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Believer vs skeptic
A contradiction that isn't
“Do you have any conceivable reason for even getting up in the morning”, Kramer to George
On my morning walk, I usually spot a baby out for a ride, staring out of an open car window. Every day, his toothless grin and wide-eyed look say “world is frikkin awesome”, as he savours the spray, sea and dogs of Bandra. Such a cheery attitude towards the world at large is essential for sound investing. Wait, that sounds contradictory. Bit rich, coming from a curmudgeonly misanthrope who insults finance professors and economists, while labelling nine out of ten businesses as unbuyable. This tension between glass half-full and glass half-empty attitudes is one of many seeming contradictions an investor has to resolve. I’ll cover other contradictions in subsequent essays.
Investing is laying out money in the face of daunting risk and uncertainty, expecting to get back substantially more after a decadal wait. It’s an optimistic act, premised on a heartfelt belief in the world being fundamentally fine and getting better. This optimism is based on centuries of progress on health, life expectancy, productivity, innovation and overcoming hard problems. Yet, I view it as belief rather than knowledge, since everyday ‘evidence’ keeps screaming that the world is screwed. Negativity dominates discourse, making everything seem fragile: democracy, capitalism, health, livelihood, peace, ecology. It takes unwavering faith to trust human ingenuity and progress through this fog of doom. Compounding’s edifice rests on this bedrock of optimism.
This isn’t some holistic healing happy babble. It’s a practical prerequisite for investing 101, which is to buy amidst gloom. How else could I invest during global economic crisis or covid-19 or meltdown threat every summer from an iceberg or a European country? In most years, including this one, world looks horrible. It is so for many. Near-term outlook is a mix of hazy and poor. Why bother buying stocks if there’s no conceivable reason for even getting up in the morning? Answer: I truly believe that, decades out, world will be just fine. Bigger, better, stronger, cleaner, healthier. So will my country and companies of interest. No different than past decades. Headlines will still be gloomy, though.
Humanity may be a tailwind, but individual humans aren’t. That’s where skepticism comes in. Starting with skepticism about myself, especially after fees. I doubt my ability to figure out most situations. I gradually expand this circle of doubt, paying special attention to humans with a propensity for cufflinks or forecasts. I doubt if most companies will endure, in a lucrative form. I doubt if concerned humans will leave me a fair share. If I clear doubts at one level, I move to the next. Reference checks, past behaviour, promise vs delivery, balance sheet, receivables, cash flow, related party transactions, contingent liabilities, footnotes. At the level of individual opportunities, my default setting is doubt, not belief. I distrust until verified.
Optically, belief-skepticism or optimism-pessimism seem contradictory. I seem to vacillate between glass half-full and half-empty. The secret of sound investing is to not fall for this false binary. It’s one of those yin-yang, wave-particle duality things, where both coexist without contradiction. As Dickens wrote, it is an epoch of belief and an epoch of incredulity. As an equity investor, optimism is a recognition that the current is in my favour over the long run. Skepticism is a recognition that I can still capsize. I still have be wary of rocks and turbulence. There’s no guarantee I’ll make it. But, if I avoid wipe-outs and have a robust boat, the current does most of the work. Oftentimes, it’s a cruise.
The true contradiction is to be long equities without being long humanity. It’s hard to sensibly invest for retirement on the back of a doomed worldview or country-view. It badly messes up minds. There’s too much dissonance, like eating baked samosa or hearing SPB sing in Hindi. Every threat appears existential and irredeemable. This-too-shall-pass and greedy-when-fearful become hollow aphorisms, without either conviction or action to back them up. Investing becomes dysfunctional. Buying opportunities become freezing opportunities. Negativity and hypertension consume investors, leading them to seek refuge in pet rocks, counterfeit money and conspiracy theories about the world being rigged.
As an investor, I balance being macro optimistic and micro skeptical. As a writer, I don’t. As I focus on investing process, I write disproportionately on risk, margin of safety, bad businesses, crooks and charlatans. Even my buggy-messy title sounds negative. As I ignore macro, in its conventional definition, I rarely talk about decadal progress. So, I do injustice to the optimist in me, with unwavering belief in humanity at large, warts and all. I especially do injustice to the centrality of this belief to sound investing. Without it, I can never buy amidst panic or hold for good. I’ll end up broke and bitter, like perma-bears and doomsday prophets.
The baby in us is a surprisingly important determinant of investment success. Speaking of him, without ruining his a sense of awe about the world, his parents will surely teach him to be wary of well-dressed strangers promising candy. We want him skeptical, not cynical.