Quote of the week:

“The model we choose to use to understand something determines what we find.” – Dr. Iain McGilchrist

Technology revolutions, entropy, and the art of investing

This week, the investor Christopher Tsai delivered a powerful keynote speech at the Latticework | MOI Global conference titled “Investing in an Age of Disruption.” The text of the speech, posted here, eloquently distills the investment opportunities—and the challenges—of navigating the current era of accelerating technological change. 

Christopher argues that investors often underestimate the speed at which technology disruptions unfold. And that’s the key point: the core of all great long-term investing is finding market mispricings, which often seem “contrarian” in the short-term. Getting in position is hard work—it requires complex fundamental research, forward-thinking valuation approaches, deep conviction and patience, a nuanced understanding of industry dynamics, and more—but it’s a necessity for active managers today. “We can’t afford not to be aligned with the future,” Christopher says. “To ignore a growth company because its valuation lacks the precision of physics and might make us uncomfortable is arguably irresponsible.” [For those interested, I spoke with Christopher earlier this year for a podcast conversation, in which we discussed everything from art to philosophy to physics, and—of course—investing.]

“Investing in an age of disruption means that, more than ever, we need to think forward as opposed to backwards. We need to ask, ‘Where is the world ultimately heading?’ And we need to break free from a ‘this makes no sense’ snap judgement and approach valuation with new eyes, particularly as GAAP (Generally Accepted Accounting Principles) accounting does a poor job of representing the underlying economic reality of rapidly growing businesses. Put differently, we need to do deep work and not dismiss a seemingly high valuation without understanding the economics of the business and the underlying system structure.”

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The pursuit of wisdom and “relevance realization” 

Tom Morgan explores the nuances of decision making through the concept of “relevance realization” — proposed by the cognitive psychologist John Vervaeke — which attempts to understand how an individual can know the right thing to do (at the right time) to optimize the best outcomes. “We are now allegedly exposed to more information in a single day than someone in the 15th century would experience in their entire lifetime,” Tom writes. “But our moment-to-moment processing power hasn’t changed. Poor relevance realization is like trying to use the internet without a search engine. We’d be hopelessly lost in an ocean of information.” He continues: 

“Wasting massive amounts of energy and attention on irrelevant things is a recipe for anxiety, or worse. But the inverse of this problem is incredibly exciting. It asks us the question: what does it mean to be healthily adapted to the Internet? If exposure to the right information helps us evolve into our specific niche, then relevance realization connected to the Internet is a real-life superpower.”

A few more links I enjoyed:

Sea Change – via Howard Marks
“The overall period from 2009 through 2021 (with the exception of a few months in 2020) was one in which optimism prevailed among investors and worry was minimal.  Low inflation allowed central bankers to maintain generous monetary policies.  These were golden times for corporations and asset owners thanks to good economic growth, cheap and easily accessible capital, and freedom from distress.  This was an asset owner’s market and a borrower’s market.  With the risk-free rate at zero, fear of loss absent, and people eager to make risky investments, it was a frustrating period for lenders and bargain hunters.”
Thinking about how to think: Short-term vs long-term – via Nick Sleep / I.G.Y. Foundation
“In our opinion, (reasoned) confidence, (deserved/earned) trust and (resultant) patience is what seems to be lacking in so many business, charity and political ecosystems. The table above contains a list of short-term characteristics and their long-term alternatives. The list is not exclusive (outputs and inputs are often inter-changeable) or exhaustive, but it may be the start of a map away from the worst moat-draining activities and behaviours and toward a more rational and fruitful allocation of time and resources. And, ultimately, as Charlie Munger (Berkshire’s vice-Chairman) likes to ask, don’t we all want to live in a seamless web of deserved trust? We hope that the check list may be of some benefit to you, as it has been to us, in spotting and avoiding the worst of the short-term folly.”

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