Herman Hesse - Demian

 This bildungsroman was pithy and engaging.  It has a mystical quality that was, by turns, magical, pompous and contradictory.  I wasn’t so perturbed by the contradictions, as much of life strikes me as having this character, but I was surprised to find such spiritual sympathy juxtaposed with such ugly elitism.  

Emil Sinclair, the protagonist, has a model childhood surrounded by the comforts of middle class, small town life.  His parents are Christian and his life is filled with the morals and prejudices of this class.  For the first part of his life, he exists in this world of being a good little boy until, around late boyhood or early adolescence, he begins to acknowledge the existence of a ‘darker’ world opposed to the ‘light’ of family prayers and well ordered domesticity.  After Emil brags about an invented crime to some poorer local boys, one of them begins to blackmail him.  His life descends into a puerile chaos of horrendous, imagined consequences and parental retribution.  He dwells on his own morality and has thoughts that he is an evil person.  All this is very well written and judiciously paced.  It reminded me of many similar realisations from childhood.  

This early part of the book also speaks eloquently about the strangely adult or semi-adult nature of the experiences of late childhood, which are sometimes lost to a simplified utopia of misremembered childhood bliss:

“The grown-up who has learnt to translate a part of his feelings into thoughts, misses these thoughts in the child and therefore finally denies even the experiences themselves.” (p28)

The scene is set for an arduous journey of discovery or, perhaps, a process of individuation involving a deeper understanding of the world around him and himself.  

The narrative moves on when a new boy, Max Demian, arrives at school and mesmerizes the young Emil with his aloof aura and unusual habits.  The two chat about the standard, Christian interpretation of the story of Cain and Abel given by the school master one day.  Demian offers an alternative explanation, suggesting that perhaps Cain is not so evil after all and that his mark is in fact one of distinction that others are afraid of and therefore revile.  Demian then ‘reads’ Emil’s thoughts, discovers that he is the victim of blackmail and resolves this unpleasant situation for him.  Demian continues to offer Emil unorthodox life advice as Emil prepares for his confirmation.  Emil is much enthralled to Demian and feels he’s an ‘apostle’ for a different path in life, away from the conformity and tradition of family and church life.  This era of change is perhaps best captured by this beautiful passage:

“Every man goes through this period of crisis.  For the average man it is the point in his life when the demands of his own fate are most at odds with his environment, when the way ahead is most hardly won.  For many it is the only time in their lives when they experience the dying and resurrection which is our lot, during the decay and slow collapse of childhood when we are abandoned by everything we love, and suddenly feel the loneliness and deathly cold of the world around us.” (p39)

However, there’s also a sense of trepidation about following this new path of self-reflection and rejecting the world that’s offered to Emil by his parents, schoolmasters and priests. This is aphoristically expressed by another well turned phrase:  “Nothing in the world is more distasteful to a man than to follow the path that leads to himself.” (p36)  

A break with Demian occurs when Emil goes off to boarding school, where he falls into drinking and misbehaving with his schoolmates and begins to learn about sexual desire.  I felt this section of the book was of a substantially lower quality than the preceding section about early childhood.  Emil falls in love with a girl he sees in the park and, rather sentimentally, believes she is a representation of everything that is good and pure in the world.  He withdraws from his boozing and carousing and starts to have strange dreams about a bird struggling to break out of an egg.  

Miraculously, a note from Demian appears in one of his school books telling him that the bird he sees is ‘Abraxas’, an ancient God and demon (perhaps Gnostic?) who unites good and evil in one deity.  The note tells him, “Whoever wants to be born must first destroy a world.” (p73)  Other mysterious or miraculous events come to pass and Emil begins to feel that he is traveling along a road to a certain destination.  While walking around the town where his boarding school is, Emil finds himself drawn to some organ music he hears coming from a church.  He stops to listen and returns several times until eventually he starts a conversation with the organist, Pistorius, who turns out to be interested in ancient mysticism too and talks to him about Abraxas and other ancient deities.  At this point in the book there are a couple of very moving passages describing the unity of all creation and history.  For example:

“To the few experiences which I had so far discovered on the road to my goal was now added this new one.  The consideration of such images as I have mentioned, the surrender to odd, irrational forms in nature produces in us a sense of the harmony of our inner being with the will which has been responsible for these shapes.  Soon we become aware of the temptation to think of them as being our own moods, our own creations; we see the boundaries between ourselves and nature quiver and dissolve and we become acquainted with the state of mind when we are unable to decide whether the lineaments of our body result from impressions received from outside or from within us.  In no other practice is it so simple to discover how creative we are and to what extent our souls participate in the continuous creation of the world.  To an even greater extent it is this same indivisible divinity which is active in us and in nature so that if the outer world were destroyed each one of us would be capable of building it up again.  For mountains and stream, tree and leaf, root and blossom, every form in nature is echoed in us and originates in the soul whose being is eternity and is hidden from us but nonetheless gives itself to us for the most part in the power of love and creation.” (p85)

And later on the same page, Pistorious says to Emil:

“We always set too narrow limits on our personalities.  We count as ours merely what we experience differently as individuals or recognise as being divergent.  Yet we consist of the whole existence of the world, each one of us, and just as our body bears in it the various stages of our evolution back to the fish and further back still, we have in our soul everything that has ever existed in the human mind.  All the gods and devils whether among the Greeks, Chinese, or Zulus are all within us, existing as possibilities, wishes, outlets.  If the human race dwindled to one single, half-developed child that had received no education, this child would rediscover the entire course of evolution, would be able to produce gods, devils, paradise, commandments and interdictions, the whole of the Old and New Testament, everything.” (p85)

I found these passages to be amongst the most moving in the book and certainly on par with the earlier sections about escaping childhood.  As such, I was excited that the book was moving in a new direction after the uninspiring section about his boarding school days.  However, almost immediately after these passages that I enjoyed so much, elements of ugly elitism began to emerge.  I suppose, with hindsight, these elements might have been contained in details like Demian’s ‘special’ appearance and his semi-magical qualities.  It also seems like Demian selects Emil as ‘marked’ in the same way as Cain.  

These elements of the book suddenly seemed to gain much greater importance.  For example, Pistorius says to Emil, ‘You do not think of all bipeds who walk along the street as human beings merely because they walk upright and carry their young nine months!’ (p86) – which I found to have a vomit-inducing sense of superiority.  I also felt it was a glaring contradiction to some of what immediately preceded it, about all possibilities existing within everyone and all history being contained within any single individual.  

My confusion increased further when Pistorius goes on to say: ‘There is no reality beyond what we have inside us.  That is why most people live such unreal lives; they take pictures outside themselves for real ones and fail to express their own world.’ (p91) If everything external is, in fact, internal because there is no reality beyond the internal, then how is it possible for ‘external’ things to have any greater or lesser ‘reality’ than internal ones?  I found it all a bit muddled up and the only explanation offered seems to be something along the lines of - everyone else is an idiot and we’re so very special that we’re the only ones who can understand the true nature of the world. Bleh! The pompous self-congratulation goes still further when Pistorious announces, ‘The way of the majority is easy, ours is hard’ (p91).  By this point, I was enjoying the book considerably less and growing a little sick of the pontification and ‘We’re so special and clever’ onanism.  Things improved a bit when Emil has what I would consider a more determinist and universalist epiphany about that nature of existence:

“At this point I felt the truth burning within me like a sharp flame, that there was some role for everybody but it was not one which he himself could choose, re-cast and regulate to his own likening.  There was but one duty for a grown man; it was to seek the way to himself, to become resolute within, to grope his way forward wherever that might lead him.  The discovery shook me profoundly; it was the fruit of this experience.  I had often toyed with pictures of the future, dreamed of roles which might be assigned to me - as a poet, maybe, or prophet or painter or kindred vocation.  All that was futile.  I was not there to write poetry, to preach or paint; neither I nor any other man was there for that purpose.  They were only incidental things.  There was only one true vocation for everybody - to find the way to himself.  He might end as poet, lunatic, prophet or criminal - that was not his affair; ultimately it was of no account.  His affair was to discover his own destiny, not something of his own choosing, and live it out wholly and resolutely within himself.  Anything else was merely a half-life, an attempt at evasion, an escape into the ideals of the masses, complacency and fear of his inner soul.  The new picture rose before me, sacred and awe-inspiring, a hundred times glimpsed, possibly often expressed and now experienced for the first time.  I was an experiment on the part of nature, a ‘throw’ into the unknown, perhaps for some new purpose, perhaps for nothing and my only vocation was to allow this ‘throw’ to work itself out in my innermost being, feel its will within me and make it wholly mine.  That or nothing!” (p103)

