Issue 3 - 18 June 2020
We’ve all felt the drastic moves of the past few months as ‘decades have happened in weeks.’ E-commerce, for example, has gained an 10% additional market share in 8 weeks. The previous 10% gain took a decade. Remote working has opened the minds of even the most conservative companies to the possibilities of a flexible and global workforce in a very short time, something that was unimaginable even five months ago.
With great change comes great opportunity, and now seems like a great time to think about what our various industries, geographies and relationships will look like in 10 years’ time.
One of the benefits of training as an actuary was really understanding exponential and other non-linear functions, because very few things in the world actually move in a straight line.
Some things grow exponentially, but almost too slowly to notice, they sneak up on us unless we really watch them (for example, compound interest or human populations in emerging markets). The good thing here is that these are somewhat predictable and forecastable.
An important example is the compounding power of relationships – mutual trust makes buying, delegation and investing easier and faster. Perhaps if everyone thought about relationships as compounding functions, we’d be far more thoughtful about doing anything in the short term that might harm our staff, investors or friends. Another wonderful thing about relationships is that they exhibit the Lindy effect. This means that if someone is your friend/investor/backer/spouse for say five years, they are more likely to be there for the next five years - the longer something persists, the longer it is likely to persist.
Other things grow exponentially, but the rate of growth is so rapid that they surprise us with the speed of their growth (say, the rate of COVID-19 cases). Still, others are like a melting ice cube that you don’t really notice is shrinking until it’s nearly gone (newspaper subscriptions and, dare I say, traditional asset management fees).
Still others are Fat Tailed (more on that in the next letter) and for these one should spend a lot of time thinking about optionality and mitigation. I would put most credit deals in this category – you don’t control the borrower’s business, but you can drastically cut down the cost of a default scenario by understanding it well and mitigating the risks. Key to this is saying no to those deals where you can’t get this right, no matter how good the deal looks. Cutting down the tail is what will make the difference between a mediocre track record and a great one. While businesses exhibit the Lindy effect (if they made money for the first ten years they are more likely than a start-up to survive the next ten), the Fat Tailed nature of credit - when things go wrong they go very wrong - means one can never simply rely on a long relationship. Continued, dispassionate monitoring is essential to ensure the business continues to perform.
I try to think about 2030 regularly - what countries and populations might look like and where I want our business and our relationships to be. It’s a hard exercise but really trying to picture the future scene allows one to work backwards. Working backwards allows us to ensure the things that we can influence are moving in the right direction and maybe pick up clues as to what of our current assumptions might be totally wrong.
One of the most valuable things it does is tell us what we could be doing better. If you picture a junior colleague as an exceptional senior colleague in the future, why not double your efforts to train her right now and get her there sooner?
Somewhere I’ve personally been focusing a lot of energy with Origin is on complete transparency and alignment, its obvious these are important to investors and is rapidly becoming mainstream… so why not just go straight there?
PS – If I sound like a big Nassim Taleb fan, I am. I even have a photo of him above my desk next to Sam Zell and Bruce Lee. If you want to explore these ideas in more detail, his books “Antifragile” and “Fooled by randomness” are two of my favourites