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Applied Big History
A Guide for Entrepreneurs, Investors,
and Other Living Things
William Grassie
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© 2018 William Grassie
All rights reserved.
ISBN-13: 978-1719853071
ISBN-10: 171985307X
Version 1.2
Please send corrections, comments, and feedback to
grassie@metanexus.net
Metanexus Imprints
New York, NY
Cover&Photo&Credit:&NASA$Earth$Observatory$images$by$Joshua$Stevens,$
using$Suomi$NPP$VIIRS$data$from$Mi guel$Román,$NASA's$Goddard$Space$Flight$
Center$
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Table of Contents
Table of Contents!..............................................................................!i!
Foreword by Mitch Julis!...............................................................!iv!
Chapter 1: Thriving in a Complex World!...............................!1!
Outperforming the Market .................................................. 3
Caveat Emptor .................................................................... 5
Applied Big History ............................................................ 8
Wikipedia ......................................................................... 10
Chapter 2: The Great Matrix of Being!..................................!13!
Size ................................................................................... 14
Time ................................................................................. 16
Matter ............................................................................... 18
Energetics ......................................................................... 19
Electromagnetism ............................................................. 23
Sound ............................................................................... 25
Information-Ingenuity ....................................................... 25
Sentience-Consciousness .................................................. 30
Culturally Constructed Hierarchies ................................... 31
Emergent Complexity ....................................................... 32
A Multi-Dimensional Matrix ............................................. 35
Chapter 3: The Economy of a Single Cell!.............................!39!
The Central Bank of Chemistry ......................................... 40
The Currency of Life ........................................................ 44
The Business Models of Life ............................................. 45
The First Agricultural Revolution ..................................... 47
The First Industrial Revolution ......................................... 48
The Whole Economy of Nature ......................................... 51
Chapter 4: Complexity Economics!..........................................!53!
“All Hell Broke Loose” ..................................................... 53
Big Money ........................................................................ 59
Short- and Long-Term Oscillations ................................... 63
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Productivity Growth ......................................................... 67
Scaling Effects .................................................................. 69
Complex Adaptive Systems .............................................. 71
Complicated and Complex Systems .................................. 73
Fluid Dynamics of Markets ............................................... 75
Natural and Economic Selection ....................................... 77
Chapter 5: Death and Taxes!.....................................................!83!
Energy Density Flow ........................................................ 85
Goldilocks Gradients ........................................................ 88
Creative Destruction ......................................................... 89
Energy Regimes................................................................ 90
Instability and Resilience .................................................. 93
Chapter 6: Your Hunter-Gatherer Brain!.............................!95!
A Really Great Ape .......................................................... 96
The Great Cooperators ...................................................... 98
What We Don’t Know .................................................... 100
Survival .......................................................................... 100
Reproduction .................................................................. 104
Sex-Gender Differences .................................................. 110
The Cognitive Revolution ............................................... 113
Stone-Age Brains ............................................................ 116
Divided Self.................................................................... 118
System 1 and System 2 ................................................... 121
Luck of the Genes ........................................................... 125
Our Inner Demons .......................................................... 127
Our Better Angels ........................................................... 128
Natural Values, Natural Morality .................................... 130
Caveats and Cautions ...................................................... 133
Chapter 7: The Big Lollapalooza!..........................................!137!
Welcome to the Anthropocene ........................................ 137
The Secret of Our Success .............................................. 141
Collective Learning ........................................................ 142
Network Effects .............................................................. 144
Imaginary Worlds and Artificial Instincts ....................... 145
Energy Capture ............................................................... 147
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Information-Ingenuity Capture ........................................ 149
Gene-Culture Coevolution of Collective Brains .............. 152
Chapter 8: Existential Challenges!........................................!155!
Anthropogenic Existential Challenges: ............................ 155
Natural Existential Challenges: ....................................... 155
Peak Humanity ............................................................... 156
Climates Change ............................................................. 159
Useless Arithmetic .......................................................... 162
The Next Leap in Energy-Matter-Ingenuity ..................... 169
Chapter 9: The Bottom Line!..................................................!173!
Creating and Capturing Value ......................................... 174
Parasites or Symbionts .................................................... 175
Species of Specialization................................................. 177
Little Bets, Big Wins....................................................... 178
Picking Winners ............................................................. 179
Diversification ................................................................ 181
The Alphas and the Rest of Us ........................................ 183
Teams Work ................................................................... 185
Inventing the Future ........................................................ 186
Bad Things Happen to Good Investors ............................ 190
Disaster Preparedness ..................................................... 191
Investing in Values ......................................................... 192
Fundamental Values........................................................ 193
Impact Investing ............................................................. 194
Creating a Little Big History ........................................... 195
Our Big Future ................................................................ 196
The Bottom Line ............................................................. 197
Acknowledgments!.......................................................................!199!
About the Author!........................................................................!203!
Bibliography!.................................................................................!205!
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Chapter 9:
The Bottom Line
We live in a layered world of selectively permeable membranes,
barriers, and borders through which energy, matter, and ingenuity are
channeled and directed by living cells, organisms, ecologies,
corporations, and cultures. In commerce, economics, and finance, we
have become very sophisticated in representing these flows as money,
but never forget that behind it all is a flux of real energy, matter, and
ingenuity that we have only recently come to understand and
enumerate. This fundamental insight about evolution and economics,
however, gives us little contextual insight into the diverse pathways
actualized in any particular evolutionary or economic niche. The
question remains: how does applied Big History provide an edge for
investors and entrepreneurs? What is the bottom line?
And it is at this point that I feel less like an informed outsider and
more like an imposter. During my career, I have built a large and
diversified intellectual and experiential portfolio— hence the ambition
of this book—but my own investment portfolio is modest and mostly
managed by TIAA-CREF. There are many technicalities and details
about which I lack understanding. In this last chapter, this Big Historian
is going to take what he has learned to develop some normative insights
about investing and business in a complex world. I do so for lay
investors as well as for those with vast formal training and experience
working in business, finance, and economics. I find this daunting on
both accounts.
Perhaps I should include some boilerplate legal disclaimer at this
point as one might find in other financial publications and
presentations. Nothing contained in this book constitutes investment
advice or offers any opinion with respect to the suitability of any
security or asset class. The views expressed in this book should not be
taken as advice to buy, sell, or hold any security or asset class. Any
strategy described herein is for illustrative purposes. No representation
or warranty, express or implied, is made or given to the information
cited in this book as to the accuracy, completeness or fairness of such
information, and no responsibility or liability is accepted for any such
information. And most important, past performance of an investment,
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strategy, fund, economy, species, and planet is not a guarantee of future
results.
Creating and Capturing Value
From the macro perspective, there is no lack of energy, matter, and
potentially also ingenuity to drive future evolutionary complexification
and economic growth on our restless planet. From a practical
perspective, however, an increase in consumption is generally at the
expense of other entities in the eat-and-be-eaten food chains and
economic markets.
There are two sides to the dramas of evolution and economics. On
the one hand, other living beings must die so that we may eat and live.
