One of the most important insights that I have had over the past several years is that I have come to appreciate that the the scalability of “things” compared to “services” often serves as an important divining rod for identifying future investments that are the most compelling. The reasons is because the production of cheap widgets (or, more accurately, widgets with a low marginal cost) can lead to ramped-up production and high returns on capital because there is not an equally corresponding increase in expenses.
For instance, if someone launches a software firm like Adobe, which makes the famous PDFs, the costs of creating a distribution channel for the future of Adobe software is fixed. It does not matter whether there are 5,000 customers or 500,000 customers using the product–the costs are generally the same (except for the negligible data costs of tracking the subscriptions). Very real wealth gets created during the delta of growth from 5,000 to 500,000 because the ability to increase the subscriber count is nearly effortless from a contribution of capital perspective.
On the other hand, if someone opens up a barber shop, and wants to go from 100 to 200 customers, it will be necessary to double the real estate commitments and double the employee count. The capital required will nearly double. In other words, service-oriented businesses tend to require a linear increase in capital and expenses to realize revenue / volume growth that is not true for businesses that sell things.
With this insight in mind, I have prepared an eBook titled “The Rocket-Ship Investments of the Future” that profiles eight publicly traded stocks that tend to have the ability to ramp up revenues at a low marginal cost and deliver market-beating returns.
Originally posted 2018-11-10 20:24:29.