Please note that for the purposes of this analysis, I use the Thomas Williams translation of Augustine’s On Free Choice of the Will.
On the Free Choice of the Will, written by 4th and 5th century early Christian theologian and philosopher Augustine of Hippo, also known as Saint Augustine. In this book, Augustine’s sets out his theory of human responsibility in order to try to reconcile our ability to have free will with God’s omnipotence. In other words, if God created us and gave us free will which we use to do evil, and he knew this would happen since he is all omnipotent, then isn’t God responsible for our evil in some way? The alleged existence of an omnipotent, omniscient, omnipresent, and omnibenevolent God, and the presence of free will and evil in the world appear to be logically contradictory concepts. Augustine’s response to this dilemma attempts to place agency on the individual because they have free will, thus holding them responsible for their actions for they know better because God endowed them to know so. In a rather atypical connection, I will argue that his analysis is very applicable to the dichotomy of investing versus speculating, and the implications regarding accountability for investment professionals today.
Augustine is a clever philosopher who very elegantly arguments that evil is not a flaw in God’s system, but rather the consequence of human inferiority to God. That is to say, Augustine argues that evil is not an entity per se that exists separately or in opposition to goodness. Evil for Augustine is, so to speak, the absence of good; in other words, evil occurs when one turns away from goodness. Augustine tries to resolve the issue of blaming God for the existence of evil in the world, a question that has “hounded” Augustine in his youth and, indeed, that has always given Christian theologians a great deal of trouble. I argue that Augustine’s method is akin to investing versus speculating, for what makes something speculative is the fact that it lacks the principles that makes something an investment. Ben Graham, in his magnum opus, Security Analysis, provided one of the best and most enduring definition and dichotomies: “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative” (Security Analysis, p.106).
Augustine does not end by establishing that evil is the absence of good, he also needed to establish why people do evil. Augustine argued that God endowed us with free will as well as rationality. Augustine writes, “God gave us free choice in order to enable us to act rightly” (Book II.18). Augustine point here was that God created human beings for the purpose of acting rightly. Implicit to his argument, he assumes that: (1) rationality is what allows us to act rightly; (2) human beings have free choice; and (3) free choice is a prerequisite for action. Therefore, he concludes that “the movement by which the will turns from enjoying the Creator to enjoying his creatures belongs to the will itself. So if that movement deserves blame… then it is not natural, but voluntary” (Book III.1). In other words, if human beings were created to act rightly, when they turn to evil by their own free will they ought to be therefore blamed because they are not fulfilling the purpose for which they were given free will (namely to act rightly). Similarly, society allowed for the creation of investors because there was a need to invest their savings with prudence, not with greed (for the most part). Those who were entrusted to invest with prudence (noting that the definition of ‘invest’ makes the term ‘prudence’ largely redundant), were by definition called investment managers. Those who conducted this business with greed were not the realm of investors, but were called speculators.
For investors, when they ceased to conduct their affairs with prudence, they no longer are acting as investors, but as speculators. They deserve blame for any speculative action when they are entrusted as act as investors. Ben Graham wrote in the Intelligent Investor:
“Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook. More than that, some speculation is necessary and unavoidable, for in many common-stock situations there are substantial possibilities of both profit and loss and the risks therein must be assumed by someone. There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are: (1) speculating when you think you are investing; (2) speculating seriously when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose” (The Intelligent Investor, p.21).
Ben Graham is apt to acknowledge that there is a role for speculation in society (note that this parallel doesn’t carry over for the case of evil for Augustine), but it is not for the person who considers himself to be an investor nor is it for the person who is entrusted to act as an investor. Why does one deserve blame for speculation? The obvious answer is that speculation much more often than not results in permanent capital losses, as opposed to large, long-term, risk-adjusted returns seen from investing.
