I know I’m not stupid. But even though I was always among the three brightest kids in class I have a good friend who, right brain or left brain, is quicker than me in every way. He, in turn, tells a story about a visiting professor who was writing the answer to a question on a blackboard and was asked a second question, after which he wrote the answer to that with his left hand, while finishing the answer to the first with his right. My buddy’s response was, “Well, I’m smart, but I’m nowhere near that gifted”. The investing lesson here was that if I was just going to think linearly, along the same path as everyone else, someone with significantly higher brain horsepower was going to get there first, and potentially earlier enough to be filling my bid to take profits.
But the fact that my family history involved frequent displacement early on turned out to be a lucky break – the “making new friends” lag time was spent reading, fiction, to the point where the habit became permanently ingrained. Unwittingly, I was learning lessons in empathy that would make me a much better investor.
There are obvious examples of this. David Liss’ “Conspiracy of Paper” provided a highly enjoyable depiction of the collapse of the South Seas bubble in the early 18th century, with the commensurate motivations of businessmen, government and criminal gangs. Through the fictionalized account, it was clear that the South Seas bubble, the result of abuse of the new Limited Liability structure, is roughly but usefully analogous to the recent securitization/financial product/CDO upheaval. The investing-related utility of other novels is more subtle. Wolfe’s Bonfire of the Vanities (the book, not the wretched movie) is more than 20 years old but continues to provide insight into the hubris and social abstraction of the new “Masters of the Universe”, hedge fund managers. Aksyonov’s criminally under-read “Generations of Winter” has nothing to do with finance but does, by presenting the horrors inherent in Stalin-era Russia, provide context for how messed up the present leadership, and by extension the economy, of Russia truly are. In more contemplative moments, you can gauge the mood of oppressed Chinese against oppressed Russians.
Unlike historical accounts, through well-drawn characters it is possible to absorb the world through another perspective, an immensely valuable skill for investors looking for ideas (or trouble). A memory bank of fictional characters will also help when the market “hive mind” pushes prices in unexpected directions, answering the question “what kind of person buys here?”.
The primary lesson of fiction is learning “this is how people act”, when they’re scared, confident, happy, determined or demoralized. Not how I would act, or how I think they should act, but how the combination of different experiences and different patterns of cognition lead to aggregate outcomes. Empathy.
Fiction is the longest-running, most rewarding relationship of my life with little or no adverse side effects, so forgive the evangelical tone. I do believe reading fiction, despite the time-sucking nature of the process, provides a competitive advantage for investors by providing wider context for decision making. I can’t answer two questions on a blackboard at once, but somewhere I have read a book with a character that will give me an idea how a person who can will react to the markets.