Antagonistic Pleiotropy Investing | The Acquirer's Multiple®

In their recent episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Tobias Carlisle discussed Antagonistic Pleiotropy Investing. Here’s an excerpt from the episode:

Jake: All right. Veggies for today are this concept called antagonistic pleiotropy. It sounds very complicated. It’s not as complicated as it sounds, but where it came from is that, there’s been a lot of talk I feel lately and this is what happens during any regime change, I think. There’s a lot of talk about like, “Oh, everyone needs to evolve with the changing times as an investor.” That sounds right, doesn’t it?” Oh, of course, you need to evolve and keep up with everything. But evolve is an interesting choice of words for this, because what do you guys think about when you think of evolution? What’s the phrase that comes to mind?

Tobias: Survival of the fittest?

Jake: Correct.

Bill: I just think a style drift in this case.

Jake: [laughs]

Bill: All I hear is underperformance.

Jake: Yeah. Don’t spoil the punchline.

Bill: No.

Jake: No, but Toby’s right that survival of the fittest is often what’s thought of, but that’s actually wrong. It’s wrong because it’s more about reproduction and passing on your genes. Imagine any organism that is living for centuries, but doesn’t reproduce, it’s effectively, evolutionarily invisible at that point.

Survival is not necessarily what matters in this. The difference between survival and reproduction can be shown with this antagonistic pleiotropy, which I will just call AP to shorten it for the rest of the segment. One, because it’s hard to say and two, because we don’t have time for that. So, AP, it comes from Greek actually, which means more and turning. It means multiple paths in a way. AP, it comes from traits that increase your productive fitness at the expense, though, of later in life like decreasing lifespan.

A classic example would be in primates, your prostate in a primate, which we are primates has increased metabolic rate. How that helps you be more reproductive is that, that actually increases sperm motility. But it comes with the downside of later in life that higher metabolic rate will create more incidence of cancer. You passed it on into the future, but it’s not good for you in your survival of the fittest.

Another classic example would be salmon, who swim upstream, this epic journey to spawn, and then they die. Another one actually is Huntington’s disease, where people with Huntington’s disease actually have a lower incidence of cancer when they’re younger than average and actually, have higher fecundity, which is better breeding, like, have more kids. But it comes at the cost later this genetic mutation causes neurodegenerative diseases later in life that are actually pretty horrific.

Basically, we have increased fitness in the short run, but that same expression, genetic expression causes a compromised long term. I did a little just playing around with return streams over, let’s say, a 30-year period of your investment horizon. I did a thing, where, let’s say that you had Hall of Fame returns 30% a year for four years and every fifth year, you had a minus 70%. You just got the shit kicked out of you.

I think that there are some people, who follow this strategy that is very high variance. When you are winning, you look like a genius. You’re killing it. When it doesn’t work out, you get absolutely monkey hammered. What ends up happening then is, if you do this four good years, one bad year, and you play that out for 30 years, a 30/70 up and down. You actually end up your 30, you’re down 60% total. It’s pretty rough. If the further that it would go actually, the further you would go down this curve toward zero.

Now, contrast that with Style B, which was 5% upside every year and a 10% drawdown. Much tighter ranges of variance. By the year of 30, you’re up 71%. It’s not you crushed it for a 30-year period, cumulative 71% is not much.

However, you made it much, much farther into it. I think you would probably have been fired well before if you were running that 30 up, 70 down time period. Now, you might be saying like, “Well, every five years, that’s unrealistic.” You’re not going to get clobbered every five years. I did another little run that was 25% per year for nine years and then down 80% on that 10th year.

You look like a genius for long stretches of time and then you get hammered every 10 years, you have a bad year. That turned into a cumulative 230% by the end of 30 years. Not too shabby. It’s okay. However, contrast that with Style B, which I would say is probably maybe more, like, I think Buffett has tried to run most of his career which is 8% upside, especially as he’s gotten bigger, but let me preface that. 8% upside, 9 out of 10 years, so, pretty modest ambitions, I would say. And 20% downside of that 10th year. You end up with a 309% total return over that 30 years.

You end up pretty materially outperforming this other higher variance strategy. This has been called variance drain in other contexts.

I think what it shows is that there are certain strategies that can make you short term look like very successful and do really well, but long term, you’re going to end up paying for it a little bit in the way that antagonistic pleiotropy applies.

I would say that, we may be seeing that little bit of a turning point and that maybe we had that period, where the first four to 10 years or whatever, four to nine years were where it was like, shoot the lights out type of strategies worked really well to go back to Bill’s point about style drift. Is it really time to be evolving more towards that or maybe still being a little bit more down the center, smaller variants is still maybe a smart thing to do? That’s up to you and your own personality, but just at least know what you’re doing.

Tobias: When you’re constructing that, is there some significance about the size of the up year versus the size of the down year?

Jake: Well, the bigger the up year, the bigger the down year that you can afford to still not–

Tobias: But are they in the same scale? Is the five down to the 20, the same as a 25 to 80? Whatever the case maybe?

Jake: Well, you can play around with different– Sorry– [crosstalk]

One Way To Avoid Getting Wiped Out!

Bill: Down 80 is bad. You pretty much wiped out?

Jake: Down 80 is bad.

Bill: I don’t think we talked about what happens though, if I increase my Twitter follower account during those up 25 years, and then I launch some Substack products, and maybe hold some conferences, and then maybe I’m in an LP structure, and then I have fun, too, and I say, I just had a bad year, and I’m about to get ready to go again, I get my two and 20 maybe-

Jake: I’ve learned all my lessons from before.

Bill: -or just my 06/20 on the first, you can get pretty rich in that first strategy.

Tobias: John Merriweather did it three times.

Bill: Yeah. So, LPs may not. But the GP can make it out pretty well.

Jake: That’s right.

Bill: He’s got to be good at sales.

Jake: If you’re a good salesman, well, that’s what I was going to say that-

Bill: That’s right.

Jake: -you can have multiple bites of that apple.

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