25iq

My views on the market, tech, and everything else

A DOZEN THINGS I’VE LEARNED ABOUT BUSINESS

1.“If you play [your competitor’s] game, you lose every time.” Allan Benton. http://www.esquire.com/features/what-ive-learned/allan-benton-interview-0909 This quotation to me is all about moats and sustainable differentiation.  If you haven’t read Warren Buffett, Michael Porter and Michael Mauboussin about “moats/sustainable competitive advantage,” well, you are missing out in a huge way.

2.“Listen, business is easy. If you’ve got a low downside and a big upside, you go do it. If you’ve got a big downside and a small upside, you run away. The only time you have any work to do is when you have a big downside and a big upside.” Sam Zell. This makes business sound a lot like gambling which it is.   The important point being made here is that you should be looking for situations in which the odds of a business proposition are substantially in your favor. Bet big when that happens. When the odds are not substantially in your favor, don’t bet.  As Charlie Munger says: “It’s just that simple.” http://archives.newyorker.com/?iid=15126&startpage=page0000061#folio=C1

3.“Optionality is the property of asymmetric upside (preferably unlimited) with correspondingly limited downside (preferably tiny). Optionality can be found everywhere if you know how to look. That which benefits from randomness (increased potential for upside in the presence of fluctuations) is convex. That which is harmed by randomness, concave.  Convexity propositions should be embraced – concave ones, avoided like the plague.” Nassim Taleb. http://www.amazon.com/Antifragile-Nassim-Nichol-Taleb/product-reviews/1846141575?pageNumber=3 Yeah, yeah, this one in part repeats 2 above but it is worth the repetition even with only twelve spots allowed on this list.  I could quote Warren Buffett too here, but I am going to try to get through this post without quoting him saying things like: “One day on land is worth a thousand years of talking about it, and one day running a business has exactly the same kind of value.” Whoops.

4.“A strategy delineates a territory in which a company seeks to be unique.” Michael Porter. http://www.fastcompany.com/42485/michael-porters-big-ideas Strategy is what you do differently than you competitor. Strategy is about what you choose NOT to do. Deciding what things not to do is hard.  Steve Jobs was a master at leaving things out and not doing things.

5.“Our whole business model is to do a few things very well and if it ain’t broke, don’t fix it.” Jim Spady. http://seattle.eater.com/archives/2013/04/17/the-dicks-drivein-story-then-now.php Anyone who has ever eaten “Chicken Rice” from a hawker stand in Singapore knows what happens when someone spends 40 years making the same dish. You get awfully good at it. People line up to buy it, your costs drop and you get scale advantages. Costco limits what it does in a way that generates attractive sustainable competitive advantage.

6.  “It’s incredibly arrogant for a company to believe that it can deliver the same sort of product that its rivals do and actually do better for very long.”  Michael Porter. http://www.fastcompany.com/42485/michael-porters-big-ideas  Just trying to rely on being good at what you do it a hard road to walk.  Maybe you get some scale benefits by making great Chicken Rice, but that is a weaker form of moat than network effects.

7.  “We like businesses that can’t be commoditized. Hardware/software can be, networks can’t.” Fred Wilson.  Network effects are the most powerful form of moat and when a company like Google has them they are hard and even impossible to compete with. Network businesses offer another advantage in that they offer up the ultimate in scalability. Some businesses are attractive at a small scale but just can’t grow profitably.  Physical stuff is hard to scale. It can be done, it’s just hard. Usually people who do profitable things selling physical stuff inevitably have great back-end systems powered by great software like Amazon, Wal-Mart and McDonalds..

8.“Supply is the killer of value.” Bill Gates. http://25iq.com/quotations/bill-gates/ When supply increases in a massive way that creates a platform on which you may be able to attach something scarce. The idea that supply itself increases value is what I call “George Gilder’s folly” and was in no small part the cause of the 1999 Internet bubble.  Yes, supply increases are “disruptive”, but revenue is not profit. As an example, I heard Bob Metcalfe say once: “No one made a nickel on Ethernet itself; only selling other things on top of the Ethernet standard was profit generated.”

9.“The only unforgivable sin in business is to run out of cash.” Harold Geneen. http://en.wikipedia.org/wiki/Harold_Geneen You can be bankrupt from an accounting standpoint and still survive as a business. But if you run out of actual cash, well, may God help you. If you lived through the Internet crash of 2002, you have experienced the critical importance of cash in a unique way.  On the related topic of EDITDA, I am with Charlie Munger that you should insert the word “bullshit” in its place whenever it is encountered. Interest, taxes and depreciation are real expenses and in fact the worst sort of expenses.

10.  “A customer that ‘chooses’ your firm’s services will be much more satisfied than one that is persuaded to buy your product through spend.” Bill Gurley. http://www.forbes.com/sites/bruceupbin/2012/08/30/the-dangerous-seduction-of-the-lifetime-value-ltv-formula/2/ Big firms have these huge marketing budgets and forget that the essence of business is being able to cost-effectively acquire a customer. Fred Wilson talks about that problem at one point in this recent interview:  http://pandodaily.com/2013/06/17/pandomonthly-new-york-with-union-square-ventures-fred-wilson-the-full-interview/ Spending on customer acquisition should be tracked on a per customer basis. People who want to spend, for example, “$100 million” on marketing without breaking it down and working it out on a per customer basis are due for a fall.

11.  “Your margin is my opportunity.” Jeff Bezos.  http://management.fortune.cnn.com/2012/11/16/jeff-bezos-amazon/ Bill Gurley lays it all out here: http://abovethecrowd.com/2013/04/18/a-rake-too-far-optimal-platformpricing-strategy/  I can’t say it better than he did so read him and not me.  Giving more value to customers is self-reinforcing in a way that marketing spending can never be.

12.   “Hire character. Train skill.” Peter Schutz, former CEO of Porsche.  http://www.fastcompany.com/3011018/make-every-hire-a-creative-minded-person-even-for-non-creative-jobs This last one is self-explanatory.

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