Meinung

In Praise of Gullibility

The art of scepticism and its application is one of the key mental habits we are taught to cultivate as investors. However, a willingness to believe is just as important as a willingness to disbelieve.

Dylan Grice
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«Nothing fortifies scepticism more than the fact that there are some who are not sceptics; if all were so, they would be wrong.» Blaise Pascal

The art of scepticism and its application to all ideas is one of the key mental habits we are taught to cultivate as investors. From the moment we find our calling and begin our process of self-education we find on every page of every book a common theme: the central importance of doubt. «Take nothing at face value; don’t trust opinion simply because it is widely believed; always seek to take the ‹contrarian› position», etc.

But something we’ve learned over the years is that the correct answer to just about every question – even the ones you’re sure about – is «it depends». Will President Trump win a second term in the forthcoming US election? It depends. Should I keep owning government bonds, even though real yields are negative? It depends. Should I read as many books as I possibly can? It depends. Complexity implies nuance, nuance requires balance and the yin to scepticism’s yang is open mindedness.

To believe is as important as to disbelieve

What the investment books don’t teach but what experience certainly does, is that a willingness to believe is as important as a willingness to disbelieve. Though it’s important to treat «conventional wisdom» with suspicion, it is just as important to treat the idea that «conventional wisdom is dumb» the same way.

So it may sound heretical, but we think allowing a tiny little bit of gullibility into the thinking process isn’t as dumb as it sounds. Consider the story recounted by Richard Feynman, winner of the 1965 Nobel Prize and unarguably one of the greatest theoretical physicists of all time, in his book «Surely You’re Joking, Mr. Feynman!», a collection of stories told to and documented by his friend Ralph Leighton.

Feynman recalled striking up an interesting conversation with a decorator who was working on painting the rooms in one of his favourite restaurants. He was explaining his craft and impressing upon Feynman just how much there was to learn for anyone hoping to make it in the painting business.

«For example», he said, «in this restaurant, what colours would you use to paint the walls, if you had the job to do?» Feynman said he didn’t know. «Well, you’d have a dark band up to such-and-such a height because, you see, people who sit at the tables rub their elbows against the walls, so you don’t want a nice, white wall there. It gets dirty too easily. But above that, you do want it white to give the feeling of cleanliness to the restaurant.»

How to get yellow from mixing paints

How about that? Feynman was impressed. The guy clearly knew his craft. «And you also have to know about colours, and how to get different colours when you mix the paint. For example, what colours would you mix to get yellow?» Feynman would later earn his Nobel prize for the work he did in demonstrating how light interacts with matter, the field which came to be known as Quantum Electrodynamics. It was the first theory in which quantum mechanics and special relativity fully agreed.

So Feynman knew more than most about colours. And he didn’t know exactly how you got yellow from mixing paints. If it was light, you’d mix green and red. But this guy was talking paint. Maybe he knew something Feynman didn’t. «I don’t know how you get yellow without using yellow». «Well,» said the painter, «if you mix red and white, you’ll get yellow».

How could you get yellow from red and white? Didn’t the guy mean pink? If you mix red and white, you get pink? «No,» insisted the painter «you’ll get yellow». Feynman was deeply puzzled at this point. He tried to think it through. «It must be some kind of chemical change», he said at last. «Were you using some special kind of pigment that makes a chemical change?» «No,» says the painter, «any old pigment will work. You go down to the five-and-ten and get some paint – just a regular can of red and a regular can of white – and I’ll mix ‘em. I’ll show how you get yellow».

Putting the painter to the test

What do you think Feynman did next? He’d studied light all his life. He knew more about it than pretty much anyone who’s ever lived, and certainly more than this painter. Wouldn’t he have been justified in politely humouring the guy and getting on with his day? But what Feynman did instead was go down to the five-and-ten and buy some paint. He brought it back to the restaurant, called the painter down from upstairs and watched as he promptly started to mix the paints. He put some red in, then some white. Then a little more red, then a little more white. But it still looked pink.

