Latest / The Dutch Investors / #68 | 5 lessons from history on things that never change | Same as Ever - Ep. 1

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#68 | 5 lessons from history on things that never change | Same as Ever - Ep. 1 · The Dutch Investors

0:00
SPEAKER_00: Hello and welcome back to another episode from the Dutch Investors.
0:06
SPEAKER_00: It's good to have you back.
0:07
SPEAKER_00: Welcome to episode 1 of Things That Never Change.
0:11
SPEAKER_00: I've been reading Morgan Housell's book Same as Ever for a second time now, and it is so good and filled with golden nuggets, it demanded a little series of its own.
0:24
SPEAKER_00: While the world obsesses over things that change, we are going to focus on things that never change, because those are the things we can rely on.
0:33
SPEAKER_00: Let's not waste any more time and get into the episode.
0:59
SPEAKER_00: Think about how often the course of humanity, the fate of nations, the survival of entire businesses has come down to a single random, unforeseeable encounter.
1:12
SPEAKER_00: A thoughtless decision.
1:14
SPEAKER_00: A moment of pure accident that led to magic for some and mayhem for many others.
1:19
SPEAKER_00: History is filled with these almost unbelievable junctures.
1:24
SPEAKER_00: Think of Coca-Cola, an global giant whose formula only came into existence because of a fountain worker in 1886, who made an unforeseeable dispensing error of mixing the intended headache syrup with carbonated water.
1:42
SPEAKER_00: Meanwhile, Amazon's fate hung on a single tense moment in 1997, when Jeff Bezos deliberately delayed sending a crucial fax, causing a deal to be cancelled, and thus preserving the company's independence.
1:58
SPEAKER_00: And finally, the entire foundation of modern Berkshire Hathaway owes its existence to a chance phone call from Warren Buffett made to a friend in 1969, leading him to buy the small local business called C's Candies and change his investment philosophy forever.
2:19
SPEAKER_00: We look back at the past and it looks inevitable.
2:23
SPEAKER_00: We know the Allied forces won World War II, it seems obvious in hindsight.
2:30
SPEAKER_00: Looking back at the mortgage pyramid scheme from 2008, we now know what happened.
2:36
SPEAKER_00: In the book, Hausl gives another beautiful example.
2:40
SPEAKER_00: Go back to the American Civil War, September 1862.
2:46
SPEAKER_00: The Confederate Army under Robert E.
2:48
SPEAKER_00: Lee is marching north.
2:50
SPEAKER_00: They're winning.
2:52
SPEAKER_00: Britain and France are on the verge of officially recognizing the Confederacy as a nation.
2:58
SPEAKER_00: If that happens, the United States, as we know it, is likely gone.
3:04
SPEAKER_00: But then, a Union corporal named Barton Mitchell is resting in a field in Maryland, and he spots a package on the ground.
3:13
SPEAKER_00: It's three cigars wrapped in a piece of paper.
3:17
SPEAKER_00: But that paper wasn't trash.
3:20
SPEAKER_00: It was a copy of Special Order 191.
3:24
SPEAKER_00: General Lee's detailed battle plans outlining exactly where his army was moving and how it was divided.
3:32
SPEAKER_00: Because of those three drop cigars, the Union Army intercepted the plans, forced the Battle of Antietam, and stopped the Confederate advance.
3:42
SPEAKER_00: Think about that for a second.
3:44
SPEAKER_00: The fate of an entire nation, the United States of America, hung on a soldier being careless with his cigars.
3:55
SPEAKER_00: So much of the world's most consequential changes come from randomness and chance.
4:02
SPEAKER_00: Your job as a long-term investor is not to perfectly predict that complexity.
4:08
SPEAKER_00: It is simply to build a portfolio of companies or ETFs that is resilient enough to survive whichever way that threat happens to snap.
4:18
SPEAKER_00: History hangs by a threat.
4:20
SPEAKER_00: If you think you can model the future with precision, remember the cigars.
4:25
SPEAKER_00: I love that story.
4:27
SPEAKER_00: That brings me to story two about risk is what you don't see.
4:32
SPEAKER_00: It is well known people suck at predicting the future.
