Latest / The Dutch Investors / #76 | Lessons from history on things that never change | Same as Ever - Ep. 2

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#76 | Lessons from history on things that never change | Same as Ever - Ep. 2 · The Dutch Investors

0:02
SPEAKER_01: Welcome to episode 2 of Same As Ever.
0:08
SPEAKER_01: In the last episode, we talked about how fragile history is, how things hang by a thread.
0:15
SPEAKER_01: Today we are continuing our deep dive into Morgan Household's Same as Ever book.
0:20
SPEAKER_01: But we're going to shift gears.
0:23
SPEAKER_01: We are moving from external events of history to internal wiring of our brains.
0:29
SPEAKER_01: As investors, and frankly, just as human beings, we like to think we are rational.
0:34
SPEAKER_01: We like to think we use data, science, and facts to come up with our responses.
0:39
SPEAKER_01: But after reading this book for the second time and doing some independent digging of my own, I'm reminded that we are often driven by invisible forces that make absolutely no sense.
0:52
SPEAKER_01: Today, we are covering five massive themes: expectations, certainty, stories, the unmeasurable, and the danger of calm.
1:03
SPEAKER_01: Let's get into it.
1:11
SPEAKER_01: The first concept is something Hausel calls the first rule of happiness: low expectations.
1:19
SPEAKER_01: And this creates a paradox.
1:22
SPEAKER_01: We all want the world to get better.
1:24
SPEAKER_01: We want more wealth, better technology, and more comfort.
1:29
SPEAKER_01: But Hausl points out a trap.
1:32
SPEAKER_01: When things get better, our expectations rise just as fast, or sometimes even faster.
1:39
SPEAKER_01: He uses the example of the 1950s.
1:43
SPEAKER_01: Most people think it was the golden age of prosperity.
1:47
SPEAKER_01: But if you look at the data, and you know I love data, that nostalgia is factually wrong.
1:53
SPEAKER_01: In the 1950s, homes were smaller, work was more dangerous, you got paid less, and healthcare was primitive compared to today.
2:03
SPEAKER_01: So why do people still miss it?
2:06
SPEAKER_01: Because the gap between you and your neighbor wasn't that big.
2:10
SPEAKER_01: It was an era it was easy to keep expectations in check, because there wasn't much social pressure to have more than the guy next door.
2:19
SPEAKER_01: Today, social media shows us the highlight reels of billionaires, and suddenly our luxury feels like poverty.
2:27
SPEAKER_01: There is a fascinating psychological phenomenon, not within the book, but it explains this perfectly.
2:34
SPEAKER_01: It's called the counterfactual thinking of Olympic medalists.
2:38
SPEAKER_01: Psychologists have studied the faces of Olympic athletes on the podium.
2:43
SPEAKER_01: Logic dictates that the silver medalist should be happier than the bronze medalist.
2:48
SPEAKER_01: Second is better than third, but the data says quite the opposite.
2:53
SPEAKER_01: The silver medalist is often more miserable while the bronze medalist is beaming and a lot more happy.
3:00
SPEAKER_01: This is due to expectations.
3:02
SPEAKER_01: The silver medalist is comparing themselves to the gold, their focus on the race they lost.
3:08
SPEAKER_01: Their expectation was winning.
3:11
SPEAKER_01: The bronze medalist, however, is comparing themselves to the fourth place, the person who got nothing.
3:17
SPEAKER_01: Their expectation was going home empty-handed, and instead they got a medal.
3:23
SPEAKER_01: Morgan Housell writes that wealth is a two-part equation, what you have and what you expect.
3:30
SPEAKER_01: And if you can't control your expectations, no amount of wealth will ever make you happy.
3:37
SPEAKER_01: Let's move to numbers.
3:43
SPEAKER_01: We love numbers in finance, and we crave accuracy.
3:47
SPEAKER_01: But Hausel argues that people don't actually want accuracy, they want certainty.
3:53
SPEAKER_01: And those are very different things.
3:57
SPEAKER_01: He tells the story of the raid on Osama bin Laden when the CIA director was asked if bin Laden was actually inside the House.
4:06
SPEAKER_01: And the answer was a probability 60 to 80%.
4:11
SPEAKER_01: President Obama later said it was basically a 50-50.
