You should behave in such a way that you can say to everybody, “Behave as Ido.”

- Immanuel Kant

"Before you begin, think as if you are a lazy person. Imagine the competition will work harder. Your only chance is a better strategy. After you begin, work as if you are a dumb person. Imagine the competition is smarter and more talented. Your only chance is to outwork them."

- James Clear

A. Asking Beautiful Questions

One of the life changing books I read a few years ago was “A More Beautiful Question” by Warren Berger. 

The book is about asking more questions in our lives as a force for igniting change. 

As the world becomes more complex and dynamic, knowledge becomes a commodity. Answers are available everywhere. 

We cannot compete with technology in storing answers. But when it comes to questioning we have the edge. Computers do not know how to ask questions. We humans have curiosity, creativity, divergent thinking skills, imagination, and judgement. 

To use this effectively we need to ask questions. 

If we think of questions and answers as stocks, the value of questions are going up and answers are coming down.

An average four year old girl in Britain asks around 390 questions a day. But as we age we stop asking questions.

Our reading and writing skills go up but our questioning skills go down. 

We stop questioning because in order to question we need to think. This requires some mental work. Our brain tries to find ways to reduce this work. One way to reduce the workload is to not question and accept everything around us and operate in an autopilot mode. Psychologist Daniel Kahneman refers to this as System 1 thinking.

In order to question we need to accept our ignorance. But our society punishes ignorance by labeling the ignorant as an idiot. In order to question we need to remain curious and engage our System 2 thinking. 

So let me start you on a question for this time of year:

What Are You Compounding In Your Life? Is this what you want to compound ?

B. Ignore Most Predictions

In January of 2020, Bloomberg put together a great overview of all the 2020 market predictions from the major shops. It’s searchable by asset and theme and a great way to see consensus around what the street was thinking. 

In 2020, the herd was calling for no recession, a muddle-through low growth economy, and very meager but positive returns in the stock market. 

The site Visual Capitalist also put together a post aggregating a summary of popular 2020 predictions after analyzing over “100 articles, white papers, and interviews.” 

Here’s a graphic they created showing Wall Street’s 2020 end of year predictions for the S&P. The average price target was for a gain of just 3.5%.

Yes 2020 was an unusual year, and I’m not sharing this to ridicule the forecasters, but to highlight just how difficult forecasting is, especially for a complex adaptive system such as the economy and stockmarket. Unusual events happen unusually often.

The more time I spend in the market, the more I realise that the best we can do is try to understand probabilities, scenarios and potential outcomes.

There is no certainty only probabilities.

And sometimes it’s easier to think five or ten years ahead and wonder what is possible, then to predict the movements over the next few days, weeks or months.

Which reminds me of a Jeff Bezos saying:

“I very frequently get the question: 'What's going to change in the next 10 years?' And that is a very interesting question; it's a very common one. I almost never get the question: 'What's not going to change in the next 10 years?'

And I submit to you that that second question is actually the more important of the two -- because you can build a business strategy around the things that are stable in time. ... [I]n our retail business, we know that customers want low prices, and I know that's going to be true 10 years from now. They want fast delivery; they want vast selection. It's impossible to imagine a future 10 years from now where a customer comes up and says, 'Jeff I love Amazon; I just wish the prices were a little higher,' [or] 'I love Amazon; I just wish you'd deliver a little more slowly.' Impossible. And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.”

A great book on forecasting is Super Forecasting by Tetlock and Gardner, more on that another time.

C. The Eighth Wonder Of The World

You are given the choice between two sums of money: one million dollars or a penny that will double every day for 30 days. 

Which should you choose?

Here are a couple hints. 

The penny that doubles daily would be worth $1.28 after the first week. After the second week, it would be worth $163.84. You will probably reason that the penny would be worth more than the one million dollars. (Why, otherwise, all the theatrics?) By just how much, though, might surprise you. 

It turns out that after doubling 30 times, the penny would be worth $10,737,418.24!

This is a terrific exercise because it highlights the not-so-obvious power of compound returns (in this case, the penny compounds at 100% for 30 periods).

I say not-so-obvious because you would have been better off taking the one million dollars until the 27th day. But in those final four days, the value of the penny increases from less than $700,000 to more than $10.7 million. 

Patience and a long-term perspective are required to give the power of compounding an opportunity to do its magic.

From this riddle, we may learn the importance of holding on so that we allow our investments to compound uninterrupted for long enough that the compounding effects we saw in days 27 to 30 have an opportunity to play out in our portfolios. 

From this great Akre Capital article on the Art of Not Selling. 

I often look at this Buffett data: 

D. A Few Things Worth Checking Out:

1. Steve Mandel, the founder of Lone Pine has compounded at ~20% since 1997. He did a long form interview this week discussing his investment philosophy, his career mistakes and what he likes now.

2. Niall Ferguson is one of my favourite thinkers and he was on the Unchained podcast discussing Why Bitcoin Now. They discuss a) what has made things money b) modern monetary theory and the role of the state in the financial system c) how Bitcoin behaves like an option on digital gold, and when it will behave like digital gold d) how Bitcoin fits into all of the different macro conditions facing the global economy e) how well the recovery from coronavirus will go, and how it will affect the development of the crypto space in the near-term.

By the way if you haven’t seen it, it’s worth checking out Niall Ferguson’s book (originally published in 2008) and PBS documentary (made in 2009) - The Ascent of Money, which is even more important today. Thanks Bjorn T for flagging this.

3. I interviewed Jim Mellon (on behalf of Pi Capital) last week on his new book Moo's Law: An Investor's Guide to the New Agrarian Revolution. While that interview is for members and clients only, Jim, also had a great discussion with Bruce Friedrich of the Good Food Institute in November on The New Agrarian Revolution.

“Someone once asked me why women don’t gamble as much asmen do and I gave the commonsensical reply that we don’t have as much money. That was a true but incomplete answer. In fact, women’s total instinct for gambling is satisfied by marriage.”

- Gloria Steinem