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Investing in turbulent times
Jeetay Investments Pvt Ltd
The future just happenedA few Mental Models to succeed in turbulent times
The future just happened
Global economy: accelerating creative destruction
Source: Economist
Some fifth wave changes
2004Real time language translation
2003Use of molecular computers
2003Smart pills with chip dispensing drugs
2003Virtual retinal displays, glasses based
2004Cars powered by hydrogen fuel cells
Year of impact Technology
Some fifth wave changes
2005DNA storage device
2004Instruction from artificial intelligence in school
2007Quantum cryptography
2005Designer babies
2007Totally automatd factories
Year of impact Technology
Source: Exact Technologies by Pearson and Neild
What these technologies mean?
Nanotechnology The science of fabricating things smaller than
100 nanometers One nanometer is equal to one-billionth of a
meter Nanotechnology will help build things that
work on the smallest possible length, atom by atom, with the ultimate level of finesse
Nanotechnology will eventually replace our entire manufacturing base with a radically more precise, less expensive, and flexible way of making products – Ralph Merkle, CEO, Zyvex
Implications of nanotechnology
Development of carbon nanotubes One hundred thousandth the thickness of a
human hair 100 times stronger than steel, tougher than
diamonds and have better thermal and elctric conductive properties than any other known material today
Potential uses includes components of nanoscale motors
Implications of nanotechnology
Development of carbon nanotubes New storage system for hydrogen fuel which is
plentiful and clean compared to fossil fuels Could eventually be used to power automobiles Nanotubes may also be the source of future
superconductors Implications in medicine is enormous
Implications of biotechnology
Biotechnology Will change the face of medicine in the next
decade Almost all known diseases can be contained if
not cured The changes in agriculture and material science
will be even more profound
Some examples of biotechnology
ICI has developed strains of bacteria capable of producing plastics The plastic is 100% bio degradable Same properties as petrochemical-based plastic
Monsanto is working on commercialising a plant that produces plastic
The new paradigm
Positive SumZero Sum
Knowledge ManagementData Processing
Networks and WebsCommand and Control
Nonlinear DynamicsComparative Statics
Increasing Returns Diminishing Returns
Intangible AssetsTangible Assets
Knowledge CapitalPhysical Capital
Excess supplyScarcity
21st Century20th Century
A few Mental Models to succeed in turbulent times
Worldly wisdom is mostly very simple
“There are a relatively small number of disciplines and a relatively small
number of truly big ideas. And it’s a lot of fun to figure it out. Even better, the fun never stops. Furthermore, there’s a lot of money in it, as I testify it from my
own personal experience” – Charlie Munger
Acquisition of worldly wisdom
Gain significant concepts or models from a wide variety of disciplines
Recognise patterns of similarities between them (i.e connectionism)
Apply critical thinking at all times
A latticework of mental models
Investing should integrate the big ideas from several disciplines besides finance Psychology Physics Biology Complexity theory Game theory Humanities
Psychology
Benjamin Graham in his portrayal of Mr. Market was warning investors of the danger of making investment errors based on emotions
Investors over react to new informationThe disposition effect - hanging to losers
for too long
Psychology
Loss aversionEndowment effectStatus quo biasAttachment biasHouse money effectRisk-Aversion effectBreak-even effect
Psychology
RepresentativenessFamiliarityCognitive dissonanceMental AccountingOver confidenceCreation of false mental models
Overcoming the psychology of misjudgment
Lay out known facts and rational factorsAttune to subconscious psychological mis-
steps either of one’s own or others
Physics
The notion of equilibriumReduction of phenomena into a few
fundamental particles and defining the forces that act on these particles
Random walk hypothesisThe rational expectations hypothesis
Dynamic disequilibrium
Questioning of the equilibrium theory that dominates economics
Complex adaptive systems can never be in equilibrium
Market is organic rather than mechanisticIs imperfectly efficient
Biology
Market can be viewed in an evolutionary framework
Economic selection will determine which ideas remain
Market is in a constant struggle for scarce resources
Financial EcologyBiological Ecology Financial Ecology
Species Trading Strategy
Individual Organism Trader
Genotype (geneticconstitution)
Functional presentationof strategy
Phenotype (observableappearance)
Actions of the strategy(buying and selling)
Population Capital
External environment Price and otherinformational inputs
Mutation andrecombination
Creation of newstrategies
Complexity theory
Self organisationSelf reinforcingAdaptiveOptimal solution is an emergent propertyDiverse participation of all investors make
the markets stronger, not weaker
Complexity theory
Diverse system is insensitive to modest amount of noise
Markets booms reflect self organised criticality
Self organising systems are prone to unstable fluctuations and instability
Game Theory
Free stock advice should always be questioned
Events affect stock prices when they are anticipated, not when they actually occur
Even short term traders need to be concerned with long term prospects
Survivorship bias makes mutual funds past performance misleadingly impressive
Humanities
PhilosophyLiterature
Philosophy
Epistemology Deals with the limits and nature of knowledge Will help the investor to develop good thinking
skills Good thinking process is central to good
investment results Helps to remain open minded
PhilosophyWilliam James’s theory of pragmatism
To understand something we must ask what differences it makes and what its consequences are
Thoughts are a go between function between new ideas and older beliefs
A belief is true and has ‘cash value’ if it helps us to get from one place to another
Truth becomes a verb not a noun All possibilities should be considered without prejudice
PhilosophyPragmatism helps having a shorter trigger to
jettison a model if it does not workNo metric is always rightApplication of any second order model that
is fruitful can be appended to the first order model
Rubik’s Cube approach to investing
Literature
Helps in developing the mental skill of critical analysis
Helps in evaluating the facts and in separating facts from opinion
Bibliography
Investing Madness by John R NofsingerLatticework by Robert HagstromQuantum Investing by Stephen WaiteGame Theory At Work by James Miller