The Resilient Investor (2015)
Be Ready for Anything
Qualities of the Resilient Investor, Scenario Planning, and Plausible Futures
READY FOR ANYTHING. TO SOME THAT MAY SOUND DAUNTING, WHILE others hear a clarion call to great adventure. It is a bit of both, harkening to the old saying (some say curse), May you live in interesting times. Clearly, the complexity and the uncertainty of our times are handing this to us in spades!
While the preliminary work you just completed is a good start, cultivating resilience requires much more than simply marching ahead with slight tweaks to what you’re already doing. This chapter asks you to pause for a moment and prepare for the work at hand by enhancing your internal and external perspectives in ways that allow you to be open and responsive to whatever may come. We are not suggesting that you need a totally clean slate, but you do have the opportunity to take a fresh look at your life, your worldview, and your investments.
We begin this deeper dive by looking inward at the personal qualities that can foster a resilient response to life’s opportunities and challenges. Being ready for anything requires flexibility and centeredness; we will point you toward mindsets and practices that may help you to face the challenges with confidence.
Then we’ll soar high for a bird’s-eye view of the four scenarios that we previewed in chapter 1 to see how the “interesting” aspects of today’s world could play out. Clear-minded consideration of the full spectrum of possible futures is an essential first step in building an effective resilient investing plan. In the chapters that follow, you’ll use your own assessment of these possible futures to help guide the design of an investment plan that both reflects your personal priorities and prepares you to nimbly respond as needed to any surprises that may come your way.
With all this terrain to cover, it’s going to be quite a ride. Are you ready?
Qualities of the Resilient Investor
Yield and you need not break,
Bent you can straighten,
Emptied you can hold,
Torn you can mend;
And as want can reward you
So wealth can bewilder.
Aware of this, a wise man has the simple return
Which other men seek.
—Tao Te Ching, Verse 22, Witter Bynner1
We know several high-level martial artists who physically embody the principles and qualities of resilience. We can see them in our mind’s eye, and perhaps sharing these images with you will help illustrate the essence of resilience.
Imagine a martial artist standing before you, upright but not stiff or rigid, completely relaxed and at ease. The face is calm and without tension or anger. The eyes are open and soft, not focused on any one thing but seeing anything that might be coming—10,000-direction eyes, in martial arts-speak. When attackers approach, our martial artist becomes even more relaxed, moving easily, staying fluid and loose, avoiding strikes and kicks most of the time. Nobody’s perfect, so when strikes land, our agile artist absorbs them with breath and flexibility, always moving; head loose and rotating; eyes clear but not focused on a single point, seeing the whole room; light on the feet, advancing and retreating in a dance with the attackers. And then there are more challengers, and the artist stays calm and collected, breathing faster now but still softly, moving with gentle precision, landing blows in unanticipated places with no forced logic or obvious reason (and all the more devastating for it), weaving and dodging, able to go softly to the ground when caught by a blow, to roll and return to balance, to move where forces lead—to be led but also to not lose one’s center and grounding and bodily alignment and structure, moving, never settling in a rigid position but staying flexible and in motion to minimize shock and to keep seeking a better position.
Can you feel a bit of the kinesthetic experience we are describing?
This dynamic centeredness and responsiveness gets to the heart of what it means to engage our world in ways that foster resilience. Tomorrow’s most successful investors will spend these times surveying the terrain, seeking out the most promising new directions, and poised to adapt to new challenges. Because this landscape is ever changing, investment pathfinders will need a high degree of flexibility and versatility. To do this you will want to reflect on, and strengthen, your inner resources. The resilient mindset does not emerge fully formed; it arises from a range of subtler perspectives that, taken together, provide the clarity and focus you will need in order to thrive as a resilient investor. While inner growth can take many forms, the following are a few key qualities that we have found to be essential.
Hold Multiple Perspectives at Once
Perhaps the central trait of the resilient investor is the ability to consider multiple perspectives about the future—our martial artist’s 10,000-direction eyes. The gaze of the resilient investor is soft and open, catching small changes at the periphery, pulling insight from all angles, detecting vectors and changes over time, operating in an expanded sphere that encompasses far more than simply focusing on what is directly at hand. The goal is to be aware of what is really happening, with eyes unclouded by our own tendencies to see what we want to see—a common blind spot that sociologists refer to as confirmation bias.
