Notes from Capital Camp

A week ago, I was in lovely Columbia, MO for my 2nd Capital Camp. If you’re unfamiliar with it, it’s a 3 day long celebration of capitalism, gathering together investors and entrepreneurs from all over. It was a remarkable experience, filled with smart, curious, and generous people from all walks of business.

Walking away, I had many ideas in my head swirling, and I’m grateful for the long weekend to spend some time ruminating and laying things out.

Busted, but booming

One of the ideas that resonated with me was: look for things that are “busted, but booming.” Things where customers are banging down the door, despite the experience being janky or compromised. It could be a product that’s held together by duct tape, but is still so good, it is flying off of the shelf. Your team could be making all of the wrong decisions, but somehow it does not matter, because the core product is so useful to customers.

I’ve been lucky enough to see it up close a few times in my work and in investing and know what it feels like. I also know that there are several order of magnitude more examples of things that are just plain busted.

Busted, but booming things are by their nature more durable and defensible, and therefore should be sought out.

Fractal truths

I also really liked the idea that there are certain truths that are "fractal” in nature.

In scientific terms, a fractal is a self-repeating pattern or structure that appears at different scales or levels of detail. They exist in the physical universe, but it turns out that they can also be rules of life and business.

The power law distribution of returns is the most obvious example of this.

Zoomed all of the way out, it's true at the market index level. The top few companies of the S&P500 drive most of the returns. But if you dial in to smaller sectors, different investing strategies, or even individual companies, that distribution of returns exists as well. A minority of stocks drive all of the return for an index, a minority of customers drive all of your revenue, a minority of employees drive all of your output.

An idea which has applicability from the macro down to the micro (nano? why not!) must have some important details to pay attention to.

Power Law

The power law was another idea circulating at Capital Camp. While it's been well studied to death in recent years, there were still some new takeaways for me.

Most importantly, it is incredibly hard to predict where the outliers may be before the fact. Take for example Nvidia, today’s mega outlier darling. There were so many times that they were considered a crap business in the early days. They were seen as a small derivative of the PC gaming market, which itself is not big. It took decades for the things that mattered and turned it into a mega outlier to take effect. If you bought Nvidia earlier enough to enjoy super outlier returns, you probably would have sold it long ago (although the beauty of public investing means that you could also have bought in later as well).

Holding on to a power law can be difficult - it requires patience and a willingness to weather ups and downs. Luck (see below) plays a huge role.

Luck

Uncomfortably, luck plays a big role on whether or not you have any exposure to anything that matters. Capital Camp was a place that, interestingly, sorted for people who enjoyed the fruits of being lucky on where they were at on the power law distribution of business success.

But could you ever repeat that performance? It’s vanishingly rare for lightning to strike twice in nature and in business. But are there small, smart things which you can do to select for luck and to increase your chances for luck? I do think so. Where do I play? Do I have sufficient exposure? Can I survive long enough to enjoy the fruits of my labor (and luck)?

But on the other hand, you could also buy the index. While it dilutes the returns of the outliers, that’s less punishing than missing out all together. And, once you realize that there is a universal speed limit to long term returns (see below) - it might not be a bad idea to just... relax.

The speed of light for investing

And finally, the idea that rounds out all of the above is on the “universal speed of light” for investing.

The speed of light is the maximum speed at which matter and information can travel in a vacuum. It is a universal speed limit, above which nothing can go faster. In investing and in business, there also appears to be a “speed limit” on how fast things can grow and compound. The very best can only somewhere in the neighborhood of 25%, consistently over decades. You may have grand slam years here and there, but in the long run, the passage of time will drag you to 25%. And that’s the upper bound, the median is probably far lower, in the lower teens.

At Capital Camp, I was fortunate to talk to people across a wild diversity of investing strategies: private equity, public equity, venture capital, SMBs. People were investing in companies doing things from AI to laundromats. But somehow, across all of those different approaches and even with your best efforts and luck, it resolves to a 25% IRR.

I know this can be deeply disturbing for some people, especially if your livelihood is dependent on an absolute return. But for me, there is something strangely comforting about this. You can’t run from it, so why hide? If I know that there is an upper bound, then isn’t it better to embrace it, deeply understand what is “enough” and move on?

Conclusion

Holding all of these ideas together is an interesting exercise. I’m continually trying to grow as an operator and investor. Where does this lead me?

I do think this has big implications for where I spend my time. Do I have enough exposure to luck? Do I have enough exposure to outlier returns on a power law distribution? Am I calibrating those exposures from the macro to the micro? Am I putting the right amount of effort and stress in order to grow, in light of the limits of what’s possible?