This quarter’s letter is a bit different to the norm. We often write analysis and observations internally. The piece below was written by Can Esenbel, our Investment Director and seasoned veteran of market panics over the past 25 years, in the teeth of the market mayhem of March. It was so arresting and relevant I decided it should form the basis of our letter to you this quarter. Can brings much-needed perspective to “our present situation: a global pandemic, economic dislocation on a scale never before experienced and fear and confusion in financial markets”. I really commend this piece to you as a thoughtful and thought-provoking alternative to knee-jerk reactions to the current crisis.
Wishing you and your loved ones the best of health,
Faisal Sheikh, Managing Director
9th April 2020
Fear and Destruction: Lessons from the Romans
In these times of seeming existential threat, it can feel like the world is a seething, brooding and dangerous place. The pain of markets in freefall compounds this mood. It is hard to not be affected. There is a danger that to assuage the pain we lose our balance and make poor decisions.
Some actions can be mostly benign like buying a year’s worth of toilet paper. Others are potentially more harmful. In the financial sphere we witness this as an overwhelming urge to take action and ‘solve’ the issue or end the discomfort. The easy action is to sell our investments and try to get back in when ‘things calm down’.
Instead of instinctive action in times of difficulty (and good times) we should reach for perspective.
The world has always been a dangerous place, risks have always abounded. Our current society is unusual in many ways: the safety and security we enjoy is unprecedented. Perhaps because of this we are less robust to new threats and the discomfort of uncertainty. Another factor is our online connectivity that leaves us proximate to any event, coupled with an echo chamber that magnifies our emotions. This aspect is a novel challenge for humanity, one that our brains are not built to handle with grace.
Hindsight
I enjoy history immensely: the grand sweep of civilisations, the ebb and flow in key moments; equally intriguing is the psychology of the individual experience, of imagining what it was like to be an individual in historical times – not just the great figures but the ordinary Joe and Jane experiencing historic events.
In studying the past we enjoy the benefits of hindsight; they didn’t.
We are living through an historical moment now. It feels glib to say this as every moment is lived history but my sense is that even outside the coronavirus threat most feel a shift in the nature of the systems and the direction of our society. It is unclear whether we are heading in a good direction and this is destabilising.
COVID-19 plugs directly into this. The virus is our fear of change and the unknown on steroids.
The Romans’ “Covid-19” moment
Recently I was reading about the Second Punic War. In 218 BCE the Carthaginian General Hannibal Barca marched his armies over the Alps (elephants and all) and invaded Italy. Over the course of a whirlwind two years he repeatedly defeated the Romans. Some of the defeats such as at Lake Trasimene were on a scale Rome had never before experienced. For a society based on the admiration of masculine military strength it was both a real and terrible human loss and a significant ego blow.
Therefore, when on a blistering August day in 216 BCE the two foes met at Cannae in the south east of Italy, the Romans were sure that the natural order would be restored. They had assembled eight legions, the largest Roman force to date and a far larger army than the opposing Carthaginians. This was their moment; Hannibal would be put back in his place.
It was not to be. The Romans experienced a defeat on a scale we can barely comprehend – in one day they suffered at least 40,000 dead (out of an army of 86,000). Approximately 1 in 10 adult males in Rome were killed in just one day.
Perspective
Take a moment to consider this number and try to scale it to our present world. How would it have felt to be in Rome at that moment? Not only was there a near certainty that someone very close to you was killed or missing (probably quite a few people); amid that grief you could be pretty sure your own destruction was imminent.
If I had told this story six months ago it would be nearly impossible for us to even slightly embody that feeling, but right now we can experience a touch of what it was like.
Moreover, that moment in Rome is but one of the multitude of moments in which ordinary humans have faced overwhelming threat over our history; including the present day all over the globe in places such as Syria. I marvel at how people endure, live on and even thrive in such trying circumstances. Yet they do.
Primo Levi, writing about his time in Auschwitz, put it so:
“Sooner or later in life everyone discovers that perfect happiness is unrealizable, but there are few who pause to consider the antithesis: that perfect unhappiness is equally unattainable.”
Back in 216 BCE the road to Rome was open, their armies destroyed, their Italian allies on the verge of mass revolt and the city of Rome in panic.
Victory for Hannibal seemed inevitable.
Hannibal refused to march on Rome, a decision that is still a matter of heated debate. His cavalry commander Maharbal reputedly chastised him with these timeless words (according to Livy):
"No one man has been blessed with all God's gifts. You, Hannibal, know how to gain a victory; you do not know how to use it.”
Fast forward a decade and a half to c. 200 BCE and the world was much changed. Hannibal defeated, the Romans victorious. Who would have predicted this other than through blind faith 15 years earlier?
History is not only a reminder that things are always changing (at least on the surface); it also reminds us how murky the future will be. From our current vantage point what will happen may feel obvious but the truth is that we are mostly blind. We may know the direction but rarely the depth and path - there is always action then reaction and nothing is static. This is the nature of complex systems.
Similarly it is a reminder that rarely is this time different or even particularly unique. It is our lack of perspective and insight that makes it feel so.
The recounting of the past also reminds us that timeframes and perspective matter. The Romans were on the brink of destruction but when we think of them, it is as a success, this war just an episode in that history. Had the Romans lost, they would be a footnote in the rise of another empire. What do we know of the Samnites, for instance?
Decision-making in a crisis
Which brings us to our present situation: a global pandemic, economic dislocation on a scale never before experienced, and fear and confusion in financial markets.
It is easy to make comfortable conclusions about what will happen from our beliefs and assumptions. We have a camp screaming about tail risk and exponential contagion. Other camps give us the stats on other diseases or ’flu in general and tell us this is a storm in a teacup, that the cure may be worse than the disease.
Who will be right?
I do not know. And to be blunt, neither does anyone else.
This is an adaptive system: it is too murky and reflexive to extrapolate tidy outcomes. Our perceptions and actions change the system. This is true before we factor in confounding elements that we cannot even conceptualise right now.
We must still make decisions into this unknown space. How do we do this? We try and consider the underlying structure of the system over the surface level events. In this case, the robustness of the structures of society and skills of humankind.
This is our belief in the ability of humans to adapt, develop and progress: the skill of the scientific and medical community to manage this outbreak; in companies to adjust their operations to mitigate the shortfall in demand; in governments to take protective action to their citizens and businesses; and for citizens to contribute positively to the protection and progress of this society.
Having this assessment it is logical to look through this uncertainty and likely dislocation and plan for a world that continues to develop over the next years and decades. If your beliefs and assessment are different, then it makes sense to act in concert with those.
In both cases we need to act with skill, Rome did not triumph through belief alone. Part of this is to accept we could be wrong. Our aim is to protect and build, not to be clever or showcase our intellect.
Finally we must be logical and consistent with our decisions. That does not mean having to be perfectly right all the time. It is fine to be consistent and suboptimal. There is no value in being right and gaining no benefit from it – to be like Hannibal and win a victory yet not know how to use it.
- CKE
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