Famous venture capitalist and silicon valley entrepreneur Peter Thiel says investors shouldn’t be too dependent on investment decisions based on formulas. Instead, they should look for companies that do things differently through disruptive business models.
Thiel believes these companies have the ability to find value in places that other people might not notice. Thiel feels to achieve investing success, investors shouldn’t wait to think big; they should look for high-growth businesses in new industries.
Peter Thiel is the co-founder of PayPal and Palantir and was also an early investor in Facebook. He also made early-stage investments in LinkedIn, Yelp, Lyft, Asana, Yammer, and many other successful technology companies. He is well known for his business and investing acumen, which has put him in the same league as the top investors of the world.
Born in Frankfurt, West Germany in 1967, Thiel was very good in mathematics. He studied Philosophy at Stanford University and also served as the Editor-in-Chief of the Standford Review. He remained the editor till he completed his Bachelor in Arts degree in 1989. He then enrolled in Stanford Law School and earned his Doctor of Jurisprudence degree in 1992.
Invest in successful businesses
Thiel says investors should pick the most successful businesses, which are monopolies as they combine proprietary technology with network effects, economies of scale and branding.
“In the real world outside of economic theory, every business is successful exactly to the extent that it does something that others cannot do. Monopoly is, therefore, not a pathology or an exception. Monopoly is the condition of every successful business,” he wrote in his hugely popular book Zero to One.
Secret behind the success of a business
Thiel says today’s largest tech giants began their business journeys as startups. The secret behind their rise was their ability to identify and eventually dominate an emerging market with little to no competition.
“The most successful companies make the core progression – to first dominate a specific niche and then scale to adjacent markets – a part of their founding narrative,” he says.
Thiel attributes the success of companies like PayPal to their ability to start small in an untapped market.
Giving the example of Paypal, he says the company started its business by playing in small niches and then perfecting its product before moving into other adjacent areas to dominate the markets.
Paypal gained traction by getting in touch with E-bay auction customers, who were a small but important niche that dealt in high-volume transactions. The company then moved outside this small niche by reaching out to non-auction customers and offered them attractive incentives. Once the company got acquired by E-bay itself, it moved to other niches like online music providers and convinced credit card gateway providers to include them on their platforms.
“Focus on a small niche helps a company avoid excessive competition while learning valuable lessons without endangering their survival. This is no different in the public market spheres, where a company establishes dominance in a product category before making ‘bolt on’ acquisitions to widen its dominance,” says he.
In his book, Thiel lists out a few tips for investors to achieve long-term investing success.
1. Look for principles in companies
An investor has to find value in unexpected places by looking at principles of a business rather than using formulas to pick potential investment bets. He says investors often make the mistake of judging companies solely on their results.
“It is important to look for the principles a company follows before looking at anything else. Companies with strong and ethical principles are a good bets to invest in,” he says.
2. Invest in Quality
Thiel says it is important for investors to conduct thorough research about a business before investing in it to ensure that they are able to pick quality stocks. He advises investors to look at the strength of the balance sheet, sound dividend policy and returns of a business to ensure that they pick the right stocks for investment.
“Look at its principles, but more importantly, look at the quality of the business. Companies with strong balance sheets can stand strong amid adverse conditions. If a company has a history of growing dividend payout, you can consider it a quality bet,” says he.
3. Love the art of investing
Thiel believes investors should take the art of investing seriously and it should be the most important task they should focus on in their priority list.
If one shows huge passion and determination while investing, one is bound to earn huge profits in the long run. “Investment is not an activity to do on the sideline of your life cycle. It should be one of the most important tasks to focus on. The culture today does encourage us to do things we love, but sometimes it could be unprofitable. Investment is an activity that can bring huge profit if done with passion and dedication. It does not matter what you do as long as you do it well,” he says.
4. Pay attention to growing companies
Investors should not have a casual approach towards investing, as it may lead to losses. Thiel feels one should pay great attention to growing companies and invest in them. Also, he is a great believer of investing in venture-backed firms.
“One of the major mistakes one can commit as an investor is to have a casual approach towards investing. Don’t make the mistake of underestimating the power of diverse portfolios in growing companies. It is important to pay attention to growing companies and invest in them,” he says.
5. The most contrarian thing of all is not to oppose the crowd, but to think for yourself
Thiel says there is no point in being contrarian for the sake of being contrarian. Only the truly independent thinking investor or entrepreneur can find market opportunities that turn into wealth generators. Thiel feels investors should have clarity in thoughts and base their decisions on facts and reasoning.
6. Monopoly is the condition for every successful business
There is a huge difference between creating value and actually capturing it. Thiel feels companies operating under perfect competition-like conditions do not capture most of the value they create and, hence, investors should be careful while investing in such companies.
On the other hand, monopoly businesses both create and capture value and, hence, should be first on the investor’s radar.
Thiel says in order to find a ‘monopoly business’, investors need to find businesses with a solid moat.
Such businesses can be identified…
- By looking for businesses that consistently underplay their monopoly status
- By looking for businesses that use their excess cash to invest for the future versus needing their excess cash to defend their margins.
7. Have a long-term focus
Investors make the mistake of having a short-term focus on investing, which can derail any effort towards building long-term durability.
Thiel’s success as an investor seems to come from following many of the same principles that have made Warren Buffett successful, which includes independent thinking or focusing on “monopoly businesses,” which is just another term for companies with moats.
Thiel advocates having a single-minded focus on very few companies that can become extremely valuable over time versus the ‘spray and pray’ approach that most other ordinary investors follow to achieve mediocre results.
(Disclaimer: This article is based on Peter Thiel’s book Zero to One
and his various interviews.)