Augustine elaborates further on why people do evil, and why these are not acceptable excuses. He writes that “defect would not be worthy of condemnation unless it were voluntary” (Book III.15). Augustine raises a tautological point to argue that by acknowledging something as undesirable in any way, that this necessarily implies that we acknowledge that it must be the result of a voluntary choice. Augustine argues that “the root of all evil is greed, that is, willing to have more than enough” (Book III.17). As a side note, Augustine never addresses where greed comes from except stating that it comes from our will, which is a circular and unsatisfying argument that has led many to critique Augustine, among many other reasons. Nevertheless, Augustine places the agency and therefore the accountability for actions on human beings. Greed is the fundamental evil that Augustine identifies that leads people away from the good to do evil. This is certainly true for speculators as well.
Augustine continues his discourse stating that even ignorance does not absolve one of accountability. Augustine acknowledges that “even some acts committed out of ignorance are condemned and judged to be worthy of correction” (Book III.18) and that “because of ignorance, error warps our actions” (Book III.18). However, Augustine argues that “The soul is not held guilty because it is naturally ignorant and powerless, but because it did not apply itself to learn and did not work to acquire ease in acting rightly” (Book III.22). Ignorance, according to his argument, is never an excuse when one has the ability and duty to seek out the truth or best possible answer. As a side note, Aristotle also makes a similar argument in his Nichomachean Ethics. Similarly, investors have a responsibility to their clients to seek the best possible returns, which necessarily must be the best risk-adjusted returns by definition, which means that they have a responsibility, and certainly the ability, to learn the best method for investing, which I believe is the value investing approach.
Overcoming ignorance requires a pursuit of knowledge, according to Augustine. He writes that “If the soul does not yet know what it ought to do, it is ignorant because it has not yet received such knowledge. But it will receive it, only if it will make good use of what it has received: the power to search diligently and piously if it wills to do so” (Book III.22). Augustine believes that we are endowed with rationality that allows us to overcome the mistakes that our passions, namely greed, incur for us. Thus, to have reason places the agency on us to make the proper choices. For investors, who are charged with the duty to maximize risk-adjusted returns, one ought to use prudence in investing, otherwise they are accountable for their mistakes. In other words, it is the responsibility of the investment professional to not be ignorant, therefore the investment professional has a duty to actively seek out the best method, which value investing has proven to be both logically and empirically. This is why investors are always concerned with the pursuit of knowledge first and foremost, and conduct diligent fundamental analysis in order to intelligently assess each and every opportunity. Meanwhile, speculators are concerned only with returns and lack the prudence to acquire the knowledge needed to obtain it. Regarding this latter point in the case of speculators, Augustine aptly points out that “For no one can achieve a happy life if he pursues something that either does not exist or cannot make him happy” (Book III.21).
An analogy might suffice to illustrate why speculators ought to be accountable for their actions, even if they are completely ignorant. A greedy speculator who inevitably losses your savings is akin to an impatient doctor who harms their patients by their recklessness in treating them. The doctor’s responsibility as a doctor is to use the method that has proven to be the most successful given the lowest possible risk, which is likely to be empirically proven, and not to by their greed or impatience take shortcuts for their own convenience. Speculators who are too imprudent to conduct their affairs properly or seek out the best method for their clients, nonetheless have the free will to make the best choice. Academics too fall into this category when they condemn common sense and empirical results, prefer the comfort of their incredulous equations and the efficient market hypothesis. Therefore, ignorance nor outside factors are an acceptable excuse for one have the responsibility and the ability to be more prudent such that these common pitfalls can be avoided.
In the course of the text, Augustine encounters a number of challenging questions and issues. Evodius, Augustine’s interlocutor in the text, asks “since God foreknew that he [human beings] was going to sin, his sin necessarily had to happen. How, then, is the will free when such inescapable necessity is found in it?” (Book III.2). This particular question is not pertinent to this analysis, but it is rather the psychological analysis in Augustine’s response that is quite remarkable. He asserts:
“I think the only reason that most people are tormented by this question is that they do not ask it piously; they are more eager to excuse than to confess their sins. Some people gladly believe that there is no divine providence in charge of human affairs. They put their bodies and their souls at the mercy of chance and give themselves up to be beaten and mangled by inordinate desires. They disbelieve divine judgments and evade human judgments, thinking that fortune will defend them from those who accuse them. They depict this “fortune” as blind, implying either that they are better than fortune, by which they think they ruled, or that they themselves suffer from the same blindness. It is perfectly reasonable to admit that such people do everything by chance, since in whatever they do, they fall” (Book III.2).
