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Investing in turbulent times

Investing in turbulent times. Jeetay Investments Pvt Ltd. The future just happened A few Mental Models to succeed in turbulent times. The future just happened. Global economy: accelerating creative destruction. Source: Economist. Technology. Year of impact. Use of molecular computers.

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Investing in turbulent times

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  1. Investing in turbulent times Jeetay Investments Pvt Ltd

  2. The future just happenedA few Mental Models to succeed in turbulent times

  3. The future just happened

  4. Global economy: accelerating creative destruction Source: Economist

  5. Technology Year of impact Use of molecular computers 2003 Smart pills with chip dispensing drugs 2003 Virtual retinal displays, glasses based 2003 Cars powered by hydrogen fuel cells 2004 Real time language translation 2004 Some fifth wave changes

  6. Technology Year of impact Instruction from artificial intelligence in school 2004 Quantum cryptography 2007 Designer babies 2005 Totally automatd factories 2007 DNA storage device 2005 Some fifth wave changes Source: Exact Technologies by Pearson and Neild

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 20th Century 21st Century Scarcity Excess supply Physical Capital Knowledge Capital Tangible Assets Intangible Assets Diminishing Returns Increasing Returns Comparative Statics Nonlinear Dynamics Command and Control Networks and Webs Data Processing Knowledge Management Zero Sum Positive Sum The new paradigm

  14. A few Mental Models to succeed in turbulent times

  15. 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

  16. 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

  17. A latticework of mental models • Investing should integrate the big ideas from several disciplines besides finance • Psychology • Physics • Biology • Complexity theory • Game theory • Humanities

  18. 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 information • The disposition effect - hanging to losers for too long

  19. Psychology • Loss aversion • Endowment effect • Status quo bias • Attachment bias • House money effect • Risk-Aversion effect • Break-even effect

  20. Psychology • Representativeness • Familiarity • Cognitive dissonance • Mental Accounting • Over confidence • Creation of false mental models

  21. Overcoming the psychology of misjudgment • Lay out known facts and rational factors • Attune to subconscious psychological mis-steps either of one’s own or others

  22. Physics • The notion of equilibrium • Reduction of phenomena into a few fundamental particles and defining the forces that act on these particles • Random walk hypothesis • The rational expectations hypothesis

  23. Dynamic disequilibrium • Questioning of the equilibrium theory that dominates economics • Complex adaptive systems can never be in equilibrium • Market is organic rather than mechanistic • Is imperfectly efficient

  24. 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

  25. Financial Ecology

  26. Complexity theory • Self organisation • Self reinforcing • Adaptive • Optimal solution is an emergent property • Diverse participation of all investors make the markets stronger, not weaker

  27. 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

  28. 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

  29. Humanities • Philosophy • Literature

  30. 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

  31. Philosophy • William 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

  32. Philosophy • Pragmatism helps having a shorter trigger to jettison a model if it does not work • No metric is always right • Application of any second order model that is fruitful can be appended to the first order model • Rubik’s Cube approach to investing

  33. Literature • Helps in developing the mental skill of critical analysis • Helps in evaluating the facts and in separating facts from opinion

  34. Bibliography • Investing Madness by John R Nofsinger • Latticework by Robert Hagstrom • Quantum Investing by Stephen Waite • Game Theory At Work by James Miller

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