Neoteny: How Evolutionary Flexibility Applies to Investing

During their recent episode, Taylor, Carlisle, and Chris Bloomstran discussed Neoteny: How Evolutionary Flexibility Applies to Investing. Here’s an excerpt from the episode:

Tobias: JT, do you want to do veggies? You got veggies?

Jake: Of course. Always have veggies. All right. So, this week we are exploring this biological concept called neoteny. I don’t know if you guys have ever heard of this before, but it’s–

Tobias: [crosstalk]

Jake: It’s sort of. Yeah, it’s N-E-O-T-E-N-Y. I know sometimes the veggies feel like monotony, but that’s not [Tobias laughs] what I said. I said neoteny. And it comes from the Greek meaning extended youth. It’s when a species retains juvenile characteristics into adulthood instead of fully maturing. This can often help an organism avoid competition and keep a flexibility.

So, basically, mother nature came up with a way to have more cards in the deck of evolutionary development by allowing certain environmental inputs to change how much development occurs.

So, there’s a classic example of this. I don’t know if I’m saying this right, but it’s the axolotl, it’s Aztec sounding word, A-X-O-L-O-T-L. They’re the native to the lakes around Mexico City. They’re these little amphibian looking– They almost look like tadpoles basically. They’re famous for staying in this juvenile state. Unlike typical salamanders, they never undergo metamorphosis. So, instead, they remain in their larval form, they keep their external feathery gills, they have an aquatic lifestyle and this youthful appearance throughout their whole lives. But they could still procreate as these little tadpoles.

So, however, they thrive when the aquatic environment is stable. But they have this hidden genetic switch inside them that for whatever reason when iodine is added to their water, which I don’t quite understand the linkage there, but it activates their thyroid gland and then they basically go the complete rest of the way in development, and they turn into effectively like mature land-dwelling looking salamanders and then they can procreate as a salamander as well. And so, they lose their gills, they get lungs, they grow limbs to move around on land. This dramatic transformation is like this built in evolutionary flexibility.

And so, it’s not just salamanders in Mexico. Actually, humans, we have neotenous traits as well. Our flat faces, larger heads relative to our bodies, less hair, extended learning phases compared to other primates. This author, John Gribbin, who actually Munger’s recommended several of his books over the years. He takes it a step further and he argues that humans became distinctly neotenous around four million years ago when we split off from the chimpanzees and gorillas. We basically kept these flexible brain structures that allowed us to adapt better to a rapidly changing environment.

He talks about it in this book called Ice Age, which we actually did a segment on that Season 5 Episode 10, if you want to double click on that. But essentially, our ancestors had these juvenile like monkey characteristics. We stayed flexible for longer in earlier development, and it gave us this evolutionary advantage for a shifting climate that was uncertain around that time period.

And so, basically, we move back and forth between the plains and the trees and probably the oceans. The chimps basically stayed in the forest and developed into full blown monkeys and we didn’t. And so, there’s this complicated phrase that biologists like to use which is ontogeny recapitulates phylogeny. Let me explain, you could just forget about those words. It doesn’t matter.

Tobias: It means that the development from a zygote to a baby mimics evolution, but it’s been debunked.

Jake: Oh, really? It’s been debunked, huh?

Tobias: Yeah.

Jake: Well, then how do they explain then like humans having gill like structures similar to fish or tails, similar to our reptilian ancestors?

Tobias: It just looks like it.

Jake: Okay. Well, thanks for blowing the hole on that one.

Tobias: Ontogeny recapitulates phylogeny.

Jake: Yeah. Well, good job, Toby, you’re way ahead.

Tobias: I’m so sorry, JT.

Jake: No, no. That’s good.

Tobias: It was on my grade 11 biology test. I remember it well.

Jake: Oh.

Christopher: Jake, I read Ice Age. My wife and my kids, they would tell you that I’ve maintained juvenile characteristics far into my own adulthood, deep into adulthood.

Jake: Yeah. Now, that’s what keeps youthful, right?

Tobias: JT, the reason I remember it is because it was on my grade 11 biology test. The textbook that we used was old. When I went and looked it up on Wikipedia, Wikipedia told me that it had been debunked before I took the test. But I didn’t know it at the time.

Jake: All right. Well, fair play. Everything that I say should be taken with a big dose of salt that it might have been updated. That’s just science, right? Okay. So, let’s see if we can torture this into an investing analogy.

As everybody knows, early in his career, Buffet followed Ben Graham’s deep value, net-net approach. He’s buying undervalued stocks for less than the working capital. Did quite well with that. But over time, markets changed. Buffett adapted. He evolved from net-nets to more Fisher and Mungerian quality companies like Coke, See’s Candy, etc., emphasizing durable moats. But all along, he retained this juvenile deep value method and returned to his roots when opportunities appeared, like, let’s say filling up his PA with Korean stocks, Korean net-nets in the early 2000s. So, he was able to revisit these foundational strategies whenever conditions called for it, which is really the essence of neoteny.

So, I think lessons for investors there would might be maintain flexibility to shift strategies with the opportunities. Never fully abandon a proven basic method. Continuous improvement and learning is the name of this game. Finance is full of cycles. So, know when old strategies become relevant again, and whether you’re a tadpole or a salamander or a human thriving by staying young at heart or an investor cycling back to foundational strategies. Sometimes the best move evolution ever made was refusing to grow up.

I’d say that Chris has demonstrated over his 25 years career a pretty broad toolkit of different businesses and valuation ranges that you’re comfortable with from quality names like Nike and Starbucks in the portfolio, or Costco like we talked about, or cyclicals in a rationalizing industry like Olin, for instance. So, that’s why I thought this would be a good fit for Chris, since he has a pretty broad range compared to a lot of investors.

Tobias: I like that one.

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