That post I just referenced has an interesting backhanded compliment: “Does thinking that a VC’s blog post is really great mean I’m actually an idiot?”
A long time ago, @cshirky, who I sat on a Board with during the dot-com bubble referred anonymously to someone I assume was me as “the tallest dwarf” because he was surprised a professional investor could have an intelligent idea
Being the tallest dwarf is, of course, a compliment, and I was flattered that he liked an idea I had (even though it was not actually my idea, it was something I had learned from Edward Deming in business school)
The interesting thing was the idea, from someone who was actually a member of the intelligentsia, that good ideas can’t come from someone whose metric of success is return on capital
There is, of course, both intuitive and evidentiary support for this idea, as anyone who has hung around a business school, i-bank, or any flavor of private equity can tell you
Posit that finance is a kraterocratic system and fitness in it is over time a stark and objective metric: did you make more money than everyone else or not?
(This is not to say that financiers are inevitably immoral, just that when morality and success coincide it is almost certainly just good luck, not causation. Plus, naturally, regulation that penalizes bad behavior)
(As an aside, this is why ethics needs to be taught: while there’s an interesting argument that morality is the result of a repeated game, finance is typically *not* repeated in any given context so bad, but not illegal, behavior by any individual can go unpunished)
This clashes with the idea that finance, especially VC, is about predicting the future: good predictions about the future should *always* seem like big ideas and the predictors should be seen as preternaturally gifted, as oracles were in the past
There are three possible resolutions: (1) Predictions are impossible, (2) There is no money in predicting the future, (3) Financiers are stupid
I’m going to reject (3) out of hand because while it may be an easy and satisfying conclusion, it can’t be systemically true
Are predictions impossible? Well, at some level they are. But at some level they are not. “Things that can’t go on forever won’t” is a prediction mechanism, for instance, and is true and reasonably easy to apply
But can you make money from predictions? Again, I think in some cases you can. There are hedge funds with genius mathematicians that make quite a bit of money from prediction
So how do we resolve the conflict? Perhaps by noticing that predictors who make money can only do so by keeping their predictions and prediction mechanisms secret. This also neatly explains why financiers seem to have no big ideas: they can’t let anyone know
This seems obvious enough. But for me, in reading Skidelsky’s biography of Keynes a couple decades ago, one thing stuck out: Keynes was both a source of great ideas and made a bunch of money in the stock market...these things were not incompatible
My conclusion was (and is) that you can make money from ideas even if you don’t keep them secret if no one else believes them. My explication of Perez in “The Deployment Age” is a great example
Perez’ ideas are lauded and cited by many of the best VCs of the last generation. But I think none of them follow what she actually says
Similarly, my popularization (such as it is) of what she said has been read about by tens of thousands of people, yet early-stage VC keeps garnering more and more money despite her direct warning that this is no longer where money can (systemically) be made
Meanwhile, people like @BrentBeshore, @bryce, and @tylertringas who are building investment firms tailored to this environment are in the minority (full disclosure: I have invested in the funds of two of these and am working on convincing the third to take my money)
So here’s my advice, which you will not take: (1) Buy low, sell high, with the caveat that the average market price today is obviously not low
(2) There will be no new overarching tech paradigm built outside the establishment that will make tons of money this decade...focus on uses not revolutions
(3) Don’t bet against the big tech companies, they will own the sociopolitical dynamic for some time. They are the enemy but you can’t beat them. /fin
