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Invest where equilibrium breaks
Asking why long enough eventually reaches the first principles of something. That is the bedrock for organizing the rest of one's thinking. Operating in some derivative of first principles makes sense and stays stable for a period, but eventually something shifts.
In a temporary equilibrium, everyone operates in the same state and tries to eke out a bit more than the next person. The interesting investing moments aren't there.
They come in finding things that are out of equilibrium, where a fundamental shift is happening. Those create fundamentally big return opportunities.
How do crowded strategies lose their edge?
Economists Sanford Grossman and Joseph Stiglitz argued in 1980 that prices cannot be perfectly efficient, because then no one would profit from gathering information. In practice, investors compete until the edge from any widely known strategy narrows to the cost of exploiting it. A 2016 paper by David McLean and Jeffrey Pontiff, which studied published market anomalies, found that their returns fell by more than half after academic publication.
Why did the shipping container reset an industry?
Malcolm McLean's ship Ideal X carried 58 containers from Newark to Houston in April 1956. Economist Marc Levinson reports in his book The Box that loading loose cargo cost about 5.86 dollars per ton at the time, compared with about 16 cents per ton for containerized cargo. New York's Manhattan and Brooklyn piers lost most of their cargo to the container terminals at Port Newark and Elizabeth, New Jersey.
Why do stable industries eventually get overturned?
Economist Joseph Schumpeter called the process creative destruction in his 1942 book Capitalism, Socialism and Democracy. New technologies and methods let entrants undercut established firms, which reshuffles which firms and jobs survive. Schumpeter argued that this churn, rather than stable competition on price, drives long-run growth.
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