Investing Principles

Ancient History, Modern Lessons- A Story From The Recent GAIA Conference

In October 2023, I attended my last conference as Chair of the Global Association of Independent Advisors (GAIA) in Stockholm. It is always great to meet with the leaders of likeminded firms across the globe and find out what they are doing to improve their service to clients.

This year’s overarching theme was about technology and how it can be used to streamline processes. The potential of AI and other new software is revolutionary. It is a happy irony that by taking the human element out of various processes, AI will free up resource, allowing us to lead even more human-centric businesses in the future.

GAIA business leaders in Stockholm

As well as exchanging ideas and hearing from thought leaders, we also had some time to take in the rich history and culture of Stockholm. We were fortunate to be able to visit the Vasa museum which is centred around a huge 17th century ship. As the Vasa resides in the most visited museum in Scandinavia, I am sure that some readers will already know it’s story. But I think it is worth retelling here.

The VASA

In the 17th century, Sweden was a growing power. As was the way of the world back then, this led to various conflicts. After suffering some naval losses, Sweden’s King, Gustavus Adolphus, ordered the construction of a huge new ship to demonstrate the might of the Swedish Empire.

The ship’s design was ambitious. It was to fit up to 145 sailors and 300 soldiers. Five months into the construction process, the King ordered 72 heavy bronze cannons. These necessitated the need to add a second gun deck. While not unheard of, this was relatively uncommon for the time. The shipbuilders did not have much expertise in this area.

The King insisted on many other changes and additions, including lavish decorations all over the ship. Another late change included putting heavier 24lb, rather than 12lb cannons on the top gun deck. Shipbuilders understood the effect this would have on the ship’s centre of gravity, but the minority that protested were not heard.

The back of the Vasa ship, showing some of the lavish decorations.

There was also miscommunication between the shipbuilding teams, who were Dutch and Swedish and did not speak the same language. Even the measurements used in the ship’s construction varied. They used Amsterdam feet (28.31cm) and Swedish feet (28.69 cm). This small, but significant, difference made the ship heavier on the port side.

Just before the ship was launched, its stability was tested by having 30 men run back and forth across the deck. These tests may have proved useful but Vice Admiral Fleming, who had arrived to oversee the tests, cut them short for the fear of the ship sinking on his watch.

The King was sending a steady stream of letters from his campaign in Poland. He wanted the ship launched as soon as possible. Despite the reservations of the Vice Admiral, among others, the ship launched on the 10th of August 1628.

Hundreds of people eagerly watched as the Vasa made its maiden voyage. The gunports were open to fire a salute as the ship left. The combined weight of shot would have been the most ever fired simultaneously from the side of a ship.

However, jubilation soon turned into horror. Just a few minutes into the journey, a gust pushed the ship onto the portside. Water rushed into the open lower gunports, sinking the ship quickly. 30 people reportedly perished. The Vasa stayed underwater for 333 years, until it was finally lifted out in 1961.

What can we learn from the Vasa?

The story of the Vasa can be seen as a cautionary tale in many contexts. Investors would do well to heed the many lessons to be learned.

The ‘right’ kind of expert

One reason for the failing of the Vasa is a story is as old as civilisation itself. An authoritarian system, such as a monarchy, is a system where even the so-called masters of their craft will go against their better judgement to appeal to the one in charge. This may be because of the promise of great reward, or the fear of punishment.

Despite their reservations, the shipbuilders approved the King’s design, as well as his modifications along the way. Vice Admiral Fleming, for fear of the ship’s sinking, abandoned the stability test. The King was shielded from the knowledge of the ship’s shortcomings until it was too late.

Unfortunately, the world of finance also contains incentive structures which are not conducive to the best outcomes. Bad ‘experts’ will be influenced by the potential reward they can get from reciting misleading narratives. They may be wilfully ignorant of alternative arguments, or only relate what those that pay them want to hear.

When listening to experts in the media, or in person, it is important to consider their stake in the game; who benefits if you and others are convinced of their narrative? Experts worth their salt give logically consistent advice and can back what they say up with plenty of evidence. ‘Good’ experts have integrity. They will not be afraid to disagree and have candid conversations with those they advise, even if that could mean missing out, financially or otherwise.

Controlling risks

Risk management is a fundamental concept in many aspects of life, financial planning is no exception. The Vasa is a great example of what can happen to those that choose to pursue short term excellence, rather than long term success. As an investor, it is easy to be seduced by the best performing assets of the day. Those who are may have some success for a time, but a mere a change in the winds can lead to a disaster.

It has been judged that the Vasa may not have sunk if the gunports weren’t open on its maiden voyage. These were made to be watertight, so the rocking of the ship would not have allowed the rush of water inside which quickly sunk the ship.

Even if the voyage had gone ahead as planned, with the gunports shut, it may have been that the ship’s instability could have been witnessed. It could then have been taken back to harbour for modifications. However, firing the salute was prioritised.

For sure, the salute would have been impressive. Many ambassadors to Stockholm were there to watch the Maiden Voyage, and the result reported back to their various homelands. Opting to maximise the ‘gain’ from a rousing salute, instead of a more cautious approach, led to the loss of an extremely valuable asset, the death of thirty crew and the embarrassment of the King.  

The Vasa was built to make a statement after a series of losses of ten other ships. Other proposals of building more, smaller ships were not followed through at the time. Investing too much resource on one experimental boat led to dismal failure and a setback for the Navy.

Those familiar with behavioural economics will recognise the phenomena of ‘loss aversion’ and the ‘sunk costs fallacy’. These biases mean those who have already suffered losses are more likely to follow risk-seeking behaviour to recover the losses they have suffered. This is an important trap not to fall into. If the Navy’s losses were replaced only with tried and tested kinds of ships, this would have led to better outcomes for the Swedish Empire.

Just like a long voyage, all financial plans hit rough waters at some point. However, with proper control of risks, setbacks do not result in failure. Measures like diversification and holding the right amount back as cash may not maximise gains over the short term but provide much greater security over one’s whole life.

It is important not to be distracted with new shiny opportunities promising high rewards, this is confusing investing with gambling. When it’s your financial wellbeing on the line, it is best to stick to tried and tested methods.

Lessons learned

Fortunately, the Dutch and Swedish shipbuilders of the Vasa learned from their mistakes. They managed to construct other similar ships which proved seaworthy. While Empires may be able to survive such blunders, an individual investor’s finances may never recover from a mistake so severe. This is especially true in retirement, where one has little or no earned income to replace investment losses.

Fortunately, unlike the construction of the Vasa, the methods used to construct our portfolios are tried, tested and proven. BpH Wealth’s investing principles are built on lessons learned and mistakes made by others over many decades. We construct our portfolios so each financial plan has the best chance of success over the long term, whatever happens.

The global association that we are a part of (GAIA website here) is founded on the principle of providing the best  financial outcomes and service to clients. To do this, we learn from best practices around the world, as well as from each other’s mistakes.

We do not sell shiny new products or clamour to offer ‘the next big thing’. Investing should not be emotionally charged, but rational. Innovation comes only when there is a substantial evidence base that change will lead to a better outcome for the clients we serve. This way, we avoid disaster.

At BpH Wealth, we pride ourselves on having an open culture, and robust governance process. We constantly test our thinking against new evidence. Importantly, we understand the pitfalls of authoritarianism. We encourage each member of the team to challenge everything we do on a regular basis. This way, we ensure that the way we invest, and serve our clients, is the best it can be.

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