Wednesday, April 13, 2016

Why having an investment thesis is important

One of activities that I consistently make time for is reading and consuming information. I am a voracious consumer of news, articles, books, podcasts etc... I also make time for sitting and thinking. When you take in a large amount of data and information you must sift the wheat from the chaff so to speak. After taking in all this information along with processing it and thinking about it I am able to come up with a view on what I think the world will look like over the next 10-20 years. Most people who are investing do not go through this exercise and even worse are afflicted with “normalcy bias”.

Normalcy Bias is when a person does not anticipate future events as being possibly detrimental to their wellbeing because they judge the future on what they experience today. In other words they have a bias towards things being normal in the future because things are normal today. This is dangerous in all facets of life and explains, for example, why some people that live in hurricane zones get caught out unprepared even when they know the hurricane is coming!

When investing and speculating I think it is imperative to have a macro level view of where one thinks the world is trending. Just buying and holding long term without thinking will not work anymore. You have to formulate a plan that takes into account the way things are in the world and not the way we want them to be. The world is changing very quickly and I think that most people will be shocked at how things change over the next 5, 10, 20 years.

There will be major economic, social, and political changes that are going to be disruptive in the very near future. There are many people who will see their lives turned upside down because they either did not or were unable to properly see what was happening in the world. Sadly, there will also be many people that have the facts and the ability to process them yet will choose not to because it is uncomfortable for them to do so.

An example comes to mind. I recently had dinner with a colleague who was retiring very soon. This guy had worked for many years at a very large industrial conglomerate and had retired from that company and then taken a job with a private equity firm.

We were discussing his impending retirement and what he planned on spending his time doing now that he no longer had to go to work. He said he was going to travel and spend time with family. All very well and good and the conversation was pleasant. We then somehow got on the subject of Social Security and Medicare. I am sure he is more than well off financially but he did indicate he had incorporated these programs into his retirement planning.

I went on my soapbox about the impending demise of these programs, as I have written about here, and I could tell he did not like the tenor of the conversation. I think what really set him off was when I said that simple math would indicate to the most obtuse that these programs are not sustainable in their current form. That seemed to touch a nerve. Instead of backing off in the spirt of being cordial I pushed on by pointing out the fact that Social Security was not a right but just another welfare program, as stated on the SSA website.


I could tell I was aggravating him and another person at the table gratefully changed the subject. The point is that even well-educated and successful people cling to untrue beliefs because. This person acknowledged that I was basically correct but evidently he had incorporated these programs into his “retirement plan”. Acknowledging that Medicare will be bankrupt before he probably dies and he will have to pay with his own money is not on his agenda. 

So after thinking about this what are some of the themes and disruptions I am investigating? Well here is a list but it is subject to change as time goes on:

The ascent of man will continue
Technological disruption
The continued aging of western democracies and Japan
Continued urbanization of the emerging and frontier markets
Water scarcity
Climate change
Decline in arable land
Automation
Rise of Asia as center of world power
9 billion people by 2050
Energy production
Monetary system realignment

These are some of the major themes I will be writing about over the next several months. One thing you may notice is that several of these actually overlap and intertwine. For example the increase in world population to 9.6 billion people will also affect energy supply, climate change, and food supply. These things are complicated and just blindly putting $288 a pay day into an S&P index fund probably will not work out for the best long term.

Please stay tuned as I will be writing about these subjects and how they will affect the investment speculative opportunities that will come about because of these changes. Change is constant and it is coming whether we want it too or not. Better to be prepared and put ourselves in the position of being able to benefit rather than becoming a victim. 

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