Other economic entities must also lose so that we may profit. There is
zero-sum competition in life and in markets between winners and
losers. A buyer must exist for every seller and often this means a profit
gained through someone else’s loss. Economic markets could not
otherwise exist. Natural selection and economic selection require as
much. There is a tragic dimension to evolution, economics, and life.
Economic markets, like nature, can indeed be “red in tooth and claw.”
It is the great Eucharistic law—eat and be eaten. Economics remains a
dismal science.
From a different vantage point, however, the dramas of evolution
and economics are actually epic stories of progress measured in
exponential leaps in cooperation, creativity, and complexity. In a world
of increasing prosperity, the cooperative side to economics (and
evolution) poses a fundamentally different moral, aesthetic, and value
proposition for entrepreneurs, investors, and other living things. This
sets off a non-zero-sum dynamic of win-win in which exchange creates
benefits for many parties, floating all boats and increasing productivity,
incomes, and wealth. This is the larger story of evolution and our
species’ rapid rise.
Competition and cooperation are two aspects of the real world. We
should avoid fuzzy thinking about either side of this dialectic,
remembering always that in the end we all die. From the beginning of
the universe, the certainty of death and taxes was mandated by the laws
of thermodynamics. In the dialectic between competition and
cooperation, however, the win-win of cooperation is the more creative
and dynamic force behind evolution in general and our species’
remarkable success in particular.
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Parasites or Symbionts
People who work and win in finance are often perceived by the
larger society as parasites sucking the blood out of the rest of the
otherwise productive economy.
237
The reality is much more
complicated. Indeed, from the perspective of Big History, all living
beings are in the business of extracting and consuming matter, energy,
and ingenuity from their environment. We’re all parasites sucking our
existence and complexity out of the great thermodynamic flux.
If we include pension and sovereign funds, then the people who
directly or indirectly buy, own, and sell securities constitute a
significant, albeit privileged, portion of humanity today. If we include
the insurance industry in this equation, then the portion of humanity
directly and indirectly invested in the financial instruments is larger
still. We might expand this circle further by including government
spending and debt as a critical component of finance that extends the
circle to include all citizens. Indeed, anyone with a bank account, a
credit card, a mortgage, a student loan, or a wallet full of cash is
already a cog in this enormous, complex, distributed system.
Together, financial services and insurance constitute about 7
percent of the US GDP,
238
but they play a significant role in enabling
all other sectors of the economy to function. Finance may not be the
engine of capitalism, but it is a vital lubricant without which the engine
would freeze up. Furthermore, most of the money in circulation, as
already discussed, is created by private lenders, not governments.
Institutional and individual investors—buyers and sellers, winners and
losers, debtors and creditors—provide three important functions in the
economic superorganism of humanity.
First, the market acts like a membrane in a cell or an organism,
transporting energy-matter-ingenuity to where it creates income-
wealth-value. The financial service industry enables the distribution of
real goods and services around the world in real time. The world would
not function without this complex allocation system, any more than a
cell could survive without its selectively permeable membranes. Seven
percent of GDP is a relatively small transaction cost for the function of
this amazingly productive economic superorganism.
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237
Matt Taibbi, "The Great American Bubble Machine," Rolling Stone, 4/5/2010 2010.
238
Analysis, "U.S. Gdp by Year."
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The second function of the market of buyers and sellers, lenders
and borrowers, is to select winners and losers. Here the market
functions much like the forces of natural selection in evolution to
“blindly” promote the most adaptive and eliminate the least adaptive
enterprises. No wonder that people resent bankers, hedge fund
managers, and investors. They play the part of the grim reaper in
economic selection—often benefiting from the failure of others.
The third function of the global finance industry is to consume,
create, and spread information-ingenuity around the world. Markets
promote innovation. They are not particularly efficient, except in this
sense of dispersing knowledge and know-how around the world.
Indeed, markets are not particularly fair, as they tend to concentrate
wealth in the hands of the few.
239
Capitalism provides neither according
to needs nor according to merit.
240
What global capitalism does well is
promote innovation-adoption-adaptation. Financial services thus
selectively speed up the global distribution of information and
ingenuity.
This macro perspective on finance says nothing about what the
appropriate compensation should be for CEOs, hedge fund managers,
bankers, and investors of all sorts. Of course, there are huge differences
in scale between a teacher hoping to retire on a modest pension and a
top hedge fund manager taking home over a billion dollars in any given
year. This macro perspective does not inform us about how the rewards
and losses should be shared within a firm among employees or how the
earnings should be taxed by the larger society, nor does it tell us what
regulations are appropriate for protecting us from the vices and follies
of others. I only want to emphasize that the 7 percent “transaction fee”
on the entire economy is not necessarily excessive. Indeed, it is a
bargain. And while extreme wealth results for the few within this
economic system, no one gets to take this wealth beyond the grave.
And as long as there is social mobility, a shared tax burden, and
philanthropic charity, the social contract that sustains free markets and
free societies may yet endure.
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239
Thomas Piketty, The Economics of Inequ ality (Cambridge, MA: Belknap Press, 2015).
240
Giacomo Corneo, Is Capitalism Obsolete?: A Journey through Alternative Economic Systems
(Cambridge, MA: Harvard University Press, 2017).
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Species of Specialization
The most important economic investment that individuals make is
in their education and career choices. This is where you will spend
most of your time and probably earn most of your money. Because of
the exponential growth in collective learning, knowledge and know-
how are abundant, expansive, and inexpensive. The problem is that
there is so damn much information and ingenuity out there. Acquiring
competency in any particular domain can take decades of social
learning. Professions that require extensive training, certification, and
licensing generally return higher compensation than other jobs.
Specialized careers function much like a moat that ensures scarcity,
leading to higher compensation. Presumably you have chosen a career
that matches your talents and passions with your needs for income and
security. Hopefully you have also garnered surplus income that you
saved and invested.
If finance and economics are not your area of expertise, you may
best be served by simply buying index funds with low management
fees. Specialized mutual funds and exchange-traded funds allow one to
further focus your investments in economic sectors and diverse
geographies, but don’t delude yourself that you’re competent to
actively manage your portfolio. It takes a lot of research and due
diligence to beat the market averages. Little ole you will be competing
with hedge funds, investment banks, and mutual funds that employ
armies of researchers and analysts with many years of training and
experience. Even professionals in finance generally prefer to hire others
to manage their investments (and are sometimes also restricted from
buying and selling individual stocks because of access to insider
information). It is probably a good idea to have two or three separate
investment managers as a hedge to incompetence and possible
maleficence. Moreover, all that time and effort spent on studying the
market is a huge opportunity cost in time and energy that could have
been spent doing something more productive, less risky, and more
enjoyable. It is one thing if you enjoy religiously reading financial
news, but maybe you would rather be spending your free time playing
with your children, working in the garden, getting some exercise, or
binge watching the latest Netflix movie.
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Little Bets, Big Wins
A little bet at the right time and place can lead to fabulous
fortunes—Netflix being a recent example. Netflix (NFLX) went public
in May 2002 at $15 per share. After two stock splits— 2004 (2:1) and
2015 (7:1)—an initial purchase of 100 shares would now be 1400
shares trading recently above $400 per share. In sixteen-years your
initial investment of $1,500 would have returned $560,000 not
including dividends, or a 35,000 percent return on investment over
sixteen years.