Augustine asserts that people do not ask this question because they are actually interested in the answer, but rather they ask it because it is an attempt to clear their moral conscious of the burden of acting rightly. They willfully subject their rationality in order to give in to their desires. They trick themselves into believing that everything that happens to them is outside of their control and therefore happens by chance. When their inordinate desires inevitability brings their downfall, they refuse to acknowledge that they are in fact responsible and accountable for their actions. Instead, they find comfort in their ignorance and swear that it was the result of bad fortune.
I believe that most speculators are just like this. Out of their own greed, ignorance and pride, speculators rarely, if ever, acknowledge their failures (and if they do, they willingly forget these lessons at the next promise of a quick gain). They fully invest during bull markets because they are indolent and lack all prudence. Despite warnings from their peers and from the immaculate lesson of history, speculators time and again find themselves fooled into believing in things that are not sensible, such as ‘housing prices never go down’ or ‘it is different this time.’ When these bubbles burst and they’ve lost the savings that their clients entrusted them to manage with prudence, instead of accepting their comeuppance they claim that these the circumstances were “unpredictable” because it was a “black swan” event. Despite the fact that there were always warnings of the excessive risk they took on most of the time (which they obviously ignored), they find comfort in their ignorance and in the largely ignorant (and speculative) masses. This provides these speculators the psychological justification that they desire to trick themselves into believing that they did their best. These speculators are otherwise too weak minded and too egoistic to accept the fact that they are simply fools (for a fool is one who lacks wisdom, by definition) because they either are too lazy to seek the truth that is within their rational ability to grasp or they are comfortable in their ignorance.
Augustine writes that those who pursue wisdom in order to fulfill their responsibilities to the best of their ability do not err with their free will. He writes:
“they would be led in the secure path of divine mercy along the road to wisdom, not becoming conceited when they made new discoveries or disheartened when they failed to do so. Their new knowledge would simply prepare them to see more, and their ignorance would make them more patient in seeking the truth” (Book III.2).
The parallels of Augustine’s right action is apparent for investors. Both not only pursue wisdom, but they do so in a stoic manner that does not allow greed or fear to take over when they encounter success and failure. Knowledge is accumulated in order to obtain more knowledge, and when they find where they are ignorant, they remain patient and diligent in seeking out the truth. As opposed to the speculators who can never obtain what they desire by their speculation, investors who pursue this right method will find happiness and success according to Augustine.
Robert Kirby wrote a wonderful passage related to this topic. In it, he laments over the destruction of the term ‘investing’ and how the profession has been reduced to its current, speculative state of affairs. He writes:
“During the 1950s, most professional investors were perfectly happy with the idea of buying the shares of a good company and anticipating that dividends would account for probably two thirds of the total return over time. In today’s world, if you own a stock and it doesn’t go up in the first month that you own it, or if you’re not the first guy to know that next quarter is going to be three cents light, you’re a failure. It is no surprise to me that the term money manager has by and large replaced the term investment manager. There are damn few investors left in the professional money management business. I still have a dream of a miracle I hope to see one day, the likelihood of which is fast diminishing. It is depicted in a cartoon I have on my wall that shows an evening financial commentator of the kind seen on Nightly Business Report. He is saying, ‘there was no trading on the NYSE today. Everyone owned exactly what he wanted.’”
– Robert Kirby, Tirade of a Dinosaur
I share his opinion. Nowadays, what used to be called investing, that meaning the kind of thoughtful analysis and definition first articulated by Ben Graham in Security Analysis, now needs to be referred to as ‘value investing’, which is a pedantically redundant term. This is because speculators, who used to be comfortable with that title back in Ben Graham’s time, no longer wanted to be called speculators while investors started to speculate. Thus the two disparate parties merged to distort the true meaning of investors, where no one can tell if you are a speculator or an investor. Unfortunately, we still inherit this mangled form of the word today.