Oh, to be judged by reality
On what's good about investing. And a rant about what's bad about some parts of social science.
“Do you have any conceivable reason for even getting up in the morning?” – Kramer to George
What’s good about investing? Not much.
Sure, the pay’s nice but investing isn’t generally good in a noble sense. We move others’ money around, for a cut. We’re posterchildren for agency problem. We spout nonsense on TV that makes astrologers look good. Some of us write insufferable essays. Most of us don’t earn our keep, as we lag benchmarks. Even if we beat the index for a while, it feels like trying to beat ageing. Eventually, even the best succumb. If the world were fair, there would be way fewer active investors. Not a good neighborhood.
But there’s one good thing, that is underappreciated. Investors are judged by reality, not peer review or perception. For a while, we can hide or ride our luck. But reality will haul us down. Eventually, we are solely judged by the returns we deliver to our investors, net of all costs. It’s a very precise reality. One number, with as many decimal points as I prefer. It’s a reliable measure of competence, as luck cancels out over the long run. When I’m done, that number will decide if I have something epitaph-worthy or if I should cry myself to sleep.
Why suddenly get philosophical about being judged by reality? While I realized this aspect of investing from day-one, I took it for granted. I had to travel to appreciate my own home. My recent digression, into data analysis outside investing, exposed me to a crowd that isn’t judged by reality: academics, think-tankers, columnists. Despite years of mocking finance academia, I was shocked at what I saw. No sense of history. Little knowledge of prior patterns. No appreciation of uncertainty, or caution in going from data to inference. Dodgy methods. Cherry-picked data. Propensity to selectively dismiss inconvenient data as unreliable. Not treating different contexts differently. Not triangulating error-prone conclusions via independent surrogate metrics. Analysis aimed at being newsworthy, not reliable. Relying on credentials over correctness.
While personal bias is partly to blame, I believe there’s also a contextual factor at play. Most are from domains where incestuous peer approval is the judge, not reality. Analysis is followed by publishing, not consequential action. So long as enough opinions are tossed out, prior mistakes can hide in the clutter. Worse, occasional hits could be touted. There’s no accountability for being wrong or personal cost to bear. Weirdly, being wrong got more approval or eyeballs from those similarly biased. Reviewers were as bad as authors, since everyone is from same surreal system, delinked from reality. Unlike hard sciences, there’s no empirical tradition of measuring shadow at two different locations or dropping balls from towers.
Investing is about soundness of decisions. Analysis is never for its own sake. End point is an actionable decision, not a write-up. Substantial money to be invested, including mine. Even inaction is a considered decision, with missed opportunity often hurting more than losing money. When I’m wrong, I’ll suffer for years. Reality holds up an IDIOT banner every day, and I know I am guilty as charged. All the lofty essays I write can’t cover for my shame. If I can’t see the world as it actually is, I’m toast. Ditto if I don’t have a sense of my own limitations. Rigor and intellectual honesty are indispensable. If I am clueless, it’s better to confess than pretend. Margin of safety, not fake precision, is the fix for uncertainty. If I am unsure based on the work I’ve done, I better do more. While analysis can be half-baked, decisions can’t. There’s a clear paper trail for post mortems of prior decisions.
My neighborhood is surrounded by others where reality is the judge. I’m used to dealing with accountable people. Promoters are judged on return on capital or (eventually) shareholder value. Sales managers on targets. Business heads on P&L. Factory managers on quality and quantity of production. Distributors and retailers will literally starve if they get stocking wrong. Over any reasonable period of time, incompetence is found out, if not weeded out. This isn’t unique to investors or business managers. Doctors, plumbers, carpenters and soldiers cannot hide from their reality either. Most real jobs have this basic honesty about them.
I’m not claiming that there are zero idiots or charlatans in my neighborhood. For some time, which feels too long, some get away. Frothy markets reward crap. Lucky investors get undeserved AUM. Eventually, there’s poetic justice though. Most valuable businesses got there for good reason. People running these are outstanding in their domain. Their words have a depth that reflects their achievements. Even outside their domain, they’re worth listening to. I make sense of messy world by listening to HM Bangur and Neville Noronha, not opinion pushers.
Social science could do with way more of being judged by reality. It leads to so many preferred attributes. Intellectual honesty. Pragmatism over dogmatism. Efficacy over labels. Sensible over clever. Soundness of decision over elegance of analysis. Uncomfortable answers over soothing ones. Confronting inconvenient findings. Openness to changing minds. An emphasis on evidence, not impressions or bias, as basis for judgment. A preference for experts who are also judged by reality.
I believe it’s no coincidence that great social scientists started with an exposure to reality. Kahneman and Tversky had to figure out who would make best pilots in a life-and-death situation. Keynes was a negotiator after World War I, with outcomes having consequences for a whole continent. As was Schelling, after World War II. The great Austrian economists were thrown into the hot seat amidst economic collapse. Graham spent years as an investor before turning professor (though someone of his genius would’ve figured out investing even if he had started off as a carpenter).
It’s a blessing to be in an occupation where reality is the judge. It leads to invaluable traits for life beyond work. It instils a degree of intellectual honesty and a bias towards others with the same. Life’s about being right and making it work, not pointless labels, graphs and debates. Essays are fine but only returns count. If my number sucks, so do I. I can pretend, but I can’t hide.
I have good reason for getting up in the morning. It’s called a reality check.