Mark Twain said it. Give him credit. “It ain’t so much the things I don’t know that hurt. It’s all the things I know that ain’t so.”
What you don’t know can hurt. Those ideas, the ones you think you know that ain’t true, can hurt even more.
All swans are white was proved wrong by finding one black swan. Some years ago, scientists thought that all swans were white. But that generalization proved wrong when the black swans were discovered in Russia.
The speed of light may not be constant but may change with time. The speed of light was considered a constant until recent studies of the light from seventy-two quasars showed evidence that older light seems to travel at a speed slightly slower than more recent light. If that is true, then the scientific law that the speed of light is a constant will be shown not to be true. If the observations are correct, the speed of light will be shown to depend on time: The more time evolves, the faster light moves. Why this occurs is not known, but to know it is true might help us better understand the nature of light and of time. Light and time are two things we need to know a lot more about. Any fool with a watch can tell you what time it is. But who can tell you what time is? We can measure time, and Einstein has told us that time is just another form of space, but really and truly we don’t know what it is.
Any fool can turn on a light. But who can say why the light goes on and what exactly makes the electromagnetic wave that we call light p. 42 appear? We can see light and we can manipulate it to our service, but we don’t really know what it is.
Scientists can be quite ignorant of the true nature of things.
Physicists tell us there are four forces in nature: the strong force, the weak force, electromagnetism, and gravity. They can measure these forces and make profound predictions on how these forces will interact. But no physicist actually knows what any of the forces really is. To their credit, physicists admit their ignorance. In fact, no one knows what gravity is or what light (an electromagnetic wave) is. Science tends to explain the things it doesn’t understand in terms of tautologies or circular reasoning. This makes science appear smarter than it really is. And the fact that scientists can successfully manipulate what they don’t fundamentally understand makes science seem even more impressive than it really is. I can always tell a nonscientist because he is the person unduly impressed by science. Real scientists know their limitations. They know how little they really know. And yet with such little knowledge, scientists are able to do so much. The telephone is a trivial application of electricity and magnets, yet its applications are not trivial. If scientists can do so much with so little knowledge, just think of what they will be able to do when they know a lot. The future is bright, bright indeed.
Not all scientists know how little they know.
Of course, there are scientists who don’t know how little they know. I met one of them, a professor of astronomy named Don Kurtz from the University of Capetown, South Africa. He was lecturing aboard the Queen Elizabeth II.
One elderly woman passenger (a grandmother type) asked Professor Kurtz what holds the galaxies together. He told her, “Gravity.”
“But what is gravity?” she retorted.
Kurtz, shocked by this abysmal display of ignorance, said, “You know, Madam, the same force we have here on earth. The force that holds the galaxies together.”
Kurtz explained this circular reasoning quite confidently, as if he believed it 100 percent. But I hope he knows, deep in his heart of hearts, that not a soul alive knows what gravity is and that he recognizes how deficient his explanation must appear. The same basic scientific ignorance applies to time, matter, and energy. Sure, we can measure those things, but we don’t actually know, all in all, what we are dealing with, what we are measuring.
Isn’t that fascinating?
p. 43 Because a thing is scientific or labeled as such doesn’t mean it is correct.
Science—nowhere else do you get such wholesale speculations from such a trivial collection of facts. That is one of the major limitations of science—the tendency of people (usually nonscientists) to overestimate what is known scientifically, and because of that overestimation, they tend to overestimate the power and control that science confers. Excessive belief in science and the scientific method results in scientism.
If we have that kind of difficulty with simple, concrete physical things, things explained by science like gravity, then what about non-physical things like love, or tenderness, devotion, loyalty, and so forth? We shouldn’t be so proud of what we’ve done or what we know, for behind the pretense of knowledge lies a gigantic ignorance vaster than the oceans, wider than the universe.
Kurtz with his answer proved that the old woman knew more about gravity in the current state of her ignorance than he, the astronomer, knew about gravity in his current state of his imagined knowledge. A more correct and honest answer would have been, “Actually, Madam, I don’t know what gravity is. No one does.”
Principle: All scientific advances represent an overthrow of previous ideas and a substitution, based on evidence, of a new idea that explains things better. Science refines our view of the reality of the situation and thereby increases our control over the physical universe. Although the control of reality is real, the explanations for that control may be erroneous. In fact, the explanations are often tautologies that merely repeat in some form the experiential data from which the scientific principle derives.
From which follows:
Lesson: In view of the current state of scientific ignorance, we should not be surprised when scientific laws that we hold so dear are overthrown. In fact, we should expert scientific laws to be overthrown as our understanding becomes more refined and more detailed.
p. 44 And speaking of time, it’s time again to exercise your brain. Is the following piece of investment advice true or false? Always diversify your investments to maximize your profits and to minimize your losses.