Later, there comes a split between Emil and Pistorius where the latter gives a speech about why he can’t follow Emil’s path:

“But I must always have things around me that I find beautiful and sacred - organ music and mystery, symbol and myth.  I need those and cannot renounce them.  That is my weakness.  For often enough, Sinclair, I know that I ought not to have desires of this kind, that they are luxury and weakness.  It would be larger-minded and juster if I put myself quite unreservedly at the disposal of fate.  But that I cannot do; it is the only really difficult thing there is.  I have often dreamed of doing so; but I cannot; I am afraid.  I am not capable of standing so naked and alone; I am a poor weak dog who needs warmth and food and likes the comfort of having his fellow creatures near him. The man who really wants nothing beyond his destiny no longer has his neighbours beside him; he stands quite alone and has nothing but the cold world around him.  Jesus in the Garden of Gethsemane.  There have been martyrs who let themselves be nailed to the cross without a murmur, but even these were not heroes, were not ‘freed’ for even they wanted something that was homely and familiar to them - they had models, they had ideals.  But the man who follows his destiny is allowed neither models nor ideals; nothing cherished or comforting!  And yet this is the path one must follow.  People like you and me are truly lonely but we still have each other; we have the secret satisfaction of being different, of putting up resistance, of desiring the unusual.  But one must cast aside that too if one wishes to go the whole way.  One may not be revolutionary, an example or a martyr either.  It is beyond imagining.” (p104)

I enjoyed this section too, even though I might not totally agree with all of it.  Hesse seems to be advocating a completely disconnected and uninterested approach to life as the highest of highs.  The character of Pistorius can’t follow Emil to these heights and castigates himself for his ‘weakness’.  I’m not sure it’s as black and white as Hesse wants to make out.  He seems very taken with a high asceticism or extreme spiritual hermitism, which could be argued to be lacking the great value that people derive from social interaction, relationships and love of others.  After this, the book descended into high farce.  In spite of all this chat about rejecting everything and living ‘quite alone with nothing but the cold world around’, Emil proceeds to go in search of Demian, find him and enters into an elitist society for super, extra special people overseen by Demian and his mum!  For me, it was beyond absurd that this could be the end of the book.  It reminded me of an X Men movie, but I’m pretty sure I remember those being a good deal more internally consistent.  The fact that Emil can be so high-falutin about rejecting society to allow his life to be governed by fate and be so dismissive of those who need to exist within a society only to then enter into his own comfortable little elitist club is an absurdity that beggars belief!  

The self-congratulation reaches fever pitch when Demian says to Emil inside their special compound for truly amazing people, ‘What nature wants of man is written in a few individuals, in you, in me.  It was written in Christ, it was written in Nietzche’ (p111)!!!! ‘Oh fuck off the lot of you,’ I thought.  How could anyone write such supercilious drivel having written so articulately about the nature of existence in the preceding pages?  I felt like throwing the book out the window! The extra special group of truly extraordinary people go on to predict the beginning of the First World War through dreams and visions.  Of course they would, wouldn’t they?

I really enjoyed the beginning of this book and a few of the ideas and passages that emerge later on before it descends into an ugly elitist fantasy.  I would probably recommend it on the strength of the better passages, and to see what someone else makes of the absolutely absurd ending!  However, I remember enjoying ‘Siddhartha’ and ‘Steppenwolf’ by the same author a lot more as they deal with some similar themes without such a repulsive and self-defeating ending! 

Paul Marshall - 10 1/2 Lessons From Experience

 This brief book is pithy and full of useful information presented in an understandable manner.  Paul Marshall, as well as being the father of one of the members of pop group Mumford and Sons, is also an experienced and successful hedge fund manager.  He co-founded Marshall Wace in 1997 with $50m, half of which reportedly came from George Soros, and it now manages more than $60bn.  As such, he is well qualified to comment on fund management as a practice and as an industry and does so in an insightful and valuable way.

The book begins by examining the nature of markets and Marshall’s opinions about managing funds in a market environment.  He accurately characterises markets as, “highly complex nonlinear systems created by a myriad of half informed or uninformed decisions made by fallible (human) agents with multiple cognitive biases.” (p6)

Lesson 1: Markets are inefficient

Marshall whole-heartedly rejects the efficient market hypothesis (EMH) and uses the following example to illustrate the folly of some of its central assumptions:

“Two economists are walking down the street.  One spots a $100 bill on the ground.  ‘Hey,’ he says to his friend, ‘there’s a hundred bucks lying on the ground!’ ‘Don’t be silly,’ the other replies, ‘if there were a hundred dollars on the ground, someone would have picked it up already!’ (p12)

He also references the work of highly respected thinkers on markets and the nature of uncertainty to illustrate his belief that psychology, bias and the price action of markets themselves all play a far larger part in price discovery than that allowed to them under the EMH.

Benoit Mandelbrot - work on inefficiency of markets (p15-16)

“Today does, in fact, influence tomorrow.  And different price series exhibit different degrees of memory….the obvious explanation…is that market participants are human beings, and humans, driven by fear and greed, are swayed by price movements.” (p16)

George Soros and reflexivity (p16-17)

“Markets not only anticipate economic developments but actually drive them and are in turn driven by them, because, ‘human beings are not merely scientific observers but also active participants in the system.’  With his theory of reflexivity, Soros was demonstrating the limits to understanding and predictability in a self-referential system, a system where an observer is part of what he is observing.” (p17)

Lesson 2:  Humans are irrational

One of the main reasons Marshall characterises markets as inefficient is because humans are irrational.  This is perfectly captured in the quote, “The heart has reasons which reason does not know.’ Pascal, ‘Pensées’ 1670 (p21).  

Marshall also references Soros’s principle of fallibility:  “In situations that have thinking participants, the participants’ view of the world never perfectly corresponds to the actual state of affairs.  People can gain knowledge of individual facts, but when it comes to formulating theories or forming an overall view, their perspective is bound to be either biassed or inconsistent or both.  That is the principle of fallibility.” ‘Fallibility, Reflexivity, and the Human Uncertainty Principle’, ‘Journal of Economic Methodology, 2013’.’ (p23)

Indeed, the recent conditions in any given market can be said to heavily influence the behaviour of its participants as exemplified by a so-called ‘Minsky Moment’ - “His central insight was that long periods of financial stability could ultimately lead to instability because they promoted complacency and excessive leverage and risk-taking.” (p24)

Marshall also posits a ‘Stupidity principle’ saying, ‘there is no such thing as a Stupidity Principle but there should be.  Stupidity is a very basic symptom of the human condition.’ (p26).  It is also an aspect of the human condition that seems to persist through the ages.  Marshall illustrates this point by quoting from Flaubert, “It accompanies poor Emma throughout her days, to her bed of love and to her deathbed.  Stupidity does not give way to science, technology, modernity, progress:  on the contrary, it progresses right along with progress.” Faubert, ‘Madame Bovary’, 1857 (p27).  I was very pleased to find a literary reference in a book about fund management as, like Marshall, I think novels contain the best understanding of human nature rather than economic or financial models.

