Apocalypse and Bubbles
Peter Thiel, entrepreneur, VC, angel, Facebook board member, and hedge fund manager, penned a long and thoughtful piece about the possibility of an impending apocalypse and how that might lead to financial bubbles. It was written in 2008 but I only came across it yesterday (on Hacker News). He calls it The Optimistic Thought Experiment. I you are an investor and haven't seen it before, I suggest you go read it in its entirety.
For those who would rather have the cliff notes, Peter's argument goes like this (Peter's words are in italics, mine are not):
1) if the truth were to be told, our slumber is not as peaceful as it once was. Beginning with the Great War in 1914, and accelerating after 1945, there has re-emerged an apocalyptic dimension to the modern world. In a strange way, however, this apocalyptic dimension has arisen from the very place that was meant to liberate us from antediluvian fears.
Peter argues that science in all of its form (nuclear weapons, biological catastrophes, etc) has vastly increased the probability of some form of apocalypse.
2) A mutual fund manager might not benefit from reflecting about the danger of thermonuclear war, since in that future world there would be no mutual funds and no mutual fund managers left. Because it is not profitable to think about one ’s death, it is more useful to act as though one will live forever.
Peter argues that betting on the apocalypse makes no sense so rational investors don't do it.
3) Globalization may end by accident or by terrible miscalculation: It may end by world war. Because there would be no winners in a new world war, every path away from globalization will end in catastrophe. Thus, in spite of the many uncertainties surrounding the costs and benefits of a more globally integrated world, investors have no choice but to bet on globalization. There are no good investments in a twenty-first century where globalization fails.
Peter argues that globalization is the anti-apocalypse bet.
4) Even the most preposterous bubbles of recent decades — Japan in the late 1980s and high-end real estate today — would have been far more restrained, had they not been stoked much further by the narrative of globalization.
He goes on to connect financial bubbles with bets on globalization. This is the most fascinating part of the essay to me. I've gone back and read it a few times now.
5) the pace and amplitude of these booms has accelerated tremendously, in complete contradiction to the widespread notion that markets are becoming more smooth and efficient over time. During the last quarter century, the world has seen more asset booms or bubbles than in all previous times put together: Japan; Asia (ex-Japan and ex-China) pre- 1997; the internet; real estate; China since 1997; Web 2.0; emerging markets more generally; private equity; and hedge funds, to name a few.
And then Peter explains that the recent slate of financial bubbles, which he calls unprecedented in history, are related to the growing sense of impending doom.
And here is the money quote:
But because we do not know how our story of globalization will end, we do not yet know which it is. Let us return to our thought experiment. Let us assume that, in the event of successful globalization, a given business would be worth $ 100/share, but that there is only an intermediate chance (say 1:10) of successful globalization. The other case is too terrible to consider. Theoretically, the share should be worth $ 10, but in every world where investors survive, it will be worth $100. Would it make sense to pay more than $10, and indeed any price up to $100? Whether in hope or desperation, the perceived lack of alternatives may push valuations to much greater extremes than in nonapocalyptic times.
It's a fascinating argument. I can't say whether I buy it or not. But it's in my head now and as a result it will be part of the way I look at the world, investing, and valuations. How much it will be a part of that remains to be seen.
At the end of the essay, Peter talks about China, Web 2.0, and hedge funds in the context of this "optimistic thought experiment". I've been thinking a lot about all three having most of my eggs in the middle basket and having taken a lot of eggs out of the latter basket and thinking about putting some eggs in the first basket. It was a good time for me to come across this essay.
Comments (Archived):
Peter Thiel is obviously a very successful person so he deserves to be heard, however, it is also instructive to remember that he predicted a sharp “decline” when we were at Dow 8800. This means that his multi-billion dollar hedge fund missed the 40+% increase in the stock market beginning in March of 2009. He was so sure that he was right that he did things most hedge fund managers don’t do: Stood on a soapbox and told the world about his thesis, publicly, on TV and to anyone else that would listen.His hedge fund is now a lot smaller and his prediction was very wrong. People that invested with Peter lost a lot of money as a result. So, even though he got Facebook very very right, his macro predictions, as far as I can tell, can been very very wrong.
very true.however, it is the arguments that i find interesting. not the predictions.
100%, Fred. There are a million reasons why any single prediction could go wrong. It’s a question of whether or not you’re making sound, logical arguments. Over the long term, that’s what is going to increase your winning percentage. Investors make thousands of decisions, and, at the end of the day, that percentage decides whether or not you make money or lose it.
i think the best investors are the ones who listen to all of the arguments,think about them, include them in their frameworks, but make their ownpredictions
same goes for founders/leaders and feedback.
Wrong or early (granted, a distinction that won’t make any difference to the size of his fund)?
Definitely thought provoking. But in the end, isn’t this the principle of casinos? Basically : give $10 to everyone and tell them : you have 1/10 chance to win, and if you do, we’ll give you $100. If you lose, you can’t play anymore.Unfortunately, we know by experience that people altogether tend to play irrationally and WILL play until they lose everything. This is simply due to the fact that time plays agains the players. The theoretical curve of their worth is at $10, but if it ever goes down below $0, the game stops. Since it WILL go down to $0 at some point, they will always lose everything. Does this mean, that no matter what you invest in, if you don’t have enough time to actually play the game, you’re screwed, I think so. We don’t value time enough.Also, how much about investing isn’t just about the final outcome? Would you rather invest in a x3 company where the only thing you do for 3 years is read the board minutes and sign them, or a company that does a x2, but where you actually spent days thinking about the business, meeting the entrepreneurs, argued over the business with other investors? If you prefer the second scenario, it probably means that you value time a little more than money, at some point!
The biggest difference between institutional investing and a casino is that managers aren’t playing with their own money or the casino’s money – they’re playing with the money of people who barely understand what they’re doing. Look at the way fund managers are compensated – big money if they win, and slightly less big money if they lose. Even when a manager loses big, he can often chalk it up to “unforseen market volatility” and raise another fund.I don’t begrudge fund managers their success. I worked in finance for a while and met some of the smartest people I’ve ever encountered. But there’s an excellent reason why they wouldn’t even have to think about the apocalypse problem – their incentives tell them not to. So whether or not one is likely to occur, they’ll still bet big and bet often because the payout is unbelievably asymmetrical.
The difference is that Peter is arguing that if you lose (and get an apocalypse), the money you would have saved by not gambling is worthless because society will have reverted to a feral condition. I can’t help but wonder if he’s right.
Is not life the same?I can’t help but observe with each passing year that I see the human level of this more and more.You work you ass off at something you’re only OK at or only mildly like, because it’s the right thing to do. Then you get hit by the cancer bus, or something similar?It happens every day, on a human level.Interestingly I just spent time with family in Europe and heard great detail about various forbears’ struggles during WWII and the holocaust. Both families were entrepreneurs. Incredibly rich, influential, connected. Lost absolutely everything. Not just material possessions but access to opportunity and connection to one another. They never, ever thought it could possibly happen. But it did. This is stuff that takes more than a generation to repair, if ever. What can I say….the world is a brutal place, and I agree there’s no reason it couldn’t happen again. Which is why we have to work hard so it does not. In reality, all any of us has is the brain in your head and the character to know who you are and what you can do. And in the end isn’t that what entrepreneurship is, anyway?
