The Power of First Principles
May 28, 2021
“Indeed, the single most powerful pattern I have noticed is that successful people find value in unexpected places, and they do this by thinking about business from first principles instead of formulas.” - Peter Thiel, Zero to One
“Thinking is all about the ability to look at complex situations and strip away things that don’t count - the ability to filter out situations and find what’s at their core.” - Douglas Hofstadter
In a world marked by often-needless complexity, we often find ourselves returning to First Principles thinking: the simple but transformative idea of breaking down a problem into its fundamental building blocks, examining the essential elements at hand, asking questions that demarcate facts from assumptions, and reconstructing a clear picture from the ground up. This mode of thinking is surprisingly rare in today’s convoluted, noise-ridden landscape. But there is power in sticking with the fundamentals that others have long forgotten.
When analyzing new companies, industries, and investment opportunities, our investment process is driven by deep research and deep understanding. Warren Buffet’s business partner Charlie Munger framed this philosophy best: “You must spend all of your time understanding, then doing is easy.” At Titan, our investment approach is built on focused understanding, furthered each day.
At the company level, First Principles thinking requires analyzing the core business through a few core perspectives:
- What kind of business has this company been in the past?
- What kind of business is this company today? How much is it worth at this moment?
- What do we think this business could potentially become?
- How do we think this business should perform at a baseline, under normal circumstances?
In our view, some of the greatest investments can be distilled down to two or three key drivers that play an outsized role in shaping the company’s future success. By building our understanding of companies and opportunities through this framework, we are able to intelligently identify which variables are likely to be most important to a given business’s future performance.
We believe the most successful investments result from the ability to filter out the noise, remain focused on the fundamentals, and accurately handicap the probabilities of anticipated outcomes. When static floods the channels and others needlessly strain to comprehend the noise, we tune into First Principles thinking for clarity and informed action.
Cash Management
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