4:15
SPEAKER_01: And we hate that.
4:17
SPEAKER_01: We hate hearing there is a 30% chance of a recession.
4:21
SPEAKER_01: We want a yes or a no answer.
4:25
SPEAKER_01: I was thinking about this in the context of the 2016 US presidential election.
4:30
SPEAKER_01: Do you remember the polls?
4:32
SPEAKER_01: Aggregators gave Donald Trump a 30% chance of winning, and Hillary Clinton a 70% chance.
4:40
SPEAKER_01: When Trump won, the general public and the media screamed that the data was wrong.
4:45
SPEAKER_01: They said the polls were broken.
4:47
SPEAKER_01: But from a data science perspective, they weren't necessarily wrong.
4:52
SPEAKER_01: A 30% chance is still a very real number.
4:56
SPEAKER_01: If I hand you a revolver with two bullets in six chambers and I ask you to spin it and pull the trigger, there's a 33% chance something terrible happens.
5:07
SPEAKER_01: If you pull the trigger and the gun goes off, you wouldn't say the math was wrong.
5:13
SPEAKER_01: Probability is about nuance and gradation.
5:17
SPEAKER_01: But in the real world, people pay attention to black and white results.
5:22
SPEAKER_01: As investors, we have to fight the urge for certainty.
5:26
SPEAKER_01: If someone tells you exactly what the market will do next year, they are either lying or delusional.
5:33
SPEAKER_01: The future is a probability distribution and it is not a scripted movie.
5:38
SPEAKER_01: Nothing is set in stone, anything can happen.
5:42
SPEAKER_01: This leads us to perhaps the most powerful force in the market.
5:50
SPEAKER_01: This one is about storytelling.
5:53
SPEAKER_01: Hausell's chapter on Best Story Wins argues that stories are a lot more powerful than statistics.
6:01
SPEAKER_01: He gave the example of Martin Luther King.
6:04
SPEAKER_01: The most famous part of his speech is, I have a dream that one day this nation will rise up and live out the true meaning of its creeds.
6:18
SPEAKER_01: But that wasn't in the prepared script.
6:21
SPEAKER_01: He improvised it.
6:23
SPEAKER_01: It wasn't the data on civil rights that changed the world that day, it was the story he told.
6:30
SPEAKER_01: In finance, Hausel says, the valuation of every company is simply a number from today multiplied by a story about tomorrow.
6:39
SPEAKER_01: There's a historical event that proves this very well.
6:43
SPEAKER_01: The 1938 War of the Worlds radio broadcast by Orson Wells.
6:48
SPEAKER_01: On Halloween Eve, Wells broadcasted radio played on H.
6:52
SPEAKER_01: G.
6:52
SPEAKER_01: Wells' novel about a Martian invasion.
6:56
SPEAKER_01: He presented it as a series of breaking news bulletins interrupting a musical program.
7:02
SPEAKER_01: The acting was superb.
7:04
SPEAKER_01: The story was very gripping.
7:06
SPEAKER_01: And the result was panic.
7:08
SPEAKER_01: Thousands of people allegedly fled their homes, convinced that New Jersey was being decimated by alien tripods.
7:17
SPEAKER_01: Now, looking back, the data was absurd.
7:21
SPEAKER_01: But in the heat of the moment, the story was so compelling that it overrode logic.
7:28
SPEAKER_01: And in the stock market, we see this every single day.
7:32
SPEAKER_01: A company with terrible fundamentals can skyrocket if the story is exciting.
7:37
SPEAKER_01: Think of the dot-com bubble or meme stocks.
7:40
SPEAKER_01: A company with great fundamentals can stagnate if the story is too boring or out of favor.
7:47
SPEAKER_01: As Hausl puts it, if you have the right answer, you may or may not get ahead.
7:52
SPEAKER_01: If you have the wrong answer, but you're a good storyteller, you'll probably get ahead.
7:58
SPEAKER_01: Now let's talk about something we can't measure.
8:03
SPEAKER_01: In a chapter called Does Not Compute, Hausel reminds us that the world is driven by forces that cannot be measured.
8:17
SPEAKER_01: He talks about the Vietnam War.
