Everyday Survival and Deep Survival by Laurence Gonzales
While never mentioning capital markets a single time, I find Gonzales’ “survival psychology” trilogy (Deep Survival, Everyday Survival, and Surviving Survival) extremely relevant to portfolio management.
I’ve read dozens of similar books or books about extreme survival situations. Why is the survival topic so interesting to me? Picking stocks is certainly no life and death matter like being stranded at sea for weeks, and yet to try and get inside the heads of survivors and understand their psychology and ability or inability to think clearly in such stressful scenarios is what is appealing, endlessly fascinating and applicable to portfolio management psychology. In every discipline, the ability to be clear-headed, present, and cool under fire is much of what separates the best from the mediocre. This is why it is worth reading Deep Survival/Everyday Survival.
The book in three sentences:
Everyday Survival shows that we are slaves to our unconscious rehearsals. Our only recourse is to try and live mindfully, learn broadly and be prepared to dislodge and revise our own deeply embedded mental scripts. We should strive to limit dogma and have no fixed identity and retain a childlike curiosity about the world around us.
Five Big Ideas from Deep Survival:
We are born with certain emotional and behavioral tendencies, however one has to learn or build their emotional response system over a lifetime of experience and conscious decision making. Your personal emotional traits and way of thinking are developed over a lifetime. If you have had the tendency towards resilience and self reliance throughout your entire life, this could very well be likely to continue in a survival scenario or stressful situation.
The first rule of survival is: "face reality." Fear is good in survival situations, too much is not.
The second rule of survival is: Maintain a sense of humor. See opportunity in misfortune.
Character, emotional regulation, personality, styles of thinking, and ways of viewing the world have more to do with how well people cope with adversity and survival situations than any type of equipment or formal training
Be willing to disrupt your own worldviews. To see the world anew is to both embrace it more fully and to guard against its dangers. “To live with unquenchable curiosity that sweeps away our mental models and makes everything new is the ultimate triumph we can experience…”
Additional Excerpts and Takeaways
We have gradually evolved a culture that allowed us as a society to drop our guard - with the illusion that we have dominion over the earth, we conclude that we have nothing to fear.
Due to modern comforts, almost nothing in our immediate environment can reach out and kill us, thus we do not need to think about predators and are not forced to be curious about our world in order to survive. We haven't had to pay close attention in order to gain any little advantages from our environment. All advantage has flowed effortlessly, so we drop our guard develop a dangerous “vacation state of mind.”
Curiosity, awareness, and attention are the tools we need to avoid our worst mistakes.
One of Britt Harris’ top rules for success: Stay fully engaged.
“If you are extremely smart but you’re only partially engaged, you will be outperformed—and should be—by people who are sufficiently smart but fully engaged.” -Britt Harris
Trouble will come to find us. It always does. What form it takes, we cannot know.
One of the main reasons smart people do really dumb things is the way the brain processes new information. It creates "behavioral scripts to automate almost anything we do." Behavioral scripts are an extension of the concept of mental models.
Mental models make us more efficient at processing information, once we've seen a book, we will generally recognize all other books, no matter the size or color.
One of the most frequently ignored factors in our behavior is the way we form models and scripts and use them rather than information directly from the world itself in most of what we do.
We are often just going through the motions, operating as if under a spell, in a vacation state of mind.
Many of our worst decisions are not really active decisions in the normal sense of the word. They're simply automated behaviors formed out of the inheritance from our animal ancestry. The script will continue until it either ends us or the illusion is finally overturned from dramatic new information from the real world.
The human brain is finely tuned to detect novelty. As everything becomes routine, we stop paying attention.
We must combat this by pushing ourselves to gather and take-in new information. Behavioral scripts may be sending a strong message that says: “The world you see before you is a familiar one. Relax. You've got this wired."
Over the eons, it has been good for survival to assume that what has happened before will happen again, and that what has not happened yet never will.
We must remain mentally flexible and be able to imagine things in capital markets that haven't happened before, or at least happened so long ago that others can't fathom it (but we can because we have studied history more rigorously than others).
The human brain tends to classify everything we encounter--along with the outcomes of interactions with those things--as good, bad, or indifferent. This helps us generalize from previous experience, so when things are similar we lump them into categories.
This is important for stock picking--people may over generalize a situation/industry/stock set-up, and we can exploit their default mental short-cutting by delving deeper into the particulars when others may simply put things into hardened categories.
We tend to average things, ignoring special cases. We automate activities for the sake of efficiency. When one of these scripts doesn't work and we are punished for our behavior, we revise our learning (if we survive) because we're smart.
A terrible experience, perhaps a near death experience or some crisis experienced or narrowly avoided, can be a gift if it awakens your curiosity about the world. It allows you to cast off your mental models and behavioral scripts and explore the true reality that's there.
"The cost of this kind of myopic learning system is that it will sometimes ignore the obvious." - Marc Hauser, evolutionary psychologist at Harvard.
