By Jason Zweig | Apr. 3, 2016 9:23 p.m. ET
Exclusive Interview With The Author Of “The Devil’s Financial Dictionary”
Joe Reilly, March 28, 2016
This month family-office consultant Joe Reilly interviews Jason Zweig, author of The Devil’s Financial Dictionary, about becoming a better investor through self-control, finding what’s funny in an investment idea, and being uncool.
Family Wealth Report doesn’t necessarily agree with all the comments stated herein, but is grateful to publish the article and, as always, welcomes reader feedback.
Joe Reilly: How did you come to write The Devil’s Financial Dictionary?
Jason Zweig: If economics is “the dismal science,” as Thomas Carlyle dubbed it, then investing is the abysmal art: dull, obscure, encrusted with polysyllabic jargon that renders even the simplest ideas incomprehensible. And investing is always presented in an utterly humorless way, even though a lot of the ideas and rituals of Wall Street are ridiculous. No wonder it all seems hard to understand. So I figured if I could make people laugh, maybe I could help them learn. And I thought it would be fun to try distilling everything I’ve learned about investing over the past 30 years down into definitions no more than 500 words long. That turned out to be surprisingly easy, so then I tried 300, then 150. I found I could do that, too. Then I wondered if I could define financial terms in no more than 20 words.
JR: In your Wall Street Journal investment column, you recently said: “My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.” If the lessons of the market are so obvious, why do people continue to make the same mistakes?
JZ: I’ve spent my entire career trying to understand why smart people do stupid things with their money. I’m a little closer to understanding that now than I was in 1987, although if you ask me the same question again in 2046, we still probably won’t have a definitive answer. I think what psychologists call “positive illusions” are the heart of the problem: It would be hard to get through daily life, let alone the challenges of the financial markets, if we honestly admitted our own limitations and the power of luck and randomness over our lives. One of the most robust features of the human immune system is psychological: Our minds are like phagocytes that will attack any intruding evidence that we aren’t as good as we would like to be.
JR: A dictionary is a good place to go to educate yourself. Do you think Wall Street has a responsibility to educate its clients?
JZ: Well, sure — in theory. But you’d be naive if you expect anything much better than the “Drink Responsibly” ads from alcohol companies or the little messages about gambling addiction that state governments put at the bottom of their promotions for Powerball. The prime directive in the casino industry is to get each customer to maximize what they call T.O.D., or “time on device”: The more often you play a slot machine, the closer to certainty it becomes that the house will make money on you. The house always knows what it takes to win, but most of the clients think they know. Wall Street makes nearly all its money off people who think they know how it works. Banks and brokerage firms and asset managers aren’t going to stop selling hope in a bottle until people stop wanting to buy hope in a bottle. That happens only one investor at a time, and we’d be foolish to expect the industry to make all its own customers renounce their belief in magic. That’s where the money is.
JR: How much education do you think a person needs to become a smart investor?
JZ: Among the many things my father taught me was this paradox: It’s remarkable how much you need to learn in order to discover how little you ever needed to know. Smarts are overrated; the world is awash with smart people. What’s in short supply is wise people. Apply the basic principles of the wisdom you’ve acquired from your experience elsewhere to investing, and you will probably fare better than many “smarter” investors. Be skeptical, think for yourself, ask for evidence and probe it for weakness, control your emotions, distrust the fashionable, remember to assess not just how much you will make if you are right but how much you will lose if you are wrong — steps like these are basic good judgment and simple wisdom. Often, people who know a lot about investing become so taken with their own knowledge that they forget the power of a few obvious questions.
JR: What did you personally learn from writing the book?
JZ: Charlie Munger has said that being a lawyer taught him something valuable to him as an investor: You don’t understand the arguments for something until you can convince someone else of the arguments against it. I found in writing The Devil’s Financial Dictionary that you can’t poke fun at an investing idea until you understand it very well – at least, you can’t poke fun at it fairly. So I’ve become a believer that one of the best ways to see whether you should be serious about something is to learn enough about it to make its proponents laugh. If you can find the aspects of an idea that even its believers think is silly, you’ve probably found its Achilles’ heel. That doesn’t make it a bad idea — after all, just about everything in the world is funny if you think about it long enough — but that will point you toward what the potential weakness is and help you decide whether the risk is worth taking. And if you don’t think there’s anything funny about a financial idea, you probably don’t understand it nearly well enough to invest in it. If you can’t find something to laugh about before you buy, there’s a good chance you’ll end up crying about it later.
JR: If there is one lesson a reader should take away from the Dictionary, what would it be?
JZ: To master investing, you don’t need more than a basic understanding of economics. What you need to understand is psychology and history, because human nature doesn’t change and financial history is an endlessly repeating chronicle of all the mistakes other people have made. The single greatest asset any investor can have is self-control — not a higher IQ, not better computers, not the earliest glimpse at information, but self-control.
JR: Your definition of structured products is “Investment products structured to be profitable to the firms that sell them and incomprehensible to the clients who buy them.” Yet they remain a popular and ever growing market, and are not likely to go away any time soon. Do you think they have a role to play in the investment world?
JZ: Yes, of course. A structured product is essentially a made-to-measure suit of clothes. If it’s custom-made by a tailor who understands you and has your best interests at heart, it should fit you at least as well as anything you can buy off-the-rack. But it’s very important to remember that you can always buy the off-the-rack suit instead. Wall Street always has a vested interest in solving simple problems in complex ways, because there’s more money in complexity than in simplicity. Often, the off-the-rack solution will be better, not just because it’s cheaper but also because it’s less risky and easier to understand. In structured products, for everything that is created, something else is destroyed: less risk here means more risk there, and more return here means less return there. If this, then that. It’s never a one-sided story. Structured products can be a good solution if you understand exactly what you stand to gain, and to give up, in the trade-off between risk and return. The important word there is exactly.
JR: Do you think the real market masters such as Buffett or Munger, or the managers portrayed in The Big Short, have something special that the average investor doesn’t?
JZ: There’s a belief that great investors have a clinical, emotionless rationality like that of Mr Spock in Star Trek. Benjamin Graham, late in his life, gave a speech in which he cited a description of himself as “humane, but not human.” The journalist Carol Loomis tells the story of a dinner party at which a woman finds herself seated next to Charlie Munger and asks, “Tell me, Mr Munger, what’s your investing secret?” “I’m rational,” growls Munger, and goes back to eating his salad. But there’s more to it than that, I think. It isn’t that great investors are unemotional; they’re inversely emotional. They have an ability to sense when other people’s emotions are getting out of hand, and then they take the other side of that trade.
Michael Burry, in The Big Short, learns he has Asperger’s, and that seems to have helped him grasp that everybody else was wrong about the housing market; he felt none of the normal need to go along with the consensus. If you read Alice Schroeder’s Buffett biography, The Snowball, it’s hard to avoid the impression that, at least in his teenage years, Warren Buffett had an almost pathological difficulty with social interactions. It’s a lot easier to be a contrarian when you have a fear of crowds. The ability to separate yourself from the herd, to find the danger and deviance in other people’s behavior — as Buffett has put it, to be fearful when others are greedy and greedy when they are fearful — doesn’t come naturally to most of us. Most of us want to be one of the cool kids. To be a great investor, you have to want to be uncool.
￼Source: Family Wealth Report