Marshall references the work of behavioural psychologists Kahneman and Tversky, who could be said to be attempting to ‘prove’ the examples of human fallibility observed in markets and decision making more broadly.  He lists the major bias they, and others, have discovered as follows:  1) Optimism bias 2) Gambler’s fallacy / mean reversion 3) Overoptimism - “when someone is doing well their portfolio should be subject to extra scrutiny and their ego deflated.” (p31) cf Fergie and Becks after the World Cup qualifying freekick vs. Greece 2001 4) anchoring bias 5) confirmation bias - “the tendency to interpret new evidence as confirmation of one’s existing beliefs or theories'' (p34) 6) disposition bias - “describes the tendency of investors to sell assets that have increased in value, while keeping assets which have dropped in value.” (p35) 7) sunk cost fallacy - “decision makers were too heavily influenced by the fact they had already ‘sunk costs’ in the project, even though these costs should make no difference to ongoing investment decisions.” (p36/7)

One assertion that gave me pause for thought was, “there is nothing assured about the outperformance of defensive sectors” (p33).  I wondered if this is true in the long term given the fact that most of the world’s oldest companies come from defensive sectors.  I also think that if a share in a company in a defensive sector trades at the same valuation as one in a cyclical sector, then the defensive share should be preferred as its earnings and cash flow should be more stable across a cycle and its risk of failure lower.  Arguably, defensive shares deserve a premium for this reason and should be purchased when the market doesn’t ascribe it to them.

Lesson 3 - Investment skill is measurable and persistent

Marshall argues that investment skill is quantifiable and continuing.  He uses the ‘success ratio’ or ‘batting average’ (winners: losers) as a means of  measuring this.  This ratio also demonstrates how fine the margins between success and failure are in fund management.  A good ratio is 52-53% winners, amazing is 55%.  Nonetheless, “it is possible to be a consistently good manager with a success ratio below 50% if you have consistent skew towards winning stocks in your position sizing.” (p43)  There is also, later on in Lesson 6 - Concentration + Diversification, the ‘slugging ratio’ - realised gains : realised losses aka win / loss ratio (p63)

This Lesson also focuses on the personal characteristics common amongst successful fund managers.  People who succeed in fund management are a fairly eclectic bunch, to put it mildly, but Marshall says, ‘perhaps above all they have to be resilient.’ (p46)  This reminded me of something one-time star fund manager Paul Woodford said about fund management being the ability to take pain.  Unfortunately since his fall from grace and the closure of his shop, it’s difficult to find information online that isn’t related to this recent, high profile failure so I couldn’t locate the quote.  Nonetheless, I think it is worth reflecting on what resilience means in this context.  Is it resilient to stick to the same idea even when the market disagrees, which is what I interpret Woodford to be saying.  Or is it, in fact, the ability to recognise that one’s ideas or hypotheses about the market or individual stocks have been wrong and change one’s mind?  The unhelpful answer is that it is both depending on the circumstances!  Nonetheless, it’s true that both situations demand severe self-reflection.  To use Woodford as an example, while at Invesco he stuck to his defensive, value oriented style through the dotcom bubble and the financial crisis - both periods during which he presumably underperformed in the run up - which meant he avoided the big losses suffered by more aggressive fund managers in the subsequent crash.  This secured him a reputation as an extremely successful fund manager.  However, when he started his own fund manager he switched to investing a significant portion of his portfolios in unlisted biotech companies, which proved to be his downfall.  In this sense, he seems to be a positive example of resilience and also an example of resilience (or attempted resilience) gone wrong!  Perhaps something similar might be said of Anthony Bolton, who enjoyed extraordinary success managing the UK Special Situations fund at Fidelity before switching to investing in China and experiencing some very poor performance.  Both situations might be seen as ones where initially resilience brings success but then this success turns into arrogance and hubris - more on that in Lesson 10.5.  Crucially, Marshall notes the importance of a fund manager's personal circumstances in helping or hindering their professional success, ‘We have found, for example, that the reddest flags for underperformance are problems in people’s personal lives - the three Ds of death, divorce and disease.” (p46)  Perhaps because it involves asking intrusive questions, this is rarely mentioned in assessing fund managers but strikes me as extremely important even though it may be difficult to assess. 

Lesson 4 - In the short term the market is a voting machine, in the long term it is a weighing machine. (Ben Graham)

‘Successful investing is anticipating the anticipations of others.’ & ‘If farming were to be organised like the stock market, a farmer would sell his farm in the morning when it was raining, only to buy it back in the afternoon when the sun came out.’ JMK (p50) 

‘It is not a case of choosing those that, to the best of one’s judgement, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest.  We have reached the third degree where we devote our intelligences to anticipating what average opinion expects average opinion to be.  And there are some, I believe, who practice the fourth, fifth and higher degrees.’ JMK, ‘The General Theory of Employment, Interest and Money’, 1936)

Marshall sees the quant side of the Marshall Wace business as playing the voting machine game and the fundamental side of the business as playing the weighing machine game. (p52)

Lesson 5 - Seek Change

“The greatest opportunities always occur around change. The valuation of a company will not change unless something changes intrinsically about the company (financially, operationally or strategically) or something changes about its economic/financial context (interest rates, growth, volatility, inflation) to create or destroy value.”

This is the first Lesson in which Marshall wags a finger at Julian Robertson and the Tiger Cubs for being ‘narrative investors’ and for ‘ramping’ their stocks. (p56)  More detail on this later on in Lesson 10 - Size Matters.

Need to find out more about / read about Philip Fisher - who Buffett credited with 15% of everything he had learned about investment, the other 85% being Ben Graham! (p58)

Lesson 6 - The best portfolio construction combines concentration with diversification

“Diversification is protection against ignorance.  It makes little sense if you know what you are doing” (p65)  This reminded me of a Charlie Munger quote, ‘the idea of diversification makes sense to a point. If you don’t know what you’re doing and you want the standard result and not be embarrassed why of course you can widely diversify.  Nobody is entitled to  a lot of money for recognising that because it’s a truism, it’s like knowing 2+2=4 but the investment professionals think that they’re helping you by arranging the diversification - an idiot could diversify a portfolio!  Or a computer for that matter.  But the whole trick of the game is have a few times when you know that something is better than average and invest only where you have that extra knowledge.  And then if you get just a few opportunities that’s enough, what the hell do you care if you own 3 securities and JP Morgan Chase owns 100?’ Daily Journal Shareholder meeting, 2019.  Marshall also makes the correct observation, ‘diversified junk is still junk’ (p100) later on in Lesson 9 - Respect Uncertainty but it seems to make more sense to include it here.

  

Gives a summary in this Lesson of why shorting is more difficult than being long, in his opinion:  1) costs to hold a short, shorts have -ive carry, longs have +ive carry if there is a divvy or stock can be lent out 2) shorting is more competitive - usually dominated by professionals and if a short is popular it will cost more to borrow the stock 3) depends on wider market conditions - ‘in a bull market, poor companies and weak balance sheets are often bailed out by central bank profligacy, asset price inflation or investor animal spirits.’ (p72) 4) unlimited liability 5) says they need to be traded more actively, which I didn’t fully understand? 6) if a short goes against you it becomes a larger % of the portfolio rather than a smaller one, as is the case with a long.

Lesson 8 - A machine beats a man, but a man plus a machine beats a machine

Given his background, Marshall is well placed to talk about hot topics of the day like machine learning and AI. He’s not overly glowing in his praise, ‘machines typically do not fare well in a crisis.  They are not good at responding to a new paradigm until the rules of the new paradigm are plugged into them by a human.’ (p83).  This made me think that they’re bad at the most important moments, a bit like the picking up pennies in front of a steam roller analogy.

Quantamental investment - using tech and data to help fundamental investment (p84-85) strikes me as where Marshall Wace has really excelled.  It seems they have successfully married a predominantly fundamental management style with highly quantitative analysis of this management's performance.   I’m a bit hazier on how MarshallWace uses automated trading and modelling alongside this and the book doesn’t go into much detail.  

Marshall Wace processes 150 petabytes per month and expects to be doing 20 petabytes per day in 3 years time (written 2020) = 600 petabytes a month - is this very costly and a risk because of energy consumption or does data processing follow a Moore’s law type rule?

Lesson 9 Risk Management - Respect Uncertainty

This was my favourite Lesson, not least because it contains my favourite Keynes quote on p90!

“We have, as a rule, only the vaguest idea of any but the most direct consequences of our acts.  Thus the fact that our knowledge of the future is fluctuating, vague and uncertain, renders wealth a peculiarly unsuitable subject for the methods of classical economic theory….By ‘uncertain knowledge’....I do not mean merely to distinguish what is known for certain from what is only probable...The sense in which I am using the term is that in which the prospect of a European War is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealth holders in the social system in 1970.  About these matters there is no scientific basis on which to form any calculable probability whatever” Quarterly Journal for Economics, 1937.