The easiest way to get rich quick would be to have been smart or
lucky enough to buy and hold several hundred shares of Netflix in
2002. The history of stock markets includes many more such examples.
Apple stock at the 1980 IPO price of $22 per share. There have
been four stock splits, so your original 100 shares grew to 5,600 shares
valued today at around $175 per share, or $980,000. This is a 30,000
percent increase in value over thirty-seven years on your original
investment, and that is not including dividends paid out annually.
241
Similarly, if you were smart or lucky enough to buy 100 shares of
Amazon at $18 per share when it went public in 1997, you would also
be very fortunate. After three stock splits, you would now own 1,200
shares of Amazon recently trading at around $1,500 per share, or
$1,800,000. This is a 100,000 percent increase over twenty-one years
of your original investment of $1,800. Similar stories could be told
about Facebook, Google, and others. Unfortunately, those boats have
already set sail.
242
Smart people are out there now looking for the next big thing with
the possibilities of scaling and exponential growth. These days, more
and more of the shares of startups are locked up in advance by venture
capital and private equity shops, so the exponential possibilities will be
fewer for other investors if and when the shares go public.
243
Anticipating the next big thing is not an easy or certain business.
Many a startup has crashed and burned. In 1996, the more obvious
Internet search engines to invest in were Yahoo!, Magellan, Lycos,
Infoseek, AltaVista, Excite, and the once-ubiquitous AOL platform.
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241
"Macrotrends," http://www.macrotrends.net/stocks/research.
242
Ibid.
243
Vito Racanelli, "Big Ipo Gain? Don't Bet on It," Barron's, September 18, 2017 2017.
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Google was launched in 1998, operating initially as just another search
engine for the growing content on the Internet. Similarly, Facebook
was a latecomer to social networking, replicating functions and services
already provided by Friendster and MySpace. And when Amazon
began in 1997, the idea of giving one’s credit card information online
seemed strange and dangerous to most consumers. Few could envision
the larger disruption in retail shopping and exponential possibilities that
inspired Jeff Bezos to start selling books online. Similar stories can be
told about most technological innovations leading to new industries in
the history of electricity, automobiles, and more. While the profits can
be enormous, there end up being a lot of failed enterprises and investors
along the way.
Exponentiality is more easily achieved over a longer time horizon.
A modest 3 percent inflation-adjusted rate of return on investment will
double in value after twenty-four years. Over fifty years, the value
quadruples. Intergenerational wealth will accrue twentyfold over a
hundred-year timeline. At this point, exponentiality begins to look
absurd. Two hundred years in on our 3 percent annual return, your
descendants would be looking at a 400-fold increase in the initial
investment. You don’t need to be a master of the universe or quant-
rocket scientist to win at this long game. You need only disciplined
saving, a diversified portfolio, competent managers, and a longer time
horizon.
Albert Einstein is reputed to have called “compound interest the
most powerful force in the universe.”
244
From the perspective of Big
History—the flows of energy, matter, and ingenuity in evolution and
economics—compounding processes leading to exponential leaps are
certainly part of our past history and future possibilities. Exponentiality
is part of the possibility space of Earth and its creatures for as long as
our Sun provides. In finance, exponential returns-on-investment is the
holy grail.
Picking Winners
Thoughtful!entrepreneurship!and!investing!requires!knowing!
something!about!the!competitive!and!innovation!space!in!different!
economic!sectors—food,!water,!energy,!transportation,!technology,!
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244
Einstein quotes about “compound interest” begin to appear after his death in writing and
without citation. The quote is probably apocryphal.
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construction,!manufacturing,!real!estate,!consumer!goods,!
medicine,!education,!entertainment,!and!so!forth.!In!this!case,!
knowing!“all!the!big!ideas!from!all!the!big!disciplines,”!as!Charlie!
Munger!advised,!also!means!understanding!in!broad!brushstrokes!
some!details!about!all!the!major!sectors!of!the!global!economy.!!
Vaclav!Smil!is!one!of!my!guides.!In!his!many!books,!Smil!
provides!an!overview!of!the!global!flows!of!energy,!matter,!and!
ingenuity!from!the!Industrial!Revolution!to!today.!His!work!makes!
investors!familiar!with!how!different!sectors!evolved!and!are!
evolving.!It!was!not!self-evident!to!me!before!reading!Smil,!for!
instance,!that!there!is!a!global!shortage!of!sand—a!particular!kind!
of!river!sand!suited!for!use!in!concrete.!And!the!world!is!consuming!
a!lot!of!concrete.
245
!!
In!his!book!The$Nature$of$Value,!Nick!Gogerty!introduced!the!
concept!of!“ino”!as!a!unit!of!innovation!and!the!key!to!value!
creation!in!economic!history!(which!we!explored!in!chapter!four).!
Gogerty!cites!Larry!Keeley!and!his!co-authors!at!the!Doblin!Group,!
who!studied!over!2,000!successful!innovations!in!businesses!and!
categorized!them!into!ten!types.!Innovations!in!these!ten!areas!can!
lead!to!unique!business!capabilities!and!competitive!outcomes:!
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1. Profit Model
2. Network
3. Structure
4. Process
5. Product Performance
6. Product System
7. Service
8. Channel
9. Brand
10. Customer Engagement
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Try using this list to enhance your SWAT analysis (strengths,
weaknesses, assets, threats) of a particular company in a particular
economic cluster. Remember that we are trying to understand
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245
Smil, Energy in Nature and Society; Making the Modern World: Materials &
Dematerialization (New York: Wiley, 2013).
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Gogerty, The Nature of Value: How to Invest in the Adaptive Economy, Kindle 1136; Larry
Keeley et al., Ten Types of Innovatio n: The Discipline of Building Breakthroughs (New York:
Wiley, 2013).
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competitive advantages and disadvantages within a cluster. A cluster
analysis gives a fuller understanding of the value proposition along
with the probabilistic space of future scenarios for any particular
enterprise in that competitive space. Unique capabilities in these ten
domains provide the edge for a company in the face of competition.
Remember that innovations in general float all our economic boats in
the long run; but innovations in particular—innovations that are
difficult to replicate, that have barriers to entry—lead to economic
success in the short run for particular companies and their shareholders.
If an economic cluster is highly competitive and fully developed,
Gogerty notes, the businesses therein have lower rates of return. Most
of the value in such clusters will be realized by the consumer and not
by the enterprises in that cluster. A crowded business environment may
also involve a lot of turnover, as companies fail because of these
narrow margins. This describes the restaurant industry in New York
City and the steel industry on a global scale over the past fifty years. In
some clusters, over time, there will be consolidation into a few super-
organizations through mergers, acquisitions, network effects, and
economies of scale.
Diversification
Building a diversified portfolio is one of the hallmarks of
successful investing. The received wisdom advises maintaining a
variable distribution among stocks, bonds, fixed income, and cash
holdings depending on life circumstances, time horizons, and formulaic
percentages. Stocks are further broken down into large, medium, and
small capitalized firms. Additional diversification is achieved by
distributing holdings across economic sectors—energy, food,
manufacturing, transportation, health care, real estate, retail, tech,
mining, and so on.
