Practical analysis for investment professionals
04 June 2015

Book Review: The Nature of Investing

The Nature of Investing: Resilient Investment Strategies through Biomimicry. 2014. Katherine Collins, CFA.

In The Nature of Investing: Resilient Investment Strategies through Biomimicry, Katherine Collins, the founder and CEO of Boston-based Honeybee Capital and former head of US equity research at Fidelity Management and Research, urges us to transform the investment process from the roots up by drawing on the field of biomimicry. Biomimicry is a new discipline that studies nature’s best ideas and imitates these designs and processes to solve human problems.

The core idea is that nature, imaginative by necessity, has already solved many of the problems we are grappling with. Animals, plants, and microbes are the consummate engineers. They have found what works, what is appropriate, and, most important, what lasts here on Earth. Biomimicry asks us to look to nature as model, mentor, and measure.

The study of biomimicry presents a framework for understanding the key characteristics of all natural systems and organisms. Following her career in traditional equity management, Collins earned her master of theological studies at Harvard Divinity School to strengthen her own core values that underpin all decision making and to study the natural world as a guide for investing.

Collins, a beekeeper, offers as an example honeybees, which exhibit excellent collective decision making in selecting the best available hive location when they are ready to swarm to a new home. First, the bees go out into the surrounding environment to gather data. Second, they come back together and engage in active, objective sharing of information. Third, they reiterate this process until the information is complete and compelling. Finally, they have a clear, shared value system.

All the bees agree on what makes the best hive location, basing their decisions on those criteria. There are no bee pundits, agency costs, or political agendas. The honeybees are motivated solely by finding the best location for the new hive.

The author states that the best investors she knows are similar to the honeybee. These investors go out into the world — observing, interacting, and gathering information — since that is where the best ideas come from. Ultimately, Collins concluded that she needed to be more like the honeybee, which meant refocusing on an investment approach that was more open and connected to the world and more explicitly based on its guiding value system.

Applying life’s principles (or the principles of biomimicry) to investing realigns and reintegrates our investment activity with the world around us. Collins’s company, Honeybee Capital, is a research firm focused on pollinating ideas that reconnect investing with the real world. She advocates an approach that realigns investing with the world it was originally meant to serve, one that values resiliency over rigidity and elegant simplicity over synthetic complexity. An example of simplicity is a traditional home mortgage between borrower and lender, versus the complexity of a collateralized debt obligation (CDO) or even a “CDO squared,” collateralized by a pool of mortgages.

According to Collins, the biomimicry-based framework offers the following key advantages:

  1. It is the ultimate in sustainability.
  2. It is nonjudgmental.
  3. It is an inherently integrated approach.
  4. It is inspiring and comforting.
  5. It is flexible and durable.
  6. It is “unfluffy.”

Explaining the first and fourth points, Collins writes:

Nature has sustained for 3.8 billion years! In fact, it goes beyond sustainable: Nature is adaptive and regenerative. . . . Relying on deep, functional knowledge, embedded in ancient, real, observable natural systems, feels a lot better than taking up the latest clever business school buzzwords. And the examples provided by nature are just stunning in their elegance and effectiveness.

The author asserts that using these biomimicry principles in her investing has produced greater clarity in her decision making, greater financial and nonfinancial total returns, and greater joy. She does not provide any financial return data on her biomimicry-based investments. It would be interesting to know whether these investments have exhibited any outperformance relative to appropriate benchmarks.

Collins outlines six of nature’s principles, together with a translation into investment practice. The first principle is to be resource and energy efficient, with subprinciples of resource efficiency that include using multifunctional design and low-energy processes, recycling all materials, and fitting form to function. An example of multifunctional design is a duck’s preen oil, which is produced by the duck’s own body, can be used for both feather waterproofing and duckbill moisturizing, and breaks down into vitamin D when exposed to sunlight.

The second of nature’s principles is to have nontoxic production, with subprinciples that include building selectively with a small subset of elements. The third principle is to integrate development with growth, with the subprinciples of combining modular and nested components, building from the bottom up, and self-organizing. Combining modular and nested components means growing in ways that are repeatable and that fit together as an organism grows, as demonstrated by the octopus. The fourth principle is to be locally attuned and responsive, with the subprinciples of using readily available materials and energy, cultivating cooperative relationships, leveraging cyclic processes, and using feedback loops. The fifth principle is to adapt to changing conditions, with the subprinciples of maintaining integrity through self-renewal; embodying resilience through variation, redundancy, and decentralization; and incorporating diversity. The sixth and final principle is to evolve to survive, with subprinciples that include replicating what works and integrating the unexpected.

In short, Collins asserts that we should be looking at nature and the field of biomimicry to help us construct our investment portfolios. During the process, our investment universe will become more resilient and regenerative as well as reconnected to the real world. As a lover of nature and animals, I found the book rewarding in its attempt to marry investment ideas with the natural world around us. It would have been more rewarding had the author discussed the degree of outperformance (if any) that she has been able to achieve by following biomimicry-based investment principles.

More book reviews are available on the CFA Institute website or in the Financial Analysts Journal.


Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Mark K. Bhasin, CFA

Mark K. Bhasin, CFA, is senior vice president of Basis Investment Group, LLC, New York City.

5 thoughts on “Book Review: The Nature of Investing”

  1. Savio Cardozo says:

    Hello Mark
    Thank you for putting the review on this book together.
    It caught my attention as the construction industry, amongst others, have drawn a lot from nature, particularly in the design of buildings to make them energy efficient.
    So, while I read though the review with anticipation, like the final sentence of your review, quantitative results of this approach were what I was looking for the most.
    Best wishes
    Savio

  2. vikash jain says:

    Thanks for the review. Some interesting ideas that I’ll let percolate for a while.

  3. Roger Mitchell says:

    In regard to performance, Collins has said, “My business is a research business. I don’t currently manage money for other people. I have a very unusual business model. . . . It’s for folks who are looking for more creative, truly long-term research. If you want hot stock tips for next week, we are not the right place for you. But if you want to develop a better stable of ‘mental models’ over time, you might appreciate our work.” So performance (in the sense of a portfolio manager) may not be the right frame of reference. For answers to these and other questions, see the CFA Institute Magazine interview with Collins: http://www.cfapubs.org/doi/abs/10.2469/cfm.v25.n4.10

  4. Hi Mark and thank you for the thoughtful review – I’m the author, and completely agree with the point about quantifying results over time. It is still early days and I am wary about presenting fairly short term information on this front, but Honeybee is also doing some interesting quantitative research in this arena, so stay tuned! I appreciate your reading the book so closely and am excited to see natural systems thinking beginning to percolate through many areas of investing – thank you again.
    kc

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