The Power of Storytelling Every Investor Should Know

The Best Story Wins

When talking about investment and economics, we often rely on cold numbers and data. However, to become a successful investor, you need more than just numbers. Those who tell stories that capture attention and make people nod in agreement tend to be rewarded. Even the best idea is useless if not well-explained, while an old or flawed idea, when compellingly presented, can spark a revolution. For instance, Morgan Freeman could make people cry while reading a grocery list, but a tongue-tied scientist might cure a disease and still go unnoticed.

There is too much information in the world for everyone to calmly review data and find the most logical and correct answer. People are busy and emotional, and a good story is always more powerful and persuasive than cold statistics. If you have the correct answer, you might succeed, or you might not. But if your answer is wrong, yet you tell the story well, you can (for a time) still get ahead. If you know the correct answer and can tell the story well, you will almost certainly succeed. It has always been this way, and it will continue to be so across many realms of history.

Not About Calculations

Many things do not make sense. Numbers don’t add up, explanations are full of holes, yet these things keep happening. People make irrational decisions and respond in strange ways that seem to defy logical thinking. But most decisions are not simply about adding numbers in a spreadsheet to arrive at a rational answer. There are human factors that are difficult to quantify or explain, seemingly detached from the original goal, yet they have more influence than anything else.

Historian Will Durant once said, “Logic is an invention of man, and it may be ignored by the universe.” If you expect the world to operate rationally, it often will. Trying to distill emotional, hormonal humans into mathematical equations leads to a lot of frustration and surprise.

Expectations vs. Reality

Happiness depends more than anything on expectations. Therefore, in a world where most things tend to get better, one of the key life skills is keeping the goalposts fixed. Yet, this is also one of the hardest things to do.

The general plot of history goes like this:

Things improve, wealth increases, technology brings new efficiencies, medicine saves lives. Quality of life rises.

But people’s expectations rise even more—much more, in fact—because these improvements also benefit those around us who are in similar situations. Even as the world gets better, happiness doesn’t change much.

Happiness depends more than anything on one’s expectations. This idea has been around for a long time. Montesquieu wrote 275 years ago:

If we only wanted to be happy, it would be easy to achieve, but we want to be happier than others, which is always difficult because we believe others are happier than they really are.

John D. Rockefeller never had penicillin, sunscreen, or Advil. But we can’t say that a low-income American today, who has Advil and sunscreen, lives better than Rockefeller did. Because that’s not how people’s minds work.

People measure their happiness by comparing themselves to those around them, and when those around them do better, luxuries become necessities in surprisingly short periods. Charlie Munger once said the world is not driven by greed but by envy.

Calm Sows the Seeds of Madness

There is a very common lifecycle to greed and fear. It goes as follows:

• Good news is assumed to last forever.
• People become numb to bad news.
• Bad news is ignored.
• Bad news is denied.
• People become shocked by bad news.
• Bad news is accepted.
• Bad news is assumed to last forever.
• Good news is ignored.
• Good news is denied.
• Good news is accepted.
• Good news is assumed to last forever.

And then we start all over again. This cycle repeats. It always has, and it always will.

The 1960s were a time of scientific optimism. In the previous 50 years, the world had gone from horses and carriages to people walking on the moon, from blood transfusions to organ transplants. This led to a movement among economists to eradicate the scourge of recessions. They thought if we could launch intercontinental ballistic missiles and walk on the moon, we could stop GDP from falling.

Hyman Minsky, who spent most of his career as an economist at Washington University in St. Louis, was fascinated by the nature of economic booms and busts. He also thought that the idea of eradicating recessions was absurd, and it would remain so.

Minsky’s big idea was that stability breeds instability. His key theory was called the Financial Instability Hypothesis. This idea doesn’t rely on math or formulas. It basically describes the psychological process: When the economy is stable, people become optimistic. When people become optimistic, they take on debt. When people take on debt, the economy becomes unstable.

Imagine a world where the stock market never fell. Market stability was virtually guaranteed, and prices only went up. What would you do? You would buy as much stock as possible. You’d take out a mortgage on your house to buy more. You might even sell a kidney to buy more. This would be a rational move! And in the process, stock prices would rise. Stocks would become more and more expensive, so much so that future returns would be nearly zero.

At that moment, the seeds of collapse would start to sprout. With asset prices so high and with no margin for error, the market would cling to the thinnest thread of hope, and the moment something less than perfect came along, it would unravel.

The irony is that when a market is guaranteed not to crash—more realistically, when people think it won’t—the chances of a crash increase. The mere idea of stability leads smart and rational moves to bid asset prices to a point where they cause instability.

Stability breeds instability. In other words, stability plants the seeds of madness. It always has, and it always will.

When Magic Happens

Necessity is the mother of invention, and throughout history, the most significant changes and most important innovations did not occur when everyone was happy and things were going well. They tend to happen when people are a bit panicked, shocked, worried, and when the consequences of not acting quickly enough are too painful to bear—that is, after or during a terrible event.

Many of the great technologies we enjoy today were either developed directly by the military or heavily influenced by it: jets, rockets, microprocessors, microwaves, nuclear energy, penicillin. Big, fast changes only happen when forced by necessity.

Is it because the military is where the best pioneers of technology congregate? Because that’s where the most talented engineers are?

Maybe. But more importantly, it’s because the military has some really big problems that need to be solved right now. Innovation is driven by incentives of all kinds.

On one hand, there’s the incentive of “If I don’t solve this, I might get fired.” That thought gets in your head. Then there’s the thought, “If I do solve this, I’ll help people and make a lot of money.” That will spark creative ideas.

And in the military, you might have this thought: “If we don’t solve this problem right now, we might all die and Adolf Hitler might take over the world.” That’s the kind of motivation that leads to the most amazing problem-solving and innovation in the shortest amount of time in world history.

It always works that way in a panic. In business, managers will look at their teams and say, “Try something new. Break out of the mold, try something different.” It’s not something they say when the economy is booming and the outlook is bright. Big, fast changes only happen when forced by necessity.

World War II began in late 1939 and ended with nuclear warfare in 1945. NASA was founded in 1958, two weeks after the Soviets launched Sputnik, and just 11 years later, we landed on the moon. These things rarely happen so quickly without fear as a motivator.

Conclusion: The Power of Storytelling

To succeed in investment and economics, you need more than just numbers. You need to move people’s hearts through the art of storytelling. Even in the world of investment, connecting with people through stories and persuasively conveying ideas is crucial. A good story holds more power than numbers and data. Now, go ahead and create your own story. Your story has the potential to change the world.