More than just entrepreneurship, that’s life in our social world.
Last night, I played some Blackjack. First I was down 75%, then up 50%, then down 75%, and finally ended up 100%.While I was at the table, a guy came up and put 20x my normal bet down. He won. Then he left all the money down (40x my normal bet) and lost it all.That’s what I’d call an apocalyptic investor. I’m not sure I buy this theory. Only because I’ve been continually amazed at the resilience of the American economy in the face of 50 years of really bad policy choices, for the most part.I think we tend to bounce back from apocalypse like I did last night. (Even though I’ll readily admit that’s not a typical outcome at a casino.)
Isn’t x3, say, Enron….and x2, perhaps, something steady-Eddy?I have to say, I would not keep gambling until it were zero. It would not be rational to me. And hearing data on women’s risk tolerances, I wonder if the behavior you describe holds across all rational humans? Or just men?If a mom has to feed her kids, she will not gamble everything. Unless she’s an addict.I don’t say it to point a finger at any guy or kick up a gender argument. But I’ve taken lots of Economics too and what you describe is truly foreign to the decision making process I’m familiar with.
I don’t gamble at all in casinos, do you? Any effort on our part to change the odds is fruitless by legal options (non scams).
Fuck no. Mark as usual we are on the same side.I view it as a pastime for people who are really bad at math.I’m sorry, did that sound overly judgmental? :-)I’ll leave my thirst for gambling to my startup, where I can have inside knowledge legally.
You forget the right way to gamble in casinos. You take an amount of money you are willing to spend on entertainment. I’m cheap, so for me, that’s $25. You go to the $5 BlackJack table and entertain yourself for an hour.If you’re lucky, you can entertain yourself with the house’s money the next time. 🙂
Now THAT’S rational!
An interesting argument but I don’t buy it.In the early days of the cold war, factoring in the apocalypse trade as far as asset valuations went, was generally ignored. Why? Because in those days it was assumed that you were either going to live or we were all going to die together. The life trade essentially goes to zero. Period. No do over.Now, in an era where technology is increasing at even a faster rate, one must factor in not only the apocalypse fear (which we can all agree puts prices at zero and is generally ignored) but also the mini-apocalypse fear, meaning that markets must price in the fear factor. In the mini-apocalypse (think 9-11 and bigger type events), life goes on albeit at a more fearful and less productive pace. This will obviously be reflected in assets prices.So where does that leave us? Well, assets prices are going down relative to real growth. This will continue to happen as markets search for the new equilibrium price that reflects the new normal.My .02MassMan
Wasn’t that segment always called “Emerging markets” and while it carried risks, so it did with upsides. Brazil, Russia, India, China (BRIC) turned out to be huge emerging markets. Peter’s thesis carries the same type of mental masturbation that Nassim Taleb subjects us to, and while it’s hard to argue with their essays, the actionable/practical take-aways are few and far in between. They throw so many possibilities and permutations that one of them is bound to stick eventually, and then they appear like prophets. That said, the globalization forces are changing investment patterns, and wealth distribution of course. Follow the money.
Perhaps the most ironic thought of your post is that Russia — the last element of the USSR left standing? — would become a “market” in which an investment could be made.This is important because the timing of the Russian Revolution in 1917 almost assures that not a Russian is alive who remembers capitalism.Communism defaults to capitalism though not a single Russian really understands what it means suggesting that capitalism is simply a normal state of individual endeavor and yearning that does not require any impetus to emerge from natural thought.
Where’s Kid when he’s got a great opportunity for an appocaliptic analysis comment ?
he’s been conspicuously absent recently
No doubt busy with pressing off web life concerns like me (had to cut back my internet diet).
Careful Fred, we libertarians will get ya.Here’s the corner to turn: When you plant yourself with both feet into globalization, the only thing that makes sense is Mundell economics. He saw the libertarian implications of macro before anyone else.Namely, ask yourself how you would want your government to behave if the whole world used a single currency, or there were multiple private currencies you could use to spend anywhere on earth (see Paypal).Since our country could not print money – there is suddenly no macroeconomics. It becomes global-micro. Each country suddenly has to compete on the basics:1. supply / demand2. savings are the only thing you can use to invest3. productivity gains are the only form of growthIn that model, many things become clear. And when you assume globalization is happening those policies that our government engages in that do not conform to the above start to look very, very bad.
The central banking system is already pretty much a global thing, so I am not following how savings would be the only capital available to invest. You will always be able to create capital via borrowing as long as this banking system exists.
I don’t think you catch my meaning.Even with fractional banking, the leverage goes down when it is IMPOSSIBLE to print money to stand behind the banks, IMPOSSIBLE to deficit spend with any heft.FDIC is suddenly only as good as the treasury / taxes of their country behind it – if that, because the “central bank” is suddenly unable to to do QE.Just take the Euro set up, every country can only deficit spend 3%, or the cost of borrowing for them goes through the roof… and imagine the whole world lives like that.Now in the US, banks could still do fractional banking, you might even still have some kind of FDIC, but the the approach to risk becomes far more conservative.The cost of money goes up (which encourages savings), and as I said there’s no Fed to print money, and stimulus is fine as long as it stays under the 3% deficit.
lol, my favorite subject!some thoughts:1. “Almost every financial bubble has involved nothing more nor less than a serious miscalculation about the true probability of successful globalization” –> no, almost always involves cheap/counterfeit money, and that is the driving factor, especially in bubbles of the past 50 years. perhaps thiel understands this, as IMHO he seems to understand john law’s financial trickery in his western exploration scheme, but the role of monetary policy is huge, and is the great enabler of selling the illusory dream of a bubble.2. on globlization, thiel writes: “On the level of economics, it means a global marketplace; and on the level of politics, it means the ascension of transnational elites and organizations, at the expense of all localized countries and governments.” yes, but does this mean global government? like UN, IMF, World Bank, etc? i was unable to gather thiel’s views on those subjects. he seems to suggest that we are on a trajectory towards globalization, and i agree, though i think we are on a trajectory towards globalization via supranational government. i think this entire system is collapsing and we will get globalization through a networked economy after the nation-state self-destructs, which i increasingly think will occur as war escalates and turns into WW III (or WW IV, if you count the last 50 years the CIA overthrowing governments around the world as WW III). a networked economy is a world that is both more local AND more global than the world afforded to us by the nation-state.3. “Along with the New Economy and New Media, there should exist a valuable sector that could be described as New Defense — at least in any twenty-first century in which humanity does not blow itself up. The absence of such a sector serves as a subtle reminder of the complacent myopia of Silicon Valley venture capitalists investing in “technology.”’ ouch. brutal diss, thiel puts the smackdown on VCs, embarrassing them in front of a global audience on the web. that’s gotta hurt. damn.of course “New Defense” begins with monetary policy, as that is what destroys the military-industrial complex, and thus prevents war from being able to be financed. if war cannot be financed, it cannot exist. in fact, the deregulation schemes that have gone on for the past ten years can be viewed as a way to make war easier to finance (by making it easier for the military industrial complex to rob people). hmm, i wonder if there is a way to recreate monetary policy……hmm, i wonder……lolin sum i think thiel’s vision is largely correct, though i think it would be a lot clearer if he was a full-blown kook, talking about 9/11 and the federal reserve and the new world order and stuff. as he seems to have a strong christian and perhaps fundamentalist bent this might not be a big leap for him, as most new world order kooks in america are fundamentalist christians (i’m not though).the wild card to all of this stuff is extraterrestrials, lol, you can’t bring that up without laughing, but seriously. we’re going to get there some day, and probably sooner than most people think. and that’s going to change everything.thiel’s point on war is especially worth noting IMHO. if you want the renaissance, The Great Boom as thiel calls it, the price is peace. if you don’t want to pay the price, that is of course your choice. so choose wisely.9/11 was an inside job,kid mercury
I don’t think of 3 as a diss, we all know that there is a fund sponsored by the government that has helped invested in Facebook if only because people are leaky creatures about themselves.He never describes what New Defense is!- Maybe it is the Minority Report?