I’m not sure how much is reproduced in the book itself so I’ve copied it from my Skidelsky notes as I lent my copy to someone else. The main gist is certainly in there and, like Keynes, Marshall is keen to emphasise the importance of expectations and their inherent uncertainty in the functioning of markets.  Some of this uncertainty might be susceptible to modelling and prediction via probability but much of it will not yield to this analysis and will remain incalculable.  This is what I understand Keynes to be saying about the future and markets.  Marshall develops this point with a quote from Frank Knight, ‘Risk, Uncertainty and Profit’ 1921, which I hadn’t come across before.  He uses the terms ‘risk’ and ‘uncertainty’ to differentiate the two concepts but his broad point is similar:

‘Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated…The essential fact is that ‘risk’ means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomena depending on which of the two is really present and operating…It will appear that a measurable uncertainty, or ‘risk’ proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all.’ (p91)

This Lesson also contained some comments on VaR (value at risk) that reminded me a lot of Marshall’s assessment of machine trading during crises from Lesson 8 - Machine + Man.   ‘They are useful in normalised environments.  But in stressed environments?  Not so much.’  (p93) This made me think that it’s great when you have no need for it and then absolutely useless when you do need it but perhaps this is an oversimplification.  Perhaps they turn the machine off during crises and don’t let it trade until more predictable assumptions can be made, thus limiting the amount the model can lose in a ‘volatile’ market.  Whatever the case, both comments show some of the limitations of using automation to manage money amidst the ‘multi-agent non-linear complexity’ (p89) displayed by markets.

This respect for uncertainty is also expressed as a dislike for doctrine and dogma.  Marshall uses the example of Colonel John Boyd, a US pilot.  ‘At a 1992 address to the Air War College he warned of the dangers of rigidity:  ‘The Air Force has got a doctrine, the Army’s got a doctrine, Navy’s got a doctrine, everybody’s got a doctrine.’  But of his own work he said, ‘doctrine doesn’t appear in there even once.  You can’t find it.  You know why I don’t have it in there?  Because it’s doctrine on day one, and every day after it becomes dogma.’...’if you got one doctrine, you’re a dinosaur.  Period.’ (p96)  I wondered about the semantics here because Marshall certainly has some beliefs about fund management that appear to be dogmatic, for example, his views on liquidity later on in this Lesson and in Lesson 10 Size Matters.  I suspect that the difference lies in the relative complexity of the situation; the more complexity the less doctrine / dogma are useful but in simpler situations they can be useful.  

The Lesson also contains some information on the funds at MarshallWace.  For example, the maximum leverage of any Marshall Wace fund is 400%, Citadel and Millenium are apparently 600-700%, but it still seemed quite high to me.  I suppose it all depends on how reliable and correlated the funds underlying holdings are.  Marshall says, ‘most of our investment funds are built on a model of diversified low-correlated alpha streams.’ (p100-101).  I wondered if this was a hubristic statement after such a successful run for MarshallWace.  Sometimes undiversified, low-correlated assets turn out to be far more correlated than historical data suggests, e.g. CDOs during the financial crisis of 2008.  I’m also unsure what an ‘alpha stream’ means in the context of a fund - is this a fund manager managing a % of the portfolio?  Or is it an automated trading strategy? Or could it just be a single stock or derivative position?  I would have liked more information on how the funds are structured at MarshallWace but the book is more of a general overview and some of the information is probably proprietary given it’s a hedge fund.

Marshall has very clear views on concentration in portfolio construction.  Some might call them doctrinal or dogmatic!  In his view, a fund should be able to meet client withdrawals in all but the most extreme instances and should never resort to gating funds and preventing clients from redeeming their holdings.  ‘Clients should never be asked to pay such a price [gating of funds, because it shows the manager has not been prudential about liquidity].  In some cases, clients literally had to pay the price, continuing to pay the management fee while the fund was gated.  This may have been legal but it was a disgrace to the fund management industry.’ (p104)  I couldn’t agree more!   It reminded me of Neil Woodford’s woes investing in unlisted (aka illiquid) biotech stocks I mentioned earlier in Lesson 3 - Skill is measurable + persistent.  He counsels investors, ‘never be in a position where the stock owns you.’ (p104)  This reminded me of Sam Zell’s famous, ‘liquidity is value’ soundbite.  I wondered what specific rules Marshall used in the funds.  For example, at the long only fund manager I used to work at, there were rules to forbid owning more than 10% of a company, 20% of the free float and owning a position larger than 30/90 days at 30% of average daily trading.

Lesson 10 Size Matters

Marshall talks about his experience at Mercury Asset Management where it simply grew too big and then blew up, performance-wise, in 1998. (p106)  Now that MarshallWace manages more than >$60bn, I wondered when he felt it would be too big.

This is the Lesson where Marshall really gives a stern telling off to Tiger Management and its founder Julian Robertson, having mildly scolded them as ‘narrative investors’ in Lesson 5 - Seek Change.  He writes, ‘Julian Robertson was the almost legendary manager of the Tiger Fund.  He annualised circa 25% per annum during the 20 year life of his fund from 1980 and became a billionaire.  But this would not have been your investor experience, especially if you were late to the party.  The money-weighted return on the fund since inception was relatively modest.  Robertson allowed the fund to grow to $13bn but did not adapt the way he ran money, which was through a concentrated high conviction portfolio.  In its last three years the fund lost 4% (1998), 19% (1999) and 13% before it was decided to close it down in 2000.  Some of the positions were so large and unwieldy that Robertson decided to distribute them in specie to clients rather than unwind in the market, most famously his 22.4% stake in US Airways.’ (p107).  This is certainly quite different from the usual narrative that surrounds Robertson and his ‘tiger cub’ proteges.  Marshall is obviously a bit upset that he enjoys such a great reputation in spite of his irresponsible management of his fund's liquidity.  Against that, averaging 25% over 20 years is fantastic performance in anyone’s eyes.  Of course, he will have taken most of that money towards the end of the fund’s life and returns would have obviously suffered given the performance in the fund’s last three years.  However, I wondered how much responsibility lies with Robertson and how much lies with his investors.  It’s undeniable that liquidity was not a key concern for him but presumably his investors knew this about his management style, especially those who invested later and could analyse his track record.  As such, I feel that his later investors were greedy and should share the blame even though I also think Marshall is right about Robertson’s irresponsible management .  It seems a bit rich to expect a fund manager to turn away clients, especially if your fund manages >$60bn! Marshall’s response to this would be that some automated trading strategies are more scalable than simple equity investments.  He writes,  ‘from our experience, execution costs typically lead to a fundamental equity strategy being capped anywhere from $1-3bn in capital.  Most good managers can deliver strong alpha on up to $1bn of capital.  Very few can deliver the same persistently above $3bn.  For systematic strategies it is possible to scale much higher.” (p108)  I wondered how they came to these conclusions, besides the ‘experience’ mentioned, as I would have imagined there are many funds >$1-3bn with significant, sustained outperformance.  Nonetheless, the point that size matters, makes outperformance more difficult and can cause big problems depending on the management style. 

Lesson 10 ½

The final lesson is best summarised by the quote, ‘all political lives, unless they are cut off in midstream at a happy juncture, end in failure, because that is the nature of politics and of human affairs.’ Enoch Powell, ‘Joseph Chamberlain’ 1977 (p111).  Marshall says this is also true of fund management.  

The advice is to always be aware of the prospect of failure and to beware of hubris at all costs.  He cites the intriguing example of fund manager Tony Dye in 1999 at the peak of the internet bubble (p113) who had been calling the bubble since 1995 but was sacked a few days before the crash after years of ‘failure’.  Sometimes failure is forced on a fund manager by clients or employers! 