Publicly traded stocks are not the only game in town. The larger
investment landscape includes trading in commodities, currencies,
bonds (private and public, secured and unsecured debt), private equity,
options, and derivatives. It is also possible to directly trade on
macroeconomic trends such as the volatility index (VIX). Retail
investors may not have access to many of these instruments, as they are
only marketed to institutional and qualified investors. In all these
exchanges, investors can also diversify internationally across
geographies and nations. A competitive space exists within each of
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these economic clusters and international markets. However, one
cannot and should not try to inhabit every economic niche. Each
becomes its own area of expertise and specialization.
Even more important than having a diversified portfolio is having
a diversified mind. To thrive in finance, one must cultivate diverse
competencies. Mathematics and applied sciences are enormous
cognitive assets that take effort to build and maintain. Individuals in
finance typically work in teams, so they also need skills in cooperation
and communication. And financial services are perhaps the most
international and culturally diverse industry in the world today.
Members of this group need to be proficient in all of the humanistic
disciplines, including history, politics, religion, culture, sociology,
psychology, and linguistics. The undergraduate curriculum for a career
in finance today is a broad and rigorous liberal arts education.
247
There is a pattern in ecology that might also be applied to
managing portfolios and diversified minds. The r/K theory tracks the
trade-offs between having many offspring with low parental investment
or fewer offspring with higher parental investment. Mouse reproduction
follows an r-selection strategy, with many offspring in a litter, a short
gestation period, less parental care, and a short time until sexual
maturity. Whales, elephants, and humans follow a K-selection strategy,
with few offspring, a long gestation period, longer-duration parental
care, and a long period until sexual maturity.
Humans are actually on a K-selection extreme—more so than ever
in the contemporary world. In the past two generations, we’ve gone
from fertility rates of 5-plus children per woman to 2.5 children per
woman. There are many factors that account for this stunning drop in
fertility rates, including an economic response to the increased costs of
parenting caused by migrations from rural and agricultural societies to
urban and capitalist societies. In many instances, childhood dependency
in humans now requires parental investment all the way through
graduate school. This may be a case of diminishing return on
investment.
Portfolio diversification is a mix of r/K selection strategies. Place
of employment is generally a K-selection situation for the individual. A
person’s job requires a great deal of time and energy and presumably
provides significant returns. Saving and investing is a way of
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247
Robert Hagstrom, Investing: The Last Liberal Art (New York: Columbia Business School,
2013).
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183!
diversifying beyond your pay check (and beyond whatever stocks and
options you may hold in your company). An r-selection investment
strategy entails a scattered approach with minimal capital outlay to
many different securities in the expectation that some fraction will
survive and thrive. This is easily achieved by holding index funds. On
the other hand, selecting individual companies to hold in your portfolio
is a K-selection proposition. You are laying out a lot more effort in
selecting and monitoring the company and the market. In a nutshell, r/K
selection strategies in population biology are analogous to the Pareto
Principle in finance (i.e., that 80 percent of return in a portfolio comes
from 20 percent of the investments).
A diversified portfolio is a way of inhabiting multiple niches in the
economic ecologies and hedging against losses. A diversified mind is a
way of synergizing with others to innovate in the business of creating
and capturing value.
The Alphas and the Rest of Us
The managers of successful hedge funds, mutual funds, and
investment banks tend to be smart contrarians. Being contrarian is
essential to beating the averages. By definition, you cannot outperform
the market by following the crowd. Being smart is essential to not
being beaten in the process. As the adage goes, luck favors the prepared
mind. Being smart, in this context, includes some mastery of analytic
and mathematical thinking, attention deficit hyperactivity disorder
(ADHD) perhaps with a touch of creative dyslexia, voracious reading,
an active memory, and a competitive streak.
The successful fund manager is also smart and contrarian when it
comes to politics and religion. Charlie Munger counsels the avoidance
of “extremely intense ideology” because it turns your mind into
“cabbage.” Don’t get too worked up for or against any particular
religious, political, or economic orthodoxy. Munger advocates
inversion—turning a problem upside down or inside out—as a way of
gaining clarity. He counsels us to articulate the other person’s
perspective better than they might do so themselves before forming our
own opinion. This ability to consider many sides of a heated argument
is similar to the skill involved in analyzing negative and positive
scenarios for any given investment decision.
248
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248
Munger, "Usc Law School Commencement Address, May 1, 2007".
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The alpha fund managers often have big, competitive egos. At a
certain point, it is not really about the money anymore, but about social
status in relation to your peers who are playing the same game. The 0.1
percenters at the top are not comparing themselves to the 99.9 percent.
The game is all about return-on-investments and growing portfolios.
Conspicuous consumption can be a manifestation of this
competitiveness and our status-conscious hunter-gatherer brains. It is
also a way to diversify assets. Real estate, jewelry, car collections, art,
and so forth are some of the ways that the superrich and the rest of us
turn dollars into tradable stuff, not to mention enjoyment.
The alphas, however, are fundamentally frugal creatures. They
climbed to the top by shopping for bargains, preserving capital, and
reinvesting. The ratio of securities-to-stuff is weighted heavily on the
securities side. Late in life, status-and-charity fortuitously aligned in
named endowments at universities, hospitals, museums, concert halls,
public broadcasting, human services, and more.
And because our hunter-gatherer brains are finely attuned to social
status and dominance hierarchies, to winning and losing, pleasure and
pain, and approaching and fleeing, the successful investor needs also to
cultivate a Daoist-like detachment from the results of his or her
decisions.
249
Surely, one should learn from one’s mistakes, but the
anticipatory anxiety and post hoc anguish of losing diminish one’s
cognitive capacities. A big win also distorts our perceptions and
decision-making. Both hope and fear turn out to be swindlers in the
game of buying and selling securities.
Poker isn’t the right analogy to successful fund management.
Instead, think of what it takes to play and win bridge tournaments. In
bridge competition, partners rotate through twenty-four boards each
with a different deal of the cards. Everyone has an opportunity to play
identical hands over twenty-four iterations, hence the term “duplicate
bridge.” Moving from table to table, partners are scored on their
relative performance. The players’ skills over the course of a
tournament, rather than the luck of any particular deal of the cards, is
decisive in determining the winners. There is no such thing as bluffing
in bridge; instead, it is a game of skill against the backdrop of
incomplete knowledge and probabilities. The bridge master beats the
poker player in the long game of investing.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!
249
The Daoist term in Chinese is wei wuwei, which means “engaged non-engagement” or “active
non-action.”
!
!
185!