Hauser trained a rat to navigate a maze to reach food. When he moved the food closer to the starting point, the rat ran right past it to get to where its script told it the food would be. This illustrates the behavior script--they allow us to ignore or discount new info even when it would be helpful and make decisions easier.
The efficiency of our scripts comes at the expense of deliberate attention to real information coming in in real-time from our environment.
Are we sometimes skipping over a more obvious and easy investment decision because we are used to digging deep into hairy situations and our script tells us that is where the “cheese” is?
Our models and scripts form the basis of not only how we act, but what we perceive and believe. We tend to not notice things that are inconsistent with the models (confirmation bias) and tend not to try what the scripts tell us is bad or impossible.
"Seeing is not believing. On the contrary, believing dictates what we see."
On "groupness" (forming tribes, herding, us versus them mentality):
“If individual human beings can form forceful and persistent mental models, organizations or groups of people seem to be able to do so on an almost unimaginable scale. A person has secret doubts and fears. An organization has the emotional life of a reptile.”
The author cites NASA’s culture as poisonous based on groupness despite on paper being the epitome of a rational technical culture.
“Anomalies that did not lead to catastrophic failure were treated as a source of valid engineering data that justified further flights.”
Instead of peering deeply into problems brought up repeatedly by engineers, top NASA executives revised their mental models until they were interpreting failure as success.
In looking for short ideas, look for management teams that show signs of not tolerating external criticism and doubt, but instead strictly “impose the party line vision” that leads to further self-deception. Look for companies lead by “alpha” individuals that punish dissent harshly (e.g. Elon Musk is known to fire engineers on the spot who point out design flaws and safety concerns) and point to lack of catastrophe as success despite repeated warnings and taking massive risks.
"The primary heuristic" is a tendency to generalize into the future what worked in the past. Whatever worked before, do it again. Whatever didn't work, avoid it. Without deliberately disrupting our own mental models, we are slaves to their dictates.”
Seymour Cray is famous for inventing the fastest super computers and liked to hire kids straight out of college because they hadn't yet learned what was impossible and so unlike senior engineers they went ahead and did it.
Interestingly, Voss consist of a self-taught value investor (me), an econ undergrad straight from school (Taylor), and Jon, who is a Psychology & Film major who started his career at a large software firm. This bothers most people who rely too much on “pedigree” for their cues of successful investors.
Gonzales when speaking of his dad, says he always began his lectures with the words "Fellow students" to remind all of them of the importance of continual learning. He professed an interest in everything. He believed that putting a large amount of diverse knowledge into his brain made it function better. He tried to avoid the trap of looking at things as uninteresting simply because they were familiar. He deliberately displaced his mental models, rewriting his scripts in an effort to see the world anew. And to see the world anew is to both embrace it more fully and to guard against it.
This is where I got the idea for each of us on the investment team to create new industry primers frequently to keep putting diverse knowledge into our minds and seeing all investments from a new angle, e.g. Jon is a software expert who was then encouraged to spend a full year doing a deep industry dive on how to analyze banks, an industry that is completely different for him and now he can analyze banks as well as financial specialists and forms new connections.
Andy Grove, former CEO of Intel: “If we were fired, what would the new leadership of Intel do?” He erased his own scripts and group identity and rebuilt them with fresh eyes from scratch.
The portfolio management equivalent of Andy Grove’s question could be, “If we were starting with 100% cash today, what would the portfolio look like?” or “If we have a large redemption/subscription next month, what would would be buying/selling?”
Learning not only changes the sum of our knowledge, it changes the frame of all our knowledge (changes the way we see everything else we already knew).
The chemicals of emotion fade away slowly. If you stub your toe, you are more likely to yell at your spouse because your emotional system is primed.
A training scar is an inappropriate sub-routine of behavior that somehow gets scripted during training (such as learning a bad process or bad risk control in portfolio management due to only working in a raging bull market that lacks corrections).
There is an interesting story of nervous pilots yawning on voice recordings. Yawning can be caused by sleepiness or lack of oxygen, but also can be a sign of fear, stress, or nervousness. The NTSB measures the level of stress a pilot is feeling by quantifying the fundamental frequency, which is how fast the vocal chords are opening and closing, the faster the rate the higher the stress. Performance is degraded by fear beyond a certain point.
A pilot functioning normally should be at a stage 1 level of stress, correlating to 30% increase in frequency of the voice and helps produce heightened attention and improved performance. Beyond Stage 1, performance deteriorates quickly. Stage 2 = 50-150% increase. Anything beyond 150% suggest panic, at which point, for all practical purposes you can't think or function.
If a pilot who panicked while hitting the wake turbulence of a 747 had done nothing at all in response, the flight would have proceeded safely.
