In his book Zero to One Peter Thiel talks about 0 to 1 vs 1 to N type innovations. 0-1 is about inventing something qualitatively new whereas 1-N is about scaling that machine. Angel investing is all about 0-1 and mature-stage investing is mostly (IMO) about 1-N.
What I like about Buffett is he finds these 10-20 year “smooth patches” where a business has a mature product plus a mature economic machine (the balance sheet is solid and earnings are being retained). The truth is that every smooth patch ends sooner or later, but the investment rewards can be great. Microsoft, Google, Facebook, Coke, Apple, Amgen, Celgene, Oracle, Walmart, Washington Post, GEICO, Texas Instruments, IBM, Adobe, Cisco, and various others all had stretches like that.
There are other businesses where the product is mature but the economic machine isn’t. In other words, the balance sheet and the IS/ CFS today aren’t what you expect in 10 years, but you think they will get there. I feel like a lot of businesses including AMZN, NFLX, TSLA, TWTR, Uber, AirBnb, and Spotify fall in that bucket. Sometimes there’s a pot of gold at the end of the rainbow and sometimes there isn’t. If there isn’t a pot of gold it becomes more of a momentum game.
I like businesses of Category 1 but that’s not to say that some people haven’t gotten insanely rich from Category 2. Just look at Jeff Bezos and Chris Sacca. I’m willing to give up those opportunities if I don’t have a 5-year rear view mirror on a mature economic machine. Momentum games work well when you catch the cycle but can work poorly when you miss it. Businesses that have “already made it” can self-finance through a downturn (e.g. Apple). So the risk is much less with Category 1 in my view.
A good term for a Category 1 might be a "gusher" since it's gushing cash here and now in ever-increasing quantities. |