Michael Mauboussin, now Director of Research at Blue Mountain
Capital, adjunct professor of finance at Columbia University Business
School, and chairman of the Board of Trustees at the Santa Fe Institute
has had a distinguished career. His many books and essays are always
insightful. In a 2016 essay written while still head of Global Financial
Strategies at Credit Suisse, Mauboussin looks back on his thirty-year
career in finance and offers his “Reflections on the Ten Attributes of
Great Investors.” There is a lot to this essay, but in summary the ten
attributes are:
1. Be numerate and understand accounting
2. Understand value (the present value of cash flow)
3. Properly assess strategy (or how a business makes money)
4. Compare effectively (expectations versus fundamentals)
5. Think probabilistically (there are few sure things)
6. Update your views effectively (beliefs are hypotheses to be
tested, not treasures to be protected)
7. Beware of behavior biases (minimizing constraints to good
thinking)
8. Know the difference between information and influence
9. Position sizing (maximizing the payoff from the edge)
10. Read (and keep an open mind)
250
On the last point—read—this book is also an invitation to go my
sources and dig deeper. Read Mauboussin and other authors discussed
in this book. My cursory reviews do them insufficient justice.
While it may not be given to all of us, or desired, to be the next
investment wizard and master of the universe, it is worth noting the
personality, character traits, virtues, and skills of those who succeed in
these careers. Many of these attributes are worth cultivating for their
own sake, even if you don’t work in finance.
Teams Work
If you do work in finance or manage a business, then you are a
specialist involved in a team sport. Teams are how we overcome the
personbyte limits to acquiring knowledge and know-how. And properly
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!
250
Michael J Mauboussin, "Thirty Years: Reflections on the Ten Attributes of Great Investors,"
(New York: Credit Suisse Global Financial Strategies, 2016).
!
!
186!
structured, teams are also how we compensate for the weaknesses of
our hunter-gatherer brains. Teams are how you create a diversified
group mind. Generalists and diverse specialists need each other to
create, innovate, and grow productivity and profits.
The investment team has been described as a “heterarchical
collaboration.”
251
This is reflected in the open architecture of the
trading floor in which managing directors, junior analysts, and
everyone in between operate in small groups without a visible
hierarchy. Structuring an effective investment team requires that we not
defer to authority or group think. Managers should cultivate and reward
disagreements and debate within their teams. Building a diversity of
perspectives within the team should also include gender diversity,
because men and women really do think and behave differently. Ray
Dalio, the founder of Bridgewater whom we encountered in chapter 4,
advocates “radical transparency” in team decision-making.
252
Philip
Tetlock also advocates a team approach consisting of differently
minded specialists and generalists building a distributed intelligence
through the exploration of multiple scenarios, possibilities, and
probabilities.
253
That means that you need a diverse team of experts who interact,
share, and actively debate the decisions at hand—examining the
challenges and opportunities from different perspectives; using multiple
models at both micro- and macro scales; considering the effect of
feedback loops and the possibility of unintended consequences; and
combining analytic, associative, and inductive thought and decision-
making processes. Economics and finance, like human evolution more
broadly, are as much about how we cooperate within groups as they are
about competition between groups. If the individuals in a group can
become better cooperators, the investment team will be more
competitive.
Inventing the Future
Innovation is the key to growing businesses and economies; but
innovation is not necessarily easy to come by. In his book Where Good
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!
251
Daniel Beunza and David Stark, "How to Recognize Opportunities: Heterarchical Search in
Trading Rooms," in The Sociology of Financial Markets, ed. Karin Knorr Cetina and Alex Preda
(Oxford: Oxford University Press, 2004).
252
Dalio, Principles: Life and Work; "How to Build a Company Where the Best Ideas Win".
253
Tetlock and Gardner, Superforecasting: The Art and Science of Prediction.
!
!
187!
Ideas Come From, Steven Johnson argues that innovation is the result
of diversified minds ruminating over problems and possible solutions.
The long-zoom approach lets us see that openness and
connectivity may, in the end, be more valuable to innovation than
purely competitive mechanisms. Those patterns of innovation
deserve recognition—in part because it’s intrinsically important to
understand why good ideas emerge historically, and in part
because by embracing these patterns we can build environments
that do a better job of nurturing good ideas, whether those
environments are schools, governments, software platforms,
poetry seminars, or social movements. We can think more
creatively if we open our minds to the many connected
environments that make creativity possible.
254
Here, too, something analogous to the r/K ratio in animal
reproductive strategies might apply. The 80 percent of your learning
across diverse disciplines help empower the 20 percent in which you
have specialized. Johnson continues:
If there is a single maxim that runs through this book’s arguments,
it is that we are often better served by connecting ideas than we
are by protecting them . . . when one looks at innovation in nature
and in culture, environments that build walls around good ideas
tend to be less innovative in the long run than more open-ended
environments. Good ideas may not want to be free, but they do
want to connect, fuse, recombine. They want to reinvent
themselves by crossing conceptual borders. They want to
complete each other as much as they want to compete.
255
In his book Out of Control: The New Biology of Machines, Social
Systems, and the Economic World, Kevin Kelly offers a formula for
complex creativity in nature and societies. He calls these “The Nine
Laws of Gods.” To be a creator, one needs to lose control of one’s
finest creations, hence the book’s title “out of control.” Kelly offers the
following guidelines to would-be innovators and creators of elegant
complexity:
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!
254
Steven Johnson, Where Good Ideas Come From: The Natural History of Innovation (New
York: Riverhead Books, 2010), 21.
255
Ibid., 22.
!
!
188!
1. Distribute being;
2. Control from the bottom up;
3. Cultivate increasing return;
4. Grow by chunking;
5. Maximize the fringes;
6. Honor your errors;
7. Pursue no optima, have multiple goals;
8. Seek persistent disequilibrium; and
9. Change changes itself.
256
!
These!“Nine!Laws!of!God”!might!well!serve!portfolio!and!
business!managers.!As!the!title!of!Kelly’s!book!implies,!the!first!step!
in!nine!(or!twelve)!is!to!admit!that!you!are!out!of!control!(i.e.,!
powerless).!The!world!is!complex.!Markets!are!fundamentally!
unpredictable.!Life!is!fragile!and!finite.!I!imagine!that!these!nine!
laws!apply!as!much!to!the!internal!workings!of!investment!teams!
and!organizations!as!well!as!to!the!kind!of!investment!portfolio!one!
should!build.!Kelly’s!nine!laws!can!also!be!understood!as!a!formula!
for!building!diversified!minds!and!perhaps!also!a!robust!ethical!and!
moral!framework.
257
!!
Distribute!being,!pursue!no!optima,!grow!by!chunking,!
cultivate!increasing!returns,!honor!your!errors—all!of!this!
translates!into!investments!in!complexity!across!all!asset!classes:!
small!to!large!cap!stocks,!junk!bonds!to!guaranteed!securities,!real!
estate!and!index!funds,!commodities!and!currencies.!Thematically,!
it!moves!across!diverse!sectors!and!geographies,!tracking!macro!
and!micro!movements!of!the!portfolio!as!an!ecosystem!of!
interrelated!parts.!Investing!in!complex!situations!and!securities!is!
now!the!best!way!to!preserve!and!build!capital!in!a!complex!world.!
Play!both!the!creative!and!destructive!sides!in!diverse!economic!
ecologies!and!scales.!This,!at!least,!is!how!the!big!hedge!funds!
achieve!alpha!and!earn!their!fees.!
