During their recent episode, Taylor, Carlisle, and Ethan Everett discussed:
Spinoza and Emotional Bondage in Investing
Nietzsche, Buffett, and Eternal Recurrence
Voltaire’s Bond Lottery Arbitrage
Net-Net Skepticism and Avoiding Scams
Davida, Asteroids, and the Philosophy of Value
Hume, Common Sense, and When to Follow Consensus
Baudrillard, Abstraction, and Meme Stocks
The Limits of Abstraction in Finance
Montaigne and the Anxiety of Wealth
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TRANSCRIPT
Tobias: I think we’re live. This is Value: After Hours. I’m Tobias Carlisle. Joined as always by my cohost, Jake Taylor. Our special guest today is Ethan A. Everett. He is the author of a new book called The Investment Philosophers: Financial Lessons from the Great Thinkers. He’s an investment analyst with GGS. Ethan, welcome to the show.
Ethan: Tobias, thank you so much for having me. Jake, nice to speak with you as well. Big fan of the podcast and of your writing as well, and really excited to have some interesting dialogue about both the book and wherever our conversation takes us.
Tobias: Well, let’s start with the book. Let’s start very high level. Give us an overview of what the book is about.
Ethan: So, for me, the book is a passion project, because I have always loved connecting different fields with investing. I would say what first got me interested in investing when I was say, 12 or 13 years old, was when I learned about the stock market, it felt a lot like chess to me.
Now, it wasn’t exactly like chess, but I felt like there were a lot of connections. I was a huge chess player, and that really, really intrigued me. So, throughout my life, I’ve really been looking around for different paradigms that could help me learn more about investing. There’s a lot of great stuff out there on different mental models that can be used. But for whatever reason, one of my favorite disciplines, it felt hadn’t really been given it’s due when it came to investing connections. I’m talking about philosophy specifically.
Listen, there are some examples. Like George Soros, for instance, you have as being a philosophy student and talking about his theory of reflexivity. And that’s philosophical. But I just thought there’s so many of these great thinkers who generally are really annoying to read, but once you distill their knowledge, you say, “Oh, my God, this is really genius.” But they usually take way too long to say it.
Jake: [chuckles] Yeah.
Ethan: At the end of the day, I wanted to make those connections to investing and see what that yielded. And not only really inspire myself, but inspire others to do the same. I think I’ve done that. I did it with 13 different thinkers. One thing I also tried to do, was not just use their philosophy in a vacuum.
I tried to say, okay, not only do I want to look at how we can learn about investing from their philosophical ideas, but also how did investing form their philosophical ideas? Were there historical events that involved investing or public companies that actually shaped the lives of these thinkers. And that was a really exciting thing, because I ended up finding out–
I’m happy to talk about some examples. I ended up finding a lot of these philosophers’ lives were actually transformed by things involving public securities markets, which really, really fascinated me.
Tobias: That’s what broke their minds.
Jake: Yeah. So, was Plato a growth or value guy?
Tobias: [chuckles]
Ethan: So, I should say, I start with Spinoza in Amsterdam in the 1600s, because the first modern public company is the Dutch East India Company is where I start. They actually started the first stock exchange in order to facilitate the trading of their own shares. So, was Plato? That’s a great question. I don’t have answer for that, but listen, at the end of the day, I think he’s value. I think he’s value. [Jake chuckles] I think he’s value.
Spinoza and Emotional Bondage in Investing
Tobias: Tell us a little bit about Baruch Spinoza and irrational emotions, how they explain the stock market.
Ethan: Fantastic. Yeah. So, Baruch Spinoza is a really interesting thinker. Just to give a tiny bit of background, he’s born into the Jewish community in Amsterdam. This is in the early-to-mid 1600s. He ends up saying some things that the Jewish community wasn’t too happy about, like, God equals nature, and the Bible was written by people. Anyway, he ends up getting excommunicated. So, nobody really wants anything to do with him. So, he starts writing stuff that nobody else really is willing to say.
One of the things he talks about, is that fundamentally humans have certain things that they’re not in control of, these irrational emotions, but he believes that if you recognize them and do this introspection, somewhat similar to what the current mindfulness movement does, you can have a better life.
He basically says the more that you see your own emotions, your irrational emotions, the more you can be in control of them, or not in control of them, but actually adjust to them. I think that Daniel Kahneman is really interesting, because he’s almost a modern version in some ways of what Spinoza is saying, you know, this type one versus type two thinking. I think what Spinoza is advocating, and not to put words in his mouth, because– This is the hard part, because I don’t get to ask Spinoza, “Oh, is this what you meant when you wrote this in Latin?”
I don’t get to ask that. But my thought is that in a way that if you think of it from a Daniel Kahneman behavioral finance perspective, you sometimes want to take your type one natural thinking that just happens and move it towards type two. Use different processes that require you to reflect on things, whether it be post mortems after you do a certain investment, whether it be having a dialogue with someone else to reflect upon your ideas.
So, I think that Spinoza believes that we should be doing that with everything in our lives. He says that if we don’t do that, we’re in bondage to our emotions. He uses that term, bondage. So, he thinks that we’re slaves to our emotions, but the most high pursuit that we can do is to use reason to transcend that. I love that just in terms of life. it’s, first of all, much easier said than done. [chuckles] It’s really easy to say, “Oh, be rational. Reflect on your irrational emotions.” Easier said than done. But I think in finance, I think it applies tremendously.
