TIP773: How Systems and Simple Math Shape Better Investing w/ Kyle Grieve
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this thought-provoking episode, Kyle Grieve explores powerful mental models from systems thinking and mathematics that can transform your approach to investing and life. He breaks down concepts like feedback loops, kill criteria, scale, compounding, randomness, and regression to the mean, showing how they shape real-world outcomes. (02:16)
- Main theme: Applying systems thinking and mathematical concepts to improve decision-making and long-term investing success
Speakers
Kyle Grieve
Kyle Grieve is the host of The Investors Podcast and a dedicated student of investing who focuses on applying mental models to improve decision-making. He specializes in long-term value investing with particular expertise in micro-cap businesses and inflection point investing, maintaining a concentrated portfolio approach with detailed tracking of his investment performance and strategies.
Key Takeaways
Master Feedback Loops for Better Investment Decisions
Understanding feedback loops is crucial for investing success. Grieve explains how reinforcing feedback loops create exponential growth while balancing loops maintain equilibrium. (03:23) The key insight is recognizing which type of loop you're participating in - for example, allowing interest to compound in a savings account creates a reinforcing loop that builds wealth over time. In investing, this means letting winners run and not interrupting the compounding process unnecessarily through premature selling or withdrawals.
Implement Kill Criteria to Combat Emotional Decision-Making
Kill criteria are pre-commitment contracts that help you make difficult decisions when noise might cloud your judgment. (10:20) As Annie Duke explains, the best kill criteria combine both a state (measurable condition) and a date. Grieve demonstrates this with his Thermal Energy International investment, where he set specific criteria for paid development agreements, order intake, and backlog levels. When the business failed to meet these benchmarks, he sold despite short-term sentiment, protecting himself from opportunity cost.
Use the Cone of Uncertainty for Position Sizing
The cone of uncertainty concept from Sleep and Zakaria helps determine conviction levels and appropriate position sizing. (14:08) Companies with narrower cones of uncertainty (more predictable futures) should receive larger allocations, while those with wider cones deserve smaller positions despite potentially higher returns. Grieve applies this by making his highest-certainty positions his largest holdings, even if they might deliver lower returns than riskier micro-cap investments.
Recognize How Scale Changes Business Dynamics
Scale fundamentally alters how businesses operate, creating both opportunities and risks that didn't exist at smaller sizes. (17:33) While economies of scale can improve margins through automation and efficiency, scale also introduces complexity that can make systems more fragile. Grieve emphasizes examining how key metrics like R&D and sales expenses change as a percentage of revenue as companies grow - shrinking percentages indicate true economies of scale, while growing percentages suggest diseconomies.
Embrace Randomness and Power Laws in Portfolio Construction
Understanding that a small number of investments will drive the majority of returns is crucial for portfolio success. (43:00) Grieve's analysis shows that just four of his 19 positions generated 53% of his year-to-date returns, demonstrating power law distributions in action. This insight argues against regular rebalancing and for letting winners run, as the convex nature of compounding means a few large winners can easily compensate for multiple smaller losses.
Statistics & Facts
- Grieve's top four positions year-to-date made up 53% of his portfolio gains, while his top five positions contributed 57% of his returns since inception, demonstrating power law distributions in real portfolios. (45:58)
- The magnificent seven stocks achieved an average 27% cash from operations CAGR over ten years, which at a fixed multiple would result in an 11x value increase over that period. (33:07)
- Research shows that credit card interest compounds daily rather than annually - a $5,000 balance at 20% annual rate becomes $6,100 after one year (not $6,000) due to daily compounding effects, costing borrowers an extra $100 from compounding alone. (40:02)
