King Canute and the Tides
Vol #173: April 4th, 2024
Just under a millenia ago, King Henry I went hunting near his castle on the shores of Normandy.
Conservation and national defense were the political concerns du jour. England had turned their eyes towards expanding their natural resources while also fortifying this southern border against the menacing French empire.
The king dined on an extravagant meal of lampreys. These parasitic fish have existed since the age of dinosaurs, and look like a slippery tube sock with a disc sander of teeth. They have no skeleton, but apparently taste like beef. Henry ate voraciously, contracted a terrible fever, and died a few days later.
The story is recounted by the prominent historian Henry of Huntingdon. A contemporary of the court, he was the sort of nobility that skimmed just below the radar, and would have been forgotten save for his entertaining and mostly factual scribblings. Events were open to interpretation, and a surfeit of lampreys felt an appropriate end for a ruthless and bellicose king.
Invertebrate funnel suckers don’t need to come with a warning label. Little is left for interpretation in King Henry’s comeuppance. Evil men getting punished was still a reasonable trope.
While the National Institute of Health is still researching these “Forbidden Fish” in present day, the fable with enduring lessons from Huntington is his recount of King Canute and the Tides. There is no clarity in prediction, and even the present day references to this story wink at the ambiguity.
King Canute was the King of England, then Denmark, then Norway. He united these three lands as the North Sea Empire in the early 12th century. His mastery of the seas for conquest is perhaps what led him to place his throne beside the beach, and beckon the court to come and observe.
We will never know Canute’s intent, or what he believed in his heart of hearts as he sat upon the shore. Huntington describes the King commanding the tide to stop, and “not to rise on to my land, nor to presume to wet the clothing or limbs of your master.” Of course, the tide did not stop.
Canute is the showman here, well aware of the effects of the tide and his powerlessness before that. The entire charade was a demonstration of his humility and deference of secular power to the ultimate power of God.
“Let all the world know that the power of kings is empty and worthless, and there is no king worthy of the name save Him by whose will heaven, earth and the sea obey eternal laws.”1
Those are some pretty bold words from a pre-renaissance monarch. It takes a supreme amount of self confidence to declare our lack of understanding or control.
I came across the King Canute reference recently in the context of investing, and I scratched my head. “Counting House” is a novel laden with rich references and scintillating commentary about the work of an endowment manager of a top - but not the top - university. As our narrator grapples with his purpose, a long string of hopeful GPs march through his office with the next great fund opportunity.
A pair of ex-Two Sigma quants have created a system that integrates signals across both fundamentals and flows, to capture edges that are unknowable to those who myopically divide the world into two camps. They won’t divulge whether they are trading TSLA, Bitcoin or Iranian Rials (it’s unclear if they know), but they will openly mock the skill that brand name managers bring to their funds.
“ ‘Dis Great Man theory of hedge fund alpha by being a ‘stock picker’ is a bit hocus-pocus, no?’ The Dutch one giggled, high pitched. ‘I’m King Canute who commands da tides.’”2
King Canute tried to command the tides, but according to Huntington it was to prove a much bigger point. The ruler is not trying to show that like Moses he can part the sea, but that there are some things beyond our grasp and control.
Always a fan of style guides, I looked to the Economist for insight into this reference. Their dry commentary “Don’t imply he was surprised to get his feet wet.” It is a rich irony that a man who went to such great lengths to demonstrate his impotence, is colloquially known for his arrogance.
The business of prediction is muddy. Very muddy. We laugh when Apple’s weather app says it won’t rain until 11am, but the Weather Channel has a 75% chance all day. But do we laugh critically enough when we hear about portable alpha or what flows are going to invariably move the price in said direction?
The business of investing is one based on forecasts. Every decision is rich with trade-offs, even the most secure and vanilla treasury bond investment. The allocation of money is implicitly taking a view of the future, and where the tides will go.
At the individual level, we are all that Great Man. Financial advisors and investment managers help to make or consult on those decisions, but the buck ultimately stops with one person. Which is why I don’t totally believe that it’s hocus pocus. You have to make decisions based on your timing and preferences, that are somewhat orthogonal to pure alpha.
I’m disinclined to believe that Paul Tudor Jones or David Tepper have some kind of crystal ball. Great surfers perhaps, but hardly in charge of the moon cycle. The pitfalls of human interference are well known in investing. We sell our winners too quickly and hold on to the losers. We’re susceptible to the news cycle. Geometric compounding is hard to wrap your head around. Even if you’ve conquered all that, we’re still mere mortals.
But for all the hocus pocus that surrounds a Michael Burry drawing a line in the sand and buying as many CDS as he could, I’m as skeptical of the black boxes that churn out anonymous profits too. Not just because I don’t want the Feds asking why my machine is trading Rials, but that my model of the world just doesn’t see the correlation between JetBlue and Morgan Stanely, and I’m not going to be comfortable with that pairs trade.
With an Olympic village of mathletes, Citadel and Two Sigmas put up impressive, but mortal results. They underperform the S&P a lot too. Because despite how tragic mankind is, there isn’t a pile of silicon that works perfectly either.
Whether you’re a quant or a qualt, you need a rubric. Discretionary bets based on a soup of signals can work well in a risk managed framework. Long bitcoin against short Turkish Lira might be the sharpe of the century - so long as there’s some trend following equities and VIX call overlays.
The lesson that King Canute brings to investing is not of a straw man who believes he can control the tides. The regent is a humble practitioner who sees things bigger than himself that are beyond his powers - and highlights that.
We must be just as mindful of da ex-machina results, as of a signal prophet. There is no lamprey level of clarity on how best to approach investments, there’s a lot that’s beyond our control. As our CIO recognizes, both of these are more pomp than circumstance, and don’t respect that the perfect trade is but an ideal.
Success is the balance where successful individual investors play the Great Man for important life decisions, and put on their systems hat for the nitty gritty details. You can’t command the tides, but you can float without sinking.
“The Counting House” by Gary Sernovitz, 2023, Loc 3180