Through the many lens of big history, we will build what famed investor Charlie Munger called âa latticework of mental models,â and thus help you to understand ...
Applied Big History
Chapter 1 Introduction
Applied Big History:
A Guide for Investors and Other Living Things Doing Good and Well in the Anthropocene by William Grassie
And the things best to know are first principles and causes. For through them and from them all other things may be known but not they through the things covered by them.... But these things, the most universal, are perhaps the most difficult things for men to grasp, for they are farthest removed from the senses. — Aristotle (384-322 b.c.e.)
Value Investing in a Complex World This book is written as a guide for doing good and doing well in a fast changing world. It is intended for other living things, but especially for investors. The ambitious goal of this book is show how economics and finance can be better understood through the lens of big history—the 13.8 billion year journey of our universe, the 4.5 billion year evolution of our planet, the million-year rise of our species, and the 10,000-year accelerating drama of human civilization. Moreover, understanding this epic of evolution from multi-perspectives provides an edge for investors today—and also other living things. Through the many lens of big history, we will build what famed investor Charlie Munger called “a latticework of mental models,” and thus help you to understand “the big ideas from all the big disciplines.” Big history is the term de jure. When I first started my graduate studies over twenty years ago, we invoked terms like the epic of evolution, the new cosmology, the journey of the universe, the history of nature, the great story, or simply, cosmos.
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Chapter 1 Introduction It is all the same story with different titles, though necessarily also told with different emphases and interpretations. The whole story of the whole cosmos involves astronomy, physics, chemistry, geology, biology, anthropology, history, psychology, technology, economics, and more. I like to call it our common story, because for the first time we have an origins story that transcends all our ethnic, political, religious, and linguistics differences. Among the many big ideas we will discuss is the history of the great acceleration of the last century. How did our species come to grow exponentially, cheating the logic of Darwin and Malthus? How does the $117 trillion global economy of over 7 billion people function? And what might cause it to dysfunction? How might our species, and your portfolio, continue to prosper in the future? It is astounding—the evolution of money and its recent exponential growth. Our global economy is quantitatively and qualitatively different from anything in the past. Ecologists and geologists now refer to our era as the Anthropocene—the age of humans. It is certainly the end of the Holocene—the last 10,000 years since the retreat of the last ice age. We will explore what it might mean for economics, finance, and the evolution of our species and the planet. We will learn about complex adaptive systems, collective learning, and how to calculate value based on the evolutionary formula of energy, matter, and ingenuity. Applied Big History examines major trends, niche opportunities, and endogenous dangers in the investment landscape of the twenty-first century. We will gain new perspectives on how to create and capture value in physics and biology and in economics and finance. By studying the epic of evolution, we come to
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Chapter 1 Introduction understand emergent complexity, creative destruction, and micro-macro dynamics in both nature and society. I take value investing to also be a metaphor for life. We all invest time, energy, and attention, hopefully growing in riches broadly defined and difficult to measure. Of course, the most important investments we make are in families and friends, education and work. Applied big history is relevant to managing your portfolio and your life. You need not work in finance or industry, as I do not, to appreciate this book. You need not be a trained scientist, as I am not, to build the latticework of big ideas that inform big history. Indeed, this book is not about specialization, but rather learning how to weave all the specializations together in a useful framework that you can use everyday in your work and in your life. Outperforming the Market Beating the market is not an easy undertaking. Most will fail in the less-than zero-sum competition of buying and selling. In an efficient market, as idealized by traditional economics, it would not be possible to beat the market. If everyone was perfectly rational with perfect information, there would be no disagreement on price or so the theory goes. Of course, markets like people are not perfect. Inefficient markets seethe with disagreements and passions, booms and busts. This give rise to possibilities of being lucky, even dumb lucky. But luck is hardly a sustainable investment strategy.
