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Biomimicry And The Nature Of Investing

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Katherine Collins, Nature of Investing

With Katherine Collins, Founder of Honeybee Capital, Author of The Nature of Investing

After a long and successful career in Equity Management at Fidelity Management and Research Company, Katherine Collins reinvented herself, earning a Master of Theological Studies at Harvard Divinity School.  Subsequently, Katherine wrote a book titled The Nature of Investing about the parallels between nature and investing.

Biomimicry

Through her first-hand experience as an investor over the past 25 years, Katherine realized that we’d increasingly taken a factory approach to investing—always looking for more efficiency and more automation.  This trend troubled her and led her to study natural systems, which is where she discovered “biomimicry” as a great model for investment decisions.

A biomimicry approach pauses to reflect on exactly what you’re trying to perform and asks, “what would nature do (WWND)? How would nature perform this function?”

Biomimicry: Real World Application

For instance, businesses are focused on growth—of revenue, markets, market share, and profits—and often take shortcuts to maximize growth.  Instead, if they took a page from nature, they’d find that bees, for instance, aren’t interested in building the biggest hive but are focused on how efficiently they can build a vibrant hive that meets their needs, within the resources available to them.  The world of investing is rife with examples of companies that sprinted out the door full of promise only to crash and burn prematurely because they didn’t invest enough in people, systems, or infrastructure to support their rapid growth.

Challenges Facing the Financial Industry

In Katherine Collins’ opinion, at its core, investing is about trying to create something of value.  Her concern is that ancillary activity surrounding that core (such as the reprocessing and repackaging of mortgages, or derivatives) has grown really quickly, and she’d like to re-orient investors back to the essential core.  For instance, our food went through a lot of processing and packaging, but now people want to peel away those layers of processing and get closer to food’s primary ingredients again.

How Biomimicry Can Be Used In Investing

Katherine cites her own investments, with funds of funds and complex securities. She used biomimicry to cull out non-essentials and to simplify her own portfolio to better meet her investment goals.

Steve believes her process would reduce a lot of the noise that’s in the system today, where investors don’t quite understand funds of funds or derivatives based on the derivatives of something else and have lost touch with what’s going on in the core.

Feedback Loops

In her book, The Nature of Investing, Katherine Collins talks about “feedback loops” and how investors can use them to improve returns.  Feedback loops have three components: a clear signal, a receptor for that signal, and an appropriate response.  Reverting to her beehive analogy, bees use feedback loops to coordinate their collection of pollen and nectar to meet the hive’s needs, and no more.

Nature’s feedback loops are also multi-dimensional, and investors can use this to their advantage.  For example, really precise information on the price of a security may not be as important as data on something more relevant, such as the company’s competitive positioning or some other dimension that might help investors develop a healthier system of feedback loops.

Water Cooler Talk At The Quotron

In closing, Katherine Collins speaks to the time, in the early 1990s, when employees did not have computers at their desks and everyone would gather around the Quotron to get their quotes and hear people talk about what was happening in the sectors they covered.  For instance, while waiting for quotes on the construction sector, she’d hear colleagues talk about the oil or tech industry and soak up that information for a much broader view of the world.

Today, computer terminals at every desk make information access much easier but at the cost of invaluable peer-to-peer interactions.  Perhaps it’s time to peel back the processing and refocus on the core and use biomimicry to improve our investment skills.


Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

Read The Entire Transcript Here

Steve Pomeranz: Katherine Collins is author of The Nature of Investing. After a long and successful career in Equity Management at Fidelity Management and Research Company, Katherine reinvented herself, earning a Master of Theological Studies Degree at Harvard Divinity School. Welcome to the show, Katherine.

Katherine Collins: Thank you, glad to be with you

Steve Pomeranz: You know Katherine, that’s quite a leap from stock trading to philosophy. What made you take that leap?

Katherine Collins: You know it’s funny. I don’t think it’s a path that’s been taken by too many people and yet the parallels between my theology studies and my studies of natural systems, and my investing career were really much stronger than I even imagined myself.

I really reached a point in my career as an investor where I wanted to step back a little bit and reflect on the real purpose of investing in the first place. And in doing so, I found that going to study philosophy and moral philosophy really, more specifically, was the great place to start.

