The Unrepentant Recalcitrant

Lessons for an accidental entrepreneur

Archive for the tag “Abnormal Earnings”

There is only One Strategy. All else is Tactics

In investing as in business (and life, if you will give me the leeway), there exists only one strategy.

Its the same for everyone regardless of the ostensible differences in situations.

Say What?

You heard me.

A very smart guy called Bruce Greenwald introduced me to this idea (More on him below. Be sure to read his book).

Warren Buffet swears by it.

Mark Zuckerberg and Sergey Brin understand it.

Coca Cola is a success because of it.

So, what is it?

Listen carefully now.

The only strategy that you need to understand in business is that of creating a competitive advantage.

A Moat around your castle. An impregnable defense.

No business should be thinking about anything else.

Everything else you do is a tactic and should be geared to supporting the strategy.

More importantly, everything you do should measured against this strategy.

If it does not create or widen your moat, its a waste of your resources and time and will land up damaging you.

If you are an investor and you observe your investment wasting time and effort in tactics that don’t propagate the moat, you better sell brother.

Buffet tells his managers to use their resources to widen their business moats.

Not to ensure an ever greater profit every year. Not to increase revenues.

Just focus on widening the moat.

Everything else just follows.

The best businesses have moats that are very difficult to overcome.

This allows them to abuse a fundamental economic principle (one of only two or three that matter).

The principle (I have mentioned this before) is that all profitable businesses will encounter competition (the more profitable it is, the more the competition) and this will continue until all profit is reduced to zero.

The natural state of things according to the dismal science (economics, for those of you new to this term!) is perfect competition and zero profit.

 All profit that endures beyond zero is termed “abnormal earnings”.

 As we discussed in an earlier post, this represents the return on invested capital (EVA).

The existence of a persistent positive return on capital (i.e. its greater than the cost of the same capital), implies that there are exceptions to the economic rule above.

The only way this is possible (The Only One!) is if there is a barrier to entry for competition or a moat.

Even those who want to compete with you, cannot.

You continue to earn more than your cost.

You are indefinitely profitable (To an extent! Another economist said, “In the long run we are all dead!”).

I will talk some more on the chameleon like nature of a moat later when discussing the various forms it can take (just like Avatars for those of you into hindu mythology!).

I want to relate this concept to your life before I close today.

Answer me this:

To what end is all the preparation you do in your life?

Why do we go to school? Why do we go to college?

What does our resume and experience mean?

What do we strive for, when we strive for “success”?

Differentiation, pure and simple.

If you don’t stand out, you can be (and will be ) replaced.

You will inevitably sink back into the human morass of identical and exchangeable.

If there is something special about you (read moat), you are differentiated.

You will continue to succeed in life because you have your own little human moat.

Everything is connected. The truth is singular.

Think about it.

PS: Bruce Greenwald is a Professor at the Columbia Business School.

 Get a hold of his book “Competition Demystified”.

 You will thank me.

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