myopic

Rhetoric

Introduction

The future is unknowable. Many possible states of reality will not materialize while others will. But it is nearly impossible to distinguish in advance. The wait for the future to reveal itself is of no value as decisions have to be made in the present. One has to either master the art of a crystal ball foretelling or accept the limitations of predictions. We cannot know the future but we can be prepared for wide range of possibilities. Broad themes are preferred to a narrow set of predictions, providing more degrees of freedom. Similarly, in an evolutionary system, the most optimized thrive in a stable environment but struggle when conditions adversely change. In finance, those who optimise on narrow set of outcomes tend to blow up as Black Swan events emerge. Those paradigm shifts are more common in a chaotic system, such as the financial system, than normal distribution predictions would suggest. Hence, those who thrive in times of uncertainty win. Such resilience and adaptability should be pursued in sector & security selection and in corresponding portfolio allocation. Further, the majority of wealth compounds in the far horizons. But first, one has to survive the battles on the way to reach the promised treasure. So put simply, the objective is to stay in the game even if it means giving up some rewards on the way.

Market behaviour and implications

Complex adaptive system (CAS). Dynamic interactions between heterogeneous agents, that adapt as they interact, form a system which is inherently unpredictable. One instance of it is the global financial market. Agents evolve their strategies as they react to the behaviour of other agents. By doing so, they form behaviour that is unexplained at the individual level. Rather, it has to be viewed from a collective point of view. As such, emergent behaviour, power laws, non-linearity, feedback loops and phase transitions become apparent. Similarly to other complex adaptive systems such as climates, cities, ecosystems, social networks, traffic flows, earthquakes, ant colonies, the brain and many others. If one agrees with such classification of the financial market, dire implications naturally follow. The approach to investment management has to deal with these system characteristics. The implications of the new philosophy are as follows. Shift from Prediction to Preparation. Non-linearity, emergence and reflexivity diminish the accuracy of predictions. Insignificant causes may produce large effects as the interconnected system amplifies through feedback loops and system-wide shocks emerge. Even in the presence of a perfect model, seemingly small changes in initial conditions cause massive deviations in the results. Think about the changes in terminal value when different growth rates are applied. Errors compound exponentially over time. Another reason is that emergent properties can not be predicted from individual parts as it emerges dynamically. For these reasons, one should shift from point-forecasting to mapping multiple scenarios or possible futures; from optimization to building redundancy and resilience, the famous margin of safety, to prevent wipeout from a systemic collapse. In a complex adaptive system, the one with the most options in times of disturbance wins. Optionality beats optimization. Investor’s focus should be on robust companies with asymmetric opportunities and probe the possible future states. Furthermore, the actions of the agents shape the results. So called reflexivity can produce self-fulfilling prophecies.

"Stop trying to act like an astronomer predicting the precise orbit of a planet and start acting like an evolutionary biologist preparing an organism to survive in a volatile ecosystem."

Company characteristics

Resilience, adaptability and optionality. Those characteristics are sought-after. Preferred qualities that hint at those characteristics are as follows. High profitability to absorb losses, or better to transfer, rising input costs. That requires added value to customers higher than the sum of price and those additional rising costs. Pricing power in a exploitative way, zero-sum setting, is regressive and hence not preferred. Only when joined with additional value. Otherwise it introduces frictions that reduce the sough-after characteristics. To the contrary, non-zero-sumness creates an ecosystem that thrives. It is unfavourable to leave such ecosystem. Hence, increase in the cooperation time period. As company grows in complexity it becomes more rigid. But the environment is in constant flux. Thus, to survive, it pays to be decentralized. Faster decision making and of higher quality is due to the closeness to customers and information sources. Lower frictions of information spreading through the organization. Innovation thrives as well as motivation when ownership is shared and accountability is rewarded.

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Rhetoric

Introduction

Market behaviour and implications

Company characteristics

Repertoire

HOLDINGS

as of: 24-05-2026