Monday, 9 September 2013

Simple business models are easier to comprehend. "Great stocks don't make you think."

Simple business models:  They're not necessarily better at making money than complicated business models. The reason to love them:  they're much easier to understand.

One exercise one can do is to try to describe a company in one sentence.  If you can - and can do so compellingly - then it has passed the test.

Can you describe Google and Wal-mart each in a sentence?  Google makes most of its money by selling targeted advertisements alongside its top-notch Internet search results.  Wal-Mart makes money by being the low-cost retailer of an incredible variety of goods.

Both sentences clearly explain how these companies make money and what their competitive advantage is in the space.  Google has the best technology; Wal-Mart has the best prices.

Those are simple business models, and you will know very quickly if either is faltering (Google ceases to have the best search capabilities or Wal-Mart ceases to have the best prices).

On the other hand, if the business is complicated and unclear, you likely won't enjoy following it.

1 comment:

Dexter Louis said...

Description of a company in one sentence is ability. A great knowledge and hard work is required to make a business faultless and well-known.