Welcome back.
I took a couple weeks off, but it's good to be back here.
I've always thought that investing is one of the few fields in the world in which it is
possible to try too hard.
And it's actually very common that people try too hard.
People's normal inclination is that if you want to do better at something in life,
you try harder.
You practice more.
More effort.
And in most areas of life, that's true.
That's the proper mindset that you want.
I just think there's so much evidence that it's not like that in investing.
Like the proper amount of intelligence that you want is like an upside down you.
It's possible to have to be too smart in investing to try too hard and in a way that's
going to come back to haunt you.
My old colleague Bill Mann has his phrase that I love during the financial crisis in 2008.
He said a lot of the problems that were happening were what he called Harvard stupid.
And he defined Harvard stupid as mistakes that only somebody who is extremely well educated
and has a natural propensity to complicate things and has a huge ego might make.
You know, blowing up your bank with a trillion dollars of derivatives is not something that
somebody who went to community college could ever do.
Like you need a certain level of intelligence to make that kind of mistake.
So this is just idea that it's possible to try too hard.
I see it all the time in investing, but I think it actually applies to a lot of areas in
life.
And it's so easy to overlook.
So let me tell you a story or two about how it's possible to try too hard.
Thomas McCray was a young 19th century doctor who was still unsure of his skills.
One day he diagnosed a patient with a common and insignificant stomach ailment.
Thomas McCray's medical school professor watched the diagnosis and he interrupted with every
student's nightmare.
The professor said in fact this patient had a very rare and very serious disease.
Thomas McCray had never heard of this disease before.
The professor's diagnosis required immediate surgery.
And after opening the patient up, the professor realized that actually McCray's initial diagnosis
was correct.
The patient was fine.
Thomas McCray later wrote in his diary that he actually felt fortunate for never having
heard of the rare disease the professor talked about.
Because it allowed his mind to settle on the most likely diagnosis rather than be searching
for the rare disease like the more educated professor did.
McCray wrote quote,
The moral of this is not that ignorance is an advantage.
But some of us are too much attracted by the thought of rare things and forget the
law of averages in diagnosis.
I think that is so true and a truth that applies to almost every field.
It's at its possible to try too hard.
And when doing so you can get worse results in those who knew less or cared less or put
in less effort than you did.
This is not intuitive at all so it can drive you absolutely crazy.
And it's hard to pinpoint when it occurs.
Like maybe McCray's professor was being appropriately cautious.
That's possible too.
But as I said earlier, there are mistakes that only an expert can make.
There are mistakes that only an expert can make.
There are errors, often catastrophic errors, that novices are not smart enough to make,
because they lack the information and the expertise needed to try to exploit an opportunity
that doesn't exist.
Let me tell you two big ones that I think about a lot.
The first one is being an expert from an era that no longer exists.
Back in the 1980s there was this investor named Dean Williams.
He was so smart one of my favorite people and he has a quote that I love.
He says quote,
expertise is great but it has a bad side effect.
It tends to create an inability to accept new ideas.
Henry Ford, back in the early days of Ford, banned his factory workers from documenting
new ideas that didn't work.
Because he feared that it would create a list of things that people refused to try again,
even when new technologies improve their chances of success.
So what was impossible in one era?
Right later, end up not only doable but the key to success.
Ford wrote in his biography that quote,
I am not particularly anxious for the men to remember what someone else has tried to
do in the past.
For then we might quickly accumulate far too many things that could not be done.
Hardly a week passes without some improvement being made, somewhere in the machine or process,
and sometimes this is made in defiance of what is called quote, the best shop practices.
In more recent times, Mark and Jason has explained how this worked in technology.
He once wrote quote,
all of the ideas that people had tried in the 1990s were basically all correct.
They were just early.
I think that's so true.
The infrastructure that was needed to make most dot com's work in the late 1990s just
didn't exist yet.
But it does exist today.
So almost every business plan that was mocked for being ridiculous 20 or 30 years ago
is a viable industry today.
The poster child of what didn't work in the 1990s was pets dot com and people ridiculed
like how could that ever work shipping dog food to people's houses.
But guess what?
Chewy dot com today.
The new business is now worth like $10 billion at it works.
To experiencing what did not work in 1995 may have left you incapable of realizing what
was possible in 2015.
The experts of one era were disadvantaged over the new crop of thinkers who weren't
burdened with old wisdom.
The same thing happens in investing.
My friend Michael Bannock made this point years ago that having experienced a big event
doesn't necessarily make you better prepared for the next big event.
So of course we went 40 years with interest rates basically going in one direction down.
And even if you were a grizzled veteran very few people had lived through a sustained rise
in interest rates.
