In this episode, we explore how the greatest natural gas trader of all time used this powerful Mental Model to be wildly successful and how the same fundamental principle applies to building long term durability into your organization.
We are excited to discover, with you, the key commonalities and best practices that allow both public and private organizations from capital intensive industries to become stronger at managing their assets over time.
Learn more at: www.durablecapitalindex.com.
https://peterattiamd.com/johnarnold/
Ben Parker:
In this episode, we will explore how the greatest natural gas trader of all time used this powerful mental model to dominate the natural gas market, and how you can use the same fundamental framework to build long-term durability into your organization. Welcome to The Durability Podcast. This is for those that are passionate about helping their organizations plan and prepare for the inevitable future. My name is Ben Parker, management consultant, chemist, creator, entrepreneur, co-founder and member of the Durable Capital Group. I'm excited for you to join me as we discover what successful organizations do to build long-term durability. We explore the tactics and strategies that allow great organizations to combine the financial wisdom of asset management, the practical street smarts of the maintenance subculture with the real world paranoia of managing risks to ensure their organizations blast. We uncover what great leaders are doing from all types of capital-intensive industries to make the decisions, build strong management teams, and prepare to meet the future in whatever form it comes. This is The Durability Podcast.
Welcome back to The Durability Podcast. I am excited to share an experience I had this week listening to the Peter Attia podcast, and what caught my eye from this specific episode was a episode about John Arnold, and the title of it is The Most Prolific Philanthropists You May Not Have Heard Of. And up until five years ago, I hadn't heard of John Arnold either, but I have since become acquainted with his work, both in the natural gas industry as well as in some of the renewable energy industry, and some of his philanthropists work as well, which has been very interesting to listen to some of his story and kind of get a broader perspective of where he came from, what he has accomplished, and how he was able to be wildly successful in trading natural gas at a time when Enron imploded and the market had significant uncertainty from Katrina and a number of other factors, where he was able, through basic fundamentals, to become probably the greatest natural gas trader of all time using some very basic, fundamental principles that are related to building durability into our organizations.
And I loved this podcast, and it was one of those experiences where I'm listening through it and there's a point there where he's talking about his experience building his hedge fund, which invested solely in natural gas, that he was able to dominate that space and really create a lot of value beyond the market average, and he did it in a fundamental way. And I think the interesting thing to me is Peter T asked him this question, and it was on the heels of them talking about just being obsessed with information and trying to learn everything they could. And Peter T asked him how much time he spent trying to understand every piece of the natural gas industry and the system that this market was built on that basically allowed him to dominate both the commodity space of natural gas in terms of arbitrage and speculation in his trading.
And what he said was very profound, and this isn't just because I am a chemist and I'm fascinated with molecules. But I firmly believe that if you follow the molecules, you can learn a tremendous amount that allows you to make good, fundamental decisions. And John Arnold talked about how he basically was... Starting as a hedge fund, they were information disadvantaged, because they weren't in the day-to-day transactions of the business. So if you compare them to a company like BP who had the information about the day-to-day operations of things, they were at a disadvantage. And so what they had to do was really dive in to the analysis of the information about the natural gas industry, about all the nuts and bolts of the pipelines, all the pieces. And what John Arnold said was really profound, and it's a fundamental principle that I think gets often overlooked in organizations when there's a lot of information.
And sometimes, we get so overwhelmed with information that we don't see the things that matter. And not just because I'm a chemist and molecules matter, but how those physical things move from one place to another matters, and that's what John Arnold says. He says, "Always follow the fundamentals." And he basically says, "Count the molecules." This is what they did in their strategy. He said, "Count the molecules. Count as many molecules as you can. Where did they come from? Where are they going, and how are they being consumed?" So you can build a model around that. And if you know how every molecule behaved yesterday, you can model how those molecules are going to behave tomorrow, and how they're going to be behaving six months from now.