#3 is definitely a diss. peter is calling investors myopic, implying they are not good enough or up to the challenge, and that he is the better man.
it would be brutal if it were true
He first talks about exits and the lack thereof in SocialMediaLand and then goes onto defense. He didn’t do a good job of connecting them.Most people don’t realize the power of social listening because people are really that leaky. I think setting up that binary was and is a mistake.
And for the record, One of the reasons I’m doing this is because I miss hearing your voice- what happened to you?
i’ve largely retired the kid mercury identity. i need to get a job — kidmercury does not help in that regard, and probably hurts. and the message ofsolving the global political and economic crisis has already been delivered;those who have found value in it do not need to hear it again, those whohaven’t will likely not benefit from hearing it again. kid mercury is goodfor conversations like this one though.
Wait a minute, Kid. Are you actually SHANA, and you’re having a conversation with YOURSELF?
Lol, in mythology, mercury does have two faces….
Not funny. I’m not you.
We’re different people. Roughly the same age. I’m definitely not the KidMercury.
🙂
Kid, they really need a first-class bouncer like you over at Tech Crunch.Although we like having you here.
my own conspiracy theory is that Fred wrote this post because he missed you and knew this was an easy way to get kid mercury out of retirement 🙂
I wonder if we could have a group brainstorm around how Kid could monetize his persona.
my partner Brad said this on one of our blog posts:”We expect your web presence to represent who you are, not who you think an employer wishes you were, so don’t waste a lot of time sanitizing your web presence before sending us there. It will just confuse your friends.”i’m happy to help the real Kid get a job. where/when/what/how?send me an email Kid
thanks for your offer, i’m sending you an email
happy to see you back around these parts Kidwe missed you (or at least i did)
no, you were not alone !
Probabilistic thinking only yields sensible conclusions for incremental changes, once you get into thought experiments about apocalypse, you leave expected values and finance and enter the realm of philosophy and religion.Pascal tried to apply logic to argue that if someone comes along and says I’m the son of God, follow me and you’ll get the infinite reward of paradise, then the logical thing to do is follow him, since if he’s right and you don’t follow him, you’ll get eternal damnation, so even if there’s only a finite probability, then that’s the positive expected value solution. The counterargument is left as an exercise. More prosaically, if there’s a 10% chance of apocalypse, and guns and gold will be worth infinity dollars since dollars will be worthless, you might decide to own more guns and gold than would intuitively seem prudent, before realizing the calculation doesn’t make much sense.Institutions that evolve successfully, whether religious, political, or monetary, create systems that trick the individual into acting in the interest of the group, and as if they and the group would live forever.Viewed in these terms, all human activity becomes a bubble, since in the long run pieces of paper with George Washington are them will be of no value at some point in the future, and in the long run we’ll all be dead.Whether you call it unfolding of consciousness, biological imperative or something else, at this point the only solution is to act as if human activity in some direction has inherent value regardless of its ultimate impact and history’s final destination.
thank you, I finally found the inspiration I need for a totally different subject vis a vis”Institutions that evolve successfully, whether religious, political, or monetary, create systems that trick the individual into acting in the interest of the group, and as if they and the group would live forever.”
i loved that quote about heading into the realm of religion. i reblogged it on fredwilson.vc
quality!
Very niceOne quibble — I might substitute the word “convince” or “seduce” for “trick” in the third paragraph.It’s not like “institutions” pretend otherewse — they very overtly seek to attract members or followers etc
It’s a symbiotic relationship.People want the metaphysics and the values and the rituals that give meaning and an illusion of safety to the way they are comfortable living, and the institutions supply them, and relieve people of the responsibility to make hard decisions. Just like people want to believe in AAA ratings on packages of subprime loans or one-decision stocks. When that leads to a market that doesn’t correspond to economic reality, you get a bubble and a financial crash. When a lot of people’s values don’t agree with social and political reality, you get wars and revolutions.The good institutions are the ones that ‘trick’ or ‘seduce’ people into behavior that is in everyone’s interest. When ruling classes start thinking in terms of how to get while the getting’s good and somehow safeguard against ‘apres moi le deluge’, and the system incentivizes that behavior, you get the kind of deluge you can’t really defend against. Better to follow a categorical imperative of acting the way one wishes everybody would act, and build stable reality-based institutions that reward that behavior.
Quick question- do you ever worry that the internet is changing the way institutions and communities function because it changes the rituals of daily life so radically?
If you google the terms “Peter Thiel” and “underwater” together, you can read about:1. the underwater ocean communities Thiel’s investing in, and2. the performance of his hedge fund, Clarion Capital.He is certainly a contrarian thinker. I sent a light pitch his way via a mutual friend and his response was that the web is a dead sector that is five years past.Reading this, though I can’t get past thinking, why does your financial strategy matter if there’s an apocalypse. Aren’t we all dead anyway?I think he is correct that people (and notably particularly Americans) are highly avoidant of the topic and the prospect of death, and I’m sure that this warps analyses.I wonder how this affects his portfolio decisions, beyond the aforementioned underwater communities, and what he proposes we actually do.In the absence of that, if I’m guaranteed to go to hell in a handbasket, then until then I want to do good, have fun with my family and friends, and look damn fabulous while doing it.
you do look fab…though why does he think it’s a dead sector. usually those who think such things long term tend to be wrong. Look at corn- we’re still figuring out uses for that!
the web is “not dead yet” in the words of monty python
Ha!I’ll bite your head off!
In contrast with others here I found this essay very thought-provoking and actionable as well. I have been having similar thoughts myself, minus the globalization angle. But the idea that the alternative to a globalized world is a feral one makes more than a little sense given the state of today’s technology. And he’s right: that idea shuts down many investment philosophies that would otherwise be perfectly rational.Swing for the fences or die trying is an interesting way to do business.