The decorator continued and continued. A bit more red, a bit more white, some more red again, and so on until eventually, after some more mixing, the painter grew exasperated and said under his breath: «I used to have a little tube of yellow here to sharpen it up a bit… then it’d be yellow». «Oh!» Said Feynman, «Of course! You add yellow and you can get yellow, but you couldn’t do it without the yellow!» The painter went back upstairs to paint.

The reason I love this story so much is that even though Feynman was almost certain that the painter was mistaken, he was only almost certain. There was still a part of him which was willing to entertain the possibility that even he, the great physicist with a profound understanding of the physics of light, might nevertheless have missed something. And he was willing to put some work into finding out.

On one level, he’d been gullible. But on another, he was opening himself up to learning something new. On this occasion he’d gone down a dead end. But that willingness to consider even the apparently preposterous is what ultimately made him one of the greatest scientists of all time. So it is with investing. Indeed, there’s a parallel in recent stock market history, which has seen most «value investors» missing the single biggest episode of value creation in economic history, as «software has eaten the world».

Making mistakes is okay

Not that there should be any shame in making mistakes, especially when a guy like Warren Buffett makes the same one. «We blew it» he told Berkshire shareholders in 2017, speaking with typical candour about not investing in Google. He could see that Geico – a Berkshire subsidiary – was paying Google $ 10 for every click, and that the marginal cost of that $ 10 was zero. «Just imagine having something that every time you just hit a click… the cash register rung somewhere out in California. So, it was and is an extraordinary business and it has some aspects of a natural monopoly».

Charlie Munger was more scathing still. «I feel like a horse’s ass for not identifying Google. We could see in our own operations how well that Google advertising was working. And we just sat there sucking our thumbs.» And Buffett closed the topic by rationalising the mistake with a now familiar defence: «We always try to stay within our circle of competence». But at what point does staying within your circle of competence become an easy excuse not to try to expand it? If missing out on Google was an illustration of having a mind which is too closed, Feynman’s paint mixing story illustrates the costs of keeping it open.

One is that you risk going down a research dead end. The other is that you risk looking like a dummy. But the benefits can be vast. It was another Nobel physicist, Duncan Haldane, who won the prize in 2016, who said it most succinctly when discussing his then recent award with the BBC. «If you can't imagine something marvellous,» he reflected «you're never going to find it.»

Dylan Grice

Dylan Grice is co-founder of Calderwood Capital Research, an investment company specialising in portfolio construction and alternative investments. Prior to founding Calderwood, Dylan was the Head of Liquid Investments at Calibrium, a prominent private investment office based in Zurich. There, he was responsible for the management of the firm’s liquid portfolio, the research underpinning that portfolio, and the teams involved in the effort. Prior to joining Calibrium in 2014, Dylan was a part of the consistently top-ranked Global Strategy team at Société Générale, and was individually ranked first in the Extel Survey of institutional investor opinion in 2011 and 2012. Dylan started his career at Dresdner Kleinwort Wasserstein as an international economist and later prop trader. He is a graduate of Strathclyde University and the London School of Economics.
Dylan Grice is co-founder of Calderwood Capital Research, an investment company specialising in portfolio construction and alternative investments. Prior to founding Calderwood, Dylan was the Head of Liquid Investments at Calibrium, a prominent private investment office based in Zurich. There, he was responsible for the management of the firm’s liquid portfolio, the research underpinning that portfolio, and the teams involved in the effort. Prior to joining Calibrium in 2014, Dylan was a part of the consistently top-ranked Global Strategy team at Société Générale, and was individually ranked first in the Extel Survey of institutional investor opinion in 2011 and 2012. Dylan started his career at Dresdner Kleinwort Wasserstein as an international economist and later prop trader. He is a graduate of Strathclyde University and the London School of Economics.