/terminal corp evolution 2019 annual
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2019 annual

"Those who grasp the sense of times, correctly interpret the potential and the direction of change and deeply understand the characteristics of the relevant paradigm, are more likely to be able to pursue their goals with viable and realistc proposals."
Carlota Perez (2003)

The following document describes PIRQUE's investment approach.


Learning Fast
Contrarians vs Common Sense
Financial Engineering
→ Pirque Intel

Velocity of Propagation
Timing and Gatekeepers
Fanatical Founders
Economic Progress
→ Pirque Network

Darwin’s Dangerous Idea
Certainty is Hard
Independent Conviction
Modern and Opportunistic
→ Pirque Capital

Standing on the Shoulders of Giants
Mental Models
Operational Learnings

“There are no times when the future is more or less visible; it is always invisible.”
Jason Zweig (2015)

The table below summarizes how we currently think about investments.
It’s a simplified version which incorporates bits and pieces of the many overlapping mental models we tend to use.
The takeaway: learning fast is the only competitive advantage.
But learning fast is not a simple thing. It is very hard. But in the realm of the possible.

“In the beginner's mind there are many possibilities, in the expert's mind there are few.”
Shunryu Suzuki (1970)

Our main guiding principle is that good investments are fundamentally a byproduct of learning.

Based on the following logic:
Returns can only exist if there is price arbitrage.
Price arbitrage can only exist if there is information asymmetry.
Information asymmetry can only exist if there are different learning rates.

Therefore, learning fast is the only competitive advantage.

How to learn fast? Improve your feedback loops.

How to improve your feedback loops? Share your ideas.
The best feedback loops are fast, honest, independent.

Machines learn by reading, and so that is our starting point.

And if we want to learn faster than our competitors, then our approach has to be via research and network. Potentially build new tools to make the information between the research and the network recursively self-improving.

Not via capital. Ever. Might sound innocent, but in the investment world, a lot of capital is not the advantage.

The house of Morgan is under fire primarily because it's CEO has completely lost the habit of learning fast. If you respect their opinion because of their logo on the top of the page, from the bottom of our hearts, good fucking luck.

“The discovery phase is the first 1000%. Great microcaps are first discovered by smart retail, then by small institutions, then by other institutions, and then finally by dumb retail.”
Ian Cassel (2019)

An analogy to the investment world is how words end up in dictionaries.

In general the criteria for entering a word in the dictionary is the following:

Widespread use: used in all sorts of places both tonally and geographically.
Sustained use: be around for a long enough time that we know it’s not just a blip.
Meaningful use: actually have a lexical meaning, people would use it in a sentence.

How do lexicographers find new words? Reading!

Citations are the raw material that they use when defining a word in a dictionary.
And once a word is added to a dictionary, people tend to use it more.

Conclusion: an investor needs to find new “words” [assets] before they get into the “dictionary” [low information asymmetry].

Finding great companies early has never gone out of style.

“The real problem of humanity is the following: we have paleolithic emotions; medieval institutions; and god-like technology.”
E.O. Wilson (2009)

A lot of people in the investment world like to call themselves contrarians. This is a bullshit concept that just sounds nice.

By definition a contrarian is only right, if his opinion becomes popular. So, a contrarian is just someone that learned and understood something before all the rest. Again, the only competitive advantage is learning fast.

Usually when you learn something it is from someone else. Therefore contrarians are just early learners.

This is very similar to the way things are considered common sense. Common sense is the least common of all senses. Because what used to be common sense decades ago, does no longer make sense, and what will be common sense decades from now is not common today.

It is only with hindsight that these events can be singled out, not only because at the time they are obvious only to a narrow community of entrepreneurs and technical people, but also because whether they flourish or not in a particular country will depend on a complex set of circumstances.

However similar or varied, the process of social assimilation of a technological revolution shapes and adapts the environment and the economy so that, when it is done, there is near complete coherence between all spheres of society. It becomes the reign of a particular paradigm to the point where it is believed to be universal common sense and becomes unconscious and invisible.

The full assimilation of a technological revolution and its techno-economic paradigm occurs when society has accepted its common sense, put in place the appropriate regulatory framework and other institutions, and learned to gear the new potential to its ends.

