While the conventional approach does sometimes work, it’s not a dependable strategy. It’s not what I’d tell my kids to do. A 2012 study from the Kauffman Foundation shows that “The [venture capital] industry hasn’t returned the cash invested since 1997.” And if you take out a few companies like Uber, Amazon, Google, and Facebook, the returns are abysmal. In other words, the odds of you investing in, starting, or being an early employee at a billion-dollar company are like the odds of winning a lottery. Just 200 out of all the startups out there are valued at $1 billion or more right now! You have a tenfold better chance of being hit by lightning.
Why doesn’t focusing on trends work as well as you might think?
Why Future Prediction Doesn’t Work
“You can’t predict, you can prepare.” — Howard Marks
Self-made billionaire, entrepreneur, and investor Howard Marks runs the investment firm Oaktree Capital and has $100 billion under management, making it one of the largest hedge funds in the world. Each year, Marks writes a widely-circulated letter to shareholders. One of these memos gives a masterclass in how investing in future trends isn’t always smart:
- The seemingly sure bets will have the most competition, which will make them less profitable. Marks writes: “Most great investments begin in discomfort. The things most people feel good about — investments where the underlying premise is widely accepted, the recent performance has been positive and the outlook is rosy — are unlikely to be available at bargain prices. Rather, bargains are usually found among things that are controversial, that people are pessimistic about, and that have been performing badly of late.”
- Luck and randomness are big, unavoidable factors. ”It’s far from certain that even ‘right’ decisions will be successful, since every decision requires assumptions about what the future will look like, and even reasonable assumptions can be thwarted by the world’s randomness,” says Marks. There are certain random events that are so influential that they completely change the game for everyone. Nassim Taleb calls these events “Black Swans.” (A great example is the 2008 financial crisis.)
- It’s much harder than you think to be consistently right. “It’s hard to consistently make decisions that correctly factor in all of the relevant facts and considerations (i.e., it’s hard to be right),” Marks notes with humility, a key trait of many of the world’s top-performing investors. Self-made billionaire Ray Dalio, the founder of the largest hedge fund in the world, drives home how hard investing is in the first sentence of his new book: “Before I begin telling you what I think, I want to establish that I’m a ‘dumb shit’ who doesn’t know much relative to what I need to know.”
- Even if you get the prediction right, you are likely to get the timing wrong. Marks says: “Even well-founded decisions that eventually turn out to be right are unlikely to do so promptly. This is because not only are future events uncertain, their timing is particularly variable.” And the problem with this is that having the wrong timing is functionally equivalent to making the wrong decision.
The field of artificial intelligence is a case in point for Marks’ argument. While artificial intelligence sounds like a sure bet now, it wasn’t always that way. From 1974–1980 and 1987–1993, the field went through “AI winters.” In these periods, AI reeled from being overhyped and lost credibility and funding. Talented young programmers left in droves. Many of the most successful people in the field now are those who survived these winters and kept going even when it didn’t seem smart to do so. Now, someone entering the AI field has to compete against droves of the smartest people in the world.
My point is that picking which fields will be hot in 20 years is not as simple as it sounds. Predicting third-, fourth-, and fifth-order consequences is almost impossible. Who would’ve predicted in the early 1900s that the invention of the automobile would ultimately lead to the creation of suburban sprawl, the hotel industry (because of the Interstate highway system), and the insurance industry.
Notice how Warren Buffett, the best investor in history, doesn’t invest in the hottest tech startups of the day. Instead, he has made his career by identifying businesses whose rock-solid fundamentals don’t change, or which change very slowly. As a result, Buffett is able to invest in companies for the long-term. He’s held stock in companies like Geico, Coca-Cola, and American Express for decades.
So if predicting the future isn’t the answer, what can you do instead?
Introducing The Trunk Technique
At the heart of the methods used by Buffett, Dalio, Marks, Taleb, and Bezos is a common theme: focus on areas that are virtually guaranteed to be valuable in the future no matter what happens.
Bezos talks about how focusing on stable customer preferences is a powerful foundation to build a company around. I’d take that a step further: focusing on stable knowledge is a powerful approach to build a life around. I call this skill the Trunk Technique…
Some forms of knowledge arise quickly and then just as quickly become obsolete. Other forms stay relevant for a very long time.
So what’s the difference between knowledge that expires relatively quickly versus knowledge with staying power?
Broadly speaking, “transitional” or quickly-expiring knowledge is the kind that helps us navigate a specific environment (such as the specialized field of liver medicine). Whereas “pillar” or longer-lasting knowledge is based on fundamental principles and mental models that can be applied in many contexts including unforeseen future ones.
Let me explain. As I share in How Elon Musk Learns Faster and Better Than Everyone Else, when most people think about knowledge, they think about it horizontally, viewing knowledge across different subjects. The problem with this is that when you look at things in one dimension, you miss important connections:
What many miss is that knowledge is vertical as well. Great thinkers and doers, I have noticed, view reality this way. There are deeper principles and mental models that connect the various subjects that we study…