The panic surrounding subprime mortgages (among other things) recalls the mess made by the internet- and telecom-bubble in 2000. The comparison is more vivid to me because the former episode occurred at precisely the same moment I finished university – when my real education began. Now another graduation is happening, both in terms of my own education and our approach to investment and doing business in general: lessons learned in the market help to inform and illustrate my more personal lessons.
After I finished school in the spring of 2000 I had plenty of time to digest the financial news and try to understand what was happening. I found more questions than answers, but those questions – questions which I was genuinely interested in, questions which I 'owned' –were what compelled me to pay attention to things in an organized and focused way: to take responsibility for my own education, to make a real investment in ideas. Making that investment requires looking past immediate realities towards the deeper substance, meaning, or qualitiy of events, trying to establish real equity and a foundation for growth. Sometimes answers have to be postponed while we cultivate the ability to ask and answer the right questions -- more effectively, more generatively, more sustainably.
That's what I've spent the past seven years working on; that's what I'm going to begin to explain, using financial investment as a metaphor for intellectual investment. But first, what's going on with the markets right now?
It would be easy to blame the system, but of course the system could be better: the problem is that these crises are caused by circumstances that are so new that the existing ways of doing things just aren’t adequate. What is needed is for the people involved to be continually diligent and responsible for improving the system, to help it evolve with emerging needs. Now who should take responsibility? Everybody? I think we know that won't happen. And if we create another regulatory body, we would just be creating something else that will cause problems that will need to be regulated down the road. We might consider consolidating and centralizing control of the system -- but let’s not forget that the market is already a kind of regulatory body, which is supposed to help us avoid the problems caused by centralized control...
And we can’t just say these problems are about emotions like fear, avarice and greed either – nor even a matter of irrationality. It might be ok to discuss these abstractions in undergraduate philosophy courses, but in practical situations, the only justification for mentioning them is to preface further discussion of particular conditions, causes and consequences. ‘Greed’ is not a real thing, neither is ‘irrationality,’ nor ‘altruism’ for that matter; they have no real existence or efficacy in the world; they are merely abstract ideas that help us distill complex realities. So while certain behaviours and actions, which might be labelled "irrationality" (or fear or greed or whatever), are undoubtedly part of the problem, those labels don’t really tell us much about possible solutions.
A third response to these problems might be to say "it’s a bit of both: part of the problem is the system and part of the problem is the greed and irrationality of individuals," but that too merely opens discussion rather than really solving anything. Of course it’s a bit of both – it probably also involves many other factors that we can’t even perceive.
It hardly matters who or what to blame; what’s important is what we do about the situation. This response expresses the core tacit opinion of all those eminently ‘practical’ people – people of action – who are too busy doing things to waste time thinking and talking about problems. They don’t bother with distractions like articulate and coherent theories – perhaps they believe in solving problems "pragmatically."
I believe in solving problems pragmatically too, but remember that pragmatism was born as a philosophical method. Everything we take for granted as practical, intuitive and spontaneous, was probably at one time the invention of some eccentric, reflective, unpractical thinker. The word "pragmatic" was introduced to our vocabulary by philosophers Charles Peirce and William James – two very unpractical people. (For example, James was educated as an M.D. but had no tolerance for the actual practice of medicine; after drifting for much of his late twenties he went on to become a philosopher – hardly a hero of practicality.)
The pragmatic approach is about ‘doing,’ but it’s equally about explaining and articulating the thing done: making our ideas clear, making action intelligent, finding (or giving) an order to experience, knowledge and society.
It’s a risky venture to stick one’s neck out and speculate on possible solutions; but speculation, adventure and risk-taking are among the most essential qualities of life – they are what make it vital. Wise investors know there is no such thing as a risk-free investment. Ironically, without risk there would be no ownership – by owning something you take a chance that you might lose it or that it’s value might diminish – and with no ownership there would be no stability or security from risk.
Wise investors know how to manage risk. They take chances and they know they will make some mistakes, they know that forces beyond their control may periodically decrease the value of their portfolio; but they learn from their mistakes, and they know that if they invest wisely -- and substantially in real properties and commodities that retains some value, even through the worst periods of recession or inflation -- then the value their estate will continue to rise in the long-term, despite short-term losses and corrections.
It's the same with ideas as it is with money: it isn't wise to go from fad to fad, investing with borrowed wealth; we need long-term vehicles for learning and understanding that retain some of their value when markets lose their footings -- or rather, such long-term enterprises are the stabilizing force that markets need.
I'm referring to both 'knowledge markets' and financial markets: the former is a foundation for the latter, and I'm using the latter as a metaphor for the former.
Wise investors don’t just invest their money, they invest their ideas: someone like Warren Buffet builds up a kind of ‘net wisdom’ to support and maintain his net worth; his financial investments don’t just tell him how well he’s doing financially, they tell him how well his knowledge and principles are performing. When unforseen problems and opportunities emerge, he not only has a great deal of financial capital to support him, he also has support from the 'universal capital' of wisdom. He not only owns his investments, he owns the ideas and principles through which he invests.
Panics like this occur because people don’t have that kind of knowledge capital or wisdom to fall back on. They see the market starting to shift away from their uninformed expectations and realize they didn’t actually know what weaknesses and risks they were exposed to. And they are at risk of losing everything -- everything they never really had in the first place.
At the same time, it's just as much of a mistake not to take speculative risks; the whole system is driven by people taking chances; the whole history of human progress is about people taking chances; and on a more general level, evolution can be interpreted as a process of speculative risk-taking: many species and adaptations fail, while the successful cases build on (or through)failures, becoming increasingly more complex vehicles for growth, more effective and competent investors and problem-solvers.
We might consider that the culmination of that process is human intelligence; but we might also consider that evolution does not end there (here?) or anywhere. Any species that doesn't take risks to extend, multiply and integrate itself into a larger ecosystem -- investing in that ecosystem by creating more complex, and sustainable vehicles for investment and growth -- would soon face extinction: it wouldn’t have established any real equity or integrity in the system, it can't capitalize, it can't use any of the levers provided by its environment.
This is why we must continue to take intellectual chances, speculating and postulating risky ideas, but managing those risks, considering what we might be exposing ourselves to, taking ownership of our ideas and enterprises, being attentive and reactive to changes, looking beyond short-term losses (and short-term gains) towards long-term growth, with confidence that past investments -- both the losers and winners combined -- provide a fairly secure net for us to fall back on.
I took a risk with my personal education, and I'm taking a small risk now by putting these ideas out for public evaluation and criticism. Some of them will certainly turn out to be wrong; but no idea is guaranteed to be right, in the same way that no investment is guaranteed to be profitable; and even the best ideas and investments will sometimes lose.
But never taking any chances is guaranteed not to be profitable: it’s the riskiest and least secure investing style of all.
[Originally posted at thecreativegeneralist.blogspot.com, August 19, 2007]
