Investing to Solve Problems

I started this blog with the intention of finding a way to define why and how I invest money. I’ve known my whole life that I am an investor and that I truly enjoy investing, but I’ve never really known why. I hoped that by writing to this blog regularly I’d find out. The funny thing was that I actually found out when I just let it sit and bubble for a bit, without any writing.

Here is the first draft of my beliefs, I’ll spend the rest of my life redefining and enhancing these:

1) I believe that investors are faced with a choice of investments generally split into two categories: finding loopholes or solving problems.

Most investors, both these days and over time (you should have a read of some of my older investment books, you’d laugh), have been focused on finding a method for outwitting the rest of the investors. It usually works for a very short time until the ‘trick’ proves to just be a magical coincidence or the rest of the market figures it out. Either way, it blows up or stops producing and the investor goes running for the next trick.

A few investors search for major problems and then figure out who is solving those problems. They vote for  the company they think that has the best solution by giving them money and then they trust the company and wait for the payoff. Some people believe this is the buy and hold strategy, but in fact that isn’t always the case. With many companies the problem/solution event happens in a relatively short period of time (six months to five years) and then they have to find another problem to solve faster than their competitors. Just investing in the team once without evaluating the investment can get you into a lot of trouble.

2) I believe that investing in the solving of important problems is the most profitable investment over time because it’s sustainable and has built in demand.

When a major issue affects society, people are willing to pay whatever it takes to get the problem solved. If a company anticipates a problem and develops a solution in time to fix the problem, they’ll be highly compensated because what they’re doing is incredibly valuable. For example, one major problem affecting the United States right now is that our infrastructure is crumbling right under us. Bridges are getting close to collapse, sewer systems and water mains are about to burst, our interstate system is full of cracks and potholes, levees are dangerously misengineered, and our electric grid is getting old. The cost to fix all of those problems is well outside of our ability to pay for it, using current technologies. But if a new technology for even one of these problems was developed that lowered the cost of fixing the problem to a managable level, the company that developed the technology would make a fortune.

3) I believe that adaquately defining problems and their effects helps investors find problems worth solving (investing in). A problem well defined is a problem half solved.

Most of the time investments go to problems that are well understood, fashionable, or within a domain that the investor understands. This is because the process of really understanding the problems affecting a given area, comparing the effects of each problem and the smaller problems that make up the larger problem is an incredible task. No one can possibly understand every factor, so we just invest in what is easy. As Warren Buffett says, he never invests in anything he doesn’t understand. My charge is that there are more problems than any investor could ever solve and we need a way to figure out what problems are affecting us most so we can direct investment money in that direction.

4) Most entrepreneurs today aren’t creating companies that solve useful problems because we don’t value them the way we should, simply because we don’t understand them yet.

We have a tendency to put off solving problems until they’re in our faces. In that case we have only moments to slap together a quick fix, hoping that will do the trick. The reason Hurricane Katrina was so devestating was because the levees broke and there was no way to patch them back up quickly. Few people had anticipated the problem and the few that did notice the problem did a terrible job of transmitting that information to the rest of us. It’s not that they are particularly bad at communication, it’s simply that there are no ways of communicating potential problems, what is causing them, and how they can be stopped. I believe that if we had a way to collect and develop essentially a ‘problems database’ then we could start to solve some of the things facing out world by inspiring people to solve problems that matter. Who really cares about getting your music streamed over the internet tin a predictive manner the way that Pandora serves it up? It’s an amazing service, but it doesn’t solve a big problem. We need to start solving big problems and investors need to start investing in big problems.

My goal: I believe that it is very worth my time to start finding a way to adequately capture problems affecting people in the world. There are tons of problems, from droughts in Africa to trash flows in the Pacific Ocean that are starting to affect people without our real understanding of how they’ll change our lives down the line. I’ll let you know how it goes, feel free to pitch in with any ideas.

Soil Erosion in Africa

More and more as I write for this blog I realize that it is actually serving as a training ground for my understanding of an economic world. Everything is now filtering through my view of consequences and outcomes. Today I read a really interesting article about a project called the Global Soil Map which is being developed based on soil mapping in Africa. It’s supported by the Bill and Melinda Gates foundation (an $18 million dollar grant) and is hoping to be able to map the surface of Africa in order to educate farmers about the best places to grow, the areas most likely to erode, and what type of crops to grow in which areas. Read more at IRIN Africa.

Again this seems to be an area where a mideconomic view or a multi-year view could work perfectly along with good predictive analysis in order to develop a wonderful theory of commodity prices in Africa. If one were to use the global soil map and overlay it with annual weather pattern models, there is the possibility of being able to predict which products are going to be needed most in which areas. As an investor, that means that I would be able to either redirect resources there or bet against the resources that are heavily influenced by African imports.

