Investing and the Art of Metaphorical Thinking

My momma always said, “Life is like a box of chocolates. You never know what you’re gonna get.” Mama always had a way of explaining things so I could understand them. ~ Forrest Gump

About a century ago, when the first automobile was introduced on the roads, most people referred to it as “horseless carriages”. Not only that, when the first set of cars came out, people called them “iron horses.”

Amusing, right? How limited people’s imagination was!

But today when the first lot of autonomous vehicles are getting ready for the roads, most people like to call them driverless cars. I am sure our future generation will be amused at our choice of words.

“Driverless? What driverless?” They would probably chuckle at the unimaginative terminology of their previous generation.

But that’s how a human mind works. The seeds of most revolutionary ideas are sown in those moments of unimaginative thoughts, like horseless carriages and driverless cars.

Driverless cars are as complicated and unbelievable to us as horseless carriages were to our great grandparents. And for a human mind, the best way to learn a complex idea is to find it living inside something else it already understands.

Famous author Napoleon Hill said, “Anything that a human mind can conceive and believe, it can achieve.” But to conceive it, the mind has to first imagine it. And how does mind imagine new things?

By drawing an analogy. “This,” is like, “that.”

It’s when we find metaphors, to explain something which doesn’t exist in our current vocabulary, we break the mental barrier and create the possibility of discovering something new.

Roger Von Oech, in his wonderfully useful Creative Whack Pack, has a card which reminds –

A powerful way to join ideas together is to make a metaphor. You can do this simply by recognizing similarities between unrelated phenomena. Indeed, this is how our thinking grows: we understand the unfamiliar by comparing it to what we know…Metaphors can also give us a fresh insight into a problem. For example, here are three metaphors for life. (1) Life is like a jigsaw puzzle but you don’t have the picture on the front of the box to use as a guide. Sometimes, you’re not even sure if you have all the pieces. (2) Life is like a bagel. It’s delicious when it’s fresh and warm, but often it’s just hard. The hole in the middle is its great mystery, and yet it wouldn’t be a bagel without it. (3) Life is like a poker game. You deal or are dealt to. You bet, check, bluff, and raise. You learn from those you play with. Sometimes you win with a pair or lose with a full house. But whatever happens, it’s best to keep shuffling along.

Forrest Gump is my all time favourite movie. Mr. Gump pictured the life as a ‘Box of Chocolate’. That was his metaphor. He lived his life, one day at a time, accepting what the Box of Chocolate served him everyday.

So what makes metaphors so powerful?

Human brain constitutes only 2 percent of body weight but it consumes 25 percent of the total energy required by the body. This means our brain is an energy-hogger. When homo sapiens lived as a hunter-gatherer in the African Savanna, food supply was very unpredictable. So evolution wired the human brain to conserve energy. Conserving energy means not letting the brain do unnecessary work. Exposing our brains to something unfamiliar results in an increased load on its processor (another metaphor). Whereas digesting familiar and known information requires very minimal processing power. That’s why human brain likes to deal with familiar things.

Put simply, left to its own, the human brain will avoid dealing with new information.

Essentially, metaphors are things we already know. Our brain understands those things very well and doesn’t need any extra CPU cycles to process any information related to them. In other words, metaphors allow us to bridge the chasm between familiar and unfamiliar and they do it without spooking the brain.

When it comes to investing, the greatest metaphor was introduced by none other than Benjamin Graham. In his investment classic, The Intelligent Investor, he created an imaginary person called ‘Mr. Market’.

By assigning a human character, Graham made it possible to model the complicated and erratic movements of the stock market to mood swings of a psychotic human being. A super-metaphor if you will.

Warren Buffett perhaps learned the power of metaphor from Graham, his mentor. So when Buffett coined the metaphor ‘moat’, it not just made the idea of durable competitive advantage (which sounds like a management jargon) simpler but clearer for lay people (which is most of us, most of the time).

For that matter, when Charlie Munger talks about the “man with the hammer” to explain the idea of multidisciplinary thinking, the vividness of the metaphor drives the point straight to the home. I don’t know if Charlie’s metaphor is original but it surely is very effective.