Indeed the perspective that is most challenging to loosen your grip on is the one you find most convincing. Being too sure of what we know, what we believe, or what we feel can make us miss the hints and clues that might have guided us toward a more nuanced perspective or a natural evolution of our worldview over time. It is crucial to draw on the innate human capacity of empathy to remain open to points of view that are entirely different from one’s own. You will find that your own perspective is actually enhanced if it includes some contradictory possibilities as well as questions that you continue to hold over time. Think of this as having a diverse ecosystem of viewpoints or worldviews.
Comfort with Ambiguity: It’s Okay to Not Know
Not knowing what is coming is a fact of life; the resilient investor always keeps this in mind and strives to be comfortable with ambiguity. It’s a humbling stance, but it keeps us from getting rigidly attached to any particular outcome. This frees us to think in terms of probabilities rather than certainties, knowing that the complexity of our times will present us with events that cannot be predicted. Someday we may find ourselves confronting a full-on crisis (societal or personal); the martial artist will respond to these times with equanimity—maintaining a calm observer’s stance—and even a readiness to let go of ideas, plans, or assets that have been rendered moot by the changes taking place.
Frugality Is Fundamental
You won’t see a martial artist expending unnecessary energy or putting up a showy front. Likewise a resilient investor maintains a steady focus on an efficient and well-directed use of resources. The more you can limit or shrink your expenditures, the more options you have. One inspiration for this is Buckminster Fuller’s concept of “ephemeralization,” which suggests seeking to do more and more with less and less. How can you continuously improve your quality of life with less need for income and less need for new physical stuff? While frugality will give you increased flexibility and choices going forward, it is also a socially and environmentally resilient response to the resource stresses of our time. Your personal commitment to live lightly reflects care for both the needs of others and the health of the ecosystem.
Know a Little about a Lot and a Bunch about a Bit
Generalists will thrive in uncertain futures with a diverse toolkit that can be put to work as needed. The more broad and diverse your understanding of the world, the more you will be attuned to and prepared for the unexpected changes that could come your way. At the same time, becoming highly competent in one or a few areas ensures both that you are employable and that you have skills or knowledge that will be valuable in your community in any possible future. Combining the two is a cornerstone of being educated and ready to play a constructive role in society. The watchful martial artist stays curious and receptive, continually scanning the horizon in all directions for useful information while honing the skills needed to be of service.
A martial artist aims to “come out alive,” ready to keep moving the situation forward in a positive way. So too the resilient investor stays focused and intent, makes nuanced decisions with clear purpose, and avoids getting stuck in habitual motion or at uncertain rest. By maintaining a dynamic engagement with the surroundings as they change—even in the midst of swirling possibilities and temporary setbacks—we cultivate the creative potential of resiliency, the ability not only to roll with a punch but to put oneself in position to go on the offensive. This quality emphasizes the virtues of having a strong vision of where you want to go and taking decisive steps to get there.
Centering Practice and Self-Awareness
All the qualities we outline here require a fair amount of diligence and focus to cultivate. Our own gradual embrace of these principles has been supported by each of our (very different) ways of prioritizing the development of our innermost resources. Over the course of a life, some combination of counseling, spiritual practice, participation in men’s or women’s groups, membership in a church community, professional development programs that include an emotional/reflective element, and extended immersions in the natural world with like-minded friends will serve to deepen your self-awareness and help clarify all the choices that present themselves to you.
While it is possible to foster this quality purely on your own by force of attention, most of us find that some sort of emotional or spiritual practice, group, or guidance is invaluable, both as a space in which to engage in more-reflective modes and as a way of staying honest with ourselves about just how “together” we really are. Plumbing our psychological and emotional depths helps us become more aware of the inner dynamics that often drive our habitual responses to events; and cultivating one or several activities that feed our hearts and souls can help lift us up out of conditioned responses and fears and into a place where love and a creative, passionate, and, yes, resilient life can prosper.
