Barton Biggs passed away in 2012, and the investment industry misses him. A long-time investment strategist at Morgan Stanley (MS, Financial) before becoming a hedge fund manager, he wrote several books on money management.
I found his book "Wealth, War and Wisdom" deeply insightful. You start with some wealth, a war comes along, your wealth gets destroyed and you end up with wisdom. Ultimately, that’s what this book is all about.
While I don’t think we will see a physical World War again, cold wars and economic wars are increasingly likely to crop up as an alternative to physical warfare given the current geopolitical tensions. Inequality, climate change, pandemics and trade tensions are ramping up as threats that increase the likelihood of major global conflict.
If we get to that stage, call it war, can we use the financial markets to protect our wealth? All we can do is try to prepare for any future that might come about, and we can use Biggs’ writing as wisdom now to guide us.
One of Biggs' central ideas is that the price action in the stock markets of the U.S., Britain, Germany and Japan called key turning points in World War II more accurately than the prevailing conventional wisdom generally held by the public, press and experts. Do investors have any special insight in this area? Aren't they driven just as much by general sentiment as everybody else? What about the "madness of crowds?"
Charles Mackay wrote, "Men, it has been well said, think in herds. It will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."
Doesn't it pay to be a contrarian, to be ahead of the curve, to enter investments before the crowd and exit as they finally pile in? Maybe, but this chapter explains why we should be respectful of the collective judgment of the market crowd. Bear in mind, George Soros thinks of himself as a "contra-contrarian" for this reason.
So what about investing experts? Experts have different incentives. Would talking heads be interesting if they mostly admitted their views were in line? Perhaps in fear of being called out for flip-flopping, many suffer from "cognitive dissonance," rejecting evidence against and emphasizing supportive arguments.
So why do markets outperform experts? Better estimates usually come from collective, aggregate views of diverse, independent, motivated people. It works best when there are strong incentives to be right. Social science calls this "a complex adaptive system." Obviously, the market is financially incentivized. Again, pundits have different incentives (publicity, etc.). Misjudgements of investors effectively cancel themselves out, leaving the more accurate group knowledge. A good example is the superior track record in election forecasting of betting markets over polls and pundits.
But we must differentiate Group-think vs. Crowd-think. Participants must be diverse, have independent judgment and have skin in the game. With consensus investing, much value is lost because of hierarchy, a lower level of responsibility assigned to group participants and mistakes on both sides of a call not having adequate chances to cancel out to leave a more considered or neutral if appropriate decision. Also, contrast individual (single investor, stock or sector) irrationality to market (aggregate) irrationality.
This book is more than just about – at the macro level – listening to the market. There’s a lot of investment strategy and other behavioural aspects to it. But for me, the main takeaway of the book is on average, the wisdom of crowds will come up with a better answer than single individuals. We need to think about the system, and we need to think about incentives.
Apparently legendary stock picker Julian Robertson (Trades, Portfolio) is at odds with this type of idea. In the book, "Inside the House of Money," Dwight Anderson quotes Robertson as hating the expression, "The market is telling me," and retorting, "The market isn't telling you anything - how come it's never talked to me?"
"Wealth, War and Wisdom" is about how various forms of wealth performed during the Second World War. It's certainly interesting reading, and a must read for those slightly paranoid - perhaps rightly so - about the state of world affairs. So much wealth can be easily wiped out by war, but thankfully, this book offers some ideas how to protect oneself should this kind of disaster strike again.
