by Nicholas Mitsakos | Book Chapter, Investment Principles, Writing and Podcasts
“Assume no knowledge” (Socrates)
No successful company can create or sustain its competitive strength without constantly examining its First Principles. It means defining a problem effectively, understanding the actions needed, and then implementing those plans. This requires a unique combination of perspective, talent, drive, and organizational flexibility. It is rare, but when discovered, it is where the most valuable investments are found. Defining a problem in its most basic form is essential for the most effective solutions. Most thinking stays at a superficial level because not enough thought is given to the problem one is trying to solve. There are many examples of this but mostly it comes from an attitude that says “it can’t be done that way” until, of course, someone does it.
This is the true source of any disruption. It is not simply doing things differently but looking at how the same thing can be done in a more basic and fundamental way. Assumptions about how things work (“assuming knowledge”) impedes innovation. “We’ve always done it that way” is usually the death knell of creative thinking. Many examples exist but some fundamental and obvious examples range from several well-known developments and innovations that were generated more from asking simple, basic questions instead of coming from some ill-defined inspiration.
Obvious answers only come from asking the right questions.
by Nicholas Mitsakos | Investment Principles, Writing and Podcasts
Luck and timing play an outsized role in determining any outcome – and these are extraneous circumstances one cannot influence. As in sports, sometimes the ball bounces your way and sometimes it doesn’t. What matters is doing the best you can. While this sounds like a cliché if one genuinely knows they have done their best, gave it everything, and left it all on the field, that self-satisfaction alone is the worthiest goal, not some sense of “winning.” Importantly, winning should never be the goal because you can never do your best if you compromise who you are – your values and character – while achieving your goals. Whatever the outcome, it’s just the outcome. But the values and standards that make you who you are inviolate and supersede any near-term goal.
by Nicholas Mitsakos | Economy, Investments, Writing and Podcasts
The current low interest rate environment increases the discounted present value of future cash flows and reduces the return demanded for every investment. In other words, when the Fed funds rate is zero, 6% bonds become disproportionately attractive. Buyers have now bid bond prices up until yields are now significantly less. What does it mean if the prices of stocks and listed credit instruments are at levels not driven primarily by fundamentals reasons (i.e. current earnings and the outlook for future growth), but in large part because of the Fed’s buying, it’s injection of liquidity, and the resultant low cost of capital and the market’s lower demanded returns on financial instruments? My conclusions are limited by inadequate foresight and influenced by my optimistic and pessimistic biases. Experience teaches it is hard to get the answer right. Or, as Charlie Munger has said, “it’s not supposed to be easy. Anyone who finds it easy is stupid.” At the risk of being stupid, equity investments in companies, including the five largest, with the unique competitive positions and “closed-loop” business models will remain excellent investments. In addition, certain fixed income securities paying high yields with attractive long-term risk-adjusted safety are extremely attractive and are being ignored in this unique interest-rate environment. This combination will create substantial value. Unique macro forces created by the central banks, unprecedented and sustainably low interest rates combined with pandemic-tested sustainable business models have created truly unique opportunities.
by Nicholas Mitsakos | Currency, Economy, Investment Principles, Investments, Public Policy, Trade, Writing and Podcasts
We are rapidly approaching a zero-interest rate world. Interest rates are being driven to zero (or below zero in many cases) as a first-line tool for central banks to generate economic activity in the face of the dramatic negative impact of the pandemic, as well as existing and lingering economic fallout. This toolbox will be empty soon, and the only remaining weapon will be fiscal policy. Among other things, fiscal policy and domestic financial markets will have an overwhelming influence on global currencies. Capital flows will dramatically impact currency volatility as capital moves to more attractive countries with more liquid and robust asset markets.
by Nicholas Mitsakos | Economy, Investment Principles, Public Policy, Writing and Podcasts
Defining and the problem precisely is the only way to solve anything, and, undoubtedly, the single greatest challenge to achieving anything. Otherwise, it is a waste of time and resources (which describes most public policy). All too often decision-makers waste time, resources, and make matters worse because they simply do not understand the actual problem they’re trying to solve. Very few problems are well-defined, and few people take the time and effort to understand what it is they are trying to solve. Motivation, energy, and focus on an outcome are inefficient, misguided, and dysfunctional. Good intentions do not effectively define any problem, and typically lead to very bad outcomes. Wanting to solve a big problem is fine, but not defining it accurately is inefficient at best, and most likely disastrous. It will never lead to a solution.
by Nicholas Mitsakos | Investment Principles, Investments, Writing and Podcasts
The government is providing a backstop for all government-backed securities. The Fed is also going to be extremely active in the markets, buying not only fixed-income securities but also stock index funds. They are working very hard to keep the market aloft and preventing it from cratering (they still may not be successful). This is an election year and this administration will do everything it can to make sure things look as good as possible through November.