Spinoza’s life, and I can talk about this later, his life was really shaped by this giant, what you would call the largest public company ever. People think Nvidia is big on an inflation adjusted basis, the Dutch East India Company. I’ve seen different estimates. Some saying that the market cap would be $10 trillion today. I think I had in the book which was written– This was like a year or two ago, I had $7.5 trillion. Estimates vary, but he lived in a place where the impact of a public company was inescapable.
Jake: Toby, what have you done to try to control your emotions in investing?
Tobias: Yeah, I’m entirely systematic. I couldn’t agree more with the approach. Spinoza’s right on the money. What do you think, JT? What have you done?
Jake: I still hold out a little bit of wiggle room for intuition, which I think might be classified as subconscious pattern matching. But I think it just has to be done carefully and in places—You probably need to catalog it and record it and then actually follow up to see where and when can you trust that intuition and where shouldn’t you.
That’s where I think there’s a little bit of a breakdown in that learning loop is that people don’t do enough recording of these intuitions. They just have a gut feeling and then they go. Or, they have a gut feeling and then they go try to back solve with all the numbers and logic that they can to get to where they wanted to go to begin with from the gut feeling. So, that post-hoc rationalization.
Tobias: There was a good article– I think it was Malcolm Gladwell about Taleb. And Taleb used to ask his analysts or his researchers, probably Spitznagel, every day when he came into the office, “Have you introspected today? Introspect.”
Ethan: Really? I will say, Taleb– Well, if somebody’s written on the connections between philosophy and investing, I do have to give him credit. He’s been quite philosophical in his book. So, I should have given credit there as well. That’s a good–
Nietzsche, Buffett, and Eternal Recurrence
Tobias: You’ve also covered one of my favorite philosophers, Nietzsche, and you connected him to Warren Buffett. What common ground do they share?
Ethan: So, this is an exciting one for me, because at the end of the day, listen, we’re all Buffett fans here. There’s so many things that just felt were played out. And I said, “Is there anything new I can do in terms of a Buffett connection?” I said, “Has anyone ever taken Nietzsche?” Because for me, it wasn’t just about Buffett’s investing. It was about his morals.
I actually, in college, remember having, on my dorm room, I had a poster that said, and I’m going to watch me misquote it, “It takes 20 years to build a reputation and 5 minutes to ruin it.” In the backdrop of my head, I always thought about Buffett’s investing, not just in terms of its financial success, but also in terms of he has this morality that just seems to come naturally to him, that he’s doing the right thing.
I looked through his writing, and what I found was the key core base of that morality was this. If you’re uncomfortable seeing something in the front page of the New York Times or you’re uncomfortable having a skeptical, yet intelligent reporter asking you about it, then you probably don’t want to do it. And that just felt very Nietzschean to me. Why? Specifically, because of this idea of eternal recurrence.
So, Nietzsche, just to say really quickly, he didn’t like the idea of, “Oh, you do good stuff, you go to heaven forever. You do bad stuff, you go to hell forever.” He said that that wasn’t going to lead to a– Actually, good morality because you’re being selfish in a sense, you’re just doing it, so that you can have this great situation forever. He thought to himself, is there a way that we can have this thought paradigm about our actions and what good and bad is without being selfish.
His idea was this idea of eternal recurrence, which was basically this thought experiment where you say, “Okay, everything I do is going to be repeated again and again and again forever.” If you’re not comfortable with your action repeating again and again and again echoing in eternity, then it’s probably not something you should do. Because a lot of the times when people want to cut corners from a moral standpoint, it’s like, “Oh, I’ll just do it this one time.” But Nietzsche’s idea transcends that, this idea that our actions echo in eternity, I thought, wait, that’s somewhat similar to what Buffett is saying. He’s trying to find a way to basically see how– He’s trying to create some thought experiment to make people really, really reflect on the morality of their actions.
And so, for Nietzsche, it’s echoing in eternity. For Buffett, it’s reading it on the front page of a newspaper. But that kind of reflection to think of morality that way, I thought was a really, really interesting connection. And then, I make some more connections. They both talk a lot about what makes value in life. Clearly, Buffett and Nietzsche as well do not see financial success as the all-encompassing measure. I think Buffett said in a Georgia Tech speech that “If nobody loves you by the end of your life, you’re probably not that good of a person.” [chuckles] He said, “There’s people with hospital wings named after them, but nobody would actually want to say anything good about them.” He says, “That’s not what you want.” Nietzsche talks about this as well, that there’s people that have financial success that are just not of a high-quality from a moral standpoint.
Jake: Happy 95th birthday to the GOAT, by the way, this weekend.
Tobias: Wow, that’s a good knock. Yeah, I like the idea of eternal recurrence as a risk measure. If there’s anything that you do with a downside that’s big enough and you do it enough times, eventually that even though it’s very remote, that downside catches up to you. You can fit morality into that too if you do something bad enough, it catches you.
Ethan: Listen, if people haven’t had too much of me already. But if there’s so many of these ideas, I didn’t even think of that. I talk about this in my preface. I’m excited for other people to start making philosophical connections to investing, because that’s a great example, eternal recurrence from a risk. Because sometimes people think, “Oh, I can take this one-off risk and get away with it.” But when you think about it from an eternal recurrence standpoint, that’s actually a really, really interesting thought tool.