"There are not sufficient scientific statements in economics saying that this has always followed from this, from this. The underlying vagueness and ignorance have not been dispelled by the inadequate and inappropriate use of a powerful instrument [mathematics] that is very difficult to handle."
John Von Neumann (1945)

Most banks and finance houses have a group of highly paid rocket scientists.
Trying to beat the market with complex, computer-aided trading strategies.
Proprietary trading they call it.
They want to be able to say that they have the forecasting model that prove most correct.

The problem with the models is that they adorn with certitude, events that are inherently uncertain. Human events.
Nonetheless, the belief that tomorrow's risk can be inferred from yesterday's prices and volatilities prevails.
When the models fail, the "solution" is to design ever-more elaborated and sophisticated models. That fail again.
The notion that relying on any formulaic model poses inescapable risks, eludes them.

We are enemies of all financial engineering.
There is no such thing as an equilibrium price, nor prices can be modeled.
Prices are just a way to register past human willingness to pay.
Good luck building models than can forecast the limits of human behavior.
So, prophecy as much as you like, but always hedge.
Randomness dominates the universe.

There are no patents in the investment world.

To learn fast, we need to behave like lexicographers. Lexicographers on the evolution of assets, deal flow, and market forces. Learning fast will allow us to have a modern version of common sense. This beats all financial engineering.

As information becomes abundant, it becomes increasingly indistinguishable from entertainment. Our effort with our own in-house research unit is to curate it. Get the required level of training in order to be prepared. Never to make predictions.

“Trafficking in intelligence and ideas, the lubricant of the investment business, has become a global undertaking and cannot be confined to furtive conversations in Palo Alto coffee-shops.”
Sequoia Capital (2010)

Direction is usually underrated.

While the future has already been created/imagined, progress is never evenly distributed.

To understand the directional arrows of progress one must not expect the phenomenon to coincide in time worldwide.

Each technological revolution originally develops in a core country, which acts as the world economic leader for the duration of that stage. There, it is fully deployed; from there, it propagates to other countries.

Concentrating on the dynamics of the core societies does not cover the whole life cycle of each surge as it spreads across the world. From a wider perspective, the long surges span a whole century, with each successive one covering a larger portion of the globe. Closer peripheries would also differ from that of the further ones (understanding distance as economic and not merely geographic).

We believe understanding the velocity (speed and direction) of propagation is key. One must not invest where the institutions are investing but invest where they are going to. Basically, being early is being ahead of the institutions.

The process of propagation of the new technologies is called the 'installation period'.

A great surge of development is defined here as the process by which a technological revolution and its paradigm propagate across the economy, leading to structural changes in production, distribution, communication and consumption as well as to profound and qualitative changes in society. The process evolves from small beginnings, in restricted sectors and geographic regions, and ends up encompassing the bulk of activities in the core country or countries and diffusing out towards further and further peripheries, depending on the capacity of the transport and communications infrastructure.

“I wanted to discuss your marks, make sure they're fair!
Yeah, I think you mean that you've secured a net-short position yourselves, so you're free to mark my swaps accurately for once because it's now in your interest to do so.”

The Big Short (2015)

“Good ideas beat bad ideas” is false. The correct formulation is “fit ideas, beat unfit ideas”. An idea will flourish when the circumstances are exactly ripe for it.
In other words, often circumstances are such that a highly potent idea just doesn't make into popular adoption.
As with all innovations, the date of introduction is less significant than the time of intense diffusion.

When each technological revolution irrupts, the logic and the effects of its predecessor are still fully dominant and exert powerful resistance.

Everything the internet did to media, is happening to retail. But it took time for the internet to be able to attack retail. What bitcoin is doing to banks will eventually do to governments, but it will take time.

The techno-economic sphere is spurred by competitive pressures, but the socio-institutional framework has greater inertia and resistance to change.

Gatekeepers have a political motivation to avoid change: remain in power.

That technical change should evolve by revolutions has only little to do with scientific and technological reasons. It is the mode of absorption and assimilation of innovations in the economic and social spheres that requires technical change to occur in coherent and interrelated constellations. Once a technological revolution irrupts and begins to propagate, its techno-economic paradigm emerges and guides the trajectories of further technological change.

“Here's to the crazy ones. The misfits…Because the people who are crazy enough to think they can change the world, are the ones who do.”
Apple Inc (1998)

The major breakthroughs in the advance of human knowledge, those that constituted the dominant sources of sustained growth over long periods and spread to a substantial part of the world, may be termed epochal innovations.