“The difference is that Peter is arguing that if you lose (and get an apocalypse), the money you would have saved by not gambling is worthless because society will have reverted to a feral condition. I can’t help but wonder if he’s right.”” if you want the renaissance, The Great Boom as thiel calls it, the price is peace. “And so, the real classic of bubble economics is alive and well, and self-referential. Financial bubbles occur when people become convinced there can only be one outcome, or at most, two where one is paradise and the other hell on earth.This one is self-referential because Thiel uses Bubble Logic to argue that you’ve got to bet on the next bubble. Why? Because the alternative is all-out Global War and nobody survives.Yet, nature is seldom as cooperative as we would like with these black and white scenarios. Hedge Funds of Nobel Prize winners can construct mathematical certainties, only to fail because they, like Thiel, forget an essential truth:The world and it’s markets are not Open Systems that can continue on whatever trajectory that has been set. They are Closed Feedback Loops. Whatever the trajectory looks like today, it will change tomorrow, because the trajectory alters the fabric of the space it inhabits the faster it moves.China may raise a larger group of people out of poverty faster than ever before, but in so doing, they destroy the cheap wages that enabled them to do it. Now they’re stuck competing like the rest of us. Technology may create limitless wealth forever based on Moore’s Law, or that law may slow over time or even fail to deliver a result that anyone cares about. In this case, we can add more cores that our software isn’t written to take advantage of, but we can’t make the clock speeds go up as fast as we once did.If you choose to make these bets as Thiel does, at least be humble enough to realize you are pursuing the Greater Fool Theory, and that if you don’t change your own course before the trajectory you’ve bet on changes, you wind up just another Fool.Cheers,BW
“Financial bubbles occur when people become convinced there can only be one outcome, or at most, two where one is paradise and the other hell on earth.”no, they most often occur because of monetary policy.
Because the people making the policy got convinced there could only be one or at most two outcomes for their policy.
no, because monetary policy is such that all money is lent into existenceand there is no restriction on the amount of money that can be created. whenexcess capital is created this capital will end up going somewhere. in thatsector there will be a bubble.
“This one is self-referential because Thiel uses Bubble Logic to argue that you’ve got to bet on the next bubble. Why? Because the alternative is all-out Global War and nobody survives.”There would seem to be an obvious third alternative (actually, there are additional alternatives, but let’s run with this one): bet on the bubble and hedge. This has the advantage that the bubbliest asset is often relatively cheap to hedge, since more folks thinks it’s going to keep going up. For example, I just checked Portfolio Armor to see what the optimal put option contracts would be to hedge positions in, respectively, the ETF that track the S&P 500 (SPY) and the one that tracks gold (GLD), and what the cost of those optimal contracts would be. The cost of hedging against a greater-than-20% decline in the S&P 500 ETF over the next six months is 3.43% of the position value; the cost of hedging against the same percentage decline in the Gold ETF over the same time frame is .092% of position value. Gold may be a bubble — some would disagree — but it’s pretty cheap to hedge it at the moment. So a simple investment strategy would seem to be to pile into GLD and hedge.
that is some really cheap insurancewe can’t get cheap insurance like that on web stocks
i love the idea of portfolio armor as a service. great idea. the gold example is a perfect sales pitch.
Nu, make his rosh hashanna happy- if you like it, spread it!
Thanks, Howard. Maybe it would be a good fit for the StockTwits store?
i would love to help Dave with portfolio armor somehow but it’s not a good service for the VC and entrepreneur crowd because the securities we would want to hedge are not traded or are ridiculously expensive to hedge. i think your crowd is a better fit howard
Fred,Thanks for thinking of me. I understand your point about the VC and entrepreneur crowd, but there is a crowd you are connected to that might be a much better fit for Portfolio Armor — investors who have accounts with your portfolio company Covestor.Covestor could become an affiliate of Portfolio Armor and present the service to its users. That would bring in new users for Portfolio Armor and a new source of revenue for Covestor, as it would earn 30% recurring affiliate referral fees from Covestor members who joined Portfolio Armor.What do you think?
Hey Howard, Dave has been working his tushy off on portfolio armor. He’s also a mensch who has been really helpful to others in the AVC community, me included.Could show us the force and strength of your Lindzon Love with some intros on who Dave can talk to, to sell it? :-)I’d help him but it’s not my field so there’s a limit to what I can activate for him.
Tereza,I appreciate the gesture, but Howard is a businessman. My working hard or being a nice guy aren’t good reasons for Howard to do business with me.Good reasons are that he thinks Portfolio Armor is a great idea, and that if he promotes it through StockTwits, he can offer a valuable service to his community while generating revenues (affiliate referral fees) for StockTwits.
#1 reason is that you’re good.But a little social pressure never hurt!
This is a great piece – thanks for the analysis, Fred.Peter makes it clear how apocalyptic conditions could create opportunities for asset bubbles. My fear is that more bubbles (and more potentials for crashes) could create opportunities for apocalypse.That’s a scary echo chamber to imagine.
reminds me a lot of the excellent discussion here around the relative merits of gold. its the question of….. even if i am certain that markets are drastically underestimated the probability of a potential major negative event, how to make ‘smart’ decisions based on that, when the outcome would be very ugly regardless.i say the best collar strategy is an internet day gig, with a hobby farm 🙂
or a farmer who writes code at night 🙂
That sounds like charlie
I know people who quite literally do that.Also, the next huge invention won’t be by Sir Tim, it will be by someone who’s currently a little boy somewhere in India, China or Brazil. (hopefully in Brazil/Uruguay)Think hundreds of thousands of farmers hacking away. Most American farmers don’t have the “class rights” to do that.
i know you are right about that vruzthink about the power of a computer in the hands of a smart kid who is hungry
the thing is, that’s not the future. I’ve seen it in the street. it’sall happening right now.
That’s the number one reason why I want the world to have broad band Internet.Dump pipes are more important than phone service (google talk/gizmo/googvoice), and only slightly less important than clean water and food. It’s the keys to unlimited books and education, free lectures, and Unquestionable Opportunity.
After years of deliberate effort trying to shield our family from the coming collapse of Western welfare nation states:1. Internet day gig: check2. House paid for right by the ocean: check (got out of the Euro at the right time!)3. Hobby farm/orchard is next on the list, but you’d be surprised how expensive agricultural land is here in Central Chile. Doing it right requires a lot of homework.Even after moving from Europe to (the top layer of) the developing world with an ongoing internet gig in the US, it still takes a fair amount of cash and obstinacy to edge yourself against the “end of the world” scenarios while remaining open to optimist Pascalian wagering.
Here’s a different take, from a guest post over at Zero Hedge recently, by Gonzolo Lira, who lived through a hyperinflationary collapse in Chile, Hyperinflation, Part II: What it will look like. A couple of key excerpts:But for sensible people, Apocalypse is a distraction—it’s not the main event. For sensible people who want to be prepared, Apocalypse represents opportunities. […]A banker friend of mine manages the assets of a fabulously wealthy 70-something gentleman, whom I’ll call Alfredo. In 1973, Don Alfredo was a youngish man, just starting out, with a degree in engineering but no money—until he inherited US$3,000 from a deceased aunt. Alfredo realized that the $3,000 were in a sense worthless: He couldn’t buy anything with them, and it wasn’t enough for him to leave the country and start over someplace else. After all, even then, $3,000 was not that much money.So he took those $3,000, went down to the stock exchange, and spent all of it on Chilean blue-chip companies: Mining companies, chemical companies, paper companies, and so on. The stock were selling for nothing—less than penny stock—because of the disastrous policies of the Allende government. His stock broker at the time told him not to buy stocks, as Allende’s government, it was thought, would soon nationalize these companies as well. Alfredo ignored his broker, and went ahead with the stock purchases: He spent all of his $3,000 on buckets of near-worthless equities. On September 11, 1973, the commanders in chief of the four branches of the Chilean military staged a coup d’état. Within a year, Alfredo’s stock had rebounded about ten-fold. Since then, they’ve multiplied several thousand-fold—yes: Several thousand-fold. Don Alfredo has lived off of that $3,000 investment ever since—it’s what made him a multi-millionare today. He realized, of course, that either those blue-chip companies would be nationalized by Allende—in which case he would lose all his $3,000 inheritance, which really wouldn’t change his fortunes very much—or somehow a new normal would arrive in Chile. Since the $3,000 couldn’t buy him anything, he took a gamble—and won. What do these two true stories tell us? Simple: Buy when there’s blood on the streets. That’s Baron de Rothschild’s famous line—but it hides a key insight, one which should be highlighted perhaps even more forcefully than the line itself: Even in the midst of Apocalypse, things will get better. That’s something people don’t quite seem to understand. In fact, it’s why teenagers tragically kill themselves over some girl or boy: They don’t realize that, no matter how bad things are now, they will get better later. To repeat:Even in the midst of Apocalypse, things will get better. I’m not repeating this insight as an empty comfort to my readers—I’m saying it as a trading strategy. When things are at their crazy worst, when everyone believes the Apocalypse is well nigh here, that’s when thing are about to turn for the better. This applies to every situation—including and most especially in a hyperinflationary situation.Maybe what Lira writes wouldn’t apply to a total nuclear war, but it might apply to a lot of apocalypses short of that.
