The key to good investment results is to invest counter to the consensus and be right. Bucking the consensus and being right creates opportunities to buy companies at substantial discounts to underlying value.
But how can we outsmart the consensus?
The consensus, it turns out, is gullible. It takes shortcuts. By taking shortcuts, the consensus is easily swayed and duped into behaving in certain ways.
One classic shortcut the consensus takes is to blindly accept without question what the intellectual elite has to say. The consensus, after all, is merely a collection of people. As people, we are each prone to believe the intellectual elite. They come from prestigious schools, they belong to prestigious clubs, and they work for prestigious institutions. We trust them. The intellectual elite has a powerful influence on the consensus.
The intellectual elite is also quite frequently wrong. When they are, they sometimes lead the consensus down the road of irrationality.
One way to find blockbuster investments, then, is to catch the intellectual elite being irrational. To find the fatal flaw in their argument.
We have found over the years that spotting fatal flaws in the arguments of the intellectual elite involves two important elements. The first element is independent thought. The consensus is gullible and sometimes makes mistakes for the very reason that it blindly accepts someone else’s arguments without question. We need to question. We need to think through every argument for ourselves and arrive at our own conclusions. Only then will we find that fatal flaw in someone else’s arguments. Only then will we find that blockbuster investment.
The second element that helps us find the fatal flaw is to take a peek into the intellectual elite’s playbook. It is easier to expose sloppy and irrational logic when we know the plays in advance. It gives us a little advantage.
One classic play in the playbook involves the omission of important variables. If Variables A, B, C, & D influence Outcome X, leaving Variables B, C, & D out of the discussion automatically attributes all the variability of Outcome X to Variable A. You might want to read that last sentence again. You should commit it to memory. It is a classic trick played by the intellectual elite to support an argument when a logical explanation doesn’t exist.
If the risk of lung cancer is determined by genetics, diet, air quality, and smoking, leaving diet, air quality, and smoking out of the analysis would attribute all the variability in lung cancer to genetics, which would obviously be an incomplete and misleading assessment of the important risks of lung cancer. If crop yields are determined by soil fertility, sun, water, and seed genetics, leaving sun, water, and seed genetics out of the analysis would attribute all the variability in crop yields to soil fertility, which again would lead to an incomplete and misleading assessment of crop yields.
When we catch the intellectual elite leaving important and obvious variables out of the analysis, we should automatically suspect a rat: It is most likely pushing an agenda rather than seeking the truth. It is a big red flag. Leaving variables out of the analysis incorrectly attributes the effects of the variables left out to the variable kept in.
We believe the intellectual elite is leaving some important variables out of its analysis of global warming, both the analysis of its causes and the analysis of the so-called solution.
Set the analysis of the cause for global warming aside for now, though, because whatever the root cause of global temperature fluctuations and whatever your thoughts on the topic of climate change, the world has embarked on a massive and all-encompassing effort to reduce its carbon footprint. It is happening and it is happening at scale. Here too, we believe some important variables are being left out of the analysis.
While we expect many great innovations and environmental benefits to result from the world reducing its carbon footprint, we also believe the consensus is largely ignoring the costs and sacrifices involved in doing so. We believe the details being left out of the analysis have created some wonderful investment opportunities. Forgotten variables that are highly relevant tend to reveal themselves as the future unfolds. Our goal is to position ourselves to benefit as reality emerges.
One example of a once forgotten detail that has already revealed itself is lithium. Lithium prices languished for decades prior to the implementation of the green agenda, then shot up nearly six fold over the last 30 months. Lithium is a critical element in the electrification of the auto value chain. The auto value chain has been shifting from hydrocarbons to electricity and, as it does, will need more and more lithium. Lithium supply, meanwhile, is constrained. Lithium supply has become a limiting factor – a pinch point of sorts – in the auto value chain’s shift to electric powertrains.
We have seen these pinch points develop in other rapidly-shifting value chains over the years. As the pinch point emerges, value shifts from the consumer of the pinch point product to the producer. In the case of lithium, price increases have shifted value from the consumers to the producers of lithium.
The lithium pinch point was not difficult to identify long before the price of lithium skyrocketed. The consensus had just ignored this important variable and key enabler in the decarbonization of the auto value chain. As reality emerged, the pinch point revealed itself, lithium prices responded, and value shifted.
Fortunately, KP7 was positioned to benefit. We owned a company called Neo-Lithium which in turn owned one of the largest undeveloped lithium deposits in the world. As the lithium pinch point emerged in 2021, our investment in Neo Lithium increased 125% over a six-month period. It was the first double in KP7’s brief history.
Lithium, of course, is no longer a forgotten variable. The lithium pinch point is now broadly known and well understood. KP7’s portfolio, as a result, no longer has exposure to lithium.
While the consensus is all over the lithium pinch point at the moment, we believe it ignores others. We are positioned to benefit as reality emerges. We currently have exposure to copper, graphite, tin, and a unique type of “green” iron ore. All are essential enablers in reducing the world’s carbon footprint. All are supply-constrained, or will be in the near future. All are potential pinch points as the world moves to reduce its carbon footprint.
