Adding Value Q3 2021: Closeness Centrality
With so much opinion and speculation in the media, it’s easy to mistake noise for signal. And when good luck lines up with noise, and we’re right, it can lead to a bad investor side effect: overconfidence. Overconfidence often leads to poor investor behavior and poor returns. It can lead us away from a well thought out investment plan and towards complicated and expensive alternative investments like hedge funds. Net of fees, they almost always underperform simpler, lower cost options like index funds. This has been backed up by research over and over again. From a thermodynamic point of view, simple means less entropy (away from your plan). It’s important to remember that in investing, maybe more so than other things, simple (but not simplistic) tends to win over time.
Many investors are searching for theories to make sense of these uncertain times. In reading through massive amounts of articles, books, and white papers about vaccination rates, rising interest rates, mask wearing, transitory inflation, and overvaluation in the stock market, a study conducted by Alex Bavelas in 1950 stood out from the rest.
Alexander Bavelas was an American psycho-sociologist credited as the first to define closeness centrality, the idea that relative proximity can define the center of a dataset. His work was widely extrapolated and influential in using mathematics to develop the concept of centralization and in formalizing fundamental concepts of network structure. Okay, don’t zone out yet…
The Bavelas experiment included subjects who were designated Group 1 and Group 2. They were separated and told to identify healthy and sick cells on their projection screens using trial and error. The interesting wrinkle is that only Group 1 received accurate feedback. If they were right, they were told they were right, and likewise, if they were wrong, they were told they were wrong. Group 2 received feedback too, but it was unreliable. In fact, the feedback subjects in Group 2 received was actually based on results from Group 1. As a result of this structure, only the 1s had a proper feedback loop. This allowed them to craft basic rules that were simple, clear, and fairly accurate. Eventually, they achieved an 80% accuracy rate. As Group 2 lacked reliable feedback, they were forced to rationalize the random data, and craft a pattern where none existed. As a result, the 2s created convoluted theories and guessed with an accuracy rate similar to pure chance.
The participants met to discuss their theories and were asked to rate the strength of each theory. What’s fascinating is the more complicated theories of the 2s were considered more persuasive by both parties. In fact, the more complex the made-up rules were that the 2s presented, the more impressed the 1s were. In addition, the 2s were rarely impressed by the simple, but accurate theories of the 1s. In subsequent trials, the 1s began incorporating the complex theories of the 2s, and performed significantly worse than they had initially.
These experiments were done in the 1950s, but it seems that the research is still relevant today. In early September (2021), researchers at NYU Cybersecurity for Democracy published a study which found that media outlets that primarily trafficked in misinformation had 6x the engagement of sources that posted factual information, and that for far right media outlets, 68% of their engagement was from misinformation posts. The point of all this is that while complexity may sound impressive when presented and reinforced over and over on social media and in the news, perhaps it is better to remain focused on simplicity, with a deep regard for science and non-partisanship.
With that in mind, what follows is a collection of the books that we found particularly interesting and compelling reads during the COVID lockdown. They don’t follow any particular order, genre or topic. They are just books (sometimes fictionalized) about heroes doing a necessary job under challenging circumstances.
A Woman of No Importance: The Untold Story of the American Spy Who Helped Win World War II by Sonia Purnell, 2019.
Arisaig’s pretty buildings and streets make it an attractive village, and Mallaig serves as the gateway to many of the islands of Scotland. Situated in the village is a small museum dedicated to the history of a secret British organization, the Special Operations Executive, “SOE”, that conducted espionage, sabotage, and reconnaissance in Nazi-occupied Europe. Behind the door of the museum (hidden in plain sight) is a list of women who were recruited by the SOE, specifically the F Section (“French Section”).
All personnel recruited to F Section had to complete a series of grueling physical and tactical training programs, after which they were transported by cover of night to France, where they worked with the French resistance to fight the Nazi occupation.
All members were bound to an oath of secrecy, and the SOE classified all records of the subnetworks as top secret. Many members, including the women (if captured), were subject to inhuman conditions, starvation, slave labor, executions, and genocide, with the most egregious conditions occurring in the women-only prison of Ravensbruck. Because of the top secret classification, many of these individual’s exploits were to remain classified for one hundred years, perhaps indefinitely.
Slowly, researchers are now digging through unmarked boxes and uncovering more and more information about these courageous women, buried in obscurity, and listed only on a sheet of aging paper in a tiny museum in a sea-side, wind-blown village on the Scottish coast. The declassification of SOE documents beginning in the 1990s permitted more accurate assessments of the agents and their accomplishments. I have now read lots of books on the subject, both fiction and non-fiction, but the biography of Virginia Hall is highly recommended:
NOTE: On our trip to Scotland, we heard a presentation by the daughter of one of the commanders at the secret training ground. She had just published her father’s memoirs and gave first-hand information of the facilities at Arisaig. Another poignant source of information on the Nazi occupation of France is Amazon Prime’s series “A Little French Village”.
Beneath a Scarlet Sky: A Novel by Mark Sullivan, 2017.
What makes a hero? If you are Pino Lella, the protagonist in Mark Sullivan’s riveting World War II thriller, you risk everything to save as many souls as you can by sneaking them over the Swiss Alps to safety. You put yourself in harm’s way, enlisting as a German soldier and becoming an Allied spy inside the German High Command.