i love that storyit appeals to the contrarian in methe last time i bought a public stock was november 2008
I found that to be true about life in general. Big changes either mean your life is going to suck or is going to get better. if you mentally prepare yourself, it will get better. Failure is strange that way.
I think it also speaks to the freedom you have to do something totally “nutty” when the money didn’t come to you in a rational way, and you didn’t earn it. The F-You money.The money I’m investing in my company is because my parents died and I inherited a little. If that didn’t happen, I’m not entirely sure I would be doing this. I am sure if I went to ask for the money, I can already hear the response: “WHAT??!! You have a high-paying job with a big American company, and you want to do WHAT??!! Are you KIDDING??!!” (if reading out loud, please employ thick Hungarian accent)But when you go through a little crap you also earn the latitude to stick your thumb back at life a little and shake things up. (Or, maybe it’s just the ‘tude that comes with turning 40)Anyway since that little bit of money was there, I could have, say, fixed the roof on my house…how boring. Or wait… start a web company!On some level you have nothing to lose when it wasn’t yours to begin with…so why the F not?!Forgive me if I’m being glib here. I’ve literally been entering and merging various school calendars, after school schedules, contacts and filling out forms for seven hours and I would jump out my window….if it weren’t on the ground floor.
Just to clarify the definintion of FU money as I understand it: FU money is enough wealth that you don’t have to do anything else for money for the rest of your life if you don’t want to.Depending on who you talk to and where you live, that’s somewhere between 1.5-5 million dollars.
Good clarification and what I’ve had (no longer!) was more like, FU chump change.But I still think there is a very different psychology to money you weren’t counting on. An ‘easy come, easy go’.
Wow, easy reading for a Sunday morning! Thanks!I’ve just read the essay and what I don’t get is why there can’t be intermediate scenarios. It’s difficult to imagine the absolute apocalypse in which everything is valueless (although possible). But I can imagine countless others in which things change and there are winners and losers. The trick is finding those winners, but I’m sure that no matter the scenario, there will be winners.I’m thinking now about Asimov’s Foundation series. The Empire collapses but other powers appear at the edges of the Galaxy to substitute it. Some of those powers are less advanced than the Empire and life can be worse, but there is still life. I know it’s fiction, but there is some logic in it.
The scary part about a globalized economy that is based on a command-control, top-down hierarchy is “the bigger they come the harder they fall”.It’s like in cosmology where some stars the burn out are massive enough to first go supernova and the still collapse back into a black hole that sucks all light and matter into a singularity. Others are smaller and though they blow up in a nova explosion and cause damage they don’t collapse into a singularity. Instead they fling a lot of material out that allows new things to grow.We know that black holes do gradually evaporate and return information and matter back into the less warped regions of spacetime. It just takes a really long time…from the stationary observers perspective that is. ;-)The solution is to to go to hyper-local, self-sustaining micro-economies that interact with each other reliably/predicatbly to produce mutually beneficial global results. The solutions are to be found in the mathematical principles of Complex Adaptive Systems(CAS) that operate to produce controllable “Emergent Complexities”.It’s only a handful of economists are just now dabbling in these concepts. Lets hope the house of cards doesn’t go supernova before they figure out and convince people to implement Complex Adaptive Economic principles.
I think he misses two critical factors if he wants to discuss the apocolypse as a way of hedging out your thoughts.Jane Jacobs brings out the idea in “Dark Ages Ahead” that you can over-leverage skill. That is, you can sub-specialize people’s skills to the point where internal decay of the system makes it harder to see from a different perspective. That is far more likely in the west, where we have lots of big machines doing lots of complex activities for us.Other thought. Steven Pinker mentions in this Ted Talk that actually violence is dying off (http://bit.ly/d16xRc). Either we are waiting for the tender to be struck, or we are gearing towards some sort of weird truth about violence. Further, I would say the state of violence is changing- more one on one, even in states of war.
i should read more Jane Jacobsthanks for the impetus
Any time.Considering I just started a book society/literary society/group on reading about media (join if it interests you?) should I add jane jacobs to the list. She’s not directly related but she has interesting ideas about society.
Wow, didn’t know Jane Jacobs wrote about these issues. She’s ridiculously smart.
Oddly, I got the Jane Jacobs recommendation here a long time ago. It’s a smart crowd, you got to keep up.Her last book was primarily about how the west could collapse. It’s oddly the only one I’ve read: by reputation, she writes about how cities and societies work through her power of observation. If she wasn’t a protester/housewife, she would have been a top notch social scientist. Though I get the feeling the academy would have been annoyed with her. She’s just not typical, and yes, I agree with you, she is ridiculously smart in an “I’m not toeing the line” sort of way
Violence is actually dying off.Unfortunately for the U.S., violence is unevenly distributed.
Never made that claim- the question at large- if violence is dying off overall, will that die-off eventually hit those areas where violence seems to be more acute? Those sorts of questions change Thiel and how to read him pretty radically. If we’re finding that violence is dying off even those areas that are acute, his apocolypse is going to have to be caused by something else, or we’re heading into a period of much heavier globalization, or ?????
I know Shana, you didn’t say that. Pinker did, and I am saying that I agree with him. (I did read that work by him)And I’m saying that the U.S. is unfortunately engaged in violent areas more than most nations are.
That may be true, that still doesn’t answer my questions. War also bringsculture to an area because of the foreigners passing through. In the longterm, is this a sign for the forces of westernization and/or globalizationor not? (I have not read the Pinker book, just saw the talk, was the bookgood or just ehh)
Science and Technology are but tools and to understand the whole phenomenon one should look at those who use the tools against others. In addition, I wouldn’t say it is the sense of impending doom which accelerates this, but rather that the disasters are calculated and deliberate. This, therefore, are your real crossroads: whether you join the corrupt or the ethical. In the Grand Scheme of things, at the unraveling of Apocalypse, whether you invest here or there is a moot point.
trapped by intellect, blind to the larger forces that move this world, my take on mr. thiel’s essay. “consciousness unfolding” is the short way to describe these forces. it plays differently than most western minds understand.
