The Importance of Connecting the Dots in a Complex World to Support Smaller Companies
In this video, I discuss my investment strategy inspired by natural ecosystem principles and how it relates to the current chaotic market environment. I share insights from my experiences and observations in the investment space, emphasizing the importance of connecting the dots in a complex world.
I also share my perspective on the need to support smaller public and private businesses to restore vibrancy to our global economies using innovative business development and financing solutions. I suggest that applying complex systems investing principles and more evolved game theory concepts (like the optimized/best outcome aspect of the Nash equilibrium) can create win-win scenarios that benefit both the companies and the investors while generating significant returns.
Please take a moment to reflect on these ideas and consider how we can better support our smaller public and private company entrepreneurs across all industries. Can we stop prioritizing most of our financial and support resources to the “Goliath” business strategies and emphasize the “Davids” instead?
The video podcast below discusses what inspired one of my recent blogs “Nash Equilibrium-Complex Systems Investing-Phoenixes Rising”
Unlocking Hidden Value in the Graveyard of Public Companies - Video Link
To learn more about Pythia Capital’s services, click here.
Unlocking Hidden Value Video Transcript
00:00 Hello, this is Lynn Marie from Pythia Capital, and welcome to another episode of Investing at the Edge of Chaos, and, I’ve been talking about the investment strategy for the Edge of Chaos for quite some time now, but it would appear that we are actually on the Edge of Chaos, or what some might feel like
00:21 in Chaos, so, This is a very timely conversation. Today I wanted to talk to you about, the complex system investing strategy, that, I designed using natural ecosystem principles.
00:38 And, it’s really hard to relate to these principles just by reading about them. It is kind of, it an experiential, Process to use these principles, but one of the really interesting things about these principles, the core of the principles that I use come from permaculture principles, which is basically
01:00 a type of, set of principles about how humans interrelate with the environment and ways that we can live in harmony with each other and with the environment and ways that are more regenerative and Ways where people have more sense of empowerment and happiness and vitality and sounds like a pipe dream
01:25 and it’s really more than buzzwords. It was never really about buzzwords but, something I had stumbled across years ago quite by accident on a train when I was heading to New York and I was sitting next to a mathematician who was a professor at a university in The United States and we were talking about
01:48 the Nash equilibrium and he had brought it up in relation to the conversation. It’s not a, something I had really thought about before that.
01:59 Although I had experienced a lot of game theory behavior in New York as an analyst and portfolio manager after working with a lot of people searching for alpha in a really doggy dog world and being a one of the, only women in the room back in those days and just having a different type of personality
02:23 in terms of how I would question companies and get to know the management teams. I got to see a lot and I got to observe a lot part of it because you were never really part of the club and many ways I thought that was an advantage because I could see what people were asking and what they were doing and
02:43 what was true and not true. I could see how people would change talking to me or when they would get in the room with all their peers.
02:52 I would see how their behavior would change. I would see how their investment strategies would change. I’d do some consulting work along the way and for different styles of investing and I’ve seen Big M&A deals happening and I’ve seen the conversations that happened and I’ve seen the way people would
03:09 market themselves and how the deals would happen. And so Game Theory was always part of my life. It just wasn’t anything I had really thought about from, you know, from the exact perspective of how perhaps a mathematician or scientist or somebody that’s studying this in an academic setting might think
03:28 about it. It was a lived experience for me. And, I always knew that when I would talk to the management teams of small companies that, they used to really love talking to me and, I think it was always really obvious even though I wasn’t always easy on them was that I really cared about their business
03:47 and I really wanted them to do well or I wouldn’t have taken the meeting in the first place so I wasn’t really trying to hurt them or, you know, from my perspective I wasn’t Looking for them to fail, especially smaller companies because, if you’re gonna, I wasn’t, I did work at a hedge fund for a short
04:06 period of my career but that was mainly not my orientation and even if it were, I wouldn’t pick the smallest, most helpless companies in the room as my target because the predatory nature of these behaviors is really quite, quite awful actually.
04:22 The naked shorting and all the sleaze and all the rumors that happens in the small cap investment space. Back in the days where I was, first in this business, both as an analyst and a portfolio manager, you could sort of deal with the sleaze because there were many other funds and there were many other
04:38 people working the strategy. And you could, you were competitors, but you still would meet each other at the conferences and there was always a respect, a camaraderie.
04:47 You’d even have idea dinners and they were very civilized and they were very fun. And there were also some market makers and there were people that covered the stock and they didn’t have to, their ratings really didn’t matter as much as covering it and there was always that sense where there would be
05:02 some price discovery, there would be a point where there would be some support, there would be a way for the company to get some stability and there would be ways of plenty of smaller funds and individuals interested in investing in the space back in the day and you could Find plenty of people to, talk
05:21 to about the stock. You could find plenty of people to invest in the company. And so the company had all sorts of choices too about who they would want, to take money from, because the venture capital investors used to come public much earlier.
