Essential Skill for Navigating the Metamorphosed Investing Landscape.
The difficulty lies not so much in developing new ideas as in escaping from old ones.
– John Maynard Keynes
I wrote five market outlooks in the past six months. Although I discussed different market aspects in those outlooks, all shared the same concern: doubts regarding the sustainability of the elevated market level. However, the market and its participants don’t seem concerned. Rather, they remain exuberant as evident from the market performance of the past six months.
I foresee distress or panic that could cause a significant price decline. But it isn’t essential; prices might consolidate around the current level for an extended period. Nevertheless, regarding financial markets, ruminating on how things might unfold in the future is generally inconclusive and often confusing.
However, amidst this ambiguity, a major fundamental shift has happened within the investment landscape. It is the shift from a declining interest rate-low inflation environment towards a high-interest rate-high-inflation environment. For investors, it is a momentous shift because what worked in the former won’t work in the latter. Worryingly, most investors are not even aware of this major consequential shift, and are thus, unprepared for the new environment.
Investors’ prevailing beliefs and strategies were designed for the former environment, which has existed for more than 40 years. Consequently, those beliefs and strategies are so entrenched that it will require great effort to remould them to the new environment. The former environment was favourable for growth stocks and bonds. Both assets are expected to underperform in the new environment, which is likely to favour value stocks and hard assets such as commodities.
For a long time, that is from the early 1980s onwards, the stock market was akin to a ‘rising tide lifts all boats’ kind of market: most of the stocks rose when the market rose. The new environment won’t allow such leeway. It would be selective. Only those stocks doing a good job will gain in price, unlike previously, when most stocks rose irrespectively. The skill of stock picking will gain prominence in the new environment.
The knowledge, assumptions, and beliefs that have served investors well for the past forty or more years are unlikely to serve them in the coming years. However, it is preposterous that despite continuing evidence of underperformance, investors never acknowledge any shortfalls in their prevailing beliefs and knowledge. Instead, they tenaciously hold onto their older patterns, rather than making the essential radical changes.
One reason they do so is because the old patterns, ideas, and beliefs have been held by them for so long, and hence, so entrenched that they have become a part of their identity. Therefore, letting go of old patterns is akin to letting go of one’s identity, which no one wishes to do because it is hard. Holding on to is easier, and the natural inclination is always to choose the easier path, however counterproductive it might be.
These behavioural tendencies are not anomalous. Being humans, every one of us is susceptible to such counterproductive behaviours. However, what differentiates the successful from the unsuccessful is their ability to recognize such tendencies within themselves, and then, work on themselves to align their thoughts and actions with reality – they are productive.
The successful ones aren’t necessarily the brightest or smartest ones. It requires a certain degree of intellectual malleability and flexibility to make the radical changes imperative to navigate the metamorphosed investing environment. However, the more intelligent you are (or think you are), the more confident you are in your knowledge, beliefs, and skills, and that means, the least degree of intellectual malleability and flexibility you possess. Hence, in this situation, intelligence is a bane rather than a boon.
It is normal to get attached to your beliefs and opinions that have served you well for a long time. But such attachment causes your beliefs and opinions to become a part of your identity. This makes it hard to make the necessary changes that your beliefs and opinions occasionally require to navigate the changed investing landscape.
Some things in life are permanent while others are transient. One should get attached and identified with only those things that are permanent, and not with those that are transient. Our values and purposes are permanent, while knowledge, beliefs, and opinions are transient. Therefore, choose wisely what you identify with. Our purpose is the preservation and growth of wealth through equity investing. Our knowledge, beliefs, and opinions should serve that purpose – if not they should be discarded or replaced.
A certain degree of intellectual detachment could help avoid such a conundrum. Yes! Practice detachment to overcome attachment to your beliefs and opinions. Attachment is the natural course. Detachment doesn’t come naturally: it requires effort and practice from your side. A detached attitude towards your beliefs and opinions makes it easy for you to validate and correct, or even drop them, according to changing reality.
Alongside intellectual detachment, a sufficient degree of intellectual humility could aid us in navigating the new and changed investing environment. Intellectual humility allows you to introspect your knowledge, beliefs, assumptions, and skillsets. It enables you to discover and acknowledge the limitations of your knowledge. It also allows you to question your beliefs and assumptions.
An effective introspection exposes shortcomings and futilities in the knowledge, beliefs, and assumptions you presently hold. After discovering such shortcomings, the next step is to ‘Unlearn’, which means letting go of everything that won’t serve you going forward – although they might have served you well before.
Once you have ‘unlearned’ what doesn’t work, the next step is ‘relearning’ what does work in the changed environment. However, there is one subtle difference between ‘unlearning’ and ‘relearning’. We unlearn by scrutinising our knowledge, beliefs, and assumptions – what we know already – and then letting go of what has lost relevance.
However, what we must ‘relearn’ is what works in the new environment, but what those are is outside our present intellectual realm, and hence, must be discovered. In other words, for relearning, we need to know ‘what we don’t know’.
How do we do that?
‘Intellectual curiosity’ will enable us to do that. ‘Intellectual detachment’ enabled us to ‘recognize’ what is wrong within us, and ‘intellectual humility’ enabled us to ‘unlearn’ them, and now ‘intellectual curiosity’ will enable us to ‘relearn’ the right thing – what works. However, importantly, don’t forget to keep a distance (detachment) from what you relearn because they too will become obsolete one day and must be dropped.