Marshall already mentioned hubris as a significant source of bias in Lesson 2 - Humans are Irrational - point 3 ‘overoptimism’.  Here he cites a classical example, ‘The Ancient Romans had a good approach to this [hubris].  When a general would return home they were typically granted a ‘triumph’ - it was technically illegal for an army or a general with imperium to enter the city other than at this event - which was effectively a big parade in which the general displayed all of the plunder and captives from the campaign…At the end of the parade, the general would ride in a chariot to be lauded by the crowds lining the streets and to offer a sacrifice at the Temple of Jupiter on Capitoline Hill in the centre of Rome.  The general would be accompanied in the chariot by an ‘auriga’ (a slave with gladiator status).  The auriga would continuously whisper in the general’s ear ‘memento mori’ - ‘remember that you are mortal’.  At the peak of his triumph, the general was reminded of his mortality.’ (p115)  I wondered how this might play out in Marshall’s hedge fund world.  After a big win or a period of huge outperformance would he gather up his employees and march on the homes and offices of his rich clients brandishing thick wads of cash while the cleaner whispered in his ear, ‘remember past performance is no guarantee of future results, these clients will turn on you and cause a redemption crisis’?  Of course, Marshall would take issue with them as he believes investment skill is measurable and persistent (Lesson 3 - Skill is measurable + persistent) and that he is a prudent manager of liquidity (Lesson 10 Size Matters)!

Conclusion

I thought this was a pithy and understandable introduction to markets and the fund management industry from a successful market practitioner.  There’s lots to think about and plenty of opportunities to delve deeper from the quotes and books mentioned, which are of an eclectic and high quality.  I would certainly recommend it to others and have already lent my copy to someone else.  

Quotes

“In theory there is no difference between theory and practice.  In practice there is.” Yogi Berra (p1)

‘In the past 50 years there have been six bull markets and six bear markets…the average bull market has lasted 6.9 years, the average bear market 1.5 years.’  (p73)

‘The definition of a stock which falls 90% is a stock that falls 80% and then halves.’ (p74)

‘As Bill Gates said, we always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.’ (p76)

‘There are old soldiers and there are bold soldiers but there are no old, bold soldiers.’  David Hackworth, US Army Colonel, ‘About Face’ (p87)

Markets are ‘a near-perfect example of multi-agent non-linear complexity.’ (p89)  

  

 

Margaret Mitchell - Gone With The Wind

This book was recommended to me by a friend’s mother, whose other favourite book is ‘Madame Bovary’.  Expectations were high and, in many ways, met by this true epic.  Scarlett O’Hara and Rhett Butler are both deliciously self-interested and complicated characters.  Mel and Ashley are excellent secondary foils.  The narrative covers a decade around the Civil War in an enjoyable and historically authentic way.  Plus, the book has an amazing ending.  So, in short, there was a lot to like!

This book was not as good as  ‘Madame Bovary’.  Obviously, almost all novels would suffer by this comparison.  ‘Gone With The Wind’ is a very good book, but it is far too long.  When I think about how quickly and effortlessly Flaubert sketches Charles Bovary’s early life and social milieu, without any loss of colour or texture, the description of Scarlett’s pre-war life at Tara feels laboured.  The prose can be verbose and the narrative repetitive.  It would be unfair to say that ‘Gone With The Wind’ doesn’t create vivid scenes or a good feel for the era, because it does that well, but at huge length.   Given the enormously ambitious scale of the book, I felt like this problem was compounded.  I also felt like some of the minor characters were a bit superfluous and caricatured.  So, it definitely could have done with some editing!  

But this can take nothing away from the glorious main characters that are so human and memorable and deserve to be spoken of as great literary achievements.  Both the narrative and the people in the book have an authentic feel, which can sometimes get lost amidst all the history in historical novels.  

‘Gone With The Wind’ is also a book of extremely prejudiced ideas.  Black people are said to have been much better off as slaves in southern America and are being duped and exploited by the Yankees offering them freedom and wages.  Irish people are degenerate alcoholics and animalistic chancers, incapable of controlling their impulses.  Women, prostitutes, the French and any other minority all receive similar treatment.  I was divided about how to feel about all these harmful stereotypes.  On the one hand, saying something along the lines of, ‘the average black person was better off under slavery in the South’ is hard for me to believe.  Nonetheless, it doesn’t feel like the author is inventing these opinions, so they probably existed around this time and so can be said to be, in some sense, historically accurate.  

Taken as a whole, the book was too long and the prose too verbose.  It’s also full of opinions and prejudices that may be offensive to modern readers.  At the same time, the characters and narrative are deeply impressive and the ending is wonderful.  I would certainly recommend the book but perhaps not without warning that some of the content is inflammatory.

Arthur Koestler - Darkness at Noon

 This was an incredibly good book that brought me closer to understanding the milieu and mindset of Communism as it may have practically existed.  The book deals with Stalin’s ‘Great Purge’ in Russia before WWII, although no country or historical character is mentioned by name.  We meet our protagonist, Rubashov, in a prison cell where he has arrived as part of a purge of the unnamed country’s Communist party.  A dictatorial leader, referred to only as No.1, now presides over the party and is in the process of eliminating his rivals.  Now in his 50s, Rubashov was once a general in the revolutionary war and a high-ranking party official.  Given these strong credentials, Rubashov and his ‘Old Bolshevik’ contemporaries are seen as threats to No. 1’s power and must be made subservient or liquidated.  

The book is divided into four sections - three ‘hearings’ or ‘interrogations’ and a final section entitled ‘The Grammatical Fiction’.  The first section finds Rubashov reflecting on the nature of history, as he does throughout the book, and his lifelong involvement with the Communist party.  The section begins with the epithet, ‘Nobody can rule guiltlessly’ from Saint Just (p1), which, like most of the epithets in the book, is apposite.  Rubashov relates convincingly the power of Communism’s new ideas and the thrill he experiences whilst he believes that his work within the party is making, or at least materially changing, history.  He conveys a feeling that much of history up to the revolution has been marred by misplaced sentimentalism and subservience, necessarily rejecting the Christian tradition that came before Communism in Russia.  ‘He who understands and forgives - where would he find a motive to act?’ (p25), he wonders and, later on, concludes that ‘the individual was nothing, the Party was all’ (p70).  However, there is definitely a sense in which these radical changes are recognised as being foisted upon the masses without their explicit consent:

‘“Certainly,” said Rubashov. “A mathematician once said that algebra was the science for lazy people - one does not work out X but operates with it as if one knew it.  In our case, X stands for the anonymous masses, the people.  Politics mean operating with this X without worrying about its actual nature.  Making history is to recognize X for what it stands for in the equation.”’ (p72)

The first section alternates chronologically between Rubashov’s time in jail and his earlier life in the party.  Rubashov tells of his youthful fervor, how he fought and led in the war and how he thought nothing of risking his life for the greater glory of Communism and the positive changes he believed it would bring to history. He also relates how he was sent to Germany after Hitler’s rise to power in 1933 to reorganise and purge the German Communist party.  In a poignant scene in an art museum in Germany, he meets with a man called Richard and explains to him that he has strayed from the party line, has become harmful and must be expelled.  Richard’s complaints about the party are legitimate and not dissimilar to the reservations Rubashov has later on in the book, but Rubashov betrays him to the gestapo.  This is the first indication we get of what the practicalities of, ‘the individual was nothing, the Party was all’ entails.  It’s not enough for Richard to simply be ejected from the Party.  He must be betrayed, discredited, imprisoned, tortured and maybe killed for his disobedience to the party elite.  While still in Germany, Rubashov himself is arrested, imprisoned and tortured but never reveals any information and is eventually released by the Nazis after two years.  He returns to a hero’s welcome but is uncomfortable about No.1’s increasingly dictatorial tendencies.  He knows No. 1 may see him as a threat, and so requests an assignment abroad rather than a domestic position where he may find himself in opposition.  No. 1 is suspicious but sends him to Belgium to enforce party discipline amongst dock workers.  Here, Rubashov finds a committed cell led by a German immigrant called Little Loewy, who tells his life story, which includes a lot of sacrifices he has made for the party.  According to Wikipedia, this section relates to the 1935 invasion of Ethiopia by Italy. This invasion was condemned internationally and led to an embargo on selling strategic resources to Italy by the League of Nations and the Communist party.  However, Rubashov must inform the dock workers that they will secretly break the embargo and supply the facist government in Italy under orders from the party elite.  The workers revolt and refuse the instructions, so Rubashov has them denounced by the party by name, all but ensuring their arrest in Belgium.  Little Loewy hangs himself and Rubashov moves on to another assignment.  This is the second indication of how brutal and dangerous it is to have ideas whose pursuit justify the use of ANY means.  It also draws a stark contrast between the party elite, who can bend and manipulate any principles they choose to further Communism, as defined by themselves, and the party rank and file who must display total obedience, even to ideas that are directly contrary to the stated principles of Communism, or risk imprisonment or death.  The example is powerful because it is so illogical, hypocritical and inhumane.

