Investing Lessons From Earthworms

During their latest episode of the VALUE: After Hours Podcast, Valdez, Taylor, and Carlisle discuss Investing Lessons From Earthworms. Here’s an excerpt from the episode:

Tobias: JT, do you have any veggies for today?

Jake: Of course, I do. I wouldn’t want to–

Tobias: We do this Mark on the show. You can come in and you can enjoy all of the fun stuff, but you’ve got to eat Jake’s veggies first.

Mark: [laughs]

Tobias: We all learn something.

Jake: The animal ones are always some of the most popular, so I’ve been trying to lean a little bit more animal.

Mark: [laughs]

Tobias: Let’s tell Mark why the animal ones are the most popular. The sperm whale is the most popular one.

Mark: [laughs]

Jake: Yeah, did one on sperm whales at one point that apparently was very popular. But this one today is about earthworms. So, we’re going the opposite of sperm whales. The earthworms, they live in the ground, obviously, and they eat this wide variety of organic matter, plant material, whether it’s leaves, branches, whatever the hell is falling and decaying. But they also eat living protozoa, bacteria, fungi, lots of microorganisms. They have two little brains that are near their mouth. That’s interesting. I don’t know of any other animals that have two brains, necessarily.

They don’t have eyes, but they do have these specialized photosynthesis or photosensitive cells that run along their backs and their sides. But to make up for being blind, they’re very sensitive touch and mechanical vibration. They have gizzards, which is this little fold, basically, in your throat, like a turkey, where they grind up the food with the help of these stored little mineral particles that basically crunch it together with that, and then it mixes with enzymes to break it down.

At birth, they emerge basically tiny versions of themselves. They’re fully formed. They become full grown after about a year. And then the average lifespan in field conditions is about four to eight years, which is longer than I would have guessed, but in a garden, typically about two years. A lot of people know this already. It’s funny that they’re hermaphrodites, which means they both carry both male and female reproductive organs. When they’re mating, the two earthworms basically 69 each other, and they’ll exchange sperm and fertilize each other’s eggs.

Apparently, on the banks of the Mekong River in Southeast Asia, there’s some species of earthworms that grow up to 10ft long, which I’d love to see. That’s wild. So, they play this major role in the conversion of relatively large pieces of organic matter that get turned into rich hummus, which it’s called, which I find it funny that loamy dark dirt is called hummus. Is that why people– Hummus tastes like dirt, I don’t know. But it really radically improves the soil fertility. They’ll shred up a leaf, basically digest it, and then they mingle that with the earth, and their movements will aerate the soil, which will allow air and water to get down into deeper into the soil and mix it all up.

So, if you have a lot of earthworms, that’s an indicator of a very healthy soil. The population size of earthworms indicates the quality of the soil. As the larger, sorry, the fresh earthworm poop, which they call casts, C-A-S-T-S, is 5 times richer in nitrogen, 7 times richer in phosphates, 11 times richer in potassium, which are all important ingredients for plants to grow. In these rich conditions, an earthworm will produce 10 pounds of casts per year per worm, which is a shocking number, right?

Mark: Mm-hmm.

Jake: Rich farmland can have up to maybe even over 1.5 million worms per acre, meaning that the weight of the earthworms in the soil is most likely greater than the weight of the livestock that’s upon on the surface. It’s estimated there are about seven million earthworms for every human on earth. So, this is actually a pretty successful species. So, here’s where things get a little off the rails, and we’ll try to make some analogies from earthworms.

Tobias: This is the most fun part, where Jake has to bring this back to investing somehow.

Mark: [laughs]

Jake: Yeah.

Tobias: Land the plane, Jake.

Mark: [laughs]

Tobias: All right, let’s see what I can do. Actually, there is a firm called Worm Capital, and I have a friend that works there named Eric Markowitz. So, shoutout to Eric. But apparently, they picked that name because they say they dig a lot. They wanted to instantly set themselves apart from Wall Street, which I feel like the name Worm Capital does pretty well. Anyway, you often hear about these vulture funds. They buy the equity or the debt of some distressed company, and they’ll often deploy legal actions to try to– They’ll try to obtain a contracted payout that was existed before.

So, think of Elliot going after Argentina and seizing one of their navy ships. But there’s a lot of negativity around that style of investment, I think that they’re taking advantage of the situation or they’re predatory. I’m sure some of that is a fair criticism, but it seems to me, there’s a place in the financial ecosystem for firms that do worm work. They buy the companies that have become economic debris, fallen leaves, left for dead in a changing world, and they recycle them back into rich soil where new growth might be able to occur.

I would argue that if you don’t have someone doing that kind of dirty worm work of liquidation, you actually don’t have a very healthy economy. I find it a little weird that we actually put stigmas on those type of investors who are turning over the soil. So, yeah, I think it’s actually fairly noble work to be doing that. We need, I think, the worms of creative destruction to keep the entire ecosystem healthy.

So, next time you see a worm on the sidewalk that’s struggling, do a good deed and move it back into the grass so that it can get back to its important job of turning over the soil, and think of this segment when you do it.

Tobias: Bravo. Good job.

Mark: That was well done.

Tobias: You did it.

Mark: That was very well done. Yeah.

Jake: Thanks.

Mark: [laughs]

Tobias: To Jake’s point, there has been this explicit moratorium on foreclosures and housing and a more implicit, I guess, prevention of a lot of stuff going under, which a lot of people think was Japan’s problem following the 1980s that they had-

Jake: No worms.

Tobias: -all the cross holdings. Yeah, they never got broken down. Do you think that Silicon Valley Bank having stumbled and then a series of banks, has that created some condition in Silicon Valley and more broadly that maybe we see a few more failures, and the earthworms can go back to work? How’d you like that segue to that question?

Jake: Nailed it.

Tobias: JT, pay me. Pay that.

Jake: Pay the man.

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