Thursday, February 16, 2012

The Fanatic - An Investing Construct

The Fanatic, as profiled in this previous post, is a construct to apply to all investing opportunities. Two vantage points to consider:

Vantage Point One - Is the business you're evaluating run by a fanatic? 

This presents its own set of opportunities and challenges that I won't go into here. Suffice it to say, investing with fanatics requires that you possess a deep conviction in the upside of the opportunity for market growth, the fanatic's ability to win that growth, and his ability to win it in a way that provides suitable returns on capital over the long-term. 

As the profile suggests, fanatics will not show many traits of shareholder friendliness while engaged in the thrall of winning market share from the competition. 

Vantage Point Two- Can the business you're evaluating survive attacks by the fanatic? 

This the more common construct you'll use in evaluating investment opportunities. It forces you to understand the deepest competitive advantage of any business by forcing your thinking process outside the simplistic world of rationally-motivated agents. 

A rational agent competitor will work through MBA uber-logic in determining whether and how to compete with your business.

Ponder this...

A. How protected is your potential investment in the face of a capable fanatic using a workable business model and backed by financial resources? Assume he is willing to run through his capital in his attempts to gain an initial toehold and that he will not be bought out...he is shooting for market dominance. How can your business win against him and/or limit his damage?

B. How much pain can your potential business endure in its fight against the fanatic? If the fight involves a price war, how deep is your advantage? Are other shareholders willing to forego the immediate gratification of earnings growth in order to invest in protection against the fanatic, or will they run for the exits and force down the share price?

Imagine you are Kmart when Sam Walton comes along. Or Barnes & Noble facing off against Jeff Bezos. What are some other examples?

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