And obviously, six months is a larger uncertainty around how things are going to flow, but in order to build a reasonable predictive model that allows them to then take that information and lay that on fundamental, good trading and investment practices, you gain key insights into how you expect things to respond and what needs to happen. It's surprising to me how if you really look at organizations, how they make decisions around where to put their money, what to expect from the different things that they're producing, whether that's a chemical product, a energy product, a physical product that's being manufactured, a food product, any capital-intensive industry has to make bets on where they're going to put their dollars. And sometimes, when we look at the fundamentals, we follow the molecules. In John Arnold's case, they were very in-depth at analyzing the natural gas market, who was buying what, where the need was, what the demand was, all of those pieces, and it allowed them to be very, very effective at their trading practices and investment strategies.
And so if you look at how they compared to their competitors in the industry, John Arnold said one of their biggest advantages was their... Centaurus had one of the biggest fundamental research departments, and that biggest advantage is that they were going to invest in the fundamentals more than anyone else and then overlay that with good trading strategies. And that's such a core key when we talk about building durability, where if we understand the fundamentals... And it doesn't matter if we're an investor and we don't have good insight into a business. If you look at some of the great investors, Warren Buffett's strategies and Charlie Munger, if they couldn't understand the business, if they didn't have enough knowledge and information to be able to make good decisions and understand what the needs were, what the constraints were, what the issues were, they wouldn't invest in it, because it was too risky.
It creates more risk with not having that uncertainty. And so a lot of times, what we see investors and business managers try to do is to short change the work of building and gaining that knowledge and insight, and it comes at an increased cost and risk. And so we don't have the information we need to make the right decisions at the right time, and we don't have the foresight to put enough pieces together to invest in the right things that will pay dividends in the future. And I'm talking financial terms here, but it also applies to maintenance and investment in capital assets. If we have a pump or a large factory, a large asset that has a cost, and it has a certain function that it's performing, and our ability to produce and make things with that asset as well as our eventual re-investment in that asset, is something that can also create returns, not just in terms of value, but overall economic value added to a company.
Because if you can save money on your investment in capital to do the same valued work, you can get additional return on your effort. And so it's the fundamental of knowing as much as you can about everything that you're involved in in the process, when your equipment needs to be replaced, when it makes the most sense from a financial standpoint to reinvest in your future work, when your cost of capital is at its lowest, and when you're looking at ways that you can optimize the long-term return on investment over time to get you to the greatest advantage. And I think that is such a fundamental principle. I know here at the Durable Capital Group, we are very much in alignment with this process of diving deep into the information, doing a really good analytics on organizations to allow them to have enough information to create better models and better understandings of some of the things that they need to be thinking about, and ways that they can invest in their future that will provide them with the greatest value long-term.
So I thoroughly enjoyed that discussion with Peter Attia and John Arnold. John Arnold is a great example of using an opportunity in a very commoditized... It doesn't get any more commoditized than natural gas. And knowing that market well, diving deep and really taking advantage of some market opportunities to really lay a good fundamental foundation going forward... And I think in our businesses, in the things that we work on, we can do the same thing if we focus on the fundamental practice and having that mental model of creating good information, doing good analytics, and really focusing on what provides value long-term. That's all I have for this week. Thank you so much for joining me on The Durability Podcast, and we will talk to you again soon. Have a fantastic day.
Hey, everybody. I just want to share with you something that has been super effective at helping organizations to really kickstart the conversation around how they're going to build long-term durability into their management practices. And if you stop what you're doing right now and go to ww.durablecapitalindex.com, that's durablecapitalindex.com, you can sign up to take a very special assessment. This is the Durable Capital Index Assessment. It's a baseline assessment, and it'll show you exactly where you're at currently with fundamental best practices for building durability, and it will give you a very detailed feedback report that you can take and share with your team. So if you go to ww.durablecapitalindex.com, sign up, take the assessment, and share with your team, and really start that conversation around building long-term durability into your organization.