Last week, I talked about the Antifragile Framework for investing.
The biggest question, by far: What about VALUATION?
It's not in the framework.
But before I explain why, there are 6 things you need to know about ANTIFRAGILITY and PREDICTING the future. A 🧵
1/
We often take what's recently happened, and project that into the future without end.
That makes sense. 99.9% of the time, you'll be right.
The same was true for our ancestors. NOT doing this would have led to extinction as hunter-gatherers
2/
But 0.1% of the time, you'll be wrong. (Black Swans)
Imagine how WRONG your predictions would've been on:
* October 23, 1929 (Black Thursday)
* December 6, 1945 (Pearl Harbor)
* Summer 1990 (Fall of USSR)
* September 10, 2001 (9/11)
* New Year's Day 2020 (COVID)
3/
Here's the thing: those 0.1% occurrence will account for the VAST MAJORITY of the effects moving forward.
From those dates above:
* Great Depression
* WWII
* End of Cold War
* Wars in Afghanistan/Iraq
* Pandemic
You could be right 99.9% of time & still be ILL PREPARED
4/
We learn:
"Wow, that was surprising!" (Hindsight)
Instead, we SHOULD learn:
"There's probably another Black Swan right around the corner." (Foresight)
Unsettling & true (note the date below)
It need not be all doom-and-gloom.
There *are* positive Black Swans. They just develop slowly.
Imagine explaining Wikipedia to someone in 1970. Or the fact that COVID vaccines were ready so quickly.
Building good things takes time. Destroying them doesn't.
5/
The same is true for companies. You cannot possibly predict what will happen in the future.
* MOATS: protect you from *negative* Black Swans
* OPTIONALITY: exposes you to *positive* Black Swans
They can't predict anything with certainty. They just tip scale in your favor
6/
That's why the only thing you can do is measure FRAGILITY.
We'll never know:
* When chaos will hit
* What the 2nd, 3rd order effects will be
* How quickly it will happen
But in chaos, fragile things break. Antifragile get stronger.
That's why I don't try to predict the future.
I don't pay attention to TAM or VALUATION (more on that on Monday).
I just want to hold the companies that will do well when [X] happens -- and it WILL happen
These lessons, from @nntaleb, help me sleep well at night.
1) We're right 99.9% of time 2) 0.1% we aren't (Black Swan, or BS). 3) BSs affect everything 4) BSs are ALWAYS around corner. 5) Moats protect from negative BS, optionality exposes to positive BS 6) Instead of predicting future, measure fragility
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1/ This is a stretch, but it's something I keep coming back to when brilliant (@nntaleb) and popular (@sapinker) collide. The recent @WSJ piece does a brilliant job of highlighting the difference between *Skepticism* and *Enlightenment*.
2/ In the end, @yhazony isn't saying we should shun all "progress", but that we need to move slowly, and locally, to make sure that we don't cause *more* damage in our pursuit of *progress* because we don't fully understand the benefits of traditions.
3/ Reminds me of re-telling of Adam and Eve in @_Daniel_Quinn's Ishmael.
The context: Narrator believes agriculture ushered in a new way of living. It pitted Modern (Agricultural) humans against indigenous peoples.
In effect: The Bible = Story to justify agriculture