I love this article by Thiel and I think I’ve read it about half a dozen times. I think he’s the smartest person alive. It’s good to see web peeps rediscovering it and thinking about it.
peter is wicked smartand you have to read him and understand himbut he can sometimes be “too smart for his own good”
A lot of people are too smart for their own good — in fact that may be thebiggest problem for really smart people.In any case, given the (rumored) recent performance of his hedge fund, youmay be right.
People can only understand and envision based on what their life gives them access to.Peter is indeed wicked smart and understand things I do not. But his life doesn’t give him access to the things that I see and experience every day. Most notably the money being left on the table in women’s markets.My optimal investor is married and has been paying off wives’ and daughters’ credit card bills for years. He knows the market is massive. And that it’s a force which cannot be stopped.Anyone understands it in concept only cannot fully respect it.
+1
makes me wonder about the many world billionaires pledging their wealth away in these 2012ish times.
I’m reading this late in the day – which gives me the benefit of a lot of great comments (early soccer tourney this morning)William Mougayar has a comment here which states: “Peter’s thesis carries the same type of mental masturbation that Nassim Taleb subjects us to”While Taleb is somewhat long winded his viewpoints – while similar to the Thiel apocalypse essay – lead to a different investing conclusion than Thiel – and coincides perhaps with Fred’s thoughts of portfolio re-balancing.I think both Taleb and Thiel have a fairly dim view of the world – and pretty fully describe all of the bad things that could happen in markets and with governments – they tend to position themselves extremely differently.Thiel has taken active negative bets against the U.S. equity and debt markets – most of which have crushed him. Since he runs a macro fund – and was no doubt leveraged – the unwinding of his losing positions forced upon him by withdrawals has only magnified these losing bets.While it is very hard to argue with Peter from an intellectual standpoint – the truth is that there are problems outside the US that have forced capital into the supposed safety of the US Treasury bond – killing guys like Thiel.Now contrast this viewpoint with Taleb – who will argue that there are all sorts of issues facing both the U.S. and the world. Rather than try and force that viewpoint on the markets – Taleb takes the view that there is some small chance of collapse (and some chance of booms) – and buying cheap options on that collapse – while taking the bulk of his money and putting it in the relative safety of government bonds.Now look at the different implications.If there is a non-Apocalyptic collapse, both investors will make money (peter more than Taleb) – but if the markets go up or stay in line – then Peter will ultimately lose all of his investors and Taleb will go on giving speeches and writing books. Of course, in the Apocalyptic scenario – none of it matters.So how does this get back to Fred and his portfolio?I’m going to assume that Fred still has a lot of his portfolio in his fund or other venture investments – and thus invested in what is generally deemed highly risky investments – with the rest in either muni bonds, government bonds, or large cap dividend paying stocks – not to mention real estate.This is fairly ideal positioning in a Taleb world. He has accumulated a portfolio of safe securities that is more than enough for him to live out his life (and perhaps even his kids lives) and on top of that he has purchased a large number of “lottery tickets.” If these lottery tickets come in – you either add more to the pile – or split the cash between more safe investments and more lottery tickets.Now if Fred really wants to listen to Thiel – and thing about Apocalyptic thought – then he should probably take Taleb’s suggestion of adding a bunch of negative outcome lottery tickets – purchasing way out of the money cheap options on the demise of the markets. Out of the money S&P Puts are one good way of doing this. Most of the time you will burn through your premium – but every once in a while you might just cash in – offsetting your losses on the long portfolio.
you have assumed correctly about our asset mix.and i am pleased to hear that it works well in a “Taleb world”
Right onBottom line, I think, is Thiel is theoretically brilliant, but, in practice, more or less uselessAs Harry points out, Thiel’s own fund has been a horrible mess.Personally, my mix is very Taleb-friendly. I also subscribe to the simple Warren Buffet-ism: “When other people get greedy I get scared; when other people get scared I get greedy.” and “Invest in what you know.” and “Some of the best deals I have ever done are the ones I did not do.”
The big time commercial real estate business has been ruled by a very simple maxim —When the dentists get in, get out.When the institutions get out, get in.I have been to the pay window more than once using no more deep thinking than that.
Just posted one – but in rereading everything, I think that the general message that you can take away fro thinking about Peter Thiel is the old investing chestnut “Markets can stay irrational longer than you can stay solvent.”I have know doubt that Peter is an intellectually smarter guy than I am – and he has made some tremendous investments but markets are rarely the province of absolutists.As Bob Ritter said to Jack Ryan in Clear and Present Danger “The world is gray Jack, the world is gray.”
brains and wisdom are often two different thingsthe old investing chestnuts you cite come from wisdom, not brains
More things have been accomplished in the world by “I Will” than “IQ” and it will always be so.
Very thought-provoking article that certainly makes a case for globalization being the only horse to bet on.I’m not sure why Peter (and so many others) are missing the more obvious and much less painful alternative though.I’m talking about the voluntary re-localization of commerce and the introduction of purposeful community marketplaces to facilitate trade and incrementally decrease our reliance on non-local inputs.Rushkoff, Gerald Celente, Mish, Chris Martenson and many others acknowledge that the only truly viable solution to stave off apocalypse is a return to local community (while retaining the benefits of global communication).It isn’t a silver bullet, but it’s a helluva lot easier than building underwater cities or heading out to the wilderness with a bunch of guns, gold and grub. Believe me – I was ready to take that path in 2005 and realized that a life lived in fear like that isn’t worth living.Rather than hiding away, I’ve chosen to do what I can to bring about a positive outcome through the project I’m working on. We are helping people shop locally and have put together a system to enable merchants and producers to connect with their local market online.A confluence of macro factors make it a really good time to go long on ‘local’ – IMO, it’s the hedge everyone is looking for.And if you can put a positive spin on it, even better – happy faces sell so much better than doomer talk that demotivates people to try to make a difference.Anyway, just my $0.02. Lots of great comments and contrarian views here.
they “miss” it because it conflicts w/ their desires – you can’t scale local communities, and companies, to be worth hundreds of billions of dollars. (of course, ironically, the infrastructure to enable those communities could be worth a lot.)
It’s worth mentioning that Vanity as a category is a great counter-cyclical.Think nylon stockings and lipstick during WWII. (Here’s a good one on Nylons: http://hubpages.com/hub/Nyl…During cataclysmic events and likely death, people’s perception of reality is highly related to the near-physical and frankly the carnal.While Peter’s building new defense, I’ll take my own shot at great wealth by investing in modern-day equivalents to nylon stockings.
Yes, I’ve read that lipstick sales tend to increase every time the economy tanks…
and hems get longer…
I’m not sure whether there is data to validate the hem lengths theory, but there is for The Lipstick Effect:http://www.guardian.co.uk/b….Cosmetics are inexpensive mood enhancers at a moment when people really need to lift their mood.Frankly I’d be curious to know if there’s a correlation between crisis and condom sales. Predictions of a post-9/11 baby boomlet turned out to be false.
the sign of an entrepreneur is when they see everything they come across as validation of their project/idea/companyyou are an entrepreneur now Tereza!
Interesting reading the Tech Crunch and XX comments where some people asked, how could you have enough hours in the day, if another younger entrepreneur is clocking more hours, how could you compete.Thing is, if you’re obsessed with an idea, is there a moment in the day when you’re not thinking about it? Plus once you’ve clocked your 10,000 hours you are way more efficient than much earlier in life.Every single conversation with anyone is market research or an inquiry to solve a problem or to what you’re doing better.I met one of my best tech business contacts through a birthday party RSVP. I raised seed funding (over lunch) and published an Op Ed….while on vacation. I’m testing usability with my 7-yr-old.Everything you read, every conversation, every interaction can move your needle…..if your concept is robust and you’re passionate about it.Who’d want to ‘clock out’ when you love what you’re doing?
