URSABLOG: You Should Have Known!

“Nothing is easier than self-deceit. For what each man wishes, that he also believes to be true.” Demosthenes

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Some time ago I overheard a conversation between two people about a medical diagnosis given to one of their daughter’s.

?“Well, at first they told us one thing, and we got the prescription and followed that course of drugs, but it wasn’t helping, and in fact the side effects of the drugs made things worse. Eventually things cleared up by themselves, and it was only later on that they found out – following a different examination for a different problem – the cause of the original issue. They should have known.”

“Of course they should have known,” said the other. “That’s what they’re paid for, but doctors don’t know nothing. They’ve got a bunch of certificates, but nothing else. No common sense. Anyone could have told them that.”

I give this harsh judgement of doctors not to have a go at the medical profession – whom I respect a great deal – but to highlight the problem of living in this world. We think someone – usually not us – should have known something that would have prevented harm happening to someone else – usually us, or someone close to us. Whether we – or someone close to us – should have known is besides the point, because (obviously) we would not have been asking someone else about something if we knew about it already. So in order to let ourselves off the hook for own ignorance, or mistake, we blame someone else for it.

This extends to politics. We will blame politicians, whatever flavour they are, when their policies that we supported, or at least voted for, turn out to have unintended consequences, especially when they are harmful to us. But then we carry on blaming them because they haven’t come up with the appropriate solutions to whatever problems are on our mind at that time, or featuring in focus groups, or are trending on Twitter.

In the world of the markets however, where there is money involved and like everywhere else the future is unknown, there is also a lot of money to be made from forecasting, advising and investing, especially if you have a combination of all three. Luring someone in by a great story, showing them how to navigate the unknown by investing in the appropriate way and then taking the money from them to do so, and getting the attendant fees and commissions, is how many people and companies make a very good living. However when the story doesn’t come true, and when the investment model was dysfunctional rarely leads to the failure of the financial adviser; there were things that he didn’t know at the time which led to a fall in value. When told that they should have known, the financial professional points to the wisdom of crowds, and says “No-one knew!” and further points out some even cleverer and richer people that got it even more disastrously wrong, and keeps the portfolio intact. Even when the investor reminds the adviser that the worst-case scenario presented turned out to be a lot better than the terrible reality the investor finds themselves in now, the adviser points to the small print, and mutters words like “of course any sophisticated investor knows that values can go down as well as up.” By appealing to the sophistication of the investor they are of course also appealing to the conceit of the investor; it is a brave and rare investor that admits that they are unsophisticated, or worse stupid.

This self-deceit, of the adviser and the investor, means that the financial advice industry is not going to become extinct any time soon. And self-deceit is not confined to financial advice either. In romantic love, in any relationship in fact, what we tell ourselves is as important, more important perhaps, than what other people tell us. Being faced with incontrovertible proof that what we think – especially what we think of ourselves – is incorrect can be very humbling, but also extremely difficult to accept. We rationalise, we try and fit elements of the story of what happened so it proves us right – however tortuous it is – and it may take us a great deal of time, if ever, to face the facts.

The humble – or not so humble – ship sale and purchase broker is as vulnerable to this trap as other lesser mortals. But I wonder sometimes whether a sale and purchase broker is the best person to give advice about what after all is a market based investment decision.

There are number of reasons why a broker could assume the role of an investment guru. They know the markets, they know the players, they know the ships. And if they also think that they are very clever, and read a lot, and are interested too, they may also bring macro-economics, geopolitics, quantum mechanics (or at least regression analysis) and even meteorology into their forecasts. But this, I believe at least, is not our role.

I have been asked many times whether the value of a ship will go up or down over time, or what the markets will do. I give an opinion of course. And the reasons are familiar:

-?????????It’s part of the job

-?????????Brokers have always done it

-?????????Every other broker I know does it, especially my (more successful) competitors

-?????????If I don’t do it, I won’t be able to attract clients

-?????????Since investing consists of positioning capital to benefit from future events, how can anyone expect to do a good job without a view regarding what those events will be??We need forecasts, even if they’re imperfect.

I have paraphrased this from a brilliant newsletter by Howard Marks of Oaktree Capital, a company not unknown in shipping investments. In fact it’s a letter that I would recommend to any owner (I have already suggested it to one of my clients) and broker with skin in the game. He is a wise man as far as investment goes.

