in 10k, assets, customers, entertainment, entropy, ergodic, growth, high margins, income, lollapalooza, low margins, novelty, Rory Sutherland


I’ve recently been (re)introduced to the mental model of ergodicity in investing.

I first encountered it and featured this in one of my weekly best reads, but saw another opinion piece elsewhere talking about roughly the same concept. There’s many avenues to unpack about the concept of ergodicity and I’m no expert. But what I do find interesting is that it mirrors what I think the most successful business minds and investors have used to contribute to their success.

Spotting Ergodicity

With what I’ve gathered so far, there are two things to look out for when looking for something that is ergodic:

  1. Symptoms
  2. Signs

In this case it’s useful to use these terms and borrow them from the medical industry. We’re all “diagnosing” what would be considered a great investment.

Here’s how a medical professional might describe a symptom versus a sign:

“Signs and symptoms are abnormalities that can indicate a potential medical condition. Whereas a symptom is subjective, that is, apparent only to the patient (for example back pain or fatigue), a sign is any objective evidence of a disease that can be observed by others (for example a skin rash or lump).”

Signs and Symptoms, Nature Journal

Similarly, I would argue the when we look for great investments, we need to look for signs and symptoms of ergodicity.

Signs of Ergodicity

Signs are the easier to arrive at of the two. Signs are often described in most investing publications and talked about at length. Even the investment greats publish the high-level tenets they follow when evaluating potential deals.

Signs come in many forms, changes with the state of the business cycle, market cycle and likely highly impacted by the technology cycle as well. All will likely be important perennially, some will occupy more importance over other depending on which part of the cycle we are in.

  • Historical Consistency
    • Margins
    • Earnings
    • Return on Capital
    • Growth
    • etc.
  • Diversified
    • Income
    • Assets
    • Time Horizons
    • etc.
  • Recurring Events
    • Revenue
    • Engagement
  • Free from Concentration
    • Ownership Interest
    • Customers

Symptoms of Ergodicity

In this case, a “symptom” of ergodicity would mean it’s the subjective aspect of why a customer/client would prefer to use your investments product/service over others.

Most of these aren’t rationale per se (like in the case, you’re forced to use X because of some forced reason). They typically are symptoms because it’s based on the investments customers/clients emotions and their perception of why this offering is good for them.

Whereas a ergodic signs can be arrived at with enough data and history, symptoms don’t always show up on screens or in 10ks or 10qs. You have to look deeper and arrive at them yourself either by being the Peter Lynch way (invest in what you know or have used) or in the way that Charlie Munger calls it (several things coming together to form a “lollapalooza”).

  • Immutability
  • Desirability
    • Makes me into “Super-X”
    • Novelty
    • Entertainment
    • Distraction
    • etc.
  • Inversion of Wants/Needs
    • Insurance from X (i.e. Rory Sutherlands theory of Brands)
    • Being Pain-free
    • Being Fear-free
    • Being Worry-free
    • Saves me time
    • Save me energy