Ben Stokes, luck and Brexit

“The best lack all conviction, while the worst

Are full of passionate intensity” (W.B. Yeats)

Another Headingley miracle

For the second time this summer, the cricket world has been left slack-jawed and dribbling at the exploits of Ben Stokes. Commentators have marvelled at his breath-taking skill, determination and clear headedness (when all around were losing theirs). Many have also highlighted that this is one of the hardest-working professionals on the planet.

In such a context, it seems churlish to debate the role of luck in his match-winning innings of 135 runs (particularly as an avid England cricket fan who suffered the 1990s). However, there is much that the investors among us can glean from debate about the roles of luck and skill.

The world needs heroes and villains

Imagine a scenario where Australian opener and pantomime villain, David Warner, held the catch Stokes offered while on 34. England lose the Ashes (for the uninitiated, this is a regular grudge match between Australia and England that dates back to the late 19th century). The Australians are lauded for their temperament, poise and skill, rather than lambasted for their lack of it. An Augean clean out of England’s test cricket personnel is called for by a humiliated and outraged public.

Luck (good or bad) is often difficult to disentangle from the skill and will of those who benefit or suffer from its whim. But the human condition may also have a role to play: we want to read or hear about the agency or potency of the individual, not the lack of it. Who among us actually wants to feel like some speck of dirt carried along by an uncaring stream of random events? Perhaps this sentiment helps explain the modern obsession with superheroes? The media, historians, film-makers and other commentators will naturally cater to this innate need.

Luck in the world economy?

A good example of luck in economic history can be seen in the Spanish conquest of South America at the turn of the 16th century. An almost accidental annihilation occurs as diseases borne by the Conquistadors ravaged unacquainted populations[1]. Among many other things, the product of this conquest was a vast trove of silver from the mines of Mexico and Bolivia.

For the Spanish, the happy problem was where to spend all that loot. Splashing it all on the domestic economy would (and did) create rampant inflation[2]. However, happily at just that time, there was tremendous demand for silver coins from China as the Ming dynasty gave up on an experiment with paper and copper money. Japanese mines were running dry, and China and its near neighbours were thriving (accounting for c.40% of the world’s commercial economy), driving increasingly insatiable demand for Spanish silver. For its part, China and the wider region also had things Europe wanted, from porcelain to spices.

What would the ensuing decades and even centuries have looked like if the looted silver from South America had not fortuitously met the appetites of the Chinese? The Spanish venture might not have amounted to much at all. The 500-odd years since might look entirely different for the world as a result.

History has long looked at this episode as a triumph of civilisation over the lack of it, mostly ignoring the role of luck. A more dispassionate examination reveals a more balanced relationship between luck and broadly-defined skill.

Brexit and making your own luck

The UK’s own history has plenty of interesting examples of this balance between opportunity and readiness. Britain may have been lucky to possess massive and conveniently situated coal deposits to help fuel its role of leader of the first industrial revolution and thus a prolonged period of global economic and political primacy. However, such luck was combined with the fact that the country’s success in the global textiles industry in the previous period had left the UK’s workers with higher wages than many of its competitors. This provided far greater incentive for the economy to substitute labour with labour saving machinery and equipment[3]. A somewhat simplistic assessment of the most important turning point for the UK and world economy in the last thousand years. However, the point would be that luck is what you make of it.

If we apply this thinking to the UK’s impending departure from the European Union, where could the lucky or unlucky twists lie?

Unlike the period of rapidly expanding global trade and interconnectedness that followed the travels of the conquistadors, the world looks set for a period of rising barriers to trade and greater protectionism. The history of global trade contains many such ebbs and flows. Much as now, the ebbs have tended to occur when a global hegemon (in this case the US) is under increasing competitive pressure and the wider world is catching up.

In such periods, scale becomes even more important. Large internal markets, such as those available to the US, China, and increasingly continental Europe, become ever more important as barriers to trade rise. To a large extent, your luck is increasingly determined by the scale of your markets. The smaller countries without such mega-markets tend to suffer disproportionately. Could it be that the UK’s search for agency comes at one of those inopportune times when size, over what you do with it, really is important? Only time will tell, but the importance of maintaining a strong trading relationship with our largest export market is undeniably important.

Lessons for investors

Though we strive for agency, luck is always likely to have a major role in deciding whether you win or lose. To bring this to investing, this is why the majority of our invested assets are organised via a process which imagines hundreds of thousands of alternate futures.

The tactical adjustments that we make at the edges are not derived from having a clearer crystal ball than others. It is more about attempts to exploit the instances when the future imagined and priced by markets looks out of keeping with our own range of probable outcomes.

For example, right now, global bond markets speak of imminent (and lasting) struggles for the world economy. There are certainly scenarios where that pessimism is proved true: trade tensions become an insupportable weight for businesses and consumers, and a global recession follows.

However, in our view, there are many more scenarios where the world economy defies such pervasive gloom and forces interest rates higher. Trade tensions level out or even recede a little, as a US President increasingly concerned about re-election is forced to cease escalating or even de-escalate.

As such, we remain underweight government bonds in client portfolios. The idea is to string as many of these high probability bets together as we can find. Over time, given patience, discipline and a dispassionate assessment of the risks (aided by our allies in behavioural finance), we hope we will continue to look lucky.

[1] Guns, Germs and Steel – the fates of human societies - Diamond, Jared (1997)

[2] The Great Divergence: China, Europe and the making of the Modern World Economy - Pomeranz, Kenneth (2000)

[3] Global Economic History (a very short introduction) - Allen, Robert C (2011) 

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*This article is for information purposes only. It is not intended as a product offer or investment advice.