Tobias: Well, if you take a one-off risk, it becomes habitual too. And eventually, that collection of one-off risks, you start seeing the underlying probabilities play out in your own life.
Ethan: Absolutely.
Voltaire’s Bond Lottery Arbitrage
Tobias: Let’s talk Voltaire.
Ethan: Oh, boy.
Tobias: This is the one I like. How did a success in the bond lottery arbitrage shape his writing and his worldview?
Ethan: So, this was probably the most exciting for me, because– First of all, so, I will say they got to make a Hollywood movie on this guy. I don’t know who’s going to be the actor, but this story is just– in my opinion, it’s made for Hollywood. So, if any producers are listening. So, for Voltaire-
Jake: They’re not.
Tobias: [chuckles]
Ethan: Yeah, they’re definitely not. Yeah, wishful thinking. But for Voltaire, he grows up as not in a bad situation, but he’s the son of a civil servant. I believe his dad is a scribe or something. He wants to be able to say things, but he can’t necessarily say everything he wants to say. He has to be careful in what he writes, because he can’t piss off royalty, he can’t piss off the duke of blah, blah. blah.
Anyway, he has trouble restraining himself and ends up writing some stuff that pisses a lot of people off. I think he wrote something that called out the Duke of Rohan’s son, and this led to him being exiled into England for I believe it was two years. He was supposed to be in jail, but somehow, he was able to finagle getting exiled for two years into Britain. While he was there, he got to read some really enlightening stuff. He’s talked to Shakespeare, Isaac Newton. I think there were some people who talked about he might have been at Isaac Newton’s funeral. I’m not sure about that.
But anyway, he comes back to France and– He’s in this position where he has to watch what he says. He just got back from exile and he happens to meet this mathematician, this famous French mathematician who points out to him a flaw in the bond lottery of France. I want to try and give– I’ll give very quickly, what do I mean by bond lottery? Okay, so, very quickly–
This was actually somewhat common in Europe. But very quickly, there was a time the government of France had borrowed– They actually borrowed through the city of Paris as a conduit. But anyway, they ended up defaulting on their debt and the bonds were trading at some tiny fraction of face value. They wanted to be able to somehow push that price up, so that other people would be willing to invest in a new issue of bonds. So, they had this crazy idea that they were going to say, “If you own these bonds, these ones that we defaulted on, you get a ticket to this lottery. And the prize of the lottery, is that your entire bond gets paid off in face value.”
Tobias: [laughs]
Ethan: Again, given that these things, let’s say they’re trading at 10 cents, 20 cents on the dollar. I forget, I did some research on what it actually was. You know this would be a big windfall.
I guess the mathematician figured out that if you bought up all of the lottery tickets, the expected value was actually higher than the cost of those tickets. The math is interesting. I ended up going through it, but long story short, Voltaire makes a ton of money. Enough money to build a body of wealth that enables him to say what the heck he wants for the rest of his life. He really, really gives it to the establishment in terms of whether it’s religion, government, you name it. But now, he had the money to buy protection and have the influence to say what he really wanted to say.
So, yeah, talk about arbitrage, leading to one of the most prolific writers of the past 500 years. Yeah, I think that definitely you could say bond– We might not have had some of these great works had it not been for bond arbitrage.
Tobias: So, there’ll be a summer blockbuster coming to you soon. John Cena as Voltaire. The Rock?
Jake: The Rock as Voltaire. [laughs]
Ethan: You think the Rock?
Jake: No, it’s going to be like-
Tobias: John Cena.
Jake: Timothée Chalamet.
Tobias: The Rock’s playing Isaac Newton.
Ethan: Timothée– That is spot– I like that. That’s spot on. Unless you want a jack Voltaire, then that’s not going to work.
Tobias: Let’s talk a little bit about Voltaire and his approach, how that applies to investment.
Ethan: So, he always had this cynical attitude towards everything in life, whether it was people, their motives, institutions. He writes about stock exchanges as a way of basically no matter how good or bad different people are, it connects people, and aligns their incentives and leads to good results. He talks about how on a stock exchange, it doesn’t matter if you’re Jewish, Muslim or Christian, the only person who gets called a heretic is the person who’s bankrupt. I love that quote. So, I think that he sees investing or financial exchanges as a really positive force in society.
More so how does it connect to investing? I think talking about his attitude towards investing, when he came across this opportunity for bond arbitrage, he had such a skeptical cynical tint to him that he was very, very willing to believe if the evidence was shown, yeah, the government could mess up. This could absolutely be a possibility. Markets aren’t necessarily efficient. Not that he was talking about it in terms of efficient market hypothesis back in those days.
But again, I think the way it connects to investing, is what is your outlook on the efficiency of markets. I think for people that are raised to be skeptics from a young age and not just accept the status quo, you’re more likely to be comfortable with this idea of challenging the efficiency of markets. Listen, something like arbitrage, where it’s just clearcut inefficiency, some people will say, “Oh, the $100 bill on the ground can’t be real, because someone would have picked it up already.”
But I think that for investing, I think while you need to question yourself and your capabilities, if you can’t fathom that there’s going to be large inefficiencies in the market, you’re unlikely to find them in the first place. You got to have your eyes out. It’s typically the skeptics, the cynics, the people with Voltaire who write stuff that pisses people off that are of that type. I don’t want to compare Bill Ackman and Voltaire. But again, that type of person who might write something that pisses people off, those are often the people are there to find those inefficiencies.
