The Big Lessons From History #150
Reflecting on a few interesting reads and listens over the past week
The Big Lessons From History
Morgan Housel is one of my favorite finance writers. A book that I recommend to most folks - the Psychology of Money (check out the podcast below if you’d like to get a quick preview).
He also wrote a post on the Big Lessons from History. I believe that our collective inability to remember lessons from the past is one of the biggest impediments to societal progress.
This post goes into lessons, not specific stories, that can be learned from past events. It is often easier to remember the stories and grow paranoid about what could happen next. For example, we will take many precautions to prevent future pandemics/diseases but the next global tragedy is unlikely to come from another disease. Just like COVID-19, it will come from an area that practically no one predicted.
Here's a quick summary of the lessons that Morgan highlights in his post:
Calm plants the seeds of crazy.
Progress requires optimism and pessimism to coexist.
People believe what they want to believe, see what they want to see, and hear what they want to hear.
Important things rarely have one cause.
Risk is what you don’t see.
Let's go through each lesson.
Calm Plants the Seeds of Crazy
"Nothing too good or too bad stays that way forever, because great times plant the seeds of their own destruction through complacency and leverage, and bad times plant the seeds of their own turnaround through opportunity and panic-driven problem-solving."
My mentality has always been to believe in society's ability to survive. No matter how dire the circumstance might be. I also try to avoid situations and environments where I can grow complacent as that's when I am more prone to get in trouble.
This is one of the things that I appreciate about Constellation Software. The decentralized structure can be seen as being overly complicated. However, it creates an environment where it is impossible to be complacent. If I am not pushing myself (and my team) to be on top of our work, we'll miss out on opportunities to competing groups inside and outside Constellation Software.
As an investor, this lesson helps me pick out businesses that I should invest in. You always want to pick companies that have the right level of 'panic-driven problem-solving.' A company that constantly has their backs against the wall and shows the ability to quickly solve their problems will consistently out-perform. The ones that are able to maintain this survivor's mindset despite being at the top of their market are truly exceptional.
Progress Requires Optimism and Pessimism to Coexist.
"Save like a pessimist, invest like an optimist."
"The trick is being able to survive the short-run problems so you can stick around long enough to enjoy the long-term growth."
Whether it’s starting a new job, investing in companies, or being in a new personal relationship, you're never guaranteed a smooth ride.
In this sense, it's important to reconcile the paradox of surviving in the short-term to see progress for the long-term. The outcomes of not being able to reconcile the short and long term include becoming:
Bitter Pessimist
Bankrupt Optimist
Or Simply Lost
The last outcome is a bit more unique to our generation. These are people who are simply too smart to fail with the short-run problems but also not patient enough to see long-term growth and end up changing directions. A few cycles of this and I believe you have someone who is very skilled but completely lost. In this sense, optionality is a blessing and a curse.
People believe what they want to believe, see what they want to see, and hear what they want to hear.
This is usually the case because it is 1) easier to change other people's minds vs. your own and 2) incentives can drive irrational behavior and thoughts.
Incentives don't have to be monetary-based. It can also come from social acceptance. In this respect, I think incentives are likely the more powerful driver of how we see the world. Unfortunately, we live in a world where the vast majority of people are incentivized to influence the way we think whether it’s social media or our day jobs. We're either influencing others ourselves or working to support someone's view of the world.
The total addressable market for influence has never been bigger than it is today.
Important things rarely have one cause.
This, to me, is fairly obvious. While stories are shared in a linear format, they rarely take place in such a way.
Take COVID-19 as an example:
"A virus transferred from animal to humans (has happened forever) and those humans socialized with other people (of course). It was a mystery for a while (small sample size) and then bad news was then likely suppressed (hoping it would soon end). Other countries thought it would be contained (standard denial) and didn’t act fast enough (bureaucracy, lack of leadership). We weren’t prepared (over-optimism) and could only respond with blunt-force lockdowns (do what you gotta do) and panic (calm plants the seeds of crazy)."
Risk is what you don’t see.
The risks that come up in the news rarely take place and if they do, aren't as big as people make it seem.
It is the risks that aren't as apparent that will often kill us. From this respect, risk management should be less about identifying what can go wrong.
It should be more about how you will operate when something goes wrong (e.g. working at 75%, 50% or even 10% capacity).
Building resiliency is the best form of risk management in my opinion.
For those interested, here's a couple of other videos from Morgan Housel that I'd recommend: