Conor Mac's avatar
$349.9m follower assets
Competition is for Losers
In 2014 Peter Thiel asked, “what valuable company is nobody building?” in his essay ‘Competition is for Losers’. But value creation isn’t enough, you must capture the value too. Airlines, for instance, provide one of the world’s most important services; shuttling millions of passengers across the skies every day. But they are terrible businesses. In contrast, a business like Google also provides a heavily used and valuable service; in search. One business competes with handfuls of others, in a race to the bottom. The other stands alone and soaks up gargantuan margins.

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What separates the two businesses is market structure; one is situated in a perfect market and the other in a monopoly. Thiel remarks that Google “hasn't competed in search since the early 2000s”, which held true until recently. However, more evidence is needed before we can rule Bing a worthy adversary. Back then Google commanded ~68% of the search market. Today, it’s closer to closer to 93%.

Theil suggests the idea of a monopoly is often confused.

> "The confusion comes from a universal bias for describing market conditions in self-serving ways: Both monopolists and competitors are incentivized to bend the truth. Monopolists lie to protect themselves. They know that bragging about their great monopoly invites being audited, scrutinized and attacked. Since they very much want their monopoly profits to continue unmolested, they tend to do whatever they can to conceal their monopoly usually by exaggerating the power of their (nonexistent) competition".

> "Non-monopolists tell the opposite lie: "We're in a league of our own." Entrepreneurs are always biased to understate the scale of competition, but that is the biggest mistake a startup can make. The fatal temptation is to describe your market extremely narrowly so that you dominate it by definition".

The essay is littered with examples that highlight the nuances of competition, and unsurprisingly concludes with the idea that competition is something you don’t want; it’s for losers. I took the liberty of converting the essay into a PDF and I also found a presentation that Thiel gave on the same topic, but in a more expansive fashion.

> “In business, money is either an important thing or it is everything. Monopolists can afford to think about things other than making money; non-monopolists can't”.
Todor Kostov's avatar
"Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate. Then monopolies can keep innovating because profits enable them to make the long-term plans and to finance the ambitious research projects that firms locked in competition can't dream of." ('Zero to One - Notes on Startups, or How to Build the Future')
Conor Mac's avatar
@kostofff I think a lot of this essay was pulled from his Zero to One perspectives. Love that book. Talks a lot about mimetic desire.
Todor Kostov's avatar
@investmenttalk Great book. Everyone should read it.
Jazzi Young's avatar
@kostofff This is the exact kind of feedback loop / flywheels we like to invest in. A business making gobs of free cash flow because they possess a degree of monopolistic market power can also buy innovation through acquisition should they fail to innovate in-house. It just takes a competent, forward-thinking leader to make those clever capital allocations.
Todor Kostov's avatar
@jazziyoung The snowball effect.
Uday's avatar
Investing in monopolistic, even oligopolistic markets, have yielded handsome returns. Some good points made here by Thiel.
Jazzi Young's avatar
Every retail investor who practices the value style of investing needs to read this. You don't want to miss out on these types of opportunities.
Too often, we see value simplistically equated to "current price relative to 52-week high" among our fellow retail investors. This is huge mistake.
Quality businesses with market pricing power are rarely priced cheap. They stay richly valued for long, long periods of time. A good mauling from a bear market might uncover an buying opportunity, but cheap is relative and other stocks will always look much, much cheaper and seemingly more enticing. The market is fairly efficient in this regard.
But you can find good value in a stock trading at its 52-week high, simply because it either has no peers in its niche market segment, or it's so far ahead of the game that it needs to stumble badly and shoot itself in the foot before its competitors catch up.
You're going to have to pay up for these businesses and it's going to hurt. If you pick well, in 5 to 10 years time you won't even remember buying the stock at all time highs.
We remember buying Coca Cola $KO, Apple $AAPL, Amazon $AMZN, Microsoft $MSFT and Mercado Libre $MELI at all time highs. We talk about it a lot ... or I should say laugh about it because it was so difficult to do at the time. You don't get them right all the time, but you only need a couple of these types of picks to dramatic change your life.
Joshua Simka's avatar
It's a great essay and Thiel makes a lot of interesting points on monopolies. This inspired me to check out how Founder's Fund (Thiel's VC firm) investments stack up against these concepts. Of couse Thiel, as one of 9 partners, is not responsible for all of these.

(And there are many more companies on the list ⬆️ than I could fit in this screengrab!)

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Maverick Equity Research's avatar
great, thank you!



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