Remembering Dr. Stephen Hawking: Lesson for Investors

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Mar 15, 2018 3:08:05 PM Leave a comment

Stephen HawkingToday, I would like to pause and remember the life and work of Dr. Stephen Hawking, renowned physicist and a personal hero of mine. His life combined a commitment to science with a complete refusal to give in to a debilitating medical condition. Instead, not only did he continue to learn and grow, but he extended the limits of human knowledge—quite literally to the end of time. Not all heroes wear capes, as the saying goes, and his heroism in continuing to live and work in the face of illness is beyond all admiration. Thank you, Dr. Hawking, not just for your work but for the inspiration and example of a life well lived.

Two of Dr. Hawking’s quotes are also favorites of mine: “Intelligence is the ability to adapt to change,” and “the greatest enemy of knowledge is not ignorance; it is the illusion of knowledge.” As lodestones for my own research and practice, I could do much worse.

Black hole: Metaphor for the markets?

Hawking’s work took on the proverbial inaccessible object, a black hole, by discarding common (but wrong) assumptions and managing to turn them into something more understandable. A summary of his work is beyond what I want to discuss here. But his methods, harking back to the quotes above, are very applicable to what we do as investors.

You can consider the markets, metaphorically, as a black hole. Lots of information goes in and is presumably digested, and information comes out in the form of prices. The actual way that happens is unobservable. The information coming out can be used, if it can be understood. In fact, understanding it is easy. Just look at all the commentators (including me!) explaining it to you. But understanding it correctly is much harder.

It gets even harder, per Dr. Hawking, if the correct answer changes over time. Harder still if we think we already know the answer but are wrong. So, do we give up? No, of course not.

There is no final answer

The first step is to understand that our knowledge of a process that continually changes will always be, and has to be, contingent. There is no final answer, and there never will be. We always have to identify what is changing and what that means for our answers. We also have to accept that the conclusion will itself be uncertain and changing. In the end, all we can hope for are approximations that work for a while.

This level of intellectual humility could be taken as surrender, as an abdication of attempting to understand the real issues, which would necessarily imply an answer. I would argue the contrary: to assume a level of certainty that we do not, and cannot, have is in fact a surrender to the limitations of our own expectations.

What does this mean for us as analysts and investors?

Be suspicious of people who have the answers. One immediate example is those who have been predicting hyperinflation here in the U.S. for years as a result of Fed policy. They thought they knew the answer and were wrong. Many still think they are right and that the facts are wrong. Not to pick on them—there are many other good examples out there in all areas of economics and markets. For some reason, these fields attract people who are seeking a level of certainty that simply isn’t there.

What do we do? Rules matter. But we also need to understand how and why they fail—and when we change our minds. Act based on facts, not expectations. Watch for when the facts change. Constantly question assumptions, and game out alternatives. It’s hard, both mentally and emotionally. But only in this way can we keep extending our knowledge and understanding.

Dr. Hawking, thanks for your example.

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