I have written several times before on the historical pattern of new technologies and innovations generally turning out to be poor investments. But describing something is not the same as explaining it, and while I do not think this phenomenon is entirely understood, I think there is an insight to be gained by considering the limits of human intelligence when it comes into conflict with human imagination.
In a sense, the ability to imagine could be considered mankind’s greatest intellectual attribute. However, imagination, once untethered from prudence, can become our greatest weakness. The same ability to discover and create is what also sometimes draws us away from a reality grounded in experience and common sense. The philosopher George Santayana offered an insight when he wrote an essay on the frailties of the human mind titled “Intellectual Ambition”:
“The resources of the mind are not commensurate with its ambition…We have memory and we have certain powers of synthesis, abstraction, reproduction, invention, in a word, we have understanding. But this faculty of understanding has hardly begun its work of deciphering the hieroglyphics of sense and framing an idea of reality, when it is crossed by another faculty, the imagination…[P]erceptions fall into the brain rather as seeds into a furrowed field or even as sparks into a keg of powder…
The mind, exercised by its own fertility and flooded by its inner lights, has infinite trouble to keep a true reckoning of its outward perceptions; it turns from the frigid problems of observation to its own visions; it forgets to watch the courses of what should be its ‘pilot stars.’ Indeed, were it not for the power of convention in which, by a sort of mutual cancellation of errors, the more practical and normal conceptions are enshrined, the imagination would carry men wholly away, the best first and the vulgar after them.”
While Santayana blames imagination without restraint for human waywardness, he missed the paradox of human imagination, which is that imagination, because of a tendency to be obsessive, has its own inherent limits, even when disconnected from any governing prudence. Consider that during the 140-year period that saw subsequent bubbles in canal stocks, railroads stocks, and automobile stocks, the same human ingenuity that created these new technologies somehow could not envision a future in which those technologies would themselves be supplanted with a mode of transportation that was faster, more economical, or superior in some other way. Acknowledging that human beings tend to envision a new future on one hand, while ignoring alternative outcomes on the other, makes it easier to understand why so many can get caught up in the prevailing mania of the time, especially when one sees the material fortunes of one’s contemporaries increasing rapidly, and the crowd is convinced that the final say on technological evolution has seemingly arrived.
Similarly, just as the business cycle reveals that a boom sews the seeds of the subsequent recession, the cycle of human behavior largely dictates that with the bursting of each bubble, the seeds are sewn for the next one. For example, an investor who remembers the dot.com mania of the 1990s might be relieved that he resisted the urge to buy Pets.com, but, 42,000% later, regrets that he did not buy Amazon.com. Forgetting his luck in the one instance, and remembering his misfortune in the other, there is a good chance this same investor will be tempted by a ‘revolutionary’ company like Snapchat, currently valued at something like 100 times revenues. While Snapchat may promise to change communication as we know it, at such a steep multiple, history shows us that the chances of it proving to be a superior investment are slim.
In sum, investors might do well to recognize that imagination is a necessity when it comes to pioneering new technologies and creating new innovations to enhance our lives. However, when it comes to investing, imagination without discipline is likely to yield disappointment. As Santayana wrote:
“[I]ndividuals and ages of fervid imagination usually waste themselves in dreams, and must disappear before the race, saddened and dazed, perhaps, by the memory of those visions, can return to its plodding thoughts.”