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China was saturated with disabling infectious diseases near the end of 1940s. Tuberculosis, plague, cholera, polio, malaria, smallpox, and hookworm were killing a lot of people in the country. More than 11 million people were infected with the water-borne liver parasite diseases. Cholera epidemics raged through the population freely, some years killing tens of thousands. Infant mortality was as high as 300 per 1000 live births.

The country was going through a political and social transition, and thus creating a national public health system and eradicating entrenched diseases was an obvious first step in improving the lives of its people.

The Chinese Communist government began initiating massive vaccination campaigns against the plague and smallpox, vaccinating nearly 300 million people. Sanitation infrastructures for clean drinking water and waste disposal were implemented throughout the country.

But physicians, immunizations and sanitation can only go so far. Something had to be done about the pests that transmit diseases –

  • Mosquitos responsible for malaria,
  • Rodents that spread plague,
  • Flies that were causing immense nuisances, and
  • Sparrows that ate the crops

These four pests – flies, mosquitos, rodents, and sparrows – were charged with public health treason and widespread irritation. This is when the Chinese government announced the “Four Pests” campaign.

The first three pests – rats, flies, mosquitoes – were identified because of their role in spreading malaria, typhoid, and the plague. Sparrows were included in this list because they consume rice and other seeds from agricultural fields. In fact, people were called upon to shoot sparrows, destroy their nests and bang pots and pans until the birds died of exhaustion. Millions of sparrows, perhaps even hundreds of millions, were killed.

The campaign worked very well. Many infectious diseases were eradicated, and their scope diminished. But that was because the Chinese had killed around 1 billion sparrows, 1.5 billion rats, 100 million kilograms of flies and 11 million kilograms of mosquitos. In terms of accomplishing its objective, the Four Pests campaign was a massive success.

Then, disaster struck.

The 1 billion sparrows that the Chinese had killed, it seemed, did not only eat grain seeds but also ate insects. Now, with no birds to control them, insect populations boomed. Locusts, in particular, swarmed over the country, eating everything they could find — including crops intended for human consumption. People, on the other hand, quickly ran out of things to eat, and millions starved.

Around 15 million (as per Chinese data) to 40 million (as per independent researchers) people died in what was called the Great Chinese Famine.

Now, the deaths of the sparrows were not the only contributing factor to the famine and deaths. A massive drought also added to the disaster. But the point here is that the Chinese – after getting the ‘brilliant’ idea to eradicate pests to eradicate diseases – ignored the “second-order effects” of their actions.

* * *

“The road to hell is paved with good intentions,” mentions A Handbook of Proverbs published in 1855.

By solving one problem, we generate another one and sometimes create an even worse one. The common pattern here is that somebody tried to modify the behaviour of a system – like the natural ecosystem in China – by tinkering with it in a small way. But that small action produced significant unintended consequences.

In fact, every action has consequences, intended and unintended. No matter how carefully we plan, we can’t anticipate everything.

Consider investing. Most of us, most of the time, operate on instant gratification. We focus on the investments we can buy today to maximize our returns in the short term. All we can think of are first-order effects, and fail to ask this very important question – “And then what?”

We overpay for stocks assuming they will continue to run up like they did in the recent past, and fail to ask, “And then what?” We forget that when we are overpaying for an investment, we automatically lose some of the implied return on that investment. If the investment loses money, we lose even more when we pay too much to own it.

We buy sub-standard businesses because someone else, especially some big investor, may have made money betting on it and then shouting about it, and fail to ask, “And then what?” For instance, when we are buying leveraged businesses, we fail to consider that most such businesses don’t have the staying power in the face of adversity.

We blindly follow the “influencers” on social media and buy into every advice they have to offer and forget to ask, “And then what?” This is because, under the spell of such people, we fail to differentiate between when they are educating us and when they are selling us products under the garb of education. And most are doing the latter.

When we partner business managers with low integrity since their stocks may be surging along with others in a bull run, we fail to ask, “And then what?” because we forget what Thomas Phelps wrote in his book 100 to 1 in the Stock Market – “Remember that a man who will steal for you, will steal from you.”

We may poke fun at others, like the Chinese in 1950s, who miss out on the second-order effects of their decisions, but we are often culprits of the same in our own lives and decisions.

* * *

I recently tweeted this image that I saw on the Whatsapp status message of my society’s security guard, a 45+ years old person with three children to take care of –

I have no idea what made him put up this image, just that I fear that he – or someone around him – may be trying to make money fast betting on stocks given the euphoria all around.

Now, I have no problem when anyone – especially people with low income and financial resources – is trying to earn money through various avenues. In fact, I have supported such activities in the past through part-funding small businesses started by some such people. But the reason I shared the above image was to serve as a warning that most people in the stock market – and especially new entrants, and especially those with low incomes and savings – do not understand the dire consequences of losing money gambling in stocks when the tide turns for the bad, and it does turn bad after a heady period, like what we have witnessed over the past 18 months. I have seen a lot of such people losing more than their few months’ income on such gambles, which is sad.

History would repeat. Though no one knows when, but it would.

Do not treat this as scaremongering, but a good friend’s warning who wants the best for you.

Noted financial writer George J. W. Goodman – who used the pen name of Adam Smith – wrote this in his wonderful book, The Money Game –

If you don’t know who you are, this is an expensive place to find out.

By “this”, Smith meant the stock market.

Asking “And then what?” is all about looking past a news event or action and understanding what that event or action might mean for the bigger picture. Of course, not all events and actions will destroy your core assumptions but looking at things wearing the “And then what?” glasses would keep you from making hurried investing decisions based on your emotions, which are often an investor’s worst enemy.

Whether you are looking to invest in a business, or invest in a new relationship or career, never forget to ask the “And then what?” question. Never forget to foresee the second-order effects.

It’s a life saver, believe me!

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