History of Extinction: When the Market Catches Up to Reality
I'll spare you the trouble of naming names, fully aware you might already have a few guesses up your sleeve – and that's all on you, not me.
Writing this piece would be a breeze if I could just drop names and examples, but let's keep it interesting with a bit of a guessing game. I'll hint at a future where the market finally catches up with the true nature of certain companies, and trust me, it won't be a pretty sight. Especially if the market reacts in a mass panic, which, more often than not, it does. But history has shown us that the market tends to catch up slowly before suddenly moving en masse. Only those who boarded the ship early enough will manage to dodge the ensuing chaos.
The concept here is straightforward enough for even a child to grasp. The bigger you grow, the more sluggish your movements become. The more sluggish you become, the more outdated you get. The more outdated you are, the more irrelevant you become. The more irrelevant you become, the less interesting you are. The less interesting you are, the quicker the market loses interest in you. The quicker the market loses interest, the faster you lose your market value.
Financial indicators might delay, offering a false sense of security. Even seemingly valuable companies appear stable before they inevitably topple.
Yet, the real indicator is the growing dissatisfaction among users of their products and services. These individuals are the real MVPs, offering all the hints necessary for those paying attention. They're often the first to jump ship, long before the market at large realizes what's happening.
Let's be honest, spotting a dinosaur isn't challenging; it's the endowment effect that makes letting go difficult. Picture this scenario.
Once upon a time, those big tech giants were merely a handful of individuals, sometimes just one or two, swift to move and innovate, rapidly learning from their mistakes. They resembled small parameter AI models: easy to train, quick to reset if things went south, effortless to deploy, and flexible for various tasks. They quickly became the market's sweethearts. As time marched on, they expanded their teams, and the hierarchy grew more complex. Initially, this evolution boosted their value. However, it eventually turned into a cumbersome load. They morphed into the big, complex AI models of the market—difficult to train, challenging to reset, cumbersome to deploy, and rigid in their operations.
Consider one of your once-favorite software applications, which I'll also refrain from naming. Some of them are as old as your adult children, still in the market but far from their youthful agility, speed, and innovation. They've become bogged down with unnecessary features in the guise of "innovation" and being a "game-changer," transforming into what's known in computing as bloatware. I encounter so much bloatware that naming them is unnecessary. These once swift and innovative applications have become bloated at every update, simply because their creators felt compelled to do so. Hence, we get versions like GameChanger 15.x and Innovator 20.x.x.
Let's be honest: these companies have run out of ideas and game-changing innovations. They're now merely catering to the market.
I'll admit, I still use some of these so-called game-changing gadgets and bloatware. Not out of the love I once had for them, but because I lack alternatives. For now. When once-enthusiastic users like me begin seeking alternatives, it signifies the market is starting to realize the true state of these companies.
Recently, my excitement for the "innovations" and "game-changers" pushed by big tech has waned. They no longer ignite my interest or enthusiasm. The reason is simple: they've become as outdated as dinosaurs. In fact, by practical measures, they were already dinosaurs a few years back when I last checked.
The market eventually catches up to this reality, treating them as they are: outdated, irrelevant, and uninteresting.
The first to catch on are the real users of their products and services—serious users, not the casual ones. They're the ones who depart first, even before the broader market realizes the truth. They're the unsung heroes, providing all the clues you need to know.
Every company, without exception, faces the inevitable journey towards becoming a dinosaur over time. Some may tread this path slower than others, but the destination remains the same for all. It's merely a question of when.
The attempts at renovation, downsizing, and all that jazz often come across as temporary fixes—a giant dinosaur stepping onto a treadmill hoping to shed a few pounds. These are stop-gap measures at best, providing short-term relief but hardly addressing the root of the problem. They merely postpone the inevitable.
Only a rare few manage to truly reinvent themselves. History has seen some examples, but such transformations are exceptional. It's akin to a dinosaur morphing back into a nimble chipmunk—a possibility, albeit a rare and remarkable one. From an investment perspective, banking on such a transformation is a gamble with high stakes.
I always emphasize that the market acts as a voting machine in the short term and a weighing machine in the long run. No matter how convincing the facade, the market will eventually recognize and react to the substance beneath. Only those entities that possess genuine beauty and value, those still vibrant and youthful in spirit, will continue to be cherished by the market.
Mathematically, the concept is quite clear. Dinosaurs are almost maxed out on growth opportunities, while chipmunks have vast expanses to grow into. The market, being the rational beast that it is, will naturally lean towards those with room to grow. You might be tempted to think investing in the former is the safer bet, but that's misleading. Remember, the market acts as a weighing machine—it doesn't differentiate between dinosaurs and chipmunks. It measures them all by the same criteria. Losing money feels the same across the board, tied to the same inherent risk. Don't be swayed by the illusion of safety.
This is the harsh truth, simple yet hard to accept due to the endowment effect and a myriad of other biases that cloud our judgment.
Let's play a little mind game: Think of a company that seems like it'll never tumble from its throne anytime soon. Got one? There's a good chance it's actually on its way to becoming tomorrow's dinosaur. Why, you ask? It's all about the numbers game. If most of us are picturing the same behemoth, that's our first clue it's prepping for a dino debut. It seems everyone's wearing rose-colored glasses, blissfully ignoring the writing on the wall.
The phrase "too big to fail" might resonate here.
Through my experiences, I've witnessed the rise and fall of numerous dinosaurs. If you're not as aged as I am, you may not have observed as many. But in time, you will.
