Week 40, 2022—Issue #224
Complexity Investing: Resilience, Optionality, and Barbell Distributions
Each week I share three ideas to help you build better organizations. This week, those ideas are all about building a complexity-conscious investment portfolio. Originally published in the WorkMatters newsletters on Oct 7, 2022.
This is the third and final part of my exploration of NZS Capital’s whitepaper on complexity investing. Parts one and two focused on the changing nature of risk and competition, respectively. It’s now time to put those insights to use!
1. Resilience
An organization’s ability to successfully operate within paradigms.
There are two fundamental traits that complexity investors should look for when considering new investments. The first one is Resilience, defined here as a company’s ability to withstand asymmetric shocks. As explained in part one on risk, we now live in a world where extreme events are so common they should be considered the norm. To this end, investors might look for things like long-term thinking, employee engagement, decentralization, and non-zero sumness as tell-tale signs of organizations that can maintain long-duration S-curves throughout the prevailing paradigm.
2. Optimality
An organization’s ability to successfully transition between paradigms.
The second trait that complexity investors should look for is Optionality, defined here as the company’s ability to adapt to new paradigms. As explained in part two on competition, we now live in a world where companies must disrupt themselves or be disrupted. To this end, investors might look for things like experimentation, innovation, network effects, market size, and (again) non-zero sumness as tell-tale signs of organizations that can stack new S-curves atop old ones and, in so doing, take up leading positions in new paradigms of technology and/or demand.
3. Barbell Distributions
A distribution that allows a portfolio to generate returns within and between paradigms.
A well-structured investment portfolio is one that balances Resilience and Optionality in a barbell-like distribution. On one side, a small number of concentrated positions in companies that combine Resilience and Optionality. On the other, a larger number of high-risk investments are optimized for Optionality only. Both halves should be roughly equal and no room should be left in the middle for average performers. This is an investment strategy designed for exceptional long-term results. By balancing Resilience and Optionality, the investor can hedge his or her bets in terms of what the future holds.
This should all sound familiar to those of us interested in new and better ways of working. Complexity investing is basically the practice of investing in the type of companies that we want to build!
Writes the authors:
Our favorite investments occurs when a company embodies Resiliance AND Optionality, BUT the market values the Optionality deep out of money, while questioning the company’s Resiliance. This is where the analyst can most fully express their skill: where investment returns are at a their most nonlinear.
For investors, the NZS whitepaper is a playbook for “exceptional long-term results”. For founders and org designers, it’s a template for building great organizations that will endure.
That’s all for this week.
Until next time: Make it matter.
How can we build better organizations? That’s the question I’ve been trying to answer for the past 10 years. Each week, I share some of what I’ve learned in a weekly newsletter called WorkMatters. Subscription is free. Back-issues are published to Medium after three months.
