Franklin Delano Roosevelt looked around the room and chuckled when his presidential library opened in 1941. A reporter asked why he was so cheerful. “I’m thinking of all the historians who will come here thinking they’ll find the answers to their questions,” he said.
There is so much we don’t know. And not just about the future, but the past.
History knows three things: 1) What’s been photographed, 2) what someone wrote down or recorded, 3) words spoken by people who historians and journalists wanted to interview and who agreed to be interviewed.
What percentage of everything important that’s ever happened falls into one of those three? No one knows. But it’s tiny. And all three suffer from misinterpretation, incompleteness, embellishment, lying, and selective memories.
In his book Why Don’t We Learn From History?, B.H. Hart wrote: “History cannot be interpreted without the aid of imagination and intuition. The sheer quantity of evidence is so overwhelming that selection is inevitable. Where there is selection there is art.”
I’ve often wondered, as someone interested in business and investing history, what to do about this.
How much of the “history” of business and investing – particularly explanations for why things happened – is a wildly incomplete story?
How many case studies of successful businesses gloss over risks that could have turned out differently?
How many brilliant investment decisions were, if you could place yourself in the person’s head at the time, blind guesses?
It must be huge.
The solution isn’t to ignore history. Or even be skeptical of it. But when you accept how incomplete the details of history must be, your takeaways should be as broad as possible. Themes > specifics.
A few repeating themes I’ve noticed:
1. Nothing too good or too bad lasts indefinitely.
A lot of stuff in life goes like this:
Something staying abnormally good or bad for a long time makes people complacent.
The world is filled with variability.
When complacency meets variability you get big, direction-changing outcomes, because people aren’t prepared to deal with something new, so they get hit with blunt-force change that knocks them in a new direction.
Companies that have been winning for years don’t spend much time thinking about how to change strategies, which hits them like a ton of bricks when their market shifts and a new strategy is needed. And investment markets that come to expect bad news enjoy outsized returns when a little good news comes, because no good news was priced in.
Extreme results one way or another tend to snowball on themselves as compounding takes hold. But there’s a limit. The bigger the snowball gets the more likely it is to hit something that’ll break it apart.
2. Unsustainable things last longer than people think.
This is a cousin of the first point. And it’s not contradictory. Nothing stays too good or too bad forever, but it can stay that way for way longer than you expect.
The cornerstone of investing is finding a flaw and believing it can, or will, eventually be corrected. “These valuation multiples are too high, they’ll eventually come down.” Or, “People will not keep investing in money-losing companies.” These are often smart observations. But smart observations do not obey calendars and timelines. Alan Greenspan called the stock market “irrationally exuberant” in 1996. The party lasted another four years. Geopolitics, markets, economies, and business trends follow a similar path. “Calm and reasonable” is rare. Some state of “unsustainable” is way more common.
This happens for a few reasons.
One is that sunk costs keeps those who make something unsustainable from walking away. The CEO who blows $1 billion on a bad idea does not want to give up. He wants to make the idea work. The investors who fund his company feel the same.
Another is price drives sentiment and sentiment drives action, so ideas snowball, even when they’re bad. A company trading for 50 times revenue might be unsustainable. But its stock price going up yesterday signals that something’s going right, and I want to be part of something going right. So I buy, which pushes its price up again, and the chain of insanity compounds. For a long time.
A third is that you think unsustainable things will end because the people involved with them won’t put up with nonsense. But people adjust to a certain amount of nonsense. Economies have their own Stockholm Syndrome: A consequence of short-term thinking is that whatever happened in the previous few months becomes the benchmark for normal, so what seems unthinkable today can become accepted tomorrow. Zero-percent interest rates looked absurd ten years ago. No one bats an eye today.
The point is that realizing something can’t last, and knowing when it will end, are entirely separate topics.
3. Everything’s a competition.
And competition is more than companies fighting for customers, or employees vying for promotion. Ideas compete for attention. Brands for trust. Money for returns. Today with yesterday.
A few things happen when the world is a fishbowl of competition.
One is that everything is relative. There’s the joke of two hikers coming across the bear. One hiker starts to run. The other says, “You fool, you can’t run faster than a bear!” The first says, “I don’t need to run faster than the bear. I just need to run faster than you.”
That’s the real world. You often don’t need to be objectively good at something; just slightly better than the nearest competitive obstacle. Relative performance helps explain why seemingly poor performance can persist for longer than you think. Flat Earth was a terrible idea, but for a long time there were no better ones. The opposite is true: You can simultaneously be amazing at something and a relative failure. The worst NBA player is ridiculously good. How your competitor performs is often more important than how you perform. This is often overlooked when people try to assess what’s going on.
Another is that everything has multiple stakeholders – employees, customers, shareholders, families, suppliers, communities – and whichever stakeholder has the most competitive leverage in a given moment gets attention, often at the expense of another.
Why do people grind at work and ignore their families? Because the odds of being fired are higher than the odds of your family leaving you. That can be a devastating dynamic, but it’s how competition allocates resources, even if your son’s baseball game has nothing to do with your quarterly sales targets. Same reason a company with demanding shareholders may cut operating corners and pollute, even if it seems like there should be no connection between a local river’s cleanliness and an investor’s EPS target. When everything is a competition and there are multiple stakeholders, things that seem unrelated to each other become competitors. Conflict is so complicated. A repeating theme throughout history.
4. Everything is sales.
The history of a lot of things – business, politics, militaries, teachers, journalists – shows that good storytellers with OK ideas often gain more authority than average communicators with the right answers.
This is especially true over the last 50 years, when economic activity shifted from physical goods to ideas and services. Ideas and services are viable to the extent that they make their customer feel better. And feeling better is rooted in the delivery. Jason Zweig wrote, “While people need good advice, what they want is advice that sounds good.”
It’s also easy to underestimate what marketing is. There are, I’ve come to realize, two types of employees: Those who know they work and sales and those who mistakenly think they don’t work in sales. Maybe you don’t sell products. But you probably sell expertise, trust, or advice. And maybe you don’t sell to customers. But you probably sell your abilities to coworkers and bosses. Everything is sales. Everything is persuasion.
There are two ways to think about sales, and this applies to everything from business to politics to teaching: You can sell something in a way that captures people’s attention, which is very effective in the short run but wears off, as attention spans and dopamine bursts expire. Or you can sell in a way that captures people’s trust, which is harder and slower than capturing attention but tends to last longer.
5. Small risks are overblown, big risks are discounted and ignored.
There’s a well-known newspaper story featuring a pregnant woman worried about jackhammer noise from nearby construction harming her unborn child. She voices these concerns to the reporter while smoking a cigarette.
This is common. There’s more fear of flying than fear of driving. And more fear of terrorists hijacking the plane than pilots making an honest error. And more attention paid to missing this month’s sales target than to employee morale.
There are a few underlying causes of these errors.
One is that risks that hit quickly are taken more seriously than risks that accrue slowly over time, even if the slow-stewing risks cause more havoc when they burst. Here again, short-term focus trumping long-term views skewers risk management. Part of this is understandable: I can’t focus on long-term risks if short-term risks will get me fired.
Another is that big risks are uncommon, even unknown, and you can’t think about the consequences of risk when you can’t comprehend the risk to begin with. What do people often say when someone they know loses a family member? “I can’t fathom what that would be like.” Again, understandable. But the first step of avoiding risk is fearing its consequences. Which, for some really big risks, is just hard to do.
Same story, again and again.
It’s hard to predict how you’ll respond to risk
The thin line between bold and reckless
Making history by doing nothing