Weekend Reading #1
This is the first edition of our weekly newsletter, Weekend Reading, sent out on Saturday 19th January 2019. It contains a little about what we're thinking, writing and reading about.
Sign up here and receive a copy each week right into your inbox.
* * * * *
Weekend Reading #1
And here's how it all started.
Sitting down to write this blog post, the words of the late, great Glenn Frey on the epic live recording of the Eagles’ hit song "Take it easy" spring to mind. Old-school music tastes aside, thank you for stopping by to find out what we're building here at Three Body Capital.
As of today, our company is less than 2 months old, comprising part of the investment team from Capricorn Fund Managers and the dynamic duo of Ed and Ed. The reason we came together to build TBC is simple: we realised that the investment management industry faces obsolescence because it’s failing investors.
Not only is there a backlash against the industry in general ("greedy bankers”, “evil hedge fund managers”, “boiler room brokers”), there’s too much of the same thing.
The truth is that our industry has become stale and ossified.
Risk-averse and backward looking thought processes are the norm. Speak to most investment advisors or wealth managers and their underlying beliefs become pretty clear:
Tomorrow looks like yesterday, so if this worked in the past, it should work in the future.
Take care of the short term and the long term will take care of itself.
The bigger, the more liquid, the cheaper - the better.
These principles have worked well over the past decade, and 10 years is a long time. Passive investment instruments have delivered strong returns, thanks to a raging bull market across the world fuelled by cheap money dished out by the Fed, the ECB, the BoJ and many other central banks in the aftermath of the 2008 crisis. But to claim victory over the market via passive instruments is reminiscent of the former UK Prime Minister Gordon Brown declaring the "end of boom and bust" in the run-up to 2008. And we all know how that turned out!
Here at Three Body Capital, we see things differently.
A confluence of factors are accelerating the rate of change in our world. Change is exponential and large swathes of the investable universe are poorly equipped to deal with change. The investor offering is no longer fit for purpose. We’re working to change that, but it will take time.
To be clear, we have the utmost respect for our peers in the investment management industry. We count our counterparties on the sell-side as partners and friends, and while we criticise the status quo, it is also a call to reflection and a challenge to break the old business models and move ahead together as an industry. The first step is to reset perspectives and remind everyone that we’re living in exceptional times.
The transformation we're seeing is about more than just tech.
Yes, iPhones, VR and blockchain are all important and profound developments that will reshape our world in the decades to come. But where “disruption" has been co-opted to refer primarily to technological change, we like to think in terms of broader “transformation” across multiple domains:
Geopolitical - think Trade Wars, balance of power, growing vs stagnant emerging economies, immigration.
Demographics - think ageing populations, pension liabilities, social welfare, healthcare.
Environmental - think migration, climate change, agriculture.
Economic - think negative interest rates, global debt burdens.
Having acknowledged that change is complex, multi-layered and reflexive, the next step is to broaden these perspectives and impart knowledge. We call this second-order thinking, with a sly nod to Howard Marks.
We believe in thinking beyond the bleeding obvious.
For example, when people think about "electric cars", they usually think "Tesla", maybe Toyota, BMW or Volkswagen. But there are also big production chains supplying legacy components across the world in Mexico, Thailand and Turkey, which are less well-known. Perhaps even more challenging is the notion that innovation in the future be led by “emerging” markets like China - are we ready to work with the prospect of a sinocentric global economy?
Looking at the broader global picture enables us to identify less crowded investment opportunities, in different sectors, markets and regions. To us, opportunity is more than the S&P 500. Opportunity is everywhere. Our challenge to everyone is to think deeper and wider: about how AI and robotics might stymie economic growth in less-developed countries; about how China's blockchain ambitions signal the decline of the USD; about how the superpowers are preparing for the next big arms race in Artificial Intelligence.
Our mission is clear: to help clients and partners comprehend the full breadth of transformation by providing provocative, forward-looking insights. These might come in the form of a quick tweet, a blog post, a full blown research note or a face-to-face meeting.
In time, we will redefine active management in a non-linear world of exponential thinking.
We believe in thematic investing, but we don’t believe in a passive, leave-it-to-a-machine approach. We want everyone to understand active management and have the knowledge and tools to make active investment decisions, with or without us.
Dismissing investing as “complicated” and making the choice to go passive (which is, ironically, an active choice) in our view severely shortchanges the average investor as a core investment strategy. As we move relentlessly towards a world of tokenised securities and new market structures, we need active management in both public and private realms to adapt and become more modern, transparent and accessible.
We're the first to admit that we can't tell for certain what the future holds. But we do know that nothing from the past is a given for the future. Navigating paradigmatic change will be as much of a process of learning for us as it is for everyone else. But by building rigorous mental models and looking beyond the first order to the unintended consequences of change, we are giving ourselves the best possible chance of success.
What does success look like?
For us, it would be creating a business that’s as described by Nassim Taleb, "Antifragile". In other words, we’re building an enterprise that benefits from non-linear change by enabling our clients to do the same.
Together, we can all thrive in a world defined by accelerating change.
Beyond the obvious.
+ Kai-Fu Lee On How AI Can Save Our Humanity
+ Passive Attack: The Story Of A Wall Street Revolution
+ If True, This Could Be One Of The Greatest Discoveries In Human History
+ Stock-Pickers Don’t Know How To Sell
+ Fortnite’s Digital Goods Are Key To The Future Of Global Trade