“We don’t want to change the Future. We don’t belong here in the Past. The government doesn’t like us here. We have to pay big graft to keep our franchise. A Time Machine is finicky business. Not knowing it, we might kill an important animal, a small bird, a roach, a flower even, thus destroying an important link in a growing species.”
“That’s not clear,” said Eckels.
“All right,” Travis continued, “say we accidentally kill one mouse here. That means all the future families of this one particular mouse are destroyed, right?”
“Right.”
“And all the families of the families of the families of that one mouse! With a stamp of your foot, you annihilate first one, then a dozen, then a thousand, a million, a billion possible mice!”
“So they’re dead,” said Eckels. “So what?”
“So what?” Travis snorted quietly. “Well, what about the foxes that’ll need those mice to survive ? For want of ten mice, a fox dies. For want of ten foxes a lion starves. For want of a lion, all manner of insects, vultures, infinite billions of life forms are thrown into chaos and destruction. Eventually it all boils down to this: fifty nine million years later, a caveman, one of a dozen on the entire world, goes hunting wild boar or saber-toothed tiger for food. But you, friend, have stepped on all the tigers in that region. By stepping on one single mouse. So the caveman starves. And the caveman, please note, is not just any expendable man, no ! He is an entire future nation. From his loins would have sprung ten sons. From their loins one hundred sons, and thus onward to a civilization. Destroy this one man, and you destroy a race, a people, an entire history of life. It is comparable to slaying some of Adam’s grandchildren. The stomp of your foot, on one mouse, could start an earthquake, the effects of which could shake our earth and destinies down through Time, to their very foundations. With the death of that one caveman, a billion others yet unborn are throttled in the womb. Perhaps Rome never rises on its seven hills. Perhaps Europe is forever a dark forest, and only Asia waxes healthy and teeming. Step on a mouse and you crush the Pyramids. Step on a mouse and you leave your print, like a Grand Canyon, across Eternity. Queen Elizabeth might never be born, Washington might not cross the Delaware, there might never be a United States at all. So be careful. Stay on the Path. Never step off !”
- From ‘A Sound of Thunder’ by Ray Bradbury.
This correspondent has always loved science fiction. And of the science fiction we’ve read, we probably enjoy Ray Bradbury’s work as much as any. One of our favourites of his short stories is 1952’s ‘A Sound of Thunder’. [If you haven’t read it but might like to, please skip to the next paragraph to avoid spoilers.] It is 2055, and a hunting party including a man called Eckels are at the offices of Time Safari Inc. Having paid $10,000 for the privilege, they will shortly travel back through time, using the company’s technology, and go big-game hunting in search of dinosaurs. Before they set off, the hunting guide Travis (cited in the extract above) warns them to keep strictly to the company’s path, so that they don’t inadvertently mess with the forces of Nature and set off a cascade of events that might change the future irrevocably. (Any dinosaurs they kill are screened in advance to ensure that they would have died naturally at the exact same time anyway.) But as a gigantic T-Rex approaches, Eckels panics, and steps off the path.. On their return to 2055, it transpires that everything has subtly changed. English words are spelt differently; people behave differently; the presidential election just gone by has been won not by the decent candidate “Keith” but by the anti-intellectual dictator “Deutscher”. Shocked, Eckels looks down at his shoes, where it is revealed that in straying from the path, he has accidentally crushed a butterfly – and changed the course of history.. Michael Crichton would go on to cover similar ground in his examination of Chaos Theory in the book and film Jurassic Park. In the film, Jeff Goldblum plays Dr. Ian Malcolm who describes Chaos Theory as follows:
“It simply deals with unpredictability in complex systems. The shorthand is the Butterfly Effect. A butterfly can flap its wings in Peking and in Central Park you get rain instead of sunshine.”
Chaos Theory is the branch of mathematics that deals with complex systems, wherein outcomes are highly sensitive to small changes in initial conditions. Apparently tiny alterations in those initial conditions can give rise to enormous consequences further down the line.
Another word for Chaos Theory could be, simply: history. And as the US author Morgan Housel reminds us in his book The Psychology of Money, history is just one damned thing after another.
