In the Land of the Lost

It was 1913 and Theodore “Teddy” Roosevelt was embarking on a journey down the Rio da Duvida (River of Doubt). The river was one of the last uncharted places on the surface of the Earth and was arguably the most dangerous in all of the Amazon. However, having just lost an election for his third term as President of the United States, Roosevelt was up for the adventure.

From the beginning of their expedition, Roosevelt and his men faced countless challenges. Between the constant rainfall, the malaria-infected mosquitos, and the piranha-infested waters, the men also had to deal with indigenous people stalking them through the jungle and the roaring rapids of the ever-changing river. Despite all of the hazards they faced as they descended the black waters of the Rio da Duvida, there was one danger that outweighed all of the others. The Polish explorer Arkady Fiedler warned of this danger to all who dare venture into the Amazon (emphasis mine):

Many cases have been known of travelers and explorers returning from its green labyrinth to become chronic patients of sanatoria, or even not returning at all…Of all the possible deaths man can die in the jungle, the most dreaded is that which results from being lost.

This story is told in The River of Doubt: Theodore Roosevelt’s Darkest Journey and has amazing parallels to how investors think about the future of markets. Just like Roosevelt’s expedition down an uncharted river, investors move into the future without knowing what will come next. Each turn in the river, each drop of rain, and each wild noise from the jungle represent the same kind of uncertainty that market participants face everyday throughout the world.

Despite this uncertainty, many investors act like they have some idea of what the future holds despite the fact that they are lost. Laurence Gonzales in his groundbreaking book Deep Survival describes the five stages of becoming lost and how they lead to a breakdown in logic. I have included Gonzales’ description of the five stages along with some of my investor related commentary in parentheses:

  1. Denial of being lost. You press onward in an attempt to make your mental map fit what you see (“This stock can’t go down. I should buy more.”)
  2. Urgency as you realize that you are lost and start to act frantically (“Perfect. It’s at an ultra discount now. Let’s sell some of my winners so I can take advantage of this bargain.”)
  3. Bargaining as you form a strategy that tries to get you back on track (“If I can buy even more I can make up for my losses when it bounces back.”)
  4. Depression as your strategy in part 3 fails to resolve the conflict (“What am I going to do? I already liquidated my 401k.”)
  5. Acceptance that you are lost and must form a new mental map (“I should talk to a financial advisor.”)

These five stages perfectly describe investors who try to make bets to predict the future, but fail miserably in doing so. While you may not be convinced that you and I are perpetually lost as investors, let’s look at some data to try and illustrate this.

Imagine the distribution of monthly returns for the S&P 500 each year across a decade. Now imagine these same distributions colored according to their expensiveness (i.e. Shiller’s CAPE) where the least expensive is blue and the most expensive is red. If we were to look at this data from 1980–1990 it would look something like this:

As you can see there seems to be no general pattern between the CAPE and the distribution of monthly returns. This becomes even more apparent as we march forward into the future. This next visualization shows the same information as above, but moves forward one year at a time:

The point of this visualization is that there is no pattern. You can try to use historical data to figure out what will happen going forward, but this has its limits. It reminds me of a famous Marshall McLuhan quote:


Nevertheless, between 1980–2017 many investors across the world thought they knew where the market was headed. However, this idea couldn’t be more ridiculous. Yes, some investors will get this right sometimes by skill (or by chance), but no one has ever known the future consistently. Failing to recognize this, many investors continue to try and time the market to their own detriment. If these individuals accepted that they were lost, they might have a chance to find their way…

Finding Your Way

Despite the grim picture I may have painted about all of us being “lost” in the markets, I mean no harm. Being lost is the default. Warren Buffett and many other legendary investors have constantly reminded us how no one knows where the market is going. However, this doesn’t mean that you can’t win in the marketplace and become wealthy. If anything, knowing you are lost is freeing, because it allows you to focus on the part of your investment strategy that you can control. Or as Laurence Gonzales so beautifully stated:

To survive, you must find yourself. Then it won’t matter where you are.

Knowing yourself is one of the most important things you can do as an investor because whether you face a bull market or a bear market, you can prevail. This doesn’t mean you will never feel lost. However, realizing your powerlessness in the face of the market can be one of the most liberating ideas that you can ever accept.

Just like those who descended the River of Doubt, we don’t know what’s around the next bend. But, if we plan, prepare, and stay level headed, we might just live to tell the tale. I have no doubt about that. Thank you for reading!


This is post 68. Any code I have related to this post can be found here with the same numbering:
