An old saying tells us that “the whole is greater than the sum of its parts”.
In scientific lingo it’s called “emergent properties” referring to properties that are completely unexpected.
These arise from a complex interaction of multiple parts which individually do not possess these properties but come up with the properties when thrown together.
Think about how insects like ants come together in groups and create complex structures like underground colonies or mounds that reach meters into air that even includes elaborate cooling ducts and heat dispersing fins.
A single ant is a limited organism, with little ability to reason or accomplish complex tasks. As a whole, however, an ant colony accomplishes astounding tasks, from building hills and dams to finding and moving huge amounts of food.
Or creating a new specie by crossbreeding to find that the new species has properties that the original species don’t have individually.
In the human body, hands have a function, so do legs, eyes, and other parts.
These body parts are mechanical in their functioning, however when combined with the brain, they acquire properties that helps us express our emotions or protect us from a danger.
Understanding the WHOLE
From the lates 1970’s accelerated in the 1980’s, Asian countries became manufacturing hubs and their contribution to the global supply chain went up many fold.
Rich Western countries with their just in time and six sigma practices looking to reduce cost for boosting shareholder value revelled in “cost arbitrage” shifting manufacturing from their countries to Asia.
This phenomenon had several positive outcomes not the least being higher productivity, lower cost and resultant lower global inflation.
The connectedness that it created across the globe resulted into a phenomenon called globalization.
Operating on their own each part would have struggled, however coming together they created prosperity.
Of course for years we only experiences the positives till the 2008 crisis, a great example where creation of Collateralized Securities rates AAA with junk underlying in 1 country engulfed the entire world into a recession.
Now if all the countries would have kept non-operating, the way they were, the impact would not have been that severe, however the inter-dependence caused a global recession.
Thinking & Executing the Whole
The ability to take these unconnected parts and understanding how they react to each other and create something unique is perhaps essential to investing.
- What’s the business of the company?
- What is it dependent upon?
- What strength does it have?
- What can impact it negatively? For example, can the war in Europe impact IT service companies’ business negatively in India
- How’s a business trying to create an eco-system rather than doing what they have always been doing?
- Is the strategy just some individual parts or do they have a meaning?
- After all this is the price, I pay for the business aligned with all the above.
Creating a narrative is one part and alignment with things not visible or faint and the price you pay is another.
A company making commodity soda ash or fluorine might appear to have no advantage, however, combine that with what these commodities could do to an emerging need like EV batteries and what the companies are doing to complete that journey and the “WHOLE” becomes clearer.
There are no easy answers and developing yourself to understand complex systems is not everyone’s cup of tea.
However, this could be a yardstick to find a manager who can help you navigate complex systems.
Thanks for Reading