Re: [asa] A parable of three investors

Interesting allegory. But let's add another twist: let's say all three of
the investors were dead wrong. None of the data was adequate to predict
that a massive war would break out in the middle east which would roil the
commodities markets. Nor was the data able to predict a new breakthrough
energy technology based on nuclear fusion. It was the same story as many
other "disruptive" technologies, like automobiles, personal computers, and
the internet. The conventional data weren't up to the task of predicting
the "creative destruction" the new technology would bring, even though all
the contemporary analysts were quite familiar with Josehph Schumpeter.

But, a fourth investor -- let's call him Bill -- had a hunch that all the
talk about the old commodities was wrong. Bill didn't spend much time
studying data, but he just had a "feeling" that all the conventional wisdom
must be wrong. He played his hunch, investing his nest egg in the penny
stock of Fusiontech, Inc., a company doing research into nuclear fusion.
Bill's friend's were horrified -- *everyone* knew that the handful of
"scientists" who claimed to make progress towards man-made nuclear fusion
were at best quacks and at worst liars. Roll the dice with computer tech
stocks, or play it safe with proven commodities like oil, Bill's friends
said. Bill didn't listen to reason.

Bill is now one of the wealthiest men in the world, having eventually bought
up most of the shares of Fusiontech before its record-breaking IPO. Ken
died in the middle east war a few years ago. Ken's heavy investment in oil
wiped out all his savings and he took a high-paying consulting job in
Baghdad to make up the loss. He was captured by insurgents and beheaded
when the third battle for Baghdad started. Henry is in jail for fraud, but
not because of Enron. Henry's interest in Enron led him to study the oil
industry in an evening MBA program, after which he took a job as an
environmental consultant at a big oil company. He was caught falsifying
data about the environmental impact of oil drilling in Alaska, along with
dozens of other big oil exectuives. Bob did ok -- he now works as a VP of
Technology at Fusiontech, Inc., which holds the patent on the method used to
produce energy safely and economically using nuclear fusion. All of the
stock brokers involved now sell real estate or life insurance.

