For a little over two years now Davis Rea clients have enjoyed returns that are, shall we say, pleasing? Ok, so? Next?
Recently, I was on my obligatory bi-annual exile from the noise that is Wall Street. As much as the ‘Street’ needs me, I must resist their never-ending calls… Costa Rica is my refuge.
As I wrote in February “The house we have rented is in the mountains, but we hear the powerful surf in the distance. It is wonderful, but extremely hot. This means I sit in the shade and mostly just think, which is really, the job I am paid to do. So far, after a week of thinking and reading, I remain convinced that the businesses you own are the best in the world, and regardless of what anyone says, I can think of no reason to change strategy.”
So? Next?
Plus ça change, plus c’est la même chose. The companies you own remain the best in the world, and there is no cause for concern. Nonetheless, lacking the ability to get advice from my Wall Street brethren, and anticipating the question ‘So, what’s next?’, I decided to consult the monkeys feeding in the trees a mere 10 yards from my desk. ‘What would you do if you were me?’ I queried. Seeking wisdom from an intelligent species, which has been credited in the past with stock picking skills superior to the likes of me seemed… wise?
Monkeys are amazing. It's not just their alleged superior intellect compared to Wall Street wizards, it’s how they navigate the treetops with ease and such aplomb. While I don’t speak ‘Monkey,’ they did drop me a hint of advice.
Monkeys have long tails for a reason. There is rarely a time that tail is not firmly clasped to a branch. Should they slip for an inexplicable reason they are saved by their tail.
Eureka! I felt like Charles Darwin on the Galapagos Islands in 1835. The monkeys had provided me a clue on what to do. Tails are safety nets. Took me 62 years…
I was comforted knowing that such a superior species always has a back-up plan, should a chosen tree branch be a poor choice. Maybe the monkey was hinting that the fruits of our labours were increasingly on thin branches? Maybe we should ensure our tails are firmly engaged? Alas, the monkeys need not us, and as such they did not directly answer my queries. But my immature monkey brain was now on high alert having divined a clue.
I pondered more and read a book: Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein. Mr. Bernstein was the first editor of the Journal of Portfolio Management, this after his retirement running a highly successful investment council firm. Anyone who has attained their Chartered Financial Analyst (CFA) designation not only knows of the man but has read his stuff. He was brilliant. If you’re a fan of math, or if you just like to make your brain hurt, in an ‘oh, that’s cool, I kind of understand’ way, you should read this book. The book starts at the beginning of math and its fascination with measurement, particularly risk.
In the really old days, risk was what the gods determined. It was after the time of the Greeks, after Socrates, who said that if there was “no proof” or “truth,” we were at the whims of the gods. Greek tragedies were proof that nothing happened but that the Gods determined. Fate. A couple hundred years later, out of chaos, conquest and killing (it's not anew phenomenon) the Arab, Hindu and Christians got together and adopted the Hindu format of numbers that replaced letters.
The world was transformed. The world of letters to measure (for example, XIV) was ditched and with it, abstract thinking really took off. Without 1’s and 0’s this letter could not be produced much less sent to you in an instant.
Gambling throughout history has always been a big thing. From dice games 1000 years ago to buying car insurance today, we are all gamblers. If you buy car insurance, it’s a terrible ‘risk.’ To pay someone for something that you hope, intend, and that is in fact, unlikely to happen is a gamble. You could roll the dice and not buy insurance. You might not get caught and you might not have an accident. Nonetheless we pay our money and take our chance. We buy lottery tickets knowing it’s ‘dumb.’ We see it today at a massive scale, as people throw money at certain stocks because ‘so and so knows so and so’ (yes, you Elon).
So? Next?
As Mr. Bernstein so elegantly wrote in 1996, when I was ten years old in this business; “The past seldom obliges by revealing to us when the wilderness will break out into the future. Wars, depressions, stock market booms and crashes, ethnic massacres come and go, but they always seem to arrive as surprises. After the fact, however, when we study the history of what happened, the source of the wilderness appears to be so obvious to us that we have a hard time understanding how people on the scene were oblivious to what ay in wait for them.” Elegant truth!
As I was flying above the mountains on my way home, leaving behind the monkeys, the captain of the plane announced, ‘I’m turning off the seat belt sign, I expect a smooth flight, our policy is to suggest you keep your belt fastened.’ You just don’t know what’s out there that could cause a bump. Like the monkey with his tail fastened snuggly on the thick branch should he reach too far for a rich treat, the captain reminded me of the monkeys’ wisdom; ‘be careful as you reach.’
Risk is all about us. Risk always is and it always will be apart of life. We can measure it, but we cannot be completely sure of its accuracy. There is false precision in measurement when there are so many variables. We do not know what will come with certainty next year. We can only choose to invest in what we understand and trust that time will be our friend.
One thing we will not do is invest with the crowd just because it's thought to be safe. Math tells you the law of large numbers does not protect from the random outcome that is the market.
We have our seat belts fastened. We are balanced in our posture like the monkey in the tree: resting, content after a delicious meal of papaya, listening to the surf down below, tail curled around a thick branch.
