Views on Change
“Change is the enemy of investments.”
— Buffett
While my operation certainly belongs in the Buffett camp regarding change and investments, I believe that Puggy Pearson’s third rule to good gambling — to know oneself — applies more broadly to the matter. In other words, how one “feels” about, where one’s natural comfort lies regarding the changes that inevitably befall businesses and industries is downright crucial to discovering one’s bailiwick as an investor.
Certain industries are subject to repeated and often disruptive change: high technology, medical devices and pharmaceuticals, retailing to a certain extent (especially with the advent of the internet), and even start-up mining speculations in a way (vis a vis volatile commodity prices, environmental challenges). Other industries, on the other hand, you can more-or-less count on to endure: beverages, chewing gum and cosmetics, to name but three.
So the question becomes: To which category are you naturally drawn? Does change and the possibility to disrupt and dethrone the champion excite you? Or does the natural uncertainty that results from instability make you anxious and frustrated? Distilling one’s natural inclination towards change into a usable investment implication, do you “like” (are more comfortable with) betting on innovations or overreactions?
I offer two four-squares to hopefully help elucidate this change dilemma that we face.
This four-square addresses primarily those industries where change frequently upsets the incumbents. The Innovation Thinker here is looking to play those disruptive technologies that unseat. Hence, I term a bet on change in these environments as a “positive” bet, a “bet for,” in essence. The payoffs are simple and straightforward. If one takes action and is right, multi-baggers are usually the result (e.g., NFLX). On the contrary, when wrong, most of one’s capital can normally be counted on to have been lost (e.g., Webvan). No action produces the ho-hum result of not losing when wrong, or the very painful (for those with this mentality) reaction of having really missed out when right. Now, for the second four-square:
The proper prospecting environment for the Overreaction Thinker occurs when the market marks down a security because participants believe the company to be threatened by change. Players here must ascertain whether the threatened change is long-term damaging to the company or whether the security’s price decline is the result of the very typical human psychology of not wanting to be associated with temporary discomfort. If one takes action, bets the latter, and is right, in victory he feels that he is simply doing his job to make money (e.g., BAX, post the Street tossing it out last year due to temporary supply/demand issues in plasma). If wrong, in defeat, money will often be lost but probably not the whole investment (e.g., Sears, which is losing ground to change in its space, is not a zero and even post-merger buyers of the stock haven’t been completely annihilated).
Killer change usually takes time in the slower moving industries that attract the Overreaction Thinker, and this allows him, when he is incorrect, to escape with something. The Do Nothing response produces an irritating frustration if the threatened change proved to be false or a feeling, somewhat similar to the Take Action/Right square, of having simply done the job of not losing money when assessing how real a threatened change is. In general, the Overreaction Thinker, lives in a less all-or-nothing, both in terms of payoffs and emotions, world.
In both four squares, guess what matters? Being right! We want to live in those boxes where we either get paid on a winner or take a pass on a loser. The point of this piece is the importance of deciding which game you want to play. I offer four guidelines to hopefully help with this decision:
1. Play in that four-square where doing the required work to make a sensible determination just doesn’t “seem” like work. Where do you achieve your “flow” state? Is it in reading and socializing about the future and the new or in curmudgeonly ridiculing man’s over-excitability?
2. Play where wins feel deserved, losses the result of the whims of probability, not flawed process or, worse, loss of discipline.
3. Play where you are excited to tell others what you are looking at and doing with your time. This is the side you can believe in.
4. Play where you can sleep at night because a life well-rested usually provides for a much happier existence!
“Change is the enemy of investments.”
— Buffett
While my operation certainly belongs in the Buffett camp regarding change and investments, I believe that Puggy Pearson’s third rule to good gambling — to know oneself — applies more broadly to the matter. In other words, how one “feels” about, where one’s natural comfort lies regarding the changes that inevitably befall businesses and industries is downright crucial to discovering one’s bailiwick as an investor.
Certain industries are subject to repeated and often disruptive change: high technology, medical devices and pharmaceuticals, retailing to a certain extent (especially with the advent of the internet), and even start-up mining speculations in a way (vis a vis volatile commodity prices, environmental challenges). Other industries, on the other hand, you can more-or-less count on to endure: beverages, chewing gum and cosmetics, to name but three.
So the question becomes: To which category are you naturally drawn? Does change and the possibility to disrupt and dethrone the champion excite you? Or does the natural uncertainty that results from instability make you anxious and frustrated? Distilling one’s natural inclination towards change into a usable investment implication, do you “like” (are more comfortable with) betting on innovations or overreactions?
I offer two four-squares to hopefully help elucidate this change dilemma that we face.
- Positive Change Environment/Thinkers Who “Like” Innovation
Take Action | Do Nothing | |
Ultimately Right | Win (and often big) | Didn’t Win (and it hurts) |
Ultimately Wrong | Lose (and often not unsubstantial) | Didn’t Lose |
This four-square addresses primarily those industries where change frequently upsets the incumbents. The Innovation Thinker here is looking to play those disruptive technologies that unseat. Hence, I term a bet on change in these environments as a “positive” bet, a “bet for,” in essence. The payoffs are simple and straightforward. If one takes action and is right, multi-baggers are usually the result (e.g., NFLX). On the contrary, when wrong, most of one’s capital can normally be counted on to have been lost (e.g., Webvan). No action produces the ho-hum result of not losing when wrong, or the very painful (for those with this mentality) reaction of having really missed out when right. Now, for the second four-square:
- Negative Change Environment / Thinkers who “Like” Overreaction
Take Action | Do Nothing | |
Ultimately Right | Make $ | Frustration |
Ultimately Wrong | Lose some | Didn’t Lose $ |
The proper prospecting environment for the Overreaction Thinker occurs when the market marks down a security because participants believe the company to be threatened by change. Players here must ascertain whether the threatened change is long-term damaging to the company or whether the security’s price decline is the result of the very typical human psychology of not wanting to be associated with temporary discomfort. If one takes action, bets the latter, and is right, in victory he feels that he is simply doing his job to make money (e.g., BAX, post the Street tossing it out last year due to temporary supply/demand issues in plasma). If wrong, in defeat, money will often be lost but probably not the whole investment (e.g., Sears, which is losing ground to change in its space, is not a zero and even post-merger buyers of the stock haven’t been completely annihilated).
Killer change usually takes time in the slower moving industries that attract the Overreaction Thinker, and this allows him, when he is incorrect, to escape with something. The Do Nothing response produces an irritating frustration if the threatened change proved to be false or a feeling, somewhat similar to the Take Action/Right square, of having simply done the job of not losing money when assessing how real a threatened change is. In general, the Overreaction Thinker, lives in a less all-or-nothing, both in terms of payoffs and emotions, world.
In both four squares, guess what matters? Being right! We want to live in those boxes where we either get paid on a winner or take a pass on a loser. The point of this piece is the importance of deciding which game you want to play. I offer four guidelines to hopefully help with this decision:
1. Play in that four-square where doing the required work to make a sensible determination just doesn’t “seem” like work. Where do you achieve your “flow” state? Is it in reading and socializing about the future and the new or in curmudgeonly ridiculing man’s over-excitability?
2. Play where wins feel deserved, losses the result of the whims of probability, not flawed process or, worse, loss of discipline.
3. Play where you are excited to tell others what you are looking at and doing with your time. This is the side you can believe in.
4. Play where you can sleep at night because a life well-rested usually provides for a much happier existence!
