17. Inflection Lag

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    Happy Tuesday!

    Over the past week I've been following the story on the Russia Ukraine border somewhat closely. I won't get into the messy politics here but it has been fascinating to watch the debate between American isolationists and interventionists.

    Isolationists generally argue for less action, less involvement, and see the conflict as less significant to American interests. On the other hand, interventionists argue that we are at an inflection point. They believe Russia's aggression signals a deeper trend of perceived American decline and we must act to combat this perception.

    Our political leadership has to decide whether or not the events on the Russian Ukrainian border are significant enough to warrant action and whether or not what's happening now represents a real inflection point.

    My area of expertise is not politics or international relations but I am fascinated by decision making more broadly and couldn't help but see parallels from this scenario to the kinds of decisions made by investors and entrepreneurs.

    Opportunities in markets arise following an inflection. A new technology is invented, consumer preferences shift, a new law is passed, and suddenly the world has changed. The status quo no longer applies.

    Following the inflection point there is always a time lag between when the change occurs and when the rest of the world perceives, understands, and accepts that change.

    This is the inflection lag.

    Inflections vs Fads

    Politicians who can perceive shifts in the culture or recognize real changes in the international landscape can act quickly and decisively to further their goals. Similarly, investors and entrepreneurs become successful when they can capitalize on the lag following an inflection.

    Often it's not obvious that an inflection point has been passed. Why did European leaders try to appease Hitler in the 1930s when he entered the Rhineland and then annexed Austria? Why didn't you buy Bitcoin in 2014?

    Other times there's so much hype around a change its hard to know if a true inflection has occurred or if it's just too early. Think the rise of the internet in the 90s and applied artificial intelligence in the 2010s.

    Other times no inflection point is coming at all. A massive shift in consumer preference creates a fad which disappears just as quickly as it started. It wasn't a real change at all. Pokemon Go? Clubhouse? Google Glass?

    Flailing vs Adapting

    In his book Good to Great, Jim Collins writes about how all great companies were able to do distinct and sometimes seemingly contradictory things:

    • Confront the brutal facts
    • Establish a cultural of discipline

    On the one hand it's important to confront the reality that an inflection has occurred. The market no longer wants whatever you're doing and to survive you must pivot or invest in a new opportunity. You must acknowledge that previous investments, expertise, or knowledge is no longer useful.

    On the other hand it's important to establish a culture of discipline and stay focused on being excellent at what you're doing. Avoid pursuing too many new opportunities however promising they may seem. Build on previous investments and continue to trust the process despite an uncertain future.

    Opportunity in the Lag

    These types of problems are hard but there is one thing I have noticed which can be useful when making decisions around points of inflection in the face of uncertainty.

    If you're trying to understand whether or not a perceived change or hype cycle is a real point of inflection it's useful to ask yourself the following questions:

    • If this were a true inflection, does it make previous work I've done, knowledge I have, or investments I've made less valuable?
    • If this were a true inflection, would it make someone else's work, knowledge, or investments less valuable?

    If the answer is yes to either then you can bet there will be groups of people who will resist understanding and accepting that change.

    This emotional resistance on a grand scale stretches the inflection lag. This is where the opportunity lies.

    Cheers,
    Nick

    © Nick Nathan, 2022