The Chesterton's Fence AI Investing Strategy

Investing in the backlash from going too far too fast

Welcome to a rare midweek version of Investing in AI. Things are happening so fast in the markets right now that I felt compelled to get this out while it was top of mind. Today’s message is about how to play the rebound on things that have gone to far - across things like AI, tariffs, and DOGE.

To start I want to remind you of an important mental model that I don’t often use for investing, but find it very useful at the moment. It is called Chesterton’s Fence (or sometimes Chesterton’s Gate). It comes from a parable relayed by GK Chesterton:

There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, “I don’t see the use of this; let us clear it away.” To which the more intelligent type of reformer will do well to answer: “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.”

I think this is happening across many levels of the economy now. In AI, people are adopting the technology to revamp workflows and improve efficiencies, without always understanding the old workflows sufficiently. At DOGE, government budget cuts are happening rapidly and whimsically, and there is no way they can really understand so quickly what all these groups are doing where all this money is going. And on tariffs, they are being wielded for all kinds of reasons with little thought to why the world order is the way it is and why it has been successful.

My goal here is not to pass judgment on whether these things should be happening. Maybe they should. We certainly need to adopt AI and we definitely need to reduce government expenditures. But my goal is to say that THE WAY they are happening violates Chesterton’s fence as a mental model and thus gives us opportunities to invest in the overexuberance of these initiatives.

I’ll give you an example from my own business experience. My first venture backed startup was at about a $3M run rate, burning about $600K/mo in 2012, but growing super fast - more than doubling revenue that year. My board looked at those numbers and said we were burning too much because we didn’t seem to match what they saw in other companies of similar run rates and employee size.

We sat down for a 2 hour meeting where we went through the budget line by line. We talked about each item, what it meant for the company, what might happen if we cut it. The consensus of the Board at the end of the meeting was that we were actually spending the right amount of money for this company and for the plan we were trying to accomplish.

In business, many companies look the same when you see their metrics. Ecomm companies look like this, SaaS companies look like this, Services companies look like this. You can usually see the metrics and very quickly know if it’s a good or bad business for that industry. It’s very tempting, because of that, to go in and rip things up and change things around because the metrics for a specific business look non-ideal. But what Chesterton’s fence tells us is that sometimes we need to look beyond the metrics and understand why they are the way they are before we act.

It’s very easy to say “sales are down, we should cut staff to match this level.” Or another option would be first understand why sales are down and if it’s a simple fix (like pricing).

Getting back to investments, how do we invest against this possible over-reach from ignoring Chesterton’s fence? We look for areas where the removals or cuts or changes have been too aggressive and we make probabilistic guesses about where the mistake may show up, and then invest against that idea.

In Public Markets - There is a high probability some of the perceived cuts, I think particularly to defense contracts, will prove problematic and be reversed. My friends in the intelligence industry expect we will have more risk of terrorism on American soil under Trump, because he doesn’t pay attention to intelligence reports and doesn’t listen to views he doesn’t want to hear. When such an event happens, the knee jerk reaction will be to suddenly go all in against whoever did it, and ramp up defense contracts again. But even without an event, I expect any defense cuts not to last very long.

On the AI side, some of the major SaaS companies are under pressure because of the rise of agents and AI. But, I think Klarna’s CEO put it well - that we will see SaaS consolidation and the winners will end up stronger than before.

In Private Markets - Venture investors are moving away from things without AI, not realizing there will still be some great businesses that just never need AI. Or, there will be some businesses where one possible market differentiator will be to be the one non-AI player with a higher human touch.

Venture and PE groups are probably both undervaluing companies that sell tech to the government, in light of recent cuts (and perceived coming cuts). Government has to be modernized and stay competitive and I expect these startups and growth companies will do better than people expect - particularly those that have both government and commercial customer segments.

And finally, agent deployments, which will definitely happen long term, are probably a little too aggressive. At my venture fund, we have a thesis that in 2026 you will start to see a lot of AI deployments break because they were put in to replace a human workflow that was only partially understood. Investing in the companies that benefit when that happens will be profitable.

In general, this is an easy strategy to execute.

1. Pick an area that was a good investment area that people now think is suffering from changes (DOGE, AI, etc).

2. Think through the catalysts that will cause the problems of the aggressive change to be realized by the powers that be.

3. Invest against that.

When things are moving too quickly and people think everything is changing, but you suspect is isn’t changing as fast as they do, it’s a good time to pull out the Chesterton’s Fence mental model and invest accordingly.

Thanks for reading.