NTSB report: “If the first officer had stopped making rudder movements at any time before the vertical stabilizer separation the accident would have been avoided.” He had a massive overreaction....automated response mediated by fear, a bad behavioral script.§ In the early days of aviation, the spin was a mysterious event, a death spiral from which pilots rarely recovered. Knowing that, if a pilot found himself in a spin and had a parachute he would most likely bail. Then people began to notice something strange...after the pilot bailed, the plane would sometimes right itself and fly on until it ran out of fuel. The airplane was never at fault. The pilots were doing something to keep the plane in a spin. Pilots began to learn to recover from spins by doing less, not more.
This could be akin to over trading after a period of bad performance. Best to spend less time in front of the computer and lower turnover, not increase it after a period of poor performance.
When we interact with other complex systems, previous training scars can become greatly exaggerated. That is why knowing ourselves and our world can be so important.
A person’s way of thinking and temperament is developed over a lifetime and this concept applies to investing and portfolio management. Once a set of beliefs and worldview are set it is hard to change one's habits of mind. This is one reason why it is so important to learn how to think properly about investing at a very young age, or else one has a lot of "unlearning" to do.
At the age of ten, your models and scripts are still constantly being revised and are not as stable. This can be good for survival situations. There is a good anecdote of 10 year old girl on vacation with her family in Thailand who had just learned of tsunamis in geography class and saved her family by recognizing the receding water for what it was--the fact her parents listened to her and acted immediately also shows they we were willing to change mental models on a moment's notice while other tourist were walking out into the water and posing for pictures. Being younger may offer more alertness of the world and flexibility of mental models.
Try to retain mental flexibility and build that into the process. Try to instill a childlike curiosity and engagement with the world by encouraging widespread non-investment related reading and allowing analysts to pursue some of their own ideas without rigid structure or any guidelines (e.g. use creativity). Also, keep people with “beginner mindsets” around (i.e. interns).
When you are scared, the emotional system takes over to initiate some form of automated behavior. This can make you do things you shouldn't.
The idea that our emotional apparatus in times of stress overtakes our rational brains is nothing new. Emotion works powerfully and quickly to motivate behavior. Emotion is an instinctive response aimed at self-preservation.
Stress releases cortisol into the blood. Long term stress kills hippocampal brain cells. Most people are incapable of performing any but the simplest tasks under stress.
In addition, stress and strong emotion erodes the ability to perceive accurately. The cortisol released interferes with prefrontal cortex, where perceptions are processed and decisions are made. Under stress you see less, hear less, miss more cues from the environment and mistakes multiply and compound.
If emotion is running particularly high, step away from the computer. Avoid getting caught up in the moment. If you detect emotion is high in other investors (as it has felt for years now), investigate leaning against them. It is uncomfortable, but so is contrarian value investing.
One trick to avoid the fall out from any potential emotional decision for Voss is to average into positions, both on the long and short side. Buying and selling become a slow iterative process, minimizing effect of any single buy/sell mistake and remove any potential for impulse decisions. No buy/sell decision is made in a single day nor can any single position be so large as to do major damage to the Fund's NAV.
"To survive you must develop secondary emotions that function in a strategic balance with reason." One such way to promote balance that Gonzales highlights is to use humor. Each pursuit has its own sub-culture with "ritual moments of homage to the organism", or in Voss's case we refer to the living organism of the market as "The Great Humiliator" and like Charlie Munger suggest to do, we “collect follies,” anxiously awaiting future presentations to students to point out the ridiculousness of this current era.
"Owl Eyes & Fox Walk" - Gain conviction from first hand knowledge.
Gonzales goes to a survival school in which the class teacher leads the students out in the woods, ask them to close their eyes and point the direction of where they originally came from. Gonzales is surprised that he is unable to. He had been "following him" not "walking his own walk." Sometimes being in a new town, if you are just relying on a friend or family member to lead the way and navigate, you may not retain navigation ability nor retain the lay of the land and are more likely to get lost. Walking your own walk in the investment world is the equivalent of doing first hand research from the source documents. This allows one to better retain the investment facts, root out what is actually important and not rely on second hand research in which one can have almost zero true conviction in.
Summary of Key Aspects to a Survival Mentality:
First rule of survival is: "Face reality" Fear is good in survival situations, too much is not.
Maintain a sense of humor--a defense mechanism to deal with stressful or dire situation.
Look for opportunity in every misfortune.
Maintain an “interior orientation” rather than an “exterior orientation.” A person with interior orientation is more likely to believe that they can change things and better their situation. An individual with an exterior orientation tends to blame others and their circumstances.
It is not about what you know, but how (And if) you apply what you know when things are spiraling out of control.
Often there are plenty of sensory signals screaming at you to adjust course but in the heat of the moment you don't pick up on any of them. "...people ignore the obvious and do the inexplicable. Pay attention and think if you are twisting things or using tortured logic to reach an erroneous conclusion (e.g. denying you are lost and saying, “I swear the giant boulder was right there…it must have just moved.”)
There are things you cannot control, so you have to know how you will react in those situations. If you have a set thesis and when it isn't playing out, don't fall prey to "thesis creep." Write out things in advance that would make you change your mind.