The evolution of how humans have combated infectious diseases is a good template to understand how an investor’s handling of the bad times will evolve. The ‘newbie’ practices the crude exercise of blood letting (letting blood out to cure an infection) and sells everything in panic, the ‘learner’ mimics the greats without contextual knowledge quite like serum treatment, whilst the ‘mature’ investor diagnoses and consumes a focused antibiotic to combat the downturn.

Blood Letting and the Novice Investors

3000 years ago, our line of defence against the onset of infections had blood letting in the forefront. From 1000 B.C. in Egypt to the late 19th century across the world, this was the only known mechanism to fight invading pathogens. The idea had some merit in that some bacteria require iron (found in haemoglobin in the blood) to replicate and grow their numbers. However, in practice, this procedure reduced the body’s ability to offer resistance as the white blood cells and the antibodies they produce are lost in blood letting. Along with the potential villain, the required saviours were lost. 

This is akin to a novice investor’s typical response to a downturn; sell everything and run. While we avoid the landmines in doing that, we also let out the very value creators that would have enabled our portfolio’s recovery. This sale en masse shows the novice’s lack of understanding of the problem at hand. Instead of diagnosing a particular symptom and narrowing down on a prognosis, a fear stricken blanket treatment is undertaken thus weakening their ability to exponentially compound wealth.

Serum Therapy and the Learners

In 1890, passive immunisation through transferring of serum was discovered. Low dosage of the diphtheria pathogen, modified by heat and injected into rats appeared to protect them. It was rightly posited that the body produces antibodies to the ‘foreign attacker’ and these were hosted in the serum. Drawing blood out of animals (especially horses given their larger size and therefore higher volumes of serum drawn made possible) and injecting it into infected human beings proved to be effective cure for diphtheria in the late 19th century and tetanus in the 20th century. But the human body never has a one size fits all solution for its problems. The serum treatment was found to be dangerous in that each serum had to be matched exactly with the specific strain of bacteria involved in the disease. For example, there are over 20 strains of pneumococcus that can cause pneumonia and each strain of the bacterium requires its own serum. Furthermore there have been cases where the human body rejected the injected serum by recognising it as a ‘foreign invader’ thus mounting an attack on the medication itself.

Investors who have spent some time in the markets and have familiarised themselves with the writings and the journey of the larger, more successful investors, try and mimic their approach while dealing with downturns. Akin to serum treatment, for this approach to be fruitful- the investors should have the exact same asset allocation strategy, return expectation, risk appetite and financial circumstances as the ‘guru’ they mimic. This is however rarely the case. Blindly adopting another’s methods can work in some cases and yet cannot be applied as a broad rule of thumb. An understanding of the portfolio specific problem still begs an internalisation of the problem and the body’s own ability to generate antibodies.

Antibiotics and Mature Investors

Antibiotics are targeted antibacterials that either kill or inhibit the growth of bacteria. There are various families of antibiotics, each with a unique way of inhibiting or killing bacterial growth. Be it the Beta Lactam family (such as Penicillin) which kill bacteria which are encompassed in a cell wall (1), or Macrolides (such as Erythromycin) which inhibits bacterial growth by affecting the ribosome structure (2); each family, therefore, has a very unique way of attacking the pathogen and are therefore applicable to a specific kind of bacteria.

Similarly mature investors take a personalised approach to realigning their portfolio in a drawdown- one that is contingent upon their investment time frame, their risk taking ability and the safety net they have built in order to sustain their current lifestyle. Mimicking another might give us sleepless nights and simply selling out of the market will ensure we miss out on the wealth creation journey altogether. For the longest amount of time, humanity witnessed infectious diseases with either no solution or with only blood letting as the hope, as do majority of investors.

Overdosing on Antibiotics?

Yet there is something to be said on overanalysing in an information rich world today. Overdosing on antibiotics has started to generate bacteria resistant to these medicines. Over analysing and actioning remedial solutions based on every quarterly result, every news headline can generate the same resistance in your portfolio to wealth creation. Perhaps we can pre-empt this one before the evolution of our fight against infectious diseases tells us what happens next.

Notes:

The idea for this article was sparked by Thomas Hager’s book on the search for the the world’s first miracle drug, ‘The Demon Under The Microscope’.

(1): Certain bacteria build cell walls by linking molecules together. This process is blocked by the Beta Lactam class of antibiotics. 

(2): Macrolides inhibit bacterial growth by affecting the ribosome structure specifically in bacteria. Ribosomes are essentially to synthesise proteins and without proteins, cells cannot do any work. Inhibiting ribosome processes therefore inhibits the growth of bacterial cells.