He mentions a book, Mistakes Were Made (but Not by Me): Why We Justify Foolish Beliefs, Bad Decisions, and Hurtful Acts , written by psychologists Carol Tavris and Elliot Aronson (which I shall be buying very soon). These observations from it ring very true, in shipping and in life:

-?????????If you hold a set of beliefs that guide your practice and you learn that some of them are incorrect, you must either admit you were wrong and change your approach or reject the new evidence.

-?????????Most people, when directly confronted by evidence that they are wrong, do not change their point of view or plan of action but justify it even more tenaciously.?

-?????????Once we are invested in a belief and have justified its wisdom, changing our minds is literally hard work.?It’s much easier to slot that new evidence into an existing framework and do the mental justification to keep it there than it is to change the framework.

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If this is Howard Marks bringing this cognitive dissonance to our attention, then we had better take notice. Marks brings his article to a close by reminding his readers of the concept of the “I know” school, and the “I don’t school”:

It’s easy to identify members of the “I know” school:

-?????????They think knowledge of the future direction of economies, interest rates, markets and widely followed mainstream stocks is essential for investment success.

-?????????They’re confident it can be achieved.

-?????????They know they can do it.

-?????????They’re aware that lots of other people are trying to do it too, but they figure either (a) everyone can be successful at the same time, or (b) only a few can be, but they’re among them.

-?????????They’re comfortable investing based on their opinions regarding the future.

-?????????They’re also glad to share their views with others, even though correct forecasts should be of such great value that no one would give them away gratis.

-?????????They rarely look back to rigorously assess their record as forecasters.

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“Confident” is the key word for describing members of this school.?

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For the “I don’t know” school, on the other hand, the word – especially when dealing with the macro-future – is “guarded.”?Its adherents generally believe you can’t know the future; you don’t have to know the future; and the proper goal is to do the best possible job of investing in the absence of that knowledge.

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Substituting the role of ‘investor’ with ‘sale and purchase shipbroker’ whether as an individual or as a company, with all the research and analysis whistles and bells, we see the problem of the “I know” school. ?Substitute shipping terms – freight rates, supply and demand, commodity prices etc. – and you see the cognitive dissonance in their confidence. And how many “guarded’ shipbrokers do you know?

I unashamedly put myself in the “I don’t know” school, even though I have been expressing my opinions about future market direction often enough. But even I cannot keep forecasting a future strong market ahead when evidence to the contrary keeps amassing before my eyes. I hope that I can admit my lack of foresight quickly enough and keep following the themes that I was discussing earlier, and use them to explain what is – or is not – happening as I expected.

But in any case the role of a ship sale and purchase broker should focus on their real expertise, amongst which I believe is:

-?????????Bringing appropriate buying and selling opportunities to their clients

-?????????Understanding what their clients want, and servicing, even anticipating their requirements

-?????????Being their eyes and ears in the market

-?????????Being able to negotiate and execute sales and deliveries in the competitive marketplace within the authority given to them

-?????????Have the knowledge, experience and expertise to deal with problems and disputes as they arise, and protect their clients’ interest.

This is enough to be getting on with I think, and getting this wrong is the difference between success and failure. I cannot, and will not, comment on what is required by my brother and sister brokers in other disciplines, but I hope that they will at least recognise the pattern. And this you will understand is not telling anyone how they should do it, just what it is I should be doing.?

But this may well be self-deceit too. This is what I am telling myself, and how I approach the marketplace, but it may not be what my clients want, and I may not want to hear that. We all have had, I expect (except perhaps psychopaths and wolves), periods in our lives when not only are we faced with unfortunate facts, but with unfortunate and uncomfortable facts about ourselves. Speaking for myself, when that happens it comes as a shock, and it hurts, especially as the temptation always is to stop the pain by rationalising the pain, and carrying on as normal. I am unwilling to accept my mistakes at first, but it is even more difficult to accept that the mistakes come from who I think I am: what my personality is, what my character is, what my story is. To change incorrect behaviour, in investment, in broking, in life, requires a huge effort, and it can be exhausting. But only in making that effort can I change, and only in changing can things be made better, for myself and those around me.

But that also requires a bit of patience, a bit of kindness. And in fact, how could I have known what I should have known before I knew it? The difficulty is first of all being humble enough to know what we do not know, find out what we do not know, and repeat, ad infinitum. And I don’t pretend that this is easy, because the painful and exhausting bit is the effort to unlearn the behaviour and assumptions we used to get to where we are. But, as many captains – and indeed shipowners – know, the sooner you understand and act on bad news, the better chance you have of survival.?

Simon Ward

www.ursashipbrokers.gr