When Life and Markets Come At You Fast, Rely on the Wisdom of the Past

There has been an interesting and somewhat esoteric debate this past week between Steve Sailer and Nicholas Taleb, author of The Black Swan. Taleb suggests that IQ is not terribly relevant nor a particularly good test of the kind of intelligence that matters, in part because of its association with spectacular failures in the field of finance. Of course, IQ, while not a tool of clairvoyance, has other well documented relevance, including assimilating complexity, solving problems, as well as associated pro-social personality traits like conscientiousness and longer time preferences.

Last week was a roller coaster in more ways than one. It appeared Trump was ready to give up on the wall and sign another spending bill that defeated this central campaign promise. But the president found his nerve—and sustained the wrath of Queen Ann—eventually standing his ground and permitting a government shutdown.

Similarly, after some back and forth about the main effort in Syria, Trump followed through with his America First campaign promise, declaring ISIS defeated and refusing to allow mission creep to ancillary missions like helping the Kurds or “maintaining stability.”

This led to the departure of Defense Secretary James Mattis, but, as I argued last week, I believe this will prove prescient. Then, at the very moment the media was complaining he was neglecting the troops and had not visited them down range, he was on Air Force One heading to Iraq. Finally, the stock market, after taking a beating for the entire first three weeks of December, reversed itself in one of the biggest rallies of all time on Wednesday.

Life truly does come at you fast.

Antidotes for Widespread Hubris
As between Sailer and Taleb, one possible response to complexity, particularly in the realm of personal finance, are rules to mitigate personal temptation as well as one’s relative lack of knowledge. These include the age-old conservative habits: prudence, thrift, and diversification.

The conversion of most people’s retirement savings from pension funds to 401(k)s and other forms of personal savings in the late 1970s did not include an associated educational effort. A great many people, particularly Baby Boomers, did not plan accordingly, relying on a combination of the optimism of the post-war years and easily available credit until 2008. Many were shellacked by the 2008 recession, right on the eve of their retirements.

Younger generations have gotten the message—some the hard way—but the means to apply this hard-won knowledge are less available, thanks to lower wages, high rates of student debt, and low interest rates for safer investments, such as FDIC-guaranteed savings accounts. Nonetheless, a lesson applies to anyone of any generation: namely, saving more and avoiding the temptation for “seeking alpha.”

Hubris is widespread on Wall Street, as is the principal-agency problem. Investment advisors claim to be able to “beat the street,” and they often have financial incentives to do so, regardless of the interests of their investors. Individual investors, too, fall prey to the temptation to “get rich quick.” Such an appetite for risk is perhaps deeply embedded in the American soul, but it means a great many people go broke hurling themselves at the wall. And finally, there are contagion risks both for individual and institutional investors, with too many stampeding when it’s time actually to sell—think Bitcoin—or the opposite, when fear creates a legitimate fear of unsustainable losses

More Sound Advice
Two of the greatest contributors to public welfare in the late 20th Century were personal finance gurus, whose lessons go hand in hand: Dave Ramsey and John Bogle.

Dave Ramsey is famous for his simple advice: get out of debt and stay out of it. He advises, somewhat contrary to the conventional wisdom, not to attack high interest debt first, but rather smaller debts. Over time, this creates momentum to tackle larger debts one-by-one. He calls it the debt snowball method, and it is a straightforward application for individuals of the principles of behavioral finance. His advice does not require prediction of the future; rather, it is simply another manifestation of controlling the things you are able to control, applying simple heuristics—what Kipling called the Gods of the Copybook Headings—to everyday life.

Bogle gave simple advice of what to do on the other side of the ledger: buy low-cost index funds. Both market timing and picking individual stocks are fool’s errands, which on average lose more than index investing. Leaving it to the experts—while superficially reasonable—leads to another set of problems, as the active management of mutual funds comes at the price of high costs paid to active managers. Just as individuals benefit from compounding interest, they are also punished by compounding costs. Bogle’s advice, investing in index funds based on the S&P 500, does “bet” in a sense on the whole U.S. economy, yet it is not sector dependent, but rather fully diversified, and it is also very low cost. One may add to this advice some sensible ratio of bonds to stocks as one approaches retirement, when one’s ability to recoup losses can approach zero.

