Simplicity of Investments and Expontential Growth of Companies
Extracts from 100-Baggers
Sosnoff’s law: Its author, Martin Sosnoff, wrote that “the price of a stock varies inversely with the thickness of its research file. The fattest files are found in stocks that are the most troublesome and will decline the furthest. The thinnest files are reserved for those that appreciate the most.”
In other words, the best ideas are often the simplest. If I find myself working really hard to justfiy keeping or buying a stock, I think of Sosnoff’s law. I’ve wasted countless hours on bad stocks and bad businesses.
“Never invest in any idea you can’t ilustrate with a crayon. Simplicity is the best.
Part 2: Facebook, Amazon, Netflix, Google, Tencent (platform-based businesses)
These companies have superior business performance because of how its business model is designed. It is hyper-scalable. There is strong operating leverage due to its low marginal cost increment as users build up.
Think for a moment… if an user signs up for a Facebook account, is it serviced by any Facebook staff? Nope. Is it a extra cost to Facebook? Extremely extremely neglible. However, the user would go about creating ever more content on its platform and be exposed to Facebook advertisements. Since there is almost no cost in terms of customer acqusitions and the users are growing, Facebook can market its platform to advertisers.
When advertisers publishes an ad to Facebook, is it serviced by any Facebook staff? Perhaps, but very low involvement, only for problematic ads. So in short, the Facebook machine generates cash itself without a lot of human involvement.
Let me illustrate with a simpler idea. There is some cost involved in playing a movie for cinema operators. Just assume the cost to breakeven this cost is having the cinema 25% filled. This means any customers that goes beyond this 25% mark… is pure profit. Sales = pure profit. This is because there is no cost of goods sold at all. It has already been absorbed by the earlier customers.
Think about how we can go about choosing companies to be in our portfolio, the moment we choose a right one, it is very likely our portfolio is able to perform better.