The Pyramid of the Flexible Mind
Seeking Truth Amidst Extremity
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Pyramid of the Flexible Mind
For any given topic — financial markets, individual stocks, entrepreneurship, politics, anything — people fit into four categories:
These mindsets fill the pyramid in inverse order:
The apathetic always make up the majority. Most people don’t care about most things. They don’t even factor into the game. They’re live in the background as non-playing characters (NPCs). If you care about something, you can’t be an NPC. If you are an NPC, you don’t care about the game in question.
The interested are interested. They take some initiative, but they’re not fully in. They’re in enough to matter to them. The interested don’t know enough to truly think for themselves, they look to extremists and the transcendent to tell them what to think.
Extremists hold unyielding views on a certain topic. Extremists are loud about those views, they live those views, and they often get attention for those views. They will not change their minds, nor are they open to ideas that don’t support their view, although they may believe they are.
Constant extremity gains attention and pushes edges. Extremity convinces the interested to follow them, and the interested aren’t often looking for complex thought or truth. They’re looking for tribes. Extremists are natural tribal leaders, religious leaders.
The transcendent mind operates with ultimate mental flexibility. They can embrace extremes, but they’re also capable of changing their minds, often rapidly, upon new information. Unlike the extremist, the transcendent seeks truth where extremists seek allegiance to a cause. Transcendents have the most flexible minds. Extremists the least.
It may seem transcendence is the best mindset because it’s at the top of the pyramid, and who doesn't think they want the truth, but there are times when the extremist mindset may be better. There are more “successful” extremists than transcendents if success involves money, attention, or power. That’s how most people define success for better or worse.
Extremists make the best entrepreneurs, creators, and politicians (if the goal is winning votes). Transcendents make the best investors.
The most compelling entrepreneurs — those that generate the best return for their investors — tend to believe unreasonable things. This is one of the original tenets of The Deload. To achieve extraordinary results, you must do something no one else wants to do. You must be contrarian and right.
To start a business and dedicate a career, that takes an extremist. You need to land on a new island and burn the boats. There’s no going back.
A belief that people would want to buy cloud software in 2000 or electric cars in 2004 or ride sharing in 2008 or room sharing in 2009 or digital assets in 2012 or NFTs in 2018. All those ideas seemed crazy at the time.
There is something in 2022 that we will look back on and say, “that was crazy, but it worked.” What will it be?
Because of his impassioned belief in the unreasonable, the extremist entrepreneur can convince the interested to work with him. He can also attract investors.
The extremity of an entrepreneur is an underrated signal for the potential for the kinds of extraordinary returns that make great venture funds, and in some cases, great public market investments.
Audience is becoming the most valuable asset in the digital era. Audience builds influence, influence gives power, power builds more audience.
Audience is most easily won through extremity per the pyramid. Extremists attract the interested. In some cases, they might even get the apathetic interested.
Like the progression from audience to influence to power, extremity sparks audience. When audience is gained through extremity, it is extended through more extremity. If the audience doesn’t get the extremity that attracted it, they will go elsewhere to find it.
All attractive extremity is ideological in nature. It lends to cults. It requires faith in certain beliefs that may not be true. Obvious truth is never extreme because something everyone must accept cannot be extreme. Gravity is not extreme. By contrast, undiscovered or unaccepted truth and untruth must always be promoted in the extreme to gain any believers.
Politics is necessarily the domain of disputed truth. If politics were only about undeniable truth, we wouldn’t have anything to argue about.
One of my favorite quotes is:
“If you say you're a unifier, you expect and usually get applause. I'm a divider. Politics is division by definition, if there was no disagreement there would be no politics. The illusion of unity isn't worth having and is anyways unattainable.”
- Christopher Hitchens
The best politicians attract the most attention, grow the biggest audience, and thus gain the most power. This may be axiomatic to anyone paying attention to modern politics on either side. It also means that the “best” politicians must be the ones who most effectively use extremity.
The Hitchens quote could just as easily be about investing with a nuance: Unity is possible to attain in investing.
One of my partners has a saying that successful investing is having everyone agree with you later.
The best investments eventually become consensus. If you invested when the idea was non-consensus, the path toward consensus results in appreciation in the asset value. Investing in Apple when everyone hated it in the early 2000s or doubted it in 2016 was non-consensus. Now everyone loves it, and the investment has been a great one.
The best investors are truth seekers, not ideologues. They must be flexible enough to change their minds lest they lose all their money by being wrong, particularly when exploring the non-consensus.
Flexibility is an asset for the transcendent but a liability for the extremist where changing their minds means losing all their power.
Consider the two classes of extremist investors: The permabull vs the permabear.
Permabulls are right for long periods, but when things get bad, they blow up. When they’re wrong, they can be really wrong. Permabears are the opposite. They’re wrong for long periods of time with occasional events of apparent genius.
Early 2022 was permabear heaven and permabull hell.
The thing is both permabulls and permabears eventually find great success if they live long enough. And most will also find painful decline if they keep living beyond that success.
The optimal investor mindset is to accept when markets are dangerous and when they are opportune. They aren’t always one or the other. Or forget markets and just look for the contrarian company or idea where everyone will agree with you later.
Notes and Quotes
Kashkari and the Fed
In the pursuit of the transcendent mind re the markets, we have to assess the rally of the past several weeks. We’re more than 20% off the lows on the Nasdaq. There’s open windows for big stock buybacks, there’s a lot of money on the sidelines, and there’s a lot of uncertainty.
The prevailing narrative has been that the Fed will pivot, and we won’t get any meaningful news about Fed policy changes until September. That’s still likely to be the case, but the Fed is doing its best to have members set the tone outside of the regular policy meetings.
Minneapolis Fed President Neel Kashkari spoke this past week, several times actually, but this interview provided the most detail of his thinking:
The bottom line is this:
Kashkari believes the Fed has a “duty” to get inflation back to 2%
He believes a Fed rate of 3.9% at the end of the year and 4.4% next year is still the right path despite recent inflation data
“Our credibility is on the line” — and we can’t flex and say 3% is OK
The median projection is that inflation will remain above target for the rest of this year and through next year
“The idea that we will be cutting rates early next year when inflation is well above our target just isn’t realistic”
Kashkari believes there’s a disconnect between him — any perhaps by extension the Fed — and the markets given the easing in rates and financial tightness over the past several months
Here’s the bottom line: The market was due for a massive rally. Positioning was completely bearish. There was a ton of cash on the sidelines. Many names were just exhausted of sellers, and heavily shorted names were destined for a squeeze if they got a bid.
Now we’ve worked through that reality, and we need to look forward.
The Fed has persistently been wrong about inflation, and they’ll probably turn out to be wrong about rates, but it is worth noting that the odds of them cutting rates in early 2023 are lower than market expectations.
Consider the logical scenarios. If we achieve a soft landing, which seems to be the assumption, why would we need to suddenly cut rates? If inflation starts picking back up, the Fed has been clear that killing inflation is their primary goal, even at the cost of a recession.
So why believe we’re getting rate cuts so soon?
The risk to me is that we start to inflate multiples again — we already have — and set ourselves up for recompression that we saw earlier this year even if earnings don’t get worse. In this scenario, few stocks will be spared, even those that beat numbers, including great growth stories.
Time will tell, and it’s consensus to be cautious, but the logic and fundamentals seem to warrant it.
Disclaimer: My views here do not constitute investment advice. They are for educational purposes only. My firm, Loup Funds, may hold positions in securities I write about. See our fuller disclaimer.
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