Everyone knows Warren Buffett likes to invest in monopolies.
Companies with a ‘wide moat’ he euphemistically calls them.
Which is just as well, as his favourite holding period is ‘forever’. You can’t have pesky things like competition getting in the way.
He’s had Coca-Cola in his stock portfolio since 1987!
Venture capitalist and entrepreneur Peter Thiel — founder of Paypal and an early investor in Facebook — holds a similar philosophy.
He prefers to invest in monopoly-type companies.
But there’s one crucial difference between the two investing greats…
Would you bet against Moore’s law?
While Buffett waits for a moat to be established before he invests, Peter Thiel invests based on the potential of a future moat.
The difference in mindset is due to the fact Thiel is ‘long’ innovation, whereas Buffett is famously shy of investing in what ‘he doesn’t understand’. Which means he’s avoided tech companies most of his investing life.
It’s the same goal, but two completely different approaches.
Going ‘long’ is just investment talk for saying you’re buying into a stock or thesis. Going ‘short’ is the opposite and means you’re selling.
Now, let me ask you a question…
In the world we live in today, what would you say is the smarter way of investing?
I know what I think, that’s for sure.
In my opinion, like Thiel, you’ve just got to go ‘long’ innovation.
Whereas Buffett just started buying Apple and Amazon stock in the past three years — well after the initial exponential share price explosion occurred — Thiel’s fund already has positions in the next ‘unicorn’ companies.
Companies such as Airbnb, Stripe and Spotify that are set to make him a bundle when they eventually list on the stock market.
Thiel is buying into companies well before Buffett has probably even heard of them. And probably decades before he’d ever consider investing himself.
Buffett would say that approach is far too risky. And there’s no doubt Thiel makes a lot of investments that lose him money.
But by finding the ‘next’ monopolies in just a few of his winning investments, he more than makes up for the losing ones.
That’s actually the secret to exponential investing. Being willing to be wrong more times you are right while knowing it’ll only take a few wins to more than make up for it.
Not everyone can stomach this approach to investing.
But to my mind it’s the smartest way for the savvy 21st Century investor to invest.
After all, the pace of technological innovation isn’t slowing down one bit. It’s increasing and not only that, but the pace of change is getting faster too!
According to futurist Ray Kurzweil:
‘We won’t experience 100 years of progress in the 21st century – it will be more like 20,000 years of progress (at today’s rate).’
Kurzweil’s idea is that each new generation of technology stands on the shoulders of its predecessors, resulting in exponential — and not linear — growth.
The most famous example you’ve probably seen in your lifetime is from Moore’s law. The fact that the doubling of microchip processing power on a regular basis has exponentially advanced computing.
Because of Moore’s law, we’ve gone from computers the size of small houses 40 years ago, to a world run on smartphones in your pocket.
Where to find the ‘monopolies’ of the future
Don’t think this is all just theory or the preserve of industry insiders.
Anyone can make real money by thinking about such things.
From an investing point of view that’s why Apple was a smart bet 10 years ago, but IBM not so much. If you’d looked ahead and joined the dots on the smartphone revolution you could’ve claimed a stake as much as anyone.
And well before Buffett!
You’ve just got to start thinking.
After that, your next step is to find some investments that match your thoughts and research.
In my opinion this is what makes the small-cap scene such an exciting place to invest.
I’ve built up theories from how blockchain will change the data industry, and in turn turbo charge the very nature of the biotech industry. I’ve envisioned a world where the banks are unbundled, a future where you add any banking products to your own personal bank as and when you require them. And I’ve looked at how artificial intelligence (AI) will not only change the jobs of the future, but also, the very nature of work itself.
It’s fun stuff to think about!
But when it comes time to part with your ‘hard-earned’ and lay down some money on these ideas, you have to play it smart. Like Thiel, you have to acknowledge you could be wrong on not just one of your chosen stocks, but probably most of them.
When it comes to exponential investing you have to invest as far and wide as you can. You’ve got to accept having more losing investments than winning ones. But you’ve also got to understand how Peter Thiel became one of the richest men in the world by investing like this and that means understanding the idea of asymmetric pay offs.
Needless to say, this is not for your ‘retirement’ money. It’s high-risk, high-reward stuff.
But it’s my firm contention that if you don’t start thinking this way — about innovation and its effect on the future — you could be left holding the bag if and when an industry is eventually disrupted by those innovative upstarts.
This is not just hyperbole.
We’ve seen it happen with hotels and Airbnb, with post offices and email, with taxis and Uber, with shopping and Amazon, with Netflix and videos…
Banks? Miners? Power companies? Technology knows no bounds…
In my opinion, no matter the markets, you need to start going ‘long’ innovation.