To me personally, it all comes down to the cost of opportunity.I’m not a teenager anymore, so I can’t wait for these disruptions to unfold to profit from them.I won’t be forever in my prime, for me time is today.All these things Thiel talks about will happen, but timing is everything.For my 6-year-old niece, it will likely be a different game entirely.With a little luck, I may be able to become her mentor.
This whole premise reminds me of a Ian Angell’s book New Barbarian Manifesto. If you have not read it get a copy TODAY. Simply put governments are scrambling and trying to tie people to its economic system – he likens the governments of the world to junkies that need their ‘fix’ of tax revenue- meanwhile the flat world and Web economy has replaced all this.powerful stuff. check it out.-Kevin Leversee
Many of the comments here seem to be overly concerned with ‘money’. It seems to me that in an apocalyptic scenario, I’d be more concerned with maintaining ‘wealth’. Imagine a time when your reputation is worth more than cash…
Ehy Fred, as you know I live in the first basket, and work on social / online games there. If you want info about the Chinese market, start-ups and the like, or just want to chat and swap ideas, get in touch. And naturally, let me know if you make it to China anytime soon!
will do Giordano
Life’s investment choices are much simpler when you only have one egg. You don’t spend much time worrying about losing that one egg. Worst case it get’s boiled and you have a nice snack.
yupread’s dave pinsen’s comment/storyit’s wonderful
Given your interest in Thiel’s thesis, you might find useful perspective in Raghuram Rajan’s “Fault Lines: How Hidden Fractures Still Threaten the World Economy” <http: http://www.amazon.com=“” fault-lines-fractures-threaten-economy=”” dp=”” 0691146837=”” ref=”sr_1_1?ie=UTF8&s=books&qid=1279425656&sr=1-1″>.In the July 19 column of David Warsh at Economic Principals, <http: http://www.economicprincipals.com=“” issues=”” 2010.07.19=”” 1163.html=””> it is characterized as: “the best book out there on the global imbalances that gave us the last financial crisis and that might well give us the next one” by fellow economist Ken Rogoff <http: en.wikipedia.org=”” wiki=”” kenneth_rogoff=””>.
thanksi will check it out
Hi, I just started reading your blog. I wanted to commend you on how you interact honestly with your community. http://bit.ly/9XbjuK It’s this honest communication that will lead to good globalization. Thanks for stalling the Apocalypse :).I originally posted this here: http://tl.gd/3gljnv but I thought you might get too much noise on twitter.
If you are interested in a deeper understanding of what stands in the way of a regular recovery it takes reading deep. The following 38 page doc is more than most people will ever read but it captures a perspective completely lacking in representation in the mainstream. It offers meaningful context for the true complexity of the problems we (US) face and why fiscal policy is doomed to failure no matter how much of our kids money we throw at today’s challenges. http://www.rcwhalen.com/pdf…
There’s a lot to think about here, but it doesn’t seem like enough reasoning to support the conclusion that the outcome is all or nothing (even when it is a logical conclusion from his arguments, those haven’t served economics too well). The primary factor that influences this is the actions of people – everything from the collective actions of billions of workers (and the billions of sub-categories among them) and tens of millions of owners/managers to a handful of world leaders. There’s a good chance that at one level or another people will make choices and participate in schemes that are far less reasonable than Thiel’s arguments. They may not make that much sense for the people doing them or for outside observers but that’s what a lot of history is.Another downside to this argument is timing – as others have brought up, even if you’re right in the end, how long that takes is quite often more important. Having just read Fareed Zakaria’s book, I believe one of the big lessons there is that even if things are changing it can take 50 years in the best case – almost more than an investing lifetime – to accomplish that change. We may think things are accelerating now but the same would be true 1000 or 2000 or 3000 years ago and on many occasions since then progress has stagnated for centuries (at least for some). Much like when I first started out in business, pricing every project as if I would execute it prefectly and planning growth as though I could hire with virtually no training, this kind of thinking can easily bypass the reality and construct a science-fiction timeline. It’s true that change can sometimes come faster than we expect (as in 1914) but is that just the rare exception? Or was that just the end of another bubble? In the end it may be true that all bubble thinking is just a case of being too early – but who’s to say if it will take another 5000 years before someone is finally on time with the end of the world as we know it?Despite all those who say that China will take over the world economy in 5 years or the 2008 Olympics were a major turning point in China’s image (to pick on one of the investing themes related to this), the true development – if it does come true – may be more like the US post-war economy that went back and forth for decades until the bull market of the 80s-2000s. Whether China repeats that pattern – or follows Japan’s path of growing modernity from the 50s to the 80s that ended in markets overshooting by far and a painful return to reality since then, another 50+ year cycle – the increasing pace of technology doesn’t remove the fact that people are at the center of this and they take generations to change. This isn’t “long waves”, just the reality of interactions between people and collective groups. Because of this it’s entirely possible that with either the utopian or apocalyptic outcomes we could have 20-30 years between now and then that are the reverse of the long-term trend.We also need to consider degrees of apocalypse – a re-arrangement of the world order that makes modern financial instruments and strategies like the yen carry trade as impractical as they were 1000 years ago would be an apocalypse for Thiel but many others would carry on with their new lives (see the research pointing out that people who are crippled in an accident often adjust and aren’t unhappy in the long term), Maybe half of us would become farmers, but if that’s what we need to do to survive will we see it as any worse than building better instant messaging channels? I’m reading Life Inc now and can’t tell yet how much may be exaggerated but it points out that a return to the “dark ages” might not be an apocalypse for everyone.Once in a while I do think through what all my investing and business planning would result in if there were a survivable apocalypse – the easy answers like stocking up on gold don’t hold up well, although there is a stronger argument for storing food that can actually be of use (I’m just not that negative yet). Just like someone who invested in the wrong tech companies in 2000 all we could do is let go of the past and apply what we learned. Skills like leadership, building organizations, and making decisions can be developed in any conditions and hold their value a lot better than financial assets. Like millions before us we would learn to live in a world we never imagined because there would be no other choice.I guess the real lesson is that financial markets are never certain and you need to diversify your investments into things that aren’t as easy to measure if you really want to be prepared (this is more of a personal finance lesson than one that applies to hedge fund managers). Literal apocalypse or not, everyone is limited to doing what they can with the uncertain amount of time they have left. Thiel’s best argument may be to ignore the actual end, because we all face it already. The fact that you can’t take it with you doesn’t mean that you necessarily need to fall for every bubble like someone on the edge of bankruptcy who chases after “wealth academy seminars” every weekend and buys their way in on credit cards. As Thiel points out, in both cases you can’t actually buy the real object of value.
which zakaria book did you just finish?i enjoy reading his books
It was The Post-American World – interesting perspective that’s applicable to this, but I don’t keep up with his other writing.
I believe the most valuable asset anyone can build in their lifetime isn’t better instant messengers, gold, or even stock piled food. It’s a strongly connected human network. A collection of folks who share our beliefs, work ethics, and passion for living.Having a group you can trust and rely on is powerful in the face of all apocalypses but the most severe. In the case that you’re the last man or woman on Earth, you can take comfort in the meaningful moments you shared with others before our time was up.
