Human beings are wired to hold self-serving beliefs about the world regardless of the accuracy of those views. While it is easy to see these tendencies in other people (e.g. flat earthers, Donald Trump’s anti-vaccination views, conspiracy theories), all human beings are wired to have blindspots when it comes to the inaccuracy of their own views. Why? Ideologies are often arbitrary but they serve social and political purposes. Nelson Mandela was once on US terrorism watchlists; nowadays, he is celebrated as a freedom fighter and human rights activist. Clearly, it’s not possible for Nelson Mandela to be both a terrorist and a hero. Yet, society conveniently ignores conflicting evidence when it distorts history to fit a particular political agenda. My theory is this: human beings participate in the mainstream ideology when it benefits them. When it doesn’t, social outcasts and misfits band together to form their own alternative ideology that benefits them. In both scenarios, the ability to ignore, downplay, and dismiss conflicting evidence lessens the mental burden of upholding a particular ideology.
What we can learn from flat earth debates
Let’s take a look at debates between flat earthers and liberally-minded pro-science individuals like Neil deGrasse Tyson. In a StarTalk episode on Youtube, Tyson suggests that there was a flat earth contingent in Christopher Columbus’ day because ‘experimental checking (of any idea you might have)’ wasn’t popular until Galileo and Francis Bacon. Unfortunately, Tyson’s historical narrative conflicts with the current consensus academic view on Columbus (CSM, Wikipedia). Educated people in Columbus’ day knew that the Earth was round; there was no flat earther contingent. However, it wasn’t clear back then as to how big the earth actually was. Columbus had unusual (crackpot) views on the earth being smaller than it actually is. Strangely enough, Columbus eventually argued that the earth was pear-shaped (see CSM)- he was a pear earther!
Like his fellow human beings, Neil Tyson sculpts information to fit into the narratives and ideologies in his head. His inaccurate historical narrative weaves popular misconceptions about Columbus with other historical narratives. His version of historical events (with references to Francis Bacon and Galileo) demonstrates the depth of his knowledge. This has a social and economic purpose for Tyson- he has a reputation as a science educator who “knows” what he’s talking about because he’s knowledgeable about science and the history of science.
But what about the flat earthers? Why do they hold the beliefs that they do? Flat earthers are very much self-aware that a round earth is the consensus view and that society looks down on flat earthers as stupid and uneducated. An ABC News profile on a flat earth convention has a soundbite from a flat earther who says that she isn’t really ‘out of the closet‘ yet. The flat earther is paralleling society’s historically negative views towards homosexuals with flat earth theory, saying that society views flat earthers negatively and that flat earthers are encouraged to keep their views private. She may or may not be referencing society’s changing views towards homosexuality and its growing acceptance, suggesting that flat earth theories will someday become acceptable to mainstream society. Regardless, I think what’s going on with flat earth theorists is that they identify themselves as part of a subculture or counter-culture that doesn’t buy into mainstream dogma.
The social utility of non-consensus views
One pattern that I see among flat earthers is that they aren’t well-spoken. They use informal conversational vocabulary rather than sophisticated vocabulary and big words. Because mainstream society associates vocabulary with intelligence, flat earthers in general come across as unintelligent people. But put yourself in the shoes of somebody that society considers to be “dumb”: if society considers you to be dumb anyways, what’s the point of agreeing with consensus scientific views? It’s pointless.
People gravitate towards sub-cultures because mainstream culture does not benefit them socially. For example, male teenagers who are not athletically gifted will not benefit from pretending to be a jock; they will not make the school’s sports teams and will not be popular. The athletically inept would be better off finding another social construct that would benefit them, e.g. nerd culture, tattoo culture, goths, etc. It is beneficial for misfits and social outcasts to band together. Similarly, it makes sense for seemingly-unintelligent people to band together into their own subculture. There is a shared bond and kinship among people who believe in conspiracy theories.
I also disagree with the social stereotype that flat earthers are really dumb people. Many of them are incredibly successful and talented.
- NBA star Kyrie Irving signed a $90M contract extension with the Cavaliers. He’s pretty good at basketball.
- Eddie Bravo and Kron Gracie are notable figures in the world of jiu jitsu. (Here is a Youtube video of their flat earth views.)
- B.o.B. is a popular musician.
Having non-consensus views is part of being human and certainly shouldn’t be confused with intelligence. People with crackpot views are often very smart (even if they’re wrong).
The utility of inaccurate views
From a political perspective, it’s easy to imagine why it makes sense for somebody to be overly confident in their beliefs. Because few people have the time to sort every truth from fiction, human beings have to rely on shortcuts: relying on authorities, siding with the more confident party, etc. Another shortcut is to side with beliefs that have a social utility. This is commonly seen in scientism, or the ideology of science. Many people want to be seen as pro-science and pro-technology because they believe that it makes them look smarter.
Ideologies and narratives relevant to investing
Scientism: Scientism is the worship of science-ey sounding beliefs and concepts regardless of the experimental evidence supporting them (if any). As discussed in my blog post on psychiatry, academic papers can be intentionally misleading. Many drugs are still being sold despite causing more harm than good. Faith in peer-reviewed journals and supposedly placebo-controlled double-blind trials is often misguided as drug approval isn’t always contingent on scientific evidence. For example, randomized controlled trials have great difficulty in proving that statins and blood thinners reduce mortality since mortality is so infrequent. Approval is sometimes based on lowering theoretical but unproven risk factors rather than patient outcomes. Post-approval, economic success of a drug can be influenced by kickbacks (speaking fees), off-label drug usage unsupported by drug trials, and misleading medical advice directed at doctors (resulting in the over-prescription of antibiotics, antidepressants, and statins).