Neither of these things—reducing debt and investing consistently in index funds—requires great intelligence. But both are very smart things to do.

Where IQ Is Meaningful
The casino atmosphere of Wall Street as well as the pursuit of systems to “beat the street” may very well be more pronounced among those with a higher IQ. Some combination of intelligence and applied laziness is likely the mother of all invention. In simpler times, one might reason, “Why get out and use the scythe when an industrial-scale thresher will do?”

But labor-saving devices are quite different from the social benefit of “financial engineering,” which appears to be either zero or negative. Wall Street increasingly has siphoned off talent from our top schools that in earlier decades might pursue academic careers, the hard sciences, or operational management of particular businesses—leading to a loss of social capital where it could do more good.  Most actively managed funds do not “beat the street,” as Jack Bogle taught us. And sometimes they nearly blow it up and create extensive collateral damage, as we saw in such dubious creatures as the late 2000s use of “financial engineering” and, earlier still, the failure of Long Term Capital Management, aptly recorded in the book When Genius Failed.

Steve Sailer has popularized many of the insights of the popular book The Bell Curve, noting its ability to explain such varied phenomena as rates of mortgage defaults, accidents, and street crime. IQ is likely deeply meaningful when distinguishing populations and individuals differing by one standard deviation or more. But Taleb also has shared a useful cautionary lessons with his companion works The Black Swan and Antifragile. While these works begin as a criticism of those who aim to predict and measure risk using mathematical tools ill-suited to a complex world, he concludes by suggesting that certain risk-avoidant personal habits can make one not only robust against the inevitable rise and fall of markets, but even prepare one to thrive in bad times.

I believe Taleb is on to something here. Something different is required to absorb and apply these lessons about risk avoidance, which are particularly anathema to those who rely heavily on their intellect to navigate and thrive in a complex and uncertain world. These lessons are fundamentally moral and spiritual, including the acceptance of one’s limitations, a commitment to self-control, and a motivation to build wealth not for personal self-indulgence, but to “give like no one else,” in the words of Dave Ramsey.

Wisdom of the Ages
Trump’s economic policies appear to have unleashed a great deal of economic growth and restored health to the real economy. Personal wealth and wages are up, and the stock market has followed suit, at least it had been doing. But we know that the stock market, as well as the broader economy, rises and falls in waves. We cannot control these things, but we can control ourselves. Even a squirrel knows to save acorns for the coming winter. This may not require a very high IQ—and indeed too high of an IQ become something like an obstacle—but this kind of overall “life Q” is a kind of applied intelligence.

Edmund Burke praised the collective wisdom of our ancestors. “We are afraid to put men to live and trade each on his own private stock of reason; because we suspect that this stock in each man is small, and that the individuals would do better to avail themselves of the general bank and capital of nations and of ages.” In other words, for conservatives, the past and our traditions are not an indictment of our crimes, but rather the highest wisdom, hard wrought from experience, encapsulated especially among our people’s great thinkers.

Socrates taught that the path to wisdom begins with “knowing what we do not know.” The Bible teaches that the beginning of wisdom is the “Fear of the Lord.” Combined, these dual foundations of Western thought should be particularly meaningful to those with the greatest intellectual gifts, not only for the field of finance, but to live a productive and responsible life more generally.

Photo Credit: Getty Images

About Christopher Roach

Christopher Roach is an attorney in private practice based in Florida. He is a double graduate of the University of Chicago and has previously been published by The Federalist, Takimag, The Journal of Property Rights in Transition, the Washington Legal Foundation, the Marine Corps Gazette, and the Orlando Sentinel. The views presented are solely his own.

Want news updates?

Sign up for our newsletter to stay up to date.