In 1848, gold was discovered at Sutter’s Mill. Thousands learned of the possibility they might find treasure in a river and decided it was time to join the hunt. On a percentage basis, very few were successful in mining for gold, silver, copper, or any substance worth money.
Over the past 25 years, many entrepreneurs started companies. Consumer based enterprises have difficult paths to enduring. For every McDonald’s, there are probably 100 chains which never quite gain consumer acceptance.
Structural Advantage
Investors likely prefer companies that own dependable structural advantages, which can be a source of profits. Adobe sells the editing and creative tools which are mandatory for content creation. Activision is a big game publisher where shareholders have earned nice returns.
In the energy area, there are hundreds, maybe thousands of exploration and production companies. Not every well that’s drilled hits something of value, the odds are not great.
An energy integrated company that owns refining, pipeline, and marketing assets (gas stations) is a more predictable business in my opinion. The largest energy companies own all parts of the value chain, including producing wells.
Land is King
In agriculture, there are many different kinds of crops available to grow and harvest. Farming is a difficult business, and there are large distinctions between the kinds of products available.
In my opinion, the best place for profits in agriculture is owning the farmland. Land where there is a large water source is crucial for the entire agricultural value chain. Leasing good land is essentially selling picks and shovels.
In the financial world, hundreds of companies want to go public every year. The exchanges, think NASDAQ and NYSE, sell the dream in a big way.
Takeaway
Ring the bell, show up in New York, appear in Times Square, and your company gains exposure all over the world. You can invest in the company which owns the exchange.
The takeaway for me is this: Investors should look for companies with strong returns. In my opinion, that’s where the businesses are found.
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Originally Posted on October 16, 2021 – In Praise of Predictable Profits
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