It also helps to commit to daily or weekly routines that offer a time for reflection and to quiet your inner chatter. For many a daily workout session or walk to start or end the day serves this purpose. Meditating regularly, even for short periods, is a readily accessible option that can be quite easily incorporated into one’s day. Weekend excursions to nearby parks, rivers, or trails are a more casual way to make time for integration. Whether or not you see yourself as on a spiritual path, some sort of mindfulness practice or centering ability is an essential tool for navigating the complex terrain we’re sketching out in this book.
We hope that this menu of qualities has given you a taste of what it takes to be an agile, resilient investor. You need not become a black belt, but any effort you make toward developing these attributes will be amply rewarded.
Now there is just one more perspective we want to introduce before you start filling in your map. This one involves a bit of time travel. We will use both our observational skills and our imaginations to paint some pictures of the various ways that things could look in the not-so-distant future, laying out a few broad possibilities along a spectrum that ranges from darker to brighter futures. Later, as you’re deciding how much to allocate to each of the resilient investing strategies, you will be guided in part by the likelihood that you assign to each of the possibilities along that spectrum.
Surprisingly, even though investing is obviously about achieving a goal in the future, many investors neglect this crucial step, leaving them vulnerable to their own unseen biases. This is a chance for you to become familiar with your own views about the future and to ask yourself some challenging questions that you might not have grappled with lately, or perhaps at all. By investing time in this exercise, you will find that your capacities for resilience will be greatly enhanced, and you will avoid some shocks and improve your ability to withstand others.
Pick a Future, Any Future
Throughout this book we have frequently made reference to the complexity, uncertainty, and unpredictability of the times in which we live. But we have not provided much backup support for that point of view. This is by design. We know that many of you have already come to the same conclusion we have through your own study and observation of current events, and that others will intuitively see and embrace this description of our world. The focus of this book is to offer proactive solutions (everyone knows the problem—tell us what we can do!), so we decided not to divert into the theoretical grounding that underlies these claims. The book’s website features our take on this “Story of Our Times,” drawing from a wide variety of fields, including complexity science, sociobiology, futurism, new economic theories, and many others.
Suffice it to say, there is an increasingly broad consensus that in today’s world we truly do need to be ready for anything. There are simply too many compounding issues rippling through our complex civilization that throw a veil of uncertainty over any attempts to predict our path with confidence. Now more than ever, we need some way to make wise decisions to best position ourselves for whatever future may come to pass. The first step is to take a solid look at all the possible scenarios without prefiltering based on how probable or preferable they are to you.
No one presumes that the future will be a clear-cut “victory” for any one of these possibilities; it is far more likely that the actual future will blend aspects of two or more. Indeed elements of all four scenarios are evident in today’s world—and, as you will see, many of the specific strategies we introduce in coming chapters can be used as cogent responses to two or more of our plausible futures.
The primary reason why we are asking you to take the time to consider these scenarios a bit more deeply before starting to make your plans is that resilient investors never go all in on any single worldview. Relying on the martial artist’s 10,000-direction eyes, you will be planning for what you perceive to be the most likely path forward, while monitoring possible challenges from the periphery and staying nimble enough to respond as needed to changing conditions. Consider the next several pages to be a vigilant gaze at the world around you, setting the stage for the responses you’ll craft in chapters 7 and 8.
So without putting off the future any longer, let’s introduce the contestants in our global scenario sweepstakes. Each has been widely championed by its own camp of serious thinkers; we include a sampling of their perspectives in our summaries and online.
GLOBAL SCENARIO 1
Breakdown, “The Long Emergency”
Social, economic, and/or environmental meltdown, leaving the global economy in tatters
A book by James Howard Kunstler of the same name2 describes an extended period of scarcity and structural collapse. Society breaks down in a combination of cascading environmental and economic/sociopolitical catastrophes, unleashing untold suffering and chaos. As the engine of economic growth collapses, the environment has a chance to recover some of its wildness. Humans reorganize into communities that start from scratch, growing their own food, constructing primitive local energy systems, and forming regional economies with local currencies, lots of bartering, and limited trade between regions. Governance takes place close to home, with national and transnational institutions losing clout. While there are many versions of this scenario, each sees the apparent solidity of modern life as a gigantic house of cards; a crisis in just a few key areas of vulnerability could cause the entire house to tumble.
