I grew up with video games. It’s amazing how many business/investing insights can be drawn from them. Mike (‘Nongaap’) set the standard with his StarCraft-based exploration of Tobi Lutke’s thinking and Shopify’s strategy. But there are insights in almost every game we can apply in investing.
Satisfactory is one example. It’s a game about making stuff. Well, maybe not quite. It’s a game about making a factory which makes stuff, and using that stuff to make an even bigger factory to make even more stuff.
It all starts with resources (ores) and ends with computers, all enabled by increasingly efficient power generation (from biomass to nuclear) and transport (from conveyor belts to trains and drones). Here’s the ‘value chain’ for one of the game’s simple building blocks, a reinforced iron plate.
The endless automation challenge is fun. But what Satisfactory teaches us is systems thinking: abandoning simple cause and effect for a broader view of how a system functions, taking account of the many feedback loops that create behaviors that themselves influence the system.
There are a lot of applications of this to investing. The one I want to focus on today is portfolio construction. Traditionally, portfolios are considered collections of exposures to market factors and idiosyncratic risks. A systems view is to view portfolios as systems that are closely integrated with your own thinking and decision-making.
This kind of thinking is useful because it helps us maximize for system outcomes, explicitly acknowledging that no portfolio is independent of the human at the helm, and vice versa.
For example, strong early results tends to boost confidence, affecting future decision-making and portfolio construction. A systems view would raise questions:
What kinds of stocks are you more likely to buy when confident? Are they more likely to improve or detract from future results?
Are you more likely to concentrate or diversify when confident? How does that fit with your natural skillset, sector coverage or asset class?
Should there be a dampener on high confidence or a booster to low confidence embedded in the system?
I don’t think this system-level view is common. I see it taking the ‘know thyself’ concept one step further by incorporating how results affect your psyche, and thus future decision-making. I hope to expand on this in coming weeks.
Best,
Eric