25 November 2014
Zero to One: Notes on Startups, or How to Build the Future by Peter Thiel with Blake Masters
I had reservations about this book because, while it was highly recommended, my primary reason for reading the book was the hope that it might contain some useful perspective on common stock investing. The book is primarily focused on venture capital, not an area that holds a high level of interest to me so I was pleasantly surprised when the first paragraph of the book contained a question that hooked me. The question was one of the author’s favorite interview questions: “What important truth do very few people agree with you on?”
The question was an easy one for me to answer as most people believe in diversification, but the truth is the opposite, i.e. portfolio concentration. Too many funds practice a high level of diversification that essentially makes them index funds with much higher fees.
This will be an unconventional blog post as most of the items I quote from the book speak for themselves.
p. 13: “The first step to thinking clearly is to question what we know about the past.”
I’m always surprised that most investing books don’t discuss investing history. If you don’t take the time to understand historical markets movements you put yourself in a bad position because you will have a much harder time understanding market cycles. The low point of cycles when everyone else is afraid to invest is the ideal time to make outstanding investments.
p. 21: What does the author say the lessons of the internet bubble were?
1. It is better to risk boldness than triviality.
2. A bad plan is better than no plan.
3. Competitive markets destroy profits.
4. Sales matters just as much as product.
p.23: “The most contrarian thing of all is not to oppose the crowd but to think for yourself.”
p.24: “Under perfect competition, in the long run no company makes an economic profit. The opposite of perfect competition is monopoly.
p.25-35: He defines a monopoly as”…the kind of company that’s so good at what it does that no other firm can offer a close substitute.”
“If you want to create and capture lasting value, don’t build an undifferentiated commodity business.”
p.25: This in investing terms would change only slightly to don’t buy an undifferentiated commodity business.
Decline of Monopolies
p.33: “…old monopolies don’t strangle innovation. With Apple’s iOS at the forefront, the rise of mobile computing has dramatically reduced Microsoft’s decades-long operating system dominance.” He talks about IBM, AT&T also eventually declined. Even the best monopolies have finite lives.
p.34: “All happy companies are different: each one earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape competition.”
p.47: “If you focus on near-term growth above all else, you miss the most important question you should be asking: will this business still be around a decade from now? Numbers alone won’t tell you the answer; instead you must think critically about the qualitative characteristics of your business.”
p. 48: Monopoly Traits:
1. Proprietary technology: “…most substantive advantage a company can have because it makes your product difficult or impossible to replicate. Mentions Google’s algorithms and that your product needs to be 10X better. Amazon had 10x inventory.
2. Network Effects
Product is more useful as more people use it. He believes that to be successful with this strategy you must start in a small market.
3. Economies of Scale.
Monopoly business gets stronger as they get bigger. Can spread costs out.
Used Apple as an example – “paid advertising, branded stores, luxurious materials, playful keynote speeches. Reinforces other monopoly traits.
Power Law p.87: “At Founders Fund, we focus on five to seven companies in a fund, each of which we think could become a multibillion-dollar business based on its unique framework Whenever you shift from the substance of a business to the financial question of whether or not it fits into a diversified hedging strategy, venture investing starts to look a lot like buying lottery tickets. And once you think that you’re playing the lottery, you’ve already psychologically prepared yourself to lose.”
What an excellent quote and advice that I wish more people will follow. Investors should approach investing in a rational serious manner which in a perfect world would allow them to make the optimal investment decisions based on the companies available that they can understand and value.
p. 90: “The most common answer to the question of future value is a diversified portfolio: “Don’t put all your eggs in one basket… investors who understand the power law make as few investments as possible.”
The author is involved with venture capital an area where the accepted wisdom is to diversify your portfolio, much like what you hear as an accepted truth in the equity investing world. In his fun he tries to purchase companies that “..have the potential to be succeed at vast scale.” The only thing I would add from an equity investing standpoint is that valuation must also play a role in your decision making process.
To wrap this blog post up I have to say that I really enjoyed the book and would have no problem recommending it to followers of the blog.