Thinking in Quantum

Or how to discover truth in investing and other fields

A mental model I like to use when looking for investments is the idea of the Quantum truth.

The search for truth is critical to investing, and most fortunes are made from it. It is no secret that finding contrarian truths is even doubly important.

So what is Quantum truth? In a nutshell, Quantum truth is this: truths often exist in Quantum entangled pairs, whereby discovering one truth can mean you are close to discovering a second truth (and possibly more). Thus whenever I find something to be true, I like to begin toying with that truth to discover if there are any other truths entangled with it.

A common example: the first company in a space has an advantage. Because they are the first business to be operating in a new field/industry/space/line of business - they have the advantage of early credibility, a monopoly on potential customers, a leg up on brand building, and they begin accruing expertise on the space. They can innovate and iterate before others. This is known as the “First Mover Advantage”.

The first mover can do quite well for themselves and their investors. And yet the first mover in a space is often not the company that tends to dominate - the final “monopoly”.

So the discovery of the advantage of the first mover leads us to conclude that there must be other truths relating to it. In this case, another entangled truth: it is also true that the last mover has a significant advantage. The Last Mover Advantage means you can take all of the expertise accrued over the years by others, learn it quickly without expending costs, and leverage it to build a better product, better brand, better company. You can see the early struggles of a space, the early failures of an industry, the mistakes of prior companies - and avoid them all. Because of this, the Last Mover Advantage is related to the First Mover Advantage, but much more powerful. Last Movers become monopolies.

This example highlights the state of a Quantum truth. These two Mover advantages are entangled together. It’s good to be a First Mover; it’s great to be a Last Mover. If a company exists as a First Mover, they should seek to eventually enter a final state of being a Last Mover.

In this way, truths can be entangled in a Quantum like state. I like to apply this style of thinking when searching for investment ideas, as mentioned above.

One way to deploy this: if I discover a truth, I will sometimes ask myself if the opposite can be true. Often contrarian truths exist in opposing pairs (quantum-style). It is simply a matter of timing as to which endpoint in the pair is true at the present moment (after all, time is a physical quantity). This can also be known as cycles. For example, investing in Electric Vehicles has proven to be incredibly lucrative over the last few years. The truth here was the EVs have both genuine, economic value and memetic value - they play well with liberal values like ESG, consumer consciousness, etc. One could see them gaining more traction and value over the last few years. So the truth here is that: Electric Vehicles are a good investment. Now, this is presently true.

Now, let’s flip it to its Quantum-entangled opposite. Electric Vehicles are a bad investment. Is this true? Let’s assume “yes”. Ok, so EVs are a bad investment. Why? Because they are overhyped, the herd loves them and they are richly valued. Because they are not that ESG-friendly - most electricity comes from Oil & Gas while the cars themselves use lots of lithium which isn’t easy to mine. Because their networks of stations and infrastructure could take 10+ years to match that of traditional gas stations. What truth can this then lead us to find? Beyond possibly shorting names like $TSLA, we can begin to look for traditional fossil fuel companies. Companies that don’t fit the current hype cycle, like $AR, $XOM, or other O&G names. Like it or not, we discover that we still depend on O&G for a vast majority of our energy needs. These companies are at historical lows in valuation (though they’ve had a nice rebound the last few months). Thus, looking at O&G stocks for a rebound in price and valuation could be a good play. And there, we have an entangled truth - O&G names are still important.

Beyond building the case for an initial “EVs are a bad investment” thesis - we could have reached this potential Quantum truth more quickly by working like this:

EVs are a great investment, O&G are polluters and crappy businesses —> EVs are a bad investment, O&G are good businesses with lots of cash flow and valuable commodities.

Energy is a necessity, and we aren’t going fully electric yet. For what it is worth, I think traditional energy does quite well over the next few years.

If we wanted to search for a non-opposite Quantum truth in this scenario, it may be this: EVs are good, but most electricity is generated from Oil & Gas. Thus, what can we use to provide clean energy? And that leads us to uranium. The coming uranium bull market will be large in value and scope, it is also valuable to ESG policies. I am invested in this space.

Personally, I use the Quantum framework all the time to follow questions toward other answers and truths that may be out there.