In their recent episode of the VALUE: After Hours Podcast, Taylor, Mitchell, Brewster, and Carlisle discussed Deep Survival And The Fear Of Losing Money. Here’s an excerpt from the episode:
Tobias: Can we cram in some veggies before we make it out?
Tobias: Yeah, man. Let’s do it.
Tobias: Let’s do it.
Jake: I’m going to try to tie it back in if I can. I’m reading this terrific book called Deep Survival. It’s about all these different, basically climbing accidents, airplane crashes, boat, shipwrecks, all these pretty harrowing stories of people out there taking these risks. The analogies for what we do are obvious and plentiful. I’m probably going to do multiple parts of this over the next few weeks, but the first one I’m doing is, in 2002, there’s these four guys that were climbing Mount Hood.
That particular climb is considered a beginner’s climb, which is actually one of the most dangerous things that anyone could ever say, is this is a beginners climb, because then, people don’t prepare, they take stupid risks. But what ends up happening is that as you’re working your way down, it’s like this big ice field, basically, that you can hike, but these guys are connected to each other with harnesses. What they do is the guy at the top is the anchor, and then the guy below him, he’s attached to him with a rope, and he’ll belay him, which means let rope out to let him down a certain amount. In this particular instance, you had a guy up at the top, who we’ll call A, a guy 35 feet down from him who was B. C was 70 feet below him, and then D was 105 feet. Basically, these guys are all stretched out on multiple ropes.
Well, what’s important is that the top guy can’t fall, because if the other guys fall, they can only fall so far before someone else arrest them. What ends up happening is that, of course, the top guy falls, and he ends up– then he’s traveling about 30 miles an hour by the time that the rope gets taught with the guy that’s was directly below him. It yanks him off of the of the– All these guys had been practicing their fall arresting, which is like you have this ice axe, and you basically jam it into the snow and then lay on it, and it’s like an anchor.
They all do it but because there’s so much stored energy when you’re up together like that, it actually goes back to this that segment we did on normal accidents, the nuclear meltdown, and all those things, you have a very complex system, high energy along with tight coupling, because they’re tied to each other. So, anyway, it cascades, and each guy pulls the next one off of the mountain, and now they’re all sliding and bouncing around, and the rope– a rope is an interesting thing from a physics standpoint, because it’s able to transmit force along it in lots of very interesting, weird ways. It’ll stretch, it’ll pull someone else in other direction.
These guys are just cruising down the mountain, they end up hitting two other guys that were below them, wrapping the rope up in them, and then that gets pulled down, and then, it hits four more guys, and then they all crash into the side of a wall, and then down into a crevasse and half of them end up dying, the other half are just shredded.
Well, what’s important, I think the analogy that we can make is that, that psychologically, mentally, spiritually even, you have to be very careful about who you’re tied to, and if they are going to fall off and potentially pull you down. You think about your friends that you talk about investing with, maybe where you work, if you’re in the investment industry, you’re effectively tied to those people psychologically because we’re a herd species. We’re very influenced by the people around us. You become the average of the five people you spend the most time with. When we’re climbing this mountain and if someone is to fall off in our group, and maybe pull another person down, and then they pull the next person down–
There’s a cliche in the climbing community that being tied in together is basically signing a suicide pact. We all are potentially signing suicide pacts of making suboptimal decisions if we get too influenced by the people that were around us. Sometimes, I think you almost have to be willing to cut your rope if everyone else is losing their minds around you, and maybe pulling you off of the mountain. The higher that we get in this mountain, which maybe correlates to some of the things we were talking about as far as how expensive things are, the setup, boy, maybe I need to be free climbing now, and not tied in with everyone else around me, because we have a ton of energy, we have a very complex system, we have a lot of interconnectedness, maybe that’s not the time to be tied in with everybody. Some interesting analogies in these life-or-death situations, and I’m going to come back in the next few weeks, I’ve got some more of them that might be kind of fun.
Tobias: Somebody wants to know, do you read these stories to your kids? They get to bed okay? [laughs]
Jake: I should, just to scare the shit out of them.
Michael: Like half of them died, it was a disaster, so just remember who you tie yourself to.
Tobias: Could not sleep.
Jake: Sit tight.
Bill: By the way, it was a super scary death, is they fell off a cliff and knew they were going to die. It was fantastic.
Tobias: All the way down. [laughs]
Bill: They couldn’t [crosstalk] halfway through.
Jake: Well, that’s that thing. It probably happened in less than five seconds, because when the first guy falls, and it’s like two seconds, he’s going 30 miles an hour already.