The Psychology of Money consists of 20 chapters, each of which carries pertinent advice on making us all better investors, or at least happier and more contented ones. And it is beautifully written. While we read plenty of investment books in any given year, many of them go unfinished due to the quality (or lack thereof) of the writing. Housel’s book is in a different league. We completed it in, we think, just three sittings. And we didn’t just read it, we devoured it, because it’s a pleasure to read. So if you’re thinking of buying yourself or a loved one an investment-themed gift for next Christmas or a birthday, look no further.
Chapter 12 – ‘Surprise!’ – may be our favourite. Housel cites the Stanford Professor Scott Sagan, who once made a remark that “everyone who follows the economy or investment markets should hang on their wall,” namely:
“Things that have never happened before happen all the time.”
And if there were ever a period that confirmed the truth of that observation, we are surely living through it now.
As Housel points out, two dangerous things happen when you rely too heavily on investment history as a guide to what’s going to happen next:
- You’ll likely miss the outlier events that move the needle the most, and
- History can be a misleading guide to the future of the economy and stock market because it doesn’t account for structural changes that are relevant to today’s world.
As he points out, try and imagine the last century without:
- The Great Depression
- World War II
- The Manhattan Project
- Vaccines
- Antibiotics
- ARPANET
- September 11th
- The fall of the Soviet Union.
Or try and imagine how different the global economy and, for that matter, the whole world would be today if just seven people among the 15 billion people born in the 19th and 20th centuries had never existed, namely:
- Adolf Hitler
- Joseph Stalin
- Mao Zedong
- Gavrilo Princip
- Thomas Edison
- Bill Gates
- Martin Luther King.
Housel goes on to commit what almost looks like heresy, namely challenging the validity of the great value investor and writer, Benjamin Graham:
“I read Graham’s book [The Intelligent Investor] when I was a teenager, learning about investing for the first time. The formulas presented in the book were appealing to me, because they were literally step-by-step instructions on how to get rich. Just follow the instructions. It seemed so easy.
“But something becomes clear when you try applying some of these formulas: few of them actually work.
“Graham advocated purchasing stocks trading for less than their net working assets – basically cash in the bank minus all debts. This sounds great, but few stocks actually trade that cheaply any more – other than, say, a penny stock accused of accounting fraud.”
Jason Zweig, a personal finance writer at the Wall Street Journal who has issued an annotated version of ‘The Intelligent Investor’, once wrote:
“Graham was constantly experimenting and retesting his assumptions and seeking out what works – not what worked yesterday but what works today. In each revised version of The Intelligent Investor, Graham discarded the formulas he presented in the previous edition and replaced them with new ones, declaring, in a sense, that “those do not work any more, or they do not work as well as they used to; these are the formulas that seem to work better now.”
“One of the common criticisms made of Graham is that all the formulas in the 1972 edition are antiquated. The only proper response to this criticism is to say: “Of course they are ! They are the ones he used to replace the formulas in the 1965 edition, which replaced the formulas in the 1954 edition, which, in turn, replaced the ones from the 1949 edition, which were used to augment the original formulas that he presented in Security Analysis in 1934.”
Even though Housel is making some guarded criticisms of Graham’s admittedly continually revised recommendations, we still think he is being a little unfair. Although Ben Graham’s preferred metrics may not necessarily be that useful today in the context of the US equity market – which as we know has been trading at expensive multiples for quite some time – that does not mean that they aren’t relevant elsewhere. It is still possible, for example, to find and identify stocks trading at less than 1.5 times book value, for example, or on single digit price / earnings multiples, even when those companies are hugely profitable; it’s just that those stocks and companies happen today to be in markets like Japan and Vietnam. So there’s possibly an element of home country bias sneaking in to Housel’s analysis.
But this is a very minor cavil in the context of a book that is chock full of useful insights into, as its title implies, the psychology of investing. As Housel himself acknowledges,
“The further back in history you look, the more general your takeaways should be. General things like people’s relationship to greed and fear, how they behave under stress, and how they respond to incentives tend to be stable in time. The history of money is useful for that kind of stuff.
“But specific trends, specific trades, specific sectors, specific causal relationships about markets, and what people should do with their money are always an example of evolution in progress. Historians are not prophets.”
