The System Solution
In building a framework for analysis, the critical first step is to recognise we are not trying to solve a distinct well defined problem such as – will this stock go up or down? Rather we are trying to understand how the stock might behave within the complex, adaptive system of the investment market. The importance of System tools is described in much more detail in the Systems Frame, however, for the purpose of understanding the philosophy behind The Equity Toolkit, the following are the important ideas:
A system is more than the sum of its parts.
The word system is a derivation of the Greek sys+histanai, meaning to place together or to place in contrast.¹ As such, system thinking requires thinking about the behaviour of the whole, in contrast to traditional analysis which involves taking things apart. This is well demonstrated by the parable of the blind men and the elephant. Each man grabs a different part of the elephant and describes what he feels. Each is correct, but differs in his experience of what an elephant is. To understand the true nature of the elephant requires a holistic approach.
Systems are made up of Parts and Relationships.
The reason the behaviour of systems differs from the sum of its parts is the relationships between these parts and the way that they interact. Understanding these relationships (feedback) is therefore a critical tool of analysis. However, because ultimately everything is connected to everything else, causes are systemic rather than local, knowledge is approximate rather than certain and truth is a function of how we ask the question.
Systems are comprised of interconnected sub-systems and hierarchies.
There is an inherent conundrum in the systems view, that in order to understand the whole, we need tools that enable us to analyse the parts. Much like a professional chess player builds up an understanding of the strategic advantages of the board via a deep understanding of the individual parts and how they interrelate it is necessary to build up the understanding of the system via the understanding first of the parts and then of the relationships.² The paradigm shift comes when we can understand and observe these units as part of the whole.
To understand the system, we therefore need to be able to (i) understand the parts; (ii) understand the relationships and (iii) observe the behaviour of the system as a whole. To do this, we need a wide variety of tools, we need a Toolkit Approach.