The Human Condition:

Hard Money, Soft Ideas – June 1, 2014


What’s the difference between an intellectual and a businessman? In my view, it’s what each one is willing to risk. The intellectual plays with ideas and reputations. The businessman plays with cold, hard cash.

I got to thinking about this the other day when the Dow Jones Industrial Average took a dip of about 150 points. This happens quite often, anymore, and then it seems to make up the loss the next day—kind of like a heart in fibrillation.1 And each day, the pundits of the business news will say that investors are responding to one earnings report or another, this housing or jobs report, this or that move by the Federal Reserve, this or that event in Europe or Asia. As if they knew …

But I don’t think so. I believe each investor focuses on the stock or bond or other investment opportunity right before his or her eyes. Is it solid? Will it pay a return? What are the risks? These people don’t vote their hearts, or their notions, or their hopes and fears about the world situation. They are making a hard-money bet on a particular opportunity.

The beauty of the stock exchange and the bond markets is that they synthesize a single movement out of thousands or millions of individual choices, like the collective motion of a flock of birds or school of fish. The flock or the school has no real existence—although you can photograph it, track it, admire it. But it is still an illusion, made up of the individual movements of a thousand single birds or fish. They may be reacting to the same currents in the air or water, or to the motions of their neighbors. None of them is moving in total isolation, like a salmon swimming upstream or a bird flitting from branch to branch. But neither are they responding to the direction of a leader or an explicit instruction—not the way the geese in a vee formation ride the wingtip vortexes in the leader’s wake, while the goose on point chooses the direction and flight path.

In the same way, investors may look at price movements in the exchange—the collective effect of the decisions made by other investors in their buying and selling—but each is making his own decision with his own money. He may bet with a price rise or against it. She may “go long” on a stock, meaning she’s buying up a low-priced stock, making a bet the price will go up and increase her money. He may “short” a high-priced stock, meaning he makes a promise to sell shares which he doesn’t yet own, in the expectation that the price will suddenly fall, so that he can acquire and deliver those shares much more cheaply. The market offers all kinds of bets, and the most savvy professional investors will know and play them all. But there is no stock market leader, no point goose, who dictates the daily index and issues explicit instructions to investors about buying and selling.2

Investors usually have a limited store of theories and philosophies about their money. They may follow the notion of “always buy cheap and sell dear.” They may have a preference for “value stocks,” which represent established name brands in stable markets. They may have personal rules about how long to hold a stock in an unexpected turn. Some few might have ethical or environmental scruples, which guide their investment choices in companies that deal with disfavored nations, or present too big a carbon footprint, or sin against some form of social justice. But investors who try to mix their politics and religion with their money usually don’t last long. Like a gambler who bets on a horse because he likes the sound of its name, the jockey’s colors, or the number, they’re playing by a null rule set—and they will usually be beaten by investors who bet by the percentages or with a strategy based on the fundamentals of the market.

They bet the market, they bet smart, because after all it’s … money. Money has no conscience. It’s a pure play in the closed arena of the marketplace. In that way, investing is a lot like particle physics. Dollars and stock prices share a lot of similarity with atomic particles, in that they have simple natures, can be observed and tracked, follow finite rules, and react to a limited and predictable set of influences. Neither dollars nor protons possess a conscience, remember where they’ve been, think about where they’re going, respond to a higher power, adhere to the will of the gods or the dictates of fashion, or take notice of good intentions. If an investment and its prospects make sense, it will likely make money. If an electron encounters an atom with a net positive charge, it will fly that toward that atom and stick.

Intellectuals seem to have a hard time understanding all this. They believe in the world of ideas. And ideas, like words, can have both their denotations—what they mean by application of their dictionary definitions—as well as their connotations—the realm of remembrance and feelings they evoke by past associations. Ideas can follow the steps of cold, dispassionate logic, or they can arouse the inner vision, the heart, the emotions, the conscience. Some ideas may be purely logical and self-evident but repellent in their net effects. Others may be hard to justify or follow rationally, but they satisfy the emotions or the imagination with their charm, their breadth of vision, or their sense of promise.3

It is easy to play with ideas. If you read the old Greek philosophers, the world seems to be divided between the hard-headed thinkers like Plato and Socrates, who knew how to evaluate a proposition logically, and then the woolly sophists, who strove for effects and consequences that the structure of their thought and language simply could not deliver.4 The difficulty is that ideas usually don’t have a definitive payback in terms of consequences. They don’t have to produce a specific amount of return at a particular time.

An intellectual, an academician, a social scientist, or even an economist can develop a theory based upon its internal logic, its charm, its promise of future results, its adherence to this or that trend—and never be called to account. The intellectual can publish his or her thought processes, defend them in the arena of ideas, tinker with and “develop” them over the years, spawn corollaries and new theories—and never have to bet a penny on whether they would work or not in the real world. The intellectual never has to bet his life, his soul, his sacred honor on the consequences of his thought processes—except occasionally, such as during a cataclysm like the French and Russian revolutions. Then another intellectual with a different point of view might feed him to the guillotine or put him up against the wall. But that doesn’t happen often and, with a quick eye and a fast tongue, one can usually avoid that kind of wretched denouement.

Intellectuals don’t have to make bets with their ideas. They don’t have to pay out in cold, hard cash to discover their consequences. Intellectuals almost never go broke, lose their stakes, and have to walk away from the table.5

Investors are like physical scientists. The experiment worked or it didn’t, and the results are there for all to see. If you placed the wrong bet or misinterpreted the data, you get egg on your face right fast. You can go broke intellectually as well as monetarily.6

But that also means you can learn. You have experience of something that doesn’t work—and now you can know it doesn’t work, so you can avoid that proposition or idea or notion and its consequences in the future. This is a useful feature of dealing with facts, elementary particles, or monetary units that have limited charm, present no ethical or visionary appeal, and carry no sense of nostalgia. You can build theories based on hard-learned reality, test them, refine them, and then trust them in moving forward.

I’ll take a man who bets his last dollar or stakes his reputation on an experiment over a man who talks a good game. Every time.

1. And that’s a bad sign for the economy, I believe. I think it means we’re pushing up against some kind of natural, internal limit.

2. Although I’m sure there are people, like Warren Buffett or Carl Icahn, who think they can make and break markets with the power of their money and sometimes with just their opinions.

3. Yes, on the one hand I’m talking about capitalism and, on the other, Marxism, socialism, fascism, and all the other political “isms” that have plagued the past two centuries.

4. And then there was Aristotle, who simply collected things, made observations about them, and thought organically and structurally. He wasn’t always right—for example, he thought heavy objects fell down, because “down” was where they belonged and was part of their natures—but his ideas always made sense within the limits of his knowledge and observations.

5. Unless you’re caught falsifying your data or cribbing your work from someone else. That can get you shamed and ostracized.

6. Unless you’re playing in the shadow theater of quantum mechanics. There, it seems, you can retrieve a faulty idea simply by positing the need for another set of dimensions or a field force that lies just beyond the reach of current observations.