The nature of these innovations is that they are not that predictable.

Most of the big breakthrough technologies, or products, or business models seem crazy at first: computers, the internet, bitcoin, airbnb, etc.

When people look at it, at first, they say: “I don’t get it, I don’t understand it. I think it’s too weird, I think it’s too unusual.”

You have to believe before you understand.

Investing in companies doing things that are breathtakingly new and ambitious is provocative. There is no way to assure a positive return – but at least it has a chance of working. Simply doing what everyone else does is not enough.

When investing in a startup, you invest in people who have the vision and the flexibility to create a success. It therefore makes no sense to destroy the asset you’ve just bought (by firing the founders).

Fanatical founders like Elon Musk are the only ones who can remove the gatekeepers from their positions of power. As CEO of Tesla, he put the entire German car making industry on its knees and accelerated the world's transition to sustainable energy by at least a decade.

It is clear that the burgeoning knowledge economy will require a very wide range of new instruments and even the overturning of some “eternal truths” about the tangible nature of assets.

Technology is the fuel of the capitalist engine.

“One reason why we do not see progress is that we are unaware of how bad the past was.”
Max Roser (2016)

Once fanatical founders take the keys from the gatekeepers, and accelerate the velocity of propagation, the great clusters of talent come forth. After the revolution is visible and because it is visible.

Economic development is based not on the ability of a pocket of the economy to consume but on the ability of people to turn their dreams into reality. Economic development is not the ability to buy but the ability to make.

Even the hardcore in the green movement use the washing machines.

The women in the favela in Rio, they want a washing machine. If you have democracy, people will vote for washing machines. Once loaded with the laundry, the machine will do the work.
Now you can go to the library.

In a metaphorical sense, the world is populated by ghosts. Faraday’, Tesla and many others live in electrical products. They unleashed the talent around the globe.

To accelerate the propagation of progress, we need to finance fanatical founders. They can challenge the gatekeepers and set the stage for the new cluster of talent.

While being close to the core hubs (e.g. Silicon Valley), we can still build a network of in the peripheries, especially with entrepreneurial families which can quickly change from gatekeepers to gate openers.

“If I were to give an award for the single best idea anyone has ever had, I'd give it to Darwin, ahead of Newton and Einstein and everyone else.”
Daniel Dennett (1995)

The only thing more important than having a great investment approach is knowing what will kill it and having the decisiveness to act.

We admit we are extremely biased by the evolutionary theory. It is more than a mental model. It is an unbounded admiration.

If we are only looking at a problem one way, then we’ve got a blind spot. And blind spots can kill us.

Great entrepreneurs are risk-killers. And we don’t know how to kill this risk (that evolution might be wrong). We remain awake and vulnerable to that possibility.

The second biggest risk is how will incentives and dynamics change, once (if) we transition to economies with negative population growth. Most of the current systems are based on positive population growth.

“I have approximate answers, and possible beliefs, and different degrees of certainty about different things. But I’m not absolutely sure of anything, and there are many things I don’t know anything about. I don’t feel frightened by not knowing things.”
Richard Feynman (1981)

Don’t ask: Are you sure?
This is a yes or no question. It demands unreasonable certainty.

Instead ask: How sure are you?
This allows for shades of gray. It says uncertainty is okay.

Most decisions should be made with around 70% of the information you wish you had. If you wait for 90%, you’re being too slow.

Mental models allow you to make decisions fast under uncertainty.

“Decisions in venture capital cannot and should not be made by a committee.”
Tom Perkins (2012)

You can borrow someone else’s ideas, but you can’t borrow their conviction. True conviction can only be obtained by trusting your own research over that of others.

Do the work so you know when to sell. Do the work so you can hold. Do the work so you can stand alone.

Don’t bother finding the next multi-bagger is you aren’t going to develop the conviction to hold it.

All great companies started as small companies.

Usually luck is defined as when opportunity meets preparation. The market takes care of the opportunities, so we simply focus on having a prepared mind by learning fast.

For this we avoid having fund-structure constraints, a pre-defined focus, or fiduciary promises on returns. We like cut-throat opportunism.

If you want something close to our “investment thesis”, just look at our portfolio (our output).

