What the expected value of a 3-point shot in basketball can tell us about portfolio construction 

I loved this Michael Mauboussin piece published this week that analyzed what contributes to winning strategies in both sports and investing. The key takeaway of article, for me at least, is that to be great at any game—be it basketball, football, investing, poker, chess—the player must be willing to change and adapt, even when (especially when?) it feels uncomfortable to do so. “In sports, the boundaries and rules are generally stable,” he writes.  “In investing, the landscape continuously changes. This includes the evolution of businesses, the nature of investment management, and the profile of investors. As a result, successful investors have little choice but to learn. This means being willing to ask naïve questions and to be mindful of the pitfalls of status quo bias.” He continues:

“Successful long-term decision makers, including investors, are familiar with the ups and downs that come with a successful long-term record. John Maynard Keynes, an economist, wrote this about long-term investors… ‘Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.’ We posit that teams and organizations are willing to experiment with new approaches when they have been very unsuccessful or highly successful… Loss aversion is less of an issue following a stretch of failure because there is little room to get worse. Consistent with this is the notion that underdogs should try new and unusual strategies in order to increase variance when they compete with a stronger team that is the favorite to win.”


Gradually, then suddenly: investing in the exponential era 

The human brain isn’t particularly well-suited to understand the implications of exponential growth. I suppose this is what makes investing in the exponential era today so challenging (and exciting.) Azeem Azhar, who writes the Exponential View newsletter, published an essay this week on the subject, writing about the “chasm between the old world and the new.” Specifically, Azhar drills into the implications of exponential growth and disruptive technologies (from e-commerce to energy) on individuals, companies, investors, and governments. Perhaps my favorite “exponential” anecdote in the piece focused on something rather prosaic: chewing gum sales. As Azhar writes, from 2007 to 2017, chewing gum sales dropped 15% – just as the exponential smartphone adoption curve began. “This was no coincidence,” he says. “When people got into a shop’s queue, they would once have spent the time browsing the goodies for sale at the counter – and gum was the obvious choice. Suddenly, they were spending that time playing with their phones. So gum sales plummeted. Nobody saw that one coming. Predicting the impact of the iPhone on grocery store gum sales would have needed a modern-day Nostradamus.” [H/T Rishi Gosalia… again :-)]  Azhar continues: 

“We can visualize the gap by looking at an exponential curve. Technological development roughly follows this shape. It starts off looking a bit humdrum. In those early days, exponential change is distinctly boring, and most people and organizations ignore it. At this point in the curve, the industry producing an exponential technology looks exciting to those in it, but like a backwater to everyone else. But at some point, the line of exponential change crosses that of linear change. And soon it reaches an inflection point. That shift in gear, which is both rapid and subtle, is hard to fathom.”


A few more links I enjoyed: 

“Every forecast takes a number from today and multiplies it by a story about tomorrow. Investment valuations, economic outlooks, political forecasts – they all follow that formula. Something we know multiplied by a story we like. The trick when forecasting is realizing that’s what you’re doing.”
“In my opinion, due to the social nature of content in general, this dominance (network effect) is actually Spotify’s moat. This moat is likely to continue compounding through time, as network effects continue bringing in more users and creators, spilling over into new audio categories. Spotify is laser focused on music/audio, whilst its competitors are not. I believe this focus explains much of the advantage Spotify has over its competition, since it is able to evangelize stakeholders in the industry.”
“We are joined by Alex Morris, otherwise known as The Science of Hitting. We discuss Airbnb, a company that went public less than a year ago. Airbnb is a company that was severely impacted by the global pandemic. Alex brings his expert knowledge of Airbnb for a great discussion regarding the history and future of the company.”
“Carbon Tracker’s fifth annual analysis of the risk of investing in oil and gas producers – warns investors that companies have not woken up to the ‘seismic implications’ of the International Energy Agency’s finding that no investment in new oil and gas production is needed if the world aims to limit global warming to 1.5°C.”

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