Thoughts from Rumelt & Soros

Stay with the uncertainty.

Useful Work comes from embodying fundamental insights through a refactoring of perception. Specialize in work where the ability to produce re-combinations to develop new systems and frameworks is optimal; combinations create value, and re-combinations sustain it.

Imagine doing the work everyday. What would you thrive in?

Understanding of a business is in essence an understanding of the ways in which the product adds value to the value chain of the customer. Effective FCF businesses are about competitive strategies (built around competitive advantages) to optimise the business process and the product around the buyers criterion of value. Moats are created by low cost, differentiation, or focus (segmentation).

At the Industry level, axis of segmentation, axis of competition and innovative disruptions mutually condition each other to give rise to operating environments for businesses. Businesses with durable competitive advantages build chain links, relationships, hard to replicate products and processes that confer cost or value advantages.

4 axis of business positioning: cost, quality, time, ease of access. A business can be profiled in terms of its location within these 4 axis.

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Reflexivity: a paradox

Market prices are determined by expectations.

Yet the expectations themselves are reflected in prices which creates a new set of expectations based on these prices.

This is due to two reasons:

1) uncertainty creates reliance on collective expectations as a reference point for the formation of expectations

2) price influence the fundamentals by changing real economic activity, and hence the conditions in which the expectations are played out

Hence a proper set of expectations would endogenize the effect of the change in expectations on the fundamentals and the expectations.
Through backward induction, a uniquely determined convergence point may be found.

Fundamentals > expectations > expectations > fundamentals > etc.

3) the paradox of uncertainty (random events which cannot be represented through a probability distribution): expectations depend on the future, but the future is uncertain