in 10k, Antonio Gracias, Berkshire Hathaway, Copart, Jeff Bezos, Nicholas Sleep, non zero-sum, Warren Buffett


I’m going to do less writing for this post because I didn’t come up with these concepts, but intuit that this is something all of the great investors have been seeking, aka The Holy Grail.

From my observations, we haven’t yet had a singular, clean way to describe this concept that exhibits in our current capitalistic system and all the great investors have used their own words to describe this, sometimes to great effect, sometimes missing the mark (as it relates to understandability). All in all, it’s the most important concept to learn from when it comes to long-term investing in the best businesses.

There is an ancient parable that I think hails from the Indian subcontinent regarding an elephant. Five or so blindfolded people all touch the same elephant and each describe what they touched differently depending on the part that they happen to touch. I think this concept is what, even the greatest of great investors, are really touching upon, in their own words, from their own unique experiences.

For me, the word that I’ve come across that best summarizes this is, pro-entropy (mostly used by Antonio Gracias from Valor Equity Partners). I find it to be the most succinct but also wanted to call out my own personal bias for describing what is otherwise a mix of concepts from the disciplines of engineering, biology, physics, math, neurology and psychology (and likely others).

Here’s what pro-entropic investing sounds like (to me):

[Pro-entropy] It’s a word we use here internally in our investment framework, and we think about – there are lots who use the word ‘resilient’. And to us, resilient things, resilient companies are things that recover quickly. So when you talk to neuroscientists about the word resilient, they define it as you come out of homeostasis, something happens to you, the adrenaline goes up, cortisol, whatever, and then you recover quickly, you go back to homeostasis and make a good decision. If you don’t recover quickly, then you can’t make a good decision.

Pro-entropic, as you think about a company, if a company’s resilient, it means that it recovers quickly when something happens. There’s a crisis, management’s good, they figure out a pivot, they figure out what to do. For us, pro-entropic, it really is a company that is good at chaos.

Antonio Gracias, Founder, CIO and CEO of Valor Equity Partners on Invest Like the Best

Mistakes in assessing insurance risk can be huge and can take many years — even decades — to surface and ripen. (Think asbestos.) A major catastrophe that will dwarf hurricanes Katrina and Michael will occur — perhaps tomorrow, perhaps many decades from now. “The Big One” may come from a traditional source, such as wind or earthquake, or it may be a total surprise involving, say, a cyber attack having disastrous consequences beyond anything insurers now contemplate. When such a mega-catastrophe strikes, Berkshire will get its share of the losses and they will be big — very Big. Unlike many other insurers, however, handling the loss will not come close to straining our resources, and we will be eager to add to our business the next day.

Warren Buffett, Berkshire Annual Shareholder Letter (2019)

Total loss frequency will continue its 40+ year trend of rising virtually every year. As vehicle complexity increases and repair costs rise, still more cars will be totalled year after year. We are not just passive beneficiaries of these forces — our active cultivation of global buyers and market-leading auction technology generates the returns that cause insurance carriers to total more vehicles. Total loss frequency has grown approximately six-fold in 40 years, not just because repairing a vehicle is less economically attractive, but because totalling a car and auctioning it to the highest bidder worldwide has become more economically attractive.

Jay Advair, CEO of Copart in Letter to Shareholders (2020)

“Staving off death is a thing that you have to work at. Left to itself — and that is what it is when it dies — the body tends to revert to a state of equilibrium with its environment. If you measure some quantity such as the temperature, the acidity, the water content or the electrical potential in a living body, you will typically find that it is markedly different from the corresponding measure in the surroundings. Our bodies, for instance, are usually hotter than our surroundings, and in cold climates they have to work hard to maintain the differential. When we die, the work stops, the temperature differential starts to disappear, and we end up the same temperature as our surroundings. Not all animals work so hard to avoid coming into equilibrium with their surrounding temperature, but all animals do some comparable work. For instance, in a dry country, animals and plants work to maintain the fluid content of their cells, work against a natural tendency for water to flow from them into the dry outside world. if they fail they die. More generally, if living things didn’t work actively to prevent it, they will eventually merge into their surroundings, and cease to exist as autonomous beings. This is what happens when they die.”

While the passage is not intended as a metaphor, it’s nevertheless a fantastic one, and very relevant to Amazon. I would argue that it’s relevant to all companies and all institutions and to each of our individual lives. In what ways does the world pull at you in an attempt to make you normal? How much work does it take to maintain your distinctiveness. To keep alive the thing or things that make your special?

Jeff Bezos quotes Richard Dawkins in The Blind Watchmaker from Amazon’s Shareholder Letter (2020)

Behavioural science tells us that humans are much worse at predicting the future than we think we are, and we’re especially bad at forecasting extreme events.

There are many reasons for this, one of which is that we tend to think about the future in terms of a bell curve, with over 99.7% of the outcomes in a three standard deviation range of the centre.

Bell curves are great for forecasting systems in equilibrium, but terrible for making predictions in complex adaptive systems such as the real world and financial markets.

Complex systems exhibit emergent properties and are incredibly sensitive to small changes — for this reason they are best explained by power laws.

NZS Capital, Complexity Investing Overview

There is a management maxim that “you learn more from your failures than your successes”. Kahneman and Tversky’s Prospect Theory (the idea that most humans are risk-seeking in the domain of probable losses, and risk-averse in the domain of probably gains), suggests that people tend to double down on their losers and cash out their winners. It feels intuitive that learning from large failures is more poignant than any other experience. But only learning from big mistakes is a slow and painful way to learn. CSI [Constellation Software] is in a good position to learn from lots of small experiments and experiences. We are trying to institutionalise that skill.

Mark Leonard, CEO of Constellation Software from a Q&A (Nov. 5, 2018)

Teledyne is like a living plant, with our companies the different branches and each putting out new branches and growing so no one business is too significant.”

Henry Singleton, “The Sphinx Speaks”, Forbes, Feb. 20, 1978