As!the!baseball!legend!and!pithy!sage!Yogi!Berra!once!quipped,!
“It!is!tough!to!make!predictions,!especially!about!the!future.”!And!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!
256
Kelly, Out of Control: The New Biology of Machines, Social Systems, and the Economic
World..
257
William J. Grassie, "Wired for the Future: Kevin Kelly's Techno-Utopia," Terra Nova: Nature
and Culture 2, no. 4 (1997).
!
!
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3,!1266aV!839!0,-39!/+8/!2U524/!0,42@86/246!=242!,31C!617.+/1C!?2//24!
/+83!@+83@2!73!.2//73.!54297@/7,36!47.+/E!F39229B!+76!6/-9726!6-..26/!
/+8/!/+242!76!83!73:2462!4218/7,36+75!?2/=223!/+2!>2978!08>2!,0!/+2!
2U524/!839!/+2!8@@-48@C!,0!/+274!54297@/7,36E
258
!Q3,/+24!4286,3!3,/!
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F3!/+274!?,,<!Superforecasting:$The$Art$and$Science$of$
PredictionB!^+7175!*2/1,@<!839!Y83!S849324!=23/!,3!/,!6/-9C!/+2!
/487/6!839!?2+8:7,46!/+8/!426-1/29!73!?2//24!54297@/7,36E
259
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0,42@86/246E!GQ!0,U!<3,=6!>83C!/+73.6B!?-/!8!+29.2+,.!,32!?7.!
/+73.BH!=4,/2!/+2!S422<!5,2/!Q4@+71,@+-6!,:24!ZB&DD!C2846!8.,E
260
!F3!
+76!54297@/7,3!/,-438>23/6B!*2/1,@<!0,-39!/+8/!
. . . low scorers look like hedgehogs: thinkers who “know one big
thing,” aggressively extend the explanatory reach of that one big
thing into new domains, display bristly impatience with those who
“do not get it,” and express considerable confidence that they are
already pretty proficient forecasters, at least in the long term. High
scorers look like foxes: thinkers who know many small things
(tricks of their trade), are skeptical of grand schemes, see
explanation and prediction not as deductive exercises but rather as
exercises in flexible “ad hocery” that require stitching together
diverse sources of information, and are rather diffident about their
own forecasting prowess.
261
!
F/!>8C!?2!/+8/!2@,3,>7@!0,42@86/73.!0,11,=6!>,42!47.,4,-6!
4-126!/+83!54297@/73.!5,17/7@81!,-/@,>26!839!2:23/6E!*+242!76!
@24/8731C!>,42!G98/8H!/,!6/-9C!839!9251,C!73!>8<73.!2@,3,>7@!
54297@/7,36E!*+2!.232481!4-12B!+,=2:24B!+,196E!b,U26!>8<2!?2//24!
0,42@86/246E!*+2C!G8..42.8/2!524652@/7:26EH
262
!Q!97:24670729!>739!76!
8!@47/7@81!@,.37/7:2!8662/!0,4!73:26/,46!839!0,U26E!*+76!?,,<!76!83!
2U/23929!2U24@762!73!?-71973.!8!97:2462!/,,1<7/B!@47/7@81!/+73<73.B!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!
258
Philip E. Tetlock, Expert Political Judgment: How Good Is It? How Can We Know? (Princeton,
NJ: Princeton University Press, 2005).
259
Tetlock and Gardner, Superforecasting: The Art and Science of Prediction.
260
Isaiah Berlin, The Hegdehog and the Fox (London: Weidenfeld & Nicolson, 1953).
261
Tetlock, Expert Political Judgment: How Good Is It? How Can We Know?
262
Tetlock and Gardner, Superforecasting: The Art and Science of Prediction, 77.
!
!
190!
learning!agility,!and!extending!the!possibilities!of!creative!
innovation.!
Bad Things Happen to Good Investors
In contemplating investment decisions, investors should pay close
attention to the dynamics of feedback, time delays, and tipping points.
Economies, we have learned, are complex adaptive systems. Investors
can anticipate, but not predict, oscillating patterns of overshoot,
collapse, chaos, and the emergence of new equilibria. The frequency,
amplitude, and duration of those patterns are impossible to forecast
with any certainty, but significant enough to require preparation. By
paying attention to these larger dynamics, we might better understand
and prepare for these episodes, surviving Nassim Taleb’s “Black
Swans” and turning them into Didier Sornette’s “Dragon King”
opportunities.
263
Debt obligations limit one’s future possibilities. This is true of
individuals, corporations, and governments. Whether it is buying on
margins or carrying a mortgage, debt is generally incurred with the
expectation that it will be easier to repay with continued growth. When
growth rates stall or decline, however, as we have recently experienced,
then this debt can quickly turn into an exponential burden, pulling
individuals, corporations, and nations into a downward spiral.
Excessive leverage in an economy is also dangerous, because the
system is so interconnected on a global level that minor failures of
corporations, banks, and nations will tend to reverberate and amplify
around the world in a self-reinforcing, negative feedback loop. Debt is
inherently destabilizing, even though debt is what keeps the monied
economy running.
We!need!to!build!what!Nassim!Taleb!calls!“antifragility”!into!
our!economies,!portfolios,!and!lives.
264
!This!means!limiting!leverage!
and!keeping!enough!capital!in!reserve!that!investors!can!reenter!
the!market!after!minor!and!major!disruptions,!when!stocks!and!
securities!are!likely!to!be!significantly!underpriced!and!a!gradual!
economic!rebound!can!be!expected.!Investors!must!have!staying!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!
263
Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improba ble, 2nd ed. (New
York: Random House, 2010); Didier Sornette, "Financial Crisis Observatory," ETH Zurich,
http://www.er.ethz.ch/fco.
264
Taleb, The Black Swan: The Imp act of the Hig hly Improbable; Nassim Nicholas Taleb,
Antifragile: Things That Gain from Disorder, Kindle ed. (New York: Random House, 2012).
!
!
191!
power!as!well!as!earning!power.!In!investing,!as!in!economics!and!
ecology,!it!would!be!better!to!change!the!rhetoric.!Rather!than!
talking!about!sustainable!futures,!let’s!talk!about!resilient!futures—
scenarios!in!which!individuals,!businesses,!portfolios,!and!societies!
bounce!back!from!disruption!stronger,!more!adaptive,!and!more!
adept!than!they!were!before.!!
Disaster Preparedness
Because!information!spreads!so!rapidly!today,!because!
technological!innovation!is!on!a!hyperbolic!trajectory,!because!the!
flow!of!Big!Money!is!growing!ever!more!intense,!investors!can!well!
expect!more!volatility!than!ever!before!in!the!coming!decades.!We!
just!don’t!know!what!or!when.!There!are!so!many!radically!
different,!but!plausible,!scenarios!for!the!short-!and!long-term!
futures!for!each!investment!and!the!world!as!a!whole.!!
Zooming!in!and!out!with!the!help!of!Big!History!is!also!a!
reminder!that!complex!adaptive!systems!can!be!extremely!fragile.!
