Collaborative Fund
The older I get the more I realize how many kinds of smart there are. There are a lot of kinds of smart. There are a lot of kinds of stupid, too.”
– Jeff Bezos
You can ace the most prestigious grad school and then spend years in prison for insider trading. It’s happened. And the decision to risk everything on a trade that nets you a few percentage points is the kind of thing someone with half the IQ will look at and say, “How stupid are you?”
There are types of smart that have nothing to do with intellect. And there are types of stupid that have nothing to do with unintelligence.
Smart is the ability to solve hard problems, which can be done many ways. Stupid is a tendency to not comprehend easy problems. It’s also is a diversified trait.
A few kinds of stupid prevalent in business and investing:
1. Intelligence creep: Not knowing the boundaries of what you’re good at, and assuming talent in one area signals skill in all others.
Dictators are never marketed as just good at politics. They’re portrayed as superhumans, masters of everything. Joseph Stalin was born Joseph Jughashvili, but changed his name to a word that translates to “Man of steel.” North Korea said Kim Jong Il shot 11 holes in one on his first round of golf, was an architectural master, and a music virtuoso.
An innocent version of this happens when you’re good at one thing, so you and those around you assume you should be good at all other things.
Take the investor who is gifted at, and made a lot of money doing, one kind of strategy (merger arbitrage) and then extrapolates that confidence into something they have no experience in (gold, macro, politics, predicting recessions). The odds of a disappointing outcome then round to 100. Of course they do – the kind of nuance and skill needed to, say, forecast global interest rates is not the kind you thing you can pick up in a year.
The important thing is most investors without big success in one strategy would never consider betting their portfolio on a new, disparate strategy. They’re more likely to stick to what they know. You need intelligence in one strategy to make you think, with confidence, that you’re good at all the other ones.
An important investing skill is defining what you’re incapable of and staying away from it.
2. Underestimating the complexity of how past successes were gained in a way that makes you overestimate their repeatability.
There’s a thing in biology called Dollo’s Law that says organisms can never re-evolve to a former state because the path that led to its former state was so complicated that the odds of retracing that exact path round to zero.
Say an animal has horns, and then it evolves to lose its horns. The odds that it will ever evolve to regain its horns are nil, because the path that originally gave it horns was so complex.
Dollo’s Law affects investors and CEOs with a unique kind of stupid.
There are things that, once lost, will likely never be regained, because the chain of events that created them in the first place can’t easily be replicated. If you realized how valuable those things are you’d be more careful about risking their loss.
Brand is one. Brands are so hard to build, requiring the right product at the right time targeted to the right users who want that one thing, produced in the right way by the right people, all done with consistency. Once lost it is nearly impossible to regain, because of odds of building a successful brand in the first place were so low. So when management cashes in brand equity for short-term gain, I want to shout, “Stop! This isn’t a factory that you can just rebuild when it’s broken. If you lose that brand it’s gone for good.”
Teams are another. Success is often personalized among one person, discounting how important members of their team were to a win. That one person will often marginalize their team, or go out on their own,...