The Star PrincipleJuly 26, 2023• [books] #investing
Book: The Star Principle
Author: Richard Koch
If you want to get rich, you could work hard, use natural abilities and such, but you can do quite well by being at the right place at the right time. You can be strategic about finding the right place. Richard Koch's strategy is evaluating opportunities in terms of Boston Consultancy Group's growth/share matrix. This is a 2x2 matrix with the 4 quadrants occupied by four kinds of businesses. The leaders in high growth market are called stars. The other quadrants are question marks, dogs and cash cows. A star business is one that (a) is a market leader in its niche (b) and the market is growing by at least ten percent a year, on average, over many years.
Find a business like that and allow compounding to work its magic. It's important that the growth is uninterrupted. Growing at 20% every year for 20 years will give you more returns than growing at 30% for 10 years. High growth sustained for a long time is the key.
A business with sales of $10 million that grows at 3 per cent a year - roughly the rate the economy grows - will increase by 34 per cent over a decade, to just over $13 million. What will a business that grows at 30 per cent a year - ten times 3 per cent - grow by in the same time? You might assume is it ten times 34 per cent, which is 340 per cent, and add a bit for the effect of compounding, to take the growth to perhaps 500 per cent. If this were true the sales after ten years would have grown to $50 million. But the correct answer is nearly $138 million.
Find a business like that to invest, start such a business, or become an early employee at such companies.
Amazon and Google were stars. So was Apple. Betfair, which the author invested in, grew at over 30 percent each month in the early aughts. Coca Cola and McDonald were stars as well, with 99 percent of their value entirely due to growth - again, emphasizing the value of compound returns.
Koch says he has bet his entire career on stars. It is a religious belief that seemingly informs all his decisions.
Stars are where the universe creates good fortune. Stars are the source of wealth. Stars are the place to invest. Stars are the place to work. Know only one thing, so that you can’t ever forget it. Know the power of stars. Believe it. Act on it. Once you know this one thing, all the rest of your professional life is tactics - how to find your star before anybody else, how to ensure it stays a star, how to work in a star as one of the early star-mongers, how to get the most out of your star. But the tactics depend upon believing in the star idea. Believe in it, because it is true, because it is the single most vital truth in the business world, and because it can set you free.
One thing is for sure, if you want out-sized returns, you must have the ability to fool yourself just enough to be dangerous. One sees this with LBJ, Steve Jobs, and Koch.
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