Karl Popper was a philosopher in the mid to late twentieth century.
He was regarded as a philosopher about science and to that end devised the idea of “empirical falsification” as the demarcation line between what could be considered science and what could not.
The essence of the idea is that we can never know everything so every theory, no matter how obvious, can only be considered science if there is a way to falsify it. For example, Hume’s consideration of the question of white swans. If you every swan you see is white, it says nothing about whether all swans are white. If you observe a million white swans, a single black swan will negate your thesis that all are white.
If you cannot say what could falsify your belief, you should think a little more about it. If you can assimilate every fact not previously considered, you may have a structure similar to a conspiracy theory.
Falsifiability is inherently curiosity and open mindedness. Neither is a bad trait to carry into investments.
Tesla is a problem if you invest only in businesses rather than in stocks. Tesla must make a great deal of money, as in free cash flow, over the next 10 years to justify its current valuation.
Can they? Tesla is operationally leveraged, (high fixed costs and relatively low variable costs) so it is possible to succeed if they can get enough volume. How do you expect them to do that given their competition?
Maybe they are a battery company that sells them packaged in cars. A better business model.
The car business is always problematic.
“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” – Warren Buffett
Amazon is equally interesting. Retail is a difficult business too. Amazon makes no profit running their business. Yet! but they have positive net cash flow. An interesting anomaly.
What would falsify Amazon? Only someone doing the same thing better.
It is hard to displace a market leader unless they do stupid things. Amazon has not indicated a preference for that, but forever is a long time. Perhaps someday an idiot will run it.
How about Facebook or Google?
Both are well entrenched, but both could have competition.
Google is very good at alternate businesses and they buy ones that can add to their capability. They may however, run into anti-trust problems if they dominate.
Facebook is a different puzzle. I have noticed my grandchildren use it less than I do. Will demographics work against them? Maybe. Would it be hard to replace? Yes, but with enough money and time, someone might.
Trial lawyers prepare both sides of the case. Preparing both sides gives them insight into their own case and shows the weaknesses in the opponents case. If you are having a court-worthy dispute, you should always hope your opponent has a smart lawyer. Someone who can help them see how much trouble they are in. Weak lawyers on the other side always cost you.
Before you invest, be aware of what could falsify the validity of your investment decision. If you are buying a passive position in a business, you will want to know what makes the business likely to succeed and what could harm it. Knowing those you can tell when it is time to find another investment or to increase your participation in this one.
Investment, like science, is not about belief, it is about objective reality.
In so far as a scientific statement speaks about reality, it must be falsifiable; and in so far as it is not falsifiable, it does not speak about reality. – Karl Popper
Seeing both sides is a strong aide in discovering objective reality.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.
In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. email@example.com 866-285-7772