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FinanceTerm Sheet

What investors can learn from sea slugs

By
Katherine Collins
Katherine Collins
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By
Katherine Collins
Katherine Collins
Down Arrow Button Icon
May 22, 2014, 4:18 PM ET

FORTUNE – This is the time of year many of us are thinking of summer vacation. Soon it will be time for getting away from it all, for planning grand experiments in unplugged living, if only for a few hours or a few days. It’s time for reconnection with our natural world.

We all know that crystal clear feeling that comes after a spell of unplugged time, especially if that time is spent outdoors. For over 20 years as a professional investor, I’ve relished these small windows of escape, and my work has benefited from the clarity that they bring. More recently I’ve wondered, what if that clarity could last longer than my sunburn does? What if instead of being a place to escape, nature could become my personal and professional mentor?

While researching my book, The Nature of Investing, I found surprising answers to this question through the practice of biomimicry – that is, mimicking the flows of nature in everyday life. Admittedly, this might sound sort of hippy dippy for most anyone working in Corporate America, but the very fact that this process begins with a question is quiet revolutionary: It does not start with an algorithm, or an RFP, or a deadline. It starts with open inquiry, with curiosity.

For example, as a fundamental investor, I’ve spent a lot of time thinking about growth and structural transformation at companies. Often, investor presentations make operations seem like a smooth, easy glide path, with every projected measurement charting up and to the right. Yet a quick glance at actual results shows that reality is rarely so smooth. Less than half of mergers are considered successful over time, and only three of Fortune’s top 20 fast-growing firms appeared on the list in both 2013 and 2012. How can we discern healthy versus unhealthy growth characteristics? What are the markers of effective mechanisms for structural transformation?

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Nature can illustrate these answers more clearly than any investor relations presentation. The main idea behind this is simple: Growth needs to be supported by other parts of the system, whether that system is within a single organism or part of a broader landscape. Wild honeybees do not rush to build the biggest hive possible; they use modular construction, building in sync with the size and needs of the colony.

As investors, we often are present for the big day, when a strategic plan, merger, new product, or restructuring is announced. But understanding more about those corporate signals and enzymes – the less dramatic, less public processes before and after big news days – is where real insights can be gained.

Another big topic for investors is risk management. Whether managing your own retirement account or large institutional funds, risk is top of mind. On this issue, I’ve found surprising inspiration from meerkats and sea slugs.

Turns out, meerkats are not just cute reality TV stars; they are also terrific managers of risk and effective educators. Adult meerkats teach their babies how to handle scorpions (a key food source) step by step. First they bring the babies dead scorpions to eat, then live scorpions with the tails removed, then finally the little meerkats are ready to handle full-fledged live scorpions, tails and all. Risk is gradually increased in alignment with the expertise and experience of the meerkats. It’s not a static equation; risk is taken in appropriate measures at appropriate times, using well-calibrated feedback loops along the way.

Nudibranchs – commonly called sea slugs – are similarly creative risk managers. Consider the life of these creatures: They are squishy and nutritious and living at the bottom of the sea, surrounded by predators. This is inherently a risk-laden proposition. You might think that nudibranchs create super-strong shelters, or that they’ve found a method for out swimming others. But some types of nudibranch have instead developed the ability to absorb toxins from organisms around them. Rather than being harmed, the sea slug passes the toxins through to harm its would-be predators, using the poison as its own defense.

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I don’t know if it’s possible to develop feedback loops as strong as the meerkats, or to incorporate risk into our own defenses like the sea slugs – yet nature does provide us the best examples of adaptive, resilient, regenerative systems. After all, we have 3.8 billion years of wisdom to draw upon. We have the opportunity to re-root our professional lives in this realm, instead of just visiting it on vacation. This re-integration is sorely needed, and is our best chance for truly, deeply profitable endeavors.

Katherine Collins is Founder and CEO of Honeybee Capital, a research firm dedicated to the pursuit of optimal investment decision-making. Katherine has previously served in numerous capacities at Fidelity Management and Research Company.

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By Katherine Collins
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