Steve Pomeranz: Well, your book speaks to the idea that following natural systems is a better way of looking at your investments and I guess looking at running companies and alike. Can you describe that a little bit for us?

Katherine Collins: Sure, well, one trend that I experienced first hand as an investor over the last 20 to 25 years is that, we’ve taken increasingly a little bit of a factory approach to investing.

Always looking for, more efficiency, more automation, more mechanization in some ways. And this trend started to trouble me after a while. And it eventually led me to the study of natural systems. And the point I’ve reached in those studies is the examination of biomimicry as a great model.

And what biomimicry asks you to do, before you make a decision or design a product or a process is to pause for a moment, try to reflect on exactly what function it is that you’re trying to perform. What’s the point? And to be clear on that and then to ask yourself what would nature do?

WWND. How would nature perform this same essential function? And to use that as your starting point instead of leaping straight for the factory model.

Steve Pomeranz: So this is a new word to everyone. It’s biomimicry, and it’s obviously mimicking with the biology and what’s going on in nature. But, drill down a little bit and give us some examples of how we would follow a natural system for something.

Katherine Collins: Sure, so one premise that is embedded in a lot of business and investing endeavors is the premise of growth. And pretty often we take some shortcuts in our thinking about growth and we look at just maximizing growth. But if you looked at a natural system like a beehive for example, bees don’t just build the biggest hive they possibly can, right?

At the outset. They build the hive as it’s needed, kind of a just-in-time approach. And, importantly they build it only as quickly as there are resources to support the ongoing maintenance and real vitality of that hive. And almost every investor I think has had a similar experience where they invested in an endeavored that looked like a real sprinter out of the gate if you will, and eventually that sprinter stumbled because they didn’t invest enough in maybe people, or systems, or infrastructure, to support that rapid growth.

Steve Pomeranz: Or maybe companies that build too much too fast in anticipation.

Katherine Collins: Exactly.

Steve Pomeranz: Of what they thought was to come, but they kind of out-built the capacity for customers or whatever it might be.

Katherine Collins: Right, it’s a very common mistake. And it’s not saying that growth is bad.

Steve Pomeranz: Hm-mm

Katherine Collins: Or even that fast growth is bad, but it’s really focusing on how that growth is achieved as opposed to just what is achieved.

Steve Pomeranz: Well you talked about the financial industry and the kind of this cookie cutter mechanized approach that takes place much of the time we have, even now.

The vast majority of transactions that take place being in this high frequency trading model, where within milliseconds, millions and millions of transactions are done. So, what are the biggest challenges facing the financial industry today, in your view?

Katherine Collins: I think in my mind there’s a real distinction between investing and finance.

And, it’s not a familiar distinction to many people. But to me, investing is really that primary transaction where you’re trying to create something in the world. Something of use and of value. So, there’s mutual exchange, there’s connection, there’s mutual benefit. And that’s still at the core of what investing is really all about.

What has grown really quickly though in recent decades is, all the tools and mechanics and products and processes that surround that core. And, that’s what I call financing. It’s the processing and the packaging, and the reprocessing and repackaging often that we see around that we see around that core activity.

And what I’d like to do with this book is just, really orient all of us as investors back towards that essential core. And, to get closer in connection to what’s actually happening in the world. It has a lot of parallels actually to the food system, where we centralized a lot of things and automated a lot of things and.

Now we’re finding a lot of people trying to peel away some of those layers of processing and get a little closer to those primary ingredients again.

Steve Pomeranz: Well, your book speaks to this biomimicry and you say the simple question at its core is this WWND. What would nature do?

So, give us some practical examples of how biomimicry can be used in investing.

Katherine Collins: Sure, well, one thing that I did early on, is just really looked at my own portfolio with these principles of nature in mind. And, I realized that there were a lot of thing in my portfolio where they didn’t have that essential connection and kind of reciprocal relationship embedded in them.

But sure enough, there were a lot of funds of funds and securities of securities.

Steve Pomeranz: Yeah.

Katherine Collins: And I tried really hard to step back and look at my own life. And what purpose those vehicles were serving, when it came to my own investment goals. And if I couldn’t come up with a really clear purpose and a reason for them to be there, I took that as an opportunity to trim out some of those layers and to find solutions that were still very active solutions but maybe a little simpler, a little more elegant in there construction as opposed to maybe overly engineered, as they were in some cases for me.