Investment advisers often tout the above idea. But is this true? How can we prove it correct? If we can’t prove it correct, how can we prove it wrong? Let’s pause for two minutes and think. How can we prove that the investment principle that you should always diversify is right or wrong?
The solution to this exercise is simple for two reasons.
One, we have already learned that simple ideas for complex subjects are likely to be wrong. So we can by deductive logic apply that generalization to this particular situation. Since investments are a complex subject, the simple advice about diversification, has to be wrong—not suspect, understand—wrong, absolutely wrong. It is wrong because it is an oversimplification of a complex problem. It cannot possibly be true for all situations and all investors.
Did you recall the type of reasoning involved? If you said it was deduction, you were correct. This was a deduction because you went from the generalization that there are no simple answers to complex problems. Then, you applied the generalization to the statement about diversification. Those of you who said a priori were also correct because a priori reasoning and deductive logic are the same. They both travel from a generalization to a particular instance.
But aside from striking the above-mentioned investment principle down on general grounds, can we also strike it down on particulars?
Recall that to prove a generalization wrong, all we have to do is show one particular example to the contrary. In this situation, we need only to show one example of an investor who concentrated and didn’t diversify and yet profited. That one example would prove the rule wrong. It would at least require that there be some qualification, modification, or further specification as to when the generalization holds and when it does not hold. Such qualification would be useful because it would help us construct the right action that we should take with our investments under the particular situation covered.
OK. All we have to do is show that some investors or any investors who have been focused, not diversified, made money. Bill Gates was focused on one company, his own Microsoft,
and made billions. Later, when Gates diversified, he lost. George Soros placed one big bet (ten billion dollars) on one currency (the English pound) at one particular p. 45 time (1992) and made a billion-dollar profit. Later, when Soros lost his focus, hedged, and diversified, he lost.
Conclusion: What counts is not diversification or focus but who owns the right investment at the right time. Being concentrated or diversified is irrelevant. Knowing that, we should focus our energies on researching individual investments, betting on what is reasonable and expected. We should not concern ourselves with diversification or focus. If we are diversified, we should not decrease our vigilance on the false belief that our investments, because of the diversification, are safe. On the other hand, we shouldn’t assume that because we are focused, we will profit.
The point, which I am sure by now is quite clear, is that focused or diversified doesn’t have much to do with investment success. Both strategies miss the mark because the key point in investment success is much more complex. Investment success has mainly to do with owning the right things at the right time. Indeed, the investment idea of diversification can’t possibly apply to all situations at all times. If it did, then investments would be impossibly simple and all diversified investors would profit and, in a few months, own the world.
Principle: Most investment advice is bunk.
A brief word on investment advisers: Sad to say, many, if not most, self-touted investment advisers, though pledged to guide the way, are actually con artists who try to deceive you with phony baloney that has for generations characterized too much of the investment industry—and, alas, alack, still does. The phony baloney takes the form of misinformation and false reasoning. Phony baloney, because it is not reality based, must lead to disaster. Need I cite recent examples?
I wish it were true that if I followed some hot tip, I would be richer than Croesus by a week from next Tuesday. I wish it were true that if I followed some magical technical rule or rules recently discovered by some self-touted market guru in his smoky laboratory that I would maximize my profits and be a billionaire.
Not only is it not true but, and here I am paraphrasing G. M. Loeb, every time they find the key to Wall Street, some SOB changes the locks.[3]
OK, so now you know the harsh and forbidding truth: There ain’t no simple way to investment success because investments and investment success ain’t simple. If that’s the case, what can we do to invest successp. 46fully? Apart from recommending my own book of investment logic titled Investment Pearls for Modern Times Expressed in Meter and in Rhymes, I suggest, since most of us know nothing about investments or business, that we rely on someone who does. Get yourself a good, honest, professional broker who has access to a backroom full of young men and women with MBAs from Harvard, Stanford, or Columbia who have studied an industry or a company for two years, who have little or no financial interest in the companies they recommend, and who are willing to give some advice sprinkled with large amounts of appropriate caution. Once those people have made a recommendation, study their reasons and the evidence that supports their conclusions. If the evidence is relevant and adequate in number, kind, and weight, then act accordingly.
But let’s get back to the point that I was trying to make, which was that we have proven that the idea that diversification is the way to invest is an overgeneralization and therefore an error in thinking. As an overgeneralization, the diversification idea leads us away from the reality situation and toward error. As a simplification, it hides the truth and prevents us from taking the correct action. Like so many overgeneralizations, it gives us a fake idea of reality, the very thing we are trying to avoid.
Overgeneralization, any overgeneralization, is an error.
