What to keep. When to let go.
There will come a day when investing strategies and norms that work today will grow old and expire. Two groups will form: Those who embrace the reality of the industry’s chaos and adapt, and those who stay in the tub, embracing a world that adheres to the logical rules stuck in their head.
Capital Thinking · Issue #850 · View online
Leo Szilard was one of the smartest people of the 20th Century.
He conceived the idea of nuclear energy, patented the process of using it in a power plant, and helped Albert Einstein write the letter that sparked the Manhattan Project.
All in his 30s.
The Unsolvable Puzzle
Morgan Housel | The Collaborative Fund Blog:
Like any genius, Szilard’s curiosity was diverse. After World War II he became a biologist, attracted to a field that hadn’t been explored as deeply as physics. The new field didn’t just change what he learned, but how he learned.
Szilard spent hours a day in the bathtub, solving physics problems in his head. Biology ruined that routine, because, as Szilard later said, he constantly had to get out of the tub to look up a fact.
Physics is guided by rational laws that have never, and will never, change. A master like Szilard could reason his way through problems like nuclear energy with only his mind as a tool.
If an idea in his head followed the laws and reason of physics, it would in real life, and would continue working forever. That’s how a guy designed a nuclear bomb in the bathtub.
Biology is different. It’s guided by things like accident and mutation, so specific behaviors sometimes defy logic and can change entirely as evolution bulldozes the past.
The flu virus has killed 731,000 Americans in the last 40 years – more than died in World War II – and not for lack of effort by the medical community. A virus that mutates and evolves means a vaccine that might work today won’t work tomorrow. And since the mutation itself is an accident, researchers are kept in perpetual scramble.
Like an unsolvable puzzle.
The physics vs. biology analogy is relevant in investing. Too many investors view their field like a physicist in the bathtub, searching for something that’s logical and permanent, while not enough view it like a virologist, needing to update their knowledge and tactics to evolve with the chaos of what happens to work now.
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Benjamin Graham’s book The Intelligent Investor was published almost 70 years ago, and is still one of the best-selling investment resources. It sells because so much of its message is timeless.
But investing evolves, and Graham’s book did, too. It went through four editions before his death in 1976.
Jason Zweig, who annotated Graham’s book, once wrote about using it as a practical guide in modern times:
Graham was constantly experimenting and retesting his assumptions and seeking out what works — not what worked yesterday but what works today.
In each revised edition of The Intelligent Investor, Graham discarded the formulas he presented in the previous edition and replaced them with new ones, declaring, in a sense, that “those do not work anymore, or they do not work as well as they used to; these are the formulas that seem to work better now.”
One of the common criticisms made of Graham is that all the formulas in the 1972 edition are antiquated. The only proper response to this criticism is to say: “Of course they are!
They are the ones he used to replace the formulas in the 1965 edition, which replaced the formulas in the 1954 edition, which, in turn, replaced the ones from the 1949 edition, which were used to augment the original formulas that he presented in Security Analysis in 1934.”
Ben Graham’s brilliance was grasping what part of investing was timeless and what part required revision.
Morgan Housel
*Feature post photo credit: Fabian Kühne on Unsplash