It’s interesting to think about using predictive modeling in this way. The question in some senses becomes “if you can predict what’s going to be short, why would you try to make money off of it rather than fixing the problem?” I believe that trying to make money off of the situation is in fact fixing the situation. Think about it. If I find an inefficiency in the market, an accurate prediction of crop shortages, then I should announce my findings to the world. So what happens when two or three people have differing findings? Who decides what gets done? That’s where capitalism becomes the amazing voting machine. I vote with my dollars that the crop is going to be short this year. You vote that it’s not. The winner gets paid. And, by betting that the crop is going to be short this year, I am redirecting crops to the area that need them most because that is the singular area that I can make the most money from it. If demand is very high, price is as well. Price is simply a rationing tool that allows us to ensure that everything is distributed in as fair a manner as possible.

I say predict away. Place your bets and move resources to the places that need them the most. And really, the better capitalists and investors get at predicting things, the less money that gets made and the less crisis happen. Place your bets on investors, they usually steer you right (until they all start referencing each other hoping the other guy is right, then all bets are off.. good luck).

Economics and a View of Life

I’ve found it interesting to think about how people organize their lives. I feel that most of us, myself included to this point, choose a particular view on life because of the events that have shaped our lives. We learn from experience and most of our experience tends to be in an area that we are drawn to as children or young adults. I know that is certainly true of myself.

I find myself drawn more and more to economics as a means of explaining the world, even if it’s just a framework for hanging knowledge on. Recently I drew out a little diagram that indicated how economics, as a viewpoint, shapes the other areas that I spend my time working on. Marketing, which I do for Click Consulting, is very directly related to economics for the simple reason that economics studies the spread of money and marketing tries to redirect the flow of money. Investing, my other business love, is directly related to economics because investing is the attempt to purchase assets before money flows to them and then sell the assets after people with money want it.

In many ways all of my interests, from psychology and biology to architecture and engineering, are directly related to economics. I picked up a book the other day called Butterfly Economics about how economic theory is mostly flawed because it looks at markets more like physics problems than biological, chaotic problems. The math and movements are less like Newtonian motion (even Brownian motion) and are in fact more like the evolution of animals or bacteria. I have found it funny that most kids believe all the random things they learn in general education classes have no use to them. Everything, if you’re willing to put it all together, is connected and influences each other. Knowing a little bit of a lot allows you to see a lot of casual connections you wouldn’t otherwise see or even have any inkling to see.

I am beginning to understand that I can learn a lot of things, even things that I would have never had any interest in, if I am willing to relate everything back to economics. I feel that economics is the study of how people place votes on what they value. It’s almost like psychology but with a voting mechanism. And in many ways I’ve found the models created to be interesting ways to look at the world. The idea that raising prices during a crisis is the humane thing to do seems counter-intuitive at first. Why would you take advantage of someone like that? In fact, it’s the exact opposite. By raising prices, the shop owner is actually ensuring that everyone gets a little bit instead of a few people hoarding. He might get lucky and might get a lot of money for his troubles, but there is always the possibility that there will be no recovery and the money he got for the goods is worth nothing. We all get paid based on risk and the value of the goods was have on hand. So I can learn psychology both directly through examples like the one above (both how the shop owner reacts, the people react, and the actions they take illuminate a lot about their views of the world) and by seeing how psychology models of the world match up to economic models of the world.

It will be interesting to see how an economic view of the world, looking at how people transfer value to each other, affects the ways I interact in the world. I wonder how your own model affects your view of the world, how you learn new knowledge, and how you interact with other people.

The new frontier

While the credit markets have created massive upheaval in the US economy, there are still plenty of investments that will pay off handsomely elsewhere. Africa is poised to take off. Sure, scoff at the idea, but that’s exactly why it’s a great investment. Twenty five years ago, no one thought anything of East Asia and now China and Japan are integral to the world economy.

More and more, it seems to me that the people willing to take risks and dive into foreign ideas and places before everyone else are the ones that make the really significant amounts of money. Both Bill Gates and Steve Jobs dove into personal computers before they were anything more than hobby kits. Real estate agents in Dubai (selling to people in the UK) have been making a killing because they’ve jumped on a massively growing market that few people truly understand.

Also, because Africa is significantly less involved in the world credit markets, they’ve been less affected by the global recession so far.

On the other hand, a recent post on World Bank African Chief Economist Shanta Devarajan’s site suggests that there may be other immediate problems that would stiffle immediate growth in African markets. On his site today, a guest poster noted these five concerns:

1. Weakened local investor confidence in equities and bonds on African Stock Exchanges

2. Return to ultraconservative lending practices

3. Losses arising from central bank reserve management practices

4. Renewed debate on the role of governments in the financial system

5. Weakened balance sheets resulting from a downturn in the real economy.

Investing and other tidbits

I believe in a lot of ways that business and investing are different sides of the same coin. In business, we’re always trying to approach the right set of customers with the right product at the right price. In investing, you’re trying to find the right industry, then the right company that is targeting the right customers with the right product at the right price, and then you have to try and buy that company at the right price for yourself.

