Have you noticed that many of the top investors we admire sound more like wise philosophers than worldly businessmen?
Warren Buffett's folksy advice on embracing an independent mindset and a long-term perspective applies to all of us, whether we're evaluating an investment or planning a career. Charlie Munger's epic Poor Charlie's Almanack is not a mere book on investing but an encyclopedia of wisdom and advice for finding success in life. Billionaire George Soros, with a doctorate in philosophy, quit investing at one point to revise his dissertation on philosophy, only returning to the business to apply his unique theory of "reflexivity" to more clearly understand financial markets.
Today, top investors on Wall Street, drowning in the endless noise and opinion of today's information age, are increasingly turning to philosophical blogs and books to clear their minds and broaden their perspectives. Ray Dalio of Bridgewater Associates and Dan Loeb of Third Point LLC are big fans of Farnam Street, a blog aiming to help its readers "develop the mental models to understand how the world works, make better decisions, and live a more meaningful life." (1) Citing prominent thinkers like Ralph Waldo Emerson and Bertrand Russell and proudly extolling the importance of reading, Farnam Street reminds us investing isn't just about algorithms, earnings reports, or P/E ratios. It demands judgment, which can be cultivated by absorbing the lifelong lessons expressed in philosophy, history, psychology, and beyond.
As Naval Ravikant, CEO of AngelList, puts it, "investment books are the worst place to learn about investment... what you actually just need is very, very broad-based judgment and thinking. The best way to do that is to study everything, including a lot of philosophy. Philosophy also makes you more stoic, makes you less emotional, and so you make better decisions; you have better judgment." (2)
You might cringe when you hear the word "philosophy." Isn't philosophy for pipe-smoking, armchair-sitting academics? Who discuss how we know what we know and logic and rationality and so forth? Many modern philosophers focus excessively on these technical topics, but ancient philosophy is much different. (3) The ancient philosophers, passionate about human nature and the art of living, are full of timeless wisdom. Seneca encourages us, in an ever-challenging world, to focus on what we can and cannot control. Buddha cautions us against forming dangerous attachments to people, lifestyles, and ideas. When investing demands us to act with objective judgment and to avoid “irrational exuberance”, it’s really demanding us to think like an ancient philosopher. It’s really demanding us, as if preparing to lead a Roman army into battle, to have a clear mind, to have trust in our preparations, and to have the courage to take the appropriate risks.
Top investors depend heavily on philosophy to cultivate their judgment because financial markets, behind its veneer of masculine bravado and lust for money, is actually deeply philosophical in nature.
The following are just a few of the concepts in financial markets that apply broadly to many aspects of life:
Risk-Reward Trade-Off: The bigger the risk you take, the bigger your reward. Riskier securities, like stocks, have higher expected returns than safer securities, like bonds. Betting $100 on a single number at the roulette table offers a bigger potential payoff than betting $100 on a color. Mark Zuckerberg, Bill Gates, and Steve Jobs took big risks by starting their respective companies, and they earned big returns. All decisions in life reflect this maxim. Do you want more? Then you must risk more. It's that simple.
No Arbitrage: This idea is best explained by a narrative. John and Judy are two finance professors walking down Walnut Street in West Philadelphia. Judy spots a $100 bill on the ground. John tells her not to pick it up, because if it were genuine, someone would have picked it up already. In finance, investors are constantly scouring the ground for $100 bills, which means genuinely lucrative investment opportunities are few and far between. In general, the world is competitive, and everyone is constantly looking for opportunities to make money. To have a really good idea for a startup, book, album, investment, and so on, you really need to think out of the box. Otherwise, there’s a good chance someone has thought of it already.
Avoid Ruin: When investors mention their main goal is to "preserve capital", they mean they never, ever want to lose all of their money. Once you go bust, you're out. Done. Finished. History. Hasta la vista. Consequently, investors never “bet it all” or get into a position that could potentially bankrupt them. It’s just not worth it. Unfortunately, many people, in life, take unnecessarily large risks. They cut corners with the law. They cheat their colleagues or customers. They go to jail. They lose their reputation. Their career ends. Anything that could leave you wearing an orange jumpsuit is never worth the risk.
The list could go on. The point is that investors, when making decisions under uncertainty, are typically incorporating principles that apply way beyond the domain of finance. As we’ve seen, the converse is also true: principles that apply to life in general also apply to investing.
This is the belief of another blog growing in popularity on Wall Street: Epsilon Theory. The blog, while discussing game theory, human nature, and history and quoting Rush lyrics and Don DeLillo novels for good measure, provides a true breath of fresh air to investors bored of the stale analyses from mainstream media. In one of the blog’s most recent posts - “Every Shot Must Have a Purpose” - the author compares mistakes in golf to mistakes in investing: they both tend to emerge from lack of focus or commitment, not technical error. (4)
In a competitive industry like investing, where many investors struggle to beat their benchmarks, a unique and rigorous perspective on markets, as provided in philosophy texts or philosophical blogs like Epsilon Theory and Farnam Street, can be surprisingly valuable.
This is the opinion of independent investment advisor James Aitken in his interview with The New York Times. “Every world-class investor is questioning right now how they can improve. So, in a machine-driven age where everything is driven by speed, perhaps the edge is judgment, time and perspective.” (5)
Texts in philosophy, and even history and psychology too, can offer this much-needed perspective.
(3) Jonathan Haidt, The Happiness Hypothesis (2006), p. 215