O God, Make Me Humble

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Caesar: What’s under the sheet?

Marcus Vindictus: Sheet? Oh! Oh, the sheet. Yes. To begin with, number one, a beautiful hand-carved alabaster bathing vessel!

Caesar: Nice. Nice. Not thrilling…but nice.

– History of the World, Part I (1981)

There is only one prayer I know which God always answers: ‘O God, make me humble.’

When I was growing up in Minooka, Illinois, I was a nice kid. I was also an insufferable know-it-all. To be fair, I wasn’t the smartest in my school. That honor belonged to Andy Kimble, a math genius who went to USC to study film. He’s now an editor for several television shows. Still, I had a reputation for knowing way more than I ought to have about far too many topics.

There was more than a little bit of small pond effect to this. I have already confessed, after all, to my status as Medium Talent. It’s a big world, and the sooner you realize how many millions of people can think circles around you, the sooner you find your place in it. Ben and I both participate in a fairly competitive online trivia league. Within the hierarchy of the league, I am placed in what is called the “B-rundle”, which is exactly what it sounds like. Nice. Not thrilling…but nice.

My one great recurring memory of being young and in school, however, was the joy with which people responded to discovering that I didn’t know something. My fifth grade teacher. That time I spelled ‘handkerchief’ wrong in a spelling bee in 7th grade. The first time I said the word ‘banal’ out loud. The time I pronounced ‘Mussorgsky’ as ‘Musso-gorsky’ in an orchestra rehearsal, and embarrassingly insisted that it was an accepted alternate way to say it. The scarier thing, of course, was how I responded to all these mostly harmless jokes at my expense. How desperately and successfully I hid the fact that there were a LOT of things I wasn’t understanding, and topics I didn’t completely follow.

At a young age, I found that I enjoyed the idea of being thought of as knowledgeable and intelligent, maybe as much as I enjoyed actually being those things. I also realized with some surprise that the payoffs of the two were usually pretty similar – the tangible payoffs that were immediately evident, anyway. And pursuing the former was a hell of a lot less work.

No self-flagellation here. As it turns out, there’s a growing body of research into how the real and perceived value of ability-signaling is effectively stunting true pursuit of education across the board. Bryan Caplan writes about it a great deal in his recent, provocative book The Case Against Education. Much more recently (i.e. this month), two Harvard researchers and one from Stanford released an NBER working paper on the topic called Signaling, Shame and Silence in Social Learning (h/t @RobinHanson). It’s an academic paper, but it is an interesting read. It will also be useful to anyone more generally interested in the intersection of narrative and metagame playing. But at its core, it seems to confirm that the negative ability-signaling associated with implying that we don’t know something keeps us from asking questions even when we should. This is a major problem of social organization. These people are not acting irrationally. In just about every major social sphere, we have created a system in which it is absolutely in our socioeconomic best interest to maximize our ability-signaling, even at significant cost to the thing we are supposedly signaling.

I have never seen an investment firm that has really solved this problem.

Bridgewater has famously, valiantly tried. They’ve done better than most. ‘Radical transparency’ goes a long way toward addressing the costs and benefits of expertise vs. perceived expertise. So does the embrace of mistakes and the attractive concept of a meritocracy of ideas. But even the Bridgewater code systematizes ability-signaling through ‘believability-weighting’.  If you don’t think managing your reputation – even at the cost of asking questions when you don’t know the answer – is as important on Glendinning Place as it is on Wall Street, you’re kidding yourself.

But at least they’ve tried.

And so must we all. It is critically important. To the extent we incentivize ability-signaling, we impair humility. To the extent we impair humility, we degrade every decision-making process we may have. The problem I described in the Cornelius Effect was one in which, beyond a certain point, increases in talent and expertise of advisers and investment professionals tend not to manifest in better outcomes. This problem is partially external. With a world full of brilliant people, believing we can find the person who can tell us the answer through singularly brilliant insights is a fool’s errand. It is also partially internal. Humility is a necessary precondition for a talented person to make himself or herself part of a process.  

But the prayer required of the organization that would actively stamp out the trappings of ability-signaling – O God, make me humble – is perilous. When you tell everyone about your vision, they will say that it is such a good idea! So long overdue! We love how transparent you are! Break the old patterns of our industry! Twelve months later, when they’re flipping through your deck, it will be different. They’ll read the bios. Hmm…what school is that? I like the strategy, but the PM’s background looks spotty…I haven’t even heard of these firms she worked at. The analyst they introduced us to seemed to be really well connected to the PM’s thinking, but remember that analyst at the other firm? He knew everything about that company! Now that was impressive!

I’m making this up, but we both know that I’m not really making this up. This isn’t an indictment of allocators or decision makers or fund managers or…anyone, really. It’s an indictment of the fact that we built an industry on professionals exploiting the knowledge gaps of their clients. It’s an indictment of the fact that the solutions we created to prevent charlatans and criminals from pursuing that exploitation were prudent man and other standards designed to minimize the appearance of risk instead of minimizing undesirable/uncompensated risk.

It’s time to revisit these standards.

This won’t be the last time we write about this.

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Mark Kahn
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Mark Kahn

(Editor’s note: you can skip all the blah, blah, blah and just read the last paragraph to get to the point.)

