A friend of mine recently asked me, “What is the most defining human quality?”. After the initial fumbling I said, “our emotions”. He disagreed, for emotions are simply the manifestations of this one quality- hope. The more I have deliberated over this over the last couple of months, the more I seem to agree that hope is in fact the defining human quality, the source of our competitive advantage. 

Investing is a study of human interactions- a combinatorial disquisition of how a human being or a group of them, have the ability to deliver on a vision; and how we interact with one another in a market place at different points of time. Hope, therefore, should be the defining quality of investors as well. 

Stoics Disagree

Of late I have also come across a plethora of reading citing the need to adopt the stoic philosophy to investing especially in the light of global “market exuberance”.  The stoic view on hope is best summarized in the following quote: 

“Limiting one’s desires actually helps to cure one of fear. ‘Cease to hope … and you will cease to fear.’ … Widely different [as fear and hope] are, the two of them march in unison like a prisoner and the escort he is handcuffed to. Fear keeps pace with hope … both belong to a mind in suspense, to a mind in a state of anxiety through looking into the future. Both are mainly due to projecting our thoughts far ahead of us instead of adapting ourselves to the present.”

-Seneca, Letters from a Stoic

The last sentence however holds the key to understanding how as investors one must be predisposed to being hopeful. Hope is denoted by “projecting our thoughts far ahead of us” and that is precisely what we do as investors. We drum up conjectures about the future and place a bet accordingly. Concerning one’s self with the present, is a role that is best left to the sell side. Long term investors cannot afford to have their wishful thinking for the future, be shackled by their understanding of the current state of the markets only. As Josh Brown rightly puts it in his recent blog post:  

“Rules of thumb, in the investment sphere, are at best worthless and at worst destructive for returns. Because the environment changes and the future doesn’t always respect the past.”

-Josh Brown, The Reformed Broker, November 20, 2017

In the Indian scenario for example, we invest on our belief of the government focusing more on one particular sector, or a reform making another sector an easier one to operate in, and so on and so forth. This is akin to daydreaming- a gross extrapolation from a small policy step taken or a speech made. Or the flag bearer of all of our air castles, “When we cross $2000 in GDP per capita…the J Curve in Consumption will be witnessed.”

Narratives Dictate Numbers

One may retort to such assertions with the belief that all predictions about the future are based on some data points of the past or the present. Theoretically, yes. However, we, the agents of the financial markets, specialize in justifying any hypothesis we conjure with data points. This numerical justification gives us a false sense of our being rational.

China is an often cited example for the J Curve in Consumption. There are economies that have seen the J Curve effect at $1650 and there are countries that have seen it post $2500. We just chose the data point that works best with our belief. It is therefore our belief dictating the data point and not the other way around. 

In a seminar by Prof. Damodaran (of NYU Stern School of Business), he aptly said that spend time thinking about your story, your narrative; I guarantee you will be able to come up with numbers to justify it. Saying that the numbers on Excel are an objective proof, independent of fear and hope, is simply a lie

AI the Investment Manager?

The financial news is littered with articles on how machine learning will cause AI to be better investors than us. Posit this however; How does an AI system identify a Google or an Uber? How does it predict the demise of brick and mortar retailers? How does it identify the private defense players in India as an investment case? Precedents in all of these cases, and therefore data points are non-existent until the actual occurrence of the event. How do you program a machine to hope by acting “irrationally” (against the data presented) and throw out a buy for a cash burning company like Amazon Inc. 15 years ago?

“In the stock market a good nervous system is even more important than a good head.” 

– Philip Fisher

At any given point, I have to assume as an investor, that there are at the very least ten others who process data faster and better than I do. It is therefore not required that I be able to analyze the data before everyone else. That is an improbable task. It is my response to that stimuli of data, that is a determinant of my success as an investor. I do not have an information edge. The only edge I have is, therefore behavioral. And in the case where I am up against AI, the only advantage really is to remain irrational; to hope. 

(P.S. I am by no means suggesting that one must hope without doing any work on one’s ideas. The ability to bet big and hold on to your belief, your conviction only comes from the work you do on your ideas. Hope is not sufficient but a necessary aspect of being an investor.)