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Chapter 1 Introduction Another way to beat the market is to cheat or steal. One can acquire insider information. One can bribe, coerce, and collude. This can be done in both illegal and legal ways depending on the context. One can also “make a market” or “front run” transactions. In a market without rules, where anything goes, relative power determines the winners and losers. That’s another way to outperform the markets. Day traders sometimes beat the market. Pattern seeking in the daily flux of stocks, however, has evolved into high frequency trading. The new day traders use computer algorithms to buy and sell securities in microseconds. Fifty to eighty percent of the trades everyday on Wall Street are high frequency trades exploiting the inherent chaos and complexity of markets. This has been extremely successful strategy for some with the requisite mathematical expertise and powerful, highspeed computer resources, but as we will see, trading by algorithm may actually create more chaos in the end. Another way to beat the market is value investing, as advocated by Benjamin Graham and practiced by Warren Buffet, Charlie Munger, John Templeton, and others. Value investing seeks to buy undervalued stocks in well-managed companies with long-term prospects for growth. Value investors are looking for long-term growth, not a get rich quick scheme. Benjamin Graham, the grandfather of value investing, understood that “Mister Market” had a bipolar disorder, oscillating between manic highs and low depressions. Grahams recipe involved a rigorous assessment of fundamentals of a company, ownership acquired below “real” value so as to provide a safety cushion, and a long-term commitment to the company. Value investors tend to buy, diversify, and hold.
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Chapter 1 Introduction In complex world with complex markets, governed by rules restricting our vices and follies, there are lots of opportunities to beat the market, even if the law of averages is against you. One can craft superior long-term and short-term strategies. It is possible to identify and exploit structural changes better and earlier than others, and to recognize and exploit instabilities. And one can arbitrage widespread errors of inference. In short, complexity economics provides lots of opportunities for growing income and wealth. Of course, this always includes the possibility of losing income and wealth. As the saying goes, luck favors the prepared mind. Applied big history is an exercise in preparing your mind. In this book, you will gain new tools and new insights to understand the complexities of our global civilization and new insights about large-scale market trends and opportunities in different segments of the global economy. If you want to understand energy, technology, food, population, politics, religion, and other global challenges, you need to understand big history. It is essential if you want to understand how the world came to be the way it is and why people are the way they are. All of the major problems in the world today look different from the perspective of big history and the solutions to those problems are a whole lot clearer. This is why I am so passionate about big history and hope to persuade you to be as well. Caveat Emptor I, William Grassie, am your humble guide. I have spent the last forty years studying global trends and contemporary science. It began for me as a star struck boy in the 1960s contemplating the night sky, the Apollo space program, Carl
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Chapter 1 Introduction Sagan’s Cosmos, and the voyages of the Starship Enterprise on Star Trek. It continued through my many years of schooling and travel. This included an undergraduate degree in political science and international relations and a doctorate in comparative religion. My doctoral dissertation in a religion department explored what it would mean to treat the modern scientific cosmology as a mythopoetic creation story. And I fell down this rabbit hole. I don’t have a CFA or an MBA. I am not an economist by training. I have never worked in finance. I don’t pick stocks and bonds. Nor am I formally trained as a scientist. It is not necessarily clear how a doctorate in religious studies qualifies me to authoritatively discuss economics and finance, let alone physics and biology. You should ask! Religions are minimally a complex manifestation of human nature. When I meet bankers and financiers, I some times joke that “I study a symbolic system of value that radically changes the world—not unlike money.” Of course, religion and finance are not really the same, but money certainly is a symbolic system of value, more powerful and more universal than any religion today. Whether metal, paper, or digital, money is always virtual—a useful social fiction—that dramatically changes the facts of life. Or so we will learn below. I hope to surprise you with lots of orthogonal and sometimes contrarian insights. More importantly, applied big history helps to build a common foundation across disciplines, helping to unify knowledge and knowhow currently fragmented in specialized guilds and trades, of which finance is one.