Even if you're so fresh to the game that you haven't seen any corporate giants take a tumble, just remember the broader strokes of history: empires rise and fall, and companies follow the same ancient rhythm. It's a cycle as timeless as the universe itself.
If history books aren't your thing, then consider the life cycle of any living creature: birth, growth, maturity, decline, and eventually, the end. Companies are much the same. They're like living entities, each going through their own journey from inception to eventual fade-out, subject to the same universal laws of life and demise.
You'll pick up the lesson somehow, either through your own trials and errors or by watching what happens to others: adopting an object-oriented approach gives you a strong base class to build upon, inherit from, and expand. Dinosaurs, diverse in forms and magnitudes, ultimately meet the same end due to common pitfalls: intrinsic shortcomings, an inability to adapt, and a failure to evolve. Their various shapes and sizes are merely polymorphic expressions of the same foundational class. The beauty of object-oriented thinking lies in its ability to help you spot these shared traits, no matter the unique specifics. That is, if you're able to embrace and follow this way of reasoning, to begin with.
And who knows? Perhaps one day, you'll find yourself reflecting on these observations, drafting an essay much like this one.
Here's another mental exercise, which might be simpler if you're not caught in the grips of the endowment effect and post-purchase rationalization. Imagine the big companies you once held in high esteem but have gradually lost interest in. Identify what they share in common, and you'll begin to notice a pattern emerging. Here's a not-so-subtle nudge in the right direction: envision those oversized, never-ending meetings that seem to achieve little to nothing. And don't be fooled into thinking that the tech facilitating these meetings, like cutting-edge remote conferencing tools, makes any real difference. It's the same old tale, just dressed up in modern garb. Agile chipmunks don't need to squander time in such gatherings. But dinosaurs? Meetings are their bread and butter, necessitated by the vast numbers of individuals involved. Over time, many of those involved in the process have already become redundant, yet they remain just to keep the gears turning. It's a textbook example of the tail wagging the dog, where the less essential parts end up consuming a significant portion of the resources. The irony is thick: the more redundant the parts, the hungrier they are for resources. Let's take a collective sigh, shall we? Often, it's these very redundant parts that end up steering the ship. Welcome to the world of corporate dinosaurs. So, anyone else pondering the necessity of downsizing now?
The more dinosaurs you witness falling, the more adept you become at forecasting their demise. It's akin to an AI model that, after being fed ample data, can make confident predictions. In this analogy, consider myself a well-tuned "model," at least in my own estimation.
For a moment, let's ponder a question: How proficient are you at spotting these camouflaged dinosaurs?
If you find yourself lacking, it's time to accumulate more training, validation, and test data to enhance your predictive capabilities. You're going to need it.
Importantly, avoid overfitting your "model." Always be open to incorporating new data, new insights, and new types of dinosaurs into your framework. Embrace polymorphic thinking, and you'll stand a better chance at identifying the next dinosaur before it becomes obvious to everyone else.
When you observe the market anew, you'll start to discern both the dinosaurs in their twilight and the nimble chipmunks just beginning their ascent. Yet, truth be told, the vast majority of these chipmunks are outsiders to the market. They must first demonstrate their worth to gain entry. Once inside, they face the continuous challenge of proving their relevance to remain. Typically, they either become obsolete early on or evolve into dinosaurs over time—there's rarely a middle ground.
Investing in the market is essentially a bet on a company's position within the evolutionary hierarchy. (Traders, on the other hand, this message isn't for you. Your game is different, akin to gambling—carry on with your endeavors.)
This underscores the importance of broadening your perspective beyond specific domains to understand the bigger picture. With this broader viewpoint, it becomes easier to identify a promising position for investment.
At the very least, you'll steer clear of sinking your resources into dinosaurs—a commendable starting point.
No dinosaur is too large to collapse under the impact of a metaphorical extinction-level comet. And such a comet will strike; it always does. It's only a matter of time.
Perhaps now is an opportune moment to revisit the film "Armageddon" (1998).
"It happened before. It will happen again. It's just a question of when." - A line from "Armageddon" (1998) that resonates with the cyclical nature of market dynamics and the inevitable downfall of once-dominant giants.
A friendly piece of advice for good measure: when weighing the opinions of gurus and experts, assess the breadth of their understanding across various domains. Those deeply entrenched in a singular area of expertise may not offer the most comprehensive advice. I tend to take financial analysts' recommendations with a grain of salt due to their often narrow focus. Instead, I lean towards the insights of polymaths, individuals with a wide-ranging grasp of multiple fields, as they're more equipped to provide a well-rounded viewpoint. Honestly, I find GPTs more valuable than financial analysts for that very reason.
In the same spirit, to pierce through the veneer of specialized expertise, you must elevate your own perspective to encompass a broader view, necessitating an exploration into diverse fields. Yes, it demands a considerable effort, but embracing this multidisciplinary approach is indispensable, like it or not. Again, honestly, GPTs are only as effective as your ability to use them properly. If your thinking is narrow, you'll only get narrow insights. Why? Because you don't know how and what to ask to gain the right insights.
The essence is, no matter what you do in life, you've got to know your stuff. It's a beautifully simple lesson, yet it seems to elude so many.
P.S. I bet some of you assumed I was alluding to the companies you've invested in as the real gems, and those you're not fond of as the dinosaurs. That's endowment and post-purchase rationalization biases in full swing. It's time to snap out of it.