Despite Hollywood’s love affair with dystopian futures, those who take these possibilities seriously are often considered to be on the fringes of society. This started to change when Jared Diamond’s 2005 book Collapse: How Societies Choose to Fail or Succeed brought thinking about this scenario to a more mainstream audience. Knowing that other great civilizations have fallen into chaos provides an alarming wake-up call and has forced even optimists to acknowledge that some version of breakdown is plausible. “Preppers”—those who stockpile food and guns—are the stereotyped image of those who think breakdown is likely. Others, such as many deep ecologists, take a more constructive approach and are working to prepare healthy foundations for local and regional economies and society.3
GLOBAL SCENARIOS 2 AND 3
Status quo structures of the global economy endure, oscillating between periods of recession and modest growth
Compared with the economic cliff of breakdown, a muddle-through scenario is a world of slippery slopes and constrained growth. The term muddle-through economy was popularized by financial writer John Mauldin in 2002 to describe an economy that is growing but far below what we were accustomed to in the twentieth century, an economy “that would move forward burdened with the heavy baggage of old problems while facing the strong headwinds of new challenges.”4
We have already seen how extreme weather events (Hurricane Sandy), environmental catastrophes (Fukushima, BP Gulf spill), debt implosions (Eurozone), political instability (Syria, Ukraine), social strains due to wealth inequality (Occupy Wall Street), and other unforeseen factors trigger a crisis response. In the breakdown/long emergency scenario, these push us over the edge; but in a muddle-through scenario, the core elements of our current world continue to function. Enough people are still getting their basic needs met, so despite severe wealth inequality social unrest does not topple dominant governance and corporate structures. Voices calling for fundamental shifts in thinking about the principles that underlie the economy and our political system continue to be marginalized. We still have a habitable and recognizable world governed by strong nation-states, with an economy dominated by global corporations.
Muddling is of course an apt description for the world we have been living in since at least the end of the dot-com bubble. While not ignoring the possible preludes to breakdown/breakthrough that are also in our midst, it seems the most likely scenario to dominate in the short term, though its prospects over longer time frames are uncertain. Within the broad swath of muddling possibilities, it will eventually become apparent if we are moving in a direction that addresses our fundamental challenges. Therefore we treat muddle through as two separate scenarios, which we call muddle through down and muddle through up.
GLOBAL SCENARIO 2
Muddle through down, “Relentless Struggle”
Rolling recessions amid a failure to address the systemic causes of environmental, social, and economic decline
Ignoring a glut of flashing indicators and scientific consensus warning us of our plight, and despite the fact that we have a wealth of solutions available to help us, we fail to mount a meaningful response to our economic, social, governance, and environmental challenges. We don’t hit the wall of systemic collapse, but life becomes a harder struggle for most, as we lurch between abrupt downturns (like we had in 2008) and periods of relative stability.
In this scenario lip service continues to be paid to serious issues such as climate change, even as we double down on a carbon-fueled energy path. Those who hold disproportionate power in today’s political/corporate economy pull out all the stops to maintain control, kicking the can down the road rather than putting forth any serious initiatives to address the root causes of our deteriorating situation. Global wealth inequality and marginalized populations fan the flames of conflict, spurring outbreaks of revolt; individual freedoms are whittled away in the name of security, and precious resources are disproportionately allocated to the military at the expense of human needs.