Intellectual curiosity is the desire to know more about the world we live in. But to have such a desire, firstly, we must be aware of the limitations of our present knowledge. Intellectual humility enables that, which is why intellectual humility is a prerequisite to inculcating intellectual curiosity.
Intellectual humility does not come naturally to us. To acquire it, of course, an open mind is essential, though that alone isn’t enough. Spending too much time with agreeable and familiar people and situations will never bring the necessary intellectual humility imperative to navigate the present changing environment. We need to put ourselves in situations where our shortcomings and fallibilities become conspicuous to us and, sometimes, to others too. For that, we must get outside of our comfort zone.
Reading about unfamiliar topics, visiting unfamiliar places, learning (or at least listening to) an unknown language, or even choosing a different route to work are a few ways to get outside our comfort zone. Getting out of our comfort zone brings a sense of uneasiness within us. If it doesn’t, you are still in your comfort zone.
On sensing the uneasiness that ensues once we get out of our comfort zone, the first instinct is to run back to our comfort zone. But, for progress, this is the wrong way to act. It is normal and okay to feel uneasiness once you get out of your comfort zone. The right way is to remain outside the comfort zone, despite the uneasiness.
The cause of the uneasiness is your unwillingness to accept the reality before you. Once you accept, surrender to, and assimilate within yourself the immediate surroundings around you, the uneasiness will surely disappear. However, it won’t disappear, if you approach it with some preconceived notion and expect reality to conform to your notions.
Once you have let go of false beliefs and irrelevant information and surrendered yourself to the new reality, the uneasiness, or the psychic pain within you dissipates. Now you have the necessary clarity and receptivity to new ideas and beliefs, even if they contradict those you held earlier.
But letting go won’t come that easily. One obstacle to letting go of old patterns is our natural inclination to trivialise and disregard information that contradicts our current beliefs, assumptions, and opinions. Meanwhile, we are ready to accept even misinformation if they agree with our current beliefs. The more attached we are to our beliefs and opinions, the more pronounced such tendencies.
This is why intellectual detachment is very important to achieve intellectual malleability. A detached attitude towards our beliefs and knowledge brings the realisation that we are not our beliefs and knowledge, and hence are more willing to question them and if necessary, let go of them.
Another obstacle to letting go is the discrepancy between our desires and reality. The past 40 years have been favourable and easy for equity investors to make money: it was desirable. However, the newly emerged environment would be unfavourable for equity investors. It would be hard to make money, because of which it would be undesirable for the many. Therefore, any information about the changed environment, being undesirable, is more likely to get neglected by the majority investor community.
Here too, the obstacle could be surmounted through detachment. As we countered confirmation bias through intellectual detachment, similarly, the desirability bias could be countered through emotional detachment. We are not our desires or feelings. Such a realisation enables us to go beyond our desires for the sake of reality.
Afterword
The purpose of this discussion on intellectual detachment, humility, and curiosity that help us achieve intellectual malleability is to prepare us to navigate the changed investing landscape effectively. The new landscape will be characterized by high and rising interest rates and moderately high inflation. For the 40 years until 2022, interest rates have been in a long, gradual decline. For half of that period, interest rates have remained near zero. The period was also characterized by low inflation.
But things started changing from March 2022 onwards. In one-and-a-half years – between March 2022 and August 2023 – the US central bank (Fed) raised its policy interest rates from 0.25 per cent to 5.50 per cent – the steepest rate hike in 40 years. Fed was compelled to undertake such a drastic rate hike due to a rapid rise in inflation during 2021-2022.
Consequent to the rate hikes, although the inflation rate has decelerated from the peaks of 2022, it still stays stubbornly above central bank target rates. This means high interest rates and moderately high inflation are to linger for some time. This is why it has become essential to prepare ourselves for it because it is an unfamiliar territory for us – no one has experienced such an environment in the past 40 years.
Most of the knowledge, beliefs, and assumptions that we hold now were formed and evolved during the declining interest rates-low interest rates-low inflation landscape. They worked then but won’t work in the new environment. Unfortunately, we don’t have the knowledge, beliefs, and assumptions that will work in the new environment. However, thankfully, we have the tools that would enable us to know ‘what we don’t know’ – the trinity of intellectual detachment, intellectual humility, and intellectual curiosity. Once you have mastered the art of intellectual detachment and humility, the eyes of intellectual curiosity should open within you.
You don’t have to venture into unfamiliar territory – you are already in it. Now all that is required of you is to scan the territory with an open mind. Something that excites or interests you is expected to gain your attention. Follow them up… Try to understand without any preconceived ideas or beliefs. You ought to gain valuable insight with enough attention and time. If you do, update your knowledge and beliefs based on the insights gained.
Once formed, regular validation of your knowledge, beliefs, and assumptions is essential. This could be done by consistently evaluating your investment decisions – their process and outcome – and the knowledge, beliefs, and assumptions that went into them. Also don’t forget to keep a distance from your newly gained knowledge, beliefs, and assumptions. This would make it easy to let go of them when they stop serving you anymore.
These three things – detachment, humility, and curiosity – that adapt us to the fast-changing world isn’t preordained. Maybe curiosity… when we were children… but not anymore… because as we grew, they were diligently tapped out… thanks to parenting, schooling, and social influencing. But if the trinity of detachment, humility, and curiosity is practised persistently, an inclination towards them could be cultivated – that is, over time, they will come to us naturally.
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