🧠 5 mental models that helped me recognize the patterns of great investments early:
1. Theory of Reflexivity by George Soros
I watched this play out in real-time with Tesla.
We often think earnings drive share prices.
But high share prices allowed Tesla to raise a 'limitless' amount of capital.
Which in turn allowed them to survive & eventually deliver earnings.
2. Ecosystem Control by Dennis Hong
Every stakeholder in the ecosystem is voluntarily locked into the business.
That lock-in is so compelling & powerful that it is economically irrational for anyone to unlock from the ecosystem.
3. Companies that are Verbs
"Let's Zoom to discuss"
"Let me Google it"
Companies that become verbs gain high ROI on marketing Word of mouth network effects create high-quality touchpoints and increase the frequency of usage.
4. Razor & blade model
The razor is sold at a low price to increase sales of a high margin complementary good—the blade.
Predictable, recurring revenue that stacks up over time drives huge investment returns.
E.g. Apple devices have recently become more affordable to boost their user pool and increase consumption of its subscription services.
5. Operating leverage
Companies that grow their revenue while the bulk of the costs are fixed.
Once it passes a tipping point, it'll explode with profits.
How much does it cost for Facebook to earn an additional dollar of ad revenue?
It all flows to the bottom line.
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