I’m constantly looking for new sources of wisdom. There’s an excessive supply of information and speakers nowadays, making the filter of this flow a very rewarding skill. This is one of the inputs I consider when thinking about what to bring to you each Sunday.
I read a lot of things and listen to many people during the week, and I always try to extract either the most valuable idea, an interrelated concept, an intersection of thoughts, or simply people’s philosophy. On this occasion, I think there is a person that is kind of overlooked, but who has contributed fascinating ideas to the investing field.
Peter Thiel is a billionaire entrepreneur and venture capitalist. He’s best known for being the Co-founder and CEO of PayPal. Thiel was the leader of the PayPal Mafia, which is an absurdly curious fact given how these people’s careers evolved. Peter was also a co-founder of Palantir and an early investor at Facebook.
However, even though this man’s career is outstanding, I’m not interested in sharing it, all of this can be found and read on the internet. Facts are fun, interesting, and we can learn from them, but we are trying to build a sustainable mental model for investing. I believe this can be only be done with more abstract lessons. Above all, I think Peter’s greatest contribution to the business world comes from the concepts he unveiled.
Capturing value
When starting, businesses, more often than not, focus on how large the pie is, thinking they can capture the totality of it. Consequently, they aim for as large a pie as possible. What is missed here is that it doesn’t matter the size of it, but rather how much value can you capture from it. Furthermore, another ignored fact is that both variables are independent from one another.
“A business creates X dollars of value and captures Y% of X. The critical thing people always miss is that X and Y are independent variables”
If we think about it, intuition would say airlines are much more value creative than Google Search. They are probably a much more necessary resource than a simple search engine. As of 2012, all US airlines combined had revenue of 195bn while Google only 50bn. That means the size of the airlines pie is much larger, as intuition suggested. However, because Google can extract a much bigger piece of this small pie, the market values the company at almost 4x that of airlines.
Competition is for losers
Peter has a binary view of companies. He says there are only two types of them:
“There are businesses that are perfectly competitive and there are businesses that are monopolies. There’s shockingly little in between”
This dichotomy is misunderstood by the financial community and the reason is that companies lie about the nature of their business. Companies that have a monopoly generally claim they are in perfect competition, so the government does not seek to regulate their landscape. On the other end of the spectrum, companies in perfect competition tend to say how unique they are, transmitting the idea of them having a monopoly. This causes the following misappreciation.
But the reality is the opposite:
Peter further breaks down this idea with very appropriate statistics.
He says non-monopolies express how narrow their market is, generally referring to it as the intersection of multiple verticals. So you have to think if the intersection makes sense. To this, a quote from him that I love:
“The something of somewhere is mostly just the nothing of nowhere”
Moreover, they’ll state they are basically the only entity in that market. The example Peter always uses is restaurants. Since the market is extremely competitive, people generally say the following thing, claiming they have a monopoly:
“We are the only British restaurant in Palo Alto”
When you look in the opposite direction, you find that companies that do have a monopoly stress how big their market is. As of 2012, Google had a 66% share over the search engine market, but the company never stated nor states that it is a search engine. If they did so, it would be obvious they had and have a monopoly.
Nevertheless, Google always say their relevant market, remember the image above, is the union of all these huge verticals. They generally claim they are a technology company, competing with Apple on phones, with Microsoft on cloud-based offerings and Workspace, with Microsoft on search, with car makers, etc. Google also describes themselves as an advertising company, competing in a hundred-billion-dollar market, out of which they only have a small share.
Personal commentary
Words run out fast on this one and I only covered 1 idea and, sadly, only partially. This man is absolutely brilliant and I believe we will all see tangible results from getting these ideas into our brains. I hope you enjoyed the article, I will have to return to Peter on a future piece because there’s a lot of value I couldn’t include here.
If you didn’t have the chance to go through Microsoft earnings review, here’s the article and the podcast version:
Likewise with Google:
Can you share the link to original Thiel’s lecture on this?