"Investing is hard. It is hard for everyone, including the most successful investors in the world. Nevertheless, investing is one of those adult responsibilities we all need to come to terms with.”
Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere by Tadas Viskanta
Trying to understand the amorphous creature that is the
financial blogosphere is an exercise as hopeless – and as pointless – as the
quest for the Holy Grail. We don’t know
what it is, we don’t know what it does and if we ever found it, we wouldn’t recognise
it.Yet, by some mysterious self-organising mechanism, the blogosphere is a system which manages to attain some form of order and structure. In the midst of this mayhem is Tadas Viskanta’s Abnormal Returns, a “forecast free” daily compendium of the best and most lucid writings from around the web, interleaved with posts giving a sideways insight into the ideas that drive the site. Combined, those ideas have now been integrated into a book which is probably the best definition of the challenges facing the modern investor now extant.
In the fourth century BC Eubulides of Miletus dreamt up the problem we know as the paradox of the heap. The paradox argues
that if you take one grain of sand away from
a heap of sand then you still have a heap of sand. If you keep on removing grains you eventually
end up with one grain – which paradoxically is still a heap.
It’s fairly clear that the ancient Greek philosophers had a lot of spare time on
their hands.
The paradox was eventually solved when we developed computers and gave them to our modern day philosophers, scientists, who promptly started using them to investigate the properties of sandpiles. In a eureka moment Per Bak, Chao Tang and Kurt Wiesenfeld showed that grains of sand demonstrated a property they called
self-organized criticality: once the number of grains reached a certain point they spontaneously organized themselves into a pile based on underlying simple local interactions. Complexity,
such as the power laws characteristic of many self-organized systems, emerged out of these simpler laws and proved to be
robust: these systems are not fragile and aren't forever sitting on the edge of collapse.
The Self-Organizing CIA
Like many good ideas it’s a bit too easy to see
self-organizing systems everywhere, once you start looking. Just as adaptive models based on evolutionary
theory can be applied to many situations, so can self-organization. However, blogging is likely a genuine case of
the phenomena – at least the CIA thinks so:
“A second self-organizing, information-sharing tool has matured in the last few years. It is called “blogging" … The “blogosphere” is truly a marketplace of ideas.”
It’s nice to see the international security community
keeping up with the times. However, the limited research on the blogosphere so far
confirms the idea: Liu, Fu and Wang in a study of Chinese bloggers confirm that the
network has small-world properties, and is scale-free. Critically small-world systems are mediated
by hubs, which provide links between nodes: think of the airline network where
to fly from Jacksonville to Baltimore you have to transit through Atlanta. Atlanta is the hub.
Sturgeon’s Crap
Abnormal Returns is a hub in the financial blogosphere, but
one mediated and managed by the interests of its creator, which lie in a very
specific direction:
“In the blogosphere, Sturgeon’s law applies as well. Sturgeon’s law states that “90% of everything is crap”. What this means is that most content, whatever the medium, isn’t really that good. In that regard, the blogosphere is no different from any other form of media”.
Avoiding the crap, and distilling what’s left, is what Abnormal
Returns does. Experienced investors will
think they know of much of this, but they probably don’t. Inexperienced investors won’t know this, and
don’t know that they need to. This is a
view of the world of investment for the twenty first century; it’s both
sophisticated and straightforward – sophisticated because investment markets
are confusing places, and straightforward because the ultimate lessons aren’t
that difficult as long as you can keep them straight in your head.
Unfortunately “keeping them straight in your head” is a
fundamentally difficult thing to do. It’s
a confusing world, made more so by a media driven by the need to find
newsworthy events, and ultimately confounded by our own wretched psychological
biases. The book has a separate section addressing these, but far more interestingly, is the first book on investing I’ve seen that actually
integrates the findings of behavioral research into the general narrative. Behavioral bias is not an add-on, but an
integral part of the investing world.
Deal with it, or get pwned.
Liberal Arts Investing
To figure out the lessons derived from a comprehensive
analysis of what bias means in the context of risk, reward, the various asset
classes, and the investing options available to twenty first century investors
you’ll have to read the book for yourselves.
However, if all of that didn’t already chime with the usual themes and
memes here, Abnormal Returns advocates a liberal arts approach to investing.
Behind the concept of liberal arts investing is the idea of
Consilience,
what Edward O. Wilson describes as the “interlocking of causal
explanation across disciplines”. By
bringing together different ideas from different domains of knowledge we can
extend and create new knowledge. In everyday life this is nowhere more important than in investing, what Robert Hagstrom calls The Last Liberal Art,
a place where multiple
disciplines converge and can create something greater than themselves: pretty much this journal's founding
principle. Knowledge is the best
possible defence against our own weaknesses and biases and, as Viskanta argues,
promotes a better, longer-term way of thinking about investment:
what Edward O. Wilson describes as the “interlocking of causal
explanation across disciplines”. By
bringing together different ideas from different domains of knowledge we can
extend and create new knowledge. In everyday life this is nowhere more important than in investing, what Robert Hagstrom calls The Last Liberal Art,a place where multiple
disciplines converge and can create something greater than themselves: pretty much this journal's founding
principle. Knowledge is the best
possible defence against our own weaknesses and biases and, as Viskanta argues,
promotes a better, longer-term way of thinking about investment:“A focus on long-term investing takes into account not only economic and financial considerations; it is also likely to include technological, demographic and cultural trends that lie outside mainstream Wall Street thinking”
Amen to that. Although we'd add physics, biology, history, geography, philosophy, anthropology and literature too. By the time you've dealt with that lot you'll have no time left to actively trade away your gains.
Seeking Consilience
You’re not going to find any simple answers in the book, perhaps the
biggest takeaways are the most obvious ones, those that many investors seem
to spend their time desperately trying to ignore. Firstly, the best way of making more money is
to save more money, which implies a life outside of investing. And secondly, time spent investing is time
that could be spent doing something else. Never forget life's opportunity costs.
The self-organizing properties of the blogosphere dictate
that people will coalesce around the hubs that fit their personal
preferences. The web supports a filter
bubble in which we only expose ourselves to information that we agree with – a tendency
increasingly reinforced by the use of online profiling to target us
individually. The true seeker of
consilience, therefore, needs to choose their hubs carefully. As long as free market capitalism is your
thing then Abnormal Returns, both website and book, would be a good choice.
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