Intriguingly, Housel doesn’t invest his own money actively – he dollar cost averages on an ongoing basis into a range of low cost US and international stock funds. But that approach doesn’t appeal hugely to us (and by extension to our clients) because we believe we can ultimately do a better job of managing the inevitable downside risk that comes with broad index investing by concentrating on a diversified range of more tenable investments instead – such as ‘value’ stocks, systematic trend-following funds, and real assets.
Notwithstanding the recent bottoming process for many mining companies, the ‘real assets’ component is where we think the strongest potential returns will come from over the next 12 months and beyond. We may of course be wrong. When we say ‘real assets’ what we specifically mean is the monetary metals, gold and silver, and related mining companies with little or no attendant debt. This is because we have long fretted over how governments will try and deal with their accumulated debt mountains, and even before the emergence of Covid-19 we were convinced that they would try and inflate the problem away. Given the extraordinary monetary stimulus that we have seen since 2020, we are even more convinced of that inflationary endgame. Given, also, the extraordinary risks inherent in bonds, we are concerned that at some point, the central banks may lose control of the bond markets, and possibly even the currency markets (which are too big for even the central banks to kick around), which could plausibly give rise to the introduction, over time, of an entirely new monetary system. In our opinion, given all of these various risks, all roads lead to gold. As the fund managers at Incrementum suggest in one of their recent gold reports:
- Monetary policy normalisation has failed;
- The coronavirus will act as accelerant for an overdue recession;
- Debt-bearing capacity is reaching its limits;
- Central banks are running out of options;
- A new monetary world order may be approaching;
- New all-time highs for gold may well be only a matter of time.
That all said, the theme of this letter has been the difficulty, if not outright impossibility, of trying to predict the future. Better, perhaps, to simply acknowledge the wisdom of Professor Sagan in that
“Things that have never happened before happen all the time.”
And prepare accordingly within our portfolios.
As if to underline this point, consider one of the final observations in Morgan Housel’s excellent book:
“I’m not pessimistic. Economics is the story of cycles. Things come, things go.”
In the immediate aftermath of the publication of Morgan Housel’s book, the world saw global lockdowns, furloughs, and massive unemployment filings. Which absolutely reinforces Professor Sagan’s fundamental point. In the space of a few short months, the world completely changed, and in a way that nobody could possibly have foreseen. For any portfolio today to be fit for purpose, it must incorporate, as far as humanly possible, diversity, independence, scarcity and permanence. That sound you hear on the horizon may not be the roll of approaching thunder, but it makes sense to prepare as if it is.
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
Get your Free
financial review
…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks.
“We don’t want to change the Future. We don’t belong here in the Past. The government doesn’t like us here. We have to pay big graft to keep our franchise. A Time Machine is finicky business. Not knowing it, we might kill an important animal, a small bird, a roach, a flower even, thus destroying an important link in a growing species.”
“That’s not clear,” said Eckels.
“All right,” Travis continued, “say we accidentally kill one mouse here. That means all the future families of this one particular mouse are destroyed, right?”
“Right.”
“And all the families of the families of the families of that one mouse! With a stamp of your foot, you annihilate first one, then a dozen, then a thousand, a million, a billion possible mice!”
“So they’re dead,” said Eckels. “So what?”
“So what?” Travis snorted quietly. “Well, what about the foxes that’ll need those mice to survive ? For want of ten mice, a fox dies. For want of ten foxes a lion starves. For want of a lion, all manner of insects, vultures, infinite billions of life forms are thrown into chaos and destruction. Eventually it all boils down to this: fifty nine million years later, a caveman, one of a dozen on the entire world, goes hunting wild boar or saber-toothed tiger for food. But you, friend, have stepped on all the tigers in that region. By stepping on one single mouse. So the caveman starves. And the caveman, please note, is not just any expendable man, no ! He is an entire future nation. From his loins would have sprung ten sons. From their loins one hundred sons, and thus onward to a civilization. Destroy this one man, and you destroy a race, a people, an entire history of life. It is comparable to slaying some of Adam’s grandchildren. The stomp of your foot, on one mouse, could start an earthquake, the effects of which could shake our earth and destinies down through Time, to their very foundations. With the death of that one caveman, a billion others yet unborn are throttled in the womb. Perhaps Rome never rises on its seven hills. Perhaps Europe is forever a dark forest, and only Asia waxes healthy and teeming. Step on a mouse and you crush the Pyramids. Step on a mouse and you leave your print, like a Grand Canyon, across Eternity. Queen Elizabeth might never be born, Washington might not cross the Delaware, there might never be a United States at all. So be careful. Stay on the Path. Never step off !”
