Strategy and Political Economy

Strategy is actually the study of differential outcomes.  Why do some businesses succeed wildly while others, with similar talent and effort come to nothing?

This is an essential issue in investing; a few firms will produce excellent returns on capital and have almost unlimited ability to reinvest that capital.  They will (and have) become the dominant share of all tradable equity securities.  Finding just one, as an investor in an early phase pretty much guarantees you the ability to get fantastically rich without having to work all that hard.  (Depends on how lucky you get, in terms of finding said firm).

Occasionally you can find one of these firms who is essentially *known* to be a big winner trading at silly valuations and have a risk free ride to pretty good returns (though in most cases not nearly as good as some early investors, but Apple, Amazon, Bank of America, S&P Global, Microsoft, Bassett Furniture and Ford, among others have offered opportunities to earn staggering amounts for late entering shareholders).

The thing is - what is important to understand is how a business will compete within its industry, to understand the scale and scope of that industry and then to recognize that almost all of the gains will go to the top firms or people and that this is true in all fields of human endeavor, whether it is art, literature, sports or enterprise.  Riding the wave of the Pareto distribution is really the secret of success.  The problem is, it is extremely difficult to determine which actors (in the sense of one who takes action, not in the theatrical sense) will get to ride that distribution.  I am not sure it is possible to know with much certainty, although being marginally better at determining it can make you a very much better investor (because the irony is that there aren't huge differences between people at say the middle and top of the distribution in terms of starting talent and resources - at least early in the game.  After awhile of course, the compounding effects of opportunities, networks and resources tend to spin some far out the distribution).

Jordan Peterson, who is a political theorist and philosopher talks about why Pareto is such an important principle of societal organization and how deeply embedded it is in human experience.  While he is really talking about a critique of Marxist organization, he is illustrating the core challenge of investment; finding those opportunities that offer the investor the chance to spin off the end of the distribution while guaranteeing that one doesn't run the risk of winding up on the other end of the distribution.

A fantastic short excerpt and well worth one's time.

https://www.youtube.com/watch?v=i0iL0ixoZYo