Jake: Voltaire’s books are shorter than Ackman’s tweets. [chuckles]
Tobias: [laughs]
Ethan: I actually believe one of his tweets was about the length of his entire Candide novel.
[laughter]
Ethan: So, that’s not true. [chuckles]
Hume, Common Sense, and When to Follow Consensus
Tobias: I liked the approach you took to David Hume, and when to follow consensus and when to reject consensus, because really that’s the whole investment game.
Ethan: Absolutely. A really quick anecdote about Hume. He talked about how stupid stocks and bonds were. He said that if everybody in London’s securities trading district were at the bottom of the sea, it wouldn’t really matter. But he then, I think it was 10 years later, said he went and bought stocks himself. He invested some of the money from his book in stocks. I think, why do I say that? He had that initial skeptical attitude, but he took common sense and observed and said, “Wait, no, stocks and bonds, this capital markets actually have some positive impact.”
I think what he’s saying is that you want to be skeptical, but you got to avoid just saying the opposite of everything. We’ve all met those people that it’s not even contrarian investing. They say the opposite of what anybody else says. The reality is, a lot of the time, the market consensus is right. In investing, that’s not going to fly. You got to really pick and choose your battles. And the question is, how do you do that? How do you pick and choose your battles? And for Hume, the way you refine that skeptical spark is what he calls common sense.
Now, this is a really difficult thing to define. What is common sense? First of all, it’s definitely not that common, I’ll say that. But it’s this taking our initial skeptical stance, and using everyday experience and other people’s thoughts. It’s basically saying, “Okay, how can we take this same skepticism that would lead someone to just question everything and hone it into a way that is productive, that is going to actually do something?”
He says, “Basically, if you’re the type of person that just does the opposite of everything, it’s like, what’s the point? What are we doing here? If we just say the opposite of everything, okay, so we don’t exist. Nothing exists. What are we talking about?” But it’s interesting, because he’s framed, if there’s one skeptic. If you say the word skeptic and I’m the type of person, when I was younger, the name David Hume came to mind. He’s the most famous skeptic, but I think he might get shortchanged insofar as he wasn’t an uncontrolled skeptic. He actually believed in common sense.
Jake: So, would that be then Klarman’s contrarian streak, plus a calculator?
Ethan: Yeah. Again, this is why I’m so excited to be having these conversations. I would have loved to [laughs] have put that in the book. [Tobias laughs] That’s a great– Yes, exactly. I love this example. I talk about Michael Steinhardt. He’s somebody who really spoke to me in terms of investing because of his idea of variant perception, which is now very well known.
Steinhardt says, “Okay, not only do you have to be against consensus, not only do you have to be right. On top of that, you have to do all of these practical things setting yourself up in a position, so that it actually means enough for your portfolio when you get proven right to benefit from it, but also not so much that it wipes you out.” So, again, I think that Hume’s idea of, “Okay, we have skepticism humored with common sense, but then we also have–”
Common sense isn’t just enough. We need to have practical considerations about our portfolios and how we do things to set ourselves up for success. So, I think, yeah, Klarman, we need to have the calculator, but then we need to have all sorts of other tools. Maybe throw in Spinoza’s introspection, as you said, what was it with Taleb, did you introspect today? [Tobias laughs] But it’s this lattice board of different models.
Baudrillard, Abstraction, and Meme Stocks
Tobias: Jean Baudrillard never really been able to crack any of his work. How does his concept of abstraction apply to modern financial markets?
Ethan: So, just so you don’t feel bad, oh my God, if there was one philosopher who was tough to get through. He has some genius ideas. You go through 400 pages and you say, “Oh, my God, this was genius. Why didn’t you say this in two pages?” [chuckles] So, it’s not just you–
Tobias: That’s good. Tell me what he said.
Jake: Yeah.
Ethan: The most interesting thing that he says and what he’s known for, is this idea that we live in a simulation. This was what the creators of the movie The Matrix latched on to. But it can be difficult to describe it.
Let me give this example. Imagine that we’re living on, let’s say like– Imagine a map that’s life sized of the globe and that’s what we’re living on top of. He says, we’re living on top of layers of different meanings. So, for instance, he’ll say, what is language? It’s an abstraction of meaning. Let’s use finance. What is a dollar? Dollar is an abstraction of what used to be backed by the gold standard. And what is gold? Gold is a store of value of something that was rare, that people at some point gave some meaning to.
He’s basically saying that there’s all these different levels of meaning. Sometimes even though we like to think that like, “Okay, let’s say language reflects what’s going on in reality.” He’s saying it’s not just a passive reflection. He’s saying that those symbols, those abstractions can go on to have their own interactions and make for all sorts of things. I think the meme stock craze made his stuff really, really relevant.
I love this example. You have AMC about to go bankrupt a couple weeks or months after the COVID crisis. They have this meme stock following that has nothing to do with the state of their business. It’s literally just people trading around symbols, the symbols of their stocks, tweeting about it and whatnot. But what ended up happening was, they said, “Okay, well, great, you want to give us this valuation that makes no sense? Let’s raise equity.” They did raise equity, and it then caused S&P to upgrade their credit rating.