In ‘The First Hearing / Interrogation’, Rubashov meets his first interrogator, Ivanov.  Ivanov is another Old Bolshevik who fought in the revolutionary war.  The atmosphere between them is cordial and they reminisce about old times, including when Rubashov convinced Ivanov not to commit suicide after his leg was amputated during the war.  The two seem to share some reservations about the direction Communism has taken since the revolution.  Ivanov tells Rubashov that if he can convince him to plead guilty to the charges against him, which will probably precipitate a sentence of 5-10 years in a labour camp rather than execution, then he will consider his debt relating to the amputation repaid.  Rubashov seems reluctant, or at least undecided, about co-operating, but Ivanov urges him to think rationally and not to be sentimental.  Ivanov tells Rubashov that once he has thought the matter through to its rational conclusions he will agree with him and sends him back to his cell for two weeks to think things over.  

The second section begins with another wonderful epithet:

‘When the existence of the Church is threatened, she is released from the commandments of morality.  With unity as the end, the use of every means is sanctified, even cunning, treachery, violence, simony, prison, death.  For all order is for the sake of the community, and the individual must be sacrificed to the common good.’ Dietrich Von Nieheim, Bishop of Verdun, De schismate libri III AD1411 (p81)

This section contains material from Rubashov’s diary and continues his reflections on the nature of history and politics and the significance of his own life and actions.  Some of the themes are similar to the first section. For instance, the idea that no one can rule guiltlessly and the uncertainty inherent in trying to direct social progress from a position of central control.  He reasons in his diary:

‘The ultimate truth is penultimately always a falsehood.  He who will be proved right in the end appears to be wrong and harmful before it.

But who will be proved right?  It will only be known later.  Meanwhile he is bound to act on credit and to sell his soul to the devil, in the hope of history’s absolution.’ (p81)

In the absence of further hearings with Ivanov, Rubashov interrogates himself about the philosophical schema he has adopted during his life.  At points, he seems to still be quite close to Communist orthodoxy, musing, ‘had not history always been an inhumane, unscrupulous builder, mixing its mortar of lies, blood and mud?’ (p104) and reasoning, ‘politics can be relatively fair in the breathing spaces of history; at its critical turning points there is no other rule possible than the old one, that the end justifies the means.’ (p81)  However, in other parts, it seems Rubashov is in a state of fundamental confusion over how to interpret his life and how best to respond to the charges he faces.  The following ethereal passage seems to indicate an internal struggle that leaves Rubashov totally disorientated:

‘He found out that those processes wrongly known as “monologues” are really dialogues of a special kind; dialogues in which one partner remains silent while the other, against all grammatical rules, addresses him as “I” instead of “you”, in order to creep into his confidence and to fathom his intentions; but the silent partner just remains silent, shuns observation and even refuses to be localized in time and space.’ (p90)

Ideas about how concepts like forgiveness and understanding stand in opposition to social progress reemerge.  For instance, when Ivanov says to Rubashov:

‘“Admit,” he said, “that humanism and politics, respect for the individual and social progress, are incompatible.  Admit, that Gandhi is a catastrophe for India; that chasteness in the choice of means leads to political impotence.”’ (p128)

Against this, Rubashov reminisces about his secretary, Arlova, when he worked at the Trade Delegation.  The two begin a relationship and Arlova becomes Rubashov’s mistress, spending almost every night with him telling him, with macabre significance later on, ‘you will always be able to do what you like with me’ (p95).  Suspicions about Arlova’s political trustworthiness begin to appear and eventually her brother and sister-in-law are arrested for ‘treasonable connections’.  Rubashov does nothing to save her, believing that it’s more important to the furtherance of the Communist cause that he stays alive instead of her.  Perhaps because of the intimate, sexual relationship between the two and the submissive attitude Arlova shows to him, this is the most gratuitous of the three betrayals for the sake of Communism that Rubashov remembers.  While Rubashov’s actions towards Richard and Little Loewy could be portrayed as part of doing his job, albeit with highly problematic moral elements, the case of Arlova feels different and far worse.  Through his actions, Rubashov appears to deny his connection to Arlova and the feelings he has for her.  In a way, this almost seems to me like Rubashov denying his own existence or soul.  When personal feelings of sufficient strength to precipitate a sexual relationship are made subservient to furthering the glory of the Communist party, it’s possible to follow the logic but it feels totally wrong.  It presupposes a future utopia so wonderful that it’s worth betraying someone with whom you have a personal and sexual connection, which will condemn them to death.  Furthermore, Arlova is looking to Rubashov to protect her, professionally and personally, and he totally disregards this duty.  I wondered what kind of utopia would have such unnatural and unpleasant beginnings.  In the same way some philosophers pondering the problem of evil wonder what kind of God would permit such evil and suffering to exist in his creation.  In this case, the choices seem to be - that there is no God and that evil can only be eliminated by the rise of Communism, to which end any means may be justifiably used, or that there is some kind of reason (God, morality, ethics, mental well being etc) why humans should never commit certain acts.  We know and feel that certain things are wrong but I don’t think it’s possible to prove that objectively, so the conundrum that Rubashov faces is a very difficult one.

Rubashov is taken to the barber in the second hearing and receives a tiny slip of paper from someone in the barbershop that says, ‘Die in Silence’.  

The second section introduces Gletkin, a younger interrogator, who advocates for the use of harsher tactics, like torture, on Rubashov.  Ivanov disagrees with him and tells Gletkin, ‘he is made out of a certain material which becomes tougher the harder you hammer on it’ (p85).  This relationship between Ivanov and Gletkin continues the theme of a younger, more ruthless generation overthrowing an older, more sentimental one.  Both Ivanov and Rubashov seem to be asking themselves if their hesitancy about the brutal direction Communism is taking during the Great Purge is down to a loss of belief in the socialist utopia or because they don’t approve of the means being used.  Gletkin argues that all means are justified by the end and implies that Ivanov must be cynical about the possibility of the end if he is squeamish about using brutal means to bring it about.

During this time, Rubashov witnesses another political prisoner, whom he knew personally, being dragged to his execution. As he passes Rubashov’s cell, the other prisoner cries out to him by name.  This has a profound effect on Rubashov.  However, Ivanov comes to his cell to tell him that it was all staged by Gletkin with the purpose of making him confess more quickly but that Ivanov believes it will have the opposite effect.  Strangely, Ivanov takes the role of defender of means-justify-the-ends Communism in this conversation with Rubashov, whereas Gletkin had been playing this role in the discussion between him and Ivanov about how best to interrogate Rubashov.  For me, the passage from pp129-133 is the lodestone of the book, containing all the key themes in their most impassioned presentation and I’ll reproduce it in its entirety here:

