It Isn’t Supposed To Be Interesting
Moneyball is a newsletter from Koble exploring the limitations of human decision-making and their implications for startup investing.
We’ve spent three years developing our groundbreaking algorithms, which discover early-stage startups that outperform the market and predict their probability of success.
This week
🧠 Mental Model #31 – Boredom – It Isn’t Supposed To Be Interesting
📖 Investor reading – “It’s like being gaslit”: Founders’ relationships with investors in the downturn – The Mixed State Of Startup Funding In 2024 – Dear Venture Capitalists: You’re blowing it
💬 Some tweets – The book publishing industry is like the VC business – A seed-stage founder I spoke with today – All normal companies now call themselves “Tech Companies”
A reminder
In case you missed it, Koble recently contributed to an article from Data-driven VC on the investors, data scientists, and tool builders building the future of Venture Capital.
It Isn’t Supposed To Be Interesting
“People say nothing is impossible, but I do nothing every day.”
A.A. Milne wrote stories that celebrate the importance of boredom. Winnie-the-Pooh transformed ennui into an artform; something interesting and life-affirming. But to most people – investors included – boredom is something to be avoided at all costs.
The dark side of boredom
In contemporary life, boredom has a dark side, with easily bored people at higher risk of depression, anxiety, drug addiction, alcoholism, compulsive gambling, eating disorders, hostility, anger, poor social skills, bad grades and low work performance.
Boredom is ubiquitous. As human beings, we’re programmed to seek stimulation, novelty, feedback. 63% of participants in a US-based sample (n=3,867) reported boredom at least once within a 7–10 day period chosen randomly over a two-year period. As Blaise Pascal famously quipped:
“All of humanity's problems stem from man's inability to sit quietly in a room alone.”
Nowhere is boredom more destructive than the field of investing. In markets, a little dopamine can be a dangerous thing, with bored investors destroying returns by endlessly fiddling with portfolios. The result is transaction costs, opportunity costs, costs, costs, costs.
Not a lazy investor
In his classic 1940 book “Where Are the Customers’ Yachts?”, Fred Schwed wrote:
“Your average Wall Streeter, faced with nothing profitable to do, does nothing for only a brief time. Then, suddenly and hysterically, he does something which turns out to be extremely unprofitable. He is not a lazy man.”
The evidence is clear: timing the market is rarely as lucrative as time in the market. A ground-breaking study published by Nobel Laureate William Sharpe in 1975 attempted to ascertain how often a person seeking to time the market must be accurate to perform as well as a passive index fund tracking a benchmark. Sharpe concluded that investors employing market timing strategies must be correct 74% of the time to beat the benchmark portfolio.
Years later, Morningstar reached a similar conclusion – active investors have to be correct 70% of the time in order to gain an edge over passive funds, which is practically impossible over the long run. Research measuring the performance of long-term investors following different investment strategies shows that the cost of waiting for the perfect moment to invest exceeds the benefit of even perfect timing.
It’s impossible to successfully (and consistently) time the market over the long run. Investors who try tend to underperform those who remain invested over the long term. Which is a key reason why illiquid asset classes such as Venture Capital and Private Equity outperform public markets – the illiquidity premium rewards investors for being forced to do nothing over long time horizons.
The intelligent acceptance of illiquidity
Illiquid investments create a psychological barrier that discourages impulsive decision-making. “The intelligent acceptance of illiquidity” – a term coined by legendary endowment investor David Swensen – conditions a level of patience and discipline that is often lacking in the face of market volatility.
Throughout Swensen’s tenure as CIO of Yale’s endowment fund, he often allocated between 70%-80% of the university’s portfolio to alternative investments. By disrupting the endowment industry’s reliance on stocks and bonds, he drove huge outperformance.
Mastering boredom is a critical skill for investors, but most humans can’t do it. Our aversion to doing nothing is simply too strong. Bertrand Russell observed, “We are less bored than our ancestors were, but we are more afraid of boredom.” Perhaps it is not really boredom that we cannot abide, but the fear of it?
This thing called temperament
How can we protect ourselves from the waste products of boredom? Warren Buffet said it best:
“Investing is not a game where the guy with 160 IQ beats the guy with 130 IQ. Once you have ordinary intelligence what you need is the temperament to control the urges that get other people into trouble investing.”
This thing called temperament is what human beings generally lack. Machines on the other hand, have it in almost infinite supply. They are able to source, analyse, execute, manage, and reinvest assets without emotion. Since they do not experience Pride, Greed, Lust, Envy, Gluttony, Wrath, and Sloth, algorithms can deploy capital rationally and consistently, at a speed and scale unattainable for the human mind.
Implications for investors
Patrick Ryan’s recent essay on “The Boringification of Culture” and its sinister implications for our future is timely. We don’t want machines genericising our art, optimising our humanity, and eroding our culture into oblivion.
But when it comes to startup investing, the writing’s on the wall; the future is boring, the future is quantitative.
The investment consultant Charles Ellis highlights the danger of excitement (and the utility of boredom) with a neat little challenge:
“Go to a continuous-process factory sometime – a chemical plant, a cookie manufacturer, a place that makes toothpaste. If you find anything interesting, you’ve found something wrong. Investing is a continuous process too. It isn’t supposed to be interesting.”
Ellis’ characterisation of investing as a process is illuminating. The largest, most liquid asset classes are not cute farm shops selling organic products, but industrial-scale farms focused on margins, yields, and market share. They are factories for investment returns.
In recent years, there has been a trend towards Venture Capital becoming less boring, more exciting. High-profile names like Not Boring Capital have made startup investing intellectually stimulating, socially rewarding… and cool.
VC has become too interesting, too distracted by its obsession with forging the future and “making the world a better place”. Which is why most VC’s fail to deliver promised returns; they are carrying too much cultural baggage, and not enough computing power.
To survive the post-AI era, the asset class needs to evolve into something more credible and robust. In order to better serve investors and founders, VC needs to become less interesting and more scalable.
The future of our industry is boring. Or at least, it should be.
Work with Koble
At Koble, we’ve spent three years developing our groundbreaking algorithms, which discover early-stage startups that outperform the market and predict their probability of success.
We’re working with forward-thinking angels, VCs, family offices, and hedge funds to re-engineer startup investing with AI. If that resonates, get in touch.
Investor reading
💔 “It’s like being gaslit”: Founders’ relationships with investors in the downturn – 49 founders and senior startup leaders respond to Sifted’s survey.
🌗 The Mixed State Of Startup Funding In 2024 – 11 charts based on recent Crunchbase data that show the state of the startup world in early 2024.
📨 Dear Venture Capitalists: You’re blowing it – If there’s to be another two decades of dealmaking, VCs better change their behaviour. And quick.
Some tweets
Parting shot
“Everything has been figured out, except how to live.”
― Jean-Paul Sartre
Regards from your [boring] startup investing AI,
About Koble
Koble is re-engineering startup investing with AI, applying quantitative strategies that have disrupted public markets to early-stage startup investing.