In their latest episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Carlisle discuss Apoptosis – Build A Kill Criteria Into Your Investments. Here’s an excerpt from the episode:
Jake: Have you guys heard of the term ‘apoptosis’ before?
Tobias: All I know is that the mitochondria is the powerhouse of the cell.
Jake: Correct. And you get your mitochondria from your mother only? I don’t know if you knew that.
Tobias: Did not. Thanks, Mom.
Jake: Yeah, thanks, Mom. So, apoptosis is this biological process in multicellular organisms that’s really best described as programmed cell death. Apoptosis is ancient Greek for falling off of leaves from a tree. So, imagine basically, the decay of something. And it’s a highly regulated process within the body and it’s happening constantly. It’s happening inside each one of us right now as we speak. It’s basically like biochemical events that lead to changes within the cell that lead to its eventual death. The average adult loses between 50 and 70 billion cells each day to apoptosis. So, there’s some turnover that’s happening inside of you at all times.
There’s a couple different ways that it happens. It can be triggered through either intrinsic pathways, which are basically things inside the cell that make it happen. A cell can kill itself because it senses either cellular stress, or damaged DNA or mRNA, heat radiation, nutrient deprivation, viral infection. All these internal things that are happening that will send a trigger like, “Okay, blow this cell up.” It can also be triggered externally by what are called extrinsic pathways. The main one of that is this thing called TNF alpha. It’s a cytokine basically that’s produced by these little cells that are called macrophages, which are basically the cellular cleanup crew. They come in and eat cells that are blown up and get all the chunks of them that would maybe harm the cells that are around it, and it cleans it up. Think of it basically that TNF alpha pathway, the extrinsic pathway, basically comes in and pushes the self-destruct button on the cell from the outside. Defective apoptosis sensors are implicated in a very wide variety of diseases. If you have insufficient sensors, actually, one of the results is uncontrolled cell proliferation, which we know better as cancer. So, it’s a hugely important thing.
To zoom out a little bit, if you think about your entire body as all these cells and think about it a herd of animals, the removal of the weakest elements of the herd allows the remaining herd to move faster, have more resources available. So, the body’s always culling the weakest cells to leave a better version left over. And so, really, cell death is programmed directly into your DNA from the start at the instruction level. Before anything gets built, it already knows how it’s going to be torn down, if the right signals occur.
Now, let’s bring this back to the real world. Annie Duke has his new book out called Quit. It’s all about basically when you make decisions, how do you decide to quit or not. One of the great takeaways that she had was this thing that she called ‘kill criteria’. The kill criteria is a simple enough idea. It’s basically what events or circumstances would cause you to reverse your decision that you’re about to say yes to. So, before you say yes, you set the kill criteria so that you can know when I need to get out of this decision. You don’t then fall subject to all of these problems like sunk cost bias that can creep up when you are trying to make the decision in real time, whether it’s time to quit. You want to be like the cell that has the DNA that’s already preprogrammed with apoptosis that happens if these certain criteria are met and your decisions should be treated similarly.
For instance, maybe it would look like if you’re going to buy this thing, you would say, “I’m buying it, but if it gets up to a certain valuation, I’ll sell.” So, there’s kill criteria that’s already built in. Or, “If management repricing options or if stock-based compensation comes in over some number that I find too egregious, I’ll sell.” You could set all these criteria that would cause you to reevaluate and possibly exit a decision. And similarly, the inverse, if you decided to pass on something, you could set the kill criteria of that decision to pass. And so, basically like, “Oh, maybe I’m not going to buy this due to valuation, but if it got to this valuation that I found attractive, I would buy it.” A kill criteria for a pass.
It’s a great way to counteract your sunk costs bias and also escalation of commitment, which is something that can happen when you get into a situation. It lets you peek around the corner in a premortem way to see like, “Okay, what could go wrong here. If it starts to go wrong, I’m going to short circuit it before it turns into basically like cancer of your decision making and I’m going to cut this off and save the resources for the more healthy decisions that I’m making.” Biology has these instructions that it uses that are relatively simple in their execution, but they create this very complex and emergent behavior that leads to you and I being able to talk right now.
The nice thing too is that just because you made a decision, you could look at your entire portfolio today and you could still come up with kill criteria for everything. It’s not too late. Going through all of your names and writing out what would have to happen for you to decide to exit that particular name, you could do it even if you’ve already owned it for a decade. It’s one of those things that definitely is better late than never. You could go through your portfolio and you can actually use an intrinsic pathway like the cells, which would be holding yourself accountable. I would say that it helps a lot to write these things down and so you could keep track of them. Keeping it in your head is a very lossy and dangerous way to do it.
Or, you can use an extrinsic pathway outside the cell pushing that by having any– Duke recommends having an a quitting coach, she calls it. So, basically, someone that would hold you accountable to your kill criteria and therefore, you execute on your best intentions and you can’t lie to them as well, as much as is it’s easy to lie to yourself.
So, take a page out of nature and she’s figured out a lot of smart ways to do things and apply that to your portfolio.
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