As I said in my previous post, I thought it might be beneficial to add a six-part series of thoughts on extreme events and uncertainty to supplement my weekly capital cycles newsletter. This continues that series which began with part 1.
If you like The Mirandolan, please share it.
If you are new to The Mirandolan, please subscribe.
Enjoy and stay safe.
7. Whereas it is possible to predict one thing, to predict with any accuracy a combination of things is harder, and, in the era of the Great Lockdown, more is palpably uncertain than in any time since Hitler’s Panzer divisions invaded Poland. In the kind of historic moment we are in now, to predict a combination of events that gives rise to the future, and is not merely a hopeful and habitual projection of the pre-crisis past into the future, would be a feat of conjuring, not intellectual genius.
Marks remarks in “Uncertainty II”, that we often think of the future as something given, already there, like a tree whose fruit hangs invitingly but which we are too blind to see and grasp, but which a happy few, the “experts”, can see with remarkable clarity and taste of its fruit. We are ill at ease with uncertainty and we grasp at expert opinion to assure ourselves over the future.
8. Mencius, Confucius’ greatest disciple, held the view that the world is fickle, and our expectations of it idealistic, too linear and deterministic, making us complacent in our expectations, unwilling to do the work. Good men do not always triumph; the best often “lack all conviction, while the worst/Are full of passionate intensity”; competent women often lose to incompetent men; riches often fall upon the stupid; the good that we do is often interred with our bones while the bad lives on; the arc of history does not always bend toward justice; inequality may rise as society gets wealthier; a company with low returns on invested capital, and no discernible moat can soar in value year after year after year, leaving stronger companies in its wake; competitive advantages can quickly erode; in the long run, all businesses end in failure –the most valuable business in history: the Dutch East India Company, with the widest moat in history, paying 5-7% in dividends over 200 years, still ended in failure; …. Whereas we seek stability and endurance, the world is ever changing, creatively destructive, always in ferment, we are simply unaware of it or fighting it most of the time. The clear skies many imagined in December 2019 as they looked to 2020, are a warning that even when everything appears settled, it can all be suddenly flung into a maelstrom of uncertainty.
9. In 1956, at the final stretch of the Grand National, Devon Loch, seven strides in front of the nearest horse, ESB, was storming to victory before he suddenly and inexplicably belly flopped, allowing ESB to win.
10. We conflate the appearance of certainty with intrinsic certainty and the confirmation of our views of stability with the lack of risk when we first judged the situation. Yet, the future is a series of paths, each forged by tiny, interconnected decisions and the interplay of human action is a choosing and rejecting and creating and destroying and interlacing of paths. If in one year the future appears to glimmer with the promise of stability and a year later, one’s views are confirmed, this was not inevitable, there were paths untaken and risks unseen and one merely erred favourably. To quote Napoleon: “Fort bien, mais a-t-il de la chance?” (“He is very good, but is he lucky?”). Better the lucky idiot than the genius whom fortune spurns.
11. Nassim Taleb, in his treatise, Silent Risk, reminds us that there are “(consequential) hidden risks, those tail events undetected or improperly detected by statistical machinery. … The difference between ‘models’ and ‘the real world’ ecologies lies largely in an additional layer of uncertainty that typically (because of the same asymmetric response by small probabilities to additional uncertainty) thickens the tails and invalidates all probabilistic tail risk measurements models, by their very nature of reduction, are vulnerable to a chronic underestimation of the tails”.
12. Machiavelli was so stricken with the fickleness of fortuna that he believed dominating fortuna is the key to the “achievement of great things.” Danger is everywhere, everywhere, even if one does not see it. “All courses of action are risky, so prudence is not in avoiding danger (it’s impossible), but calculating risk and acting decisively. Make mistakes of ambition and not mistakes of sloth. Develop the strength to do bold things, not the strength to suffer.” Machiavelli’s ideal prince had to embody certain qualities, virtù, in order to dominate fortuna, yet, often success was the happy meeting of virtù with fortuna so that one was successful in one situation but thoroughly overwhelmed in another, an example of which is the group of “Big Shorts” who dazzled with their prescience in 2008 and muddled through the last decade. True excellence, for Machiavelli, is in constantly adapting to the wildness and fluidity of fortuna, like a rider taming a wild horse.