05:36 And, so the companies didn’t stay-private. You know, raising massive amounts of money, hyping up stories so they can justify raising massive amounts of money so that they can pretend that they have a real company so that they can come public without a viable business model that has, no operating model
05:52 , which is a lot of what we see today, even in the most, sexy spaces, but it wasn’t always, wasn’t always like that.
06:00 And, now it’s not really talked about too much, but it’s just an acceptance. Of once we have quant funds, we have very few market makers, we have very few small broker dealers who have lots of new rules, which actually instead of making it less predatory made it worse.
06:19 so the predators are still there, it’s just now all of the regulations in this area in terms of research and other things have made it nearly impossible for, companies to come public and been possible for It’s to be a business that’s even worth it.
06:34 So, what you have is nothing but bottom fishers, and I’m sure that wasn’t the intent of a lot of the regulators around the world, but that’s basically what happened.
06:43 So, that’s a kind of the perfect storm in small companies, in many ways, but can anybody really imagine any sort of global society where, Small companies don’t exist, and there’s no pathway for companies to come public, where regular people can invest, and when they could come public earlier, the retail
07:03 investors could participate along with everybody else, and there was still plenty of upside for them, too. now you have companies, staying public much longer, and a lot of the money is made before the company even comes public, and then oftentimes the companies will just drop right off a cliff, because
07:17 they were so hyped up and so overvalued, but there’s still private. And so, when I was on the train back to circling back to the conversation about being on the train, when this gentleman started talking about game theory, I guess I had to put that conversation in the perspective of what I knew about
07:37 the space and what I knew about investing. And one of the conclusions I came to was Really interesting and counterintuitive.
07:46 When I would talk to the company, I would have a very open and honest conversation with companies, not that they would tell me things I shouldn’t know, but, I would learn more about the management teams and I would learn more about the company because it was a very human conversation.
07:58 It was a very interactive conversation. It was a very strategic conversation. It was very personal in many ways. I really cared about who they were.
08:05 I really wanted to know who they were. And sometimes I would get criticized by hedge funds that sometimes would be in the room listening to me ask all my so-called weird questions.
08:15 And I think that one of the things that they probably didn’t realize Is how much more information I would get because of how I was, and I wasn’t doing anything but acting like a human being, and, I would learn so much more, and I would get to know the people so much better, and the companies would learn
08:35 so much from our interactive conversations that wouldn’t stay on such a linear path. My style has always been very non-linear, and I’ve always been connecting the dots in really creative ways, and in a world like Today, where that’s a skill that investors need to have, and although very few do, because
08:56 that’s just not how they were trained, and that’s just not what made the money in the past, and I can understand why in this chaos, why it would be so difficult for people to know what to do when you have many years training doing something, and everybody in the room is so super specialized, like the
09:13 biotech person is not talking to the tech person, and the tech person, there may be five different tech analysts, and Four different healthcare analysts and then you have the consumer person and they have with the portfolio manager and so it’s this really siloed world and then we have this really non-linear
09:29 world now where you have to be able to connect the dots in real time and you have to know what you know and what you don’t know.
09:34 The uncertainty is enormous, but when you, investing in small companies and watching the space change was something that was doable to something that’s very complex right now, it became more and more difficult to invest in the space, not impossible but more difficult.
09:48 And the way that you would be able to navigate this landscape is to really connect the dots, because you really had no other choice, because this chaotic aspect of investing in the space was always there, especially as the space became more difficult to invest in.
10:02 And so, I guess you could say I’ve always been on the edge of chaos, so this is really nothing new for me.
10:07 So when I looked at all the over-valuation, it was really, and you look at the ability to connect the dots, and I guess I’ve been somewhat surprised at, Things that seem obvious to people who connect the dots are not so obvious when you have industry players that are, you know, used to looking at data
10:25 and not really understanding where the data came from. Like, for example, you might say, oh, the consumer’s fine looking at some piece of data and some, report that comes out in a month and everybody’s stocks go up because they say the consumers are doing well and whatnot.
10:38 And they’re looking at interest rates. Oh, good. The interest rates are here. And, and then you walk down the street, you know, in one town, You know, a wealthy town and you see people out to dinner and you see them buying expensive suits and then you go to a lot of other towns and then you see nobody
10:53 out to dinner and you see them only eating pizza but smiling and making the best of it that you see the store is completely empty and then you look at and you start Looking at the stocks go straight up and up and up and up and then you see the small cap companies have underperformed large companies for-more
11:10 than 10 years now, and then you see the larger cap companies getting bigger and bigger and bigger and the magnificent seven which is nothing new if you’re used to looking at bubbles like I am having always worked in the smaller company area.
11:21 I’d seen plenty of them in my career. Across industries and that was just in my mind another bubble because you can’t have an industry where making profits is absolutely not necessary.
11:31 It’s ridiculous. It’s a waste of money and it’s just always silly. but it’s amazing how people get get Caught up in this and the way that they always think that it’s different this time, and it pretty much never is different this time.
11:47 So the fact that we’re experiencing chaos really shouldn’t be surprising to anybody and you can blame Trump all you want about how he’s handling this.