Memories can be a very valuable asset – but to qualify this and my original comment I’m just speaking as a small owner-operator. Thiel’s arguments may have more value to those who manage large funds (although others here have brought up some great counterpoints on that side too) unless they want to become “relationship investment managers” 🙂
Got it. Appreciated your well thought comment. Hope to see you around here more often.
Anyone read Gregg Easterbrook’s Sonic Boom? Seems like the anti-Thiel – more stressful world, rockier years, but unabated progress and wealth, per the very long trend (not just the recent period Thiel calls an aberration.)http://www.amazon.com/Sonic…
not yet. sounds like i should add it to my kindle library
what a great/thoughtful post from Peter Thiel. While he reads to have quite a smarter brain than mine, I find his comparitive points between economics and religion to be off base. Economics is based on irational thinking. Religion is based on faith. If this was a true comparison, then Thiel should point out anything is possible (not just what is made by man). Perhaps also quote Mathew 6:24:”No one can serve two masters. Either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve both God and Money.”
great quote
“There are no good investments in a twenty-first century where globalization fails.”What about local investment? Maybe the returns won’t be that huge, but it will be tangible.For a realistic look at what post-globalization might look like (and a rousing tale), check out Paolo Bacigalupi’s “Wind Up Girl”. It’s pretty grim, but there are still (smaller) opportunities.
Oh, I would add that post-globalisation opportunities will look a lot like pre-globalization opportunities! 🙂
Actually, I have to strongly disagree with a key point made by Thiel.I respect his work and accomplishments, but when he states: “Peter argues that betting on the apocalypse makes no sense so rational investors don’t do it.”I am not totally inclined to believe him.After reading the Black Swan by Taleb – i can see that people do actually buy the out of the money options so far out – just in case it does happen.There are investors that will not make any money while things are going as planned, but as soon as there’s a financial crisis, or a bond meltdown, is when they profit most.Granted, it’s not an apocalypse, but still, they are out there.
Fred,Thanks very much for alerting me to this article. Peter Thiel’s “Optimistic Thought Experiment” is a heady piece and an enjoyable read, but unfortunately I did not find it to be particularly useful for investment analysis. To argue against his main premise, however, is akin to arguing against solipsism. Although we have endured dark ages and depressions in the past and will endure them again to varying degrees, the long progresssion of mankind has been toward increasing technological prowess and globalization. We have the ability to blow ourselves up as never before, but in every age, the cynics and critics have been telling us that we are going to hell in a handbasket. Rome fell and our age may too pass, but even on those types of time scales, the phoenix of society has always risen again.Nevertheless, I simply cannot buy into his asset valuation premise. For example, there is no way that investors would today pay anywhere near approaching 2X the value of a wager on black to be realized at some indeterminate time in the future as long as the casino and society is still standing. Although it is beyond the scope of this comment to place a precise valuation on an asset with the return characteristics that Thiel describes, I believe that investors might view such an asset priced akin to a very long term option contract with the time decay element predicated on the collective assessment of investors as to when the option would expire. That would prove an interesting practical experiment! I wonder what the answer would be if there were such a market?I don’t think I would want to entrust pension money to someone who prices assets as described in the article. I think commentators DeMott and Druce fairly well nailed it on the head in paraphrasing Keynes in response to this piece. Thiel’s argument for globalization and its impact is certainly correct in the long run, but we are not going to be around to appreciate it absent some tremendous technological advances in the short run….
There’s a curious underlying notion here that “globalization” is some unalloyed good. Obviously transnational corporations and VC investors in various globalizing start-ups believe it is. But if you go to the poor world, people don’t always enjoy the intrusion on their culture and way of life and they often get screwed by the kleptocratic and corrupt regimes that benefit from globalization deals. This is so visible in Central Asia, for example. So you have to realize globalization is as much a conflict-generator as it is a conflict-resolver. That’s why people like Mary Robinson, the High Commissioner for Human Rights started movements for “ethical globalization”.
First man harnessed animals — horses — to allow himself to travel greater distances than his two feet could take him. Then man harnessed the wind to travel great distances at sea, the world literally becoming global as adventurers used wind power to expand their presence on the globe. To travel out of sight of land.The speed of globalization was accelerated by the internal cumbustion engine driving cars, ships and planes again driving man to see and learn more — physically.Now the Internet is accelerating globalization by driving information, digital media and dialogue allowing man to see and learn even more — physically and intellectually.In the end man’s travels allow him to go somewhere and bring the best “stuff” home to use for his own community’s benefit.Globalization is simply expanding the size of your own neighborhood.Not everything that has made its way to your neighborhood is good — though clearly most things are. One of the things that has come home with the adventurer is a bit of attendant evil.As the world gets smaller, far away goods and evils can find their way to your home.The future holds more of the same but it is evolutionary rather than revolutionary.
In the early 1980s, I sat w/ very sophisticated foreign investors who were moving huge amounts of money from Europe to the US because they feared a Russian invasion of Germany.I remember leaving that meeting and chatting w/ my colleagues and saying — “have you ever thought about the prospect of war — tanks coming across the border — pertinent to any investment we have ever contemplated?”The answer was — of course not.As it turned out these foreign investors were of the WWII generation and they and their families had lived throught the Blitz in WWII and were of the age to have fought against the Germans. They possessed a unique frame of reference.What was most interesting was to contemplate the basis upon which they had made the original European investments — in the aftermath of WWII, they had almost literally stolen the properties given the chaotic aftermath of WWII.The prospect of apocalytic events was not invented last year.
Coming from two grandfathers who built huge businesses out of nothing and then lost absolutely everything with WWII and Communists afterward I can assure you that, for some people, apocalyptic events are still on our minds. And while we hope they won’t happen again, you never know. Lots of people living there never thought what happened would happen.I would argue, JLM, that their perspective appears “unique” to us as Americans, but over there was actually extremely typical and almost trite.Go to that part of the world and with intelligent inquiry and not a small amount of hard alcohol tap into a flood of stories, survivors’ guilt and very complicated, primal emotions. Americans are incredible people — I am one — but they are generally naive to these kinds of stories which seem fantasmagorical while in other geographies are routine and very personal. They’re not something you read in a book, they’re actual people you know (or knew) intimately.My own mother was not supposed to survive the war because as a toddler with osteomilitis in Prague they could not get antibiotics. Her mother should have been sent to Auschwitz but her (non-Jewish) husband, my grandfather, gave up his business assets to change her identity and her life (and a secret that only came to light, literally, this summer). He worked as a clerk for a long time after, in the business he had founded himself. Other grandfather, similar but different stories, changed identities, massive lost assets. My dad was a prisoner of war of the Russians, was 16 and in a fateful moment lied about his identity so he wouldn’t be sent to the Uranium mines. I have a very dear friend whose big sister was raised by their grandparents because their own parents were politically imprisoned for about 10 years (they joke she was the “pre-prison child” and he was the “post-prison child”).For example I remember visiting Auschwitz and seeing the room full of suitcases with victims’ names and addresses written on them. I got sick because the addresses were totally familiar — in the neighborhood where I was living at the time. This stuff is very close to home.They may be dying off but they’re still there, and no doubt they color perspectives on investment and to some degree will continue to.