#013: Investing Through Industry Insights
The link between shareholder value and actual value-creation for humanity
Imagine the internet did not exist and you were to start investing and you had absolutely no idea about finance: how would you proceed?
You would have no choice but to invest based on personal inisghts and your network.
Despite a gazllion websites providing investment advice, it turns out, relying on your personal knowledge is still a worthwhile strategy to pursue.
If you think short-term you will only get confused
Investing in the stock market can seem nontransparent for starters.
How should one navigate temporary fluctuations that depend on the macro-economic environment?
We are in a recession, inflation is high, interest rates are going up and the geopolitical situation is uncertain.
All of this might impact the global supply chain and thus, stock prices of various industries.
Speculation or hypes such as the GameStop short squeeze can outcompete the most experienced hedge fund managers and create FOMO among many people:
Many of us want to jump on the bandwagon as we observe that everybody can cash out nowadays no matter how little knowledge or experience one has.
Your common sense can beat “sophistication“
Yet, in the long run, shareholder value creation is always linked to real value creation.
If a company creates something really useful for humans then there can be sustainable growth.
If you can detect that company early you should invest at the expense of diversification.
Diversification means betting on the loser at the expense of the winner.
We diversify our investments because we don’t know who the winners will be.
However, what if you can spot the winner or a winnnig industry?
If you have insights, you should bet on them.
Insights can be:
- domain or industry knowledge through your network;
- specific knowledge through your personal interests or expertise;
- understanding where the smartest people you know work. They must create value so it might be worth to invest in them.
Let’s get concrete
An example of my knowledge through personal interest:
Ever since I started to implement machine learning models myself early in my career I have a genuine interest and passion for the topic.
I believe AI is the most impactful technological innovation humanity has ever seen to date.
As I see the need for powerful AI models unfolding I heavily invest in companies that produce hardware that drives AI.
I do this regardless of current supply-chain shortages or macro-economic hiccups.
An example of investing in the smartest people I know:
If I cluster the people I have the highest bandwith-conversations with, I notice that some work at startups some in research and some at specific big tech companies.
I observe that smart people tend to self-assemble as they attract other smart people to work with them.
This leads me to the conclusion that big tech companies that employ groups of smart people I know are worth investing for me.
That does not mean that I don’t also follow an investment strategy based on diversification as you can read here.
However, it is one additional way for me to pick specific companies to place exciting bets on.
Key takeaways
- Long-term shareholder value is linked to actual real-world value creation.
- Real value creation is less dependent on macro-economic fluctuations.
- Where do you see actual value creation through personal insights? Invest in those companies.
Don’t miss the next post if you want to get more actionable insights on how I optimize my life.
