5 big tech stocks. And 5 of their strategies.

August 10, 2018

Some housekeeping. Every month new people join this newsletter. If you're one of them, or if you want a high-level refresher of our approach, visit the www.onedayinjuly.com website. There, on the front page, we try to articulate our argument in four concise points.

If, despite my repeated warnings, you snuck a peek at Jim Cramer or anyone else who sells financial entertainment for a living, you've heard of big tech's recent rise: Apple, Amazon, Alphabet-Google, Microsoft, and Facebook. With the exception of Facebook (in my opinion), they are fantastic firms that have advanced our standard of living. They have also advanced the S&P 500. Click here to see a chart of this factoid: these 5 firms when combined have the equivalent market capitalizations of the bottom 282 companies in the S&P 500 (1).

Normally at this point financial people make projections about trades, valuations, etc. Prognosticators start wringing their hands that the future is hopeless. Let's skip the projections and drama and instead examine five strategies these firms have used to achieve growth. You might glean insights for your own firm, organization, or even dealings with your spouse.

1. They trade in attention. Attention is the scarce commodity in today's world, and all of them are a type of traffic cop that directs your attention. Ever wonder why Amazon sells window cleaning poles at a loss? If they have your attention, they can sell ads, a primary reason they beat their profit targets a couple of weeks ago. Another example: Google pays Apple about $3 billion a year to be the default search engine on the iPhone (2). That's what attention is worth.

2. They are the castle, and they burn down the surrounding forest. As a competitor, you cannot get your army near their castle, because your army will run out of food. In the early days of the Internet, search engines considered charging users for each search. But it you give enough away for free or at a loss, and only make sales in certain areas, it creates a formidable barrier to others trying to enter. (This is not part of Apple's strategy).

3. They hunt for network effects. The users become the glue, with the firm in some way at the center. It is difficult to displace a firm with a network effect. Think AT&T before the U.S. government broke it into Baby Bells - who would want to be on a phone system by themselves? Whether they want to or not, everyone has to do business with the firm at the hub. And now, with the Internet reaching to the far corners of the Earth, the network itself is bigger.

4. They vacuum the room. By this, I mean they vacuum the industry of talent. Try building an operating system when Microsoft is recruiting, at high salaries, many of the talented computer scientists in the field. The pickings get slim.

5. They self-disrupt. The founders of these firms achieved their positions by disrupting sleepy industries, and they do not intend to have the same strategy turned against themselves. They work hard to invent new products, businesses and industries, even if it means cannibalizing one they dominate.

And how would you use this newfound strategy in your spousal dealings? I suggest #4. Just vacuum some rooms. I mean that literally.

Dan Cunningham

Sources: (1) Marketwatch 7-19-2018 (2) CNBC 8-14-2017