I understand there is riskiness, but I expect economic activity and fed support to continue to increase. Even if we have an increase in coronavirus cases, people will remain optimistic – justifiably or not.
There will be extreme volatility. Economic activity will waiver, increase suddenly, pull back, and the pattern will continue for some time to come.
Market volatility is our friend because we have a stable source of cash flow that protects our capital base. On top of that, the speculative strategy will profit from volatility while the equity investment strategy will play for the long term – it is a multi-year long-term perspective.
Although there are a handful of investments where confidence in the five-year curve is justified, and now is a great time to make these long-term investments, it is still very unpredictable.
The short- and long-term state of the economy, how this massive amount of debt gets repaid, how we reopen businesses, etc. is unknown, volatile, and any attempt to predict seems fruitless. But, understanding how to adjust for risk, accept, and ultimately take advantage of volatility, will be powerful. Along with a long-term perspective, this will be the most effective investment strategy. The Fed is printing more money. We’re going to see a lot of capital injected into the global economy. But the presence of money is not the important factor. It’s the velocity of money – how people are spending it and is that money chasing after other goods. That will drive inflation. We didn’t see it in the past even though we had a massive capital injection. Deflation and recession are much bigger concerns. Inflation is not on the horizon. The Fed’s enhanced bond-buying, which includes high-yield bonds and other fixed-income securities is unprecedented and has boosted the value of debt portfolios. However, these portfolios (mostly just above or just below investment grade) still yield attractive disproportionate risk-adjusted returns.
by Nicholas Mitsakos | Artificial Intelligence, Technology, Writing and Podcasts
The history of AI shows that attempts to build human understanding into computers rarely work. Instead, most of the field’s progress has come from the combination of ever-increasing computer power and exponential growth in available data. Essentially, the ability to bring ever more brute computational force to bear on a problem-focused on larger data sets have given increasing usefulness. But, it’s limitations are also magnified in sharp relief more than ever. The bitter lesson is that the actual contents of human minds are tremendously, irredeemably complex…They are not what should be built into machines. Machine learning doesn’t live up to the hype. These systems are fundamentally brittle, and always break down at the edges where performance is essential and consequences much direr. There are many potential applications that can be effective and useful tools. They are simply much less ambitious than the current hype would indicate, but they are also far more realistic.
by Nicholas Mitsakos | Artificial Intelligence, Public Policy, Writing and Podcasts
Productivity, expansion, and entrepreneurship were enabled through the adoption of new technology. Undeniably, the net economic benefit was substantial. But lives were disrupted, jobs were lost, and what would be seen with a historical perspective as an obvious beneficial choice, was anything but obvious to those so immediately and negatively impacted. Technological advancements produce net benefits for society. But for every advancement, there is a cost. Leadership and subsequent public policy must address this shortfall. As in the past, the solution has been training and education leading to economic inclusion and prosperous lives. and subsequent public policy must address this shortfall. As in the past, the solution has been training and education leading to economic inclusion and prosperous lives. History has taught us the net benefit of technological advancement, the turmoil it brings, and the solution required.
by Nicholas Mitsakos | Artificial Intelligence, Biotechnology, Health Care, Technology, Writing and Podcasts
Medical Intelligence is a new discipline, converging human and artificial intelligence. Artificial intelligence will not replace human intelligence, especially in medicine. Diagnosis and treatment will remain a human endeavor. But AI will be an indispensable tool helping human intelligence effectively deliver better quality healthcare. The overwhelming benefit is that it raises the bar for all practitioners. A minimum level of quality medical care can available globally. The higher standard for diagnostic accuracy, therapeutic recommendations, and overall care from this mass of data gathering will improve overall health and wellness everywhere. Applied effectively, these tools also drive down overall healthcare costs, diagnostic errors, and unnecessary procedures. Greater accuracy eliminates needless testing and procedures significantly and delivers effective care more quickly. Diagnosis is more immediate, recovery times faster, care more available, and overall expenses reduced.
