The Unsolvable Puzzle

Leo Szilard was one of the smartest people of the 20th Century. He conceived the idea of nuclear energy, patented the process of using it in a power plant, and helped Albert Einstein write the letter that sparked the Manhattan Project. All in his 30s.

Like any genius, Szilard’s curiosity was diverse. After World War II he became a biologist, attracted to a field that hadn’t been explored as deeply as physics.

The new field didn’t just change what he learned, but how he learned.

Szilard spent hours a day in the bathtub, solving physics problems in his head. Biology ruined that routine, because, as Szilard later said, he constantly had to get out of the tub to look up a fact.

Physics is guided by rational laws that have never, and will never, change. A master like Szilard could reason his way through problems like nuclear energy with only his mind as a tool. If an idea in his head followed the laws and reason of physics, it would in real life, and would continue working forever. That’s how a guy designed a nuclear bomb in the bathtub.

Biology is different. It’s guided by things like accident and mutation, so specific behaviors sometimes defy logic and can change entirely as evolution bulldozes the past.

The flu virus has killed 731,000 Americans in the last 40 years – more than died in World War II – and not for lack of effort by the medical community. A virus that mutates and evolves means a vaccine that might work today won’t work tomorrow. And since the mutation itself is an accident, researchers are kept in perpetual scramble. Like an unsolvable puzzle.

The physics vs. biology analogy is relevant in investing.

Too many investors view their field like a physicist in the bathtub, searching for something that’s logical and permanent, while not enough view it like a virologist, needing to update their knowledge and tactics to evolve with the chaos of what happens to work now.


Benjamin Graham’s book The Intelligent Investor was published almost 70 years ago, and is still one of the best-selling investment resources. It sells because so much of its message is timeless.

But investing evolves, and Graham’s book did, too. It went through four editions before his death in 1976.

Jason Zweig, who annotated Graham’s book, once wrote about using it as a practical guide in modern times:

Graham was constantly experimenting and retesting his assumptions and seeking out what works — not what worked yesterday but what works today. In each revised edition of The Intelligent Investor, Graham discarded the formulas he presented in the previous edition and replaced them with new ones, declaring, in a sense, that “those do not work anymore, or they do not work as well as they used to; these are the formulas that seem to work better now.”

One of the common criticisms made of Graham is that all the formulas in the 1972 edition are antiquated. The only proper response to this criticism is to say: “Of course they are! They are the ones he used to replace the formulas in the 1965 edition, which replaced the formulas in the 1954 edition, which, in turn, replaced the ones from the 1949 edition, which were used to augment the original formulas that he presented in Security Analysis in 1934.”

Ben Graham’s brilliance was grasping what part of investing was timeless and what part required revision. His philosophy was rooted in principles of investor behavior that rarely change, but for tactical matters he wasn’t afraid to get out of the tub and look up new facts.

Just before he died, Graham was asked whether detailed analysis of individual stocks – a tactic he became famous for – remained a strategy he favored. He answered:

In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook was first published. But the situation has changed a great deal since then.

What changed was: Competition grew as opportunities became well known; technology made information more accessible; and industries changed as the economy shifted from industrial to technology sectors, which have different business cycles and capital uses.

Admitting this in real time is a hard skill. And it’s rare, because abandoning past strategies feels like defeat, and creates anxiety over what to do next. Obliviousness and denial are more common responses. But it’s a mandatory skill in any field where competition hacks away at the existence of outperformance, and social and regulatory forces evolve.

Think about the investment factors that have changed in just the last 20 years.

Private equity assets have gone from $600 billion to more than $5 trillion. The number of public companies has halved. Index funds have attracted effectively all public equity asset flows. Annual reports went from being sent in the mail to being scanned for keywords by supercomputers. The cost of storing industrial amounts of data went from millions of dollars on rack servers to thousands of dollars in the cloud. Social media connects what used to be walled off. Stocks went from being traded by humans to high-frequency traders, and now the HFTs have competed themselves down to zero profits. The Federal Funds rate averaged 6.5% from 1960 to 2000. Now it’s been below 1% for 105 of the last 188 months.

Looks what’s changed just this year: ICOs have raised more money for startups than venture capital funds. SoftBank launched a fund that is larger than all U.S. IPO proceeds raised from 2010-2012. I’ve heard rumors that things are unusual in Washington.

Buying stocks for less than hard book value worked, until it didn’t. A dividend yield below Treasury yields was a sign of an overvalued stock, until it wasn’t. Discounted cash flow models were an edge, until a spreadsheet could make one. Convertible bond arbitrage was profitable, until other investors realized just how profitable. This doesn’t happen in a field like physics. Gravity doesn’t get arbitraged away due to popularity.

It’s hard to look at how much markets evolve and expect a successful investing strategy to remain stagnant over time. There’s an irony in the number of investors who expect the companies they invest in to adapt and keep up with competition, but they, themselves, expect to invest like a physicist in a bathtub.

We solved the nuclear energy puzzle, the how-to-put-a-man-on-the-moon puzzle, and the send-information-around-the-world puzzle. But we will never permanently solve the investment puzzle, because solutions have shelf lives, and expiration dates that are usually only obviously in hindsight.


There will come a day when investing strategies and norms that work today will grow old and expire. Two groups will form: Those who embrace the reality of the industry’s chaos and adapt, and those who stay in the tub, embracing a world that adheres to the logical rules stuck in their head.

The hard part is that most of investing is stable over time. Most tactical changes are regretted. It’s difficult to tell, without hindsight, whether a strategy is expired or just temporarily out of favor. Long-term investing tends to work specifically because all strategies go out of favor from time to time, testing investors’ wills at the cost of returns. Distinguishing a paradigm shift from a temporary cycle is what separates good investors from momentarily lucky investors.

The investing industry is filled with brilliant people and terrible results. The reason is that the field has less to do with the kind of knowledge that makes a good physicist, and more to do with the rare intellectual flexibility and nimbleness that makes a good flu vaccine researcher.

Leo Szilard once said: “If you want to succeed in the world, you don’t have to be much cleverer than other people. You just have to be one day earlier.”