Don’t!take!human!civilization!for!granted.!The!great!deleveraging!
and!natural!disasters!in!our!future!will!not!be!pretty,!but!it!is!a!sure!
thing!from!the!perspective!of!economic!and!ecological!histories.!!
The!rich!buy!super-yachts!not!just!for!recreation!and!status,!
but!as!a!way!to!escape!to!distant!lands!in!times!of!crisis.!They!keep!
money!in!offshore!accounts!and!stashes!of!gold!and!silver!bullion.!
Some!have!private!jets!ready!to!take!them!to!well-stocked!estates!
in!New!Zealand.!Others!keep!a!country!home!and!their!guns!ready!
in!expectation!of!the!social!chaos!that!will!ensue,!when!the!
electricity!fails,!transportation!halts,!and!food!supply!lines!dry!up.!
You!don’t!need!to!be!rich!to!hedge!your!bets.!Disaster!preparedness!
minimally!means!storing!a!month’s!worth!of!emergency!water!and!
other!supplies.!Depending!on!the!nature!of!the!disaster,!one!might!
flee!the!chaos!or!hunker!down!in!place,!each!requiring!different!
tactics!suited!to!the!location!and!circumstances.
265
!!
Don’t!panic!in!advance!or!otherwise!become!too!obsessed!with!
survival.!Sometimes,!one!is!in!the!wrong!place!at!the!wrong!time.!In!
the!end,!we!all!die!anyway.!Negativity!bias,!as!we!learned,!is!one!of!
the!major!cognitive!heuristics!that!gets!investors!and!the!rest!of!us!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!
265
"How to Prep are for Eme rgen cies," American Red Cross, h ttp://www .redcross.org/get-
help/how-to-prepare-for-emergencies/make-a-plan.
!
!
192!
into!trouble.!Maintaining!intellectual!and!emotional!equanimity!
does!not!come!easily!to!humans.!It!is!not!in!the!nature!of!our!
evolved!Paleolithic!cognition!and!emotions.!Getting!to!know!your!
hunter-gatherer!brain!and!partially!overcoming!your!evolved!
biases!may!provide!the!most!important!edge!of!all!for!investors!in!
particular!and!humanity!in!general!at!this!moment!in!our!cultural!
evolution.!
Investing in Values
The term “value investing” is well worn in finance. It is an
investment strategy first articulated by Benjamin Graham and David
Dodd in their 1934 book Security Analysis.
266
The strategy involves
buying securities at a discount of their “intrinsic” value by conducting
careful analyses of a company’s “fundamentals.” Value investing is
generally a long-term strategy of buy and hold.
For a philosopher, “investing in values” is more a complicated
question than studying price-to-earning ratios. Human values are hotly
debated within and between countries in cultural wars and clashing
civilizations. What does “values investing” mean in this broader sense?
What is the purpose of accumulating income and wealth? What are the
human values we seek to maximize in our life through our careers and
investments? Are there “universal” values to uphold?
It helps to do an inventory of many different kinds of values that
humans share, before getting lost in the flat monetization of value by
economic markets. Economic values are not all equal, even though the
use of money would lead us to think of them as equivalent and
interchangeable.
Take Maslow’s hierarchy of needs as one kind of guide.
267
At the
base of Maslow’s pyramid are physiological needs for survival—the
food and water needed to sustain life. Some businesses specialize in
providing these needs, albeit today in a complex, global manufacturing
and supply chain. Subsistence is essential, though today this involves
hunting and gathering in the aisles of your local supermarket.
In Maslow’s pyramid, the next level addresses the needs for safety
and security—for instance, shelter, clothing, and protection from harm.
Again, some businesses specialize in providing for these needs.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!
266
Benjamin Graham and David Dodd, Security Analysis (New York: McGraw-Hill, 1934).
267
Abraham H. Maslow, Motivation and Personality (New York: Harper & Brothers, 1954).
!
!
193!
Humans have traded in caves and yurts for suburban houses and urban
high-rise apartments, but the function provided is still essential for
human well-being.
Next in Maslow’s pyramid, we encounter social and psychological
needs for love and belonging, which are required if individuals are to
thrive. Once the purview of the hunter-gatherer tribal unit, social needs
today are provided by complex networks of families, friends, schools,
congregations, clubs, and all manner of affiliations, including,
especially, one’s place of work.
At the top of Maslow’s pyramid are needs for esteem and self-
actualization. In the context of economic plenty, the relative importance
of each layer inverts the pyramid, if not the actual causal hierarchy.
Fundamental biological needs can be taken for granted in wealthy
societies, whereas the roles of esteem and self-actualization loom ever
larger. Much of our economic activity today is focused not on the
necessities of life, but on providing goods and services for esteem and
self-actualization. Much of advertising is about connecting the top of
Maslow’s pyramid to products and services provided on the lower
levels.
Fundamental Values
It is pretty much universally the case that people everywhere
prefer health over sickness, freedom over slavery, prosperity over
poverty, education over ignorance, empowerment over powerlessness,
pleasure over pain, justice over injustice, easy over hard, and living
over dying. Missing from the list are three other universal preferences:
humans prefer belonging over isolation, meaning over
meaninglessness, and certainty over uncertainty. We might well expand
this list. We may disagree about the degree and interpretation of these
terms, but not about the basic principles. How much is enough? When
is enough too much? And, critically, how do we decide when these
universal preferences conflict with one another in actual life as they
necessarily do?
In economic terminology, we can refer to these values as “utility
functions.” The problem is that these various goods invariably conflict
with each other. We cannot maximize all goods simultaneously. Trade-
offs are necessary as we negotiate the satisfaction of our conflicting
aspirations and desires.
!
!
194!
One of the unfortunate side effects of money is the illusion that all
values can be represented interchangeably and reduced to a mere
number. This is certainly not the case. Sacred, moral, and aesthetic
values transcend cost-benefit analyses. And while there is much
disagreement about what counts for good, true, and beautiful values
around the world, these are potent categories that profoundly shape
human behavior beyond the ken of transactional economic analyses.
I am convinced that our material needs, as well as our spiritual
aspirations, are best served by limited forms of government. Individuals
should have the freedom to produce and consume, negotiate and
exchange, and worship and express themselves according to their own
preferences and abilities. The role of government is critical in
protecting private-property rights and individual liberties in such a free
society and free economy. Limited government can also regulate
commerce, communication, and other services in an effort to increase
efficiencies, including goods and services such as education,
transportation, and environmental protection. Limited government can
also promote forms of social insurance. In the latter categories are
police and national defense, but also healthcare and services for the
poor. Moreover, limited government can also create rules, regulations,
and enforcement to protect us from our frailties, follies, and vices.
Limited government adds value to the economy, for instance by
funding and promoting scientific research and technological
innovation. Taxes are the price of civilization. It is reasonable that
those who benefit most from civilization pay a larger share of the costs.
These convictions place me ambiguously somewhere between
libertarianism and democratic socialism. For me, the detailed policy
implications are pragmatic considerations to be debated, not immutable
ideological principles. I note that these classical liberal values are under
threat around the world today. The financial services industry, one of
the most cosmopolitan industries in the world today, has a big stake in
protecting and improving free societies.