From which follows:
Lesson: The technique of generalizing is essential to thought, yet in a sense it involves an oversimplification. Thus it is a two-edged weapon. Legitimately used, it can achieve great intellectual victories; abused it leads to disaster. Watch out for overgeneralization. When you see it, do not be deceived.
More examples: Many overgeneralizations surface in everyday life and are easily defeated by a little common sense. Take the statement, “all neurologists are stupid.” Can that be true? How can we prove that it is not true?
Neurologists are medical specialists who deal with the diseases of the brain, spinal cord, nerves, and muscles. They usually have finished high school and college and always have completed medical school. Neurologists must have an internship lasting at least one year and a residency in the specialty that lasts at least three years. Furthermore, along p. 47 the way, they must pass numerous written and practical examinations in the field, plus they must hold a license to practice medicine. How likely is it for anyone to get through all those hoops and over all those hurdles and yet be stupid?
Answer: Very unlikely indeed.
How likely, therefore, is it that all neurologists are stupid? Some of them might be stupid, granted. Perhaps most of them might be stupid. But all? No way. The point is important. All is a small word, but it has a big meaning. If we can give just one exception to a statement that has the word all in it, the statement is proven false. We have only to adduce one case. We need find only one nonstupid neurologist. Note we don’t need to prove our neurologist a paragon of excellence. Nor do we have to prove the neurologist smart. We need only show that the neurologist is not stupid. And having shown that one neurologist is not stupid, we will have disproved the thesis that all neurologists are stupid.
Principle: Any view, statement, or assertion with the word all in it is very hard to maintain because it is extreme. In this form, any argument with the words all, each, every, all the time, never, absolutely, or any such all-encompassing word or statement can be exploded by a single contrary instance.
From which follows:
Lesson: Until proven otherwise, any blanket statement should be considered false.
When a cold-calling broker from New York tells you that the stock he recommends to you is absolutely sure to go up 40 percent in the next week, you can be pretty sure—no, change that, you can be absolutely sure that the statement is not true. When the President of the United States says, “I assure you that bin Laden will be caught,” you can be pretty sure that the statement is not true because no one, not even the powerful American President , can with absolute certainty predict the future. Therefore, even the President of the United States cannot absolutely assure us of anything in the future, much less that bin Laden will be captured.
Pancho Villa (1878-1923), a Mexican bandit and guerrilla leader p. 48 who became a folk hero, led brutal attacks on American citizens in Mexico and the American Southwest. President Woodrow Wilson told the public that Villa would be captured and executed. President Wilson sent an American military force into Mexico to do that. The force didn’t get Pancho. So the President was proved wrong. Subsequent historical events proved that President Wilson lied.
Whoa!
President Wilson a liar? That depends on the definition of liar and lying. My statement that Wilson lied may have been a bit too strong. If you accept as a definition that a lie is a false statement that one knows to be false and is made with the deliberate attempt to deceive, it is unlikely that President Wilson lied. It is unlikely that the President of the United States would or could deliberately attempt to deceive the public. It does happen, and there have been recent examples, but in general it is unlikely. Therefore, under strict definition, Wilson probably didn’t lie. He was just wrong. He was probably told by some cautious military man that the action against Villa was doable. From that hopeful statement, Wilson’s mind probably entered a state of wishful thinking that then became extrapolated to the form that was delivered to the public: Pancho Villa will be caught. The same contorted mental process probably led to President Bush’s statement about bin Laden.
Principle: Most substantive consoling messages are fake.
But why did the public receive these obviously wrong messages with
out any serious questioning? Simple. Those are consoling messages. The public wanted to hear them. The public had an emotional need to hear them. The politicians wanted to fill that emotional need. Therefore, the politicians wanted to give them those consoling messages. They were consoling messages that were fake. They were not true and they couldn’t be true. If you wish to live in la-la land, then you should believe them. My opinion is that such consoling messages delivered to the people are mistakes because they promise too much and deliver too little. Eventually, the truth comes out. Eventually, we and the presidents have to face reality.
Wouldn’t it be better to promise little and deliver much?
Regardless of the reasons for the mistake, though, the assurance was wrong. It was wrong because neither the President nor any other human can accurately predict the future. President Wilson, an extremely p. 49 intelligent man, should have known that. He should have known that a blanket assurance in this particular instance had to be impossible, hence wrong.
Principle: Presidents are human. As humans, presidents are subject to the same defective thinking as the rest of us.
From which follows:
Lesson: Watch out for presidential statements and those from politicians in general. Such statements, especially when accompanied by blanket assurances about contingent events in the future (the economy will recover, Americans are now safe from terrorists, Iraq has weapons of mass destruction, etc.), are likely to be wrong, dead wrong.
Truth, Knowledge, or Just Plain Bull: How to tell the difference Page 5
