The end of the calendar year brings with it a flood of investment retrospectives and forecasts. These are then immediately followed with an equally predictable cynical backlash saying how the entire exercise is arbitrary and pointless.
What this dismissal always misses is that the process of synthesizing all the most meaningful events of the year can produce something valuable. This thing isn’t just a by-product, it’s increasingly the most important thing.
“Soup, Sleep and Shiba Inu”
[11 minute read]
Source: Getty Images
Back in 2015, I got really swept up in the disruptive tech narrative. I became embarrassingly, naively optimistic about self-driving cars, AI, drones, 3D printing and anything to do with exponential growth. As I breathlessly phoned veteran fund managers across the world, the more patient ones simply asked “that’s great, how do I actually invest in it?” There were many more exciting ideas than there were appropriate fundamental investments.
An old joke about Wall Street is it’s a rare industry that can infinitely expand supply to cater to whatever consumers demand. One of my all-time favourite Onion headlines is from 2008: “Recession-Plagued Nation Demands New Bubble To Invest In.” And thus it has just happened at a truly historical scale. A tsunami of SPACs and IPOs totaling $300bn this year alone. Narrative-wrapper ETFs covering everything from genomics to the metaverse. The trend has accelerated into totally new asset classes. NFTs offering status and scarcity. Crypto assets promising decentralization, rebellion and humour. At one stage this year, the combined market cap of cryptocurrency was over $3 trillion. A Pew study found that 16% of U.S. adults have now invested in crypto, but as much as 43% of men aged 18-29. Packy McCormick has made the simple point that new retail investors wanted more from their investments than professionals.
This premium has been caused by a thousand different factors, and it is fluctuating wildly in its impact (especially right now). However there are good reasons to believe it’s structural as well as highly cyclical. In the first Attention Span last February, I made the case that the number of people now connected to the internet, and thus capital markets, was getting close to incomprehensible. This is quantifiably very different from previous cycles. According to Bloomberg, in the last 12 months investors have plowed $1 trillion into equities funds. That’s more than the combined inflows of the past 19 years. At the peak last January, retail was close to a quarter of U.S. equities trading. And unless every electrical circuit on earth suddenly gets wiped out by an orbital nuke, it’s unlikely to fully reverse. The demand landscape for exciting narratives is absurdly larger than it has ever been before, and it often demands seemingly-absurd things.
Markets have always been driven by speculative narratives, that’s not a fresh or interesting observation. The definition of fundamentals themselves has grown ever more intangible with digitization. That’s not an insightful observation either. But the current balance between fundamentals and narratives has swung manically in favour of intangible factors. The investment cake used to be a lot of fundamentals sponge with narrative frosting. Now the frosting layer has expanded to the point that often there’s NOTHING but narrative. In a year of incomprehensible statistics, the crypto markets were exemplified by the alleged story that one holder of Shiba Inu coin, saw their “investment” balloon from $8,000 to $5.6 BILLION between August 2020 and October 2021. On paper at least, it’s likely the greatest trade of all time. And its basis was literally a joke. As Matt Levine puts it in his own unique style:
“Crypto has developed tools to create scarce claims on computerized representations of memes, to create scarce tradable claims on societal attention. This is… extremely, extremely stupid? I think? But what do I know. The point is that it works.”
As it’s intensely subjective, this additional narrative component is resistant to quantitative analysis. Despite the fact it’s driving many “traditional” investors completely insane, this is not a dismissal. Far from it. My central argument has always been: you can assemble a bunch of seemingly irrational trends and find that they represent a completely rational whole. What makes one idea more powerful than another is rarely entirely random. If there is now an infinite sea of information, attention is what’s scarce and some crypto assets are attempting to monetize that scarcity. Where we choose to direct our attention is a proxy for meaning, and attention leads price.
The obvious practical takeaway is that there’s an enduring edge to be gained if you become adept at determining meaning or hearing resonance.
How might you do it?
As someone obsessed with finding universal patterns, there’s a clear process reported by all the greatest geniuses across history. It’s synthesis followed by inspiration. A chef chops ingredients, adds water and cooks it to make soup. The chopping of ingredients into pieces is the initial analysis. The mixing is the process of synthesis. The taste of the soup is the result: something entirely new is created through combination.
