The Tallest Mountain

One of Nassim Taleb’s most useful heuristics is what he calls the Lucretius Problem.

Simply put, we assume the biggest thing we’ve ever seen is the biggest thing that can exist.

Investors do this all the time.

When Vinati Organics traded above 20× sales during the 2021 specialty chemicals boom, many believed that was the tallest valuation mountain. Surely no chemical company could deserve more than that.

Then came Clean Science, trading at over 50× sales, and the mountain became taller.

Invert the situation.

When RPG Life traded around 0.4× sales, or Neuland Labs fell below 1× sales, many assumed those valuations were justified because every recent financial metric pointed in that direction. The market had plenty of evidence to support its pessimism.

In both cases, investors made the same mistake.

They treated the most extreme valuation they had observed as the limit of what was possible.

Taleb’s point is simple:

The fool believes the tallest mountain in the world is the tallest mountain he has personally seen.

Markets make the same mistake.

Bull markets convince us that today’s premium multiple is the natural ceiling.

Bear markets convince us that today’s distressed multiple is the natural floor.

Neither is a law of nature.

Both are forecasts disguised as facts.

Today, in my own investment universe, I see companies spread across this entire spectrum. Some are priced as if their best years will continue indefinitely. Others are priced as if their recent struggles define their future. My job isn’t to assume either view is correct. It’s to ask whether the market is extrapolating the most recent mountain it has climbed, instead of evaluating the landscape that’s still unfolding.

That’s where Taleb’s heuristic has become invaluable. It reminds me that history is evidence, not a boundary.

The presentation below explains some current examples.