In the world of mining, technical reports are a scam. Scientism would lead you astray because you might blindly assume that engineering and mineral estimates are based on scientific principles- they are but uncertainty is involved. Technical reports can be highly subjective and therefore prone to abuse because of the uncertainty. However… money corrupts, regulators are mostly useless, and charlatan stock promoters are good at hiring dishonest engineers (stock promoters also pressure engineers into behaving dishonestly). I can’t recall a single technical report where the projections have turned out to be correct.
Journalists writing about technology: Blockchain, faerie-dust-as-a-service, self-driving cars, augmented reality, or the “hot new thing” are all examples of an ideological echo chamber. While some hot new technologies have merits, the supposed benefits of a hot new technology and its disruptive effects on society rarely live up to the hype. Many ideas don’t survive the real world.
Deep value investing hasn’t worked in the past several years. Faith in deep value investing may be misguided as its underperformance isn’t ‘supposed’ to last several years.
Skill versus luck: The majority of famous investors with high returns are more often than not lucky rather than skilled. Among investors with a non-diversified (e.g. focused) portfolio and high sector concentration, some of them will have incredible returns thanks to their volatile portfolio. The lucky ones are over-represented in the media and in books.
Hard work, merit and being intelligent: Usually hard work on a single stock does not translate into investment returns as the luck factor dominates. Investors tend to be overconfident in their ability to predict the future when they have put in a lot of work on a stock.
Healthcare ideologies vary from country to country but are often wrong. Americans erroneously view their private health insurance market as an example of free markets. Canadians inaccurately see their healthcare system as single payer. However, the prescription drug aspect of Canadian healthcare is close to a free market (most Canadians pay for prescription drugs out of pocket) while the American system isn’t (the government bullies employers into providing health insurance benefits). In practice, prescription drugs are much cheaper in Canada than the US. The American system is worse than a free market system, contrary to what most Americans would like to believe.
The bigger picture is that politics and ideology shape how profitable a particular healthcare market is. The American healthcare market is clearly more profitable than those in other equally developed countries. United Therapeutics (UTHR) derived 89% of its revenues from the United States according to its latest 10-K even though the US only accounts for a small portion of the world’s developed country population. Some drugs are available only in the US because it is the most profitable market in the world. Certainly, ideology and politics have played a large role as to why the US healthcare market has been so unusually broken and profitable. I believe that American health insurance stocks are worth studying because they have performed quite well over the past two decades.
Professional investors are often overconfident in their abilities and have no idea what they’re doing, contrary to what society teaches us about professionals. Investing professionals rarely generate value despite formal certification (e.g. CFA), a university degree, or an Ivy League MBA.
Do CEOs know what they’re doing? According to left-wing ideologies, capitalists are evil but also really smart at exploiting society to make money. According to right-wing ideologies, free markets are the best thing since sliced bread; private enterprise is efficient and therefore CEOs must be good at running companies efficiently. In reality, I don’t think that reality matches either world view. Most CEOs aren’t good at making money for shareholders. In the junior mining world, the CEO that creates value for shareholders is the exception rather than the rule. When it comes to short selling, short sellers know that there are plenty of dumb rich people who invest in frauds like AOL, China Medical, Jos A Bank, etc. etc.
Unethical companies and industries sometimes outperform the market by a large margin. For example, tobacco stocks have performed quite well and are the main reason why the Nifty Fifty have outperformed the S&P 500. While I personally would like to believe in karma and would like to see governments eventually step in to regulate away unethical behaviour, it is often the case that ethics and stock performance are unrelated.
The one percent and other criticisms of the wealthy: left-wing ideologies have a tendency to attack those with economic status. For example, regulators have gone after tech giants like Google and Facebook. The public criticism against those companies is largely along the lines of “they are making lots of money, therefore they must be doing something evil”. The real world is inconsistent with that ideology. The most successful musicians, actors, and athletes clearly did not become wealthy from unethical behaviour (with the exception of performance-enhancing drugs in athletes) or the exploitation of the working class.
My own personal blind spots
I’ve certainly experienced my share of the Dunning-Kruger effect – the cognitive bias in which people with little experience are quite overconfident in their abilities. My biggest mistake in reading textbooks on mineral exploration and mine exploration is that I developed the mistaken belief that I could spot deposits that may turn into profitable mines. In reality, mine deposits are black boxes to public investors because technical report authors intentionally withhold key technical data. Therefore, due diligence isn’t possible. Scientism is partly to blame- my faith in mining professionals was misplaced.
In my investing history, I have not invested in a single deposit that has turned into a profitable mine. Northfield Capital / Canada Lithium, Queenston Mining, Noront, KWG Resources, and Altius Minerals (Alderon + prospect generation) have all turned out to be busts. To be fair, pure play mineral exploration stocks in Canada+US have been an absolute disaster. Nonetheless, I underestimated the political aspects of the mining and stock promotion industries. Technical reports are a joke and so are most of the parties buying deposits from juniors. Publicly-traded companies regularly buy uneconomic deposits without performing meaningful due diligence. This goes against the widespread belief that CEOS and professional investment analysts know what they’re doing. I understand that some people find my opinion on junior mining to be off-putting… “surely it can’t be that bad”. But my experience has been that I was never cynical enough about junior mining. Sometimes extreme viewpoints turn out to be correct.
At the end of the day, the way out of the quagmire takes time and research. Spend the time to question and verify commonly-held beliefs that are highly relevant to your portfolio. While having wildly non-consensus views may be highly uncomfortable, you can simply keep those views to yourself. Investing does not require you to come out of the closet and the stock market won’t care.
*Disclosure: Long Google, Facebook, and US health insurers. I have a token/sentimental position in Northfield Capital. I do not own Canada Lithium (RB Energy), Queenston Mining or the Osisko shares it turned into, Noront, KWG, or Altius Minerals.