Impact Investing
The destructive side of evolution and economics is necessary and
presumably also ultimately creative in the long run, but what is good
for your portfolio may not be good for your soul or society. Shorting a
particular company, for instance, is a different value proposition from
going long. Investing in the hopes of an enterprise’s failure is ethically
!
!
195!
distinct from investing in the hopes of an enterprise’s success. In fact,
investors piling-on can hasten the collapse of a company that might not
otherwise fail.
There are lots of investment opportunities for providing social
goods and creating new wealth. Given the choice, why wouldn’t you
prefer, on balance, to invest in companies that also provide for social
goods while returning a sustainable profit to shareholders? Social
impact investing adds good karma to your bottom line and helps make
a better world.
We need to also consider “anti-social impact investing” that
exploits human frailties. Profiting from addictions (tobacco, gambling)
and violence (slavery, arms exports, gladiator sports) are morally
compromised. Exploiting vulnerable populations (young, old, poor,
uninformed) is also beyond my moral ken. Short of government
regulations and restrictions, however, you will need to decide for
yourself whether to invest and profit from such businesses.
In truth, however, the web of interconnections in evolution and
economics means that there is no morally pure vantage point from
which one can live, work, and invest. Don’t let your sacred and moral
values delude you into fuzzy thinking, as if these issues were all black
and white.
Creating a Little Big History
High school students in the Bill Gates–funded Big History Project
are asked at the end of the course to write a short essay on a “Little Big
History” of their choice. The curriculum covers nine thresholds in
emergent complexity from the Big Bang to the present. The student’s
essay might start with something contemporary and familiar—sneakers,
coffee, horses, smartphones, pizza, etc.—but must then include at least
three of the nine thresholds in explaining how the object or commodity
functions and how it evolved.
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This, then, is your homework assignment—to create a Little Big
History for the valuation of your business. This book is itself a long
“Little Big History” for the financial services industry, but the
challenge now is to do the same within each industry and company. In
the corporate setting, the process might begin as a group brainstorm
that leads to a sense of common purpose, as well as new ideas for
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Gates et al., "The Big History Project".
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marketing and product development. It can be otherwise hard to see the
significance of one’s work—a small cog in a big organization and big
economy—without these larger perspectives.
As New York University Business School professor Aswath
Damodaran explores in his book Numbers and Narratives, the
valuation of a business is always also a story told. Financial numbers
and accounting formulas are presented as evidence for a particular and
plausible future outcome. Good storytellers are more likely to raise
capital and keep the company’s valuation high. A case in point is
Amazon, which until recently never made a profit and yet the
company’s stock valuation has soared into the stratosphere.
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Your
company’s Little Big History is more fodder for effectively telling your
story.
Our Big Future
Human civilization began fitfully some 10,000 years ago. The
Great Acceleration started its steep climb a mere 100 years ago. Earth
has another billion years, give or take, before our Sun turns into a Red
Giant. At that time, Earth will become too hot and uninhabitable.
Perhaps our descendants will have the technological means to build
new homes in our solar system farther away from the Sun. If they
succeed in such a migration, then our descendants may well have a 5-
billion-year future time horizon before the Sun uses up all its fuel and
goes completely cold. Whether 1 billion or 5 billion, these future time
horizons are difficult to grok. Our descendants have the possibility of
an incredibly big future.
[N.B., unless there are major new discoveries overturning
fundamental physics as we now understand it, accompanied by
commensurate technological innovations, interstellar travel will forever
remain science fiction. Wishful thinking does not make for good
investing or good science. As much as I enjoy watching Star Trek and
imagining such futures, the Earth and this solar system will forever be
our home.]
Imagining the next billion years of evolution, including human
evolution, is an impossible task. I only note that the Sun has sufficient
fuel to support Earth-based complexity for another billion years,
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Aswarth Damodaran, "Numbers and Narratives: Modeling, Storytelling, and Investing," in CFA
Institute, ed. NY SSA (Boston2014).
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perhaps much longer. The far future inevitable—death—is not as
interesting or important as the far future possible—life more abundant.
Our descendants have the possibility of an inconceivably big future on
this blessed planet. We now know that our cities and civilization, like
all complex adaptive systems, will come and go and need to be
continually rebuilt. In the process, we must seek to minimize entropy
and maximize creativity (e.g., ingenuity, work, value). As we rebuild,
let us build in resilience—the ability to bounce back stronger and more
adept than we were before. And ultimately, this may mean leaving
Earth for more distant shores within our solar system.
We now know that climates do change and, like our ancestors, our
descendants will also face evolutionary bottlenecks. Of all the large
mammals, however, we are the most likely to survive and thrive again
on the other side of those geological transitions—slow or fast, hot or
cold, dry or wet, anthropogenic or natural. Indeed, the other flora and
fauna may need our help reestablishing themselves on the other side of
major planetary catastrophes.
Our greatest vulnerability as a species is also our greatest asset.
Humans developed collective learning and thus knowledge and know-
how that can grow exponentially with each passing generation. Every
child, however, is also born without language and learning. Each
generation must be taught anew, if our species is not to forget what we
have been so fortunate to recently learn. Collective learning is thus our
greatest strength, but always at risk of being forgotten or diminished in
future bottlenecks.
Guaranteeing our big future, as best we can today, is the greatest
return on investment that we can possibly imagine. The most valuable
asset we can leave our descendants, to help them meet the challenges
they will surely face, is this grand scientific story we have been so
fortunate to recently learn—the greatest, truest, and most practical story
ever told. Their gift back to us from that big future is more meaning,
purpose, and value in our lives today.
The Bottom Line
The product of the evolutionary and economic processes, for you
and other living things, should be life more abundant, more beautiful,
more complex. In the end, it is not about me and mine, or even you and
yours. Collectively, we carry in our genes and minds all future
possibilities, even as our ancestors did for us. Life does not follow us to
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the grave. It continues without us. Our individual sojourns are brief, but
spectacular—each individual a remarkable node of complexity and
subjectivity. Each life is an incredible opportunity within the context of
our long and fortuitous evolution histories.
In the end, economic and evolutionary processes are not merely a
flux of energy, matter, and ingenuity, but also an immaterial flux of
ever more truth, beauty, and goodness. And while we have partially
enumerated truth through this exploration of Big History, beauty and
goodness remain precious mysteries.
The bottom line turns out to be as much a spiritual practice as an
investment or business strategy. Build diversified minds. Develop
enhanced mathematical, statistical, and analytic skills. Think
dynamically in terms of processes and relationships. Cultivate critical
curiosity. Pay attention to your hunter-gatherer instincts. Compensate
as necessary. Turn groupishness upside-down and inside-out to
enhances deductive, inductive, and associative decision-making. Do not
be seduced by hope or fear. Be a hopeful pessimist or better a
considered optimist. Learn from your losses with grace. Take your
gains with humility. Limit leverage. Seek exponentiality through
multiple optima. Innovate. Prepare for disasters. Be resilient. Clarify
your fundamental values, monetary and otherwise. Nurture the better
angels of your nature. Practice gratitude. Grok Big History!
