A platform is the base from which something big happens. Kevin Systrom
Platforms are all the rage in the investment and business world. There are a couple of distinct definitions of a platform, and I am going to share with you the non-political one: a raised level surface on which people or things can stand. Why is a platform important for businesses? The best way to think about platforms for a business is having a fulcrum which can be used to boost value by finding other segments of business to enter. Let me provide a few examples to illustrate the point. When Warren Buffett first bought Berkshire Hathaway, it was a textile company where the value was primarily in cash, accounts receivables, and inventory. Buffett used the cash to buy National Indemnity, an insurance company based in the midwest. While the parent company did poorly in textiles, the insurance company was a much better business and grew nicely over time. Cash generated from the insurance company was then used to buy See’s candy, another big cash generating entity. Berkshire was the base with an asset rich balance sheet, and it was used as a fulcrum to much better businesses. Another example is Google using its wildly profitable search business to buy Youtube and other advertising companies. Facebook built a huge global audience, and developed advertising for it, along with user generated content to grow the advertising features for a wide variety of entities. They then leveraged this success by buying Instagram and Whatsapp and developing those companies. Finally, Apple had a monster hit with the Iphone, and used the succcess to develop other unique products like the Ipad, Applewatch, and Airpods. They then added payment features to the phone, along with the recent rollout of Apple music and tv subscriptions. Great investments usually follow this kind of pattern. In today’s market, Shopify would be the best example. Some think Zoom and Pelaton have chances to expand their platforms as well. Now that we have looked at the specific ways businesses create platforms, let’s turn to being an investor and how to create a platform with your past experience.
Investing is a knowledge based business, and the most opportunity you have is to use the past experience you have in the market to find other situations which might have possibilities. As an example, by learning about the large integrated oil business, you discover there are all kinds of regional entities with strong operations in storage, pipelines, and marketing. In Hawaii, by knowing about the oil industry, you discover the value of logistics and apply this to real estate. The real estate information is then applied to other geographies outside of Hawaii. When you learn about commercial and investment banking, those industries force you to discover payments, lending, insurance, asset management, private equity, and prime brokerage. Turning to the media area, when you investigate cable, you become familiar with large telecom companies, along with internet and small business advertising. Learning about mergers and acquisitions gets you into the field of merger arbitrage. Over time, the knowledge you gain from each industry is used as a stepping stone into other areas. All of this requires a wide area of interest and many hours reading about different businesses. Yes, you can buy an index and stay out of active investing, which is how the majority of investors have exposure to the market. By doing so you won’t get to enjoy the knowledge you build by creating your own investment platform. Many of you already have this base, and congratulations on using it wisely.
In the last week of the year, markets were quiet on the earnings front. President Trump signed the second piece of the Cares stimulus bill after foreshadowing plenty of displeasure with different pieces of the spending package. Tuesday will be the Georgia Senate runoff elections, and Wednesday brings the first meeting of the new congress to officially declare the electoral votes. It certainly will be interesting to watch. In the meantime, I hope you and yours have a healthy and happy 2021.
Thank you for reading the blog this week, and if you have any questions about investing, please email me at email@example.com.
Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation. The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.