Other beliefs are squishier. You can believe in something but know it has exceptions, qualifications, and headwinds. I believe people are inherently good. One of the strangest stories in history is the Christmas truce in World War I. British and German soldiers paused combat for a day, came out of their trenches, shook hands with their sworn enemy, shared a cigarette, and played a friendly game of soccer.
Then they went back to killing each other the next day. People want to be good. Sharing a cigarette and playing soccer may be natural, because most people are naturally good.
But toss in a few incentives and slaughter can be flipped on in an instant. And we love that narrative, because people are actually good. The beautiful story incentives tell — that you can have your cake and eat it too — has caused good people to embrace and defend ideas that range from goofy to disastrous. The famous marshmallow test — where kids patient enough to forgo one marshmallow now in exchange for two later ended up doing better in life — had an overlooked and relevant takeaway.
The patient kids did not exercise self-control as we assume. They distracted themselves, playing games, singing songs, and hiding under tables. Most of the kids who sat there staring at the single marshmallow ate it.
The temptation was too much. Incentives should be treated the same. Just be careful with the incentives you show them in the first place. I believe past performance is not an indicator of future returns. Markets change, history surprises, and performance is cyclical. Why has the United States been an economic success?
Part is an entrepreneurial culture, which can change overnight in a way that offers no assurance of future success. But part is more enduring. But if you know the history of countries who are just as capable as Americans but have been ravaged by battle every few generations you know how devastating the after-effects of war are, in both infrastructure and culture.
Things could change, of course. But it is reasonable to assume America will indefinitely have an economic advantage over other nations because of its structural advantages in geography and natural resources? To me it is at least as reasonable as predicting a nation has an advantage because of, say, a good educational system. This is true in the other direction. Economists Ken Rogoff and Carmen Reinhart showed in their book This Time Is Different that the best indicator that a country will default on its debt is not the level of debt or economic growth.
Countries with a history of debt find it more politically palatable to default again, and vice versa. The same idea works for industries. An industry with terrible historic returns — mining, for example — is likely to maintain that poor performance because the historical record reflects a structural truth.
In this case, mining is a brutal combination of uncertainty and capital intensity. Same for asset classes. Stocks have performed better than other assets historically.
The opposite — that success is cyclical because it promotes laziness at one end and hunger at the other — is one of my firm beliefs. I believe companies can create amazing work cultures with intentional perks, autonomy, transparency, and mission. Free kombucha and casual dress codes are no match for layoffs, losing money, and watching your stock price plunge against competitors.
Every company known for a great culture is winning. And every company struggling with culture is losing. There are few exceptions to this rule. Which came first, the culture or the performance? But the causation is stronger in the other direction. Not the other way around. I believe culture is both important and can be created. But I only believe it a little, because there are limits. The World Series champions who stay at Motel 6 will be in a better mood than the losers who stay at the Four Seasons.
Ideas That Changed My Life. The Laws of Investing.