“Can you tell me a story?”

Source: Pixabay.

Reading to our children was one of the most rewarding things I ever did as a parent. Almost every evening we would sit together in the living room and I would read a classic children’s story, or a passage from a longer work – Hop on Pop and Yertle the Turtle when the kids were young; the Narnia, Little House, or Lord of the Rings series when they were older. It was a lot of fun, and we all have enduring memories from those years. I can still hear them as I write this: “This one has a little star. This one has a little car. Say! What a lot of fish there are!”

Stories fill the world around us, especially in the markets. News sites spin yarns about “cash on the sidelines” or a rock-star manager’s market outlook. Folks search for reasons why a stock goes up or down and the read about Disneyland opening or RobinHood bros getting bored. Politicians love to get into the act: trade disputes are a sign of an “icy” relationship; another politician is “unhinged”; an agency is unfairly targeting one group or another. Our brains are hard-wired to think in stories.

Sitting and listening to stories has been a part of our civilization for as long as history has been recorded. The blind poet Homer and recited the epics about Greece, Troy, Hector, Achilles, and Odysseus – probably during a religious festival. The Epic of Gilgamesh tells how a Sumerian king battled monsters and searched for the meaning of life. Spoiler alert: there’s no easy answer.

Head of an ancient monster. Source: Wikipedia.

Storytelling is an important part of our economy. In a fast-paced, automated, and digitally-driven society, a human touch is increasingly scarce. Stories create emotional energy that weaves together the facts and characteristics a product or service might evoke. I remember, as a child, my mother smearing Vicks Vape-o-Rub on my chest when I had a cold. I later read how the marketers who wrote the ads for Vicks specifically focused on the mothers in their ads. Vicks wasn’t selling relief for a sick child; they were selling relief for the parent who was worried about their sick child. People may forget what you say, but they never forget how you make them feel.

Ad from 1922. Source: Wikipedia.

As an investor, I hear stories all the time, like: “This company has a wide competitive moat;” or “Revenue and earnings will continue to surprise us;” or “We love how management is executing its business plan.” After listening to stories like these for almost four decades, however, I no longer know what most of these words mean. I’ve worked in and for several public corporations, I don’t think management thinks much about moats and surprises. They do think about their “plan,” but that’s usually the annual budget that guides their spending decisions – a budget drafted in October and November, approved in the December Board Meeting, and implemented starting on January 1. Executing a plan means staying on budget. Not a very dramatic story.

Investment funds tell stories, too. The dominant story these days is about indexing. Over many long-run periods, indexing beats the majority of actively managed mutual funds. The math behind this was clearly laid out 30 year ago in a short article by the Nobel Prize winner Bill Sharp entitled, “The Arithmetic of Active Management.” Dr. Sharpe doesn’t tell stories about fund managers’ emotional attachments or loss aversion or personnel issues. He just describes some mathematical formulas and explains them. But algebra doesn’t sell very well, so index fund sponsors spin yarns worthy of Gilgamesh and Vicks. They can’t just say buy an index and do nothing. That would be boring.

Don’t be afraid of stories. Our minds are hard-wired to think that way. Just remember that the story you’re hearing may be no more “real” than Dr. Seuss’s fish with a little star. The language of investing, is math, not storytelling. I didn’t do algebra in the evening with my kids – they did that on their own. But that’s the way to think about our investments – especially if we want our numbers to get bigger over time.