Jake: They’re just going down this thousand-foot face in five seconds, and then they’re all wadded up down at the bottom together.
Tobias: I like that analogy, but I think at that time you need to be careful in investing is as you’re ascending, because I think that as you get closer and closer to the peak, everybody starts cheering and having fun, and that’s the time when it’s most dangerous. Totally unrelated. I’m taking a fairly long Twitter break. I’m on Twitter every now and again, but I’m mostly off these days, because it’s all got a little bit loopy for me.
Jake: Twitter is totally tying yourself to a bunch of other people’s opinions letting that soak in. It’s by looser tie, probably than you talking with your friends or in a Slack channel like you guys have.
Tobias: If you want to look though, gets into your mind. Gets deep into your [crosstalk].
Jake: No doubt. I’m just kidding.
Bill: I’d like to say that. I’m very glad. I got on Twitter, and it got in my mind. It’s made me much smarter. I would have been a dumb ass without it. I’ve probably would have lost everything and– [crosstalk]
Tobias: You’ve got Qurate, who you follow? Who you pay attention to?
Michael: Ooh, Qurate.
Bill: [crosstalk] Oh, Qurate.
Tobias: Oh, there you go, fellas. [laughs]
Bill: If only Dave Venable could cook it up for me.
Jake: Full circle.
Michael: I like that story, Jake. That’s a good– In my mind, I’m thinking, it really matters, who you partner with. It really, really, really matters. Just it matters. It’s just keep coming down to–
Tobias: That’s a good point, but most of the time, they say the pilots, it’s like driving a bus 99% of the time, then 1% of the time, you need to find a pilot who knows what to do. Given that is the case is probably true. So, in investing, 99% of the time, it’s incredibly boring and there’s nothing much fun going on. Then, 1% of the time, it’s just brown undies time. You don’t really know what your partner’s going to be like through that time. So, how do you stress test them before the event?
Michael: It’s impossible. At least if somebody knows, I don’t know. The guy that I invest with, who does the private deals and I do the public deals, we do them all together, Bryant Kobe, he and I’ve been friends for a decade. I had no idea. We’ve invested together, but I had no idea what it would be like to invest with him our own capital and in times of stress, and he and I, from February really through the end of July, spoke every day, invested together, and did very, very well. For me, he’s my ride or die.
I know exactly what it’s going to be. If stuff hits the fan, and we’ve got a 40% drawdown, I know exactly what he’s going to say. I don’t know any other way to do it than to just do it. Maybe there is a way, but– By the way, I had some friends where it was the exact opposite of that in that exact scenario where I expected them to do something based on all the conversations and the thought process we’d had before, and they did the exact opposite of what I would have expected. It’s totally fine. It’s not positive or negative, it’s just– That’s good information to have.
Tobias: As we’ve pointed out, there are many theories that we all like to embrace, but when it comes to our own money, sometimes you just want to take the irrational approach, because the irrational approach makes more sense in your individual scenario.
Michael: It is amazing, fear of losing money, what that does to people. It’s really remarkable. Actually, when you have to see– I don’t know if you can predict it, but you know it when you see it. It affects people very differently. People get very, very weird. It’s what Bill was saying about capital, and that’s part of the reason why I think capitalizing your gains until you realize that it was a mistake, because when you get into that loss position, the fear just grips you, it turns you into a very different person. At least people that I’ve interacted with my investment career all become very different when they become afraid of losing money.
Jake: At the chemical level, it’s changing you.
Michael: There’s nothing they can do.
Tobias: Yeas. It’s physical. It’s physical.
Michael: There’s nothing they can do. It just takes over you. That’s why I say until you see it, you don’t really know what it’s going to look like.
Tobias: I think [crosstalk] little look like Keynes.
Jake: It’s literally your amygdala is driving the show then, because it’s a survival thing.
Jake: You don’t have time for executive processing in those– You don’t feel like you do in those situations. So, the amygdala takes over, and it has first lien on controls of this machine, because it got us to an evolutionary place, but it doesn’t fit our world now. [crosstalk] fear response.
Tobias: I like Keynes take on it. When in 1929, he was running a few different accounts, King’s College and some insurance companies accounts, and one of the insurance companies made him liquidate all of his positions, but he said to the King’s College and to the other insurance company, if we liquidate now, then there’s no chance of recovery. If it keeps on getting worse from here, then it’s going to be Mad Max Thunderdome in the streets anyway. Really, the only path here is to stay invested and to ride this thing back up.
Jake: Pot committed.
Tobias: I think it’s true. Pot committed.
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