past fifteen years since I first reached out to Pulak asking for a job. So, I am hoping to make my first batch of 2022 essays a bit more personal: journey, strokes of luck, screw-ups, formative influences, personal learnings, connecting the dots etc. Hopefully, it will still be about investing and not about me.