On 10/28/06, Glenn Morton <glennmorton@entouch.net> wrote:
>
> Consider several investors, each with a small amount of money to invest.
> In
> the late 1990s, they all go to the same investment broker who presents an
> investment strategy to them (interpretations of what the broker thinks
> will
> happen in the future). The strategy has its particular risks of being
> right
> and being wrong. The broker likes a set of mutal funds which have had good
> track record and good management. They are in various broad areas of the
> economy, banking, international, commodities, transporation etc. They are
> good solid but not stellar investments. They will ensure the money grows,
> but not necessarily outperform the market.
>
> The first guy, named Henry, who is the youngest, listens to all the
> research and logic of the broker. But he decides that such research is
> really designed to prevent him from getting to where the real money is to
> be
> made. Indeed, he thinks there is a grand conspiracy on the part of the
> brokers to maintain the fiction that brokers know what they are doing.
> Brokers hold their beliefs in order to hold their jobs. This grand
> conspiracy uses other people's money to ensure that the conspirators make
> money, enabling the conspirators to prevent others from making money and
> to
> prevent others from publishing on how to make money.. Thus, this young
> decides that research and sound logic isn't useful in investing. He knows
> that if he invests with the right sort of people, people who are good,
> then
> he will make money, he will make money. So, Henry ignores all data, all
> research and embarks on his own investment program--one given him by his
> friend, the preacher. Enron was the preferred investment vehicle. Henry
> heard that the guy at the top of this organization was the son of a
> preacher, so he must be the right sort of guy to invest with. Henry
> gathered
> lots of followers with him and they all invested in Enron. Investments,
> require having a the approved set of beliefs in order to be successful.
>
> The second guy, named Bob, is appalled at the willingness of this younger
> sort of fellow to ignore data.The broker lays out why he should not invest
> in technology (this is the late 1990s). They are over priced, the P/E
> ratios
> are too high, they don't' make profits etc. These things are poised for a
> fall, the broker says. But Bob likes the tech stocks and doesn't want the
> broker's scenarios to be right. He wants this scenario to be wrong, to
> be
> false. He doesn't want the predictions of the models to match reality.
> Bob's friends tell him that he shouldn't be that way,but he keeps
> muttering
> something like, the broker's scenarios are not supposed to tell us about
> the
> future or reality. They are merely designed to tell us how to behave--how
> to
> invest. They are rules of the road only, not the road. They don't' tell us
> anything factual because they are predictions. They can't be included in
> the
> world of facts.. Also, Bob thinks, it really doesn't matter if it is true
> or
> not; it is a great story of doom and gloom for the tech stocks and it
> makes
> a great allegory of hard times. .This scenario is merely a way for the
> broker to tell us about behavior, not true returns on capital employed or
> what industries will increase in share price over the next several
> months..
> With Bob, the broker offers his best strategy, one which the broker
> recommended, which he firmly believed would make money for the
> client. Bob
> politely declines to invest with this strategy. Bob said, "nothing you say
> is meant to match the future, indeed, the future can't be predicted. So
> what
> you are doing is offering grand myths about the future. Knowing this, and
> knowing that myths are never meant to be taken seriously as history, I
> want
> to use another strategy." The broker, of course, says, "But if you use
> another strategy, you will lose your money." And Bob, says, "I don't like
> your strategy, I want it to be wrong so I want to invest in things that
> makes your scenario false" So Bob invests heavily in tech stocks
>
> The third guy, named Ken, listens to the broker's claims about the future,
> he doesn't like everything he hears, but figures that if he is going to
> make
> money, he better deal with the data--high P/E values, lack of profits in
> the
> tech group. But he tells the broker he wants to invest in oil because
> there
> will be a shortage coming in the next few years.
>
> The broker is apalled. The broker points out that oil is a lousy
> investment;
> oil is so, so, so old industry, indeed dirty industry. It isn't the new
> economy; it is a dinosaur industry. Look at all the severe price
> collapses
> oil has had over the past few years. No one else he knows in the oil
> industry thinks there will be a shortage. Ken shows him some articles, he
> agrees he should avoid tech stocks save as a short play and Ken agrees to
> invest some money in the mutual funds. On oil, eventually, Ken wins the
> broker over to his position by showing the broker lots of data. Oil will
> go
> up and if one invests now, he will make money. Even the broker invests
> that
> way. Ken doesn't LIKE the fact that oil price will rise, he wishes it
> weren't so. But one better deal with reality if money is to be made.
> Between
> the two of them, Ken and the broker, they created a scenario they didn't
> like, but which made money and matched reality
>
> Henry lost it all, but he didn't have to accept that silly research, which
> made him very happy. He also had lots of followers.. Bob lost 75% but
> when
> last seen was still preferring to invest in things which would not match
> reality because reality is so boringly and antiquatedly concordistic. Who
> would want that?
> Ken, the concordist, and the broker, both of whome wanted the strategy to
> match reality, made money.
>
> I would ask, when faced with a choice, one interpretation makes the Bible
> capable of matching archaeological and scientific reality and the other
> demonstrably makes the Bible false, why on earth do we WANT to chose the
> one
> which makes it factually false? Do we like investing in theories which
> makes it false? I suspect we too often do. For the life of me, I can't
> figure out why. If one applies such a strategy to life (like investing
> where bad decisions lead immediately to great pain), one will lose money.
> Maybe we don't have any real skin in the game (there is that word 'real'
> again)
>
> I just find it so difficult to understand why people prefer the Bible to
> be
> false to having at least a hope that it contains some history--real
> history.
> As I said to Iain in the discussion about Yeled in Chapter 5. Atheists too
> want the Bible to be false. For us to play their game is insanity. Like
> Henry or Bob
>
>
> glenn
> They're Here: The Pathway Papers
> Foundation, Fall, and Flood
> Adam, Apes and Anthropology
>
> http://home.entouch.net/dmd/dmd.htm
>
>
>
>
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Received on Sat Oct 28 13:59:40 2006