As we’ve written previously most people tend to have a natural bias either to detail (micro) or big picture thinking (macro). An individual who masters both is like a Jedi Knight; think Steve Jobs or Warren Buffett and these are the droids you’re looking for, but they’re very rare.
Looking big picture
One mental model for illuminating a bigger picture of how the investing world functions is relating it to nature.
An immutable natural law is that over time everything must coexist in balance. Nature is hard wired to enforce balance as everything within our ecosystem is co-dependent; if one element changes it forces all others to adapt.
A concern of many with the natural ecosystem is that humans continue to manipulate resources by burning fossil fuels, increasing longevity of life, and deforestation which allows increased food production and soon these actions will change the natural balance but we just don’t know how?
One specific area of (un)natural engineering which concerns some greatly is the genetic modification of crop seeds (GMO).
Creating seeds which have a spliced DNA giving greater resistance to disease and increasing yields is beneficial, that’s not in doubt.
What is in doubt are the consequences to changing what nature has created over millennia. It’s the archetypal “butterfly’s wings” of cause and effect.
So in essence the question is, do we believe it’s advantageous to re-engineer the naturally created to achieve better results initially, whilst being unsure of the consequences which we then possibly can’t control?
This is not an issue of the divine but of design.
Related to finance
The model of applying the natural order of things to matters financial works in the same way.
As we become more sophisticated we have increasingly attempted to engineer better solutions with modifications to increase yields, profits and value from assets.
As an example venture capitalists take over a company, load it with debt, stop investing in infrastructure, reduce head counts and so drive up profits sufficiently to sell it back to the public at a higher price, but to what end ultimately?
This is the equivalent of financial steroids, there’s an initial benefit (the VC “bulks up” its profits) but that often results in permanent longer term damage to the company.
The 2007 / 08 depression was in essence created by the financial engineering of the mortgage market to provide products (new crops) producing higher yields but with reduced risk.
The consequential effect was that a fundamentally stable construct (meaning able to survive the normal economic variances) became almost terminally destabilised.
The time line of how most great crashes evolve is that everyone sequentially stops believing in the security of new asset classes until the whole ecosystem is affected.
What nobody knew initially was the consequential effects would not stop at housing or even banks.
Car finance, industrial finance, insurance companies, multi-national companies and finally the populations of entire countries (most of whom had never heard of a MBS or CDO).
All from the re-engineering of how mortgages were created and packaged for resale.
The creative destruction evident in business today is moving faster than ever before and is an aggressive example of Darwinian natural selection at work.
Industries and businesses are born, grow to peak size and start to diminish not in centuries but in several decades or less; think Nokia, AOL, Motorola and Yahoo.
To understand the increased velocity of change one only need reference Moore’s law which has correctly predicted since the 1970s that total existing computing power will double every 24 months. The next 731 days will create more power that in totality has ever existed up to today (mind blowing).
This same speed of evolution as evident in the case of companies such as Netflix or Tesla means investors are currently willing to invest at 100’s of times P/E ratios for future growth. This is logical only if one believes that growth will be both explosive and more importantly sufficiently long lasting. The longevity part of the equation has to be questionable however as both are technology enterprises and highly vulnerable to the creative destruction of superseding advances (time will tell).
What comes next
Quite possibly the single most significant development of the next decade will be the integration of Artificial Intelligence into everyday life. The stuff of dreams (we all sit about while droids run around doing all the boring stuff) or of our nightmares (the Matrix or Skynet).
The medical advances from Biotechnology and the sequencing of the Genome will be vast and will cure many, but we already have an overpopulated planet and the treatments will be enormously costly.
Technology will create new markets and destroy existing ones, probably at an increasing speed. (Continued employment will require regular retraining.)
One way to have some sense of continuity in a rapidly changing word is to look at humans themselves.
It’s interesting to ask how much humans have actually altered since say Roman times.
They were highly territorial and combative, loved the arts and sports, were very commercial and had dysfunctional politics.
So not a lot really!
If you wanted therefore to invest for the long term it is probably useful to think of companies that provide the best of the things that we have used and will continue to use (such as toiletries, waste disposal, sports equipment, housing).
I don’t see a time in my future when I happily allow a robot to laser my teeth clean so toothpaste it is.
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.