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I've written before about one of the most useful questions in economics and investing.
It's only three words:
And then what?
Warren Buffett has used the phrase in exactly that context. The point is simple: the first consequence of a decision is usually obvious. The second, third and fourth are where things get interesting.
One Nation's new Superannuation proposal is a near-perfect example.
(Please put your political views – for or against – aside for a minute; this is about economics.)
The policy would allow eligible renters and mortgage holders to redirect 3 percentage points of the 12% compulsory Super contribution into take-home pay for up to three years.
First-order thinking says: more money in your bank account.
And, yes, that sounds good. Particularly when households are dealing with high mortgage repayments, rents and grocery bills.
But: and then what?
Some, probably most, of that money gets spent. More money chasing the same amount of goods and services adds to demand, and therefore to inflationary pressure.
And then what?
If inflation is stronger than it otherwise would have been, the Reserve Bank may have to keep interest rates higher for longer – or raise them further – eating into some (more) of the benefit.
And then what?
Three years later, the extra take-home pay disappears. But prices probably don't fall. (When was the last time prices – other than maybe petrol or fruit & veg – fell?)
Remember: Lower inflation doesn't mean prices fall – just that they rise more slowly. So when that 3-year period expires, prices will be higher, but your take-home pay would be lower.
Oh, and the money diverted from Super wasn't invested and compounding during that period!
The pollies aren't wrong that people are doing it tough. It's tempting to think a hand-out would solve that. But unfortunately, it's not that easy. Because you have to ask and then what?
And the same is true in investing.
Imagine someone told you in 1974 that global air travel was going to increase roughly ten-fold over the following half-century.
They'd have been spectacularly right.
Global passenger journeys rose from about 421 million in 1974 to 4.27 billion in 2023.
You might reasonably have thought: "Bingo! I'll buy shares in airlines."
Except airlines have historically been terrible businesses.
They require enormous amounts of capital. They have high fixed costs. They're exposed to fuel prices, recessions, wars, pandemics and regulation. And fierce competition has often meant much of the benefit from increasing demand has gone to passengers through cheaper fares rather than to airline shareholders through higher share prices and dividends.
Even today, peak body, the International Air Transport Association, expects the global airline industry's return on invested capital to remain well below its cost of capital!
The prediction that more people will fly was right.
The investment results were… not good.
And then what?
We've seen something similar with lithium.
The first-order thesis was compelling: electric vehicles and battery storage are going to grow rapidly, therefore the world will need vastly more lithium.
Again, totally accurate.
But markets respond.
High lithium prices encouraged miners to expand existing projects, develop new ones and spend more on exploration.
Supply surged.
By 2024, lithium demand was around six times its 2015 level. Yet lithium prices had fallen back to around 2015 levels. The International Energy Agency says the huge increase in supply drove lithium prices down by more than 80% from their recent highs.
The demand thesis wasn't wrong. It just ignored the subsequent actions and reactions.
"This technology will change the world" is interesting, but not an investment thesis.
"This industry will grow rapidly" is a forecast, not an investment thesis.
"This commodity will be needed in much greater quantities" is a good insight. But, no, not an investment thesis.
They're very good starting points.
But you still need to ask what competitors will do. What suppliers will do. Whether new capacity will be added. Whether prices will fall.
Whether customers, suppliers or shareholders capture the benefits.
(And that's before asking what the share price already accounts for!)
In other words:
And then what?
And then ask it again.
And again.
Because in economics, public policy and investing – in life in general, really – the first-order consequence is usually the easiest one to see. It's the second, third and fourth that tend to get you. Or, more positively, that can provide opportunities.
Either way, the task is to think past just the initial impact.
To ask 'And then what?'.
Fool on!