Railway promotion [in the 1840s] was originally a matter for routes where the need was evident and the engineering practicable, then it spread to routes where the demand was doubtful and the engineering full of problems. Finally, with the public clamoring for railway shares, companies were being formed so that promoters might in due course unload their shares at a premium.

Soon, for both production and financial capital, it was emigration time again -often together- in search of new outlets abroad, or outside the established paradigm, in unusual innovations.

Investing in companies is similar to investing in movies, music bands or any other creative art. It’s always evolving. There is no plan. Artists don’t have time to be humanly involved in everything, but capital does have infinite time.

How do we prioritize then? Access is better than capital. And discipline is the best hedge.

On breakthrough ideas, you still have to run the experiment: we make active and small bets.

On propagation waves, you need to arrive before institutional understand them: we make passive and low-cost bets.

Sometimes we will build/incubate if necessary.
Making modern and opportunistic investments requires moving fast with uncertainty. And because things evolve, you cannot be flinchy or passionate. There is no purpose on the planlessness of evolution. There is just drive.

We try to build strong conviction regardless of the lifecycle of the asset: early-stage to latestage, illiquid or liquid. And once we have the conviction, we behave like A-type investors: give the money, sign the paperwork, and shut the fuck up.

We have copied (word by word in many cases) the ideas we like. Mainly because they were written in a better way than we possible could. Thanks:

“Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages”
Carlota Perez

“The Conviction to Hold”
Ian Cassel

“The Bitcoin Reformation”
Adamant Capital

“What happened to the future?”
Founders Fund (written by Bruce Gibney)

Daniel Dennett, Annie Duke, David Perell, Hans Rosling, Kory Stamper, Eric Weinstein, and many more.

“If you really want to learn something put down the 20th book you’ve read on Buffet and study the entire art form of investing and its greatest artists: value, growth, shorts, VC, PE, commodities, active, passive, etc. Study them all.” -Ian Cassel (2019)

Information “filters” cause selective perception, perception of only selected parts of information. Many of these filters can be called mental models.

Mental models are how we understand the world. Based on a small set of fundamental assumptions. They affect the way that people work with information, and also how they determine the final decision.

“Mental Models: The Best Way to Make Intelligent Decisions (109 Models Explained)”
Farnam Street

More resources on the “Thoughts on” tab of pirque.vc/resources

Intermediaries: Use modern platforms and bypass all agents. Is not that complicated to actively operate a portfolio yourself. Learn how to use software in your favor. If there are no tools, built them.
"There is a difference between an intentional scam and an accidental scam, but if you are the investor, you were scammed in both instances.” -Fred Wilson

Humans: Bullshit is a consequential aspect of human condition. “We are biased towards accepting bullshit as true. It therefore requires additional processing to overcome this bias.” -Harry Frankfurt

KYC: Demand transparency from companies and people. Locals know better. Liquidity is a continuum (an IPO is not a liquidity event). It’s not money until you can buy beer with it.
“Fraud is not a trade secret.” -Tyler Shultz

Pioneers: They get arrows in their backs. But you only have one chance to get in at the beginning. Dating is a zero-sum game.
“There must be high risk -in fact, very high risk. It’s the key to success. If there is no risk, you have already missed the boat. Your competitors will already be there.” -Tom Perkins

Kosher: No derivatives, no leverage, no shorting, no financial engineering. There are no patents. Never pay people to gamble with your money.
"No school can teach someone how to be a great investor. If it were true, it'd be the most popular school in the world, with an impossibly high tuition.” -Michael Burry

Power Law: Winner takes all/most. Search for de facto monopolies.
"Monopoly is the condition of every successful company." -Peter Thiel

Compounding: Most powerful force of nature. Never interrupt it unnecessarily. Buy and hold.
“Income may be taxed, but wealth compounds.” -Naval Ravikant

Market: It is not awed by reputation. It does not pause for sleep. It waits for no man.
“The market can remain irrational longer than you can remain solvent.” -John Keynes

Curiosity: Convexity is most often found in places where others are not looking or where they are not seeing what is actually happening. Look everywhere.
“You cannot predict, but you can prepare.”- Howard Marks (1998)

Owners: Talk to the source, cut the middleman. Double down on your relations with the Bloomberg’s and the Kirk Christiansen’s of this world.
“Knowing whose advice to take and on what topic is the single most important decision an entrepreneur can make.” -Vinod Khosla