4:36
SPEAKER_00: Or while we can somewhat estimate and guess what will happen, but the things that we don't see coming are the things that change everything.
4:45
SPEAKER_00: Risk is what you have left over after you thought of everything.
4:50
SPEAKER_00: Let me tell you two short stories from the book that explain this law.
4:56
SPEAKER_00: Before launching themselves into space on rockets, NASA astronauts ran tests in high-altitude hot air balloons.
5:05
SPEAKER_00: A balloon flight on May 4, 1961, took American Victor Prater and another pilot to 113,000 feet, scraping the edge of space.
5:17
SPEAKER_00: The goal was to test SNASA's spacesuit.
5:20
SPEAKER_00: The flight was a massive success, and the suit worked beautifully.
5:24
SPEAKER_00: As Praetor descended back to Earth, he opened his faceplate on his helmet when he was low enough to breathe on his own.
5:31
SPEAKER_00: He landed in the ocean as planned, where a helicopter was to pull him into safety.
5:37
SPEAKER_00: But there was a small mishap.
5:40
SPEAKER_00: While connecting himself to the helicopter's rescue line, Praetor slipped, falling into the ocean.
5:47
SPEAKER_00: This shouldn't have been that big of a deal, and no one in the rescue helicopter panicked.
5:53
SPEAKER_00: The spacesuit should have been watertight, but since Praetor had opened his faceplate, he was now exposed to the elements.
6:03
SPEAKER_00: Water rushed into his suit.
6:06
SPEAKER_00: Praetor drowned.
6:08
SPEAKER_00: Think of how much planning goes into launching someone into space.
6:13
SPEAKER_00: So much expertise, so many contingencies, so many what ifs and what thens.
6:21
SPEAKER_00: Every detail is contemplated by thousands of experts.
6:25
SPEAKER_00: NASA is probably the most planning centric organization that ever existed.
6:30
SPEAKER_00: You don't go to the moon by crossing your fingers and hoping for the best.
6:34
SPEAKER_00: Every conceivable risk has a plan, a plan B and a plan C.
6:40
SPEAKER_00: If no more.
6:41
SPEAKER_00: But even then, despite so much planning, a tiny thing, such as opening your faceplate, invites catastrophe.
6:51
SPEAKER_00: The other story I want to tell you about is about Harry Houdini, the world's greatest escape artist.
6:57
SPEAKER_00: He made a living surviving the impossible, such as being buried alive or being handcuffed underwater.
7:04
SPEAKER_00: He was a master of risk management for the things he could see.
7:09
SPEAKER_00: But in 1926, he was sitting in his dressing room, and a student walked in and asked if it was true Houdini could withstand a punch to the stomach.
7:18
SPEAKER_00: Houdini, who was recovering from a broken ankle and wasn't expecting it, nodded.
7:24
SPEAKER_00: The student hit him straight to the chest before Houdini could prepare.
7:30
SPEAKER_00: The student caught Houdini off guard.
7:32
SPEAKER_00: The next day, Houdini woke up with a lot of pain.
7:36
SPEAKER_00: His appendix was ruptured, and Harry Houdini died.
7:42
SPEAKER_00: He didn't die from the stunts, he died from a ruptured appendix caused by an unexpected punch in a dressing room.
7:51
SPEAKER_00: I mean, really?
7:53
SPEAKER_00: This is the definition of risks.
7:56
SPEAKER_00: It's the thing you don't see coming.
7:59
SPEAKER_00: It's the event that isn't in your DCF or spreadsheet.
8:03
SPEAKER_00: It's 9 11 closing the stock market or a global pandemic shutting down the economy.
8:10
SPEAKER_00: You cannot prepare for these specific events because you don't know what they are.
8:15
SPEAKER_00: And the only defense is a massive margin of safety.
8:20
SPEAKER_00: Saving money for no specific reason.
8:23
SPEAKER_00: Just to survive the punch to the appendix.
8:26
SPEAKER_00: Just to survive the punch you didn't see coming.
8:30
SPEAKER_00: Weird, right?
8:31
SPEAKER_00: Risk is such a weird and strange topic and we have so much more to learn about that.
8:38
SPEAKER_00: Let me take you to the third story.
8:41
SPEAKER_00: Now you see me.