This correspondent has always loved science fiction. And of the science fiction we’ve read, we probably enjoy Ray Bradbury’s work as much as any. One of our favourites of his short stories is 1952’s ‘A Sound of Thunder’. [If you haven’t read it but might like to, please skip to the next paragraph to avoid spoilers.] It is 2055, and a hunting party including a man called Eckels are at the offices of Time Safari Inc. Having paid $10,000 for the privilege, they will shortly travel back through time, using the company’s technology, and go big-game hunting in search of dinosaurs. Before they set off, the hunting guide Travis (cited in the extract above) warns them to keep strictly to the company’s path, so that they don’t inadvertently mess with the forces of Nature and set off a cascade of events that might change the future irrevocably. (Any dinosaurs they kill are screened in advance to ensure that they would have died naturally at the exact same time anyway.) But as a gigantic T-Rex approaches, Eckels panics, and steps off the path.. On their return to 2055, it transpires that everything has subtly changed. English words are spelt differently; people behave differently; the presidential election just gone by has been won not by the decent candidate “Keith” but by the anti-intellectual dictator “Deutscher”. Shocked, Eckels looks down at his shoes, where it is revealed that in straying from the path, he has accidentally crushed a butterfly – and changed the course of history.. Michael Crichton would go on to cover similar ground in his examination of Chaos Theory in the book and film Jurassic Park. In the film, Jeff Goldblum plays Dr. Ian Malcolm who describes Chaos Theory as follows:
“It simply deals with unpredictability in complex systems. The shorthand is the Butterfly Effect. A butterfly can flap its wings in Peking and in Central Park you get rain instead of sunshine.”
Chaos Theory is the branch of mathematics that deals with complex systems, wherein outcomes are highly sensitive to small changes in initial conditions. Apparently tiny alterations in those initial conditions can give rise to enormous consequences further down the line.
Another word for Chaos Theory could be, simply: history. And as the US author Morgan Housel reminds us in his book The Psychology of Money, history is just one damned thing after another.
The Psychology of Money consists of 20 chapters, each of which carries pertinent advice on making us all better investors, or at least happier and more contented ones. And it is beautifully written. While we read plenty of investment books in any given year, many of them go unfinished due to the quality (or lack thereof) of the writing. Housel’s book is in a different league. We completed it in, we think, just three sittings. And we didn’t just read it, we devoured it, because it’s a pleasure to read. So if you’re thinking of buying yourself or a loved one an investment-themed gift for next Christmas or a birthday, look no further.
Chapter 12 – ‘Surprise!’ – may be our favourite. Housel cites the Stanford Professor Scott Sagan, who once made a remark that “everyone who follows the economy or investment markets should hang on their wall,” namely:
“Things that have never happened before happen all the time.”
And if there were ever a period that confirmed the truth of that observation, we are surely living through it now.
As Housel points out, two dangerous things happen when you rely too heavily on investment history as a guide to what’s going to happen next:
As he points out, try and imagine the last century without:
Or try and imagine how different the global economy and, for that matter, the whole world would be today if just seven people among the 15 billion people born in the 19th and 20th centuries had never existed, namely:
Housel goes on to commit what almost looks like heresy, namely challenging the validity of the great value investor and writer, Benjamin Graham:
“I read Graham’s book [The Intelligent Investor] when I was a teenager, learning about investing for the first time. The formulas presented in the book were appealing to me, because they were literally step-by-step instructions on how to get rich. Just follow the instructions. It seemed so easy.
“But something becomes clear when you try applying some of these formulas: few of them actually work.
“Graham advocated purchasing stocks trading for less than their net working assets – basically cash in the bank minus all debts. This sounds great, but few stocks actually trade that cheaply any more – other than, say, a penny stock accused of accounting fraud.”