GLOBAL SCENARIO 3
Muddle through up, “Incremental Progress”
Gradual improvement of key quality-of-life indicators within the status quo framework of political and economic systems
We deploy our capacities to their highest effectiveness, making needed improvements and reforms to our existing systems. This moves us steadily toward a prosperous, sustainable future. The late energy activist Randy Udall proclaimed that the motto for this scenario should be We have not yet begun to fight! If we faced our challenges head up, with some discipline and focus and political unity, we could still do great things.5
Paul Gilding, author of The Great Disruption, concurs, seeing a World War II-type mobilization (all hands on deck!) to tackle climate change, as it becomes apparent that the cost of inaction is higher than the cost of restructuring our energy and transportation systems. But all is not necessarily rosy; futurist Jamais Cascio calls this path “walking the tightrope,” noting that our eventual success at living within the planet’s limits may depend on more-coordinated government planning and that our tardy climate response may necessitate some applications of geo-engineering to forestall the severest damage to the earth’s ecosystems.6
By pulling together and using all the tools at our disposal, we eventually address our most pressing challenges and find ways to keep the historical arc of global prosperity moving upward. Governments find a way to rise above gridlock. Corporations continue to take incremental steps toward becoming responsible global citizens, giving consideration to social and environmental factors alongside the financial ones. Technological innovations expand access to clean energy and clean water in the developing world, while developed nations become much more efficient. Nations realize that security is more likely to come through fostering education, healthcare, and democracy while addressing global poverty head-on. The climate situation, population pressures, and other environmental concerns continue to worsen for a time, but gradually we work our way toward balance.
GLOBAL SCENARIO 4
Breakthrough, “Rational Emergence”
Exponential social innovation, new technologies, and the evolution of wisdom/consciousness to deploy them wisely
In this twist on Alan Greenspan’s famous “irrational exuberance” utterance, humanity embraces the future by unleashing its full potential of creativity and innovation on the economic, political, and social spheres of society. The result is a world that includes technological wonders but also a responsible, respectful connection to the life-support systems of the planet.
Where this scenario breaks from muddling through up is that here we seize the initiative to reinvent social structures that have outlived their usefulness. The emergence of new forms of organization is the essence of evolution in both life and society; it would indeed be rational for us to adapt our ways of doing things to meet the new demands of our time.
If our reliance on debt-based currency and ever-expanding (i.e., infinite) growth no longer serves the collective good, we will develop new economic frameworks that allocate resources in ways that enhance quality of life around the world without destroying the biosphere. If we need stronger global governance systems to tackle global issues, or enhanced localized networks to address regional resilience, they will emerge so that we can act effectively. If today’s open-source, crowdfunding, and sharing-economy experiments continue to prove their worth, business-as-usual will change. Global awareness and deeper collaborative relationships among nations lead to new, shared priorities that put an end to war and poverty. Ultimately, it becomes possible to live an abundant, meaningful life within a society that restores and maintains the environment.
So there we have it: four distinct stories about the future that are derived from looking at our current situation and envisioning ways that multiple variables may interact and unfold. We cannot possibly know which of these will dominate the next decade—or century. Therefore, as investors needing to make decisions about an uncertain future, we must at some level be prepared for all of them.
Immersing ourselves in these various scenarios is one of the best ways we know to do this preparation. Cascio says that futurism (using scenarios to explore possible futures)7 can be compared to a vaccination: “It is not a way to know what is going to happen but to prepare yourself for what might happen.” As a vaccination trains your body to ward off pathogens, he says, foresight sensitizes us to changes in our world that we might not have noticed: “We suddenly start paying attention to the world in a different way because we are focused not just on what is happening now but on how what happens now evolves and emerges into the next generation.”8
As you consider these scenarios, it may be hard to imagine today’s global systems actually breaking down—or being fundamentally transformed for the better. Widespread systemic change seems almost unfathomable. As Margaret Thatcher famously said, “There is no alternative” to market capitalism as we know it. In the minds of many, the systems that govern our world today are the crowning achievement of human civilization and will serve us well into the foreseeable future. But others are not so sure, and one of the reasons why we wrote this book was to make sure that investors were at least considering this possibility.
A simple way to think about the four global scenarios might be summed up with these two questions:
Do you think it is likely or unlikely that there will be some version of systemic change within the time frame of the investments you are considering?
Will society respond in a coherent way? In other words, will the direction of change be positive or negative?
For example, if you think it is likely that there will be systemic change and the direction of change will be positive, that describes our breakthrough/rational emergence scenario.
Of course, as we have learned, resilient investing does not require you to know the answers to these monumental questions. It only asks that you consider them from time to time, take a current pulse on your outlook, and assign some probabilities. Doing so will maintain your RIM as a reliable guide even as the world continues to change.