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Chapter 1 Introduction For many decades now through my career, curiosities, and concerns, I have been professionally involved in big questions and big problems, in and out of higher education, philanthropy, research, writing, and social entrepreneurship. I have been blessed with many opportunities to learn from great scientists, philosophers, theologians, entrepreneurs, and investors. We have wrestled with great debates in philosophy, anthropology, psychology, evolutions, economics, technology, conflict, and social change. I especially follow the new discoveries about our common origins, our evolved human natures, and the accelerating drama of our global civilization. Charlie Munger, partner at Berkshire Hathaway, is a fan of this multidisciplinary technique. Munger recounts: So I went through life constantly practicing this… approach. Well I can’t tell you what that’s done for me, it’s made life more fun, it’s made me more constructive, it’s made me more helpful to others, it’s made me enormously rich...1 I can’t say that this approach has made me rich, but that was never my personal goal. Let’s see if we can prove him right in this book, especially the fun, constructive, and helpful parts. While not formally trained in economics and finance, I have been fortunate to find many mentors and guides, so I am able to say with confidence that we have important things to explore together and for us to also debate. When it comes to my recent explorations of economics and finance, I need to credit three mentors in particular: John Mark Templeton, Mitch Julis, and Rashmini Yogaratnam.
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Chapter 1 Introduction Through my academic work on religion and science, I came to know John Mark Templeton (1912-2008), one of the original mutual fund managers and great value investors of the twentieth century.2 Sir John was a classic long-term, value investor, noted also for his spiritually grounded optimism. He wrote folksy books and imagined what “progress in religion” and “humility in theology” would mean for humanity. Sir John was my benefactor for many years. He funded what was essentially a twelve-year postdoctoral position running the Metanexus Institute and serving on the Advisory Board of his foundation. Through this work, supported by a staff of seventeen at one point and with over 400 projects based at universities in 45 countries, I was able to dramatically expand my understanding of the diverse disciplines and perspectives that constitute the story of our universe, the wonders of human evolution, and the contemporary world. My association with Mitch Julis is more recent, but also important, as he challenged me to embark upon this endeavor. Julis is a successful fund manager at Canyon Partners in Los Angeles. A few years back I gave a talk on big history at their annual research retreat, specifically on why it matters to value investors. This was my first foray into applied big history and finance. Mitch challenged me to go further with the topic, suggesting books and forwarding a steady stream of articles on value investing and complexity economics. His support and guidance allowed me to devote a year of research dedicated to this book. In many cases, the precise words used in this book are taken from our correspondence and conversations.
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Chapter 1 Introduction Rashmini Yogaratnam, my wife, is a managing director at Citigroup. Through her I have learned some of the most important and intimate lessons about the financial services industry. Rashmini and I were classmates at Middlebury College. We connected at our 25th reunion and married in 2007 at which time I moved to New York City. This gave me a front row seat to the 2008 financial crisis. Through Rashmini and her friends, I gained tremendous respect for the caliber of people who work in finance. It takes a lot of smarts and hard work to sustain a successful career on Wall Street. Rashmini has supported me throughout this long endeavor. More than anyone, I owe this book to my wife from whom I have also learned so much. To these mentors, I add many teachers and a large bibliography. It is rather extraordinary how much humanity has come to know. Collective learning has allowed our species to exponentially accumulate knowledge and know-how. Indeed, most of what we now know about big history in detail, we learned in the last fifty years. Applied Big History It turns out that the universe and the economy can both be understood as complex thermodynamic flows of energy, matter, and ingenuity. Nature and markets manifest common dynamics as sometimes chaotic systems, in which we discover thresholds, tipping points, Goldilocks parameters, positive and negative feedback loops, nonlinear dynamics, deterministic chaos, and patterns of emergent and truly elegant complexity. Nature, appropriately interpreted, can and should inform investment decisions.