‘‘Yes,’ said Rubashov. "So consequent, that in the interests of a just distribution of land we deliberately let die of starvation about five million farmers and their families in one year. So consequent were we in the liberation of human beings from the shackles of industrial exploitation that we sent about ten million people to do forced labour in the Arctic regions and the jungles of the East, under conditions similar to those of antique galley slaves. So consequent that, to settle a difference of opinion, we know only one argument: death, whether it is a matter of submarines, manure, or the Party line to be followed in Indo-China.  Our engineers work with the constant knowledge that an error in calculation may take them to prison or the scaffold; the higher officials in our administration ruin and destroy their subordinates, because they know that they will be held responsible for the slightest slip and be destroyed themselves; our poets settle discussions on questions of style by denunciation to the Secret Police, because the expressionists consider the naturalistic style counter-revolutionary, and vice versa. Acting consequentially in the interests of the coming generations, we have laid such terrible privations on the present one that its average length of life is shortened by a quarter. In order to defend the existence of the country, We have had to take exceptional measures and make transition-stage laws, which are in every point contrary to the aims of the Revolution. The people's standard of life is lower than it was before the Revolution; the labour conditions are harder, the discipline is more inhuman, the piece-work drudgery worse than in colonial countries with native coolies; we have lowered

the age limit for capital punishment down to twelve years; our sexual laws are more narrow-minded than those of England, our leader-worship more Byzantine than that of the reactionary dictatorships. Our Press and our schools cultivate Chauvinism, militarism, dogmatism, conformism, and ignorance. The arbitrary power of the Government is unlimited, and unexampled in history; freedom of the Press, of opinion and of movement are as thoroughly exterminated as though the proclamation of the Rights of Man had never been.  We have built up the most gigantic police apparatus, with informers made a national institution, and with the most refined scientific system of physical and mental torture. We whip the groaning masses of the country towards a theoretical future happiness, which

only we can see. For the energies of this generation are exhausted; they were spent in the Revolution; for this generation is bled white and there is nothing left of it but a moaning, numbed, apathetic lump of sacrificial flesh…..Those are the consequences of our consequentialness. You called it vivisection morality. To me it sometimes seems as though the experimenters had torn the skin off the victim and left it standing with bared tissues, muscles and nerves….’

‘Well, and what of it?,' said Ivanov happily. 'Don't you find it wonderful? Has anything more wonderful ever happened in history? We are tearing the old skin off mankind and giving it a new one. That is not an occupation for people with weak nerves; but there was once a time when it filled you with enthusiasm. What has so changed you that you are now as pernickety as an old maid?'

Rubashov wanted to answer: "Since then I have heard Bogrov call out my name.' But he knew that this answer did not make sense. So he answered instead:

"To continue with the same metaphor: I see the flayed body of this generation: but I see no trace of the new skin. We all thought one could treat history like one experiments in physics. The difference is that in physics one can repeat the experiment a thousand times, but in history only once. Danton and Saint-Just can be sent to the scaffold only once; and if it should turn out that big submarines would after all have been the right thing, Comrade Bogrov will not come to life again.'

'And what follows?' asked Ivanov. ‘Should we sit with idle hands because the consequences of an act are never quite to foreseen, and hence all action is evil? We vouch for every act with our heads - more cannot be expected of us. In the opposite camp they are not so scrupulous, Any old idiot of a general can experiment with thousands of living bodies; and if he makes a mistake he will most be retired.  The forces of reaction and counter-revolution have no scruples of ethical problems.  Imagine a Sulla, a Galliffet, a Kolchak reading Raskolnikov.  Such peculiar birds as you are found only in the trees of revolution. For the others it is easier…..’

He looked at his watch.  The cell window had turned a dirty grey; the newspaper which was stuck over the broken pane swelled and rustled in the morning breeze.  On the rampart opposite, the sentry was still doing his hundred steps up and down.  

"For a man with your past,' Ivanov went on, 'this sudden revulsion against experimenting is rather naive. Every year several million people are killed quite pointlessly by epidemics and other natural catastrophes.  And we should shrink from sacrificing a few

hundred thousand for the most promising experiment in history? Not to mention the legions of those who die of undernourishment and tuberculosis in coal and quicksilver mines, rice-fields and cotton plantations. No one takes any notice of them; nobody asks why or what for but here we shoot a few thousand objectively harmful people, the humanitarians all over the world foam at the mouth. Yes, we liquidated the parasitic part of the peasantry and let it die of starvation. It was a surgical operation which had to be done once and for all; but in the good old days before the Revolution just as many died in any dry year - only senselessly and

pointlessly. The victims of the Yellow River floods in China amount sometimes to hundreds of thousands. Nature is generous in her senseless experiments on mankind. Why should

mankind not have the right to experiment on itself?' 

He paused; Rubashov did not answer. He went on:

"Have you ever read brochures of an anti-vivisectionist society? They are shattering and heartbreaking; when one reads how some poor cur which has had its liver cut out, whines and licks his tormentor's hands, one is just as nauseated as you were tonight. But if these people had their say, we would have no serums against cholera, typhoid, or diphtheria…’

He emptied the rest of the bottle, yawned, stretched and stood up. He limped over to Rubashov at the window, as looked out.

'It's getting light," he said. 'Don't be a fool, Rubashov.  Everything I

brought up tonight is elementary knowledge, which you know as well as I. You were in a state of nervous depression, but now it is over.' He stood next to Rubashov at

the window, with his arm round Rubashov's shoulders; his voice was nearly tender.  "Now go

and sleep it off, old war-horse; tomorrow the time is up, and we will both need a clear

head to concoct your deposition. Don't shrug your shoulders - you are yourself at least half convinced that you will sign.  If you deny it, it's just moral cowardice, Moral cowardice has

driven many to martyrdom.”

Rubashov looked out into the grey light. The sentry was just doing a right-about

turn. Above the machine-gun turret the sky was pale grey, with a shade of red. 'I’ll think it over again,' said Rubashov after a while.

When the door had closed behind his visitor, Rubashov knew that he had already half-surrendered. He threw himself on the bunk, exhausted and yet strangely relieved. He felt hollowed-out and sucked dry, and at the same time as if a weight had been lifted from him. Bogrov's pathetic appeal had in his memory lost some of its acoustic sharpness. Who

could call it betrayal if, instead of the dead, one held faith with the living?

While Rubashov slept quietly and dreamlessly - the toothache had also quietened down - Ivanov, on the way to his room, paid a visit to Gletkin. Gletkin sat at his desk in full uniform, and was working through files. For years he had had the habit of working right through the night three or four times a week. When Ivanov entered the room, Gletkin stood up to attention.

“It is all right,” said Ivanov. “Tomorrow he will sign. But I had to sweat to repair your idiocy.”

Gletkin did not answer; he stood stiffly in front of his desk. Ivanov, who remembered the sharp scene he had had with Gletkin before his visit to Rubashov's cell and knew that Gletkin did not forget a rebuff so easily, shrugged his shoulders and blew cigarette smoke into Gletkin's face. 'Don't be a fool, ' he said. "You all suffer from personal feelings. In his place, you would be even more stubborn.”

 “I have a backbone, which he hasn't,” said Gletkin.

"But you're an idiot,” said Ivanov. “For that answer you ought to be shot before him.”

He hobbled to the door and banged it from outside.

Gletkin sat down to his desk again. He did not believe Ivanov would succeed, and at the same time he was afraid of it. Ivanov's last sentence had sounded like a threat, and with him one never knew what was a joke and what serious. Perhaps he did not know himself - like all these intellectual cynics….

Gletkin shrugged his shoulders, shoved his collar and crackling cuffs into place, and went on with his work on the pile of documents.’

During the third hearing or interrogation, Rubashov continues to write in his diary about his theory of history and human progress:

“Now every technical improvement creates a new complication to the economic apparatus, causes the appearance of new factors and combinations, which the masses cannot penetrate for a time.  Every jump of technical progress leaves the relative intellectual development of the masses a step behind, and thus causes a fall in the political-maturity thermometer.  It takes sometimes tens of years, sometimes generations, for a people’s level of understanding gradually to adapt itself to the changed state of affairs, until it has recovered the same capacity for self-government, as it had already possessed at a lower stage of civilisation.  Hence the political maturity of the masses cannot be measured by an absolute figure, but only relatively, i.e. in proportion to the stage of civilization at that moment.

