Don’t Build Planes out of Straw
In the Second World War, a few tiny islands in the Pacific played host very severe battles between Japanese and American troops. The local people, who had never seen soldiers before watched the violent spectacle happening outside their huts. People in strange uniforms held bones like phone to their ears and spoke into them. Enormous birds (warplanes) circled the skies, dropping packages full of tin cans.
After the war, when the troops had withdrawn and the locals were alone again, something interesting happened. A new cult bounced up on many of the islands—a Cargo Cult. These cults had taken burned down hilltops and encircling the cleared area with stones. They built full-scale planes out of straw and placed them on the artificial runways. Then they constructed radio towers out of bamboo, carved headphones out of wood, and mimicked the movements of the soldiers as they had seen during the war. They lit fires to imitate signal lights and tattooed emblems on their skin like the ones similar on the troop’s uniforms.
They were doing everything right exactly the way it looked before. But without any functioning equipment. It’s not just native people who fall for cargo cults. We might be laughing at cargo cults, but they’re surprisingly widespread among Investors.
One particularly well-established cargo cult ritual can be found among equity investors. It is very common among many investors to have a strict checklist. Like checking international market and trends, sensing geo political situation and analyzing the theories around it, doing technical charting on lots of listed companies etc. They adhere all sort of analysis to make a theory of their investment strategy to succeed or outperform market. But when market goes down at times of Dotcom bubble, Subprime crisis, COVID pandemic or during wars, the experts are often blindsided. Evidently they are very good at identifying and analyzing situation, just not well enough at finding the actual risks.
We, at Shalibhadra, stay far away from any type of cargo cult. We avoid substance less imitation of others. Above all, we don’t mimic the behavior of successful investors without truly understanding what made them successful in the first place.
Nishit Siddharth Shah