What George Soros and Daniel Loeb Do Not Want You to Know

17 September, 2018

Alex Gavrish explains how great investors benefit from storytelling and narratives

I recently read an interesting book “Sensemaking: The Power of the Humanities in the Age of the Algorithm” by Christian Madsbjerg. The book makes a compelling case for the need of human perspective when analyzing data and making decisions. The author correctly, in my view, argues that the mere task of collecting data is meaningless in the abstract. It is impossible to study the world without some sort of paradigm for thinking about what you want to study.


Madsbjerg writes: “…sensemaking shows us how to cultivate a perspective on how data fits together as an expressive portrait…”


I think that “sensemaking” and “expressive portrait” are just alternative terms that replace the word “story.” Or narrative. Because expressive portrait tells the viewer a story.


The most effective way one can understand this contrast between abstract data and human, “expressive portrait” is through art. Take a look at some of the abstract paintings with their order, straight lines, and geometric forms and then look at Chaim Soutine’s portraits. Technically speaking, the portraits are full of emotions, drama, tensions and human presence. But these are just the means. The means to tell us something, to tell a story.


Without a story that connects different facts and data and provides meaning, one can easily “miss the forest for the trees.”


I was not surprised to find in the book examples from the world of finance and investing. Madsbjerg tells of his discussion with Robert Johnson, who studied economics at MIT and completed his PhD at Princeton and was one of the managers at Soros Fund Management. He quotes Johnson:


“The data was not numbers mostly. It was not all quantifiable on spreadsheets. It was experiences, newspaper articles, stories about how people were reacting, conversations. Narrative data.”


The key question for me though (as I believe for everyone) is not whether to give a human perspective and data its proper weight and place in the decision-making process, but how to do it?


In my book “Story Investing” I argue that the only way to do it is with the help of storytelling, stories, and narrative mode of thinking in general. But even more than that. It is not only a matter of making a sense out of data, determining what is important, extracting the meaning. Or, to define it more generally: it is not only a matter of perceiving reality correctly. It is not about providing verbal and common sense explanation of the numbers.


Because this is a trivial part. The non-trivial idea is to look at companies and their stocks themselves as stories.


In practice, this means that best investments are just like good stories or movies: with three-part story structure (complication, development, resolution), important turning points, intrigue, drama, and surprises.


Additionally, a strictly analytical approach to investment management does not provide us with tools for dealing with uncertainty. The closed and fixed form of analytics leaves no place for imagination. And without imagination, we are just not capable of fathoming uncertainty, fathoming the future.


Isaac Bashevis Singer, Nobel Prize laureate in literature said: “A story to me means a plot where there is some surprise. Because that is how life is – full of surprises”. The same holds true for investing, because companies, markets, and economy by their very nature are social processes. And when there are humans involved, there will always be surprises.


Narrative, by its nature, allows us to understand the time dimension better: order of events, their length, and different time periods. For example, George Soros, in his book “Alchemy of Finance” describes how he analyzed certain investment situations. What is amazing is that in order to see the big picture and analyze the case he uses terms borrowed from the world of literature, movies, and theatre. He calls the overall cycle “scenario” and different stages of the cycle “act one”, “act two”, “act three”, “act four”, and puts an emphasis on main “actors”: the shareholders.


I think that the use of such terms is not a coincidence: it serves well the purpose of looking at how the situation develops over time.


Daniel Loeb, a well-known activist investor, and manager of hedge fund management firm Third Point told me that he agrees with the story thesis.


Activist investors are well known for their ability to deliver their case to the public. When activist investors communicate their investment thesis to the general public, they often tell a story: about a struggling business, a corrupt CEO or management team, a restructuring process that failed or is not reflected in the share price yet, a strategy for improving business and a myriad other types of stories. Activists tell these stories with an intrigue, with drama, with conflict, with struggle, with emotions.


Jerome Bruner, a famous cognitive psychologist, explains that narrative mode of thinking leads to conclusions not about certain absolute truths, but about varying perspectives that can be constructed to make experience comprehensible. By telling stories, we formulate these different perspectives.


Of course, such an approach is highly dependent on one’s personal interpretation of a company’s story. This storytelling should be supported by standard analytics and fundamental valuation. But it is this art of narrative thinking and story composition that will ultimately make a difference.