Remember too that while any of these global scenarios is possible, that does not mean they are all equally likely. Each of us needs to come to our own determination about how we see the future unfolding and then take that into consideration as we make resilient investment decisions. Look at each one with as much unbiased openness as you can muster so that your resilient investing plan is drawing from all the clues that are out there on the winds.
If you accept the premise that we have been muddling along for some time, it is likely you’ll conclude that this will continue for at least the foreseeable future. Yet even there, muddling through down and muddling through up are very different pictures requiring significantly different responses. Even those with faith in the long-term strength of the current system may want to be poised to respond constructively if it begins to fragment or to transform.
And consider breakdown: you do not want to be so reluctant to even give it room to exist as an option that you become an ostrich about systemic risks, nor should you let a profound despair about the future paralyze you. Similarly with breakthrough: you do not want knee-jerk cynicism to limit your ability to be part of constructive and potentially rewarding choices, and neither should profound hopes for a better future spur you to put all your chips on it. Too many things have to go right, and human dynamics may not evolve that quickly. Keeping a foot in the world as it is will balance your efforts to move things forward.
To help make these scenarios come alive, we sometimes like to use well-known movies to dramatize what they might look like. At the breakdown/long emergency end of the spectrum is the Mad Max future: post-apocalyptic, global-scale economic and ecological collapse, roving bands of mutant beasts and madmen, and oil being hoarded and killed for. At the breakthrough/rational emergence end of the spectrum is the Star Trek world: all energy problems are solved; earth is free of conflict, money, and poverty; we’ve figured out what whales are all about; and we have cool gadgets like transporters, holodecks, and communicators (hey, check it out: we’ve already got communicators!).
Between these wild extremes are the futures that more closely resemble the world we live in now. The muddle-through-down/relentless struggle future is the Blade Runner scenario: not total collapse, but elites are in control, with social isolation and climate change shaping the world (it’s raining all the time in Los Angeles).
Interestingly—and troublingly, once it became clear—we cannot really come up with any popular movies that sketch out a plausible muddle-through-up/incremental progress path; and indeed even our breakthrough example, Star Trek, doesn’t give much of a clue about how we got from the heart of the Cold War to Captain Kirk. Currently, the entertainment world is raking it in by peddling apocalyptic horrors, but there are some uplifting writers. Kim Stanley Robinson believes that we need to think about a post-capitalist, utopian world; he tries to “envision things going right, and then to figure out what we could do now to put us on that course.”9 So to our readers in Hollywood: it’s time to roll out some inspiring paths forward, folks!
Living with Scenarios: Staying Open to the Future
We all know how easy it is to be influenced by the latest article or news story that catches us, as well as by talking to friends who suppose they know with certainty where we are headed. When you hear someone predicting that the Dow is heading for 30,000, well, there’s a muddle-through-up proponent! Gnashing of teeth, breakdown! Of course these are extremes, but with practice you will notice the worldview that lies behind any strongly worded opinion about the future. The key is to simply let everyone have their own ideas without reacting or trying to change them, consider what they are saying, and then make your own independent assessments.
You are likely to find voices for a spectrum even wider than the one we’ve presented. Someone might point you to Guy McPherson, who presents a sober argument for how climate change is likely to bring about the near-term extinction of the human race—within the next generation or two.10 (Ouch!) At the other end is Ray Kurzweil’s “singularity”; he urges us to take good care of ourselves because shortly we will have the technologies in place that could make us essentially immortal.11 (Not sure if that’s such a good idea.)
This is where we need to draw on the inner qualities of resilience that began this chapter. It takes vigilance to question the thinking of others and humility to question our own thinking, knowing that the world is a complex and dynamic place. It also bears repeating that the future is unlikely to settle into any one of these scenarios. William Gibson’s line comes to mind: “The future is already here—it’s just not very evenly distributed.”12
As promised, this chapter touched on some deeply personal, interior dimensions; plunged into dystopian nightmares; and soared out to futuristic longings. How was the ride? Remember in the introduction when we said that there are no easy formulas that will help you navigate the future, to be ready for anything? The times we live in, not to mention the future that awaits, are beyond “interesting”; they are downright incredible. So let’s put these perspectives and tools to work as you start to fill in the blanks of your own RIM.