8:19
SPEAKER_01: Robert McNamara, the Secretary of Defense, was a numbers guy.
8:24
SPEAKER_01: He tracked every statistic: body counts, bombs dropped, supply lines, ammo used, anything you can imagine.
8:34
SPEAKER_01: And based on the numbers, the US was winning.
8:38
SPEAKER_01: But they lost.
8:39
SPEAKER_01: So why did they lose?
8:41
SPEAKER_01: Because you cannot measure the feelings of the Vietnamese people or their will to fight.
8:48
SPEAKER_01: I want to add to a story here about Sir Ernest Shackleton.
8:53
SPEAKER_01: In 1914, Shackleton led the endurance expedition to Antarctica.
8:58
SPEAKER_01: Their ship was crushed by ice, stranding 28 men on floating ice floes for months.
9:05
SPEAKER_01: Through an Antarctic winter with no radio and dwindling supplies, they eventually took lifeboats across 800 miles of the roughest ocean on the planet to reach a whaling station.
9:19
SPEAKER_01: If you put that scenario into a computer model, calories burned versus calories available, temperature versus clothing insulation, probability of surviving a hurricane in a rowboat, the model would return one result death.
9:36
SPEAKER_01: 100% death.
9:38
SPEAKER_01: But they all survived, every single man.
9:42
SPEAKER_01: You cannot model leadership, you cannot model the human refusal to die.
9:47
SPEAKER_01: And in investing, we try to model everything.
9:51
SPEAKER_01: But Hauser reminds us that the one thing we can measure, we can't predict, and can't model is the most powerful force in all of business.
10:03
SPEAKER_01: This is the animal spirits Keynes talked about.
10:07
SPEAKER_01: Fascinating, right?
10:10
SPEAKER_01: Finally, let's wrap up with a concept that explains why markets crash.
10:22
SPEAKER_01: Hausel calls it, calm plants the seeds of crazy.
10:26
SPEAKER_01: The idea comes from Hyman Minsky.
10:29
SPEAKER_01: Stability is destabilizing.
10:33
SPEAKER_01: When the economy is stable, people get confident.
10:36
SPEAKER_01: When they get confident, they take risks and go into debt.
10:41
SPEAKER_01: That debt eventually causes a crash.
10:44
SPEAKER_01: So the lack of recession is actually what causes the next recession.
10:50
SPEAKER_01: There is a famous metaphor for this from philosopher Bertrand Russell, popularized by Nassim Taleb, called the Turkey Problem Imagine you are a turkey.
11:00
SPEAKER_01: A nice farmer feeds you every single day.
11:04
SPEAKER_01: For a thousand days, your data shows that the farmer loves you.
11:08
SPEAKER_01: Your statistical model says that life is good and food is guaranteed.
11:13
SPEAKER_01: Every single day of calm reinforces your confidence.
11:17
SPEAKER_01: Then comes day 1001, the day before Thanksgiving.
11:22
SPEAKER_01: The Turkey's calm was not safety, it was the preparation for the slaughter.
11:28
SPEAKER_01: The risk was highest when the data looked best.
11:33
SPEAKER_01: Hausell writes that the irony is that when markets are guaranteed not to crash, they are far more likely to crash.
11:42
SPEAKER_01: We saw this in 2008, we saw this with COVID, we got so good at preventing pandemics that we stopped preparing for them.
11:51
SPEAKER_01: So, what do we do with all of this?
11:54
SPEAKER_01: We should recognize that the most important variables in our portfolio aren't interest rates or PE ratios.
12:02
SPEAKER_01: It's recognizing that our happiness is just reality minus expectations.
12:08
SPEAKER_01: It's accepting that we will never have certainty, only probability.
12:13
SPEAKER_01: It's understanding that a good story can make people believe anything.
12:18
SPEAKER_01: And it's remembering that when things feel calm, that is exactly when the seeds of crazy are being planted.
12:26
SPEAKER_01: Same as Ever isn't about predicting the future.
12:30
SPEAKER_01: No one can.
12:31
SPEAKER_01: It's about understanding the behaviors that never change.
12:36
SPEAKER_01: I'll see you in episode 3 of Same As Ever.
12:39
SPEAKER_01: And as always, stay curious, keep learning, and happy investing!