ZERO to ONE
I recently finished a book titled Zero to One, which was written by Peter Thiel. Peter is an entrepreneur and investor, who started PayPal in 1998. After he took the company public, he made the first outside investment in Facebook, and since that time has been an investor in hundreds of startups. The book stems from a course on startups that he taught at Stanford in 2012.
He wrote that successful people find value in unexpected places and they do this by thinking about business first from principles instead of formulas. The same could be said of all successful investors. Making investments based on formulas or technical analysis does not lead to successful investment outcomes over fundamental analysis.
This week Bill Gross wrote (and underlined) in his April Investment Outlook that “equity markets are priced for too much hope, high yield bond markets for too much growth, and all asset prices elevated to artificial levels that only a model driven, historically biased investor would believe could lead to returns resembling the past six years, or the decades predating Lehman. High rates of growth, and the productivity that drives it, are likely distant memories from a bygone era.”
Bill also wrote that “Northwestern’s Robert Gordon has long argued that lower productivity may now be a function of having picked all of the “low hanging fruit” such as electrification and other gains from 20th century technology.”
Bill has one of the greatest bond investment track-records, but I know that Peter would not agree with much of this statement. Peter wrote in his book that new technology tends to come from new ventures – startups. These startups build a different plan for the future. They are both imagining and creating the new technologies, while questioning received ideas and rethinking business from scratch. Peter believes in the power of planning and he writes that long-term planning is often undervalued by our indefinite short-term world. In July 2006, Yahoo! offered to buy Facebook for $1 billion. Mark Zuckerberg scoffed at the idea. The rest is history.
I believe that this way of thinking can be applied to many of the companies that have been the big winners in our economy. Eight of the top 10 companies in the S&P 500 companies are continuously innovating. Of these top companies – Apple, Google, Microsoft, Amazon, Berkshire Hathaway, J&J, and Facebook – all share the similar characteristic of being a monopolistic power. Peter defines a “monopoly” as a kind of company that’s so good at what it does, that no other firm can offer a close substitute. He believes that the reality is that there is an enormous difference between perfect competition and a monopoly. Either a business has it, or it doesn’t.
The cash flows for these monopolies require much less capital investment and more human capital. Outsized profits come from these monopolies, in turn, leads to higher stock appreciation. To paraphrase Peter, creative monopolies give customers more choices by adding entirely new categories of abundance; they are powerful engines for making it better. A company such as Apple only becomes a monopoly when people will pay even more money for a product. A search engine such as Google’s cannot be replicated. Hasbro is one of the most popular companies in our local area and they have been a very creative monopoly. I have a few clients who work there and you would be surprised that none of them think of their company as a toy company, rather it’s a technology company that specializes in entertainment.
Geopolitics and what happens in government is important, but not nearly as much as investing long-term in companies that are developing creative monopolies. There is a premium to own many of these types of businesses and this will likely remain the case even through these volatile markets.
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