But years ago Michael made this great point he wrote quote so what will the current rate
hikes look like the last one or the one before that will different asset classes behave
similarly or the same or the exact opposite we have no idea.
She wrote quote on the one hand people that have been investing through the events of 1987
and the year 2000 and 2008 have experienced a lot of different markets.
On the other hand isn't it possible that this experience can lead to overconfidence or
feeling to admit that you are wrong or anchoring to previous outcomes.
And I think that's exactly what's happening of course that's possible it happens all
the time the feeling of power that you get from a hard thought experience is stronger
than the urge to change your mind even when it's necessary.
Our next one is career incentives can push complexity in fields where simplicity leads
to the best outcome.
Jason Zwagger the Wall Street Journal says there are three ways to earn money as a writer.
Number one lie to people who want to be lied to and you'll get rich.
Number two tell the truth to those who want the truth and you'll make a living.
Or number three tell the truth to those who want to be lied to and you'll go broke.
Some that is so perfect and some variation of this applies to a lot of fields especially
in service industries where someone pays for an expert's opinion.
There could be a huge difference between knowing what's right and making a living delivering
what you know to be right.
This may be the most common in investing or a law or even in medicine when do nothing
is the best answer a lot of the time but do something is the career incentive for you
to do.
Sometimes your willingness as an expert to take an action is not moral.
You think of like a stock broker churning your account and telling you to make trades
that you don't need to make.
And mostly though I think it's just an advisor feels useless if they tell a client that
they don't need to do anything that there's no action they need to be taken.
In the quest to be helpful they add complexity even when none is needed or even when it might
backfire.
Many years ago John Stewart on the Daily Show he interviewed Jim Kramer the CBC stock market
pundit.
And when pressed on why CBC content ranges from contradictory to a name sometimes Jim
Kramer said quote look we've got 17 hours of live TV to do every day.
And John Stewart responded quote maybe you could cut down on that.
Like that's the answer that's what you should do here but if you're in the TV business
if you're a producer on CBC you can't do that.
You have to fill the TV hours with something to say even if nothing needs to be said that
day.
Most of the time I think this is truly innocent.
The experts believe that their complexity adds value because reality is too painful to
bear especially in a competitive career where there's a lot of stress and long hours.
There was a doctor who once told me that the biggest thing that they don't teach you
in medical school is the difference between medicine and being a good doctor.
Medicine is like a biological science while being a doctor is often a social skill of managing
expectations and understanding the insurance system and communicating effectively and on
and on.
And the gap between those two which applies to many fields beyond medicine can lead to
mistakes that only an expert can make.
Where only an expert can advise.
To get it's the same in investing.
Many years ago the financial times wrote this amazing piece on the fact of how many professional
investors don't own the funds that they manage.
It writes quote half of the 15,000 mutual funds in the United States are run by portfolio
managers who do not invest a single dollar of their own money in their own products.
And frankly I think doctors have their own version of this.
There's an article many years ago written by a doctor who talked about the difference
between the care that doctors prescribe to their patients.
And the care that those doctors themselves choose for themselves when they get sick.
This article writes quote.
Almost all medical professionals have seen what we call futile care being performed on
people.
It's when doctors bring the cutting edge of technology to bear on a grievously ill person
near the end of their life.
The patient will get cut open and perforated with tubes and hooked up to machines and
assaulted with drugs.
All of this occurs in the intensive care unit at a cost of tens of thousands of dollars
per day.
And what it buys is misery that we would not inflict on a terrorist.
This doctor writes quote I cannot count the number of times fellow physicians have told
me in words that very only slightly.
To promise me that if you ever find me like this that you will kill me and they meet it.
Some medical personnel will wear medallions stamped no code to tell physicians not to perform
CPR on them.
I have seen it even as a tattoo.
The last portion of this great essay by this doctor writes quote.
The trouble is that even doctors who hate to administer futile care must find a way to
address the wishes of patients and families.
Imagine once again the emergency room with those grieving and possibly hysterical family
members.
They don't know the doctor.
So establishing trust and confidence under such circumstances is a very delicate thing.
People are prepared to think the doctor is acting out of base motives, trying to save
them.
Or money or effort, especially if the doctor is advising against further treatment.
This of course is a huge problem.
It affects many fields.
And I don't know what a good solution is here.
I don't have the answers for what to do here.
But it's very helpful to acknowledge in lots of areas of life that there is one set of
skills that comes from being an expert.
And there's another set of skills that comes from being a novice unburdened by the weight
of experience or incentives.
The former being skilled from your expertise is obvious.
The latter, the skills that come from your lack of experience or your lack of education
or even your ignorance is very easy to ignore.
That's all for this week.
We'll see you next time.