As the editor states, “You forgo the life you thought you’d have to do whatever you can to stop the madness. It’s not often I that recommend true stories, especially ones that have been crafted into page-turning fiction. But after I picked up Beneath a Scarlet Sky and read into the wee hours, I was absorbed and amazed by the story of Italy’s Pino Lella, a real-life unsung hero of World War II, and felt compelled to write about this one. The tale of a young man, at the tender age of seventeen, pushed headlong into the horrors of war, is timeless, relevant, and inspiring. I’m not sure I would ever be as brave as Pino, and I’m so honored to share his story with you. But ultimately, my feelings are superseded by my hope that Beneath a Scarlet Sky will be a “stay up all night to read book” that you will not soon forget.”
NOTE: We are hopeful that we will be able to follow the route of Pino Lella next summer as we plan to travel to Northern Italy. Meanwhile, Context Travel has completed a streaming program on Zoom narrated by Laura Benetti that documents the geography of the area, with interviews with Mark Sullivan and Pino Lella.
In February 2020, WIRED magazine dedicated the issue to an excerpt of 2034. Then for the next six weeks, it serialized the excerpts on its website. The book, in its entirety, went on sale on March 9, 2021. It was a hit, and eventually made the rounds of the Sunday morning talk shows. The authors, Elliot Ackerman, a decorated Marine who served five tours of duty in Iraq and Afghanistan, and Admiral James Stavridis, a four-star admiral who was a Supreme Allied Commander at NATO and commander of the US Southern Command overseeing military operations through Latin America, wrote this chillingly authentic, geopolitical page turner.
This is another “stay up all night to read” book. The lines blur between fact and fiction. Having stood on US soil in Alaska, and looked across the Bering Strait to Russia, walked down the stunningly modern boulevards in Shanghai admiring the avant-guard architecture, and navigated the chaotic tempo of India’s capital city, New Delhi, it’s easy to imagine the possibilities and catastrophes of this future world.
NOTE: You can watch an interview with the authors here.
The Code Breaker: Jennifer Doudna, Gene Editing, and the Future of the Human Race by Walter Isaacson, 2021.
Jennifer Doudna has spent most of her career researching the plucky little RNA molecule, which spawned life on our planet. Walter Issacson’s latest best seller, The Code Breaker, focuses on Dr. Doudna’s achievements. Of course, she didn’t go from A (the RNA molecule) to B (the vaccine) immediately. Instead, by trial and error, and over a period of 40 years, she had amassed enough knowledge to fast track a vaccine at a critical moment in time. All creatures large and small use whatever tricks they can to survive, and so should we. Bacteria came up with a pretty clever virus-fighting technique, but it took them millions of life cycles to do so. Dr. Doudna, through her research of RNA’s most basic biological function, realized that we could turn our own cells into manufacturing plants for the spike protein that would stimulate our immunity to Covid-19.
Great inventions come from understanding basic science. Never before had an RNA vaccine been approved for use. There was now a sudden shift between what human technology can do and what viruses can do. CRISPR and COVID are speeding our entry into the life science era. Molecules are the new microchips. Until 2020, only 5 women, beginning with Marie Curie in 1911, had won the Nobel Prize for chemistry, out of 184 honorees. What an inspiring story!
Bits and Pieces
Important lessons from the COVID-era are dealing with disruption, uncertainty, change, isolation, and more technology in our everyday lives. One way or another, all the heroes and heroines of the recommended books follow this thread. Our firm and our industry, like everyone, everywhere, are adjusting to this paradigm shift. Here is what we are seeing and how we are adapting.
1. We have added personnel and upgraded our professional designations, especially the CFP designations, and purchased new software to be able to provide additional financial planning resources. Our new planning software can address Social Security, Medicare, 529 plans, long–term care considerations, and the transfer of wealth, among other services, with rigorous mathematical modeling. Many of our clients have taken advantage of this analysis already. It is especially useful to those contemplating retirement, either as a stand-alone analysis, or as a comparison to other provider reports. We encourage you to ask us about these new features. We’re here to make your transition to retirement smooth and seamless.
2. We are upgrading our website to provide more information about our suite of wealth management services. You can view our services page here. If you have any questions about integrating these services into your plan, let us know. Or, if you have any thoughts or observations on our site, we’d love to hear them. We appreciate your feedback and insight.
3. The SEC has been performing a routine exam of our firm over the past several months. In a collaborative manner, they have suggested some fine-tuning of our processes. One suggestion was to update our Trusted Contact list. If you haven’t returned your form, or added your Trusted Contact(s) through the Schwab website, please do so. During the COVID lockdown, when we couldn’t reach you after repeated calls, we got worried. It will be helpful to have the contact information of an alternative person in our files, NOT to make any financial decisions or to be privy to confidential information, but for assurance, if needed, that you are okay.
4. Many of you who owned Vanguard annuities voiced discontent about the service from the successor firm, Transamerica. As you know, as a fiduciary, we have never sold a commissioned product, nor do we intend to, and we’re completely agnostic to the financial products in the marketplace. That said, we heard you. And through changes in the financial landscape, we now have the opportunity to help clients exchange high-cost variable annuities to lower cost options, tax-free, and oftentimes to a provider with a better credit rating and a wider selection of investments. If you have an annuity for which you would like an alternative quote, please let us know.
The capital markets have remained calm, cool, and collected in 2021 year-to-date, while the news cycle has featured hurricanes, wildfires, the Delta Variant upswing, Afghanistan, and other frenetic, anxiety inducing headlines. The fourth quarter should be interesting. We’ll be busy.
Kathleen S. Wright, CFA
President and Managing Partner
Kathe founded Wright Associates on the principle that to build trust you have to provide exceptional value. That means developing and implementing customized plans that deliver targeted results and evolve as needs change.