Focusing on Assets vs. Emotions

As Dan Ariely pointed out, humans are Predictably Irrational. I used to think this generalization made sense but that only exists in a realm where rationality is seen as black and white. A view I disagree with. My rational might be another’s irrational.

But this doesn’t mean people are always rational either. Many economic models assumed people to be rational actors but much of history has shown that to not be the case.

“History doesn’t repeat itself, but human nature remains the same.” - Ken Burns

As much as we can’t assume people will always be irrational, we can’t assume people to always be rational. But is it possible to predict the constant of human nature?

This further begs the question of how one would define human nature. Is it as simple as making decisions on self-interest? Possibly through the guidance of the great sins like lust, greed, envy, etc…?

Bezos has famously noted that customers will always want things cheaper, to have more options, and delivered faster. I think he was right in believing such behaviours to persist over decades. In some ways, he was able to predict a constant of human nature.

But I wonder if such predictability to human nature is bound to change. Just as much as an irrational behaviour could persist for a long time and one might deduce it to be obvious by saying it's human nature. Until it stops and reverts.

“Markets can remain irrational longer than you can remain solvent.” - John Maynard Keynes

So even if exuberance, driven by….let’s say greed, persists and makes something like the stock market appear to behave irrationally, it would be dangerous to conclude this will persist because greed is a core part of human nature. It very well might persist but one cannot know when tides may shift, as they inevitably do. Greed might be constant but it can come out in many forms of behaviour.

The stock market is one such place where human nature is on full display daily. A place where emotions run high. Even if algorithms are involved the folks writing it are fallible humans. A few seem able to feel the winds of change of human nature in the markets like a skilled sailor. I’d love to be one too but I don’t quite have the data to confirm I am such a figure.

If an arena of gauging emotions is not my place, then another possible arena might be one of assets. Assets in the form of businesses. Businesses that can collectively capture the predictability of human nature, quite like Bezos was able to with Amazon.

The way this may manifest is through investment in owners per Anthony Deden. The inclination for investors is to “make money” so it’s natural to be drawn to the realm of emotions to take advantage of perceived arbitrage in human nature. But owners focus entirely on the asset they own because a business’s operations are not impacted by the daily whims of capital markets (usually the ones run by mercenary CEOs are).

Now, this might sound like a blind approach where one ignores price to bet on great owners. If only it were so easy. But price makes a big difference to returns and that requires some thoughts about the emotions that have set present prices. Rather, maybe it’s about being so strict on the criteria of what qualifies individuals to be great owners that it too helps form the margin of safety inherent in the price. All to try and limit the amount of judgment I have to make on what emotions are running amok in the markets now. The practice of trying to cultivate an owner’s mindset by investing in owners.