Jason Zweig, a personal finance writer at the Wall Street Journal who has issued an annotated version of ‘The Intelligent Investor’, once wrote:
“Graham was constantly experimenting and retesting his assumptions and seeking out what works – not what worked yesterday but what works today. In each revised version of The Intelligent Investor, Graham discarded the formulas he presented in the previous edition and replaced them with new ones, declaring, in a sense, that “those do not work any more, or they do not work as well as they used to; these are the formulas that seem to work better now.”
“One of the common criticisms made of Graham is that all the formulas in the 1972 edition are antiquated. The only proper response to this criticism is to say: “Of course they are ! They are the ones he used to replace the formulas in the 1965 edition, which replaced the formulas in the 1954 edition, which, in turn, replaced the ones from the 1949 edition, which were used to augment the original formulas that he presented in Security Analysis in 1934.”
Even though Housel is making some guarded criticisms of Graham’s admittedly continually revised recommendations, we still think he is being a little unfair. Although Ben Graham’s preferred metrics may not necessarily be that useful today in the context of the US equity market – which as we know has been trading at expensive multiples for quite some time – that does not mean that they aren’t relevant elsewhere. It is still possible, for example, to find and identify stocks trading at less than 1.5 times book value, for example, or on single digit price / earnings multiples, even when those companies are hugely profitable; it’s just that those stocks and companies happen today to be in markets like Japan and Vietnam. So there’s possibly an element of home country bias sneaking in to Housel’s analysis.
But this is a very minor cavil in the context of a book that is chock full of useful insights into, as its title implies, the psychology of investing. As Housel himself acknowledges,
“The further back in history you look, the more general your takeaways should be. General things like people’s relationship to greed and fear, how they behave under stress, and how they respond to incentives tend to be stable in time. The history of money is useful for that kind of stuff.
“But specific trends, specific trades, specific sectors, specific causal relationships about markets, and what people should do with their money are always an example of evolution in progress. Historians are not prophets.”
Intriguingly, Housel doesn’t invest his own money actively – he dollar cost averages on an ongoing basis into a range of low cost US and international stock funds. But that approach doesn’t appeal hugely to us (and by extension to our clients) because we believe we can ultimately do a better job of managing the inevitable downside risk that comes with broad index investing by concentrating on a diversified range of more tenable investments instead – such as ‘value’ stocks, systematic trend-following funds, and real assets.
Notwithstanding the recent bottoming process for many mining companies, the ‘real assets’ component is where we think the strongest potential returns will come from over the next 12 months and beyond. We may of course be wrong. When we say ‘real assets’ what we specifically mean is the monetary metals, gold and silver, and related mining companies with little or no attendant debt. This is because we have long fretted over how governments will try and deal with their accumulated debt mountains, and even before the emergence of Covid-19 we were convinced that they would try and inflate the problem away. Given the extraordinary monetary stimulus that we have seen since 2020, we are even more convinced of that inflationary endgame. Given, also, the extraordinary risks inherent in bonds, we are concerned that at some point, the central banks may lose control of the bond markets, and possibly even the currency markets (which are too big for even the central banks to kick around), which could plausibly give rise to the introduction, over time, of an entirely new monetary system. In our opinion, given all of these various risks, all roads lead to gold. As the fund managers at Incrementum suggest in one of their recent gold reports:
That all said, the theme of this letter has been the difficulty, if not outright impossibility, of trying to predict the future. Better, perhaps, to simply acknowledge the wisdom of Professor Sagan in that
“Things that have never happened before happen all the time.”
And prepare accordingly within our portfolios.
As if to underline this point, consider one of the final observations in Morgan Housel’s excellent book:
“I’m not pessimistic. Economics is the story of cycles. Things come, things go.”
In the immediate aftermath of the publication of Morgan Housel’s book, the world saw global lockdowns, furloughs, and massive unemployment filings. Which absolutely reinforces Professor Sagan’s fundamental point. In the space of a few short months, the world completely changed, and in a way that nobody could possibly have foreseen. For any portfolio today to be fit for purpose, it must incorporate, as far as humanly possible, diversity, independence, scarcity and permanence. That sound you hear on the horizon may not be the roll of approaching thunder, but it makes sense to prepare as if it is.
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
Get your Free
financial review
…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks.
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