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.

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 Power of Making Friends

I should set this up by saying two things. I’ve spent most of my life talking to strangers and I’ve rarely made significant friends. Recently, however, I’ve found that I’ve been making a lot more friends and I’ve started to feel a lot more enriched in my life. The turning point happened about two months ago when I realized why we’re friends in the first place.

For a long time I looked at friendship as a very categorized endeavor. I had friends that I played sports with and friends that I lived with. I had friends from classes and friends that were geographically isolated from each other. Very few of my friends interacted with any of my other friends. In fact, I actively tried to keep them separate as if they might contaminate each other. And then, two months ago, the lightbulb clicked. Friendship is the exact opposite. It’s about sharing and connecting. The real power of friendship is trust.

I’m starting to believe that friendship is the thing that allows our society to work in the first place. Without it we’d all be running in forests trying to hunt down animals all on our own. To me, friendship allows us to separate the world into three parts. The unknown people, the people we trust, and the people we do not trust. The people we trust are the people with whom we can do business, work together for protection, celebrate, and enjoy our lives with. The enemies are those who we know will try to destroy us with every chance they have. They are few and far between. The unknowns are generally thought of as enemies because, even though enemies are few and far between, they have incredible power when they are true enemies. Friendship allows us to shine a light into the darkness of the unknown. The more friends we have, the further we can shine that light.

This concept or understanding is pretty basic to most people. For a long time I viewed people as either being pertinent to my life currently or of little value. So, I rarely kept track of anyone because I felt that it would be too long before they would have anything I needed and it would be hard for me to provide any value until that point. I’ve now started to realize that the power of friendship is a completely different phenomenon. It’s not about what you can do for me or what I can do for you, it’s about how we can work together to shine the light deeper into the unknowns of strangers, and how we can help each other find the resources we need to solve the problems we have, at exactly the moment we have them. The power is in our combined networks. It’s in sharing our trust.

If I trust you and you trust someone down the street, I will immediately have raised my trust level with the man down the street because he gets a little bit of your reputation applied to him. That is shining the light into the unknown. The guy down the street might also be a plumber and I would thus trust him more at a time of need (like when my water heater breaks) than I would a guy out of the yellow pages.

In the last few months I’ve been enjoying making friends for no other reason than to help each other shine lights into the unknown. I’ve connected researchers with business people whom they would never otherwise meet, allowing them to use my flashlight to connect to a resource they couldn’t see before. I’ve connected business people together. I’ve connected friends together. It’s almost like playing matchmaker, but without the risk. And it’s fun. The best part is that all the people I’ve met are now getting value from me even when I have no direct value to give because I’m sharing resources they wouldn’t have. I’m gaining their trust, becoming their friend, and then I’m sharing my friends. Without the sharing of friends, the world would be a very treacherous place.

Finally, remember that the value of a friend is the amount that you can trust them. If you’ve barely met someone, they cannot help you see very far yet. But as the person shares their beam and proves that they can help you find significant resources, you will trust them and gain more friendship with them. I sure am enjoying sharing my little flashlight in the world.

Note: Picture from Dan Wildman of the UK.