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Chapter 1 Introduction Applied big history can help investors better learn how to zoom into the details and zoom out to the big picture, back and forth, taking multiple viewpoints on any given decision across different time frames and scales. In so doing, the analyst learns analytic, associative, and inductive thought processes essential to value investing in a complex world. Applied big history provides an essential framework for successful capital managers, by allowing investors to understand both microeconomic and macroeconomic perspectives, to anticipate market instabilities, in order to build resilient growth portfolios. Again, these insights and habits of mind are not just relevant to investors. The applied part of big history impacts how we conceive every career and industry, every academic discipline and vocation, every problem and opportunity. Indeed every aspect of your career and life can be reframed as a “little big history”—a story that you will be equipped to weave by the end of this book. Big history is not simply an esoteric scholastic endeavor. Indeed, it has been recognized as a powerful pedagogical tool for promoting general literacy in the 21st century. The narrative approach—from the Big Bang to the 21st century—provides a mnemonic to help students understand and remember the many details of science and history. It provides a framework for understanding, debating, and solving the great challenges of our time. It provides an ennobling perspective on our lives— wonder, awe, amazement, and gratitude. Bill Gates was inspired to create the BigHistoryProject.com, a free, online curriculum for high school students now used in about three thousand classrooms around the world.3 3 Page 10 of 13
Chapter 1 Introduction In addition to the Big History Project, numerous books have been written about big history. David Christian, Fred Spier, Eric Chaisson, Yuval Hariri and many others have penned and processed excellent books that use this chronological approach to the many insights of contemporary science.4 This book is not another chronological retelling of big history. Nor do I offer much background information on the history of scientific discovery—how we came to know what is presented here is factual. When appropriate I will also point out where there is scientific debate within various disciplines. This book will give you some sense of this chronology and important thresholds in the rise of complexity, including our human complexity, but it is my intention to jump around from the micro to the macro to the meso and back again. This ability to adopt multiple perspectives will help to better understand the creation and capture of value and wealth. This book will not help you pass the CFA exams. Nor is it likely to help you obtain an MBA or any other professional certification. It will, however, give you a larger macro perspective for understanding the micro-economic predictions and choices that make up portfolio management. As hedge fund manager Daniel Och said “If you don’t do macro, macro will do you.” Big history is as macro as we can get. One of the many things we learn from studying big history is how incredibly lucky we all are to live at this moment in the natural history of our planet and the cultural evolution of our species. Pharaoh and Caesar would trade places with any of us to have the same opportunities for health and wealth, travel and education, entertainment and food. It helps to have this larger perspective on our lives to 4 Page 11 of 13
Chapter 1 Introduction weather the daily onslaught of bad news, as well as the ups and downs of the market. It puts our immediate worries in perspective. Still, past performance is no guarantee of future success, as they say in this industry. This is true for each of us individually, for your managed funds, and for our global civilization. Humanity faces some grave challenges that we are ill-equipped to deal with, but understanding big history can significantly shift the odds in our favor. The book is dedicated to Wikipedia and not just because it was a constant companion in my research and writing. Wikipedia is an icon for collective learning—the process by which knowledge and knowhow accumulates in human networks spanning generations and geographies. Wikipedia is the tenth most visited website in the world. There are editions of Wikipedia in 295 languages. Half the traffic is on the English language edition, which contains 5.4 million articles. Scientific and technical entries are particularly reliable and up-to-date. This is not always the case with highly politicized or obscure topics, but for the most part, Wikipedia is a place to find facts—a good place to take a reality check on a wide variety of topics. Wikipedia receives hundreds of millions of visitors and many billions of page views every month. And it’s free! Collective learning is also largely free. It is the foundation of our evolutionary and economic success story. Knowledge and knowhow was passed on and accumulated exponentially. Proficiencies, however, are hard to acquire. Decades of rigorous training are often required to master a technical profession. Moreover, every generation must be taught anew, less what we have so recently learned be forgotten. If our descendants are going to succeed, come what may on our restless
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Chapter 1 Introduction planet, they must never forget what our generation has been so fortunate to recently learn—a new and very practical story of the universe and ourselves. Wikipedia is an icon—a symbol and an incarnation—of collective learning and may its contents, more or less, always be part of our descendant’s collective memory. It is our duty to ensure that what we have received and recently learned is only added to and never forgotten. This is how our species has and will continue to succeed. From this new vantage point, we come to understand education as a sacred intergenerational duty; but first I need to show you how big history gives you an edge in the challenges of business, economics, and finance. Here begins a 13.8 billion year journey into territory and topics rarely discussed in classrooms, let alone in boardrooms or on trading floors.
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