Never Do That Again
On November 12, 2001, American Airlines flight 587 took off from JFK with 260 people onboard, en route to the Dominican Republic. Seventy-nine seconds after takeoff, the plane’s tail snapped off, sending the Airbus A300 crashing into a residential Queens neighborhood. Everyone onboard, and five people on the ground, died.
The crash’s proximity to 9/11 caused a panic. The Empire State building and the UN Headquarters were evacuated. It was quickly determined the crash was due to mechanical failure. For a world on edge at the thought of more terrorism, this was unbelievably good news. People exhaled, went back to focusing on the aftermath of 9/11, and Flight 587 became perhaps the least-remembered major plane crash in history.
But the NTSB did what it’s done for every commercial air accident for the last 50 years. It scoured every piece of data to determine the crash’s cause, and mandated changes to prevent that cause from happening again.
In this case, wake from a plane that took off before flight 587 caused severe turbulence, and the first officer responded with aggressive rudder movements that put more stress on the plane’s tail than it was designed to withstand. This largely came from a training issue. A particular variant of the A300’s rudder controls were far more responsive than other planes pilots were trained in – 732 times more sensitive than a Boeing 767 – which flight simulators and pilot guidelines didn’t reflect. The result was a tendency for pilots to massively overreact to heavy turbulence, even though they were reacting as they were trained. After flight 587, dozens of new training guidelines were put into place to correct this error.
Could the same accident happen again? Probably. But the odds are lower today than they were in 2001, because the NTSB sniffed out the precise cause of the accident and put in place regulations to prevent it from happening again. That’s it’s playbook, and it’s quite good at it. Accidents caused by the same thing rarely happen twice.
This can’t be overemphasized: The reason flying is as safe as it is is because after every accident comes an intense learn-and-fix process that reduces the odds of future accidents. And the reason that works is because flying is governed by immutable laws of physics, and basic airplane mechanics haven’t changed much in the last 50 years. It’s not uncommon for 25-year-old jets to still be in service. We’ve learned nearly everything about these planes, and when something goes wrong we implement specific processes to ensure it doesn’t happen again.
Which can’t be said about businesses, the economy, or any investment market.
More than half of new restaurants fail in the first five years.
Why? This is a centuries-old business. We have all the data in the world. You’d think we’d figure out the formula of what works and what doesn’t by now.
But what would a restaurant success formula look like?
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Location is everything. Unless the food is great, then people will find you wherever.
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Make sure the food is great. Although in some spots there’s a market for mediocre food.
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Make it clean and welcoming. Unless it’s a dive bar; then messy adds charm.
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Compete on price. Unless it’s upscale; then high prices signals quality.
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Focus on service. Unless it’s fast food; then, just smash it out quickly.
For every rule of what works are piles of exceptions. Starbucks became a giant name by purposefully saturating the market with locations. Krispy Kreme tried that and nearly killed itself. The rules of local restaurants are even more nuanced. Location is everything, but a hidden taco truck can draw bigger crowds than a Main St. storefront with a huge marketing budget.
Most of what makes a restaurant work is “buzz.” Atmosphere. Feel. Energy. These are elusive concepts that change without warning. So it’s hard to learn from one restaurant failure and implement its lessons onto the next restaurant, like the NTSB would after a plane crash. The jump from “here’s what went wrong” to “here’s what should be done next time” is a mile wide. The result is that most restaurants are failures, and always will be. Totally different from air travel, where accidents consistently decline as we learn.
Many things in business and investing work like this.
What’s a good investing formula? Finance attracts some of the smartest people in the world, so you’d think we’d figure it out by now. But by and large, we haven’t. And that’s because, unlike g-forces on an airplane’s tail, things adapt over time. There are strategies that work extremely well for years on end before, one day, they stop. Momentum is one. Buying stocks for less than tangible book value is another. 1999’s lesson was “Don’t buy Amazon at what looks like a crazy, valuation.” Which has been painful advice for the last decade. Value investing, on the other hand, works – sometimes. Ben Carlson recently showed that only buying stocks when they trade at below-average P/E ratio leaves you with below-average returns, and how below average those returns are has changed tremendously over time. I have spent considerable time with quantitative investors over the years. A question I always ask is “How do you know when your strategy has permanently stopped working?” It’s the hardest question for them to answer, and I can’t blame them. How hard would NTSB’s job be if aerodynamics went in and out of favor?
Same with economics. A society whose economy has been hit with devastation may be more risk-averse than one with a luckier past. The lesson from France’s economy could be “A welfare state slows innovation.” Or it could be “After being ransacked by neighbors twice in 25 years, people tend to value a stronger safety net.” When one country’s (or region’s, or culture’s, or demographic’s) experience doesn’t offer a good template for what might work in another, we’re often left confused. Which is why economists argue more than engineers.
Part of the reason we will always have recessions is because it’s hard to identify exactly what caused a recession, and even if we could the next recession might respond totally differently to the same set of circumstances. Stimulus works in a recession – as long as that recession is caused by inadequate demand, and policymakers maintain the bond market’s trust in long-term fiscal prudence. Sometimes they can, sometimes they can’t.
I think I’m more open-minded than I’ve ever been as an investor. I’ve seen too much stuff work that technically shouldn’t have worked, and too much stuff fail that technically should have worked.
Some things are timeless. Bubbles will always occur. A handful of companies will dominate industries. Things won’t be fair. Patience will be rewarded, stubbornness will be penalized, and we’ll never be able to tell which is which.
But I’m not optimistic on learning specific lessons from individual events. We are not the NTSB. There’s a limited amount we can learn from one event that makes us better prepared to handle the next event.
I think it’s rare that we can say, “Always do this.” Or even, “Never do that again.” Unless it’s flagrantly obvious or reckless, “I have an evidence-based strategy but I am perpetually open to amending those views as our ever-evolving world adapts, and I know I’ll occasionally be wrong even when I technically should have been right” should be your position on almost every business, investing, and economic topic.