When the level of mass-consciousness catches up with the objective state of affairs, there follows inevitably the conquest of democracy, either peaceably or by force.  Until the next jump of technical civilization - the discovery of the mechanical loom, for example - again sets back the masses in a state of relative immaturity, and renders possible or even necessary the establishment of some form of absolute leadership…The peoples of Europe are still far from having mentally digested the consequences of the steam engine.  The capitalist system will collapse before the masses have understood it.” (p136-7, Rubashov’s diary)

The interrogation continues, now under the sole direction of Gletkin.  Gletkin favours more extreme methods than Ivanov and uses sleep deprivation and exposure to a blinding light to wear Rubashov down.  Rubashov begins to show signs of physical exhaustion, “The idea of death had a long time ago lost any metaphysical character; it had a warm, tempting, bodily meaning - that of sleep.” (p177)  He also begins to show a more general weariness of the life he has led in pursuit of Communist ideals.  Speaking of his comrades in the older generation, he reflects, “Worn by years of illegal struggle, eaten by the damp of the prison walls, between which they had spent half their youth; spiritually sucked dry by the permanent nervous strain of holding down the physical fear, of which one never spoke, which each had to deal with alone - for years, for tens of years.  Worn by the years of exile, the acid sharpness of factions within the Party, the unscrupulousness with which they were fought out; worn out by the endless defeats, and the demoralization of the final victory?” (p175) The strong impression is that Rubashov is about to confess and he confides this to his neighbour in cell 402 via their system of morse code tapped out on the prison’s internal piping.  His fellow prisoner scolds him and the two argue about the nature of honour before breaking off contact.

During the interrogation, Gletkin makes the practicalist arguments that run right through the book, ‘“Experience teaches,” said Gletkin, “that the masses must be given for all difficult and complicated processes a simple, easily grasped explanation.  According to what I know of history, I see that mankind could never do without scapegoats.”’ (p181)  He refers to Ivanov in the past tense and reveals that he has been executed.  Rubashov, in his state of physical and existential exhaustion, begins to see an inexorable logic to his confession.  He will be sacrificed to the party, just like Richard, Little Loewy and Arlova.  Perhaps, in his worn out state, Rubashov reverts to the mode of thinking he has used throughout his life and returns to it as a default.  He no longer has the will or the energy to resist or argue with himself about which course of action to take.  He even begins to think of the emergence of a more ruthless generation, like Gletkin, in evolutionary terms and writes in his diary:

“With what right do we who are quitting the scene look down with such superiority on the Gletkins? There must have been laughter amidst the apes when the Neanderthaler first appeared on earth.  The highly civilized apes swung gracefully from bough to bough; the Neaderthaler was uncouth and bound to the earth.  The apes, saturated and peaceful, lived in sophisticated playfulness, or caught fleas in philosophic contemplation; the Neaderthaler trampled gloomily through the world, banging around with clubs.  The apes looked down on him amusedly from their tree tops and threw nuts at him.  Sometimes horror seized them: they ate fruits and tender plants with delicate refinement; the Neaderthaler devoured raw meat, he slaughtered animals and his fellows.  He cut down trees which had always stood, moved rocks from their time-hallowed place, transgressed against every law and tradition of the jungle.  He was uncouth, cruel, without animal dignity - from the point of view of the highly cultivated apes, a barbaric relapse of history.  The last surviving chimpanzees still turn up their noses at the sight of a human being…” (p184)

The final section, ‘The Grammatical Fiction’ begins with a quote from the Prussian-German polymath Ferdinand Lassalle’s ‘Franz von Sickingen: A Tragedy in Five Acts’:

“Show us not the aim without the way.

For ends and means on earth are so entangled

That changing one, you change the other too;

Each different path brings other ends in view.” (p193)

It opens in the house of Vasily the porter, who served under Rubashov in the revolutionary war, lying in bed, old and unwell, while his daughter reads the report of Rubashov’s trail from the paper ‘for educational reasons’ (p193).  He’s turned away from her and mutters extracts from the bible inaudibly.  Before Rubashov’s conviction, he had a bible secreted in his mattress but his daughter found it and threw it away.  A picture of No.1 hangs ominously over the room and beside it a nail where Rubashov’s picture once hung before he was arrested.  His daughter has registered herself to be married to a man who shares a room with other factory workers and the prospect of them receiving their own house is years away.  Vasily is already under suspicion for his close connection to Rubashov and the threat of his own daughter denouncing him to the Secret Police to get his house for herself and her fiance hangs over the scene balefully.  It’s a truly horrible scene - menacing, unnatural and ugly.  The daughter produces a paper for her father to sign, presumably censuring Rubashov. He asks if those who fought in the war must also sign.  She tells him no one is required to sign it but makes a thinly veiled threat about his connection to Rubashov.  He signs the paper without reading it or hearing what is written on it.  His daughter says Rubashov’s confession disgusts her and he replies:

‘“Don’t imagine that you understand,’ he said.  ‘God knows what was in his mind when he said that.  The Party has taught you all to be cunning, and whosoever becomes too cunning loses all decency.  It’s no good shrugging your shoulders,’ he went on angrily. ‘It’s come to this in the world now that cleverness and decency are at loggerheads, and whosoever sides with one must do without the other.  It’s not good for a man to work things out too much.  That’s why it is written : ‘Let your communication be Yea, yea; Nay, nay; for whatever is more than these cometh of evil.”’ (p198) 

The cunning cruelty of the daughter plotting to denounce her father made my skin crawl but I suppose it’s viewed as a logical consequence of abandoning what Rubashov refers to as ‘the silent partner’.  

The action returns to Rubashov awaiting his execution in his cell, experiencing an unexpected calm. “He still did not understand why it had become so quiet, within and without.  But he knew that now nothing could disturb this peace any more.” (p200)  His confession is couched as an inevitably in a similar way to Tolstoy’s analysis of history in the epilogue of ‘War and Peace’:

“They were too deeply entangled in their own past, caught in the web they had spun themselves, according to the laws of their own twisted ethics and twisted logic; they were all guilty, although not of those deeds of which they accused themselves.  There was no way back for them.” (p201)

Rubashov struggles with the meaning and consequences of his career in the party and where they’ve led him, perhaps also wondering why he is confessing at all and not dying in honourable silence as his fellow prisoners have urged him. Perhaps guilt about everything described in his career forces him to realise he has no right to complain about being purged for the good of the party:

“For 40 years he had lived strictly in accordance with the vows of his order, the Party.  He had held to the rules of logical calculation.  He had burnt the remains of the old, illogical morality from his consciousness with the acid of reason.  He had turned away from the temptations of the silent partner, and had fought against the ‘oceanic sense’ with all his might.  And where had it landed him?  Premises of unimpeachable truth had led to a result which was completely absurd; Ivanov’s and Gletkin’s irrefutable deductions had taken him straight into the weird and ghostly game of the public trial.  Perhaps it was not suitable for a man to think every thought to its logical conclusion.” (p205)

The ‘oceanic sense’ seems to describe a oneness in the universe and an end to the ego and perception of individuality.  As death approaches, Rubashov reflects on the the metaphysical nature of the universe in one of the book’s more beautiful passages:

“And, indeed, one’s personality dissolved as a grain of salt in the sea; but at the same time the infinite sea seemed to be contained in the grain of salt.  The grain could no longer be localized in time and space.  It was a state in which thought lost its direction and started to circle, like the compass needle at the magnetic pole; until finally it cut loose from its axis and travelled freely in space, like a bunch of light in the night; and until it seemed that all thoughts and all sensations, even pain and joy itself, were only the spectrum of lines of the same ray of light, disintegrating in the prisma of consciousness.’ (p203)

Finally, Rubashov seems to arrive at some kind of epiphany about the importance of ‘the silent partner’ and feels a sense of quietude amidst the incomprehensibility of his life:

“What had he once written in his diary? ‘We have thrown overboard all conventions, our sole guiding principle is that of consequent logica; we are sailing without ethical ballast.  Perhaps the heart of evil lay there.  Perhaps it did not suit mankind to sail without ballast.  And perhaps reason alone was a defective compass, which led one on such a winding, twisted course that the goal finally disappeared in the mist.” (p206)

The book ends with Rubashov being marched to his execution and shot in the head.  The final four sentences are, ‘’Then all became quiet.  There was the sea again with its sounds.  A wave slowly lifted him up.  It came from afar and travelled sedately on, a shrug of eternity.’ (p211)

This was an amazing book and one I would recommend to anyone.  It really helped me to understand the mindset of Stalinism and the dangers of believing in anything with fanatical certainty.  It’s a masterpiece and among the best books I’ve ever read.