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1/8 Thread: The Ant Model and capital allocation
Ants are not only much older than dinosaurs but also hundred million years older than humans.
~14,000 ant species have been identified which live in colonies that have one or more reproductive females while the rest are sterile.
Ants are not only much older than dinosaurs but also hundred million years older than humans.
~14,000 ant species have been identified which live in colonies that have one or more reproductive females while the rest are sterile.
2/8 Since many of these ants are sterile aka workers, most ants do not make more ants. It is the colonies that reproduce more colonies. In an ecological sense, colony is the individual organism.
However, no colony has any central control. Nobody tells anybody what to do.
However, no colony has any central control. Nobody tells anybody what to do.
3/8 So how do they get anything done?
They accomplish their tasks based on how frequently ants interact with each other and how the colony itself interacts with its environment. It appears somewhat random.
They accomplish their tasks based on how frequently ants interact with each other and how the colony itself interacts with its environment. It appears somewhat random.
4/8 While ants are widely known as industrious, half the ants in a colony actually do nothing. These lazy ants act as reserves or buffers.
A defining characteristic that ant colonies have is they do NOT optimize. From the outside, it may seem the system is riddled with waste.
A defining characteristic that ant colonies have is they do NOT optimize. From the outside, it may seem the system is riddled with waste.
5/8 While optimization can seem tempting during good times, in a complex system bad times are inherently unpredictable.
Only the paranoids survive and behaviors that may seem inefficient can prove to be resilient during turbulent times.
Only the paranoids survive and behaviors that may seem inefficient can prove to be resilient during turbulent times.
6/8 Looking at Big tech balance sheets, it’s amazing how much cash they have and how “sub-optimal” their capital allocation may seem in a ZIRP world.
And yet, if anything this Covid-19 proved, optimizing may not be the best solution in the long run.
And yet, if anything this Covid-19 proved, optimizing may not be the best solution in the long run.
7/8 Given the "guaranteed" rate of failure in the "long run", for founder led companies it makes a lot of sense to reduce the terminal value risk as much as possible.
Not going for "optimal" capital allocation policies can make a company more resilient.
Not going for "optimal" capital allocation policies can make a company more resilient.
8/8 It also allows these resilient companies to capitalize on more optimized AND more fragile companies during extreme events.
Of course, central bank/govt bailouts have shifted things to more "central" control which is the opposite of what ants would do.
Of course, central bank/govt bailouts have shifted things to more "central" control which is the opposite of what ants would do.
