History is a funny thing. Despite being over and done with, it’s changing. It’s fluid. Our understanding of history is in a state of flux.

Our knowledge of any past event is always incomplete, probably inaccurate, beclouded by ambivalent evidence and biased historians, and perhaps distorted by our own patriotic or religious partisanship. “Most history is guessing, and the rest is prejudice.”

To top it off, we may not have enough information — yet or ever — to piece it all together. New ideas and discoveries can rewrite what we thought we knew about the past.

So historians make do with what they have. The result is an incomplete, biased, and often simplistic story that brings order to past events.

That’s roughly how The Lessons of History, a book by Will and Ariel Durant, presents it. And it relates surprisingly well to investing. For instance, the above describes how media present headlines and narratives around market moves. Continue Reading…

Quote for the Week

I refer to a cartoon whose caption is: “Everything that was good for the market yesterday is no good for it today.” I wrote that “in the real world, things generally fluctuate between ‘pretty good’ and ‘not so hot.’ But in the world of investing, perception often swings from ‘flawless’ to ‘hopeless.’” Nobody can say why this happens or why the tipping point was reached. But the psychology of the market is so irrational and excessive in its swings…

You just can’t think of the market as this machine. There is no schematic for how it works. It just picks funny things to obsess about on the positive side for a while and then the negative side. This could be the beginning of a down leg or not — but you just can’t attach too much intelligence to the market’s daily fluctuations. — Howard Marks (source)

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Quote for the Week

The fact that Black Swans can and do happen in our financial system holds important lessons for how we think about risk. While we look for corroboration of what we believe (confirmation bias), what we really ought to be looking for is the opposite—that observation that would prove us wrong. Sad to relate, we know what is wrong with a lot more confidence than what we know is right. Yet we continue to look ahead with apparent confidence that the past is prologue, based on our assumptions that the probabilities established by history will endure.

The idea of seeking out evidence that contradicts our belief goes far beyond the financial markets. It goes to the very nature of knowledge itself. For the eminent British philosopher Sir Karl Popper—well-known for his use of the Black Swan metaphor—the key question was “what if science didn’t proceed from observation to theory? What if it was the other way around?” Writing in The New Yorker, journalist Adam Gopnik described Popper’s reasoning: “No number of white swans could tell you that all swans were white, but a single black swan could tell you that they weren’t… Science, Popper proposed, didn’t proceed through observations confirmed by verification; it proceeded through wild, overarching conjectures which generalized ‘beyond the data,’ but were always controlled and sharpened by falsification (i.e., proof that the theory was wrong).”

“It was the conscious, purposeful search for falsification by refutation, by the single decisive experiment” (or swan), Popper believed, “that allowed science to proceed and objective knowledge to grow.” Yet most of us—in our investment ideas and political ideas alike—do quite the reverse: we search for facts that confirm our beliefs (reinforcement bias), not for the facts that would negate them. — John Bogle (source)

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Andrew Carnegie was among the first to go big in the industrial age. He was a titan. He built the steel industry and, in turn, became the richest man in the world.

His autobiography details his journey from Scotland to America, from bobbin boy to captain of industry. While Carnegie paints a rosy picture at times, some lessons on business, investing, and life stand out.

It pays to be early.

Carnegie wasn’t the first to build an iron mill. He wasn’t the second or third or fourth. But he did know the railroad industry. He knew it was in its infancy based on personal experience.

When he joined the Pennsylvania Railroad, no rails had crossed the Mississippi River yet (the first bridge over the river was built at Rock Island in 1856). He recognized that industries that needed iron products had a massive growth runway.

One of Carnegie’s earliest endeavors was a rail-making company. The North had a supply problem during the Civil War. There were more than enough raw materials to supply the war effort. What they were short on was iron rails. Continue Reading…

Quote for the Week

Nothing tells in the long run like good judgment, and no sound judgment can remain with the man whose mind is disturbed by the mercurial changes of the Stock Exchange. It places him under an influence akin to intoxication. What is not, he sees, and what he sees, is not. He cannot judge of relative values or get the true perspective of things. The molehill seems to him a mountain and the mountain a molehill, and he jumps at conclusions which he should arrive at by reason. His mind is upon the stock quotations and not upon the points that require calm thought. Speculation is a parasite feeding upon values, creating none. — Andrew Carnegie (source)

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