Why Business is Winner Take All

1. AMAndrew Marks0:00

   One of my favorite writings on investing, it's not actually about investing, but it's this guy Brian Arthur, and he wrote something called Increasing Returns in the New World of Business, and that was in the mid-'90s. And he made the observation that with the new world, with the new distribution models of things like the Internet and whatever, the best companies could continue to get bigger and bigger, whereas, uh, you were sort of capped out more in the old world. And so you would have diminishing returns to scale over time. And by the way, that couldn't have been more right. You look at markets over the subsequent, you know, couple decades, and you have companies like Apple and Amazon and, and, you know, Google and Microsoft that just continue to get bigger and bigger. And, you know, they're-- I think a lot of that comes from the fact that they're just continue to dominate more and more of, of various markets.

2. BGBen Gilbert0:54

   This is one of my favorite pieces of trivia of all time about that paper. Brian Arthur was friends with Cormac McCarthy, the author who wrote All the Pretty Horses and No Country for Old Men, and Cormac helped shape the prose in that piece.

3. AMAndrew Marks1:08

   Oh, very interesting.

4. BGBen Gilbert1:09

   One of the reasons why it's very successful.

5. AMAndrew Marks1:11

   Well, yeah. I guess for an economist, it was extremely well-written.

6. HMHoward Marks1:15

   Before I lose the opportunity, I just wanna add one thing to Andrew's list of criteria for success in this continued expansion mode, and that is companies that, that are able to avoid the, uh, negative effects of success. You have to stay lean and flexible and unbureaucratic and future-looking.

7. BGBen Gilbert1:33

   But Andrew, you're pointing out this really interesting thing where you have two opposing forces that have butting heads. One is now we have globally addressable markets, so TAMs are bigger, therefore market caps can be bigger. And at the same time, you have competition happens faster than ever because paradigms change faster than ever. And so therefore, the future is less certain than it's ever been, despite the fact that the opportunity for any given business is the largest it's ever been.

8. AMAndrew Marks2:00

   Yeah. And by the way, I wouldn't just say global markets, I would say, you know, strategically adjacent markets as well. Again, look at the big companies and how they continue to step out and do more and more in things that are, you know, tangential to, to their, their existing businesses. I mean, Amazon's a great example of that, right? They started in books, then they went to media, and then continued on and on and on, and eventually they leveraged their scale into cloud computing and whatever.

9. BGBen Gilbert2:26

   Then that into databases and all sorts of stuff. Yep.

10. AMAndrew Marks2:28

    Yeah, exactly.

11. HMHoward Marks2:29

    Ben, Andrew mentioned that he'd never heard your voice at real speed, uh, because he listens to podcasts, uh, accelerated. I think the way to think about it is take Darwinism and turn up the knob a few clicks.

12. BGBen Gilbert2:44

    [laughs]

13. HMHoward Marks2:45

    It's what it is. It's winners and losers, maybe more dramatic than ever, and happening faster than ever.

14. AMAndrew Marks2:52

    And then this all, I think, dovetails into one other point that we made from the memo that I think is really important, which is that, that markets and-- evolve and, and games evolve. I was an obsessive poker player. I've always been an obsessive games player generally, and my dad and I, we sit around and we'll play backgammon for forever and whatever. And I, I got obsessed with poker right when the poker boom happened, which was, you know, Chris Moneymaker won the World Series of Poker-

15. BGBen Gilbert3:18

    Oh, yeah

16. AMAndrew Marks3:18

    ... and they started online poker.

17. BGBen Gilbert3:19

    Moneymaker and Farha.

18. AMAndrew Marks3:21

    Yeah. Well done. That's very impressive poker trivia. So when online poker first launched and everyone got into the poker boom, because no one knew how to play and it was so new, if you just sat around and you played aces and kings and nothing else, you could win money, and it was very easy. And then over time, peop-people figured that out, and they sorta figured out the next level of the game and whatever, and the winning strategy turned into the very exploitable strategy, and that evolution has happened a lot more times to the point that I'm, I'm probably terrible at poker now. But anyway, I think the same thing has happened in markets. And so back in the times when Buffett was starting, information about companies and the ability to transact in companies, and actually even finding out about companies was extremely hard. I mean, you had to go to the library, you had to take out the Moody's Manual.

19. BGBen Gilbert4:11

    He was driving around buying stock certificates from farmers.

20. AMAndrew Marks4:14

    Yeah. I don't know if you've ever looked at a Moody's Manual, but there's not that much there.

21. BGBen Gilbert4:17

    [laughs]

22. AMAndrew Marks4:17

    And so if you were interested in something, you had to mail away for the annual report and so on and so forth. And then you had to call your broker, and they had to figure out how to buy an illiquid stock. And because there was so much friction to getting information and transacting, it was much more possible for value to be hidden in plain sight. And I wasn't there, but I know this because Buffett says that this is exactly what he did. You could look at something and just plainly see that the company just continued to march ahead and, and just plainly understand that it was undervalued relative to those prospects if you had conservative assumptions about the future continuing. And nowadays, information is totally ubiquitous. Anyone can buy a stock. There's tons and tons and tons of smart people investing in the stock market, but there are also algorithms and machine learning and all this type of stuff. And so it's very hard to believe that, um, you can just have some sort of knee-jerk surface level understanding of something and just look at financials and have some very elementary view on something and have it be some sort of insight that's profitable.

23. HMHoward Marks5:23

    Well, the phrase I took away from that, and it's in the memo, is readily available quantitative information about the present. And Andrew pointed out the evolution of markets. And you know, I was taught at Chicago in the mid-'60s the efficient market hypothesis, that everything is priced right because everybody's working so hard to find the bargains and the overpricings. And of course, that's a framework, and it was not true that everything was priced right. But certainly over time, things are priced more right.

24. BGBen Gilbert5:54

    It's become more true.

25. HMHoward Marks5:55

    Right. Inefficiencies, which I, I prefer to say mistakes, things the markets misprices, where do they come from? They come from ignorance and prejudice. So Moody's had a prejudice against the single B bond. It had a prejudice in favor of the Nifty50, as did most investors. And I was lucky to find some things that either others didn't know about or didn't understand. But human knowledge is cumulative, and lately it's been rushing forward at an incredible pace. So, uh, it's, uh, it's hard to imagine that there's a piece of information that I can get off the internet that's gonna make me any money for the simple reason that everybody else can get it off the internet. This is a zero-sum game for a fixed amount of profit, and it'll go to the people who do better at the expense of the people who do worse. So you have to have an advantage, a knowledge advantage, a skill advantage if you're gonna be one of the people who, uh, ends up on the positive side of that equation.

26. AMAndrew Marks6:57

    And so to bring this back to what we were talking about earlier, it's, it's very dangerous to just, uh, make qualitative judgments about a company that, that seemingly everyone has. Oh, this is a great company, whatever, and it'll just continue winning without also saying, well, to what extent is this reflected in the price? And so that's the whole point of investing, whether it's value investing or quote "growth investing," and that's sort of the, the point we make in the memo. I mean, you have to be able to make, you know, judgments about the future prospects of the company, and then you have to be able to say, well, well, to what extent is this already reflected in the price?

27. SPSpeaker7:33

    [singing] Who got the truth? Is it you? Is it you? Is it you? Sit me down, say it straight. Another story on the way. Who got the truth? Who got the truth now? Hmm.

Episode duration: 7:53