Steve Pomeranz: It seems like a process that would reduce a lot of the noise that’s in the system today that investors have so much trouble dealing with. And I think you make a very good point. You have these products of products or funds of funds, or you have derivatives based on something else and then you have a new derivative based on the derivatives of that something else, and you’ve lost touch with what’s going on in the core.

And it’s good to kind of come back to what the core meaning is. I know one big theme in the book as well, is what you call feedback loops. And, perhaps you can explain it, when you’re talking about the beehive again. Where’s the feedback loop in a beehive?

And how can we as investors, utilize that to improve our results?

Katherine Collins: Sure, well feedback loops are a really important element of any natural system, and really in fact any system that functions in an effective way. And, what you need for a feedback loops are three things. One is a clear signal, the second is a receptor for that signal, and then the third is an appropriate response.

Not just any response, but an appropriate response. So if you think of that in a beehive for example, bees are just terrific communicators and we have a lot of great scientific research on this now. When bees communicate about resources for pollen and nectar for example, they come back and they convey not only the location, but also the quality of the pollen and nectar.
And importantly it doesn’t stop there. There’s also a series of feedback loops coming from within the hive. So when there’s actually enough pollen and nectar that’s been gathered, the bees slow down their activity. Again they don’t just maximize for the sake of maximizing. There’s a sense of sufficiency.

So, there are a couple of things there to notice. One is that, the loops actually feed on themselves and connect in a really wonderful way. And the second is that, they’re multi-dimensional. So when I look at that and compare it to investments, for a lot of us, our primary feedback loop is just price.

And, we’ve gotten really precise about that. You can get microsecond pricing data now. But, I wonder if having microseconds of pricing data is as valuable as having similar data on something else. Maybe environmental impact, or social impact, or, the how of growth that we talked about before. It seems to me that having a little less information on price and a little more information on other dimensions might help us to have a healthier system of feedback loops.

Steve Pomeranz: Yeah, so it’s a question of the quality of information. Price does have information, but is it, the end-all, be-all, of all the information that you need to get a good response in this feedback loop to make the best decision possible?

Katherine Collins: Exactly, and to me this is very familiar.

I grew up in an investment organization that focused on fundamental research. And you would never just look at revenues, for example, and not examine the rest of the financial statement. So, I think this is something good investors are already very familiar with, and it’s just putting it in a little different context.

Steve Pomeranz: My guest is Katherine Collins in the book is The Nature of Investing and you can kind of see the framework about this. We’ve got about a minute left Katherine. There was a part in the book that was very simple. You were talking about your colleagues at Fidelity and how you would all have to.

Forget it, wasn’t going around the water cooler so much, but there was some other place where you’d have to go, the Cotron.

Katherine Collins: The Cotron yeah, yeah.

Steve Pomeranz: Yeah, years ago, nobody had really a computer at their desk. We had one Cotron in the middle of the office somewhere and everybody would gather around to get their quotes.

And that was a form of getting feedback on what was going on on the world. Take as through that real quick.

Katherine Collins: Absolutely, still this is a perfect example of something that’s gotten much more efficient, but maybe, less effective. So, to get pricing information on stocks, and, this isn’t that long ago, it’s the early 1990s.

We still had to walk down the hall to a shared terminal and type in tickers one by one and wait for the information to come back to us. Now I can view that any minute of the day all over the world, just in my pocket, on my phone there’s ten apps that do it immediately.

So the volume of information has gotten much more dramatic and the speed has gotten much more efficient. In theory that’s a great thing. But what we benefited from, were a few things. First we had to actually walk down the hall with intent. You really had to wonder what the price was doing and have a reason to wonder about it.

So there was an intention and the questioning but, most importantly, it connected us all to each other, personally, and also to what was happening in the rest of the market. I would be there looking up construction stocks, but my colleague would be looking at oil prices, and then a third person would be looking at retail comps for the month.

And, you couldn’t help but kinda soak up all that exchange. And it was a very organic, kind of natural bottom up system. It wasn’t something that had to be automated or mechanized.

Steve Pomeranz: So, lots of questions that you wanna ask, in terms of how to take a more natural approach to investing.

The book is The Nature of Investing, very interesting stuff to read. My guest, Katherine Collins. Thank you so much for joining us Katherine.

Katherine Collins: Thank you.