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March 2023 Newsletter
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Why do human beings shake hands?

When asked this question, people tend to make up strange answers that are clearly made up on the spot; answers like, “to show that we don’t have any weapons”. I will assure you that very few customs in society have quite the modern origin as a concealed weapon. If you are looking for the answer as to why humans shake hands, you need look no further than your local zoo. We shake hands because we are primates; all primates do it. In fact, our handshaking and greeting patterns are significantly less complex than some of our fellow beings in the animal kingdom. Chimpanzees will hold their hand in certain angles to communicate their place in the social hierarchy. It is primal instincts that compel us to touch hands when we walk up to one another, and it is also our primal instincts that drive us to work, reproduce, hunt, fish, and invest.

Perhaps the more interesting question is really, “Why are handshakes a necessary part of human society?”, and the answer to this question has more to do with trust and the balance of selfishness and altruism in our human society. A handshake is a pact, it is a mutual agreement that both parties are equal in some way, or are looking for similar outcomes. A handshake is a sign that both humans are willing to put aside their selfishness and embrace altruism to achieve some sort of goal. This is what makes humans very unique animals. How many animals can gather in the thousands or tens of thousands without violence? Not many. Humans are unique because we get stronger the more the congregation grows. A group of just a few humans is able to emotionally support each other and build relatively small projects, while a group of millions of humans can research, fund, design, and execute a plan to land on the moon.

We know that society overall will work better with more altruistic actors who care less about who gets the credit and more about what is accomplished, but what will lead to the best outcome for an individual actor? Well it seems that the most effective way to accumulate resources would be to be a selfish actor in an environment of altruists. An selfless society produces more, so there is more to steal if you are a selfish individual. The more altruistic society becomes, the more it pays to steal if you can get away with it. It is for this reason that one of the primary goals of legislation is to prevent selfish actors from ruining the otherwise altruistic society. We outlaw theft and murder, and even our religious moral codes prohibit even considering these actions.

When it comes to the world of investing, these game theory calculations are only slightly different. Instead of selfishness and altruism setting the stage for our decisions, fear and greed rule the world of investing. Last year, in our piece called “The Emotional Investor”, we laid out our understanding of how emotions, and fear in particular, play a very significant role in markets today. Humans are guided by their emotions, their primal instincts, and even the most steadfast investor can be overcome by fear if their peers are doing the same. The difference here is that the legislative guardrails around behavior do not exist in investments. The investor themselves can make whatever decisions they want while having their fear and greed on full display. The world of investing does not punish being greedy when others are fearful or being fearful when others are greedy, and the game theory table from before reflects that.

In this equilibrium, the investors that make out the best are actually the investors going against the grain, an option not available in other parts of life. Take, for example, the late 90s when internet companies were all the rage. To add even more fuel to the fire, venture capital was being adopted in a large way at this time, and thus, the valuations of companies like Pets.com and NorthPoint Communications were legendarily inflated. There was no law against this at all. Venture capitalists and the owners of these businesses were being greedy just like everyone else. Being fearful at this time would be synonymous with missing out on the next big thing that would change the world for decades to come, like MP3.com.

Of course this greed sandwich was unsustainable, and gave way to an atmosphere of fear where venture capital pulled back and the internet seemed to have met its match. However, we know that in times of deep and pervasive fear, a brave and greedy actor can change the world and that is exactly what Jeff Bezos did with Amazon. After the dotcom bubble burst in 2000, Amazon spent another $3 billion growing the company completely against the grain. Of course it looks like the correct decision at the time of writing in 2023, but I will assure you that investing three billion dollars in an industry that had just suffered a crash was anything but obvious.

At Peak 15, we are students of the market, and students of history. We learn from the past and invest intelligently to generate returns for out investors and partners. We may not be in the midst of a crash as dramatic, or as well covered, as the dotcom bubble was in the late 90s, but 2022 saw some of the largest and fastest interest rate hikes in decades, completely cutting the feet out from underneath an overheated real estate market. Not only were rents not increasing 20% per annum anymore, but the more expensive (and unpredictable) price of debt meant that it was only a matter of time before aggressive underwriters got hurt. Fear started creeping into the picture as the rate hikes went up and it is still fear that has its hold on the market.

Enter Peak 15 Capital Fund I at the end of last year; a new fund from principals with decades of real estate experience. We spent time and money to grow a real estate firm when the rest of the industry was scared; and many refused to raise capital. Many of the investors in our space took pauses from acquisitions and did not invest for the better part of 2022 and are continuing to this day. We felt the pressure ourselves to take a pause on new acquisitions, but we decided to push ahead anyway and be contrarians. The old Warren Buffett saying is “Be fearful when others are greedy, and greedy when others are fearful.” Today, we have a fund that is already deploying capital into projects that others simply are not ready to take advantage of, and our investors are better off for it.

Keep Climbing!