George has written an excellent half year investment report and really, I have nothing useful to add to his piece.
The performance so far this year is above decent, and we are excited that the changes made at the rebalance should meaningfully upgrade returns.
So instead I’m going to write an impenetrable load of waffle on the topic of networks and systems and what they mean for future investing decisions.
It’s the day after England gloriously won the Cricket World Cup in probably the greatest match ever played, by the resounding margin of nil.
The old sports adage that a result doesn’t have pictures, it just says “Winner” is true, but it doesn’t tell the story and in this case what a story!
England’s success has come after their disastrous performance four years ago when the tournament was held in Australia. They were abject, had no plans, no structures and therefore no level of performance. This total shambles forced them to undertake a complete reimagining of how to create a winning culture and team. What skills were needed in each position? The recognition of the vital values of consistency of message and implementation and the bravery to stick to the plan through the inevitable tougher times.
And now we are
THE WINNERS !!!!!!!!!!!!!
CAN THIS SAME METHOD BE APPLIED TO SUCCESSFUL INVESTING?
The answer to this question we believe is challengingly contra-intuitive, because it appears to make absolute sense that you should be able to apply the same methods to achieve investment success in the future. What’s more it’s the basic working method adopted today by the majority of the investment industry. Fundamentally, the use of computing power and algorithms to crunch huge amounts of historic data to demonstrate that a strategy, whatever it is, has achieved above par results and so by implication will continue therefore to do so.
THE DIFFERENCE BETWEEN SYSTEMS AND NETWORKS
Societies run on systems.
The Law is a system, Democracy is a system and so is Taxation.
Technology has enabled the creation of highly complex systems management from vast global supply chains to inner city traffic calming.
Technology companies have been built to become behemoths by utilising systems.
Microsoft – computer operating system
Google – Search algorithm
Amazon – Retail supply chain systems
Facebook- Interaction algorithm
Apple – Communication and entertainment in a secure ecosystem
To create and manage systems you need to be able to model all its elements accurately with algorithms, which can react to changing input levels.
An algorithm is simply a mathematical equation with a number of interacting variables, which allows for the changing of answers depending upon the variance of inputs, to create optimal outcomes for particular specified problems.
Humans do this intuitively; we feel it’s cold so we wear a coat, if we move house we book a removals company, or we don’t drive in certain areas at certain times because we know they will be congested.
HOW IS A NETWORK DIFFERENT TO A SYSTEM?
For an algorithm to work the key is to know that there are a set number of variables, which if all accounted for and interacting will allow for the computation of optimal performance.
So, if we equate this to the English cricket team then we know for sure that there will be 11 players who each need to do their specific jobs better than their opponents. We can then work out how to make that happen.
But crucially systems need rules, they need constant relationships which can flex in amplitude but not break or become something fundamentally different. This can’t be modelled with an algorithm. If that happens, there is no historic data on the new element, no way to calculate the likely effects on everything else in the system so the outcomes are incalculable.
So, the difference of a Network is that its ecosystem is constantly changing and its variables are therefore not constants. There can be numerous systems within a network, but they only continue to operate consistently for as long as their inputs are stable. With rapidly developing networks, new elements are being introduced which can partially or completely disrupt embedded systems and require them to be re-understood, although they will inevitably change again.
So, to put this into a real-world context.
Amazon: – Disruption to the system of retail, music, computer data storage etc etc
Tesla: – Disruption to automotive industry
Uber: – Disruption to taxis, then car ownership and ultimately mass driverless transport probably
So, in the case of the car, system management would be to take what is known and improve upon it. Which has until now been about refining vehicles which run on fossil fuels to be more efficient.
But that’s not the future, the network is rapidly moving to autonomous electric.
THE WHY AND THE WHAT
Most people when making investment decisions will ask themselves or someone else:
WHAT should I invest in to achieve what I want?
Perfectly sensible question.
From our perspective however we are intent on asking the Why questions:
WHY should we invest in companies where their operating systems are breaking down?
WHY should we invest in parts of economies which are being disrupted or superseded?
WHY should future returns be like past returns when that assumption can only be based on the future repeating the past, which clearly, it will not.
As we have said previously, humans intuitively seek out repeating patterns of previously successful outcomes to feel safe about future outcomes.
This is absolutely logical but in a world changing so quickly and so profoundly, that equally it makes no logical sense to assume that just because something has worked it will continue to do so.
To therefore embrace the reality that global networks are constantly evolving with new elements, requires investments to be chosen with this as a primary filter.
It doesn’t mean that a Disney, Walmart or BMW won’t be successful in the future, but that success won’t be achieved by refining their previous models. To a greater extent what has been has gone.
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. 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.