Investing Lessons From Trees | The Acquirer's Multiple®

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

Jake: You guys want to squeeze some veggies in?

Tobias: Yeah, let’s do some veggies. Good idea.

Jake: So, this week is all about the life of trees. So, we’re staying in a biology area. A lot of it’s from this book called The Hidden Life of Trees by Peter Wohlleben, I believe his last name is. So, trees are actually very interesting to study because they exist on such long timelines. If you guys remember, I don’t remember which Lord of the Rings movie it was, but where the trees are talking and they can move around, but they’re incredibly slow. I think they were actually pretty far spot on with that, as you might notice, as I’m going to give you some more facts about this stuff.

Most people have heard of that bristlecone pine tree, the Methuselah tree in California, that’s 5,000-ish years old. But apparently, there’s a spruce tree in Norway, that’s more than 9,500 years old which boggles the mind. It’s like 115 times the average human lifespan. But a typical beach tree or oak tree will usually live between 400 years and 500 years. Something I learned, like, trees are way more social than I ever thought. They can distinguish between their own roots and other roots of other species, and they can even recognize the roots from related individuals of their own species. They can actually share food within their root structure with their related individuals. Food, just meaning like sugar and water, basically. But they won’t share with other species.

Beach trees, they’ll actually synchronize their photosynthesis, because some trees have a better vantage point, like, their canopy is getting more sun than others, just the way that they grew and however they structured themselves. They’ll equalize out the differences underground by sharing resources underground through their roots. It’s almost like a form of Social Security in a way. Some are earning more, and others earn less, and they equalize it a little bit down at the root level. So, acacia trees that are being eaten by a giraffe will give off this warning gas that’s detected by neighboring trees, and then they’ll start to ramp up–

Tobias: [unintelligible [00:44:03]

Ian: Yeah, there’s a crisis at hand, and they’ll start ramping up the pumping of these toxic substances to deter the herbivores that are probably going to move down the line to them. If you add a pinch of crushed spruce or pine needles to a drop of water that’s containing protozoa, they’ll be dead within a second. They’re actually pretty powerful chemicals. A lot of the chemicals that we know of in the world that we use are come originally from trees and plants and everything. Most of our medicines are derivatives of plants, and we’ve just figured out how to make them synthetically.

So, when a caterpillar takes a bite out of a leaf, the leaf tissue actually sends out an electrical signal, just like human tissue that’s injured. The signal doesn’t travel in milliseconds though like in humans. It moves at about a third of an inch per minute. So, this is like electrical signal is just very slowly moving through the tree, and eventually after about an hour, it gets to the place where it needs to that tells it to ramp up the defensive compounds, these chemicals, to then reach the leaf and then spoil the meal for the caterpillar, basically. It makes you wonder, like, if trees, they can tell actually which species is invading them. Do you want to guess how they can tell which species that’s actually eating them?

Tobias: The saliva.

Jake: That’s right.

Tobias: No way.

Jake: Yeah. Actually, they can tell the saliva of what’s eating them, and then they’ll release a specific pheromone that will then attract– Basically, they have this whole arsenal of different chemicals they can release, and they can pattern match to the species that’s invading them, and it will attract a beneficial predator that will come and eat that caterpillar. So, they’re basically sending up the signals chemically like, “Hey, this animal is here that’s hurting me. Come eat him,” basically. Researchers also found that that roots crackle at a frequency apparently of like 220 Hz, which maybe seems not that big a deal, like, burning wood crackles, like, who cares?

What’s interesting is that, when seedling roots were exposed to that 220 Hz crackling, they oriented their tips in that direction, which almost makes it– Trees can actually hear effectively is another thing that you could say. The tree canopy itself tip in a forest will capture 97% of the sunlight, meaning that just 3% filters down to the forest floor. It seems like the saplings would be starved of energy, basically. But it turns out that for young trees, it’s better to grow slowly and to scale in a way that allows them to build at a much slower rate, and that they’ll actually live much longer than–

Modern forestry will target a max age of between 80 and 120 years on a plantation of trees before they’ll cut them down. But that would still be a very, very young tree under normal conditions. That’s an adolescent tree by the time when it’s 80. And so, when they grow slower in the natural forest, their cells are actually much, much smaller and they’ll contain almost no air, as opposed to when they grow very fast, they use air as part of the cell. Where it comes in is that anytime that basically the air will allow fungi to– When fungi gets in there, that’s like a requisite for the air. They need air basically to respire. And so, when trees grow quickly, their rings get really huge, and they contain a great deal of air, and that makes them susceptible. If fungi gets in there, it can feast, basically.

Whereas when they’re smaller, if they grow slower, they’re much tighter rings, smaller amount of wood, and they’re much harder to penetrate for fungi, so they’re actually much more resilient. But it’s weird. A small beech tree can be 100 years old, and it’s still basically like waiting in the wings under its mother who’s 300 years old, and it’s waiting for its turn even though it’s 100 years old.

Tobias: Like, King Charles.

Jake: King Charles.

[laughter]

Jake: Exactly right. So, in places where there’s a lot of sunlight, the trees will go for broke and try to grow as fast as they can to capture all that light, but they typically don’t live as long then in those situations. The ones who grow more carefully will live longer, as I’ve said a few times now. The ones that grow very fast are much more susceptible to drought and temperature changes, wind blowing them over invasive species. To pull out the analogy, I was going to ask you, Ian, if this fits with you. It makes me Wonder if hypergrowth companies might be comparable to the fast growing trees that are showered by a lot of VC sunlight that they’re just trying to get big as fast as they can, and that maybe you would almost like, “Boy, if our growth rates are too high, then maybe that’s indicative of the fact that, ‘Okay, it’s growing a lot, but it might not be a very solid growth for a very long-term outcome.’” What do you think about that, Ian?

Ian: I thought you’re going to compare it to that or maybe Ark or something like that, but I was ready for it. [laughs] I think it’s pretty fair. I think it’s hard to find a company that can grow very, very quickly and not be just incinerating cash. I think that’s the key to it all as well. There’s companies that can actually grow at a decent pace and still have the right people, processes, culture in place to sustain that and support that growth over time, including the customer. So, I think overall, generally, you’re probably right. I was thinking about another analogy while you were talking too towards the end when you were asking me that.

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