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I am a fan of the Coffee Can Portfolio, an “Active Passive” approach to investing.
The idea of a Coffee Can is simple: Buy a basket of the best stocks you can and let them sit for years. You incur no costs with such a portfolio, and it is simple to manage.
You can follow and track my stock baskets here, on my Performance Scorecard.
Major shifts in the business landscape can either create wonderful investment opportunities (eg: Amazon and Tesla), or lead to devastating consequences (see Kodak and Blockbuster). As investors, it is our job to find and invest in leaders who can “see around corners,” that is, spot disruptive changes, because they’re the only ones with the potential to succeed in a fast changing world.
Such leaders have an uncanny ability to see changes coming, and use them to their advantage. This is particularly paramount when Investing in Mavericks, that is, in innovative companies benefiting from significant changes to the status quo.
But how do such leaders anticipate and capitalize on these disruptive changes?
Here are a few ways:
They Pay Attention to Glitches in the Matrix
They Repurpose What’s Working Elsewhere
They Apply First Principles Thinking
They Integrate Disparate Ideas
Paying Attention to Glitches in the Matrix
We all see things from the corner of our eye. For example, when we leave home, as we drive, bike, or walk to work, we might see something that looks unusual. This might briefly catch our attention, but the vast majority of us dismiss what we see. Why? Because we are creatures of habit: We are in the routine of going to work and simply going through the motions.
Entrepreneurial people however are more alert. They don’t automatically dismiss these things. Instead, they try to understand these so-called “glitches in the matrix.” They start by asking a few questions about the anomalies they notice. If they discover something interesting, they probe a little more. And keep going from there.
Such anomalies can be opportunities. In the business world, these anomalies are referred to as ”gaps in the market.” If one spots and exploits an anomaly, one can garner a great entrepreneurial outcome.
Repurposing What’s Working Elsewhere
Once a gap has been identified, entrepreneurs have an uncanny ability to see what’s working somewhere else, understand why, then repurpose it in their own context.
Starbucks (SBUX) provides a great example. Howard Schultz did not create Coffee Culture - He first noticed it in Italy, loved it, and wanted to bring it to the US. In 1983 Starbucks sent Schultz to a trade show in Italy, where he had his first latte. He came back to Seattle charged up about the potential for espresso bars. For him, espresso was the future, and it was obvious. Jerry Baldwin, one of Starbucks’ original co-founders, acknowledged that neither he nor the other co-founders saw the huge potential of espresso drinks. Schultz however, was determined to demonstrate that potential.
But it wasn’t as easy as simply copying what he had seen. The concept had to be customized to the tastes of the American customer. The Starbucks as we know it, is a more casual setting, and has become what the company calls the “Third Place”: “The concept of the third place— a warm and welcoming place, outside of our homes and our workspaces, is where we connect and build community. We think of the third place as a mindset — a feeling of comfort that uplifts customers everywhere, and in every way, they experience Starbucks.”
Applying First Principles Thinking
Another way to fill a market gap is to apply first principles in an open space that hasn’t yet been addressed. It may not always look like it, but that often is a problem: It’s a friction point, a bottleneck, perhaps a problem for you or for others.
Space travel is an example. It may not seem like a problem for many, but to people like Elon Musk and Jeff Bezos, it is a problem worth solving. When driven entrepreneurs make up their minds to solve such problems, they approach the problem from first principles, and build solutions like a bricklayer would - piece by piece from the ground up. If we take SpaceX as an example, Elon went to Nasa and asked “when is the US Space Program going to Mars?” That problem was not solved. Then he went to Russia and tried to find out the same. He found that no governments were taking this seriously. So he stood up SpaceX in order to build a reusable rocket, in an attempt to create an economically viable enterprise that may one day go to Mars.
On a side note, Richard Branson and Jeff Bezos both went into space recently. I wonder who history will remember as the person who kick-started the era of space travel? My bet is on Branson.
Integrating Disparate Ideas
Some entrepreneurs are very good at mashing up interesting ideas in new ways, thereby creating novelty at those intersections. This shouldn’t be surprising if you read my post on Polymathy.
Sometimes this can work very well. Combining the Phone, the iPod, and the Internet gave us the magical iPhone. Combining the Luxury Car with the All Terrain Vehicle gave us Luxury SUVs. Chipotle combined Fast and Casual Dining. Many Internet companies have successfully combined things in interesting ways. For example, today Mercado Libre and Shopify are combining both eCommerce and Payments at scale.
In Conclusion
As stock market investors, it is our job to find and invest in leaders who can “see around corners” because they’re the only ones who can succeed in a constantly changing business environment.
One way to narrow down the field is to ask ourselves, what gaps in the market do these leaders see? That is, what glitch in the matrix is their opportunity, and how are they going to take advantage of it?
To answer these questions, we must put ourselves in the leaders’ shoes. And the only way we can do that is by being curious. Curiosity is our friend, and it unlocks the ability to spot opportunity. It is a trait that’s available to all of us, and it is up to us to ask questions, probe, discover, learn and build conviction, just like the leaders of the companies we want to invest in have.
If we do this, we have the potential to generate some wonderful returns.
Note: This article was inspired by ideas from Amy Wilkinson, Lecturer at the Stanford Graduate School of Business.
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