Investing in turbulent times

Jeetay Investments Pvt Ltd

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

The future just happened

Global economy: accelerating creative destruction

Source: Economist

Some fifth wave changes

2004Real time language translation

2003Use of molecular computers

2003Smart pills with chip dispensing drugs

2003Virtual retinal displays, glasses based

2004Cars powered by hydrogen fuel cells

Year of impact Technology

Some fifth wave changes

2005DNA storage device

2004Instruction from artificial intelligence in school

2007Quantum cryptography

2005Designer babies

2007Totally automatd factories

Year of impact Technology

Source: Exact Technologies by Pearson and Neild

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

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

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

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

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

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

The new paradigm

Positive SumZero Sum

Knowledge ManagementData Processing

Networks and WebsCommand and Control

Nonlinear DynamicsComparative Statics

Increasing Returns Diminishing Returns

Intangible AssetsTangible Assets

Knowledge CapitalPhysical Capital

Excess supplyScarcity

21st Century20th Century

A few Mental Models to succeed in turbulent times

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

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

A latticework of mental models

Investing should integrate the big ideas from several disciplines besides finance Psychology Physics Biology Complexity theory Game theory Humanities

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 informationThe disposition effect - hanging to losers

for too long

Psychology

Loss aversionEndowment effectStatus quo biasAttachment biasHouse money effectRisk-Aversion effectBreak-even effect

Psychology

RepresentativenessFamiliarityCognitive dissonanceMental AccountingOver confidenceCreation of false mental models

Overcoming the psychology of misjudgment

Lay out known facts and rational factorsAttune to subconscious psychological mis-

steps either of one’s own or others

Physics

The notion of equilibriumReduction of phenomena into a few

fundamental particles and defining the forces that act on these particles

Random walk hypothesisThe rational expectations hypothesis

Dynamic disequilibrium

Questioning of the equilibrium theory that dominates economics

Complex adaptive systems can never be in equilibrium

Market is organic rather than mechanisticIs imperfectly efficient

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

Financial EcologyBiological Ecology Financial Ecology

Species Trading Strategy

Individual Organism Trader

Genotype (geneticconstitution)

Functional presentationof strategy

Phenotype (observableappearance)

Actions of the strategy(buying and selling)

Population Capital

External environment Price and otherinformational inputs

Mutation andrecombination

Creation of newstrategies

Complexity theory

Self organisationSelf reinforcingAdaptiveOptimal solution is an emergent propertyDiverse participation of all investors make

the markets stronger, not weaker

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

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

Humanities

PhilosophyLiterature

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

PhilosophyWilliam 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

PhilosophyPragmatism helps having a shorter trigger to

jettison a model if it does not workNo metric is always rightApplication of any second order model that

is fruitful can be appended to the first order model

Rubik’s Cube approach to investing

Literature

Helps in developing the mental skill of critical analysis

Helps in evaluating the facts and in separating facts from opinion

Bibliography

Investing Madness by John R NofsingerLatticework by Robert HagstromQuantum Investing by Stephen WaiteGame Theory At Work by James Miller