Snippets of worldly wisdom I

1. Morgan Housel has five lessons from history,

People suffering from sudden, unexpected hardship are likely to adopt views they previously thought unthinkable.

Reversion to the mean occurs because people persuasive enough to make something grow don’t have the kind of personalities that allow them to stop before pushing too far.

Unsustainable things can last longer than you anticipate.

Progress happens too slowly for people to notice; setbacks happen too fast for people to ignore.

Wounds heal, scars last.

The attributes required to make or attain something is different from that required to maintain  that thing,

The kind of personality willing to take enough risks to earn outsized returns is generally not compatible with the kind of personality willing to shift everything into muni bonds once they’ve made enough money. They’ll keep taking risks until those risks backfire. It’s why the Forbes list of billionaires has 60% turnover per decade. Long-term success in any endeavor requires two tasks: Getting something, and keeping it. Getting rich and staying rich. Getting market share and keeping market share. These things are not only separate tasks, but often require contradictory skills. Getting something often requires risk-taking and confidence. Keeping it often requires room for error and paranoia.

On the power of stories over statistics,

Stories are more powerful than statistics because they take less effort for your brain to contextualize complex issues. “Housing prices in relation to median incomes are now above their historic average and typically mean revert,” is a statistic. “Jim just made $300,000 flipping homes and can now retire early and his wife thinks he’s amazing” is a story. And it’s way more persuasive in the moment.

And this about how the tide can turn fast as progress accumulates and builds on itself,

In his 1952 book on American history, Frederick Lewis Allen wrote:

Several years went by before the public grasped what the Wrights were doing; people were so convinced that flying was impossible that most of those who saw them flying about Dayton [Ohio] in 1905 decided that what they had seen must be some trick without significance – somewhat as most people today would regard a demonstration of, say, telepathy. It was not until May, 1908 – nearly four and a half years after the Wright’s first flight – that experienced reporters were sent to observe what they were doing, experienced editors gave full credence to these reporters’ excited dispatches, and the world at last woke up to the fact that human flight had been successfully accomplished.

Even after people caught on to the plane’s wonder, they underestimated it for years.

First it was seen mainly as a military weapon. Then a rich person’s toy. Then, perhaps, used to transport a few people... 

Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant. The irony is that growth – if you can stick around – is a more powerful force, because it compounds. But setbacks capture greater attention because they happen suddenly.

Or this,

The Washington Post wrote in 1909: “There will never be such a thing as commercial aerial freighters. Freight will continue to drag its slow weight across the patient earth.” The first cargo plane took off five months later. 

2. Chesterton's Fence is a problem that reformers too often ignore and leave their worlds with disastrous post-reform consequences,

G K Chesterton describes the classic case of the reformer who notices something, such as a fence, and fails to see the reason for its existence. However, before they decide to remove it, they must figure out why it exists in the first place. If they do not do this, they are likely to do more harm than good with its removal. In its most concise version, Chesterton’s Fence states the following:

Do not remove a fence until you know why it was put up in the first place.

Chesterton went on to explain why this principle holds true, writing that fences don’t grow out of the ground, nor do people build them in their sleep or during a fit of madness. He explained that fences are built by people who carefully planned them out and “had some reason for thinking [the fence] would be a good thing for somebody.” Until we establish that reason, we have no business taking an axe to it. The reason might not be a good or relevant one; we just need to be aware of what the reason is. Otherwise, we may end up with unintended consequences: second- and third-order effects we don’t want, spreading like ripples on a pond and causing damage for years.

3. Howard Marks has a very good newsletter where he questions the merits of "meaningful knowledge regarding the future investment environment" given the nature of the uncertainty being faced,

What does the U.S. see today?

• one of the greatest pandemics to reach us since the Spanish Flu of 102 years ago,
• the greatest economic contraction since the Great Depression, which ended 80 years ago,
• the greatest oil-price decline in the OPEC era (and, probably, ever), and
• the greatest central bank/government intervention of all time.

The future for all these things is clearly unknowable. We have no reason to think we know how they’ll operate in the period ahead, how they’ll interact with each other, and what the consequences will be for everything else. In short, it’s my view that if you’re experiencing something that has never been seen before, you simply can’t say you know how it’ll turn out.

Quoting Harvard epidemiologist Marc Lipsitch, he makes the distinction between informed extrapolation about the future from information about the past and opinions or speculations.

He quotes Edward Lampert on the choice facing governments as they contemplate exiting lockdowns,

Driving an automobile is risky. In 2018, the number of auto-related fatalities in the United States was 36,560, according to the National Highway Traffic Safety Administration. Yet we don’t ban automobiles, nor do we impose a 10 mile an hour speed limit. Doing so would eliminate most of those deaths and injuries, but it would also adversely affect economic activity enabled by faster transportation of people and products. Overall, the benefits of automobiles exceed the costs. Individuals knowingly assume the risks. Businesses compete to make money by reducing those risks. To deal with market failures and externalities, and to provide a certain minimum floor, we have regulatory mechanisms imposed by government to mitigate risks and compensate for losses. These same approaches can be useful in guiding the public policy response to the coronavirus, showing the way to a middle ground that minimizes harm without excessive costs to either the economy or individual freedom.

Such choices are rarely technical ones. They are in the realm of political debates. While technical arguments inform such debates, they are only one of the many considerations. Considerations of equity and fairness, even parochial short-term political factors, are all important ingredients. And there should be space for such debates to happen and choices to get exercised than allow the agenda to be hijacked by experts.

4. Some memorable quotes from Howard Marks again,

We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know. (JK Galbraith)

No amount of sophistication is going to allay the fact that all of your knowledge is about the past and all your decisions are about the future. Ian E. Wilson (former Chairman of GE)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. (Mark Twain)

Doubt is not a pleasant condition, but certainty is absurd. (Voltaire)

Incompetent people are at a double disadvantage, since they are not only incompetent but also likely unaware of it. (Leslie Lichtenstein)

“Ignorance more frequently begets confidence than does knowledge.” It goes on to say, “Being a true expert involves not only knowing stuff about the world but also knowing the limits of your knowledge and expertise.” (Charles Darwin)

This about making confident assessments in times of extreme uncertainty, like with Covid 19,

Medical statistician Robert Grant]: “I’ve studied this stuff at university, done data analysis for decades, written several NHS guidelines (including one for an infectious disease), and taught it to health professionals. That’s why you don’t see me making any coronavirus forecasts. . .”

5. Morgan Housel on tail-end risk,

There are three distinct sides of risk:

• The odds you will get hit.
• The average consequences of getting hit.
• The tail-end consequences of getting hit.

The first two are easy to grasp. It’s the third that’s hardest to learn, and can often only be learned through experience.