You’ve hit on this before when you wrote about the real versus perceived reason clients should hire an FA – not for all his or her smart ideas, but to prevent the client from making emotionally-driven bad decisions. The problem is the client doesn’t want to hear this. He or she wants to believe they are hiring an FA for their super genuineness or at least strong market and financial acumen and not to prevent them from doing dumb things.

Be honest with your clients – tell them all the things you don’t know (why stocks went up or down today or what rates will do in the future) or why a “principal-protected” structured product doesn’t really replicate being long stocks (and has other risks) – and you’ll find it hard to get and keep clients. It’s also one of the reasons why I’ve been a “product” guy – manager of traders, money mangers or strategists (or one myself) – in my career and not a salesperson as I can maintain an arm’s length (or kid myself that I am anyway) from all that unpleasantness.

I do directly manage my mother’s small nest-egg and have since my dad past away 26 years ago. I receive negative compensation for this effort – I make nothing, but have increased aggravation. And there is no client that I have more of an incentive to be honest with – I want her to truly understand what she owns, why and the process behind it, but telling her the absolute truth is exhausting and unrewarding for her and me.

She hasn’t worked all these years, has seen her principal increase dramatically, and, despite shockingly lower interest rates, has seen her purchasing power rise (not a term she’d use, but she has said she knows she has “more freedom with her income” or something like that). She also knows her friends complain that they have less income, so she gets that she’s done well…for a moment. Then the questions come (on different days): how come my interest rates are so low?/ X’s is getting 10% on her money and it’s risk free, can you look into that? / why do I own any stocks? / why don’t I own more stocks? / the paper says interest rates are going up, when will I see more income? / why are you pointing your hand to your head like it’s a gun and mock pulling the trigger?

I have kept her in a diversified portfolio of equity and fixed income via very low cost funds and direct purchases and have kept turnover incredibly low by using redemptions, excess income and the occasional equity buyout to rebalance (which has resulted in her buying low, selling high, overall, and truly capturing the compounding of two long-rallying asset classes) and have maximized her after tax return by studying her tax situation closely and aligning it to her investments. It’s all worked very, very well, but she doesn’t really care about any of that (the process) – she looks at me politely and thinks about what she’s going to have for dinner when I explain these things to her. But if I were to mention a “good” stock to buy or a “new” fund – she’d become all focus and attention.

Why is it hard to be humble – I have the exact, perfect client to be humble with and she doesn’t want humble at all / she makes being humble painful for me. She wants smart / she want confident future predictions / she wants “winning” investments – “the process” that works bores her and leaves her unimpressed. I want to be humble; the client doesn’t want it. I have a feeling, many, many, many in our industry are in the exact same position. I don’t want to exploit the knowledge gap, but my client wants me to – begs me to.

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George
Member
George

Fantastic, thank you!
Humility is certainly one characteristic in short supply.

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Thomas
Member
Thomas

No great surprise, the military has also grown highly susceptible to ability-signaling and minimizing the appearance of risk. The former was frequently apparent in staff briefing sessions and the latter emerged in even more bizarre ways considering the job of warfare is all about tangible physical risk. Anybody who had to endure a ‘safety stand down’ knows what I mean. The true harm is that institutional learning has ground to a standstill amid this era of perpetual military failure. I only discovered just yesterday that a commissioned study of Army performance in Iraq has been suppressed for years: https://taskandpurpose.com/army-secret-study-iraq-war/

Suffice to say the military did not transition well into the age of enlightened corporate administration nor the increase of individual career incentives that require face-saving and lying. Tom Ricks has remained a sincere critic of of US defense over the years and makes a powerful case why regularly relieving senior commanders was absolutely vital to the health of sound strategy and institutional management. Ever since writing ‘Fiasco’ on the Iraq invasion he remains my go to source for sane defense analysis. I was pleased he took his thinking (along with his Council of the Former Enlisted) away from Foreign Policy and over to Task & Purpose earlier this year.

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Ben Hunt
Admin

Wasn’t familiar with Tom Ricks, but now I’m digging into his work. Thanks, Thomas.

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Thomas
Member
Thomas

He always stumped for frontline troops. Big fan of Gen. George C. Marshall. Ricks ran the gamut critiquing senior military leadership circa 2012 – books/think tank/columns/TV/lectures – but not much of that wisdom ever stuck. Spot on observation from Ricks in late 2017 before McMaster got shuffled off by the current administration:

“It’s been sad for me to watch McMaster in recent weeks because he’s a thoughtful man as well – more emotional, more big and physical than Mattis but an intellectual himself. He wrote a very good book, called “Dereliction Of Duty,” about the Vietnam War and the failures of American generals to tell the truth to American politicians, especially President Lyndon Johnson. And so it’s almost Shakespearean to see McMaster in the White House as the national security adviser faced with the same situation, in many ways, that the Vietnam generals had. And when it’s his job to get up and speak truth to power, instead he appears, in recent days, to have stood up and shielded the president from the truth and dissembled about the truth rather than insisting on the truth.”

Source: https://www.npr.org/2017/05/22/529516184/churchill-orwell-and-the-fight-against-totalitarianism

Also was heard on one the singularly best podcast episodes from early 2018:
http://radioopensource.org/the-state-of-disunion/

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Ben Hunt
Admin

Fantastic. Thanks again.

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