Tobias: [laughs]
Ethan: So, the reason I think that’s such an incredible example, is it shows this idea of a reflection, actually, not just being passive, but coming around and actually shaping the underlying reality. I love that. That’s really what Baudrillard is trying to say. He has it with all sorts of different things.
I’ll give you an example. We talked about language being an abstraction. Maybe what if there was a language that only had negative words, or had a ton of words for saying bad and negative, but only one word for saying good and positive? Would that influence the activity and the actual lives of the people? Because I think at the end of the day, what he’s saying is, “Especially in finance, we can’t just think that abstractions and symbols are passive. They’re often shaping the underlying reality.” Listen, I have to say, George Soros absolutely is on this as well. This is very similar to the idea of reflexivity.
Jake: That’s cool. Toby, are you frozen? Okay, well, we’ve lost our fearless leader. [laughs] Maybe I will do the veggies at this point since Toby’s frozen. Actually, I knew that we were having some philosophy on the show today, so I’ve chosen a bit of a philosophical idea to explore. Have you heard of this 511 Davida, which is an asteroid?
Ethan: I have not, but this sounds very interesting.
Davida, Asteroids, and the Philosophy of Value
Jake: All right. Well, let’s get into it. So, we’re going to take a journey today, not just into space, but into the very foundations of how we think about wealth, and value and these strange numbers that shape our imagination of the future.
So, at the center of this story is this giant rock basically that’s drifting quietly in an asteroid belt that’s called 511 Davida, D-A-V-I-D-A. At the surface of it, it seems very unremarkable. It’s about 185 miles across and it’s about 319 million miles away from us. So, it’s too far away and too small for us to see with the naked eye. It looks like just another rock amongst millions. And yet, there’s these been these headlines that have called it one of the most valuable objects in the entire solar system.
Now, why is that? It’s because if you take its estimated composition of nickel, iron, cobalt, gold, platinum, nitrogen and ammonia, and then you multiply it by today’s commodity prices, you arrive at this staggering number $27 quintillion. That’s not billions, not trillions, quintillions. That’s what the BlackRock’s managing, a couple quintillion at this point. [laughs]
Ethan: Somewhere around there.
Jake: Yeah. So, this is a figure that’s larger than the entire global economy by orders of magnitude. Okay. But here’s a paradox. On paper, Davida is the richest treasure humanity has ever found. And in practice, it’s worth practically nothing. In that contradiction, there’s a lesson about value, and it really ripples across philosophy, economics, finance.
So, let’s start with the abstraction. I feel like numbers have this strange magic to them. They take something vast and incomprehensible, and they bring it into something that we can relate to, which is dollars. And so, the calculation is very simple on this. The mass of the metals times the spot price equals the value of this rock that’s floating out in space.
Suddenly, this distant asteroid feels like it belongs on a spreadsheet next to market capitalization, or GDP or cash on the balance sheet at Berkshire. And in this sense, Davida feels liquid already. The wealth is there and it’s just like waiting to be unlocked. This abstraction has really collapsed huge distances and incredible engineering difficulties into a single denominator. But it’s a very brittle abstraction, because imagine for a moment that all of Davida’s platinum was somehow dumped into Earth’s markets. Prices would not stay where they are today. Obviously, they’d collapse. The commodity might become nearly worthless.
Ethan: It’s a great point.
Jake: Even worse than that, without massive infrastructure to transport it, refine it, distribute it, these metals, they’re really unusable. The calculation is formally correct, but it’s void of any practicality. So, the reality is, is that you can’t mine asteroids from a spreadsheet.
This isn’t unique to space. Economists talk about stranded assets, whether it’s oil or coal reserves that might be technically exist, but they can’t be tapped because of regulations or environmental limits or prohibitive costs. And so, from one angle, they’re worth trillions. From another, they’re worth zero. Intrinsic value really depends not on the resource itself, but our ability to realize it and make use of it.
So, when Davida was declared worth $27 quintillion, they’re speaking in a language of objective wealth, as though the metals themselves, simply by existing, hold this definite universal value. I think Austrian economists might laugh at this interpretation. So, for thinkers like Menger, or Baum, Bauer or Mises, values not in a physical property like a weight or a density. It doesn’t reside in molecules of nickel or platinum. It comes from human judgment that the materials are useful for helping them achieve some goal. This is the essence of subjective value.
So, goods don’t come with objective prices hidden inside them. Instead, prices emerge from human needs, from subjective choices, from supply meeting demand. So, through this lens, Davida’s metals are worthless until humans decide to get them. Value doesn’t really scale linearly with tonnage. It shifts with perception and context. Unfortunately, and you were getting at this, Ethan, like the actual job to be done of many of the things in our world today, the real function of them is to serve as gambling instruments, sports betting.
Ethan: Just ask Robinhood.
Jake: Right. There’s a lot of [Ethan laughs] degenerate behavior. Much of crypto. Many stocks serve their one primary purpose, and that is to be trading sardines, really, where one human attempts to get over on another in a decidedly zero-sum game.
And so, the other thing that Austrian economists give us on this is that this theory– Another lens to look through it is time preference. So, people prefer something today over the same good in the future. So, a loaf of bread today is worth more than a promise of a loaf a year from now. You see why this fortune collapses to near zero when viewed in the present, because a ton of nickel here and now is valuable, it can be used in batteries. A ton of nickel on an asteroid, hypothetically retrievable centuries away, basically discounts back to zero. So, at best, Davida represents an option value. That might be one way to think about it. There’s this very faint possibility that future technologies might unlock it.
