Nick Gogerty: Part 2 of an interview by Bob Morris

GogertyNick is the author of The Nature of Value: How to Invest in the Adaptive Economy (Columbia University Press 2014) and was involved in a technical confidential project with one of the world’s largest global macroeconomic hedge funds. He lectures in Columbia University’s MBA value investing program on innovation, macro-economic portfolio, and scenario risk management. Meanwhile, he is a top 1% performer as a portfolio manager for a long/short hedge fund (+20% v. -60% for S&P 500 2007-2009) and advises large banks on risk management, including the Flash Crash, and was a chief analyst managing commercialization for a science research institute modeled on the MIT Media Lab. His primary fields of inquiry include biotechnology, nanotechnology, artificial intelligence, renewable energy, genetics, quantum computation, and others such as

o Venture capital screening and start-up advisory work

o Founding software startups in social media and crypto currency space

o Expert testimony to the United States Senate on the international risks associated with the $200 billion Y2K technology issue

o Human behavior studies with an undergraduate degree in cultural anthropology from the University of Iowa focused on sustainable economic development in West Africa

He earned an MBA from The Ecole Nationale de Ponts et Chaussees in Paris with a thesis on a quantitative approach for hedge funds and is a designated Chartered Alternative Investment Analyst (CAIA). Nick resides in Greenwich (CT) with his wife and daughter.

Here is an excerpt from my interview of Nick. To read all of Part 2, please click here.

* * *

Morris: When and why did you decide to write The Nature of Value?

Gogerty: I started writing it in 2009 as a way of organizing my thoughts. It was to be a series of blog posts entitled “The Long Game” in regards to long term value investing. The topic grew as I asked “why how does that happen” repeatedly. Three years later the book was done, with a final year for cleaning up graphics and simplification of ideas, language and structure.

Morris: Were there any head-snapping revelations while writing it? Please explain.

Gogerty: A few come to mind:

1. The doblin model for innovation which I was introduced to by Larry Keely. It is one of the only robustly tested methods of digging into innovation, competitive capabilities etc. beyond product I have ever come across. The methodology of ten types of innovation provided the basis for my extension of considering the duration and depth of moat using the cycle lengths of each unique capability and the excess margin that each type of innovation may be delivered by the innovation. These capability sets match nicely with biological capabilities.

2. A second breakthrough was coming up with a “how” or means for innovation propagation, namely the ino. By creating the ino (in no) unit of innovation I had an informational unit analogous to the bit, gene or meme which is non-dimensional, context relevant, and ubiquitous unit for evolution’s economic domain.

3. Another major breakthrough occurred when my friend, Dr. Ed Rietman, introduced me to the work of astrophycisist Eric J. Chaisson. Chaisson’s Phi(m) metric shows evolution to be a process with a form of evolving progression or development working across time scales, physical domains including (cosmological, geological, ecological, economic and potentially post economic). Suddenly evolution provided not just an analogy but a framework for the mechanics. At its heart, the economic domain is a normal symbiogenetic extension from evolution’s ecological domain. The economy just uses different media and localized goals (value vs. life) to adapt, select and amplify information and expressed structures for increasing energy flow capture and increasing energy processing densities.

Morris: To what extent (if any) does the book in final form differ significantly from what you originally envisioned?

Gogerty: The original focus was on an explanation of what makes a company survive and thrive. The final book is a much deeper look at the economy as an evolving system. The addition of the monetary theory piece and how money as a social protocol, informationally supports resource allocation was also a first principle derivative of the work.

After moving beyond companies, the next question was economies and portfolios. Surprisingly after creating the quadrant approach to diversification among value creating/representing processes and monetary information growth I discovered the macro-quadrants mapped directly onto Berkshire’s four types of operating companies, the Harry Brown’s Permanant Porftolio, and one of the world’s largest hedge funds most successful global macro frameworks. This was unforeseen and seemed truly remarkable as the 1st principles approach using evolution, energy and information principles seemed to provide a generalized framework for all modern economies.

Morris: In your opinion, what is the source of all economic value?

People’s experienced perceptions. Economic value links back to people’s individually and in groups attempting optimize Maslow’s hierarchy of needs given their gifts and resources. As of 2014 there are $262 trillion in global wealth and all of it is due to humanity’s collective value perceptions.

Morris: In a society viewed as a garden, what are the defining characteristics of an organization — viewed as an organism — that is “growing”?

Gogerty: If a society or economy is growing, the role of the organization is to try and grow its ROC. This local goal of optimization is thwarted by competition which ends up delivering a super-ordinate goal of a wealthier and better off society. This occurs as economies get more complex and informationally “ino” denser.

Consider the complexity evolved to supply the estimated one billion SKUs on offer in New York city which are delivered ever more efficiently over time. Competition has adapted these incredible value delivering structures and capabilities.

The equivalent in ecology is evolution maximizing biological carrying capacity for a given resource set. This involves increasing biological complexity and density. The Amazon rain forest is an incredible robust energy processor which happens to be incredibly information (genetic) rich substrate network.

Morris: To extend the metaphor a tad, what are the defining characteristics of an organization — viewed as an organism — that is “withering” and “dying”?

Gogerty: Organizations are complex systems that are competing to create value effectively. Most complex systems fail in one of two ways and exhibit one of two characteristic dying processes. The most obvious death is a lightning bolt or something out of the blue, the proverbial asteroid if you will. This is rare.

Far more common deaths are stressors within or outside the competitive cluster leading to functional death. Complex systems under stress that ultimately prove fatal exhibit one of two characteristics.

1. Wild oscillations in behavior as the struggling firm attempts to find a new viable economic structure or form. This might be trying on new business models, capabilities, lots of M&A activity etc. and wild operating margin and balance sheet changes found in the organization and its competitors.

2. The other trait of dying organizations is absolute stasis. A stressor may cause analysis paralysis or reversion to a fixed structure that becomes inviolable while the operating context around it changes. Change will eventually kill those who fail to adapt and learn.

For those interested, the list of longest lived companies (firms founded before 1700) is mostly dominated by brewers, distillers, and small restaurants. These are small capability niches, some of which have been stable for over 500 years.

* * *

To read all of Part 2, please click here.

To read Part 1, please click here.

Nick cordially invites you to check out the resources at these websites:

His Amazon page link

The Nature of Value Amazon link

The Nature of Value website link

Thoughtful Capital Group website link

Eric J. Chaisson link

Nick cordially invites you to check out the resources at these websites:

His Amazon page link

The Nature of Value Amazon link

The Nature of Value website link

Thoughtful Capital Group website link

Eric J. Chaisson link

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s