A book about political ideology reveals much about investors’ minds, too.
Analyst Recommendation: Strong Buy.
Arnold Kling’s short book on the “languages” of politics is well worth the small effort it requires. More like an essay than a tome, Kling argues a simple thesis: We can understand most folks’ political views by their highest stated ethical and moral values. And while this book is wholly on politics, many of the lessons in bias and ideology apply to investors, too.
He simplifies us all into one of three buckets, each defined by a prevailing value:
1. Progressives value equality highest
2. Conservatives value tradition highest
3. Libertarians value freedom highest
Every thinking person will quibble with such broad generalizations, but that’s not really the point. Kling, an economist who worked at the Federal Reserve and Freddie Mac, argues we humans are motivated reasoners and highly subjective—we tend to see issues not so much as they are, but as we think they ought to be. This is different than seeing things as we “wish” them to be (an often argued but ultimately condescending appraisal of humanity, which has confronted and survived much stark reality through strife and suffering over the millennia).
Instead, we interpret through the lens of our most-favored core values. It’s not about “wishing,” it’s about our values actually altering the perceived reality in front of us. This insight is important for more than politics. Part of what makes investing so difficult is that our primary values serve as biases—not out of stupidity or ignorance but a bedrock belief in the way we think the world “ought” to be. For example, many investors prefer “cheap” stocks because cheap seems to signify a better value. Hence, myths that will never die about P/E ratios (a measure of how much you’re paying per unit of earnings) and their forward predictability. It turns out they have basically no useful predictive function.
Kling is quick to observe most people fit into all three of these categories by degrees, but the one that takes priority tends to lead the ideology—that is, dictate a person’s experienced reality. And he keenly points out that ideology, by definition, will ignore large swaths of reality in order to preserve the integrity of its view. That’s why ideology is poison for investing.
Let us recall the old wisdom, usually attributed to American novelist F. Scott Fitzgerald, which says “Intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.” There’s this whole cult of value investing that compiled mountains of evidence to show value stocks are surely the best for all time. That’s ideology. Value stocks have been crushed for nearly a decade now relative to pricier growth stocks. That’s reality.
Reality won’t deter either side—I’d bet value and growth investors will duke it out for eternity, each insisting their view is the truth. Just as opposing political sides will. But why do any of that? Why not straddle the conflict—seek to benefit when each kind of stock has its moment in a market cycle? Growth prevails now, but value will again one day. And on it goes. Why be ideological about investing styles? It only guarantees wrongness at some future point.
A short book provides short answers. Part of the problem here is that we abstract too much, Kling says; we lump everyone into the same generic bucket too often. Such broad generalizations are a mixed blessing. They are convenient ways to draw distinctions—Kling himself generalizes with his three political viewpoint categories, but only as a means to elucidate a broader argument. Trouble arises when generalizations ostensibly meant to “help” others navigate choppy political waters and “see” more clearly become dogmatic, ignoring complex and contradictory realities. We could all likely do with a little less seeing each other through the same lens, and a little more seeing others in all their contradiction, complexity, and subjectivity. That is, their humanness.
Well-functioning stock markets do something like that. Markets love to price in differing views. Heterogeneity makes for a strong price—the free and turbulent push-pull of opinion. In spite of all our own blind ideology, a larger, more integrated view somehow tends to prevail—one with elements of our individual views but different on the whole than any of us envisioned. Homogeneity (when everyone holds the same view) is when things get treacherous—if everyone thinks one way, reality in all its complexity will pull back toward the non-ideological (and likely unpriced) truth. Our ideologies won’t save us; reality ultimately cares little for them.
Top-down money managers mostly spend their days abstracting conceptual ideas across huge frameworks (e.g., global capital markets, global economics, etc.). It’s not the kind of work that settles the mind easily. Indeed, it creates more contradiction than resolution. When you think globally, you see just how flawed ideology really can be, how often data thwarts the views you want to be true, how messy is the world.
Far better to live with the sometimes painful tension of opposing views and see the world a little clearer than to relent toward the safety of confirming what we believe it should be. Let’s wish each other luck in the trying—politics and investing alike.