If this all sounds a little bit abstract, we can bring it back down to Earth. Let’s think about startups with patents valued at a billion dollars. If no one ever buys or license or uses them, what is that billion dollars really worth? Or, venture capital portfolios, maybe they’re marked up by the last round prices. Numbers that are often generated on thin markets with relatively little real liquidity, on paper, the wealth looks enormous. Or, private equity firms may be trading assets back and forth at increasingly higher marks. In reality, it’s all notional until you get the actual liquidity event.
So, Davida is a cosmic version of this illusion. Spreadsheet optimism colliding with impractical reality. Getting close to the end here, so hang in there. This brings us to a story from Ben Graham, who obviously the father of value investing. He asked, “What would you pay for a corporation that never returned a cent to shareholders?” Imagine this glass box that has a money printer inside of it and its printing cash all the time, but it never pays a dividend. You can’t open the box, never buys back shares, never liquidates. “What would you pay for this frozen corporation?” is what he called it.
Well, Davida is a cosmic frozen corporation, basically. Probably literally too. Its balance sheet looks spectacular, quintillions of dollars in metal. But without a mechanism to distribute them, it’s inert. Both Davida and Graham’s frozen firm seduce us with their arithmetic, but the value is not in the things, it’s in the minds, in the access, in time, in flow. Wealth becomes real only when it moves into human hands and serving human ends.
So, is Davida the richest object in the solar system or the poorest? Both answers are actually true, depending on the framing. That’s the paradox we live with every day in finance, where numbers make us feel certain, but that certainty is usually an illusion. So, like Davida itself, value drifts in orbit, real only when pulled into the gravity of human use.
Tobias: That’s good stuff, JT. I think I lost my internet connectivity as you’re kicking off there.
Jake: That’s all right. We plowed forward.
Tobias: Good job.
Ethan: It’s so funny. Very quickly, I’ll say. First of all, I love bringing back Ben Graham. He would start every class or supposedly every value investing class by quoting Spinoza. So, that was actually one of my first things. Also, I love what you said about, if you flood the market, you assume the state say, “Oh, well, the current market value is going to stand.” I remember way back with the Sears thesis on their real estate and people were valuing this mall real estate, “Oh, my God. Well, if you take the going market rate for a vacant mall.” And I said, “Wait, but what if you throw hundreds of vacant mall anchor spots all at the same time? Is that going to affect the mark going price?”
So, it’s again, these second order effects, which I think you described beautifully, that it’s very easy for numbers to seduce you into not thinking of those second order effects when they actually mean a ton.
Net-Net Skepticism and Avoiding Scams
Tobias: You had a good line in here about net-net skepticism and how investors can profit from that, so given that I love net-nets.
Jake: And I cannot lie.
[laughter]
Tobias: Let’s go, Ethan. Net-net skepticism.
Ethan: So, I think net-net skepticism speaks to what I was saying earlier with Hume, that at the end of the day, net-net, what is your opinion on this thing? You can take a skeptical stance, but then you have to make all sorts of considerations, whether the liabilities or whatever it is. You have to account for all these things, these off-balance sheet things, so to say, what is the net-net value of your insight or of your investment thesis taking into account everything, not just the clear assets, cash liabilities. Is there some legal liability hanging around there? Is there some off balance sheet, pension, underfunded?
I think that for me, it’s your skepticism investing needs to be net of a lot of things. Just like, when you’re actually looking for the cash value of a cigar bud, you got a net-net, what are you actually getting. What’s the cash burn? It’s not always as simple as just looking at, all right, current assets minus current liabilities, and there it is. There’s often a lot more to be dealt with.
Tobias: That’s like overcoming your skepticism to buy something. But what about the reverse situation where you’ve got– What philosophical principles help you to not invest with somebody like Madoff? Like, how do you suspend the belief there?
Ethan: So, I specifically talked about–
Jake: Common sense.
Tobias: [laughs]
Ethan: Definitely common sense. It’s funny, because I actually saw– So, I had an example about Ken Langone, the co-founder of Home Depot. Basically, he had Madoff, and this is a true story, came to him a month before the collapse and basically told Ken Langone, “I’m going to give you this incredible deal. I’m not giving it to any of my other clients.” Langone tells this story. He says, he was just uncomfortable with the idea that, “Wait, if you’re screwing your existing clients, now what are you going to do to me? That’s not right. I don’t feel comfortable with not giving them the deal. These people have been with you for years and you’re just going to give this to me?”
Jake: There’s a saying that when a man marries his mistress, a new position opens up.
Tobias: [laughs]
Ethan: I love it. I love it. Basically, he saw that and I actually compared that to there’s a philosopher named Martin Buber who would seem to have nothing to do with markets, but he had this philosophy of the way we interact with the world, whether it be other people in the investment world, whether it be friends, family, whatever. We have two fundamental ways of relating. One is where the other person is a fundamentally worthy conscious being and the other where you treat somebody like an object.
He didn’t say this, I’m making this connection. I’m basically saying that if you treat other people in the market, for instance, the other side of the trade, as worthy beings, not just people to be dismissed like, “Oh, these are the idiots. This is the dumb money on the other side of the trade,” you’re going to be in a lot better position. I think that understanding that there actually is somebody, a real person on the other side, that was something that really helped Ken Langone specifically not invest in Madoff.
