What I Believe Least

Belief doesn’t have to be black or white. It lives on a spectrum, filled with asterisks.

There are things I believe most, which are forces so powerful they’re universal and hard to overcome.

Other beliefs are squishier. You can believe in something but know it has exceptions, qualifications, and headwinds.

A few examples:

I believe people are inherently good. They want to do what’s right and avoid harming others. The world doesn’t work unless they do.

But it’s one of the things I believe least, because while people are inherently good the power of incentives can get good people to do crazy things.

One of the strangest stories in history is the Christmas 1914 truce in World War I. British and German soldiers paused combat for a day, came out of their trenches, shook hands with their sworn enemy, shared a cigarette, and played a friendly game of soccer. Then they went back to killing each other the next day.

People want to be good. But if there’s a natural nudge toward being good, incentives are a gale-force wind. A quote I’ve heard several times from combat soldiers is a variation of, “If I didn’t kill him, he would have killed me.” Then there’s the national pride, protecting your homeland, etc. Sharing a cigarette and playing soccer may be natural, because most people are naturally good. But toss in a few incentives and slaughter can be flipped on in an instant.

One of my unpopular views after the financial crisis is that people were too critical of “greedy bankers,” because critics underestimate their own willingness to sell subprime bonds if a $17 million bonus were dangled in front of them. That’s not an excuse for breaking the law or causing havoc. It’s an observation that many good people will break the law and cause havoc if the incentives are there.

Most people parting with their ethics to embrace an incentive don’t do it consciously, which is why incentives are so persuasive. Incentives are expert storytellers, able to tell a convincing narrative in anyone’s head that the actions they’re promoting are actually good. And we love that narrative, because people are actually good. The beautiful story incentives tell – that you can have your cake and eat it too – has caused good people to embrace and defend ideas that range from goofy to disastrous.

The famous marshmallow test – where kids patient enough to forgo one marshmallow now in exchange for two later ended up doing better in life – had an overlooked and relevant takeaway.

The patient kids did not exercise self-control as we assume. They distracted themselves, playing games, singing songs, and hiding under tables. Most of the kids who sat there staring at the single marshmallow ate it. The temptation was too much. It wasn’t until temptation was removed that it could be overcome.

Incentives should be treated the same. Don’t give people incentives and assume they’ll draw a moral boundary around them. Just be careful with the incentives you show them in the first place.

I believe past performance is not an indicator of future returns. Markets change, history surprises, and performance is cyclical.

But it’s one of the things I believe least, because past performance over a long period of time likely reflects structural facts about an asset, country, or company that can be enduring.

Why has the United States been an economic success? Part is an entrepreneurial culture, which can change overnight in a way that offers no assurance of future success.

But part is more enduring. It might sound silly, but having a ton of land endowed with tons of natural resources buffered from long-time foes by the world’s biggest oceans on both coasts is responsible for more of our prosperity than we think. I don’t know how much. But if you know the history of countries who are just as capable as Americans but have been ravaged by battle every few generations you know how devastating the after-effects of war are, in both infrastructure and culture.

Things could change, of course. But it is reasonable to assume America will indefinitely have an economic advantage over other nations because of its structural advantages in geography and natural resources? To me it is at least as reasonable as predicting a nation has an advantage because of, say, a good educational system.

This is true in the other direction. Economists Ken Rogoff and Carmen Reinhart showed in their book This Time Is Different that the best indicator that a country will default on its debt is not the level of debt or economic growth. It’s past default. Countries with a history of debt find it more politically palatable to default again, and vice versa. Past performance is the best indicator of future returns because it reveals something structural about a country’s political spirit, which can endure longer than financial trends.

The same idea works for industries. An industry with terrible historic returns – mining, for example – is likely to maintain that poor performance because the historical record reflects a structural truth. (In this case, mining is a brutal combination of uncertainty and capital intensity.)

Same for asset classes. Stocks have performed better than other assets historically. It’s reasonable to assume that will continue for over the long run. And not because of today’s valuations or whatever innovations companies are pursuing, but because assets with unpredictable returns tend to eventually be more rewarding than those with stable returns – which will continue being true for stocks for generations to come.

That’s all hard for me to write. The opposite – that success is cyclical because it promotes laziness at one end and hunger at the other – is one of my firm beliefs. And the most important events in history are when a long-standing structural truth ends, because they’re the most disruptive.

That’s what I believe. But I only believe it a little because most of the time, for most things, over a long enough period of time, past performance is the best indicator of future returns even if it’s incomplete.

I believe companies can create amazing work cultures with intentional perks, autonomy, transparency, and mission.

But it’s one of the things I believe least, because most of what makes a culture great is just whether a company is winning or not.

Free kombucha and casual dress codes are no match for layoffs, losing money, and watching your stock price plunge against competitors.

On the other hand, employees will gladly pack their own lunch if they’re part of a team that’s crushing expectations.

Every company known for a great culture is winning. And every company struggling with culture is losing. There are few exceptions to this rule.

But there’s a chicken-and-egg problem with culture. Which came first, the culture or the performance?

It’s easy to link culture to morale and morale to performance. But the causation is stronger in the other direction. A company’s performance affects things like job security and external signaling, which affect loyalty and pride, which build culture. Craig put it this way: “Winning as a company enables great culture. Not the other way around.”

I believe culture is both important and can be created. But I only believe it a little, because there are limits. The World Series champions who stay at Motel 6 will be in a better mood than the losers who stay at the Four Seasons.

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