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The trouble with entropy

In a world of increasing disorder, how do you maintain order in your investments?

Entropy inpost

What happens when you open up a perfume bottle? Its contents are released into the atmosphere. But the perfume molecules will not stay close to the bottle; over time, they will gradually fill the room. The ordered state of the perfume in the bottle is transformed into a state of disorder. As entropy—a measure of a system’s disorder—increases, so does the chaos in the system. And as we know from the Second Law of Thermodynamics, most systems move towards increasing disorder over time. This is why perfume doesn’t return to the bottle once you open it, but rather, just keeps spreading around the room.

Entropy is easier to manage when we focus on the "80/20" of what drives long-term investment performance.

It turns out that entropy is one of the chief challenges we face in life. Without effort, our bodies increasingly become out of shape, the weeds take over our gardens and the cobwebs proliferate. Investing is no different. Our portfolios will gradually deteriorate without applying time and energy. But since we don’t have unlimited amounts of either, where should we focus our attention for the most benefit?

In Mawer’s experience, entropy is easier to manage when we focus on the “80/20” of what drives long-term investment performance. For us, this means starting with a consistent and time-tested investment philosophy. Our approach is to build well-diversified portfolios of wealth-creating companies, with effective management, bought at an attractive price. We believe these portfolios will be more resilient over time. Because we operate using this well-defined approach, it allows our team to cut through investment noise and expend energy on data that matters.

Process also simplifies effort. Because entropy naturally tends to increase over time, we need to find methods to efficiently control the increasing disorder. We have found that a disciplined, repeatable process allows our team to be consistent and thorough. Ultimately, process is what allows us to repeatedly make effective and efficient decisions. Rather than constraining us—as some might expect—it gives us more time to think creatively. In fact, this is how our team keeps the perfume in the bottle and our clients’ investments in order. It may sound boring, but it works.


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