Now, I’m not going to say I would doubt Ken Langone’s ever heard of Martin Buber, but again, I think that that idea that combined with skepticism can be very potent for not getting scammed.
Jake: Apparently, there’s a saying in the MLB, the pros, that you know the other guy lives in a big house too.
Ethan: Right.
The Limits of Abstraction in Finance
Tobias: I like this idea of the limits of abstraction. How should investors apply that concept?
Ethan: Listen, I think that for me, there’s so many different types of abstractions in finance. Sometimes when you even go to derivatives, they take on ridiculous levels of abstraction. So, I talk about the example. In there that, leading up to the housing crisis in 2008, we had, okay, you have a mortgage, you have a– Let’s say someone bars to buy a house. Okay, you symbolize that with a mortgage note. Then some Wall Street bank bundles those together and you have a mortgage-backed security. And then, they bundled those together and then you had a CDO. And then, they bundled those together and they had a CDO squared. This actually did happen. There were only a couple of them. There were some CDO cubes.
Jake: My God.
Ethan: I did verify that.
Tobias: I think you could buy insurance on the CDO squared at least.
Ethan: Exactly. At that point, you just imagine you’re so detached from what’s underlying. Not to be crude but I imagine, you have a box inside of a box inside of a box and every single one of them is labeled gold. But then, you open it up and it’s just a pile of crap.
Tobias: [laughs]
Ethan: But you’re so far removed. So, I think that at the end of the day, the limits of abstraction, we need to come from both ends. I think that for me coming as a really Graham inspired deep value investor, I was always inclined to go straight bottom up all the time. But even that, that can have its drawbacks. I think you need to go from top down and bottom up to triangulate the reality of something, because nothing exists, as Jake was saying earlier, inside of a vacuum, the top-down dynamics do matter. But at the same time, if you’re forgetting the fundamental, you don’t know what’s inside that box at the end of the day.
So, abstraction is great and it’s used a lot in finance, but it’s not the be all end all. We need to balance our abstraction with what James would call the cash value of something. I think we were talking about this earlier. When he says cash value, he means what is the ultimate end use? What does it all come down to? Net-net, what does it all mean? Is there actually any use? Because it’s in opposite to what Jake was talking about with this theoretical value of something that has nothing to do with the pragmatic aspects of the reality.
So, I think yeah, the limits of abstraction, it can be really helpful. I even gave the example. Listen, all of computing, besides quantum computing, which is evolving. All computing is based on zeros and ones, abstracted to one language, abstracted to another level of computer language. So, abstraction is great. I’m not an abstraction hater. I just think that we need to respect the limits of abstraction.
Tobias: How do you apply these concepts in a practical context in a day-to-day investment strategy?
Ethan: I think it’s the hardest part. I think that one way that it really shows itself, is first of all, in my idea screening and the ways I go about screening for ideas. I think that one another way it shows up is when I’m questioning my own investment theses, like how do I go about cleansing myself, so to say, of my irrational views or my irrational emotions like Spinoza? How do I go about finding whether I’m being too skeptical or like–
Listen, there have been ideas where I could have hit home runs, but I was too skeptical of my own ideas. There’s that Bruce Berkowitz saying about how he tried to kill his own ideas. Once he found one he couldn’t kill, that was something that had merit to it. But I’m sure we’ve all had those examples, I certainly have, where I had a good investment idea that I was too aggressive on. I killed it when it shouldn’t have been killed.
So, there’s balance constantly thinking of these things, I think again in how I’m screening and the things that I’m skeptical of from a market standpoint in determining where I want to fish. I use a lot of these philosophical frameworks and I think also I use those philosophical frameworks when I’m inspecting my own ideas. Frankly, I think that they could be used all over the place in all sorts of contexts, but those are two specific ways on a daily basis that I see them rearing their head.
Jake: Ethan, what do you think about that bell curve meme, where you’ve got the dunce one side and the Jedi on the other and then the sweaty guy in the middle who’s– The dunce is like, “Amazon prime is great.” And then, the bell curve guys like, “Well, there’s 10 Amazon or AWS’ baked into the price of today’s [Tobias laughs] Amazon price.” And then, the Jedi is like, “Amazon prime is great.” [chuckles]
Ethan: I think that’s such an accurate reflection of reality. Sometimes overthinking doesn’t pay. I think especially when you look at the stuff– Listen, look at something like Nvidia. There are people who I would– Listen, not that I have such a nuanced understanding of Nvidia, but I would bet there are people that have made tons of money on Nvidia that do not have that deep of an [laughs] understanding of what they do and what they’re doing, why they’re able to earn the gross margins that they do. It’s tough.
Again, it’s something that’s worth philosophically reflecting on, right? What level of depth and skepticism pays? I think I’m trying to remember if it was Klarman who talks about like, there’s this 80% that you have to know, but beyond that, there’s diminishing returns in terms of gaining.
One of the problems I had coming up as an investor was I would hyper focus on things like say, “Oh, my God, I have a legal background, so I’m going to study this potential tort liability lawsuit that they have.” It only ended up affecting 1% of the company’s enterprise value. But I was so excited to be able to dig deeper than anyone else that I jump into it. But it didn’t really move the needle. So, I think we need to be cognizant of when we get in depth is it actually moving the needle. That’s something that I would say is an application.
