Chimps and Swans

I’ve read many books over the years, almost all of them have been non-fiction. At times like these, all of those bits of knowledge gleamed from all of those books, hopefully do add up to something of value. Take Dr. Steve’s book for instance.

the chimp paradox – dr. steve peters

I now understand that my head is indeed inhabited by two brains. What comes next depends upon which brain is in control. The chimp brain is more primitive, impulsive, faster and stronger and so leaps to conclusions and can get us into trouble but is essential for our continued survival. Then there is our human brain which is slower, more considered, more considerate and calculating. It looks before it leaps. Often by the time it is ready to take action the chimp has already been in there and potentially broken everything. Dr. Steve has helped countless sportsmen and teams achieve their best by controlling their inner chimp. I couldn’t recommend the book enough. Then there is “The Black Swan”

the black swan – nassim nicholas taleb

The book discusses the unthinkable happening and how these events change everything. Forever. Although rare occurrences, black swan events have done more to shape the past than many individuals suspect and will also continue to do the same in the future. The Covid-19 outbreak is often called a black swan event, but if you had read the book you would understand it just isn’t one. To qualify as a black swan event;

  • Firstly the event must be outside of our normal understanding of what could happen, because nothing we have seen before would give us an inclining that it was even possible. Alien invasion? We have all thought of that one. 9/11? A suicide mission to fly a jet into a skyscraper formed part of the plot in the 1982 book by Richard Bachman a.k.a. Stephen King called “The Running Man”.
  • Secondly is has an extreme impact.
  • Thirdly, in spite of the fact we previously could not have imagined it, we subsequently all say we knew it was going to happen all along!

A global pandemic has been talked about, but unfortunately inadequately planned for, over many decades. So if it can be imagined it can’t be a black swan event, even though the second and third rules have been fully met.

The book is heavy, but worth a read. Along with “fooled by randomness” and “anti-fragile” by the same author, all the books are critically acclaimed masterpieces.

chimp + swan = ?

Well, we know that this pandemic was not unimaginable. It therefore follows that this was not a true ‘black swan’ event. So the history of previous pandemics and potential past pandemics, thankfully should offer us some forward guidance. We also know that if we react too quickly, it was probably our chimp that is running the show. A gut reaction I think would have been a good outcome so far for some adventurous risk clients, but probably a reckless decision to make for the majority of our clients. Before we act we need to understand the nature of the problem “swan” and who in our head is providing the solution “chimp or human”.

we are also biased of course.

Humans are subject to many biases. Not that we care to admit it. That is particularly true of investment biases. In my recent blog “You’ve been Framed”, I discussed framing bias. Another important bias we need to be aware of and try to control is Recency Bias.

Recency Bias is our tendency to rely on recent experiences more than distant ones in predicting what will happen in the future. This can and does work against us. It’s not often that the media is full of fine uplifting stories – that just doesn’t sell well. Instead the media have become overly-biased doom-mongers. The most recent stories we read tend to frame our next decisions. Trying to remain balanced has been difficult for years now, when our inputs are so skewed to the downside.

Covid – 19 news makes us fearful. We don’t understand the virus fully and we have a fear only of the unknown. It is easy to make irrational decisions when we are fearful.

how do we feel?

I’m probably not alone in feeling the situation is looking hopeless one day yet feeling quite optimistic the next. Lesley must think she is living with Dr. Jekyll and Mr. Hyde. I have to be in a balanced mood to make the correct portfolio decisions for us all. A fortnight ago was probably the first period when a sustained balance was achieved over a consecutive number of days and I was confident that my decisions wouldn’t be framed by over optimism nor over pessimism. So the mainstream portfolios commenced their overhaul which will be completed now the markets have become less erratic. Our AIM portfolios and Go for Growth portfolios have already been rebalanced fully, whilst there was a feeling of unbridled opportunity in the air.

action taken

Lucas and I have clicked through the charts of all the individual shares we own, plus a similar number that sit on our substitutes bench. We have narrowed these down with an approach that favours those shares that were showing sustained strength before Covid- 19 hit and then continued to show relative strength in the recovery since. After this technical analysis we checked to see if the fundamentals stacked up. No unsustainable dividend players and no companies with a hopeless level of debt that could be a drag on performance in the short term. This laborious process certainly didn’t impress the impulsive chimps in us, they were taking a nap.

The fruits of our labour will probably not fully show for months to come, such is the nature of patient investment, but we are hopeful we have trimmed any dead-weight that we were carrying and are excited about the new editions into the portfolio.

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Ken Whittleston
Ken Whittleston
1 month ago

Hi Howard
Please can you share your thinking about the sale of Johnson Matthey and UDG Healthcare

Ken Whittleston
Ken Whittleston
1 month ago
Reply to  Howard

Thanks for the fully comprehensive reply Howard