Quote of the week: 

“Be brutally honest about the short term and optimistic and confident about the long term.” – Reed Hastings

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When network effects fall apart

What do Cincinnati and MySpace have in common? The answer, as Todd Wenning writes about this month, is network effects. Both entities enjoyed network effects that led to their initial meteoric rise. But when the network effects unraveled, growth stalled, and competitors were able to quickly capture market share. 

The anecdote is instructive. Network effects create powerful boom cycles for cities and businesses alike. But nothing lasts forever.  And when network effects unravel, they can do so quickly. The implication for investors is crucial. As Todd writes, “When evaluating a network effects advantage and considering the relevance of a company’s product or service, look for indications that the ‘offer’ for joining the network is getting better—or at least not getting worse—relative to other options.” He continues:

“Products that have lost relevance can still be recognizable. Groupon is still recognizable, but it’s far less relevant than a decade ago. Recognizable isn’t the same thing as relevance. Relevance is best thought of as mind-share or, even better, wallet-share. Are users transacting more or less frequently over time? Are they using the service more or less overall? Relevance begets pricing power and a continuation of the network effects. The network effects benefits peak when the incremental user moves from enthusiasm to indifference. Sooner or later, the user will find value and opportunity in another network. When those continuous transactions and feedback mechanisms that Geoffrey West noted in the opening quote about networks start to fade, that’s when you should reassess your thesis and forecast.”

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The link between decision-making, health, and sleep

A couple of weeks ago, I highlighted a smart recent essay from Frederik Gieschen on the importance of focus. The gist of the piece was how investor focus is an under-discussed competitive advantage in markets. Our research analyst Cam Tierney suggested another competitive advantage that doesn’t get much ink: Sleep. Cam pointed me to this excellent TED talk on sleep from neuroscience professor and sleep expert Dr. Matthew Walker. The talk explores how a healthy sleep cycle leads to better neurocognition and decision-making. It also offers a few  practical tips on how to get a better night’s rest.

“There is simply no aspect of your wellness that can retreat at the sign of sleep deprivation and get away unscathed. It’s rather like a broken water pipe in your home. Sleep loss will leak down into every nook and cranny of your physiology, even tampering with the very DNA nucleic alphabet that spells out your daily health narrative.”

A few more links I enjoyed:

The Case Against Prediction– via Rohit Krishnan
“Sometimes I think how in markets there are investors and then there are traders. Investors take a view on how things will evolve and what the future will look like. Traders will take a view on the shortest timeframes and react swiftly seeing what’s changing in the markets. We need them to have a well functioning market. Not just them, but let’s talk about them here. And it feels part of a bigger trend, between our love for accurate prediction and sidelining the need for fast reaction.”
How I Turned $300 Into $5.1 Billion – via Noah Kagan
“Jean Paul DeJoria is the founder of Paul Mitchell Systems (hair care) and Patron (tequila). In this video, I learn how he went from being homeless and living out of his car, to building two billion dollar global business empires in totally separate industries.”
The Business of Taylor Swift – via Recode Media
“Taylor Swift is on one of the most successful concert tours of all time, but what’s her secret? Switched on Pop’s Charlie Harding sits down with Peter to discuss the business of Taylor Swift. How her music, her fans, and her industry expertise catapulted her to being one of the most profitable singers of this generation.”

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