The Dangers of Narrative

A few years back two of my kids were in the middle school play.  Only small, non-speaking parts, but Dad was still expected to show the flag and sit through the performance.  Unfortunately, this was not a teen version of an otherwise solid, age-appropriate work of theatre — Beauty and the Beast, for example.  This was an original work by middle school teachers, one of whom had an interminable axe to grind about Galileo and the Catholic Church.  (Yes, I know that, “It still moves!”  No, I don’t want to have a 13-year-old tell me about it for an hour.)

The play was called The Power of Story.  I didn’t love the show, but I’ve been thinking a lot lately about the title.

Stories are powerful.  They are more accessible, and more emotionally resonant, than unconnected facts.  The best non-fiction writers know the importance of assembling the random sequences of reality into a narrative arc, in order to captivate and entertain the reader.  (Two of  my favorite examples are Barbara Tuchman’s The Guns of August and Bruce Caton’s Civil War trilogy.)

At best, narratives can help us make sense of the world, and engage us actively in difficult material from which our minds would otherwise detach.  The danger comes when we mistake our narratives for reality.

For much of the last five years, one dominant narrative has been (Cliff Notes version) that Barack Obama is Jimmy Carter.  Hyperinflation is just around the corner, and the U. S. dollar is doomed to go the way of the Weimar-era Deutschmark.  This story has been particularly ubiquitous on my own side of the political spectrum, especially on conservative talk radio.

The problem is that history sometimes neither repeats nor rhymes.  I confess that I expected inflation to heat up long before now.  But my historical lens has never been short-term enough to want to own gold.  I don’t like investments with no economic return.

Since the market low in March of 2009, stocks are up almost 150%, while gold was first up 106%, before more recently falling by 30% to $1,278 per ounce.  (During the period of gold’s collapse, the U. S. stock market rose 24%, a relative return advantage for stocks of more than 50% over two years.)  Overall, from the beginning of the financial crisis through today, gold is up 43.8% and stocks up 32.1%.  The data set shows clearly that gold is not a reliable alternative currency, but an extremely volatile commodity, profitable only during brief periods of rising tension or accelerating inflation.

How confident do you have to be in your Fall-of-the-American-Republic/end-of-days narrative to be comfortable owning an asset that has earned no economic return for thousands of years, versus one that has appreciated 1,300% since I graduated from college in 1978?

At the end of the day, constructing a narrative is a job for politicians and screenwriters, not for investment managers.  In the unforgiving world of running other people’s money, where you and your clients must both live with every mistake quite literally for the rest of your lives, you’d better ignore the narratives and focus on the real.

For us, the real is price, value and economic returns.  Right now those variables signal caution, which is reflected in our portfolios.  As I’ve said many times, it is unwise to take investment advice from either Paul Krugman or Glenn Beck.

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