11:56 But if you understand behind the scenes how unfair this economy has been from Main Street and the financial industry has done so well with so much leverage has So much monetary and fiscal stimulus has really made, the top, earners, so much money with all of the, everything bubble, all the assets, and
12:21 it’s been the economy so highly levered, and it’s so fragile. but without this really, the connecting the dots can be surprisingly like having common sense, and I think that what a lot of macro wonderful macro analysts are starting to see as the data is not really supporting, what we’re seeing anymore
12:40 , and there’s more of, a conversation about the quality of the data that the Federal Reserve and other people are actually using, where you could have just walked down the street in any sort of mall in the middle of America, and you could have seen it for yourself, how unstable things have been, and
12:56 how hard things have been, and continue to be, and you try to be, an 80 year old person trying to get, her car fixed and not being able to afford to fix it and not being able to buy a new car and not wanting to go without a car at this point and not being able to buy a new car and, and just watching
13:15 the human factor play out. And, and so we’re seeing all of that and, of course it is extremely chaotic because of the way, This administration is, going about trying to rectify some of these imbalances, in a shiva destroyer kind of way.
13:34 but the one thing that was pretty clear is that we couldn’t go on the way we were, and that something was gonna, gonna change things.
13:43 I wrote on one of my, notes on one of, the different places that I, am-on. I had discussed how this was a let-them-eat cake economy.
13:53 And, saying that you don’t always know what the catalytic events are-going-to be to change such extreme incoherence and other than, it will happen because, things were just so unstable.
14:05 And so this soft leaning, soft landing scenario in my mind was always ridiculous, just looking at the imbalances, just looking at the unfairness of the economy, just looking at, How unhealthy people were.
14:19 Do you see people dying at all ages? You see people getting sicker and sicker. You see the environment getting more and more toxic.
14:28 see people are what regardless of how much money you have, just not feeling happy, just feeling restless and knowing that something is really, really wrong.
14:39 And that when you keep Passing more and more regulations like I’ve seen in the financial industry to fixed things and then you see that only the biggest companies can afford to hire all the lawyers to comply with all the regulations and you wonder why all the European executives are coming to the United
14:57 States. and now even the United States has gone down the path of a lot of regulations which instead of fixing things tends to make it worse.
15:06 And instead of helping small businesses, we keep helping a large businesses. So, this particular note that I’ll link to in the description is really a blog that-is-a, reprint of an article I wrote about Game Theory and really what it relates to is just the common sense of the more cooperative aspect
15:26 of Game Theory and how unlikely it is under normal circumstances but how The more cooperative aspect of game theory is actually is really the, nature’s complex system, investing principles really, where you want more coherent outcome, where you want something where there’s more vibrancy, where you want
15:48 more creativity. Of course you need more, a mixture of small and large businesses. Of course you need to support. Innovation, of course you need to find some other way of financing companies other than venture capital because that’s not the right path for I would argue most companies and yet we have
16:03 no viable pathway for small businesses to raise money and and it doesn’t mean they’re not innovative. It doesn’t mean they’re not interesting.
16:11 It doesn’t mean they don’t need help. I’m just really been very surprised and disappointed at the lack of support in at the state level at the federal level or even in the entrepreneurial ecosystems to support.
16:24 Small businesses because it’s not a buzzword, it’s really about the health and vitality of, of our country and our world.
16:33 And, to be call yourself self-reliant doesn’t mean that you need a label on you like I’m a libertarian or I’m a this or I’m a that, we have to get past all the name calling and all the labels and really just understand, That regular people, regular workers deserve a chance, and they just, they want more
16:51 than just a job. They want meaning, they want happiness, and, some self-respect. And so this aspect of game theory that I wrote about in this note was really just about how closely correlated, nature’s complex adaptive systems are when nature is abundant, when it’s thriving.
17:12 To-the concepts of the healthier aspect of game theory of how do you get people to cooperate? Because, you don’t really need to get people to cooperate when you really understand what the real goals are.
17:23 Then it all really comes quite naturally. It’s quite organic because it’s more contextual. So get behind the spreadsheets, get behind the numbers, and start, connecting the dots between Main Street and the financial industry.
17:36 My personal feeling is, is that investors and analysts and executives are going to have to bring those two worlds together and a much closer way than we’ve experienced in these last years.
17:48 And, as countertuitive as it might sound to talk about my expertise, which is really in the smaller public side of investing, really are the best value out there.
18:00 And what I had proposed in my, in my note, was really By closely looking at these natural principles and how they relate to the higher, more evolved aspect, I should say, of game theory and how that can really be a game changer, can really be highly transformative for, the entrepreneurial ecosystem,
18:19 because it’s a self-organizing set of principles. It’s not top-down. It’s not command and control. It’s, autopoietic in the best sense of the word.
18:29 and I look forward to, sharing more with you about these, really beautiful strategies because what we’re looking for in the ashes of all this chaos are Phoenix rising opportunities and, more inspiring times.
18:45 And I thank you very much for all your attention. Thank you.