A mental model I learnt recently is redistribution.

During February and March when Kumbh mela was happening in Prayagraj, airlines were able to redistribute their capacities from other routes to and from Kumbh mela. On the other hand, hotels in say Chennai and Bengaluru were unable to redistribute any capacity towards Prayagraj. Both airlines and hotels sell a perishable commodity. But one industry was able to redistribute capacity and take advantage, another wasn’t.

I said above that airlines and hotels sell a perishable commodity. If a plane has 180 seats and 1 seat goes empty, that 1 seat is lost forever and hence it is a perishable commodity. So an airline is able redistribute capacity across geographies but is unable to do so across time horizons.

At my home, sometimes there is leftover food which we the refrigerate. And this becomes available the next day and hence we make less food the next day. So, this way we are able to redistribute food across time horizons. Similarly, farmers can redistribute their produce over time horizons by refrigerating. Therefore invention of refrigeration allowed us to redistribute over time horizons.

Similarly, banking and associated financial innovations like compound interest, money markets etc. allow you to redistribute your money across time horizons. Say company A has excess money that it does not need today but may do so in 6 months. It lends to company B via a money market and B repays A after 6 months with interest. So A is able to redistribute it’s financial liquidity across time horizons – sort of like refrigeration.

Right now, we talk about intermittency in renewable power. That is, we generate excess solar power during the day and nothing at night. And because we are unable to store the excess power, it goes waste. And so we are trying to come up with solutions like Battery Energy Storage Systems (BESS) and other power storage mechanisms which will allow us to redistribute the power supply across time horizons.

A taxi is a fantastic service because if you have a surge in demand for transportation, you can use the taxi and then stop using it when the surge is over. That way, you carry less redundancy. Businesses with seasonal demand patterns tend to use labor on contract instead of hiring full time employees because that allows them to scale up and down more flexibly.

Roads have a capacity. During morning hours, they get clogged in one direction while the other side is emptier; in the evening the opposite happens. So do watch this short video on how China redistributed road capacity to ease congestion.

Impatient investors want growth every quarter. But the reality of business is such that you may get excess revenues in some quarters and less in others. And therefore this creates a perverse incentive for companies to redistribute some income from good quarters to lean quarters. In the book ‘Financial Shenanigans’ there is a case study of a company no less than Microsoft which did this. Similarly, one investment manager had a fantastic year when one of his companies went up multifold. And so he redistributed his fees over two years. (I wouldn’t recommend this though.)

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Now, think about what happens when there is an inability to redistribute.

Excess farm produce and excess food will perish. You may end up with excess in one time horizon and deficit in another. You may know from some of my previous blogs, that long periods of deficit can be lethal. You may earn a lot in your 30s and 40s but if you can’t redistribute it to your 60s, 70s and 80s, you will go bankrupt. Businesses that invest a lot on capacity in good times, like airlines, may go bankrupt when the demand goes away during bad times.

Inability to redistribute leads to fragility.

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So there are a few takeaways for me at least when I think in terms of redistribution.

• Don’t try to do everything in one day. Try to redistribute it because there is only so much your body and mind can take.
• Exercise and seek balance. Exercising is a way of redistributing good health over many years. Time lost in exercising today is time gained in longevity and if you understand how compound interest works, you know magic happens because of time.
• Cash is not an unproductive asset. Sometimes we need to redistribute from our portfolios today to our portfolios tomorrow and cash is a waypoint in that journey. Therefore as an investor, I should sell some assets during good times so that (1) I can survive bad times and (2) I can buy assets really cheap during bad times. Warren Buffett has insurance businesses that throw out a lot of cash and hence he can stay invested during ups and downs. When he was younger and he didn’t have those cash flows, he too was a frequent seller.
• In good times try to provision for bad times. Another way to think is – we need to have staying power during bad times.

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Charlie Munger taught us about different mental models and how the world and investing becomes very interesting when we apply those models. He said something like not being able to think using mental models was like working with your hands cut off.

I miss Charlie Munger.

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Cheers!