Know everything about something and something about everything. Continuing my belief in this statement, I am starting a series of Multi-disciplinary thinking that can help squeeze out the best from a few subjects and apply them to our lives and investing. Let's continue the series by learning these ideas from Chemistry.
Activation energy
Activation energy is a concept in chemistry about the minimum energy required for a reaction to begin. It is the key to everything, from a morning routine to a revolution. Activation energy is the power to break something apart and transform it into something new.
In a reaction, activation energy can be rising temperature or rising pressure. All reactions have a required energy by the range that can greatly vary. Similarly, in our lives, everything we wish to change can be done, but the effort and investment required to do it greatly vary.
For example, I love reading, but a while back, I thought I was falling off. So, I decided to make sure to read before I sleep. The activation energy was minimal because it's not something new to me, and hence, I found it easy to change the habit.
However, when I was working on the website you all read today, I found it difficult because I have never made a website, so not only did it take a lot of time to make it, but it also took a lot of time for me actually to focus on it. Another example would be that it's straightforward for me not to smoke because I don't smoke, but it's tough for someone who is a chain smoker. The activation energy differs from person to person and from situation to situation.
This idea applies to all things investing as well. For a business you are learning, which is a possible turnaround story, the result won't be sudden because it is not so easy; hence, the initial investment and time will be significant.
This mental model helps me in two ways: It teaches me patience because some things can be challenging to achieve, so we need to give them time. Second, I recognise what needs to be done and what effort it might take to see some results.
Sometimes, you need a matchstick, and sometimes, you need dynamite.
Catalysts
Catalysts are ingredients that make a reaction work faster. They aren't necessarily needed, but they can cut the time or energy required to reach a particular result. No single substance increases the rate of all reactions. Because different reactions have different activation energies, there are many different catalysts.
Let's go out of chemistry and think of the Catalyst that shaped the world.
Industrial Revolution: As the name suggests, the Industrial Revolution revolutionised the world. It has significantly impacted many things: the rise of liberalism, education, the economy, the emergence of the West as a global power, climate change, etc. If you think about it, rising income, literacy, and increasing GDP have existed for a long time. After the invention of credit and renaissance, these things started to expand. However, the Industrial Revolution propelled the pace of the acceleration to another level. There was a massive rise in these factors, all because of the Industrial Revolution. The surge was already there, but the Industrial Revolution was a catalyst for all these factors.
COVID-19: I never in my life imagined a virtual class. I was young and dumb, so maybe I did not see this coming. But did any of us envision such a radial shift towards digitalisation? Probably not. We all knew that the world was inching towards digitalisation, but the change post-COVID was sudden and acted as a catalyst.
These catalysts create opportunities for investing. A prevalent investment in the past was Avanti feeds. The Catalyst in that business was the shortage of shrimp internationally because of the sudden outbreak of some disease. Similarly, a catalyst in mining companies is the approval of expanding capacity. Identifying positive Catalysts can generate good alpha over the long run.
Alloying
We would not be where we are without alloying. An alloy is a mixture, either in solution or compound, of two or more metals or a metal and a nonmetal. Alloying, then, describes the process of creating an alloy. It is done to synthesise a product with unique properties, such as greater strength, anticorrosion, service life, and improved performance.
Alloying is responsible for Bronze, a combination of copper and Tin. Bronze led to the Bronze Age, which was the beginning of the emergence of the Human race( we already were quite dominant, but you get the point). Stainless steel, one of the most widely used metals and the one responsible for most of the architecture in the world is a product of Iron and carbon.
Not every combination of elements produces a better, more helpful alloy, but when you find one that works, the results can allow you to accomplish things previously out of reach.
Let's consider real-life examples to understand this process. Australia has a lethal bowling attack and was responsible for winning the World Test championship. Cummins, Starc, and Hazlewood are all great bowlers, but it is their combination that makes them lethal. Individually, they all might be good, but together, Australia has an incremental advantage.
Similarly, the Allied forces won World War II because of the combination of the EU and the USA. Individually, they might not have been enough.
Let's take the stock market, for example. Why have PSUs done so well? It combines neglected names, pristine asset quality, and a picking-up economy. The returns we would have gotten if one only held true in three different instances would be nowhere close to the combination of them working together.
In Alloying, it's not A+B+C=5. Its AxBxC= 20.
There is an incremental effect in play.
The interdisciplinary approach of applying chemistry concepts to investing and life provides a unique perspective that enhances our understanding and decision-making. By drawing parallels between chemical principles and real-world applications, we gain valuable insights into the importance of balance, patience, adaptability, and interconnectedness. Embracing these lessons can lead to more informed investment strategies and a more fulfilling, resilient life.
Credits
Parrish, Shane; Beaubien, Rhiannon. The Great Mental Models Volume 2: Physics, Chemistry and Biology. Latticework Publishing Inc.. Kindle Edition.
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