Assume nothing, new models and analytical tools, coupled with constant revision, questioning everything, reassessing, and re-analyzing, are essential to success in today’s markets. Often, and we are seeing that in today’s market, relying on bad assumptions, dogma, or prior belief can be disastrous.
This story about medieval astronomy applies directly to investment strategies, market valuations, and portfolio construction today. It’s the same lesson –begin by questioning the very assumptions on which an entire system is built. There is also a very specific application of this model that is particularly current.
One of the most valuable lessons is to assume no knowledge and analyze closely every initial assumption. Nothing is so obvious that it can’t be questioned. Unexamined ideas and assumptions will eventually be useless. Any assumptions and any model used to explain and predict anything (whether it’s the movement of planets or financial markets) needs to go back to first principles and discard any assumptions, preconceived knowledge, or bias.
Businesses that combine closed-loop, arms dealer and monopoly characteristics represent something fundamental that is shifting in the global economy. They represent automation that is pervasive, smart, and is a layer that sits across the entire economy. Data processing and prediction build these business models. They permeate all services, including supply chains, logistics, mobility, and consumer offerings. Pervasive and innovative, they represent opportunities for increasing investment returns. Incumbents enhance their position, generate increasing value, create challenging barriers, enable more innovation to solidify their position and will sustain their value because of this new competitive dynamic. Innovation is always a threat, and value can be created from a new entrant, but the bar is increasingly higher for both the level of disruption and quality of innovation to an existing or even new market.
To be sure, new opportunities will be created as new technology develops. An example is the wireless data and smart phone market. Essentially, 4G mobile technology enabled the substantial value creation at Facebook, Netflix, Uber and AirBnB. These companies could build their services on top of this technological platform and create not only a new competitive business, but a new market where they could be the dominant player. As 5G develops and we see unimagined high-speed for data, entertainment, communication, and other services, we will have new businesses and opportunities created on this platform – only so much can be imagined today, others which are yet to come. But there will be real-time connection with customers enabling new and innovative products and services, artificial intelligence permeating software and communication enhancing quality and innovation further, enhanced gaming (perhaps even to a professional level), and virtual reality and augmented reality perhaps finally becoming the market opportunity that has been imagined for many years. This list is far from exhaustive, and without doubt, there will be valuable companies created whose business models we can’t quite imagine today.
Look at the facts not the opinion about the facts. Anyone holding themselves out as an expert has, a very deep but narrow knowledge base that is rarely universally applicable. Fundamentally, listening to opinions rarely give useful insight. Often, it assumes looking backward but does not apply to the current situation. Global commerce, trade (and trade wars) tariffs, flexible manufacturing, and global markets, along with technological innovation and automation create significant pressures against inflation, regardless of employment levels. These are the set of facts to be considered, not an assumed economic model where few people understand the actual inputs from 50 years ago.Another example looks at revenue projections based on historical business models. But what happens when those business models are changing? We discussed the example of the metamorphosis from Blockbuster to Netflix where a fundamental change in the business model made revenue projections from the historical model meaningless. Then, Netflix had to change their business model again to one of the original production and international expansion – once again obviating existing models for revenue. Facts are what happened. Specific and verifiable. Knowledge is the appropriate combination of facts. Knowledge comes from understanding the facts that matter. Wisdom is the insight that leads to prediction. At its core, any investment strategy predicts the future. To predict the future effectively one needs the wisdom to grasp what will happen. Of course, this cannot be known, and there are many random events that can affect the future (see Anti-fragile and Fooled by Randomness by Naseem Taleb), and uncertainty should always be factored into any investment decisions or predictions.
Most people have no idea what they are doing. The best intentions combined with intellectual prowess and plentiful capital rarely achieve anything worthwhile. They fail because they don’t know what they’re trying to solve. Nothing can be solved until the problem is defined accurately. Otherwise it is a waste of time and resources (which describes most public policy). All too often decision makers waste time, resources, and make matters worse because they simply do not understand the actual problem they’re trying to solve.