In fact, if you can’t explain your thoughts to lay people i.e., in simple language, chances are that you aren’t clear about those insights either. So the practice of using metaphors is an exercise to bring more clarity inside your head.

‘Margin of Safety’ is another important concept that every value investor should know and practice. And how did Buffett tackle the challenge of explaining this to his audience? He wrote –

When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing.

I am sure, after looking at this image, you can never forget what ‘margin of safety’ means in investing.

When you think about investing, the metaphors that you use have a strong influence on your investing style. Do you see the stock market as a place to get rich quickly? Like a ‘Lottery’. Or do you visualize investing as a ‘Compounding Machine’ that should be run slowly and steadily?

Einstein called ‘compounding’ the eighth wonder of the world. Well, that was Einstein’s metaphor for describing the power of compounding. In my mind, when I think about compounding, I love the metaphor of the Chinese bamboo tree.

When you sow the seeds of Chinese bamboo tree, nothing happens for first few years. No sign of the plant. The twist in the tale comes sometime during the fifth year when one fine day a tiny bamboo sprout breaks through the ground. And then in next six weeks that puny sapling shoots up in the sky, not stopping until it achieves a dizzying height of ninety feet!

That’s how compounding works. In the initial few years, there’s no visible change in the principal amount but after that it increases rapidly. In the initial years, like a Chinese bamboo tree, compounding tests your patience and in the later years, your bewilderment.

For that matter, the two most commonly used metaphors in the share market, bulls and bears, have become so natural for investors that they don’t even think about them as metaphors.

Now, how else can you make use of metaphors while investing? Think of the Fukushima nuclear incident in March 2011. The emergency power generators kept the cooling pumps working beautifully — but only until a major earthquake caused a tsunami that disabled the power supply and cooling of three reactors, causing the nuclear accident. So, a nuclear plant that is built with the highest margin of safety can sometimes be violated. In the same way, if you pay a high price for even the best of businesses, a sudden, major change in the business environment can cause serious problems.

Remember Taleb’s idea of antifragile? These are things that benefit from shocks; they thrive and grow when exposed to volatility, randomness, obstacles, disorder, unexpected events, change, and stressors. Taleb also says that “Nature likes to overinsure itself.”

In the same way, you as a long term investor should focus first on avoiding devastating losses because the biggest problem with fragility is that it causes irreversible damages. By this logic, avoid bad businesses that can break easily – stuff like real estate that’s anyways broken, or commodities where you are never sure what would come next.

You see, so far, I have been trying to convince you that metaphors are good. They help you understand complex ideas. But there’s another side to the coin (Sheesh…another metaphor!). Metaphors can be misused, rather abused, too. Here’s an example of talk that you would hear quite frequently on financial news –

Markets may be “nervous” or “jittery”, can suffer from “vertigo” or can be “clawing their way back”. Or they may simply be “directionless” and may “drift” idly.

Pretty vivid, right? In a few seconds, the sentence took an inanimate object like stock market movement and metaphor-ed (if there is such a word) into half a dozen human emotions.

Financial media is paid to sensationalize the facts to make sure they get your attention and keep your eyes glued to their metaphors. It doesn’t matter if their metaphors make any logical sense. Their purpose is to trigger the most basic human emotions i.e., greed, fear, and envy. And that’s why metaphors can be very dangerous too.

In spite of this flip side, there’s no question that metaphors are very useful tools for thinking and communicating. If you want to be creative, find metaphors to join ideas together.

A wonderful harmony is created, writes Oech, “when we join together the seemingly unconnected.”

The bad news is that it’s not easy to find good metaphors. It’s hard. It’s very hard. That’s why an amateur learns things by memorizing and an expert looks for metaphors. But the good news is that, like any other skill, it can be practiced. The skill for finding good metaphors can be learnt.

When you see a story, an example, a wonderment, take a moment to look for the metaphor inside.

So what metaphors are you creating?