I started investing in the stock market when I was twelve and did it all through high school. When I reached college I realized that I didn’t have time to really understand what was going on. That’s one of the tricks to making money consistently in the market in my view. You have to really understand mideconomics. Most people are split into macro or micro economics, but in my view both focus the attention on cycles that are too short. Microeconomics tries to guess which company is going to be best over the next quarter because of the customers they have tomorrow. It looks at internal company metrics and industry-wide comparisons. Don’t get me wrong, i believe each of these metrics are quite important, but they don’t tell the whole story. See, a huge part of being successful in investing is picking the right industry as I said before. if you have the best company in a bad industry, you have a bad stock. But if you have a marginal stock in a great industry, you have a good stock. Macroeconomics has a tendency to, amazingly, also become very shortsighted. People start looking at movements in the Fed as the holy grail for what to do tomorrow. The implication is that the macroeconomic decisions will affect us right now so we have to react or we’ll be left behind.The macroeconomic view also fails to really tell us which industry to invest in unless the industry we select is somehow tied directly to macroeconomic trends. Again, don’t ignore macroeconomic information, but don’t make it your main priority. Here’s a crazy stat to think about: we’re heading into a recession so our economy is going to drop somewhere between 1-5%. So we still have 95% of our economy. Why are so many people worried? Do we all believe we’re in the bad 5%? Business still has to get done and certain companies are going to take advantage of everyone else’s fears and nervousness.

This is where my idea of the mideconomic view has served me well. I try to take both the micro and macro economic views, but I also try to find one further view that few others seem to follow. I try to find where the game changing industries are going to be. It seems that the industries with the most innovation are the ones that tend to make it over the long term. That’s why, for example, I would recommend investing in solar eventually, once the market settles down a bit. There are absolutely amazing innovations being made that will cause solar to become a viable power alternative over the next few years. Here are a few examples: Rensselaer Polytechnic Institute Researchers found a way to make solar panels non-reflective and thus absorb sunlight from any angle, greatly increasing the light uptake and conversion. In Spain, researchers have found a way to make solar cells take up sunlight from either side, again decreasing the cost of harvesting sunlight. The real trick to investing by way of mideconomics is understanding that you are actually investing for 5 years or more out. It’s not long term investment in the traditional sense where you figure that a company will be around forever so they’re a good investment, but rather an educated bet on both an industry and then a company inside of that industry because of the macroeconomic, cyclical view of the future and the microeconomic, industry and company view. How does the individual company invest in the future, what kind of links do they have to established researchers, and how well do they manage their internal resources?

In other news and tidbits, here are some interesting links. “A new study published in the journal of Minerva Cardioangiologica reveals Pycnogenol, pine bark extract from the French maritime pine tree, reduces jetlag in passengers by nearly 50 percent… lowered symptoms of jetlag such as fatigue, headaches, insomnia and brain edema (swelling) in both healthy individuals and hypertensive patients”, read more here. Elsewhere, it appears that we can use rocks to solve global warming. Part of the techtonic plates, about 20 miles underground, react with CO2, so we could be piping CO2 from powerplants down there in the near future. Read more here.

Welcome

I’d like to welcome you to my site. My name is Cody Boyte and this is my first blog post. I’ll be commenting on the things that affect my life, most often I will comment on business and economics. At this point, that seems to be the most important thing in the national news so it bears comments.

I won’t outline any manifesto or ground rules for my blog, I have chosen to let it evolve. Please comment as you please. I look forward to talking to everyone who gets involved.

I’ll start my blog with a comment on the state of the economy and give a little hope for the future. I’ve spent a bit of time over the last few months thinking about whether our economy is going to stay stagnent, move towards a recession, recover, or go into runaway inflation. At this point it seems like we’re occillating between inflation and deflation because the major financial institutions have started to completely deleveraged, which causes deflation, and yet at the same time the Fed is handing out money and has lowered the interbank rate back to the same rate that it was at when our economy started towards the problems we currently have.

In any case, I read an interesting article today. It was called “How Japan learnt how to stop worrying and love the recession” in the Times Online (timesonline.co.uk). Towards the bottom of the article I read a little passage that shared the secret for anyone that wants to learn what to do if we hit a deep recession:

Japanese instinctively hoarded cash for a rainy day: financially and philosophically, companies and the general population began carrying umbrellas even when the forecast was good. Household risk aversion now commands cultish devotion: books about living on a fiver a day sell in millions, and TV programmes on the theme are primetime fare.

If you can learn to be the guy selling the tome on how to live on a fiver a day, watch out. You’ll be doing just fine in the recession. The key it seems is to play to the times, whatever they are. Best of luck.