Saturday Serendipity
Quote, Mental Model, Interesting find.
Hi there!
Today’s post is a special one.
Reading time: About 6 minutes.
Quote
“It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents. This is a great mental discipline.” ~ Charlie Munger
Mental Model
Chaos Theory
Chaos theory is a concept from mathematics that we do not know a lot about but we should. Not a lot of people write about this but it is a very important concept and it is important to have in your latticework.
“You may not be interested in Chaos theory but Chaos theory is interested in you.” ~ Peter Kauffman
Chaos theory applies to all complex systems. They start out like a normal system initially being sensitive to conditions. Then they tend to get a push or what we call Black Swan events. You can see the spike in the graph above. The problem is with the timing of this push. You can never predict a push that causes chaos all you should know is that a Black Swan event is inevitable at some point. All complex systems are subject to feedback loops causing reciprocation and ripple effects of these pushes. And this loop is never ending. This loop is never ending as it can go on forever so what we truly do know is that we have no possible way of knowing what is truly going to happen.
So when I speak about complex systems the one thing that comes to mind easily is the stock market. The entire world itself is a very complex system. You see there are small pushes in just about everything which cause ripple effects and feedback loops that are unimaginable.
In Football
This might sound crazy but there is one person who we can hold responsible for Argentina winning the World Cup. This person would be Neal Maupay. In a game that he played against Arsenal in the 2020 season he injured the Arsenal goalkeeper Bernd Leno. Because of this Emi Martinez got to play for Arsenal and he helped them win the Fa Cup. He impressed people. He joined Aston Villa and became a starter for them. Then soon he gets called up to play for his country. He becomes solidified in the team and helps them win the Copa Del Rey a trophy they wanted to win for a long long time. Emi Martinez then went on to keep for Argentina in the World Cup and helped them win it. He saved penalties and even made a last minute save to keep them in the game.
These chain of events started with a push the initial start of the chaos theory. That was Neal Maupay injuring Bernd Leno. After that the feedback loops and ripple effects took over.
Nobody could have told you in 2020 that Emi Martinez would play for Argentina in the World Cup and win it in 2023. Leave that no one would tell you that he was going to win the golden glove and become one of the best if not the best goalkeeper currently.
Why can nobody predict these things?
Well that’s what chaos theory teaches us. The impossible is inevitable and one thing is for sure nobody can predict when it will happen nor can anyone predict how long it will go on for.
In Life
In a similar way to Maupay but a much bigger reaction there is one person who has had the most impact to our lives in the past century. Any guesses on who that person is?
It is Gavrilo Princip. The person who murdered the Arch Duke Ferdinand caused WW1 which caused WW2. Which led to a lot more of Cold wars,etc. But in the end it has shaped how the world is now.
“Separating proximate from ultimate causations frequently leads to better understandings of the events and systems concerned”.
—Neil Greenberg
In Investing
Chaos theory applies to Investing. (as most things do if you try and think of it). The stock market is a very complex structure. You have a lot of people trading a lot of companies at the same time. In a structure like this it is inevitable for there to be a huge push (Black Swan event). As investors everyone knows that. There are many bubbles that form and they eventually pop.
Like Chaos theory where you cannot predict when the inevitable is going to happen. Investing is the same. You cannot predict what the Stock Market is going to do tomorrow or day after. It is impossible.
The Antidote
Guess what though Charlie Munger does have a solution for all of us :
“We try and operate so that it wouldn’t
be too awful for us if something really extreme happened—like interest rates at 1% or at 20%. We try to arrange our affairs so that no matter what happens we’ll never have to go back to ‘go’”.—Charlie Munger
You have to expect the impossible. The phrase Keep the Grass Wet so as to prevent a fire from catching is perfectly fitting as well. We need to understand one thing properly. The only thing that we do control in chaos theory is the initial starting point. We just have to make sure that the spring does not go negatively but goes positively.
You have to do two things:
Get a margin of safety as Munger says in his quote you have to be prepared for situations where the interests rates could be 20% also because history has taught us that the unthinkable happens all the time.
In life we need to make sure to have good relationships with people and a positive impact on them. When the time comes the positive impacts tend to be the main thing. There have to be trustworthy relationships.
Conclusion
Now as Munger says there is never only one right answer. Chaos theory is important to know about and it can help us explain a lot of things. But I have mentioned a lot of mental models that have helped me explain Chaos theory and that tells me that everything has multiple reasons. Which is why we need a latticework that can be applied when we do face problems.
Interesting Find
Thats it for this week!
Have a great weekend!