Jake: I’ve wondered the thought experiment of if you took everyone who’s ever owned Berkshire over the last 60 years and you line them up in order of understanding of accounting, I think [Ethan laughs] you might end up with a reverse order as far as returns go.
Ethan: It’s a really good thought experiment. I don’t want to break it down to something so as is ignorance bliss.
Jake: Well, it’s like I trust Warren and I like him and seems like he’s doing things the right way, like do it. I don’t need accounting to trick myself into selling at the–
Ethan: Well, the book, 100 Baggers, which is a really interesting book, and you just look at the time it took for these people to reach those 100 times returns. You almost have to think every single time they had a doubt, they stayed with it, for whatever reason. Why that is, is it potentially a detriment to be too skeptical at certain standpoints. Maybe Hume’s knowledge comes in there saying, “Okay. Well, you got to use the common sense that Warren Buffett has the incentives in line and is an ethical person, has shown the ability to make above average investments.” Yeah, it’s tough. I’m a skeptical type of person. [chuckles] Just holding on blindly has never been my strong suit.
Montaigne and the Anxiety of Wealth
Tobias: What is the anxiety of having money, and how can philosophy help with it?
Jake: I’m staying poor, buddy. [chuckles]
Ethan: So, I must say I’m a big fan of the philosopher that this has to do with, and I wish he was talked about more. His name is Michel de Montaigne. He’s actually credited as being– Some people say he originated the essay format, which we take for granted. But anyway, awesome guy. He talked about basically the fact that he went through– Not that he grew up poor or anything, but he had money. And then, he, towards the end of his life, had more money, enough to go into his tower and write all day.
The way he actually made his final bit of money was he sold his judgeship. I’m not making this up. [Jake laughs] Back in France, there was an asset class of judgeships where basically you bought the ability to be a judge for a certain place and you would basically charge fees on the people that came and had cases in your court. Anyway, he was a judge.
Jake: We just rent that out in the US. We don’t sell it.
Ethan: Yeah. Can you imagine? But I would love to see what the returns were on that. I think somebody should do a study. So, anyway, he sold it and he went away to his castle and he started writing. One of the things that he wrote about was the fact that having all this money did not necessarily make him not just not happier, but even feel so much more secure. He felt like the more he had, the more things oftentimes he had to worry about. He talks about how when he’s traveling–
Jake: More money, more problems.
Ethan: Yeah, more money–
Tobias: [laughs]
Ethan: This was the original more money more problems guy. He talks about how not only is wealth not something that can make us feel fully good about ourselves, but he also even talks about how we can’t rely on it for relationships with other people as well. He gives the example of a father who tries to use his wealth to have a good relationship with his kids, and he talks about how that’s bound to fail.
I think that he basically says, at the end of the day, this is a weird way to say it, what’s the cash value of cash? At the end of the day, money can only go so far. Now, listen, to get you to a certain– Again, if someone’s below the poverty line or something like that, I totally understand. That’s different. There’s a certain level of wealth I’m talking about where you reach, where beyond that there’s diminishing returns on the happiness it returns.
Sometimes it can even get in the way of relationships. It can create all sorts of anxiety within yourself within regard to your relationships with other people. You’re worried about who’s robbing you here, who’s trying to screw me there. So, that’s something that Montaigne talked about. I thought it was interesting, because it’s not intuitive.
Listen, I would say it’s a great problem to have. Give me that problem, then I’ll deal with that anxiety. Be philanthropic and give it away. It’s not that wealth is a bad thing in and of itself, but I think he was trying to say, “Okay, most people are anxious, because their relationship with money is that they don’t have it. I have a lot of it, I still have a lot of angst.” He wrote about that and I thought that was a really, really fascinating thing that I wanted to talk about, because–
Listen, frankly, I’ve interacted with a few, very few, but a few billionaire investors. I have seen all sorts of different, let’s just say, affects or dispositions or views on life. What I mean by that is, happy, go lucky, thankful versus why am I wasting my time on you. [chuckles] So, I think it’s really interesting to see how money affects people. It’s not a cure all. It doesn’t necessarily make you a happier, better person.
Tobias: Hey, Ethan, we’re coming up on time here. If folks want to buy the book or get in touch with you, what are the best ways of doing that?
Ethan: Yeah. So, it’s available for pre order on Amazon. It should be also on Columbia Business School Publishing’s website. To get in touch with me, LinkedIn is definitely the best way. I am not the social media maven, but I’ve been building up my LinkedIn presence. So, please feel free to get in touch with me through LinkedIn. And that would be fantastic. I really, really appreciate you, guys, having me on. Jake and Tobias, this has really been just– It’s been a privilege for me.
Tobias: We’ve enjoyed having you on. The book is called The Investment Philosophers: Financial Lessons from the Great Thinkers by Ethan A. Everett through Columbia Business School. It’s available for pre-order on Amazon. I just checked it out today. Congratulations. It’s a really great book, Ethan. I had a lot of fun reading through it. JT, any final words?
Jake: Be good to each other.
Tobias: [laughs] All right, folks. We’ll see you next week. Same bat time, same bat channel. Peace. Thanks, Ethan.
[Transcript provided by SpeechDocs Podcast Transcription]
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