8:43
SPEAKER_00: No, I'm not talking about the movie, although it's a pretty good movie.
8:48
SPEAKER_00: Nothing is more persuasive than what you've experienced firsthand.
8:54
SPEAKER_00: There is a massive gap between understanding something intellectually and understanding and feeling it emotionally.
9:02
SPEAKER_00: In school, you might learn that the Great Depression was a time when there was a lot of uncertainty and stock prices fell.
9:10
SPEAKER_00: You might memorize the dates and you pass the test, but you haven't lived it, so you don't really know it.
9:18
SPEAKER_00: Hausel points out that you cannot simulate fear.
9:22
SPEAKER_00: When you're stressed or terrified, your body floods with cortisol.
9:27
SPEAKER_00: Your brain literally functions differently when you are calm.
9:32
SPEAKER_00: This is why people sell at the bottom of a market crash.
9:35
SPEAKER_00: It's not because they're stupid, it's because the pain of losing money is an emotional experience.
9:42
SPEAKER_00: It's not a math problem.
9:45
SPEAKER_00: Farlam Shamilov, a poet who spent 15 years in prison in a gulag, once wrote how quickly normal people can crack under stress and uncertainty.
9:58
SPEAKER_00: Take a good, honest, loving person and strip them of basic necessities, and you'll soon get an unrecognizable monster who'll do anything to survive.
10:09
SPEAKER_00: He said, Under high stress, a man becomes a beast in three weeks.
10:16
SPEAKER_00: The big takeaway is that we really have no idea as what policies we'll be pushing for in, say, five or ten years.
10:23
SPEAKER_00: Unexpected hardship makes people do and think things that never imagine when things are calm.
10:31
SPEAKER_00: Your personal views fall into the same trap.
10:35
SPEAKER_00: In investing, saying I will be greedy when others are fearful is easier said than done, because people underestimate how much their views and goals change when the markets break.
10:48
SPEAKER_00: The reason you may embrace ideas and goals you once thought unthinkable because there are more changes during downturns than just asset prices declining.
11:00
SPEAKER_00: It's very hard to imagine the full context until you experience it firsthand.
11:07
SPEAKER_00: It's a lesson about humility.
11:09
SPEAKER_00: Don't look at someone acting irrationally during a crisis and judge them.
11:15
SPEAKER_00: You have no idea how you will behave until that moment arrives.
11:20
SPEAKER_00: And when you build your financial plan, assume that the future you will be scared and less rational than the present you.
11:29
SPEAKER_00: So build guardrails that prevent you from making permanent mistakes when you are in that emotional state.
11:37
SPEAKER_00: You might think you know how to feel, then you experience it firsthand and you realize, okay, it's more complicated than I thought.
11:47
SPEAKER_00: Fascinating, is it not?
11:50
SPEAKER_00: Time for the fourth story.
11:52
SPEAKER_00: Wounds heal, scars last.
11:56
SPEAKER_00: We like to think we analyze the world objectively, but we really don't.
12:02
SPEAKER_00: We analyze it through the lens of our own trauma.
12:06
SPEAKER_00: Hausel uses the example of the generation that grew up during the Great Depression.
12:12
SPEAKER_00: Even forty years later, in the booming 1960s, that generation saved money at rates that made no sense to economists.
12:23
SPEAKER_00: They refused to take risks.
12:26
SPEAKER_00: They avoided the stock market.
12:28
SPEAKER_00: Wounds heal, but scars last.
12:32
SPEAKER_00: Your view of risk is anchored by what happened to you in your formative years.
12:39
SPEAKER_00: If you came of age during high inflation, you will always fear inflation.
12:45
SPEAKER_00: If you were bitten by a large dog when you were young, you'll always have that same fear.
12:51
SPEAKER_00: If you started investing during the tech boom, you will be more comfortable with higher valuations.
12:58
SPEAKER_00: Is any of that bad?
12:59
SPEAKER_00: Not necessarily.
13:01
SPEAKER_00: But it's not good in any way either.
13:04
SPEAKER_00: What have you experienced that I haven't that makes you believe what you do?
13:09
SPEAKER_00: And would I think about the worlds like you do if I experience what you have?
13:15
SPEAKER_00: That's a good question, right?
