The ex-post world

24th July, 1964. DCW Jones, a waterworks engineer in Aberfan, Wales sends a letter to a colleague expressing concern. He’s worried about the danger of coal slurry in a mountain of coal waste being toppled and turning into an avalanche and putting the lives of young schoolchildren studying at Pantglas Junior School at the base of that hill, at grave risk. He then writes to the National Coal Board. No one bats an eye. On October 21st, the tip of the hill gives away and 150,000 tonnes of slurry slides and hits the school, claiming the lives of 116 children and 28 adults. Independent inquiries are then set up to investigate the causes and prevent further disasters of that scale from occurring. Coal tips are cleared at other sites from the village giving a sense of a major problem solved.

The ex-post nature of the world is another one of those bitter truths we live with. Security patches are released after the network and the data has been compromised. Intelligence agencies are revamped after the attack has happened. Regulation policies are written after the incumbents are already too big to fail.

Part of it comes from human nature, we learn from our mistakes and have used history as a guide to navigate the present. Societal norms also ensure ‘problem solving’ is encouraged. A problem solved is a job well done and is rewarded adequately. Pre-emptive action is risky business, you do not want to put your reputation on the line by blowing the whistle when there’s only smoke and no fire. We prefer the pat on the back instead.

The problem with learning from history is that it only rhymes, it rarely repeats. Morgan Housel wrote a brilliant piece on learning from history. The best takeaways are broad and behavioural at best. But we still end up learning from the last disaster and hope the teachings save us from the next one.

Internalising problem solving in itself isn’t a problem. But waiting to act until something becomes one is. Wouldn’t we be better off if we managed the smoke instead of putting out the fires? Averting a loss does not feel like a win but in the long run that is what keeps us in the race.

For instance, we’ve known for quite some time now the fragility of the global supply chains we all depend on. It took all sorts of shortage and supply constraints for us to realise that this problem needs addressing. Neither did we have enough medical supplies or emergency beds for that matter before it became a massive problem and forced us to act. Dare I remind of what happened in 2007 and 2008 that rocked the global banking and financial system.

It holds equally true in investing and risk management. Too much exposure to highly levered assets, excessively volatile instruments, momentum driven strategies may work extremely well when you’re at the right side of the trade, but when things start going south, you’re like that deer staring in the headlights. No fun in learning by blowing up when you’re not playing the game anymore. But as Howard Marks very rightly said in The Most Important Thing, being too early or too far ahead of your time is indistinguishable from being wrong. So you need to be right and right at right time.

About time we try being like DCW Jones more often and see the ex-post from time to time only.

Till next time,

The Atomic Investor

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