The story of Alan Turing and his silver hoard shows that investing well takes more than extremely high intelligence and getting your analysis correct.

As stock markets plunge globally, it may be a good time to reflect on how many and varied are the ways in which you can lose money through correctly predicting the future.

Turing was a prodigy, a mathematician and logician who played a central role in breaking the Nazi ciphers in World War II and who went on to be widely hailed as the father of computer science and artificial intelligence.

During the dark days of 1940, when a German invasion of Britain was a legitimate threat, Turing set his lateral thinking ability to working out how he might protect and grow his modest capital, as related in Andrew Hodges’ biography, “Alan Turing: The Enigma”.

After first rejecting his own idea of converting his savings into a suitcase full of razor blades, presumably on the idea that they would later be hard to get and rise in value, Turing was taken with the thinking of his fellow mathematician David Champernowne, who had observed that silver bullion was one of the few assets to do well during and after the chaos of World War I. Turing seized on this idea as being correct and joined Champernowne in buying silver, in his case converting, for him, a substantial 250 pounds sterling (perhaps 15,000 pounds sterling today) into two shining ingots.

Yet, perhaps fearful of confiscation by a successful enemy or a government tax on capital, a plan that was mooted in Britain in 1920, Turing did not, like Champernowne, put his silver in the bank. Instead, Turing opted to take the somewhat extreme step of burying his ingots separately. Using a baby-buggy to transport what I estimate was more than 150 lbs. of silver, Turing secreted the ingots in the woods around Bletchley Park, the top-secret code-breaking installation where he was based during the war. Turing even went so far as to devise a cipher explaining exactly where the ingots were buried, to help find them when the time came.

Sound plan, poor execution

Turing’s analysis of financial markets was exactly right. By March of 1946 silver was up 80 percent at the London fixing price from its early 1940 levels.

This allowed Champernowne to turn a healthy profit. But when Turing went hunting for his bars he discovered that the landmarks of the countryside had changed and he was unable to find them, even when he eventually employed a metal detector. He searched repeatedly, in 1944, 1946 and 1952 (by which point his putative returns were fattened by a 30 percent devaluation of the pound against the dollar). Turing never found his sterling, and like so many investors with lesser minds before or since, he was undone, not by the main thrust of this thinking, but by ham-handed and overly complicated execution. Turing was, in this instance, “too clever by half,” favoring a rackety scheme intended to wring the last cent of profit out of a good trade over capitalizing more safely on his market prediction.

Rather than the very good profit he envisioned, Turing’s foray into commodity trading (and secreting) was a disaster, with the injury of a complete loss of capital made worse by the insult of having to pay a fellow Bletchley Park code-breaker 5 pounds sterling per day to help in his fruitless woodland search.

In other words, the investment was a complete loss with a negative carrying basis.

While it would be easy to brush the incident off as simply the unworldliness for which so many geniuses are known, the truth is that Turing made a number of investment mistakes to which we are all prone, even those of us who have yet to have an original thought.

First, he passed on what is sometimes called the only free lunch in investment: diversification. Or perhaps Turing thought that plunging his money into one heavy asset and burying it in two different places is what is meant by diversifying.

Second, like so many very successful and brilliant people, Turing was wildly overconfident in his own analysis, his own abilities and his vision of how the future would play out.

It may well be that extreme circumstances, like Britain during the war, give rise to extreme tactics. And don’t forget that Turing’s approach would have probably been one of the best available to an investor on the losing side; certainly stocks, bonds and bank deposits were all vaporized in defeat.

The rest of us should be far less confident, especially as we react to market storms like the one now underway.

 

James Saft is a Reuters columnist.