13:18
SPEAKER_00: Investing is largely about psychology and human behavior.
13:22
SPEAKER_00: People who've had different experiences from you will think differently than you do.
13:29
SPEAKER_00: Most debates are not about disagreements, but people with different experiences talking over each other.
13:37
SPEAKER_00: We absolutely hate it if we can't measure something.
13:41
SPEAKER_00: We want that fake sense of security.
13:44
SPEAKER_00: We can see and measure just about everything, except people's moods, fears, hopes, grudges, goals, triggers, and expectations.
13:54
SPEAKER_00: And this is critical for you, for me as investors.
14:00
SPEAKER_00: When you disagree with someone, no matter the topic or data available to you, ask yourself what scars do they have that I don't, and equally important, what scars do I have that are potentially blinding me?
14:16
SPEAKER_00: Beautiful.
14:17
SPEAKER_00: It's time for the fifth and final story of this episode.
14:21
SPEAKER_00: Wild Minds.
14:23
SPEAKER_00: I think you'll like this one.
14:26
SPEAKER_00: We have this fantasy about smart people, geniuses.
14:31
SPEAKER_00: We want the visionary CEO who builds electric cars and rockets, but we also want them to be stable, predictable, polite board members.
14:41
SPEAKER_00: Hausell says, forget about it, it doesn't work that way.
14:46
SPEAKER_00: He looks at people like John von Neumann, the father of modern computing, or Steve Jobs, or Elon Musk.
14:57
SPEAKER_00: These people have wild minds.
14:59
SPEAKER_00: They think differently than 99% of the population.
15:04
SPEAKER_00: But you cannot unbundle the genius from madness.
15:08
SPEAKER_00: The same brain wiring that allows them to take these risks necessary to change the world is the same wiring that makes them erratic, difficult, and obsessive.
15:18
SPEAKER_00: Of course they have abnormal characteristics.
15:22
SPEAKER_00: It's the reason they're successful.
15:24
SPEAKER_00: There is no world in which we should assume that all those abnormal characteristics are positive, polite, endearing, or appealing.
15:35
SPEAKER_00: People who are abnormally good at one thing tend to be abnormally bad at something else.
15:42
SPEAKER_00: It's as if the brain has a capacity for only so much knowledge and emotion, and an abnormal skill robs bandwidth from the other parts from someone's personality.
15:54
SPEAKER_00: Take Elon Musk, I think it's the most clear example.
15:59
SPEAKER_00: Elon Musk is 54 years now, but when he started, what kind of 32-year-old thinks he can take on General Motors, Ford, and NASA at the same time?
16:12
SPEAKER_00: I mean you have to be an other maniac.
16:15
SPEAKER_00: The kind of person who thinks normal constraints don't apply to them.
16:20
SPEAKER_00: People love the visionary genius side of Musk, but they want it to come without the side that operates in his distorted I don't care about your customs version of reality.
16:32
SPEAKER_00: But Hausel, and we have to agree with Hausel, don't think those two things can really be separated.
16:39
SPEAKER_00: They're the risk-reward trade-offs of the same personality trade.
16:44
SPEAKER_00: The same goes for Steve Jobs, who was both a genius, but he could be a monster of a boss.
16:50
SPEAKER_00: Same goes for Walt Disney, whose ambitions pushed every company he touched to the razor's edge of bankruptcy.
16:59
SPEAKER_00: Former US National Security Advisor McGeorge Bundy once told President John F.
17:05
SPEAKER_00: Kennedy that trying to go to the moon was a stupid, crazy goal.
17:10
SPEAKER_00: Kennedy responded, You don't run for president in your 40s unless you have a certain moxie.
17:17
SPEAKER_00: If you invest in a company led by a well-minded, for example Elon Musk, you have to accept the whole package.
17:27
SPEAKER_00: It's the cost of doing business with the outliers.
17:32
SPEAKER_00: That's it for part one.
17:34
SPEAKER_00: Five stories of things that never change.
17:37
SPEAKER_00: We have quite a few more to go, and I'm excited.
17:40
SPEAKER_00: So we'll see you in the next one.
17:42
SPEAKER_00: As always, stay curious, keep learning, and happy investing.