As Bertrand Russell puts it in A History of Western Philosophy:
‘I have found that, when I wish to write a book on some subject, I must first soak myself in detail until all the separate parts of the subject-matter are familiar; then, some day, if I am fortunate, I perceive the whole with all its parts duly interrelated. After that, I have only to write down what I have seen. The nearest analogy is first walking all over a mountain in a mist, until every path and ridge and valley is separately familiar, and then, from a distance, seeing the mountain whole and clear in bright sunshine.’
The same process appears to be true of many great investors. In the book Hedgehogging, Barton Biggs profiles a very successful macro fund manager, named “Tim” (via Alex Barrow at Macro Ops).
“When I asked him how he got his investment ideas, at first he was at a loss. Then, after thinking about it, he said that the trick was to accumulate over time a knowledge base. Then, out of the blue, some event or new piece of information triggers a thought process, and suddenly you have discovered an investment opportunity. You can’t force it. You have to be patient and wait for the light to go on. If it doesn’t go on, “Stay close to shore.””
The very same process the cynics mock; synthesizing all your thoughts at regular intervals, can itself identify the “narrative layer” increasingly driving markets.
A huge advantage in this process is the ability to tolerate the uncomfortably dissonant process before anything has yet taken shape. As was well articulated in John Cleese’s recent short book on creativity (insights here), the longer you can wait, the larger the breakthrough. Hence never make creative decisions before you have to. As Einstein himself said: “it's not that I'm so smart, it's just that I stay with problems longer.”
Aside from “wait in discomfort.” How does one enhance this skill? One relatively universal answer is to cultivate boundary periods. For me it’s the period between sleeping and wakefulness. I assemble the ingredients in my head before bed, and often awake annoyingly early with the answers. Lia DiBello’s work on accelerated learning talks about how after a day of visceral failure in her simulations, participants would return next day with the solution. Studies on “insight problems” showed that those that had slept beforehand performed twice as well as those that hadn’t. It seems REM sleep is especially associated with these kind of insight breakthroughs. Other “boundary practices that have worked for me are medium pace runs, embodiment, massages and cold showers.” [There’s also a decent list in the HBR article below].
Applying this methodology back to the markets as we look into 2022, we need to make sure we’re assembling raw ingredients from the right places. Bloomberg’s recent 2021 retrospective noted that the value of many of the new speculative assets “is derived solely from the strength and influence of the communities surrounding them.” If virtual community strength increasingly drives asset prices, then we need to be monitoring them; for example Reddit, YouTube, TikTok, Discord & Twitter. For the last 15 years, Google has been the most visited web domain in the world, but it was overtaken by TikTok in 2021. Careful curation of Twitter has been the single most value added addition to my thinking over the last 12 months.
Drilling down into market specifics, Tom Pence’s recent year-end equities letter offered an essential appraisal of which trends that he thinks will be transitory and which are enduring. We see compelling investments in industries such as healthcare, cloud-based software, security, automation, alternative energy, and blockchain technologies (to name just a few).
For me personally, the “big picture” synthesis process has resulted in increasingly conviction we’re witnessing the emergence of a “Global Phase Change.” The rare people who can see the whole picture and help us navigate the transition are “hybrid thinkers.” We’re excited to explore how this will play out over the coming months and years.
Happy New Year to you and your family!
- Read: The Paranoid Style In American Investing in 2021 by Chris Bryant in Bloomberg. (23 minute read).
- Why read. Probably the best retrospective I’ve read of some of this year’s more bonkers market events.
- Read: 4 Steps to Having More Aha Moments in the Harvard Business Review (11 minute read)
- Why Read: A practical, but surprisingly good, list.
- Take time outside or in silence.
- Let your mind wander (allows for the marinating of ideas)
- Focus on positive emotions (with the view that anxiety creates noise).
- Take a break from active thinking (e.g. exercising. I also get massages)
- This brings to mind Rory Sutherland’s comment in Alchemy: “Given the modern open-plan office and our obsession with responding to e-mails as quickly as possible, it might be embarrassing or even damaging to spend 20 minutes staring blankly into space. However, without this time to disengage, it is harder to practise mental alchemy.”
- Listen. My friend Frederick Gieschen interviewing William Green (1 hour 31 minutes).
- Why Listen. William published a book in April called, Richer, Wiser Happier. A Brit in America, William is an Eton and Oxford grad who had an existential crisis and now writes about spirituality and investing. I see no obvious links between us. He’s interviewed an incredibly high-class array of investors over a very long period of time. This pod is full of resonant wisdom. I especially love the idea of pattern recognition across multiple spiritual disciplines. If you see the same thing everywhere; it probably means something.