Steven D. Bleiberg of Epoch Investment Partners Inc. wrote a fascinating white paper (a portion of which ended up in Barron’s if you want the shorter version) and appeared on Grant’s podcast to discuss it as well.
While it gets finance-professional wonky (his topic is Modern Portfolio Theory), here is the broader takeaway: every idea starts with something in the real world. We can use language to describe it, and we can create tools and models to help us understand / predict / reproduce some aspect of that real world thing, BUT we also must remember to tether the use of our model back to the reality of the world we are operating in. If we don’t, we risk becoming untethered from reality itself.
An extreme example might be: a caveman on an island who sees a naturally occurring fire. He grunts to another caveman, and they carry a burning branch a safe distance away, where they build their own fire and cook a meal. Later, archaeologists discover their bones and the scene, and wonder if they built the fire to get the attention of primitive cavemen-airplane to rescue them from the island. The cavemen were tethered to reality, the archaeologists were not. Remember that reality has a temporal component too. Think that’s too extreme of an example? It may not be.
Bleiberg uses uses the temporal aspect of investor tools today compared to those available in 1968. He shows how it can be a mistake to apply our current knowledge to behaviors at other points in time (think about THAT). Most interesting to non-finance geeks, he gives examples of art and baseball to point at the dangers (or at least lack of any provided value) of when our models become untethered. These analogies are worth reading / hearing alone.
Art stirs an emotional connection in the viewer, so what happens when “modern art” doesn’t resonate with the average person anymore? Is there still a point, or are we in the realm of theoretical cavemen-airplane justifications?
Baseball generates lots of statistics but those statistics don’t win the games, the players do. So what happens when math starts to dictate everything a team does? Can it miss the point? Can we misread the actions of one stranded person on an island from another in time?
He closes the paper with a Bill James quote from an early 2018 EconTalk appearance that I’ll share here. That interview is worth revisiting as well. The quote perfectly captures an expert acknowledging the reality of staying tethered to reality, and the modern use of the language and methods he helped to formulate:
The most surprising thing was an understanding of how many people contribute to a championship. And it literally is impossible to explain to an outsider how many people it requires doing how many different jobs at a high level in order for a baseball team to win a World Championship. And, the number of streams—the number of little streams that feed into that river, is—it’s almost incalculable. You’d have to—if you take a single player—let’s say, Dustin Pedroia—you have to look at everybody who had a big influence on Dustin Pedroia, which may include your Minor League managers, your Minor League coaches; it may include the scouts—the first scout who focused on him and the other scouts who focused on him. But it also includes, you know, his father, and his high school coaches. And, all of those people had some impact on the Red Sox eventually winning World Championships in 2007 and 2013.
Bleiberg reminds us that even the most elegant models in the world are based on language to describe something complex in the real world. We can’t lose sight of that relationship.
Don’t get me wrong – we still need the language and the models, we’re social creatures who need to communicate after all, but we must stay tethered.